Quarterly Report (10-q)

Date : 10/30/2019 @ 4:16PM
Source : Edgar (US Regulatory)
Stock : Big 5 Sporting Goods Corporation (BGFV)
Quote : 3.85  0.0 (0.00%) @ 4:24PM
Big 5 Sporting Goods share price Chart

Quarterly Report (10-q)

 

 

 

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 September 29, 2019

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 21,671,686 shares of common stock, with a par value of $0.01 per share outstanding as of October 22, 2019.

 

 

 


 

BIG 5 SPORTING GOODS CORPORATION

INDEX

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of September 29, 2019 and December 30, 2018

3

 

Unaudited Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended September 29, 2019 and September 30, 2018

4

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Thirteen and Thirty-Nine Weeks Ended September 29, 2019 and September 30, 2018

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 29, 2019 and September 30, 2018

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

Report of Independent Registered Public Accounting Firm

20

Item 2

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

21

Item 3

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4

Controls and Procedures

30

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

31

Item 1A

Risk Factors

31

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3

Defaults Upon Senior Securities

31

Item 4

Mine Safety Disclosures

31

Item 5

Other Information

31

Item 6

Exhibits

31

 

 

SIGNATURES

32

 

 

 

 


 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

September 29,

2019

 

 

December 30,

2018

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

5,042

 

 

$

6,765

 

Accounts receivable, net of allowances of $34 and $28, respectively

 

 

10,332

 

 

 

14,184

 

Merchandise inventories, net

 

 

310,514

 

 

 

294,900

 

Prepaid expenses

 

 

8,395

 

 

 

9,224

 

Total current assets

 

 

334,283

 

 

 

325,073

 

Operating lease right-of-use assets, net

 

 

270,363

 

 

 

 

Property and equipment, net

 

 

70,524

 

 

 

76,488

 

Deferred income taxes

 

 

13,930

 

 

 

14,543

 

Other assets, net of accumulated amortization of $1,968 and $1,772, respectively

 

 

3,725

 

 

 

3,457

 

Total assets

 

$

692,825

 

 

$

419,561

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

90,375

 

 

$

80,613

 

Accrued expenses

 

 

59,653

 

 

 

67,659

 

Current portion of operating lease liabilities

 

 

66,673

 

 

 

 

Current portion of finance lease liabilities

 

 

2,546

 

 

 

2,322

 

Total current liabilities

 

 

219,247

 

 

 

150,594

 

Operating lease liabilities, less current portion

 

 

219,474

 

 

 

 

Finance lease liabilities, less current portion

 

 

4,710

 

 

 

4,823

 

Long-term debt

 

 

60,642

 

 

 

65,000

 

Deferred rent, less current portion

 

 

 

 

 

14,615

 

Other long-term liabilities

 

 

8,108

 

 

 

9,668

 

Total liabilities

 

 

512,181

 

 

 

244,700

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, authorized 50,000,000 shares; issued 25,321,899 and

   25,074,307 shares, respectively; outstanding 21,671,686 and 21,424,094 shares, respectively

 

 

253

 

 

 

250

 

Additional paid-in capital

 

 

119,602

 

 

 

118,351

 

Retained earnings

 

 

103,316

 

 

 

98,787

 

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

 

 

(42,527

)

 

 

(42,527

)

Total stockholders' equity

 

 

180,644

 

 

 

174,861

 

Total liabilities and stockholders' equity

 

$

692,825

 

 

$

419,561

 

 

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

 

 

39 Weeks Ended

 

 

 

September 29,

2019

 

 

September 30,

2018

 

 

September 29,

2019

 

 

September 30,

2018

 

Net sales

 

$

266,150

 

 

$

266,351

 

 

$

752,401

 

 

$

740,480

 

Cost of sales

 

 

180,158

 

 

 

183,852

 

 

 

517,416

 

 

 

509,984

 

Gross profit

 

 

85,992

 

 

 

82,499

 

 

 

234,985

 

 

 

230,496

 

Selling and administrative expense

 

 

76,886

 

 

 

77,680

 

 

 

221,676

 

 

 

225,824

 

Operating income

 

 

9,106

 

 

 

4,819

 

 

 

13,309

 

 

 

4,672

 

Interest expense

 

 

683

 

 

 

860

 

 

 

2,197

 

 

 

2,309

 

Income before taxes

 

 

8,423

 

 

 

3,959

 

 

 

11,112

 

 

 

2,363

 

Income tax expense

 

 

2,026

 

 

 

844

 

 

 

3,023

 

 

 

805

 

Net income

 

$

6,397

 

 

$

3,115

 

 

$

8,089

 

 

$

1,558

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.15

 

 

$

0.38

 

 

$

0.07

 

Diluted

 

$

0.30

 

 

$

0.15

 

 

$

0.38

 

 

$

0.07

 

Weighted-average shares of common stock

   outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,132

 

 

 

20,990

 

 

 

21,093

 

 

 

20,972

 

Diluted

 

 

21,154

 

 

 

21,000

 

 

 

21,125

 

 

 

21,021

 

 

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 September 29, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of June 30, 2019

 

 

21,684,601

 

 

$

253

 

 

$

119,145

 

 

$

97,996

 

 

$

(42,527

)

 

$

174,867

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6,397

 

 

 

 

 

 

6,397

 

Dividends on common stock ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,077

)

 

 

 

 

 

(1,077

)

Share-based compensation

 

 

 

 

 

 

 

 

457

 

 

 

 

 

 

 

 

 

457

 

Forfeiture of nonvested share awards

 

 

(12,915

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 29, 2019

 

 

21,671,686

 

 

$

253

 

 

$

119,602

 

 

$

103,316

 

 

$

(42,527

)

 

$

180,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of July 1, 2018

 

 

21,431,124

 

 

$

250

 

 

$

117,323

 

 

$

105,042

 

 

$

(42,527

)

 

$

180,088

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,115

 

 

 

 

 

 

3,115

 

Dividends on common stock ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(3,213

)

 

 

 

 

 

(3,213

)

Share-based compensation

 

 

 

 

 

 

 

 

540

 

 

 

 

 

 

 

 

 

540

 

Forfeiture of nonvested share awards

 

 

(2,850

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

 

 

21,428,274

 

 

$

250

 

 

$

117,863

 

 

$

104,944

 

 

$

(42,527

)

 

$

180,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39 Weeks Ended September 29, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of December 30, 2018

 

 

21,424,094

 

 

$

250

 

 

$

118,351

 

 

$

98,787

 

 

$

(42,527

)

 

$

174,861

 

Cumulative adjustment from change in

   accounting principle, net of tax

 

 

 

 

 

 

 

 

 

 

 

(339

)

 

 

 

 

 

(339

)

Net income

 

 

 

 

 

 

 

 

 

 

 

8,089

 

 

 

 

 

 

8,089

 

Dividends on common stock ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

(3,221

)

 

 

 

 

 

(3,221

)

Issuance of nonvested share awards

 

 

338,256

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

1,475

 

 

 

 

 

 

 

 

 

1,475

 

Forfeiture of nonvested share awards

 

 

(31,570

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment

   of withholding tax

 

 

(59,094

)

 

 

(1

)

 

 

(220

)

 

 

 

 

 

 

 

 

(221

)

Balance as of September 29, 2019

 

 

21,671,686

 

 

$

253

 

 

$

119,602

 

 

$

103,316

 

 

$

(42,527

)

 

$

180,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39 Weeks Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Treasury

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Stock,

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

At Cost

 

 

Total

 

Balance as of December 31, 2017

 

 

21,345,159

 

 

$

249

 

 

$

116,495

 

 

$

112,424

 

 

$

(42,099

)

 

$

187,069

 

Cumulative adjustment from change in

   accounting principle, net of tax

 

 

 

 

 

 

 

 

 

 

 

575

 

 

 

 

 

 

575

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,558

 

 

 

 

 

 

1,558

 

Dividends on common stock ($0.45 per share)

 

 

 

 

 

 

 

 

 

 

 

(9,613

)

 

 

 

 

 

(9,613

)

Issuance of nonvested share awards

 

 

213,062

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Exercise of share option awards

 

 

6,564

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Share-based compensation

 

 

 

 

 

 

 

 

1,704

 

 

 

 

 

 

 

 

 

1,704

 

Forfeiture of nonvested share awards

 

 

(7,420

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of common stock for payment

   of withholding tax

 

 

(53,343

)

 

 

(1

)

 

 

(365

)

 

 

 

 

 

 

 

 

(366

)

Purchases of treasury stock

 

 

(75,748

)

 

 

 

 

 

 

 

 

 

 

 

(428

)

 

 

(428

)

Balance as of September 30, 2018

 

 

21,428,274

 

 

$

250

 

 

$

117,863

 

 

$

104,944

 

 

$

(42,527

)

 

$

180,530

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

- 5 -


 

BIG 5 SPORTING GOODS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

39 Weeks Ended

 

 

 

September 29,

2019

 

 

September 30,

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

8,089

 

 

$

1,558

 

Adjustments to reconcile net income to net cash provided by (used in) operating

    activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,630

 

 

 

14,374

 

Share-based compensation

 

 

1,475

 

 

 

1,704

 

Amortization of other assets

 

 

195

 

 

 

141

 

ROU asset gain on disposal

 

 

(110

)

 

 

 

Noncash lease expense

 

 

45,439

 

 

 

 

Deferred income taxes

 

 

735

 

 

 

659

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

4,152

 

 

 

1,404

 

Merchandise inventories, net

 

 

(15,614

)

 

 

(932

)

Prepaid expenses and other assets

 

 

118

 

 

 

381

 

Accounts payable

 

 

8,969

 

 

 

(18,029

)

Operating lease liabilities

 

 

(46,721

)

 

 

 

Accrued expenses and other long-term liabilities

 

 

(7,705

)

 

 

(9,319

)

Net cash provided by (used in) operating activities

 

 

13,652

 

 

 

(8,059

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,128

)

 

 

(8,448

)

Net cash used in investing activities

 

 

(6,128

)

 

 

(8,448

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

135,950

 

 

 

167,213

 

Payments under revolving credit facility

 

 

(140,308

)

 

 

(128,690

)

Changes in book overdraft

 

 

548

 

 

 

(12,382

)

Principal payments under finance lease liabilities

 

 

(1,874

)

 

 

(1,413

)

Proceeds from exercise of share option awards

 

 

 

 

 

31

 

Purchases of treasury stock

 

 

 

 

 

(428

)

Tax withholding payments for share-based compensation

 

 

(221

)

 

 

(366

)

Dividends paid

 

 

(3,342

)

 

 

(9,610

)

Net cash (used in) provided by financing activities

 

 

(9,247

)

 

 

14,355

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

 

(1,723

)

 

 

(2,152

)

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

6,765

 

 

 

7,170

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

5,042

 

 

$

5,018

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired under finance leases

 

$

2,093

 

 

$

4,146

 

Property and equipment additions unpaid

 

$

1,583

 

 

$

2,036

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,150

 

 

$

2,130

 

Income taxes paid

 

$

725

 

 

$

20

 

 

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 433 stores and an e-commerce platform as of September 29, 2019. 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, tennis, golf, winter and summer recreation and roller sports. 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 December 30, 2018 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 2019 is comprised of 52 weeks and ends on December 29, 2019. Fiscal year 2018 was comprised of 52 weeks and ended on December 30, 2018. The fiscal interim periods in fiscal 2019 and 2018 are each comprised of 13 weeks.

Recently Adopted Accounting Updates

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with prior GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease. However, unlike prior GAAP—which required only finance (formerly capital) leases to be recognized on the balance sheet—the new ASU requires both types of leases to be recognized on the balance sheet. The ASU took effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This standard can be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes certain practical expedients that an entity may elect to apply, including an election to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which make improvements to Accounting Standards Codification (“ASC”) 842 and allow entities to not restate comparative periods in transition to ASC 842 and instead report the comparative periods under ASC 840.

- 7 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company adopted ASC 842 using the modified retrospective approach at the beginning of the first quarter of fiscal 2019, coinciding with the standard’s effective date. In accordance with ASC 842, the Company did not restate comparative periods in transition to ASC 842 and instead reported comparative periods under ASC 840. Adoption of the standard resulted in the initial recognition of operating lease right-of-use (“ROU”) assets of $262.9 million and operating lease liabilities of $279.7 million as of December 31, 2018. These amounts are based on the present value of such commitments using the Company’s incremental borrowing rate (“IBR”), which was determined through the development of a synthetic credit rating. The adoption of this standard did not have a material impact on the Company’s interim unaudited condensed consolidated statements of operations, shareholders’ equity or cash flows, and had no material impact on beginning retained earnings in fiscal 2019. The Company has implemented new lease administration and accounting software and has developed and mapped new and existing controls in the context of the Company’s control environment. In addition, the Company completed its evaluation of the practical expedients offered and enhanced disclosures required in ASC 842, as well as identified arrangements that contain embedded leases, among other activities, to account for the adoption of this standard. The Company elected the transition package of practical expedients permitted within the new standard which, among other things, allowed it to carryforward the historical lease classification. The Company did not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of ROU assets.

Recently Issued Accounting Updates

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This standard removes, modifies, and adds certain disclosure requirements for fair value measurements. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. While the Company is currently in the process of evaluating the effects of this standard on the consolidated financial statements, the Company plans to adopt ASU No. 2018-13 in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company plans to adopt the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

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

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. Actual results could differ significantly from these estimates under different assumptions and conditions.

 

 

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, in 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. Collectibility is reasonably assured since the Company only extends immaterial credit purchases to certain municipalities and local school districts.

 

- 8 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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

 

 

39 Weeks Ended

 

 

 

September 29,

2019

 

 

September 30,

2018

 

 

September 29,

2019

 

 

September 30,

2018

 

 

 

(In thousands)

 

Hardgoods

 

$

145,974

 

 

$

145,822

 

 

$

383,193

 

 

$

379,288

 

Athletic and sport footwear

 

 

73,277

 

 

 

74,128

 

 

 

208,902

 

 

 

210,679

 

Athletic and sport apparel

 

 

45,466

 

 

 

45,111

 

 

 

155,931

 

 

 

146,147

 

Other sales

 

 

1,433

 

 

 

1,290

 

 

 

4,375

 

 

 

4,366

 

Net sales

 

$

266,150

 

 

$

266,351

 

 

$

752,401

 

 

$

740,480

 

 

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 at a point in time 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 is not material.

The Company recognized $1.5 million and $5.2 million in stored-value card redemption revenue for the 13 and 39 weeks ended September 29, 2019, respectively, compared to $1.6 million and $5.5 million in stored-value card redemption revenue for the 13 and 39 weeks ended September 30, 2018, respectively. The Company also recognized $0.1 million and $0.3 million in stored-value card breakage revenue for the 13 and 39 weeks ended September 29, 2019, respectively, and for the 13 and 39 weeks ended September 30, 2018, respectively. The Company had outstanding stored-value card liabilities of $5.8 million and $7.0 million as of September 29, 2019 and December 30, 2018, respectively, which are included in accrued expenses. Based upon historical experience, stored-value cards are predominantly redeemed in the first two years following their issuance date.

The Company recorded, as prepaid expense, estimated right-of-return merchandise cost of $0.8 million and $1.4 million related to estimated sales returns as of September 29, 2019 and December 30, 2018, respectively, and the Company recorded, as accrued expense, an allowance for sales returns reserve of $1.6 million and $2.6 million as of September 29, 2019 and December 30, 2018, 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.

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.

 

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BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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. Each store typically requires net investments of approximately $0.5 million, excluding ROU assets, in long-lived assets to be held and used, subject to recoverability testing. The carrying amount of an 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 asset group. If the 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 asset group exceeds its fair value, determined using discounted cash flow valuation techniques and an evaluation of current market value rentals for ROU assets associated with the asset group, as contemplated in ASC 820, Fair Value Measurements.

The Company determines the sum of the undiscounted cash flows expected to result from the asset group by projecting future revenue, gross margin and operating expense for each store 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 future expectations, competitive factors in various markets and inflation. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions.

The Company did not recognize any impairment charges in the first nine months of fiscal 2019 or 2018.

Leases

The Company adopted ASC 842 as of December 31, 2018, using the modified retrospective approach and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning on December 31, 2018 are reported and presented under ASC 842, while prior period amounts and disclosures are not adjusted and continue to be reported and presented under ASC 840, Leases. Additionally, the Company elected:

 

1.

A package of practical expedients allowing the Company to:

 

a.

carry forward its historical lease classification (i.e., it is not necessary to reclassify any existing leases at the adoption date),

 

b.

avoid reassessing whether any expired or existing contracts are or contain leases, and

 

c.

avoid reassessing initial direct costs for any existing leases.

 

2.

A practical expedient allowing the Company to not separate lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) from nonlease components (e.g., common area maintenance costs), primarily impacting the Company’s real estate lease population. The election of this practical expedient eliminates the burden of separately estimating the real estate lease and nonlease costs on a relative stand-alone basis.

 

3.

A practical expedient related to land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and eliminated the need to reassess existing lease contracts to determine if land easements are separate leases under ASC 842.

 

- 10 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company did not elect a practical expedient which would allow the Company to use hindsight in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and to assess impairment of the entity’s ROU assets, since election of this expedient could make adoption more complex given that re-evaluation of the lease term and impairment consideration affect other aspects of lease accounting.

In accordance with ASC 842, 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. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the interim unaudited condensed consolidated balance sheet. Finance leases are included in property and equipment, other current liabilities, and other long-term 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 statement of operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are not material; the Company recognizes lease expense for these 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 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 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, and which the Company adjusts quarterly with a yield curve that approximates the Company’s market risk profile. 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. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

For fiscal 2018, the Company evaluated and classified its leases as either operating or capital leases for financial reporting purposes, in accordance with ASC 840.

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 both ASC 840 and 842, these contingent rents are expensed as they accrue.

In accordance with ASC 840, deferred rent represents the difference between rent paid and the amounts expensed for operating leases. Certain leases have scheduled rent increases, and certain leases include an initial period of free or reduced rent as an inducement to enter into the lease agreement (“rent holidays”). The Company recognized rent expense for rent increases and rent holidays on a straight-line basis over the term of the underlying leases, without regard to when rent payments are made. The calculation of straight-line rent begins on the possession date and extends through the “reasonably assured” lease term as defined in ASC 840 and may exceed the initial non-cancelable lease term.

Additionally, in accordance with ASC 840, landlord allowances for tenant improvements, or lease incentives, were recorded as deferred rent and amortized on a straight-line basis over the “reasonably assured” lease term as a component of rent expense.

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

 

 

 

- 11 -


BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

(3)

Fair Value Measurements

The carrying values of cash, accounts receivable, accounts payable and accrued expenses approximate the fair values of these instruments due to their short-term nature. The carrying amount for borrowings under the revolving 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, including ROU assets, are reduced to their estimated fair values.

As of September 29, 2019 and December 30, 2018, 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 market data, 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:

 

 

 

September 29,

2019

 

 

December 30,

2018

 

 

 

(In thousands)

 

Payroll and related expense