UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
or
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
(State or other jurisdiction of
incorporation or organization)
2525 East El Segundo Boulevard
El Segundo, California
(Address of principal executive offices)
95-4388794
(I.R.S. Employer
Identification No.)
90245
(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
Common Stock, par value $0.01 per share
Trading Symbol(s)
BGFV
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 an
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
Non-accelerated filer
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting stock held by non-affiliates of the registrant was $182,130,973 as of July 2, 2023 (the last business day of the
registrant’s most recently completed second fiscal quarter) based upon the closing price of the registrant’s common stock on the NASDAQ Stock Market LLC reported for
June 30, 2023. Shares of common stock held by each executive officer and director and by each person who, as of such date, may be deemed to have beneficially owned
more than 5% of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates of the registrant under certain circumstances. This
determination of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
The registrant had 22,438,892 shares of common stock outstanding at February 20, 2024.
Documents Incorporated by Reference
Part III of this Form 10-K incorporates by reference certain information from the registrant’s 2024 definitive proxy statement (the “Proxy Statement”) to be
filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1C. CYBERSECURITY
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
EXHIBIT INDEX
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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F-1
Forward-Looking Statements
This document includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements relate to, among other things, our financial condition, our results of operations, our growth strategy and the business of
our company generally. In some cases, you can identify such statements by terminology such as “may,” “could,” “project,” “estimate,” “potential,”
“continue,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends” or other such terminology. These forward-looking statements involve known
and unknown risks and uncertainties and other factors that may cause our actual results in current or future periods to change significantly and differ
materially from forecasted results. These risks and uncertainties include, among other things, the economic impacts of COVID-19, including any potential
variants, on our business operations, including as a result of regulations that may be issued in response to COVID-19, global supply chain disruptions
resulting from the ongoing conflicts in Ukraine and the Middle East, changes in the consumer spending environment, fluctuations in consumer holiday
spending patterns, increased competition from e-commerce retailers, breach of data security or other unauthorized disclosure of sensitive personal or
confidential information, the competitive environment in the sporting goods industry in general and in our specific market areas, inflation, product
availability and growth opportunities, changes in the current market for (or regulation of) firearm-related products, a reduction or loss of product from a
key supplier, disruption in product flow, seasonal fluctuations, weather conditions, changes in cost of goods, operating expense fluctuations, increases in
labor and benefit-related expense, changes in laws or regulations, including those related to tariffs and duties as well as environmental, social and
governance issues, public health issues (including those caused by COVID-19 or any potential variants), impacts from civil unrest or widespread
vandalism, lower than expected profitability of our e-commerce platform or cannibalization of sales from our existing store base which could occur as a
result of operating the e-commerce platform, litigation risks, stockholder campaigns and proxy contests, risks related to our historically leveraged financial
condition, changes in interest rates, credit availability, higher expense associated with sources of credit resulting from uncertainty in financial markets and
economic conditions in general. Those and other risks and uncertainties are more fully described in Part I, Item 1A, Risk Factors, in this report. We caution
that the risk factors set forth in this report and the other reports that we file with the SEC are not exclusive. In addition, we conduct our business in a highly
competitive and rapidly changing environment. Accordingly, new risk factors may arise. It is not possible for management to predict all such risk factors,
nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking statement. We undertake no obligation to revise or update any forward-looking
statement that may be made from time to time by us or on our behalf.
3
ITEM 1. BUSINESS
General
PART I
Big 5 Sporting Goods Corporation (“we,” “our,” “us” or the “Company”) is a leading sporting goods retailer in the western United States,
operating 430 stores and an e-commerce platform under the “Big 5 Sporting Goods” name as of December 31, 2023. Throughout this section, our fiscal
years ended December 31, 2023 and January 1, 2023 are referred to as fiscal 2023 and 2022, respectively. We provide a full-line product offering in a
traditional sporting goods store format that averages approximately 12,000 square feet. Our 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. We supplement our traditional sports merchandise mix with an assortment of other products that we purchase through opportunistic
buys of vendor over-stock or close-out merchandise.
We believe that over our 69-year history we have developed a reputation with the competitive and recreational sporting goods customer as a
convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at
competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Rawlings, Skechers,
Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality
items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through digital marketing
programs, print advertising in major and local newspapers, and direct mailers designed to generate customer traffic, drive net sales and maintain brand
awareness. We also maintain social media sites to enhance distribution capabilities for our promotional offers and to enable communication with our
customers.
Robert W. Miller co-founded our company in 1955 with the establishment of five retail locations in California. We sold World War II surplus
items until 1963, when we began focusing exclusively on sporting goods and changed our trade name to “Big 5 Sporting Goods.” In 1971, we were
acquired by Thrifty Corporation, which was subsequently purchased by Pacific Enterprises. In 1992, management bought our company in conjunction with
Green Equity Investors, L.P., an affiliate of Leonard Green & Partners, L.P. In 1997, Robert W. Miller, Steven G. Miller and Green Equity Investors, L.P.
recapitalized our company so that the majority of our common stock would be owned by our management and employees. In 2002, we completed an initial
public offering of our common stock and became a publicly-traded company.
Our accumulated management experience and expertise in sporting goods merchandising, advertising, operations, store development and
overall cost management have enabled us to generally produce profitable results. We believe our historical success can be attributed to a value-based and
execution-driven operating philosophy, a controlled growth strategy and a proven business model. Additional information regarding our management
experience is available in Item 1, Business, under the sub-heading “Management Experience,” of this Annual Report on Form 10-K.
We are a holding company incorporated in Delaware on October 31, 1997. We conduct our business through Big 5 Corp., a 100%-owned
subsidiary incorporated in Delaware on October 27, 1997. We conduct our gift card operations through Big 5 Services Corp., a 100%-owned subsidiary of
Big 5 Corp. incorporated in Virginia on December 19, 2003.
Our corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245. Our Internet address is
www.big5sportinggoods.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and
amendments, if any, to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act, are available on our website, free
of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Impact of Global Events
Recent global events, including the novel coronavirus (“COVID-19”) and the ongoing conflicts in Ukraine and the Middle East, have
adversely affected global economies, disrupted global supply chains and contributed to increased inflation and rising interest rates, impacting the cost of
products and services.
In response to disruptions related to COVID-19 that began in fiscal 2020, we undertook measures to reduce expense, preserve capital and
enhance our liquidity. Certain of those measures, such as reductions to advertising expense in comparison with historical levels, continued to benefit us in
fiscal 2022 and 2023 and we expect to maintain our advertising expense below pre-pandemic levels in the foreseeable future.
4
Disruptions related to the ongoing conflicts in Ukraine and the Middle East, regions in which we do not have direct operations, contributed to
higher fuel prices and consequently higher product costs. The ongoing conflicts in Ukraine and the Middle East may continue to lead to disruptions in the
global supply chain, rising fuel costs, or cybersecurity risks, and economic instability generally, any of which could materially and adversely affect our
business and results of operations. As long as these conflicts continue, we expect these challenges to remain into fiscal 2024.
We will continue to monitor these events and take appropriate actions to mitigate the risk of these global events, or any other global events
that arise, as necessary.
Expansion and Store Development
Throughout our operating history, we have sought to expand our business with the addition of new stores through a disciplined strategy of
controlled growth. Our expansion within the western United States has typically been systematic and designed to capitalize on our brand recognition,
economical store format and economies of scale related to distribution. Over the past five fiscal years, we have opened 13 stores including relocations, of
which 62% were in California. Our store openings over the past five fiscal years reflect our cautious approach toward store expansion in the current retail
environment, which includes increasing e-commerce competition and the COVID-19 pandemic in fiscal 2020 and 2021. The following table reflects our
store opening, closing and relocation activity during the periods indicated:
Year
2019
2020
2021
2022
2023
California
Stores Opened
Other Markets
Total
Stores
Relocated
Stores
Closed
(1)
2
—
2
2
2
1
—
3
1
—
3
—
5
3
2
(1 )
—
(2 )
(1 )
(1 )
Number of Stores
at Period End
434
430
431
432
430
(4 )
(4 )
(2 )
(1 )
(3 )
(1)
In the first two months of fiscal 2024, we closed six stores, including four underperforming stores and one store that was previously
damaged by severe rain, lowering our store count to 424 at the end of fiscal February 2024.
Our store format enables us to have substantial flexibility regarding new store locations. We have successfully operated stores in major
metropolitan areas and in areas with as few as 30,000 people. Our 12,000 average square foot store format differentiates us from superstores that typically
average over 35,000 square feet, require larger target markets, are more expensive to operate and require higher net sales per store for profitability.
New store openings typically represent attractive investment opportunities due to the relatively low investment required and the relatively
short time necessary before our stores typically become profitable. While the required investment has been relatively low, we have recently experienced
inflationary pressures that have led to increasing costs to open a store. Our store format normally requires investments of approximately $0.9 million in
fixtures, equipment and leasehold improvements, net of landlord allowances, and approximately $0.3 million in net working capital with limited pre-
opening and real estate expense related to leased locations that are built to our specifications. We seek to maximize new store performance by staffing new
store management with experienced personnel from our existing stores.
Our in-house store development and real estate personnel seek new store locations which are analyzed with the assistance of real estate firms
that specialize in retail properties. Historically, we look for expansion opportunities to further penetrate our established markets, develop recently entered
markets and expand into new, contiguous markets with attractive demographic, competitive and economic profiles.
Merchandising
We target the competitive and recreational sporting goods customer with a full-line product offering at a wide variety of price points. We
offer a product mix that 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. We believe we deliver consistent value to consumers by
offering a distinctive merchandise mix that includes a combination of well-known brand name merchandise, merchandise produced exclusively for us
under a manufacturer’s brand name, private label merchandise and specials on quality items we purchase through opportunistic buys of vendor over-stock
and close-out merchandise.
Through our 69 years of experience across different demographic, competitive and economic markets, we have refined our merchandising
strategy in an effort to offer a selection of products that meets customer demand. Specifically, we continue to strategically refine our merchandise and
marketing strategies in order to better align our product mix and promotional efforts with today’s consumer.
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The following table illustrates our mix of soft goods, which are non-durable items such as shirts and shoes, and hard goods, which are
durable items such as exercise equipment and baseball gloves, as a percentage of net sales. The change in sales mix for fiscal 2020 reflects the change in
consumer demand resulting from the COVID-19 pandemic, including higher sales related to fitness and outdoor recreational activities and reduced sales for
team sports and back to school products:
Hard goods
Soft goods
Athletic and sport footwear
Athletic and sport apparel
Total soft goods
Total
2023
2022
Fiscal Year
2021
2020
2019
54.0 %
54.1 %
55.0 %
60.2 %
49.7 %
25.0
21.0
46.0
100.0 %
24.8
21.1
45.9
100.0 %
24.1
20.9
45.0
100.0 %
22.0
17.8
39.8
100.0 %
28.2
22.1
50.3
100.0 %
We sell our popular branded merchandise from an extensive list of major sporting goods equipment, athletic footwear and apparel
manufacturers. Below is a selection of some of the brands we carry:
adidas
Asics
Bearpaw
Bushnell
Callaway
Camp Chef
Carhartt
Casio
Coleman
Columbia
Crosman
Daisy
Dickies
Easton
Everlast
Fila
Footjoy
Franklin
Gildan
Head
Heelys
Hillerich & Bradsby
iFit (Proform)
Igloo
Impex
JanSport
Lifetime
McDavid
Mizuno
Mossberg
Mueller Sports Medicine
New Balance
Rawlings
Razor
Remington
Rollerblade
Russell Athletic
Saucony
Shimano
Skechers
Spalding
Speedo
Timex
Titleist
Under Armour
Wilson
Winchester
We believe we enjoy significant advantages in making opportunistic buys of vendor over-stock and close-out merchandise because of our
strong vendor relationships, purchasing volume and rapid decision-making process. Our strong vendor relationships and purchasing volume also enable us
to purchase merchandise produced exclusively for us under a manufacturer’s brand name which allows us to differentiate our product selection from
competition, obtain volume pricing discounts from vendors and offer unique value to our customers. Our advertising highlights our opportunistic buys
together with merchandise produced exclusively for us in order to reinforce our reputation as a retailer that offers attractive values to our customers.
In order to complement our branded product offerings, we offer a variety of private label merchandise, which has historically represented
approximately 2% of our net sales. Our sale of private label merchandise enables us to provide our customers with a broader selection of quality
merchandise at a wider range of price points and allows us the potential to achieve higher margins than on sales of comparable name brand products. Our
private label items include shoes, apparel, camping equipment, fishing supplies and snowsport equipment.
Seasonality influences our buying patterns and we purchase merchandise for seasonal activities in advance of a season and supplement our
merchandise assortment as necessary and when possible during the season. We tailor our merchandise selection on a store-by-store basis in an effort to
satisfy each region’s specific needs and seasonal buying habits. In the fourth fiscal quarter we normally experience higher inventory purchase volumes in
anticipation of the winter and holiday selling season.
Our buyers, who average 18 years of experience with us, work in collaboration with senior management to determine and enhance product
selection, promotion and pricing of our merchandise mix. Management utilizes integrated merchandising, business intelligence analytics, distribution,
point-of-sale and financial information systems to continuously refine our merchandise mix, pricing strategy, advertising effectiveness and inventory levels
to best serve the needs of our customers.
Advertising and Marketing
Through years of targeted advertising, we have solidified our brand reputation for offering quality products at attractive prices through
convenient store locations. We market our products through the effective use of both digital communications as well as print media.
We built our value-based brand through weekly print advertisements beginning in 1955, and we provide print advertisements and other
targeted promotional offers through carrier delivery and direct mail. Over the last several years we have been reducing our overall advertising spend. In
fiscal 2020, we accelerated the reduction of print advertising in response to the COVID-19 pandemic and our print advertising remained substantially
reduced (from pre-pandemic levels) in fiscal 2022 and 2023 as we continued to evaluate our advertising programs.
6
We promote our products through digital marketing programs that include sending regular digital communications to our customers (e-mail
marketing to our “E-Team”), search engine marketing, social media including Facebook, X (formerly known as Twitter) and Instagram, mobile programs
and other website initiatives.
Our digital promotional strategy is designed to provide opportunities to connect with potential customers and enable us to promote the Big 5
brand. Our e-mail marketing program invites our customers to subscribe to our E-Team for daily special deals, weekly advertisements and product
information disseminated on a regular basis. We use search engine marketing methods as a means to reach those customers searching the Internet to gather
information about our products. Within our social media program, our customers have the opportunity to engage in conversations with other sports-minded
people and receive exclusive information about new products and unique weekly offers. All of these marketing methods are intended to simplify the
shopping experience for our customers and further demonstrate our commitment to provide great brands at great values.
Our website features a broad representation of our product assortment and provides visibility of store inventory to our customers, thereby
enabling them to determine if items featured on our website are in-stock in one or more of our store locations. Our e-commerce platform delivers an online
shopping experience to our customers, and we continue to develop our online capabilities to meet customer expectations of being able to shop at their
convenience.
We have developed a strong cause marketing platform through our support of the American Red Cross annual fundraising campaign and
numerous other charities and organizations throughout our marketplace. We also build brand awareness by providing sponsorship support of established,
high-profile events that benefit our customers’ active lifestyles, such as the “LA Marathon” in Los Angeles, California, and the “Duke City Marathon” in
Albuquerque, New Mexico, for which we are the title sponsor.
Vendor Relationships
We have developed strong vendor relationships over the past 69 years. We currently purchase merchandise from over 600 vendors. In fiscal
2023, only one vendor represented greater than 5% of our total purchases, at 5.1%. We believe current relationships with our vendors are good. We benefit
from the long-term working relationships with vendors that our senior management and our buyers have carefully nurtured throughout our history.
Information Technology Systems
We have fully integrated information technology (“IT”) systems that support critical business functions, such as sales reporting, inventory
management and distribution functions and provide pertinent information for financial reporting, as well as robust business intelligence and retail analytics
tools. We manage IT solutions for e-commerce, e-mail and networks that connect our employees to appropriate technology solutions and tools. This
includes connecting our stores via a managed wide area network connection for purchasing card (i.e., credit and debit card) encryption, tokenization,
authorization and processing, as well as providing access to valuable tools such as collaboration, online training, workforce management, online hiring,
Company website functions and corporate communications. Our cloud-based disaster recovery solution provides redundancy and availability-redundant
networks and applications to be used in the event of an emergency or unplanned outage. We believe our IT systems are effectively supporting our current
operations and provide a foundation for future growth and new business initiatives.
The protection of our customer, employee and business data is critical to us. Our business, like that of most retailers, involves the receipt,
storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information
about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for
processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and
systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, data theft, misplaced
or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through
fraud or other means, including deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or
degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We
have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of
secured data and to prevent data loss.
7
Distribution
We operate a 953,000 square-foot distribution center located in Riverside, California, that includes storage and office space and services all
of our stores. In January 2024, as part of our effort to consolidate operations and manage our expense structure, we moved out of an additional 172,000
square-foot distribution space adjacent to our distribution center that we used for additional capacity. The distribution center warehouse management
system is fully integrated with our enterprise-level IT systems and provides comprehensive warehousing and distribution capabilities. We regularly
distribute merchandise from our distribution center to our stores using our fleet of leased tractors, as well as contract carriers.
Industry and Competition
The retail market for sporting goods is highly competitive. We operate as a traditional sporting goods chain with stores that average 12,000
square feet and are frequently located in multi-store shopping centers. We carry a broad assortment of merchandise and position ourselves as convenient
neighborhood stores. In general, competition tends to fall into the following five basic categories:
Sporting Goods Superstores. Stores in this category typically are larger than 35,000 square feet and tend to be free-standing locations. These
stores emphasize high volume sales and a large number of stock-keeping units. Examples include Academy Sports & Outdoors and Dick’s Sporting Goods.
Specialty Sporting Goods Stores. Specialty sporting goods retailers are stores that typically carry a wide assortment of one specific product
category or brand, such as athletic shoes, golf, or outdoor equipment. Examples of these retailers include Bass Pro Shops, Cabela’s, Foot Locker,
Sportsman’s Warehouse and REI. This category also includes pro shops that often are single-store operations.
Mass Merchandisers. This category includes discount retailers such as Walmart and Target and department stores such as JC Penney and
Kohl’s. These stores range in size from 50,000 to 200,000 square feet and are primarily located in regional malls, shopping centers or on free-standing sites.
Sporting goods merchandise and apparel represent a small portion of the total merchandise in these stores and the selection is often more limited than in
other sporting goods retailers.
E-commerce Retailers. This category consists of many retailers that sell a broad array of new and used sporting goods products via e-
commerce, including Amazon.com. The types of retailers mentioned above may also sell their products through e-commerce. E-commerce has been a
rapidly growing sales channel, particularly with younger consumers, and an increasing source of competition in the sporting goods retail industry.
Athletic and Sporting Goods Brands. This category consists of athletic and sporting goods brands that engage in direct-to-consumer sales
through traditional retail channels, e-commerce or a combination of both. These brands may also sell their products to us and other competitors. Examples
of brands that sell directly to consumers include Nike, adidas and Under Armour.
In competing with the retailers discussed above, we focus on what we believe are the primary factors of competition in the sporting goods
retail industry, including breadth, depth, price and quality of merchandise offered; advertising; purchasing and pricing policies; experienced and
knowledgeable personnel; customer service; effective sales techniques; direct involvement of senior officers in monitoring store operations; enterprise-level
IT systems; and convenience of store location and format.
Human Capital
We believe the experience and tenure of our professional staff in the retail industry contributes to enhanced performance and gives us a
competitive advantage. The table below indicates the tenure of our professional staff in some of our key functional areas as of December 31, 2023:
Executive Management
Vice Presidents
Buyers
Store District / Regional Supervisors
Store Managers
8
Number of
Employees
Average
Number of
Years With Us
7
24
19
48
431
37
23
18
25
12
As of December 31, 2023, we had approximately 7,900 active employees, of which approximately 2,300 were full-time. The General
Teamsters, Airline, Aerospace and Allied Employees, Warehousemen, Drivers, Construction, Rock and Sand; Airline Employees, Local Union No. 986,
affiliated with the International Brotherhood of Teamsters (“Local 986”) represents approximately 380 hourly employees in our distribution center and
select stores. In December 2022, we entered into a five-year collective bargaining agreement with Local 986 for the covered distribution center employees,
and in June 2023 we entered into a five-year collective bargaining agreement with Local 986 for a smaller number of covered store employees. Both
collective bargaining agreements are retroactive to September 1, 2022, and expire on August 31, 2027. We have not had a strike or work stoppage in over
40 years, although such a disruption could have a significant negative impact on our business operations and financial results. We believe we provide
working conditions and wages that are comparable to those offered by other retailers in the sporting goods industry and that employee relations are good.
We utilize an automated Learning Management System (“LMS”) and have developed comprehensive training that can be expressly tailored
for store and corporate positions. Our LMS allows us to rapidly convey and track the dissemination of important information as it develops, such as product
merchandising strategies, policy changes, safety rules, cash handling procedures, systems resolution and utilization, loss prevention updates and inventory
control guidelines. All new store employees are assigned introductory LMS learning material as well as provided with a live orientation highlighting basic
policies and responsibilities and our expectation that each employee strives to deliver excellence in customer service, product knowledge and salesmanship.
New full-time store salespeople, cashiers and manager trainees receive supplementary training and evaluations specific to their job responsibilities and their
ongoing development. The versatility of the LMS provides us with the ability to track and monitor many different types of training and the flexibility we
need to deliver our message to widely dispersed personnel within the structure of our on-the-go work environment. Our employee training programs
include self-directed online courses, live webinars, production of soft and hard copy reference materials, one-on-one training, hands-on training and
progressive developmental training. In the stores, manager trainees are expected to complete a progressive series of outlines and evaluations in order to be
considered for each successive level of advancement. Experienced store management training includes advanced merchandising, delegation, personnel
management, scheduling, payroll control, harassment and discrimination prevention and loss prevention. On a yearly basis, we require all employees to
complete workplace anti-discrimination and harassment training in order to foster a heightened awareness and help eliminate biases that may adversely
impact the corporate, distribution center and store spaces. Our overall training strategy and LMS enable us to efficiently manage, monitor, assign and report
employee training results online and in real time.
During the COVID-19 pandemic, to provide for the safety of our employees and customers, we have taken many actions in our stores,
corporate office and distribution center spaces based on the needs, risks, and regulations present in each community and facility. We continue to monitor
the business and regulatory environment and expect to continue to adapt our operations to address federal, state, and local requirements, as well as to
implement standards or processes that we determine to be in the best interest of our employees and customers.
Description of Service Marks and Trademarks
We use the “Big 5” and “Big 5 Sporting Goods” names as service marks in connection with our business operations and have registered these
names as federal service marks. The renewal dates for these service mark registrations are in 2025 and 2033, respectively. We have also registered the
names Golden Bear, Harsh, Pacifica and Rugged Exposure as federal trademarks under which we sell a variety of merchandise. The renewal dates for these
trademark registrations range from 2026 to 2028. We intend to renew these service mark and trademark registrations if we are still using the marks in
commerce and they continue to provide value to us at the time of renewal.
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ITEM 1A. RISK FACTORS
An investment in the Company entails risks and uncertainties including the following. You should carefully consider these risk factors when
evaluating any investment in the Company. Any of these risks and uncertainties could cause our actual results to differ materially from the results
contemplated by the forward-looking statements set forth herein, and could otherwise have a significant adverse impact on our business, prospects,
financial condition or results of operations or on the price of our common stock.
Risks Related to Our Business and Industry
Disruptions in the overall economy and the financial markets may adversely impact our business and results of operations.
The retail industry can be greatly affected by macroeconomic factors, including changes in national, regional and local economic conditions,
as well as consumers’ perceptions of such economic factors. In general, sales represent discretionary spending by our customers. Discretionary spending is
affected by many factors, including general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency
exchange rates, taxation, gasoline prices, income, unemployment trends, home values and other matters that influence consumer confidence and spending.
Many of these factors are outside of our control. We are experiencing, and may continue to experience, increased inflationary pressure on the cost of certain
products. Our customers’ purchases of discretionary items, including our products, generally decline during periods when disposable income is lower, when
prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. Deterioration of the consumer spending
environment could be harmful to our financial condition and results of operations, could adversely affect our ability to comply with covenants under our
credit facility and, as a result, may negatively impact our ability to continue payment of our quarterly dividend, to repurchase our stock and to open
additional stores in the manner that we have in the past. During fiscal 2022 and into fiscal 2023, competition for labor and broad-based inflation has caused
us to pay higher wage rates and contributed to increased operating expenses.
Our quarterly net sales and operating results, reported and expected, can fluctuate substantially, which may adversely affect the market price of our
common stock.
Our net and same store sales and results of operations, reported and expected, have fluctuated in the past and will vary from quarter to
quarter in the future. These fluctuations may adversely affect our financial condition and the market price of our common stock. A number of factors,
many of which are outside our control, have historically caused and will continue to cause variations in our quarterly net and same store sales and operating
results, including changes in consumer demand for our products, competition in our markets, inflation, increases in operating expense, changes in pricing
or other actions taken by our competitors, weather conditions in our markets, natural disasters, litigation, political events, government regulation, changes
in accounting standards, changes in management’s accounting estimates or assumptions and economic conditions, including those specific to our western
United States markets.
Intense competition in the sporting goods industry could limit our growth and reduce our profitability.
The retail market for sporting goods is highly fragmented and intensely competitive. We compete directly or indirectly with the following
categories of companies, through traditional retail and e-commerce channels:
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sporting goods superstores, such as Academy Sports & Outdoors and Dick’s Sporting Goods;
specialty sporting goods shops and pro shops, such as Bass Pro Shops, Cabela’s, Foot Locker, Sportsman’s Warehouse and REI;
mass merchandisers, discount stores and department stores, such as Walmart, Target, Kohl’s and JC Penney;
e-commerce retailers, such as Amazon.com; and
athletic and sporting goods brands that engage in direct-to-consumer sales, such as adidas and Under Armour.
Some of our competitors have a larger number of stores, greater e-commerce capabilities or greater financial, distribution, marketing and
other resources than we have. If our competitors reduce their prices, it may be difficult for us to retain market share without reducing our prices, which
could impact our margins. As a result of this competition, we may also need to spend more on advertising and promotion than we anticipate. Increased
competition in our current markets or the adoption or proliferation by competitors of innovative store formats, aggressive pricing strategies and retail sales
methods, such as e-commerce, could cause us to lose market share and could have a material adverse effect on our business.
While e-commerce has been a rapidly growing sales channel and an increasing source of competition in the retail industry, sales from our e-
commerce channel are not material to our operations. We have no assurance that our e-commerce efforts will prove profitable, whether due to product
preferences of online buyers, ability to compete with other (often more established) online retailers, or for other reasons, such as the cannibalization of sales
from our existing store base. If we are unable to compete successfully, our operating results may suffer.
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A reduction or loss of product from a key supplier could cause our net sales and profitability to suffer.
In fiscal 2023, we purchased merchandise from over 600 vendors, and our 20 largest vendors collectively accounted for 39.3% of our total
purchases. One vendor represented greater than 5% of total purchases in fiscal 2023, at 5.1%.
If there are disruptions in supply from a principal supplier or distributor, we may be unable to obtain merchandise that we desire to sell and
that consumers desire to purchase. A vendor could discontinue or restrict selling products to us at any time for reasons that may or may not be within our
control. The increased development of direct-to-consumer initiatives by athletic and sporting goods brands could result in additional restrictions on the
products available for us to purchase and sell. Our net sales and profitability could decline if we are unable to promptly replace a product vendor that is
unwilling or unable to satisfy our requirements with a vendor providing equally appealing products. Moreover, many of our key suppliers provide us with
incentives, such as return privileges, volume purchase allowances and co-operative advertising. A decline or discontinuation of these incentives could
reduce our profits.
If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory, higher inventory markdowns and lower
margins.
Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty. These preferences are also
subject to change and can be impacted by various factors, including sports participation levels in our market areas, the performance of sports teams for
which we sell licensed products, weather conditions in our market areas and regulatory or political changes. Our success depends upon our ability to
anticipate and respond in a timely manner to consumer trends and consumers’ participation in sports and other recreational activities for which we sell
products. If we fail to identify and respond in a timely manner to these changes, our net sales and profitability may decline. In addition, because we often
make commitments to purchase products from our vendors up to nine months in advance of the proposed delivery, if we misjudge the market for our
merchandise or conditions change after we have committed to purchase products, we may overstock unpopular products and be forced to take inventory
markdowns that could have a negative impact on profitability.
If we are unable to effectively and efficiently connect with our customers through our advertising and marketing programs, our operating results may
suffer.
We historically utilized print advertising programs that included newspaper inserts, direct mailers and courier-delivered inserts in order to
effectively deliver our message to our targeted markets. Newspaper circulation and readership has been declining, and in 2020, in response to the novel
coronavirus (“COVID-19”) pandemic, we accelerated the reduction of our print advertising programs. The consumer preferences for certain of our product
categories that have driven positive sales during the COVID-19 outbreak have not continued after the outbreak has subsided, and we may need to increase
advertising and promotional activity from the current historically low levels in an effort to drive customer traffic and sales, which could impact our
profitability. While we expect to continue to benefit from reduced print advertising activity in the foreseeable future, if our efforts to evolve our advertising
programs fail or we are unable to develop other effective strategies to reach potential customers within our desired markets, awareness of our stores,
products and promotions could decline and our net sales could suffer.
The COVID-19 pandemic has disrupted and could in the future disrupt our business, which could have a material adverse impact on our business,
results of operations, liquidity and financial condition for an extended period of time.
As COVID-19 continues to evolve, we may be further required to restrict the operations of our stores or our distribution facility if
recommended or mandated by authorities. If the classification of what is an “essential” business changes in jurisdictions where our stores are located, or the
restrictions on retail operations in our markets are reinstituted, or other government regulations are adopted pertaining to how we may operate our stores,
we may be required to temporarily close or restrict operations at more, if not all, of our stores, or incur additional expense to operate our stores, which
would significantly impact our sales and results of operations. Additionally, if we do not respond appropriately to the pandemic, or if customers do not
perceive our response to be adequate for a particular region or our company as a whole, we could suffer damage to our reputation and our brand, which
could adversely affect our business in the future.
COVID-19 has also impacted our supply chain for products we sell, particularly those products that are sourced from Asia. To the extent one
or more of our vendors or shipping or port facilities are negatively impacted by COVID-19, including due to the closure of its distribution centers or
manufacturing facilities, we may be unable to maintain delivery schedules or adequate inventory in our stores. Future prolonged and sustained delays in
product reaching our stores from overseas vendors, particularly during the holiday season, could result in our inability to obtain adequate levels of
merchandise inventories to meet our consumers’ needs, which could have an adverse impact on our net sales and profitability.
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The extent to which the COVID-19 outbreak impacts our business, results of operations, liquidity and financial condition will depend on
future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and impact of the
COVID-19 outbreak, the effects of the outbreak on our customers, employees and vendors, the regulatory response and impact of stimulus measures
adopted by local, state and federal governments, and to what extent normal economic and operating conditions can resume. Additionally, the consumer
preferences for certain product categories that have driven positive sales during the COVID-19 outbreak have not continued after the outbreak has
subsided, and any further negative change in consumer preferences could negatively impact our results of operations. We may need to increase advertising
and promotional activity from the current historically low levels in an effort to drive customer traffic and sales, which could impact our profitability.
Furthermore, the financial condition of our customers and vendors may be adversely impacted by the pandemic, which may result in a decrease in
discretionary consumer spending and our store traffic and sales, and an increase in bankruptcies or insolvencies with respect to our vendors. These events
may, in turn, have a material adverse impact on our business, results of operations, liquidity and financial condition.
Because our stores are concentrated in the western United States, we are subject to regional risks.
Our stores are located in the western United States. Because of this, we are subject to regional risks, such as the economy, including
downturns in the housing market, state financial conditions, unemployment and gas prices. Other regional risks include adverse weather and climate
conditions, power outages, earthquakes and other natural disasters specific to the states in which we operate. For example, particularly in California where
we have a high concentration of stores, seasonal factors such as unfavorable weather conditions or other localized conditions including flooding, drought,
fires, earthquakes or electricity blackouts could impact our sales and harm our operations. State and local regulatory compliance, such as with recent
minimum wage increases in our market areas, also can impact our financial results. Economic downturns or other adverse regional events could have an
adverse impact upon our net sales and profitability and our ability to open additional stores in the manner that we have in the past.
Additionally, California is subject to a property tax law commonly referred to as Proposition 13, which allows properties to be reassessed
only at the time of change in ownership or completion of construction, and annual property reassessments are limited to a 2% increase from previously-
assessed values thereafter. As a result, Proposition 13 generally results in significant below-market assessed values over time. From time to time, and
recently, lawmakers and political coalitions have initiated efforts to repeal or amend Proposition 13 to eliminate its application to commercial and industrial
properties. Since we lease all of our store locations, as well as our corporate offices and distribution center facilities in California, and are required under
the terms of our leases to pay property taxes thereon, any repeal of Proposition 13 could substantially increase the assessed values and property taxes we
pay for our leased properties in California.
A significant amount of our sales is impacted by seasonal weather conditions in our markets.
Because many of the products we sell are used for seasonal outdoor sporting and recreational activities, our business is significantly impacted
by weather and climate conditions in our markets. For example, our winter sports and apparel sales are dependent on cold winter weather and snowfall in
our markets and can be negatively impacted by unseasonably warm or dry weather in our markets during the winter product selling season. Conversely,
sales of our spring products and summer products, such as baseball gear and camping and water sports equipment, can be adversely impacted by
unseasonably cold or wet weather in those periods. Accordingly, our sales results and financial condition will typically suffer when weather and climate
patterns do not conform to seasonal norms. This dynamic could be amplified if climate change disrupts climate patterns or otherwise increases the volatility
of weather in our markets.
Uncharacteristic or significant weather conditions or natural disasters and the impacts of climate change could adversely affect our results of
operations.
Uncharacteristic or significant weather conditions, including the physical impacts of climate change, can affect consumer shopping patterns,
particularly for seasonal items, which could lead to lower sales and adversely affect our results of operations. In addition, we have significant operations in
certain states where natural disasters are more prevalent. Natural disasters in those states could result in significant physical damage to or closure of one or
more of our stores, distribution center, or key vendors. In addition, weather conditions, natural disasters, and other catastrophic events in areas where we or
our vendors operate, or depend upon for continued operations, could adversely affect the availability and cost of certain products within our supply chain,
affect consumer purchasing power, and reduce consumer demand. Any of these events could adversely affect our results of operations.
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The long-term effects of global climate change are expected to be widespread and unpredictable, and potential impacts present a variety of
risks. The physical effects of climate change, such as extreme weather conditions, drought, and rising sea levels, could adversely affect our results of
operations, including by increasing our energy costs, disrupting our supply chain, negatively impacting our workforce, damaging our stores, distribution
center, and inventory, and threatening the habitability of the locations in which we operate. In addition to physical risks, the potential impacts of climate
change also present transitional risks, including regulatory and reputational risks.
Our business is subject to seasonal fluctuations, and unanticipated changes in our customers’ seasonal buying patterns can impact our business.
We experience seasonal fluctuations in our net sales and operating results. Seasonality influences our buying patterns which directly impacts
our merchandise and accounts payable levels and cash flows. We purchase merchandise for seasonal activities in advance of a season and supplement our
merchandise assortment as necessary and when possible during the season. Our efforts to replenish products during a season are not always successful. In
the fourth fiscal quarter, which includes the holiday selling season and the start of the winter selling season, we normally experience higher inventory
purchase volumes and increased expense for staffing and advertising. If we miscalculate the consumer demand for our products generally or for our product
mix in advance of a season, our net sales can decline, which can harm our financial performance. A significant shortfall from expected net sales,
particularly in the fourth fiscal quarter, can negatively impact our annual operating results.
All of our stores rely on a single distribution center. Any disruption or other operational difficulties at this distribution center could reduce our net sales
or increase our operating expense.
We rely on a single distribution center facility located in Riverside, California to service our business. Any natural disaster or other serious
disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of our inventory and could materially
impair both our ability to adequately stock our stores and our net sales and profitability. The lease for our distribution center is scheduled to expire in 2030
with no extension options. Extensions of such lease would likely be at significantly increased rents and our inability to extend such lease could materially
impair both our ability to adequately stock our stores and our net sales and profitability. If the security measures used at our distribution center do not
prevent inventory theft, our gross profit may significantly decrease. Our distribution center is staffed in part by employees represented by Local 986. We
have not had a strike or work stoppage in over 40 years, although such a disruption could have a significant negative impact on our business operations and
financial results. Further, in the event that we are unable to grow our net sales sufficiently to allow us to leverage the costs of this distribution center in the
manner we anticipate, our financial results could be negatively impacted.
Additionally, because we rely on a single distribution center, our store growth could be limited to the geographic areas to which we can
efficiently distribute products from this facility. Our store growth also could be limited if our distribution center reaches full capacity. Such constraints
could result in a loss of market share and our inability to execute our business plan, which could have a material adverse effect on our financial condition
and results of operations.
If we are unable to successfully implement our controlled growth strategy or manage our growing business, our future operating results could suffer.
One of our strategies includes opening profitable stores in new and existing markets. Our ability to successfully implement and capitalize on
our growth strategy could be negatively affected by various factors including:
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a slowdown of our expansion efforts, or close underperforming stores, as a result of challenging conditions in the retail industry and the
economy overall;
increased difficulty in finding suitable sites available for leasing within our existing market areas, and our distribution capabilities may limit
our ability to expand beyond our current market areas;
increased difficulty in negotiating acceptable lease terms;
increased difficulty in hiring and retaining qualified store personnel; and
increased difficulty in securing the financial resources necessary to fund our expansion plans.
In recent years, we have slowed our store openings and strategically closed certain stores as we maintained a cautious approach toward store
expansion in the current retail environment, which includes increasing e-commerce competition. If we are unable to resume our store expansion efforts for
any of the reasons discussed above, our operating results could suffer.
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In addition, our expansion in new and existing markets may present competitive, merchandising, marketing and distribution challenges that
differ from our current challenges. These potential new challenges include competition among our stores, added strain on our distribution center, additional
information to be processed by our information technology (“IT”) systems, diversion of management attention from ongoing operations and challenges
associated with managing a larger enterprise. We face additional challenges in entering new markets, including consumers’ lack of awareness of us,
difficulties in hiring personnel and problems due to our unfamiliarity with local real estate markets and demographics. New markets may also have
different competitive conditions, consumer tastes, responsiveness to advertising and discretionary spending patterns than our existing markets. To the extent
that we are not able to meet these new challenges, our net sales could decrease and our operating expense could increase.
Because many of the products that we sell are manufactured abroad, we may face delays, increased cost or quality control deficiencies in the
importation of these products, which could reduce our net sales and profitability.
Like many other sporting goods retailers, a significant portion of the products that we purchase for resale, including those purchased from
domestic suppliers, is manufactured abroad in Asia. In addition, we believe most, if not all, of our private label merchandise is manufactured abroad.
Foreign imports subject us to the risks of changes in, or the imposition of new, import tariffs, duties or quotas, new restrictions on imports, loss of “most
favored nation” status with the United States for a particular foreign country, antidumping or countervailing duty orders, retaliatory actions in response to
illegal trade practices, work stoppages, delays in shipment, freight expense increases, product cost increases due to foreign currency fluctuations or
revaluations, public health issues that could lead to temporary closures of or delays at facilities or shipping ports, such as the COVID-19 pandemic, and
other economic uncertainties. If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are
located or impose additional costs in connection with the purchase of our products, we may be unable to obtain sufficient quantities of products to satisfy
our requirements and our results of operations could be adversely affected.
To the extent that any foreign manufacturers which supply products to us directly or indirectly utilize quality control standards, labor
practices or other practices that vary from those legally mandated or commonly accepted in the United States, we could be hurt by any resulting negative
publicity or increases in operating costs or, in some cases, face potential liability.
In addition, instability in the political and economic environments of the countries in which our vendors or we obtain our products, or general
international instability, could have an adverse effect on our operations. In the event of disruptions or delays in supply due to economic or political
conditions in foreign countries, such disruptions or delays could adversely affect our results of operations unless and until alternative supply arrangements
could be made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently
purchase abroad.
Disruptions in transportation, including disruptions at shipping ports through which our products are imported, could prevent us from timely
distribution and delivery of inventory, which could reduce our net sales and profitability.
A substantial amount of our inventory is manufactured abroad. From time to time, shipping ports experience capacity constraints, labor
strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract dispute at the ports through which our products
travel, particularly the Ports of Los Angeles and Long Beach, could lead to protracted delays in the movement of our products, which could further delay
the delivery of products to our stores and impact net sales and profitability. In addition, other conditions outside of our control, such as adverse weather
conditions, acts of terrorism or public health issues that could lead to temporary closures of or delays at facilities or shipping ports, such as the COVID-19
pandemic, could significantly disrupt operations at shipping ports or otherwise impact transportation of the imported merchandise we sell. While we have
generally been able to sufficiently stock product in our stores to meet most consumer demand, future prolonged and sustained delays in product reaching
our stores from overseas vendors, particularly during the holiday season, could result in our inability to obtain adequate levels of merchandise inventories
to meet our consumers’ needs, which could have an adverse impact on our net sales and profitability.
Our costs may change as a result of currency exchange rate fluctuations or inflation in the purchase cost of merchandise manufactured abroad.
We and our suppliers source goods from various countries, including Asia, and thus changes in the value of the U.S. dollar compared to other
currencies, or foreign labor and raw material cost inflation, may affect the cost of goods that we purchase. If the cost of goods that we purchase increases,
we may not be able to similarly increase the retail prices of goods that we charge consumers without impacting our sales and our operating profits may
suffer.
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Increases in transportation costs due to volatile fuel costs, climate change regulation and other factors may negatively impact our operating results.
We rely upon various means of transportation, including ship and truck, to deliver products from vendors to our distribution center and from
our distribution center to our stores. Consequently, our results can vary depending upon the price of fuel. The price of oil has fluctuated drastically over the
last few years, creating volatility in our fuel costs. In addition, efforts to combat climate change through reduction of greenhouse gases may result in higher
fuel costs through taxation or other means. Any such future increases in fuel costs would increase our transportation costs for delivery of product to our
distribution center and distribution to our stores, as well as our vendors’ transportation costs, which could decrease our operating profits.
In addition, labor shortages or other factors in the transportation industry could negatively affect transportation costs and our ability to supply
our stores in a timely manner. In particular, our business is highly dependent on the trucking industry to deliver products to our distribution center and our
stores. Our operating results may be adversely affected if we or our vendors are unable to secure adequate trucking resources at competitive prices to fulfill
our delivery schedules to our distribution center or stores.
Risks Related to Our Capital Structure
Our future cash flows may not be sufficient to meet our obligations and we might have difficulty obtaining more financing or refinancing any existing
indebtedness on favorable terms.
As of December 31, 2023, our long-term revolving credit borrowings outstanding were zero. However, we have historically maintained a
leveraged financial position. This means:
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our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes might be impeded;
we are more vulnerable to economic downturns and our ability to withstand competitive pressures is limited; and
we are more vulnerable to increases in interest rates, which may affect our interest expense and negatively impact our operating results.
If our business declines, our future cash flows might not be sufficient to meet our obligations and commitments.
If we fail to make any required payment under our revolving credit facility, our debt payments may be accelerated under this agreement. In
addition, in the event of bankruptcy, insolvency or a material breach of any covenant contained in our revolving credit facility, our debt may be accelerated.
This acceleration could also result in the acceleration of other indebtedness that we may have outstanding at that time.
The level of our indebtedness, and our ability to service our indebtedness, is directly affected by our cash flows from operations. If we are
unable to generate sufficient cash flows from operations to meet our obligations, commitments and covenants of our revolving credit facility, we may be
required to refinance or restructure our indebtedness, raise additional debt or equity capital, sell material assets or operations, delay or forego expansion
opportunities, or cease or curtail our quarterly dividends or share repurchase plans. These alternative strategies might not be effected on satisfactory terms,
if at all.
The terms of our revolving credit facility impose operating and financial restrictions on us, which may impair our ability to respond to changing
business and economic conditions.
The terms of our revolving credit facility impose operating and financial restrictions on us, including, among other things, covenants that
require us to maintain a fixed-charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances, restrictions on our ability to incur liens, incur
additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee obligations, pay dividends or make other distributions or
repurchase stock, and make advances, loans or investments. For example, our ability to engage in the foregoing transactions will depend upon, among other
things, our level of indebtedness at the time of the proposed transaction and whether we are in default under our revolving credit facility. As a result, our
ability to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and we may
be prevented from engaging in transactions that might further our growth strategy or otherwise benefit us and our stockholders without obtaining consent
from our lenders. In addition, our revolving credit facility is secured by a perfected security interest in our assets. In the event of our insolvency,
liquidation, dissolution or reorganization, the lenders under our revolving credit facility would be entitled to payment in full from our assets before
distributions, if any, were made to our stockholders.
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Disruptions in the economy and financial markets may adversely impact our lenders.
Volatility in capital and credit markets can impact the ability of financial institutions to meet their lending obligations. Based on information
available to us, Bank of America, National Association, the lender under our revolving credit facility is currently able to fulfill its commitments thereunder.
However, circumstances could arise that may impact its ability to fund its obligations in the future. Although we believe the commitments from our lender
under the revolving credit facility, together with our cash on hand and anticipated operating cash flows, should be sufficient to meet our near-term
borrowing requirements, if Bank of America, National Association, or any other lender under the credit facility from time to time, is for any reason unable
to perform its lending or administrative commitments under the facility, then disruptions to our business could result and may require us to replace this
facility with a new facility or to raise capital from alternative sources on less favorable terms, including higher rates of interest.
Risks Related to Regulatory, Legislative and Legal Matters
Current and future government regulation may negatively impact demand for our products and increase our cost of conducting business.
The conduct of our business, and the distribution, sale, advertising, labeling, safety, transportation and use of many of our products are
subject to various laws and regulations administered by federal, state and local governmental agencies in the United States, as well as regulations
administered by various youth sports leagues and organizations. These laws and regulations may change, sometimes dramatically, as a result of political,
economic or social events, such as the state and local stay-at-home orders issued in our markets in response to the COVID-19 pandemic. Changes in laws,
regulations or governmental policy may alter the environment in which we do business and the demand for our products and, therefore, may impact our
financial results or increase our liabilities. Some of these laws and regulations include:
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laws and regulations governing the manner in which we advertise or sell our products;
laws and regulations that prohibit or limit the sale, in certain localities, of certain products we offer, such as firearm-related products;
laws and regulations governing the activities for which we sell products, such as hunting and fishing;
laws and regulations governing consumer products generally, such as the federal Consumer Product Safety Act and Consumer Product Safety
Improvement Act, as well as similar state laws;
labor and employment laws, such as minimum wage or living wage laws, paid time off and other wage and hour laws;
laws requiring mandatory health insurance for employees, such as the Affordable Care Act;
U.S. customs laws and regulations pertaining to duties and tariffs, including proper item classification, quotas and payment of duties and
tariffs;
laws and regulations governing consumer privacy, such as the California Consumer Privacy Act; and
laws and regulations designed to address climate change, including measuring, reporting and mitigating greenhouse gas emissions.
Changes in these and other laws and regulations or additional regulation could cause the demand for and sales of our products to decrease.
Moreover, complying with increased or changed regulations could cause our cost of obtaining products and our operating expense to increase. This could
adversely affect our net sales and profitability.
We may be subject to periodic litigation that may adversely affect our business and financial performance.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be maintained in
jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Due to the inherent uncertainties of litigation
and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material
adverse impact on our business, results of operations and financial condition. In addition, regardless of the outcome of any litigation or regulatory
proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend against these claims, which
could impact our results of operations.
In particular, we may be involved in lawsuits related to employment, advertising and other matters, including class action lawsuits brought
against us for alleged violations of the Fair Labor Standards Act, state wage and hour laws, state or federal advertising laws and other laws. An unfavorable
outcome or settlement in any such proceeding could, in addition to requiring us to pay any settlement or judgment amount, increase our operating expense
as a consequence of any resulting changes we might be required to make in employment, advertising or other business practices.
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In addition, we sell products manufactured by third parties, some of which may be defective. Many such products are manufactured overseas
in countries which may utilize quality control standards that vary from those legally allowed or commonly accepted in the United States, which may
increase our risk that such products may be defective. If any products that we sell were to cause physical injury or injury to property, the injured party or
parties could bring claims against us as the retailer of the products based upon strict product liability. In addition, our products are subject to the federal
Consumer Product Safety Act and the Consumer Product Safety Improvement Act, which empower the Consumer Product Safety Commission to protect
consumers from hazardous products. The Consumer Product Safety Commission has the authority to exclude from the market and recall certain consumer
products that are found to be hazardous. Similar laws exist in some states and cities in the United States. If we fail to comply with government and industry
safety standards or reporting requirements, we may be subject to claims, lawsuits, product recalls, fines and negative publicity that could harm our results
of operations and financial condition.
We also sell firearm-related products, which may be associated with an increased risk of injury and related lawsuits. We may incur losses due
to lawsuits relating to our compliance with firearm and ammunition laws as mandated by city, municipality, state and federal law, or the performance of
background checks in connection with firearms or ammunition purchases, or the improper use of firearms sold by us. This may include, for example,
lawsuits by individuals, government entities or other organizations attempting to recover damages or costs from firearms manufacturers and retailers
relating to the sale, advertisement, misuse, loss, or release of firearms or ammunition. Commencement of these lawsuits against us could reduce our net
sales and decrease our profitability. The sale of firearm-related products also may present reputational risks and negative publicity that could affect
consumers’ perception of us or willingness to shop with us, which could harm our results of operations and financial condition.
The insurance coverage under policies that we maintain or that our product vendors maintain and under which we may be insured may not be
adequate to cover claims that could be asserted against us. If a successful claim was to be brought against us in excess of our insurance coverage, or for
which we have no insurance coverage, it could harm our business. Even unsuccessful claims could result in the expenditure of substantial funds and
management time and could have a negative impact on our business. In addition, the cost of maintaining adequate insurance coverage could increase based
on claims asserted against us, the type of products that we sell and market conditions generally.
The sale of firearm-related products is subject to strict regulation, which could affect our operating results.
Regulations which took effect January 1, 2024 contributed to the discontinuation of firearm sales in our California markets. While this impact
is expected to be immaterial, because we continue to sell firearms in our other markets and firearm-related products in all of our markets, we are required to
comply with federal, state and local laws and regulations pertaining to the purchase, storage, transfer and sale of such products. These laws and regulations
require us to, among other things, obtain and maintain federal, state or local permits or licenses in order to sell firearms or ammunition, ensure that certain
employees obtain licenses to sell firearms or ammunition, ensure that all purchasers of firearms are subjected to a pre-sale background check and other
requirements, record the details of each firearm sale on appropriate government-issued forms, record each receipt or transfer of a firearm at our distribution
center or any store location on acquisition and disposition records, and maintain these records for a specified period of time. Additionally, in certain
jurisdictions we are required to obtain a license to sell ammunition or record the details of each ammunition sale and maintain these records for a specified
period of time. We also are required to timely respond to traces of firearms by law enforcement agencies. Over the past several years, the purchase and sale
of firearm-related products has been the subject of increased federal, state and local regulation, such as new minimum age restriction laws, ammunition
sales laws, and new security laws. These regulatory efforts are likely to continue in our current markets and other markets into which we may expand. If
enacted, new laws and regulations could limit the types of firearm-related products that we are permitted to purchase and sell, impose new restrictions and
requirements on the manner in which we purchase, sell and store these products, increase regulatory fees charged to the consumer and impact our ability to
offer these products in certain retail locations or markets. If we fail to comply with existing or newly enacted laws and regulations relating to the purchase
and sale of firearm-related products, our permits or licenses to sell firearm-related products at our stores or maintain inventory of firearm-related products
at our distribution center may be suspended or revoked. We may also incur losses related to these products if we fail to obtain or timely renew a necessary
license. If this occurs, our net sales and profitability could suffer. Further, complying with increased regulation relating to the sale of firearm-related
products could cause our operating expense to increase and this could adversely affect our results of operations.
17
Risks Related to Investing in Our Common Stock
The declaration of discretionary dividend payments or the repurchase of our common stock pursuant to our share repurchase program may not
continue.
We currently pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends
are in the best interest of us and our stockholders. Our dividend policy may be affected by, among other items, business conditions, our financial condition,
our views on potential future capital requirements, the terms of our debt instruments, legal risks, changes in federal income tax law and challenges to our
business model. Our dividend policy may change from time to time and we may or may not continue to declare discretionary dividend payments.
Additionally, we are not obligated to make any purchases pursuant to the share repurchase program authorized by our Board of Directors and we may
reduce the amount of purchases we make under the program or discontinue the program at any time.
If we are unable to establish and maintain adequate internal controls over financial reporting, we may not be able to report our financial results in a
timely and reliable manner, which could lead to a loss of investor confidence and result in a decline in the market price of our common stock.
Adequate and effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. If we are
unable to provide reliable financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Even established adequate
and effective internal controls have inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.
Therefore, even established adequate and effective internal controls can provide only reasonable assurance with respect to the preparation and fair
presentation of financial statements. In addition, projections of any evaluation of adequate and effective internal controls over financial reporting in future
periods are subject to the risk that the control may become inadequate because of changes in conditions or a deterioration in the degree of compliance with
the policies or procedures.
If we fail to maintain adequate and effective internal controls, including any failure to implement new or improved controls, or if we
experience difficulties in their implementation, we may be unable to meet our reporting obligations in a timely and reliable manner, and there could be a
material adverse effect on our business and financial results. If our current control environment deteriorates, investors may lose confidence which could
adversely affect the market price of our common stock.
Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change of control would be beneficial to our
stockholders.
Provisions of our amended and restated certificate of incorporation and Second Amended and Restated Bylaws (“Bylaws”) as well as
provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in
control would be beneficial to our stockholders. The provisions of our amended and restated certificate of incorporation, amended and restated bylaws and
Delaware law that could discourage, delay or prevent a merger, acquisition or other change in control include:
•
•
•
•
•
•
a Board of Directors that is classified such that two or three of the seven directors, depending on classification, are elected each year and each
director is elected for a three-year term;
limitations on the ability of stockholders to call special meetings of stockholders;
prohibition of stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders;
a requirement in our certificate of incorporation that stockholder amendments to our bylaws and certain amendments to our certificate of
incorporation must be approved by 80% of the outstanding shares of our capital stock;
authorization of the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of
outstanding shares and thwart a takeover attempt; and
establishment of advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law (“DGCL”) limits business combination transactions with 15%
stockholders that have not been approved by the Board of Directors. These provisions and other similar provisions make it more difficult for a third party to
acquire us without negotiation. These provisions may apply even if the transaction may be considered beneficial by some stockholders.
18
Our Bylaws designate certain state or federal courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could
limit stockholders’ ability to obtain a favorable judicial forum for disputes with us and may impose additional costs on us and our stockholders.
Our Bylaws provide that, unless we consent to the selection of an alternative forum: (a) the Court of Chancery of the State of Delaware (the
“Chancery Court”) (or, in the event that the Chancery Court does not have jurisdiction, the federal district court or other state courts located within the State
of Delaware) shall be the sole and exclusive forum for (i) any derivative action, suit or proceeding brought on our behalf, (ii) any action, suit or proceeding
asserting a breach of a fiduciary duty, (iii) any action, suit or proceeding arising pursuant to any provision of the DGCL or our Certificate of Incorporation
or Bylaws or (iv) any action, suit or proceeding asserting a claim against us that is governed by the internal affairs doctrine; and (b) subject to the preceding
provisions, federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint or cause of action arising
under the Securities Act of 1933, as amended, including all causes of action asserted against any defendant to such complaint. We refer to the above
provisions as the forum selection provisions and we refer to the bylaw provision governing causes of action under the Securities Act of 1933 as the federal
forum selection provision. The Bylaws further enable us to initiate an action against a stockholder to enforce the forum selection provisions should the
stockholder sue, or threaten to sue, in another jurisdiction. Notwithstanding the foregoing, the forum selection provisions shall not apply to suits brought to
enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.
Our forum selection provisions do not relieve us of our duties to comply with the federal securities laws and the rules and regulations
thereunder, and our stockholders are not deemed to have waived our compliance with the same. Any person or entity purchasing or otherwise acquiring any
interest in security of our Company is deemed to have notice of and consented to the forum selection provisions.
These forum selection provisions may impose additional costs on stockholders pursuing claims described above. They may limit a
stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other team members or
stockholders, which may discourage the filing of lawsuits against our Company and our officers and directors, even though an action, if successful, might
benefit stockholders. The Chancery Court and the federal district courts of the United States may also reach different judgments or results than would other
courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may
be more or less favorable to our company than our stockholders.
Section 22 of the Securities Act of 1933 creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty
or liability created by the Securities Act of 1933. While the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions
purporting to require claims under the Securities Act of 1933 be brought in federal court are ‘facially valid’ under Delaware law, there is uncertainty as to
whether other courts will enforce that provision. If a court were to find any forum selection provision contained in our Bylaws to be inapplicable or
unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business,
results of operations and financial conditions. The forum selection provisions may also impose additional litigation costs on stockholders who assert that
the provision is not enforceable or invalid.
Significant stockholders or potential stockholders may attempt to effect changes or acquire control over our Company, which could adversely affect our
results of operations and financial condition.
Stockholders may from time to time attempt to effect changes, engage in proxy solicitations or advance stockholder proposals, all of which
may increase with the effectiveness of SEC universal proxy rules. Responding to proxy contests and other actions by activist stockholders can be costly and
time-consuming, disrupting our operations and diverting the attention of our Board of Directors and senior management from the pursuit of business
strategies. As a result, stockholder campaigns could adversely affect our results of operations and financial condition.
General Risk Factors
If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer.
Our future success depends to a significant degree on the skills, experience and efforts of Steven G. Miller, our Chairman, President and
Chief Executive Officer, and other key personnel with longstanding tenure who are not obligated to stay with us. The loss of the services of any of these
individuals for any reason could harm our business and operations. In addition, as our business grows and evolves, we will need to attract and retain
additional qualified management personnel in a timely manner to hire, develop, train and manage an increasing number of middle-level management, sales
associates and other employees.
19
During fiscal 2022 and continuing into fiscal 2023, competition for qualified employees intensified, requiring us to pay higher wages. In the
future, increases in the cost of living in our market areas could require us to pay higher wages and benefits to attract a sufficient number of qualified
employees and increases in the minimum wage or other employee benefit costs could increase our operating expense. If we are unable to attract and retain
personnel as needed in the future, our net sales growth and operating results may suffer.
Our information technology systems are critical to the functioning of our business and are vulnerable to failure, damage, theft or intrusion that could
harm our operations.
Our success, in particular our ability to successfully manage inventory levels and process customer transactions, largely depends upon the
efficient operation of our IT systems. We use IT systems to track inventory at the store level and aggregate daily sales information, communicate customer
information and process purchasing card transactions, process shipments of goods and report financial information. These systems and our operations are
vulnerable to damage or interruption from:
•
•
•
•
•
earthquake, fire, flood and other natural disasters;
failed system implementations;
power loss, computer systems failures, Internet and telecommunications or data network failures, third-party vendor system failures, operator
negligence, improper operation by or supervision of employees;
physical and electronic loss of data, security breaches, misappropriation, data theft and similar events; and
computer viruses, worms, Trojan horses, intrusions, or other external threats.
Any failure of our IT systems that causes an interruption in our operations, loss of data, or a decrease in inventory tracking could result in
reduced net sales and profitability. Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant
costs in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating results.
Breach of data security or other unauthorized disclosure of sensitive or confidential information could harm our business, employees and standing
with our customers.
The protection of our customer, employee and business data is critical to us. Our business, like that of most retailers, involves the receipt,
storage and transmission of customers’ personal information, consumer preferences and payment card information, as well as confidential information
about our employees, our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security for
processing, transmission and storage of all such data, including confidential information. Despite the security measures we have in place, our facilities and
systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, data theft, misplaced
or lost data, programming or human errors, or other similar events. Unauthorized parties may attempt to gain access to our systems or information through
fraud or other means, including deceiving our employees or third-party service providers. The methods used to obtain unauthorized access, disable or
degrade service, or sabotage systems are also constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We
have implemented and regularly review and update our control systems, processes and procedures to protect against unauthorized access to or use of
secured data and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes, and
there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any security breach involving the
misappropriation, loss or other unauthorized disclosure of customer payment card or personal information or employee personal or confidential
information, whether by us or our vendors, could damage our reputation, expose us to risk of regulatory enforcement, litigation and liability, disrupt our
operations, harm our business and have an adverse impact upon our net sales and profitability. In addition, as the regulatory environment related to
information security, data collection and use, and privacy becomes increasingly rigorous, with new and changing requirements applicable to our business,
compliance with those requirements could also result in additional costs.
20
Terrorism and the uncertainty of war may harm our operating results.
Terrorist attacks or acts of war may cause damage or disruption to us and our employees, facilities, information systems, vendors and
customers, which could significantly impact our net sales, profitability and financial condition. The ongoing conflicts in Ukraine and the Middle East may
lead to disruption in the global supply chain, rising fuel costs, or cybersecurity risks, and economic instability generally, any of which could materially and
adversely affect our business and results of operations. Terrorist attacks could also have a significant impact on ports or international shipping on which we
are substantially dependent for the supply of much of the merchandise we sell. Our corporate headquarters is located near Los Angeles International
Airport and the Port of Los Angeles, which have been identified as potential terrorism targets. The potential for future terrorist attacks, the national and
international responses to terrorist attacks and other acts of war or hostility may cause greater uncertainty and cause our business to suffer in ways that we
cannot currently predict. Military action taken in response to such attacks could also have a short or long-term negative economic impact upon the financial
markets, international shipping and our business in general.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could
significantly affect our financial results.
Accounting principles generally accepted in the United States of America and related accounting standards, implementation guidelines and
interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition; income taxes; 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 card breakage and the valuation of share-based compensation awards; and obligations related to litigation, self-
insurance liabilities and employee benefits are highly complex and may involve many subjective assumptions, estimates and judgments by our
management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could
significantly change our reported or expected financial performance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
We maintain processes intended to identify, assess, and manage material risks from cybersecurity threats, and these processes are subject to
oversight from our management and Board of Directors. As the global cybersecurity environment evolves, we have processes designed to help evaluate and
prioritize our response to the impact of ever-growing cybersecurity risk on our operations, along with the potential related cost to our business. Our
Information Security (“InfoSec”) department has responsibility for protecting our computer systems, related information technology (“IT”) infrastructure
and information (including when processed by third-party service providers). However, given that cybersecurity is an enterprise risk, and not just an IT
function, we maintain a cross-functional approach to cybersecurity. Accordingly, while many processes and policies are initiated by the InfoSec team, risks
and controls are also assessed at the department and enterprise levels.
Risk Management and Strategy
Cybersecurity risk is identified and managed through a variety of means. However, there can be no assurance that our cybersecurity risk
management processes, including policies, controls, or procedures, will be fully implemented, complied with or effective in protecting our systems and
information.
We have established an Enterprise Risk Management (“ERM”) program that focuses on the identification, evaluation, and mitigation of risks
facing us as a whole. The ERM Committee, which consists of executives representing a broad base of our operations, meets semi-annually after updating
its company-wide risk assessment, which includes cybersecurity risk. The Internal Audit team focuses on risks specific to Information Technology General
Controls (“ITGC”) which impact financial reporting systems.
The InfoSec department is responsible for implementing and maintaining our IT security-related policies including those policies which
govern cybersecurity matters. The InfoSec department also engages independent third parties to conduct various types of risk assessments to evaluate our
security program, including various types of independent security access testing and scoring of the security program against certain recognized
cybersecurity frameworks. While we use such frameworks as a guide, this does not imply that we meet any particular technical standards, specifications or
requirements.
21
The InfoSec department is comprised of three functional groups consisting of Security Operations (“SecOps”), Security Assurance &
Compliance, and Identity & Access Management (“IAM”). The SecOps functional group consists of in-house cybersecurity analysts and managed services
that are responsible for monitoring key cybersecurity alerts, investigating potential cybersecurity incidents, and searching for and responding to critical
threats. Additionally, and as supported by the Security Assurance & Compliance functional group, we strive to comply with multiple applicable regulatory
compliance frameworks, such as Internal Control Over Financial Reporting (“ICOFR”) and the Payment Card Industry Data Security Standard (“PCI
DSS”), and have put in place related IT controls designed to play a role towards compliance. The primary objective of the IAM functional group is to
balance the need for access to resources with the necessity for strong cybersecurity, compliance, and governance, which they attempt to achieve by
implementing and maintaining access policies and authentication and authorization methods.
We are not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect our business
strategy, operations, results of operations or financial condition. We face certain ongoing risks from cybersecurity threats and vulnerabilities that, if
realized, could reasonably likely materially affect our business strategy, operations, results of operations or financial condition. Those and other risks and
uncertainties are more fully described in Part I, Item 1A, Risk Factors, in this report.
Governance
The Board of Directors and senior management have the responsibility for overseeing our risk management as a whole. To assist with this
responsibility, the VP of InfoSec reports to the Chief Information Officer (“CIO”) and hosts quarterly briefings for the Executive Security Committee
(“ESC”), consisting of executives from various departments selected to monitor and evaluate IT-related security risks, including IT, operations, loss
prevention, legal, internal audit and others. The VP of InfoSec also presents to the Board of Directors at least annually. Communications and reporting to
the ESC and Board of Directors include key security program and performance metrics, internal and external threat landscape, status of cybersecurity
initiatives and future projects under consideration.
Results of the ERM program, including significant risks, risk evaluation and mitigation efforts, are presented to the Board of Directors at
least annually.
In addition to the regular reporting, cybersecurity incidents identified by InfoSec or executives that meet or have the potential of meeting
certain materiality thresholds are communicated to senior management. After evaluation, if deemed appropriate, cybersecurity incidents are reported to the
Board of Directors.
Our management has significant experience in managing and leading IT and cybersecurity teams. The VP of the InfoSec Team holds several
industry certifications including the Certified Information Security Manager (“CISM”), Certified Information Privacy Manager (“CIPM”) and the GIAC
Strategic Planning, Policy, and Leadership (“GSTRT”) certifications. Prior to joining us, the VP of InfoSec helped to successfully develop and maintain
security, compliance and privacy programs for two multi-national organizations. Our CIO has held this position for eight years, was the original designer of
our security and compliance programs and has provided oversight of our security program for approximately 20 years.
ITEM 2. PROPERTIES
Properties
Our primary corporate headquarters are located at 2525 East El Segundo Boulevard, El Segundo, California 90245, with a satellite office
located nearby at 2401 East El Segundo Boulevard, El Segundo, California 90245. We lease 55,000 square feet of office and adjoining retail space related
to our primary corporate headquarters, and we lease 11,500 square feet related to our satellite office. The lease for the primary corporate headquarters is
scheduled to expire on February 28, 2026 and provides us with one five-year renewal option. We are terminating the lease for 3,500 square feet of our
satellite office as of February 29, 2024 as part of our effort to consolidate operations and manage our expense structure. The lease for the remainder of the
satellite office is scheduled to expire on February 28, 2026 and provides us with no remaining options.
We own a parcel of land with an existing building adjacent to our corporate headquarters location. We currently lease a portion of the parcel
of land, including the building, to a restaurant retailer. The lease is scheduled to expire on February 28, 2030, or earlier by providing the lessee with a one-
year written notice. The remaining portion of the parcel of land includes a parking lot that we currently use for our corporate headquarters.
Our distribution facility is located in Riverside, California and has 953,000 square feet of warehouse and office space. Our lease for the
distribution center is scheduled to expire on August 31, 2025 and includes one additional five-year renewal option. In January 2024, as part of our effort to
consolidate operations and manage our expense structure, we moved out of an additional 172,000 square-foot distribution space adjacent to our distribution
center that we used for additional capacity. Our lease for this additional facility is scheduled to expire on August 31, 2025 and includes three additional
five-year renewal options. We are currently exploring alternatives for this space, including subleasing the facility if conditions are favorable.
22
We lease all of our retail store sites. Most of our store leases contain multiple fixed-price renewal options having a typical duration of five
years per option. As of December 31, 2023, of our total store leases, 67 leases are due to expire in the next five years without renewal options. We intend to
renegotiate most of these leases as they expire, either for existing store locations or new leases for substantially equivalent locations in the same general
area.
Our Stores
Throughout our history, we have focused on operating traditional, full-line sporting goods stores. Our stores generally range from 8,000 to
15,000 square feet and average approximately 12,000 square feet. Our typical store is located in either a free-standing street location or a multi-store
shopping center. Our numerous convenient locations and accessible store format encourage frequent customer visits, resulting in approximately 19.7
million sales transactions and an average transaction size of approximately $45 in fiscal 2023. The following table details our store locations by state as of
December 31, 2023:
State
California
Washington
Arizona
Oregon
Colorado
New Mexico
Nevada
Utah
Idaho
Texas
Wyoming
Total
Year
Entered
1955
1984
1993
1995
2001
1995
1978
1997
1994
1995
2010
Number
of Stores
(1)
Percentage of Total
Number of Stores
223
45
41
29
22
19
19
18
11
2
1
430
51.9 %
10.5
9.5
6.7
5.1
4.4
4.4
4.2
2.6
0.5
0.2
100.0 %
(1)
In the first two months of fiscal 2024, we closed six stores, including four underperforming stores and one store that was previously
damaged by severe rain, lowering our store count to 424 at the end of fiscal February 2024.
Our same store sales per square foot were approximately $178 for fiscal 2023.
ITEM 3. LEGAL PROCEEDINGS
On March 13, 2023, a complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Zareyah
Thompson v. Big 5 Corp., et. al., Case No. 23CV412334 (“Thompson Complaint”). The Thompson Complaint was brought as a purported California
Private Attorneys General Act (“PAGA”) action on behalf of “current and former employees who worked for the Company or its operating subsidiary in
California as a non-exempt, hourly paid employee and received at least one wage statement.” The Thompson Complaint alleges, among other things, that
Big 5 failed to (i) provide minimum wages, (ii) provide compliant meal or rest periods, (iii) maintain and provide accurate itemized wage statements, (iv)
properly compensate for all time worked, including overtime, premium, vacation and final wages, (v) properly maintain payroll records, and (vi) provide
suitable seating. On March 21, 2023, a second complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled
Christopher Puga v. Big 5 Corp., et. al., Case No. 23CV412953 (“Puga Complaint”). The Puga Complaint was brought as a purported PAGA action on
behalf of “all current and former non-exempt employees that worked either directly or via a staffing agency for the Company or its operating subsidiary at
any location in California” (“Putative Covered Employees”). The Puga Complaint alleges, among other things, that Big 5 (i) unlawfully required Putative
Covered Employees to agree to unlawful criminal background checks, (ii) conducted unlawful financial and criminal background checks, and did not (iii)
provide minimum wages, (iv) provide accurate itemized wage statements, (v) maintain accurate records pertaining to the Putative Covered Employees’
employment, (vi) produce or make available Putative Covered Employees’ personnel records and/or payroll records, (vii) provide compliant meal or rest
periods, (viii) properly compensate for all time worked, including overtime, premium, vacation, and final wages, (ix) reimburse necessary business
expenses; (x) provide suitable seating; (xi) provide sick leave pay to Putative Covered Employees, (xii) accurately calculate sick leave accrual and rate of
pay, (xiii) put the Putative Covered Employees on notice of their paid sick leave rights, and (xiv) provide supplemental paid sick leave. The Thompson and
Puga complaints have many overlapping causes of action. Accordingly, on or about April 12, 2023, a notice of related cases was filed with the Court
regarding the Thompson Complaint and Puga Complaint. The Court subsequently conducted a case management conference on June 29, 2023 for both
complaints, and jointly coordinated the complaints. The Company’s counsel held a mediation with opposing counsel on September 27, 2023. The Company
has reached a tentative settlement in both cases and established a cumulative indemnity reserve of $1.5 million. Any settlement finalized will be subject to
Court approval.
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The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock, par value $0.01 per share, trades on The NASDAQ Stock Market LLC under the symbol “BGFV.”
As of February 20, 2024, there were 22,438,892 shares of common stock outstanding held by 536 holders of record.
Dividend Policy
Dividends are paid at the discretion of the Board of Directors. In the first nine months of fiscal 2023, we paid aggregate cash dividends of
$0.75 per share, or $0.25 per share per quarter, of outstanding common stock, and in the fourth quarter of fiscal 2023 we paid a cash dividend of $0.125 per
share of outstanding common stock, resulting in full fiscal 2023 aggregate cash dividends paid of $0.875 per share of outstanding common stock. In the
first quarter of fiscal 2024, our Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding common stock, which will be paid
on March 22, 2024 to stockholders of record as of March 8, 2024.
The agreement governing our revolving credit facility imposes restrictions on our ability to make dividend payments. For example, our
ability to pay cash dividends on our common stock will depend upon, among other things, our compliance with certain availability and fixed charge
coverage ratio requirements at the time of the proposed dividend or distribution, and whether we are in default under the agreement. Our future dividend
policy will also depend on the requirements of any future credit or other financing agreements to which we may be a party and other factors considered
relevant by our Board of Directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of
surplus or current net profits.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this section, the Big 5 Sporting Goods Corporation (“we,” “our,” “us”) fiscal years ended December 31, 2023 and January 1,
2023 are referred to as fiscal 2023 and 2022, respectively. The following discussion and analysis of our financial condition and results of operations for the
years presented includes information with respect to our plans and strategies for our business and should be read in conjunction with the consolidated
financial statements and related notes, the risk factors and the cautionary statement regarding forward-looking information included elsewhere in this
Annual Report on Form 10-K.
Our fiscal year ends on the Sunday nearest December 31. Fiscal 2023 and fiscal 2022 each included 52 weeks.
Impact of Global Events
Recent global events, including the novel coronavirus (“COVID-19”) and the ongoing conflicts in Ukraine and the Middle East, have
adversely affected global economies, disrupted global supply chains and contributed to increased inflation and rising interest rates, impacting the cost of
products and services.
In response to disruptions related to COVID-19 that began in fiscal 2020, we undertook measures to reduce expense, preserve capital and
enhance our liquidity. Certain of those measures, such as reductions to advertising expense in comparison with historical levels, continued to benefit us in
fiscal 2022 and 2023 and we expect to maintain our advertising expense below pre-pandemic levels in the foreseeable future.
Disruptions related to the ongoing conflicts in Ukraine and the Middle East contributed to higher fuel prices and, consequently, higher
product costs. The ongoing conflicts in Ukraine and the Middle East may continue to lead to disruptions in the global supply chain, rising fuel costs, or
cybersecurity risks, and economic instability generally, any of which could materially and adversely affect our business and results of operations. As long
as these conflicts continue, we expect these challenges to remain into fiscal 2024.
We will continue to monitor these events and take appropriate actions intended to mitigate the risk of these global events, or any other global
events that arise, as necessary.
Overview
We are a leading sporting goods retailer in the western United States, operating 430 stores and an e-commerce platform under the name “Big
5 Sporting Goods” as of December 31, 2023. We provide a full-line product offering in a traditional sporting goods store format that averages
approximately 12,000 square feet. Through our e-commerce platform, we also offer selected products online. E-commerce sales for fiscal 2023 and 2022
were not material. Our 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.
We believe that over our 69-year history we have developed a reputation with the competitive and recreational sporting goods customer as a
convenient neighborhood sporting goods retailer that consistently delivers value on quality merchandise. Our stores carry a wide range of products at
competitive prices from well-known brand name manufacturers, including adidas, Coleman, Columbia, Everlast, New Balance, Rawlings, Skechers,
Spalding, Under Armour and Wilson. We also offer brand name merchandise produced exclusively for us, private label merchandise and specials on quality
items we purchase through opportunistic buys of vendor over-stock and close-out merchandise. We reinforce our value reputation through digital marketing
and periodic print advertising in major and local newspapers and direct mailers, in an effort to generate customer traffic, drive sales and build brand
awareness. Over the last several years we have been reducing our overall advertising spend and also shifting our advertising spend away from print media
towards digital advertising, which we believe allows us to more effectively manage our advertising expense. We also maintain social media sites to enhance
distribution capabilities for our promotional offers and to enable communication with our customers.
26
Throughout our history, we have emphasized controlled growth. Our store openings during recent years reflect our cautious approach toward
store expansion in the current retail environment, which includes increasing e-commerce competition. The following table summarizes our store count for
the periods presented:
(1)
Beginning of period
New stores
Stores relocated
(2)
Stores closed
End of period
Stores opened (closed) per year, net
Fiscal Year
2023
2022
432
2
(1 )
(3 )
430
(2 )
431
3
(1 )
(1 )
432
1
(1)
(2)
Stores that are relocated are classified as new stores. Sales from the prior location are treated as sales from a closed store and thus are
excluded from same store sales calculations.
In the first two months of fiscal 2024, we closed six stores, including four underperforming stores and one store that was previously
damaged by severe rain, lowering our store count to 424 at the end of fiscal February 2024.
For fiscal 2024, we anticipate opening approximately five new stores and closing approximately ten stores.
Executive Summary
Our net loss for fiscal 2023 compared to net income for fiscal 2022 was mainly attributable to reduced net sales, partially offset by lower
selling and administrative expense year over year. We believe the decrease in net sales in fiscal 2023 in part reflected significant inflationary pressures
which dampened consumer sentiment and reduced demand for discretionary products.
•
•
•
•
Net sales for fiscal 2023 decreased 11.1% to $884.7 million compared to $995.5 million for fiscal 2022. The decrease in net sales reflects a
decline of 11.2% in same store sales when compared with fiscal 2022. We believe our lower same store sales in fiscal 2023 in part reflected
significant inflationary pressures and heightened recessionary concerns that negatively impacted consumer demand, which contributed to
reduced net sales across each of our major merchandise categories of apparel, hardgoods and footwear.
Gross profit for fiscal 2023 represented 32.3% of net sales, compared with 34.3% in the prior year. Merchandise margins were unchanged
compared with the prior year, while store occupancy expense and distribution expense, including costs capitalized into inventory, as a
percentage of net sales were higher compared with fiscal 2022. While merchandise margins were unchanged year over year, they remained
healthy and continued to compare favorably to pre-pandemic levels.
Selling and administrative expense for fiscal 2023 decreased 3.6% to $296.6 million, or 33.5% of net sales, compared to $307.7 million, or
30.9% of net sales, for fiscal 2022. The decrease in selling and administrative expense primarily reflects a decrease in employee labor and
benefit-related expense, company performance-based incentive accruals, and advertising expense year over year, partially offset by higher
legal expense and operational expense impacted by inflation.
Net loss for fiscal 2023 was $7.1 million, or $0.33 per basic share, compared to net income of $26.1 million, or $1.18 per diluted share, for
fiscal 2022. The decreased earnings reflect lower net sales, partially offset by the favorable impact of lower selling and administrative
expense year over year.
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements
primarily through cash on hand, cash flows from operations and borrowings from our revolving credit facility.
•
•
•
Operating cash flow for fiscal 2023 was a positive $18.5 million compared to a negative $28.4 million in the prior year. The increased
operating cash flow was primarily due to decreased funding of merchandise inventory partially offset by decreased net income.
Capital expenditures for fiscal 2023 decreased to $11.0 million from $13.2 million in fiscal 2022, primarily reflecting reduced investment in
the opening of new stores and store-related remodeling in fiscal 2023 compared with fiscal 2022. We expect to open approximately five new
stores in fiscal 2024, after opening two new stores in fiscal 2023.
We had cash of $9.2 million and $25.6 million as of December 31, 2023 and January 1, 2023, respectively. We have had no borrowings under
our credit facility since the full pay-down of outstanding balances under the credit facility in the third quarter of fiscal 2020.
27
•
•
We paid cash dividends in fiscal 2023 of $19.8 million, or $0.875 per share, compared with $22.3 million, or $1.00 per share, in fiscal 2022.
We did not repurchase any shares of our common stock in fiscal 2023, and we repurchased 295,719 shares of our common stock for $4.1
million in fiscal 2022.
Results of Operations
The following table sets forth selected items from our consolidated statements of operations by dollar and as a percentage of our net sales,
and other financial data, for the periods indicated:
Statement of Operations Data:
Net sales
Cost of sales
Gross profit
(2)
Selling and administrative expense
(3)
Operating (loss) income
Interest (income) expense
(Loss) income before income taxes
Income tax (benefit) expense
Net (loss) income
Other Financial Data:
Net sales change
Same store sales change
(4)
Fiscal Year
(1)
2023
2022
(Dollars in thousands)
$884,745
598,901
285,844
296,578
(10,734)
(153)
(10,581)
(3,498)
$(7,083)
100.0%
67.7
32.3
33.5
(1.2)
0.0
(1.2)
(0.4)
(0.8)%
(11.1)%
(11.2)%
$995,538
654,323
341,215
307,700
33,515
572
32,943
6,809
$26,134
100.0%
65.7
34.3
30.9
3.4
0.1
3.3
0.7
2.6%
(14.3)%
(14.5)%
(1)
(2)
(3)
(4)
Fiscal 2023 and 2022 each included 52 weeks.
Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight, inventory reserves, buying, distribution
center expense, including depreciation, and store occupancy expense. Store occupancy expense includes rent, amortization of
leasehold improvements, common area maintenance, property taxes and insurance.
Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising,
depreciation and amortization, expense associated with operating our corporate headquarters, and impairment charges, if any.
Same store sales for a period reflect net sales from stores that operated throughout the period as well as the full corresponding prior-
year period and sales from e-commerce.
Fiscal 2023 Compared to Fiscal 2022
Net Sales. Net sales decreased by $110.8 million, or 11.1%, to $884.7 million for fiscal 2023 from $995.5 million for fiscal 2022. The
change in net sales was primarily attributable to the following:
•
Same store sales decreased by $109.7 million, or 11.2%, for fiscal 2023 versus the comparable prior-year period. We believe the decrease in
same store sales reflected the following:
o
Our markets were influenced by a continuation of significant and persistent inflationary pressures and heightened recessionary
concerns that dampened consumer sentiment and weakened demand for discretionary products, which negatively affected sales.
o
In the fourth quarter of fiscal 2023, we experienced unfavorable winter weather conditions across a large part of our market,
with unseasonably warm weather adversely impacting sales of our winter-related products.
o While we experienced strong winter-related product sales as a result of favorable winter-weather conditions during the first
quarter of fiscal 2023, cooler-than-normal weather patterns negatively impacted sales for the spring and summer product
categories through the second quarter of fiscal 2023.
o
o
Our lower same store sales in fiscal 2023 reflected a decrease in each of our major merchandise categories of apparel, hardgoods and
footwear.
Same store sales are made on a comparable-week basis. Same store sales comparisons exclude sales from stores permanently closed,
or stores in the process of permanently closing, during the comparable periods. Sales from e-commerce in fiscal 2023 and 2022 were
not material.
•
We experienced decreased customer transactions of 9.9% and a lower average sale per transaction of 1.3% in fiscal 2023 compared to the
prior year.
28
Gross Profit. Gross profit decreased by $55.4 million to $285.8 million, or 32.3% of net sales, in fiscal 2023 from $341.2 million, or 34.3%
of net sales, in fiscal 2022. The change in gross profit was primarily attributable to the following:
•
•
•
•
Net sales decreased by $110.8 million, or 11.1%, in fiscal 2023 compared to the prior year.
Merchandise margins, which exclude buying, occupancy and distribution expense, were unchanged compared with fiscal 2022, when
merchandise margins decreased by an unfavorable 63 basis points over the prior year. While merchandise margins were unchanged year over
year they remained healthy and continued to compare favorably to pre-pandemic levels.
Distribution expense, including costs capitalized into inventory, increased by $0.6 million, or an unfavorable 72 basis points, compared to the
prior year. The increase in expense primarily reflected decreased costs capitalized into inventory, partially offset by lower trucking and fuel
expense as well as lower employee labor and benefit-related expense.
Store occupancy expense decreased by $0.1 million but increased by an unfavorable 126 basis points as a percentage of net sales, compared
with last year.
Selling and Administrative Expense. Selling and administrative expense decreased by $11.1 million, or 3.6%, to $296.6 million, or 33.5% of
net sales, in fiscal 2023 from $307.7 million, or 30.9% of net sales, in fiscal 2022. The change in selling and administrative expense was primarily
attributable to the following:
•
•
•
Store-related expense, excluding occupancy, decreased by $7.0 million, due largely to reductions in employee labor and benefit-related
expense, primarily lower health and welfare expense as compared to the prior year which experienced a surge related to post-COVID-19
medical treatment. These expense reductions were partially offset by increases in expenses related to store security and systems
improvements, as well as the impact of broad-based inflation on operational expense. Wages continue to reflect the incremental impact of
legislated minimum wage rate increases primarily in California, where over half of our stores are located. In California, state-wide minimum
wage rates have risen from $10.00 per hour in 2017 to $15.50 per hour beginning on January 1, 2023. Additionally, certain other jurisdictions
within California, including Los Angeles and San Francisco, as well as within various other states in which we do business, are and have
been implementing their own scheduled increases that exceed the statewide minimum wage rates, which may also include interim impacts
effective at various points throughout the year. Labor expense in fiscal 2023 also reflected higher demand for labor in many of our markets
resulting in higher wage rates. We have partially mitigated these wage rate pressures by managing our store labor hour usage. However, we
estimate that the combined impact of these wage rate pressures caused our labor expense to increase by approximately $4.1 million for fiscal
2023 compared with fiscal 2022.
Administrative expense decreased by $2.2 million, primarily attributable to reduced company performance-based incentive accruals and
employee benefit-related expense in the current fiscal year, partially offset by an increase in legal expense primarily resulting from a tentative
legal settlement, as well as an increase in employee labor expense and non-cash impairment charges of $0.6 million related to certain
underperforming stores.
Advertising expense decreased by $1.9 million and remains less than half of our pre-pandemic expense level. We expect our advertising
expense in the foreseeable future to continue to benefit from reduced advertising activity compared to our pre-pandemic expense level as we
continue to evaluate the impact on our sales.
Interest (Income) Expense. Interest expense decreased by $0.7 million in fiscal 2023 compared to fiscal 2022 as a result of generating
increased interest income for the current fiscal year reflecting higher interest earned on cash equivalents.
Income Tax (Benefit) Expense. The provision for income taxes decreased to a benefit of $3.5 million for fiscal 2023 compared to an expense
of $6.8 million for fiscal 2022, primarily reflecting lower pre-tax income in fiscal 2023 compared to fiscal 2022. Our effective tax rate of 33.1% for fiscal
2023 compared with 20.7% for fiscal 2022. Our higher effective tax rate for fiscal 2023 mainly reflected the impact of reduced tax deductions combined
with lower pre-tax income.
Liquidity and Capital Resources
Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements
primarily through cash on hand, cash flows from operations and borrowings from our revolving credit facility. We believe our cash on hand, future cash
flows from operations and borrowings from our revolving credit facility will be sufficient to fund our cash requirements for at least the next 12 months.
29
We ended fiscal 2023 and 2022 with $9.2 million and $25.6 million of cash, respectively, and no revolving credit borrowings. The following
table summarizes our cash flows from operating, investing and financing activities:
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Fiscal Year
2023
2022
(In thousands)
$
$
18,538
(10,962 )
(23,940 )
(16,364 )
$
$
(28,440 )
(13,180 )
(30,235 )
(71,855 )
For fiscal 2023, we believe our lower net same store sales reflected a continuation of significant and persistent inflationary pressures and
heightened recessionary concerns that dampened consumer sentiment and weakened demand for discretionary products, which negatively affected sales.
Consequently, after replenishing depleted merchandise inventory levels in fiscal 2022, in response to lower sales for the current year we reduced our
merchandise inventory balances. The increase in our operating cash flow for fiscal 2023 compared to the prior year primarily reflected our reduced funding
of merchandise inventory partially offset by lower net income.
For fiscal 2022, compared to the prior year we experienced weaker consumer demand that we believe reflected in part significant inflationary
pressures and heightened recessionary concerns that negatively impacted consumer sentiment. We believe the higher inflation and softening consumer
demand led to lower sales and higher expenses which contributed to decreased net income year over year. Funding for merchandise inventory increased in
fiscal 2022 as we continued to replenish depleted inventory levels resulting from strong consumer demand and supply chain challenges in fiscal 2021. The
decrease in our operating cash flow for fiscal 2022 compared to the prior year primarily reflected our lower earnings and increased funding of merchandise
inventory.
Operating Activities. Operating cash flows for fiscal 2023 and 2022 were a positive $18.5 million and a negative $28.4 million, respectively.
The increased cash flow from operating activities in fiscal 2023 compared to fiscal 2022 primarily reflects decreased funding of merchandise inventory
partially offset by decreased net income.
Investing Activities. Net cash used in investing activities for fiscal 2023 and 2022 was $11.0 million and $13.2 million, respectively. Capital
expenditures, excluding non-cash acquisitions, represented substantially all of the cash used in investing activities for each period. Our capital expenditures
primarily reflect store-related remodeling, new store openings, distribution center investments and computer hardware and software purchases. Capital
expenditures by category are as follows:
Store-related remodels
New stores
Computer hardware, software and other
Distribution center
Total
Fiscal Year
2023
2022
(In thousands)
6,740
2,262
1,063
957
11,022
$
$
7,805
3,577
599
1,212
13,193
$
$
Capital expenditures in the fiscal years presented included investment in existing store remodeling to support our merchandising initiatives
and enhancement of information security measures to support our infrastructure. Our capital expenditures included two new stores, including relocations, in
fiscal 2023 and three new stores, including relocations, in fiscal 2022.
Financing Activities. Financing cash flows for fiscal 2023 and 2022 were a negative $23.9 million and a negative $30.2 million, respectively.
For fiscal 2023 and 2022, net cash was used primarily to fund dividend payments and make principal payments on finance lease liabilities. In fiscal 2022,
cash was also used to purchase treasury stock.
As of December 31, 2023, we had no revolving credit borrowings and we had letter of credit commitments of $2.0 million outstanding.
These balances compare to no revolving credit borrowings and letter of credit commitments of $1.4 million outstanding as of January 1, 2023.
In fiscal 2023 and 2022 we paid cash dividends of $0.875 and $1.00 per share of outstanding common stock, respectively. In the first quarter
of fiscal 2024, our Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding common stock, which will be paid on March 22,
2024 to stockholders of record as of March 8, 2024.
30
Periodically, we repurchase our common stock in the open market pursuant to programs approved by our Board of Directors. We may
repurchase our common stock for a variety of reasons, including, among other things, our alternative cash requirements, existing business conditions and
the current market price of our stock. In the first quarter of fiscal 2022, our Board of Directors authorized a new share repurchase program of up to $25.0
million of our common stock, which replaced the previous share repurchase program. Under this program, we may purchase shares from time to time in the
open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission.
However, the timing and amount of such purchases, if any, would be at the discretion of our management and Board of Directors, and would depend on
market conditions and other considerations. We did not repurchase any shares of common stock in fiscal 2023 and we repurchased 295,719 shares of
common stock in fiscal 2022. Since the inception of our initial share repurchase program in May 2006 through December 31, 2023, we have repurchased a
total of 4,186,014 shares for $53.6 million.
Loan Agreement. We are party to a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as agent and lender,
which was amended on November 22, 2021, October 19, 2022 and May 16, 2023 (as so amended, the “Loan Agreement”). The Loan Agreement has a
maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to $150.0 million. We may
also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the existing lender under the Loan Agreement
will have the option to increase their commitment to accommodate the requested increase. If the lender does not exercise that option, we may (with the
consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek other lenders willing to provide such commitments. The
credit facility includes a $50.0 million sublimit for issuances of letters of credit.
We may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the then
aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in the
Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables; plus
(b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly
liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of
inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost
of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent
in its reasonable discretion.
Generally, we may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR rate loans. The
applicable interest rate on our borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap over amounts
borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as Term SOFR rate loans bear interest at a rate equal
to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a 0.10% “SOFR
adjustment” spread, plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate equal to the
applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-half of one
percent (0.50%), (b) the one-month SOFR rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced from time
to time within BofA as its “prime rate.” The applicable margin for all loans will be a function of Average Daily Availability for the preceding fiscal quarter
as set forth below.
Level
I
II
Average Daily Availability
Greater than or equal to $70,000,000
Less than $70,000,000
SOFR Rate
Applicable Margin
1.375%
1.500%
Base Rate
Applicable Margin
0.375%
0.500%
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
31
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of our assets. The Loan
Agreement contains covenants that require us to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances, and limits the
ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business, guarantee
obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. We may generally declare or pay cash
dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such dividend or repurchase of
stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements are satisfied, although we
are permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the availability or fixed charge
coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge coverage ratio requirements
will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75 days. The Loan Agreement
contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to the credit facility, failure to
pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in the Loan Agreement, failure
to satisfy certain judgments against us, failure to pay when due (or any other default which permits the acceleration of) certain other material indebtedness
in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
Future Capital Requirements. We had cash of $9.2 million as of December 31, 2023. We expect capital expenditures for fiscal 2024,
excluding non-cash acquisitions, to range from approximately $13.0 million to $18.0 million, primarily to fund the opening of new stores, store-related
remodeling, distribution center investments and computer hardware and software purchases. For fiscal 2024, we anticipate opening approximately five new
stores and closing approximately ten stores.
Dividends are paid at the discretion of the Board of Directors. In fiscal 2023 and 2022 we paid annual cash dividends of $0.875 per share and
$1.00 per share, respectively, of outstanding common stock. In the first quarter of fiscal 2024, our Board of Directors declared a quarterly cash dividend of
$0.05 per share of outstanding common stock, which will be paid on March 22, 2024 to stockholders of record as of March 8, 2024.
As of December 31, 2023, a total of $20.9 million remained available for share repurchases under our new share repurchase program. We did
not repurchase any shares of our common stock in fiscal 2023 and we repurchased 295,719 shares of our common stock in fiscal 2022. We consider several
factors in determining when and if we make share repurchases including, among other things, our alternative cash requirements, existing business
conditions and the market price of our stock.
We believe we will be able to fund our cash requirements from cash on hand, operating cash flows and borrowings from our credit facility,
for at least the next 12 months.
Contractual Obligations. Our material contractual obligations include operating lease commitments associated with our leased properties and
other occupancy expense, finance lease obligations, borrowings under our credit facility, if any, and other liabilities. Operating lease commitments consist
principally of leases for our retail store facilities, distribution center and corporate offices. These leases frequently include options which permit us to
extend the terms beyond the initial fixed lease term, and we intend to renegotiate most of these leases as they expire. Operating lease commitments also
generally consist of information technology (“IT”) systems hardware, distribution center delivery tractors and vehicle leases. Additional information
regarding our operating leases is available in Item 2, Properties and Note 7, Lease Commitments, of the Notes to Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
As of the end of fiscal 2023 and 2022, we had no borrowings under our revolving credit facility.
In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise in advance of expected delivery.
Because most of these purchase orders do not contain any termination payments or other penalties if cancelled, they are not considered as outstanding
contractual obligations.
32
Critical Accounting Estimates
Our critical accounting estimates detailed below are included in our significant accounting policies as described in Note 2 of the
Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Those
consolidated financial statements were prepared in accordance with GAAP. Critical accounting estimates are those that we believe are most important to
the portrayal of our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expense. Our estimates are evaluated on an ongoing basis and drawn from
historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are
prepared. Actual results may differ from our estimates. Management believes that the following accounting estimates are critical and reflect the more
significant judgments and estimates we use in preparing our consolidated financial statements.
Valuation of Merchandise Inventories, Net
Our merchandise inventories 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 consists of the direct purchase price of merchandise inventory, net of vendor allowances and cash
discounts, in-bound freight-related costs and allocated overhead costs associated with our distribution center.
We record valuation reserves on a quarterly basis for merchandise items with slow-moving or obsolescence exposure and merchandise that
has a carrying value that exceeds net realizable value. These reserves are estimates of a reduction in value to reflect inventory valuation at the lower of cost
or net realizable value. Factors included in determining slow-moving or obsolescence reserve estimates include recent customer demand, merchandise
aging, seasonal trends and decisions to discontinue certain products. Because of our merchandise mix, we have not historically experienced significant
occurrences of obsolescence. Our inventory valuation reserves for damaged and defective merchandise, slow-moving or obsolete merchandise and for
lower of cost or net realizable value provisions totaled $2.2 million and $2.7 million as of December 31, 2023 and January 1, 2023, respectively,
representing approximately 1% of our merchandise inventory for both periods.
A 10% change in our inventory valuation reserves estimate in total as of December 31, 2023, would result in a change in reserves of $0.2
million and a change in pre-tax earnings by the same amount. Our 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 our expectations. At this time, we do not
believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions that we use to calculate our inventory
reserves.
Valuation of Long-Lived Assets
In accordance with Accounting Standards Codification 360, Property, Plant and Equipment, we review our 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’ operating lease right-of-use (“ROU”) assets and property and equipment, which
consists primarily of leasehold improvements. Factors that could trigger an impairment review include a current-period operating or cash flow loss
combined with a history of operating or 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.
We evaluate the store asset groups with indicators of impairment by estimating future undiscounted cash flows of a store asset group over its
remaining reasonably certain lease term to determine whether the long-lived assets are recoverable. In situations where the carrying amount of the store
asset group exceeds the undiscounted cash flows, a fair value of the store asset group is determined using discounted cash flow valuation techniques and
impairment is recognized when the carrying amount exceeds the fair value.
We determine 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, operating expense in relation to the current economic environment and our future expectations,
competitive factors in our 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.
33
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 an individual 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.
Our evaluation resulted in impairment charges recognized in fiscal 2023 of $0.6 million. The Company recorded no impairment charges in
fiscal 2022.
Seasonality and Impact of Inflation
We experience seasonal fluctuations in our net sales and operating results, which can suffer when weather does not conform to seasonal
norms. Seasonality in our net sales influences our buying patterns which directly impacts our merchandise and accounts payable levels and cash flows. We
purchase merchandise for seasonal activities in advance of a season and supplement our merchandise assortment as necessary and when possible during the
season. Our efforts to replenish products during a season are not always successful. In the fourth fiscal quarter, which includes the holiday selling season
and the start of the winter selling season, we normally experience higher inventory purchase volumes and increased expense for staffing and advertising. If
we miscalculate the consumer demand for our products generally or for our product mix in advance of a season, particularly the fourth quarter, our net sales
can decline, which can harm our financial performance. A significant shortfall from expected net sales, particularly during the fourth quarter, can
negatively impact our annual operating results.
In fiscal 2022 and 2023, we experienced greater inflation in the cost of products that we purchase for resale than in previous years. While our
merchandise inventory costs have been impacted by inflationary pressures, we have generally been able to adjust our selling prices in response to these
higher product purchase costs. However, if we are unable to adjust our selling prices for product purchase cost increases that might occur in the future, then
our merchandise margins could decline, which would adversely impact our operating results. In fiscal 2022 and 2023, we experienced broad-based
inflationary pressures which adversely impacted many categories of costs and expenses, including increased wage-rate pressures, and which are expected to
continue during fiscal 2024.
Recently Issued Accounting Updates
See Note 2 to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because we are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information
under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the supplementary financial information required by this Item and included in this Annual Report on Form 10-K
are listed in the “Index to Consolidated Financial Statements” beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
34
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information which is
required to be timely disclosed is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), in a timely fashion. We conducted an evaluation, under the supervision and with the participation of our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2023. Based on such evaluation, our CEO and CFO have
concluded that, as of December 31, 2023, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and
are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and disposition of assets; provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures are being made only in accordance with the authorization of our management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any
evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023, based
upon the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management has concluded that, as of December 31, 2023, we maintained effective internal control over financial reporting. The
attestation report issued by Deloitte & Touche LLP, our independent registered public accounting firm, on our internal control over financial reporting is
included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Big 5 Sporting Goods Corporation
El Segundo, California
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Big 5 Sporting Goods Corporation and subsidiaries (the “Company”) as of December 31,
2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 28, 2024, expressed an unqualified
opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 28, 2024
36
ITEM 9B. OTHER INFORMATION
During the fiscal year ended December 31, 2023, none of the Company’s directors or executive officers adopted or terminated any contract,
instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)
or any “non-Rule 10b5-1 trading arrangement.”
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item has been omitted and will be incorporated herein by reference, when filed, to our Proxy Statement,
which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item has been omitted and will be incorporated herein by reference, when filed, to our Proxy Statement,
which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this Item has been omitted and will be incorporated herein by reference, when filed, to our Proxy Statement,
which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item has been omitted and will be incorporated herein by reference, when filed, to our Proxy Statement,
which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item has been omitted and will be incorporated herein by reference, when filed, to our Proxy Statement,
which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2023.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report:
(1)
Financial Statements.
See Index to Consolidated Financial Statements on page F-1 hereof.
(2)
Financial Statement Schedule.
See Index to Consolidated Financial Statements on page F-1 hereof.
(3)
Exhibits.
The exhibits listed in the Index to Exhibits shown beginning on the next page are filed as part of this Annual Report on Form 10-K, or are
incorporated by reference from documents previously filed by the Company with the Securities and Exchange Commission as required by
Item 601 of Regulation S-K.
ITEM 16. FORM 10-K SUMMARY
None.
39
BIG 5 SPORTING GOODS CORPORATION
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
3.1
3.2
4.1
4.2
(a)
10.1
10.2
10.3
10.4
(a)
10.5
(a)
10.6
(a)
10.7
(a)
10.8
(a)
10.9
10.10
(a)
10.11
(a)
10.12
(a)
10.13
(a)
10.14
(a)
10.15
(a)
10.16
(a)
10.17
Amended and Restated Certificate of Incorporation of Big 5 Sporting Goods Corporation.
(1)
Amended and Restated Bylaws.
(11)
Specimen of Common Stock Certificate.
(2)
Description of Registrant’s Common Stock.
(18)
Second Amended and Restated Employment Agreement, dated as of December 31, 2008, between Steven G. Miller and Big 5 Sporting
Goods Corporation.
(9)
Form of Indemnification Agreement.
(1)
Form of Indemnification Letter Agreement.
(2)
Lease dated as of April 14, 2004 by and between Pannatoni Development Company, LLC and Big 5 Corp.
(3)
Employment Offer Letter dated August 15, 2005 between Barry D. Emerson and Big 5 Corp.
(5)
Severance Agreement dated as of August 9, 2006 between Barry D. Emerson and Big 5 Corp.
(6)
Big 5 Sporting Goods Corporation 2007 Equity and Performance Incentive Plan (Amended and Restated as of April 19, 2016).
(13)
Amendment No. 1 to Big 5 Sporting Goods Corporation 2007 Equity and Performance Incentive Plan, effective as of January 12, 2018.
(14)
Form of Big 5 Sporting Goods Corporation Stock Option Grant Notice and Stock Option Agreement for use with 2007 Equity and
Performance Incentive Plan.
(7)
Form of Big 5 Sporting Goods Corporation Restricted Stock Grant Notice and Restricted Stock Agreement for use with 2007 Equity and
Performance Incentive Plan.
(8)
Form of Big 5 Sporting Goods Corporation Restricted Stock Unit Agreement and Restricted Stock Unit Grant Notice approved for use
with Amended and Restated 2007 Equity and Performance Incentive Plan.
(10)
Big 5 Sporting Goods Corporation 2019 Equity Incentive Plan.
(15)
Form of Stock Option Agreement and Stock Option Grant Notice for use with 2019 Equity and Incentive Plan.
(16)
Form of Restricted Stock Agreement and Restricted Stock Grant Notice for use with 2019 Equity Incentive Plan.
(16)
Form of Restricted Stock Unit Agreement and Restricted Stock Unit Grant Notice for use with 2019 Equity Incentive Plan.
(16)
Form of Change of Control Severance Agreement, dated as of August 5, 2015.
(12)
Loan, Guaranty and Security Agreement, dated as of February 24, 2021 among Big 5 Sporting Goods Corporation, Big 5 Corp. and Big
(17)
5 Services Corp., the financial institutions party to the Agreement from time to time as lenders, and Bank of America, N.A., as agent.
10.18
First Amendment to Loan, Guaranty and Security Agreement, dated as of November 22, 2021 among Big 5 Sporting Goods
Corporation, Big 5 Corp. and Big 5 Services Corp., and Bank of America, N.A., as agent and lender.
(18)
10.19
Second Amendment to Loan, Guaranty and Security Agreement, dated as of October 19, 2022 among Big 5 Sporting Goods
Corporation, Big 5 Corp. and Big 5 Services Corp., and Bank of America, N.A., as agent and lender.
(19)
10.20
Third Amendment to Loan, Guaranty and Security Agreement, dated as of May 16, 2023 among Big 5 Sporting Goods Corporation, Big
5 Corp. and Big 5 Services Corp., and Bank of America, N.A., as agent and lender.
(20)
19.1
21.1
23.1
31.1
Insider Trading Policy.
(21)
Subsidiaries of Big 5 Sporting Goods Corporation.
(4)
Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP.
(21)
Rule 13a-14(a) Certification of Chief Executive Officer.
(21)
40
31.2
32.1
32.2
97.1
101.INS
101.SCH
104
Rule 13a-14(a) Certification of Chief Financial Officer.
(21)
Section 1350 Certification of Chief Executive Officer.
(21)
Section 1350 Certification of Chief Financial Officer.
(21)
Clawback Policy.
(21)
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded
within the Inline XBRL Document.
(21)
Inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document.
(21)
Cover Page Interactive Data File (embedded within the Inline XBRL document).
(21)
(a)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
Management contract or executive compensation agreement.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on March 31, 2003.
Incorporated by reference to Amendment No. 4 to the Registration Statement on Form S-1 filed by Big 5 Sporting Goods Corporation on June 24,
2002.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on August 6, 2004.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on September 6, 2005.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on March 16, 2006.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on August 11, 2006.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on June 25, 2007.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on March 10, 2008.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on January 6, 2009.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on June 20, 2011.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on December 22, 2022.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on October 28, 2015.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on June 14, 2016.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on February 28, 2018.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on June 11, 2019.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on July 31, 2019.
Incorporated by reference to the Current Report on Form 8-K filed by Big 5 Sporting Goods Corporation on March 1, 2021.
Incorporated by reference to the Annual Report on Form 10-K filed by Big 5 Sporting Goods Corporation on March 2, 2022.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on November 2, 2022.
Incorporated by reference to the Quarterly Report on Form 10-Q filed by Big 5 Sporting Goods Corporation on August 2, 2023.
Filed herewith.
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
BIG 5 SPORTING GOODS CORPORATION,
a Delaware corporation
Date: February 28, 2024
By:
/s/ Steven G. Miller
Steven G. Miller
Chairman of the Board of Directors,
President, Chief Executive Officer and
Director of the Company
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
Signatures
/s/ Steven G. Miller
Steven G. Miller
/s/ Barry D. Emerson
Barry D. Emerson
/s/ Colleen B. Brown
Colleen B. Brown
/s/ Stephen E. Carley
Stephen E. Carley
/s/ Lily W. Chang
Lily W. Chang
/s/ Jennifer H. Dunbar
Jennifer H. Dunbar
/s/ Van B. Honeycutt
Van B. Honeycutt
/s/ David R. Jessick
David R. Jessick
Title
Chairman of the Board of Directors,
President, Chief Executive Officer and
Director of the Company
(Principal Executive Officer)
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date
February 28, 2024
February 28, 2024
Director of the Company
February 28, 2024
Director of the Company
February 28, 2024
Director of the Company
February 28, 2024
Director of the Company
February 28, 2024
Director of the Company
February 28, 2024
Director of the Company
February 28, 2024
42
BIG 5 SPORTING GOODS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets at December 31, 2023 and January 1, 2023
Consolidated Statements of Operations for the fiscal years ended December 31, 2023 and January 1, 2023
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2023 and January 1, 2023
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2023 and January 1, 2023
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule:
Valuation and Qualifying Accounts as of December 31, 2023 and January 1, 2023
F-1
F-1
F-2
F-4
F-5
F-6
F-7
F-8
Schedule
II
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Big 5 Sporting Goods Corporation
El Segundo, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Big 5 Sporting Goods Corporation and subsidiaries (the “Company”) as of December
31, 2023 and January 1, 2023, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the fiscal years ended
December 31, 2023 and January 1, 2023, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023
and January 1, 2023, and the results of its operations and its cash flows for each of the fiscal years ended December 31, 2023 and January 1, 2023, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an unqualified opinion on
the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Inventory - Valuation of merchandise inventories, net for slow-moving or obsolete merchandise reserves - Refer to Note 2 to the financial
statements
Critical Audit Matter Description
The Company’s merchandise inventories are valued using the weighted-average cost method. The Company estimates and records valuation reserves on a
quarterly basis to record inventory at the lower of cost or net realizable value (“LCNRV”). This includes, among other things, estimating the valuation
reserve for inventory with slow-moving or obsolescence exposure, which consider factors such as recent customer demand, merchandise aging, seasonal
trends, and decisions to discontinue certain products.
We identified the valuation reserves on slow-moving or obsolete merchandise inventories as a critical audit matter because of the significant assumptions
required in identifying the population of inventory with slow-moving or obsolescence exposure and measuring the valuation reserves required to record
such inventory at the LCNRV, resulting in a high degree of auditor judgment and an increased extent of effort when performing audit procedures to
evaluate such assumptions.
F-2
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation reserves for inventory with slow-moving or obsolescence exposure included the following, among others:
• We tested the operating effectiveness of management’s controls over the review of slow-moving and obsolescence inventory exposure and the
required reserves to record such inventory at the LCNRV.
• We evaluated the appropriateness of the underlying financial information used in management’s analysis, including the aging of on-hand
inventory balances, recent sales quantity for specific inventory, and classification of inventory category by department.
• We evaluated the assumptions used by management in identifying the population of inventory with slow-moving or obsolescence exposure that
require a reserve and determining the amount of reserve to record.
• We performed data analytical procedures over the inventory balance, such as analyzing inventory trend levels and turnover rates, to evaluate the
completeness of management’s identified population of inventory with slow-moving or obsolescence exposure that require a reserve.
• We compared actual inventory sold below cost in the current fiscal year to the inventory valuation reserve estimated by the Company in the prior
year to evaluate management’s ability to accurately estimate the valuation reserve for inventory.
• We evaluated management’s calculation of the valuation reserve by testing the mathematical accuracy of the reserve calculation.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 28, 2024
We have served as the Company’s auditor since 2007.
F-3
BIG 5 SPORTING GOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
December 31,
2023
January 1,
2023
Current assets:
Cash
Accounts receivable, net of allowances of $48 and $44, respectively
Merchandise inventories, net
Prepaid expenses
Total current assets
Operating lease right-of-use assets, net
Property and equipment, net
Deferred income taxes
Other assets, net of accumulated amortization of $1,954 and $1,359, respectively
LIABILITIES AND STOCKHOLDERS' EQUITY
Total assets
Current liabilities:
Accounts payable
Accrued expenses
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Total current liabilities
Operating lease liabilities, less current portion
Finance lease liabilities, less current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 26,747,617 and
26,491,750 shares, respectively; outstanding 22,440,362 and 22,184,495 shares, respectively
Additional paid-in capital
Retained earnings
Less: Treasury stock, at cost; 4,307,255 shares
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
9,201
9,163
275,759
16,052
310,175
253,615
58,595
13,427
8,871
644,683
$
$
55,201
61,283
70,372
3,843
190,699
191,178
11,856
6,536
400,269
267
128,737
169,667
(54,257 )
244,414
644,683
$
25,565
12,270
303,493
16,632
357,960
276,016
58,311
9,991
6,515
708,793
67,417
70,261
70,584
3,217
211,479
214,584
7,089
6,857
440,009
264
126,512
196,265
(54,257 )
268,784
708,793
See accompanying notes to consolidated financial statements.
F-4
BIG 5 SPORTING GOODS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling and administrative expense
Operating (loss) income
Interest (income) expense
(Loss) income before income taxes
Income tax (benefit) expense
Net (loss) income
(Loss) earnings per share:
Basic
Diluted
Weighted-average shares of common stock outstanding:
Basic
Diluted
$
$
$
$
Fiscal Year Ended
December 31,
2023
January 1,
2023
$
$
$
$
884,745
598,901
285,844
296,578
(10,734 )
(153 )
(10,581 )
(3,498 )
(7,083 )
(0.33 )
(0.33 )
21,749
21,749
995,538
654,323
341,215
307,700
33,515
572
32,943
6,809
26,134
1.21
1.18
21,634
22,089
See accompanying notes to consolidated financial statements.
F-5
BIG 5 SPORTING GOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Balance as of January 2, 2022
Net income
Dividends on common stock ($1.00 per share)
Issuance of nonvested share awards
Conversion of vested share unit awards
Exercise of share option awards
Share-based compensation
Forfeiture of nonvested share awards
Retirement of common stock for payment
of withholding tax
Purchases of treasury stock
Balance as of January 1, 2023
Net loss
Dividends on common stock ($0.875 per share)
Issuance of nonvested share awards
Exercise of share option awards
Share-based compensation
Forfeiture of nonvested share awards
Retirement of common stock for payment
of withholding tax
Balance as of December 31, 2023
Common Stock
Shares
22,097,467
$
—
—
284,630
124,012
83,400
—
(31,955 )
(77,340 )
(295,719 )
22,184,495 $
—
—
327,112
39,325
—
(30,505 )
Amount
260
—
—
2
1
1
—
—
—
—
264
—
—
3
1
—
—
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock,
At Cost
$
124,909
$
—
—
(2 )
(1 )
348
2,470
—
(1,212 )
—
126,512 $
—
—
(3 )
116
2,738
—
$
$
192,261
26,134
(22,130 )
—
—
—
—
—
—
—
196,265 $
(7,083 )
(19,515 )
—
—
—
—
(50,121 ) $
—
—
—
—
—
—
—
—
(4,136 )
(54,257 ) $
—
—
—
—
—
—
Total
267,309
26,134
(22,130 )
—
—
349
2,470
—
(1,212 )
(4,136 )
268,784
(7,083 )
(19,515 )
—
117
2,738
—
(80,065 )
22,440,362
$
(1 )
267
$
(626 )
—
128,737
$
169,667
$
—
(54,257 ) $
(627 )
244,414
See accompanying notes to consolidated financial statements.
F-6
BIG 5 SPORTING GOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization
Impairment of long-lived assets
Share-based compensation
Amortization of other assets
Loss on disposal of equipment
Noncash lease expense
Proceeds from insurance recovery - lost profit margin and expenses
Gain on recovery of insurance proceeds - lost profit margin and expenses
Gain on recovery of insurance proceeds - property and equipment
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable, net
Merchandise inventories, net
Prepaid expenses and other assets
Accounts payable
Operating lease liabilities
Accrued expenses and other long-term liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from insurance recovery - property and equipment
Proceeds from disposal of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Changes in book overdraft
Debt issuance costs paid
Principal payments under finance lease obligations
Proceeds from exercise of share option awards
Cash purchases of treasury stock
Tax withholding payments for share-based compensation
Dividends paid
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash at end of year
Supplemental disclosures of non-cash investing and financing activities:
Property and equipment acquired under finance leases
Property and equipment additions unpaid
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Fiscal Year Ended
December 31,
2023
January 1,
2023
$
(7,083 )
$
26,134
18,315
631
2,738
595
—
70,060
619
(299 )
(25 )
(3,436 )
2,752
27,734
(2,371 )
(11,846 )
(71,435 )
(8,411 )
18,538
(11,022 )
60
—
(10,962 )
(130 )
—
(3,538 )
117
—
(627 )
(19,762 )
(23,940 )
(16,364 )
25,565
$
$
$
$
$
9,201
$
8,931
711
707
24
$
$
$
$
18,020
—
2,470
453
288
68,929
—
—
—
2,106
1,641
(23,512 )
(3,292 )
(37,251 )
(70,940 )
(13,486 )
(28,440 )
(13,193 )
—
13
(13,180 )
619
(18 )
(3,504 )
349
(4,136 )
(1,212 )
(22,333 )
(30,235 )
(71,855 )
97,420
25,565
3,828
1,592
586
5,471
See accompanying notes to consolidated financial statements.
F-7
BIG 5 SPORTING GOODS CORPORATION
NOTES TO 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 December 31, 2023. The Company provides a full-line product offering in a traditional sporting goods store format that
averages approximately 12,000 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 under the “Big 5 Sporting Goods” name 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 Company’s consolidated financial statements as of December 31, 2023 and January 1, 2023 and for the years ended December 31, 2023
(“fiscal 2023”) and January 1, 2023 (“fiscal 2022”) represent the financial position, results of operations and cash flows of the Company and have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
(2)
Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated 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 2023 and fiscal 2022
each included 52 weeks.
Recently Issued Accounting Updates
In June 2023, the Securities and Exchange Commission (“SEC”) approved new listing standards that were proposed by the New York Stock
Exchange and Nasdaq. The new listing standards require listed companies to adopt and comply with a written policy providing for the recovery, in the
event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is
based on erroneously reported financial information. The listing standards took effect on October 2, 2023, and registrants had until December 1, 2023 (60
days after the effective date) to adopt a recovery policy. The recovery policy must, however, apply to erroneously awarded incentive-based compensation
received (as defined in the listing standards) after the effective date. The adoption of these new listing standards did not have a material impact on the
Company’s consolidated financial statements.
In July 2023, the SEC adopted the final rule under SEC Release Nos. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and
Incident Disclosure, requiring current disclosure about material cybersecurity incidents; periodic disclosures about a registrant’s processes to assess,
identify, and manage material cybersecurity risks; a description of management’s role in assessing and managing material cybersecurity risks; and the board
of directors’ oversight of cybersecurity risks. While the incident-reporting requirements under this rule will be effective in the second quarter of fiscal 2024
due to the Company’s status as a smaller-reporting company, the disclosure requirements under this rule were effective in the fourth quarter of fiscal 2023.
The adoption of this final rule did not have a material impact on the Company’s consolidated financial statements.
In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-06,
Disclosure Improvements—Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which incorporates into the
Accounting Standards Codification (“ASC”) certain incremental disclosure requirements introduced by the SEC as part of its disclosure update and
simplification initiative. The amendments in this update are intended to clarify or improve presentation and disclosure requirements around a variety of
ASC Topics, improve entity comparability for users, and align ASC requirements with SEC regulations. For entities subject to the SEC’s existing
disclosure requirements, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X
or Regulation S-K becomes effective. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments
will be removed from the ASC and not become effective. Early adoption is prohibited. The Company does not expect the issuance of this ASU to have a
material impact on its consolidated financial statements.
F-8
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures,
which aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In
addition, the amendments in the ASU enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment
measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure
requirements. The ASU applies to all public entities that are required to report segment information in accordance with ASC 280, and is effective for fiscal
years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The
Company is evaluating the future impact of the issuance of this ASU on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures, which include
improvements to income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2)
income taxes paid disaggregated by jurisdiction. This ASU also includes certain other amendments to better align disclosures with Regulation S-X and to
remove disclosures no longer considered cost beneficial or relevant. This ASU is effective for public entities for annual periods beginning after December
15, 2024, with earlier or retrospective application permitted. The amendments in this ASU should be applied prospectively for annual financial statements
not yet issued or made available for issuance. The Company is evaluating the future impact of the issuance of this ASU on its consolidated financial
statements.
Other recently issued accounting updates are not expected to have a material impact on the Company’s consolidated financial statements.
General Concentration of Risk
The Company maintains its cash accounts in financial institutions, and accounts at these institutions are insured by the Federal Deposit
Insurance Corporation up to $250,000.
Because of the Company’s geographic concentration in the western United States, the Company is subject to regional risks, such as the
economy, including downturns in the housing market, state financial conditions, unemployment and gas prices. Other regional risks include weather
conditions, fires, droughts, earthquakes, power outages, floods and other natural disasters specific to the states in which the Company operates.
The Company relies on a single distribution center located in Riverside, California, which services all of its stores and e-commerce platform.
Any natural disaster or other serious disruption to the distribution center due to fire, earthquake or any other cause could damage a significant portion of
inventory and could materially impair the Company’s ability to adequately stock its stores and fulfill its e-commerce business.
The Company purchases merchandise from over 600 suppliers, and the Company’s 20 largest suppliers accounted for 39.3% of total
purchases in fiscal 2023. One vendor represented greater than 5% of total purchases in fiscal 2023, at 5.1%. A significant portion of the Company’s
inventory is manufactured abroad in Asia. Foreign imports subject the Company to the risks of changes in, or the imposition of new, import tariffs, duties
or quotas, new restrictions on imports, loss of “most favored nation” status with the United States for a particular foreign country, antidumping or
countervailing duty orders, retaliatory actions in response to illegal trade practices, work stoppages, delays in shipment, freight expense increases, product
cost increases due to foreign currency fluctuations or revaluations, public health issues that could lead to temporary closures of facilities or shipping ports,
such as the recent outbreak of the novel coronavirus (“COVID-19”), and other economic uncertainties. If a disruption of trade were to occur from the
countries in which the suppliers of the Company’s vendors are located, the Company may be unable to obtain sufficient quantities of products to satisfy its
requirements, or the cost of obtaining products may increase.
A substantial amount of the Company’s inventory is manufactured abroad. From time to time, shipping ports experience capacity constraints
(such as delays associated with COVID-19), labor strikes, work stoppages or other disruptions that may delay the delivery of imported products. A contract
dispute may lead to protracted delays in the movement of the Company’s products, which could further delay the delivery of products to the Company’s
stores and impact net sales and profitability. In addition, other conditions outside of the Company’s control, such as adverse weather conditions or acts of
terrorism or war, such as the current conflicts in Ukraine and the Middle East, could significantly disrupt operations at shipping ports or otherwise impact
transportation of the imported merchandise we sell, either through supply chain disruptions, or rising freight and fuel costs.
F-9
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company could be exposed to credit risk in the event of nonperformance by its lender under its revolving credit facility. Instability in the
financial and capital markets could bring additional potential risks to the Company, including higher costs of credit, potential lender defaults, and potential
commercial bank failures. The Company has received no indication that any such events will negatively impact its lender under its credit facility; however,
the possibility does exist.
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 consolidated financial statements and reported amounts of revenue and expense during the
reporting period to prepare these consolidated 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 December 31, 2023, 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.
Segment Reporting
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, and whose Chief Operating Decision Maker (“CODM”) is the Chief Executive Officer. The
CODM reviews financial information presented on a consolidated basis, for purposes of allocating resources and evaluating financial performance. The
Company’s stores typically have similar square footage, with the stores and e-commerce platform offering a similar general product mix. The Company’s
core customer demographic remains similar across all sales channels, as does the Company’s process for the procurement and marketing of its product mix.
Furthermore, the Company distributes its product mix for both the stores and e-commerce platform from a single distribution center. Given the consolidated
level of review by the CODM, the Company operates as one reportable segment as defined by ASC 280, Segment Reporting.
Earnings Per Share
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic
and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding,
reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the
potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards.
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. Collectability is reasonably assured since the Company only extends immaterial credit
purchases to certain municipalities and local school districts.
F-10
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As noted in the segment information elsewhere in this Note 2 to the Notes to Consolidated Financial Statements, the Company’s business
consists of one reportable segment. 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:
Hardgoods
Athletic and sport footwear
Athletic and sport apparel
Other sales
Net sales
Fiscal Year Ended
December 31,
2023
January 1,
2023
$
$
(In thousands)
475,350
219,184
185,064
5,147
884,745
$
$
536,294
246,302
209,672
3,270
995,538
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 transaction price for each contract is the stated price on the product, reduced by any stated discounts at that point in time. The Company
does not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in
the future at a material discount. The implicit point-of-sale contract with the customer, as reflected in the transaction receipt, states the final terms of the
sale, including the description, quantity, and price of each product purchased. Payment for the Company’s contracts is due in full upon delivery. The
customer agrees to a stated price implicit in the contract.
The transaction price relative to sales subject to a right of return reflects the amount of estimated consideration to which the Company
expects to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to
the extent that it is probable that there will be no significant reversal in a future period. Actual amounts of consideration ultimately received may differ
from the Company’s estimates. There were no material adjustments to the Company’s previous estimates. The allowance for sales returns is estimated
based upon historical experience and a provision for estimated returns is recorded as a reduction in sales in the relevant period. The estimated right-of-
return merchandise cost related to the sales returns is recorded as prepaid expense in the Company’s consolidated balance sheet as of December 31, 2023. If
actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net sales and earnings in the
period such variances become known.
The Company has elected to apply the practical expedient, relative to e-commerce sales, which allows an entity to account for shipping and
handling 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.
Contract liabilities are recognized primarily for stored-value card sales and issuances in exchange for returns. Cash received from the sale or
issuance of stored-value cards is recorded as a contract liability in accrued expenses in the Company’s consolidated balance sheets, and the Company
recognizes revenue upon the customer’s redemption of the stored-value card. Stored-value card breakage is recognized as revenue in proportion to the
pattern of customer redemptions by applying a historical breakage rate of five percent. The Company does not sell or provide stored-value cards that carry
expiration dates.
F-11
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company recognized $5.5 million and $6.1 million in stored-value card redemption revenue for fiscal 2023 and 2022, respectively. The
Company also recognized $0.3 million in stored-value card breakage revenue for each of fiscal 2023 and 2022. The Company had outstanding stored-value
card liabilities of $9.2 million and $8.8 million as of December 31, 2023 and January 1, 2023, respectively, which are included in accrued expenses in the
Company’s consolidated balance sheets. 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 in the Company’s consolidated balance sheets, estimated right-of-return merchandise cost of $0.9
million and $1.2 million related to estimated sales returns as of December 31, 2023 and January 1, 2023, and recorded, as accrued expense in the
Company’s consolidated balance sheets, an allowance for sales returns reserve of $1.7 million and $2.3 million as of December 31, 2023 and January 1,
2023, respectively.
Cost of Sales
Cost of sales includes the cost of merchandise, net of discounts or allowances earned, freight (including e-commerce shipping and handling
costs), inventory reserves, buying, distribution center expense, including depreciation and amortization, and store occupancy expense. Store occupancy
expense includes rent, amortization of leasehold improvements, common area maintenance, property taxes and insurance.
Selling and Administrative Expense
Selling and administrative expense includes store-related expense, other than store occupancy expense, as well as advertising, depreciation
and amortization, expense associated with operating the Company’s corporate headquarters and impairment charges, if any.
Vendor Allowances
The Company receives allowances for co-operative advertising and volume purchase rebates earned through programs with certain vendors.
The Company records a receivable for these allowances which are earned but not yet received when it is determined the amounts are probable and
reasonably estimable. Amounts that represent a reimbursement of costs incurred, such as advertising, and amounts relating to the purchase of merchandise
are recorded as a reduction of inventory cost and reduce cost of goods sold as the merchandise is sold.
Advertising Expense
Advertising is expensed when the advertising first occurs. Advertising expense amounted to $10.2 million and $12.1 million for fiscal 2023
and 2022, respectively. The Company continues to benefit from reduced advertising in fiscal 2023 and 2022 as a result of measures implemented in
response to the COVID-19 pandemic. Advertising expense is included in selling and administrative expense in the Company’s consolidated statements of
operations. The Company receives co-operative advertising allowances from certain product vendors in order to subsidize qualifying advertising and
similar promotional expenditures made relating to vendors’ products. The Company treats these advertising allowances as a reduction of inventory cost and
cost of goods sold which had an immaterial effect on the Company’s consolidated financial statements.
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 13 to the Notes to Consolidated Financial Statements for a
further discussion on share-based compensation.
Pre-opening Costs
Pre-opening costs for new stores, which are not material, consist primarily of payroll and recruiting expense, training, marketing, rent, travel
and supplies, and are expensed as incurred and included in selling and administrative expense in the Company’s consolidated statements of operations.
F-12
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cash
Cash consists of cash on hand, and the Company had no cash equivalents as of any periods presented. Book overdrafts for checks outstanding
are classified as current liabilities in the Company’s consolidated balance sheets.
Accounts Receivable
Accounts receivable consist primarily of third party purchasing card receivables, amounts due from inventory vendors for returned products,
volume purchase rebates or co-operative advertising, amounts due from lessors for tenant improvement allowances and insurance recovery receivables.
Accounts receivable have not historically resulted in any material credit losses. An allowance for doubtful accounts is provided when accounts are
determined to be uncollectible.
Valuation of Merchandise Inventories, Net
The Company’s merchandise inventories 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.
Prepaid Expenses and Other Assets
Prepaid expenses include the prepayment of various operating expenses such as insurance, income and property taxes, software maintenance
and supplies, which are expensed when the operating cost is realized, as well as estimated right-of-return merchandise cost related to estimated sales
returns.
Other assets include the long-term portion of certain prepaid expenses, capitalized deferred financing fees related to the Company’s credit
facility and capitalized implementation costs related to information technology (“IT”) system hosting arrangements that are service contracts. While
deferred financing fees and implementation costs are capitalized and amortized over the respective terms of their arrangements, costs related to the service
element of a hosting arrangement that is a service contract are expensed as incurred.
Property and Equipment, Net
Property and equipment are stated at cost and are being depreciated or amortized utilizing the straight-line method over the following
estimated useful lives:
Land
Buildings
Leasehold improvements
Furniture and equipment
Internal-use software
Indefinite
20 years
Shorter of estimated useful life or term of lease
3 – 10 years
3 – 7 years
Maintenance and repairs are expensed as incurred.
F-13
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company incurs costs to purchase and develop software for internal use. Costs related to the application development stage are
capitalized and amortized over the estimated useful life of the software. Costs related to the design or maintenance of internal-use software are expensed as
incurred. See Note 3 to the Notes to Consolidated Financial Statements for a further discussion on property and equipment.
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 or 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 individual 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 recognized impairment charges of $0.6 million in fiscal 2023 related to certain underperforming stores, and did not recognize
any impairment charges in fiscal 2022.
F-14
BIG 5 SPORTING GOODS CORPORATION
NOTES TO 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, IT 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 Company’s
consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities, current and noncurrent, on the Company’s
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 Company’s consolidated statement 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 Company’s consolidated balance sheets. 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 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.
See Note 7 to the Notes to Consolidated Financial Statements for a further discussion on leases.
Self-Insurance Liabilities
The Company is self-insured for certain of its various insurance risks including its estimated workers’ compensation liability risk in some
states. The Company also has a self-funded insurance program for a portion of its employee medical benefits. Under these programs, the Company
maintains insurance coverage for losses in excess of specified per-occurrence amounts. Estimated expenses incurred under the self-insured workers’
compensation and medical benefits programs, including incurred but not reported claims, are recorded as expense based upon historical experience, trends
of paid and incurred claims, and other actuarial assumptions. If actual claims trends under these programs, including the severity or frequency of claims,
differ from the Company’s estimates, its financial results may be significantly impacted. The Company’s actuarially-estimated self-insurance liabilities,
which are reported gross of expected workers’ compensation insurance reimbursements, are classified on the Company’s consolidated balance sheets as
accrued expenses or other long-term liabilities based upon whether they are expected to be paid during or beyond the normal operating cycle of 12 months
from the date of the Company’s consolidated financial statements. Self-insurance liabilities totaled $11.0 million and $11.1 million as of December 31,
2023 and January 1, 2023, respectively, of which $4.6 million were recorded as a component of accrued expenses as of December 31, 2023 and January 1,
2023, and $6.4 million and $6.5 million were recorded as a component of other long-term liabilities as of December 31, 2023 and January 1, 2023,
respectively, in the Company’s consolidated balance sheets.
F-15
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Income Taxes
Under the asset and liability method prescribed within ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for
the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date. The realizability of deferred tax assets is assessed throughout the year and a valuation allowance is recorded if
necessary to reduce net deferred tax assets to the amount more likely than not to be realized. Certain prior period deferred tax disclosures were reclassified
to conform with current period presentation.
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be
sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. ASC 740 also
provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company’s practice is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in selling and
administrative expense in the Company’s consolidated statements of operations. As of December 31, 2023 and January 1, 2023, the Company had no
accrued interest or penalties. See Note 9 to the Notes to Consolidated Financial Statements for a further discussion on income taxes.
Treasury Stock Purchases
The Company repurchases its common stock in the open market pursuant to programs approved by its Board of Directors. In the first quarter
of fiscal 2022, the Board of Directors authorized a new share repurchase program of up to $25.0 million of common stock, which replaced the previous
share repurchase program. Under this program, the Company may purchase shares from time to time in the open market or in privately negotiated
transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission. The Company may repurchase its
common stock for a variety of reasons, including, among other things, its alternative cash requirements, existing business conditions and the current market
price of its stock. However, the timing and amount of such purchases, if any, would be at the discretion of management and the Board of Directors. The
Company did not repurchase any shares of common stock in fiscal 2023 and repurchased 295,719 shares of common stock in fiscal 2022.
(3)
Property and Equipment, Net
Property and equipment, net, consist of the following:
Leasehold improvements
Furniture and equipment
Internal-use software
Land
Building
Accumulated depreciation and amortization
(1)
Assets not placed into service
Property and equipment, net
December 31,
2023
January 1,
2023
(In thousands)
$
$
188,216 $
151,007
37,205
2,750
1,775
380,953
(323,284 )
57,669
926
58,595 $
184,326
146,392
37,192
2,750
1,775
372,435
(315,596 )
56,839
1,472
58,311
(1)
Includes accumulated amortization for internal-use software development costs of $35.7 million and $34.4 million as of December 31,
2023 and January 1, 2023, respectively.
F-16
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Depreciation expense associated with property and equipment, including assets leased under finance leases, was $8.3 million and $8.0
million for fiscal 2023 and 2022, respectively. Amortization expense for leasehold improvements was $8.5 million and $8.0 million for fiscal 2023 and
2022, respectively. Amortization expense for internal-use software was $1.5 million and $2.0 million for fiscal 2023 and 2022, respectively. The gross cost
of equipment under finance leases, included above, was $22.6 million and $19.1 million as of December 31, 2023 and January 1, 2023, respectively. The
accumulated depreciation related to these finance leases was $5.8 million and $8.2 million as of December 31, 2023 and January 1, 2023, respectively.
(4)
Impairment of Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Assets subject to the Company’s evaluation totaled $253.6 million and $58.6 million for ROU assets and property and equipment,
respectively, as of December 31, 2023. No long-lived assets were subject to evaluation as of January 1, 2023. In fiscal 2023, the Company recognized non-
cash impairment charges of $0.6 million related to certain underperforming stores. These impairment charges represented property, equipment and
leasehold improvements of $0.5 million and ROU assets of $0.1 million, and are included in selling and administrative expense in the consolidated
statements of operations. The lower-than-expected sales performance, coupled with future unfavorable undiscounted cash flow projections, indicated that
the carrying value of these stores’ assets exceeded their estimated fair values as determined by their future discounted cash flow projections. No
impairment charges were recognized in fiscal 2022.
(5) 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. Book overdrafts for checks outstanding are classified as current liabilities in the Company’s consolidated balance sheets. 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.
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 estimates 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 classifies 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. As of December 31, 2023, there were $0.6 million of long-lived assets subject to
impairment and as of January 1, 2023, there were no long-lived assets subject to impairment.
(6)
Accrued Expenses
The major components of accrued expenses are as follows:
Payroll and related expense
Occupancy expense
Sales tax
Other
Accrued expenses
December 31,
2023
January 1,
2023
$
$
(In thousands)
22,331 $
8,655
7,581
22,716
61,283 $
26,525
10,126
9,964
23,646
70,261
F-17
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(7) Lease Commitments
The Company has operating and finance leases for the Company’s retail store facilities, distribution center, corporate offices, IT hardware,
and distribution center delivery tractors and equipment, and accounts for these leases in accordance with ASC 842. The Company’s operating leases have
remaining reasonably certain lease terms of up to 11 years, which typically include options to extend the leases for up to 5 years. The Company’s finance
leases have remaining reasonably certain lease terms of up to 6 years.
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:
Lease expense:
Operating lease expense
Variable lease expense
Operating lease expense
Amortization of right-of-use assets
Interest on lease liabilities
Finance lease expense
Total lease expense
In accordance with ASC 842, other information related to leases was as follows:
Operating cash flows from operating leases
Financing cash flows from finance leases
Operating cash flows from finance leases
Cash paid for amounts included in the measurement of lease liabilities
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term—finance leases
Weighted-average remaining lease term—operating leases
Weighted-average discount rate—finance leases
Weighted-average discount rate—operating leases
F-18
Fiscal Year Ended
December 31,
2023
January 1,
2023
(In thousands)
$
$
84,480 $
18,884
103,364
3,822
406
4,228
107,592 $
83,412
18,803
102,215
3,652
282
3,934
106,149
Fiscal Year Ended
December 31,
2023
January 1,
2023
(In thousands)
$
$
$
$
86,207 $
3,538
437
90,182 $
9,118 $
47,948 $
4.3 years
4.7 years
6.1 %
5.4 %
86,170
3,504
289
89,963
3,859
74,829
3.8 years
5.0 years
3.8 %
4.9 %
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In accordance with ASC 842, maturities of finance and operating lease liabilities as of December 31, 2023 were as follows:
Fiscal Year Ending:
2024
2025
2026
2027
2028
Thereafter
Undiscounted cash flows
Reconciliation of lease liabilities:
Weighted-average remaining lease term
Weighted-average discount rate
Present values
Lease liabilities - current
Lease liabilities - long-term
Lease liabilities - total
Difference between undiscounted and discounted cash flows
(8)
Long-Term Debt
Finance
Leases
Operating
Leases
(In thousands)
4,711 $
4,253
3,928
2,706
1,788
594
17,980 $
4.3 years
6.1 %
15,699 $
3,843
11,856
15,699 $
2,281 $
82,480
68,846
51,708
34,726
23,497
36,288
297,545
4.7 years
5.4 %
261,550
70,372
191,178
261,550
35,995
$
$
$
$
$
The Company, Big 5 Corp. and Big 5 Services Corp. are parties to a Loan, Guaranty and Security Agreement with Bank of America, N.A.
(“BofA”), as agent and lender, which was amended on November 22, 2021, October 19, 2022 and May 16, 2023 (as so amended, the “Loan Agreement”).
The Loan Agreement has a maturity date of February 24, 2026 and provides for a revolving credit facility with an aggregate committed availability of up to
$150.0 million. The Company may also request additional increases in aggregate availability, up to a maximum of $200.0 million, in which case the
existing lender under the Loan Agreement will have the option to increase the commitment to accommodate the requested increase. If such existing lender
does not exercise that option, the Company may (with the consent of BofA in its role as the administrative agent, not to be unreasonably withheld) seek
other lenders willing to provide such commitments. The credit facility includes a $50.0 million sublimit for issuances of letters of credit.
The Company may borrow under the Loan Agreement from time to time, provided the amounts outstanding will not exceed the lesser of the
then aggregate committed availability (as discussed above) and the Borrowing Base (such lesser amount being referred to as the “Line Cap”). As defined in
the Loan Agreement, the “Borrowing Base” generally is comprised of the sum, at the time of calculation, of (a) 90.00% of eligible credit card receivables;
plus (b) the cost of eligible inventory (other than eligible in-transit inventory), net of inventory reserves, multiplied by 90.00% of the appraised net orderly
liquidation value of eligible inventory (expressed as a percentage of the cost of eligible inventory); plus (c) the cost of eligible in-transit inventory, net of
inventory reserves, multiplied by 90.00% of the appraised net orderly liquidation value of eligible in-transit inventory (expressed as a percentage of the cost
of eligible in-transit inventory), minus (d) certain agreed-upon reserves as well as other reserves established by BofA in its role as the administrative agent
in its reasonable discretion.
Generally, the Company may designate specific borrowings under the Loan Agreement as either base rate loans or Term SOFR rate loans.
The applicable interest rate on the Company’s borrowings is a function of the daily average, over the preceding fiscal quarter, of the excess of the Line Cap
over amounts borrowed (such amount being referred to as the “Average Daily Availability”). Those loans designated as Term SOFR rate loans bear interest
at a rate equal to the then applicable secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) rate plus a
0.10% “SOFR adjustment” spread, plus an applicable margin as shown in the table below. Those loans designated as base rate loans bear interest at a rate
equal to the applicable margin for base rate loans (as shown below) plus the highest of (a) the Federal funds rate, as in effect from time to time, plus one-
half of one percent (0.50%), (b) the one-month SOFR rate, plus one percentage point (1.00%), or (c) the rate of interest in effect for such day as announced
from time to time within BofA as its “prime rate.” The applicable margin for all loans is a function of Average Daily Availability for the preceding fiscal
quarter as set forth below.
Level
I
II
Average Daily Availability
Greater than or equal to $70,000,000
Less than $70,000,000
SOFR Rate
Applicable Margin
1.375%
1.500%
Base Rate
Applicable Margin
0.375%
0.500%
The commitment fee assessed on the unused portion of the credit facility is 0.20% per annum.
F-19
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Obligations under the Loan Agreement are secured by a general lien on and security interest in substantially all of the Company’s assets. The
Loan Agreement contains covenants that require the Company to maintain a fixed charge coverage ratio of not less than 1.0:1.0 in certain circumstances,
and limits the ability to, among other things, incur liens, incur additional indebtedness, transfer or dispose of assets, change the nature of the business,
guarantee obligations, pay dividends or make other distributions or repurchase stock, and make advances, loans or investments. The Company may
generally declare or pay cash dividends or repurchase stock only if, among other things, no default or event of default then exists or would arise from such
dividend or repurchase of stock and, after giving effect to such dividend or repurchase, certain availability and/or fixed charge coverage ratio requirements
are satisfied, although the Company is permitted to make up to $5.0 million of dividend payments or stock repurchases per year without satisfaction of the
availability or fixed charge coverage ratio requirements, but dividends or stock repurchases made without satisfying the availability and/or fixed charge
coverage ratio requirements will require the establishment of an additional reserve that will reduce borrowing availability under the Loan Agreement for 75
days. The Loan Agreement contains customary events of default, including, without limitation, failure to pay when due principal amounts with respect to
the credit facility, failure to pay any interest or other amounts under the credit facility, failure to comply with certain agreements or covenants contained in
the Loan Agreement, failure to satisfy certain judgments against the Company, failure to pay when due (or any other default which permits the acceleration
of) certain other material indebtedness in principal amount in excess of $5.0 million, and certain insolvency and bankruptcy events.
As of December 31, 2023 and January 1, 2023, the Company had no long-term revolving credit borrowings outstanding. As of December 31,
2023 and January 1, 2023, the Company had outstanding letter of credit commitments of $2.0 million and $1.4 million, respectively. Total remaining
borrowing availability, after subtracting letters of credit, was $148.0 million and $148.6 million as of December 31, 2023 and January 1, 2023, respectively.
(9)
Income Taxes
Income tax (benefit) expense consists of the following:
Fiscal 2023:
Federal
State
Fiscal 2022:
Federal
State
Current
Deferred
(In thousands)
Total
$
$
$
$
(28 ) $
(34 )
(62 ) $
2,958 $
1,745
4,703 $
(2,770 ) $
(666 )
(3,436 ) $
1,905 $
201
2,106 $
(2,798 )
(700 )
(3,498 )
4,863
1,946
6,809
The provision for income taxes differs from the amounts computed by applying the federal statutory tax rate of 21% to earnings before
income taxes, as follows:
Tax (benefit) expense at statutory rate
State tax (benefit) expense, net of federal tax effect
Tax credits
Change in valuation allowance
Additional deduction related to share-based compensation
Nondeductible expenses
Other
Fiscal Year Ended
December 31,
2023
January 1,
2023
(In thousands)
$
$
(2,222 ) $
(556 )
(452 )
(221 )
(119 )
104
(32 )
(3,498 ) $
6,918
1,734
(826 )
—
(1,321 )
259
45
6,809
Deferred tax assets and liabilities as of December 31, 2023 and January 1, 2023 are tax-effected based on the federal and state corporate
income tax rates.
F-20
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Deferred tax assets and liabilities consist of the following tax-effected temporary differences:
Deferred tax assets:
Employee benefit-related liabilities
Insurance liabilities
Net operating loss
Property, plant and equipment
Gift card liability
Deferred rent
Merchandise inventory
Disaster relief tax credits
Share-based compensation
Accrued legal fees
Allowance for sales returns
Other deferred tax assets
Gross deferred tax assets
Less: Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Prepaid expense
Federal liability on state deferred tax assets
Accrual for software as a service
Deferred tax liabilities
Net deferred tax assets
December 31,
2023
January 1,
2023
(In thousands)
$
$
2,864 $
2,633
2,343
1,801
1,768
1,307
1,139
968
884
473
239
72
16,491
—
16,491
(1,361 )
(1,094 )
(609 )
(3,064 )
13,427 $
2,781
2,654
—
816
1,594
1,632
1,103
63
810
60
324
863
12,700
(280 )
12,420
(992 )
(954 )
(483 )
(2,429 )
9,991
As of the end of fiscal 2023, the Company eliminated a valuation allowance of $0.3 million that was maintained as of the end of fiscal 2022
related to unused California Enterprise Zone Tax Credits which the Company was not able to carry forward beyond the 2023 tax year as a result of
California’s termination of this program. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and
projections of future taxable income over the periods during which the deferred tax assets are deductible, except as noted above, management believes it is
more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income are reduced. Certain prior period amounts were reclassified to conform with current period
presentation requirements.
The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of
limitations for its consolidated federal income tax returns are open for fiscal years 2020 and after, and state and local income tax returns are open for fiscal
years 2019 and after.
As of December 31, 2023 and January 1, 2023, the Company had no unrecognized tax benefits that, if recognized, would affect the
Company’s effective income tax rate over the next 12 months. The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expense. As of December 31, 2023 and January 1, 2023, the Company had no accrued interest or penalties.
F-21
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(10)
Earnings Per Share
The Company calculates earnings per share in accordance with ASC 260, Earnings Per Share, which requires a dual presentation of basic
and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted-average shares of common stock outstanding,
reduced by shares repurchased and held in treasury, during the period. Diluted earnings per share represents basic earnings per share adjusted to include the
potentially dilutive effect of outstanding share option awards, nonvested share awards and nonvested share unit awards. Diluted earnings per share was
computed using the treasury stock method for share option awards, nonvested share awards and nonvested share unit awards, if any.
The following table sets forth the computation of basic and diluted earnings per common share:
Net (loss) income
Weighted-average shares of common stock outstanding:
Basic
Dilutive effect of common stock equivalents arising
from share option and nonvested share awards
Diluted
Basic (loss) earnings per share
Diluted (loss) earnings per share
Antidilutive share option awards excluded
from diluted calculation
Antidilutive nonvested share awards excluded
from diluted calculation
Fiscal Year Ended
December 31,
2023
January 1,
2023
(In thousands, except per share data)
$
(7,083 ) $
26,134
$
$
21,749
—
21,749
(0.33 ) $
(0.33 ) $
165
410
21,634
455
22,089
1.21
1.18
16
185
The computation of diluted earnings per share for fiscal 2023 excludes all potential share option awards since the Company reported a net
loss, and the effect of their inclusion would have been antidilutive (i.e., including such share option awards would result in higher earnings per share). The
computation of diluted earnings per share in fiscal 2022 excludes certain share option awards since the exercise prices of these share option awards
exceeded the average market price of the Company’s common shares, and the effect of their inclusion would have been antidilutive.
The computation of diluted earnings per share for fiscal 2023 excludes all potential nonvested share awards since the Company reported a net
loss, and the effect of their inclusion would have been antidilutive. The computation of diluted earnings per share for fiscal 2022 excludes certain
nonvested share awards that were outstanding and antidilutive since the grant date fair values of these nonvested share awards exceeded the average market
price of the Company’s common shares.
(11)
Employee Benefit Plans
The Company has a 401(k) plan covering eligible employees. Employee contributions are supplemented by Company contributions subject
to 401(k) plan terms. The Company recognized employer matching and profit-sharing contributions of $1.3 million and $2.4 million for fiscal 2023 and
2022, respectively.
F-22
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(12) Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material effect on the Company’s results of operations or financial condition.
Recovery of Insurance Proceeds
In the fourth quarter of fiscal 2022, one of the Company’s stores qualified for loss recovery claims due to property damage sustained as a
result of a roof collapse, and the Company disposed of assets of approximately $0.4 million related to lost inventory and property and equipment. In the
third quarter of fiscal 2023, the Company reached an agreement with its insurance carrier and, after application of a deductible of $0.5 million, the
Company received, as part of the insurance recovery, a cash advance of $0.7 million in total, of which $0.6 million related to the reimbursement of lost
inventory and profit margin and $0.1 million related to the reimbursement of property and equipment. Accordingly, the Company recognized a gain of $0.3
million related to the recovery of lost inventory and profit margin and a gain of $25,000 related to the recovery of property and equipment. The gain related
to the recovery of lost inventory and profit margin is included in the accompanying consolidated statement of operations as a reduction to cost of goods
sold and the gain related to the recovery of lost property and equipment is included in the accompanying consolidated statement of operations as a
reduction to selling and administrative expense for fiscal 2023. Further recovery is expected in fiscal 2024.
Legal Proceedings
On March 13, 2023, a complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled Zareyah
Thompson v. Big 5 Corp., et. al., Case No. 23CV412334 (“Thompson Complaint”). The Thompson Complaint was brought as a purported California
Private Attorneys General Act (“PAGA”) action on behalf of “current and former employees who worked for the Company or its operating subsidiary in
California as a non-exempt, hourly paid employee and received at least one wage statement.” The Thompson Complaint alleges, among other things, that
Big 5 failed to (i) provide minimum wages, (ii) provide compliant meal or rest periods, (iii) maintain and provide accurate itemized wage statements, (iv)
properly compensate for all time worked, including overtime, premium, vacation and final wages, (v) properly maintain payroll records, and (vi) provide
suitable seating. On March 21, 2023, a second complaint was filed in the Superior Court of the State of California, County of Santa Clara, entitled
Christopher Puga v. Big 5 Corp., et. al., Case No. 23CV412953 (“Puga Complaint”). The Puga Complaint was brought as a purported PAGA action on
behalf of “all current and former non-exempt employees that worked either directly or via a staffing agency for the Company or its operating subsidiary at
any location in California” (“Putative Covered Employees”). The Puga Complaint alleges, among other things, that Big 5 (i) unlawfully required Putative
Covered Employees to agree to unlawful criminal background checks, (ii) conducted unlawful financial and criminal background checks, and did not (iii)
provide minimum wages, (iv) provide accurate itemized wage statements, (v) maintain accurate records pertaining to the Putative Covered Employees’
employment, (vi) produce or make available Putative Covered Employees’ personnel records and/or payroll records, (vii) provide compliant meal or rest
periods, (viii) properly compensate for all time worked, including overtime, premium, vacation, and final wages, (ix) reimburse necessary business
expenses; (x) provide suitable seating; (xi) provide sick leave pay to Putative Covered Employees, (xii) accurately calculate sick leave accrual and rate of
pay, (xiii) put the Putative Covered Employees on notice of their paid sick leave rights, and (xiv) provide supplemental paid sick leave. The Thompson and
Puga complaints have many overlapping causes of action. Accordingly, on or about April 12, 2023, a notice of related cases was filed with the Court
regarding the Thompson Complaint and Puga Complaint. The Court subsequently conducted a case management conference on June 29, 2023 for both
complaints, and jointly coordinated the complaints. The Company’s counsel held a mediation with opposing counsel on September 27, 2023. The Company
has reached a tentative settlement in both cases and established a cumulative indemnity reserve of $1.5 million. Any settlement finalized will be subject to
Court approval.
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters is not expected to have a material effect on the Company’s results of operations, financial condition or cash flows.
F-23
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(13)
Share-Based Compensation Plans
2019 Equity Incentive Plan
In April 2019, the Company adopted the 2019 Equity Incentive Plan, as amended and restated in June 2022 (“2019 Plan”), which replaced
the Company’s Amended and Restated 2007 Equity and Performance Incentive Plan (the “Prior Plan”). The amendment and restatement of the 2019 Plan
in June 2022 primarily authorized an additional 3,300,000 shares available for future grant. Awards under the 2019 Plan may consist of share option awards
(both incentive share option awards and non-qualified share option awards), stock appreciation rights, nonvested share awards, other stock unit awards or
dividend equivalents. Share option awards issued by the Company have typically been non-qualified share option awards, while nonvested share awards
and nonvested share unit awards issued by the Company have typically been based on the attainment of service-only conditions. Upon the adoption of the
2019 Plan, the Company stopped issuing awards under the Prior Plan, although the Company will continue to honor any outstanding awards under the Prior
Plan.
The 2019 Plan (i) permits the Company to issue a maximum of 7,148,803 shares of the Company’s common stock plus the number of any
additional shares that may thereafter become available as a result of the forfeiture, expiration or other cancellation of awards under any prior plans; and (ii)
expires on April 11, 2029.
Any share option awards or stock appreciation rights shall be counted against this limit as one share for every one share granted. Any shares
that are subject to awards other than share option awards or stock appreciation rights (including shares delivered on the settlement of dividend equivalents)
shall be counted against this limit as 2.5 shares for every one share granted. The aggregate number of shares available under the 2019 Plan and the number
of outstanding share option awards will be increased or decreased to reflect any changes in the outstanding common stock of the Company by reason of any
recapitalization, spin-off, reorganization, reclassification, stock dividend, stock split, reverse stock split, or similar transaction.
At its discretion, the Company grants share option awards, nonvested share awards and nonvested share unit awards to certain employees, as
defined by ASC 718, Compensation—Stock Compensation, under the 2019 Plan, and accounts for its share-based compensation in accordance with ASC
718. As of December 31, 2023, 3,563,101 shares remained available for future grant, and 253,385 share option awards, 634,227 nonvested share awards
and zero nonvested share unit awards remained outstanding.
The Company accounts for its share-based compensation in accordance with ASC 718 and recognizes compensation expense on a straight-
line basis over the requisite service period, net of estimated forfeitures, using the fair-value method for share option awards, nonvested share awards and
nonvested share unit awards granted with service-only conditions. The estimated forfeiture rate considers historical employee turnover rates stratified into
employee pools in comparison with an overall employee turnover rate, as well as expectations about the future. The Company periodically revises the
estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recorded under this method for fiscal
2023 and 2022 was $2.7 million and $2.5 million, respectively, which reduced operating income and income before income taxes by the same amount.
Compensation expense recognized in cost of sales was $0.1 million in fiscal 2023 and 2022 and compensation expense recognized in selling and
administrative expense was $2.6 million and $2.4 million in fiscal 2023 and 2022, respectively. The recognized tax benefit related to compensation expense
for fiscal 2023 and 2022 was $0.9 million and $0.5 million, respectively. Net loss for fiscal 2023 and net income for fiscal 2022 reflects the net-of-tax
charge of $1.8 million and $2.0 million, respectively, or $0.08 and $0.09 per basic and diluted share, respectively.
F-24
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Share Option Awards
Share option awards granted by the Company generally vest and become exercisable in four equal installments of 25% per year with a
maximum life of ten years. The exercise price of share option awards is equal to the quoted market price of the Company’s common stock on the date of
grant. No share option awards were granted in fiscal 2023. The Company granted 10,000 share option awards with a weighted-average grant-date fair value
of $5.46 per share option award in fiscal 2022.
The following table details the Company’s share option awards activity for the current fiscal year:
Outstanding at January 1, 2023
Exercised
Forfeited
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Vested and Expected to Vest at December 31, 2023
Weighted-
Average
Remaining
Contractual
Life
(In Years)
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
$4.24
2.96
3.27
$4.47
$4.21
$4.47
5.78
5.51
5.78
$728,550
$510,325
$728,475
Shares
300,035
(39,325)
(7,325)
253,385
187,789
253,301
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based upon the Company’s closing stock price
of $6.34 per share as of December 31, 2023, which would have been received by the share option award holders had all share option award holders
exercised their share option awards as of that date.
The total intrinsic value of share option awards exercised, the total cash received from employees as a result of employee share option award
exercises and the actual tax benefit realized for the tax deduction from share option award exercises in fiscal 2023 was approximately $0.2 million, $0.1
million and $0.1 million, respectively.
The fair value of each share option award on the date of grant was estimated using the Black-Scholes method based on the following
weighted-average assumptions:
Risk-free interest rate
Expected term
Expected volatility
Expected dividend yield
Fiscal Year Ended
December 31,
2023
January 1,
2023
—
—
—
—
2.7 %
6.5 years
80.8 %
7.4 %
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected
term of the option award; the expected term represents the weighted-average period of time that option awards granted are expected to be outstanding
giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the
Company’s common stock; and the expected dividend yield is based upon the Company’s dividend rate at the time fair value is measured and future
expectations.
As of December 31, 2023, there was $0.1 million of total unrecognized compensation expense related to nonvested share option awards
granted. That expense is expected to be recognized over a weighted-average period of 0.5 years.
Nonvested Share Awards and Nonvested Share Unit Awards
Nonvested share awards granted by the Company vest for employees from the date of grant in four equal annual installments of 25% per
year. Nonvested share awards and nonvested share unit awards granted by the Company to non-employee directors for their service as directors, as defined
by ASC 718, vest 100% on the earlier of (a) the date of the Company’s next annual stockholders meeting following the grant date, or (b) the first
anniversary of the grant date.
F-25
BIG 5 SPORTING GOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Nonvested share awards become outstanding when granted and are delivered to the recipient upon their vesting. Vested share unit awards,
including any dividend reinvestments, are delivered to the recipient on the tenth business day of January following the year in which the recipient’s service
to the Company is terminated, at which time the units convert to shares and become outstanding. Outstanding nonvested share awards and nonvested share
unit awards accrue dividends at the same rate as dividends paid to the Company’s shareholders. Accrued dividends on nonvested share awards are paid
upon vesting of the underlying shares and forfeited if a recipient’s service to the Company is terminated prior to vesting. Accrued dividends on nonvested
share unit awards are reinvested into additional nonvested share unit awards, vest on the same schedule as the underlying share unit awards, and are settled
at the same time as the underlying share unit awards. The total fair value of nonvested share awards which vested during fiscal 2023 and 2022 was $2.0
million and $3.3 million, respectively. No nonvested share unit awards vested during fiscal 2023 and 2022. On January 14, 2022, the Company delivered
124,012 shares from previously vested share unit awards, which included dividend reinvestments, to a Board member who retired in November 2021.
The Company granted 327,112 and 284,630 nonvested share awards in fiscal 2023 and 2022, respectively, with a weighted-average grant-
date fair value per share of $7.91 and $15.03 in fiscal 2023 and 2022, respectively.
The following table details the Company’s nonvested share awards activity for the current fiscal year:
Balance at January 1, 2023
Granted
Vested
Forfeited
Balance at December 31, 2023
Weighted-
Average
Grant-
Date Fair
Value
11.64
7.91
9.65
10.48
10.56
Shares
587,675 $
327,112
(250,055 )
(30,505 )
634,227 $
To satisfy employee minimum statutory tax withholding requirements for nonvested share awards that vest, the Company withholds and
retires a portion of the vesting common shares, unless an employee elects to pay cash. In fiscal 2023, the Company withheld 80,065 common shares with a
total value of $0.6 million. This amount is presented as a cash outflow from financing activities in the Company’s consolidated statement of cash flows.
As of December 31, 2023, dividends accrued but not paid related to nonvested share awards were $1.2 million.
The Company granted no nonvested share unit awards in fiscal 2023 and 2022.
As of December 31, 2023, there were 196,418 cumulative vested share unit awards remaining, of which 82,265 of these awards represented
cumulative dividend reinvestments. These cumulative vested share unit awards are deliverable to the holders on the tenth business day of January following
the year in which the holder’s service to the Company terminates, at which time the units convert to shares of the Company’s common stock and become
outstanding.
As of December 31, 2023, there was $4.6 million of total unrecognized compensation expense related to nonvested share awards, which is
expected to be recognized over a weighted-average period of 2.1 years. There was no remaining unrecognized compensation expense related to nonvested
share unit awards.
(14) Subsequent Event
In the first quarter of fiscal 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding
common stock, which will be paid on March 22, 2024 to stockholders of record as of March 8, 2024.
In the first two months of fiscal 2024, the Company closed six stores, including four underperforming stores and one store that was
previously damaged by severe rain, lowering the store count to 424 at the end of fiscal February 2024.
F-26
BIG 5 SPORTING GOODS CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Deductions
Balance at
End of Period
December 31, 2023
Allowance for doubtful receivables
Allowance for sales returns
Inventory reserves
January 1, 2023
Allowance for doubtful receivables
Allowance for sales returns
Inventory reserves
$
$
$
$
$
$
44
2,324
5,464
62
2,528
5,547
$
$
$
$
$
$
(1)
48
(602 )
4,034
(1)
61
(204 )
3,836
$
$
$
$
$
$
(44 )
—
(4,738 )
(79 )
—
(3,919 )
$
$
$
$
$
$
48
1,722
4,760
44
2,324
5,464
(1)
Represents an increase (decrease) in the required reserve based upon the Company’s evaluation of anticipated merchandise returns.
II
Exhibit 19.1
BIG 5 SPORTING GOODS CORPORATION POLICY
ON
INSIDER TRADING AND UNAUTHORIZED DISCLOSURES
and Guidelines with Respect to
Certain Transactions in Company Securities
(AMENDED AND RESTATED AS OF OCTOBER 26, 2023)
The following information regarding our policy on insider trading and unauthorized disclosures of Inside
Information may be summarized very simply: IT IS ILLEGAL to trade in the Company's securities if you are
in possession of Inside Information. DO NOT trade on or pass to others Inside Information about the
Company or those with whom the Company has business relationships. To do so could have grave
consequences for you, for them and for the Company.
General Policy Regarding Inside Information
The Company's policy on Inside Information is simple: You may not trade in the Company's securities when you are in
possession of Inside Information (subject to the very limited exceptions described below). You may not disclose Inside
Information unless you are authorized to do so. Violation of this policy may subject you to criminal and civil liability and may
constitute grounds for disciplinary action, including termination of your employment by the Company. Please note that, as used
herein, the term "the Company" refers to Big 5 Sporting Goods Corporation and its direct and indirect subsidiaries.
Applicability of Policy
Our Policy on Insider Trading and Unauthorized Disclosures (the "Policy") applies:
•
•
To you, as an employee, officer, member of the board of directors of, or consultant to, Big 5 Sporting Goods
Corporation or its direct or indirect subsidiaries (the "Company"). In addition, your spouse or partner, minor
children, other relatives residing in your home, trusts or other entities in which you or they have a beneficial
interest, and trusts and other accounts over which you or they exercise control or investment influence (collectively,
“Family”) also are restricted by this Policy.
To all transactions in the Company's securities, including common stock, options for common stock and any other
securities that the Company may issue from time to time, such as preferred stock, warrants and debentures, as well
as to derivative securities relating to the Company's securities, whether or not issued by the Company, such as
exchange-traded options.
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What is Inside Information?
"Inside Information" is any information (either positive or negative) that a reasonable investor would consider
important in deciding whether to buy or sell the Company's securities that has not been publicly disclosed by means of a
press release or a Securities and Exchange Commission ("SEC") filing. This information continues to be "Inside
Information" until it has been so disclosed to the general public. For purposes of the restrictions set forth in this Policy,
information will cease to be Inside Information at the commencement of trading on the Nasdaq Stock Market on the second
trading day after its public release by the Company.
While it is not possible to define all categories of Inside Information, any information relating to the affairs of the
Company and its business, operations, assets or ownership that would reasonably be expected to result in a change in the market
price or value of any of the Company's securities should be considered to be Inside Information.
Although it may be difficult to determine whether particular information is Inside Information, various categories of
information are particularly sensitive and, as a general rule, should always be considered Inside Information. Examples include
information about and plans and proposals regarding:
Financial results, including sales results
•
Projections of future revenues, earnings or losses
•
•
Issues relating to the Company's accounting methods
• News of a pending or proposed merger or other acquisition
• News of a tender offer or exchange offer involving the Company
•
Significant joint ventures, alliances or strategic partnerships
• News of the disposition of a subsidiary
•
•
•
•
•
•
• New equity or debt offerings or other material financing transactions
•
•
•
• Major changes in senior management
• Major labor disputes
• Major disputes with material contractors or suppliers
The gain or loss of a substantial supplier or contract
Changes in dividend policy
Significant new product announcements
Significant product defects
Significant pricing changes
Stock splits, stock dividends or stock buy-backs
Impending bankruptcy or financial liquidity problems
Significant new or threatened litigation or developments in major litigation
Significant actions by regulatory bodies
The foregoing list is for illustration only and is not exhaustive. Other types of information may be considered Inside
Information at particular times, depending upon the circumstances. Finally, remember that either positive or negative
information may be Inside Information.
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Criminal and Civil Liability
Liability for Insider Trading. It is illegal to trade in the Company's securities while in possession of Inside Information.
Under the federal securities laws, if you purchase or sell securities of the Company (including derivative securities) while in the
possession of Inside Information:
• You may be liable to other traders in the amount of profit you make or loss you avoid.
•
•
The SEC can bring an action against you to recover civil penalties of up to three times the amount of profit you
make or loss you avoid.
If your transaction was willful, the SEC may bring an action against you for criminal penalties of up to twenty years'
imprisonment and $5 million in fines.
• A federal court may enjoin you (temporarily or permanently) from serving as an officer or director of any public
company.
Liability for Tipping. If you disclose Inside Information to another person (called a "tippee") who then purchases or sells
securities of the Company or who in turn discloses such information to someone else who then purchases or sells the Company's
securities, you may be liable for the same civil penalties as if you had engaged in the transaction directly. This is true whether or
not you profit from the tippee's trading.
The Size of Your Transaction Doesn't Matter. The size of the transaction or the amount of profit received by you or the
tippee does not have to be large to result in prosecution. The SEC and other securities regulators have the ability to monitor even
the smallest trades and find people violating these rules by engaging in routine market surveillance. Brokers and dealers who
handle stock and option transactions for the Company or individuals are required by law to inform the SEC and other securities
regulators of any possible violations by people who may have Inside Information. The SEC aggressively investigates even small
insider trading violations.
Your Reason for Trading Doesn’t Matter. Even if your prospective trade in the Company's securities is necessary or
justifiable for an independent reason, such as a personal financial emergency or a broker's margin call, or (subject to the limited
exceptions described below) even if the trade was planned well before you came into possession of the Inside Information, you
still may not trade if you possess Inside Information, for these are not exceptions to the SEC's rules against trading on Inside
Information.
Risks to the Company
Insider trading also poses significant risks to the Company. First, if you trade on Inside Information, the SEC can bring
an action against the Company (and, potentially, individuals who may be deemed to control the Company) to recover civil
penalties of up to the greater of $1 million or three times the amount of profit you make or loss you avoid. Second, disclosure of
even small amounts of Inside Information could require the Company under federal securities laws to make complete disclosure
regarding the matter in question
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before it is otherwise obligated to do so (that is, if the story is disclosed selectively or only part of the story is disclosed to the
general public, the Company may have a duty to publicly disclose the full story). Third, disclosure of any Inside Information
could damage the Company's competitive position, jeopardize important strategic plans and threaten or eliminate opportunities
such as acquisitions or financings.
Specific Company Policies
In an effort to safeguard the Company's Inside Information and to avoid violation of the federal securities laws, the
Company requires you to observe the following policies:
Do Not Trade on Inside Information. Do not buy or sell or make donations of securities of the Company while you are
in possession of Inside Information or during any trading "blackout period" that applies to you (see below).
You may not trade until the commencement of trading on the Nasdaq Stock Market on the second trading day after
public release by the Company of any Inside Information you possess.
Do Not Engage in Short Sales or Derivatives Transactions. Do not engage in any short sale of securities of the
Company. Do not engage in any transaction involving puts, calls, "collars," warrants or other options on the Company's
securities or any other derivative securities relating to the Company's securities (except for the exercise of options issued by the
Company under employee benefit plans; note that there is no such exception for the sale of common stock acquired upon exercise
of stock options—the Policy applies to all such sales). Under appropriate circumstances, the Company may by advance written
consent permit limited exceptions to this derivative securities policy.
Keep Inside Information Confidential. All nonpublic information relating to the Company, including Inside Information,
is the property of the Company. Do not disclose any nonpublic information, including Inside Information, to any person who is
not an employee of the Company except as and then only to the extent required in the performance of your regular corporate
duties on behalf of the Company. Avoid unnecessary communications with other employees or consultants of the Company
about Inside Information.
Family and Friends. There is no exception to the confidentiality of the Company's nonpublic information for family
members or friends. Do not disclose Inside Information to family members or friends. Do not permit any member of your
Family (defined above) or anyone acting on your behalf to buy or sell securities of the Company while you are in possession of
Inside Information.
Don't "Tip" or Tout the Company's Stock. Do not "tip" anyone. Do not recommend to anyone else that he or she buy
or sell securities of the Company when you are in possession of Inside Information. In addition, the Company advises you not to
recommend trading in the Company's securities to anyone else, even if you believe that you do not know any Inside Information.
Remember that "tipping" Inside Information is always prohibited and that your recommendation could be attributed to the
Company and may be misleading if you do not have all relevant information. Your recommendation will be
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reviewed with 20/20 hindsight. You should not pass on analysts' comments or recommendations.
Analysts, Media and Investors. If you receive inquiries about the Company from securities analysts, reporters, potential
investors or others, you must decline comment and direct them to the Company's designated spokespersons. Only the Company's
Chief Executive Officer, Chief Financial Officer and any employees that either of them specifically designate are authorized to
disclose Inside Information on behalf of the Company to, or otherwise communicate about the Company with, analysts, the
media or investors.
Be Careful with Inside Information. Do not discuss Inside Information where it may be overheard, such as in
restaurants, elevators, restrooms, and other public places. Remember that cellular phone conversations may be monitored and
voice mail, e-mail and text messages may be retrieved by persons other than their intended recipients. Keep all memoranda,
correspondence and other documents that reflect Inside Information in a secure place, such as a locked office or a locked file
cabinet. Unless otherwise advised, follow the Company's normal policies with respect to whether to retain the information and if
so for how long.
Trading Guidelines
Blackout Periods/Trading Windows. Because current financial information about the Company is so important to the
trading public, the Company imposes certain "blackout" periods (“Blackout Periods”) during which officers, directors and
specified employees as well as members of their Families (collectively, the “Covered Persons”) may not engage in any trading of
the Company’s securities. Other employees or consultants in sensitive positions may also be subject to these restrictions. You
will be notified if you are a Covered Person subject to Blackout Periods.
Subject to certain limited exceptions outlined below, Blackout Periods apply to all transactions in the Company's
securities, including common stock, options for common stock and any other securities that the Company may issue from time to
time, such as preferred stock, warrants and convertible debentures, as well as to derivative securities relating to the Company's
securities, whether or not issued by the Company, such as exchange-traded options.
The period beginning with the third month of each fiscal quarter and ending on the second trading day following the date
of public disclosure of the financial results for that quarter is a particularly sensitive period of time for transactions in the
Company's securities from the perspective of compliance with applicable securities laws. This sensitivity is due to the fact that
officers, directors and certain other employees will, during that period, often possess Inside Information about the expected
financial results for the quarter.
Accordingly, to ensure compliance with the Policy and applicable federal and state securities laws, the Company requires
that all Covered Persons refrain from conducting transactions involving the purchase, sale, donation or other transfer of the
Company's securities (other than a distribution or transfer of shares that does not constitute a change in
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beneficial ownership of such shares) other than during the period (the "Trading Window") commencing (i) in the first quarter of
each fiscal year, at the opening of trading on The Nasdaq Stock Market on the second trading day following the date of
public disclosure of the financial results for the preceding year and continuing until the close of business two weeks
thereafter and (ii) in the second, third and fourth quarters of each fiscal year, at the opening of trading on The Nasdaq
Stock Market on the second trading day following the date of public disclosure of the financial results for the preceding
fiscal quarter and continuing until the close of business on the last day of the second month of the fiscal quarter. No
trading (other than pursuant to an approved 10b5-1 trading plan) should ever occur during the Blackout Period.
From time to time, the Company may also require that certain persons suspend trading because of developments known
to the Company and not yet disclosed to the public. In such event, such persons should not engage in any transaction involving
the purchase or sale of the Company's securities during such period and should not disclose to others the fact of such suspension
of trading.
Be aware, however, that even during the Trading Window, if you possess Inside Information concerning the Company you
should not engage in any transactions in the Company's securities until such information has been known publicly for at least one
full trading day or such information is no longer material, whether or not the Company has recommended a suspension of trading
to you. Trading in the Company's securities during the Trading Window should not be considered a "safe harbor," and all
Covered Persons should use good judgment at all times in conducting transactions in the Company's securities.
Individual Responsibility. You have the individual responsibility to comply with this Policy against insider trading, even
if the Company has not imposed a Blackout Period on you or anyone else. The guidelines set forth in this Policy are guidelines
only. You should exercise appropriate judgment in connection with any trade in the Company's securities. Be aware that (subject
to the limited exceptions described below) you may, from time to time, have to forego a proposed transaction in the Company's
securities even if you planned to make the transaction before learning of Inside Information and even though you believe you
may suffer an economic loss or forego anticipated profit by waiting.
Post-Termination Restrictions. Please note that if your employment with or service as a Covered Person of the Company
ceases for any reason, you will continue to be subject to any applicable Trading Window or Blackout Period for a 90-day period
after you leave the Company. After the 90-day period has expired, you will no longer be subject to the Trading Windows or
Blackout Periods. However, even if you are not subject to any Trading Window or Blackout Period, you cannot trade in the
Company’s securities following termination of your service to the Company if you are in possession of Inside Information.
Confidential Information of Other Companies
In addition to Inside Information about the Company, you may become aware of similar confidential information about
other companies, such as suppliers, customers, or competitors, whose securities are publicly traded. In such a situation, you must
handle the
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confidential information of the other company according to the same rules that apply to the Company's Inside Information. You
can be liable for trading on the basis of material non-public information in any publicly-traded company's securities. In
addition, disclosure or improper use of any confidential information of another company may violate the terms of a non-
disclosure or confidentiality agreement entered into by the Company and/or jeopardize the Company's business relationships.
Online Exchanges of Information Regarding the Company
In addition to the Company's policies regarding Inside Information, you are prohibited from disclosing Inside
Information regarding the Company or its financial condition, results of operation, stock price, technology or other information
by any means of communication, including any disclosure through online chat rooms, message boards, social media such as
Facebook, Twitter or comparable media. The Company has adopted this policy in order to avoid the possibility that statements
made by its directors, officers or employees in these media could be attributed to the Company.
No Comment Policy Regarding Rumors
The Company has implemented a "no comment" policy with respect to market rumors about the Company. Accordingly,
the Company will always respond to market rumors by issuing a statement to the effect that "it is our policy not to comment on
market rumors or speculation". You should be aware that any failure to provide consistent responses to market rumors could
constitute tipping. As mentioned above, only the Company’s Chief Executive Officer, Chief Financial Officer and any
employees that either of them specifically designate are authorized to disclose Inside Information on behalf of the Company to, or
otherwise communicate about the Company with, analysts, the media or investors.
Certain Limited Exceptions
Company Stock Options and Employee Stock Purchase Plans. You may exercise options granted by the Company or
purchase shares pursuant to any employee stock purchase plan the Company may establish regardless of whether you are in
possession of Inside Information or whether the Company has established a Blackout Period. However, and very importantly, the
sale or transfer of any shares of the Company's common stock that you receive upon exercise of your Company stock options or
that you purchase pursuant to any employee stock purchase plan is not subject to this limited exception.
Withholding of Taxes for Restricted Stock and Restricted Stock Units. The Company may withhold shares otherwise
issuable to you upon the vesting of restricted stock or restricted stock units in order to satisfy your income tax withholding
obligations regardless of whether you are in possession of Inside Information or whether the Company has established a Blackout
Period, as long as either such withholding is automatic, or, if you have the ability to elect to choose between satisfying such
obligations in cash or withheld stock, you do not make or change any such election during a Blackout Period or while in
possession of Inside Information. However, and very importantly, the sale or transfer of
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any shares of the Company's common stock that you receive in respect of restricted stock or restricted stock unit awards is not
subject to this limited exception.
Dividend Reinvestment Plan. You may acquire shares through the regular reinvestment of dividends under a dividend
reinvestment program sponsored by the Company or its transfer agent regardless of whether you are in possession of Inside
Information or whether the Company has established a Blackout Period. However, an election to begin, increase or terminate
participation in such a plan may not be made during a Blackout Period or while in possession of Inside Information. In addition,
shares acquired through a dividend reinvestment plan may not be sold during a Blackout Period or while in possession of Inside
Information.
Certain Pre-Planned Trades. Notwithstanding your possession of Inside Information or the existence of a Blackout
Period, you may trade in the Company's securities in accordance with a Rule 10b5-1 trading plan you adopt that complies with
the affirmative defense requirements set forth in Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended, subject
to the following important conditions. First, your Rule 10b5-1 trading plan (or any proposed modifications to your Rule 10b5-1
trading plan) must be submitted to and preapproved by the Company's General Counsel or his or her designee prior to its
adoption. Second, your Rule 10b5-1 trading plan may only be adopted or modified if it has been entered into in good faith at a
time when you were not in possession of Inside Information about the Company and not otherwise in a Blackout Period, and you
have acted in good faith with respect to the Rule 10b5-1 trading plan. Third, you may not have multiple overlapping Rule 10b5-1
trading plans except under the limited circumstances permitted by Rule 10b5-1 and subject to preapproval by Company's General
Counsel or his or her designee. Fourth, you may not trade in the Company’s securities pursuant to your Rule 10b5-1 trading plan
during any “cooling-off” period required by the Securities Exchange Act of 1934, as amended, and in no event within (a) 30 days
after adoption or modification of your Rule 10b5-1 trading plan if you are not a Section 16 Reporting Person (defined in the
below section), and (b) the later of 90 days after adoption or modification of your Rule 10b5-1 trading plan or two business days
after filing the Form 10-K or Form 10-Q disclosing financial results covering the fiscal quarter in which your Rule 10b5-1 trading
plan was adopted, up to a maximum of 120 days. Fifth, if you are a Section 16 Reporting Person, then your Rule 10b5-1 trading
plan shall include a representation certifying that at the time of the adoption of a new or modified Rule 10b5-1 trading plan: (1)
you are not aware of material nonpublic information about the Company or its securities; and (2) you are adopting the Rule 10b5-
1 trading plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. Please understand that
the foregoing conditions are in addition to any other requirements of the Securities Exchange Act of 1934, as amended, and that
neither the Company nor the Company's General Counsel nor any other director, officer, employee or representative of the
Company is making or will make any representation or warranty as to whether a Rule 10b5-1 trading plan you adopt complies
with the requirements of Rule 10b5-1 or any other applicable securities laws. Compliance with those requirements is solely your
responsibility. Additionally, it is your responsibility to pre-clear with the Company's General Counsel or his or her designee, and
report to the Company upon your entering into or modifying, a Rule 10b5-1 trading plan so that the Company may comply with
the Company’s public disclosure obligations in its annual and quarterly filings.
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Directors and Executive Officers Subject to Section 16
Persons Subject to Section 16. Directors and executive officers1 of the Company, as well as their family members and
related entities (e.g., trusts and partnerships) (collectively, "Section 16 Reporting Persons"), must comply with the reporting
obligations and limitations on short-swing transactions set forth in Section 16 of the Securities Exchange Act of 1934, as
amended. The practical effect of these provisions is that Section 16 Reporting Persons who purchase and sell the Company's
securities within a six-month period must disgorge all profits to the Company, whether or not they had knowledge of any Inside
Information. Moreover, no executive officer or director may ever make a short sale of the Company's stock, or an equivalent
transaction, such as selling put options.
Covered Transactions. In general, Section 16 Reporting Persons must file a report within two business days of a change
in ownership of the Company's securities. This includes not only open-market purchases and sales of Company stock, but also
transactions with the Company (e.g., stock option issuances). The two-business day filing requirement also applies to purchases
or sales of Company stock pursuant to any Rule 10b5-1 trading plan set up with a broker. (Remember that all Rule 10b5-1
trading plans and modifications thereto must be pre-cleared with the Company's General Counsel or his or her designee.)
If you are unavailable to execute a Form 4 when necessary to permit a timely filing, we will, at your request, prepare,
file and execute the form on your behalf using a power of attorney. (Please contact the Company's General Counsel if you have
not yet executed a power of attorney for Section 16 reports and wish to do so.) Remember, however, that you are personally
responsible for the timely filing of all required Section 16 reports.
Prior Clearance of Trades. All Section 16 Reporting Persons must pre-clear any transaction involving the Company's
securities (including exercises of stock options, gifts, loans, contributions to a trust or any other transfers), even outside of a
Blackout Period, with the Company's General Counsel or his or her designee. A request for pre-clearance should be submitted to
the General Counsel or his or her designee at least two business days in advance of the proposed transaction. Neither the General
Counsel nor his or her designee is under any obligation to approve a transaction submitted for pre-clearance and may determine
not to permit the trade.
Transactions effected pursuant to a 10b5-1 trading plan that has been approved by the Company’s General Counsel or his
or her designee do not require further pre-clearance at the time of the transaction if the approved Rule 10b5-1 trading plan (a)
specifies the dates, prices and amounts of the contemplated trades, (b) establishes a formula for determining the dates, prices and
amounts, or (c) prohibits you from exercising any subsequent influence over the transactions. However, any such transactions (i)
must comply with any “cooling-off” period required by the Securities Exchange Act of 1934, as amended, (ii) must be reported
immediately to the General Counsel or his or her designee, and (iii) are subject to
_________________________________
1 For purposes of Section 16, an executive officer includes the Company's president, principal financial officer, principal
accounting officer, any vice-president in charge of a principal business unit, division or function (such as sales, administration or
finance) and any other officer who performs a policy making function for the Company.
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the two-business day Section 16 reporting requirement. If the Rule 10b5-1 trading plan specifies in advance the dates on which
trades will be executed (e.g., on the 15th day of each month), then a Form 4 reporting each trade must be filed with the SEC
within two business days after the date of execution. If you do not select in advance the date of execution of the transaction, for
purposes of determining the start of the two-business day period, the SEC deems the trade date to be the date your broker or
dealer notifies you the transaction has been executed; however, the Form 4 must be filed no later than five business days after the
actual date the trade is executed.
Sanctions. The Company must report any late or delinquent Section 16 filings in its proxy statement, with the name of
the late filer. The SEC also has broad authority to impose other sanctions as appropriate. Therefore, your compliance with these
procedures is imperative.
* * *
Please remember that violation of any of the laws prohibiting insider trading can result in both civil and criminal
penalties as well as great embarrassment to you and the Company.
It is the Company's policy to cooperate fully with the SEC and other governmental and regulatory authorities in
investigating possible violations by employees and others of applicable laws and regulations. If appropriate, the Company will
assist authorities in the prosecution of persons who engage in illegal conduct.
Please contact the Company's General Counsel if you have any questions about this Policy or its application to any
specific set of facts.
YOUR OBSERVANCE OF THE FOREGOING POLICY IS EXTREMELY IMPORTANT. VIOLATION
OF ANY PORTION OF THIS POLICY IS A VERY SERIOUS MATTER AND MAY CONSTITUTE
GROUNDS FOR DISCIPLINARY ACTION OR TERMINATION OF YOUR EMPLOYMENT BY THE
COMPANY.
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-149730, 333-179602, 333-215545, 333-234317, and 333-
268129 on Form S-8 of our reports dated February 28, 2024, relating to the financial statements of Big 5 Sporting Goods Corporation and
the effectiveness of Big 5 Sporting Goods Corporation's internal control over financial reporting appearing in this Annual Report on Form
10-K for the year ended December 31, 2023.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 28, 2024
CERTIFICATIONS
Exhibit 31.1
I, Steven G. Miller, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Big 5 Sporting Goods Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 28, 2024
/s/ Steven G. Miller
Steven G. Miller
President and Chief Executive Officer
CERTIFICATIONS
Exhibit 31.2
I, Barry D. Emerson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Big 5 Sporting Goods Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 28, 2024
/s/ Barry D. Emerson
Barry D. Emerson
Executive Vice President, Chief Financial
Officer and Treasurer
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Big 5 Sporting Goods Corporation (the “Company”) for the
period ending December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Steven G. Miller, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Steven G. Miller
Steven G. Miller
President and Chief Executive Officer
February 28, 2024
A signed original of this written statement required by Section 906 has been provided to Big 5 Sporting Goods Corporation and
will be retained by Big 5 Sporting Goods Corporation and furnished to the Securities and Exchange Commission or its staff upon
request.
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Big 5 Sporting Goods Corporation (the “Company”) for the
period ending December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Barry D. Emerson, Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Barry D. Emerson
Barry D. Emerson
Executive Vice President, Chief Financial Officer
and Treasurer
February 28, 2024
A signed original of this written statement required by Section 906 has been provided to Big 5 Sporting Goods Corporation and
will be retained by Big 5 Sporting Goods Corporation and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 97.1
BIG 5 SPORTING GOODS CORPORATION
POLICY FOR RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION
Big 5 Sporting Goods Corporation, a Delaware corporation (the “Company”) has adopted this Policy for Recovery of
Erroneously Awarded Compensation (the “Policy”), effective as of October 2, 2023 (the “Effective Date”). Capitalized terms
used in this Policy but not otherwise defined herein are defined in Section 11.
1.
Persons Subject to Policy
This Policy shall apply to current and former Officers of the Company.
2. Compensation Subject to Policy
This Policy shall apply to Incentive-Based Compensation received on or after the Effective Date. For purposes of this
Policy, the date on which Incentive-Based Compensation is “received” shall be determined under the Applicable Rules, which
generally provide that Incentive-Based Compensation is “received” in the Company’s fiscal period during which the relevant
Financial Reporting Measure is attained or satisfied, without regard to whether the grant, vesting or payment of the Incentive-
Based Compensation occurs after the end of that period.
3. Recovery of Compensation
In the event that the Company is required to prepare a Restatement, the Company shall recover, reasonably promptly, the
portion of any Incentive-Based Compensation that is Erroneously Awarded Compensation, unless the Committee has determined
that recovery would be Impracticable. Recovery shall be required in accordance with the preceding sentence regardless of
whether the applicable Officer engaged in misconduct or otherwise caused or contributed to the requirement for the Restatement
and regardless of whether or when restated financial statements are filed by the Company. For clarity, the recovery of
Erroneously Awarded Compensation under this Policy will not give rise to any person’s right to voluntarily terminate
employment for “good reason,” or due to a “constructive termination” (or any similar term of like effect) under any plan,
program or policy of or agreement with the Company or any of its affiliates.
4. Manner of Recovery; Limitation on Duplicative Recovery
The Committee shall, in its sole discretion, determine the manner of recovery of any Erroneously Awarded
Compensation, which may include, without limitation, reduction or cancellation by the Company or an affiliate of the Company
of Incentive-Based Compensation or Erroneously Awarded Compensation, reimbursement or repayment by any person subject to
this Policy of the Erroneously Awarded Compensation, and, to the extent permitted by law, an offset of the Erroneously Awarded
Compensation against other compensation payable by the Company or an affiliate of the Company to such person.
Notwithstanding the foregoing, unless otherwise
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1
prohibited by the Applicable Rules, to the extent this Policy provides for recovery of Erroneously Awarded Compensation
already recovered by the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 or Other Recovery Arrangements,
the amount of Erroneously Awarded Compensation already recovered by the Company from the recipient of such Erroneously
Awarded Compensation may be credited to the amount of Erroneously Awarded Compensation required to be recovered pursuant
to this Policy from such person.
5. Administration
This Policy shall be administered, interpreted and construed by the Committee, which is authorized to make all
determinations necessary, appropriate or advisable for such purpose. The Board of Directors of the Company (the “Board”) may
re-vest in itself the authority to administer, interpret and construe this Policy in accordance with applicable law, and in such event
references herein to the “Committee” shall be deemed to be references to the Board. Subject to any permitted review by the
applicable national securities exchange or association pursuant to the Applicable Rules, all determinations and decisions made by
the Committee pursuant to the provisions of this Policy shall be final, conclusive and binding on all persons, including the
Company and its affiliates, equityholders and employees. The Committee may delegate administrative duties with respect to this
Policy to one or more directors or employees of the Company, as permitted under applicable law, including any Applicable Rules.
6.
Interpretation
This Policy will be interpreted and applied in a manner that is consistent with the requirements of the Applicable Rules,
and to the extent this Policy is inconsistent with such Applicable Rules, it shall be deemed amended to the minimum extent
necessary to ensure compliance therewith.
7. No Indemnification; No Liability
The Company shall not indemnify or insure any person against the loss of any Erroneously Awarded Compensation
pursuant to this Policy, nor shall the Company directly or indirectly pay or reimburse any person for any premiums for third-party
insurance policies that such person may elect to purchase to fund such person’s potential obligations under this Policy. None of
the Company, an affiliate of the Company or any member of the Committee or the Board shall have any liability to any person as
a result of actions taken under this Policy.
8. Application; Enforceability
Except as otherwise determined by the Committee or the Board, the adoption of this Policy does not limit, and is
intended to apply in addition to, any other clawback, recoupment, forfeiture or similar policies or provisions of the Company or
its affiliates, including any such policies or provisions of such effect contained in any employment agreement, bonus plan,
incentive plan, equity-based plan or award agreement thereunder or similar plan, program or agreement of the
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2
Company or an affiliate or required under applicable law (the “Other Recovery Arrangements”). The remedy specified in this
Policy shall not be exclusive and shall be in addition to every other right or remedy at law or in equity that may be available to
the Company or an affiliate of the Company.
9. Severability
The provisions in this Policy are intended to be applied to the fullest extent of the law; provided, however, to the extent
that any provision of this Policy is found to be unenforceable or invalid under any applicable law, such provision will be applied
to the maximum extent permitted, and shall automatically be deemed amended in a manner consistent with its objectives to the
extent necessary to conform to any limitations required under applicable law.
10. Amendment and Termination
The Board or the Committee may amend, modify or terminate this Policy in whole or in part at any time and from time
to time in its sole discretion. This Policy will terminate automatically when the Company does not have a class of securities listed
on a national securities exchange or association.
11. Definitions
“Applicable Rules” means Section 10D of the Exchange Act, Rule 10D-1 promulgated thereunder, the listing rules of the
national securities exchange or association on which the Company’s securities are listed, and any applicable rules, standards or
other guidance adopted by the Securities and Exchange Commission or any national securities exchange or association on which
the Company’s securities are listed.
“Committee” means the committee of the Board responsible for executive compensation decisions comprised solely of
independent directors (as determined under the Applicable Rules), or in the absence of such a committee, a majority of the
independent directors serving on the Board.
“Erroneously Awarded Compensation” means the amount of Incentive-Based Compensation received by a current or
former Officer that exceeds the amount of Incentive-Based Compensation that would have been received by such current or
former Officer based on a restated Financial Reporting Measure, as determined on a pre-tax basis in accordance with the
Applicable Rules.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Financial Reporting Measure” means any measure determined and presented in accordance with the accounting
principles used in preparing the Company’s financial statements, and any measures derived wholly or in part from such measures,
including GAAP, IFRS and non-GAAP/IFRS financial measures, as well as stock or share price and total equityholder return.
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3
“GAAP” means United States generally accepted accounting principles.
“IFRS” means international financial reporting standards as adopted by the International Accounting Standards Board.
“Impracticable” means (a) the direct costs paid to third parties to assist in enforcing recovery would exceed the
Erroneously Awarded Compensation; provided that the Company (i) has made reasonable attempts to recover the Erroneously
Awarded Compensation, (ii) documented such attempt(s), and (iii) provided such documentation to the relevant listing exchange
or association, (b) to the extent permitted by the Applicable Rules, the recovery would violate the Company’s home country laws
pursuant to an opinion of home country counsel; provided that the Company has (i) obtained an opinion of home country counsel,
acceptable to the relevant listing exchange or association, that recovery would result in such violation, and (ii) provided such
opinion to the relevant listing exchange or association, or (c) recovery would likely cause an otherwise tax-qualified retirement
plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C.
401(a)(13) or 26 U.S.C. 411(a) and the regulations thereunder.
“Incentive-Based Compensation” means, with respect to a Restatement, any compensation that is granted, earned, or
vested based wholly or in part upon the attainment of one or more Financial Reporting Measures and received by a person: (a)
after beginning service as an Officer; (b) who served as an Officer at any time during the performance period for that
compensation; (c) while the issuer has a class of its securities listed on a national securities exchange or association; and (d)
during the applicable Three-Year Period.
“Officer” means each person who serves as an executive officer of the Company, as defined in Rule 10D‑1(d) under the
Exchange Act.
“Restatement” means an accounting restatement to correct the Company’s material noncompliance with any financial
reporting requirement under securities laws, including restatements that correct an error in previously issued financial statements
(a) that is material to the previously issued financial statements or (b) that would result in a material misstatement if the error
were corrected in the current period or left uncorrected in the current period.
“Three-Year Period” means, with respect to a Restatement, the three completed fiscal years immediately preceding the
date that the Board, a committee of the Board, or the officer or officers of the Company authorized to take such action if Board
action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare such
Restatement, or, if earlier, the date on which a court, regulator or other legally authorized body directs the Company to prepare
such Restatement. The “Three-Year Period” also includes any transition period (that results from a change in the Company’s
fiscal year) within or immediately following the three completed fiscal years identified in the preceding sentence. However, a
transition period between the last day of the Company’s previous fiscal year end and the first day of its new fiscal year that
comprises a period of nine to 12 months shall be deemed a completed fiscal year.
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4