BIG 5 SPORTING GOODS CORP 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 2, 2022.

Our fiscal year ends on the Sunday nearest December 31. Fiscal 2022 is comprised
of 52 weeks and ends on January 1, 2023. Fiscal 2021 was comprised of 52 weeks
and ended on January 2, 2022. The interim periods in fiscal 2022 and 2021 are
each comprised of 13 weeks.

Overview

We are a leading sporting goods retailer in the western United States, with 431
stores and an e-commerce platform under the name “Big 5 Sporting Goods” as of
April 3, 2022. 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.

In the first quarter of fiscal 2022 and 2021 we did not open or close any
stores. For fiscal 2022, we anticipate opening approximately four new stores and
closing approximately two stores.

Executive Summary

Net income decreased in the first quarter of fiscal 2022 compared with
historically-high net income in the first quarter of fiscal 2021 as a result of
decreased net sales and increased selling and administrative expense, partially
offset by the favorable impact of higher merchandise margins year over year.
Decreases in net sales and earnings in the first quarter of fiscal 2022
reflected comparison to the first quarter of fiscal 2021, which represented our
highest first-quarter net sales and net income as a public company as a result
of strong consumer demand associated with the COVID-19 pandemic. While earnings
in the first quarter of fiscal 2022 decreased from the prior year, net income
remained healthy compared to pre-pandemic levels due mainly to a continuation of
improved merchandise margins.

Net sales for the first quarter of fiscal 2022 decreased 11.3% to $242.0 million
compared to $272.8 million for the first quarter of fiscal 2021. The decrease in
net sales reflects a decline of 11.4% in same store sales when compared with the
first quarter of fiscal 2021, when same store sales increased by 31.8% over the
first quarter of fiscal 2020. The same store sales increase achieved in the
first quarter of fiscal 2021 reflected our then-highest quarterly same store
sales increase as a public company. Our lower same store sales in the first
quarter of fiscal 2022 reflected decreases across each of our major merchandise
categories of hardgoods, apparel and footwear.

Gross profit for the first quarter of fiscal 2022 represented 35.5% of net
sales, compared with 35.9% in the first quarter of the prior year. The decrease
in gross profit margin primarily reflects higher store occupancy expense as a
percentage of net sales, partially offset by higher merchandise margins,
compared with the prior year.

Selling and administrative expense for the first quarter of fiscal 2022
increased 7.4% to $75.3 million, or 31.1% of net sales, compared to $70.1
million, or 25.7% of net sales, for the first quarter of fiscal 2021. The
increase in selling and administrative expense primarily reflects increased
employee labor and benefit-related expense year over year, along with the
elimination of an employment agreement-related liability last year.

Net income for the first quarter of fiscal 2022 was $9.1 million, or $0.41 per
diluted share, compared to net income of $21.5 million, or $0.96 per diluted
share, for the first quarter of fiscal 2021. The decreased earnings primarily
reflect lower net sales and higher selling and administrative expense, partially
offset by the favorable impact of higher merchandise margins year over year.

Operating cash flow for the first quarter of fiscal 2022 was a negative $23.7
million compared to operating cash flow in the first quarter of fiscal 2021 of a
positive $42.0 million. The decreased operating cash flow was due primarily to
increased funding of merchandise inventory and a decrease in net income year
over year, combined with decreased accrued expenses primarily related to company
performance-based incentive accruals and income taxes.

Capital expenditures for the first quarter of fiscal 2022 increased to $2.9
million from $1.7 million for the first quarter of fiscal 2021. We expect to
open approximately four new stores in fiscal 2022, after opening five new stores
in the prior year.

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Cash and cash equivalents were $62.0 million, $97.4 million and $100.1 million
as of April 3, 2022, January 2, 2022 and April 4, 2021, respectively. We have
had no borrowings under our credit facility since the full pay-down of
outstanding balances under the credit facility in the third quarter of fiscal
2020.

We paid cash dividends in the first quarter of fiscal 2022 of $6.1 million, or
$0.25 per share, compared with $3.4 million, or $0.15 per share, in the first
quarter of fiscal 2021.

We repurchased 94,983 shares of common stock for $1.6 million in the first
quarter of fiscal 2022.

Results of Operations

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

13 Weeks Ended April 3, 2022 Compared to 13 Weeks Ended April 4, 2021

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
April 3, April 4,
2022 2021
(Dollars in thousands)
Net sales $ 241,981 100.0 % $ 272,806 100.0 %
Cost of sales (1) 156,048 64.5 174,913 64.1
Gross profit 85,933 35.5 97,893 35.9
Selling and administrative expense (2) 75,317 31.1 70,144 25.7
Operating income 10,616 4.4 27,749 10.2
Interest expense 184 0.1 342 0.1
Income before income taxes 10,432 4.3 27,407 10.1
Income tax expense 1,329 0.5 5,861 2.1
Net income $ 9,103 3.8 % $ 21,546 8.0 %

(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 decreased by $30.8 million, or 11.3%, to $242.0 million in
the first quarter of fiscal 2022 from $272.8 million in the first quarter last
year. The change in net sales reflected the following:

Same store sales decreased by $30.6 million, or 11.4%, for the 13 weeks ended
April 3, 2022, versus the comparable 13-week period in the prior year. The
decrease in same store sales reflected the following:

o

The decrease in same store sales compares to a 31.8% increase in same store
sales for the first quarter of fiscal 2021, which at the time was our highest
quarterly increase in same store sales as a public company. Sales in the first
quarter of fiscal 2022 were impacted by unfavorable warm and dry winter weather
conditions in our markets, as well as reduced customer traffic due to COVID-19
and product availability constraints resulting from ongoing supply chain
disruptions.

o

The record increase in our same store sales achieved for the first quarter of
fiscal 2021 resulted from strong consumer demand for many categories of sporting
goods products last year as certain COVID-19 pandemic restrictions were lifted,
and also reflected favorable comparisons against temporary store closures
related to COVID-19 in the first quarter of fiscal 2020.

o

Our lower same store sales reflected a decrease in each of our major merchandise
categories of hardgoods, apparel and footwear.

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 quarter of fiscal 2022 and 2021 were not
material.

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We experienced decreased customer transactions and a lower average sale per
transaction in the first quarter of fiscal 2022 compared to the prior year.

The decrease in net sales was partially offset by a favorable calendar shift
related to the Easter holiday, during which our stores are closed, from the
first quarter in fiscal 2021 to the second quarter in fiscal 2022.

Gross Profit. Gross profit decreased by $12.0 million to $85.9 million, or 35.5%
of net sales, in the 13 weeks ended April 3, 2022, compared with $97.9 million,
or 35.9% of net sales, in the 13 weeks ended April 4, 2021. The change in gross
profit was primarily attributable to the following:

Net sales decreased by $30.8 million, or 11.3%, compared with the first quarter
of last year.

Store occupancy expense increased by $0.3 million, or 126 basis points as a
percentage of net sales, compared with the first quarter of last year.

Merchandise margins, which exclude buying, occupancy and distribution expense,
increased by a favorable 119 basis points compared with the first quarter of
last year when merchandise margins increased by a favorable 350 basis points.
Our continued strong merchandise margins primarily reflect favorable promotional
pricing, 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 continue to reflect increased raw material, labor and freight costs
initially resulting from shortages related to COVID-19. Shipping capacity
constraints and labor shortages at the ports also continue to contribute to
higher freight costs and are adversely impacting our ability to obtain
sufficient quantities of certain products in our stores to meet customer demand.

Distribution expense, including costs capitalized into inventory, decreased by
$1.4 million, but increased by an unfavorable 3 basis points as a percentage of
net sales, in the first quarter of fiscal 2022 compared to the prior year. The
decrease primarily reflected increased costs capitalized into inventory,
partially offset by higher freight-related expense.

Selling and Administrative Expense. Selling and administrative expense increased
by $5.2 million to $75.3 million, or 31.1% of net sales, in the 13 weeks ended
April 3, 2022, from $70.1 million, or 25.7% of net sales, in the first quarter
last year. The change in selling and administrative expense was primarily
attributable to the following:

Store-related expense, excluding occupancy, increased by $3.0 million due
largely to increases in employee labor and benefit-related expense as well as
various operating expenses to support our increased operating hours compared
with the reduced store operating hours that we maintained in the prior year in
response to the pandemic. While store operating hours were higher in the first
quarter of fiscal 2022 compared with the same period last year, store operating
hours remain below pre-pandemic levels. Higher labor expense for the first
quarter of fiscal 2022 also reflected increased wage expense as a result of
higher demand for labor in many of our markets, and these wage pressures
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 California, state-wide minimum wage rates have risen from $10.00 per
hour in 2017 to $15.00 per hour in 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 $0.5 million for the first quarter of fiscal 2022 compared with
the first quarter of fiscal 2021.

Administrative expense increased by $1.8 million, primarily attributable to an
increase in employee labor and benefit-related expense in the current year and
the elimination of an employment agreement-related liability in the first
quarter of fiscal 2021, partially offset by a decrease in company
performance-based incentive accruals in the current year.

Our advertising expense increased by $0.3 million in the first quarter of fiscal
2022 due mainly to higher digital advertising in comparison to the prior year.
Despite this year-over-year increase, our expenses continue to benefit from
significantly reduced advertising activity that resulted from initial measures
we took in response to COVID-19 in fiscal 2020. We expect our expenses to
continue to benefit from reduced advertising activity in the foreseeable future
as we continue to evaluate the impact on our sales.

Interest Expense. Interest expense decreased by $0.2 million in the first
quarter of fiscal 2022 compared to the first quarter of fiscal 2021.

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Income Taxes. The provision for income taxes decreased to $1.3 million for the
first quarter of fiscal 2022 from $5.9 million for the first quarter of fiscal
2021, primarily reflecting lower pre-tax income in the first quarter of fiscal
2022 compared to the first quarter of fiscal 2021. Our effective tax rate was
12.7% for the first quarter of fiscal 2022 and 21.4% for the first quarter of
fiscal 2021. Our lower effective tax rate for the first quarter of fiscal 2022
reflected a higher tax deduction related to share-based compensation combined
with lower pretax income.

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, when necessary.

As of April 3, 2022, we had $62.0 million of cash and cash equivalents compared
to $100.1 million of cash and cash equivalents as of April 4, 2021. Our cash
flows from operating, investing and financing activities are summarized as
follows:

13 Weeks Ended
April 3, April 4,
2022 2021
(In thousands)
Total cash (used in) provided by:
Operating activities $ (23,717 ) $ 41,974
Investing activities (2,926 ) (1,493 )
Financing activities (8,739 ) (5,038 )

Net (decrease) increase in cash and cash equivalents $ (35,382 ) $ 35,443

Operating Activities. Operating cash flows for the first quarter of fiscal 2022
and 2021 were a negative $23.7 million and a positive $42.0 million,
respectively. The decreased cash flow provided by operating activities for the
first quarter of fiscal 2022 compared to the prior year primarily reflects
increased funding of merchandise inventory, decreased net income, decreased
accrued expenses primarily related to performance-based incentive accruals and
income taxes, and smaller decreases in credit card receivables.

Investing Activities. Net cash used in investing activities for the first
quarter of fiscal 2022 and 2021 was $2.9 million and $1.5 million, respectively.
Capital expenditures, excluding non-cash acquisitions, represented substantially
all of the cash used in investing activities for each period. In the first
quarter of fiscal 2021, capital expenditures of $1.7 million were partially
offset by a portion of settlement proceeds related to a civil unrest insurance
recovery 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 quarter of fiscal 2022
and 2021 were a negative $8.7 million and a negative $5.0 million, respectively.
For the first quarter of fiscal 2022, net cash was used primarily to fund
dividend payments, purchase treasury stock and make principal payments on
finance lease liabilities. For the first quarter 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. The change in cash
flow from financing activities for the first quarter of fiscal 2022 compared to
last year primarily reflects an increase in the quarterly dividend rate declared
and paid in the first quarter of fiscal 2022.

As of April 3, 2022, January 2, 2022 and April 4, 2021, we had no revolving
credit borrowings and $1.1 million of letter of credit commitments outstanding.

In the first quarter of fiscal 2021, second quarter of fiscal 2021, third
quarter of fiscal 2021 and fourth quarter of fiscal 2021 our Board of Directors
declared quarterly cash dividends of $0.15 per share of outstanding common
stock, $0.18 per share of outstanding common stock, $0.25 per share of
outstanding common stock and $0.25 per share of outstanding common stock,
respectively. Additionally, in the second quarter of fiscal 2021 and fourth
quarter of fiscal 2021, our Board of Directors declared special cash dividends
of $1.00 per share of outstanding common stock. In the first quarter of fiscal
2022, our Board of Directors declared a quarterly cash dividend of $0.25 per
share of outstanding common stock, and in the second quarter of fiscal 2022, our
Board of Directors declared a quarterly cash dividend of $0.25 per share of
outstanding common stock, which will be paid on June 15, 2022 to stockholders of
record as of June 1, 2022.

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Periodically, we repurchase our common stock in the open market pursuant to
programs approved by our Board of Directors. We may repurchase our common stock
for a variety of reasons, including, among other things, our alternative cash
requirements, existing business conditions and the current market price of our
stock. In fiscal 2016, our Board of Directors authorized a share repurchase
program for the purchase of up to $25.0 million of our common stock, which was
in effect through the fourth quarter of fiscal 2021 and under which a total of
$7.7 million remained available for share repurchases as of January 2, 2022. In
the first quarter of fiscal 2022, our Board of Directors authorized a new share
repurchase program of up to $25.0 million of our common stock, which replaced
the previous share repurchase program. Under this program, we may purchase
shares from time to time in the open market or in privately negotiated
transactions in compliance with the applicable rules and regulations of the
Securities and Exchange Commission. However, the timing and amount of such
purchases, if any, would be at the discretion of our management and Board of
Directors, and would depend on market conditions and other considerations. We
repurchased 94,983 shares of common stock in the first quarter of fiscal 2022
pursuant to our new share repurchase program. We did not repurchase any shares
of common stock in the first quarter of fiscal 2021. Since the inception of our
initial share repurchase program in May 2006 through April 3, 2022, we have
repurchased a total of 3,985,278 shares for $51.0 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 terminated the Prior Credit Agreement and entered into
a Loan, Guaranty and Security agreement with Bank of America, N.A. (“BofA”), as
agent and lender, which was amended on November 22, 2021 (as so amended, the
“Loan Agreement”). 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 lender under the Loan Agreement will have the option to increase their
commitment to accommodate the requested increase. If the lender does 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.” As amended, the Loan Agreement provides for a transition to an
alternative benchmark reference rate following the cessation of the LIBO 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%

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

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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.

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.

Future Capital Requirements. We had cash and cash equivalents on hand of $62.0
million as of April 3, 2022. We expect capital expenditures for fiscal 2022,
excluding non-cash acquisitions, to range from approximately $14.0 million to
$18.0 million primarily to fund the opening of new stores, store-related
remodeling, distribution center investments and computer hardware and software
purchases. For fiscal 2022, we anticipate opening approximately four new stores
and closing approximately two stores.

Dividends are paid at the discretion of our Board of Directors. In fiscal 2021
we paid cash dividends of $2.83 per share of outstanding common stock. Dividends
declared in fiscal 2021 included special dividends totaling $2.00 per share of
outstanding common stock. In the first quarter of fiscal 2022, our Board of
Directors declared a quarterly cash dividend of $0.25 per share of outstanding
common stock, and in the second quarter of fiscal 2022, our Board of Directors
declared a quarterly cash dividend of $0.25 per share of outstanding common
stock, which will be paid on June 15, 2022 to stockholders of record as of June
1, 2022.

As of April 3, 2022, a total of $23.4 million remained available for share
repurchases under our new share repurchase program. We repurchased 94,983 shares
of our common stock in the first quarter of fiscal 2022 and did not repurchase
any shares of our common stock in the first quarter of fiscal 2021. 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, if
any, 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 quarter of fiscal 2022 and 2021, we had no borrowings under our
revolving credit facility. Our zero borrowings 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.

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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 2, 2022, we consider our estimates on
valuation of merchandise inventory 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 13 weeks ended April 3, 2022.

Seasonality and Impact of Inflation

We experience seasonal fluctuations in our net sales and operating results,
which can suffer when weather does not conform to seasonal norms, such as the
first quarter of fiscal 2022 when we experienced warm and dry winter-weather
conditions across our markets. Seasonality in our net sales influences our
buying patterns which directly impacts our merchandise 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.

In fiscal 2021 and the first quarter of fiscal 2022, we experienced greater
inflation in the cost of products that we purchase for resale as well as higher
freight costs than in previous years. While our merchandise inventory costs have
been impacted by these inflationary pressures, up to this point we have
generally been able to adjust our selling prices in response to these higher
product purchase costs. However, if we are unable to continue to adjust our
selling prices for product purchase cost increases that might occur in the
future, then our merchandise margins could decline, which would adversely impact
our operating results. In fiscal 2021 and the first quarter of fiscal 2022, we
also experienced increased wage expense as a result of higher demand for labor
in many of our markets.

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 and uncertainties and
other factors that may cause our actual results in current or future periods to
change significantly and differ materially from forecasted results. 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 from 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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