Why Big 5 Is Not a Good Bet for Income-Seeking Investors

Over the last few weeks, we have witnessed renewed skepticism over retailers given the mixed results of the December and January retail sales reports and an increase in store closings. According to data published by Coresight Research, there have been 4,810 retail store closures so far in 2019. This number includes all 2,500 Payless and 805 Gymboree locations, 94 Charlotte Russe shops, as well as 70 Sears and 50 Kmart stores. In short, retailers are once again feeling the heat. However, this time it's not just the shift to digital shopping that is putting the pinch on them. Now there is also the financial picture of the consumer, and it isn't a pretty one. We are seeing record levels of consumer debt, as well as rising, if not record, delinquency levels across credit cards, and auto and student loans. This helps explain the traffic and revenues shift to off-price retailers such as Ross Stores, Inc. , TJX Cos., Inc. , and Costco Wholesale Corp. , vs. department stores and other specialty retail names such as L Brands, Inc. , the parent company of Victoria's Secret. Peering into the monthly retail sales data, some of the hardest hit categories over the last year have been sporting goods as well as hobby, musical instrument and bookstores. We have talked about the bleak outlook for Barnes & Noble, Inc. , despite its enticingly high dividend yield. In our view, the outlook is the same for Big 5 Sporting Goods Corp. and its 5.3% yield. Big 5 may not have the same brand awareness as larger rival Dick's Sporting Goods, Inc. , but it is a sporting goods retailer in the Western United States with 436 stores. Let's start with the hard data. Per the monthly retail sales reports, the category that we find Big 5's business in -- sporting goods, hobby, musical instrument and bookstores -- fell 14% year over year in December, and then another 6.1% year over year in January. Not good, but that category does contain businesses other than sporting goods. Meanwhile, two of Big 5's competitors, Dick's and Hibbett Sports, Inc. , both offered tepid outlooks. Hibbett called for same-store sales to be in the 0%-1% range, while Dick's served up a 2.2% decrease in its same-store sales for its January 2019 quarter. For the prior 12 months, Dick's same-store sales fell 3.1%, which means its flat-to-up-modestly outlook for that metric this year is still down compared to 2017. What this tells us is that the two headwinds discussed above are taking a bite out of the bricks-and-mortar sporting goods industry, which is taking it on the chin. This does not bode well for smaller players like Big 5, and helps explain the erosion in the sporting goods retailer's share price to current levels below $4, from just over $9 last June. Also abetting Big 5's stock price decline were several quarters filled with missed earnings expectations and negative operating cash flow in 2018. The sports retailer's debt levels are on the rise, even as its cash position declines. In other words, Big Five is living the pain its industry is facing. Now let's talk about the elephant in the room: the company's dividend yield. Big 5's annual dividend payment is $0.20 per share to its 25.07 million outstanding shareholders. Simple math says that this is an annual payment of $5 million. On its balance sheet, Big Five had $6.8 million in cash at the end of December, but it is expected to generate a loss of $0.08 per share this year. In other words, there is more pain coming to Big 5, which could lead to either a dividend cut, or the company taking on additional debt. Based on the health of Big 5's business, its 2018 interest expense was one of the larger reasons the company posted the operating losses that it did. For Big 5, taking on more debt would be like putting an even bigger anchor on a boat that already has a sizable hole in it. Will You Have Enough Money to Retire? Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert Mr. Retirement Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.

Why Big 5 Is Not a Good Bet for Income-Seeking Investors

Let's talk about the elephant in the room: the sporting goods retailer's dividend yield.

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