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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 4, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _____________________ to ____________________

Commission file number:  000-49850

 

BIG 5 SPORTING GOODS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4388794

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2525 East El Segundo Boulevard

El Segundo, California

 

90245

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (310) 536-0611

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

BGFV

The Nasdaq Stock Market LLC

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

There were 22,290,210 shares of common stock, with a par value of $0.01 per share outstanding as of April 27, 2021.

 

 

 


 

 

BIG 5 SPORTING GOODS CORPORATION

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of April 4, 2021 and January 3, 2021

3

 

Unaudited Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended April 4, 2021 and March 29, 2020

4

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen Weeks Ended April 4, 2021 and March 29, 2020

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended April 4, 2021 and March 29, 2020

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

Report of Independent Registered Public Accounting Firm

21

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4

Controls and Procedures

31

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

32

Item 1A

Risk Factors

32

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3

Defaults Upon Senior Securities

33

Item 4

Mine Safety Disclosures

33

Item 5

Other Information

33

Item 6

Exhibits

33

 

 

SIGNATURES

34

 

 

 

 


 

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

April 4,

2021

 

 

January 3,

2021

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

100,097

 

 

$

64,654

 

Accounts receivable, net of allowances of $80 and $58, respectively

 

 

11,399

 

 

 

19,879

 

Merchandise inventories, net

 

 

247,287

 

 

 

251,180

 

Prepaid expenses

 

 

10,513

 

 

 

11,684

 

Total current assets

 

 

369,296

 

 

 

347,397

 

Operating lease right-of-use assets, net

 

 

271,964

 

 

 

278,607

 

Property and equipment, net

 

 

58,710

 

 

 

57,245

 

Deferred income taxes

 

 

12,532

 

 

 

13,831

 

Other assets, net of accumulated amortization of $594 and $2,407, respectively

 

 

3,610

 

 

 

2,914

 

Total assets

 

$

716,112

 

 

$

699,994

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

88,613

 

 

$

80,882

 

Accrued expenses

 

 

78,351

 

 

 

82,877

 

Current portion of operating lease liabilities

 

 

73,196

 

 

 

73,737

 

Current portion of finance lease liabilities

 

 

2,664

 

 

 

2,089

 

Total current liabilities

 

 

242,824

 

 

 

239,585

 

Operating lease liabilities, less current portion

 

 

210,891

 

 

 

217,788

 

Finance lease liabilities, less current portion

 

 

4,332

 

 

 

2,504

 

Other long-term liabilities

 

 

6,865

 

 

 

7,479

 

Total liabilities

 

 

464,912

 

 

 

467,356

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 50,000,000 shares; issued 25,938,473 and

   25,580,541 shares, respectively; outstanding 22,288,260 and 21,930,328 shares, respectively

 

 

259

 

 

 

255

 

Additional paid-in capital

 

 

122,188

 

 

 

121,837

 

Retained earnings

 

 

171,280

 

 

 

153,073

 

Less: Treasury stock, at cost; 3,650,213 shares

 

 

(42,527

)

 

 

(42,527

)

Total stockholders' equity

 

 

251,200

 

 

 

232,638

 

Total liabilities and stockholders' equity

 

$

716,112

 

 

$

699,994

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 3 -


 

 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

13 Weeks Ended

 

 

 

April 4,

2021

 

 

March 29,

2020

 

Net sales

 

$

272,806

 

 

$

217,736

 

Cost of sales

 

 

174,913

 

 

 

153,181

 

Gross profit

 

 

97,893

 

 

 

64,555

 

Selling and administrative expense

 

 

70,144

 

 

 

71,370

 

Operating income (loss)

 

 

27,749

 

 

 

(6,815

)

Interest expense

 

 

342

 

 

 

735

 

Income (loss) before taxes

 

 

27,407

 

 

 

(7,550

)

Income tax expense (benefit)

 

 

5,861

 

 

 

(2,939

)

Net income (loss)

 

$

21,546

 

 

$

(4,611

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.01

 

 

$

(0.22

)

Diluted

 

$

0.96

 

 

$

(0.22

)

Weighted-average shares of common stock

   outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

21,417

 

 

 

21,149

 

Diluted

 

 

22,371

 

 

 

21,149

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

- 4 -


 

 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

 

 

13 Weeks Ended April 4, 2021

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of January 3, 2021

 

 

21,930,328

 

 

$

255

 

 

$

121,837

 

 

$

153,073

 

 

$

(42,527

)

 

$

232,638

 

Net income

 

 

 

 

 

 

 

 

 

 

 

21,546

 

 

 

 

 

 

21,546

 

Dividends on common stock ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(3,339

)

 

 

 

 

 

(3,339

)

Issuance of nonvested share awards

 

 

235,480

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

196,200

 

 

 

2

 

 

 

974

 

 

 

 

 

 

 

 

 

976

 

Share-based compensation

 

 

 

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

425

 

Forfeiture of nonvested share awards

 

 

(3,520

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of

   withholding tax

 

 

(70,228

)

 

 

 

 

 

(1,046

)

 

 

 

 

 

 

 

 

(1,046

)

Balance as of April 4, 2021

 

 

22,288,260

 

 

$

259

 

 

$

122,188

 

 

$

171,280

 

 

$

(42,527

)

 

$

251,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended March 29, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of December 29, 2019

 

 

21,664,076

 

 

$

252

 

 

$

120,054

 

 

$

102,593

 

 

$

(42,527

)

 

$

180,372

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,611

)

 

 

 

 

 

(4,611

)

Dividends on common stock ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,081

)

 

 

 

 

 

(1,081

)

Issuance of nonvested share awards

 

 

241,600

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

475

 

 

 

 

 

 

 

 

 

475

 

Forfeiture of nonvested share awards

 

 

(3,755

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment of

   withholding tax

 

 

(64,573

)

 

 

 

 

 

(97

)

 

 

 

 

 

 

 

 

(97

)

Balance as of March 29, 2020

 

 

21,837,348

 

 

$

254

 

 

$

120,430

 

 

$

96,901

 

 

$

(42,527

)

 

$

175,058

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 5 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

13 Weeks Ended

 

 

 

April 4,

2021

 

 

March 29,

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,546

 

 

$

(4,611

)

Adjustments to reconcile net income (loss) to net cash

 

 

 

 

 

 

 

 

    provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,259

 

 

 

4,606

 

Share-based compensation

 

 

425

 

 

 

475

 

Amortization of other assets

 

 

265

 

 

 

83

 

Noncash lease expense

 

 

16,033

 

 

 

15,792

 

Proceeds from insurance recovery - lost profit margin and expenses

 

 

1,083

 

 

 

 

Gain on recovery of insurance proceeds - lost profit margin and expenses

 

 

(460

)

 

 

 

Gain on recovery of insurance proceeds - property and equipment

 

 

(249

)

 

 

 

Deferred income taxes

 

 

1,299

 

 

 

645

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,885

 

 

 

5,812

 

Merchandise inventories, net

 

 

3,893

 

 

 

(3,032

)

Prepaid expenses and other assets

 

 

927

 

 

 

1,510

 

Accounts payable

 

 

7,683

 

 

 

1,589

 

Operating lease liabilities

 

 

(16,828

)

 

 

(16,243

)

Accrued expenses and other long-term liabilities

 

 

(5,787

)

 

 

(11,928

)

Net cash provided by (used in) operating activities

 

 

41,974

 

 

 

(5,302

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,742

)

 

 

(2,342

)

Proceeds from insurance recovery - property and equipment

 

 

249

 

 

 

 

Net cash used in investing activities

 

 

(1,493

)

 

 

(2,342

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

 

 

 

116,913

 

Payments under revolving credit facility

 

 

 

 

 

(59,197

)

Changes in book overdraft

 

 

68

 

 

 

(11,852

)

Debt issuance costs paid

 

 

(717

)

 

 

 

Principal payments under finance lease liabilities

 

 

(931

)

 

 

(951

)

Proceeds from exercise of share option awards

 

 

948

 

 

 

 

Tax withholding payments for share-based compensation

 

 

(1,046

)

 

 

(97

)

Dividends paid

 

 

(3,360

)

 

 

(1,192

)

Net cash (used in) provided by financing activities

 

 

(5,038

)

 

 

43,624

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

35,443

 

 

 

35,980

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

64,654

 

 

 

8,223

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

100,097

 

 

$

44,203

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired under finance leases

 

$

3,334

 

 

$

 

Property and equipment additions unpaid

 

$

1,316

 

 

$

931

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

192

 

 

$

772

 

Income taxes paid

 

$

6

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

- 6 -


 

 

BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)

Description of Business

Big 5 Sporting Goods Corporation (the “Company”) is a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform as of April 4, 2021. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet.  The Company’s 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. The Company is a holding company that operates as one reportable segment through Big 5 Corp., its 100%-owned subsidiary, and Big 5 Services Corp., which is a 100%-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift cards and returned merchandise credits (collectively, “stored-value cards”).

The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its 100%-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s 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 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 2021 is comprised of 52 weeks and ends on January 2, 2022. Fiscal year 2020 was comprised of 53 weeks and ended on January 3, 2021. The four quarters of fiscal 2021 are each comprised of 13 weeks. The first three quarters in fiscal 2020 were each comprised of 13 weeks, and the fourth quarter of fiscal 2020 was comprised of 14 weeks.

Recently Issued Accounting Updates

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the expedients and exceptions provided by the amendments in this standard to determine their impact.

Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

 


- 7 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

COVID-19 Impact on Concentration of Risk

The novel coronavirus (“COVID-19”) pandemic has significantly impacted health and economic conditions throughout the United States and globally, as public concern about becoming ill with the virus has led to the issuance of recommendations and/or mandates from federal, state and local authorities to practice social distancing or self-quarantine.

The Company primarily operates traditional sporting goods retail stores located in the western United States, with approximately 52% of its stores, along with its corporate offices and distribution center, located in California. Because of this, the Company is subject to regional risks, including the impact of the COVID-19 outbreak. Beginning on March 20, 2020, the Company temporarily closed more than one-half of its retail store locations in response to state and local shelter orders related to the COVID-19 outbreak. The Company was subsequently able to gradually reopen its store locations based on initially qualifying as an “essential” business under applicable regulations and later as a result of the easing of regulatory restrictions on retail operations in the Company’s market areas. In an effort to promote social distancing protocols, the Company implemented reduced store hours, limited the number of customers in its stores at any one time and generally implemented social-distancing guidelines throughout the store operating space in fiscal 2020. Due to the reduced customer traffic, and in an effort to preserve capital, the Company implemented temporary and permanent workforce reductions throughout the organization, temporarily reduced merchandise inventory orders and reduced advertising and capital spending in fiscal 2020. As of the end of fiscal 2020 and during the first quarter of fiscal 2021, all of the Company’s stores were open for in-store shopping, subject to continued appropriate social distancing restrictions and with reduced operating hours. The Company may further restrict its store operations and operations in its distribution facility if deemed necessary or if recommended or mandated by authorities, and new temporary closures of stores may be required if additional orders are issued in response to changing health conditions.

General Concentration of Risk

The Company purchases merchandise from over 680 suppliers, and the Company’s 20 largest suppliers accounted for 36.4% of total purchases in fiscal 2020. One vendor, Nike, represented greater than 5% of total purchases, at 8.5%, in fiscal 2020 and accounted for 7.2% of the Company’s total sales in fiscal 2020. In the first quarter of fiscal 2021, the Company was informed of an expansion of Nike’s direct-to-consumer initiatives that will impact certain multi-branded retailers, including the Company, and which will lead to a significant reduction in the Company’s future supply chain relative to this vendor. This transition is not expected to impact the Company’s ability to continue to purchase certain Nike branded products from authorized licensees. The Company is actively expanding its relationships with other new and existing vendors in order to replace the affected Nike product within its product mix.

Use of Estimates

Management makes a number of estimates and assumptions relating to the reporting of assets, liabilities and stockholders’ equity and the disclosure of contingent assets and liabilities at the date of the Interim Financial Statements and reported amounts of revenue and expense during the reporting period to prepare these Interim Financial Statements in conformity with GAAP. Certain items subject to such estimates and assumptions include the carrying amount of merchandise inventories, property and equipment, lease assets and lease liabilities; valuation allowances for receivables, sales returns and deferred income tax assets; estimates related to stored-value cards and the valuation of share-based compensation awards; and obligations related to litigation, self-insurance liabilities and employee benefits. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after April 4, 2021, including those resulting from the impacts of the COVID-19 pandemic, may result in actual outcomes that differ from those contemplated by management’s assumptions and estimates.

 


 

- 8 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

Revenue Recognition

The Company operates solely as a sporting goods retailer, which includes both retail stores and an e-commerce platform, that offers a broad range of products in the western United States and online. Generally, all revenue is recognized when control of the promised goods is transferred to customers, for an amount that reflects the consideration in exchange for those goods. Accordingly, the Company implicitly enters into a contract with customers to deliver merchandise inventory at the point of sale. Collectability is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.

In accordance with ASC 606, Revenue from Contracts with Customers, the Company disaggregates net sales into the following major merchandise categories to depict the nature and amount of revenue and related cash flows:

 

 

 

13 Weeks Ended

 

 

 

April 4,

2021

 

 

March 29,

2020

 

 

 

(In thousands)

 

Hardgoods

 

$

140,906

 

 

$

108,774

 

Athletic and sport footwear

 

 

66,673

 

 

 

57,498

 

Athletic and sport apparel

 

 

63,526

 

 

 

49,128

 

Other sales

 

 

1,701

 

 

 

2,336

 

Net sales

 

$

272,806

 

 

$

217,736

 

 

Substantially all of the Company’s revenue is for single performance obligations for the following distinct items:

 

Retail store sales

 

E-commerce sales

 

Stored-value cards

For performance obligations related to retail store and e-commerce sales contracts, the Company typically transfers control, for retail stores, upon consummation of the sale when the product is paid for and taken by the customer and, for e-commerce sales, when the product is tendered for delivery to the common carrier. For performance obligations related to stored-value cards, the Company typically transfers control upon redemption of the stored-value card through consummation of a future sales transaction. The Company accounts for shipping and handling relative to e-commerce sales as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Revenue associated with e-commerce sales was not material for the 13 weeks ended April 4, 2021 and March 29, 2020.

The Company recognized $1.7 million and $1.9 million in stored-value card redemption revenue for the 13 weeks ended April 4, 2021 and March 29, 2020, respectively. The Company also recognized $0.1 million in stored-value card breakage revenue for the 13 weeks ended April 4, 2021 and March 29, 2020. The Company had outstanding stored-value card liabilities of $7.0 million and $7.5 million as of April 4, 2021 and January 3, 2021, respectively, which are included in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.

In the accompanying interim unaudited condensed consolidated balance sheets, the Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.9 million and $1.2 million related to estimated sales returns as of April 4, 2021 and January 3, 2021, respectively, and recorded, in accrued expenses, an allowance for sales returns reserve of $1.8 million and $2.4 million as of April 4, 2021 and January 3, 2021, respectively.

Share-Based Compensation

The Company accounts for its share-based compensation in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense on a straight-line basis over the requisite service period using the fair-value method for share option awards, nonvested share awards and nonvested share unit awards granted with service-only conditions. See Note 10 to the Interim Financial Statements for a further discussion on share-based compensation.

 

- 9 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Valuation of Merchandise Inventories, Net

The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or net realizable value using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory, net of vendor allowances and cash discounts, in-bound freight-related expense and allocated overhead expense associated with the Company’s distribution center.

Management regularly reviews inventories and records valuation reserves for damaged and defective merchandise, merchandise items with slow-moving or obsolescence exposure and merchandise that has a carrying value that exceeds net realizable value. Because of its merchandise mix, the Company has not historically experienced significant occurrences of obsolescence.

Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends.  The Company performs physical inventories of its stores at least once per year and cycle counts inventories at its distribution center throughout the year.  The reserve for inventory shrinkage primarily represents an estimate for inventory shrinkage for each store since the last physical inventory date through the reporting date.

These reserves are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from expectations.

Valuation of Long-Lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Long-lived assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”), usually at the store level. The carrying amount of a store asset group includes stores’ property and equipment, primarily leasehold improvements, and operating lease right-of-use (“ROU”) assets. The carrying amount of a store asset group is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the store asset group. Factors that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating and cash flow losses, and a projection that demonstrates continuing losses or insufficient income over the remaining reasonably certain lease term associated with the use of a store asset group. Other factors may include an adverse change in the business climate or an adverse action or assessment by a regulator in the market of a store asset group. When stores are identified as having an indicator of impairment, the Company forecasts undiscounted cash flows over the store asset group’s remaining reasonably certain lease term and compares the undiscounted cash flows to the carrying amount of the store asset group. If the store asset group is determined not to be recoverable, then an impairment charge will be recognized in the amount by which the carrying amount of the store asset group exceeds its fair value, determined using discounted cash flow valuation techniques, as contemplated in ASC 820, Fair Value Measurements.

The Company determines the cash flows expected to result from the store asset group by projecting future revenue, gross margin and operating expense for each store asset group under evaluation for impairment. The estimates of future cash flows involve management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning, and include assumptions about sales growth rates, gross margins and operating expense in relation to the current economic environment and the Company’s future expectations, competitive factors in its various markets, inflation, sales trends and other relevant environmental factors that may impact the store under evaluation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions. If economic conditions deteriorate in the markets in which the Company conducts business, or if other negative market conditions develop, the Company may experience additional impairment charges in the future for underperforming stores.

The resulting impairment charge, if any, is allocated to the property and equipment, primarily leasehold improvements, and operating lease ROU assets on a pro rata basis using the relative carrying amounts of those assets. The allocated impairment charge to a long-lived asset is limited to the extent that the impairment charge does not reduce the carrying amount of the long-lived asset below its individual fair value. The estimation of the fair value of an ROU asset involves the evaluation of current market value rental amounts for leases associated with ROU assets. The estimates of current market value rental amounts are primarily based on recent observable market rental data of other comparable retail store locations. The fair value of an ROU asset is measured using a discounted cash flow valuation technique by discounting the estimated current and future market rental values using a property-specific discount rate.

The Company did not recognize any impairment charges in the first quarter of fiscal 2021 or 2020.

 

- 10 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Leases

In accordance with ASC 842, Leases, the Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware, and distribution center delivery tractors and equipment. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities on the interim unaudited condensed consolidated balance sheets. Lease liabilities are calculated using the effective interest method, regardless of classification, while the amortization of ROU assets varies depending upon classification. Finance lease classification results in a front-loaded expense recognition pattern over the lease term which amortizes the ROU asset by recognizing interest expense and amortization expense as separate components of lease expense and calculates the amortization expense component on a straight-line basis. Conversely, operating lease classification results in a straight-line expense recognition pattern over the lease term and recognizes lease expense as a single expense component, which results in amortization of the ROU asset that equals the difference between lease expense and interest expense. Lease expense for finance and operating leases are included in cost of sales or selling and administrative expense, based on the use of the leased asset, on the interim unaudited condensed consolidated statements of operations. Variable payments such as property taxes, insurance and common area maintenance related to triple net leases, as well as certain equipment sales taxes, licenses, fees and repairs, are expensed as incurred, and leases with an initial term of 12 months or less are excluded from minimum lease payments and are not recorded on the balance sheet. The Company recognizes variable lease expense for these short-term leases on a straight-line basis over the remaining lease term.

ROU assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the reasonably certain lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate (“IBR”) to determine the present value of lease payments. The collateralized IBR is based on a synthetic credit rating that is externally prepared on an annual basis. This analysis considers qualitative and quantitative factors based on guidance provided by a rating agency for the consumer durables industry. The Company adjusts the selected IBR quarterly with a company-specific unsecured yield curve that approximates the Company’s market risk profile. The collateralized IBR is also based upon the estimated impact that the collateral has on the IBR. To account for the collateralized nature of the IBR, the Company utilized a notching method based on notching guidance provided by a rating agency whereby the Company’s base credit rating is notched upward as the yield curve on a secured loan is expected to be lower versus an unsecured loan.

The operating lease ROU asset also includes any prepaid lease payments made and is reduced by lease incentives such as tenant improvement allowances. The operating lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.

Certain of the leases for the Company’s retail store facilities provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. Under ASC 842, these contingent rents are expensed as they accrue.

In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and the resultant expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A—Topic 842 and Topic 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. The election is available for concessions related to the effects of the COVID-19 pandemic that result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.

 

- 11 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In accordance with this interpretive guidance, the Company elected to account for lease concessions related to the effects of the COVID-19 pandemic that resulted in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, the Company did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company accounted for its remaining lease deferrals related to COVID-19 as if no changes to the lease contract were made while continuing to recognize expense during the deferral period and deferring the payment obligation as a liability. The Company recorded remaining lease deferrals related to COVID-19 of $0.4 million and $0.6 million as of April 4, 2021 and January 3, 2021, respectively, in accrued expenses in the accompanying interim unaudited condensed consolidated balance sheets.

See Note 5 to the Interim Financial Statements for a further discussion on leases.

 

 

(3)

Fair Value Measurements

The carrying values of cash and cash equivalents, 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, if any, under the Company’s credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. When the Company recognizes impairment on certain of its underperforming stores, the carrying values of these stores are reduced to their estimated fair values.

As of April 4, 2021 and January 3, 2021, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were assets subject to long-lived asset impairment related to certain underperforming stores. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the asset and on observable real estate market data of underperforming stores’ specific comparable markets, when available. The Company classified these fair value measurements as Level 3 inputs, which are unobservable inputs for which market data are not available and that are developed using the best information available about pricing assumptions used by market participants in accordance with ASC 820.

(4)

Accrued Expenses

The major components of accrued expenses are as follows:

 

 

 

April 4,

2021

 

 

January 3,

2021

 

 

 

(In thousands)

 

Payroll and related expense

 

$

32,202

 

 

$

37,826

 

Occupancy expense

 

 

10,403

 

 

 

10,215

 

Sales tax

 

 

9,938

 

 

 

11,609

 

Other

 

 

25,808

 

 

 

23,227

 

Accrued expenses

 

$

78,351

 

 

$

82,877

 

 

Payroll and related expense as of April 4, 2021 and January 3, 2021 reflected a deferral of the employer portion of Social Security tax provided by the U.S. Coronavirus Aid, Relief and Economic Security Act, which allowed employers to defer their portion of the social security payroll tax otherwise due with respect to wages earned from March 27, 2020 through December 31, 2020.


 

- 12 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

(5)

Lease Commitments

The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, information technology hardware and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842.

Certain of the leases for the Company’s retail store facilities provide for variable payments for property taxes, insurance,  common area maintenance payments related to triple net leases, rental payments based on future sales volumes at the leased location, as well as certain equipment sales taxes, licenses, fees and repairs, which are not measurable at the inception of the lease, or rental payments that are adjusted periodically for inflation. The Company recognizes variable lease expense for these leases in the period incurred which, for contingent rent, begins in the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In accordance with ASC 842, the components of lease expense were as follows:

 

 

 

13 Weeks Ended

 

 

 

April 4,

2021

 

 

March 29,

2020

 

 

 

(In thousands)

 

Lease expense:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

649

 

 

$

722

 

Interest on lease liabilities

 

 

59

 

 

 

89

 

Finance lease expense

 

 

708

 

 

 

811

 

Operating lease expense

 

 

20,336

 

 

 

20,287

 

Variable lease expense

 

 

4,492

 

 

 

4,124

 

Sublease income

 

 

(78

)

 

 

(293

)

Total lease expense

 

$

25,458

 

 

$

24,929

 

In accordance with ASC 842, other information related to leases was as follows:

 

 

 

13 Weeks Ended

 

 

 

April 4,

2021

 

 

March 29,

2020

 

 

 

(In thousands)

 

Operating cash flows from operating leases

 

$

22,145

 

 

$

20,742

 

Operating cash flows from finance leases

 

 

60

 

 

 

112

 

Financing cash flows from finance leases

 

 

931

 

 

 

951

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

23,136

 

 

$

21,805

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

3,334

 

 

$

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

9,446

 

 

$

23,282

 

Weighted-average remaining lease term—finance leases

 

3.5 years

 

 

3.0 years

 

Weighted-average remaining lease term—operating leases

 

4.9 years

 

 

5.2 years

 

Weighted-average discount rate—finance leases

 

 

3.7

%

 

 

4.7

%

Weighted-average discount rate—operating leases

 

 

5.9

%

 

 

6.1

%

 

 

- 13 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

In accordance with ASC 842, maturities of finance and operating lease liabilities as of April 4, 2021 were as follows:

 

Year Ending:

 

Finance

Leases

 

 

Operating

Leases

 

 

 

(In thousands)

 

2021 (remaining nine months)

 

$

1,898

 

 

$

64,078

 

2022

 

 

2,451

 

 

 

75,954

 

2023

 

 

1,599

 

 

 

59,910

 

2024

 

 

711

 

 

 

51,230

 

2025

 

 

341

 

 

 

34,803

 

Thereafter

 

 

388

 

 

 

41,831

 

Undiscounted cash flows

 

$

7,388

 

 

$

327,806

 

Reconciliation of lease liabilities:

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

3.5 years

 

 

4.9 years

 

Weighted-average discount rate

 

 

3.7

%

 

 

5.9

%

Present values

 

$

6,996

 

 

$

284,087

 

Lease liabilities - current

 

 

2,664

 

 

 

73,196

 

Lease liabilities - long-term

 

 

4,332

 

 

 

210,891

 

Lease liabilities - total

 

$

6,996

 

 

$

284,087

 

Difference between undiscounted and discounted cash flows

 

$

392

 

 

$

43,719