Big 5 Sporting Goods Corp (BGFV) 2006 Q3 法說會逐字稿

Welcome to the Big 5 Sporting Goods third quarter 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] On the call with us today is Steve Miller, President and CEO and Berry Emerson CFO. I will now turn the call over to Mr. Steve Miller, please go ahead, sir.

Thank you, operator. Good afternoon, everyone and welcome to our fiscal 2006 third quarter conference call. Today we will review our financial results for the third quarter of 2006, and provide general updates on our business as well as update guidance. At the end of our remarks, we will of course open it up for questions. I will now turn the call over to Barry to read our Safe Harbor statement.

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 annual report on Form 10-K for fiscal 2005, our quarterly reports on Form 10-Q for the first and second quarters of fiscal 2006, 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.

Thanks, Barry. We are pleased to report on the state of our business. Our execution driven operating and merchandising strategy continues to produce gains in sales and bottom-line results. We are benefiting from improved efficiencies in our new distribution center, and we believe we have strong momentum as we enter the holiday season.

Now to comment on our third quarter. For the quarter we rang the register to the tune of $223.3 million, up 7.9% from sales of $206.8 million in the third quarter of 2005. Our same-store sales increased 3.8% for the third quarter. We achieved this increase against our strongest quarterly same-store sales gain of 2005. And the streak continues. We have now enjoyed 43 consecutive quarters of positive comp store sales.

Our sales gains were driven by a combination of increased customer traffic and a higher average transaction size. Our sales performance was generally consistent and healthy throughout the quarter. Each of our three major merchandise categories -- footwear, hard goods and apparel -- comped positively within a reasonably tight range of one another. For those keeping score, apparel was slightly stronger than hard goods, which was slightly stronger than footwear. Our product margin performance for the quarter was generally consistent with the prior year. The strength of our sales did allow us to achieve nice leverage in our SG&A expenses for the quarter. Barry will talk to that along with gross margins in a moment. Before he does that, I will provide you with a brief update on our new distribution center and store openings.

We have now completed two full quarters operating exclusively out of our new distribution center located in Riverside, California and our distribution operation is running well. We continue to enjoy benefits at the store level from increased efficiencies and product pricing at check-in and clearly our store product fulfillment is more accurate and complete than ever before. This results in improved maintenance and accounting for store inventories and the opportunity for increased sales.

Now commenting on our store openings. We opened five new stores during the third quarter, bringing our store count to 334 stores as of quarter end. Our third quarter store openings were in Fresno, California; Kingman, Arizona; Lakewood, Washington; Minden, Nevada; and Roswell, New Mexico. We have opened new stores in Orville, California and Aurora, Colorado during the fourth quarter to date. We expect to open seven additional stores in the fourth quarter, three in California and one each in Arizona, Washington, Oregon, and Nevada. That will bring us to a total of 19 new store openings for fiscal 2006, and 343 stores at year end.

At this time, I will turn the call over to Barry who will provide more information about the quarter as well as speak to our balance sheet, our capital expenditures, our cash flows, and update our guidance.

Thanks, Steve. Our gross profit margin for the third quarter was 34.8% of sales compared to 35.6% of sales for the third quarter of 2005. Distribution center costs during the third quarter increased $1.1 million due primarily to higher labor-related costs to support our new larger distribution facility, and increased trucking expense related, in part, to higher gasoline prices. Gross profit comparisons also were negatively affected by a $1.5 million decrease of distribution center costs, capitalized in the inventory, compared to the same period last year, due primarily to the expense increase last year as we transitioned to our new larger distribution center facility.

Our SG&A expenses as a percentage of sales improved to 26.4% in the third quarter from 27.9% in the third quarter of the prior year. The year-over-year improvement in SG&A as a percentage of sales was primarily due to a $1.2 million decrease in legal and audit fees, resulting from additional expense in the prior year, related to the Company's restatement of prior period financials, and the favorable impact of recording co-op advertising cost reimbursements from vendors for fiscal 2006 earlier in the year.

We also continued to experience favorable trends in our store-related expenses, as a result of the efficiencies created by our new distribution center that Steve discussed. Together with our positive sales, these factors allowed us to leverage store-related expenses, which declined 50 basis points as a percentage of sales and advertising expenses which declined 72 basis points as a percentage of sales during the third quarter. This leverage in SG&A occurred despite a $0.6 million charge incurred in the third quarter related to the adoption of the new stock-option expense rules this year.

Depreciation and amortization expense increased $0.3 million for the third quarter, primarily due to the commencement of operations at our new distribution center and also reflecting an increase in store count to 334 stores at the end of the third quarter this year from 314 stores at the end of the third quarter last year. Interest expense for the third quarter increased $0.3 million over the prior year due to the impact of rising interest rates, partially offset by lower average debt levels compared to the prior year.

Looking at our bottom line, net income for the third quarter increased to $7.8 million or $0.34 per diluted share, including a $0.02 charge for the expensing of stock options, versus net income in the third quarter of 2005 of $7.2 million or $0.32 per diluted share. Net income for the third quarter of last year benefited from the Company's receipt of $1.8 million in settlement proceeds in an eminent domain action related to one of the Company's stores.

Briefly reviewing our year-to-date results, sales rose 7.9% during the first 39 weeks of fiscal 2006, to $642.3 million from $595.1 million in the same period last year. Same-store sales increased 4.0% in this year's first 39 weeks versus the same period last year. Net income for the first 39 weeks of fiscal 2006 increased to $21.2 million or $0.93 per diluted share from net income of $19.8 million or $0.87 per diluted share in the same period last year. Results for the first 39 weeks of fiscal 2006 included a $0.04 charge for the expensing of stock options, and a $0.05 charge for costs incurred in the first quarter related to the completion of our distribution center transition.

Now turning to our balance sheet. Total chain inventories amounted to $240.8 million at the end of the third quarter of fiscal 2006, up $11.6 million from $229.2 million at the end of the third quarter of fiscal 2005. Inventories this year include an additional $3.6 million of distribution center cost capitalized in the inventory over the prior year. Excluding capitalized costs, our inventories on a per-store basis were unchanged from last year. We believe our inventory is well positioned to support our sales growth and that we are in very good shape going into the holiday season.

Looking at our capital spending, CapEx, excluding non-cash acquisitions totaled $10.2 million for the first nine months of fiscal 2006. We expect capital expenditures for the fourth quarter of fiscal 2006, excluding non-cash acquisitions of approximately $4 to $5 million, primarily to fund the opening of approximately nine new stores and store-related remodeling. We generated cash from operations of $17.1 million for the first nine months of fiscal 2006 compared to $14.6 million for the same period last year. The Company has typically generated healthy free cash flow in the past, particularly in the fourth quarter, and we would look for that to continue. We evaluate the best use of our free-cash flow on an ongoing basis, including, for example, paying shareholder dividends, reducing our debt, or repurchasing the Company's stock.

During the third quarter, we repurchased 64,310 shares of the Company's stock under our share repurchase program, for a total expenditure of $1.3 million. Following those repurchasing, we have $13.7 million of availability remaining under our share purchase program. Our total debt at the end of the third quarter was $96.7 million, versus $100.1 million as of the end of the third quarter of fiscal 2005. We were able to reduce our overall debt levels despite opening 20 new stores and funding nearly $7.3 million in shareholder dividends and $1.3 million in share repurchases.

Now I'll spend a moment on our guidance. We expect to realize same-store sales growth in the low to mid-single-digit range, and earnings per diluted share in the range of $0.34 to $0.40 for the fourth quarter of fiscal 2006. Fourth quarter earnings guidance includes a charge of approximately $0.02 per diluted share for the expensing of stock options. For the full year, we expect same-store sales growth in the low to mid-single-digit range and earnings per diluted share in the range of $1.27 to $1.33. Full-year earnings guidance includes a charge of approximately $0.06 per diluted share for the expensing of stock options. Our fourth quarter guidance, compared to the same period last year, reflects the unfavorable impact of recording co-op advertising cost reimbursements from vendors for fiscal 2006 earlier in the year as well as a significantly lower benefit from the inventory cost capitalization than was experienced in the fourth quarter of fiscal 2005.

Now I'd like to turn the call back over to Steve.

Thank you, Barry. Before I turn it over to the operator for questions, I'd like to briefly remark about our fourth quarter to date. We are pleased with our sales trends thus far in the quarter. That said, the back half of the quarter, which includes the holiday season, represents significantly more volume than the first half of the quarter. We do feel very well prepared for the holiday push, our inventories are in good shape, and as always we have a strong promotional plan for the holiday season.

Operationally, we believe we stand to benefit this year, given that the last holiday season we were in the midst of our distribution center transition which affected the flow of products to our stores. Now operating out of our new facility we believe we can distribute product more effectively and efficiently this holiday season. We think this positions us well for a strong finish to the year.

Operator, I think we're now ready to turn the call back over to you for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Sean McGowan with Wedbush Morgan.

Sorry. I had mute on. Just wanted to ask a quick clarification for Barry, did you say CapEx was 10.2 through the nine months?

That's right, Sean.

Okay. Second question -- can you comment at all at this point about store opening schedule for the next couple of quarters, how that might look year-over-year? Is there any change?

I don't know that we can be overly specific for the next couple of quarters. I mean we're looking to maintain a growth of about 6% annually. I think it will be tilted a little more toward the front end of the year than this past year, this current year. I would say -- my best guess would say we probably net two, perhaps three in the first quarter, and I'm not sure I can be too specific in the second quarter.

Okay. That is helpful. And could you talk a little bit more in terms of the distribution center about any positive or negative surprises that have come up recently? Or is everything kind of playing out as expected at this point?

I would say it's playing out as expected. We're very pleased, the DC. It's operating well. The distribution of products to our stores is clearly more accurate than ever before. We're getting the efficiencies at store level that we anticipated with improved pricing and check-in. Meaning the product's now arriving at our stores preticketed, which allows it to get out on the store shelves faster. Our productivity per man hour at the DC continues to improve.

Our staffing issues that we experienced after moving into the DC appears to be resolved. We were fighting a degree of turnover and attrition, but really as of probably actually October our DC was fully staffed. This certainly is going to benefit our labor costs going forward, and should really limit the overtime pay that we might experience in peak periods. So we feel absolutely terrific about the efficiencies at our DC.

And final question to the extent that you can comment on. Does the subject internally in the Company ever come up of looking at the stock market performance and saying maybe this would be better off as a private company again?

I don't -- I think -- we obviously consider all interests that would enhance shareholder value. I mean we would never say never, and I guess about as much as I can say at this time.

Fair enough. Thank you.

Thanks, Sean.

And our next question comes from Anthony Lebiedzinski from Sidoti and Company.

Good afternoon. Couple of questions. Last year in the fourth quarter, you guys had a little bit of softness in your sales of winter product merchandise. Can you remind us at what point did you start to see softness last year and any further discussion about that?

Yes. I mean the softness, really developed I guess toward the back half of the fourth quarter when one would anticipate or certainly hope for snow and cold weather. Last year we really only had the benefit of what I would call decent winter conditions in our northwest market. So, maybe 40, 45 stores had the benefit of good winter weather and the better part of another 300, were sorely lacking cold weather and the snow that drives winter sales.

Got it. And also if you could tell us as far as the fourth quarter, the call up advertising costs? How much is that going to hurt in the fourth quarter, as well as what is the extent of the -- I guess charge, if you want to use that word, as far as the lower benefit from the inventory cost cap for the fourth quarter?

Yes, Anthony, the impact of the co-op advertising is roughly $0.05 a share, and don't forget now, this is not a net reduction of our overall co-op reimbursements from vendors. On an annual basis the amounts are very comparable. It's just, matching properly the credit we get from our vendors with the cost that we incur throughout the year so we're estimating that to be about $0.05 in the fourth quarter, and then from an inventory cost capitalization standpoint, the net swing is somewhere in the neighborhood of about $1.8 million plus or minus.

Okay. And I know you guys haven't provided yet the '07 guidance, and -- but you have talked about I guess store growth being 6% per year. Any kind of early read in '07 in terms of margins maybe you could share with us?

Anthony at this point we, we have not -- of course we are looking at this internally, but we have not said anything about 2007 to date. You can expect our 6% store growth kind of thing. We do expect that with the-- we're going to be able to leverage our DC costs. We think we're going to be able to leverage our DC costs beginning in the fourth quarter and if you look at the first quarter last year, of course -- well the first quarter 2006, we had about $1.8 million in transition costs that were in the first quarter of '06, so we expect to comp favorably to that in the first quarter of '07 and then -- and really we hope to be able to leverage our DC costs going forward, just like we have -- had the old distribution center.

Yes. What I really was trying to get at is at what point do you expect to get back to the 8% operating margin roughly that you had back in 2004?

At this point, we are not going to go ahead and give guidance or give any indication, Anthony, out into '07 and '08. We feel that we're going to be able to get there. We expect to be able to get there, but at this point on this call, we're not prepared to tell you exactly when.

Okay. That's fair. All right. Well thank you.

Sure.

[OPERATOR INSTRUCTIONS] We'll move now to Rick Nelson with Stephens, Inc.

Thank you and good afternoon.

Hi, Rick.

Steve, how would you characterize the overall promotional environment in the sector, and what would be your expectation for the fourth quarter?

I would characterize it as rational at the moment, and I would expect as it always does, heat up in the fourth quarter, nothing that is out of the ordinary as we view it.

Any comments on the early showing of ski and snowboard?

We're very encouraged and -- I mean we really haven't enjoyed any weather that would for the most part in our marketplace that would arguably benefit the winter product. That being said the early indications are that our customers are excited about the products in our stores. I think the fact we wound up with strong a strong sell-off in our winter product. Last year, if you recall, our winter came very, very late but came very strong really in March. And we sold down tremendously last year. Our product out is very fresh and customers seem to be reacting positively it to. So we're encouraged.

In the footwear category, if you could speak to that specifically, what is driving the comp there. And any comments on the lady's area would be helpful.

Well we're not going to get too detailed in terms of what is driving our footwear business. We have enjoyed continued success in that marketplace, comped positively -- solidly positively again, and I don't think for competitive reasons we're going to get too detailed beyond that.

Okay. Thank you.

You're welcome.

And now we have Jeff Sonnek with FBR.

Thank you. Steve can you comment, again, on the distribution center? What I'm kind of wondering about is you have clearly gone from an antiquated system, very labor intensive, to one that really relies on systems. What do you see as kind of some key opportunities as you guys become more efficient in managing these new systems going forward?

Yes, I mean always taking increased advantage of some of the systems and automation at our DC. There's features of our new DC that we haven't turned on yet, an example being what we call batch picking. Right now as an order filler walks up an aisle he's picking one store at a time. We think there's an opportunity, and our system allows us -- would enable him to pick multiple stores at a time. And that's just one example of potentially improved productivity that would result in lower labor costs.

Great. That's all I had. Thank you.

[OPERATOR INSTRUCTIONS] And we'll go to Nancy Hoch with J.P. Morgan.

Great. Thank you. Good afternoon.

Hi, Nancy.

Barry, one last question on the DC; you mentioned a $1.1 million difference in the cost of running that facility. Is that something you would expect to continue in the near term on a similar run rate?

Well, actually, Nancy for the fourth quarter, recall in the fourth quarter of last year, that was kind of the height of our transition.

Right.

So if you look at the fourth quarter of this year, our warehousing costs are actually going to be down versus the fourth quarter of last year because of all of those transition costs last year.

Right. I understand that. I guess just in terms of the underlying cost of running one facility versus the other is that what you were referring to in terms of the 1.1 or was just a net difference year-over-year?

Yes, it was just a net difference year-over-year.

So it's inclusive of both. It was great to see debt levels coming down a little bit in the third quarter. Do you have -- with the cash you are generating in the fourth quarter and moving forward do you have any targets on where you would like to see debt levels go?

Well, Nancy, it kind of depends on the best use of our cash. We're evaluating the use of our cash, looking at shareholder dividends and debt pay-down and stock buyback and that kind of thing, so we'll evaluate the interest rates and stock price and things like that. But I'll tell you, we have a term loan out there that is priced at a premium, and so we'll be taking a hard look at debt pay down in the fourth quarter.

Okay. Great. And then I think you mentioned the product margins were flat in the third quarter. Have your expectations changed in terms of still seeing maybe 20 to 30 basis points a year of improvement in that line? Or is there anything that has changed in the environment or mix, or the way you're buying; do you expect that to flatten out?

No, certainly not, not in the long run. We have always maintained that we're far more focused on gross profit dollars rather than simply product margins. Our comps were up 3.8 with margins flat. Arguably our results would have been the same if the comps had been up in the 3 to 3.5 range and our margins up 10 or 20 basis points, we would have wound up with the same number if you follow what I'm saying Nancy.

Okay.

Really it's a factor of sort of playing out the product at our disposal at any given time. Optimizing our pricing strategies, and we don't see anything changing overall in terms of product margin direction.

Great. One last question. Has there been any impact from the Copeland's liquidation sales and the Sports Authority now buying the rest of the chain; do you expect any increase in liquidation activity from them?

We haven't been able to measure any impact at any of our stores resulting in anything going on at Copeland's. I think it's premature to try to figure out what is going to happen in the long run. You hear different stories in terms of what exactly, and we don't know exactly which locations Sports Authority may be acquiring. Sounds like at the end of the day there are going to be a number of stores that are going to be closing, and I think it's just part of the evolution of retail sporting goods competition.

Great. Thank you.

[OPERATOR INSTRUCTIONS] And we'll move to Jason West with Deutsche Bank.

Thanks a lot. Wondering if you guys could help us at all in quantifying the amount of sales you left on the table last year because of difficulties getting the new DC ramped up. And I think that was an issue in the first quarter if I remember correctly.

It was, and honestly we have spent a lot of time ourselves trying to figure out how to quantify it. We know it was out there. I mean, we clearly struggled getting the products to our stores. We had many issues of trucks being late, which means we had to take staff that should have been on the sales floor having to unload trucks. We were very distracted from that standpoint. Yet it's just impossible to quantify it. Last year we put a strong premium in getting our ad product to our stores, but we definitely suspended flowing regular products over much of December and into the first quarter, so it had to hurt us last year, and that can only be a positive as we comp against those numbers.

Okay. That helps. And anything sort of new or exciting going on in the stores for the holidays this year in terms of products, or the way you guys are going to market?

For us it is always new and exciting. We never just rest on our laurels and do same-old, same-old. We do feel we have a strong promotional plan. There's some product that we're excited about and we're going to let the consumer discover that as the quarter rolls on.

And then the last one on the ad spending, you talked about is down as a percent of sales. On a dollar basis I'm assuming you guys are sort of running flattish there. And just wondering what is the plan longer term for ad spending? Are you able now to get comps on less dollars? Is that sort of what is going on?

We think, this year with our recently strong comp store performance, we have been able to leverage our ad spend, our true ad spend, so yes.

Okay. Great. Thanks.

And Chris Svezia with Susquehanna Financial Group is next.

Good afternoon, gentlemen. Just, actually most of my questions been asked, but just two quick questions. I guess first I notice you continue to open up stores and look for opportunities in the California market, and I'm just curious at this juncture, do you still see a lot more opportunities as you move forward in that market for you guys? And, I guess, second, as you look to new markets you've entered, particularly, I guess in the Colorado market, maybe talk about the competitive environment. Have you seen any issues there at all?

Well, to answer the first part of the question, I mean we continue to see opportunities to grow in California. There's still very positive growth within California and even though we have been here for over 50 years there's still places that make sense for us that we're not yet at. The competitive environment as we move away is, on the whole, it's not too dissimilar from what is in California. I think it's pretty competitive in California, and, we go out to other markets and do face competition obviously everywhere. But we have seen our growth in the markets in Colorado very similar to what we did when we went into Arizona successfully, into Utah, into Oregon, into Idaho, and so on.

Okay, that's helpful. And then just lastly on that, I guess with new store productivity that you opened up over the past 12 months or so continues to meet your plan roughly give or take, I'm seeing roughly 70% or so at the base in terms of new store productivity in the first year. Are you still comfortable in terms of what you are seeing in those new stores as they open up?

We absolutely are. Very pleased with the stores we've opened thus far this year.

Thank you very much.

And now we have [Cody McCallum] with SunTrust Robinson Humphrey.

Good afternoon, guys. I was just wondering if you could give me a quick breakdown in your comp number your traffic versus ticket and what is really driving that there.

Well, they were both up, both traffic and our average sale, as I recall it -- I don't have it right in front of me -- that the traffic was up slightly more than average sale. But they're both comping positively.

Okay. And traffic up, is that a trend that you see continuing here?

We certainly hope so yes. That's certainly what we work hard to do day in and day out, and it's been -- we have been realizing that for a long period of time.

Okay. Thank you, gentlemen.

We have Ralph Jean with Wachovia Securities.

Great. Thanks. Couple of quick questions, one, on the gross margin, if you backed out the co-op and the inventory cost capitalization issues, would the gross margin still likely be down due to the trucking expenses?

You need to be careful, Ralph, the co-op advertising -- let's make sure -- that is not in gross margin.

Okay.

It's just the DC costs that are in gross margin.

Okay.

And yes, with the higher DC costs that we are incurring it is a much larger facility. The gross margins would still be down a little bit.

And secondly what do you think your same-store sales leverage threshold would be in Q4? What do you need to leverage expenses?

We think we can leverage -- let me first say this. Let me first say that because of some of the things that we have talked about, our co-op advertising reversal -- we had $1 million -- let me first say that we don't expect to leverage our expenses in the fourth quarter because of certain things, and those would include the co-op advertising reversal in the fourth quarter as well as last year we had about a $1 million benefit from the reduction in worker's compensation reserves in the fourth quarter. And also, of course this year's fourth quarter, now we have the new compensation expense which is about $600,000 plus or minus that's impacting our fourth quarter.

So, now if you normalize all of our numbers, we still feel confident that we're heading in the right direction from a leverage standpoint, but in the fourth quarter we don't expect to leverage our expenses.

Great thank you.

Sure.

[OPERATOR INSTRUCTIONS] And we'll move to Peter Keith with Piper Jaffray. Mr. Keith, your line is open.

I'm sorry, I had it on mute there. Yes, thanks for taking my call. I wanted to get a sense on how the co-op advertising and inventory cost capitalization might flow into 2007.

I'm glad you asked that, Peter, because I'm glad that we can start distancing ourselves from these issues in 2007. In 2007 we'll account for our co-op advertising reimbursements from vendors just the same way that we did in 2006 so we won't have these comparability challenges. And also once we have gone through one full loop on the inventory cost cap and we have got a year behind us or away from the transition that took place in 2005, we'll get back to more standard comparisons on the inventory cost cap as well.

That having been said the first quarter of last year did have significant transition costs in it. And so the benefit in the first quarter of 2006 was pretty significant and so we'll be up against that in the first quarter of '07.

Okay. So you think that Q1 might be the only quarter where there could be a significant or semi significant impact?

Yes.

Okay. Thank you for that.

Sure.

And that concludes the question and answer session. Gentlemen I'll turn the conference back over to you for any additional or closing remarks.

All right. We thank you very much for participating in the call today, and we certainly look forward to speaking with you again soon. Take care.

That does conclude today's conference call. Once again we thank you for your participation.