Big 5 Sporting Goods Corporation

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Big 5 Sporting Goods Corporation

2525 East El Segundo Boulevard
El Segundo, California 90245
U.S.A.
Telephone: (310) 536-0611
Fax: (310) 297-7585
Web site: http://www.big5sportinggoods.com

Public Company
Incorporated: 1955 as United Merchandising Corporation
Employees: 6,321 Sales: $667.5 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: BGFV
NAIC: 339920 Sporting and Athletic Goods Manufacturing

Big 5 Sporting Goods Corporation is an El Segundo, California-based regional chain of approximately 275 value-oriented sporting goods stores located in ten western states. While approximately 60 percent of outlets are found in California, Big 5 stores are also located in Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, and Washington. Big 5 is a niche player that is able to successfully compete against superstores by operating units in the 11,000-square-foot range generally located in strip centers, as opposed to the 40,000-square-foot freestanding big box operations of its larger rivals. Requiring less space, Big 5 is able to take a neighborhood approach and concentrate a number of stores in a particular market, which is then supported by weekly newspaper inserts and mailers, a marketing approach the company has successfully pursued for nearly 50 years. Big 5 also concentrates on offering superior customer service, which is enhanced by a limited selection of goods and low profile fixtures that allow customers to find what they are looking for and sales associates to spot customers in need of assistance. Rather than attempt to match the broad selection of goods that giant competitors can offer, Big 5 focuses on mid-price-point items from major brands such as Nike and Reebok and budget-priced merchandise for lesser brands such as Brooks, Pony, Spalding, and Riddell, augmented by inventory acquired in closeouts. As a result of this approach, sales associates do not have to become knowledgeable about an excessive number of items, and Big 5 also greatly reduces its exposure to markdowns taken on more expensive shoes and apparel. If conditions warrant, individual stores have some latitude in adding higher-price-point merchandise. A Beverly Hills outlet, for example, carries Taylor Made golf clubs while the chain as a whole concentrates on value-priced golfing products from Spalding, Dunlop, Wilson, and Northwestern. Store managers, along with senior and mid-level management, have a direct incentive in making sure the Big 5 formula continues to work, sharing in the ownership of the company as the result of a 1997 recapitalization plan. In general, Big 5 is known for its conservative approach to business as well as a penchant for maintaining a low profile. Management rarely speaks with the press and avoids industry events sponsored by the major trade associations. The chain’s buyers, however, attend trade shows, invariably focusing on opening price point products and a few mid-priced items.

Big 5 Founded in 1955

Big 5’s parent company was formed in September 1955 as United Merchandising Corp. by Maurie and Harry Liff and the company’s current Chairman Emeritus Robert W. Miller. They opened five stores in downtown Los Angeles, Burbank, Ingle-wood, Glendale, and San Jose. For a trade name they chose “Big 5 Stores,” unconcerned that the name might not sound as appropriate should they one day expand the operation. In its early years, Big 5 concentrated on World War II army surplus items, as well as tents and air mattresses the company manufactured itself, plus assorted housewares and handtools. From the earliest days of the chain, Big 5 turned to print advertisements, making a regular practice of advertising on the back page of the Los Angeles Times, its customers growing accustomed to looking there for weekly specials. Other sporting goods aside from tents soon became part of the product mix, a natural for the highly active population of southern California. Sports merchandise became so popular that in 1963 management decided to specialize in it, and in December of that year changed its operating name to “Big 5 Sporting Goods.”

Thrifty Acquires Big 5 in 1971

By March 1971, Big 5 had grown to 19 stores and entered the northern California market, at which point the company was merged with Thrifty Corporation, the West Coast’s largest chain of drug stores. Big 5 operated as a subsidiary of Thrifty for the next 15 years. Then, in 1986, Pacific Enterprises, parent corporation of Southern California Gas Co., acquired Thrifty. With Robert Miller still at the helm of the company he helped found, Big 5 continued to prosper, by 1992 growing to 140 stores in California, Nevada (entered in 1978), and Washington (entered in 1984). To support its growth the company built a 440,000-square-foot, state-of-the-art distribution center twice the size of its previous facility. Pacific Enterprises’ retail operations as a whole, however, endured mounting losses. In 1992, Pacific Enterprises decided to refocus on its core utility business and pay down debt by selling the 620-store Thrifty Drug Store chain and five other retail chains to an investment group headed by Los Angeles financier Leonard Green & Partners, a firm that specialized in management buyouts. In addition to Big 5, these assets included two other sporting goods subsidiaries, 83 MC Sporting Goods stores located in the Midwest and 52 Gart Brothers Sporting Goods stores in the Rocky Mountain states, as well as 40 Oregon B-Mart discount stores and 124 Pay ‘n Save stores located in the Pacific Northwest, Hawaii, and Alaska. In a subsequent transaction to strengthen the Thrifty chain and allow it to retire some debt, Green formed a second investment group and along with a management group purchased Big 5 in a deal valued at $150 million. For the purpose of making this acquisition, Big 5 Holdings, Inc. and its parent, Big 5 Corporation, were established. Big 5 Holdings purchased all outstanding stock from Thrifty and merged with Big 5 Corporation, which then became the surviving entity.

Robert Miller stayed on as CEO and chairman of Big 5, while his son, Steve, retained his position as president and chief operating officer. They planned to continue to grow the chain, anticipating the addition of eight to ten stores each year. During the first year following the separation from Pacific Enterprises, Big 5 opened ten stores, followed by 15 in both 1993 and 1994, and 19 units in 1995 (including seven through acquisitions). During this period, it also closed four older stores. In the process of expansion, the chain entered new markets, such as Arizona and Idaho in 1993, and New Mexico, Oregon, and Texas in 1995. To support this growth, Big 5 installed and implemented new merchandising, distribution, and financial systems, allowing management to accomplish an inventory reduction strategy in 1995, a move instrumental in maintaining the company’s ongoing fiscal health. To maintain strong growth at existing stores, the company also pursued a remodeling program. When California’s economy slowed down in the mid-1990s, Big 5 cut back the pace of expansion, adding only four new stores in 1996. Annual revenue for the year reached $404.3 million with $4 million in net profits.

Management Acquires Controlling Stake in 1997

In November 1997, Miller led a management effort to control the destiny of the company, raising $250 million to acquire a controlling interest in Big 5 from Leonard Green. As a result, Leonard Green’s ownership position fell from 67 percent to 36.2 percent. While still holding a sizeable interest in the business, the banking firm now took a less active role in the running of Big 5, although it retained seats on the board of directors. Having paid just $28.5 million in 1992 for its stake in Big 5, Leonard Green realized a windfall profit from the sporting goods chain, despite an economic environment during which the market value of major national chains dropped significantly. Senior management and Big 5 employees, in the meantime, saw their ownership position grow from just 14 percent to 55.3 percent. A significant portion of the chain’s employees now had a personal interest in continuing to make Big 5’s 40-year formula for success continue to work; this had become even more imperative because as a result of the buyout the chain was saddled with $173 million in long-term debt.

Although highly leveraged, Big 5 maintained its plan for expanding the chain. In 1997, 14 new stores were added, eight located in markets outside of California, bringing the total number of units in the chain to 210. In 1998, the company entered a new market in Utah, and during the year opened 12 new stores, one of which replaced an older unit. Big 5 added another 15 stores in 1999 and 15 in 2000 while closing 2 units, resulting in a total of 249 outlets in the chain. Revenues kept pace during this period, growing to $491.4 million in 1998, $514.3 million in 1999, and $571.5 million in 2000. Big 5’s debt burden, however, adversely impacted profits, which dropped from $8.7 million in 1997 to $4.5 million in 1998, then improved to $5.8 million in 1999 and $11.1 million in 2000. Compared to the fortunes of publicly held competitors, Big 5’s performance during these years was especially impressive. Since the heady days of the early 1990s, when several sporting goods chains went public, leading to a glut of new stores, many of Big 5’s competitors had lapsed into bankruptcy or been forced to merge with better financed rivals.

Company Perspectives:

At Big 5, throughout our 46 year history we have focused on value, service, and integrity in providing quality sporting goods products to our customers.

During the late-1990s, Big 5 took steps to improve its information technology infrastructure. In 1999, the company launched a project to replace its decade-old point-of-sale registers and software with new hardware and a system based on a Micrsoft Windows NT operating system, a change that would allow it the flexibility of taking advantage of existing Windows applications while improving system speed and stability. Rollout of the point-of-sale systems was completed during 2000. Also in 1999, Big 5 implemented an electronic data interchange system (EDI) that dramatically cut down the time between ordering and receiving goods from participating vendors, in some cases reducing the cycle time from as long as three weeks to just three days. The move was actually initiated a year earlier by Nike, a major proponent of the technology, which encouraged Big 5 to start using EDI. Previously, Big 5 entered orders into a database system, then had a secretary spend two to three hours each day simply faxing purchase orders to individual vendors. On the other end of the fax machine the same data was entered into a computer a second time. Big 5’s motivation for turning to EDI was essentially to avoid losing Nike as a vendor, but once the system was in place the company quickly realized a number of time-saving benefits. The company began using EDI to transmit insurance paperwork as well as employee with-holding tax information to state governments. Big 5 also began to encourage its other vendors to come online in order to further magnify the benefits of the system.

In 2001, Big 5 entered a new market, Colorado, opening two stores. For the year, sales grew to nearly $622.5 million, with net income totaled almost $15 million. Management also made plans to take the company public, in the summer of 2001 filing for an initial public offering (IPO), hoping to raise as much as $115 million despite a difficult market for IPO’s in recent months. Not only would Big 5 be able to relieve its debt burden, freeing up cash flow dedicated to servicing its debt and making the company less vulnerable to downturns in the economy, Leonard Green and its affiliate, Green Equity Investors, was looking to reduce its ownership position and further profit from its investment in the sporting goods chain. Big 5 enlisted Credit Suisse First Boston Corp. to underwrite the stock sale in association with U.S. Bancorp Piper Jaffray Inc., Jefferies & Co., and Stephens Inc. With the stock market adversely impacted by the terrorist attacks of September 11, 2001, the offering was postponed. It was finally held in June 2002 but proved somewhat disappointing. The company had established an expected price range of $14 to $16 per share but in the end had to settle for $13, resulting in $104.65 million raised. Moreover, when the stock began trading on the NASDAQ, the price showed almost no movement on the first day. It reached a high of $13.84 before closing at $13.17, leaving Big 5 with a market capitalization of little more than $280 million. Over the ensuing weeks, the stock continued to receive a lackluster response, prompting management to consider buying back some of the shares. Nonetheless, management planned to continue its strategy of controlled expansion, especially in markets beyond California. In the western states already served, Big 5 estimated it could backfill another 150 stores. To accommodate this growth, the company also made plans to replace its 12-year-old Fontana warehouse, setting up a satellite distribution center while it began looking at properties that could accommodate a new facility. Given that Big 5 had enjoyed ongoing success for nearly 50 years, there was every reason to believe that the chain would indeed have use for the additional warehouse space.

Principal Competitors

Foot Locker, Inc.; Gart Sports Company; The Sports Authority, Inc.; Sport Chalet Inc.

Key Dates:

1955:: United Merchandising is formed using the trade name “Big 5 Stores.”
1963:: Operating name is changed to “Big 5 Sporting Goods” as the chain specializes in sporting goods.
1971:: Thrifty Corp. acquires the chain.
1986:: Thrifty is acquired by Pacific Enterprises.
1992:: Big 5 is acquired in management-led buyout financed by Leonard Green & Partners.
1997:: The company is recapitalized, with majority ownership passing to employees.
2002:: Big 5 goes public.