Sie sind auf Seite 1von 5

Retail Sporting Goods Industry

Consisted of about 20000 companies with total annual revenue of $38


billion
Highly concentrated with 50 largest companies accounting for more
than 55% of revenue
Products include
outdoor
clothing
and shoes, firearms,
sports and
Large Format
Stores
Traditional
Specialty
Stores
exercise equipment, and bicyclesRetailers
Size

20k-200k sq ft

5k-20k sq ft

2k-20k sq ft

Location

Strip malls or
standalone

Strip or enclosed
malls

Strip or enclosed
malls

Revenue

> $ 5 million

< $ 1 million

Also sold by mass merchandisers and internet retailers


Employe > 50
< 10
es

Large Retailers

Broad range of
merchandise at low prices
Used analytics for layout
planning

Small Retailers
Connecting with the community through sponsoring
local events
Knowledgeable salespeople offering technical
expertise and customer support

Short selling seasons for many sports


Difficult to estimate demand as orders were placed
months in advance
Important to identify fast moving products to maximize
profits

Inventory
Financing
was
importan
t

Company Background: Big 5 Sporting Corporation


Founded by Robert W. Miller in 1955, the company completed an IPO in
2002
Being a leading sporting goods retailer in western United States, it
operated 398 stores in 12 states as of Jan, 2011
Product mix included athletic shoes, apparel and accessories as well as
a broad selection of outdoor and athletic equipment which targeted the
competitive and recreational sporting goods customers
Offered a combination of well known brand name merchandise,
merchandise produced exclusively under a manufacturers brand name,
private label merchandise and merchandise available through vendor
overstock and close out merchandise
Vendor overstock and close out merchandise purchase were enabled
because of strong vendor relationship, high purchasing volume and
Store decision making. They typically represented 10% of sales. This
rapid
Format differentiation form competitors
allowed
Company operated traditional sporting goods store that averaged
approximately 11000 sq ft
This enabled it to operate in both metropolitan areas and smaller towns
It had opened 79 stores in the last 5 years, The new stores required
lower investments and took shorter time before they were profitable
Stores required about $0.5 mn in fixtures, equipment and leasehold
improvements and $0.4 mn in net working capital

Financial Lease vs Operating Lease


As per the US GAAP a lease qualifies as a capital lease if any of the conditions
apply:
Transfer of ownership at the end of lease term
Bargain purchase option
The lease term is at least 75% of assets economic life
Present value of minimum lease payment is greater than or equal to 90% of
assets market value
Financial
Operating Lease
Other leases are operating
leases Lease
Liabilities (current and longterm)

Higher

Lower

Assets

Higher

Lower

Net income (in early years)

Lower

Higher

Net income (Later years)

Higher

Lower

Total Net income

Same

Same

Cash Flow from operations

Higher

Lower

Cash Flow from financing

Lower

Higher

Total Cash Flow

Same

Same

Debt/Assets

Higher

Lower

Items Treated by Big 5


Sporting Goods Corporation

Delivery Tractors,
Management information
system hardware and point-ofsale equipment

Retail store facilities,


distribution center and
corporate office

The significant proportion of operating leases is


a potential red-flag for BGFV
In order to effectively realize the understated liabilities, we calculated a capitalized version of
the current and future operating lease expenses. Since we dont have the lease agreement
details of each and every lease we have taken this extreme case of capitalizing every
Leases
operating leaseCapital
and analyzing
the impact.
Year Ending
2011
2012
2013
2014
2015
PV of minimum
lease payments
Discount Rate

Future Capital
Leases (In
thousands)
2069
866
479
266
71
3498

PV Payment
(in thousands)
2069
786
395
199
48
3498
10.12%

Operating Leases
Year Ending
2011
2012
2013
2014
2015
Thereafter
PV of
minimum lease
payments

Operating Leases
(In thousands)
61998
57994
53451
45691
34522
70113

PV Payment
(in thousands)
61998
52667
44082
34221
23480
428132
644579

After calculating the difference in payments of a capital lease versus the current operating
leases, we found a ~$650 million understatement of liabilities. This is a significant
number, and can be considered an aggressive accounting strategy

The D/E changes from 0.50 to 4.78. This is an indicator of an increased riskiness of the firm

Recommendations & Learning


It is important to look at following things while establishing
price target for any company Understand how a company creates value for its customers,
its strategy for achieving this, and the implications for the
company's financial performance
To analyse a company's growth, its ability to generate cash
flows, and its financial performance
To evaluate a company's accounting methods and their
impact on a company's financial performance, and
specifically to evaluate the use of off-balance debt arising
from operating leases
Understand whether the tax and reporting recognition of
lease expenses were similar
To value the company's common equity securities.
Specifically speaking in reference to retailing companies,
It is important to ascertain how finance leases have been
reported as operating lease to reduce reported debt from the
balance sheet.
This happened with Lennar Corporation whose stock price
dropped significantly after off-balance sheet debt arising from

Das könnte Ihnen auch gefallen