Big 5 Sporting Goods Corp (BGFV) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Big 5 Sporting Goods 2002 fourth quarter and year end results conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time if you have a question please press the one, followed by the four on your telephone. As a reminder, this conference is being recorded Wednesday, February 12, 2003.

Your speakers for today are Steve Miller, Chairman, President, and CEO, and Chuck Kirk, the company’s Chief Financial Officer.

I would now like to turn the conference over to Steve Miller. Please go ahead, sir.

Thank you. Good afternoon. I would like to welcome you to our 2002 fiscal fourth quarter conference call. Today we will review our financial results for the 13 and 52 weeks ended December 29th, 2002, as well as provide an outlook for 2003.

Before we do that Chuck will read the Safe Harbor Statement.

Except for statements of historical facts any remarks that we may make about our future expectations, plans, and process constitute forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that might cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our filings with the Securities & Exchange Commission, including our registration statement on Form S-1 filed originally on August 21st, 2001.

The company disclaims any obligation to update these factors or to publicly announce the results of any revisions to any of the forward-looking statements made during this call to reflect future events or developments.

Big 5 completed its initial public offering in June 2002, and the underwriters [over allotment] option was completed a few days later in early July. These events impacted the company’s net financial results which we record in accordance with generally accepted accounting principles. We also present and will discuss our earnings [inaudible] on a basis that assumes our IPO that occurred at the beginning of the period presented and excludes among other items the affect of certain one-time expenses relating to the IPO and over allotment option.

The use of pro forma reporting internally to evaluate our operating performance without regard to certain [inaudible] financial affects of the IPO, and believe this presentation will provide investors with additional insight into our operating results. These pro forma adjustments are more fully explained in our press release.

Thank you, Chuck.

I will begin with our fourth quarter results. We were clearly challenged here in the fourth quarter, and we feel very good about how we responded. We faced not only what turned out to be a sluggish holiday shopping season, but also warm and dry weather conditions in all of our major markets that were decidedly unfavorable to our business. Despite these adverse circumstances we stayed true to our game plan and did not give-away margins. And when all is said and done, we posted positive results.

Starting with sales, we rang the register to the tune of 176.7m in the 2002 fourth quarter, up 6.9m over the 169.8m in the fourth quarter of the previous year. Same store sales increased 0.4 percent for the quarter. This was our 28th consecutive quarter of positive comp store comparisons.

In terms of product performance you may recall that for reporting purposes we break-out our sales mix into three major merchandise categories, apparel, footwear, and hard goods. For the first three quarters of 2002, and in fact, for some period of time prior to that our comp store growth had been fairly consistent across these three major categories.

This was certainly not the case during the fourth quarter. Unseasonably warm weather conditions clearly influenced product performance. Sales of virtually all cold weather related products were significantly down which led to sales in our total apparel category being down in the mid to high single-digit range for the quarter. Sales of hard goods which were negatively impacted by the performance of winter related equipment were up low single digits.

Our strongest performing category was footwear which showed a mid single-digit increase for the quarter. The footwear category’s success continues to be driven by brand name special make of product and opportunistic buys.

Now commenting on margins. Despite the challenging retail environment in the holiday season we did not believe it prudent to alter our game plan in an effort to chase sales. In fact, we’ve always felt that when generating sales becomes more challenging and perhaps less predictable it becomes even more important to protect margins.

Our gross profit margins rose to 36.1 percent from 35.6 percent for the same quarter of the previous year. Margin gains were consistent across all of our major product categories. In the expense arena our selling and administration expenses increased to 24.0 percent of sales from pro forma selling and administration expenses of 23.7 percent in the fourth quarter of the prior year. This increase reflects higher store labor costs as a percentage of sales, as well as continued expense pressure in the areas of health and welfare benefit costs and insurance.

Looking at the bottom line, net income available to common stockholders increased to 8.8m in the fourth quarter of 2002, versus pro forma net income of 6.7m in the 2001 fourth quarter, or 8.1m for last year’s period if we also exclude the impact of the wage hour litigation settlement related to our employees which was fully accrued in the fourth quarter of 2001.

Earnings per diluted share increased 34.5 percent to 39 cents per diluted share, versus pro forma earnings per diluted share of 29 cents for the fourth quarter of last year, or 36 cents from last year’s period after further adjusting for the wage hour litigation settlement.

Now, I’ll briefly comment on our full year results. We feel very good about fiscal year 2002. We successfully completed our initial public offering, and our full year EPS numbers were comfortably within the range of guidance that we provided when we were on the road for the IPO.

For the full year 2002 sales rose 45m to 667.5m from 622.5m the prior year. Same store sales increased 4.0 percent for the year. We realized positive performance across all of our geographic regions in all major merchandise categories.

Looking at the bottom line net income available to common stockholders on a pro forma basis increased to 24.6m for the full year 2002, versus pro forma net income of 15.4m for the full year 2001, or 16.9m from last year excluding the impact of the wage hour litigation settlement in 2001.

Earnings per diluted share on a pro forma basis increased 60.3 percent to $1.09 per diluted share versus pro forma earnings per diluted share of 68 cents for the full year of 2001, or 74 cents for last year after further adjusting for the wage hour litigation settlement.

Now, I’ll bring you up-to-date on our store growth. We opened 10 stores in the fourth quarter which enabled us to meet our 2002 plan of 15 new stores, bringing our store count to 275 at year-end. The performance of our new stores to date has run ahead of our projections. We’ve opened one store thus far in 2003, and anticipate opening a total of between 16 and 20 stores for the whole year, with one store closing.

At this time, I’ll turn the call over to Chuck who will talk about our balance sheet, give some flavor to our recent bond repurchase, and provide earnings guidance for 2003.

Thanks, Steve.

First, looking at our balance sheet, our inventories were in very good shape at the end of the year. Year versus year total chain inventories increased 5.8m to 169.5m, from 163.7m at the end of 2001. We feel good about this moderate increase in inventories since as of year end we were operating 15 more stores than the prior year, and the fact that we carried over more cold weather related inventory than we anticipated. On a per store basis inventories actually decreased two percent from 630,000 a store to 616,000 in ’02.

The capital spending was on-target with expenditures totaling 10.3m for fiscal 2002. These expenditures primarily funded the opening of [16] new stores during the year.

The combination of our strong operating performance, improved inventory turns, and non-target capex resulted in excellent free cash flow performance from our operations for fiscal 2002. The operations threw out 25m in free cash flow, which was used along with IPO proceeds to retire some high coupon debt and preferred stock, as well as to reduce year versus year levels on our remaining debt by 3.7m. The remaining debt includes our day-to-day revolving credit facility and our publicly traded senior notes.

We continue to see the business generating significant free cash flow going forward. On December 31st we announced the pending redemption of 20m of our publicly traded [10 and 7A] senior notes, using availability from our revolving credit facility. Although there was an approximately 5.5 percent one-time premium associated with this redemption for a charge of three cents per share which will be recorded in our 2003 first quarter earnings, the buyback will pay for itself quickly adding approximately four cents a year to our EPS based on current interest rates.

Now, I’ll spend a few moments on our guidance. We’ve always prided ourselves on our ability to play-through reasonable variations in weather patterns. However, during the fourth quarter of last year and since the start of the first quarter this year the variations were anything but reasonable. The warm and dry weather patterns were definitely unfavorable to our business in the fourth quarter.

Weather patterns have only worsened from our perspective since the start of the first quarter of this year. The month of January average temperatures in all of the regions in which we operate were either the warmest or second warmest on record. That means in the last 109 years. Because of this record warmth our first quarter to date sales performance has been even more impacted in cold weather related categories, [another indication] in the fourth quarter.

With that said, and combined with the fact we’re comping against strong first quarter increases which have been six to seven percent for each of the last three years, we currently estimate first quarter same store sales will range from a low single-digit decrease to a slight increase. We’re guiding to low single-digit same store sales increases for the second through fourth quarter of 2003.

The sales performance combined with continued margin expansion and de-leveraging of our debt should produce earnings per diluted share in the range of 15 to 18 cents in the first quarter of 2003. The full year guidance is for earnings per diluted share in the range of approximately $1.18 to $1.23. These estimates exclude a charge to first quarter earnings of approximately three cents per diluted share related to partial redemption of the company’s senior notes. As I mentioned earlier, this extraordinary charge will be recorded in our first quarter.

And with that, I’d like to turn the call back to the Operator, and open it up for any questions.

Thank you. (Caller Instructions.)

Our first question comes from the line of [Ian Cordan[ph] with B. Riley and Company. Please proceed with your question.

Hi, guys.

Hello, Ian.

Could you talk about what you’re expecting in ’03 as far as gross margins? Are you expecting to continue to get improvements there?

Yeah, we see continued improvement there, in the range of 20 to 30 basis points. We just continue to do well on the product side, and we will leverage some of that from the [DC] later in the year.

Okay. And what kind of comp number do you need to get positive leverage on SG&A?

In the range of about two to three percent is probably a good number. You know, we’re still fighting [inaudible] some from continued increase in the insurance costs area.

Right. Okay. And the 16 to 20 new stores, are those all in existing markets?

All in existing or contiguous markets, as part of our normal expansion.

Okay, thanks.

You’re welcome.

Thank you.

Our next question comes from the line of [Brent Ryestrom[ph] with Piper Jaffray. Please proceed with your question.

Hi, this is Jeff [Sonack][ph] for Brent Ryestrom. Just piggybacking on the new stores, do you expect those to be back-end weighted in the fiscal year?

Somewhat, a little less than last year. Last year’s were more so because we got a little diverted with the IPO. But we’re still back-end weighted for the most part.

Okay, and then can you touch on how you think the comp progressed through the quarter, just with the weather patterns? Just give us a little flavor, if that changed by category at all? I know you mentioned margins were consistent through the categories, but did that change at all as things progressed?

Yes, I mean the – for the fourth quarter – you’re saying for the fourth quarter?

Correct.

I think the big issue for us was the lack of weather that, you know, the winter season actually got off to a really – early November when we got the cold weather. But it was unseasonably warm from probably the second week, second, third week in November throughout the entire holiday season. And as winter became a more significant component of total sales that put pressure on comp store performance.

So then, is there going to be some markdowns trying to get rid of some of that inventory going forward here?

Other than really the ordinary mark-downs that, you know, go always at the tail-end of the winter season. The good thing for us is that the product that we have, and we will carryover some excess winter inventory this year. But the product is not fashion. We’ll pack it up and bring it out next year, and it’ll play next winter season as well as it would have played this winter season had we had snow.

Okay, thank you.

You’re welcome.

Thanks.

(Caller Instructions.)

Our next question comes from the line of Brett Hendrickson with Bonanza Capital. Please go ahead with your question.

Good afternoon, guys.

Hey, Brett.

Now that we’re getting into mid-February – I know it’s obviously real cold and wet here in California right now in the last few days. Is it kind of too little too late if we start getting more snow up at [Mammoth[ph] and start getting more cold down here in California? Is it getting to the point of the year already where you don’t need cold weather?

Well, the issue now, any snow we’ll be grateful for for the remainder of the winter season. The real issue now is rain is probably, there’s less to be gained in the winter season versus what can arguably be a loss in moving into spring sports, and particularly baseball. And so, at this stage of the game, I mean cold and snow in the mountains is certainly good. But if it’s – it comes along with the rain that we have for today, for example, certainly in our markets here in California that’s arguably not good.

Plus Brett, these storms are hitting the California markets, not the Northwest. The Northwest continues pretty dry.

Okay, that’s all I had guys, thanks.

Thank you.

Okay.

Our next question comes from the line of [Christina Bonney[ph] with CS First Boston. Please proceed with your question.

Yes, good afternoon, everyone. My first question was if you could just reiterate what your target is for capex for the year, and if you have a free cash flow target for 2003?

Yeah, what I think, actually we can [calculate] 10.5m to 11.5m range, 15 to 20 stores, about 350 to 400 a pop drives most of that. And what was the second part of the question?

If you have a free cash flow target for 2003?

We’re looking at somewhere in the neighborhood of 20m.

20m, okay. And just a housekeeping point, can you give us the revolver balance and the senior note balance as of December 31?

The revolver balance was 22m in change. And the – what was the other one?

Just the senior note.

Right around $103m.

Okay. Great. And do you have by any chance the availability that there was at the end of the year, under the revolver?

I believe it was in the $70m to $80m range.

Okay. Great. Thanks very much.

Our next question comes from the line of Brent Ryestrom with Piper Jaffray. Please go-ahead with your follow-up question.

(No response.)

(Caller Instructions.)

Our next question from the line of David Burman with Burman Capital. Please proceed with your question.

Hi. This is actually Christina Henry for David Burman. Just had a question on your leveraged goals or where you see your targets at in terms of either paying down debt, or you know, what you’re envisioning, you know, going forward over the next year?

We, as I mentioned to Christina, we see about 20m in free cash flow. I think that’ll all go to paying down our debt level. So if we’re at 125 at the end of ’02 you can expect us to be just north of 100m next year.

Okay. Great. Thanks.

Our next question comes from the line of Brent Ryestrom with Piper Jaffray. Please go ahead with your question.

Hi, guys, again. One follow-up. You mentioned spring merchandise. Can you give us kind of a timeframe of when the transition goes from, you know, concentrating on the winter goods to baseball and more the spring sports and apparel?

Yeah, it’s sort of a moving target. Clearly, it could happen now, and certainly, in Southern California and warm weather markets, Arizona, you know, that heads-up north into Northern California, I think is in transition probably as we speak. Washington, northwest, it’s in a little later. And finally, our cold weather markets, Colorado, Utah, so forth.

And are there any, you know, I don’t know new products, or anything like that that you guys expect to kind of drive sales early-on? Or is it just the, excuse me, the typical baseball gloves, soccer balls, shorts, T-shirts, that kind of thing.

Well, I don’t think there’s any new scooter-like product. I mean we feel very strong about our core categories performing super well. We’ve found the environment for opportunistic buys to be very positive for our business. And so, we would feel terrific about that. And really lots of our categories are performing excellent. I think if we factored out the impact of the cold weather related categories we’d be marching along at a very positive comp store sales result.

All right, great. Thanks.

You’re welcome.

(Caller Instructions.)

Gentlemen, I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

All right. Well, I think then just in closing, you know, just a comment. Notwithstanding the short-term impact of the weather we want to say that we feel very confident that the fundamental drivers of our success continue to work very well. We’re certainly excited about the opportunities ahead of us this year, and look forward to delivering another strong performance.

We thank you for your interest, and look forward to speaking with you soon. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect, and thank you for participating.