Big 5 Sporting Goods Corp (BGFV) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Big 5 Sporting Goods fourth quarter conference call. This conference is being recorded Wednesday, February 11, 2004. Your speakers for today are Mr. Steve Miller, President and CEO, Mr. Chuck Kirk, CFO.

I will now turn it over to Steve Miller, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to our 2003 fiscal fourth quarter and full year conference call. Today we will review our financial results for the 13 and 52 weeks ended December 28, 2003, as well as provide outlook for the 2004 first quarter and full year, and of course, open it up for questions.

Before we do that, Chuck will read the Safe Harbor statement and provide you with some additional information about how we report our results.

Except for statements of historical fact, any remarks that we may make about our future expectations, plans and prospects, 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 may cause our actual results to differ materially from forecasted results.

These risks and uncertainties include those more fully described in form 10-K, and other filings with the SEC. We disclaim any obligation to update these factors or to publicly announce results of any revisions to any of the forward-looking statements made during this call to reflect future events or development.

Big 5 completed its initial public offering in June 2002, and the underwriters allotment option was completed a few days later in early July. These events impacted the company's 2002 net financial results, which we report in accordance with generally accepted accounting principles.

We'll also present and will discuss our earnings and expenses on a basis that assumes our that IPO occurred at the period presented and excludes, among other items, certain one-time expenses related to the IPO, and allotment options. We'll present and discuss our earnings and expenses for 2003 on a basis that excludes charges related to partial redemption of senior notes in both the first and fourth quarters of 2003.

We use this pro forma information internally to evaluate our operating performance without regard to certain nonrecurring financial affects of the IPO, and certain financial affects of the partial note redemption and will presentation will provide investors with additional insight into our operating ruts. Pro forma adjustments relate together IPO and partial note redemptions are more fully displayed in the press release and on our web site at www.big5sportinggoods.com. All references to annual performance relate to fiscal quarters and fiscal years.

Thank you, Chuck. It's great to be able to report another outstanding quarter and full year for Big 5 Sporting Goods. In the fourth quarter, we combined our strongest comp store increase of the year with continued outstanding gross margin performance to achieve meaningful gains in net income.

On top of strong earnings results, we completed our 6 million share $108 million secondary stock offering in mid November, which substantially increased the public flow to our stock and broadened our institutional shareholder base. We redeemed 35 million of our high cost senior notes in December, using lower cost bore ocean under our revolving credit facility and end the year with an overall reduction in total debt of 25 million, versus last year's ending debt balance.

Now I'd like to comment on sales. In the fourth quarter, we rang the register to the tune of $191.8 million, up 8.5% from 176.7 million of sales in the fourth quarter of the previous year. Our same store sales increased 3.6% for the quarter. This represented our 32nd consecutive quarter or 8 full years of positive comp store quarterly comparisons as I mentioned was our strongest quarterly same store performance of fiscal 2003.

We feel very good about the consistency of our sales performance for the quarter. We were comfortably up in each month of the quarter, and all five of our geographic regions, and in each of our three major merchandise categories, footwear, hard goods and apparel. Most of our sales gains were driven by increased customer traffic with a slight increase in our average transaction size.

Now turning to our margins, again, an outstanding story. Gross profit margins increased 50 basis points to 36.6% of sales, from 36.1% for the same quarter of the previous year. Margin gains were remarkably consistent in each of our three major merchandise categories. Clearly, our unique mix of unline product, special merchandise, along with opportunistic buys is creating a great value proposition for our customers while allowing us to continue to achieve margins that are healthy for our business.

In the expense arena, our SG&A expenses increased to 24.4% of sales, from 24.0% in the fourth quarter the prior year, primarily reflecting continued expense pressure on our overall employee benefit costs.

Looking at our bottom line, our sales increase and margin gains, combined with lower interest costs resulting from our senior note redemptions and free cash flow from operations, as well as lower tax rate, allowed to us report strong earnings for the quarter. Earnings per diluted share increased 26% to 49 cents, excluding a one-time note charge of 6 cents for the fourth quarter of 2003, versus earnings per diluted share of 39 cents for the same period last year.

We are pleased to report these earnings exceeded the range of guidance we provided guidance we provided during our last call, as well as analysts' consensus of 47 cents per share. This quarter, of course, completed our fiscal year, a highlight our full year results.

For 2003, sales rose 6.3% to 709 million from 67.5 million in the prior fiscal year. Same store sales increased 2.2%, for the full year of 2003. Earnings per diluted share, excluding note redemption charges in the first and fourth quarters totaling 9 cents, were $1.25 for 2003, versus pro forma earnings per share of $1.09 for 2002 and GAAP earnings per throughouted share of 57 cents for 2002.

Moving on to our store growth. We completed the year operating 293 stores, 11 of which were opened during the fourth quarter. For the year, we opened 19 stores with one store closing.

In terms of store growth for 2004, we have opened two stores to date, one of which was a relocation. We expect to complete the year with a net increase of 15 to 20 new stores. We anticipate the stores to be well dispersed over our ten-state geographic footprint.

At this time, I will turn it over to Chuck who will provide earnings guidance for the 2004 first quarter and full year.

Thanks, Steve. Looking at our balance sheet. We believe inventories were in great shape at the end of the year, total inventories increased 10.1 million to 179.6 million at December 28, 2003, from 169.5 million at the end of the fourth quarter in 2002.

We feel good about our inventory position, especially since at year-end, we were operating 18 more stores than last year. In fact, on a per store basis, inventories decreased slightly from 616,000 at the end of 2002, to 613,000 at the end of '03 on a per store basis.

Capital spending totaled 5.7 million for the fiscal 2003 fourth quarter, and ten and a half million for the full year of 2003. These expenditures were for the addition of 19 new stores, that's 18 net, including one closure. Combination of our strong operating performance, disciplined inventory management, and minimal cap ex requirements resulted in excellent cash flow performance from our operations in fiscal 2003, and we use that to reduce our debt balances.

Our total debt levels were 99.7 million, at the end of the fourth quarter 2003, down a full 25.4 million from the 125.1 million of total debt reported at December 29th, 2002.

During the fourth quarter, we completed the redemption of an additional 35 million of our publicly traded 10-A, senior notes which we funded through a credit line. Although there was a resulting charge of 6 cents per diluted share to our '03 fourth quarter earnings, this debt redemption will pay for itself quickly, adding approximately 7 cents annually to our go-forward EPS based on current interest rates.

All in all, we successfully redeemed 55 million of the ten and seven eighth notes in 2003, and we reduced the balance outstanding from 103 million to 48 million. Our go-forward capital strategy is unchanged. We've continued to see the business generating significant free cash flow in 2004 and beyond.

We plan to use that cash flow to pay down debt and, if the opportunity arises, use availability under revolving credit facility to redeem or repurchase our senior notes. This strategy should continue to reduce our outstanding debt levels as well as our interest costs.

Now I'd like to spend a few minutes on '04. We're excited about our overall earnings growth potential for 2004.

Starting with the first quarter, our best feel at this point suggests same-store sales growth in the 2004 first quarter should be in the mid single digit range. This sales performance should in turn lead to GAAP earnings per share in the range of 23 to 25 cents per diluted share for the first quarter.

As far as the full year goes, we believe with the continued stable strengthening economy, we can achieve positive same-store sales results in the low to mid single digit range and that will result in GAAP earnings roughly in the range of 1.47 to $1.53 per diluted share.

I want to point out, too, that because we are retailing operating fiscal four-week, five-week quarterly calendar, every few years we pick up a week to true you up our quarter. That will happen in 2004.

We believe the resulting extra week of sales will not materially affect earnings for the quarter and year. In terms of cap ex, we anticipate spending about 12 to 13 million on normal new store and maintenance cap ex in 2004, and that's driven primarily by the addition of 15 to 20 net new stores.

In addition, we anticipate spending approximately 10 to 11 million of the anticipated 15 million total capital spending requirements for our new distribution center, which is planned to be operational by mid 2005.

With that, I'd like to turn the call back to Steve for a moment before we get into our Q & A.

Thank you. In summary, we feel very good about our accomplishments for 2003. We believe there are highly experienced Big 5 teams. Again, we executed our game plan in an outstanding fashion.

We are very pleased with how we finished the year. Perhaps more importantly, we are excited to report the 2004 has gotten off to a very positive start, clearly benefiting from excellent winter weather comparisons in most of the markets in which we operate.

A fundamental driver of our success appear to be firmly in place. We feel we are very well positioned for an outstanding 2004.

With that, I'd like to ask the operator to open the call for questions.

Our first question comes from the line of Brian Nagel with UBS. Please proceed.

Congratulations on a good quarter. Had a couple questions. First off, your comp guidance for the first quarter assumes a pickup from the fourth quarter levels. I was wondering if you can give an indication of how sales have tracked for the first few weeks of 2004?

Sales have tracked very, very positively. We're off to, as I mentioned a, a wonderful start to the year. Clearly, we are getting a nice kick from favorable weather conditions in most of our markets.

Okay. The second question has to do with expense line. You guys did leverage by 40 basis points again. What point do we start to leverage expenses? Or maybe you can pin point the comp level we need to get to expense leverage.

In our sort of guidance model that we're looking at, in '04 basically, at the numbers we talked about, you're looking at comps, say, of about 4%, you basically are breaking even and starting to leverage from there.

We're still facing a tremendous pressure in health benefits and workers' comp next year, we're looking at probably a 30-plus percent overall increase in that factor, but other than that we've done a lot to bring down some of our other expenses and feel we can start leveraging, or will start leveraging the 4% range.

Is there a sense that the government's starting to work on the workers' comp issue in California, or there's not really any progress there?

I think there's definitely a sense there's lots of discussion about it. We're hopeful, believe that it represents at this point in time only one side opportunity, but we want to be conservative in our planning. Don't want to bank it until we see it.

So you're essentially reserved for the trend that you've been seeing?

Yeah, we are conservative in our guidance on that one.

Great. Thank you.

Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

Good afternoon, guys. I just had a few questions. First, just wondering about the tax rate that you had in the quarter. Is this something that we should assume going forward or was this sort of abnormal?

No, when we analyze our effective tax rate at the end of the year we saw that at the appropriate rate was 40% versus the 41 we were booking it. As we move into get more sales outside of California, some of those states have lower rates and that of course factor lowers our overall effective tax rate and there's some other areas, employment tax credits, et cetera, that we're taking advantage of. So we see that in our modeling anyway, at least 40% rate from here forward.

Okay, got it. Looking at your debt levels, you know, you did a good job with reducing the overall debt. Where do you see the long-term debt being at the end of '04?

I think we did 25 million in '03, obviously. In '04, we have this one-time in terms of cap ex. I would say if we're at 100 million at the end of '0 03, we're looking at another 15 to 20 million lower by the end of '04.

Okay. At what point would you feel comfortable with your debt level that you may possibly maybe look to pay a dividend, for example, given your strong cash flow generation?

We haven 't talked about a specific target. Right now we're just bringing our levels down, but yeah, there is some point we will talk about that internally and decide what we will do.

As far as the store growth, you're looking to do 15 to 20 new stores. What's the deciding factor whether or not to do the 15 to 20 stores? Is it just availability of real estate, or is it something else here?

We're shooting to do as we did last year, we came in toward the upper ends of our range, we would think that we would likely be there as well, but just given the uncertain nature of securing deals, we're very careful in our real estate. We don't go forward until we have the utmost confidence that the deal makes sense for us. It's difficult to give a precise number that's why we give a range.

Thank you very much.

Our next question comes from the line of John Chanley with Wells Fargo Securities.

Congratulations on a good quarter. On the guidance you've given for '04 and kind of relating back to earlier question on leveraging SG&A and you need a 4% comp in order to start to leverage or at least have flat year over year SG&A expenses on year over year sales.

Is it safe to assume going into '04 most will be in the gross margin side and you've done a good job of third quarter and fourth quarter of '03 as far as gross margin improvement. How should we look at it in '04?

I think similar, not probably as robust as '03, but in the 30 to 40 basis point type of range.

Okay. The other question I had is just in terms of any update at all in terms of the stores that you've opened in '03, the 19 or so new stores, any commentary at all about how they're performing in terms of sales planned at this point?

We're very encouraged by the group of stores we opened. Mind you, most of the openings or many of the openings occurred late in the fourth quarter so we don't have a long history, but early indications are very positive. We're essentially pleased with each and every store we opened last year.

Okay, and Steve just going off of that question, looking at '04, should we kind of plan similar store in terms of the opening of stores by quarter, should we look at it kind of mirror the same way it's gone the past two years?

It will again be back-end loaded, typical. Chuck, how would you characterize?

Very similar to last year. You know, we always try and move our openings up, but by the time we get down to it we get with sort of back year pattern. That's how I'd build my model.

Thank you very much, gentlemen, and congratulations again.

Our next question is from Jennifer Neil.

This is Jennifer Neil calling in for David McGee. Good quarter. Two quick questions. First, can we expect any expansion outside of the sort of the ten-state radius at this point, anytime soon? I'll ask the second one in a minute.

Sure. We have no current plans this year to open outside of our ten-state footprint. That being said, we're going to continue to do what we've done for many years as we're working the ten-state area, we always have our eye open to the contiguous market and if the right opportunity opens up, we could find ourselves there, but there is no present plans.

Great, thanks. Second, following up, I know you said the employee benefits are tending to be the driver of SG&A increases. I know at one point we had spoken to about credit and debit fees. Are those coming down or are those still a problem?

In fact, that's a good news story. We sat down with our processor and sort of twisted their arms and actually got some give-back there in rates and I don't have the numbers in front of me. In fourth quarter, we were, in terms of leverage, level, and that and the fact is people are using their credit cards a lot more.

So we were able to see no deleverage and take on significant more credit card volume. We feel good about credit card fees going forward in leverage.

Thank you very much.

Our next question comes from the line of Murray Wanstrath with Hibernia Southcoast Capital.

Most of my questions have been asked. Components of gross margin. Any buying occupancy leverage there or is it all merchandise margin improvement?

Pretty much was all merchandise improvement.

Okay. And advertising as a percent of sales?

Level to last year in the end, just under 6% of sales.

Okay, so still falling on line, not really shifting any dollars around there?

No. The quarter was level.

Okay, and for the first quarter, same as last year?

Yes.

Okay. Can you give me feedback on what your customers are looking at in the stores? You said all categories were positive, but are you seeing anything in particular within the shoe category specifically, and also on the winter products like skis and snowboards? Any kind of color there that you can comment on?

Yeah, we're not in the ski specific business. We're doing a nice snowboard business. We don't really break down our business by classes of product beyond the major categories. Whole winter business has been positive, hard goods, soft goods, we're seeing strength across a number of product lines.

All right, I've just been skiing; I get the ski reports, and the weather looks pretty good over there. as far as the resorts and all. So I was wondering if that was trickling into your business?

Absolutely. Our winter business, as I thought I mentioned, has been just excellent for the really entire quarter. We've got what I would consider to be favorable snow conditions, and most of the markets in which we operate, not just in mammoth. And that's trickling into sales of both hard goods and winter hard goods and soft goods.

All right, excellent. All right, guys, well, good luck going forward.

Our next question comes from the line of Ian Corydon with B. Riley & Co..

I think all my questions have been answered, but just on the distribution center, I know that doesn't come on line until next year, but maybe you could give us a little more detail on when you expect to incur some of that cap ex associated with the D.C. this year and how far along in the planning process are you and how do you plan to manage that transition?

We have a pretty good handle on really divided 10-plus million between the third and fourth quarter this year. As we bring in fixtures, et cetera.

We're well along in the design process, we've completed the design of the building, there will be 52,900 square feet. We've essentially completed our plan for the design of all the material handling equipment, the modules, conveyers and racks, and we're moving along in terms of systems bringing our systems management up to date for the transition. We feel we're taking all the right steps.

All right, great, thanks a lot.

Our next question comes from the Jim Ragan. Please proceed with your question, sir.

Yes, hello, just a follow-up to the distribution center. If you could refresh my memory on how large the existing D.C. is, and then secondarily, other than just having more space, is there any plans or any hope that the new distribution center could actually help increase your margins going forward?

To answer your first question, our current D.C, we operate at 400,000 square foot D.C. which has a 30,000 square foot mezzanine. Additionally, across the parking lot from that facility is a satellite facility of approximately 131,000 square feet. So, it's a substantial increase moving to a 953,000 square foot facility fully rigged.

In terms of increasing margin, I think perhaps there will be, because of some of the automation we're adding, there will be some efficiencies in terms of labor, which in effect would increase margins, but product margins we're not sure about.

Okay. Did the trend on the inventory per store coming down and again slightly down in the fourth quarter, is that something that you think you can continue to bring down going forward, or are you kind of happy with the levels now?

We're reasonably happy with the levels now. Just I think through just increased efficiencies and execution, all things being equal, we think there's still room to bring those levels down. That being said, our sole purpose in life is not necessarily to drive inventories down.

We are opportunistic buyers. At times. we purposefully make decisions to essentially trade turns for future sales and margins. Right now. we're find the opportunistic buying arena to be favorable and at any given point in time that could drive up inventories in the short-term.

Okay, great. And then also I have a question. Do you have available the numbers yet on the business mix for the full year between the three major categories, apparel, footwear and hard goods?

We do. They're really remarkably similar to last year. I think the apparel and hard goods grew slightly faster than they were all for the year. The apparel and hard goods were up slightly stronger than footwear. I think last year we published our results of hard goods being 53.3%.

I think this year it will be 53.5. Apparel will move from 15 and 9 to 16.1. And footwear from 30.8 to 30.4. So as you can see, we think reasonably remarkably consistency year over year.

All right, okay. Finally, Chuck, do you have operations numbers available for Q4 or the year?

I don't have the GAAP funds from operations number. I'd have to dig that out. I may get it in a few minutes and chime in, but right now, I don't.

Okay, all right, well, that's it for me. Good job and keep it up.

There are no further questions at this time. I will turn the call back to you. Please continue the presentation or closing remarks.

We thank you very much for your interest. We appreciate you joining us today and look forward to our next quarterly reports. Thank you and have a good afternoon.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.