Big 5 Sporting Goods Corp (BGFV) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods third quarter 2007 earnings results conference call. (OPERATOR INSTRUCTIONS.)

This conference is being recorded today, November the 1st, 2007. With us today is Mr. Steve Miller, President and Chief Executive Officer of Big 5 Sporting Goods. Also with us is Mr. Barry Emerson, Chief Financial Officer of Big 5 Sporting Goods. I would now like to turn the conference over to Mr. Steve Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to our fiscal 2007 third quarter conference call. Today we will review our financial results for the third quarter of 2007, as well as provide the outlook for the remainder of the year before we open the call 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 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 second quarter of fiscal 2007, and other filings with the Securities & 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 believe our third quarter results clearly demonstrate the strength of the Big 5 business model. Despite a continued challenging consumer environment in our markets, we delivered solid earnings that exceeded both the top end of our guidance and analyst expectations. By steadily executing our proven merchandising and operating formula, we combined a slight improvement in comp store sales with higher product margins and significant savings in our distribution center operation to achieve meaningful gains to the bottom line. Based on our third quarter performance, we are raising and tightening our full year earnings guidance from $1.22 to $1.42 per share to $1.33 to $1.43 per share.

Now I'll provide third quarter details. For the quarter, we rang the register to the tune of $231.3 million in sales, up 3.6% from $223.3 million in the same period last year. As we indicated in our last call, the quarter started off slowly partially due to unfavorable weather comparisons in many of our markets that hindered the sale of summer related products. July comp sales were negative in the low single digit range. Our trends improved in August and particularly in September when weather comparisons were more normal and we benefited from some strategic enhancements to our promotional activity.

For the quarter, our same store sales increased 0.1%, returning the Company to a positive quarterly comp store performance. We achieved this increase while driving product margins up roughly 30 basis points over the same period last year. Our team did an outstanding job of generating margin growth during the quarter. We believe that growing product margins in this difficult environment illustrates the effectiveness of our merchandizing and promotional strategy, which is designed to offer a product mix that creates compelling values for our customers while maximizing gross profit dollars.

For the quarter, we realized a small increase in our average transaction size and a slight decline in customer traffic. It has become clear to us that there is a correlation between pockets of particular sales softness in areas most affected by housing related issues. In general, these are areas that had been experiencing very high rates of residential growth.

From a product standpoint, our hard goods category was our strongest comping up in the low single digits. Our footwear category was negative below single digits due primarily to the softening of our roller shoe business. Excluding roller shoes, our footwear category comped slightly positive for the quarter. Apparel was our softest category comping down low to mid single digits. Apparel sales were particularly soft at the start of the quarter impacted by unfavorable weather comparisons in many of our West Coast markets. Although these trends improved as weather comparisons began to ease, the category remained challenged over the back half of the quarter.

Moving on to store growth; during the third quarter, we opened six new stores including one relocation. The openings were in Atascadero, California; Oro Valley and Surprise, Arizona; Spanish Fork, Utah; and Hobbs, New Mexico, and we relocated our Concord, California store. During the final quarter of 2007, we expect to open ten stores, including three that open their doors today in Wheat Ridge, Colorado; Logan, Utah; and Rexburg, Idaho.

The seven additional new store openings for the quarter will be well dispersed within our existing geographic footprint and also will include our first store in Oklahoma in the City of Lawton. This will result in a total of 20 net new stores in fiscal 2007, right on target with our plan and a year-end count of 363 stores.

Before turning the call over to Barry, I'd like to provide some information about trends we are seeing in the fourth quarter. Early indications suggest that the retail environment continues to be challenging. Sales for the first three weeks of the quarter were relatively flat with the prior year and generally consistent with what we saw during much of the third quarter. However, beginning with the fourth week of October, unfavorable weather conditions led to a softening of our sales trends in some of our markets, particularly southern California where the heat and winds led to the extensive wildfires throughout the region. Fortunately, none of our stores had any direct fire damage, but a few were unable to open for a couple days and access to many stores was restricted. The fires and resulting air quality imposed a virtual moratorium on outdoor activities through much of southern California.

We concluded October with comp store sales down below single digits. Now, we should point out that October is our lowest volume sales month of the year and in terms of the fourth quarter, the holiday season is the critical period. We are well aware that the consumer environment this holiday season could be quite challenging and weather is always an uncertainty. That being said, we believe that we are well positioned for a successful holiday season. We have a strong merchandising and promotional plan in place to drive business. We think our product assortment is improved over last year. We have taken advantage of a number of opportunistic buys and are very excited about our winter product offering.

We have been through many successful holiday seasons at Big 5 and remain confident in the effectiveness of our business model. As we did in the third quarter, we continue to look for ways to improve our top and bottom line performance in this challenging environment.

At this time, I will turn the call over to Barry, who will provide more information about the third quarter and update our guidance for the year.

Thanks, Steve. Moving down our income statement, our gross profit margin for the third quarter was 35.5% of sales compared to 34.8% of sales for the third quarter of 2006. The improvement was due to a combination of higher product margins and lower distribution center costs partially offset by occupancy costs related to new store openings. As Steve mentioned, product margins increased approximately 30 basis points from Q3 2006 and distribution center expense decreased $1 million due to operational efficiencies at our new facility.

Our selling and administrative expenses as a percentage of net sales were 26.8% in the third quarter of fiscal 2007 versus 26.4% in the third quarter of the prior year primarily reflecting softness in our sales and higher administrative expenses to support our overall growth and financial reporting initiatives.

Depreciation and amortization expense increased $0.5 million for the third quarter of 2007 primarily due to the increase in store count. Interest expense for the third quarter decreased by $0.1 million mainly reflecting lower average debt levels.

Net income for the third quarter was $8.4 million or $0.37 per diluted share compared to net income in the third quarter of 2006 of $7.8 million or $0.34 per diluted share.

Briefly reviewing our nine-month results, sales rose 3.7% for the 2007 year-to-date period to $666.2 million from $642.3 million during the same nine-month period in 2006. Same store sales increased 0.2% versus the same period last year. Looking at our bottom line for the nine-month period, net income was $21.9 million or $0.97 per diluted share compared to net income of $21.2 million or $0.93 per diluted share in the same period last year.

Now turning to our balance sheet. Total chain inventories amounted to $257.9 million at the end of fiscal 2007 third quarter up from $240.8 million at the end of the third quarter of fiscal 2006. On a per-store basis, inventories were up approximately 3.6% at the end of the third quarter versus last year. The increase in inventory is largely attributable to the timing of inventory receipts and primarily reflects our bringing in product earlier this year and certain opportunistic buys in anticipation of the upcoming holidays and winter season. 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 with a high quality product assortment.

Looking at our capital spending, CapEx excluding non-cash acquisitions totaled $11.1 million for the first nine months of fiscal 2007 primarily reflecting expenditures for our new stores, store remodeling, distribution center, and computer hardware and software. We expect capital expenditures for the fourth quarter of fiscal 2007 excluding non-cash acquisitions to range from $6 to $7 million primarily to fund the opening of ten additional new stores, store-related remodeling, computer hardware and software purchases, distribution center investments, and corporate office improvements.

We generated cash from operations of $13.5 million for the first nine months of fiscal 2007. We continue to see our business generating significant free cash flow, and we will continue to evaluate the best use of cash, including paying shareholder dividends, reducing debt, or repurchasing the Company's common stock.

We have been very active with our share repurchase program. During fiscal 2007 third quarter and fourth quarter through October 31, the Company repurchased 586,425 shares of its common stock for a total expenditure of $12.2 million. Since the inception of the Company's $15 million repurchase program in the second quarter of 2006, the Company has repurchased 666,535 shares for a total expenditure of $13.9 million and has one $1.1 million of repurchase authorization remaining under that program.

Because we have utilized nearly all of the authorization under our existing share repurchase program and because of the strength of our business and cash flow and the current price of our stock, our board of directors has authorized an additional share repurchase program for the purchase of up to $20 million of the Company's common stock. We will evaluate the best use of our free cash flow and will purchase shares from time to time based on market conditions and other considerations.

Our total long-term debt at the end of the third quarter was $95.1 million, down slightly from $96.7 million as of the end of the third quarter of fiscal 2006. We were able to reduce our overall debt levels despite opening 19 new stores and funding $8.1 million in shareholder dividends and 10.8 million share repurchases from the end of the third quarter of fiscal 2006 through the end of the third quarter of fiscal 2007.

Now I'd like to spend a few moments on our guidance. Our challenging sales results for October, which were impacted by continuing macroeconomic issues affecting the consumer environment and the wildfires in southern California have influenced our outlook for the fourth quarter. We expect to realize 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 $0.36 to $0.46.

For the 2007 fiscal year, we continue to 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 $1.33 to $1.43. Our full year guidance compared to the prior year continues to reflect 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 to you for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS.)

Our first question comes from the line of Brian Nagel with UBS Financial. Please go ahead.

Hi. Good afternoon.

Hi, Brian.

Barry, I have a question on the distribution center cost. You guys do a nice job of leveraging that here in the quarter, so as we look at what happened here in Q3, what's changing, so to say, in the efficiencies you're seeing from earlier in the year? And then I'll ask another question after that.

Yes, Brian. The -- well, the new DC, kind of taking you back a little bit, I guess in terms of the improvements that we're seeing, I mean, we're seeing an awful lot of improvement just in terms of efficiencies in in-store labor. We've been able to scale back some shifts and just utilizing the equipment, the automated equipment in an even better fashion, really just moving up the learning curve in terms of the automation and the functionality of the overall system.

Okay, so it's primarily then -- because you guys have talked about that before, primarily moving store labor essentially into the DC then? Well, I guess it's taking store labor costs down because it's a more efficient DC.

I think the savings that we saw at the distribution center is simply a function, as Barry said, of us just, as we expected to, moving up the learning curve of working at the new facility. Our people have gotten better and better as we gain more experience. We have a more stable workforce. When we moved into the new DC as we would expect, we churned a fair amount of our workforce as our team doing the work day over day gets more experience. We get greater efficiencies. We've been able to eliminate some shifts because of our efficiencies in the DC, which has allowed us to reduce supervision and certain headcount and overhead expenses.

We've taken advantage of automation. We put in this year an additional conveyor line to help route products through the distribution center. We've made some positive steps in improving our routing logistics. I think we're more efficiently managing our freight. All in all, we're just very, very pleased with the productivity and efficiency of the distribution center and we certainly think we have room to improve further.

But, Brian, you're certainly correct in realizing that we're achieving savings at store level because of the efficiency coming out of the distribution center. Of course, we're now having the product tagged and priced at the distribution center and no longer at store level. We're also -- the accuracy coming out of the distribution center is so exciting and so accurate that we're not having to actually do the 100% store check-in at the store level. We're able to get the product right onto the sales floor and that's saving us cost at store level.

Is there any reason to believe that these synergies would not be sustainable at least into the fourth quarter?

No. We think that these will be sustainable certainly through the fourth quarter.

Okay. Well, thank you very much.

Sure, Brian.

Our next question comes from the line of Rick Nelson with Stephens. Please go ahead.

Thank you. Good afternoon and congratulations.

Thanks, Rick.

I'm curious about the higher product margins up 30 basis points. It wouldn't appear that it was mix driven with apparel weak and the hard lines stronger. What exactly is driving that, Steve?

The higher product margins?

Yes.

Well, I think it's just being able to sort of -- we're very focused in finding product that gives our consumer tremendous, tremendous value, margins that are good for us. I think we experienced improved margins across a wide array of categories over the quarter. No single item. It's something that we've been focused on for a number of years, just the mix of product that we were selling. We were able to produce stronger margins, and still maintain our sales.

You mentioned some strategic changes to advertising. Can you elaborate there?

Yes. I mean, again, this is something that is -- it's not novel for the third quarter. We're always trying to maximize the return of our advertising investment, changes in advertising. I'm not going to get overly specific for competitive reasons, but, I mean, it has to do with how many pages we may be running in any particular week, dates and days of distribution, of secondary ads over the course of a week, and circulation and where we press circulation, so I think we did a nice job of making some adjustments that had a positive impact on our business.

And you mentioned that apparel improved as the weather compares got easier. Did that turn positive comp later in the quarter?

Rick, we're not going to give a blow by blow. I'm not even sure I have that month by month. I think apparel -- it would be safe to say and what we try to say is remain reasonably challenging and certainly our most challenging category over the course of the quarter.

Thank you.

Our next question comes from the line of Mitch Kaiser with Piper Jaffray. Please go ahead.

Thanks. Good afternoon, Barry and Steve.

Hi, Mitch.

Hi.

On the distribution center costs, it looks like in the second quarter you got about 33 basis points of positive gross margin on that and if I calculate it right it's about 41 basis points this quarter, so this is a meaningful acceleration at this point, right?

Yes, absolutely. Absolutely.

Okay.

We've been talking about this and we're realizing those savings. It's fantastic.

Yes. Okay. So, as we go forward kind of in that range, is that something -- a number that we should be thinking about?

We're seeing the largest expense savings from the efficiencies of the DC right now during the facility's second year of operation. In 2008, we expect distribution center expenses to be flat to up a little bit, so clearly this is a big year for us in terms of efficiencies. Beyond 2008, we see a normal increase in distribution center expense as our business grows and we expect to leverage these costs for several years.

Okay. You said flat to up on the expense on the DC side next year?

Flat to up a little bit next year, right.

Okay. But not as a percent of sales? You would expect to leverage that next year, right?

We expect to leverage that one next year. That's right.

Okay. Fair enough. I know you mentioned roller shoes being weak. How would you assess your inventory position in that category, do you think?

We think we're reasonably well positioned for the fourth quarter. We still expect it to be meaningful business and we're watching it very carefully. We don't think we have any huge exposure in the area. We're looking to come out reasonably well over a period of time in the product.

Okay. Okay. And then lastly, I know everybody's favorite topic; the inventory cost capitalization, what impact did that have this quarter? I'm sorry if I missed that.

It was about a negative $500,000, Mitch.

Okay. And what should we expect this quarter then?

This quarter, it's going to really be about the same down slightly, but it'll be a negative effect in the quarter, but it's going to be under a half a million dollars.

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

Thank you.

Our next question comes from the line of Jeffrey Sonnek with FBR Capital. Please go ahead.

Thank you. Hey, Barry, I was just looking at my notes from the last quarter and I'd written down somewhere that internal expectations were maybe for flattish gross margin in the third quarter with an acceleration in the fourth quarter. Am I mistaken, or can you provide some color as to what your internal projections were for gross profits in the third quarter?

For the third quarter? I mean, gross profit came in as we mentioned. We are actually anticipating flat product margins in the third quarter and a relatively flat gross margin in the third quarter and we were able to better that with the product margins and also the reduction in our DC costs.

So, I mean, I've visited that DC and you guys do have a lot of positive things going on there, but is that something that you just didn't have visibility into or is it just kind of -- is this one of these things where all the sudden it sneaks up on you and you realize hey, these guys -- we've been training for the last nine months, are really starting to hit their stride and everybody's kind of patting themselves on the back. I mean, how does that dynamic -- how is that kind of working through? Are you targeting efficiencies in certain areas of the DC or does it just kind of come to you?

We're very proud of our performance in the third quarter. I think some things came together well and we made some benefits of just doing things more efficiently. I think some savings on the freight logistics that are part of that, maybe not necessarily related to the facility, so I think all that added up to a really nice performance for us in the third quarter at the DC.

How about -- one thing, I think, that was not presently implemented in the third quarter but was a strategy going forward was multi-store pick. Is that in place today?

It's not. We still feel that's an opportunity for the future. We're just looking to get really, really better efficiencies with our team picking essentially one store at a time and that's happening and we'll try and make a call if we feel there's -- and we do believe there'll be additional benefits in the future with what we call batch picking.

Okay. Great. Good luck. Thanks.

Our next question comes from the line of David Magee with SunTrust Robinson Humphrey. Please go ahead. Once again, our next question is from the line of David Magee with SunTrust Robinson Humphrey. Your line has been opened. Please go ahead with your question.

Yes. Thank you. Sorry about that. Congratulations on a good quarter. Just a couple of questions. Can you comment about the new store productivity this year and what you're seeing there?

Very consistent with past years. We're pleased with our new store productivity.

So, it's similar to past openings in the last couple years then? Is that correct, Steve?

Reasonably similar, yes.

And also, could you remind me how the weather was last year in the fourth quarter or are you going against any unusual comparisons in November and December?

The weather is always usual, so the answer to that's yes, but last year we had -- I mean it was -- again, different in different parts of our -- the different regions in which operate. I would say as a whole the weather got very good for us very late in the quarter. Certainly, the last eight, nine, ten days the weather was good pretty much everywhere. Before that, it was a pretty mixed bag and I would characterize it as a whole as -- it was reasonably okay last year. There's certainly plenty of opportunity for us to get more favorable weather this year. Of course, it's obviously conceivable that it's worse. I would characterize last year's weather, although the timing and patterns were unusual, as a whole reasonably normal. Last year we did have better weather than 2005 when the winter weather conditions were generally poor.

Thank you, and then lastly it seems like the opportunistic merchandise played a bigger role in the third quarter than it did in the second quarter. Is that because of more merchandise being made available to you or was it just better focus just given the conditions out there in the marketplace?

I think -- we had some positive situations. I'm not sure I can quantify it relative to the second quarter. I don't think that was the, again, our performance between the two quarters were not too dissimilar in terms of our comp stores sales performance, so I'm not sure I can speak to a difference between the impact of opportunistic buys Q3 versus Q2.

Fair enough. Thanks, Steve.

You're welcome.

Our next question comes from the line of Anthony Lebiedzinski with Sidoti. Please go ahead.

Good afternoon. I was wondering if you could comment on the product margin expansion. Do you think this is a sustainable trend given the mix of products? I mean, what is your assessment of that?

I think over the long run I think we absolutely have opportunities to expand product margins. That's not our -- it's really not our sole focus in merchandizing. We're really about trying to create and optimize gross profit dollars. Sort of the hand we're playing changes from time to time, arguably week to week, month to month, and sometimes it lends itself to driving margins somewhat more effectively. Other times it may be more sales friendly and if we have a strong product and promotions that we're able to use to drive business -- if it's less than average gross profit margins, but creating incremental gross margin dollars, we're happy with it. So, we certainly believe there's continued opportunities to improve gross margin performance.

And with your comment about the October same store sales being down a little bit, what is that comparing to October, 2006? What was the comp then?

I honestly, I don't have that. We were -- I know we were positive all throughout Q4 of '06, but the fact of the matter is October is always our lowest volume month of the year. The fact that the -- and we were running relatively flat, we had a softening in the back portion of the period which we think is certainly directly related to the weather situations and fires. We're not overly concerned with the trends of October as being an indicator of the fourth quarter. We really have put our advertising thrust in terms of driving sales into the more critical period and of course, that's the time from Thanksgiving through the end of the year.

Now, if you exclude the fire affected areas, how are your comps doing? Are they positive or are they flat? Just trying to get a general sense of how the rest of the store base is holding up.

As we said, I think our overall comps through the first three weeks of the quarter were relatively flat. The last week we had softness certainly related to the weather, some of which was affected areas outside of California, but again, we're talking about relatively small numbers over -- based against the full fourth quarter.

And my last question; you mentioned that you're entering Oklahoma. I was wondering how many stores you think you can have in that state potentially and are there other new states that you're looking at to open stores in? Thank you.

I don't have a specific number the top of my head in Oklahoma. We certainly think there's obviously opportunities to grow in Oklahoma. This is just part of our continued growth, growth under control strategy. We're looking to fill in the existing footprints in which we operate and look for opportunities to move to continuous areas and we thought this represented a nice opportunity to gently expand our footprints.

Okay. Thank you.

Our next question comes from the line of Reed Anderson with D.A. Davidson. Please go ahead.

Good afternoon, and I did join the call late so if you covered this, I apologize. Steve, I was just curious, I mean, you've been in this business a long time. You know it as well as anybody, and the environment now is obviously tough and I'm sure you've seen this before historically, but does it cause you to rethink at all kind of your pace of growth maybe next year? I mean, does it cause you to want to dial it in a little bit or should we just think that it's going to be kind of business as usual?

Well, I think we can think of it in terms of business as usual. I mean, we've been through tough times before. We don't see anything that suggests that our business model isn't working and working well. We're dedicated to continuing the growth that we've built this Company so successfully on.

Okay. Good, and then -- I guess that's it for me. Thank you.

Thanks, Reed.

(OPERATOR INSTRUCTIONS.) Mr. Miller, there are no further questions at this time. Please continue.

Great. Well, we certainly thank you for being with us today and we look forward to speaking with you again soon. Thank you and take care.

Ladies and gentlemen, this concludes the Big 5 Sporting Goods third quarter 2007 earning results conference call. Thank you for your participation. You may now disconnect and a have a pleasant day.