Big 5 Sporting Goods Corp (BGFV) 2008 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 2008 earnings results conference call. With us today is Steve Miller, Chairman, President, and Chief Executive Officer; and Barry Emerson, Senior Vice President, and Chief Financial Officer.

(Operator Instructions). This conference is being recorded today, Monday, November 3 of 2008. 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 2008 third-quarter conference call. Today, we will review our financial results for the third quarter of 2008, 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 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 include the uncertainties as more fully described in our annual report on Form 10-K for fiscal 2007, our quarterly report on Form 10-Q for the second quarter of fiscal 2008, and other filings with the Securities and Exchange Commission.

We undertake no obligation to revise or update any forward-looking statements that may be made from time to time by us or on our behalf.

Thank, Barry. Given the unprecedented challenges of the consumer environment, we're pleased with the relative strength of our performance and ability to deliver earnings that exceeded our third-quarter guidance. By continuing to focus on managing the controllable aspects of our business, such as inventory and expenses, we successfully lessened the impact of the macro environment on our third-quarter results.

Now, for the numbers. In the third quarter, sales were $223.2 million, down 3.5% from $231.3 million for the third quarter of fiscal 2007. Following the Fourth of July holiday, which fell into the first week of the quarter, our sales were consistently soft throughout the period. We experienced our weakest sales of the quarter during the last two weeks, when our nation's economy seemed to go from bad to worse. This led to a same-store sales decline of 6.6% for the third quarter.

As of recent quarters, the sales decrease was primarily a traffic issue with a mid-single-digit decrease in customer traffic. Our average transaction size was down less than 1%.

From a product standpoint, our three major merchandise categories of apparel, footwear, and hard goods performed within a relatively tight range of one another, down in the mid-to-high single-digit range. Apparel was our strongest category, and footwear was our weakest. Footwear results reflect the impact of roller shoes, which in the third quarter accounted for 55 basis points of our overall comp sales decline. Although this is still a meaningful number, the impact of roller shoes on our business has diminished significantly from what it was during the three previous quarters.

We're pleased that we were able to increase our product margins 11 basis points for the quarter, the second consecutive quarter in which we have expanded these margins in the face of a challenging consumer environment and inflationary pressures. I'm very proud of our team's efforts to optimize our sales and margins and provide compelling values to our customers.

As one would expect, we placed a tremendous focus on managing our inventories in this difficult environment, and we continue to achieve good results. As of the end of the third quarter, our total chain-wide inventories were down 4.9% from the prior year, while operating nineteen additional stores. This is a decrease of 9.7% on a per-store basis. Our careful inventory management has positioned us positively to consider and take advantage of opportunistic buys as they become available.

On the expense side, our entire team is working very hard to achieve savings in all areas. We continue to be extremely pleased with the productivity and efficiency levels at our distribution center. During the third quarter, we were able to lower our overall expenses from the prior year by nearly 3% despite supporting nineteen additional stores and experiencing significant increases in trucking costs due to higher fuel prices. We expect to achieve additional benefit from lower distribution expenses during the fourth quarter, given the dramatic fall in fuel prices of the past few weeks.

Commenting on store growth. We opened three new stores during the third quarter. These stores were Castle Rock, Colorado; Madera, California; and Redmond, Oregon. We also closed one store in Ventura, California, which we relocated during the second quarter. We have opened one new store in Show Low, Arizona thus far in the fourth quarter. We will be opening three stores later this week in Tooele, Utah; Albuquerque, New Mexico; and Atwater, California. We anticipate opening five additional stores by Thanksgiving, which will give us nine openings for the quarter and have us end the year with 18 new stores net of relocations and closures.

In light of the current economic environment, we're carefully reviewing our overall store expansion plans for 2009. While we continue to find quality store locations and attractive lease terms, at this point in time, I would say that it is likely that we will be opening fewer stores in 2009 than we will this year.

Turning now to current trend trends. The further softening of sales trends that we experienced over the last few weeks of the third quarter has continued into the fourth quarter. While the economic climate is difficult to forecast, given everything we're seeing, we have to assume that consumer spending will remain soft through the holiday season. Our fourth-quarter guidance, which Barry will speak to in a moment, reflects this assumption.

That being said, there are some factors that we believe could stack up positively for us in the fourth quarter. First we are comp'ing against our weakest holiday selling season since 1995. Second, the recent decline in gas prices should have a positive impact on discretionary spending. Third, we think the impact of the competitive environment in our markets on comp store sales should ease, given that we will be cycling a greater number of competitive openings from last year than we will face this year. However, that benefit may be offset somewhat by the fact that we will be facing some liquidation sales from recent bankruptcy filings.

Most importantly, we feel that we have positioned ourselves very positively for the holiday season from an operational, promotional, and product-offering perspective. Big 5 has been recognized for over 50 years for its tremendous value proposition, and we believe this will resonate very positively with consumers as they evaluate their spending power in today's economy.

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

Thanks, Steve. Our gross profit margin for the third quarter was 33.3% of sales compared to 34.3% of sales for the third quarter of 2007. The 11-basis-points increase in product selling margins and decrease in distribution center expenses were offset by higher store occupancy costs due mainly to new store openings.

Our selling and administrative expense as a percentage of net sales was 29.6% in the third quarter of fiscal 2008 versus 27.7% in the third quarter of the prior year. The higher rate year over year was primarily due to the softer sales conditions and higher store-related expenses, reflecting an increased store count.

Now looking at our bottom line, net income for the third quarter was $4.5 million, or $0.21 per diluted share, compared to net income in the third quarter of fiscal 2007 of $8.4 million, or $0.37 per diluted share. Briefly reviewing our nine-month results, net sales declined 3.2% for the 2008 year-to-date period to $645 million from $666.2 million during the same nine-month period in 2007. Same-store sales decreased 6.5% versus the same period last year.

Looking at the bottom line for the first nine months, net income was $10.3 million, or $0.48 per diluted share, compared to net income of $21.9 million, or $0.97 per diluted share, in the same period last year.

Earnings results for the first nine months of fiscal 2008 include the previously reported after-tax charge of $0.9 million, or $0.04 per diluted share, to correct an error in our straight-line rent expense, substantially all of which related to prior periods.

Turning to our balance sheet, at the end of the third quarter, total chain inventories were $247.7 million, which was approximately $10 million below last year's levels. As Steve mentioned, we continue to focus on managing our inventory, and on a per-store basis quarter-end inventories were down 9.7% from the same period last year.

Looking at our capital spending, CapEx excluding non-cash acquisitions totaled $14.2 million for the first nine months of fiscal 2008, reflecting expenditures for new stores, store-related remodeling, distribution center and corporate headquarters costs, and IT purchases. We expect total capital expenditures for fiscal 2008, excluding non-cash acquisitions, of approximately $20 million to $21 million. The investment will find the opening of approximately 18 net new stores, store-related remodeling, corporate office and distribution center improvements, and corporate -- and computer hardware and software purchases.

We generated cash flow from operations of $29.4 million in the first nine months of fiscal 2008 compared to $14.6 million for the same period last year. The difference is mainly due to our efforts to reduce inventories to better align them with current sales levels. We have historically used our free cash flow for new-store expansion, paying shareholder dividends, reducing debt, or repurchasing the Company's common stock. And we will continue to evaluate the best use of our cash on a quarter-by-quarter basis.

To update activity under our share repurchase program, we have slowed our purchasing to preserve capital in light of the current economic environment. In the third quarter we repurchased 85,757 shares of our stock for a total of $0.6 million. As of the end of the third quarter, we had $14.4 million available for stock repurchases under our $20 million share repurchase program authorized in the fiscal 2007 fourth quarter.

Because of the current economic downturn, we would like to spend a few minutes talking about our debt structure. We have $175 million financing agreement with the CIT Group and a syndicate of lenders, with interest rates having a floor of 1% over LIBOR and a ceiling of 1.5% over LIBOR. If you're interested, the agreement and related amendments have been publicly filed as part of our SEC filings.

The amended agreement includes covenants that, among other things, require us to maintain a fixed charge coverage ratio of not less than 1:1 in the event that the availability under our financing agreement for the three-month average for any quarter falls below $40 million. In very general terms, the fixed charge coverage ratio is computed on a rolling 12-month basis and is the ratio of EBITDA to capital expenditures, interest expense, payment of other indebtedness, income taxes, and dividend payments. Stock buybacks for 2007 and 2008 have been excluded from the fixed charge coverage ratio calculation, but any buybacks in 2009 and forward would be included.

At the end of the third quarter fiscal 2008, we had $99.9 million in outstanding borrowings compared to $103.4 million at the end of fiscal 2007 and $95.1 million at the end of the third quarter last year. We also had letter of credit commitments of $7.2 million outstanding as of the end of the third quarter. Our revolving credit facility balances have historically increased as we build inventory leading into the summer and winter selling seasons, and decreased as we sell off inventory and use our cash flow from operations to fund our indebtedness. We are currently comfortably in compliance with all covenants under our credit agreement.

Now I will turn to guidance. Although earnings results for the third quarter of fiscal 2008 exceeded our expectations, the consumer environment has become more challenging over the last several weeks. With economic conditions difficult to forecast, we are assuming that sales will continue to be impacted by weak consumer spending, and we are maintaining a cautious outlook. Based on that assumption, we are providing the following guidance.

For the fourth quarter, we expect a decline in same-store sales in the mid-to-high single-digit range, and earnings per diluted share in the range of $0.07 to $0.17. For the full year 2008, we expect a decline in same-store sales in the mid-to-high single-digit range, and earnings per diluted share in the range of $0.55 to $0.65. This full-year guidance is even with or slightly below the low end of the range of our previously issued guidance. 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.

Operator, we are now ready to turn the call back to you for questions and answers.

(Operator Instructions). David Magee, SunTrust Robinson Humphrey.

Just a quick question on the historic growth for next year, if you decided to pull back, what would be the impact do you think on the earnings next year?

David, we haven't forecasted our 2009 earnings to a specific degree, but certainly as you scale back, if you scale back, depending on how dramatic you scale back your new store openings, that would have certainly some impact on our revenue for next year.

But as far as -- they are accretive, are they not, in the first year?

Yes, they typically are accretive in the first year.

The other question I have -- just on the footwork category, can you call out anything that particularly is working well right now, with Nike or any other vendors that seem to be selling through well?

David, we generally do not comment on the individual vendor performance, just to be consistent with past practice.

Good luck, guys.

Rick Nelson, Stephens, Inc.

Thank you and good afternoon. Steve, you mentioned your lean inventory position and potentially allowing you to do more in the way of opportunistic purchases, which, given the tough macro environment, I would think those might be more plentiful. What are you seeing in terms of opportunistic buys at this point?

Well, we think things from an opportunistic-buy standpoint are pretty dynamic right now, given the growing number of retailers that are closing stores, filing for bankruptcy protection. And we certainly seem to be -- there seem to be more cancellations out there that are creating -- perhaps creating buying opportunities for us.

That being said, I think the vendors are pretty tuned into the state of the economy, and they are certainly trying to tighten their belts as well. But all in all, we think it's positive. I think it could be hopefully even getting more positive for us as conditions play out.

Did you recognize benefits in the third quarter -- the 11-basis-point improvement in growth, was that at all driven by opportunistic buys?

Oh, I think that helps, absolutely. It's really allowing us to create compelling values for our customers and yet maintain margins that are healthy for our business.

What were the other drivers to the gross margin improvement, the 11-basis-points that you referred to? Is that mix?

I guess there's always an element of mix that's there, Rick. But it's pretty consistent with what we've tried to achieve in the long run, is try and optimize our pricing strategies and really manage the business to maximize gross profit dollars, certainly with the goal to try to maintain margins and optimize sales.

And the store opening pull-back for 2009. What is the driver there? Is it the rents are becoming more attractive, and you're waiting for those to decline? And how many, roughly, are you thinking about for next year?

Well, I -- one, I think maybe there is some advantage to waiting in today's environment, but just given the uncertainties of the extent and duration of the economic downturn, we think it's prudent to be cautious and do a lot of evaluation in terms of new stores, moving forward with new stores. We continue to evaluate these plans, really on almost a daily basis, and we will certainly have more to say after the holiday season when we are a whole lot wiser about the direction of the overall economy.

Do you see any issues with covenants as we move forward? And how difficult it is to change those with the banks?

Rick, the -- as of our fixed charge -- the covenants that we have typically are twofold. They are a fixed charge coverage ratio, and that kicks in if our availability is under $40 million, as I described in the details of the communication earlier. The details of the covenant and all of our bank covenants are included in our credit facility agreement and related amendments, which have been publicly available as exhibits to our SEC filings.

Our credit facility requires us, among other things, to maintain a fixed charge coverage ratio of not less than 1:1 in the event that the availability under the financing agreement for a three-month average for any quarter falls below $40 million. In very general terms, in terms of the fixed charge coverage ratio, on a rolling 12-months basis, it includes -- it takes EBITDA to capital expenditures, interest expense, payment of other indebtedness, income taxes, and dividend payments; and then as we mentioned, the stock buyback would also be included in there beginning in 2009.

Okay, thank you.

In terms of the levers that we have -- that's one of the things that you had mentioned -- there are several variables that go into the evaluation of covenant compliance. Of course, sales are obviously the number-one variable. But certainly, expenses are another, and we always are watching expenses very closely for any opportunities. But apart from EBITDA, the fixed charge coverage ratio, as I indicated, have a number of different aspects, from capital expenditures, income taxes, and so on.

We've indicated that we have slowed our stock buyback activity in order to preserve capital. We would obviously also examine other aspects of the uses of free cash flow if sales got to the point where we needed to do that. So there's a number of levers that we have to help stay in compliance with our covenants.

But as of today, we're comfortably in compliance with our covenants, and we feel we'll continue to be in compliance with our covenants at year end.

And pull-back that you're talking about in terms of store openings, is that aimed at being compliant now, as well?

I think it creates greater flexibility for some of the uncertainties in the future.

Where do you stand with the fixed charge coverage ratio now?

As of the end of September, Rick, we had a fixed charge -- our fixed charge coverage ratio was 1.11, and our availability was $44 million. And again, our fixed charge coverage ratio -- the comparison is 1:1, and so as long as our availability is over $40 million, we do not need to maintain compliance with the fixed charge coverage ratio, although as of the end of September, we were in compliance with both.

Brian Nagel, UBS.

A couple of questions. First off, with respect to the guidance and particularly the macro environment, clearly we're in a very dynamic environment at this point. But how do you think about -- if you look at gas prices, which have been coming down, housing is still weak, credit is becoming more difficult. How do you think about the macro environment as it pertains to Big 5 sales, and what factors may be most important to you guys?

Well, I think all factors that affect the amount of discretionary income in our consumers' pockets is important to us. I'm not sure exactly how to weigh them. What I feel is important to us is the fact that we have a value offering that we think in today's economy may resonate. It's resonated well for many, many years.

And right now maybe the consumer needs us arguably more than ever, because we have a tremendous reputation in our marketplace for delivering value, and I don't think anybody would dispute the fact that right now the general consumer out there is looking for value. So we're very hopeful that although obviously it's a challenging environment, we think we are playing well through the challenging environment, particularly given our geography. And we would look for that to continue going forward through this holiday season.

On that note, with your circulars have you been able to, or have you decided to up the publication of those just to enhance the value image of Big 5 in the marketplace?

We are aggressive 52 weeks a year really in terms of reaching out to our consumers. So we're going to continue to obviously be aggressive in terms of the -- getting out our circulars and making sure everybody understands the values that are available at Big 5 Sporting Goods.

Then just one quick modeling question. I noticed your tax rate in the quarter went down to 37.4%. Is that a one-time event, or how should we be modeling taxes?

Brian, that's a one-time event. Really that's reflective of the impact of lower pretax income on our tax credit situation. So that's really a true up for the nine months. So I would use a rate of about 38.5% or so for the full year.

That sounds good.

Mike Baker, Deutsche Bank.

I apologize if I missed it, but did you say what your CapEx expectation is this year? And more importantly, I guess, wondering if you could talk a little of what it might be next year. And if you don't have a number, could you remind us how much CapEx goes into store openings versus maintenance CapEx, so if we make our own assumptions of store openings next year, we can come up with an estimate? Thanks.

Yes. Our capital expenditures for this year should be roughly $20 million to $21 million, and that's to fund the opening of approximately 18 net new stores, and store-related remodeling, corporate office, distribution center, corporate -- or computer hardware and software, and of course our PCI compliance. We typically spend on opening a new store approximately $500,000 per store. Just for modeling purposes, we are looking to, as we said, open 18 new stores this year. The CapEx -- the maintenance CapEx runs roughly $3 million to $4 million a year -- something like that.

Do you have any stores at this point for 2009 for which you are obligated to open because you have a lease signed or anything along those lines? Or could the number go to zero?

No, it won't go to zero. I think we have at this time three stores that we've committed to, one of which is a relocation of an existing store. So we really retain great flexibility in terms of what the ultimate number will be for 2009.

Okay. So if we just were to assume 18 to three, then we could track out 15 stores times $0.5 million per store to get a CapEx estimate? Is that a fair way to look at it for next year?

Yes.

Well, we're not saying that we're going to only open three stores next year, but that's (multiple speakers) you asked how many we've committed to.

And that's just focused on the new stores. Of course, there's other aspects of our capital expenditures including our distribution center, our IT investments, and things like that.

Nick Genova, B. Riley & Company.

Hi, guys. Good quarter.

Just a couple of quick questions. First on the comp guidance, with the -- pretty much by the Q4 I'm assuming that the roller shoe category won't have a whole lot of impact, and then you guys are also lapsing a pretty weak Q4 in 2007. So with those factors in mind, could this guidance you guys gave on the comp perspective, could that prove conservative? Are you guys looking at it from a pretty conservative perspective?

Well, we certainly hope so. I mean, the roller shoes -- we'll probably still comp down in roller shoes in Q4 this year against last year, although from a profitability standpoint, our margins in roller shoes a year ago were very soft. A year ago we were really pushing through roller shoes, and what we were selling were at very compromised margins, so from a bottom-line standpoint, I think there will be way less impact. Probably still a little impact in Q4, but more along the lines of what it was, or hopefully less than it was, in Q3.

And certainly we are going against our softest numbers that we've gone against, at least since 1995. And we would obviously hope that there is some rebound in the consumer activity. We think we've positioned ourselves well, as I just mentioned, to optimize sales in this environment. And we would -- I think several -- a few months ago we probably would've certainly been guiding higher. We were for Q4. But given sort of this -- what I will call the worsening of the nation's economic crisis I think we and most all retailers have experienced over the last five or six weeks, there does remain a degree of uncertainty, and so we certainly believe our guidance reflects that.

Okay. And then on product margins, it was encouraging to see that you guys continued to at least maintain or actually grew those by 11 basis points. With your lower inventory position, can you talk a little bit about whether or not you will be able to maintain those product margins, and how the lower inventory position benefits or helps that?

Well, the lower inventory position -- I think our inventories are clean -- let me say this. Our inventories are clean right now. So I think we may be looking at potentially fewer markdowns. Certainly, the lower inventory position allows us great flexibility to take advantage of opportunistic buys as they become available. And typically, opportunistic buys is a way we can create great value for our customers, yet hopefully enhance margins.

You know, we've -- the roller shoes, as I mentioned, we sold a fair amount of roller shoes still last year at very soft margins, and that should benefit the margin comparisons this year. So that being said, it's a challenging environment, and we want to make sure that we're priced right to try and optimize sales and gross profit dollars. So our guidance actually reflects a small reduction in product selling margins this year.

All right. And then kind of on that point with pricing and maintaining competitiveness, is there anything you guys are doing looking ahead to Q4 and seeing the trends so far that are obviously weaker than we would've anticipated a few months ago, is there any shift in advertising strategy or promotional strategy that you guys are pursuing?

Well, as a matter of practice, whether the environment is healthy or challenged, we adjust our promotional, and we've spent a lot of time every week looking at upcoming ads and thinking about pricing strategies. So we're always making adjustments, and we think we're -- hopefully can make the right calls as this holiday season plays out.

Good luck.

(Operator Instructions). Reed Anderson, D.A. Davidson.

Steve, is it still a situation that if you look at your store base, your geography or however you want to look at it, that Southern California continues to be kind of one of the worst areas, and Northern is maybe not quite as bad? Can you just give us a little flavor on kind of what you're seeing across your geographies?

Well, Reed, during the third quarter I would say sales were generally soft across all market areas. Logically, we did have some areas which performed better than others. But for competitive reasons, and again, consistent with past practice, we're just not going to get very specific on geographical performance.

I think it's well-documented that some of the areas in the states -- California, Nevada, Arizona, are frequently spoken of as being three -- maybe along with Florida -- three of the four worst -- toughest environments in the country. But we're just not going to get very detailed about the specific regional performance.

Okay. How about then on to the SG&A side. Despite sales, you guys have done a good job kind of controlling that. I'm just curious, have you gone so far as to make staffing cuts, or are you pulled back anywhere? Have you tweaked store level inventory -- or people; excuse me -- staffing? Can you give us a sense of what you might have done there to keep that in check?

Yes. We're always watchful of expenses and certainly increasingly watchful now, given the current conditions. We manage our store labor on a week-to-week basis. We have implemented -- I think we're getting the benefit -- a new Kronos time-keeping system that provides better visibility and management of week-to-week payroll usage and faster reaction time to changing sales trends. So we certainly manage our store payrolls carefully, and we're watching that then as we go forward.

And then what about like the DC or corporate? Have you cut back there a little bit, or not?

Well, again in the DC, our expense -- we operated our DC with less expense this year in the third quarter than we did last year, despite operating 19 additional stores and paying -- particularly in the third quarter -- dramatically higher fuel costs than the previous year. And really the way we did that was by managing our labor and improving efficiencies of productivity.

Then, Barry, just a quick kind of housekeeping one. I was just going to look at my model. Maybe I don't have the historical data right. But it looks like -- I looked at your balance sheet. It looks like your payables are actually going down as a percentage if you look at relative to inventory. I'm just wondering if that's a fluke, or if I've got the wrong number, or if that's by plan. I'm just thinking about managing working capital. I would think you would want to flex that the other way if possible.

Reed, yes, I don't see -- I shouldn't -- I don't know. Your model, it's -- I would expect our leverage ratio for payables to be roughly equal to what it was at the end of last year. We're not doing anything different relative to managing the terms. If anything, we're working with our vendors in this environment to try and improve terms, and so I think that that's what we would expect.

Okay. That makes sense. Thanks.

Jeff Mintz, Wedbush Morgan Securities.

A couple of questions. In terms of the sales percentage that comes from your newspaper inserts, I know historically that's been fairly consistent. Have you seen any change in that kind of percentage of sales as the consumer has gotten a little bit weaker here in the last month or so?

No, I think it's generally speaking in the same ballpark. I think our -- the ratio of our promotional sales to overall sales is not changed dramatically.

Okay, great. And then in light of kind of the weakness out there, have you looked at or considered closing more stores? Is the -- is kind of consumer weakness raising the potential that there are stores that might have worked in a better environment and aren't working in the current environment?

We're certainly always evaluating our store base, looking at our lowest performing stores. At this point in time, we don't have any plans currently to close any stores. We will continue to watch and evaluate it on an ongoing basis.

Okay great. And then the DC costs, it's amazing that you were able to reduce them 3% given the environment. Can you give us some sense of what the potential is, given the lower gas costs and similarly the lower shipping costs? Could that be down mid-to-high single digits in Q4 given better shipping rates?

Well, yes. Just in terms of an order of magnitude, yes. We do expect our DC costs in the fourth quarter to be down from what they were in the fourth quarter of last year. Now, they will be up a little bit obviously from the third quarter of this year just because of higher volume. But the overall cost of the DC is costing us roughly, a little -- about 4.5% to 5% of sales, and we -- if you go back to the old DC, it was closer to 3.5% to 4%. So -- but we're getting pretty doggone close to leveraging those costs of the DC nowadays, even with the sales levels where they are today. So again, we continue -- if volume continues to kind of decline and be weak, we're going to continue to manage those costs real carefully.

Barry, does that suggest that when we do get some kind of a turnaround and you start to get better comp numbers that you will be able to significantly leverage those costs?

Absolutely. We have said that all along. We can -- when sales conditions turn around, not only will we be able to leverage the DC semi-fixed costs, but certainly all of the corporate labor, which -- we have added some base costs into our financial reporting in our socks, in our MIS team. We have the costs related to stock compensation that have been burdened on our corporate costs for the last couple of years. But when sales conditions turn around, we think we're going to be able to leverage those for quite a while.

Okay, great. Thanks very much and good luck.

(Operator Instructions). Anthony Lebiedzinski, Sidoti and Company.

A couple of questions for you guys. Now, if you achieve your sales plans, where do you expect your year-end inventories to be?

Well, if we continue to -- if our sales plans are achieved, the other thing -- we expect our inventory to continue to trend downward. We expect our inventories to be in very good shape at the end of the year, down well below the prior year as has been the trend all year.

Any sort of idea as to where free cash flow is going to be for this year?

Yes. I think as we've talked -- for 2008 we certainly expect to return to more normal levels of free cash flow than we experienced prior to 2007. We generated cash flow from operations of $29.4 million for the first three quarters of this year compared to $14.6 million for the same period in fiscal 2007, and of course this was being driven by the reduction in our overall inventory purchases.

We would expect free cash flow in the range of $20 million or so for 2008, and we're going to continue to evaluate the best use of cash, which of course includes shareholder dividends and reducing debt and repurchasing our Company's common stock.

Aaron Goldstein, JPMorgan.

It's Aaron Goldstein, from JPMorgan. I was just wondering if you could talk about your average transaction or average basket. I see that that wasn't a big decline for the quarter. I'm just seeing -- have big-ticket items held up relatively well sequentially, or have you just seen customers building baskets?

It seems like our average transactions remained reasonably consistent. I mean, I'm trying to think about your question. I would say that it's all kind of -- the average basket is -- remained reasonably consistent. Unfortunately, just slightly fewer baskets, so I guess the big-ticket sales are off, but consistent with our overall business.

All right, and then just to clarify, when you said trends are kind of continued from 3Q into 4Q, have they consistently deteriorated, or are they just kind of leveled off from where they declined in the back half of 3Q -- or 2Q?

I would say they have sort of leveled off, just kind of dropped a bit in the end of Q3, and that softness has continued but has not really accelerated into Q4.

Mr. Miller, there are no further questions at this time. Please continue with any closing remarks you may have.

Thank you, operator. We would like to thank everyone for your interest and being on today's call, and we look forward to speaking with you again soon. Thank you.

Thank you. Ladies and gentlemen, this does conclude the Big 5 Sporting Goods third quarter 2008 earnings results conference call. We thank you for your participation. You may now disconnect.