Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Big 5 Sporting Goods Corporation (“we,” “our,” “us”) financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes (“Interim Financial Statements”) included herein, the Risk Factors included herein and in our other filings with the Securities and Exchange Commission (“SEC”), and our consolidated financial statements, related notes, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
Our fiscal year ends on the Sunday nearest December 31. Fiscal 2022 is comprised of 52 weeks and ends on January 1, 2023. Fiscal 2021 was comprised of 52 weeks and ended on January 2, 2022. The interim periods in fiscal 2022 and 2021 are each comprised of 13 weeks.
Overview
We are a leading sporting goods retailer in the western United States, with 431 stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of October 2, 2022. 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, home recreation, tennis, golf and winter and summer recreation.
In the first nine months of fiscal 2022 we opened one store which was a relocation. In the first nine months of fiscal 2021 we opened one and closed two stores. For fiscal 2022, we anticipate opening three new stores and closing two stores.
Executive Summary
Net income decreased in the third quarter of fiscal 2022 compared with net income in the third quarter of fiscal 2021 as a result of reduced net sales, lower merchandise margins and higher selling and administrative expense year over year. After experiencing strong consumer demand associated with the COVID-19 pandemic in the third quarter of fiscal 2021, decreases in net sales in the third quarter of fiscal 2022 reflected increased inflationary pressures which dampened consumer sentiment and impacted discretionary spending. Worsening inflation and higher labor costs also resulted in higher operational expense which had an unfavorable impact on our earnings.
•Net sales for the third quarter of fiscal 2022 decreased 9.7% to $261.4 million compared to $289.6 million for the third quarter of fiscal 2021. The decrease in net sales reflects a decline of 9.8% in same store sales when compared with the third quarter of fiscal 2021. After experiencing strong same store sales associated with the COVID-19 pandemic in the third quarter of fiscal 2021, our lower same store sales in the third quarter of fiscal 2022 reflected significant inflationary pressures and heightened recessionary concerns that are negatively impacting consumer sentiment, which contributed to reduced net sales across each of our major merchandise categories of footwear, apparel and hardgoods.
•Gross profit for the third quarter of fiscal 2022 represented 33.1% of net sales, compared with 37.3% in the third quarter of the prior year. The decrease in gross profit margin primarily reflects lower merchandise margins, as well as higher store occupancy and distribution expense as a percentage of net sales compared with the prior year. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
•Selling and administrative expense for the third quarter of fiscal 2022 increased 4.1% to $78.2 million, or 29.9% of net sales, compared to $75.1 million, or 25.9% of net sales, for the third quarter of fiscal 2021. The higher selling and administrative expense primarily reflects an increase in employee labor and benefit-related expense as well as higher operational expense impacted by inflation, partially offset by a decrease in company performance-based incentive accruals year over year.
•Net income for the third quarter of fiscal 2022 was $6.4 million, or $0.29 per diluted share, compared to net income of $24.1 million, or $1.07 per diluted share, for the third quarter of fiscal 2021. The decreased earnings reflect lower net sales, the unfavorable impact of lower merchandise margins and higher selling and administrative expense year over year.
•Operating cash flow for the first nine months of fiscal 2022 was a negative $29.9 million compared to operating cash flow in the first nine months of fiscal 2021 of a positive $95.2 million. The decreased operating cash flow was due primarily to decreased net income, increased funding of merchandise inventory and decreased accrued expenses primarily related to performance-based incentive accruals.
•Capital expenditures for the first nine months of fiscal 2022 increased to $8.8 million from $7.3 million for the first nine months of fiscal 2021. We expect to open three new stores in fiscal 2022, after opening five new stores in the prior year.
- 21 -
•Cash and cash equivalents were $34.4 million, $97.4 million and $114.0 million as of October 2, 2022, January 2, 2022 and October 3, 2021, respectively. We have had no borrowings under our credit facility since the full pay-down of outstanding balances under the credit facility in the third quarter of fiscal 2020.
•We paid cash dividends in the first nine months of fiscal 2022 of $16.9 million, or $0.75 per share, compared with $34.6 million, or $1.58 per share, in the first nine months of fiscal 2021. The decrease in year-over-year dividends paid reflected a special dividend of $1.00 per share that was declared in the second quarter of fiscal 2021.
•We repurchased 295,719 shares of common stock for $4.1 million in the first nine months of fiscal 2022, and we repurchased 100,498 shares of common stock for $2.3 million in the first nine months of fiscal 2021.
Results of Operations
The results of the interim periods are not necessarily indicative of results for the entire fiscal year.
13 Weeks Ended October 2, 2022 Compared to 13 Weeks Ended October 3, 2021
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 |
|
|
|
October 2,
2022 |
|
|
October 3,
2021 |
|
|
|
(Dollars in thousands) |
|
Net sales |
|
$ |
261,445 |
|
|
|
100.0 |
% |
|
$ |
289,637 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
174,862 |
|
|
|
66.9 |
|
|
|
181,660 |
|
|
|
62.7 |
|
Gross profit |
|
|
86,583 |
|
|
|
33.1 |
|
|
|
107,977 |
|
|
|
37.3 |
|
Selling and administrative expense (2) |
|
|
78,205 |
|
|
|
29.9 |
|
|
|
75,147 |
|
|
|
25.9 |
|
Operating income |
|
|
8,378 |
|
|
|
3.2 |
|
|
|
32,830 |
|
|
|
11.4 |
|
Interest expense |
|
|
69 |
|
|
|
0.0 |
|
|
|
175 |
|
|
|
0.1 |
|
Income before income taxes |
|
|
8,309 |
|
|
|
3.2 |
|
|
|
32,655 |
|
|
|
11.3 |
|
Income tax expense |
|
|
1,940 |
|
|
|
0.7 |
|
|
|
8,524 |
|
|
|
2.9 |
|
Net income |
|
$ |
6,369 |
|
|
|
2.5 |
% |
|
$ |
24,131 |
|
|
|
8.4 |
% |
(1)Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation and amortization, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.
(2)Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation and amortization, expense associated with operating our corporate headquarters and impairment charges, if any.
Net Sales. Net sales decreased by $28.2 million, or 9.7%, to $261.4 million in the third quarter of fiscal 2022 from $289.6 million in the third quarter last year. The change in net sales reflected the following:
•Same store sales decreased by $28.1 million, or 9.8%, for the 13 weeks ended October 2, 2022, versus the comparable 13-week period in the prior year. The decline in same store sales reflected the following:
oAfter experiencing strong same store sales associated with the COVID-19 pandemic in the third quarter of fiscal 2021, the decline in same store sales in the third quarter of fiscal 2022 reflected significant inflationary pressures and heightened recessionary concerns that are negatively impacting consumer sentiment and discretionary spending.
oOur lower same store sales reflected a decrease in each of our major merchandise categories of apparel, hardgoods and footwear.
oSame store sales comparisons are made on a comparable-week basis. Same store sales for a period normally consist of sales for stores that operated throughout the period and the full corresponding prior-year period, along with sales from e-commerce. Same store sales comparisons exclude sales from stores permanently closed, or stores in the process of closing, during the comparable periods. Sales from e-commerce in the third quarter of fiscal 2022 and 2021 were not material.
•We experienced decreased customer transactions of 8.0% and a lower average sale per transaction of 1.8% in the third quarter of fiscal 2022 compared to the prior year.
- 22 -
Gross Profit. Gross profit decreased by $21.4 million to $86.6 million, or 33.1% of net sales, in the 13 weeks ended October 2, 2022, compared with $108.0 million, or 37.3% of net sales, in the 13 weeks ended October 3, 2021. The change in gross profit was primarily attributable to the following:
•Net sales decreased by $28.2 million, or 9.7%, compared with the third quarter of last year.
•Merchandise margins, which exclude buying, occupancy and distribution expense, decreased by an unfavorable 132 basis points compared with the third quarter of last year when merchandise margins increased by a favorable 152 basis points. Our decreased merchandise margins primarily reflect increased promotional pricing. Additionally, we continue to experience higher product purchase costs reflecting increased raw material, labor and fuel costs initially resulting from shortages related to COVID-19, and are worsened by current inflationary pressures. While merchandise margins were down year over year they remained healthy and continued to compare favorably to pre-pandemic levels.
•Distribution expense, including costs capitalized into inventory, increased by $0.9 million, or an unfavorable 90 basis points as a percentage of net sales, in the third quarter of fiscal 2022 compared to the prior year. The increase primarily reflected decreased costs capitalized into inventory, which were partially offset by decreased trucking expense.
•Store occupancy expense increased by $0.6 million, or an unfavorable 116 basis points as a percentage of net sales, compared with the third quarter of last year.
Selling and Administrative Expense. Selling and administrative expense increased by $3.1 million to $78.2 million, or 29.9% of net sales, in the 13 weeks ended October 2, 2022, from $75.1 million, or 25.9% of net sales, in the third quarter last year. The change in selling and administrative expense was primarily attributable to the following:
•Store-related expense, excluding occupancy, increased by $3.7 million due largely to increases in employee labor and benefit-related expense and other operating expenses driven by inflation. Staffing shortages remained a challenge in the third quarter of fiscal 2022 and resulted in an inability to operate certain of our stores at optimal hours. Wages continue to reflect the incremental impact of legislated minimum wage rate increases primarily in California, where over fifty percent of our stores are located. In California, state-wide minimum wage rates have risen from $10.00 per hour in 2017 to $15.00 per hour in 2022 and are projected to increase to $15.50 per hour on January 1, 2023. Additionally, certain other jurisdictions within California, including Los Angeles and San Francisco, as well as various other states in which we do business, are implementing their own scheduled increases, which may also include interim impacts effective at various points throughout the year. Labor expense for the third quarter of fiscal 2022 also reflected higher demand for labor in many of our markets resulting in higher wages. We estimate that the combined impact of these wage pressures caused our labor expense to increase by approximately $0.9 million for the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021.
•Our advertising expense increased by $0.2 million in the third quarter of fiscal 2022. Despite this year-over-year increase, our expenses continue to benefit from significantly reduced advertising activity that resulted from initial measures we took in response to COVID-19 in fiscal 2020. We expect our expenses to continue to benefit from reduced advertising activity in the foreseeable future as we continue to evaluate the impact on our sales.
•Administrative expense decreased by $0.8 million, primarily attributable to a decrease in company performance-based incentive accruals in the current year, partially offset by an increase in employee labor and benefit-related expense year over year.
Interest Expense. Interest expense decreased by $0.1 million in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021.
Income Taxes. The provision for income taxes decreased to $1.9 million for the third quarter of fiscal 2022 from $8.5 million for the third quarter of fiscal 2021, primarily reflecting lower pre-tax income in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. Our effective tax rate was 23.3% for the third quarter of fiscal 2022 and 26.1% for the third quarter of fiscal 2021. Our lower effective tax rate for the third quarter of fiscal 2022 mainly reflected reduced pre-tax income for the period compared to the first half of the year.
- 23 -
39 Weeks Ended October 2, 2022 Compared to 39 Weeks Ended October 3, 2021
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 2,
2022 |
|
|
October 3,
2021 |
|
|
|
(Dollars in thousands) |
|
Net sales |
|
$ |
757,226 |
|
|
|
100.0 |
% |
|
$ |
888,463 |
|
|
|
100.0 |
% |
Cost of sales (1) |
|
|
495,844 |
|
|
|
65.5 |
|
|
|
555,670 |
|
|
|
62.5 |
|
Gross profit |
|
|
261,382 |
|
|
|
34.5 |
|
|
|
332,793 |
|
|
|
37.5 |
|
Selling and administrative expense (2) |
|
|
230,150 |
|
|
|
30.4 |
|
|
|
223,670 |
|
|
|
25.2 |
|
Operating income |
|
|
31,232 |
|
|
|
4.1 |
|
|
|
109,123 |
|
|
|
12.3 |
|
Interest expense |
|
|
389 |
|
|
|
0.1 |
|
|
|
701 |
|
|
|
0.1 |
|
Income before income taxes |
|
|
30,843 |
|
|
|
4.0 |
|
|
|
108,422 |
|
|
|
12.2 |
|
Income tax expense |
|
|
6,437 |
|
|
|
0.9 |
|
|
|
25,942 |
|
|
|
2.9 |
|
Net income |
|
$ |
24,406 |
|
|
|
3.1 |
% |
|
$ |
82,480 |
|
|
|
9.3 |
% |
(1)Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution center expense, including depreciation and amortization, and store occupancy expense. Store occupancy expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.
(2)Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation and amortization, expense associated with operating our corporate headquarters and impairment charges, if any.
Net Sales. Net sales decreased by $131.3 million, or 14.8%, to $757.2 million in the first nine months of fiscal 2022 from $888.5 million in the first nine months last year. The change in net sales reflected the following:
•Same store sales decreased by $130.5 million, or 14.9%, for the 39 weeks ended October 2, 2022, versus the comparable 39-week period in the prior year. The decrease in same store sales reflected the following:
oThe decrease in same store sales compares to an 18.9% increase in same store sales for the first nine months of fiscal 2021, reflecting strong consumer demand as COVID-19 restrictions eased. Sales in the first nine months of fiscal 2022 were impacted by significant inflationary pressures and heightened recessionary concerns that are negatively impacting consumer sentiment and discretionary spending, as well as unfavorable warm and dry winter weather conditions in our markets in the first quarter of fiscal 2022 that resulted in lower sales of winter-related products.
oThe increase in our same store sales achieved for the first nine months of fiscal 2021 resulted from strong demand for many categories of sporting goods products last year as certain COVID-19 pandemic restrictions were lifted, and also reflected favorable comparisons against temporary store closures related to COVID-19 in the first nine months of fiscal 2020.
oOur lower same store sales reflected a decrease in each of our major merchandise categories of hardgoods, apparel and footwear.
oSame store sales comparisons are made on a comparable-week basis. Same store sales for a period normally consist of sales for stores that operated throughout the period and the full corresponding prior-year period, along with sales from e-commerce. Same store sales comparisons exclude sales from stores permanently closed, or stores in the process of closing, during the comparable periods. Sales from e-commerce in the first nine months of fiscal 2022 and 2021 were not material.
•We experienced decreased customer transactions of 12.0% and a lower average sale per transaction of 2.9% in the first nine months of fiscal 2022 compared to the prior year.
- 24 -
Gross Profit. Gross profit decreased by $71.4 million to $261.4 million, or 34.5% of net sales, in the 39 weeks ended October 2, 2022, compared with $332.8 million, or 37.5% of net sales, in the 39 weeks ended October 3, 2021. The change in gross profit was primarily attributable to the following:
•Net sales decreased by $131.3 million, or 14.8%, compared with the first nine months of last year.
•Merchandise margins, which exclude buying, occupancy and distribution expense, decreased by an unfavorable 43 basis points compared with the first nine months of last year when merchandise margins increased by a favorable 275 basis points. Our merchandise margins primarily reflect an unfavorable shift in our product sales mix, increased promotional pricing and higher sales prices in response to increases in product purchase costs. The higher product purchase costs we are experiencing continue to reflect increased raw material, labor, freight and fuel costs initially resulting from shortages related to COVID-19, and are worsened by current inflationary pressures. Shipping capacity constraints and labor shortages at the ports contributed to higher freight costs and adversely impacted our ability to obtain sufficient quantities of certain products in our stores to meet customer demand.
•Store occupancy expense increased by $1.3 million, or an unfavorable 163 basis points as a percentage of net sales, compared with the first nine months of last year.
•Distribution expense, including costs capitalized into inventory, decreased by $3.4 million, but increased by an unfavorable 39 basis points as a percentage of net sales, in the first nine months of fiscal 2022 compared to the prior year. The decrease primarily reflected increased costs capitalized into inventory and reduced employee labor expense, partially offset by higher freight and fuel expense.
Selling and Administrative Expense. Selling and administrative expense increased by $6.5 million to $230.2 million, or 30.4% of net sales, in the 39 weeks ended October 2, 2022, from $223.7 million, or 25.2% of net sales, in the first nine months of last year. The change in selling and administrative expense was primarily attributable to the following:
•Store-related expense, excluding occupancy, increased by $7.6 million due largely to increases in employee labor and benefit-related expense and other operating expenses driven by inflation and to support our increased operating hours compared with the reduced store operating hours that we maintained in the prior year in response to the pandemic. While store operating hours were higher in the first nine months of fiscal 2022 compared with the same period last year, store operating hours remain below pre-pandemic levels. Wages continue to reflect the incremental impact of legislated minimum wage rate increases primarily in California, where over fifty percent of our stores are located. In California, state-wide minimum wage rates have risen from $10.00 per hour in 2017 to $15.00 per hour in 2022 and are projected to increase to $15.50 per hour on January 1, 2023. Additionally, certain other jurisdictions within California, including Los Angeles and San Francisco, as well as various other states in which we do business, are implementing their own scheduled increases, which may also include interim impacts effective at various points throughout the year. Labor expense for the first nine months of fiscal 2022 also reflected higher demand for labor in many of our markets resulting in higher wages. We estimate that the combined impact of these wage pressures caused our labor expense to increase by approximately $2.0 million for the first nine months of fiscal 2022 compared with the first nine months of fiscal 2021.
•Our advertising expense increased by $1.2 million in the first nine months of fiscal 2022 reflecting an increase in newspaper and digital advertising, as well as an increase in advertising labor expense. Despite this year-over-year increase, our expenses continue to benefit from significantly reduced advertising activity that resulted from initial measures we took in response to COVID-19 in fiscal 2020. We expect our expenses to continue to benefit from reduced advertising activity in the foreseeable future as we continue to evaluate the impact on our sales.
•Administrative expense decreased by $2.3 million, primarily attributable to a decrease in company performance-based incentive accruals in the current year, partially offset by an increase in employee labor and benefit-related expense year over year and the elimination of an employment agreement-related liability in the first quarter of fiscal 2021.
Interest Expense. Interest expense decreased by $0.3 million in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021.
Income Taxes. The provision for income taxes decreased to $6.4 million for the first nine months of fiscal 2022 from $25.9 million for the first nine months of fiscal 2021, primarily reflecting lower pre-tax income in the first nine months of fiscal 2022 compared to the first nine months of fiscal 2021. Our effective tax rate was 20.9% for the first nine months of fiscal 2022 and 23.9% for the first nine months of fiscal 2021. Our lower effective tax rate for the first nine months of fiscal 2022 reflected a higher tax deduction related to share-based compensation combined with lower pretax income.
- 25 -
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash and cash equivalents on hand, cash flows from operations and borrowings from the revolving credit facility, when necessary.
As of October 2, 2022, we had $34.4 million of cash and cash equivalents compared to $114.0 million of cash and cash equivalents as of October 3, 2021. Our cash flows from operating, investing and financing activities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 2,
2022 |
|
|
October 3,
2021 |
|
|
|
(In thousands) |
|
Total cash (used in) provided by: |
|
|
|
|
|
|
Operating activities |
|
$ |
(29,918 |
) |
|
$ |
95,193 |
|
Investing activities |
|
|
(8,814 |
) |
|
|
(7,017 |
) |
Financing activities |
|
|
(24,249 |
) |
|
|
(38,824 |
) |
Net (decrease) increase in cash and cash equivalents |
|
$ |
(62,981 |
) |
|
$ |
49,352 |
|
Operating Activities. Operating cash flows for the first nine months of fiscal 2022 and 2021 were a negative $29.9 million and a positive $95.2 million, respectively. The decreased cash flow provided by operating activities for the first nine months of fiscal 2022 compared to the prior year primarily reflects decreased net income, increased funding of merchandise inventory, and decreased accrued expenses primarily related to performance-based incentive accruals.
Investing Activities. Net cash used in investing activities for the first nine months of fiscal 2022 and 2021 was $8.8 million and $7.0 million, respectively. Capital expenditures, excluding non-cash acquisitions, represented substantially all of the cash used in investing activities for each period. In the first nine months of fiscal 2021, capital expenditures of $7.3 million were partially offset by a portion of settlement proceeds related to a civil unrest insurance recovery of $0.2 million. Capital expenditures for both periods primarily reflect store-related remodeling, new store openings, distribution center investments and computer hardware and software purchases.
Financing Activities. Financing cash flows for the first nine months of fiscal 2022 and 2021 were a negative $24.2 million and a negative $38.8 million, respectively. For the first nine months of both periods, cash was used primarily to fund dividend payments, purchase treasury stock and make principal payments on finance lease liabilities, partially offset by proceeds received from the exercise of employee share option awards. The change in cash flow from financing activities for the first nine months of fiscal 2022 primarily reflects a decrease in dividends paid in the first nine months of fiscal 2022 compared to the same period last year, which included a special dividend of $1.00 per share that was declared in the second quarter of fiscal 2021.
As of October 2, 2022, January 2, 2022 and October 3, 2021, we had no revolving credit borrowings and $1.1 million of letter of credit commitments outstanding.
In fiscal 2021 we paid cash dividends of $2.83 per share of outstanding common stock. Dividends declared in fiscal 2021 included special dividends totaling $2.00 per share of outstanding common stock. In the first nine months of fiscal 2022, we paid aggregate quarterly cash dividends of $0.75 per share of outstanding common stock, and in the fourth quarter of fiscal 2022, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on December 15, 2022 to stockholders of record as of December 1, 2022.
- 26 -
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, among other things, our alternative cash requirements, existing business conditions and the current market price of our stock. In fiscal 2016, our Board of Directors authorized a share repurchase program for the purchase of up to $25.0 million of our common stock, which was in effect through the fourth quarter of fiscal 2021 and under which a total of $7.7 million remained available for share repurchases as of January 2, 2022. In the first quarter of fiscal 2022, our Board of Directors authorized a new share repurchase program of up to $25.0 million of our common stock, which replaced the previous share repurchase program. Under this program, we may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission. However, the timing and amount of such purchases, if any, would be at the discretion of our management and Board of Directors, and would depend on market conditions and other considerations. We repurchased 295,719 shares of common stock for $4.1 million in the first nine months of fiscal 2022 pursuant to our new share repurchase program. We repurchased 100,498 shares of common stock for $2.3 million in the first nine months of fiscal 2021. Since the inception of our initial share repurchase program in May 2006 through October 2, 2022, we have repurchased a total of 4,186,014 shares for $53.6 million.
Loan Agreement. As of January 3, 2021, we had a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a syndicate of other lenders, as amended (the “Prior Credit Agreement”), which was terminated and replaced on February 24, 2021 as discussed below.
On February 24, 2021, we terminated the Prior Credit Agreement and entered into a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as agent and lender, which was amended on November 22, 2021 and October 19, 2022 (as so amended, the “Loan Agreement”). The Loan Agreement has a maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to $150.0 million. We may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lender under the Loan Agreement will have the option to increase their commitment to accommodate the requested increase. If the lender does not exercise that option, we may (with the consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The credit facility includes a $50.0 million sublimit for issuances of letters of credit.
Similar to the Prior Credit Agreement, we may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent in its reasonable discretion.
Generally, we may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR rate loans. The applicable interest rate on our borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as Term SOFR rate loans bear interest at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a 0.10% “SOFR adjustment” spread, plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one percent (0.50%), (b) the one-month SOFR rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time to time within BofA as its “prime rate.” The applicable margin for all loans will be a function of Average Daily Availability for the preceding fiscal quarter as set forth below.
|
|
|
|
|
|
|
Level |
|
Average Daily Availability |
|
SOFR Rate
Applicable Margin |
|
Base Rate
Applicable Margin |
I |
|
Greater than or equal to $70,000,000 |
|
1.375% |
|
0.375% |
II |
|
Less than $70,000,000 |
|
1.500% |
|
0.500% |
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
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Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of our assets. The Loan Agreement contains covenants that require us to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limits the ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. We may generally declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied, although we are permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. The Loan Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the credit facility, failure to pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in the Loan Agreement, failure to satisfy certain judgments against us, failure to pay when due (or any other default which permits the acceleration of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
In the first quarter of fiscal 2021, we paid and capitalized $0.7 million in new creditor and third-party fees associated with the Loan Agreement, which is amortized over the term of the Loan Agreement, and extinguished $0.2 million of deferred financing fees associated with the Prior Credit Agreement.
Future Capital Requirements. We had cash and cash equivalents on hand of $34.4 million as of October 2, 2022. We expect capital expenditures for fiscal 2022, excluding non-cash acquisitions, to range from approximately $10.0 million to $13.0 million primarily to fund the opening of new stores, store-related remodeling, new stores, distribution center investments and computer hardware and software purchases. For fiscal 2022, we anticipate opening three new stores and closing two stores.
Dividends are paid at the discretion of our Board of Directors. In fiscal 2021 we paid cash dividends of $2.83 per share of outstanding common stock. Dividends declared in fiscal 2021 included special dividends totaling $2.00 per share of outstanding common stock. In the first nine months of fiscal 2022, we paid aggregate quarterly cash dividends of $0.75 per share of outstanding common stock, and in the fourth quarter of fiscal 2022, our Board of Directors declared a quarterly cash dividend of $0.25 per share of outstanding common stock, which will be paid on December 15, 2022 to stockholders of record as of December 1, 2022.
As of October 2, 2022, a total of $20.9 million remained available for share repurchases under our new share repurchase program. We repurchased 295,719 shares of our common stock in the first nine months of fiscal 2022 and repurchased 100,498 shares of our common stock in the first nine months of fiscal 2021. We consider several factors in determining when and if we make share repurchases including, among other things, our alternative cash requirements, existing business conditions and the market price of our stock.
We believe we will be able to fund our cash requirements from cash and cash equivalents on hand, operating cash flows and borrowings from our credit facility, for at least the next 12 months.
Contractual Obligations. Our material contractual obligations include operating lease commitments associated with our leased properties and other occupancy expense, finance lease obligations, borrowings under the credit facility, if any, and other liabilities. Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate offices. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term, and we intend to renegotiate most of these leases as they expire. Operating lease commitments also consist of information technology (“IT”) systems hardware, distribution center delivery tractors and equipment. Additional information regarding our operating and finance leases is available in Notes 2 and 5 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
In the first nine months of fiscal 2022 and 2021, we had no borrowings under our revolving credit facility. Our zero borrowings reflect improved profitability and positive operating cash flow from increased consumer demand related to the COVID-19 pandemic during fiscal 2020 and 2021.
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.
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Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, we consider our estimates on valuation of merchandise inventory to be among 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 39 weeks ended October 2, 2022.
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results, which can suffer when weather does not conform to seasonal norms, such as the first quarter of fiscal 2022 when we experienced warm and dry winter-weather conditions across our markets that resulted in significant carryover of winter inventory. Seasonality in our net sales 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 and supplement our merchandise assortment as necessary and when possible during the season. Our efforts to replenish products during a season are not always successful. In the fourth fiscal quarter, which includes the holiday selling season and the start of the winter selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. If we miscalculate the consumer demand for our products generally or for our product mix in advance of a season, particularly the fourth quarter, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales, particularly during the fourth quarter, can negatively impact our annual operating results.
In fiscal 2021 and the first nine months of fiscal 2022, we experienced greater inflation in the cost of products that we purchase for resale as well as higher freight costs than in previous years. While our merchandise inventory costs have been impacted by these inflationary pressures, we have generally been able to adjust our selling prices in response to these higher product purchase costs. However, if we are unable to adjust our selling prices for product purchase cost increases that might occur in the future, then our merchandise margins could decline, which would adversely impact our operating results. In fiscal 2021 and the first nine months of fiscal 2022, we also experienced increased wage expense as a result of higher demand for labor in many of our markets. Broad-based inflationary pressures are adversely impacting many categories of costs and expenses during fiscal 2022.
Recently Issued Accounting Updates
See Note 2 to the Interim Financial Statements included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.
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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 and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ materially from forecasted results. These risks and uncertainties include, among other things, the economic impacts of COVID-19, including any potential variants, on our business operations, including as a result of regulations that may be issued in response to COVID-19, changes in the consumer spending environment, fluctuations in consumer holiday spending patterns, increased competition from e-commerce retailers, breach of data security or other unauthorized disclosure of sensitive personal or confidential information, the competitive environment in the sporting goods industry in general and in our specific market areas, inflation, product availability and growth opportunities, changes in the current market for (or regulation of) firearm-related products, a reduction or loss of product from a key supplier, disruption in product flow, seasonal fluctuations, weather conditions, changes in cost of goods, operating expense fluctuations, increases in labor and benefit-related expense, changes in laws or regulations, including those related to tariffs and duties as well as environmental, social and governance issues, public health issues (including those caused by COVID-19 or any potential variants), impacts from civil unrest or widespread vandalism, lower than expected profitability of our e-commerce platform or cannibalization of sales from our existing store base which could occur as a result of operating the e-commerce platform, litigation risks, stockholder campaigns and proxy contests, risks related to our historically leveraged financial condition, changes in interest rates, credit availability, higher expense associated with sources of credit resulting from uncertainty in financial markets and economic conditions in general. Those and other risks and uncertainties are more fully described in Part II, Item 1A, Risk Factors, in this report and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K and other filings with the SEC. We caution that the risk factors set forth in this report and the other reports that we file with the SEC 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.
