e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 29, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the transition period
from
to
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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
El Segundo, California
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90245
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(Address of Principal Executive
Offices)
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(Zip Code)
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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 x 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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o
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Accelerated filer
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x
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Non-accelerated
filer
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o
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(Do not check if a smaller
reporting company)
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|
Smaller reporting company
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|
o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
There were 21,545,792 shares of common stock, with a par
value of $0.01 per share outstanding at July 25, 2008.
BIG 5
SPORTING GOODS CORPORATION
INDEX
PART I. FINANCIAL
INFORMATION
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|
Item 1.
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Financial
Statements
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June 29,
|
|
|
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December 30,
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2008
|
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2007
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|
ASSETS
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Current assets:
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|
|
|
|
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Cash and cash equivalents
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$
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5,717
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|
$
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9,741
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Accounts receivable, net of allowances of $298 and $405,
respectively
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|
|
|
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9,198
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|
|
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14,927
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Merchandise inventories, net
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|
251,399
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|
|
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|
252,634
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Prepaid expenses
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|
|
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|
|
7,725
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|
|
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|
7,069
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Deferred income taxes
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|
|
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|
|
7,550
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|
8,051
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Total current assets
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|
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281,589
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292,422
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Property and equipment, net
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91,396
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93,244
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Deferred income taxes
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14,797
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12,780
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Other assets, net of accumulated amortization of $267 and $241,
respectively
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1,024
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1,044
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Goodwill
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4,433
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4,433
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Total assets
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$
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393,239
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$
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403,923
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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100,415
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$
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95,310
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Accrued expenses
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|
47,782
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|
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62,429
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Current portion of capital lease obligations
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1,308
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|
1,649
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Total current liabilities
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149,505
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|
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159,388
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Deferred rent, less current portion
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23,483
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22,075
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Capital lease obligations, less current portion
|
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1,765
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|
2,279
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Long-term debt
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103,334
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|
|
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103,369
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Other long-term liabilities
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|
|
|
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|
7,657
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7,657
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|
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|
|
|
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Total liabilities
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|
|
|
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|
285,744
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294,768
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Commitments and contingencies
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Stockholders equity:
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Common stock, $0.01 par value, authorized
50,000,000 shares; issued 23,004,087 and
22,894,987 shares, respectively; outstanding 21,631,549 and
22,012,691 shares, respectively
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229
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|
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228
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Additional paid-in capital
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91,795
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90,851
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Retained earnings
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36,047
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34,137
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Less: Treasury stock, at cost; 1,372,538 and
882,296 shares, respectively
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(20,576)
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(16,061)
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Total stockholders equity
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107,495
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109,155
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Total liabilities and stockholders equity
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$
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393,239
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$
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403,923
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See accompanying notes to
unaudited condensed consolidated financial statements.
- 3 -
BIG 5
SPORTING GOODS CORPORATION
(In thousands, except per
share data)
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13 Weeks Ended
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26 Weeks Ended
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June 29,
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July 1,
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June 29,
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July 1,
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2008
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2007
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2008
|
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|
2007
|
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Net sales
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$
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|
208,995
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|
$
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|
217,846
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$
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421,861
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|
$
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|
|
434,853
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Cost of sales
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140,620
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|
143,085
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281,903
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|
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|
284,337
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|
|
|
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|
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|
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|
|
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Gross profit
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|
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|
68,375
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|
|
|
|
74,761
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|
|
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|
139,958
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|
|
|
|
150,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Selling and administrative expense
|
|
|
|
|
64,393
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|
|
|
|
63,466
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|
|
|
|
127,623
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|
|
|
|
125,255
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
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|
Operating income
|
|
|
|
|
3,982
|
|
|
|
|
11,295
|
|
|
|
|
12,335
|
|
|
|
|
25,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense
|
|
|
|
|
1,156
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|
|
|
|
1,473
|
|
|
|
|
2,745
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|
|
|
|
2,922
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes
|
|
|
|
|
2,826
|
|
|
|
|
9,822
|
|
|
|
|
9,590
|
|
|
|
|
22,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Income taxes
|
|
|
|
|
1,102
|
|
|
|
|
3,879
|
|
|
|
|
3,746
|
|
|
|
|
8,809
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Net income
|
|
$
|
|
|
1,724
|
|
$
|
|
|
5,943
|
|
$
|
|
|
5,844
|
|
$
|
|
|
13,530
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per share:
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Basic
|
|
$
|
|
|
0.08
|
|
$
|
|
|
0.26
|
|
$
|
|
|
0.27
|
|
$
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
0.08
|
|
$
|
|
|
0.26
|
|
$
|
|
|
0.27
|
|
$
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Dividends per share
|
|
$
|
|
|
0.09
|
|
$
|
|
|
0.09
|
|
$
|
|
|
0.18
|
|
$
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted-average shares of common stock outstanding:
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Basic
|
|
|
|
|
21,684
|
|
|
|
|
22,691
|
|
|
|
|
21,785
|
|
|
|
|
22,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
|
|
21,693
|
|
|
|
|
22,847
|
|
|
|
|
21,793
|
|
|
|
|
22,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
unaudited condensed consolidated financial statements.
- 4 -
BIG 5
SPORTING GOODS CORPORATION
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
|
|
|
June 29,
|
|
|
|
July 1,
|
|
|
|
|
2008
|
|
|
|
2007
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
|
|
5,844
|
|
$
|
|
|
13,530
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
9,534
|
|
|
|
|
8,372
|
Stock-based compensation
|
|
|
|
|
961
|
|
|
|
|
1,052
|
Tax (deficiency) benefit from stock options
|
|
|
|
|
(16)
|
|
|
|
|
173
|
Excess tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
(137)
|
|
Amortization of deferred finance charges
|
|
|
|
|
26
|
|
|
|
|
25
|
Deferred income taxes
|
|
|
|
|
(1,516) |
|
|
|
|
(1,118) |
|
Loss on disposal of equipment
|
|
|
|
|
50
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
5,729
|
|
|
|
|
284
|
Merchandise inventories, net
|
|
|
|
|
1,235
|
|
|
|
|
(23,120)
|
|
Prepaid expenses and other assets
|
|
|
|
|
(652) |
|
|
|
|
(1,368) |
|
Accounts payable
|
|
|
|
|
13,541
|
|
|
|
|
20,950
|
Accrued expenses and other long-term liabilities
|
|
|
|
|
(13,400)
|
|
|
|
|
(12,547)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
21,336
|
|
|
|
|
6,096
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
|
|
(9,143) |
|
|
|
|
(7,205)
|
|
Proceeds from disposal of property and equipment
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
(9,113)
|
|
|
|
|
(7,205)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net principal (payments) borrowings under revolving credit
facilities and book overdraft
|
|
|
|
|
(7,045) |
|
|
|
|
9,015
|
Principal payments under capital lease obligations
|
|
|
|
|
(948) |
|
|
|
|
(1,052)
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
|
|
|
429
|
Excess tax benefits of stock options exercised
|
|
|
|
|
|
|
|
|
|
137
|
Purchases of treasury stock
|
|
|
|
|
(4,329)
|
|
|
|
|
(379)
|
|
Dividends paid
|
|
|
|
|
(3,925)
|
|
|
|
|
(4,084)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
|
|
(16,247)
|
|
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
|
(4,024)
|
|
|
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
9,741
|
|
|
|
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
5,717
|
|
$
|
|
|
8,102
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired under capital leases
|
|
$
|
|
|
96
|
|
$
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment purchases accrued
|
|
$
|
|
|
2,221
|
|
$
|
|
|
3,131
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases accrued
|
|
$
|
|
|
186
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
3,192
|
|
$
|
|
|
3,168
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
6,878
|
|
$
|
|
|
11,335
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
unaudited condensed consolidated financial statements.
- 5 -
|
|
(1)
|
Description
of Business
|
Business
Big 5 Sporting Goods Corporation (the Company) is a
leading sporting goods retailer in the western United States,
operating 370 stores in 11 states at June 29, 2008.
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 of the Company and its wholly-owned
subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States
(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 unaudited condensed consolidated
financial statements do not include all of the information and
notes required by GAAP for complete financial statements. These
interim unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto for the fiscal year ended
December 30, 2007 included in the Companys Annual
Report on
Form 10-K.
In the opinion of management, the interim unaudited condensed
consolidated 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.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
Consolidation
The accompanying interim unaudited condensed consolidated
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 2008 is comprised of 52 weeks and ends on
December 28, 2008. Fiscal year 2007 was comprised of
52 weeks and ended on December 30, 2007. The fiscal
interim periods in fiscal 2008 and fiscal 2007 are comprised of
13 weeks.
- 6 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
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 consolidated financial statements and reported amounts of
revenues and expenses during the reporting period to prepare
these condensed consolidated financial statements in conformity
with GAAP. Significant 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; estimates related to
the valuation of stock options; and obligations related to asset
retirements, litigation, workers compensation and employee
benefits. Actual results could differ significantly from these
estimates under different assumptions and conditions.
Reclassifications
and Adjustments
In the second quarter of fiscal 2008, the Company corrected the
presentation of its workers compensation reserves on the
interim unaudited condensed consolidated balance sheet. Prior to
this change, the Companys workers compensation
reserves were reported as current liabilities. However, due to
the long-tailed nature of workers compensation claims,
which can extend over a period of years, the Company believes
that the portion of reserves related to these claims that are
expected to be paid beyond the Companys normal operating
cycle, or after 12 months from the date of the consolidated
financial statements, should be classified as long-term
liabilities. As a result, prior period balances have been
reclassified to conform to the current periods
presentation. For comparative purposes, the Company reclassified
approximately $5.1 million of workers compensation
reserves from accrued expenses to other long-term liabilities on
the consolidated balance sheet as of December 30, 2007.
Additionally, the Company reclassified approximately
$2.0 million of the related deferred income tax assets from
current deferred income taxes to long-term deferred income taxes
on the consolidated balance sheet as of December 30, 2007.
This reclassification had no effect on the Companys
previously reported interim unaudited condensed consolidated
statements of operations or interim unaudited condensed
consolidated statement of cash flows, and is not considered
material to any previously reported consolidated financial
statements.
In the second quarter of fiscal 2008, the Company recorded a
pre-tax charge of $1.5 million to correct an error in its
previously recognized straight-line rent expense, substantially
all of which related to prior periods and accumulated over a
period of 15 years. This charge reduced net income by
$0.9 million, or $0.04 per diluted share, on the
Companys interim unaudited condensed consolidated
statements of operations, and increased the deferred rent
liability by $1.5 million on the Companys interim
unaudited condensed consolidated balance sheet. The Company
determined this charge to be immaterial to its prior
periods and current year consolidated financial statements.
The Company revised its previously reported interim unaudited
condensed consolidated statement of cash flows for the
26 weeks ended July 1, 2007 to reflect an increase of
approximately $1.2 million in cash provided by operating
activities and cash used in investing activities. The revision
corrects an error in classification made in presenting the cash
flow statement impact of accrued liabilities related to
purchases of property and equipment.
- 7 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
The correction had no effect on the Companys previously
reported interim unaudited condensed consolidated balance sheet,
interim unaudited condensed consolidated statements of
operations or net cash flows, and is not considered material to
any previously reported consolidated financial statements.
The Company reclassified its previously reported interim
unaudited condensed consolidated statements of operations to
conform to the current year presentation which increased cost of
sales and decreased gross profit for the 13 weeks and
26 weeks ended July 1, 2007, by $2.3 million and
$4.6 million, respectively, and increased selling and
administrative expense for the 13 weeks and 26 weeks
ended July 1, 2007, by $1.9 million and
$3.8 million, respectively, from amounts previously
reported. Historically, the Company presented total depreciation
and amortization expense separately on the face of its interim
unaudited condensed consolidated statements of operations and
its corporate headquarters occupancy costs within cost of
sales. In the fourth quarter of fiscal 2007, and presented in
the Annual Report on
Form 10-K
for the year ended December 30, 2007, the Company
retrospectively changed its classification of distribution
center and store occupancy depreciation and amortization expense
to cost of sales and store equipment and corporate
headquarters depreciation and amortization expense to
selling and administrative expense. Depreciation and
amortization expense is no longer presented separately in the
interim unaudited condensed consolidated statements of
operations. The corporate headquarters occupancy costs are
now included in selling and administrative expense. This
reclassification had no effect on the Companys previously
reported operating or net income, interim unaudited condensed
consolidated balance sheet and interim unaudited condensed
consolidated statement of cash flows, and is not considered
material to any previously reported consolidated financial
statements.
Certain other immaterial prior period amounts have been
reclassified to conform to the current year presentation.
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 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 2008). The Company recognized approximately $122,000 and
$245,000 in gift card breakage revenue for the 13 weeks and
26 weeks ended June 29, 2008, respectively, compared
to approximately $114,000 and $222,000 for the 13 weeks and
26 weeks ended July 1, 2007, respectively.
- 8 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
The Company records sales tax collected from its customers on a
net basis, and therefore excludes it from revenues as defined in
Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF)
06-3, How
Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That
Is, Gross versus Net Presentation).
Included in revenue are sales of returned merchandise to vendors
specializing in the resale of defective or used products, which
have historically accounted for less than 1% of net sales.
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 certain
allowances, and allocated overhead costs associated with the
Companys distribution center. Management regularly reviews
inventories to determine if the carrying value of the inventory
exceeds market value and the Company records a reserve to reduce
the carrying value to its market price, as necessary. Because of
its merchandise mix, the Company has not historically
experienced significant occurrences of obsolescence. However,
these reserves are estimates, which could vary significantly
from actual results if future economic conditions, consumer
demand and competitive environments differ from expectations.
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 count 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.
Leases
and Deferred Rent
The Company leases all but one of its store locations. The
Company accounts for its leases under the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 13, Accounting for Leases, and subsequent
amendments, which require that leases be evaluated and
classified as operating or capital leases for financial
reporting purposes.
Certain leases may provide for payments based on future sales
volumes at the leased location, which are not measurable at the
inception of the lease. In accordance with
SFAS No. 29, Determining Contingent Rentals, an
amendment of FASB Statement No. 13, these contingent
rents are expensed as they accrue.
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 rental expense for rent increases and rent holidays
on a straight-line basis over the terms 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
- 9 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
defined in SFAS No. 98, Accounting for Leases:
Sale-Leaseback Transactions Involving Real Estate, Sales-Type
Leases of Real Estate, Definition of the Lease Term, and Initial
Direct Costs of Direct Financing Leasesan amendment of
FASB Statements No. 13, 66, and 91 and a rescission of FASB
Statement No. 26 and Technical
Bulletin No. 79-11.
This amended definition of the lease term may exceed the initial
non-cancelable lease term.
Landlord allowances for tenant improvements are recorded as
deferred rent and amortized on a straight-line basis over the
lease term as a component of rent expense, in accordance with
FASB Technical
Bulletin No. 88-1,
Issues Relating to Accounting for Leases.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This standard provides guidance
for using fair value to measure assets and liabilities. The
standard also responds to investors requests for expanded
information about the extent to which companies measure assets
and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value,
but does not expand the use of fair value in any new
circumstances. There are numerous previously issued statements
dealing with fair values that are amended by
SFAS No. 157. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP)
FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, which scopes out leasing
transactions accounted for under SFAS No. 13,
Accounting for Leases. In February 2008, FSP
FAS 157-2,
Effective Date of FASB Statement No. 157, was
issued, which delays the effective date of
SFAS No. 157 to fiscal years and interim periods
within those fiscal years beginning after November 15, 2008
for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
The implementation of SFAS No. 157 for financial
assets and financial liabilities, effective December 31,
2007, did not have a material impact on the Companys
interim unaudited condensed consolidated financial statements.
The Company is currently assessing the impact of
SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on its interim unaudited condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement
No. 115. SFAS No. 159 provides companies with
an option to report many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. The objective of SFAS No. 159
is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. The FASB believes
that SFAS No. 159 helps to mitigate accounting-induced
volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need
for companies to comply with detailed rules for hedge
accounting. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons
between
- 10 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
companies that choose different measurement attributes for
similar types of assets and liabilities, and would require
entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value
on the face of the balance sheet. The new statement does not
eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair
value measurements included in SFAS No. 157, Fair
Value Measurements. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company did not elect this fair
value option; consequently, the adoption of
SFAS No. 159 did not have an impact on the
Companys interim unaudited condensed consolidated
financial statements.
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 110, which expresses the views of the
SEC staff regarding the use of a simplified method,
as discussed in the previously issued SAB No. 107
(SAB 107), in developing an estimate of
expected term of plain vanilla share options in
accordance with SFAS No. 123(R), Share-Based
Payment. In particular, the SEC staff indicated in
SAB 107 that it will accept a companys election to
use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the SEC
staff believed that more detailed external information about
employee exercise behavior (e.g., employee exercise patterns by
industry
and/or other
categories of companies) would, over time, become readily
available to companies. Therefore, the SEC staff stated in
SAB 107 that it would not expect a company to use the
simplified method for share option grants after
December 31, 2007. The SEC staff understands that such
detailed information about employee exercise behavior may not be
widely available by December 31, 2007. Accordingly, the SEC
staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. Upon
the Companys adoption of SFAS No. 123(R), the
Company elected to use the simplified method to estimate the
Companys expected term. Effective December 31, 2007,
the Company discontinued use of the simplified method when it
determined that sufficient data was available to develop an
estimate of the expected term based upon historical participant
behavior. This transition resulted in a decrease in the expected
term from 6.25 years for fiscal 2007 to 6.18 years for
fiscal 2008 and did not have a material impact on the valuation
of the Companys stock-based compensation expense.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP in the
United States. This Statement shall be effective 60 days
following the SECs approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The Company
does not expect the adoption of SFAS No. 162 to have a
material impact on its interim unaudited condensed consolidated
financial statements.
- 11 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
|
|
(3)
|
Fair
Values of Financial Instruments
|
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 financing agreement approximates
fair value because of the variable market interest rate charged
to the Company for these borrowings.
The Company adopted SFAS No. 157 for financial assets
and financial liabilities in the first quarter of fiscal 2008,
which did not have a material impact on the Companys
interim unaudited condensed consolidated financial statements.
In accordance with FSP
FAS 157-2,
the Company has deferred application of SFAS No. 157
until December 29, 2008, the beginning of the next fiscal
year, in relation to nonrecurring nonfinancial assets and
nonfinancial liabilities including goodwill impairment testing,
asset retirement obligations, long-lived asset impairments and
exit and disposal activities.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
|
|
|
|
|
December 30,
|
|
|
|
|
|
2008
|
|
|
|
|
2007
|
|
|
(In thousands)
|
|
Payroll and related expenses
|
|
|
|
|
$
|
16,360
|
|
|
|
|
$
|
19,968
|
Occupancy costs
|
|
|
|
|
|
5,985
|
|
|
|
|
|
6,785
|
Advertising
|
|
|
|
|
|
5,349
|
|
|
|
|
|
7,963
|
Sales tax
|
|
|
|
|
|
4,867
|
|
|
|
|
|
9,514
|
Gift cards
|
|
|
|
|
|
4,698
|
|
|
|
|
|
6,027
|
Current portion of self-insurance
|
|
|
|
|
|
2,742
|
|
|
|
|
|
2,593
|
Other
|
|
|
|
|
|
7,781
|
|
|
|
|
|
9,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
$
|
47,782
|
|
|
|
|
$
|
62,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for income taxes under the asset and
liability method whereby deferred tax assets and liabilities are
recognized 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.
- 12 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
The Company files a consolidated federal income tax return and
files tax returns in various state and local jurisdictions. The
Company believes that the statutes of limitations for its
consolidated federal income tax returns are open for years after
2003 and state and local income tax returns are open for years
after 2002. The Company is not currently under examination by
the Internal Revenue Service or any state or local income tax
jurisdictions.
The Company adopted the provisions of FASB Interpretation
No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, on January 1, 2007. The
adoption of FIN 48 had no impact on the Companys
consolidated financial statements. At June 29, 2008 and
December 30, 2007, 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 expenses. At June 29, 2008 and
December 30, 2007, the Company had no accrued interest or
penalties.
|
|
(6)
|
Stock-Based
Compensation
|
The Company accounts for its stock-based compensation in
accordance with SFAS No. 123(R), Share-Based
Payment.
In the 26 weeks ended June 29, 2008, the Company
granted 313,000 stock options and 109,100 restricted
(nonvested) stock awards to certain employees, as
defined by SFAS No. 123(R), under the Companys
2007 Equity and Performance Incentive Plan (the
Plan). Under the Plan, options and nonvested stock
awards granted generally vest and become exercisable at the rate
of 25% per year with a maximum life of ten years. The exercise
price of the options is equal to the market price of the
Companys common stock on the date of grant. The
weighted-average grant-date fair value per option for stock
options granted in the 26 weeks ended June 29, 2008
and July 1, 2007 was $2.85 and $10.96, respectively. The
grant-date fair value per share of the Companys nonvested
stock awards granted in the 26 weeks ended June 29,
2008 was $7.92. The Company recognized approximately
$0.5 million and $1.0 million in combined stock-based
compensation expense related to stock options and nonvested
stock awards for the 13 weeks and 26 weeks ended
June 29, 2008, respectively, compared to $0.6 million
and $1.1 million for the 13 weeks and 26 weeks
ended July 1, 2007, respectively.
- 13 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
Options
The fair value of each option 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
|
|
|
June 29,
|
|
July 1,
|
|
June 29,
|
|
July 1,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
3.7%
|
|
5.0%
|
|
2.8%
|
|
4.6%
|
Expected term
|
|
6.18 years
|
|
6.25 years
|
|
6.18 years
|
|
6.25 years
|
Expected volatility
|
|
46%
|
|
43%
|
|
46%
|
|
43%
|
Expected dividend yield
|
|
4.46%
|
|
1.37%
|
|
4.02%
|
|
1.41%
|
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 option; the expected
term represents the weighted-average period of time that options
granted are expected to be outstanding giving consideration to
vesting schedules and historical participant exercise behavior
for fiscal 2008 and the simplified method pursuant to
SAB 107 for fiscal 2007; the expected volatility is based
upon historical volatilities of the Companys common stock;
and the expected dividend yield is based upon the Companys
current dividend rate and future expectations.
As of June 29, 2008, there was $3.4 million of total
unrecognized compensation cost related to nonvested stock
options granted. That cost is expected to be recognized over a
weighted-average period of 2.7 years.
Nonvested
Stock Awards
The following table illustrates the Companys nonvested
stock awards activity for the 26 weeks ended June 29,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
|
|
|
Fair Value
|
|
|
Balance at December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
109,100
|
|
|
|
|
|
$
|
|
7.92
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2008
|
|
|
109,100
|
|
|
|
|
|
$
|
|
7.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of nonvested stock
awards is the quoted market value of the Companys common
stock on the date of grant, as shown in the table above.
- 14 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
As of June 29, 2008, there was $0.8 million of total
unrecognized compensation cost related to nonvested stock
awards. That cost is expected to be recognized over a
weighted-average period of 3.7 years.
The Company calculates earnings per share in accordance with
SFAS No. 128, 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 during the period. Diluted earnings per share is
calculated by using the weighted-average shares of common stock
outstanding adjusted to include the potentially dilutive effect
of outstanding stock options and nonvested stock awards.
The following table sets forth the computation of basic and
diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
|
|
|
|
|
|
July 1,
|
|
|
|
|
|
June 29,
|
|
|
|
|
|
July 1,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income
|
|
|
|
|
$
|
|
1,724
|
|
|
|
|
|
$
|
|
5,943
|
|
|
|
|
|
$
|
|
5,844
|
|
|
|
|
|
$
|
|
13,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
21,684
|
|
|
|
|
|
|
|
22,691
|
|
|
|
|
|
|
|
21,785
|
|
|
|
|
|
|
|
22,683
|
|
Dilutive effect of common stock equivalents arising from stock
options and nonvested stock awards
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
21,693
|
|
|
|
|
|
|
|
22,847
|
|
|
|
|
|
|
|
21,793
|
|
|
|
|
|
|
|
22,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
$
|
|
0.08
|
|
|
|
|
|
$
|
|
0.26
|
|
|
|
|
|
$
|
|
0.27
|
|
|
|
|
|
$
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
$
|
|
0.08
|
|
|
|
|
|
$
|
|
0.26
|
|
|
|
|
|
$
|
|
0.27
|
|
|
|
|
|
$
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computation of diluted earnings per share for the
13 weeks ended June 29, 2008, the 26 weeks ended
June 29, 2008, the 13 weeks ended July 1, 2007
and the 26 weeks ended July 1, 2007 does not include
options of 1,416,256, 1,314,598, 160,329 and 153,899,
respectively, that were outstanding and antidilutive.
The Company repurchased 210,474 shares of its common stock
for $1.7 million during the 13 weeks ended
June 29, 2008 and repurchased 15,100 shares of its
common stock for $0.4 million during the 13 weeks
ended July 1, 2007. The Company repurchased
490,242 shares of its common stock for $4.5 million
during the 26 weeks ended June 29, 2008 and
repurchased 15,800 shares of its common stock for
$0.4 million during the 26 weeks ended July 1,
2007. Since the inception of its initial share repurchase
program in May 2006 through June 29, 2008, the Company has
repurchased a total of 1,258,328 shares for
$20.0 million. As of June 29, 2008,
- 15 -
BIG 5
SPORTING GOODS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(continued)
a total of $15.0 million remained available for share
repurchases under the Companys current share repurchase
program.
|
|
(8)
|
Commitments
and Contingencies
|
On January 17, 2008, the Company was served with a
complaint filed in the California Superior Court in the County
of Los Angeles, entitled Adi Zimerman v. Big 5 Sporting
Goods Corporation, et al., Case No. BC383834, alleging
violations of the California Civil Code. On May 31, 2008,
the Company was served with a complaint filed in the California
Superior Court in the County of San Diego, entitled Michele
Gonzalez v. Big 5 Sporting Goods Corporation, et al., Case
No. 37-2008-00083307-CU-BT-CTL,
alleging violations of the California Civil Code and California
Business and Professions Code and invasion of privacy. Each
complaint was brought as a purported class action on behalf of
persons who made purchases at the Companys stores in
California using credit cards and were requested to provide
their zip codes. Each plaintiff alleges, among other things,
that customers making purchases with credit cards at the
Companys stores in California were improperly requested to
provide their zip code at the time of such purchases. Each
plaintiff seeks, on behalf of the class members, statutory
penalties, injunctive relief to require the Company to
discontinue the allegedly improper conduct and attorneys
fees and costs. The plaintiff in the Gonzalez case also seeks,
on behalf of the class members, general damages, special
damages, exemplary or punitive damages and disgorgement of
profits. The Company believes that each complaint is without
merit and intends to defend each suit vigorously. The Company is
not able to evaluate the likelihood of an unfavorable outcome in
either case or to estimate a range of potential loss in the
event of an unfavorable outcome in either case at the present
time. If either case 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 business practices, as well as the costs of
defending this litigation, could have a negative impact on the
Companys results of operations.
In February 2008, the Company entered into a lease for a parcel
of land with an existing building adjacent to its corporate
headquarters location. The lease term commences in 2009 and the
primary term expires on February 28, 2019, which may be
renewed for six successive periods of five years each. In
accordance with terms of the lease agreement, the Company is
committed to the construction of a new retail building on the
premises before the primary term expires in 2019, regardless of
whether or not any renewal options are exercised.
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
will not have a material adverse effect on the Companys
financial position, results of operations or liquidity.
In the third quarter of fiscal 2008 the Companys Board of
Directors declared a quarterly cash dividend of $0.09 per share
of outstanding common stock, which will be paid on
September 15, 2008 to stockholders of record as of
August 29, 2008.
- 16 -
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 June 29, 2008 and the
related condensed consolidated statements of operations for the
13 week and 26 week periods ended June 29, 2008
and July 1, 2007, respectively, and cash flows for the
26 week periods ended June 29, 2008 and July 1,
2007. These interim financial statements are the responsibility
of the Corporations management.
We conducted our review 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 December 30, 2007, 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 10, 2008, 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 December 30, 2007 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 1, 2008
- 17 -
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations
This discussion and analysis of the Big 5 Sporting Goods
Corporation (we, our, us)
financial condition and results of operations should be read in
conjunction with our interim unaudited condensed consolidated
financial statements and the notes thereto 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
for the year ended December 30, 2007.
Overview
We are a leading sporting goods retailer in the western United
States, operating 370 stores in 11 states under the
name Big 5 Sporting Goods at June 29, 2008. 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
|
|
|
|
|
Net income for the second quarter of fiscal 2008 declined 71.0%
to $1.7 million, or $0.08 per diluted share, compared to
$5.9 million, or $0.26 per diluted share, for the second
quarter of fiscal 2007. The decline was driven primarily by
lower sales levels, including a reduction in same store sales of
7.6%. The reduced net income also reflects a second quarter
pre-tax charge of $1.5 million ($0.9 million
after-tax), or $0.04 per diluted share, to correct an error in
our previously recognized straight-line rent expense,
substantially all of which related to prior periods and
accumulated over a period of 15 years (see page 20,
footnote 3 of table). Additionally, selling and
administrative expense was higher as a percentage of net sales.
|
|
|
|
Net sales for the second quarter of fiscal 2008 decreased 4.1%
to $209.0 million compared to $217.8 million for the
second quarter of fiscal 2007. The decrease in net sales was
primarily attributable to a decrease of $16.3 million in
same store sales and $1.6 million in closed store sales,
offset by an increase of $8.9 million in new store sales.
|
|
|
|
Gross profit as a percentage of net sales for the second quarter
of fiscal 2008 decreased by 160 basis points to 32.7%,
primarily reflecting higher store occupancy costs compared to
the second quarter of fiscal 2007. The increase in store
occupancy cost was primarily due to a second quarter pre-tax
charge of $1.5 million to correct an error in our
previously recognized straight-line rent expense, substantially
all of which related to prior periods and accumulated over a
period of 15 years (see page 20, footnote 3 of
table), and new store openings.
|
|
|
|
Selling and administrative expense as a percentage of net sales
for the second quarter of fiscal 2008 increased by approximately
170 basis points to 30.8%. The increase was due mainly to
lower sales levels combined with higher costs related to opening
new stores.
|
|
|
|
Operating income for the second quarter of fiscal 2008 declined
64.7% to $4.0 million, or 1.9% of net sales, compared to
$11.3 million, or 5.2% of net
|
- 18 -
|
|
|
|
|
sales, for the second quarter of fiscal 2007. Operating income
was adversely impacted by soft sales conditions and a second
quarter pre-tax charge of $1.5 million to correct an error
in our previously recognized straight-line rent expense,
substantially all of which related to prior periods and
accumulated over a period of 15 years (see page 20,
footnote 3 of table).
|
RESULTS
OF OPERATIONS
The results of the interim periods are not necessarily
indicative of results for the entire fiscal year.
13
Weeks Ended June 29, 2008 Compared to 13 Weeks Ended
July 1, 2007
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
|
|
|
|
June 29, 2008
|
|
|
July 1, 2007
|
|
|
|
(In thousands, except percentages)
|
|
|
Net sales
|
$
|
|
208,995
|
|
|
|
100.0
|
%
|
$
|
|
217,846
|
|
|
|
100.0
|
%
|
Cost of sales
(1) (2)
(3)
|
|
|
140,620
|
|
|
|
67.3
|
|
|
|
143,085
|
|
|
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (1)
(3)
|
|
|
68,375
|
|
|
|
32.7
|
|
|
|
74,761
|
|
|
|
34.3
|
|
Selling and administrative
expense
(1) (4)
|
|
|
64,393
|
|
|
|
30.8
|
|
|
|
63,466
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,982
|
|
|
|
1.9
|
|
|
|
11,295
|
|
|
|
5.2
|
|
Interest expense
|
|
|
1,156
|
|
|
|
0.6
|
|
|
|
1,473
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,826
|
|
|
|
1.3
|
|
|
|
9,822
|
|
|
|
4.5
|
|
Income taxes
|
|
|
1,102
|
|
|
|
0.5
|
|
|
|
3,879
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(3)
|
$
|
|
1,724
|
|
|
|
0.8
|
%
|
$
|
|
5,943
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Historically, we have presented
total depreciation and amortization expense separately on the
face of our interim unaudited condensed consolidated statements
of operations and our corporate headquarters occupancy
costs within cost of sales. In the fourth quarter of fiscal
2007, as presented in our Annual Report on
Form 10-K
for the year ended December 30, 2007, we retrospectively
changed our classification of distribution center and store
occupancy depreciation and amortization expense to cost of sales
and store equipment and corporate headquarters
depreciation and amortization expense to selling and
administrative expense. Depreciation and amortization expense is
no longer presented separately in the interim unaudited
condensed consolidated statements of operations. The corporate
headquarters occupancy costs are now included in selling
and administrative expense. We reclassified our prior period
interim unaudited condensed consolidated statements of
operations and related discussion and analysis to conform to the
new presentation, which increased cost of sales and decreased
gross profit by $2.3 million and increased selling and
administrative expense by $1.9 million for the second
quarter of fiscal 2007 from amounts previously reported. This
reclassification had no effect on our previously reported
operating or net income, interim unaudited condensed
consolidated balance sheet and interim unaudited condensed
consolidated statement of cash flows, and is not considered
material to any previously reported consolidated financial
statements.
|
(2) |
|
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.
|
- 19 -
|
|
|
(3) |
|
In the second quarter of fiscal
2008, we recorded a pre-tax charge of $1.5 million to
correct an error in our previously recognized straight-line rent
expense, substantially all of which related to prior periods and
accumulated over a period of 15 years. This charge reduced
net income by $0.9 million, or $0.04 per diluted share. We
have determined this charge to be immaterial to our prior
periods and current year consolidated financial statements.
|
(4) |
|
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 decreased by
$8.8 million, or 4.1%, to $209.0 million in the
13 weeks ended June 29, 2008 from $217.8 million
in the same period last year. The decrease in net sales was
primarily attributable to the following:
|
|
|
|
|
The challenging consumer environment experienced during fiscal
2007 and the first quarter of fiscal 2008 continued during the
second quarter of fiscal 2008 and resulted in lower customer
traffic into our retail stores. Same store sales and closed
store sales decreased by $16.3 million and
$1.6 million, respectively, partially offset by an increase
of $8.9 million in new store sales which reflected the
opening of 26 new stores, net of relocations, since
April 1, 2007. Same store sales decreased 7.6% in the
13 weeks ended June 29, 2008 versus the 13 weeks
ended July 1, 2007.
|
|
|
|
Our net sales also continue to be negatively impacted by
weakness in the performance of the roller shoe product category,
which declined $3.0 million from the same period last year.
While we expect roller shoe sales comparisons to the prior year
to remain weak during fiscal 2008, we expect the magnitude of
these negative comparisons to lessen each fiscal quarter.
|
|
|
|
Net sales in the second quarter of fiscal 2008 reflected one
more shopping day compared to the second quarter last year
resulting from the shift of the Easter holiday, when our stores
are closed, into March in fiscal 2008. The benefit of this
Easter holiday shift was offset by a shift in the timing of the
Fourth of July holiday further into the third quarter, which
resulted in shifting a portion of our pre-Fourth of July sales
into the third quarter this year.
|
Store count at June 29, 2008 was 370 versus 348 at
July 1, 2007. We opened six new stores, including one
relocation of a store that was closed subsequent to the end of
the period, in the 13 weeks ended June 29, 2008, and
opened four new stores, including one relocation of a store that
was closed in the prior quarter, in the 13 weeks ended
July 1, 2007. We expect to open approximately 20 new stores
during fiscal 2008, net of closures and relocations.
Gross Profit. Gross profit decreased by
$6.4 million, or 8.6%, to $68.4 million, or 32.7% of
net sales, in the 13 weeks ended June 29, 2008 from
$74.8 million, or 34.3% of net sales, in the 13 weeks
ended July 1, 2007. The decrease in gross profit was
primarily attributable to the following:
|
|
|
|
|
Store occupancy costs increased by $2.9 million, or
170 basis points, year-over-year due mainly to a second
quarter pre-tax charge of $1.5 million to correct an error
in our previously recognized straight-line rent expense,
substantially all of which related to prior periods and
accumulated over a period of 15 years (see page 20,
footnote 3 of table), new store openings and higher
depreciation.
|
|
|
|
Product selling margins, which exclude buying, occupancy and
distribution costs, increased 11 basis points versus the
same period in the prior year. In fiscal 2008 we are
experiencing increasing inflation in the purchase cost of our
products which could impact future margins.
|
- 20 -
Selling and Administrative. Selling and
administrative expense increased by $0.9 million to
$64.4 million, or 30.8% of net sales, in the 13 weeks
ended June 29, 2008 from $63.5 million, or 29.1% of
net sales, in the same period last year. The increase in selling
and administrative expense as a percentage of net sales for the
13 weeks ended June 29, 2008 compared to the same
period last year reflects softer sales conditions. Store-related
expenses, excluding occupancy, increased by $1.8 million,
or 162 basis points as a percentage of net sales, due
primarily to an increase in store count. Advertising expense
decreased by $0.5 million from the prior year, but
increased four basis points as a percentage of net sales due to
softer sales conditions.
Interest Expense. Interest expense decreased
by $0.3 million, or 21.5%, to $1.2 million in the
13 weeks ended June 29, 2008 from $1.5 million in
the same period last year. Although average debt levels
increased approximately $17.7 million to $98.9 million
in the second quarter of fiscal 2008 from $81.2 million in
the same period last year, the decrease in interest expense
reflects lower average interest rates of approximately
250 basis points to 4.2% in the second quarter of fiscal
2008 from 6.7% in the same period last year.
Income Taxes. The provision for income taxes
was $1.1 million for the 13 weeks ended June 29,
2008 and $3.9 million for the 13 weeks ended
July 1, 2007, reflecting our lower pre-tax income. Our
effective tax rate was 39.0% for the second quarter of fiscal
2008 compared with 39.5% for the second quarter of fiscal 2007.
26
Weeks Ended June 29, 2008 Compared to 26 Weeks Ended
July 1, 2007
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
|
|
|
|
June 29, 2008
|
|
|
July 1, 2007
|
|
|
|
(In thousands, except percentages)
|
|
|
Net sales
|
$
|
|
421,861
|
|
|
|
100.0
|
%
|
$
|
|
434,853
|
|
|
|
100.0
|
%
|
Cost of sales
(1) (2)
(3)
|
|
|
281,903
|
|
|
|
66.8
|
|
|
|
284,337
|
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (1)
(3)
|
|
|
139,958
|
|
|
|
33.2
|
|
|
|
150,516
|
|
|
|
34.6
|
|
Selling and administrative
expense
(1) (4)
|
|
|
127,623
|
|
|
|
30.3
|
|
|
|
125,255
|
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,335
|
|
|
|
2.9
|
|
|
|
25,261
|
|
|
|
5.8
|
|
Interest expense
|
|
|
2,745
|
|
|
|
0.6
|
|
|
|
2,922
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,590
|
|
|
|
2.3
|
|
|
|
22,339
|
|
|
|
5.1
|
|
Income taxes
|
|
|
3,746
|
|
|
|
0.9
|
|
|
|
8,809
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(3)
|
$
|
|
5,844
|
|
|
|
1.4
|
%
|
$
|
|
13,530
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Historically, we have presented
total depreciation and amortization expense separately on the
face of our interim unaudited condensed consolidated statements
of operations and our corporate headquarters occupancy
costs within cost of sales. In the fourth quarter of fiscal
2007, as presented in our Annual Report on
Form 10-K
for the year ended December 30, 2007, we retrospectively
changed our classification of distribution center and store
occupancy depreciation and amortization expense to cost of sales
and store equipment and corporate headquarters
depreciation and amortization expense to selling and
administrative expense. Depreciation and amortization expense is
no longer presented separately in the interim unaudited
condensed consolidated statements of operations. The corporate
|
- 21 -
|
|
|
|
|
headquarters occupancy costs
are now included in selling and administrative expense. We
reclassified our prior period interim unaudited condensed
consolidated statements of operations and related discussion and
analysis to conform to the new presentation, which increased
cost of sales and decreased gross profit by $4.6 million
and increased selling and administrative expense by
$3.8 million for the first 26 weeks of fiscal 2007
from amounts previously reported. This reclassification had no
effect on our previously reported operating or net income,
interim unaudited condensed consolidated balance sheet and
interim unaudited condensed consolidated statement of cash
flows, and is not considered material to any previously reported
consolidated financial statements.
|
(2) |
|
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.
|
(3) |
|
In the second quarter of fiscal
2008, we recorded a pre-tax charge of $1.5 million to
correct an error in our previously recognized straight-line rent
expense, substantially all of which related to prior periods and
accumulated over a period of 15 years. This charge reduced
net income by $0.9 million, or $0.04 per diluted share. We
have determined this charge to be immaterial to our prior
periods and current year consolidated financial statements.
|
(4) |
|
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 decreased by
$13.0 million, or 3.0%, to $421.9 million in the
26 weeks ended June 29, 2008 from $434.9 million
in the same period last year. The decrease in net sales was
primarily attributable to the following:
|
|
|
|
|
The challenging consumer environment experienced during fiscal
2007 continued during the first half of fiscal 2008 and resulted
in lower customer traffic into our retail stores. Same store
sales and closed store sales decreased by $27.2 million and
$3.3 million, respectively, partially offset by an increase
of $17.1 million in new store sales which reflected the
opening of 27 new stores, net of relocations, since
January 1, 2007. Same store sales decreased 6.4% in the
26 weeks ended June 29, 2008 versus the 26 weeks
ended July 1, 2007.
|
|
|
|
Our net sales also continue to be negatively impacted by the
weakness in performance of the roller shoe product category,
which declined $7.2 million from the same period last year.
While we expect roller shoe sales comparisons to the prior year
to remain weak during fiscal 2008, we expect the magnitude of
these negative comparisons to lessen each fiscal quarter. Sales
of winter-related products were higher in the first quarter of
fiscal 2008 than the prior year due to favorable weather
conditions in our markets.
|
Store count at June 29, 2008 was 370 versus 348 at
July 1, 2007. We opened seven new stores, including one
relocation of a store that was closed in a subsequent period, in
the 26 weeks ended June 29, 2008, and opened five new
stores, net of closures and relocations, in the 26 weeks
ended July 1, 2007. We expect to open approximately 20 new
stores during fiscal 2008, net of closures and relocations.
Gross Profit. Gross profit decreased by
$10.5 million, or 7.0%, to $140.0 million, or 33.2% of
net sales, in the 26 weeks ended June 29, 2008 from
$150.5 million, or 34.6% of net sales, in the 26 weeks
ended July 1, 2007. The decrease in gross profit was
primarily attributable to the following:
|
|
|
|
|
Store occupancy costs increased by $4.1 million, or
120 basis points, year-over-year due primarily to new store
openings, a second quarter pre-tax charge of $1.5 million
to correct an error in our previously recognized straight-line
rent expense, substantially all of which related to prior
periods and accumulated over a period of 15 years (see
page 20, footnote 3 of table), and higher depreciation.
|
- 22 -
|
|
|
|
|
Product selling margins, which exclude buying, occupancy and
distribution costs, decreased 35 basis points versus the
same period in the prior year, primarily due to lower margins
for winter-related products, roller shoes and certain other
product categories and slightly more aggressive promotional
pricing in an effort to drive sales and reduce merchandise
inventory. Additionally, in fiscal 2008 we are experiencing
increasing inflation in the purchase cost of our products which
could impact future margins.
|
Selling and Administrative. Selling and
administrative expense increased by $2.3 million to
$127.6 million, or 30.3% of net sales, in the 26 weeks
ended June 29, 2008 from $125.3 million, or 28.8% of
net sales, in the same period last year. The increase in selling
and administrative expense as a percentage of sales for the
26 weeks ended June 29, 2008 compared to the same
period last year reflects softer sales conditions. Store-related
expenses, excluding occupancy, increased by $3.4 million,
or 135 basis points as a percentage of net sales, due
primarily to an increase in store count. Administrative expense
and advertising expense declined $0.6 million and
$0.4 million, respectively, from the prior year but
increased as a percentage of net sales due to softer sales
conditions.
Interest Expense. Interest expense decreased
by $0.2 million, or 6.1%, to $2.7 million in the
26 weeks ended June 29, 2008 from $2.9 million in
the same period last year. Although average debt levels
increased approximately $22.5 million to
$104.0 million in the first half of fiscal 2008 from
$81.5 million in the same period last year, the decrease in
interest expense reflects lower average interest rates of
approximately 160 basis points to 5.1% in the first half of
fiscal 2008 from 6.7% in the same period last year.
Income Taxes. The provision for income taxes
was $3.7 million for the 26 weeks ended June 29,
2008 and $8.8 million for the 26 weeks ended
July 1, 2007, reflecting our lower pre-tax income. Our
effective tax rate was 39.1% for the first 26 weeks of
fiscal 2008 compared with 39.4% for the first 26 weeks of
fiscal 2007.
- 23 -
LIQUIDITY
AND CAPITAL RESOURCES
Our principal liquidity requirements are for working capital,
capital expenditures, stock repurchases and cash dividends. We
fund our liquidity requirements primarily through cash on hand,
cash flow from operations and borrowings from our revolving
credit facility. We believe our cash on hand, future funds from
operations and borrowings from our revolving credit facility
will be sufficient to finance our anticipated cash requirements
for at least the next twelve months. There is no assurance,
however, that we will be able to generate sufficient cash flow
or that we will be able to maintain our ability to borrow under
our revolving credit facility.
We ended the first half of fiscal 2008 with $5.7 million of
cash and cash equivalents compared with $8.1 million at the
end of the first half of fiscal 2007. Our cash flows from
operating, investing and financing activities for the first
26 weeks of fiscal 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
|
|
|
|
|
|
July 1,
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
$
|
|
21,336
|
|
|
|
|
|
$
|
|
6,096
|
|
Investing activities
|
|
|
|
|
|
|
(9,113
|
)
|
|
|
|
|
|
|
(7,205
|
)
|
Financing activities
|
|
|
|
|
|
|
(16,247
|
)
|
|
|
|
|
|
|
4,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
|
|
$
|
|
(4,024
|
)
|
|
|
|
|
$
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities. Net cash provided
by operating activities for the 26 weeks ended
June 29, 2008 and July 1, 2007 was $21.3 million
and $6.1 million, respectively. The increase in cash
provided by operating activities for the first 26 weeks of
fiscal 2008 compared to the same period last year primarily
reflects reduced funding for working capital, partially offset
by lower net income for the period. The decrease in funding for
working capital was primarily due to the reduced purchases of
merchandise inventory in the first 26 weeks of fiscal 2008
to better align inventory balances with weaker sales conditions.
Favorable cash flow from operating activities was also provided
through reduction of accounts receivable primarily for amounts
due from vendors.
Investing Activities. Net cash used in
investing activities for the 26 weeks ended June 29,
2008 and July 1, 2007 was $9.1 million and
$7.2 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. Capital spending primarily reflects new store
openings, store-related remodeling, distribution center and
corporate headquarters costs and computer hardware and software
purchases.
Financing Activities. Net cash used in
financing activities for the 26 weeks ended June 29,
2008 was $16.2 million and net cash provided by financing
activities for the 26 weeks ended July 1, 2007 was
$4.1 million. For the first 26 weeks of fiscal 2008,
cash was used primarily to pay down borrowings under our
revolving credit facility, repurchase stock, pay dividends and
for capital expenditures. For the first 26 weeks of fiscal
2007, cash was provided primarily from increased borrowings
under our revolving credit facility to fund inventory purchases,
capital expenditures and dividend payments.
- 24 -
As of June 29, 2008, we had revolving credit borrowings of
$103.3 million and letter of credit commitments of
$0.8 million outstanding under our financing agreement.
These balances compare to revolving credit borrowings of
$103.4 million and letter of credit commitments of
$0.4 million outstanding as of December 30, 2007 and
revolving credit borrowings of $88.8 million and letter of
credit commitments of $0.5 million outstanding as of
July 1, 2007.
Quarterly dividend payments of $0.09 per share were paid in
fiscal 2007 and the first two quarters of fiscal 2008. In the
third quarter of fiscal 2008, our Board of Directors declared a
quarterly cash dividend of $0.09 per share of outstanding common
stock, which will be paid on September 15, 2008 to
stockholders of record as of August 29, 2008.
Periodically, we repurchase our common stock in the open market
pursuant to programs approved by our Board of Directors. We may
repurchase our common stock for a variety of reasons, including
the current market price of our stock, to offset dilution
related to equity-based compensation plans and to optimize our
capital structure.
We repurchased 490,242 shares of our own common stock for
$4.5 million during the first 26 weeks of fiscal 2008
and repurchased 15,800 shares of our own common stock for
$0.4 million in the first 26 weeks of fiscal 2007.
Since the inception of our initial share repurchase program in
May 2006 through June 29, 2008, we have repurchased a total
of 1,258,328 shares for $20.0 million. As of
June 29, 2008, a total of $15.0 million remained
available for share repurchases under our current share
repurchase program.
Future Capital Requirements. We had
cash on hand of $5.7 million at June 29, 2008. We
expect capital expenditures for the second half of fiscal 2008,
excluding non-cash property and equipment acquisitions, to range
from approximately $14.0 million to $15.0 million,
primarily to fund the opening of approximately 13 new stores,
net of closures and relocations, store-related remodeling,
distribution center equipment, corporate office and distribution
center improvements and computer hardware and software
purchases. As of June 29, 2008, a total of
$15.0 million remained available for share repurchases
under our share repurchase program. We consider several factors
in determining when and if we make share repurchases including,
among other things, our alternative cash requirements and the
market price of our stock. In the third quarter of fiscal 2008,
our Board of Directors declared a quarterly cash dividend of
$0.09 per share of outstanding common stock, which will be paid
on September 15, 2008 to stockholders of record as of
August 29, 2008.
We believe our cash on hand, future funds from operations and
borrowings from our revolving credit facility will be sufficient
to finance our anticipated cash requirements for at least the
next twelve months. 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. See
Part II, Item 1A, Risk Factors included in
this report and Part I, Item 1A, Risk
Factors included in our Annual Report on
Form 10-K
for the fiscal year ended December 30, 2007.
If we are unable to generate sufficient cash flow from
operations to meet our obligations and commitments, 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, discontinue
repurchasing our stock, suspend dividend payments or delay or
forego expansion opportunities. We might not be able to effect
successful alternative strategies on satisfactory terms, if at
all.
- 25 -
Contractual Obligations and Other
Commitments. Our material off-balance sheet
contractual commitments are operating lease obligations and
letters of credit. We excluded these items from the balance
sheet in accordance with accounting principles generally
accepted in the United States of America (GAAP).
Operating lease commitments consist principally of leases for
our retail store facilities, distribution center and corporate
office. These 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 $0.8 million
at June 29, 2008, and were related primarily to importing
of merchandise and funding insurance program liabilities.
We also have capital lease obligations which consist principally
of leases for our distribution center delivery trailers and
management information systems hardware. Included in our other
liabilities is an employment agreement obligation for Robert W.
Miller, co-founder of the Company, and asset retirement
obligations related to the removal of leasehold improvements
from our stores upon termination of our store 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
for the year ended December 30, 2007 is a discussion of our
future obligations and commitments as of December 30, 2007.
In the first half of fiscal 2008, our revolving credit
borrowings remained relatively unchanged from the end of fiscal
2007, and we entered into new operating lease agreements in
relation to our store expansion and business operations. We do
not believe that these operating leases would materially change
our contractual obligations or commitments presented as of
December 30, 2007.
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.
Financing Agreement. On December 15,
2004, we entered into a $160.0 million financing agreement
with The CIT Group/Business Credit, Inc. and a syndicate of
other lenders. On May 24, 2006, we amended the financing
agreement to, among other things, increase the line of credit to
$175.0 million.
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
must pay an early termination fee. 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.
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.
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
- 26 -
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 no default or event of default exists on the dividend
declaration date and a default is not expected to result from
the payment of the dividend and certain other criteria are met,
as more fully described in Part II, Item 2,
Unregistered Sales of Equity Securities and Use of
Proceeds, in this report. We are currently in compliance
with all 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, our debt may be
accelerated under this agreement. This acceleration could also
result in the acceleration of other indebtedness that we may
have outstanding at that time.
SEASONALITY
AND IMPACT OF INFLATION
We experience seasonal fluctuations in our net sales and
operating results and typically generate higher operating income
in the fourth quarter, which includes the holiday selling season
as well as the winter sports selling season. As a result, we
incur significant additional expense in the fourth quarter due
to normally higher purchase volumes and increased staffing.
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
quarter, our net sales can decline, resulting in excess
inventory, which can harm our financial performance. Because a
larger portion of our operating income is typically derived from
our fourth quarter net sales, a shortfall in expected fourth
quarter net sales can negatively impact our annual operating
results.
In fiscal 2008, we are experiencing increasing inflation in the
purchase cost of our products. If we are unable to adjust our
selling prices, our product selling margins will decline, which
could adversely impact our operating results. We do not believe
that inflation had a material impact on our operating results
for fiscal 2007.
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
for the fiscal year ended December 30, 2007, we consider
our estimates on inventory valuation, vendor allowances,
impairment of long-lived assets and goodwill, stock-based
compensation 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 first
26 weeks of fiscal 2008.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements. This standard provides guidance for using fair
value to measure assets and liabilities. The standard also
responds to investors requests for expanded information
about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings.
The standard applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value, but
does not expand the use of fair value in any new circumstances.
There are numerous previously issued statements dealing with
fair values that are amended by SFAS No. 157.
SFAS No. 157 is effective for
- 27 -
financial statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP)
FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, which scopes out leasing
transactions accounted for under SFAS No. 13,
Accounting for Leases. In February 2008, FSP
FAS 157-2,
Effective Date of FASB Statement No. 157, was
issued, which delays the effective date of
SFAS No. 157 to fiscal years and interim periods
within those fiscal years beginning after November 15, 2008
for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
The implementation of SFAS No. 157 for financial
assets and financial liabilities, effective December 31,
2007, did not have a material impact on our consolidated
financial statements. We are currently assessing the impact of
SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on our interim unaudited condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement
No. 115. SFAS No. 159 provides companies with
an option to report many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. The objective of SFAS No. 159
is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. The FASB believes
that SFAS No. 159 helps to mitigate accounting-induced
volatility by enabling companies to report related assets and
liabilities at fair value, which would likely reduce the need
for companies to comply with detailed rules for hedge
accounting. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities, and would require
entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value
on the face of the balance sheet. The new statement does not
eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair
value measurements included in SFAS No. 157, Fair
Value Measurements. SFAS No. 159 is effective as
of the beginning of an entitys first fiscal year beginning
after November 15, 2007. We did not elect this fair value
option; consequently, the adoption of SFAS No. 159 did
not have an impact on our interim unaudited condensed
consolidated financial statements.
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 110, which expresses the views of the
SEC staff regarding the use of a simplified method,
as discussed in the previously issued SAB No. 107
(SAB 107), in developing an estimate of
expected term of plain vanilla share options in
accordance with SFAS No. 123(R), Share-Based
Payment. In particular, the SEC staff indicated in
SAB 107 that it will accept a companys election to
use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of
expected term. At the time SAB 107 was issued, the SEC
staff believed that more detailed external information about
employee exercise behavior (e.g., employee exercise patterns by
industry
and/or other
categories of companies) would, over time, become readily
available to companies. Therefore, the SEC staff stated in
SAB 107 that it would not expect a company to use the
simplified method for share option grants after
December 31, 2007. The SEC staff understands that such
detailed information about employee exercise behavior may not be
widely available by December 31, 2007. Accordingly, the SEC
staff will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. Upon
our
- 28 -
adoption of SFAS No. 123(R), we elected to use the
simplified method to estimate our expected term. Effective
December 31, 2007, we discontinued use of the simplified
method when we determined that sufficient data was available to
develop an estimate of the expected term based upon historical
participant behavior. This transition resulted in a decrease in
the expected term from 6.25 years for fiscal 2007 to
6.18 years for fiscal 2008 and did not have a material
impact on the valuation of our share-based compensation expense.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used
in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP in the
United States. This Statement shall be effective 60 days
following the SECs approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. We do not
expect the adoption of SFAS No. 162 to have a material
impact on our interim unaudited condensed consolidated financial
statements.
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, 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 or increased costs related to distribution center
operations, changes in interest rates, credit availability 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
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.
|
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. If the
LIBOR rate were to change 1.0% as compared to the rate at
June 29, 2008, our interest expense would change
approximately $1.0 million on an annual basis based on the
outstanding balance of our
- 29 -
borrowings under our revolving credit facility at June 29,
2008. We do not hold any derivative instruments and do not
engage in foreign currency transactions or hedging activities.
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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 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 June 29, 2008, 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.
PART II.
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings
|
On January 17, 2008, the Company was served with a
complaint filed in the California Superior Court in the County
of Los Angeles, entitled Adi Zimerman v. Big 5 Sporting
Goods Corporation, et al., Case No. BC383834, alleging
violations of the California Civil Code. On May 31, 2008,
the Company was served with a complaint filed in the California
Superior Court in the County of San Diego, entitled Michele
Gonzalez v. Big 5 Sporting Goods Corporation, et al., Case
No. 37-2008-00083307-CU-BT-CTL,
alleging violations of the California Civil Code and California
Business and Professions Code and invasion of privacy. Each
complaint was brought as a purported class action on behalf of
persons who made purchases at the Companys stores in
California using credit cards and were requested to provide
their zip codes. Each plaintiff alleges, among other things,
that customers making purchases with credit cards at the
Companys stores in California were improperly requested to
provide their zip code at the time of such purchases. Each
plaintiff seeks, on behalf of the class members, statutory
penalties, injunctive relief to require the Company to
discontinue the allegedly improper conduct and attorneys
fees and costs. The plaintiff in the Gonzalez case also seeks,
on behalf of the class members, general damages, special
damages, exemplary or punitive damages and disgorgement of
profits. The Company believes that each complaint is without
merit and intends to defend each suit vigorously. The Company is
not able to evaluate the likelihood of an unfavorable outcome in
either case or to estimate a range of potential loss in the
event of an unfavorable outcome in either case at the present
time. If either case is resolved unfavorably to the Company,
this litigation could have a material adverse effect on the
Companys financial condition, and
- 30 -
any required change in the Companys business 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
will not have a material adverse effect on the Companys
financial position, results of operations or liquidity.
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
for the fiscal year ended December 30, 2007.
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|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following tabular summary reflects the Companys
repurchase activity during the fiscal quarter ended
June 29, 2008:
ISSUER
PURCHASES OF EQUITY
SECURITIES 1
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Total
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Maximum
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|
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|
Number of
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|
Number (or
|
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|
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Shares
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|
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Approximate
|
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Purchased
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Dollar Value)
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as Part of
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of Shares that
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Total
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Publicly
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May Yet Be
|
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|
Number of
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Average
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Announced
|
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Purchased
|
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Shares
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Price Paid
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Plans or
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Under the Plans
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Fiscal Period
|
|
Purchased
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per Share
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Programs
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or Programs
|
|
|
March 31 April 27
|
|
|
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|
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|
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|
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|
$
|
16,708,000
|
|
April 28 May 25
|
|
|
43,991
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|
|
$
|
8.23
|
|
|
|
43,991
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|
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$
|
16,346,000
|
|
May 26 June 29
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166,483
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$
|
8.11
|
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166,483
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$
|
14,996,000
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|
|
|
|
|
|
|
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|
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|
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|
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Total
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210,474
|
|
|
$
|
8.14
|
|
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210,474
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$
|
14,996,000
|
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1
|
The Company repurchased
490,242 shares of its common stock for $4.5 million during
the first 26 weeks of fiscal 2008 and repurchased
15,800 shares of its common stock for $0.4 million
during the first 26 weeks of fiscal 2007. The current share
repurchase program was announced on November 1, 2007. The
current program authorizes the repurchase of the Companys
common stock for amounts totaling $20.0 million, and the
Company has repurchased 521,585 shares (for a total of
$5.0 million) pursuant to that authorization through
June 29, 2008. As of June 29, 2008, a total of
$15.0 million remained available for share repurchases
under the Companys current share repurchase program. Since
the inception of its initial share repurchase program in May
2006 through June 29, 2008, the Company has repurchased a
total of 1,258,328 shares for $20.0 million. The
Companys dividends and stock repurchases are generally
funded by distributions from its subsidiary, Big 5 Corp.
Generally, as long as there is no default or event of default
under the Companys financing agreement, Big 5 Corp. may
make distributions to the Company of up to $15.0 million
per year (and up to $5.0 million per quarter) for any
purpose (including dividends or stock repurchases) and may make
additional distributions for the purpose of paying Company
dividends or repurchasing Company common stock if Big 5 Corp.
will have post-dividend liquidity (as defined in the financing
agreement) of at least $30 million.
|
- 31 -
|
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Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
On June 18, 2008, the Company held its annual meeting of
stockholders. At the annual meeting, the Companys
stockholders approved the proposal to re-elect the following two
Class C directors to the Companys Board of Directors,
each to hold office until the 2011 annual meeting of
stockholders (and until each such directors successor
shall have been duly elected and qualified):
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Votes For
|
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Votes Withheld
|
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Jennifer Holden Dunbar
|
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16,052,641
|
|
|
|
5,013,214
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|
Steven G. Miller
|
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18,165,370
|
|
|
|
2,900,485
|
|
The term of office for the following directors continued after
the meeting: G. Michael Brown (Class A director), David R.
Jessick (Class A director), Sandra N. Bane (Class B
director) and Michael D. Miller (Class B director).
There were no abstentions or broker non-votes.
|
|
Item 5.
|
Other
Information
|
On July 28, 2008, the Compensation Committee of the Company
approved a revised form of Stock Option Grant Notice for use
under the 2007 Equity and Performance Incentive Plan and amended
outstanding option agreements under the plan to conform to this
revision. The revisions provide for the acceleration of vesting
of stock options upon a change of control of the Company (as
defined in the plan).
(a) Exhibits
|
|
|
|
|
Exhibit Number
|
|
Description of
Document
|
|
|
10
|
.1
|
|
Form of Stock Option Grant Notice and Stock Option Agreement for
use with the 2007 Equity and Performance Incentive Plan
|
|
10
|
.2
|
|
Notice of Amendment of Stock Option Terms
|
|
15
|
.1
|
|
Independent Auditors Awareness Letter Regarding Unaudited
Interim Financial Statements
|
|
31
|
.1
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer
|
|
31
|
.2
|
|
Rule 13a-14(a)
Certification of Chief Financial Officer
|
|
32
|
.1
|
|
Section 1350 Certification of Chief Executive Officer
|
|
32
|
.2
|
|
Section 1350 Certification of Chief Financial Officer
|
- 32 -
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.
BIG 5 SPORTING GOODS CORPORATION,
a Delaware corporation
|
|
|
|
|
Date: August 1, 2008
|
|
By:
|
|
/s/ Steven G. Miller
|
|
|
|
|
Steven G. Miller
|
|
|
|
|
Chairman of the Board of Directors,
President and Chief Executive Officer
|
|
|
|
|
|
Date: August 1, 2008
|
|
By:
|
|
/s/ Barry D. Emerson
|
|
|
|
|
Barry D. Emerson
|
|
|
|
|
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
|
- 33 -