HOTT Hot Topic, Inc. (MM)

Big 5 Sporting Goods Corp. (BGFV) posted strong first-quarter 2013 results with earnings marking a massive jump to 34 cents per share against a penny reported in the comparable year-ago quarter. The year-over-year increase was primarily driven by strong sales growth and improved margins.

Moreover, the quarterly earnings of this Zacks Rank #2 (Buy) company surpassed its own guidance range of 18 – 24 cents per share and the Zacks Consensus Estimate of 21 cents.

Quarter in Detail

Net sales for the quarter increased approximately 12.7% to $246.3 million compared with $218.5 million in the first quarter of 2012 and surpassed the Zacks Consensus Estimate of $238.0 million. Sales in the quarter mainly benefited from favorable weather conditions, surge in demand for firearms and ammunition products along with the company’s ongoing merchandise and marketing initiatives, partially offset by the negative impact from the shift in Easter timings.

Same-store sales rose 10.5% over the year-ago quarter, ahead of the high-single-digit increase the company had guided. Improvement in same-store sales was primarily driven by increased customer traffic and higher average sale.

Gross profit in the quarter increased 19.3% to $80.5 million, while gross profit margin expanded 180 basis points (bps) to 32.7% due to a 113 bps improvement in merchandise margins, and reduced store occupancy and distribution expenses as a percentage of sales.

Selling and administrative expense, as a percentage of net sales, contracted 290 bps to 27.6%. However, in dollar terms, selling and administrative expenses increased $1.3 million to $67.9 million. The escalation is primarily attributable to increased store-related expenses due to higher store count and elevated employee benefit-related costs, which were somewhat offset by reduced advertising expenses.

Operating income for the quarter stood at $12.5 million against $0.8 million reported in the first quarter of 2012. Consequently, operating margin came in at 5.1% against 0.4% in the comparable year-ago quarter. The year-over-year improvement in operating margin was primarily driven by increased gross profit margin and reduced selling and administrative expenses as a percentage of sales.

Financial Update

Big 5 ended the quarter with cash and cash equivalents of $5.4 million. The company’s inventory level at the end of the first quarter was up 0.6% at $271.9 million compared with $270.4 million at the end of fiscal 2012.

Long-term date as of Mar 31, 2013 stood at $31.9 million compared with $47.5 million as of Dec 31, 2012. Shareholders’ equity at the end of the quarter stood at $170.4 million.

The company continues to enhance shareholder value by returning cash in the form of dividends and share repurchases. Subsequent to the earnings result, Big 5 declared a quarterly cash dividend of 10 cents per share, payable on Jun 14, 2013 to shareholders of record as of May 31, 2013.

Store Update

In the reported quarter, Big 5 inaugurated 1 store and closed 1, bringing the store count at the end of quarter to 414 stores.

Looking ahead, Big 5 plans to open 2 new stores during the second quarter of 2013. For full-year 2013, the company targets to open nearly 15 to 20 new outlets.

Guidance

In anticipation of favorable weather conditions, shift of the Easter holiday and higher demand for firearms and ammunition products, management expects same-store sales in the second quarter of 2013 to increase in the mid-single-digit range. Further, the company anticipates earnings for the quarter to range from 20 cents – 26 cents per share. Currently, the Zacks Consensus Estimate stands at 21 cents per share.

Other Stocks to Consider

Apart from Big 5, other stocks in the sporting goods retail industry worth considering include Cabela’s Inc. (CAB), Hot Topic Inc. (HOTT) and Buckle Inc. (BKE). Currently, Cabela’s holds a Zacks Rank #1 (Strong Buy) while Hot Topic and Buckle carry a Zacks Rank #2 (Buy).

 
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