Big 5 Sporting Goods Stock: Caution – Headwinds Remain In Play (NASDAQ:BGFV)

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has had a tough year, experiencing the headwinds that most industries have been experiencing, with the high probability the headwinds aren’t going to go away any time soon.

I think the near-term performance of the stock will be determined by its performance in the fourth quarter of 2022, and if it disappoints to the downside and guidance is very moderate or weak, I think it’s going to fall below its 52-week low of $8.36.

Assuming an underperformance isn’t outrageously bad, it would provide an extraordinary opportunity to take a position at an excellent entry point that would provide a terrific dividend yield.

On the other hand, if its performance is down in a big way, it could put pressure on the dividend if it’s accompanied by guidance suggesting a tough few quarters ahead.

In this article, we’ll look at some of the latest numbers from its earnings report, the macroeconomic conditions it continues to operate in, and why there aren’t any visible catalysts pointing to a rebound in its performance in the near future.

Some of the numbers

For the third quarter of 2022, BGFV generated revenue of $261 million, compared to revenue of $290 million in the third quarter of 2021. Revenue in the first 39 weeks of 2022 was $757 million, compared to revenue of $888 million in the first 39 weeks of 2021.

Gross profit in the third quarter was $86.5 million, compared to $108 million in the third quarter of 2021.

Adjusted EBITDA was $13 million, compared to $37.3 million in the third quarter of 2021. Gross profit margin in the reporting period was 33.1 percent, compared to $37.3 percent in gross profit margin in the third quarter of 2021.

Net income in the reporting period was $6.4 million, or $0.29 per diluted share, compared to net income of $24.1 million, or $1.07 per diluted share in the third quarter of 2021.

Same-store sales were for the first nine months of fiscal 2022 were down 14.9 percent.

Cash and cash equivalents at the end of the third quarter of 2022 were $34.4 million, compared to cash and cash equivalents of $407.3 million as of January 2, 2022.

Near-term momentum

I think the results from the fourth quarter are going to be important for the momentum of the company in 2023, as any underperformance or disappointing numbers will put further downward pressure on the stock, and with the historically slower season approaching, the company would find it hard to dig itself out of the hole it’s in if that’s the scenario that plays out.

Per company guidance, that is how it’s performance in the fourth quarter of 2022 is probably going to end up, as it guided for same-store sales to be down in the high single-digit to low double-digit range, compared the fourth quarter of 2021.

The company based its same-store guidance on its expectations that macroeconomic headwinds will have a strong influence on consumer discretionary spending in the fourth quarter. The level of the impact on spending will determine the near-term volatility of the stock, and as mentioned, if guidance for the first quarter of calendar 2023 or beyond is weak as well, the share price of BGFV is likely to collapse.

Even though inflation has started to pull back, I don’t think there is any doubt the Federal Reserve has at least a couple of more increases left in it, which will probably end up slightly on either side of the 5 percent level. At that time, it’s likely to pull back and wait to see the impact on inflation. The reason I believe that is because it’s limited to the upside in regard to the hefty $31 trillion plus Federal debt, which if interest rates were to go too high, it would put extraordinary pressure on the government to pay on it.

With that in mind, I believe there are still more headwinds for BGFV to face before consumers start to loosen up their wallets again, and that includes the large number of layoffs and terminations in the labor market that are causing people to rethink and prioritize their spending. Spending at Big Five Sporting Goods isn’t going to be at the top of most people’s spending priorities.

On the other hand, if somehow BGFV manages to outperform or surprise to the upside in any way, and it includes some positive guidance, it could be off to the races. I don’t see that happening, but with some moderate relief in inflation and expectations the Federal Reserve is going to lower the size of the increases, it could be creating a more positive spending environment for consumers. That’s an absolute best-case scenario that isn’t likely to occur, but in the market, you never know how things will play out because of the irrationality of people and their responses to various stimuli.

Conclusion

From an inventory standpoint, the company should have had more than enough on hand for most levels of consumer demand in the fourth quarter. So, whatever the demand was, it should be reflected in the sales and earnings of the company in the reporting period.

Based upon visible headwinds, I think they’re going to be on the lower side of guidance, and possibly below it.

If there is an underperformance and inventory levels are elevated, it creates another issue where the company will have to sell at a discount, if they already haven’t. Compared to the third quarter of 2021, third quarter 2022 inventory was up 23.2 percent.

With its share price up roughly 20 percent since its 52-week low of $8.36 on December 28, 2022, I think the stock is trading too high based upon the headwinds and lack of catalysts.

It looks like what’s happening there is investors are buying the rumor, i.e., expectations it could outperform in the fourth quarter. It could of course be nothing more than a typical bounce after a correction, so we’ll see how that plays out. Whatever the reason, it’s not based on fundamentals, so it’s highly subject to a quick downward move.

These are the times to be cautious, when a stock, for no apparent reason, has a big upward move. I’m thinking it will either quickly correct, or some swing traders may hold on long enough for the next earnings report to get closer. They won’t wait for the report, as they’ll sell on the news, which is expectations concerning the approaching report.

I’m getting a little detailed in this because these are the types of situations investors can get caught up in a big move and end up holding the bag for a prolonged period of time.

The fact is we have no idea at this time how BGFV did in the fourth quarter, and whether or not it’ll get a tailwind from a surprising performance, if it’s going to underperform and possibly fall drop below its 52-week low.

Until there is further clarity, I would at best wait until the share price pulls back in order to lower downside risk and get a better yield on the dividend.