Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has emerged an unlikely favorite in the sports retail space, trading higher by 215% over the last year. Meanwhile, competitors Hibbett Sports, Inc. (NASDAQ:HIBB) and Dicks Sporting Goods Inc (NYSE:DKS) have traded slightly lower over the last year. Therefore, with Big 5 currently trading lower by 17%, here are three reasons that Big 5 is a post-earnings buy!
Same-store sales
I’ve said on many occasions, in retail, same-store sales are golden. A company can easily throw up new stores to boost revenue, but the growth of existing stores is what drives margin growth, which, therefore, creates shareholder value.
Therefore, Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’s same-store sales growth is more than double that of its competitors. This means that Big 5 is attracting new consumers at a rate that exceeds the industry’s growth.
Bottom line growth
As I said, one of the reasons that you want to see same-store sales growth is because it impacts margins. For example, if a company’s costs to operate a store with staff, utility bills, and taxes remain the same, but a company’s revenue per store rises, then profits are naturally going to be higher.
This is what Big 5 Sporting Goods Corporation (NASDAQ:BGFV) has accomplished. During the last quarter, the company’s net income grew 135% year-over-year. This income growth is far greater than the company’s 6% revenue growth in the same period, indicating significant margin improvements.
In the same period, Hibbett grew revenue 3%, but the company’s net income growth was flat. Hibbett has an operating margin of 14%, which many believe is near peak margins for this particular space.
Dicks Sporting Goods Inc (NYSE:DKS) did a little better than Hibbett, but not nearly as well as Big 5 Sporting Goods Corporation (NASDAQ:BGFV). Dick’s grew revenue 4% and its net income increased nearly 15%. This reflects healthy growth, and once again, we can revert back to its operating margins of 9% to find the reason why Dick’s has improved.
Hence, if Hibbett’s 14% operating margin is ideal efficiency in the space, then Dick’s’ 9% has room to improve. With that said, Big 5’s operating margin of 3.9% easily has the most to gain, and is the reason that the company’s bottom line is growing so rapid.
Valuation
The most important measure to any investment is a company’s valuation relative to its peers. I have discussed this aspect in great detail, and when looking at Big 5 Sporting Goods Corporation (NASDAQ:BGFV) relative to its competitors, you can definitely see Big 5’s value.
In terms of assessing value, there are countless metrics we could look at; however, there are two metrics that really jump off the board to me.
The first is the forward P/E ratio, which is essentially a P/E ratio based on a stock’s current price and using the next 12 months’ earnings expectations. Hibbett and Dick’s trades at 17.32 and 15.57 times earnings, respectively. Big 5 is significantly cheaper at 13.4 times next year’s earnings, which is also below the S&P 500. This is especially impressive considering Big 5 has such lower operating margins compared to its peers.
Lastly, is its price/sales ratio. Hibbett Sports, Inc. (NASDAQ:HIBB) trades at 1.83 times sales and Dicks Sporting Goods Inc (NYSE:DKS) is at 1.09 times sales. Big 5 trades at just 0.54 times sales. This shows that minor operational changes can be made in order to produce high profits relative to the company’s market capitalization. In my opinion, this one metric alone shows the value present in shares of Big 5, despite its large one-year return.
Final thoughts
When you’re assessing a company, you need to do more than just look at the stock itself. You have to compare the stock to its competitors in order to realize true value.
In the case of Big 5 Sporting Goods Corporation (NASDAQ:BGFV), it was trading lower by 17% on Wednesday after a quarter that wasn’t too bad. However, after such a rapid run higher, there are many who associate stock gains with value, and that is simply not the case.
Big 5, compared to its peers, is presenting value: It is cheaper, has more room to improve, and is growing its same-store sales. Therefore, I’d take a long hard look at Big 5 after its post-earning loss.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Takeaways From This Sports Retailer’s Earnings originally appeared on Fool.com and is written by Brian Nichols.
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