Big 5 Sporting Goods Corporation (BGFV): Stadium Capital Sends Scathing Letter to Chairman of Board

Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’s largest shareholder among institutional investors with 2.51 million shares accounting for 11.3% of their common shares, is not the least bit pleased with the company’s corporate governance and boardroom decision-making. Co-Chief Investment Officer of Alexander Medina Seaver‘s Stadium Capital Management, Dominic Demarco, who was appointed to Big 5’s board of directors in October 2011, sent an open letter to Big 5’s Chairman of the Board Steven Miller on Wednesday, slamming the board’s recent decision to create a “super committee”.

Big 5 Sporting Goods Corporation (NASDAQ:BGFV)

Stadium Capital Management (SCM), is a small hedge fund founded in 1997, with an equity portfolio valued at $315 million, according to their most recent 13F filing. SCM has been a long-time shareholder of Big 5’s, dating back to 2006. That holding represented 7.46% of SCM’s portfolio as of September 30, with their greatest investments being in Builders FirstSource, Inc. (NASDAQ:BLDR) with 12.37 million shares, and Ascena Retail Group Inc (NASDAQ:ASNA) with 4.97 million shares.

The “super committee” that the board passed on January 19 effectively cuts Demarco out of having any power on the board, as it allows the committee (from which only Demarco is excluded) to act with the full power of the board. The board’s adoption of the special committee stems from a letter and proposal submitted to the board by SCM on December 18, that sought to remove the classification of the board, adopting majority voting in director elections, as well as requiring all directors to be elected on an annual basis as opposed to once every three years.

In justifying their formation of the committee, the board alleged that Demarco has a conflict of interest with other non-management stockholders, a position which Demarco flatly denied in his letter, calling that argument “absurd” and “wholly indefensible”. Demarco declared that his interests are quite perfectly  and naturally aligned with those of other non-management stockholders, those interests being to see the company maximize shareholder value.

In rebuttal, Demarco cited numerous instances of what he called true conflicts of interest on the board, including with one of the board’s directors, G. Michael Brown, who is partner at the law firm Musick, Peeler & Garrett LLP, which has received millions of dollars in legal fees from Big 5 Sporting Goods Corporation (NASDAQ:BGFV) over the years. It’s this kind of bad governance that Demarco cited as the reason why Big 5 has fared quite poorly over the years, returning negative value to shareholders over the last five and ten years.

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) took yet another market hit last week when it announced disappointing fourth quarter results that came in below expectations and forced the company to revise downward their full-year forecast. The mild winter weather in many markets through the end of the year was partially blamed for the lower fourth quarter sales, which rose less than 1% from a year ago to $250.3 million, below the Zacks Consensus Estimate of $257 million. Net sales for the year fell from $993.3 million in 2013 to $977.9 million in 2014, also coming in below the Zacks estimate of $984 million.

That news sent Big 5’s stock tumbling 4.8% the next day, to just $12.34 at the time. Trading at $12.69 in afternoon trading today, Big 5 is down 16.27% year-to-date, and 34.63% over the past calendar year. That downturn follows a strong first half to 2013 when the stock nearly doubled from the start of the year to $24.47 by July 24, and closed the year up 50%.

Other notable funds with an investment in Big 5 Sporting Goods Corporation (NASDAQ:BGFV) are Brett Hendrickson’s Nokomis Capital with 486,061 shares, Mario Gabelli’s GAMCO Investors with 395,000 shares, and Michael Price’s MFP Investors with 157,138 shares.

Disclosure: None