Big 5 Sporting Goods Corp (BGFV) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods 2008 first quarter conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Steve Miller, President and CEO.

Thank you. Good afternoon, everyone, and welcome to our fiscal 2008 first quarter conference call. Today, we will review our financial results for the first quarter of 2008 and provide general updates on our business, as well as provide guidance. At the end of our remarks, we will open the call for questions.

I will now turn the call over to Barry Emerson to read our Safe Harbor statement.

Thanks, Steve. Except for statements much 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 2007, and other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statement that may be made from time to time by us or on our behalf.

Thank you, Barry.

We, like many other retailers, continue to experience a very difficult consumer environment. Although we are disappointed with our first quarter results, our sales and earnings were in line with the guidance we provided in February. We're particularly pleased to report that despite the soft sales conditions, we were able to tremendously improve our inventory position during the quarter.

Now for the numbers. In the first quarter, sales were $212.9 million, down 1.9% from $217 million for the first quarter of fiscal 2007. Our same store sales declined 5.1% for the first quarter. Favorable weather in many of our markets helped to boost sales of winter products, which posted a solid double-digit gain over the prior year. However, these gains were not enough to offset a decline in customer traffic, and continued weakness in the roller shoe category compared to the prior year. This category alone accounted for approximately 40% of the overall decline in same store sales.

Our average transaction was essentially flat for the quarter. Additionally, first quarter same store sales were negatively impacted by approximately 100 basis points as a result of a loss of a business day during the quarter, due to the shift of the Easter holiday when our stores are closed, out of the second quarter last year and into the first quarter this year. Our apparel merchandise category comped slightly positive during the quarter, largely due to sales of winter-related products. Hard goods was down low single digits, and footwear was down low double digits, due in large part to the roller shoe business.

Our product margins declined 83 basis points for the quarter, and were negatively impacted by higher sales of winter-related products and lower margins versus the prior year, lower sales and margins in roller shoes, and slightly more aggressive promotional pricing in an effort to drive sales and reduce merchandise inventory. I should also point out that our product margins increased 80 basis points during the first quarter of 2007 over the prior year.

Turning now to current trends. In April, we have seen more of the same softness in the retail environment, but we have not had the benefit of a category helping our business to the degree that winter products did during the first quarter. Roller shoes continue to have a material negative impact on our business, though for the second quarter we expect the impact to be slightly less than in the first quarter. This category will be much less of an issue for us by the time we get into the third quarter.

Overall, while we are certainly taking a hard look at all aspects of our business, we strongly believe that the major factor impacting our sales is the macroeconomic environment. Housing issues, higher gas prices, and inflation, particularly in food items, have to be affecting our customers' ability to make discretionary purchases. We continue to work very hard to improve each aspect of our business that is within our control, including the customer experience in our stores, our merchandise mix, promotional plans, inventory levels, and our expenses.

We believe that our team has done an outstanding job of improving our inventory position. From the end of the fourth quarter of fiscal 2007 to the end of the first quarter of fiscal 2008, our total inventory comparisons versus the prior year improved by approximately $24 million. On a per store basis, quarter-end inventories were down 5.3% from the prior year. This improvement has been maintained and actually slightly enhanced so far in the second quarter.

The process of right-sizing our inventories has been particularly challenging, given the levels of product inflation we're experiencing. The cost of raw goods, production and associated transportation costs have risen significantly in recent months across a number of our product categories. In the past, inflation has been a positive phenomenon for our business because we have generally been able to pass along price increases to our customers. However, given the current consumer climate, we intend to be careful and measured in evaluating our pricing strategies in an effort to optimize both sales and margins. In these challenges times, we think it is a real benefit to have a buying team with a depth of experience that ours has. Our buyers average 19 years with us, and we draw on that experience as we confront issues such as inflation.

Before I turn the call over to Barry, I will comment on our distribution center and store openings. We continue to be extremely pleased with the productivity and efficiency levels at our distribution center. Controlling expenses is the key to operating in the current environment, and during the first quarter our D.C. team managed to keep expenses flat with the prior year, despite supporting 20 more stores, and experiencing significant increases in trucking costs due to higher fuel prices.

During the first quarter, we opened one store in Red Bluff, California. In the second quarter we expect to open four new stores, one of which is a relocation of an existing store. We have two additional stores slated for opening toward either the end of the second quarter, or the first part of the third quarter.

Given the current environment, we continue to take a hard look at each potential new store location. This environment is presenting us with some real estate opportunities that are particularly attractive. We're very pleased with locations that we have in the pipeline, and we continue to expect to open approximately 20 net new stores during 2008. At this time, we think that maintaining our controlled store growth strategy will allow us to further solidify our market position and benefit us when the consumer climate improves.

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

Thanks, Steve.

Our gross profit margin for the first quarter was 33.6% of sales, compared to 34.9% of sales for the first quarter of 2007. The difference was primarily a result of the 83-basis point decline in product selling margins that Steve discussed, and higher store occupancy costs due mainly to new store openings. Our selling and administrative expense as a percentage of net sales was 29.7% in the first quarter of 2008, versus 28.4% in the first quarter of the prior year. The higher rate year-over-year was due primarily to lower sales levels and higher store-related expenses, reflecting an increased store count. Despite the addition of 20 net new stores year-over-year, we maintained our relatively constant levels of advertising expenses.

I would like to remind everyone that on our fourth quarter 2007 call, we announced that we are no longer separately breaking out depreciation and amortization expense. D&A expense associated with our distribution center and store occupancy is now classified in cost of sales, and D&A expense associated with our store equipment and corporate headquarters is now classified in selling and administrative expense. This is a more standard presentation of these items in the retail industry, and all historical results have been reclassified to conform to this presentation. The reclassification had no effect on the company's previously reported operating or net income.

Now looking at our bottom line, net income for the first quarter was $4.1 million or $0.19 per diluted share, compared to net income in the first quarter of 2007 of $7.6 million or $0.33 per diluted share.

Turning to our balance sheet, total chain inventories amounted to $233.2 million, at the end of the fiscal 2008 first quarter, basically flat with $233.5 million at the end of the fiscal 2007 first quarter, and down $19.5 million from the end of fiscal 2007. As Steve discussed, it -- we made great strides in right-sizing our inventories during the quarter, and on a per store basis, quarter-end inventories were down approximately 5.3% from last year.

Looking at our capital spending, CapEx excluding noncash acquisitions totaled $4.9 million for the first quarter of fiscal 2008, reflecting expenditures for new stores, store remodeling, distribution center costs and IT purchases. We expect capital expenditures for the remainder of fiscal 2008, excluding noncash acquisitions, to range from 19 to $20 million. This CapEx will be used primarily to fund the opening of approximately 19 net new stores, store-related remodeling, new point of sale terminals at our stores, corporate office and distribution center improvements, and computer hardware and software purchases.

We generated cash flow from operations of $20 million for the fiscal 2008 first quarter, compared to $19 million for the fiscal 2007 first quarter. We expect our operating cash flow to improve from the prior year in fiscal 2008, as we benefit from the right-sizing of our inventories. We will continue to evaluate the best use of cash, including paying shareholder dividends, reducing debt, or repurchasing the company's common stock.

Our long-term debt at the end of the first quarter was $97.3 million versus $67.5 million at the end of the first quarter last year, and $103.4 million at the end of fiscal 2007. We reduced our debt level by $6 million since the end of the year, while continuing to repurchase stock, pay shareholder dividends and invest in CapEx.

To update our activity under our share repurchase program, in the first quarter we repurchased 279,768 shares of our stock, for a total of 2.8 million. We have $16.7 million of remaining availability under our $20 million share repurchase program authorized in the fiscal 2007 fourth quarter.

Now turning to our guidance. Although first quarter results were in line with our expectations, the continuing softness in the consumer environment and the resulting unpredictability of customer traffic and sales make our ability to forecast the remainder of the year challenging. Based on this uncertain economic environment, and our recent sales trends, we are maintaining a cautious outlook. Our guidance for the fiscal 2008 second quarter and full year assumes that sales will continue to be impacted by a challenging consumer environment throughout the year. Based on that assumption, we are providing the following guidance.

For the second quarter, we expect a decline in same-store sales in the mid-single digit range, and earnings per diluted share in the range of $0.06 to $0.12. And for the full year of 2008, we expect a decline in same-store sales in the low-to-mid single-digit range and earnings per diluted share in the range of $0.60 to $0.85. A material improvement or decline in the overall consumer environment during the remainder of the year could materially impact our performance relative to this guidance. While the retail environment has remained challenging during the second quarter, we believe that our continued focus on improving the execution of our overall business model will position us well when the consumer climate improves.

Operator, I think we are now ready to turn it back to you for questions and answers.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Rick Nelson with Stephens, Inc. Please go ahead.

Good evening, guys. Can you discuss, Steve, the merchandise categories that are - where you're seeing some relative strength, and I guess the weaker categories as well, what is working, what is not working?

Sure. I mean, over the -- the -- certainly the winter products categories was our -- arguably our strongest-performing category for the first quarter. But we have other specific areas of strength that I think for competitive reasons we'd just as soon not discuss, certain categories. I think softness for the first quarter, obviously we talked about the roller shoe category, golf business remained -- remained somewhat in the doldrums. Our baseball business was relatively soft and somewhat disappointing to us. We think, you know, given the challenging economy, arguably there is perhaps no category that we carry that there is more hand me down products in folks' closets than baseball. It seems like this year perhaps people were not replacing equipment to the same degree that they had in the past.

What is happening in footwear, ex-heelies?

Our generally, our general footwear and non-winter-related apparel product was relatively soft, reflecting the weak economy, the weak environment.

What -- will you be getting the UA cross trainer in your stores and, if so, how many stores and what sort of impact might that have?

We will be getting the product. It will be in -- roughly -- roughly half of our stores and, you know, we are certainly looking at it as hopefully a positive.

Okay. And how about the promotional environment? Did that intensify, you know, from your competitors from fourth quarter to first, and what is your expectation there and what -- what sort of plan do you have for advertising?

Well, I think it is always relative. I think we always see more competition or more - everybody being more aggressive in the fourth quarter than the first. You know, I don't think that currently in the first quarter we really saw what I call more activity in the sense of greater frequency of competitors ads. I think in some cases we perhaps are seeing more aggressive pricing, possibly competitors' efforts to address their inventory issues.

And how about regional areas of strength. Is California softer than your other operating regions? Texas, for example? What we hear is it is actually pretty healthy right now. Is that the case at Big 5?

Yes, Rick. We're not going to talk about specific areas, in a very specific sense of -- of store performance. I think what I would -- what I will say is that, you know, generally sales have been recently challenging, in most of the markets. I think initially as we started to see softness creep into our business, it was something that we could more directly correlate to the housing issues, the areas that had generally been spoken of as having higher foreclosure and default areas. You know, my sense now is that while the housing issues certainly persist, the more significant issue that, you know, we and I think perhaps all retailers are facing, are the issues of higher gas prices, higher food prices, and I think that's affecting all the regions of the country, and certainly for the most part our market areas as well.

And is there any opportunity on the expense? You're a pretty lean organization as it is.

Barry, you want to try this?

Yes, you know, Rick you know, as you mentioned, you know, we have historically operated as a pretty lean business. Yes, that being said some of our larger expense items that we always evaluate of course include, you know, store labor, advertising, our distribution center, and certainly our administrative departments. We have made a number of advances in expense savings across our business, you know, which individually may not be overly material, but taken together, add up to significant savings for us. Some examples would be store labor hour reductions in the current environment, safety enhancements, you know, favorably impacting our workers' comp costs. We're out there you know working on lighting retrofits, you know, reducing supplies because of volumes at our distribution center. We're trying to - you know, we're working to reduce courier expenses between our corporate office and stores. We are, you know, looking as I mentioned at trimming our ad spend and making adjustments to the ad calendar to more efficiently deploy our ad dollars and we have been also receiving benefits as we are working with our insurance providers as well. We're really looking at all aspects of the business.

Very good. And just one final question. If you hit the earnings guide, where do you see free cash flow for the year?

Yes, Rick, you know we expect as we mentioned that, our free cash flow -- you know, we really see last year as an anomaly. You know, we really kind of had - inventories were too high, our sales were low. You know, we have worked those off considerably. We expect cash flow for 2008 currently to get back to more normal levels, and that would -- we would expect free cash flow to exceed $20 million this year.

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

The question I wanted to ask is how you're thinking about the annual guidance now. You had - Q1 was soft but in line with your expectations, and you have guided your expectations down now for the year.

Brian, can you speak a little louder? We're not hearing you real well.

The question I have is you know basically how your -- you took down your guidance for the year after a soft but in line Q1. What -- you know, we know the environment is weak but is there anything specific that you guys saw change in the trends of your business in Q1 to you know encourage you to put out a more subdued outlook for the balance of 2008?

Oh, you know Brian, I mean our guidance really is -- we have tried to be as trant parent as we -- transparent as we possibly can. The guidance assumes that sales will continue to be impacted by the challenging consumer environment throughout the year. We certainly hope, you know, that the measures taken by the government, you know, and the lower interest rates you know will have some form of positive effect on consumer spending but we really have no way of predicting how consumers will react to those measures. Currently, you know, we're not seeing an indication that the consumer spending environment is improving. The housing issues have worsened, inflation has worsened, gas prices continue to rise. The recent sales trends as you mentioned, you know, have reflected this weakness in the consumer environment. For that reason, we're maintaining a cautious outlook for the -- for the full year. You know, if consumer spending, you know, materially improves or declines through the year, I mean our performance could certainly change to -- significantly. You know, as we indicated in our last call, based on the current modeling, we would expect each 1 percentage point change in our same-store sales for the year to have an EPS impact of approximately $0.10 per diluted share. So you can see the leveraging impact.

Has weakness in the environment allowed you to find better opportunistic purchases out there?

Yes, I think that's -- yes, right now, I think the vendor community is being reasonably careful about what they produce. We're certainly seeing a steady flow of opportunistic buys. I am not sure that I could characterize it - at this point in time as "better." I think given this environment, we believe and that we could see a -- an improvement in the opportunistic buy arena in the months ahead. And we're particularly pleased that with our recent inventory adjustments; we feel we are in an outstanding position to take advantage of the right opportunistic buys when they arise.

The final question, when do we cycle past the difficult roller shoe comparisons?

Really, as we get into Q3, it should be for the most part behind us or way - far, far less material than it has been last year and in Q1 and will be in Q2. Q3 it, it should be nominal and Q4 it may be an absolute non-issue.

And Barry, that is factored into the guidance now?

That sure is, Brian.

Absolutely.

Okay, thanks a lot.

Our next question comes from the line of Robert Samuel with JPMorgan. Please go ahead.

Hi, good afternoon. Just one question. Any comments around the tax rebates and how you guys are thinking about them? Should they be having any sort of positive impact on the business?

Well, we certainly hope so. Can't hurt, but I mean it -- it is difficult for us to plan or factor into our guidance how people will spend their tax rebate, if it will be spent you know in stores or go to pay off debt and put in savings accounts, but it -- hopefully, it's obviously a positive.

But you're not factoring in any sort of bump up, you know, for the rebates?

No, we're really not factoring that in.

Okay. And then second question. Excluding the Under Armour launch, are there any new brands or upcoming launches that you see on the horizon that you think could help out the business?

No, I mean we got, you know, individual items that you know we're -- we're excited about. You know, as we always are in terms of you know, making specific purchases. But no major launch similar to what is going on with the Under Armour product that we can speak of. We're certainly very excited about our summer products. We think we have worked very hard to optimize our product mix for the summer season. We have got a number of fresh - fresh items, and weather cooperating and economy cooperating, we think we're well positioned for a good summer business.

Great, thanks so much.

Thank you. Our next question comes from the line of Bill Dezellem with Titan Capital Management.

We have a group of questions. First of all, you had mentioned that you're seeing good deals on the real estate front. I would like to dial in specifically to real estate locations. Are you finding an ability to get better locations than you had in the past, and not intending to imply that your past locations were poor, but just that you really truly have a -- a step function increase in opportunities?

Yes, I think to a degree, I mean we -- we think they are -- you know because of other -- other retailer's store closures, because of other retailers cutting back on what may have been planned -- planned growth, I think some developers are sitting with some excess properties, and, you know, we think that can only advantage us going forward.

And then on the inventory front, as you pointed out, you have made very nice progress from the end of December. Inventories I believe were flat versus the end of Q1 '07, and given that the environment is more challenging today than it was then, are you inclined to bring your inventories down further, or what is the general thought process on the inventories at their current levels, thinking about the future?

Well, you know, we think there's - again, it is certainly if the environment remains as soft as it currently is, we -- we think there are opportunities to continue to bring down our inventory levels relative to the prior year.

Now I think Barry had mentioned that some of that has already taken place in the month of April. And may we interpret your comments that there is still more that can be done, even from today's level? Even though the reported results are the end of March?

Yes, we certainly think there is more that can be done, and you know we also want to remind, you know, you and everyone that we're also opportunistic buyers. And given the right situations, we have the - we believe, the experience to evaluate opportunities that, you know, we believe will be positive -- positive for the business, but maybe contrary to lowering inventories. So obviously we're looking to take the appropriate measures for the long-term success of the business.

But Bill, I don't want to give you the impression -- you really need to look at the inventory levels relative to the prior year. So our inventory levels in the second and third quarters are going to be higher than where they are today, just because of the seasonal purchasing that we're going to go through. But at the end of the year, we currently anticipate that our inventories are going to be down significantly from the prior year.

That's a helpful clarification, thank you. And then one additional question. Would you please reconcile a couple items that sound like they might be different, and probably just confusion on our part, and that is that the product margin I thought we heard you say was up 80 basis points, but yet at the same time that you're being cautious passing the -- the product inflation, or cost inflation through. Could you try to pull those two together for us?

I guess I am not sure --

Well, Bill, I want to make sure it is clear. What we said in the -- in the first quarter, you know, our product QS margins were down 83 basis points.

I thought we -- okay I --

No, our -- in the first quarter --

Our margins were down.

Were down 83 basis points.

We saw the total gross margin was down but it sounds like I may have misheard you state on the call that product margins --

I think what you misheard was that last year, we were -- this year we were down 83 basis points, 2008 over 2007, product selling margins. Last year, our margins improved 80 basis points '07 versus '06.

In essence what you're saying is that your profit margins are at the same spot they were two years ago. I am trying to highlight that this is not a disaster from your perspective.

Precisely. A lot has to do with the -- the mix of product, the winter business, and '08 relative to '07, relative to '06, and so forth.

That's helpful and I apologize for the confusion, thank you.

Thank you. Our next question comes from the line of David Magee with SunTrust Robinson Humphrey.

This is Chris [Rabelje] on the call for David this evening. Just a few questions. First, looking into second quarter is there anything -- could you just remind us if there is anything particular about weather comparisons year-over-year that we should think about?

Weather in the second quarter, not overly material as the second quarters played out as I recall. Probably the most significant, you know, item in terms of the second quarter- two actually, is the calendar -- the impact of Easter, which was in the second quarter last year and the first quarter this year. So that was a positive of the business. But for the Fourth of July holiday, as our calendar works, the Fourth of July holiday moves two days further from the end of the quarter, and will cost us some business in the second quarter to the benefit of the third quarter.

Okay. And then, with the current sales trends, do you see anything that makes you concerned that we might be losing share to other competitors in the region or anybody specific? Or do you see it, you know, mainly as just an issue of the environment?

No, we see this primarily and really as an issue of the environment. In fact, I think most of what I hear and read, you know, you know given our geography and trying to follow what is happening in the competitive environment, I think I can make the case that you know we're outperforming a number of players in our market place.

Uh-huh.

I just think these are trying times for the American consumer, and certainly a difficult condition for us and all retailers.

Okay. And then, finally, I think your CapEx number may be just a bit lower than the number that was given on the last call. Have you had any, you know, projects that you have decided not to move forward with or what is behind that reduction?

I think our CapEx is in the neighborhood of 23 to $24 million. We really haven't really haven't changed any projects, you know, for the year.

Oh, I'm sorry, I thought you said 19 to 20 earlier today.

Yes, that's the -- that's the remaining CapEx for balance of the year. The total is about 23 to $24 million for the full year.

Okay. Well, thanks very much.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good afternoon. A few questions. Is it safe to assume that your guidance now assumes more margin pressure than what you saw in the first quarter?

At the -- I think our margin assumptions are pretty consistent from what we saw in the first quarter for the full year.

Okay. What about for the second quarter?

That -- again, think we're all pretty consistent. We're expecting margins to be down on a point of sale basis in the second quarter and for the full year.

Uh-huh. Okay. And also, could you guys quantify the impact of the Easter shift for the first quarter, and also what you expect for the second quarter?

Yes, roughly probably 75 to 100 basis points.

Of comp, okay. Any thoughts on -- any changes to the promotional marketing plans, you know, going forward?

No, I mean this is something that we always evaluate and I don't -- can't think of any situation where we don't make changes. So, you know, we're -- we believe that we're going to be early promotional, going forward, I mean I think we're watching the add spend carefully, historically, you know we have sort of had a belief that when times are good, you press advertising. You know, first inclination. When times get rough is to press advertising. I think we feel in these circumstances, trying to evaluate the situation, that it -- it is prudent to watch our ad spend carefully, and yet we're still working and think we have some sound strategies to try to maximize the results of our ad spend and we're pretty excited about our plans to try to drive business, really for the Memorial Day, Father's Day, Fourth of July timeframe.

Okay, thank you.

Thanks, Anthony.

Thank you. There are no further questions. Mr. Miller, at this time I will turn it back to you for closing comments.

Thank you, Operator. Well, like most retailers, our business certainly is facing significant headwinds right now. We strongly believe that staying focused on our proven business model which produced 45 consecutive quarters of positive same-store sales growth, until the overall consumer climate softened last year, is the best course of action to weather the storm. We will continue to refine all aspects of our business in an effort to position ourselves for solid growth when the consumer climate improves. We appreciate your interest and look forward to speaking with you again soon.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.