BIG 5 SPORTING GOODS : Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (type 10-Q)

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The following discussion and analysis of the Big 5 Sporting Goods Corporation
(“we,” “our,” “us”) financial condition and results of operations includes
information with respect to our plans and strategies for our business and should
be read in conjunction with our interim unaudited condensed consolidated
financial statements and related notes (“Interim Financial Statements”) included
herein, the Risk Factors included herein and in our other filings with the
Securities and Exchange Commission (“SEC”), and our consolidated financial
statements, related notes, Risk Factors and Management’s Discussion and Analysis
of Financial Condition and Results of Operations contained in our Annual Report
on Form 10-K for the fiscal year ended January 3, 2021.

Our fiscal year ends on the Sunday nearest December 31. Fiscal 2021 is comprised
of 52 weeks and ends on January 2, 2022. Fiscal 2020 was comprised of 53 weeks
and ended on January 3, 2021. The four quarters of fiscal 2021 are each
comprised of 13 weeks. The first three quarters in fiscal 2020 were each
comprised of 13 weeks, and the fourth quarter of fiscal 2020 was comprised of 14
weeks.

Impact of COVID-19

During March 2020, the World Health Organization declared the rapidly growing
novel coronavirus (“COVID-19”) outbreak to be a global pandemic. The COVID-19
pandemic has significantly impacted health and economic conditions throughout
the United States, as public concern about becoming ill with the virus has led
to the issuance of recommendations and/or mandates from federal, state and local
authorities to practice social distancing or self-quarantine.

Beginning on March 20, 2020 and continuing into the second quarter of fiscal
2020, we temporarily closed more than one-half of our retail store locations in
response to state and local shelter orders related to the COVID-19 outbreak. We
were subsequently able to gradually reopen all store locations based initially
on qualifying as an “essential” business under applicable regulations and later
as a result of the easing of regulatory restrictions on retail operations in our
market areas. Throughout fiscal 2020, the pandemic and the shelter orders that
were in place in our market areas negatively impacted customer traffic into the
stores that were operating, and certain stores required additional closures
during the remainder of the year. In an effort to promote social distancing
protocols, we implemented reduced store hours for our open stores and limited
the number of customers in our stores at any one time. While these temporary
store closures, limited hours of operation and shelter orders in our market
areas related to the initial COVID-19 outbreak had an unfavorable impact on our
operations initially, as we began reopening stores we recognized significant
shifts in consumer demand in favor of fitness and outdoor recreational products
and we rapidly evolved our product assortment, which had a favorable impact on
our operating results throughout the remainder of fiscal 2020. In the first half
of fiscal 2021, as COVID-19 restrictions continued easing in many of our
markets, we experienced strong consumer demand across a broad assortment of
product categories, in addition to the continued benefit from increased consumer
demand for fitness and outdoor recreational product categories that performed
well during the height of the COVID-19 pandemic.

During fiscal 2020, in response to COVID-19, we also initially took measures to
reduce expense and preserve capital across the organization, including
negotiating lease concessions with landlords that would reduce or defer our
lease-related payments, scaling back merchandise inventory orders and extending
payment terms with merchandise vendors, implementing temporary and permanent
workforce reductions throughout the organization, reducing advertising and the
amount of planned capital spending, and suspending our quarterly dividend
payment, among other measures. Although a certain portion of the expense
reduction initiatives only benefited the second quarter of fiscal 2020, the
remainder of fiscal 2020 and the first half of fiscal 2021 continued to reflect
labor expense savings due primarily to continued reduced store operating hours
throughout most of the period, as well as advertising expense savings due to
significantly reduced advertising activity. We expect to continue to benefit
from reduced levels of labor and advertising expense in the foreseeable future
as we continue to evaluate the impact on our sales. We will continue to evaluate
the impact of COVID-19 on our future operations.

The initial unfavorable impacts caused by the COVID-19 outbreak also led us to
take various actions to enhance our liquidity. We initially increased borrowings
and exercised the accordion feature under our previous revolving credit
facility, and we drew down additional amounts that resulted in our highest
borrowing level of $143.3 million as of March 31, 2020. However, with our
favorable operating results throughout the remainder of fiscal 2020, we were
able to fully repay our borrowings while increasing our levels of cash and cash
equivalents, and our financial condition was further enhanced during the first
half of fiscal 2021, reflecting our strong sales and operating cash flow for the
period. As of July 4, 2021 and January 3, 2021, we had zero long-term revolving
credit borrowings, compared to $35.0 million outstanding as of the second
quarter ended June 28, 2020. As of July 4, 2021 and January 3, 2021, we had cash
and cash equivalents of $118.9 million and $64.7 million, respectively, compared
to cash of $16.7 million as of June 28, 2020.

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A substantial amount of the Company’s inventory is manufactured abroad.
COVID-19, and surging consumer demand initially associated with the pandemic,
has also impacted the Company’s supply chain for products sold, particularly
those products that are sourced from China. To the extent one or more vendors is
negatively impacted by COVID-19, including due to the closure of those vendors’
distribution centers or manufacturing facilities, or we are unable to obtain the
necessary shipping capacity, the Company may be unable to maintain delivery
schedules or adequate inventory in its stores.

Overview

We are a leading sporting goods retailer in the western United States, with 430
stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of
July 4, 2021. We provide a full-line product offering in a traditional sporting
goods store format that averages approximately 11,000 square feet. Our product
mix includes athletic shoes, apparel and accessories, as well as a broad
selection of outdoor and athletic equipment for team sports, fitness, camping,
hunting, fishing, home recreation, tennis, golf and winter and summer
recreation.

The following table summarizes our store count for the periods presented:

13 Weeks Ended 26 Weeks Ended
July 4, June 28, July 4, June 28,
2021 2020 2021 2020
Beginning stores 430 431 430 434
Stores permanently closed – – – (3 )
Ending stores 430 431 430 431

For fiscal 2021, we anticipate opening approximately five new stores and closing
two stores.

Executive Summary

Net income increased to a historically-high level in the second quarter of
fiscal 2021 compared with net income in the second quarter of fiscal 2020 as a
result of increased sales and higher merchandise margins, primarily reflecting
continued strong demand for many categories of sporting goods products as a
result of COVID-19 and consumers’ desire to recreate and stay active. The
increase in same store sales in the second quarter of fiscal 2021 compares to a
decrease in same store sales for the second quarter of fiscal 2020 that resulted
from temporary store closures related to COVID-19 last year.

• Net sales for the second quarter of fiscal 2021 increased 43.0% to $326.0
million compared to $227.9 million for the second quarter of fiscal 2020.
The increase in net sales was primarily attributable to strong consumer
demand for most product categories this year and COVID-19-related temporary
store closures last year. Our higher net sales reflected substantial
increases in each of our major merchandise categories of apparel, footwear
and hardgoods.

• Gross profit for the second quarter of fiscal 2021 represented 38.9% of net
sales, compared with 31.7% in the second quarter of the prior year. The
increase in gross profit margin primarily reflects higher merchandise
margins, lower store occupancy expense as a percentage of net sales and
lower distribution expense, including costs capitalized into inventory, as a
percentage of net sales, compared with the prior year.

• Selling and administrative expense for the second quarter of fiscal 2021
increased 34.5% to $78.4 million, or 24.0% of net sales, compared to $58.3
million, or 25.6% of net sales, for the second quarter of fiscal 2020. The
increase in selling and administrative expense primarily reflects increased
employee labor and benefit-related expense compared with the same quarter
last year in which significant actions were taken as a response to COVID-19,
including temporary store closures and reduced store operating hours, which
had an impact on staffing levels in the prior year.

• Net income for the second quarter of fiscal 2021 was a historically-high
$36.8 million, or $1.63 per diluted share, compared to net income of $11.1
million, or $0.52 per diluted share, for the second quarter of fiscal 2020.
The increased earnings were driven primarily by higher net sales and
merchandise margins, partially offset by increased selling and
administrative expense.

• Operating cash flow for the first half of fiscal 2021 was a positive $88.7
million compared to operating cash flow in the first half of fiscal 2020 of
a positive $58.2 million, due primarily to an increase in net income year
over year partially offset by increased funding of merchandise inventory as
a result of increased inventory levels in the first half of fiscal 2021
compared with decreased inventory levels in the same period of the prior
year.

• Capital expenditures for the first half of fiscal 2021 increased to $4.1
million from $3.4 million for the first half of fiscal 2020. We expect to
open approximately five new stores in fiscal 2021, after not opening any new
stores in the prior year.

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• Borrowings under our credit facility were zero as of July 4, 2021 and
January 3, 2021, compared with $35.0 million as of June 28, 2020. Our zero
borrowings as of July 4, 2021 and January 3, 2021 reflected a full pay-down
of the credit facility since the end of the second fiscal quarter of fiscal
2020. We had cash and cash equivalents of $118.9 million and $64.7 million
as of July 4, 2021 and January 3, 2021, respectively, compared to cash of
$16.7 million as of June 28, 2020.

• We paid cash dividends in the first half of fiscal 2021 of $29.1 million, or
$1.33 per share, compared with $1.2 million, or $0.05 per share, in the
first half of fiscal 2020. The increase in year-over-year dividends paid
reflected a special dividend of $1.00 per share that was declared in the
second quarter of fiscal 2021 as well as an increase in the regular dividend
payment from $0.15 per share that was paid in the first quarter of fiscal
2021 to $0.18 per share that was paid in the second quarter of fiscal 2021,
compared with the first half of fiscal 2020 in which dividends were
suspended in the second quarter of fiscal 2020 as a response to the COVID-19
pandemic.

Results of Operations

The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.

13 Weeks Ended July 4, 2021 Compared to 13 Weeks Ended June 28, 2020

The following table sets forth selected items from our interim unaudited
condensed consolidated statements of operations by dollar and as a percentage of
our net sales for the periods indicated:

13 Weeks Ended
July 4, June 28,
2021 2020
(Dollars in thousands)
Net sales $ 326,020 100.0 % $ 227,935 100.0 %
Cost of sales (1) 199,097 61.1 155,742 68.3
Gross profit 126,923 38.9 72,193 31.7
Selling and administrative expense (2) 78,379 24.0 58,333 25.6
Other income – – (2,500 ) (1.1 )
Operating income 48,544 14.9 16,360 7.2
Interest expense 184 0.1 749 0.3
Income before income taxes 48,360 14.8 15,611 6.9
Income tax expense 11,557 3.5 4,475 2.0
Net income $ 36,803 11.3 % $ 11,136 4.9 %

(1) Cost of sales includes the cost of merchandise, net of discounts or
allowances earned, freight, inventory reserves, buying, distribution
center expense, including depreciation and amortization, and store
occupancy expense. Store occupancy expense includes rent,
amortization of leasehold improvements, common area maintenance,
property taxes and insurance.

(2) Selling and administrative expense includes store-related expense,
other than store occupancy expense, as well as advertising,
depreciation and amortization, expense associated with operating our
corporate headquarters and impairment charges, if any.

Net Sales. Net sales increased by $98.1 million, or 43.0%, to $326.0 million in
the second quarter of fiscal 2021 from $227.9 million in the second quarter last
year. The change in net sales reflected the following:

• Same store sales increased by $77.2 million, or 31.2%, for the 13 weeks
ended July 4, 2021, versus the comparable 13-week period in the prior year.
The increase in same store sales reflected the following:

o Continued strong demand for many categories of sporting goods products
as a result of COVID-19 and consumers’ desire to recreate and stay
active.

o We experienced strong same store sales increases for each of our major
merchandise categories of apparel, footwear and hardgoods.

o The increase in same store sales compares to a 4.2% decrease in same
store sales for the second quarter of fiscal 2020, which reflected
temporary store closures related to COVID-19 last year.

o Same store sales comparisons are made on a comparable-week basis. Same
store sales for a period normally consist of sales for stores that
operated throughout the period and the full corresponding prior-year
period, along with sales from e-commerce. Same store sales comparisons
exclude sales from stores permanently closed, or stores in the process
of closing, during the comparable periods. Sales from e-commerce in the
second quarter of fiscal 2021 and 2020 were not material.

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• The increase in net sales included an approximately $20.0 million favorable
impact from the calendar shift related to our 53-week fiscal 2020 that
caused the fiscal 2021 second quarter to begin one week later than the
fiscal 2020 second quarter, during which we were adversely impacted by
significant temporary store closures related to COVID-19. This calendar
shift also resulted in a benefit from pre-Fourth of July holiday sales
moving from the third quarter in fiscal 2020 to the second quarter in fiscal
2021, as well as the calendar shift related to the Easter holiday, during
which our stores are closed, from the second quarter in fiscal 2020 to the
first quarter in fiscal 2021.

• We experienced significantly increased customer transactions, which were
partially offset by a lower average sale per transaction, in the second
quarter of fiscal 2021 compared to the prior year.

Gross Profit. Gross profit increased by $54.7 million to $126.9 million, or
38.9% of net sales, in the 13 weeks ended July 4, 2021, compared with $72.2
million, or 31.7% of net sales, in the 13 weeks ended June 28, 2020. The change
in gross profit was primarily attributable to the following:

• Net sales increased by $98.1 million, or 43.0%, compared with the second
quarter of last year.

• Merchandise margins, which exclude buying, occupancy and distribution
expense, increased by a favorable 380 basis points compared with the second
quarter of last year when merchandise margins increased by a favorable 173
basis points. The increase primarily reflects lower promotional activities,
a shift in our product sales mix and higher sales prices in response to
increases in product purchase costs. The higher product purchase costs we
are experiencing reflect increased raw material, labor and freight costs
initially resulting from shortages related to COVID-19, as well as strong
consumer demand. Shipping capacity constraints are also contributing to
higher freight costs and are adversely impacting our ability to obtain
sufficient quantities of certain products to meet the higher demand.

• Store occupancy expense increased by $3.3 million, but declined by a
favorable 184 basis points as a percentage of net sales, compared with the
second quarter of last year, which reflected the favorable impact from lease
concessions in the amount of $3.0 million in the second quarter last year
that we negotiated in response to the COVID-19 pandemic.

• Distribution expense, including costs capitalized into inventory, increased
by $1.0 million, but declined by a favorable 145 basis points as a
percentage of net sales, in the second quarter of fiscal 2021 compared to
the prior year. The increase primarily reflected higher employee labor and
benefit-related expense, as well as higher trucking and fuel expense, in
order to meet the increased demand for our products, partially offset by
higher costs capitalized into inventory corresponding to the increase in
merchandise inventories compared with the second quarter of last year.

Selling and Administrative Expense. Selling and administrative expense increased
by $20.1 million to $78.4 million, or 24.0% of net sales, in the 13 weeks ended
July 4, 2021, from $58.3 million, or 25.6% of net sales, in the second quarter
last year. The change in selling and administrative expense was primarily
attributable to the following:

• Store-related expense, excluding occupancy, increased by $13.3 million due
largely to increased employee labor and benefit-related expense, including a
special recognition bonus for certain store employees related to performance
during the COVID-19 pandemic, compared with lower labor from reduced store
operating hours in the prior year in response to the pandemic, as well as
higher credit card fees and increases in various operating expenses to
support our increased operating hours and higher sales. The increases in
employee labor include a tightening labor market that reflected wage
pressures as a result of higher demand for labor in many of our markets. The
increases in employee labor also included wage pressures that continue to
reflect the incremental impact of legislated minimum wage rate increases
primarily in California, where over fifty percent of our stores are located.
In April 2016, California passed legislation to enact additional state-wide
minimum wage rate increases from $10.00 to $15.00 per hour to be implemented
in annual increments through fiscal 2022, including annual increases of
$1.00 per hour effective in fiscal 2019 through fiscal 2022. Additionally,
certain other jurisdictions within California, including Los Angeles and San
Francisco, as well as various other states in which we do business, are
implementing their own scheduled increases, which may also include interim
impacts effective at various points throughout the year. We estimate that
the impact of the California state-wide minimum wage rate increase, combined
with the impact of the additional minimum wage rate increases in certain
other jurisdictions within California and other states, caused our labor
expense to increase by approximately $0.4 million for the second quarter of
fiscal 2021 compared with the second quarter of fiscal 2020.

• Administrative expense increased by $4.8 million, primarily attributable to
an increase in company performance-based incentive accruals, as well as
increases in various operating expenses to support our higher sales.

• Advertising expense increased by $1.9 million, due mainly to higher print
advertising in comparison to the prior year, which was reduced significantly
in the second quarter of fiscal 2020 in response to the impact of the
COVID-19 pandemic last year.

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Other Income. Other income in the second quarter of fiscal 2020 consisted of a
cash condemnation settlement related to eminent domain proceedings, as more
fully described in Note 9 to the Interim Financial Statements included in Part
I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Interest Expense. Interest expense decreased by $0.6 million in the second
quarter of fiscal 2021 compared to the second quarter of fiscal 2020, primarily
reflecting a zero balance in borrowings under our existing credit facility since
July 2020.

Income Taxes. The provision for income taxes increased to $11.6 million for the
second quarter of fiscal 2021 from $4.5 million for the second quarter of fiscal
2020, primarily reflecting higher pre-tax income in the second quarter of fiscal
2021 compared to the second quarter of fiscal 2020. Our effective tax rate was
23.9% for the second quarter of fiscal 2021 and 28.7% for the second quarter of
fiscal 2020. Our effective tax rate for the second quarter of fiscal 2021
reflects an increased tax benefit related to the deduction for share-based
compensation and a $0.1 million favorable reduction of our previously
established valuation allowance related to unused California Enterprise Zone Tax
Credits.

26 Weeks Ended July 4, 2021 Compared to 26 Weeks Ended June 28, 2020

The following table sets forth selected items from our interim unaudited
condensed consolidated statements of operations by dollar and as a percentage of
our net sales for the periods indicated:

26 Weeks Ended
July 4, June 28,
2021 2020
(Dollars in thousands)
Net sales $ 598,826 100.0 % $ 445,671 100.0 %
Cost of sales (1) 374,010 62.5 308,923 69.3
Gross profit 224,816 37.5 136,748 30.7
Selling and administrative expense (2) 148,523 24.8 129,703 29.1
Other income – – (2,500 ) (0.6 )
Operating income 76,293 12.7 9,545 2.2
Interest expense 526 0.1 1,484 0.3
Income before income taxes 75,767 12.6 8,061 1.9
Income tax expense 17,418 2.9 1,536 0.3
Net income $ 58,349 9.7 % $ 6,525 1.6 %

(1) Cost of sales includes the cost of merchandise, net of discounts or
allowances earned, freight, inventory reserves, buying, distribution
center expense, including depreciation and amortization, and store
occupancy expense. Store occupancy expense includes rent,
amortization of leasehold improvements, common area maintenance,
property taxes and insurance.

(2) Selling and administrative expense includes store-related expense,
other than store occupancy expense, as well as advertising,
depreciation and amortization, expense associated with operating our
corporate headquarters and impairment charges, if any.

Net Sales. Net sales increased by $153.1 million, or 34.4%, to $598.8 million in
the first half of fiscal 2021 from $445.7 million in the first half last year.
The change in net sales reflected the following:

• Same store sales increased by $142.4 million, or 31.5%, for the 26 weeks
ended July 4, 2021, versus the comparable 26-week period in the prior year.
The increase in same store sales reflected the following:

o Continued strong demand for many categories of sporting goods products
as a result of COVID-19 and consumers’ desire to recreate and stay
active was partially offset by reduced demand for products related to
team sports which remained impacted by the widespread suspension of
league play during the first quarter of fiscal 2021.

o We experienced strong same store sales increases for each of our major
merchandise categories of apparel, hardgoods and footwear.

o The increase in same store sales compares to a 7.5% decrease in same
store sales for the first half of fiscal 2020, which reflected
temporary store closures related to COVID-19 last year and unfavorable
winter weather in the first quarter of fiscal 2020.

o Same store sales comparisons are made on a comparable-week basis. Same
store sales for a period normally consist of sales for stores that
operated throughout the period and the full corresponding prior-year
period, along with sales from e-commerce. Same store sales comparisons
exclude sales from stores permanently closed, or stores in the process
of closing, during the comparable periods. Sales from e-commerce in the
first half of fiscal 2021 and 2020 were not material.

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• We experienced increased customer transactions and a higher average sale per
transaction in the first half of fiscal 2021 compared to the prior year.

• The increase in net sales included an approximately $10.0 million favorable
impact from the calendar shift related to our 53-week fiscal 2020 that
caused fiscal 2021 to begin one week later than fiscal 2020 and resulted in
pre-Fourth of July holiday sales moving from the third quarter in fiscal
2020 to the second quarter in fiscal 2021.

Gross Profit. Gross profit increased by $88.1 million to $224.8 million, or
37.5% of net sales, in the 26 weeks ended July 4, 2021, compared with $136.7
million, or 30.7% of net sales, in the 26 weeks ended June 28, 2020. The change
in gross profit was primarily attributable to the following:

• Net sales increased by $153.1 million, or 34.4%, compared with the first
half of last year.

• Merchandise margins, which exclude buying, occupancy and distribution
expense, increased by a favorable 369 basis points compared with the first
half of last year when merchandise margins increased by a favorable 84 basis
points. The increase primarily reflects lower promotional activities, a
shift in our product sales mix and higher sales prices in response to
increases in product purchase costs. The higher product purchase costs we
are experiencing reflect increased raw material, labor and freight costs
initially resulting from shortages related to COVID-19, as well as strong
consumer demand. Shipping capacity constraints are also contributing to
higher freight costs and are adversely impacting our ability to obtain
sufficient quantities of certain products to meet the higher demand.

• Distribution expense, including costs capitalized into inventory, increased
by $4.0 million, but declined by a favorable 68 basis points as a percentage
of net sales, in the first half of fiscal 2021 compared to the prior year.
The increase primarily reflected higher employee labor and benefit-related
expense, as well as higher trucking and fuel expense, in order to meet the
increased demand for our products, partially offset by higher costs
capitalized into inventory corresponding to the increase in merchandise
inventories compared with the first half of last year.

• Store occupancy expense increased by $3.3 million, but declined by a
favorable 210 basis points as a percentage of net sales, compared with the
first half of last year, which reflected the favorable impact from lease
concessions in the amount of $3.0 million in the second quarter last year
that we negotiated in response to the COVID-19 pandemic.

Selling and Administrative Expense. Selling and administrative expense increased
by $18.8 million to $148.5 million, or 24.8% of net sales, in the 26 weeks ended
July 4, 2021, from $129.7 million, or 29.1% of net sales, in the first half last
year. The change in selling and administrative expense was primarily
attributable to the following:

• Store-related expense, excluding occupancy, increased by $13.6 million due
largely to increased employee labor and benefit-related expense, including a
special recognition bonus for certain store employees related to performance
during the COVID-19 pandemic, compared with lower labor from reduced store
operating hours in the prior year in response to the COVID-19 pandemic, as
well as higher credit card fees and increases in various operating expenses
to support our increased operating hours and higher sales. The increases in
employee labor include a tightening labor market that reflected wage
pressures as a result of higher demand for labor in many of our markets. The
increases in employee labor also included wage pressures that continue to
reflect the incremental impact of legislated minimum wage rate increases
primarily in California, where over fifty percent of our stores are located.
In April 2016, California passed legislation to enact additional state-wide
minimum wage rate increases from $10.00 to $15.00 per hour to be implemented
in annual increments through fiscal 2022, including annual increases of
$1.00 per hour effective in fiscal 2019 through fiscal 2022. Additionally,
certain other jurisdictions within California, including Los Angeles and San
Francisco, as well as various other states in which we do business, are
implementing their own scheduled increases, which may also include interim
impacts effective at various points throughout the year. We estimate that
the impact of the California state-wide minimum wage rate increase, combined
with the impact of the additional minimum wage rate increases in certain
other jurisdictions within California and other states, caused our labor
expense to increase by approximately $0.9 million for the first half of
fiscal 2021 compared with the first half of fiscal 2020.

• Administrative expense increased by $6.5 million, primarily attributable to
an increase in company performance-based incentive accruals.

• Advertising expense decreased by $1.2 million, due mainly to lower print
advertising in the first half of fiscal 2021 that resulted in part as a
response to the impact of the COVID-19 pandemic.

Other Income. Other income in the first half of fiscal 2020 consisted of a cash
condemnation settlement related to eminent domain proceedings, as more fully
described in Note 9 to the Interim Financial Statements included in Part I, Item
1, Financial Statements, of this Quarterly Report on Form 10-Q.

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Interest Expense. Interest expense decreased by $1.0 million in the first half
of fiscal 2021 compared to the first half of fiscal 2020, primarily reflecting a
zero balance in borrowings under our existing credit facility since July 2020.

Income Taxes. The provision for income taxes increased to $17.4 million for the
first half of fiscal 2021 from $1.5 million for the first half of fiscal 2020,
primarily reflecting higher pre-tax income in the first half of fiscal 2021
compared to the first half of fiscal 2020. Our effective tax rate was 23.0% for
the first half of fiscal 2021 and 19.1% for the first half of fiscal 2020. Our
effective tax rate for the first half of fiscal 2021 reflects an increased tax
benefit related to the deduction for share-based compensation, a $0.3 million
favorable reduction of our previously established valuation allowance related to
unused California Enterprise Zone Tax Credits and a $0.2 million disaster
recovery credit related to fires in California. Our effective tax rate for the
first half of fiscal 2020 reflects the write-off of deferred tax assets related
to share-based compensation of $0.3 million. As a result of the U.S. Coronavirus
Aid, Relief and Economic Security Act enacted on March 27, 2020, to provide
relief from the impact of COVID-19, we amended our 2018 income tax return and
our effective tax rate for the first half of fiscal 2020 reflects the carryback
of our 2018 net operating loss to a period with a higher statutory income tax
rate.

Liquidity and Capital Resources

Our principal liquidity requirements are for working capital, capital
expenditures and cash dividends. We fund our liquidity requirements primarily
through cash and cash equivalents on hand, cash flows from operations and
borrowings from the revolving credit facility.

As of July 4, 2021, we had $118.9 million of cash and cash equivalents compared
to $16.7 million of cash as of June 28, 2020. Our cash flows from operating,
investing and financing activities are summarized as follows:

26 Weeks Ended
July 4, June 28,
2021 2020
(In thousands)
Total cash provided by (used in):
Operating activities $ 88,738 $ 58,230
Investing activities (3,856 ) (3,207 )
Financing activities (30,596 ) (46,511 )

Net increase in cash and cash equivalents $ 54,286 $ 8,512

Operating Activities. Operating cash flows for the first half of fiscal 2021 and
2020 were a positive $88.7 million and a positive $58.2 million, respectively.
The increased cash flow provided by operating activities for the first half of
fiscal 2021 compared to the prior year primarily reflects an increase in net
income for the current year, partially offset by increased funding of
merchandise inventory that resulted from an increase in inventory in the first
half of fiscal 2021 compared to a decrease in inventory in the same period last
year. Additionally, the higher cash flow provided by operating activities
reflected a larger decrease in accounts receivable primarily related to credit
card receivables for the first half of fiscal 2021 compared with the same period
of fiscal 2020.

Investing Activities. Net cash used in investing activities for the first half
of fiscal 2021 and 2020 was $3.9 million and $3.2 million, respectively. Capital
expenditures, excluding non-cash acquisitions, represented substantially all of
the cash used in investing activities for each period. In the first half of
fiscal 2021, capital expenditures of $4.1 million were partially offset by a
portion of settlement proceeds related to a civil unrest insurance recovery of
$0.2 million, and in the first half of fiscal 2020, capital expenditures of $3.4
million were partially offset by a portion of settlement proceeds from an
eminent domain condemnation of $0.2 million. Capital expenditures for both
periods primarily reflect store-related remodeling, distribution center
investments and computer hardware and software purchases.

Financing Activities. Financing cash flows for the first half of fiscal 2021 and
2020 were a negative $30.6 million and a negative $46.5 million, respectively.
For the first half of fiscal 2021, net cash was used primarily to fund dividend
payments, make principal payments on finance lease liabilities and pay debt
issuance costs, partially offset by proceeds received from the exercise of
employee share option awards. For the first half of fiscal 2020, net cash was
used primarily to pay down borrowings under the credit facility, make principal
payments on finance lease liabilities and fund dividend payments. The change in
cash flow from financing activities for the first half of fiscal 2021 compared
to last year primarily reflects a full pay-down of borrowings under the credit
facility to zero, as a result of improved profitability and positive operating
cash flow from increased consumer demand related to the COVID-19 pandemic,
partially offset by dividend payments in fiscal 2021 that included a special
dividend of $1.00 per share that was declared in the second quarter of fiscal
2021.

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As of July 4, 2021, we had zero revolving credit borrowings and letter of credit
commitments of $1.1 million outstanding. These balances compare to zero
revolving credit borrowings and letter of credit commitments of $2.6 million
outstanding as of January 3, 2021 and revolving credit borrowings of $35.0
million and letter of credit commitments of $4.7 million outstanding as of June
28, 2020.

In the first quarter of fiscal 2020 we paid a quarterly cash dividend of $0.05
per share of outstanding common stock. In the second quarter of fiscal 2020, our
Board of Directors suspended our quarterly cash dividend as a result of
COVID-19. In response to the improved strength of our balance sheet, operations
and cash flow generation, in the third quarter of fiscal 2020, our Board of
Directors reinstated our quarterly cash dividend at the previous rate of $0.05
per share of outstanding common stock and declared a cash dividend of $0.10 per
share of outstanding common stock. The $0.10 cash dividend reflected our
reinstated quarterly cash dividend of $0.05 per share of outstanding common
stock for the third quarter of fiscal 2020, and also included an additional
$0.05 per share in recognition that we did not pay a dividend in the second
quarter of fiscal 2020. In the fourth quarter of fiscal 2020, first quarter of
fiscal 2021 and second quarter of fiscal 2021, our Board of Directors declared
increases in our quarterly cash dividends to $0.10 per share of outstanding
common stock, $0.15 per share of outstanding common stock and $0.18 per share of
outstanding common stock, respectively. Additionally, in the second quarter of
fiscal 2021, our Board of Directors declared a special cash dividend of $1.00
per share of outstanding common stock, which was paid on June 1, 2021. In the
third quarter of fiscal 2021, our Board of Directors declared an increase in our
quarterly cash dividend to $0.25 per share of outstanding common stock, which
will be paid on September 15, 2021 to stockholders of record as of September 1,
2021.

We did not repurchase any shares of common stock in the first half of fiscal
2021 or fiscal 2020 pursuant to our current share repurchase program. Since the
inception of our initial share repurchase program in May 2006 through July 4,
2021, we have repurchased a total of 3,528,972 shares for $41.8 million.

Loan Agreement. As of January 3, 2021, we had a credit agreement with Wells
Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and a
syndicate of other lenders, as amended (the “Prior Credit Agreement”), which was
terminated and replaced on February 24, 2021 as discussed below.

On February 24, 2021, we entered into a Loan, Guaranty and Security agreement
with Bank of America, N.A. (“BofA”), as agent and lender (the “Loan Agreement”),
at which time the Prior Credit Agreement was terminated. The Loan Agreement has
a maturity date of February 24, 2026 and provides for a revolving credit
facility with an aggregate committed availability of up to $150.0 million. We
may also request additional increases in aggregate availability, up to a maximum
of $200.0 million, in which case the existing lenders under the Loan Agreement
will have the option to increase their commitment to accommodate the requested
increase. If the lenders do not exercise that option, we may (with the consent
of BofA in its role as the administrative agent, not to be unreasonably
withheld) seek other lenders willing to provide such commitments. The credit
facility includes a $50.0 million sublimit for issuances of letters of credit.

Similar to the Prior Credit Agreement, we may borrow under the Loan Agreement
from time to time, provided the amounts outstanding will not exceed the lesser
of the then aggregate committed availability (as discussed above) and the
Borrowing Base (such lesser amount being referred to as the “Line Cap”). As
defined in the Loan Agreement, the “Borrowing Base” generally is comprised of
the sum, at the time of calculation, of (a) 90.00% of eligible credit card
receivables; plus (b) the cost of eligible inventory (other than eligible
in-transit inventory), net of inventory reserves, multiplied by 90.00% of the
appraised net orderly liquidation value of eligible inventory (expressed as a
percentage of the cost of eligible inventory); plus (c) the cost of eligible
in-transit inventory, net of inventory reserves, multiplied by 90.00% of the
appraised net orderly liquidation value of eligible in-transit inventory
(expressed as a percentage of the cost of eligible in-transit inventory), minus
(d) certain agreed-upon reserves as well as other reserves established by BofA
in its role as the administrative agent in its reasonable discretion.

Generally, we may designate specific borrowings under the Loan Agreement as
either base rate loans or LIBO rate loans. The applicable interest rate on our
borrowings is a function of the daily average, over the preceding fiscal
quarter, of the excess of the Line Cap over amounts borrowed (such amount being
referred to as the “Average Daily Availability”). Those loans designated as LIBO
rate loans bear interest at a rate equal to the then applicable adjusted LIBO
rate plus an applicable margin as shown in the table below. Those loans
designated as base rate loans bear interest at a rate equal to the applicable
margin for base rate loans (as shown below) plus the highest of (a) the Federal
funds rate, as in effect from time to time, plus one-half of one percent
(0.50%), (b) the LIBO rate, plus one percentage point (1.00%), or (c) the rate
of interest in effect for such day as announced from time to time within BofA as
its “prime rate.” The applicable margin for all loans will be a function of
Average Daily Availability for the preceding fiscal quarter as set forth below.

LIBO Rate Base Rate
Level Average Daily Availability Applicable Margin Applicable Margin
I Greater than or equal to $70,000,000 1.375% 0.375%
II Less than $70,000,000 1.500% 0.500%

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The commitment fee assessed on the unused portion of the credit facility is
0.20% per annum.

Obligations under the Loan Agreement are secured by a general lien on and
security interest in substantially all of our assets. The Loan Agreement
contains covenants that require us to maintain a fixed charge coverage ratio of
not less than 1.0:1.0 in certain circumstances, and limits the ability to, among
other things, incur liens, incur additional indebtedness, transfer or dispose of
assets, change the nature of the business, guarantee obligations, pay dividends
or make other distributions or repurchase stock, and make advances, loans or
investments. We may generally declare or pay cash dividends or repurchase stock
only if, among other things, no default or event of default then exists or would
arise from such dividend or repurchase of stock and, after giving effect to such
dividend or repurchase, certain availability and/or fixed charge coverage ratio
requirements are satisfied, although we are permitted to make up to $5.0 million
of dividend payments or stock repurchases per year without satisfaction of the
availability or fixed charge coverage ratio requirements, but dividends or stock
repurchases made without satisfying the availability and/or fixed charge
coverage ratio requirements will require the establishment of an additional
reserve that will reduce borrowing availability under the Loan Agreement for 75
days. The Loan Agreement contains customary events of default, including,
without limitation, failure to pay when due principal amounts with respect to
the credit facility, failure to pay any interest or other amounts under the
credit facility, failure to comply with certain agreements or covenants
contained in the Loan Agreement, failure to satisfy certain judgments against
us, failure to pay when due (or any other default which permits the acceleration
of) certain other material indebtedness in principal amount in excess of $5.0
million, and certain insolvency and bankruptcy events.

The Prior Credit Agreement had a maturity date of September 29, 2022 and, as
amended, provided for a line of credit up to $140.0 million, which amount could
be increased at our option up to a maximum of $165.0 million. We could also
request additional increases in aggregate availability, on an uncommitted basis
up to a maximum of $200.0 million. The prior revolving credit facility included
a $25.0 million sublimit for issuances of letters of credit and a $20.0 million
sublimit for swingline loans. The Prior Credit Agreement provided for LIBO rate
loans to bear interest at a rate equal to the applicable adjusted LIBO rate plus
an applicable margin, as shown in the table below. The loans designated as base
rate loans bore interest at a rate equal to the applicable margin for base rate
loans plus the highest of (a) the Federal funds rate in effect plus one-half of
one percent, (b) the LIBO rate, plus one percentage point, or (c) the prime
interest rate. Under the Prior Credit Agreement, the applicable margin for all
loans was a function of Average Daily Availability for the preceding fiscal
quarter as set forth below.

LIBO Rate Base Rate
Level Average Daily Availability Applicable Margin Applicable Margin
I Greater than or equal to $70,000,000 1.250% 0.250%
II Less than $70,000,000 1.375% 0.500%

The commitment fee assessed on the unused portion of the prior credit facility
was 0.20% per annum.

In the first quarter of fiscal 2021, we paid and capitalized $0.7 million in new
creditor and third-party fees associated with the Loan Agreement, which will be
amortized over the term of the Loan Agreement, and extinguished $0.2 million of
deferred financing fees associated with the Prior Credit Agreement.

In order to support our liquidity in response to the rapidly growing COVID-19
outbreak, in March 2020 we exercised the accordion feature under our $140.0
million prior credit facility and drew down additional amounts under that
facility that resulted in long-term revolving credit borrowings of $143.3
million as of March 31, 2020, our highest borrowing level. As a result of
improved profitability and positive operating cash flow from increased consumer
demand related to the COVID-19 pandemic, we paid our long-term revolving credit
borrowings down to zero and we had letter of credit commitments of $1.1 million
and $2.6 million outstanding as of July 4, 2021 and January 3, 2021,
respectively, compared with borrowings of $35.0 million and letter of credit
commitments of $4.7 million as of June 28, 2020. Total remaining borrowing
availability, after subtracting letters of credit, was $148.9 million and $162.4
million as of July 4, 2021 and January 3, 2021, respectively, compared with
$125.3 million as of June 28, 2020.

Future Capital Requirements. We had cash and cash equivalents on hand of $118.9
million as of July 4, 2021. As a response to the COVID-19 pandemic, we initially
suspended capital spending in the first half of fiscal 2020 but have since
resumed our planned capital spending through the remainder of fiscal 2020 and
for fiscal 2021. We expect capital expenditures for fiscal 2021, excluding
non-cash acquisitions, to range from approximately $11.0 million to $15.0
million primarily to fund the opening of new stores, store-related remodeling,
distribution center investments and computer hardware and software purchases.
For fiscal 2021, we anticipate opening approximately five new stores and closing
two stores.

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We have historically paid quarterly cash dividends, subject to declaration by
our Board of Directors. In order to support our liquidity initiatives as a
result of COVID-19, in the second quarter of fiscal 2020 our Board of Directors
suspended our quarterly cash dividend. In response to the improved strength of
our balance sheet, operations and cash flow generation, in the third quarter of
fiscal 2020 our Board of Directors reinstated our quarterly cash dividend at the
previous rate of $0.05 per share of outstanding common stock and declared a cash
dividend of $0.10 per share of outstanding common stock. The $0.10 cash dividend
reflected our reinstated quarterly cash dividend of $0.05 per share of
outstanding common stock for the third quarter of fiscal 2020, and also included
an additional $0.05 per share in recognition that we did not pay a dividend in
the second quarter of fiscal 2020. In the fourth quarter of fiscal 2020, first
quarter of fiscal 2021 and second quarter of fiscal 2021, our Board of Directors
increased our quarterly cash dividend to $0.10 per share of outstanding common
stock, $0.15 per share of outstanding common stock and $0.18 per share of
outstanding common stock, respectively, and in the second quarter of fiscal 2021
our Board of Directors also declared a special cash dividend of $1.00 per share
of outstanding common stock. In the third quarter of fiscal 2021, our Board of
Directors declared an increase in our quarterly cash dividend to $0.25 per share
of outstanding common stock, which will be paid on September 15, 2021 to
stockholders of record as of September 1, 2021.

As of July 4, 2021, a total of $15.3 million remained available for share
repurchases under our current share repurchase program. We did not repurchase
any shares of our common stock in the first half of fiscal 2021 or fiscal 2020.
We consider several factors in determining when and if we make share repurchases
including, among other things, our alternative cash requirements, existing
business conditions and the market price of our stock.

We believe we will be able to fund our cash requirements from cash and cash
equivalents on hand, operating cash flows and borrowings from our credit
facility, for at least the next 12 months.

Contractual Obligations. Our material contractual obligations include operating
lease commitments associated with our leased properties and other occupancy
expense, finance lease obligations, borrowings under the credit facility and
other liabilities. Operating lease commitments consist principally of leases for
our retail store facilities, distribution center and corporate offices. These
leases frequently include options which permit us to extend the terms beyond the
initial fixed lease term, and we intend to renegotiate most of these leases as
they expire. Operating lease commitments also consist of information technology
(“IT”) systems hardware, distribution center delivery tractors and equipment.
Additional information regarding our operating and finance leases is available
in Notes 2 and 5 to the Interim Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q.

In the first half of fiscal 2021, we had zero borrowings under our revolving
credit facility. Our zero borrowings as of the second quarter of fiscal 2021 and
the prior year end reflect improved profitability and positive operating cash
flow from increased consumer demand related to the COVID-19 pandemic.

In the ordinary course of business, we enter into arrangements with vendors to
purchase merchandise in advance of expected delivery. Because most of these
purchase orders do not contain any termination payments or other penalties if
cancelled, they are not included as outstanding contractual obligations.

Critical Accounting Estimates

As discussed in Part II, Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, of our Annual Report on Form 10-K
for the fiscal year ended January 3, 2021, we consider our estimates on
valuation of inventory and long-lived assets to be among the most critical in
understanding the judgments that are involved in preparing our consolidated
financial statements. There have been no significant changes to these estimates
in the 26 weeks ended July 4, 2021.

Seasonality and Impact of Inflation

We experience seasonal fluctuations in our net sales and operating results.
Seasonality in our net sales influences our buying patterns which directly
impacts our merchandise inventory and accounts payable levels and cash flows. We
purchase merchandise for seasonal activities in advance of a season and
supplement our merchandise assortment as necessary and when possible during the
season. Our efforts to replenish products during a season are not always
successful. In the fourth fiscal quarter, which includes the holiday selling
season and the start of the winter selling season, we normally experience higher
inventory purchase volumes and increased expense for staffing and advertising.
If we miscalculate the consumer demand for our products generally or for our
product mix in advance of a season, particularly the fourth quarter, our net
sales can decline, which can harm our financial performance. A significant
shortfall from expected net sales, particularly during the fourth quarter, can
negatively impact our annual operating results.

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During the latter part of fiscal 2020 and continuing in the first half of fiscal
2021, we are experiencing rising product purchase costs, including higher
freight costs. As a result of strong consumer demand related to COVID-19 and
reduced product availability, in fiscal 2020 and 2021 we have been able to
adjust our selling prices for purchase cost increases. However, if we are unable
to adjust our selling prices for purchase cost increases in the future, then our
merchandise margins will decline, which will adversely impact our operating
results.

Recently Issued Accounting Updates

See Note 2 to the Interim Financial Statements included in Part I, Item 1,
Financial Statements, of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This document includes certain “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements relate to, among other things, our financial condition, our results
of operations, our growth strategy and the business of our company generally. In
some cases, you can identify such statements by terminology such as “may,”
“could,” “project,” “estimate,” “potential,” “continue,” “should,” “expects,”
“plans,” “anticipates,” “believes,” “intends” or other such terminology. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results to change significantly. These
risks and uncertainties include, among other things, the economic impacts of
COVID-19, including any potential variants, on our business operations,
including as a result of regulations that may be issued in response to COVID-19,
changes in the consumer spending environment, fluctuations in consumer holiday
spending patterns, increased competition from e-commerce retailers, breach of
data security or other unauthorized disclosure of sensitive personal or
confidential information, the competitive environment in the sporting goods
industry in general and in our specific market areas, inflation, product
availability and growth opportunities, changes in the current market for (or
regulation of) firearm-related products, a reduction or loss of product from a
key supplier, disruption in product flow, seasonal fluctuations, weather
conditions, changes in cost of goods, operating expense fluctuations, increases
in labor and benefit-related expense, changes in laws or regulations, including
those related to tariffs and duties, public health issues (including those
caused by COVID-19 or any potential variants), impacts of civil unrest or
widespread vandalism, lower than expected profitability of our e-commerce
platform or cannibalization of sales from our existing store base which could
occur as a result of operating the e-commerce platform, litigation risks,
stockholder campaigns and proxy contests, risks related to our historically
leveraged financial condition, changes in interest rates, credit availability,
higher expense associated with sources of credit resulting from uncertainty in
financial markets and economic conditions in general. Those and other risks and
uncertainties are more fully described in Part II, Item 1A, Risk Factors, in
this report and in Part I, Item 1A, Risk Factors, in our Annual Report on Form
10-K and other filings with the SEC. We caution that the risk factors set forth
in this report and the other reports that we file with the SEC are not
exclusive. In addition, we conduct our business in a highly competitive and
rapidly changing environment. Accordingly, new risk factors may arise. It is not
possible for management to predict all such risk factors, nor to assess the
impact of all such risk factors on our business or the extent to which any
individual risk factor, or combination of factors, may cause results to differ
materially from those contained in any forward-looking statement. We undertake
no obligation to revise or update any forward-looking statement that may be made
from time to time by us or on our behalf.

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