Big 5 Sporting Goods Corp (BGFV) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Big 5 Sporting Goods first-quarter earnings 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 star then the number 1 on your telephone. If you would like to withdraw your question, press star and the number 2 on your telephone. As a reminder this conference is being recorded, Thursday, April the 29th. Your speakers for today are Mr. Steve Miller, Chairman, President and CEO, and Mr. Chuck Kirk, CFO. I would now like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you. Good afternoon, and welcome to our 2004 fiscal first-quarter conference call. Today we'll review our financial results for the 13 weeks ended March 28, 2004 as well as provide outlooks for the 2004 second 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 statement 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 Acts of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our Form 10-K and other filings with the Securities and Exchange Commission. 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 developments. Big 5 repurchased $20 million face value of the company's 10 and 7/8 senior notes in the first quarter of 2003. This event impacted the company's 2003 net financial results which we report in accordance with generally accepted accounting principles.

We will discuss our earnings and expenses for the first quarter 2003, both in accordance with GAAP and on a basis that excludes charges relating to our partial redemption of our senior notes in the first quarter of 2003. We use this pro forma reporting internally to evaluate our operating performance without regard to certain financial effects of the partial note redemption and believe this presentation will provide investors with additional insights into our operating results. Pro forma adjustments relating to partial note redemption are more fully explained in our press release and our website at www.big5sporting goods.com. Finally all references to quarterly and annual performance relate to our fiscal quarter and fiscal year.

Thank you, Chuck. It's great to report another outstanding quarter for Big 5 Sporting Goods. During the quarter we continued to experience positive momentum in sales trends realizing our strongest comp store increase since the third quarter of fiscal 2002. We also continued to achieve outstanding gross margin performance which when combined with our top line performance led to meaningful gains in bottom line results.

Additionally during the quarter we announced the redemption of an additional $15 million face value of our high cost senior note, and that redemption was completed during our fiscal second quarter using lower cost borrowings under our revolving credit facility. Now I'd like to comment on sales. In the first quarter we rang the register to the tune of $181 million, up 10% from $164.5 million of sales in the first quarter of the previous year. Our same-store sales increased 5.2% for the quarter. This represented our 33rd consecutive quarter of positive comp store comparisons. Most of our sales gains for the quarter were driven by increased customer traffic with a slight increase in our average transaction size. Once again, we comped positively in all five of our geographic regions and in each of our three major categories, footware, hard goods and apparel. Same store sales for our footwear business increased in the low single digit range, hard goods comped in the mid single digits and the apparel category comped in the double digit range benefiting from strong winter-related product sales during the quarter.

Now turning to our margins, again an outstanding story. Gross profit margins increased 110 basis points to 36.3% of sales, from 35.2% for the same quarter of the previous year. Margin gains were very positive in each of our three major merchandise categories. Margin improvements in the winter-related categories were particularly impressive, clearly benefiting from positive weather comparisons.

We were able to sell through a higher percentage of our winter product with fewer markdowns. In the expense arena, our SG&A expenses remained unchanged from the first quarter of 2003, at 27.4% of sales. Our positive sales results and focus on expenses allowed us to leverage our overall salary and store-related expenses. These improvements were offset by continued expense pressure in the employee benefit areas, including health benefits and worker's compensation costs. We are hopeful that the recently signed legislation in California will provide some future relief against worker's compensation costs. However, at this time we're not able to quantify the impact of this legislation, but we certainly believe it can only help. Looking at our bottom line, our sales increase and margin gains combined with significantly lower interest costs resulting from our partial senior note redemption and free cash flow from operations allowed us to report very strong earnings for the quarter.

Earnings per diluted share increased 57.9% to 30 cents versus earnings per diluted share of 19 cents, excluding a one-time note redemption charge of 4 cents for the first quarter of 2003. We are pleased to report that these earnings significantly exceeded the 23 to 25 cents per diluted share range of EPS guidance we provided during our last call as well as analysts' consensus of 25 cents per share. Moving on to our store growth. We completed the quarter operating 294 stores. For the quarter, we opened three stores, two of which were store relocations where our leases were up. The relocations were in Tucson, Arizona and Palm Desert, California, and we opened a new location in Vancouver, Washington. In terms of store growth for the remainder of 2004, we expect to complete the year with a net increase of 15 to 20 new stores. Consistent with prior years, our store growth will be back-end loaded and well dispersed over our 10 states geographic footprint.

Additionally our plans are proceeding positively in the development of our new distribution center in Riverside, California. We are looking forward to breaking ground shortly, actually next week, and we expect that the new facility will be operational in 2005. At this time I will turn the call over to Chuck, who will speak to our balance sheet and provide earnings guidance for the 2004 second quarter and full year.

Thanks, Steve. Looking at our balance sheet, inventories were in great shape at the end of the quarter. Total chain inventories increased $6.6 million to $188.7 million on March 28, '04 from $182.1 million at the end of the first quarter in 2003. This is very positive in that we were operating 294 stores this year versus 275 stores last March. On a per store basis our inventories actually decreased 3%. We feel our team really did a great job in this area given on top of this per store decrease in inventories we provided 5.2% comps at very healthy margins.

Capital spending totaled $1.5 million for the first quarter of '04. These are expenditures primarily for the addition of three new stores during the quarter and that includes the two relocated stores. Our total debt levels were $109 million at the end of the first quarter; that's down $22.5 million from the $131.5 million of total debt reported at March 30, 2003. During the first quarter we announced the redemption of an additional $15 million principal amount of our 10 and 7/8 senior notes using funds available under our revolving credit facility.

This redemption was completed on April 15, 2004 and will be reflected in our second-quarter financials. Although there will be a resulting one-time charge of 2 cents per diluted share to 2004 second quarter earnings, the [INAUDIBLE] redemption will pay for itself quickly adding approximately a penny per quarter to our EPS based on current interest rates. The outstanding principal balance of the senior notes was reduced to $33 million from a prior principal balance of $48 million prior to the redemption. Our capital strategy going forward remains unchanged. We continue to see the business generating significant free cash flow in 2004 and beyond.

We plan to use this cash flow to pay down debt, and if the opportunity arises, we may use availability you know our 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 moments on our guidance. We continue to be excited about our overall earnings growth potential for the remainder of 2004. Starting with the second quarter, our best deal at this point suggests that same store sales growth in the second quarter should be in the low to mid-single digit range. This sales performance should in turn lead to earnings in the range of 34 cents to 36 cents per diluted share for the second quarter. And that excludes the 2 cent charge related to the $15 million senior note redemption.

With respect to the full year, we believe that absent any major jolt to the macro economic environment, we can achieve positive same-store sales results in the low to mid-single digit range and that results in a increase from our previous full year earnings guidance which was $1.47 to $1.53 per diluted share to a new range of $1.55 to $1.61 per diluted share, and again that excludes the 2 cent debt redemption charge which will be incurred in the second quarter. I also want to point out again that because we are a retailer operating on a fiscal four week, four week, five week quarterly calendar every six years or so we pick up an extra week in our fourth fiscal quarter to true up our calendar. In fiscal 2004, we will pick up that extra week. We believe the resulting extra week of sales will not materially affect earnings for the fourth quarter or year. In terms of CapEex, we continue to anticipate spending approximately 12 to $13 million on what we call normal new store and maintenance CapEx in 2004. And that's driven primarily by the opening of 15 to 20 net new stores. In 2004 we also anticipate spending approximately 10 to $11 million of the planned $15 million total debt spending requirements for our new distribution center which we plan to have operational in 2005. With that I'd like to turn the call back to the operator for Q&A.

Thank you. Ladies and gentlemen, if you would like to register a question, please press star, then the number 1 on your telephone. If your question has been answered and you would like to withdraw your registration please press star, then the number 2. If you are using a speaker phone, please lift your handset before entering your request. One moment please for your first question. Your first question comes from Shawn McAllen with Harris Nesbitt.

I hope you can hear me. I'm on a cell phone in an airport. Is it coming through?

Yes, we hear you well.

Great. Couple of questions. Besides the mix where apparel was up you know a lot more than the other two categories, is there anything else within the operations that's driving gross margins higher? Specifically can you talk about the benefit of fewer markdowns and to the extent to which that drove gross margins higher?

Sure. It's something we think has been ongoing for some period of time that really doing a better job of continually getting the right products to our stores at the right times and in the right quantities, each and every season we seem to do a little bit better really using our experience. I think we go through an ongoing process of continually weeding out products that are less margin friendly and trying to identify products that offer the customers great value, but also at margins that are healthy for our business. When we identify those items, we try and ride them for a long period of time. Special makeup products allow us to achieve this goal. Just a continued focus on doing what we do best really.

Okay. Thanks. The second question and then I'll turn it over is, can you talk about where we would see the effect both maybe positively or adversely in the near term of the new distribution center, like where might costs go up or where that might be offsetting savings?

We're going to see costs go up some in '05 when we start paying rent on the new facility basically in the first quarter I believe.

Cost of sales?

What's that? Yeah, it will show up in cost of sales, and then over time as we operate the new facility, because of the technology involved, there'd be some efficiencies and some give back on the labor side that that'll show up after we open it up later in '05 and into '06 and beyond.

Okay. Thanks a lot.

Yeah.

Thank you.

Your next question comes from Ralph John with Wachovia Securities.

Great, thank you. Just a couple quick questions. Gross margin improvement now is third quarter in a row, and you put up a 100 basis point improvement in Q3 of last year. Should we see that rate of improvement decelerate as we get into the back half of the year?

Yeah, we should. Remember, a lot of that, not a lot but, you know, 40 or 50 basis points came from our winter business. We were up against a very, very dismal season last year in terms of weather and did well this year. So it should decelerate a bit going into the back half the year, but we still see room for improvement.

My second question is simply I understand the healthcare and workers' comp issues are specific to California. If you had not had those issues or if you kept them flat year-over-year, what kind of expense leverage would you have gotten on a 5.2% same-store sales increase?

I think we would be looking at a 20 to 30, 40 basis-point improvement.

Okay, thank you very much.

You bet.

Your next question comes from Edward Kelly with Credit Suisse.

Congratulations on a great quarter.

Thanks.

Thanks, Ed.

Could you talk about what percentage of your sales in the quarter were winter product, and how much better is the margin on that product versus I guess like the company average?

Yeah. We don't specifically break out the winter category sales. You know, certainly recently significant particularly in the first half of the quarter. Margins in winter, probably slightly better. There's still a markdown factor as we transition out of the season. I think our winter margins would be somewhat above our average margins. Steve, do you agree with that?

Yes, yes. Yes, they would. Okay.

Especially in the apparel side.

Right, right. With the overhaul of workers' comp, when do you think would be the earliest that you may see some relief in this area without quantifying it? But I know that you're self-insured, so could you maybe walk through how that would work?

That's a good question. We have an actuarial do a study. We get it once a year, but we're going to do it look at it again mid-year and have them do it this year, mid-year, and if the actuarial tables start reflecting some easing, that's when we'll start seeing some give back. But from what I'm hearing we aren't building into our models anything this year yet, but that's conservative. There should be something later.

Great.

I'm sorry, but earliest it would be Q3.

Okay. And last question, can you just discuss some of the sales trends you've seen so far in Q2?

Sure. Very positive, really a continuation of the positive performance in Q1.

Okay. Great. Thanks.

Our next question comes from George Lush with Fulcrum Global Partners.

Thank you. Just a follow-up on the sales trends. Has there been any impact with the increasing gasoline prices I guess especially in California, and then, Chuck, can you just give us the square footage at the end the quarter please?

Sure. In terms of gas prices, it's certainly not reflected in our sales. I guess one could argue maybe they'd be, you know, even better if the customers’ pockets are being pinched by higher gas prices. We think the values that we bombard them with week in and week out maybe plays well for us. But we certainly can't relate directly to gas prices impacting our business.

Okay.

In terms of square footage, George, at the end of Q1 about 3 million 290. I think we ended the year at 3 million 280 or something like that.

Okay. Thank you very much.

You bet.

Your next question comes from John Shanley with Wells Fargo.

Good afternoon, gentlemen. This is Christopher Spezia (ph) calling in for John Shanley. Congratulations on a great quarter.

Thanks.

Just a couple quick questions. First, I was just wondering, I mean you operate roughly 25 stores that were in close proximity I guess to a Just For Feet store. And I was just wondering if maybe you could just talk about if there was any impact as the result of the Just For Feet liquidation, and also maybe can you just kind of quantify or maybe comment on the opportunity that exists for you guys now that it seems like a major competitor has exited some of your markets?

Yeah, we have looked at that, and honestly we can't quantify any impact from Just For Feet leaving our marketplace during their liquidation.

We even sent some of our district supervisors out to look, and, you know, just it didn't seem to be an impact at all.

Again, generally speaking, where they are at there are lots of footwork players, and one player leaving a market doesn't necessarily tilt the equation that significantly for us.

Okay. Terrific. That's good to hear. A question on the gross margin, very strong results in Q1 obviously. And I was just wondering are some of the gains that you're getting from getting better terms from some of your vendors and are you also getting better product allocations from some of these vendors as well like Nike?

Yeah, I think we're always doing a better job of working with our vendors. That's a constant process. We'd like to think we continually figure out how to do it one up each and every time, and certainly we think that's a plus in terms of our margins.

Okay. And last question, just on the inventory levels, nice job in Q1. Can you give us any color as to what we should expect for the balance of the year?

A similar type of management I think. You know, our buyers operate with budgets and are doing a great job with that. So I think you're seeing, you know, some, maybe per store decrease but --

We think all things being equal, we look for improvement. We've been seeing improvement. That being said, we are opportunistic buyers. At any given point in time, opportunities present themselves, and we make very conscious decisions to arguably trade terms and inventory numbers at any given point in time for future sales and margins. So essentially what I'm saying is our sole focus in life is not the simply to drive down inventory levels. However, all things being equal we seem to do better each and every year.

And you like what you see in terms of opportunistic buys right now?

Feels pretty good, yes.

Okay. Terrific. Congratulations, again.

Thanks, thanks.

Your next question comes from Brian Nagel with UBS.

Congratulations on another good quarter.

Thanks, Brian.

Thanks, Brian.

A couple questions, first off regarding sales. You guys showed some really good momentum in the first quarter from fourth-quarter levels. I was wondering if you could just drill down a little bit more on maybe the drivers of that? Was it weather or the improving economy may have had an effect on your business as well?

I think weather certainly was a plus. I mean, weather was favorable, particularly versus a year ago where weather was very reasonably contrary to our business, and economy, I mean, we're not economists but I guess it feels a little better, continues to feel just a bit better out there.

Especially since the second-quarter trends have been positive and the weather is less of a factor, so --

Could you break down for us the ticket versus the traffic numbers in the first quarter?

In terms of the comps?

Yes.

Let me get this right here. The traffic was 4 1/2% of the 52 and the ticket increase was the rest.

Okay. My second question has to do with the expenses and kind of tags along a previous question. But when you guys, you laid out your comp guidance and your earnings guidance for the year, were you assuming any type of expense leverage in the back half of the year within that guidance?

Not at the low to mid-single digit range but we feel, we feel pretty comfortable that we can come close to being flat.

Okay. And the final question, more of just a maintenance question.

Oh, Brian, let me add to that. As we move more into the 4 to 5% range, we should start seeing leverage [INAUDIBLE].

On the total SG&A line?

Yes.

And again if we get some relief from the workers' comp issues, that could represent upside for us.

We've done a great job in some areas like in credit card fees or labor. The guys have done a great job of controlling that. So things really are under control. It is just the healthcare area and worker's comp right now..

Workers' comp, do we anniversary any time soon a spike up in that?

It seems like we would, but there's spike every year. It's been an animal, and that's what we hope more than anything, just to see some reasonable, if there's an increase a reasonable increase going forward.

Okay. And my final question is just a maintenance question. Your tax rate gives us about 40% in Q1. It seems like it shifted around a little bit lately. What should we be looking for over the balance of 2004?

We're now looking at our provision quarterly and 40% was brought on, so to speak, for the first quarter. There may be some -- I would model 40%, but there may be more reduction in that as we get more sales out of California or the higher tax California.

Okay. Great, thanks a lot.

Your next question comes from Harry Ikenson (ph) with First Albany.

Good afternoon. Thank you. Some final questions. On the sales for the quarter, could you sort of rank them by month and let us know how the trends was, which was strongest, or give us a little bit a breakdown? And then second on merchandise, can you go over some of the hot products by some of the categories and maybe some that are accelerated, maybe some that are decelerating? And then third on the gross margin, could you also go over a little more of the components? I believe you said that markdowns were less, but we didn't hear anything about IMU or any of the other drivers? Thank you.

Yeah. In terms of the how the sales flowed through the period, it started very strong, softened a little bit. We were up in each of our months or periods of the quarter, but relatively a little softer during the mid-part of the quarter and then gained momentum in the third month of the third period in the quarter, and has continued. Part two of the question?

Merchandise.

Yeah, we don't comment about specific product, product sales. So we'll--

It doesn't have to be a number. Just could you --

I mean, we were strong across a broad array of product categories, a very consistent performance. As we mentioned we were up in all of our major categories -- footwear, apparel, hard goods. We've had a pretty solid baseball season, and a number of categories performing very soundly.

Good. Looking forward on products, are there any newer renovations in technology, whatever, anything that is something newness that may be special coming on the horizon that you can talk about?

Truly no individual product that we see as extremely material to our business.

Okay. Then finally, could you go over a little more on the components on the gross margin other than the [ INAUDIBLE ] mark-downs are down, can you talk about IMUs?

We aren't really in a position to comment on that. I mean, nothing out of the ordinary.

Okay.

It is a really continuation, as we've said, of what we've been doing for we think a long time. We are just executing our fundamental focus on trying to buy very aggressively, promote it aggressively, make sure we're delivering great value to the consumers and figure out how to do it with a little healthier margins hopefully each and every time.

Okay. Thank you very much.

Thank you.

Your next question comes from Anthony Lebiedzinski with Sidoti and Company.

Hi, good afternoon. Just a couple of questions. In terms of the gross margin, were you able to pick up any leverage from your store occupancy and D.C. costs?

We were basically flat there to slight deleverage at the D.C.. As we, you know, start thinking about the new D.C., there is a little deleverage there.

Okay. So should we expect that, assuming that you can do a, let's say, a 5% comp again in Q2, should we expect that to remain?

We should expect, yeah, about basically flat in those areas. I wouldn't expect any leverage.

Gotcha. Okay. Now, looking at your senior debt, when do you think is the likelihood that you'll do another redemption like the one that you did in mid-April?

The earliest we would do one would be mid-November when the premium ratchets down about 187 basis points on buying in. We may, you know, we'll look at that time and at earliest mid-November to the end the year.

Gotcha, okay. Now looking at the new D.C., once that's operational how many stores can that facility handle?

We think it'll accommodate our growth for 10 plus years, certainly the double capacity of the current D.C..

Gotcha. And then, you know, looking over the longer term, when do you think that you'll expand beyond the 10-state operating area that you're currently in?

We have no specific timeline. What we're going to continue to do, follow is a controlled growth strategy that's been in place really since the founding of the business nearly 50 years ago, and that's to fill in our existing for the footprint. We always have an eye over into [INAUDIBLE] markets. If we find a really an opportunistic situation that allows us to move one state over, we'll certainly jump on it but no specific time frame to comment on.

Okay. Got it. Okay. Thank you.

Thank you.

Thank you.

Your next question comes from Rick Nelson with Stevens Incorporated.

Hi, guys. This is Joe Franga for Rick.

Hi.

I just wanted to ask as far as new store openings can you give us a little clearer picture on the timing of the new store openings other than they're back-end loaded? Do you guys have a –- can you quantify at all a little bit?

Sure, I can do that. Back end similar to last year. Last year we were basically all back half of the year 7 in Q3 and 11 in Q4. This year I modeled very similar numbers, except we did open net obviously in Q1 and maybe one more in Q2, and then the back half similar to last year.

Okay. Thanks. And as far as debt levels at year end, you mentioned there could be one more debt redemption in November or December. So throughout the year we can expect interest expense as far as the fixed portion to be relatively stable?

Yes.

Okay. And that's all I have, thanks.

Great.

Your next question comes from David McGee with SunTrust.

Good afternoon, and good quarter.

Thanks, David.

Thanks, David.

A couple of questions. First on the sales line, what was your experience in some of your larger markets like Denver versus some of the smaller more medium sized markets?

You know, again, we don't comment on any specific market. I mean, we just, we recently entered the Colorado market and, you know, are very, very satisfied with our -- the Denver market for our performance there. You know, we perform positively across all markets, one store markets as well as a major metropolitan city.

You're equally happy with both sides?

Absolutely.

Secondly, what would be your allocation right now for a shrink versus last year? Would it be about the same?

Very similar, yes, and, you know, we've improved maybe 5, 10 basis points last year versus '02 and running about flat to last year right now.

And then lastly, you mentioned deleveraging on maybe the D.C. costs. Is that because as you think about a new D.C., is that because you're putting some investment up front for the new D.C., or is that inefficiency with the old system?

It's somewhat investment in the new D.C.. We have added some people who will focus on the new D.C., so there is a little bit of a labor increase out there right now. But other than that, we aren't seeing deleverage in any the other areas out there.

We're really ramping up for the transition. We've got some management in the D.C. that is clearing spending a percent of their time focusing on the transition to the new D.C..

Great. Thanks, and good luck.

Thanks.

Your next question comes from James Ragen with Crowell, Weedon.

Yes. Thank you. I was wondering if you might be able to give us the rough percentage of revenue among your three major categories on the quarter?

We don't normally comment quarterly but similar to our annual numbers.

Okay. All right. And then also, do you have the cash from operations number for the quarter?

I believe it's going to be flattish with last year at about a little over $5 million.

Okay. And then getting back to an earlier question about the price of gasoline, I know, Steve, you had answered it as far as relating it to how it may have impacted your sales. What about as a cost, as a transportation expense, is that something that you're having to deal with, or how is that affecting you right now?

Yeah, it does have a impact on us now, and I probably should have brought that up in our D.C. cost, too. It is a slight deleveraging factor out there. Absolutely.

But assuming that you were -- I guess it was higher throughout the quarter. So the impact of those higher prices already shows up in the current numbers?

Yeah, it shows up in our gross margins. And it's probably, it was probably about a 10 basis points type of number, mid-teen type of increase.

Okay. Great, thank you very much.

Uh-huh.

At this time, there are no further questions.

All right. Well, we thank you for participating in the call. In summary we feel very positive about our performance in the first quarter. Thought it was just a great, another great job of execution by the entire Big 5 team. Our start to the second quarter has a great feel to it, and we're certainly very excited about the year and look forward to our next conference call. Thank you for joining us. Good day.

This concludes today's conference. You may now disconnect.