e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 4, 2010
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number: 000-49850
BIG 5 SPORTING GOODS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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95-4388794 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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2525 East El Segundo Boulevard |
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El Segundo, California
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90245 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code: (310) 536-0611
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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o (Do not check
if a smaller
reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 21,813,662 shares of common stock, with a par value of $0.01 per share outstanding as of
August 1, 2010.
BIG 5 SPORTING GOODS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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July 4, |
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January 3, |
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2010 |
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2010 |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
5,581 |
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$ |
5,765 |
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Accounts receivable, net of allowances of $80 and $223, respectively |
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12,005 |
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13,398 |
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Merchandise inventories, net |
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252,040 |
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230,911 |
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Prepaid expenses |
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10,360 |
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9,683 |
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Deferred income taxes |
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7,616 |
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7,723 |
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Total current assets |
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287,602 |
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267,480 |
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Property and equipment, net |
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78,377 |
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81,817 |
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Deferred income taxes |
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13,195 |
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11,327 |
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Other assets, net of accumulated amortization of $372 and $346, respectively |
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1,091 |
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1,065 |
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Goodwill |
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4,433 |
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4,433 |
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Total assets |
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$ |
384,698 |
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$ |
366,122 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
96,143 |
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$ |
85,721 |
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Accrued expenses |
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49,490 |
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59,314 |
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Current portion of capital lease obligations |
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1,895 |
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1,904 |
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Short-term revolving credit borrowings |
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64,083 |
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Total current liabilities |
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211,611 |
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146,939 |
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Deferred rent, less current portion |
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23,544 |
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23,832 |
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Capital lease obligations, less current portion |
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1,652 |
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2,278 |
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Long-term revolving credit borrowings |
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54,955 |
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Other long-term liabilities |
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6,712 |
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6,257 |
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Total liabilities |
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243,519 |
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234,261 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $0.01 par value, authorized 50,000,000 shares; issued 23,295,712 and
23,050,061 shares, respectively; outstanding 21,812,417 and 21,566,766
shares, respectively |
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233 |
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230 |
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Additional paid-in capital |
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96,958 |
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95,259 |
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Retained earnings |
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65,354 |
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57,738 |
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Less: Treasury stock, at cost; 1,483,295 shares |
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(21,366 |
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(21,366 |
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Total stockholders equity |
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141,179 |
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131,861 |
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Total liabilities and stockholders equity |
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$ |
384,698 |
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$ |
366,122 |
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See accompanying notes to unaudited condensed consolidated financial statements.
-3-
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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13 Weeks Ended |
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26 Weeks Ended |
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July 4, |
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June 28, |
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July 4, |
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June 28, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
219,828 |
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$ |
216,040 |
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$ |
438,349 |
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$ |
426,331 |
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Cost of sales |
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146,862 |
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144,709 |
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293,833 |
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287,929 |
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Gross profit |
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72,966 |
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71,331 |
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144,516 |
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138,402 |
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Selling and administrative expense |
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65,002 |
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63,029 |
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128,065 |
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124,867 |
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Operating income |
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7,964 |
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8,302 |
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16,451 |
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13,535 |
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Interest expense |
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363 |
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608 |
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767 |
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1,321 |
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Income before income taxes |
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7,601 |
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7,694 |
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15,684 |
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12,214 |
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Income taxes |
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2,849 |
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3,039 |
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5,899 |
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4,800 |
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Net income |
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$ |
4,752 |
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$ |
4,655 |
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$ |
9,785 |
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$ |
7,414 |
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Earnings per share: |
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Basic |
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$ |
0.22 |
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$ |
0.22 |
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$ |
0.45 |
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$ |
0.35 |
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Diluted |
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$ |
0.22 |
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$ |
0.22 |
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$ |
0.45 |
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$ |
0.35 |
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Dividends per share |
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$ |
0.05 |
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$ |
0.05 |
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$ |
0.10 |
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$ |
0.10 |
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Weighted-average shares of common
stock outstanding: |
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Basic |
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21,554 |
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21,429 |
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21,519 |
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21,422 |
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Diluted |
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21,893 |
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21,554 |
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21,873 |
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21,483 |
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See accompanying notes to unaudited condensed consolidated financial statements.
-4-
BIG 5 SPORTING GOODS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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26 Weeks Ended |
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July 4, |
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June 28, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
9,785 |
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$ |
7,414 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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9,407 |
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9,716 |
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Share-based compensation |
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940 |
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1,031 |
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Excess tax benefit related to share-based awards |
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(290 |
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Amortization of deferred finance charges |
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26 |
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27 |
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Deferred income taxes |
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(1,761 |
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674 |
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Loss (gain) on disposal of property and equipment |
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18 |
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(11 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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1,393 |
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7,921 |
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Merchandise inventories, net |
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(21,129 |
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(8,194 |
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Prepaid expenses and other assets |
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(729 |
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(2,257 |
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Accounts payable |
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12,691 |
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20,181 |
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Accrued expenses and other long-term liabilities |
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(9,929 |
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(7,968 |
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Net cash provided by operating activities |
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422 |
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28,534 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(4,987 |
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(2,198 |
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Proceeds from disposal of property and equipment |
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4 |
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Net cash used in investing activities |
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(4,983 |
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(2,198 |
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Cash flows from financing activities: |
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Net borrowings (payments) under revolving credit facility
and book overdraft |
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6,804 |
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(28,648 |
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Principal payments under capital lease obligations |
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(1,021 |
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(1,206 |
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Proceeds from exercise of stock options |
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614 |
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8 |
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Excess tax benefit related to share-based awards |
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290 |
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Tax withholding payments for share-based compensation |
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(143 |
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(47 |
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Dividends paid |
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(2,167 |
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(2,150 |
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Net cash provided by (used in) financing activities |
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4,377 |
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(32,043 |
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Net decrease in cash and cash equivalents |
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(184 |
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(5,707 |
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Cash and cash equivalents at beginning of period |
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5,765 |
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9,058 |
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Cash and cash equivalents at end of period |
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$ |
5,581 |
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$ |
3,351 |
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Supplemental disclosures of non-cash investing and financing activities: |
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Property and equipment acquired under capital leases |
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$ |
405 |
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$ |
1,341 |
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Property and equipment purchases accrued |
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$ |
911 |
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$ |
457 |
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Stock awards vested and issued to employees |
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$ |
456 |
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$ |
182 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
749 |
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$ |
1,443 |
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Income taxes paid |
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$ |
7,365 |
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$ |
296 |
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See accompanying notes to unaudited condensed consolidated financial statements.
-5-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(1) |
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Description of Business |
Business
Big 5 Sporting Goods Corporation (the Company) is a leading sporting
goods retailer in the western United States, operating 388 stores in 12 states at July 4, 2010.
The Company provides a full-line product offering in a traditional sporting goods store format that
averages approximately 11,000 square feet. The Companys product mix includes athletic shoes,
apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team
sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding and in-line skating. The
Company is a holding company that operates as one business segment through Big 5 Corp., its
wholly-owned subsidiary, and Big 5 Services Corp., which is a wholly-owned subsidiary of Big 5
Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of
gift cards.
The accompanying interim unaudited condensed consolidated financial statements (Interim
Financial Statements) of the Company and its wholly-owned subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and are presented in accordance with the requirements of Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not
include all of the information and notes required by GAAP for complete financial statements. These
Interim Financial Statements should be read in conjunction with the consolidated financial
statements and notes thereto for the fiscal year ended January 3, 2010 included in the Companys
Annual Report on Form 10-K/A. In the opinion of management, the Interim Financial Statements
included herein contain all adjustments, including normal recurring adjustments, considered
necessary to present fairly the Companys financial position, the results of operations and cash
flows for the periods presented.
The operating results and cash flows of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim period or the full year.
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(2) |
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Summary of Significant Accounting Policies |
Consolidation
The accompanying Interim Financial Statements include the accounts of Big 5 Sporting Goods
Corporation, Big 5 Corp. and Big 5 Services Corp. Intercompany balances and transactions have been
eliminated in consolidation.
Reporting Period
The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest
December 31. Fiscal year 2010 is comprised of 52 weeks and ends on January 2, 2011. Fiscal year
2009 was comprised of 53 weeks and ended on January 3, 2010. The four quarters in fiscal 2010 are
each comprised of 13 weeks, while the first three quarters in fiscal 2009 were each comprised of 13
weeks, and the fourth quarter of fiscal 2009 was comprised of 14 weeks.
-6-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Recently Issued Accounting Updates
In May 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification (ASC) 855, Subsequent Events, which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, ASC 855 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. In February 2010,
Accounting Standards Update (ASU) 2010-09, Amendments to Certain Recognition and Disclosure
Requirements, was issued to clarify certain questions that arose in practice. ASU 2010-09 amended
ASC 855 to, among other things, expressly require Securities and Exchange Commission (SEC) filers
to evaluate subsequent events through the date the financial statements are issued. ASC 855 was
effective for interim or annual financial periods ending after June 15, 2009, and shall be applied
prospectively, while ASU 2010-09 was effective upon issuance. Accordingly, the Company adopted ASC
855 in the second quarter of fiscal 2009 and ASU 2010-09 in February 2010. The adoption of ASC 855
and ASU 2010-09 had no impact on the Companys Interim Financial Statements.
Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the Interim
Financial Statements and reported amounts of revenue and expense during the reporting period to
prepare these Interim Financial Statements in conformity with GAAP. Certain items subject to such
estimates and assumptions include the carrying amount of property and equipment, and goodwill;
valuation allowances for receivables, sales returns, inventories and deferred income tax assets;
estimates related to gift card breakage and the valuation of share-based payment awards; and
obligations related to asset retirements, litigation, self-insurance liabilities and employee
benefits. Actual results could differ significantly from these estimates under different
assumptions and conditions.
Revenue Recognition
The Company earns revenue by selling merchandise primarily through its retail stores. Revenue
is recognized when merchandise is purchased by and delivered to the customer and is shown net of
estimated returns during the relevant period. The allowance for sales returns is estimated based
upon historical experience.
Cash received from the sale of gift cards is recorded as a liability, and revenue is
recognized upon the redemption of the gift card or when it is determined that the likelihood of
redemption is remote (gift card breakage) and no liability to relevant jurisdictions exists. The
Company determines the gift card breakage rate based upon historical redemption patterns and
-7-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
recognizes gift card breakage on a straight-line basis over the estimated gift card redemption
period (20 quarters as of the end of the second quarter of fiscal 2010). The Company recognized
approximately $108,000 and $217,000 in gift card breakage revenue for the 13 weeks and 26 weeks
ended July 4, 2010, respectively, compared to approximately $115,000 and $231,000 for the 13 weeks
and 26 weeks ended June 28, 2009, respectively.
The Company records sales tax collected from its customers on a net basis, and therefore
excludes it from revenue as defined in ASC 605, Revenue Recognition.
Included in revenue are sales of returned merchandise to vendors specializing in the resale of
defective or used products, which accounted for less than 1% of net sales in each of the periods
reported.
Valuation of Merchandise Inventories
The Companys merchandise inventories are made up of finished goods and are valued at the
lower of cost or market using the weighted-average cost method that approximates the first-in,
first-out (FIFO) method. Average cost includes the direct purchase price of merchandise
inventory, net of vendor allowances and cash discounts, and allocated overhead costs associated
with the Companys distribution center.
Management regularly reviews inventories and records valuation reserves for merchandise damage
and defective returns, merchandise items with slow-moving or obsolescence exposure and merchandise
that has a carrying value that exceeds market value. Because of its merchandise mix, the Company
has not historically experienced significant occurrences of obsolescence.
Inventory shrinkage is accrued as a percentage of merchandise sales based on historical
inventory shrinkage trends. The Company performs physical inventories of its stores at least once
per year and cycle counts inventories at its distribution center throughout the year. The reserve
for inventory shrinkage represents an estimate for inventory shrinkage for each store since the
last physical inventory date through the reporting date.
These reserves are estimates, which could vary significantly, either favorably or unfavorably,
from actual results if future economic conditions, consumer demand and competitive environments
differ from expectations.
Leases and Deferred Rent
The Company accounts for its leases under the provisions of ASC 840, Leases.
The Company evaluates and classifies its leases as either operating or capital leases for
financial reporting purposes. Operating lease commitments consist principally of leases for the
Companys retail store facilities, distribution center and corporate office. Capital lease
obligations consist principally of leases for some of the Companys distribution center delivery
tractors, management information systems hardware and point-of-sale equipment for the Companys
stores.
Certain of the leases for the Companys retail store facilities provide for payments based on
future sales volumes at the leased location, which are not measurable at the inception of the
lease. These contingent rents are expensed as they accrue.
-8-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Deferred rent represents the difference between rent paid and the amounts expensed for
operating leases. Certain leases have scheduled rent increases, and certain leases include an
initial period of free or reduced rent as an inducement to enter into the lease agreement (rent
holidays). The Company recognizes rent expense for rent increases and rent holidays on a
straight-line basis over the term of the underlying leases, without regard to when rent payments
are made. The calculation of straight-line rent is based on the reasonably assured lease term as
defined in ASC 840 and may exceed the initial non-cancelable lease term.
Landlord allowances for tenant improvements, or lease incentives, are recorded as deferred
rent and amortized on a straight-line basis over the lease term as a component of rent expense.
|
|
|
(3) |
|
Fair Value Measurements |
The carrying value of cash, accounts receivable, accounts payable and accrued expenses
approximate the fair values of these instruments due to their short-term nature. The carrying
amount for borrowings under the Companys financing agreement approximates fair value because of
the variable market interest rate charged to the Company for these borrowings.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 4, |
|
|
January 3, |
|
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Payroll and related expense |
|
$ |
16,918 |
|
|
$ |
18,472 |
|
Occupancy costs |
|
|
7,527 |
|
|
|
7,634 |
|
Sales tax |
|
|
6,210 |
|
|
|
10,379 |
|
Advertising |
|
|
4,646 |
|
|
|
6,202 |
|
Other |
|
|
14,189 |
|
|
|
16,627 |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
49,490 |
|
|
$ |
59,314 |
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
Revolving Credit Borrowings |
The Companys existing financing agreement with the CIT Group/Business Credit, Inc. (CIT)
and a syndicate of other lenders, as amended, originally provided for a line of credit up to $175.0
million. In the second quarter of fiscal 2010, the Company elected to permanently reduce the line
of credit available under the existing financing agreement to $140.0 million as a cost saving
measure.
During the second half of fiscal 2010, the Company intends to negotiate a new revolving credit
financing agreement to replace the existing financing agreement which has an initial termination
date of March 20, 2011. Accordingly, as of July 4, 2010, outstanding debt associated with the
existing revolving credit facility was classified as a current liability. The Company had
-9-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
short-term revolving credit borrowings of $64.1 million as of July 4, 2010, compared to
long-term revolving credit borrowings of $55.0 million as of January 3, 2010.
As of July 4, 2010 and January 3, 2010, the Company had a total remaining borrowing capacity
under the existing revolving credit facility, after subtracting letters of credit, of $72.5 million
and $94.3 million, respectively.
Under the asset and liability method prescribed under ASC 740, Income Taxes, the Company
recognizes deferred tax assets and liabilities for the future tax consequences attributable to
differences between financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be realized or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date. The
realizability of deferred tax assets is assessed throughout the year and a valuation allowance is
recorded if necessary to reduce net deferred tax assets to the amount more likely than not to be
realized.
The Company files a consolidated federal income tax return and files tax returns in various
state and local jurisdictions. The statutes of limitations for consolidated federal income tax
returns are open for years 2006 and after, and state and local income tax returns are open for
years 2005 and after.
At July 4, 2010 and January 3, 2010, the Company had no unrecognized tax benefits that, if
recognized, would affect the Companys effective income tax rate over the next 12 months. The
Companys policy is to recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expense. At July 4, 2010 and January 3, 2010, the Company had no
accrued interest or penalties.
|
|
|
(7) |
|
Share-based Compensation |
At its discretion, the Company grants share option awards or nonvested share awards to certain
employees, as defined by ASC 718, CompensationStock Compensation, under the Companys 2007 Equity
and Performance Incentive Plan (the Plan) and accounts for its share-based compensation in
accordance with ASC 718. The Company recognized approximately $0.5 million and $0.9 million in
share-based compensation expense, including share option awards and nonvested share awards, for the
13 weeks and 26 weeks ended July 4, 2010, respectively, compared to $0.5 million and $1.0 million
for the 13 weeks and 26 weeks ended June 28, 2009, respectively.
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable at the rate
of 25% per year with a maximum life of ten years. The exercise price of the share option
-10-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
awards is equal to the quoted market price of the Companys common stock on the date of grant.
In the 26 weeks ended July 4, 2010, the Company granted 12,000 share option awards. The
weighted-average grant-date fair value per option for share option awards granted in the 26 weeks
ended July 4, 2010 and June 28, 2009 was $6.26 and $1.92, respectively.
The fair value of each share option award on the date of grant is estimated using the
Black-Scholes method based on the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
26 Weeks Ended |
|
|
July 4, |
|
June 28, |
|
July 4, |
|
June 28, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
2.4% |
|
3.3% |
|
2.4% |
|
2.3% |
Expected term |
|
6.50 years |
|
6.50 years |
|
6.50 years |
|
6.50 years |
Expected volatility |
|
55.2% |
|
55.2% |
|
55.2% |
|
55.2% |
Expected dividend yield |
|
1.54% |
|
1.52% |
|
1.54% |
|
4.07% |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant for periods corresponding with the expected term of the share option award; the expected term
represents the weighted-average period of time that share option awards granted are expected to be
outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Companys common stock; and the
expected dividend yield is based upon the Companys current dividend rate and future expectations.
As of July 4, 2010, there was $1.3 million of total unrecognized compensation cost related to
nonvested share option awards granted. That cost is expected to be recognized over a
weighted-average period of 2.4 years.
-11-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nonvested Share Awards
In the 26 weeks ended July 4, 2010, the Company granted 172,000 nonvested share awards. The
weighted-average grant-date fair value per share of the Companys nonvested share awards granted in
the 26 weeks ended July 4, 2010 and June 28, 2009 was $15.52 and $13.17, respectively.
The following table details the Companys nonvested share awards activity for the 26 weeks
ended July 4, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2010 |
|
|
92,925 |
|
|
$ |
8.60 |
|
Granted |
|
|
172,000 |
|
|
|
15.52 |
|
Vested |
|
|
(29,875 |
) |
|
|
8.45 |
|
Forfeited |
|
|
(300 |
) |
|
|
7.91 |
|
|
|
|
|
|
|
|
Balance at July 4, 2010 |
|
|
234,750 |
|
|
$ |
13.69 |
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of nonvested share awards is the quoted market
price of the Companys common stock on the date of grant, as shown in the table above.
Nonvested share awards granted by the Company vest from the date of grant in four equal annual
installments of 25% per year.
As of July 4, 2010, there was $2.9 million of total unrecognized compensation cost related to
nonvested share awards. That cost is expected to be recognized over a weighted-average period of
3.2 years.
To satisfy employee minimum statutory tax withholding requirements for nonvested share awards
that vest, the Company withholds and retires a portion of the vesting common shares, unless an
employee elects to pay cash. In the 26 weeks ended July 4, 2010, the Company withheld 9,104 common
shares with a total value of $143,000. This amount is presented as a cash outflow from financing
activities in the accompanying interim unaudited condensed consolidated statements of cash flows.
-12-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share,
which requires a dual presentation of basic and diluted earnings per share. Basic earnings per
share is calculated by dividing net income by the weighted-average shares of common stock
outstanding, reduced by shares repurchased and held in treasury, during the period. Diluted
earnings per share represents basic earnings per share adjusted to include the potentially dilutive
effect of outstanding share option awards and nonvested share awards.
The following table sets forth the computation of basic and diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
|
|
July 4, |
|
|
June 28, |
|
|
July 4, |
|
|
June 28, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,752 |
|
|
$ |
4,655 |
|
|
$ |
9,785 |
|
|
$ |
7,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
of common stock
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
21,554 |
|
|
|
21,429 |
|
|
|
21,519 |
|
|
|
21,422 |
|
Dilutive
effect of
common stock
equivalents
arising from
stock
options and
nonvested
stock awards |
|
|
339 |
|
|
|
125 |
|
|
|
354 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
21,893 |
|
|
|
21,554 |
|
|
|
21,873 |
|
|
|
21,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.45 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.45 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted earnings per share for the 13 weeks ended July 4, 2010, the 26
weeks ended July 4, 2010, the 13 weeks ended June 28, 2009 and the 26 weeks ended June 28, 2009
does not include share option awards in the amounts of 890,462, 890,763, 1,389,996 and 1,403,855,
respectively, that were outstanding and antidilutive (i.e., including such share option awards
would result in higher earnings per share), since the exercise prices of these share option awards
exceeded the average market price of the Companys common shares.
No nonvested share awards were antidilutive for the 13 weeks and 26 weeks ended July 4, 2010.
The computation of diluted earnings per share for the 13 weeks and the 26 weeks ended June 28, 2009
does not include nonvested share awards in the amounts of 2,637 and 1,319 shares, respectively,
that were outstanding and antidilutive.
The Company did not repurchase any shares of its common stock in fiscal 2009 or the first half
of fiscal 2010. Since the inception of its initial share repurchase program in May 2006 through
-13-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
July 4, 2010, the Company has repurchased a total of 1,369,085 shares for $20.8 million,
leaving a total of $14.2 million available for share repurchases under the current share repurchase
program.
|
|
|
(9) |
|
Commitments and Contingencies |
On August 6, 2009, the Company was served with a complaint filed in the California Superior
Court for the County of San Diego, entitled Shane Weyl v. Big 5 Corp., et al., Case No.
37-2009-00093109-CU-OE-CTL, alleging violations of the California Labor Code and the California
Business and Professions Code. The complaint was brought as a purported class action on behalf of
the Companys hourly employees in California for the four years prior to the filing of the
complaint. The plaintiff alleges, among other things, that the Company failed to provide hourly
employees with meal and rest periods and failed to pay wages within required time periods during
employment and upon termination of employment. The plaintiff seeks, on behalf of the class members,
an award of one hour of pay (wages) for each workday that a meal or rest period was not provided;
restitution of unpaid wages; actual, consequential and incidental losses and damages; pre-judgment
interest; statutory penalties including an additional thirty days wages for each hourly employee
in California whose employment terminated in the four years preceding the filing of the complaint;
civil penalties; an award of attorneys fees and costs; and injunctive and declaratory relief. On
December 14, 2009, the parties engaged in mediation and agreed to settle the lawsuit. On February
4, 2010, the parties filed a joint settlement and a motion to preliminarily approve the settlement
with the court. On July 16, 2010, the court granted preliminary approval of the
settlement and scheduled a hearing for December 10, 2010, to consider final approval of the
settlement. Under the terms of the settlement, the Company agreed to pay up to a maximum amount of
$2.0 million, which includes payments to class members who submit valid and timely claim forms,
plaintiffs attorneys fees and expenses, an enhancement payment to the class representative,
claims administrator fees and payment to the California Labor and Workforce Development Agency.
Under the settlement, in the event that fewer than all class members submit valid and timely
claims, the total amount required to be paid by the Company will be reduced, subject to a minimum
payment amount calculated in the manner provided in the settlement agreement. The Companys
anticipated total payments pursuant to this settlement were reflected in a legal settlement accrual
recorded in the fourth quarter of fiscal 2009. The Company admitted no liability or wrongdoing with
respect to the claims set forth in the lawsuit. Once final approval is granted, the settlement will
constitute a full and complete settlement and release of all claims related to the lawsuit. If the
court does not grant final approval of the settlement, the Company intends to defend the lawsuit
vigorously. If the settlement is not finally approved by the court and the lawsuit is resolved
unfavorably to the Company, this litigation could have a material adverse effect on the Companys
financial condition, and any required change in the Companys labor practices, as well as the costs
of defending this litigation, could have a negative impact on the Companys results of operations.
The Company is involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the Companys financial position, results of
operations or liquidity.
-14-
BIG 5 SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In the third quarter of fiscal 2010, the Companys Board of Directors declared a quarterly
cash dividend of $0.05 per share of outstanding common stock, which will be paid on September 15,
2010 to stockholders of record as of September 1, 2010.
-15-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Big 5 Sporting Goods Corporation
El Segundo, California
We have reviewed the accompanying condensed consolidated balance sheet of Big 5 Sporting Goods
Corporation and subsidiaries (the Corporation) as of July 4, 2010 and the related condensed
consolidated statements of operations for the 13 week and 26 week periods ended July 4, 2010 and
June 28, 2009, and cash flows for the 26 week periods ended July 4, 2010 and June 28, 2009. These
interim financial statements are the responsibility of the Corporations management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such
condensed consolidated interim financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Big 5 Sporting Goods Corporation
and subsidiaries as of January 3, 2010, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated March 3, 2010, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of January 3, 2010 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
August 6, 2010
-16-
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of the Big 5 Sporting Goods Corporation (we, our,
us) financial condition and results of operations includes information with respect to our plans
and strategies for our business and should be read in conjunction with our interim unaudited
condensed consolidated financial statements and related notes (Interim Financial Statements)
included herein and our consolidated financial statements and related notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual
Report on Form 10-K/A for the fiscal year ended January 3, 2010.
Overview
We are a leading sporting goods retailer in the western United States, operating 388 stores in
12 states under the name Big 5 Sporting Goods at July 4, 2010. We provide a full-line product
offering in a traditional sporting goods store format that averages approximately 11,000 square
feet. Our product mix includes athletic shoes, apparel and accessories, as well as a broad
selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing,
tennis, golf, snowboarding and in-line skating.
Executive Summary
Our operating results for the second quarter of fiscal 2010 and the second quarter of fiscal
2009 reflect a difficult environment for retailers resulting from the ongoing economic recession
and uncertainty in the financial sector. If measures implemented by the federal and state
governments or private sector spending fail to stimulate a prolonged economic recovery, this
economic recession could continue, which may continue to impact our operating results.
|
|
|
Net income for the second quarter of fiscal 2010 increased 2.1% to $4.8 million, or
$0.22 per diluted share, compared to $4.7 million, or $0.22 per diluted share, for the
second quarter of fiscal 2009. The increase in net income primarily reflected higher net
sales year over year, partially offset by deleveraging of selling and administrative
expense. |
|
|
|
|
Net sales for the second quarter of fiscal 2010 increased 1.8% to $219.8 million
compared to $216.0 million for the second quarter of fiscal 2009. The increase in net
sales was attributable to increases in new store sales and the
benefit of a calendar shift as discussed in Results of Operations
below. |
|
|
|
|
Gross profit as a percentage of net sales for the second quarter of fiscal 2010
increased by approximately 20 basis points to 33.2% compared to the second quarter of
fiscal 2009, primarily as a result of slightly higher merchandise margins and lower
distribution costs as a percentage of net sales. |
|
|
|
|
Selling and administrative expense for the second quarter of fiscal 2010 increased 3.1%
to $65.0 million, or 29.6% of net sales, compared to $63.0 million, or 29.2% of net sales,
for the second quarter of fiscal 2009. The increase was primarily |
-17-
|
|
|
attributable to higher store-related expense, excluding occupancy, as a result of new store
openings. |
|
|
|
|
Operating income for the second quarter of fiscal 2010 decreased 4.1% to $8.0 million,
or 3.6% of net sales, compared to $8.3 million, or 3.8% of net sales, for the second
quarter of fiscal 2009. The lower operating income primarily reflects higher selling and
administrative expense, due largely to higher store-related expense as a result of new
store openings. |
Results of Operations
The results of the interim periods are not necessarily indicative of results for the entire
fiscal year.
13 Weeks Ended July 4, 2010 Compared to 13 Weeks Ended June 28, 2009
The following table sets forth selected items from our interim unaudited condensed
consolidated statements of operations by dollar and as a percentage of our net sales for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
|
July 4, 2010 |
|
|
June 28, 2009 |
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
219,828 |
|
|
|
100.0 |
% |
|
$ |
216,040 |
|
|
|
100.0 |
% |
Cost of sales
(1) |
|
|
146,862 |
|
|
|
66.8 |
|
|
|
144,709 |
|
|
|
67.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
72,966 |
|
|
|
33.2 |
|
|
|
71,331 |
|
|
|
33.0 |
|
Selling and
administrative
expense
(2) |
|
|
65,002 |
|
|
|
29.6 |
|
|
|
63,029 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
7,964 |
|
|
|
3.6 |
|
|
|
8,302 |
|
|
|
3.8 |
|
Interest
expense |
|
|
363 |
|
|
|
0.1 |
|
|
|
608 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes |
|
|
7,601 |
|
|
|
3.5 |
|
|
|
7,694 |
|
|
|
3.6 |
|
Income
taxes |
|
|
2,849 |
|
|
|
1.3 |
|
|
|
3,039 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,752 |
|
|
|
2.2 |
% |
|
$ |
4,655 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of sales includes the cost of merchandise, net of discounts or allowances
earned, freight, inventory shrinkage, buying, distribution center costs and store occupancy
costs. Store occupancy costs include rent, amortization of leasehold improvements, common area
maintenance, property taxes and insurance. |
|
(2) |
|
Selling and administrative expense includes store-related expense, other than store
occupancy costs, as well as advertising, depreciation and amortization and expense associated
with operating our corporate headquarters. |
Net Sales. Net sales increased by $3.8 million, or 1.8%, to $219.8 million in the 13
weeks ended July 4, 2010 from $216.0 million in the second quarter last year. The change in net
sales reflected the following:
|
|
|
New store sales increased, reflecting the opening of seven new stores, net of
relocations, since March 29, 2009. |
-18-
|
|
|
Net sales for the second quarter of fiscal 2010 reflected the benefit of a calendar
shift, as we transition to a 52-week fiscal year in 2010 from a 53-week fiscal year in 2009.
This calendar shift resulted in net sales for a higher volume sales week leading up to the
Fourth of July holiday being included in the second quarter of fiscal 2010, while net sales
for this period were included in the third quarter of fiscal 2009. Additionally, compared to
the second quarter of fiscal 2009, net sales for the second quarter of fiscal 2010 benefited
from an extra sales day due to the shift of the Easter holiday, during which our stores are
closed, into the first quarter of fiscal 2010. |
|
|
|
Customer traffic into our retail stores increased for the 13 weeks ended July 4,
2010 versus the comparable 13 week period in the prior year. |
|
|
|
|
Same store sales decreased 0.5% in the 13 weeks ended July 4, 2010 versus the
comparable 13 week period in the prior year, reversing a trend of four consecutive
quarters of same store sales growth which began in the second quarter of fiscal 2009.
Our sales were negatively impacted by the sluggish pace of the economic recovery and
unfavorable weather comparisons in many of our markets. Same store sales for a period
reflect net sales from stores that operated throughout the period as well as the
corresponding prior period; e.g., comparable quarterly reporting periods for quarterly
comparisons. |
Store count at July 4, 2010 was 388 versus 382 at June 28, 2009. We opened two new stores in
the 13 weeks ended July 4, 2010, while we opened one new store in the 13 weeks ended June 28, 2009.
We anticipate opening between 10 and 15 net new stores in fiscal 2010.
Gross Profit. Gross profit increased by $1.7 million, or 2.3%, to $73.0 million, or 33.2% of
net sales, in the 13 weeks ended July 4, 2010 from $71.3 million, or 33.0% of net sales, in the 13
weeks ended June 28, 2009. The change in gross profit was primarily attributable to the following:
|
|
|
Net sales increased by $3.8 million in the 13 weeks ended July 4, 2010 compared to
the 13 weeks ended June 28, 2009. |
|
|
|
|
Merchandise margins, which exclude buying, occupancy and distribution costs,
increased approximately 10 basis points versus the second quarter last year, primarily
reflecting shifts in product sales mix. |
|
|
|
|
Store occupancy costs increased by $0.7 million, or approximately 20 basis points,
year over year, primarily reflecting the expense for new stores. |
|
|
|
|
Distribution costs, including costs capitalized into inventory, decreased $0.1
million, or 1.2%, compared to the same period last year. Distribution costs as a
percentage of net sales decreased approximately 15 basis points year over year. |
Selling and Administrative Expense. Selling and administrative expense increased by $2.0
million to $65.0 million, or 29.6% of net sales, in the 13 weeks ended July 4, 2010 from $63.0
million, or 29.2% of net sales, in the same period last year. The increase in selling and
administrative expense compared to the prior year was largely attributable to an increase in
store-related expense, excluding occupancy, of $1.6 million due mainly to higher labor and
operating costs to support the increase in store count.
Interest Expense. Interest expense decreased by $0.2 million, or 40.2%, to $0.4 million in the
13 weeks ended July 4, 2010 from $0.6 million in the same period last year. This decrease was due
to a reduction in average debt levels of approximately $17.0 million to $57.4 million in the second
quarter of fiscal 2010 from $74.4 million in the second quarter
-19-
last year, combined with a reduction in average interest rates of approximately 70 basis
points to 1.5% in the second quarter of fiscal 2010 from 2.2% in the same period last year.
Income Taxes. The provision for income taxes was $2.8 million for the 13 weeks ended July 4,
2010 and $3.0 million for the 13 weeks ended June 28, 2009. Our effective tax rate was 37.5% for
the second quarter of fiscal 2010 compared with 39.5% for the second quarter of fiscal 2009. Our
lower effective tax rate for the second quarter of fiscal 2010 compared to the same period last
year primarily reflects an increased benefit from income tax credits for the current year.
26 Weeks Ended July 4, 2010 Compared to 26 Weeks Ended June 28, 2009
The following table sets forth selected items from our interim unaudited condensed
consolidated statements of operations by dollar and as a percentage of our net sales for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended |
|
|
|
July 4, 2010 |
|
|
June 28, 2009 |
|
|
|
(In thousands, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
438,349 |
|
|
|
100.0 |
% |
|
$ |
426,331 |
|
|
|
100.0 |
% |
Cost of sales
(1) |
|
|
293,833 |
|
|
|
67.0 |
|
|
|
287,929 |
|
|
|
67.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
|
144,516 |
|
|
|
33.0 |
|
|
|
138,402 |
|
|
|
32.5 |
|
Selling and
administrative
expense
(2) |
|
|
128,065 |
|
|
|
29.2 |
|
|
|
124,867 |
|
|
|
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
16,451 |
|
|
|
3.8 |
|
|
|
13,535 |
|
|
|
3.2 |
|
Interest
expense |
|
|
767 |
|
|
|
0.2 |
|
|
|
1,321 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes |
|
|
15,684 |
|
|
|
3.6 |
|
|
|
12,214 |
|
|
|
2.9 |
|
Income
taxes |
|
|
5,899 |
|
|
|
1.4 |
|
|
|
4,800 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,785 |
|
|
|
2.2 |
% |
|
$ |
7,414 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of sales includes the cost of merchandise, net of discounts or allowances
earned, freight, inventory shrinkage, buying, distribution center costs and store occupancy
costs. Store occupancy costs include rent, amortization of leasehold improvements, common area
maintenance, property taxes and insurance. |
|
(2) |
|
Selling and administrative expense includes store-related expense, other than store
occupancy costs, as well as advertising, depreciation and amortization and expense associated
with operating our corporate headquarters. |
Net Sales. Net sales increased by $12.0 million, or 2.8%, to $438.3 million in the 26
weeks ended July 4, 2010 from $426.3 million in the 26 weeks ended June 28, 2009. The increase in
net sales was primarily attributable to the following:
|
|
|
New store sales increased, reflecting the opening of seven new stores, net of
relocations, since December 28, 2008. |
|
|
|
|
Net sales for the first half of fiscal 2010 reflected the benefit of a calendar shift,
as we transition to a 52-week fiscal year in 2010 from a 53-week fiscal year in 2009. This
calendar shift resulted in net sales for a higher volume sales week leading up to the Fourth
of July holiday being included in the first half of fiscal 2010, while net sales for this
period were included in the third quarter of fiscal 2009. |
|
|
|
|
Same store sales increased 0.9% in the 26 weeks ended July 4, 2010 versus the
comparable 26 week period in the prior year. Same store sales for a period reflect net
sales from stores that operated throughout the period as well as the corresponding
prior period; e.g., comparable year-to-date reporting periods for year-to-date
comparisons. |
-20-
|
|
|
Customer traffic into our retail stores increased for the 26 weeks ended July 4,
2010 when compared with the 26 weeks ended June 28, 2009. |
Store count at July 4, 2010 was 388 versus 382 at June 28, 2009. We opened four new stores,
net of relocations, in the 26 weeks ended July 4, 2010, while we opened one new store in the 26
weeks ended June 28, 2009. We anticipate opening between 10 and 15 net new stores in fiscal 2010.
Gross Profit. Gross profit increased by $6.1 million, or 4.4%, to $144.5 million, or 33.0% of
net sales, in the 26 weeks ended July 4, 2010 from $138.4 million, or 32.5% of net sales, in the 26
weeks ended June 28, 2009. The change in gross profit was primarily attributable to the following:
|
|
|
Net sales increased by $12.0 million in the 26 weeks ended July 4, 2010 compared to
the 26 weeks ended June 28, 2009. |
|
|
|
|
Merchandise margins, which exclude buying, occupancy and distribution costs,
increased approximately 15 basis points year over year, primarily reflecting shifts in
product sales mix. |
|
|
|
|
Distribution costs, including costs capitalized into inventory, decreased $1.2
million compared to the same period last year. Distribution costs as a percentage of
net sales decreased approximately 40 basis points year over year. |
|
|
|
|
Store occupancy costs increased by $1.3 million, or approximately 5 basis points,
year over year, primarily reflecting the expense for new stores. |
Selling and Administrative Expense. Selling and administrative expense increased by $3.2
million to $128.1 million, or 29.2% of net sales, in the 26 weeks ended July 4, 2010 from $124.9
million, or 29.3% of net sales, in the same period last year. The increase in selling and
administrative expense compared to the same period last year was largely attributable to an
increase in store-related expense, excluding occupancy, of $2.8 million due mainly to higher labor
and operating costs to support the increase in store count. This increase, combined with an
increase of $0.8 million in various administrative costs, was partially offset by a decline in
advertising expense of $0.4 million.
Interest Expense. Interest expense decreased by $0.5 million, or 41.9%, to $0.8 million in the
26 weeks ended July 4, 2010 from $1.3 million in the same period last year. This decrease was due
to a reduction in average debt levels of approximately $28.1 million to $56.8 million in the first
half of fiscal 2010 from $84.9 million in the same period last year, combined with a reduction in
average interest rates of approximately 70 basis points to 1.6% in the first half of fiscal 2010
from 2.3% in the same period last year.
Income Taxes. The provision for income taxes was $5.9 million for the 26 weeks ended July 4,
2010 and $4.8 million for the 26 weeks ended June 28, 2009, primarily reflecting our higher pre-tax
income. Our effective tax rate was 37.6% for the first half of fiscal 2010 compared with 39.3% for
the first half of fiscal 2009. Our lower effective tax rate
-21-
for the first half of fiscal 2010 compared to the same period last year primarily reflects an
increased benefit from income tax credits for the current year.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash
dividends. We fund our liquidity requirements primarily through cash on hand, cash flow from
operations and borrowings from our revolving credit facility. Our existing financing agreement is
scheduled to expire in March of 2011. We expect to replace our existing financing agreement with a
new facility later this year. We believe our cash on hand, future funds from operations and
borrowings from our existing revolving credit facility will be sufficient to fund our cash
requirements through the remainder of fiscal 2010. There is no assurance, however, that we will be
able to generate sufficient cash flow, maintain our ability to borrow under our existing revolving
credit facility or successfully negotiate a new revolving credit facility.
We ended the first half of fiscal 2010 with $5.6 million of cash and cash equivalents compared
with $3.4 million at the end of the same period in fiscal 2009. Our cash flows from operating,
investing and financing activities for the 26 weeks ended July 4, 2010 and June 28, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended |
|
|
|
July 4, |
|
|
June 28, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
422 |
|
|
$ |
28,534 |
|
Investing activities |
|
|
(4,983 |
) |
|
|
(2,198 |
) |
Financing activities |
|
|
4,377 |
|
|
|
(32,043 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(184 |
) |
|
$ |
(5,707 |
) |
|
|
|
|
|
|
|
Operating Activities. Net cash provided by operating activities for the 26 weeks ended July 4,
2010 and June 28, 2009 was $0.4 million and $28.5 million, respectively. The decrease in cash
provided by operating activities for the 26 weeks ended July 4, 2010 compared to the same period
last year primarily reflects higher funding of merchandise inventory purchases along with reduced
accounts payable leverage, due in part to the timing of inventory receipts and payments, and a
smaller reduction in accounts receivable, partially offset by the favorable impact of higher net
income. Our increase in inventory purchasing during the first half of this year over the first half
of last year primarily reflected an anticipated improvement in business conditions, increased
availability of certain products this year, opportunistic buying and bringing in seasonal product
earlier to avoid potential delivery delays.
Investing Activities. Net cash used in investing activities for the 26 weeks ended July 4,
2010 and June 28, 2009 was $5.0 million and $2.2 million, respectively. Capital expenditures,
excluding non-cash property and equipment acquisitions, represented substantially all of the net
cash used in investing activities for both periods. This increase was primarily attributable to the
resumption in store expansion activity, after a slowdown in fiscal
-22-
2009 due to the economic recession, and a corresponding increase in new store capital
expenditures.
Financing Activities. Net cash provided by financing activities for the 26 weeks ended July
4, 2010 was $4.4 million and net cash used in financing activities for the 26 weeks ended June 28,
2009 was $32.0 million. For the 26 weeks ended July 4, 2010, cash was provided primarily from
increased borrowings under our revolving credit facility, offset by cash used to pay dividends. For
the 26 weeks ended June 28, 2009, cash was used primarily to pay down borrowings under our
revolving credit facility and pay dividends.
As of July 4, 2010, we had revolving credit borrowings of $64.1 million and letter of credit
commitments of $3.4 million outstanding under our financing agreement. These balances compare to
revolving credit borrowings of $55.0 million and letter of credit commitments of $2.7 million
outstanding as of January 3, 2010 and revolving credit borrowings of $72.6 million and letter of
credit commitments of $3.2 million outstanding as of June 28, 2009. As of July 4, 2010, our
revolving credit borrowings increased by 16.5% from the end of fiscal 2009 due primarily to funding
of merchandise inventory purchases to replenish inventory levels following the year-end holiday
selling season and the resumption of our store expansion.
Financing Agreement. Our financing agreement with The CIT Group/Business Credit, Inc. (CIT)
and a syndicate of other lenders, as amended, originally provided for a line of credit up to $175.0
million. In the second quarter of fiscal 2010, we elected to permanently reduce the line of credit
available under our existing financing agreement to $140.0 million as a cost saving measure. The
initial termination date of the revolving credit facility is March 20, 2011 (subject to annual
extensions thereafter). The revolving credit facility may be terminated by the lenders by giving at
least 90 days prior written notice before any anniversary date, commencing with its anniversary
date on March 20, 2011. We may terminate the revolving credit facility by giving at least 30 days
prior written notice, provided that if we terminate prior to March 20, 2011, we are subject to an
early termination fee under the terms of the financing agreement, which is not expected to be
material. Unless it is terminated, the revolving credit facility will continue on an annual basis
from anniversary date to anniversary date beginning on March 21, 2011.
Under the revolving credit facility, our maximum eligible borrowing capacity is limited to
72.60% of the aggregate value of eligible inventory during October, November and December and
66.90% during the remainder of the year. An annual fee of 0.325%, payable monthly, is assessed on
the unused portion of the revolving credit facility. As of July 4, 2010 and January 3, 2010, our
total remaining borrowing capacity under the revolving credit facility, after subtracting letters
of credit, was $72.5 million and $94.3 million, respectively.
The revolving credit facility bears interest at various rates based on our overall borrowings,
with a floor of LIBOR plus 1.00% or the JP Morgan Chase Bank prime lending rate and a ceiling of
LIBOR plus 1.50% or the JP Morgan Chase Bank prime lending rate. Additionally, if our earnings
before interest, taxes, depreciation and amortization (EBITDA) for the prior four quarters, in
the aggregate, falls below $50 million, the interest rate under the revolving credit facility is
increased to LIBOR plus 1.75% or the JP Morgan Chase Bank prime lending rate plus 0.25%.
-23-
Our dividend payments and stock repurchases, if any, are generally funded by distributions
from our subsidiary, Big 5 Corp. Generally, as long as there is no default or event of default
under our financing agreement, Big 5 Corp. may make distributions to us of up to $15.0 million per
year (and up to $5.0 million per quarter) for any purpose (including dividend payments or stock
repurchases) and may make additional distributions for the purpose of paying our dividends or
repurchasing our common stock if Big 5 Corp. will have post-dividend liquidity (as defined in the
financing agreement) of at least $30 million.
Our financing agreement is secured by a first priority security interest in substantially all
of our assets. Our financing agreement contains various financial and other covenants, including
covenants that require us to maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 in
certain circumstances, restrict our ability to incur indebtedness or to create various liens and
restrict the amount of capital expenditures that we may incur. Our financing agreement also
restricts our ability to engage in mergers or acquisitions, sell assets, repurchase our stock or
pay dividends. We may repurchase our stock or declare a dividend only if, among other things, no
default or event of default exists on the stock repurchase date or dividend declaration date, as
applicable, and a default is not expected to result from the repurchase of stock or payment of the
dividend. The requirements are described in more detail in the financing agreement and the
amendments thereto, which have been filed as exhibits to our previous filings with the Securities
and Exchange Commission (SEC). We are currently in compliance with all financial covenants under
our financing agreement. If we fail to make any required payment under our financing
agreement or if we otherwise default under this instrument, the lenders may (i) require us to agree
to less favorable interest rates and other terms under the agreement in exchange for a waiver of
any such default or (ii) accelerate our debt under this agreement. This acceleration could also
result in the acceleration of other indebtedness that we may have outstanding at that time.
During the second half of fiscal 2010, we intend to negotiate a new revolving credit financing
agreement to replace our existing financing agreement which has an initial termination date of
March 20, 2011. We expect that the interest rate on our borrowings and amortization associated with
financing fees will be higher in fiscal 2011 as a result of entering into a new financing
agreement. Under our existing financing agreement, the LIBOR borrowing base option includes an
interest rate range of LIBOR plus 1.00% to 1.50%. Based on current market conditions, under a new
revolving credit financing agreement the interest rate range is expected to increase by
approximately 100 basis points. Because our existing financing agreement terminates on March 20,
2011, as of July 4, 2010 our outstanding debt associated with this agreement was classified as a
current liability.
Future Capital Requirements. We had cash on hand of $5.6 million at July 4, 2010. We expect
capital expenditures for the second half of fiscal 2010, excluding non-cash property and equipment
acquisitions, to range from approximately $9.0 million to $12.0 million, primarily to fund the
opening of new stores, store-related remodeling, distribution center equipment and computer
hardware and software purchases. As a result of the economic recession, we slowed our store
expansion efforts substantially in fiscal 2009 by opening only three net new stores. We anticipate
opening between 10 and 15 net new stores in fiscal 2010.
-24-
During fiscal 2009 and for the first half of fiscal 2010, the Company paid quarterly cash
dividends of $0.05 per share of outstanding common stock. In the third quarter of fiscal 2010, our
Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding common
stock, which will be paid on September 15, 2010 to stockholders of record as of September 1, 2010.
As of July 4, 2010, a total of $14.2 million remained available for share repurchases under
our share repurchase program. We did not make any share repurchases in fiscal 2009 or the first
half of fiscal 2010 due to the economic recession and expect limited, if any, share repurchases in
fiscal 2010.
We believe we will be able to fund our cash requirements from cash on hand, operating cash
flows and borrowings from our existing revolving credit facility through the remainder of fiscal
2010. However, our ability to satisfy such cash requirements depends upon our future
performance, which in turn is subject to general economic conditions and regional risks, and to
financial, business and other factors affecting our operations, including factors beyond our
control. There is no assurance that we will be able to generate sufficient cash flow, maintain our
ability to borrow under our existing revolving credit facility or successfully negotiate a new
revolving credit facility.
If we are unable to generate sufficient cash flow from operations to meet our obligations and
commitments, or if we are unable to maintain our ability to borrow sufficient amounts under our
revolving credit facility, or successfully negotiate and enter into a new revolving credit facility
to replace our current facility, which has an initial termination date of March 20, 2011, we will
be required to refinance or restructure our indebtedness or raise additional debt or equity
capital. Additionally, we may be required to sell material assets or operations, suspend or further
reduce dividend payments or delay or forego expansion opportunities. We might not be able to
implement successful alternative strategies on satisfactory terms, if at all.
Off-Balance Sheet Arrangements and Contractual Obligations. Our material off-balance sheet
arrangements are operating lease obligations and letters of credit. We excluded these items from
the balance sheet in accordance with generally accepted accounting principles in the United States
of America (GAAP).
Operating lease commitments consist principally of leases for our retail store facilities,
distribution center and corporate office. Our facility leases frequently include options which
permit us to extend the terms beyond the initial fixed lease term. With respect to most of those
leases, we intend to renegotiate those leases as they expire.
Issued and outstanding letters of credit were $3.4 million at July 4, 2010, and were related
primarily to importing merchandise and funding insurance program liabilities.
Our material contractual obligations include capital lease obligations, borrowings under our
revolving credit facility, certain occupancy costs related to our leased properties and other
liabilities. Capital lease obligations consist principally of leases for some of our distribution
center delivery tractors, management information systems hardware and point-of-sale equipment for
our stores. Our revolving credit facility debt fluctuates daily depending
-25-
on operating, investing and financing cash flows. Occupancy costs include estimated property
maintenance fees and property taxes for our stores, distribution center and corporate headquarters.
Other liabilities consist principally of actuarially-determined reserve estimates related to
workers compensation claims, a contractual obligation for the surviving spouse of Robert W.
Miller, our co-founder, and asset retirement obligations related to the removal of leasehold
improvements for certain stores upon termination of their leases.
Included in the Liquidity and Capital Resources section of Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on
Form 10-K/A for the fiscal year ended January 3, 2010, is a discussion of our future obligations
and commitments as of January 3, 2010. In the 26 weeks ended July 4, 2010, our revolving credit
borrowings increased by 16.5% from the end of fiscal 2009, due primarily to funding of merchandise
inventory purchases to replenish inventory levels following the year-end holiday selling season and
the resumption of our store expansion. We entered into new operating lease agreements in relation
to our business operations during the 26 weeks ended July 4, 2010, but do not believe that these
operating leases would materially change our contractual obligations or commitments presented as of
January 3, 2010.
In the ordinary course of business, we enter into arrangements with vendors to purchase
merchandise in advance of expected delivery. Because most of these purchase orders do not contain
any termination payments or other penalties if cancelled, they are not included as outstanding
contractual obligations.
Critical Accounting Estimates
As discussed in Part II, Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations, of our Annual Report on Form 10-K/A for the fiscal year ended January 3,
2010, we consider our estimates on inventory valuation, impairment of long-lived assets and
self-insurance reserves to be the most critical in understanding the judgments that are involved in
preparing our consolidated financial statements. There have been no significant changes to these
estimates in the 26 weeks ended July 4, 2010.
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results and typically
generate higher net sales in the fourth fiscal quarter, which includes the holiday selling season.
Accordingly, in the fourth fiscal quarter we experience normally higher purchase volumes and
increased expense for staffing and advertising. Seasonality influences our buying patterns which
directly impacts our merchandise and accounts payable levels and cash flows. We purchase
merchandise for seasonal activities in advance of a season. If we miscalculate the demand for our
products generally or for our product mix during the fourth fiscal quarter, our net sales can
decline, resulting in excess inventory, which can harm our financial performance. A shortfall from
expected fourth fiscal quarter net sales can negatively impact our annual operating results.
In the first half of fiscal 2009, we experienced increasing inflation in the purchase cost of
certain products, while during the last half of fiscal 2009 the trend of inflation in
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product purchase costs generally appeared to stabilize. In the first half of fiscal 2010, the
impact of inflation was minimal, although there appears to be increasing inflationary cost pressure
in the second half of this year. If we are unable to adjust our merchandise selling prices to cover
purchase cost increases then our merchandise margins will decline, which could adversely impact our
operating results.
Recently Issued Accounting Updates
See Note 2 to Interim Financial Statements included in Part I, Item 1, Financial Statements,
of this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This document includes certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other
things, our financial condition, our results of operations, our growth strategy and the business of
our company generally. In some cases, you can identify such statements by terminology such as
may, could, project, estimate, potential, continue, should, expects, plans,
anticipates, believes, intends or other such terminology. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results
in future periods to differ materially from forecasted results. These risks and uncertainties
include, among other things, continued or worsening weakness in the consumer spending environment
and the U.S. financial and credit markets, the competitive environment in the sporting goods
industry in general and in our specific market areas, inflation, product availability and growth
opportunities, seasonal fluctuations, weather conditions, changes in cost of goods, operating
expense fluctuations, disruption in product flow, changes in interest rates, credit availability
and our ability to refinance our existing financing agreement on favorable terms or at all, and
higher costs associated with current and new sources of credit resulting from uncertainty in
financial markets and economic conditions in general. Those and other risks and uncertainties are
more fully described in Part II, Item 1A, Risk Factors, in this report and in Part I, Item 1A, Risk
Factors, in our Annual Report on Form 10-K/A and other filings with the SEC. We caution that the
risk factors set forth in this report are not exclusive. In addition, we conduct our business in a
highly competitive and rapidly changing environment. Accordingly, new risk factors may arise. It
is not possible for management to predict all such risk factors, nor to assess the impact of all
such risk factors on our business or the extent to which any individual risk factor, or combination
of factors, may cause results to differ materially from those contained in any forward-looking
statement. We undertake no obligation to revise or update any forward-looking statement that may be
made from time to time by us or on our behalf.
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
We are subject to risks resulting from interest rate fluctuations since interest on our
borrowings under our revolving credit facility is based on variable rates. We enter into borrowings
under our revolving credit facility principally for working capital, capital expenditures and
general corporate purposes. We routinely evaluate the best use of our cash and manage financial
statement exposure to interest rate fluctuations by managing our level of indebtedness and the
interest base rate options on such indebtedness, either LIBOR or the JP Morgan Chase Bank prime
rate. We do not utilize derivative instruments and do not engage in foreign currency transactions
or hedging activities to manage our interest rate risk. If the LIBOR or JP Morgan Chase Bank prime
rate was to change 1.0% as compared to the rate at July 4, 2010, our interest expense would change
approximately $0.6 million on an annual basis based on the outstanding balance of our borrowings
under our revolving credit facility at July 4, 2010.
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Item 4. |
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Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the
end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded
that, as of the end of such period, our disclosure controls and procedures are effective, at a
reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act and are effective in ensuring that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management,
including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended July 4, 2010, no changes occurred with respect to our internal
control over financial reporting that materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
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PART II. OTHER INFORMATION
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Item 1. |
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Legal Proceedings |
On August 6, 2009, the Company was served with a complaint filed in the California Superior
Court for the County of San Diego, entitled Shane Weyl v. Big 5 Corp., et al., Case No.
37-2009-00093109-CU-OE-CTL, alleging violations of the California Labor Code and the California
Business and Professions Code. The complaint was brought as a purported class action on behalf of
the Companys hourly employees in California for the four years prior to the filing of the
complaint. The plaintiff alleges, among other things, that the Company failed to provide hourly
employees with meal and rest periods and failed to pay wages within required time periods during
employment and upon termination of employment. The plaintiff seeks, on behalf of the class members,
an award of one hour of pay (wages) for each workday that a meal or rest period was not provided;
restitution of unpaid wages; actual, consequential and incidental losses and damages; pre-judgment
interest; statutory penalties including an additional thirty days wages for each hourly employee
in California whose employment terminated in the four years preceding the filing of the complaint;
civil penalties; an award of attorneys fees and costs; and injunctive and declaratory relief. On
December 14, 2009, the parties engaged in mediation and agreed to settle the lawsuit. On February
4, 2010, the parties filed a joint settlement and a motion to preliminarily approve the settlement
with the court. On July 16, 2010, the court granted preliminary approval of the settlement and
scheduled a hearing for December 10, 2010, to consider final approval of the settlement. Under the
terms of the settlement, the Company agreed to pay up to a maximum amount of $2.0 million, which
includes payments to class members who submit valid and timely claim forms, plaintiffs attorneys
fees and expenses, an enhancement payment to the class representative, claims administrator fees
and payment to the California Labor and Workforce Development Agency. Under the settlement, in the
event that fewer than all class members submit valid and timely claims, the total amount required
to be paid by the Company will be reduced, subject to a minimum payment amount calculated in the
manner provided in the settlement agreement. The Companys anticipated total payments pursuant to
this settlement were reflected in a legal settlement accrual recorded in the fourth quarter of
fiscal 2009. The Company admitted no liability or wrongdoing with respect to the claims set forth
in the lawsuit. Once final approval is granted, the settlement will constitute a full and complete
settlement and release of all claims related to the lawsuit. If the court does not grant final
approval of the settlement, the Company intends to defend the lawsuit vigorously. If the settlement
is not finally approved by the court and the lawsuit is resolved unfavorably to the Company, this
litigation could have a material adverse effect on the Companys financial condition, and any
required change in the Companys labor practices, as well as the costs of defending this
litigation, could have a negative impact on the Companys results of operations.
The Company is involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the Companys financial position, results of
operations or liquidity.
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Item 1A. Risk Factors
There have been no material changes to the risk factors identified in Part I, Item 1A, Risk
Factors, of the Companys Annual Report on Form 10-K/A for the fiscal year ended January 3, 2010.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
None.
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Item 3. |
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Defaults Upon Senior Securities |
None.
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Item 4. |
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(Removed and Reserved) |
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Item 5. |
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Other Information |
None.
(a) Exhibits
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Exhibit Number |
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Description of Document |
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15.1 |
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Independent Auditors Awareness Letter Regarding Interim
Financial Statements. |
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31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a) Certification of Chief Financial Officer. |
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32.1 |
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Section 1350 Certification of Chief Executive Officer. |
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32.2 |
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Section 1350 Certification of Chief Financial Officer. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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BIG 5 SPORTING GOODS CORPORATION,
a Delaware corporation
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Date: August 6, 2010
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By: |
/s/ Steven G. Miller
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Steven G. Miller |
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Chairman of the Board of Directors,
President and Chief Executive Officer
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Date: August 6, 2010
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By: |
/s/ Barry D. Emerson
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Barry D. Emerson |
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Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer) |
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