Big 5 Sporting Goods Corp (BGFV) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods first-quarter earnings conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS) I would like to remind everyone that today's call is being recorded. Today you will hear from Chuck Kirk, Chief Financial Officer of Big 5 Sporting Goods, and Steve Miller, Chairman, President and CEO. Now for opening remarks and introductions, I would like to turn the conference over to Steve Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to our 2005 fiscal first-quarter conference call. Thank you for joining us. Today we will review our financial results for the 13 weeks ended April 3, 2005, as well as provide outlooks for the 2005 second quarter and full year, and of course open it up for questions. Before we do that, Chuck will read the Safe Harbor statement to provide you with some additional information about how we provide our guidance.

Thanks Steve.

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 in future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our Form 10-K, our most recently filed Form 10-Q for our third quarter of fiscal 2004, 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 that reflect future events or developments.

At this time I'd like to update you on the status of our 10-K filing.

We previously announced that we would restate our prior reported financial statements for fiscal years 2002 and 2003 and the quarterly periods of fiscal years 2002, 2003 and 2004 in order to correct an accounting error and to make other adjustments relating to the previously disclosed establishment of the sales return allowance and to our accounting treatment for leases.

Due to the focused but time-consuming review being conducted by the Company and its independent professional advisers, our financial statements and the related audit by KPMG, our auditors, have not been able to be completed in order to permit the filing of our 10-K. Accordingly, the results included in our earnings release and provided on this call are provided on a preliminary basis. We do not believe that the ongoing review of our prior reported financial statements will identify any other material errors or adjustments than those we have already reported, or result in any material change to the Company's financial information for the fiscal quarter we're providing today. We are working diligently to complete the review process and file our 10-K as quickly as possible.

We will discuss our earnings guidance for fiscal 2005 both in accordance with US Generally Accepted Accounting Principles -- that's GAAP -- and on a basis that excludes charges for anticipated expenses relating to the Company's transition to its new distribution center. We will use this adjusted reporting to internally evaluate our operating performance without regard to certain financial effects of this transition to the new DC, and believe that this presentation will provide investors with additional insights into our operating results.

You should also note that the second-quarter and fiscal year guidance, both as adjusted and as calculated in accordance with GAAP, also do not include charges that are incurred after the first fiscal quarter or expenses relating to the restatements because the Company is unable to adequately estimate those expenses at this time.

Finally, because our fiscal year period shifted from a 53 week fiscal year in 2004 to a 52 week fiscal year in 2005, our first fiscal quarter of 2005 began a week later than our first fiscal quarter of 2004. As a result, comparability between the two periods is challenging. With the exception of our same-store sales which are provided on a comparative 13 week basis, all references to quarterly and annual performance relate to our fiscal quarter and fiscal year.

Thank you Chuck.

We're pleased with our first quarter results and believe that we are off to a strong start in fiscal 2005. By steadily executing our proven merchandising and operating formula, we increased comp store sales and achieved meaningful gains in net income, while improving our balance sheet.

Beginning with sales, in the first quarter we rang the register to the tune of $189.9 million, up 4.5% from preliminary restated sales of 181.8 million in the first quarter of 2004. Our same-store sales increased 1.7% for the quarter versus a comparable 13 week period last year. This represented our 37th consecutive quarter over 9 full years of positive comp store quarterly comparisons.

We're generally pleased with our sales performance given that we were comping against our strongest quarterly gain of 2004, we were open one less business day during the quarter due to the shift of the Easter holiday from Q2 of 2004 to Q1 of 2005 -- our stores are closed on Easter Sunday -- and given that weather conditions certainly were not in our corner during the quarter. We had near record, if not record, rainfall in Southern California. A rain during the winter can be good for business, but there is a point where enough is enough. I believe we've clearly hit that point this year. In fact, we actually have one store in Northern California that was forced to close for 63 days during the quarter as a result of flooding conditions. On the other end of the spectrum, we had drought conditions in the Northwest which contributed to clearly the poorest winter sports season the Northwest has experienced in many, many years. So weather definitely impacted the business over the quarter, but on the whole I believe we weathered the weather reasonably well.

Looking at our merchandise, once again we comped positively in each of our three major product categories, footwear, hard goods and apparel, with footwear up in the low to mid single digit range and apparel and hard goods up low single digits for the quarter. Our sales gains were primarily driven by an increase in average transaction size with customer traffic during the quarter consistent with the prior year.

Now turning to our margins, gross profit margins came in at 36.0% of sales during the first quarter versus 36.4% of sales for the same quarter of last year. This performance was slightly below our internal plan.

There are several components to our reported gross margins. Most significantly, of course, are product margins which were flat for the quarter. Product mix shifts driven by the abnormal weather conditions we mentioned prevented us from realizing the increases in product margins that we've experienced in past quarters.

The primary factor in our gross margin decrease was rising distribution center expenses. We had anticipated that warehouse labor costs would be up as we continue to prepare for our distribution center transition. However, we did not anticipate the magnitude of fuel increases that we saw during the quarter. Additionally, we experienced a slight deleveraging of our occupancy costs during the quarter.

Our SG&A expenses decreased 20 basis points to 27.4% of sales from 27.6% of sales in the first quarter of 2004. This decrease reflects the one less business day during the quarter due to the shift of the Easter holiday, and its positive impact on store related expenses. We achieved our decreases in SG&A expenses despite the fact that we incurred higher than anticipated expenses associated with Sarbanes-Oxley compliance work, as well as some expenses for work related to our restatements.

Looking at our bottom line, our sales increase, combined with significantly lower interest costs resulting from our 2004 senior note redemptions and free cash flow from operations, allowed us to report very solid earnings for the quarter. Preliminary earnings per diluted share increased 10.3% to $0.32 versus preliminarily restated earnings per diluted share of $0.29 for the first quarter of 2004.

Now moving on to our store growth, we completed the quarter operating 309 stores. For the quarter we opened one store in Glendale, California which was a relocation. Subsequent to the end of the quarter we opened 1 new store in the Denver, Colorado market, and are currently operating 310 stores.

In terms of store growth for the remainder of 2005, we expect to complete the year with a net increase of 16 to 20 new stores which will be spread within our 10 state geographic footprint. Although our store openings remain back end loaded, as is customary for us, we feel we are definitely in a better position to open more stores earlier in the year this year than we did last year.

Additionally, we are excited to report that we are nearing completion on construction of our new 953,000 square foot replacement distribution center in Riverside, California. The building shell is finished and racking and material handling systems installation is well underway. All warehouse management systems are being extensively tested. We now anticipate that we will begin utilizing the facility with a slow ramp up of operations during the back half of the third quarter, and will complete our transition in Q1 of 2006.

At this time I will turn the call over to Chuck who will speak to our balance sheet, provide earnings guidance for the 2005 second quarter and full year.

Thanks Steve.

Looking at the balance sheet, inventories were in very good position at the end of the quarter. Total chain inventories increased 13.4 million to 203.3 million at April 3, '05 from 189.9 million at the end of the first quarter in '04. We feel good about our inventory positions since at the end of the quarter we are operating 16 more stores than last year.

On a more comparable per store basis inventories increased only slightly by approximately 1.5% versus the end of the first quarter in '04. And then factoring out the carryover of very sellable winter related product, per store levels were virtually equal between periods. So inventories are in great shape.

Capital spending totaled $5.6 million for the first quarter of '05. These expenditures primarily were for store related maintenance and new store spend, as well as approximately 3.0 million for our new distribution center.

Our total debt levels were 95.4 million at the end of the first quarter, down 13.6 million from the 109.0 million of total debt reported at March 28, '04.

We continue to generate significant free cash flow, and we see the business doing so through the remainder of '05 and beyond. We plan to use that cash to continue to reduce debt and pay our quarterly cash dividend to further enhance our shareholder value proposition.

Now I would like to spend a few moments on our guidance.

We continue to be enthusiastic about our overall earnings growth potential for 2005. Starting with the second quarter, our best feel at this point suggests that same-store sales growth should be in the low single digit range. This sales performance should in turn lead to earnings per diluted share in the range of $0.34 to $0.37 for the quarter. This compares to preliminarily restated earnings per diluted share for the second quarter of fiscal 2004 of $0.31, and that reflects a $0.02 reduction from what was originally reported, and also includes a $0.02 debt redemption charge.

With respect to the full year, we believe that absent any major jolt to the macroeconomic environment we can achieve positive same-store sales results in the low single digit range, resulting in full year earnings guidance of $1.70 to $1.80, excluding $0.09 associated with expenses related to the Company's transition to its new distribution center, most of which are expected to be incurred in the third and fourth quarters of fiscal 2005. The Company expects 2005 fiscal year GAAP earnings per diluted share of $1.61 to $1.71, including the expenses related to the Company's transition to its new distribution center.

As I mentioned at the beginning of the call, the second-quarter and full-year guidance, both as adjusted and as calculated in accordance with GAAP, also exclude charges that will be incurred after the first fiscal quarter for expenses related to the restatements because the Company is unable to adequately estimate those expenses at this time.

Moving on to CapEx, in terms of CapEx we continue to anticipate spending approximately 12 to 13 million on normal new store and maintenance CapEx in '05. That's driven primarily by the opening of 16 to 20 net new stores. In addition, we still anticipate the total spend for the construction of our new distribution center to be approximately 22.5 million, of which 8.2 million was spent in fiscal 2004. We anticipate spending the remaining 14.3 million of the new distribution center spend in fiscal 2005, of which 3 million was incurred in the first quarter. As Steve mentioned we expect a slow ramp up of operations at our new distribution center during the back half of the third quarter, and we will complete our transition in Q1 of 2006.

With that I'd like to turn the call over to questions and back to the operator.

(OPERATOR INSTRUCTIONS) David Magee, SunTrust Robinson Humphrey.

Good afternoon. It's actually Jennifer Neil (ph) calling in for David. Just a couple of things.

First off, I was wondering, Chuck, if you could give us any outlook on gross margin going forward, whether we expect them to kind of remain flat or if we will go back to growing gross margin?

And then secondarily question on the DC, what milepost should we look for as you move into the DC, and what could cause that $0.09 to be too much or too little going forward?

In terms of gross margin, I think the first quarter was impacted somewhat by timing of our winter sales as it relates to weather patterns, and that our product went out a little later than normal, and we took our normal markdowns during that period and suffered a bit there. But what we see in April thus far are our margins are back on track and we see nice improvements. I think we're back to the historical type of patterns there.

As it release to the DC, I'll let Steve answer that.

In terms of the expense standpoint, we're on track with what we said at our last call in terms of the -- as Chuck mentioned, in terms of CapEx. And I think that -- was that the question?

Yes, I just wanted to know, I guess moving into the third quarter and -- I guess at this point as best you see there's nothing that's going to affect that $0.09 one way or the other at this point.

We think we're pretty conservative on the $0.09, and it's pretty equally divided between Q3 and Q4.

Thank you very much.

John McGowan, Harris Nesbitt.

A couple of questions. I will start out with a question on the DC. Could you review what the total size of the DC is, how it compares to the previous one, and how many years basically of capacity do you think you have in there before you might need to add to that, whether it's because it's at capacity or because you've moved so far East that it's too far away?

Our new DC will be 950,000 square feet. Our current DC is 400,000 square feet with a 40,000 foot mezzanine. We've also been operating a satellite DC of approximately 100,000 plus square foot sort of across the parking lot. So this new DC is also much more efficiently racked. So we've got significantly more capacity. We anticipate it servicing our needs comfortably for eight to ten years. And at that point in time, we likely would be moving far enough East that a new DC more appropriate for that geography would be the answer. But that's eight to ten years up the road in our way of thinking right now.

So the effective capacity with the better racking is more than twice then what you had before?

I think it's comfortably a 2 to 300 stores, and we will see from there.

Okay. The other question I had was -- you may have already talked about this in previous calls, but I just want to get a review of where you are on FAS 123 and how is that in your numbers at this point?

The 123, is that options?

Options, yes.

We don't have anything in our Q3, Q4 numbers. I think it's been put off until next year anyway. But I think it's a $0.01 to $0.02 on the quarters within our footnotes.

SO that's what it would have been if it had been adopted?

Right.

Okay, thanks.

Jason West, Deutsche Bank.

I wonder if you guys could talk a little bit more about the delays in the 10-K. Sort of what are the issues there because I know in the last call you guys thought it would be filed on time, and then we had the delay that you said would put us out at the end of April. Just wonder if you could talk a bit about what is going on there.

We certainly are as frustrated as anyone with the time it has taken to get this K on file. I think, as we see it, a reflection of the current environment in which we're operating. The process of completing all the reviews and auditing necessary to get the K on file has simply been just more time consuming than we ever could have imagined. Current public company environment, even a straightforward human error has to be reviewed extensively to make certain there wasn't anything more involved, proving a negative as it turns out that there is nothing more than meets the eye sometimes can be harder and evidently a lot more time-consuming than proving the opposite. Unfortunately, the process of getting everyone comfortable and able to sign off on the numbers has just simply taken longer than we would have expected. Please understand that management continues to be very comfortable with the numbers and we're very confident that as this K gets filed it will clearly establish that what occurred was simply a human error and there's nothing more to it.

So what is your comfort level that -- I guess you guys mentioned in the release that you don't expect any further changes relative to what's already been stated. Is that just your best guess at this point, or is that sort you looked at the numbers and you're far enough along in the process that the chances of that changing are very low?

The numbers have been reviewed internally, externally, and to this point nothing has come up. We are pretty far along in the process and we don't expect any further material changes.

As I say, I think this is simply a reflection of the environment we live in. And as far as why, we just didn't properly understand just the time lines associated with all the work involved in today's environment.

Has there been any shortage of just accountants or available people there to work on this? Has that had anything to do with the timing, just not having the resources there to do it? Or has that had nothing to do with it?

Well, it may have. Obviously there's a lot going on in the accounting world. There's a lot of restatements out there, Sarbanes-Oxley, etc., etc. But we feel that now everyone has grown at it and working as hard as we can to get that K on file.

I think today everyone wants to just be very, very cautious in dealing with anything in the accounting arena.

When you guys are talking about the expenses associated that you cannot estimate at this point, I assume you're talking about the fees for the auditors and the accountants and the legal side of it that would be sort of onetime once that's all finalized?

Right. We did have some of that in Q1 -- I think about 100 to 150,000 was in Q1. We just can't get our arms around what's going to be coming at us here.

Brian Nagel, UBS.

A couple questions, if I could. First off, looking at your SG&A line, for the past couple of quarters now you guys have done a good job of leveraging there. Any more color on exactly where the leverage is coming from? I want to get an idea of how sustainable that is as we look over the next few quarters.

I think we're to the point now where the things that really hit us hard before -- workers comp, store-related, some other store-related expenses -- we're starting to see leverage in that 2 to 3% comp range. I feel fairly comfortable we can continue to see that. The one thing out there, again, though, is this week difference. And it may swing 10 basis points one way or the other quarter to quarter. It's very hard to analyze what the week lag does to that. But we feel good about where we are.

We also did, as we mentioned, benefit from the fact that we were closed one day during this quarter.

Any impact -- did you quantify the impact of that on the leverage side? Would you guys have done another 10 basis points, or is there some way to quantify that?

That would just be a guess at this point, but that wouldn't be out of line (multiple speakers) what you said. Remember too, we did have these costs in our first quarter -- our SOx costs -- Sarbanes-Oxley were higher than anticipated, and the 100 to 150 I mentioned on the restatement. So it was even a little better than it looked.

On the gross margin line, you talked -- putting the product margin side -- you talked about these higher distribution expenses are related primarily to fuel. Are those issues that will be corrected once you have your new DC open? Or is this something that relates to fuel and you may still incur this type of stuff even with the new DC?

There's two components to the DC -- the labor component and the trucking transportation or fuel. The fuel -- the new DC doesn't obviously logically impact the fuel costs. So we're still subject to where oil prices are going in that.

In terms of labor, once operating the new DC we anticipate very significant labor efficiencies in the DC. Right now we're operating in an inefficient environment given the space constraints of our current DC. So we definitely look to improve labor efficiencies at the new DC.

Said another way, you guys lost 40 basis points in your gross margin this quarter. If the new DC had been opening -- had been opened or operating, how much would that decline have been? Is there a way to look at that?

It's hard to quantify the efficiencies, but just -- it was about half between trucking and labor. So 20 was just the trucking, but there will be labor efficiencies we don't know, we haven't quantified that yet.

From past experience we expect there to be a ramp up of gaining all the efficiencies that we will expect to realize in the new DC.

Okay. And then can you comment -- you guys may have alluded to this a little bit, but just sales trends thus far in the second quarter? Your comparisons ease a bit for you here by about a point as we go into Q2. Any comment on what we have seen here early I guess in the first month?

We're pretty much on target in the second quarter. We, again, benefited from the shift in Easter that hurt us in the first quarter. Sales trends are fundamentally on target with the notable exception of summer-related products. It's been a rather cool spring thus far. Last year we had some outstanding early spring weather, and it's clearly impacted the water sports, summer apparel, those types of items. The start of the quarter pretty much is in line, though, factored into our guidance that we provided.

The comps get a little easier in the back half of the quarter.

Final question. You saw the announcement today that Nike is not going to be selling their products in Sears. Any effect for you guys from that?

I would think negligible.

Great. Okay, thanks a lot. Talk to you later.

(OPERATOR INSTRUCTIONS) Rick Nelson.

I just want to follow up on the 10-K issue. Have your accountants given you any sort of time line on when they might be done with their work and enable you to file?

Rick, given that we were already wrong once in terms of a time line, I think we would rather not speculate on that. We're hoping it will be done reasonably quickly, but until it's done it's not done, so I would rather not put a specific time.

If you could comment on what is driving the footwear gains; is it the higher price point, high-tech shoes?

No, not really. For us to it's our general mix, both athletic and casual. We're more in the mid-price range footwear. We're not doing a lot with the high-end, more fashion-oriented footwear.

The ticket now, is that rising in footwear?

No, we didn't (multiple speakers)

I am not sure we measured it for the quarter. It seems to be reasonably consistent, our price points.

How about apparel? Is there any kind of trend there in terms of migration toward higher price points?

We have seen good performance -- results in the performance apparel, and that's probably taking the average price up a bit in that.

If you could just refresh my memory on the $0.09, what is in it? And is that just a duplicate cost of running both systems over the remainder of the year?

Yes, it's sort of a combination of duplicate and costs that will go away.

What's in there is the rent from the current facility, obviously, which will go away; depreciation. We do have some supervisors who will be focused completely on the transition. We've added six people to do that -- supplies, trucking. There will be trucking costs as we shuttle product between the two facilities. So it's a combination of duplicative and sort of onetime costs that will go away. That's why we broke the $0.09 out.

Thanks Chuck.

Chris Jones, Oppenheimer.

When you look at the gross margin and the SG&A that you were talking about for the second quarter, and when I compare it, I guess in the first quarter you had to restate the first quarter, and I put in flat numbers for the second quarter. I come to a number that's essentially higher than your guidance. I'm just trying to figure out what you expect in terms of maybe restatements, if you could you give us an idea of what you think the second quarter of '04 so we can sort of come up with a better model for the second quarter of this year.

You know what? Let me go over the whole year for you. Originally we said that we would have a $0.06 basically adjustment for the restatement piece -- or the mistake piece of our restatement, and that would be in the fourth quarter. But as you saw, there was -- we pushed back to the quarters, and we had $0.01 adjustment in Q1. I would anticipate and we did indicate this in our guidance -- $0.02 in Q2, and I'd make that adjustment into COGS. And then I use similar numbers for Q3 and 4. In other words, the $0.06 is still the same, but it's $0.01 in Q1, $0.02 in Q2, $0.01 in Q3 and $0.02 in Q4. All those adjustments should go against COGS.

And one other thing to remember is the cumulative sales return adjustment. We took a cumulative adjustment in Q3 of last year totaling -- of '04 totaling $0.02. We're pushing that back into appropriate quarters as part of this restatement. So that's going to add that $0.02 back to our '04 earnings number. So we will pick up a little there.

And then finally, the third part of the restatement, the lease accounting, you don't have to change any of our quarters for that. There will be some reclasses among COGS and depreciation, but no bottom line impact.

Excellent. Thank you.

David Schick, Legg Mason.

Just quickly, you talked about the split between, say, 20 basis points DC and 20 basis points of fuel. At this point would you expect --? I'm assuming that's part of your guidance, and that fuel would continue to work against you on the trucking-transportation side of gross margin.

Yes, although a little less so in Q2 because last year in Q2 fuel really shot up from Q1 sequentially. So --

It's starting to lap.

Yes, it is starting to lap, although it is obviously higher than last year, but not to the degree it was in the first quarter.

Okay. And then secondly you mentioned that weather had an impact on both comp and gross margin. If there's any way to just sort of give a ballpark estimation for the gross margin component of that, that would be helpful, the mix shift.

I think there's just too many pieces to accurately quantify it. Clearly we are losing margin-friendly spring sales, some shift in baseball sales as we got rained out of some higher than average margin baseball sales. We sold winter product at markdown prices. But we haven't done the math, and I would only be guessing whether it's 10 basis points, 20 basis points. We're in that ballpark, but that's a wild guess.

Okay, that's helpful. Thank you.

James Ragan, Crowell Weedon.

Steve, to continue on that baseball business, coming out of the fourth-quarter report there was discussion about the baseball business getting pushed into the second quarter. And so it sounds like maybe some of that business is lost rather than getting pushed out. What's your feeling on that?

No, we definitely had -- that played out exactly as we anticipated. I think as a consequence of the shift in Easter holiday that clearly pushed baseball business from Q1 into Q2. That being said, we had, as you know -- I know you're local -- a whole lot of rain in Q1, and that depressed baseball sales beyond what we might have planned for. It's hard to say, and maybe a little early to say, whether that will all come back or not. I think it probably rained so hard that I would suspect there may have been some baseball sales just lost for good.

Are there typically any inventory issues with baseball product, or is that pretty clean product that you can sell throughout the year? Would you anticipate any markdowns?

Let me say, whatever -- if we're missing baseball -- we still think we're going to have an okay baseball year. Maybe not quite as strong if weather had been ideal, but we certainly have no inventory issues as a result of the rains. For the most part our baseball product plays very well from season to season.

Thank you.

Jason West, Deutsche Bank.

I wanted to follow-up on the earlier clarity on the quarterly restatements. I believe when you guys issued fourth quarter you had said that the number was about $0.06 lower than expected because of the error in the accounts payable.

Right.

And now you guys are saying that's actually going to be spread around a little bit more throughout the year.

Right.

So that means everyone's fourth-quarter number out there is maybe too low. Is that the right way to look at it?

Right, rather than a $0.06 reduction in Q4, a $0.02 reduction would be modeled into Q4, the $0.06 being spread over the year -- $0.01 in Q1, $0.02 in Q2, $0.01 in Q3 and the $0.02 in Q4.

Okay that helps because I was having a little trouble figuring out why the back end of the year would be so much higher than the front half. But it sounds like we were starting off the wrong base because of the restatement.

Right. In reviewing the error we agree and the accountants agreed with us, that we should push some back to the quarters related to some vendor allowances that had been taken in as part of this whole analysis we did.

Can you explain that a little bit, Chuck, why you decided to move it to the quarters versus the fourth quarter?

Based on our annual review of the accounts within accounts payable, we had an over-accrual, and that over-accrual we reversed part of that quarterly. A piece related to vendor allowances. And in our analysis when we went through this with our accountants we decided we should push back to the quarters and reverse those over-accruals also. It just spread the $0.06 out over the year.

Okay, you guys feel like that's going to be the final way it gets treated?

Yes we absolutely do.

Okay great. Thanks a lot.

Ralph Jean, Wachovia Securities.

Just one housekeeping note. Is this tax rate of -- we had been modeling 40%. It came in at 39.4. Which number should we be using?

39.4 is appropriate.

Just one other thing. You talked about how Q2 is going so far. I'm just wondering if you have seen a change in traffic levels relative to Q1. Are you seeing some acceleration in traffic, some pick up?

Reasonably consistent with Q1.

Okay thanks.

Michael McTighe, Brean Murray. I apologize. We'll hear from Anthony Lebiedzinski with Sidoti & Co.

Just a couple of questions. The 1.7% comp increase in the first quarter, was that mostly traffic or was there any increase in ticket across your products?

It was primarily average transactions. Traffic, as we mentioned, was reasonably consistent with the prior year. Arguably it would have been up a tick if you factor out that we were closed a day. Traffic may have been up a tick otherwise. But our average transaction was up a couple of percent.

With respect to the quarterly restatements, I don't mean to beat a dead horse, but you said that the $0.06 would be spread out throughout the quarters. But then there's the other $0.02 for the reversal of the sales return allowance, right?

Right. In Q3 of last year we took a cumulative adjustment that equated to a $0.02 reduction in Q3 earnings. Since we're restating quarters and going back because of the error, we are also pushing that cumulative adjustment back to the appropriate quarter. So that $0.02 impact will not be in '04.

Okay, thank you.

John Shanley, Susquehanna Financial.

It's actually Christopher Sazia (ph). I have a couple of quick questions. Most of my questions actually have been answered. But I guess first just on the inventory, it looked like the inventory in total was up a little bit more than what we were looking for. And I was just kind of curious, I mean you mentioned a little bit specifically about the winter product and just kind of difficulty with the weather and the sales trends there. I was just wondering if you looked at Q2, and you looked at your inventory, particularly in that category, do you feel pretty comfortable as you enter the second quarter? Or is there some inventory that you might have to purge as you go into the second quarter?

We feel very comfortable with our inventory levels. As it relates specifically to winter, we have a little more winter carryover than we had the prior year, not very material. And it's all great inventory that we're happy to roll out next season. We actually bought opportunistically winter product and really set it aside for next year. And that's obviously in our inventory numbers. But we feel great about our inventory really across all product lines right now.

On a per store basis, remember, even with the ski (ph) we're only up 1.5% year versus year.

And do you get a sense that there is a pretty good availability of closeout merchandise available pretty much across all your product categories at this point?

I would never say across all product categories. The opportunities come and go daily, weekly. But there are certainly opportunities that we're consistently looking at, and it feels fine out there.

I was just wondering if you can just remind us again -- you're currently in roughly 10 states at this point; you have 310 stores. Can you maybe just touch basically on what you believe the capacity is for Big 5 for the most part within the existing 10 states that you're in at this point as you look out over the next 3 or 4 years at this point?

We think there's comfortably another 150 plus stores that we can open within the 10 state geographic footprint we operate in. We're always sort of looking in contiguous markets and would fully anticipate that somewhere in the next several years we will just broaden the footprint a state at a time.

Thanks very much.

Edward Kelly, CSFB.

Could you guys discuss your new store plans or outlook for new stores post the completion of your new DC? So in other words, would you consider accelerating square footage growth once you have the capacity in place, particularly given that your balance sheet just continues to get better, you continue to generate more free cash flow. Can you talk about that?

The opening of the new DC is not -- we have not constrained our growth as a result of the current DC. Virtually nor would we accelerate as a consequence of the DC. We have always grown the store base in a manner that we feel is most appropriate for our business -- solid growth, but what we call growth under control. No plans to accelerate at all. We expect to increase our growth as we have on the basis of just the fact that we're a bigger chain and maintaining something in the neighborhood of 6% type growth. So it will just naturally expand as we grow. But we're not going to wildly step on the accelerator just because we open a new DC.

Okay thanks.

(OPERATOR INSTRUCTIONS) Donald Trott, Jefferies & Co.

You mentioned that one of the uses of the excess cash flow will be for further debt retirement. Could you give us some idea of the magnitude of possible retirement during 2005 and the ongoing swing in interest expense in 2006 that would result from that?

I think in '05 because of our DC spend we will be a little below our historical levels. But we're guiding to about 10 to 15 million of debt reduction. We began the year at 81 million, and so we're down in that 65 to $70 million range by the end of the year. And then once we get past our DC, we sort of return to historical reduction free cash flow in the 25 to $30 million a year range.

In terms of what that does to our interest costs, I can't do the math. But our all-in rate is somewhere in the neighborhood of 4, 4.5% on our debt.

Thank you very much.

We do have time for one more question. That will come from Michael McTighe with Brean Murray.

What type of assumptions have you made in your guidance to account for potential disruptions from the DC as you transition into it during the later half of the year?

Really none, and we don't anticipate any disruptions in the DC. We believe we've got a very well-thought out plan of transitioning. And we fully believe that we can make the transition without any disruption of flow of product.

We're taking -- there's several ways of approaching this. We're taking what we call sort of a slow ramp up. We've got utilization of both facilities throughout the Q1 of '06. And we're in a position of going slow and easy, testing all systems, and achieving certainty that everything is in order and that we can make this transition without a disruption. So we have clearly not factored any disruption in business into our guidance.

Just one last one in terms of you 10-K. Could you just maybe discuss have you had any conversations with the NASDAQ just given what's going on there with the panel? I know you guys have filed a petition to speak with them. Can you just discuss what's going on there with the delisting (indiscernible) and any conversations with those guys?

Sure. I'll give you a sort of rundown on how the process works. As a standard practice, when we did not file our 10-K by the extended filing deadline we received a preliminary notice of delisting from NASDAQ. That is the standard procedure. That's when you saw the fifth character "E" appended to our ticker symbol signifies that we're a late filer. We've timely appealed the NASDAQ delisting determination, and an oral hearing on our appeal has been scheduled for May 19th. Pending the outcome of the hearing, NASDAQ has stayed our delisting. We've submitted a written response to NASDAQ outlining our plans to get our 10-K on file and to maintain compliance with NASDAQ's listing requirements. But we intend to present this plan to NASDAQ's hearing panel at our delisting hearing on May 19th.

That's helpful. Thanks.

As this works, and obviously we look to get the K on file as quickly as we can. We're certain that we'll be found in compliance at that point and certainly stay in compliance going forward.

(OPERATOR INSTRUCTIONS) Gentlemen, it appears there are no questions left in the queue at this time. I would like to turn it back to you for any additional or closing remarks.

We thank you all for your interest and being on the call today. We certainly feel positive about the performance of the business, how our business model continues to work so well. Just another great job of execution by our experienced team. Thank you. We look forward to our next call.

That does conclude our conference today. We would like to thank everybody for their participation. Have a nice day.