Buy Big 5 Sporting Goods for Its Dividend; But How About Growth?
November 02, 2022 at 01:00 AM EDT
Big 5 Sporting Goods (NASDAQ: BGFV) stock fell over 8% the day after it reported third-quarter earnings. And that brings the 12-month loss for BGFV stock to over 56 percent. This drop comes even though the sporting goods retailer delivered a solid earnings report. In fact, the company beat on both the top and bottom lines.
Here are the specifics. Top line revenue came in 1% higher than forecast at $261.45 million. The beat was stronger on the bottom line with the retailer delivering 29 cents per share. This was 7% higher than analysts’ forecast of 27 cents per share.
Is now a good time to buy this dip on BGFV stock? That’s the question we’ll be looking at in this article.
Timing is Everything
If Big 5 Sporting Goods delivered this report in the last week of October, the stock might likely be moving higher. But the report came out the evening before the next Federal Reserve announcement on interest rates. That means that investors don’t need much reason to sell a stock.
And Big 5’s guidance did just that. The company suggests that it is still dealing with the macroeconomic headwinds that have existed for much of the year. And that means the slowdown in growth will continue at a high single-digit pace in the current quarter. Earnings were lowered to a range between 8 cents and 20 cents per share compared to the 29 cents forecast by analysts.
There was some encouraging news. The company said that it is “right-sized” in terms of its inventory heading into the holiday season. Combined with profit margins that are slightly higher than the sector average, the company is well-positioned to make targeted promotions to stimulate sales.
It’s been tricky to look at retail stocks considering the past two years, which were outliers of historical proportions. Management is noting the same thing and was quick to remind investors that a fairer comparison to the company’s numbers was 2019.
Viewed in comparison to 2019 the company is expecting single-digit revenue growth in same-store sales. However, Big 5 Sporting Goods was trading as a penny stock back in 2019 with a price-to-book (P/B) ratio of approximately 0.33. Today, the company’s P/B is around 1 and its stock is trading at over $11 per share. This is reflected in the company's market cap which is over four times higher than the $60 million market cap it had in 2019.
Back then, BGFV stock looked undervalued. Today, that doesn’t appear to be the case. I’ll admit the P/E ratio of just over 4X earnings is attractive. But sometimes stocks are cheap for a reason.
Is the Dividend Enough to Own BGFV Stock?
Big 5 Sporting Goods did announce that it was maintaining its current quarterly dividend at 25 cents per share. The stock currently has a juicy dividend yield of over 7%. This is encouraging because in light of falling revenues investors may have been wondering if the company would cut its dividend.
But unless you’re already a shareholder, BGFV stock looks like a Hold. Depending on your point of view, the economy is already in, or headed for, a recession. The economy is clearly having an impact on demand. And it seems like only a matter of time before that will be reflected in the job numbers.
As is the case with many retailers, Big 5 Sporting Goods appears to be managing these headwinds as best they can. But that’s still a lot of uncertainty for a sector that will continue to have loads of it for the rest of this year into next year. That means there are likely better candidates out there for growth-oriented investors.