UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 26, 2004

OR

For the transition period from                     to                    

Commission file number: 000-49850

BIG 5 SPORTING GOODS CORPORATION

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 x No o

     There were 22,672,627 shares of common stock with a par value of $0.01 per share outstanding at October 29, 2004.

BIG 5 SPORTING GOODS CORPORATION

INDEX

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BIG 5 SPORTING GOODS CORPORATION

Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share data)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Consolidated Condensed Statements of Cash Flows
(unaudited)
(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Notes to Condensed Consolidated Financial Statements
(unaudited)

(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 hardlines, softlines and footwear, operating 298 stores at September 26, 2004 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada, Utah, Idaho and Colorado. We are a holding company that operates our business through Big 5 Corp., our wholly owned subsidiary, and Big 5 Services Corp., which is a wholly owned subsidiary of Big 5 Corp. Big 5 Services Corp. 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 September 26, 2004 and December 28, 2003, the results of operations for the 13 and 39 weeks ended September 26, 2004 and September 28, 2003 and cash flows for the 39 weeks ended September 26, 2004 and September 28, 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 consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K (as amended by the Form 10-K/A Amendment No. 1) for the fiscal year ended December 28, 2003.

(2) Debt Redemption

     On October 27, 2004, we announced that we would redeem $10.0 million principal amount of our 10.875% senior notes due 2007, using funds available under our revolving credit facility. Following the redemption, which is scheduled to be completed on November 30, 2004, the outstanding balance of our 10.875% senior notes will be reduced to a face amount of $23.1 million from an original face amount of $131.0 million when the notes were issued in November 1997.

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

(3) Quarterly Dividend

     On October 27, 2004, our Board of Directors declared a cash dividend of $0.07 per share, which will be paid on December 15, 2004, to stockholders of record as of December 1, 2004.

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(4) Earnings Per Share

     The following table sets forth the computation of basic and diluted net income per share of common stock:

(in thousands except earnings per share data)

     The computation of diluted earnings for the 13 and 39 weeks ended September 26, 2004 does not include 333,200 options that were outstanding at the end of the period. In addition, the computation of diluted earnings for the 39 weeks ended September 28, 2003 does not include 59,000 options that were outstanding at the end of the period. The exercise price of these options was greater than the average market price of our common stock during the relevant reporting periods and thus would have been antidilutive. The outstanding warrant was exercised in the first quarter of fiscal 2003.

(5) Stock-Based Compensation

     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 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

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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 and pro forma net income per share would have been as follows:

(6) Related Party Transactions

     Prior to September 1992, Big 5 Corp. 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 Aid, which, if converted, would represent approximately 13.5% of Rite Aid’s outstanding stock. Green Equity Investors, L.P., an affiliate of Leonard Green & Partners, L.P., owned more than 27% of our outstanding common stock until it sold substantially all of its shares in a secondary public offering in November 2003.

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(7) 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.

     During the fiscal 2004 third quarter, the Company changed its accounting for sales returns by establishing an allowance for estimated sales returns. This resulted in a cumulative adjustment in the third quarter to establish the allowance, which will be adjusted based on the Company’s estimated sales returns at the end of each quarter going forward. The cumulative effect of this accounting change resulted in a reduction of approximately $1.9 million in net sales, $0.7 million in gross profit, and $0.4 million in net income, or $0.02 per diluted share, for the third quarter and nine months ended September 26, 2004. In prior periods, the Company’s net sales were reported net of actual sales returns. The difference between recording actual sales returns and establishing an allowance for sales returns is not considered to have had a material impact on the Company’s prior or current period financial statements.

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. Costs of sales does not include depreciation and amortization.

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 and amortization of leasehold interest.

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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.

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 the net realizable value of inventory. 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 September 26, 2004 Compared to 13 Weeks Ended September 28, 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 $12.5 million, or 6.8%, to $195.8 million in the 13 weeks ended September 26, 2004 from $183.3 million in the same period last year. This growth reflected an increase of $4.8 million in same store sales and an increase of $8.9 million in new store sales, which reflected the opening of 25 new stores since June 29, 2003. The remaining variance was attributable to net sales from closed stores. Same store sales increased 2.6% in the 13 weeks ended September 26, 2004 versus the same period last year, representing the thirty-fifth consecutive quarterly increase in same store sales over comparable prior periods. This 2.6% 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 September 26, 2004 was 298 versus 282 at September 28, 2003. We opened three new stores in the 13 weeks ended September 26, 2004 and we opened seven new stores in the 13 weeks ended September 28, 2003. We expect to open 11 new stores during the fourth quarter of fiscal 2004.

     During the fiscal 2004 third quarter, the Company changed its accounting for sales returns by establishing an allowance for estimated sales returns. This resulted in a cumulative adjustment in the third quarter to establish the allowance, which will be adjusted based on the Company’s estimated sales returns at the end of each quarter going forward.

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The cumulative effect of this accounting change resulted in a reduction of approximately $1.9 million in net sales. The implementation of the sales return allowance negatively impacted same store sales growth versus the same quarter last year by 1.0%. In prior periods, the Company’s net sales were reported net of actual sales returns. The difference between recording actual sales returns and establishing an allowance for sales returns is not considered to have had a material impact on the Company’s prior or current period financial statements.

     2. Gross Profit. Gross profit increased by $5.2 million, or 8.0%, to $70.4 million in the 13 weeks ended September 26, 2004 from $65.2 million in the same period last year. Gross profit margin was 36.0% in the 13 weeks ended September 26, 2004 compared to 35.6% in the same period last year. We achieved higher product selling margin comparisons in each of our three major product categories. Warehouse payroll and benefit expenses increased $0.6 million, or 0.2% of net sales, 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, which increased $0.4 million, or 0.2% of net sales, versus the third quarter of last year.

     3. Selling and Administrative. Selling and administrative expenses increased by $3.7 million, or 7.6%, to $52.0 million in the 13 weeks ended September 26, 2004 from $48.3 million in the same period last year. The increase was driven by a $2.4 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 $0.8 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 26.6% for the 13 weeks ended September 26, 2004 and 26.4% for the 13 weeks ended September 28, 2003.

     4. Depreciation and Amortization. Depreciation and amortization expense increased $0.3 million, or 10.8%, to $2.9 million for the 13 weeks ended September 26, 2004 from $2.6 million for the same period last year, primarily due to the increase in store count to 298 stores at the end of the third quarter of fiscal 2004 from 282 stores at the end of the third quarter of fiscal 2003.

     5. Interest Expense, Net. Interest expense, net decreased by $1.2 million, or 42.8%, to $1.6 million in the 13 weeks ended September 26, 2004 from $2.8 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. A reduction in overall debt levels since the beginning of fiscal 2003 also contributed to the decrease in interest expense.

     6. Income Taxes. Provision for income taxes was $5.6 million for the 13 weeks ended September 26, 2004 and $4.7 million for the 13 weeks ended September 28, 2003. We accrue taxes at the statutory tax rate, which is reevaluated on an ongoing basis by management. In the 13 weeks ended September 26, 2004 we determined the Company’s effective tax rate to be 40%, down from 41% in the 13 weeks ended September 28, 2003, due in part to the growth in our store base outside of California.

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39 Weeks Ended September 26, 2004 Compared to 39 Weeks Ended September 28, 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 $43.4 million, or 8.4%, to $561.3 million in the first 39 weeks of fiscal 2004 from $517.9 million in the same period last year. This growth reflected an increase of $19.8 million in same store sales and an increase of $26.6 million in new store sales, which reflected the opening of seven new stores, including two relocated stores, during the first 39 weeks of fiscal 2004 and 19 new stores in fiscal 2003. The remaining variance was attributable to net sales from closed stores. Same store sales increased 3.9% in the first 39 weeks of fiscal 2004 versus the same period last year. The 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 September 26, 2004 was 298 versus 282 at September 28, 2003. We opened seven new stores, including two relocated stores, in the first 39 weeks of fiscal 2004 and we opened eight new stores and closed one store in the first 39 weeks of fiscal 2003. We expect to open 11 new stores during the fourth quarter of fiscal 2004.

     During the fiscal 2004 third quarter, the Company changed its accounting for sales returns by establishing an allowance for estimated sales returns. This resulted in a cumulative adjustment in the third quarter to establish the allowance, which will be adjusted based on the Company’s estimated sales returns at the end of each quarter going forward. The cumulative effect of this accounting change resulted in a reduction of approximately $1.9 million in net sales. The implementation of the sales return allowance negatively impacted same store sales growth versus the same period last year by 0.3%. In prior periods, the Company’s net sales were reported net of actual sales returns. The difference between

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recording actual sales returns and establishing an allowance for sales returns is not considered to have had a material impact on the Company’s prior or current period financial statements.

     2. Gross Profit. Gross profit increased by $18.1 million, or 9.7%, to $203.7 million in the first 39 weeks of fiscal 2004 from $185.7 million in the same period last year. Gross profit margin was 36.3% in the first 39 weeks of fiscal 2003 compared to 35.8% in the same period last year. We were able to achieve higher gross profit ma