UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

      (Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                                          to                                         

BIG 5 SPORTING GOODS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		95-4388794
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2525 East El Segundo Boulevard
El Segundo, California		90245
(Address of Principal Executive Offices)		(Zip Code)

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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     There were 22,657,517 shares of common stock, with a par value of $0.01 per share outstanding at October 31, 2006.

 

 

BIG 5 SPORTING GOODS CORPORATION

INDEX

					Page
PART I – FINANCIAL INFORMATION
Item 1		Financial Statements
		Unaudited Condensed Consolidated Balance Sheets at October 1, 2006 and January 1, 2006			3
		Unaudited Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 1, 2006 and October 2, 2005			4
		Unaudited Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 1, 2006 and October 2, 2005			5
		Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3		Quantitative and Qualitative Disclosures About Market Risk			26
Item 4		Controls and Procedures			27
PART II – OTHER INFORMATION
Item 1		Legal Proceedings			28
Item 1A		Risk Factors			29
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3		Defaults Upon Senior Securities			29
Item 4		Submission of Matters to a Vote of Security Holders			29
Item 5		Other Information			30
Item 6		Exhibits			30
SIGNATURES					31
EXHIBIT 15.1
EXHIBIT 15.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIG 5 SPORTING GOODS CORPORATION

(In thousands, except share amounts)

		October 1,				January 1,
		2006				2006
Assets
Current assets:
Cash and cash equivalents		$	4,851			$	6,054
Trade and other receivables, net of allowances for doubtful accounts and sales returns of $2,622 and $3,129, respectively			4,347				7,900
Merchandise inventories			240,804				223,243
Prepaid expenses and other current assets			9,732				9,561
Deferred income taxes			9,442				9,146
Total current assets			269,176				255,904
Property and equipment, net of accumulated depreciation and amortization of $88,643 and $82,047, respectively			85,386				86,475
Deferred income taxes			6,657				5,050
Leasehold interest, net of accumulated amortization of $28,385 and $27,966, respectively			—				419
Other assets, net of accumulated amortization of $577 and $489, respectively			1,209				702
Goodwill			4,433				4,433
Total assets		$	366,861			$	352,983
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	99,851			$	90,698
Accrued expenses			51,319				63,490
Current portion of capital lease obligations			1,954				1,904
Current portion of long-term debt			—				6,667
Total current liabilities			153,124				162,759
Deferred rent, less current portion			19,417				19,150
Capital lease obligations, less current portion			3,380				4,528
Long-term debt, less current portion			96,671				88,760
Other long-term liabilities			2,272				2,115
Total liabilities			274,864				277,312
Commitments and contingencies and subsequent events
Stockholders’ equity:
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 22,833,037 and 22,805,337 shares, respectively; outstanding 22,654,517 and 22,691,127 shares, respectively			228				227
Additional paid-in capital			87,089				85,007
Retained earnings (Accumulated deficit)			6,530				(8,992	)
Less: Treasury stock, at cost; 178,520 and 114,210 shares, respectively			(1,850	)			(571	)
Total stockholders’ equity			91,997				75,671
Total liabilities and stockholders’ equity		$	366,861			$	352,983

See accompanying notes to unaudited condensed consolidated financial statements.

BIG 5 SPORTING GOODS CORPORATION

(In thousands, except per share data)

		13 Weeks Ended								39 Weeks Ended
		October 1, 2006				October 2, 2005				October 1, 2006				October 2, 2005
Net sales		$	223,276			$	206,834			$	642,263			$	595,065
Cost of goods sold, buying and occupancy, excluding depreciation and amortization shown separately below			145,592				133,297				414,440				381,251
Gross profit			77,684				73,537				227,823				213,814
Operating expenses:
Selling and administrative			58,961				57,774				174,924				167,954
Depreciation and amortization			4,069				3,784				12,473				10,718
Total operating expenses			63,030				61,558				187,397				178,672
Operating income			14,654				11,979				40,426				35,142
Other income			—				(1,409	)			—				(1,409	)
Interest expense			1,709				1,425				5,407				3,849
Income before income taxes			12,945				11,963				35,019				32,702
Income taxes			5,120				4,721				13,820				12,900
Net income		$	7,825			$	7,242			$	21,199			$	19,802
Dividends per share declared		$	0.09			$	0.07			$	0.25			$	0.21
Earnings per share:
Basic		$	0.34			$	0.32			$	0.93			$	0.87
Diluted		$	0.34			$	0.32			$	0.93			$	0.87
Weighted average shares of common stock outstanding:
Basic			22,692				22,678				22,701				22,678
Diluted			22,794				22,809				22,802				22,808

See accompanying notes to unaudited condensed consolidated financial statements.

BIG 5 SPORTING GOODS CORPORATION

(In thousands)

		39 Weeks Ended
		October 1, 2006				October 2, 2005
Cash flows from operating activities:
Net income		$	21,199			$	19,802
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			12,473				10,718
Share-based compensation			1,674				—
Amortization of deferred finance charges			138				284
Deferred income taxes			(1,903	)			(1,409	)
Gain on disposal of equipment			(200	)			(32	)
Changes in operating assets and liabilities:
Merchandise inventories			(17,561	)			(22,977	)
Trade and other receivables, net			3,553				2,944
Prepaid expenses and other assets			(816	)			(3,463	)
Accounts payable			10,911				7,637
Accrued expenses and deferred rent			(12,345	)			1,090
Net cash provided by operating activities			17,123				14,594
Cash flows from investing activities:
Purchases of property and equipment			(10,192	)			(25,120	)
Proceeds from disposal of equipment			223				32
Net cash used in investing activities			(9,969	)			(25,088	)
Cash flows from financing activities:
Net principal borrowings under revolving credit facilities and book overdraft			4,486				14,990
Principal payments on term loan			(5,000	)			—
Principal payments on capital lease obligations			(1,296	)			(1,242	)
Proceeds from exercise of stock options			298				4
Excess tax benefit of stock options exercised			111				—
Purchases of treasury stock			(1,279	)			—
Dividends paid			(5,677	)			(4,762	)
Net cash (used in) provided by financing activities			(8,357	)			8,990
Net decrease in cash and cash equivalents			(1,203	)			(1,504	)
Cash and cash equivalents at beginning of period			6,054				6,746
Cash and cash equivalents at end of period		$	4,851			$	5,242
Supplemental disclosures of non-cash investing activities:
Property acquired under capital leases		$	198			$	3,704
Property purchases accrued		$	598			$	725
Supplemental disclosures of cash flow information:
Interest paid		$	6,592			$	3,711
Income taxes paid		$	18,769			$	18,854

See accompanying notes to unaudited condensed consolidated financial statements.

BIG 5 SPORTING GOODS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Description of Business

Business

     Big 5 Sporting Goods Corporation (“we” or the “Company”) is a leading sporting goods retailer in the United States, operating 334 stores in 10 western states at October 1, 2006. The Company provides a full-line product offering in a traditional sporting goods store format that averages approximately 11,000 square feet. The Company’s 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, tennis, golf, snowboarding and in-line skating. The Company is a holding company that operates its business through Big 5 Corp., its wholly-owned subsidiary, and Big 5 Services Corp., which is a wholly-owned subsidiary of Big 5 Corp. Big 5 Services Corp. provides a centralized operation for the issuance and administration of gift certificates and gift cards.

     The accompanying unaudited condensed consolidated financial statements of the Company and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended January 1, 2006 included in the Company’s Annual Report on Form 10-K. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented.

     The operating results or cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

Consolidation

     The accompanying unaudited condensed consolidated financial statements include the accounts of Big 5 Sporting Goods Corporation, Big 5 Corp., and Big 5 Services Corp. All significant intercompany balances and transactions have been eliminated in consolidation.

Reporting Period

     The Company follows the concept of a 52-53 week fiscal year, which ends on the Sunday nearest December 31. Fiscal year 2006 is comprised of 52 weeks and ends on December 31, 2006. Fiscal year 2005 was comprised of 52 weeks and ended on January 1,

2006. The fiscal interim periods ended October 1, 2006, July 2, 2006 and April 2, 2006 and October 2, 2005, July 3, 2005 and April 3, 2005 were comprised of 13 weeks.

Use of Estimates

     Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with GAAP. Significant items subject to such estimates and assumptions include the value of stock options; the carrying amount of property and equipment and goodwill; valuation allowances for receivables, sales returns, inventories and deferred income tax assets; and various accrued obligations such as litigation, workers’ compensation and employee benefits. Actual results could differ significantly from these estimates under different assumptions and conditions.

Segment Reporting

     Given the economic characteristics of the Company’s store formats, the similar nature of the products sold, the type of customer and the method of distribution, its operations are aggregated in one reportable segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosure About Segments of an Enterprise and Related Information.

Reclassifications

     Certain prior period amounts have been reclassified to conform to the current year presentation.

Stock-Based Compensation

     In June 2002, the Company adopted the 2002 Stock Incentive Plan (“2002 Plan”). The 2002 Plan provides for the grant of incentive stock options and non-qualified stock options to the Company’s employees, directors, and specified consultants. Under the 2002 Plan, the Company may grant options to purchase up to 3,645,000 shares of common stock. At October 1, 2006, 2,426,350 shares remained available for future grant under the 2002 Plan. Options granted under the 2002 Plan generally vest and become exercisable at the rate of 25% per year with a maximum life of ten years. Upon exercise of granted options, shares are expected to be issued from new shares previously registered for the 2002 Plan.

     In the first quarter of fiscal 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, in accordance with the modified-prospective-transition method and began recognizing compensation expense for stock options which vested during the quarter. The adoption of this method increased compensation expense by $0.6 million and $1.7 million for the 13 weeks and 39 weeks ended October 1, 2006, respectively, and reduced operating income and income before income taxes by the same amount. The recognized tax benefit related to the compensation expense for the 13 weeks and 39 weeks ended October 1, 2006 was $0.2 million and $0.7 million, respectively. Net income for the 13 weeks and 39 weeks

ended October 1, 2006 was reduced by $0.4 million, or $0.02 per basic and diluted share, and $1.0 million, or $0.04 per basic and diluted share, respectively.

     A summary of the status of the Company’s stock options is presented below:

										Weighted
										Average
						Weighted				Remaining				Aggregate
						Average				Contractual				Intrinsic
Options		Shares				Exercise Price				Life				Value
														(In thousands)
Outstanding at January 1, 2006			739,650			$	18.48
Granted			519,200				19.26
Exercised			(28,100	)			10.49
Forfeited or expired			(67,600	)			20.57
Outstanding at October 1, 2006			1,163,150			$	18.92				8.13			$	5,153
Exercisable at October 1, 2006			394,800			$	16.90				6.83			$	2,623

     The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $22.80 as of October 1, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of stock options exercised for the 39 weeks ended October 1, 2006 and October 2, 2005 was approximately $0.3 million and $8,400, respectively.

     The fair value of each option on the date of grant was estimated using the Black-Scholes method based on the following weighted-average assumptions:

		13 Weeks Ended				39 Weeks Ended
		October 1, 2006				October 1, 2006
Assumptions:
Risk-free interest rate			—				4.7	%
Expected term			—			6.25 years
Expected volatility			—				52	%
Expected dividend yield			—				1.97	%

     The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option; the expected term represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and using the simplified method pursuant to Staff Accounting Bulletin (“SAB”) No. 107, Share-based Payment; the expected volatility is based upon historical volatilities of the Company’s common stock and an index of a peer group because the Company’s historical period to measure volatility was not long

enough to cover the expected terms of the options; and the expected dividend yield is based upon the Company’s current dividend rate and future expectations. There were no options granted during the third quarter of 2006; therefore, no weighted-average assumptions were used for a valuation during the third quarter of 2006.

     Pursuant to SFAS No. 123(R), the weighted-average fair value of stock options granted during the 39 weeks ended October 1, 2006 was $8.96 per share. The Company did not grant any stock options during the 13 weeks ended October 1, 2006 and the 39 weeks ended October 2, 2005. The total cash received from employees as a result of employee stock option exercises during the 13 weeks and 39 weeks ended October 1, 2006 was approximately $0.1 million and $0.3 million, respectively. The total cash received from employees as a result of employee stock option exercises during the 39 weeks ended October 2, 2005, was $4,100. There was no cash received from exercises during the 13 weeks ended October 2, 2005.

     As of October 1, 2006, there was $5.7 million of total unrecognized compensation cost related to nonvested stock options granted. That cost is expected to be recognized over a weighted-average period of 2.9 years. The total fair value of stock options vested during the 39 weeks ended October 1, 2006 and the 39 weeks ended October 2, 2005 was $1.5 million and $2.1 million, respectively.

     Awards which vested in fiscal 2005 and earlier were accounted for under the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (“APB 25”). No compensation expense related to options was recognized because the exercise price of our employee stock options equaled the market price of the underlying stock on the grant date. If we had elected to recognize compensation cost based on the fair value of the awards at the grant date under SFAS No. 123, net earnings would have been the pro forma amounts shown below:

		13 Weeks Ended				39 Weeks Ended
		October 2, 2005				October 2, 2005
		(In thousands, except per share data)
Net income, as reported		$	7,242			$	19,802
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects			214				685
Pro forma net income		$	7,028			$	19,117
Basic earnings per share:
As reported		$	0.32			$	0.87
Pro forma		$	0.31			$	0.84
Diluted earnings per share:
As reported		$	0.32			$	0.87
Pro forma		$	0.31			$	0.84

     The fair value of each option on the date of grant was estimated using the Black-Scholes method based on the following weighted-average assumptions:

		13 Weeks Ended				39 Weeks Ended
		October 2,				October 2,
		2005				2005
Assumptions:
Risk-free interest rate			2.8	%			2.8	%
Expected term		4 years				4 years
Expected volatility			60	%			60	%
Expected dividend yield			0.1	%			0.1	%

Valuation of Merchandise Inventories

     The Company’s merchandise inventories are made up of finished goods and are valued at the lower of cost or market using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory and allocated overhead costs associated with the Company’s distribution center. 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.

     Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. The Company performs physical inventories of stores and distribution center throughout the year. The reserve for inventory shrinkage represents an estimate for inventory shrinkage for each location since the last physical inventory date through the reporting date.

Recently Issued Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 excludes income taxes from FASB Statement No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006 and provides transitional guidance for treating differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption. The Company does not expect that FIN 48, when adopted, will have a material impact on the Company’s consolidated financial statements.

     In July 2006, the Emerging Issues Task Force (“EITF”) promulgated Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (i.e., Gross Versus Net Presentation). The task force concluded that entities should present these taxes in the income statement on either a gross or a net basis based upon their accounting policy. However, Issue No. 06-3 states that if such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company currently records taxes on a net basis (i.e., sales tax is not included in sales, but is instead recorded as a liability under accrued expenses), so Issue No. 06-3 will not impact the Company’s consolidated financial statements.

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. There are numerous previously issued statements dealing with fair values that are amended by SFAS No. 157. The Company has not yet evaluated the impact, if any, that the adoption of SFAS No. 157 will have on the Company’s consolidated financial statements.

     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 (a.k.a. SAB Topic 1.N) addresses quantifying the financial statement effects of misstatements or, more specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB No. 108 does not change the SEC staff’s previous positions in SAB No. 99, Materiality (a.k.a. SAB Topic 1.M) regarding qualitative considerations in assessing the materiality of misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect that SAB No. 108, when adopted, will have a material impact on the Company’s consolidated financial statements.

     There are no other accounting standards issued as of November 7, 2006 that are expected to have a material impact on the Company’s consolidated financial statements.

(2) Quarterly Dividend

     Quarterly dividend payments of $0.07 per share were paid during fiscal 2005. For fiscal 2006, a quarterly dividend of $0.07 per share was paid in the first quarter. In the second quarter of fiscal 2006, the Company’s Board of Directors authorized an increase of the dividend to an annual rate of $0.36 per share of outstanding common stock. Quarterly dividend payments of $0.09 per share were paid on June 15, 2006 and September 15, 2006 to stockholders of record as of June 1, 2006 and September 1, 2006, respectively. In the fourth quarter of fiscal 2006, the Company’s Board of Directors declared a quarterly cash dividend

of $0.09 per share of outstanding common stock, which will be paid on December 15, 2006 to stockholders of record as of December 1, 2006.

(3) Earnings Per Share

     The Company calculates earnings per share in accordance with SFAS No. 128, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average shares of common stock outstanding during the period. Diluted earnings per share is calculated by using the weighted-average shares of common stock outstanding adjusted to include the potentially dilutive effect of outstanding stock options.

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

		13 Weeks Ended								39 Weeks Ended
		October 1, 2006				October 2, 2005				October 1, 2006				October 2, 2005
		(In thousands, except per share data)
Net income		$	7,825			$	7,242			$	21,199			$	19,802
Weighted-average shares of common stock outstanding:
Basic			22,692				22,678				22,701				22,678
Dilutive effect of common stock equivalents			102				131				101				130
Diluted			22,794				22,809				22,802				22,808
Basic earnings per share		$	0.34			$	0.32			$	0.93			$	0.87
Diluted earnings per share		$	0.34			$	0.32			$	0.93			$	0.87

     The computation of diluted earnings per share for the 13 weeks ended October 1, 2006, the 39 weeks ended October 1, 2006, the 13 weeks ended October 2, 2005, and the 39 weeks ended October 2, 2005 does not include 891,129, 761,665, 2,500 and 2,500 options, respectively, that were outstanding and had an antidilutive effect on those dates.

(4) Long-Term Debt

     Long-term debt consists of the following:

		October 1, 2006				January 1, 2006
		(In thousands)
Revolving credit facility		$	88,338			$	82,094
Term loan			8,333				13,333
			96,671				95,427
Less current portion			—				(6,667	)
Long-term debt, less current portion		$	96,671			$	88,760

     On December 15, 2004, the Company entered into a $160.0 million financing agreement with The CIT Group/Business Credit, Inc. and a syndicate of other lenders. On May 24, 2006, the Company amended the financing agreement to, among other things, increase the line of credit to $175.0 million, consisting of a non-amortizing $161.7 million revolving credit facility and an amortizing term loan balance of $13.3 million. The initial termination date of the revolving credit facility is March 20, 2011 (subject to annual extensions thereafter). The financing agreement is secured by a first priority security interest in substantially all of the Company’s assets.

     The revolving credit facility may be terminated by the lenders by giving at least 90 days prior written notice before any anniversary date, commencing with its anniversary date on March 20, 2011. The Company may terminate the revolving credit facility by giving at least 30 days prior written notice, provided that if the Company terminates prior to March 20, 2011, an early termination fee must be paid. Unless it is terminated, the revolving credit facility will continue on an annual basis from anniversary date to anniversary date beginning on March 21, 2011.

     The revolving credit facility bears interest at various rates based on the Company’s overall borrowings, with a floor of LIBOR plus 1.00% or the JP Morgan Chase Bank prime lending rate and a ceiling of LIBOR plus 1.75% or the JP Morgan Chase Bank prime lending rate plus 0.25%.

     A principal payment on the term loan of $6.7 million is due December 15, 2007, with the remaining balance due December 15, 2008. During the second quarter of fiscal 2006, the Company prepaid $5.0 million of the term loan to bring the outstanding balance at October 1, 2006 to $8.3 million. The Company may prepay without penalty the principal amount of the term loan, subject to certain financial restrictions. The term loan bears interest at LIBOR plus 3.00% or the JP Morgan Chase Bank prime lending rate plus 1.00%.

     Our financing agreement contains various financial and other covenants, including covenants that require us to maintain various financial ratios, restrict our ability to incur indebtedness or to create various liens and restrict the amount of capital expenditures that we may incur. Our financing agreement also restricts our ability to engage in mergers or acquisitions, sell assets or pay dividends. We may declare a dividend only if no default or event of default exists on the dividend declaration date and is not expected to result from the payment of the dividend and certain other criteria are met, which may include the maintenance of certain financial ratios.

(5) Contingencies

     On August 12, 2005, the Company was served with a complaint filed in the California Superior Court in the County of Los Angeles, entitled William Childers v. Sandra N. Bane, et al., Case No. BC337945 (“Childers”), alleging breach of fiduciary duty, violation of the Company’s bylaws and unjust enrichment by certain executive officers. On November 17, 2005, the plaintiff filed an amended complaint in this action. The amended complaint was brought as a purported derivative action on behalf of the Company against all of the members of the Company’s Board of Directors and certain executive officers. The amended complaint alleges that the Company’s directors breached their fiduciary duties and violated the Company’s bylaws by, among other things, failing to hold an annual stockholders’ meeting on a timely basis and allegedly ignoring certain unspecified internal control problems, and that certain executive officers were unjustly enriched by their receipt of certain compensation items. The amended complaint seeks an order requiring that an annual meeting of the Company’s stockholders be held, an award of unspecified damages in favor of the Company and against the individual defendants and an award of attorneys’ fees. On January 20, 2006, the Company filed a demurrer to the amended complaint (as did the individual director and officer defendants). At a hearing on April 3, 2006, the court sustained the demurrers and granted the plaintiff leave to further amend the complaint and to seek limited discovery.

     Prior to the filing of any further amendment to the complaint, and following arms-length negotiations, the parties came to an agreement to settle the matter. The parties executed a Stipulation of Settlement, dated as of August 30, 2006 (the “Settlement”), and on September 8, 2006, the court gave preliminary approval to the proposed Settlement. Terms of the Settlement include no admission of liability with regard to the litigation by the Company or any individual defendant, an acknowledgment by the Company that the litigation preceded the adoption or implementation of certain measures, internal controls and procedures that relate to certain of the allegations raised in the litigation and confer a benefit to the Company, and the payment by the Company’s insurance carrier of $150,000 in plaintiffs’ attorneys’ fees on behalf of the Company and the individual director and officer defendants. A final hearing is scheduled to be held before the court on December 4, 2006, to determine, among other things, whether the proposed Settlement is fair, reasonable, adequate, and in the best interests of the Company and its shareholders and should be finally approved by the court, and whether to dismiss the Childers action with prejudice.

     In addition, 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES

     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.

Use of Estimates

     We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). Significant items subject to such estimates and assumptions include the value of stock options; the carrying amount of property and equipment and goodwill; valuation allowances for receivables, sales returns, inventories and deferred income tax assets; and various accrued obligations such as litigation, workers’ compensation and employee benefits. Actual results could differ significantly from these estimates under different assumptions and conditions.

Revenue Recognition

     We earn revenue by selling merchandise primarily through our retail stores. Also included in revenue are sales of returned merchandise to vendors specializing in the resale of defective or used products, which historically has accounted for less than 1% of net sales. Revenue is recognized when merchandise is purchased by and delivered to the customer and is shown net of estimated returns during the relevant period. The allowance for sales returns is estimated based upon historical experience. Cash received from the sale of gift cards is recorded as a liability, and revenue is recognized upon the redemption of the gift card or when it is determined that the likelihood of redemption is remote and no liability to relevant jurisdictions exists. Installment payments on layaway sales are recorded as a liability, and revenue is recognized upon receipt of final payment from and delivery of product to the customer.

Valuation of Merchandise Inventories

     Our merchandise inventories are made up of finished goods and are valued at the lower of cost or market using the weighted-average cost method that approximates the first-in, first-out (“FIFO”) method. Average cost includes the direct purchase price of merchandise inventory and allocated overhead costs associated with our distribution center. 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.

     Inventory shrinkage is accrued as a percentage of merchandise sales based on historical inventory shrinkage trends. We perform physical inventories of our stores and distribution center throughout the year. The reserve for inventory shrinkage represents an estimate for inventory shrinkage for each location since the last physical inventory date through the reporting date.

Valuation of Long-Lived Assets

     Long-lived assets and goodwill 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. We did not recognize any impairment charges in the 13 or 39 weeks ended October 1, 2006 or the 13 or 39 weeks ended October 2, 2005.

Leases

     We lease the majority of our store locations. We account for our leases under the provisions of SFAS No. 13, Accounting for Leases, and subsequent amendments, which require that our leases be evaluated and classified as operating or capital leases for financial reporting purposes.

     Certain leases have scheduled rent increases. In addition, certain leases include an initial period of free or reduced rent as an inducement to enter into the lease agreement (“rent holidays”). We recognize rental expense for rent escalations and rent holidays on a straight-line basis over the terms of the underlying leases, without regard to when rent payments are made. The calculation of straight-line rent is based on the reasonably assured lease term as defined in SFAS No. 98, Accounting for Leases, which may exceed the initial non-cancelable lease term.

     Certain leases also may provide for payments based on future sales volumes at the leased location, which are not measurable at the inception of the lease. In accordance with SFAS No. 29, Determining Contingent Rentals, an amendment of FASB Statement No. 13, these contingent rents are expensed as they accrue.

RESULTS OF OPERATIONS

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

13 Weeks Ended October 1, 2006 Compared to 13 Weeks Ended October 2, 2005

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

		13 Weeks Ended
		October 1, 2006								October 2, 2005
		(In thousands, except percentages)
Net sales		$	223,276				100.0	%		$	206,834				100.0	%
Cost of goods sold			145,592				65.2				133,297				64.4
Gross profit			77,684				34.8				73,537				35.6
Operating expenses:
Selling and administrative			58,961				26.4				57,774				27.9
Depreciation and amortization			4,069				1.8				3,784				1.8
Total operating expenses			63,030				28.2				61,558				29.8
Operating income			14,654				6.6				11,979				5.8
Other income			—				0.0				(1,409	)			(0.7	)
Interest expense			1,709				0.8				1,425				0.7
Income before income taxes			12,945				5.8				11,963				5.8
Income taxes			5,120				2.3				4,721				2.3
Net income		$	7,825				3.5	%		$	7,242				3.5	%

     Net Sales. Net sales increased by $16.4 million, or 7.9%, to $223.3 million in the 13 weeks ended October 1, 2006 from $206.8 million in the same period last year. The growth in net sales was mainly attributable to an increase of $7.8 million in same store sales and an increase of $8.5 million in new store sales, net of sales for closed stores, which reflected the opening of 24 new stores, net of relocations, since July 3, 2005. Same store sales increased 3.8% in the 13 weeks ended October 1, 2006 versus the 13 weeks ended October 2, 2005. The increase in net sales for the 13 weeks ended October 1, 2006 was attributable to higher sales in each of our three major merchandise categories of footwear, hard goods and apparel. Store count at October 1, 2006 was 334 versus 314 at October 2, 2005. We opened 5 new stores in the 13 weeks ended October 1, 2006, and opened 4 stores and closed 1 store in the 13 weeks ended October 2, 2005. We expect to open approximately 19 new stores during fiscal 2006.

     Gross Profit. Gross profit increased by $4.2 million, or 5.6%, to $77.7 million in the 13 weeks ended October 1, 2006 from $73.5 million in the 13 weeks ended October 2, 2005. Our gross profit margin was 34.8% in the 13 weeks ended October 1, 2006 compared to 35.6% in the same period last year. Product selling margins, which exclude buying, occupancy and distribution costs, were unchanged compared with the same period last year. Distribution center costs during the third quarter increased $1.1 million, or 14 basis points, due primarily to higher labor-related costs to support our new larger distribution facility and increased trucking expense, related in part to higher gasoline prices. Store occupancy costs increased by $0.9 million year-over-year due mainly to new store openings, but declined 5

basis points as a percentage of sales as a result of higher sales volume. Distribution center costs capitalized into inventory decreased by $1.5 million, or 71 basis points, compared to the same period last year due primarily to the expense increase last year for our transition to a new larger distribution facility. Inventory reserve provisions increased by $0.1 million from the same period last year due primarily to an increased provision for the realizability of the value of returned goods inventories offset partially by a lower provision for inventory shrink. Inventory reserve provisions as a percent of sales declined by 5 basis points. Our gross profit for the 13 weeks ended October 2, 2005 reflected the benefit of an extinguishment of $0.6 million in store credit liabilities and the negative impact of an asset write-off of $0.7 million.

     Selling and Administrative. Selling and administrative expenses increased by $1.2 million to $59.0 million, or 26.4% of net sales, in the 13 weeks ended October 1, 2006 from $57.8 million, or 27.9% of net sales, in the same period last year. Store-related expenses, excluding occupancy, increased by $1.7 million due primarily to an increase in store count, but declined 50 basis points as a percentage of sales as our sales level for the current period allowed leveraging of these expenses. Stock-based compensation expense increased $0.6 million, or 26 basis points, due to our implementation of SFAS No. 123(R) on January 2, 2006. Advertising expense decreased by $0.6 million, or 72 basis points, from the prior year due primarily to the benefit of recording co-op advertising cost reimbursements from vendors for fiscal 2006 earlier in the year. Legal and audit fees decreased $1.2 million, or 59 basis points, from the prior year due to additional expense in the prior year related to the restatement of our prior period financial statements.

     Depreciation and Amortization. Depreciation and amortization expense increased $0.3 million, or 7.5%, to $4.1 million for the 13 weeks ended October 1, 2006 from $3.8 million for the same period last year. The higher expense was primarily due to the commencement of operations at our new distribution center as well as the increase in store count to 334 stores at the end of the third quarter of fiscal 2006 from 314 stores at the end of the third quarter of fiscal 2005.

     Other Income. In the 13 weeks ended October 2, 2005, we recorded proceeds from the settlement of a claim related to the required relocation of one of our stores, which was located on land acquired by a city redevelopment agency through eminent domain. Settlement proceeds totaled $1.8 million, of which $1.4 million was recorded as other income and $0.4 million was recorded as selling and administrative expense primarily as a reduction in legal fees incurred in connection with this eminent domain proceeding.

     Interest Expense. Interest expense increased by $0.3 million, or 19.8%, to $1.7 million in the 13 weeks ended October 1, 2006 from $1.4 million in the same period last year. The increase in interest expense primarily reflects the impact of rising interest rates on our variable rate debt, partially offset by slightly lower average debt levels.

     Income Taxes. The provision for income taxes was $5.1 million for the 13 weeks ended October 1, 2006 and $4.7 million for the 13 weeks ended October 2, 2005. Our effective tax rate was 39.6% for the third quarter of fiscal 2006 and 39.5% for the third quarter of fiscal 2005.

39 Weeks Ended October 1, 2006 Compared to 39 Weeks Ended October 2, 2005

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

		39 Weeks Ended
		October 1, 2006								October 2, 2005
		(In thousands, except percentages)
Net sales		$	642,263				100.0	%		$	595,065				100.0	%
Cost of goods sold			414,440				64.5				381,251				64.1
Gross profit			227,823				35.5				213,814				35.9
Operating expenses:
Selling and administrative			174,924				27.3				167,954				28.2
Depreciation and amortization			12,473				1.9				10,718				1.8
Total operating expenses			187,397				29.2				178,672				30.0
Operating income			40,426				6.3				35,142				5.9
Other income			—				0.0				(1,409	)			(0.2	)
Interest expense			5,407				0.8				3,849				0.6
Income before income taxes			35,019				5.5				32,702				5.5
Income taxes			13,820				2.2				12,900				2.2
Net income		$	21,199				3.3	%		$	19,802				3.3	%

     Net Sales. Net sales increased by $47.2 million, or 7.9%, to $642.3 million in the 39 weeks ended October 1, 2006 from $595.1 million in the same period last year. The growth in net sales was mainly attributable to an increase of $23.5 million in same store sales and an increase of $23.2 million in new store sales, net of sales for closed stores, which reflected the opening of 26 new stores, net of relocations, since January 2, 2005. Same store sales increased 4.0% in the 39 weeks ended October 1, 2006 versus the 39 weeks ended October 2, 2005. The net sales increase was due to higher sales in each of our three major merchandise categories of footwear, hard goods and apparel. Store count at October 1, 2006 was 334 versus 314 at October 2, 2005. We opened 10 new stores in the 39 weeks ended October 1, 2006, and we opened 8 new stores, 2 of which were relocations, and closed 1 store in the 39 weeks ended October 2, 2005. We expect to open approximately 19 new stores during fiscal 2006.

     Gross Profit. Gross profit increased by $14.0 million, or 6.6%, to $227.8 million in the 39 weeks ended October 1, 2006 from $213.8 million in the same period last year. The gross profit margin was 35.5% in the 39 weeks ended October 1, 2006 compared to 35.9% in the prior year period. Product selling margins, which exclude buying, occupancy and distribution costs, were unchanged compared with the same period last year. Distribution center costs during the period increased by $7.8 million, or 91 basis points, due primarily to the commencement of operations at our new larger distribution facility, higher labor-related costs and increased trucking expense, related in part to higher gasoline prices. Store occupancy costs increased by $3.2 million, or 4 basis points, over the same period last year, due mainly to new store openings. Distribution center costs capitalized into inventory increased by $0.7 million, or 7 basis points, compared to the prior year period due primarily to higher costs for our new larger distribution facility. Inventory reserve provisions decreased by $1.4 million, or 30 basis points, from the prior year due primarily to lower

provisions for inventory shrink offset partially by an increased provision for the realizability of the value of returned goods inventories. Our gross profit for the 39 weeks ended October 2, 2005 reflected the benefit of an extinguishment of $0.6 million in store credit liabilities and the negative impact of an asset write-off of $0.7 million.

     Selling and Administrative. Selling and administrative expenses increased by $7.0 million to $174.9 million, or 27.3% of net sales, in the 39 weeks ended October 1, 2006 from $168.0 million, or 28.2% of net sales, in the same period last year. Store-related expenses, excluding occupancy, increased by $5.2 million due primarily to an increase in store count, but declined 45 basis points as a percentage of sales as our sales level for the current period allowed leveraging of these expenses. Store-related expenses were favorably impacted by a $0.7 million settlement of a class-action lawsuit relating to credit card fees which was offset by an increased provision of $0.5 million for public liability claims. Advertising expense declined by $0.5 million, or 54 basis points, compared to last year, due primarily to the benefit of recording co-op advertising cost reimbursements from vendors for fiscal 2006 earlier in the year. Selling and administrative expenses for fiscal 2006 reflect stock-based compensation expense of $1.6 million due to our implementation of SFAS No. 123(R) on January 2, 2006.

     Depreciation and Amortization. Depreciation and amortization expense increased $1.8 million, or 16.4%, to $12.5 million for the 39 weeks ended October 1, 2006 from $10.7 million for the same period last year. The higher expense this year is primarily due to the commencement of operations at our new distribution center and the increase in store count to 334 stores at October 1, 2006 from 314 stores at October 2, 2005.

     Other Income. In the 39 weeks ended October 2, 2005, we recorded proceeds from the settlement of a claim related to the required relocation of one of our stores, which was located on land acquired by a city redevelopment agency through eminent domain. Settlement proceeds totaled $1.8 million, of which $1.4 million was recorded as other income and $0.4 million was recorded as selling and administrative expense primarily as a reduction in legal fees incurred in connection with this eminent domain proceeding.

     Interest Expense. Interest expense increased by $1.6 million, or 40.4%, to $5.4 million in the 39 weeks ended October 1, 2006 from $3.8 million in the same period last year. The increase in interest expense primarily reflects the impact of rising interest rates on our variable rate debt, partially offset by slightly lower average debt levels.

     Income Taxes. The provision for income taxes was $13.8 million for the 39 weeks ended October 1, 2006 and $12.9 million for the 39 weeks ended October 2, 2005. Our effective tax rate was 39.5% for the 39 weeks ended October 1, 2006 and 39.4% for the 39 weeks ended October 2, 2005.

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 from the revolving credit facility under our financing agreement.

     Operating Activities. Net cash provided by operating activities was $17.1 million for the first 39 weeks of fiscal 2006 and $14.6 million for the first 39 weeks of fiscal 2005. The increase for fiscal 2006 primarily reflects higher net income and non-cash expense components of net income offset partially by increased funding for working capital versus the same period last year. Comparing the first 39 weeks of fiscal 2006 to the corresponding period in the prior year, the positive cash flow effect of higher accounts payable along with the reduced use of cash to purchase merchandise inventories was more than offset by the funding of a larger reduction in accrued expenses for employee benefits and other expenses.

     Investing Activities. Net cash used in investing activities for the first 39 weeks of fiscal 2006 and fiscal 2005 was $10.0 million and $25.1 million, respectively. Capital expenditures, excluding non-cash acquisitions, for the first 39 weeks of fiscal 2006 were $10.2 million compared to $25.1 million for the same period last year. The higher capital expenditures last year reflect expenditures for our new distribution center.

     Financing Activities. Net cash used in financing activities for the first 39 weeks of fiscal 2006 was $8.4 million and net cash provided by financing activities for the first 39 weeks of fiscal 2005 was $9.0 million. For the current period, cash used in financing activities was used primarily to fund working capital and dividend payments, pay down debt and to finance share repurchases under our share repurchase program. For the prior year period, cash requirements were provided by our revolving credit facility to finance working capital, capital expenditures and dividend payments.

     As of October 1, 2006, we had revolving credit borrowings of $88.4 million, a term loan balance of $8.3 million and letter of credit commitments of $3.7 million outstanding under our financing agreement. These balances compare to revolving credit borrowings of $80.1 million, a term loan balance of $20.0 million and letter of credit commitments of $3.7 million outstanding under our financing agreement as of October 2, 2005.

     Future Capital Requirements. We had cash and cash equivalents on hand of $4.9 million at October 1, 2006. We expect capital expenditures for the fourth quarter of fiscal 2006, excluding non-cash acquisitions, to range from $4.0 million to $5.0 million, primarily to fund the opening of approximately 9 new stores and for store-related remodeling. We expect to pay dividends of approximately $2.0 million on December 15, 2006 in connection with the recent dividend declaration.

     We believe we will be able to fund our future cash requirements for operations from cash on hand, operating cash flows and borrowings from the revolving credit facility under our financing agreement. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures, satisfy our scheduled payments under debt obligations, repurchase common stock and pay quarterly dividends 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 Item 1A, “Risk Factors” included in this report and in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

     If we are unable to generate sufficient cash flow from operations to meet our obligations and commitments, we will be required to refinance or restructure our indebtedness or raise additional debt or equity capital. Additionally, we may be required to sell material assets or operations, suspend dividend payments or delay or forego expansion opportunities. We might not be able to effect these alternative strategies on satisfactory terms, if at all.

     Contractual Obligations and Other Commitments. Our material off-balance sheet contractual commitments are operating lease obligations and letters of credit. We excluded these items from the balance sheet in accordance with GAAP.

     Operating lease commitments consist principally of leases for our retail store facilities, distribution center and corporate office. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate those leases as they expire. Capital lease commitments consist principally of leases for our distribution center trailers and management information systems hardware. Payments for these lease commitments are provided for by cash flows generated from operations or through borrowings from the revolving credit facility under our financing agreement.

     Issued and outstanding letters of credit were $3.7 million at October 1, 2006, and were related primarily to importing of merchandise.

     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.

     Financing Agreement. On December 15, 2004, we entered into a $160.0 million financing agreement with The CIT Group/Business Credit, Inc. and a syndicate of other lenders. On May 24, 2006, we amended the financing agreement to, among other things, increase the line of credit to $175.0 million, consisting of a non-amortizing $161.7 million revolving credit facility and an amortizing term loan balance of $13.3 million. The initial termination date of the revolving credit facility is March 20, 2011 (subject to annual extensions thereafter). The financing agreement is secured by a first priority security interest in substantially all of our assets.

     The revolving credit facility may be terminated by the lenders by giving at least 90 days prior written notice before any anniversary date, commencing with its anniversary date on March 20, 2011. We may terminate the revolving credit facility by giving at least 30 days prior written notice, provided that if we terminate prior to March 20, 2011, we must pay an early termination fee. Unless it is terminated, the revolving credit facility will continue on an annual basis from anniversary date to anniversary date beginning on March 21, 2011.

     The revolving credit facility bears interest at various rates based on our overall borrowings, with a floor of LIBOR plus 1.00% or the JP Morgan Chase Bank prime lending

rate and a ceiling of LIBOR plus 1.75% or the JP Morgan Chase Bank prime lending rate plus 0.25%.

     A principal payment on the term loan of $6.7 million is due December 15, 2007, with the remaining balance due December 15, 2008. During the second quarter of fiscal 2006, we prepaid $5.0 million of the term loan to bring the outstanding balance at October 1, 2006 to $8.3 million. We may prepay without penalty the principal amount of the term loan, subject to certain financial restrictions. The term loan bears interest at LIBOR plus 3.00% or the JP Morgan Chase Bank prime lending rate plus 1.00%.

     Our financing agreement contains various financial and other covenants, including covenants that require us to maintain various financial ratios, restrict our ability to incur indebtedness or to create various liens and restrict the amount of capital expenditures that we may incur. Our financing agreement also restricts our ability to engage in mergers or acquisitions, sell assets or pay dividends. We may declare a dividend only if no default or event of default exists on the dividend declaration date and is not expected to result from the payment of the dividend and certain other criteria are met, which may include the maintenance of certain financial ratios. We are currently in compliance with all covenants under our financing agreement. If we fail to make any required payment under our financing agreement or if we otherwise default under this instrument, our debt may be accelerated under this agreement. This acceleration could also result in the acceleration of other indebtedness that we may have outstanding at that time.

SEASONALITY

     We experience seasonal fluctuations in our net sales and operating results. In fiscal 2005, we generated 26.9% of our net sales and 29.5% of our operating income in the fourth fiscal quarter, which includes the holiday selling season as well as the peak winter sports selling season. As a result, we incur significant additional expenses in the fourth fiscal quarter due to higher purchase volumes and increased staffing. If we miscalculate the demand for our products generally or for our product mix during the fourth fiscal quarter, our net sales could decline, resulting in excess inventory, which could harm our financial performance. Because a substantial portion of our operating income is derived from our fourth fiscal quarter net sales, a shortfall in expected fourth fiscal quarter net sales could cause our annual operating results to suffer significantly.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 excludes income taxes from FASB Statement No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006 and provides transitional guidance for treating differences between the amounts recognized in the statements of financial position prior to

the adoption of FIN 48 and the amounts reported after adoption. The Company does not expect that FIN 48, when adopted, will have a material impact on the Company’s consolidated financial statements.

     In July 2006, the Emerging Issues Task Force (“EITF”) promulgated Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (i.e., Gross Versus Net Presentation). The task force concluded that entities should present these taxes in the income statement on either a gross or a net basis based upon their accounting policy. However, Issue No. 06-3 states that if such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The Company currently records taxes on a net basis (i.e., sales tax is not included in sales, but is instead recorded as a liability under accrued expenses), so Issue No. 06-3 will not impact the Company’s consolidated financial statements.

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. There are numerous previously issued statements dealing with fair values that are amended by SFAS No. 157. The Company has not evaluated the impact, if any, that the adoption of SFAS No. 157 will have on the Company’s consolidated financial statements.

     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 (a.k.a. SAB Topic 1.N) addresses quantifying the financial statement effects of misstatements or, more specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB No. 108 does not change the SEC staff’s previous positions in SAB No. 99, Materiality (a.k.a. SAB Topic 1.M) regarding qualitative considerations in assessing the materiality of misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect that SAB No. 108, when adopted, will have a material impact on the Company’s consolidated financial statements.

     There are no other accounting standards issued as of November 7, 2006 that are expected to have a material impact on the Company’s consolidated financial statements.

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”, “will”, “could”, “project”, “estimate”, “potential”,

“continue”, “should”, “feels”, “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 in future periods to differ materially from forecasted results. These risks and uncertainties include, among other things, the competitive environment in the sporting goods industry in general and in our specific market areas, inflation, product availability and growth opportunities, seasonal fluctuations, weather conditions, changes in costs of goods, operating expense fluctuations, disruption in product flow or increased costs related to distribution center operations, changes in interest rates and economic conditions in general. Those and other risks and uncertainties are more fully described in Item 1A, “Risk Factors” in this report and in our Annual Report on Form 10-K and other risks and uncertainties more fully described in our other filings with the SEC. We caution that the risk factors set forth in this report 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 disclaim any obligation to revise or update any forward-looking statement that may be made from time to time by us or on our behalf.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We are subject to risks resulting from interest rate fluctuations since interest on our borrowings under our financing agreement are based on variable rates. If the LIBOR rate were to increase 1.0% as compared to the rate at October 1, 2006, our interest expense would increase approximately $1.0 million on an annual basis based on the outstanding balance of our borrowings under our financing agreement at October 1, 2006. We do not hold any derivative instruments and do not engage in hedging activities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of October 1, 2006.

Changes in Internal Control Over Financial Reporting

     There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     On August 12, 2005, the Company was served with a complaint filed in the California Superior Court in the County of Los Angeles, entitled William Childers v. Sandra N. Bane, et al., Case No. BC337945 (“Childers”), alleging breach of fiduciary duty, violation of the Company’s bylaws and unjust enrichment by certain executive officers. On November 17, 2005, the plaintiff filed an amended complaint in this action. The amended complaint was brought as a purported derivative action on behalf of the Company against all of the members of the Company’s Board of Directors and certain executive officers. The amended complaint alleges that the Company’s directors breached their fiduciary duties and violated the Company’s bylaws by, among other things, failing to hold an annual stockholders’ meeting on a timely basis and allegedly ignoring certain unspecified internal control problems, and that certain executive officers were unjustly enriched by their receipt of certain compensation items. The amended complaint seeks an order requiring that an annual meeting of the Company’s stockholders be held, an award of unspecified damages in favor of the Company and against the individual defendants and an award of attorneys’ fees. On January 20, 2006, the Company filed a demurrer to the amended complaint (as did the individual director and officer defendants). At a hearing on April 3, 2006, the court sustained the demurrers and granted the plaintiff leave to further amend the complaint and to seek limited discovery.

     Prior to the filing of any further amendment to the complaint, and following arms-length negotiations, the parties came to an agreement to settle the matter. The parties executed a Stipulation of Settlement, dated as of August 30, 2006 (the “Settlement”), and on September 8, 2006, the court gave preliminary approval to the proposed Settlement. Terms of the Settlement include no admission of liability with regard to the litigation by the Company or any individual defendant, an acknowledgment by the Company that the litigation preceded the adoption or implementation of certain measures, internal controls and procedures that relate to certain of the allegations raised in the litigation and confer a benefit to the Company, and the payment by the Company’s insurance carrier of $150,000 in plaintiffs’ attorneys’ fees on behalf of the Company and the individual director and officer defendants. A final hearing is scheduled to be held before the court on December 4, 2006, to determine, among other things, whether the proposed Settlement is fair, reasonable, adequate, and in the best interests of the Company and its shareholders and should be finally approved by the court, and whether to dismiss the Childers action with prejudice.

     In addition, 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.

Item 1A. Risk Factors

     There have been no material changes to the risk factors identified in Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following tabular summary reflects the Company’s repurchase activity during the fiscal quarter ended October 1, 2006:

ISSUER PURCHASES OF EQUITY SECURITIES ¹

														(d) Maximum
										(c) Total				Number (or
										Number of				Approximate
										Shares				Dollar Value)
										Purchased as				of Shares that
		(a) Total								Part of Publicly				May Yet Be
		Number of				(b) Average				Announced				Purchased
		Shares				Price Paid per				Plans or				Under the Plans
Period		Purchased				Share				Programs				or Programs
July 3 – July 30			—				—				—			$	15,000,000
July 31 – August 27			—				—				—			$	15,000,000
August 28 – October 1			64,310			$	19.89				64,310			$	13,721,000
Total			64,310			$	19.89				64,310			$	13,721,000

     ¹ On May 11, 2006, the Company announced that its Board of Directors authorized a share repurchase program for the purchase of up to $15.0 million of the Company’s common stock. Under the authorization, the Company 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 management, and would depend upon market conditions and other considerations.

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

Item 5. Other Information

     In the fourth quarter of fiscal 2006, the Company negotiated a one-year extension to its existing contract, as previously amended, with The Steel, Paper House, Chemical Drivers & Helpers, Local Union 578, affiliated with the International Brotherhood of Teamsters, covering certain store employees. As the Company previously reported, during the third quarter of fiscal 2006 the Company negotiated a one-year extension to its existing contract with Local 578 covering hourly employees in the Company’s distribution center. As a result of these extensions, the contracts between the Company and Local 578 relating to the Company’s distribution center employees and store employees will now expire on August 31, 2007.

Item 6. Exhibits

     (a) Exhibits

Exhibit Number		Description of Document
10.1		Severance Agreement dated as of August 9, 2006 between Barry D. Emerson and Big 5 Corp. (Incorporated by reference to Exhibit 10.1 to the issuer’s Quarterly Report on Form 10-Q filed on August 11, 2006).
15.1		Report of Independent Registered Public Accounting Firm.
15.2		Letter of Awareness of Independent Registered Public Accounting Firm.
31.1		Rule 13a-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a) Certification of Chief Financial Officer.
32.1		Section 1350 Certification of Chief Executive Officer.
32.2		Section 1350 Certification of Chief Financial Officer.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT 15.1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Big 5 Sporting Goods Corporation:

We have reviewed the condensed consolidated balance sheet of Big 5 Sporting Goods Corporation and subsidiaries (the Company) as of October 1, 2006, the related condensed consolidated statements of operations for the thirteen weeks and thirty-nine weeks ended October 1, 2006 and October 2, 2005, and the related condensed consolidated statements of cash flows for the thirty-nine weeks ended October 1, 2006 and October 2, 2005. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Big 5 Sporting Goods Corporation and subsidiaries as of January 1, 2006, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 16, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Los Angeles, California
November 3, 2006

EXHIBIT 15.2

November 3, 2006

The Board of Directors and Shareholders
Big 5 Sporting Goods Corporation
E1 Segundo, California

Re: Registration Statement No. 333-104898

With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated November 3, 2006 related to our review of interim financial information.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.

/s/ KPMG LLP
Los Angeles, California

Exhibit 31.1

CERTIFICATIONS

I, Steven G. Miller, President and Chief Executive Officer, certify that:

	1.		I have reviewed this Quarterly Report on Form 10-Q of Big 5 Sporting Goods Corporation;
	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

          Date: November 7, 2006

Exhibit 31.2

CERTIFICATIONS

I, Barry D. Emerson, Senior Vice President, Chief Financial Officer and Treasurer, certify that:

	1.		I have reviewed this Quarterly Report on Form 10-Q of Big 5 Sporting Goods Corporation;
	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

          Date: November 7, 2006

Exhibit 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report on Form 10-Q of Big 5 Sporting Goods Corporation (the “Company”) for the period ending October 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven G. Miller, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

	(1)		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Steven G. Miller
Steven G. Miller
President and Chief Executive Officer
November 7, 2006

A signed original of this written statement required by Section 906 has been provided to Big 5 Sporting Goods Corporation and will be retained by Big 5 Sporting Goods Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report on Form 10-Q of Big 5 Sporting Goods Corporation (the “Company”) for the period ending October 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry D. Emerson, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

	(1)		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Barry D. Emerson
Barry D. Emerson
Senior Vice President, Chief Financial Officer and Treasurer
November 7, 2006

A signed original of this written statement required by Section 906 has been provided to Big 5 Sporting Goods Corporation and will be retained by Big 5 Sporting Goods Corporation and furnished to the Securities and Exchange Commission or its staff upon request.