UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 27, 2004

OR

For the transition period from                     to                    

Commission file number: 333-43129

BIG 5 CORP.

Registrant’s telephone number, including area code: (310) 536-0611

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

     There were 1,000 shares of common stock with a par value of $0.01 per share outstanding at July 30, 2004.

BIG 5 CORP.

INDEX

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BIG 5 CORP.

Condensed Consolidated Balance Sheets

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BIG 5 CORP.

Condensed Consolidated Statements of Operations

See accompanying notes to condensed consolidated financial statements.

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BIG 5 CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited)
(in thousands)

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BIG 5 CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

(1)

Basis of Presentation and Description of Business

     We operate in one business segment, as a sporting goods retailer under the Big 5 Sporting Goods name carrying a broad range of hard goods, soft goods and footwear, operating 295 stores at June 27, 2004 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada, Utah, Idaho and Colorado. Big 5 Corp. (the Company) is wholly owned by Big 5 Sporting Goods Corporation, our parent company (the Parent). We have a wholly owned subsidiary, Big 5 Services Corp., which began operations at the beginning of fiscal 2004 to centralize the issuance and administration of gift certificates and gift cards.

     In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly and in accordance with accounting principles generally accepted in the United States of America (GAAP) the financial position as of June 27, 2004 and December 28, 2003, the results of operations for the 13 and 26 week periods ended June 27, 2004 and June 29, 2003 and cash flows for the 26 weeks ended June 27, 2004 and June 29, 2003. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2003.

(2)

Debt Redemption

     On April 15, 2004, we redeemed $15.0 million face value of our 10.875% senior notes due 2007 using borrowings under our credit facility. We also redeemed $20.0 million face value and $35.0 million face value of our 10.875% senior notes due 2007 during the first and fourth quarters of fiscal 2003, respectively, using borrowings under our credit facility.

(3)

Stock-Based Compensation

     The employees of Big 5 Corp. participate in the stock-based compensation plan of the Parent. As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, we continue to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provide pro forma net income and pro

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forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. SFAS No. 123 was amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123, to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Therefore, compensation expense for stock options issued to employees is recorded on the date of grant only if the then-current market price of the underlying stock exceeded the exercise price. If we had determined compensation cost based upon the fair value at the grant date for our stock options under SFAS No. 123 using the Black Scholes option pricing model, pro forma net income would have been as follows:

(4)

Related Party Transactions

     Prior to September 1992, the Company was a wholly owned subsidiary of Thrifty Corporation (“Thrifty”), which was in turn a wholly owned subsidiary of Pacific Enterprises (“PE”). In December 1996, Thrifty was acquired by Rite Aid Corp. (“Rite Aid”).

     As a result of the Company’s prior relationship with Thrifty and its affiliates, the Company continues to maintain certain relationships with Rite Aid, PE and PE’s successor company, Sempra Energy. These relationships include continuing indemnification obligations of PE to the Company for certain environmental matters; agreements between the Company and PE with respect to various tax matters and obligations under ERISA, including the allocation of various tax obligations relating to the inclusion of the Company and each member of the affiliated group of which the Company was a subsidiary in certain consolidated and/or unitary tax returns of PE, and subleases. Green Equity Investors III, L.P., an affiliate of Leonard Green & Partners, L.P., holds convertible preferred stock in Rite

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Aid, which, if converted, would represent approximately 13.0% of Rite Aid’s outstanding stock. Green Equity Investors, L.P., an affiliate of Leonard Green & Partners, L.P., owned more than 27% of Parent’s outstanding common stock until it sold substantially all of its shares in a secondary public offering in November 2003.

(5)

Contingencies

     The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BASIS OF REPORTING

Net Sales

     Net sales consist of sales from all stores operated during the period presented, net of merchandise returns. Same store sales for a period reflect net sales from stores operated throughout that period as well as the corresponding prior period. New store sales for a period reflect net sales from stores opened in that period as well as net sales from stores opened during the prior fiscal year. Stores that are relocated during any period are treated as new stores.

Gross Profit

     Gross profit is comprised of net sales less all costs of sales, including the cost of merchandise, inventory markdowns, inventory shrinkage, inbound freight, distribution and warehousing, payroll for our buying personnel and store and corporate office occupancy costs. Store and corporate office occupancy costs include rent, contingent rents, common area maintenance, real estate property taxes and property insurance.

Selling and Administrative

     Selling and administrative includes store management and corporate expenses, including non-buying personnel payroll, employment taxes, employee benefits, management information systems, advertising, insurance other than property insurance, legal, store pre-opening expenses and other corporate level expenses. Store pre-opening expenses include store-level payroll, grand opening event marketing, travel, supplies and other store opening expenses.

Depreciation and Amortization

     Depreciation and amortization consists primarily of the depreciation of leasehold improvements, fixtures and equipment owned by us, amortization of leasehold interest and non-cash rent expense.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

     In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition.

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Valuation of Inventory

     We value our inventories at the lower of cost or market using the weighted average cost method that approximates the first-in, first-out (“FIFO”) method. Management has evaluated the current level of inventories in comparison to planned sales volume and other factors and, based on this evaluation, has recorded adjustments to inventory and cost of goods sold for estimated decreases in inventory value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand and competitive environments differ from our expectations. We are not aware of any events or changes in demand or price that would indicate to us that our inventory valuation may be materially inaccurate at this time.

Valuation of Long-Lived Assets

     Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by us to be generated by these assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. We are not aware of any events or changes in circumstances that would indicate to us that our long-lived assets are impaired or that would require an impairment consideration at this time.

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RESULTS OF OPERATIONS

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

13 Weeks Ended June 27, 2004 Compared to 13 Weeks Ended June 29, 2003

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated:

     1. Net Sales. Net sales increased by $14.4 million, or 8.4%, to $184.5 million in the 13 weeks ended June 27, 2004 from $170.1 million in the same period last year. This growth reflected an increase of $6.6 million in same store sales and an increase of $9.1 million in new store sales, which reflected the opening of four new stores, including two relocated stores, during the first 26 weeks of 2004 and 18 new stores since March 30, 2003. The remaining variance was attributable to net sales from closed stores. Same store sales increased 3.9% in the 13 weeks ended June 27, 2004 versus the same period last year, representing the thirty-fourth consecutive quarterly increase in same store sales over comparable prior periods. This 3.9% increase in same store sales was attributable to higher sales in each of our three major product categories of footwear, hard goods and apparel. Store count at June 27, 2004 was 295 versus 275 at June 29, 2003. We opened one store in the 13 weeks ended June 27, 2004, and no stores in the 13 weeks ended June 29, 2003. We expect to open 13 to 16 net new stores during the remainder of fiscal 2004.

     2. Gross Profit. Gross profit increased by $5.1 million, or 8.1%, to $67.7 million in the 13 weeks ended June 27, 2004 from $62.6 million in the same period last year. Gross profit margin was 36.7% in the 13 weeks ended June 27, 2004 compared to 36.8% in the same period last year. We achieved higher product selling margin comparisons in each of

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our three major product categories; however, gross profit margin declined 0.1% as a result of higher warehouse and distribution costs, which increased 0.2% as a percent of net sales. Warehouse payroll and benefit expenses increased in order to support our store growth and to prepare for the new distribution center scheduled to open in fiscal 2005. In addition, higher gasoline prices negatively impacted trucking expense.

     3. Selling and Administrative. Selling and administrative expenses increased by $3.5 million, or 7.6%, to $50.0 million in the 13 weeks ended June 27, 2004 from $46.5 million in the same period last year. The increase was driven by a $2.3 million increase in store-related expenses, including payroll and payroll taxes, as a result of store growth, as well as increased employee health benefit costs. Advertising expense increased by $0.9 million due to the growth in our store base since the same period last year. The remaining difference resulted from other administrative costs, such as corporate payroll and benefit expense. When measured as a percentage of net sales, selling and administrative expenses were 27.1% for the 13 weeks ended June 27, 2004, down from 27.3% in the 13 weeks ended June 29, 2003. The decrease primarily resulted from a 0.2% decline in store salaries when measured as a percent of sales.

     4. Depreciation and Amortization. Depreciation and amortization expense increased $0.2 million, or 7.3%, to $2.7 million for the 13 weeks ended June 27, 2004 from $2.5 million for the same period last year, primarily due to the increase in store count to 295 stores at the end of the second quarter of fiscal 2004 from 275 stores at the end of the second quarter of fiscal 2003.

     5. Redemption Premium and Unamortized Financing Fees Related to Redemption of Debt. Redemption premium and unamortized financing fees related to redemption of debt were $0.8 million in the 13 weeks ended June 27, 2004. There were no redemption premium and unamortized financing fees related to redemption of debt in the 13 weeks ended June 29, 2003. The $0.8 million charge in the 13 weeks ended June 27, 2004 resulted from the redemption of $15.0 million face value of our 10.875% senior notes and the related carrying value of applicable deferred financing costs and original issue discount which totaled $0.2 million in the second quarter of fiscal 2004.

     6. Interest Expense, Net. Interest expense, net, decreased by $1.3 million, or 43.9%, to $1.6 million in the 13 weeks ended June 27, 2004 from $2.9 million in the same period last year. Interest expense benefited from the redemption of $15.0 million of our 10.875% senior notes in the second quarter of fiscal 2004 and $35.0 million in the fourth quarter of fiscal 2003 through borrowings from our lower cost credit facility as well as a reduction in overall debt levels since the beginning of fiscal 2003.

     7. Income Taxes. Provision for income taxes was $5.0 million for the 13 weeks ended June 27, 2004 and $4.4 million for the 13 weeks ended June 29, 2003. We accrue taxes at the statutory tax rate, which is reevaluated on an ongoing basis by management. In the 13 weeks ended June 27, 2004 we determined the Company’s effective tax rate to be 40%, down from 41% in the 13 weeks ended June 29, 2003, due in part to the growth in our store base outside of California.

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26 Weeks Ended June 27, 2004 Compared to 26 Weeks Ended June 29, 2003

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated:

     1. Net Sales. Net sales increased by $30.9 million, or 9.2%, to $365.5 million in the 26 weeks ended June 27, 2004 from $334.6 million in the same period last year. This growth reflected an increase of $15.0 million in same store sales and an increase of $17.6 million in new store sales, which reflected the opening of four new stores, including two relocated stores, during the first 26 weeks of 2004 and 19 new stores in fiscal 2003. The remaining variance was attributable to net sales from closed stores. Same store sales increased 4.5% in the 26 weeks ended June 27, 2004 versus the same period last year. This 4.5% increase in same store sales was attributable to higher sales in each of our three major product categories of footwear, hard goods and apparel. Store count at June 27, 2004 was 295 versus 275 at June 29, 2003. We opened four stores, including two relocated stores, in the 26 weeks ended June 27, 2004. We opened one store and closed one store in the 26 weeks ended June 29, 2003. We expect to open 13 to 16 net new stores during the remainder of fiscal 2004.

     2. Gross Profit. Gross profit increased by $12.9 million, or 10.7%, to $133.3 million in the 26 weeks ended June 27, 2004 from $120.4 million in the same period last year. Gross profit margin was 36.5% in the 26 weeks ended June 27, 2004 compared to 36.0% in the same period last year. We were able to achieve higher gross profit margins primarily due to improved product selling margin comparisons in each of our three major product categories, partially offset by a 0.2% increase in warehouse and distribution costs when measured as a percentage of sales. The 0.2% increase in warehouse and distribution costs was largely driven by higher warehouse payroll and benefit expenses to support our store growth and to prepare for the new distribution center scheduled to open in fiscal 2005. In addition, higher gasoline prices negatively impacted trucking expense.

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     3. Selling and Administrative. Selling and administrative expenses increased by $8.0 million, or 8.7%, to $99.6 million in the 26 weeks ended June 27, 2004 from $91.6 million in the same period last year. The increase was driven by a $5.0 million increase in store-related expenses, including payroll and payroll taxes, as a result of store growth, as well as increased employee health benefit costs. Advertising expense increased by $1.8 million due to the growth in our store base since the same period last year. The remaining $1.2 million increase resulted from other administrative costs, such as corporate payroll and benefit expense. When measured as a percentage of net sales, selling and administrative expenses were 27.3% for the 26 weeks ended June 27, 2004, down from 27.4% in the 26 weeks ended June 29, 2003. The decrease primarily resulted from a 0.2% decline in store salaries when measured as a percent of sales.

     4. Depreciation and Amortization. Depreciation and amortization expense increased $0.5 million, or 9.1%, to $5.5 million for the 26 weeks ended June 27, 2004 from $5.0 million for the same period last year, primarily due to the increase in store count to 295 stores at the end of the second quarter of fiscal 2004 from 275 stores at the end of the second quarter of fiscal 2003.

     5. Redemption Premium and Unamortized Financing Fees Related to Redemption of Debt. Redemption premium and unamortized financing fees related to redemption of debt were $0.8 million in the 26 weeks ended June 27, 2004 versus $1.5 million during the same period last year. The $0.8 million charge in the 26 weeks ended June 27, 2004 resulted from the redemption of $15.0 million face value of our 10.875% senior notes and the related carrying value of applicable deferred financing costs and original issue discount which totaled $0.2 million in the second quarter of fiscal 2004. The $1.5 million charge in the first 26 weeks of fiscal 2003 resulted from the redemption of $20.0 million face value of our 10.875% senior notes during the first quarter of fiscal 2003.

     6. Interest Expense, Net. Interest expense, net, decreased by $2.3 million, or 39.4%, to $3.6 million in the 26 weeks ended June 27, 2004 from $5.9 million in the same period last year. Interest expense benefited from the redemption of $15.0 million of our 10.875% senior notes in the second quarter of fiscal 2004 and $55.0 million in fiscal 2003 through borrowings from our lower cost credit facility as well as a reduction in overall debt levels since the beginning of fiscal 2003.

     7. Income Taxes. Provision for income taxes was $9.5 million for the 26 weeks ended June 27, 2004 and $6.7 million for the 26 weeks ended June 29, 2003. We accrue taxes at the statutory tax rate, which is reevaluated on an ongoing basis by management. In the 26 weeks ended June 27, 2004 we determined the Company’s effective tax rate to be 40%, down from 41% in the 26 weeks ended June 29, 2003, due in part to the growth in our store base outside of California.

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LIQUIDITY AND CAPITAL RESOURCES

     Our principal liquidity requirements are for working capital and capital expenditures. We fund our liquidity requirements with cash on hand, cash flow from operations and borrowings under our credit facility.

     Net cash used by operating activities for the first 26 weeks of fiscal 2004 and fiscal 2003 was $2.5 million and $5.9 million, respectively. The change between periods primarily reflects higher net income in the first 26 weeks of fiscal 2004, partially offset by increased working capital requirements between periods to fund store growth.

     Capital expenditures for the first 26 weeks of fiscal 2004 and 2003 were $3.4 million and $1.7 million, respectively. Expenditures for our planned new distribution center accounted for approximately $0.6 million of capital expenditures in the first 26 weeks of fiscal 2004. We expect capital expenditures for the remaining 26 weeks of fiscal 2004 to range from $15.0 to $20.0 million. We expect to spend $7.0 to $10.0 million primarily to fund the opening of approximately 13 to 16 net new stores (which includes store relocations), store improvements and remodelings, warehouse and headquarters improvements and computer hardware and software expenditures. In addition, we anticipate spending an estimated $8.0 to $10.0 million of the approximately $15.0 million of total capital spending requirements for our planned new distribution center, which is scheduled to be operational in the second half of fiscal 2005.

     Net cash provided by financing activities for the first 26 weeks of fiscal 2004 and fiscal 2003 was $3.5 million and $5.1 million, respectively. As of June 27, 2004, we had borrowings of $76.5 million and letter of credit commitments of $0.5 million outstanding under our credit facility and $33.1 million of our 10.875% senior notes outstanding. These balances compare to borrowings of $52.1 million and letter of credit commitments of $5.4 million outstanding under our credit facility and $82.8 million of our 10.875% senior notes outstanding as of June 29, 2003. On April 15, 2004, we redeemed $15.0 million face value of our 10.875% senior notes due 2007, using borrowings under our credit facility. We also redeemed $20.0 million face value and $35.0 million face value of our 10.875% senior notes due 2007 during the first and fourth quarters of fiscal 2003, respectively, using borrowings under our credit facility. We had $6.4 million of cash at June 27, 2004 and $6.8 million at June 29, 2003.

     We believe we will be able to fund our future cash requirements for operations from operating cash flows, cash on hand and borrowings under our credit facility. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures and satisfy our scheduled payments under debt obligations for at least the next twelve months. However, our ability to satisfy such obligations depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control. See “Risk Factors That May Affect Future Results.”

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     Our principal future obligations and commitments, excluding periodic interest payments, include the following:

     Long-term debt consists of our 10.875% senior notes that mature on November 13, 2007. We expect to repay our 10.875% senior notes by the maturity date using a combination of cash flow from operations, drawings under our credit facility, an expansion or replacement of our credit facility and the issuance of debt or equity securities. The 10.875% senior notes are general unsecured obligations, which rank senior in right of payment to all of our existing and future subordinated indebtedness and pari passu in right of payment with all of our current and future unsubordinated indebtedness, subject to the security interests that have been granted in substantially all of our assets in connection with our credit facility.

     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. We intend to renegotiate those leases as they expire. Payments for these lease commitments are provided for by cash flows generated from operations.

     In April 2004 we signed an operating lease agreement for a new distribution facility in order to facilitate our store growth. The new distribution facility will be located in Riverside, California and will have approximately 952,900 square feet of storage and office space. We anticipate completing the construction of and transition to the new distribution center in fiscal 2005. The expected annual lease payments are included in the table above.

     We have a non-amortizing $140.0 million revolving credit facility. The credit facility may be terminated by the lenders by giving at least 90 days prior written notice before any anniversar