Little 5 Sporting Goods

Big Five Sporting Goods (BGFV) is no longer worthy of its name, its stock price having been harpooned more than 95% from its 2021 high. The sporting goods retailer of 425 stores trades for just $40 million, or about $94,000 per store. But the company’s inventory averages $680,000 per store, so this is worth a closer look!

The company’s tangible book value is $225 million, for a price to book ratio of 18%. The reason for the massive discount is a drop in same-store sales resulting in a negative turn on the income statement, and cancellation of the dividend. The former darling has lost money for three straight quarters, and has guided to another loss in the current quarter. But the way I see it, the risk reward ratio is very favourable to the investor at the current price, even though there is a non-zero risk of total loss here.

Big Five has assets of $669 million and liabilities of $443 million.

The liabilities are mostly made up of lease obligations. Over time, these will roll off the books through the normal course of business as the company closes more stores than it opens and re-negotiates terms to avoid burning cash. We don’t need management to be rocket scientists here, but simply let stores close that are doing poorly and keep the stores that are worth keeping.

The assets are mostly made up of inventory ($290 million) and the rights to use the stores (the asset side of the lease obligations). Every investor will have his own preferences for how to discount the assets to determine a conservative value of what they’re worth. Myself, I end up chopping off some $75 million to arrive at my adjusted book value of $6.64, still 3.5 times the current stock price.

As a sanity check, I compare my $75 million haircut to the current quarter’s guidance. The most pessimistic end of the company’s guidance range is for a loss of $0.35 per share, or $8 million. If the company continued to do this for 9 more quarters, then it would hit my $75 million haircut, but that’s a lot of time to turn things around.

This is no sure-thing, however. Things could spiral out of control due to a poor economy or competitor actions that bankrupt Big Five. For that reason, I consider this only a basket-sized position. The odds of a triple or quadruple are pretty good here in my opinion (what it would require is a return to consistent profitability), but the odds of a zero are also significant!

Though management is slowly closing stores and cutting capex, I’d like to see more significant efforts in this area, in order to protect the downside. The California (where roughly half of Big Five’s stores are located) minimum wage increases appear to have run their course, so hopefully there are no more headwinds on that front.

There is also the potential that investors can be saved by an activist or bought out by a competitor or someone who thinks they can do better. There is very little insider ownership, so with a market cap of just $40 million, there are a ton of potential suitors. Even I, with my tiny fund, could take a run at controlling this company at its current price. (But I won’t, as that’s not what I do.)

The risk of complete loss here is very real. But the upside potential of a multi-bagger is also a strong possibility, in my opinion. As a result, I think Big Five is an excellent candidate for a basket-sized position.
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