Big 5 Sporting Goods Corp (BGFV) 2007 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Big 5 Sporting Goods second quarter 2007 earnings conference call. (Operator instructions)

I would now like to turn the conference over to Mr. Steve Miller, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon everyone and welcome to our fiscal 2007 second quarter conference call. Today we will review our financial results for the second quarter of 2007, provide general updates on our business, as well as provide 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 Emerson, our CFO, 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 include known and unknown risks and uncertainties that may cause our actual results in current and 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 2006, our quarterly report on form 10-Q for the first quarter of fiscal 2007, 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. The second quarter was certainly challenging. We first recognized sales headwinds midway through April and these headwinds persisted throughout the quarter. Our clear sense is that macroeconomic issues affecting the overall consumer environment, be they gas prices, housing, mortgage rates, or other issues, impacted our customer base and their spending habits during the quarter.

In addition to the macroeconomic issues, we did not enjoy the favorable early summer weather in many of our markets that benefited us last year, further making for a difficult year over year comparison. We've addled through these challenged and generated positive sales for May and June, but those sales were not enough to offset weakness in April. Consequently our comp store sales were narrowly down for the quarter.

Now I'll provide some second quarter details. For the quarter we rang the register to the tune of $217.8 million, up 2.9% from sales of $211.8 million in the second quarter of 2006. Our same store sales declined 0.2% for the second quarter. This slight miss broke our streak of 45 consecutive quarters, or over 11 years, of positive quarterly comp store performance. We did realize a small increase in our average transaction size for the quarter, but this was offset by a decline in customer traffic.

From a product standpoint, our hard goods category was slightly positive, footwear was slightly negative, and apparel was our softest category comping down in the low single digits. We believe that summer related products, particularly apparel, were impacted by unfavorable weather comparisons in many of our west coast markets during the back half of the quarter. Last year these markets experienced an early arrival of warm summer weather, while this year weather was cooler than normal.

Our product margins for the second quarter were essentially even with the prior year. Barry will talk to our gross margins and expenses in a moment. Before he does that, I will provide you with a brief update on our store openings and our third quarter trends to date.

During the second quarter we opened stores in Denver and Fort Collins, CO, and Selma, CA. Ws also completed the relocation of our Monterey, CA store, following the closure of our previous Monterey location during the first quarter. We expect to open five new stores during the third quarter, including one relocation. We continue to anticipate opening approximately 20 net new stores during fiscal 2007.

Before turning the call over to Barry I'd like to provide some information about trends we are seeing in the third quarter. Early indications are showing the continuation of a tough retail environment and slower consumer spending. We found the challenges in July to be generally consistent with what we faced during the second quarter. Our summer related products also continue to be impacted by unfavorable weather comparisons.

Last July, many of our west coast markets, particularly California, experienced a long lasting heat wave that benefited summer product sales. As we saw in June, the climate this year in these markets has been much cooler. As a result, sales of warm weather driven items, for example, water sports equipment, summer apparel, canopies, have been considerably weaker than last year.

Although we are currently running slightly down for the quarter, we are cautiously optimistic the trends will improve over the back half of the quarter. Here's why. First, we believe the weather will not be as large of a factor going forward. Last year's heat wave subsided at the end of July and year over year weather comparisons should ease in August and September. In addition, given that we sold through several products early last year, we believe that we are in a good position to perform positively in our warm weather related product categories over the remainder of the quarter. There's still plenty of summer left in our markets.

We have a strong promotional plan for the rest of the quarter and we've been encouraged by the positive performance of a number of our non-summer related product categories. We, of course, continue to look for ways in which to improve our top and bottom line performance in this challenging environment, but we remain confident in the effectiveness of our overall business model.

At this point I will turn the call over to Barry, who will provide more information about the second quarter and update guidance.

Thanks, Steve. Our gross profit margin for the second quarter was 35.4% of sales, compared to 36.2% of sales for the second quarter of 2006. Our gross margin reflected product margins generally in line with the prior year, as well as a $0.4 million reduction in distribution center expenses due to operational efficiencies at our new facility, which was offset by a $0.9 million decrease in distribution center cost capitalized into inventory, compared to the same period last year.

Our selling and administrative expenses as a percentage of net sales were 28.3% in the second quarter of 2007, versus 27.7% in the second quarter of the prior year, reflecting softness in our sales, an increase in advertising expenses to support our sales and store growth, and higher administrative expenses to support our overall growth and financial reporting initiatives.

Depreciation and amortization expense increase $0.2 million for the second quarter of 2007, mainly due to an increase in store count. Interest expense for the second quarter decreased by $0.4 million, primarily reflecting significantly lower average debt levels compared to last year, partially offset by slightly higher interest rates.

Reflecting our challenging business conditions, net income for the second quarter was $5.9 million, or $0.26 per diluted share; compared to net income in the second quarter of 2006 of $7.4 million, or $0.33 per diluted share.

Briefly reviewing our year to date results, sales rose 3.8% during the first 26 weeks of fiscal 2007 to $434.9 million from $419 million in the same period last year. Same store sales increased 0.3% in this year's first half, versus the same period in 2006.

Net income for the first 26 weeks of fiscal 2007 was $13.5 million, or $0.59 per diluted share; compared to net income of $13.4 million, or $0.59 per diluted share in the same period last year.

Now turning to our balance sheet. Total chain inventories amounted to $252.1 million at the end of the fiscal 2007 second quarter, up $6.5 million from $245.6 million at the end of the second quarter of fiscal 2006. Excluding capitalized costs, our inventories on a per store basis were down approximately 1% from last year. We believe we are well positioned from an inventory perspective going into the second half of the year to support our sales growth.

Looking at our capital spending, CapEx, excluding non-cash acquisitions, totaled $6.0 million for the first 26 weeks of fiscal 2007, primarily reflecting expenditures for our new stores, store remodeling, and computer software. We expect capital expenditures for the back half of fiscal 2007, excluding non-cash acquisitions, to range from $11 to $12 million, primarily to fund the opening of approximately 15 additional new stores, store related remodeling, computer hardware and software purchases, distribution center investments, and corporate office improvements.

We generated cash from operations of $4.9 million for the first half of fiscal 2007, well above the same period last year. The company has historically generated healthy free cash flow and we expect that to continue. We evaluate the best use of our free cash flow on an ongoing basis, including, for example, paying shareholder dividends, reducing debt, or repurchasing the company's common stock.

During the fiscal 2007 second quarter and third quarter through July 31, 2007, the company repurchased 215,100 shares of its common stock under the company's share repurchase program, for a total expenditure of $5.0 million. Since the inception of the repurchase program in the second quarter of 2006, the company has repurchased 280,110 shares for a total expenditure of $6.3 million. The repurchase program has a total authorization of $15.0 million, of which approximately $8.7 million remains available as of today.

Our total short and long term debt at the end of the second quarter was $88.8 million, down $20.8 million from $109.6 million as of the end of the second quarter of fiscal 2006. We were able to meaningfully reduce our overall debt levels despite opening 19 new stores, and funding $8.2 million in shareholder dividends, and $1.7 million in share repurchases from the end of the second quarter of fiscal 2006 through the end of the second quarter of fiscal 2007.

Now I'd like to spend a moment on guidance. We expect to realize same store sales growth in the low single digit negative to low single digit positive range for the third quarter of fiscal 2007, and earnings per diluted share in the range of $0.27 to $0.35. Third quarter assumes that sales will continue to be challenged by macroeconomic issues affecting the consumer environment, and compared to the prior year reflects higher administrative expenses to support our overall growth and financial reporting initiatives.

For the fiscal 2007 fiscal year, we now expect same store sales growth in the low single digit negative to low single digit positive range, and earnings per diluted share in the range of $1.22 to $1.42. Full year guidance assumes continued sales pressure from macroeconomic issues and compared to the prior year reflects lower distribution center expenses offset by a reduction in inventory cost capitalization and higher administrative expenses to support our overall growth and financial reporting initiatives.

Operator, I think we are now ready to turn the call back over to you for questions.

Thank you, sir. (operator instructions) And we'll go first to Reed Anderson with D.A. Davidson.

Good afternoon. Just really one or two questions; trying to find a little positive here. On the hard line side, talking about -- that was positive from a comp standpoint; I'm just curious to what extent you think that the golf business helped you in the quarter. It seems to be an area that other people are doing okay in; any comments on that, please.

Yeah, we're not getting beyond the hard goods, generally speaking; get overly specific about the individual product/product categories. I think for the second quarter, we had strength in the fitness business; our camping and fishing business was pretty solid; a number of categories performed good. We're just -- for competitive reasons, we're just not going to get overly specific.

Okay. And just from a store opening standpoint, I would suspect that you're seeing weakness equivalent to your mature stores in the newer stores as well. Any further commentary on how the newer locations are performing?

Yeah, we're pleased with our new stores. I would characterize the performance of new stores as reasonably consistent with our past vintages of new stores.

All right. That'll do it for me. Thanks. Good luck.

And we'll take our next question from Nancy Hoch of JP Morgan.

Great, thanks. Steve, can you give us a little more color on what types of promotional changes you're talking about for the back half? Is this just an increase in advertising frequency, or are you experimenting with different media types?

Yeah, again, we're not going to get this for competitor reasons, too detailed; but it's primarily trying to look at, to some degree, our frequency distribution, the amounts of circulars that we might be putting out at any given period of time, and trying to identify areas that we can gently caress to drive top line and certainly keep an eye on protecting our very healthy bottom line.

We are engaged in a CRM, customer relations management program, that we're looking to use to supplement the reach of our current print circulation, but that's really a program that we put in place for the long run. I don't think it's a -- I wouldn't characterize it as a quick fix to a difficult sales environment.

Okay, great. And then a question on the full year guidance. The range seems fairly well, and is it fair to say that the low end, about 22, is the worst-case scenario; and what are the biggest levers that are going to move you from the high end to the low end of that range?

Well, Nancy, our guidance, of course, assumes that the challenges we're presented by the macroeconomic environment will continue for the rest of the year. Of course it's impossible to determine whether the overall consumer sentiment in our markets will improve. If the conditions worsen, we'd expect to come in at the low end of our range; and if conditions improve, we'd expect to come in at the high end or perhaps even exceed our range.

Okay. And then just one other question on product margins. I know that historically you run a little bit of improvement each quarter, whether it was -- historically, 50 basis points, and you've been at 20 for a while. Is flat 5% margins a good way to think about the business for the remainder of the year, or is there some tailwind there you're hoping to pick up?

Nancy, I think from a product margin standpoint, we're really guiding to really kind of flat product margins for the third quarter and then for the full year, or course, because we had a pretty good upside in the first quarter. We're looking at overall product margins to be up for the full year, but flat for the third quarter.

Okay, thanks.

Sure.

And we'll take our next question from Ralph Jean with Wachovia.

Great. Thank you. Just a couple of things I want to clarify. I've been looking through my model in your cues and it doesn't seem like you guys provide ending square footage for the quarter. So if we assume $11,000 per square foot per store -- it looks as though your inventory per store and per square foot was down, and your operating expense per store and per square foot was down. What I'm wondering is, is there something you managed to, or kind of reacted to the environment and pulled back on expenses, which would be justifiable? Are there timing differences there that might explain that, or what?

Well, Ralph, we -- our inventory on a per store basis is down year over year, which we think is favorable; and we still feel that our inventory levels and our product selection is well positioned here for the back half of the year. We certainly try to manage appropriately for the sales volume, and I think our buying team has made good adjustments; we're watching the tick of business, and trying to react appropriately from an inventory standpoint.

Right. So if we were to get a rebound in consumer spending and traffic in the stores, it seems like you might get some better leverage from your expense line, or would that require you to flex up that spending line, too, as traffic came back?

Yeah, Ralph. Our assumptions here on sales growth are, as you can see, in a pretty tight range. An uptick of a percent or a downtick of a percent really isn't going to affect the way we staff the stores; so an uptick would be a benefit clearly to the bottom line, and of course, the reverse would happen as well.

And then, could you just remind me, Barry, the timing of the anniversary of your buildup of your financial reporting capabilities; when we might start to anniversary the majority of those costs?

It'll be next year, Ralph. We built the team, and it's not just -- you know, I mean, we've added just to support the overall growth of the company and other administrative functions as well. But clearly, accounting was an area of focus. And we really added people kind of throughout 2006, so we're feeling that fully loaded effect in 2007, and we'll anniversary that next year.

Okay. Thank you very much.

And we'll take our next question from Mitch Kaiser of Piper Jaffray.

Thanks, guys. Good afternoon. I was hoping you could just talk directionally about how the cost capitalization and the inventory provisions and things like that might affect gross margin. I know you said that product margins are going to be roughly flat, but can you just tell us about how we should be thinking about those for the third and fourth quarters?

Sure, Mitch. The inventory cost cap, really, in terms of that element, that was felt most significantly in the first quarter, and to a lesser degree, in the second quarter. But let me just kind of take you back a little bit, and just kind of explain kind of the overall magnitude, so that we get this.

Our inventory cost capitalization for 2006 full year was a benefit of about $3 million, and we are expecting cost capitalization for 2007 to be in the range of about $200,000; actual charge of about $200,000; and therefore year over year we expect an unfavorable variance of about $3 million in inventory cost cap. As we transition to our new DC during the second half of 2005 and the first quarter of 2006, our cost pools increased, which resulted in increased benefit of inventory cost capitalization for the first quarter, and then to a lesser degree the second quarter of 2006.

As our cost pools began to stabilize following the Q1 2006 completion of our DC transition, the benefit of inventory cost capitalization in the third and fourth quarters of 2006 was much, much lower. Comparing the impact of the difference in inventory cost capitalization between years, clearly the largest effect was felt in Q1 of 2007, with a negative variance of over $2 million. We expect a negative comparison to the prior year for inventory cost capitalization to continue through the third quarter of 2007, although becoming progressively smaller. The negative comparison in inventory cost capitalization for the third quarter of 2007 versus the same period last year is expected to be about $300,000 negative, versus about a $900,000 negative in the second quarter of this year.

So that's really -- the overall gross margin that we're anticipating in the third quarter is roughly -- we don't expect -- we're anticipating flat with the prior year.

Okay. That's all -- taking all of the inventory cost capitalization, product margins, all those sort of things into account; kind of flat year over year.

That's right; taking it all in, product margins flat, and overall gross margins flat in Q3, and frankly, for the full year as well.

Okay. So that would be a good assumption for the fourth quarter as well, because I think you said product margins kind of flat, and then the inventory cost capitalization should be less of a negative impact in the fourth quarter, relative to the third, correct?

Yeah, that's true. We're actually expecting our gross margin to be up a tick in the fourth quarter, but our overall gross margin for the year is actually expected to be flat.

Okay. And then, I apologize if you mentioned this: would you be willing to say where the quarter is, just kind of perspective, quarter to date, given your kind of guiding negative low single digits to low single digits positive? Is it safe to assume that things are kind of running similar to how they were in the second quarter or no?

I think -- I mean, what we said is we're running slightly down, quarter to date. I think the -- our sense is the situation is pretty consistent with what we experienced in Q2. I think we've got a little more drag from the summer-related that has us sitting slightly down. I think the tick to us feels relatively flat at the moment.

Okay. Sounds good. Thanks, guys. Good luck.

Thank you, Mitch.

And we'll take our next question from Brian Nagel of UBS.

Hi, good afternoon. One question first, to follow on a previous question. With respect to the gross margins, you're saying that gross margins in Q3 and Q4 should be about flat. I would think, given the efficiencies you saw in your DC here in the second quarter, shouldn't that continue in Q3 and Q4 and actually become better?

Yeah. Well, we're seeing efficiencies at the DC, Brian, but in the second quarter, that was offset, as I mentioned, by about $500,000. Our benefit -- our reduction in benefit for the inventory cost cap was about $900,000 and our savings on the DC was about $400,000 in the second quarter. We are continuing to realize improvements in DC from an efficiency standpoint in the third quarter and certainly the fourth quarter, but we're still going to be to the negative when you net that against the cost capitalization in the third quarter.

Yeah, but the inventory cost cap, if I heard the number correctly, was down to a negative $300,000 in the third quarter, so in Q3, you're losing $600,000 there.

I think, Brian -- I think we also see a slight de-leveraging of store occupancy, given relatively flat sales, and that factors into the gross margin as well.

Okay. The other question I have is you look at today's announcement versus what you previously guided to, both for Q2 and then for the full year. Is the variance in the bottom line results simply sales, as you look at your own internal plans; or were expenses also higher?

I think it's about 99.9% sales. You agree, Barry?

That's right, Brian. Sales.

Okay. And then, (inaudible). If you look at the range that you gave, then, for Q3 and for the full year, those ranges that are a function simply of the comp guidance?

Yes, that's true.

Thanks a lot.

Thank you.

And we'll take our next question from Jeff Sonnek of FBR.

Thank you. Steve, can you comment a little bit just on how you see your business and the markets that you guys play in today in this environment, relative to the '02 to '03 timeframe. That was a tough period for retailers as well; yet you posted healthy low single digit comps. Just any color there, and kind of how you see the consumer changing their shopping behavior?

I'm not sure I can speak fully from memory about all the issues we were facing in '02, 03. Our feel is that this is a more difficult consumer environment than we faced in a number of years, certainly well beyond '02, '03. That being said, we feel (inaudible) the fact that we've been at this for a long time, so we've got an extremely experienced team. We've got a buying team that averages over 19 years with the company. We have a group of nearly 40 district and regional supervisors that have averaged 20 years with Big 5; store managers that average over 9 years with Big 5. so collectively, we've seen challenging times before, and I think we know how to battle through those times, and we feel well-prepared to do the battle.

Okay. How about just all the fires and all the things that you guys have had to endure on the West Coast? I thought a couple years ago it was pretty bad as well, and you guys kind of saw a drop-off in some of those outdoor-related categories. Does that have anything to do with the second quarter weakness at all?

I would think in the grander scheme of things, I would call that an non-event; and I don't know that we can tie it into any sales relationship to fires.

All right. Thanks.

And we'll go next to David Magee of Suntrust Robinson Humphreys.

Yeah, hi. Good afternoon. Just a couple of questions. Are you seeing any reaction from your competition as you tweaked up the promotions, or do you anticipate any further burden of that in the second half of the year?

Say that again; have we seen any --

Are you seeing your competition become more promotional as well in this environment?

I don't think I would be able to say that at this point in time. I see reasonable consistency from a competitive standpoint.

Yeah. Is Foot Locker causing some issues for you all as they try to downsize inventory?

Again, we just saw their announcement of -- I guess it was yesterday or the day before. We think that generally, Foot Locker has a different customer base than we have. It's hard for us to evaluate what effect their issues may have on our footwear sales. We're certainly focused and continuing to create the compelling value with our products for our customers. And we don't necessarily do that in a manner that maintains and maximizes gross profit dollars, and we work hard to maintain our market share.

And lastly, Steve, are you seeing any greater opportunities as far as buying opportunistic merchandise, as some retailers have cancelled orders or reduced orders or things like that?

We're certainly constantly evaluating the opportunistic buying arena. I don't know that it would be fair to say that we're seeing at this point in time a major sea change in that area. It is something that could very well potentially develop.

Okay, great. Good luck. Thank you.

And we'll take our next question from Bill Dezellem of Tieton Capital Management.

Thank you. We had a number of questions, but first of all, would you please break out, if you have the data available, the second quarter comps between your non-summer products and your summer-related products?

We don't have that data specifically available, and again, we comment on our three major merchandise categories, and we said there's -- hard goods was slightly positive, footwear was slightly negative, apparel, single digit negative. I think summer -- apparel is more weather-driven than either of the other two categories; although there are components of weather-related products certainly in the hard goods and in the footwear departments.

Let me ask you to speculate then; if weather would have been similar to last year, you feeling as though your comps would have been positive?

Yeah, I think that's a fair statement.

Okay, that's helpful.

Yeah, absolutely. We think -- again, I don't want to characterize the situation as that weather is the issue. We think that the most significant issue is a difficult retail environment. Given that, we certainly don't feel that we got any benefit from the weatherman.

Right. And then, would you be able to share comps by either state or region, and here we're trying to isolate, if there's any particular area of store locations that are weaker than others?

Well, I mean, we're certainly not going to, for competitive reasons, talk about state-by-state or region-by-region performance. The best I will give you is that we certainly see a correlation -- and seeing a clear correlation between a number of the areas that have been spoke about or written about as having more significant housing/foreclosures/mortgage defaults issues and others, and there's certainly some correlation with that and with our store performance; but we're certainly not going to get more specific than that comment.

That's just fine. Thank you. And then, finally, from a philosophical perspective, would you share you view of the trade-offs between paying down debt and buying shares back with today's situation?

Yeah, Bill, let me just take that. We and our board continue to evaluate the best use of free cash. We do this continuously; we continuously monitor the price of our stock, interest rates, and other factors really to make the best determination of the best use of free cash. And we certainly had an opportunity to buy some stock here at the end of the second quarter and did that, and so we are clearly looking at it opportunistically, and making sure that we do the best we can with our free cash flow.

And so, given that the most recent time period, the month of July, you chose buy shares rather than pay down debt, does that imply that, with the metrics -- or the matrix currently looks, you would have a preference for buying shares?

Well, Bill, we can only tell you what we had in the release, and we certainly can't make any predictions on how we're going to use our cash in the future.

All right. Thank you both.

And we'll take our next question from Rick Nelson of Stevens.

Thank you; just to follow up on the last question. If you hit your EPS targets for this year, what would be the related range of free cash flow that you see for the year?

Rick, we generated free cash flow last year of about $26 million, and we see, given where we are operationally this year, something in that range.

Okay. And just to drill down a little bit, also on the apparel area, I know you cited that as one of your weaker major categories. Under Armour is a hot product in the industry, and I'm curious if you're getting the (inaudible) for it (inaudible) in all of your stores; is their product that you're not getting that you'd like to get?

Rick, as a matter of practice, we just do not talk about specific product or vendor relationships publicly. We certainly do have a nice situation with Under Armour and a good relationship, but not going to talk more detail than that.

Okay. Thank you.

And we'll take our next question from Anthony Lebiedzinski of Sidoti and Company.

Good afternoon. I was curious to know as to how many of your stores overlap with Foot Locker.

I don't have that specific number, but I think, safe to say, plenty.

And also regarding the sales weakness, would it be safe to say it was mainly in California and Arizona?

Anthony, we're not going to comment about geographical performance.

Okay. And also, what percentage of your product sales in the third quarter would you describe as weather-sensitive, weather-related?

I say in rounder figures, it could be 20%, plus-minus, 25%. It's not a clear line in the sand on that.

And my last question is on your previous conference calls, you had talked about your expectation of returning to historical types of operating margins in two to three years. I was wondering if you could give us an update on how you view that now.

Yeah, Anthony, you know, it's really -- we have historically achieved operating margins in the 7% to 8% range. Operating margins for 2007 are lower than in the past, primarily due to the softer sales levels, the higher cost of the new distribution center, and administrative compensation expense to support financial reporting initiatives and audit SOX costs; and of course, we're also being burdened by the expensing of stock options, which we didn't have to do in prior year.

We believe that we can leverage these expenses, these investments in a meaningful way as revenues grow, and we expect to return to our historical operating margin levels, but given where we are today, it's very contingent upon our sales; and the forecast is challenging for a quarter or six months, let alone three or four years, at this stage.

But do you still eventually expect to be able to leverage the bigger distribution center?

Absolutely. We're leveraging it every quarter. We are leveraging it -- we leveraged it -- certainly in the second quarter, and we're expecting to leverage it again in the third quarter roughly 30 basis points.

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

And we'll go next to Sujata Shekar of CIBC World Markets.

Yes, hi, Steve and Barry. My first question was on inventory. I think it's very creditable that it's even in line with revenues; wanted to speak specifically on apparel inventories, since that was the weakest category. How is that looking?

We're very secure with our inventory across the board, including apparel. We think we've made appropriate adjustments to insure appropriate inventory levels; and we feel we're very well situated. We're well prepared for a strong, strong performance in the back half of the third quarter and beyond.

Okay. So whatever markdowns you needed to take in apparel have already been taken?

Well, there's always an element of seasonal apparel markdowns, so as we get to the end of summer, as we always do, there's some markdowns that occur. What I'm saying is is that we don't feel at all uncomfortable about the position of our apparel inventory at this point in time.

Okay; understand. And then, looking into the third quarter, I presume that August will be a more important month; how does the last two months compare to July in terms of relative importance; and how are the comparisons versus how they trended, how comps trended last year?

Our comps -- I think reasonably, reasonably consistent throughout the quarter last year. They're all good, good months. August is certainly a very, very prime time for us, and sort of the start of September, with Labor Day, business begins to soften, as always, sometimes toward -- after Labor Day. The period of time between now and Labor Day are very, very healthy periods.

And in terms of the productivity of your circulars, I find it very creditable again that your SG&A is up only as much as it is, especially because you're stepping up on the promotions. Do you see any change, you know, when you send out a circular, the kind of sales response you're having? How are you managing that?

Again, we stepped up our promotions slightly. We didn't, again, go wild in terms of pressing our advertising. We feel very good about the productivity of our circular. We feel it's one of our -- strengths of our business. It allows us to play through challenging times; the fact that we don't just open our doors and hope that the wind is blowing customers into our doors. We feel that our circulars are giving us good response, helping us battle through these challenging times.

And then the last question, just on a broader note. I know you have about 20%, 25% queue overlap with Wal-Mart. With them getting even more promotional and sort of planning to do so for the back-to-school period, do you think that that's a factor at all?

Well, Sujeta, I'm not -- I don't believe we have 20%, 25% SKU overlap with Wal-Mart. I think that's a --

How much do you think you have?

SKU overlap? Specific SKUs where they're carrying the exact specific item that we're carrying is -- I couldn't speculate, but I think it's a much smaller number than 20% or 25%.

But in terms of the comparable price point products, do you think that their higher promotional levels are making some sort of impact?

Say it one more time?

Do you think that increased promotions at Wal-Mart are having any sort of impact on Big 5's business?

I think it's hard to speculate on that. I think we're -- I think we create lots of compelling values for our customers that allow us to compete very positively in areas around -- we have many, many stores all around Wal-Marts.

Okay. Thank you.

You're welcome.

And we'll take our next question from Jonathan Cramer with Cowen.

Good afternoon, guys. Just a quick question on trends in the apparel and footwear categories; what you're seeing and how much of the softness was related to weather.

We think -- consider; we think we know there's a considerable softness in our apparel that is related to weather. Last year, we had very favorable early summer weather; our second quarter '06 apparel business was up high single digits, it was very positive; a positive mid single digit increase in Q3, and then certainly an element of that was weather. So it makes all the sense in the world to us that when the weather is meaningfully cooler year over year, in the summer, weather's going to be impacted, just as if we get great snowfall in winter time. That's positive for winter apparel.

And how about the footwear category?

What's the specific question about the footwear category?

Trends or what you see is causing the softness in that category.

I think our best sense is that's part of the macro situation -- and not to say that the macro environment doesn't affect apparel. One may make the case, and maybe, I'm sure there is a case that apparel is sensitive to the macro environment as well. That's harder to quantify, but what we can quantify is that when it's hotter, we sell more hats than when it's cooler.

Okay, thank you.

Thank you.

(operator instructions) And Mr. Miller, there are no further questions at this time. Sir, I'd like to turn the call back over to you for any additional remarks.

Terrific. Well, we thank you. We certainly thank you for your interest and we look forward to joining you on our next call. Good afternoon.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.