Big 5 Sporting Goods Corp (BGFV) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods fourth quarter 2008 earnings results conference call. (Operator Instructions). This conference is being recorded today, Thursday, February 26th of 2009. On the call today we have Mr. Steve Miller, President and CEO; and Mr. Barry Emerson, CFO. At this time, I would 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 fourth quarter conference call. Today we will review our financial results for the fourth quarter and full year of 2008, provide general updates on our business, as well as provide guidance for the current quarter. At the end of our remarks, we will open the call questions. I will now turn the call over to Barry to read our Safe Harbor statement.

Thanks, Dave. 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 uncertainties more fully described in our Annual Report on Form 10-K for fiscal 2007, our quarterly report on Form 10-K for the first, second and third quarters 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 you, Barry. Today, we reported fourth quarter and full year earnings at the upper end of the guidance range we provided in conjunction with our third quarter earnings release last November. We feel good about this accomplishment, given how difficult the holiday season turned out to be for virtually all retailers. We think our business was well-served by our customer valued proposition and our focus on managing the aspects of the businesses that we can control -- product selection and promotions, inventories and expenses. As we previously reported fourth quarter sales, I will now provide just a brief recap of the numbers. In the fourth quarter, sales were $219.6 million, down 5.4% from $232.1 million for the fourth quarter of fiscal 2007. Same-store sales declined 8.6%. Consistent with recent quarters, the sales decrease was a traffic issue, as our average transaction size for the quarter was virtually flat with the prior year.

From a product standpoint, our three major merchandise categories of apparel, footwear and hard goods performed within a relatively tight range of one another. Hard good was just slightly stronger than footwear and apparel. Sales of winter-related products were particularly softer in the quarter, due both to the difficult economy and the lack of cold weather and snow in our markets until the last two weeks of the year, when conditions turned very favorable for that product. Commenting on the overall holiday season, the environment was certainly one we would characterize as highly promotional. Not only did we see some of our competitors become very aggressive with their pricing, but we also faced a number of liquidation sales in our markets. For the most part, we were able to hold the line on our pricing, which enabled us to achieve margins for the quarter that we believe compared well to much of the retail world. Our product margins decreased approximately 50 basis points for the quarter. They were down just 25 basis points for the full year.

These results in this highly promotional environment reflect our team's ability to provide a broad range of product offerings that deliver tremendous value to our customers, yet maintain healthy margins for our business. During the fourth quarter, we continued to successfully align our inventories to our sales levels. As of the end of fiscal 2008, our total chain-wide inventories were down 7.8% from the prior year while operating 18 additional stores. On a per-store basis, inventories were down approximately 11%. On the expense side, our team has worked very hard to increase operating efficiencies and manage costs. During the fourth quarter, we lowered our SG&A expense by $2.6 million. We accomplished this by judiciously reducing our ad spend over the prior year, lowering administrative expenses, and reducing store-related expenses despite ending the quarter with 18 more stores than the prior year.

Additionally, over the course of fiscal 2008, through carefully managed attrition, we reduced our Company-wide full-time headcount by approximately 9% and we continued to align our part-time store labor to sales levels. Store labor is our largest controllable expense, and our team did a terrific job of managing this area throughout the year. Commenting on store growth, we opened nine new stores the fourth quarter. These stores were in Show Low, Arizona; Tooele, Utah; Albuquerque, Carlsbad and Rio Rancho, New Mexico; Sandpoint, Idaho; Parker, Colorado; and Fontana and Atwater, California. We ended fiscal 2008 with 18 new stores, net of relocations, and a total of 381 stores. In light of the current economic environment, we're taking a more measured approach to store growth in fiscal 2009. While we continue to be in the market for quality store locations and attractive lease opportunities, at this point in time I think it's safe to say we will be opening substantially fewer stores in 2009 than we did in 2008 -- most likely in the single digits.

We are waiting to see some indication of a broader economic recovery before we resume our historical pace of store growth. One benefit of our model is that it allows us the flexibility to open stores quickly once we see the signs of an economic turnaround. Turning now to the current quarter, during the first two months of the first quarter of fiscal 2009, the overall retail environment clearly has remained challenging. Winter product sales in particular have been disappointing, which we attribute both to the economy and unfavorable weather comparisons in our markets, particularly in January. Quarter to date, our same-store sales are tracking down in the high single digit range, pretty similar to how we ran in the fourth quarter. While it's hard to get a firm read on our run rate at the moment, given the impact of weather. Sales are steady and do not appear to be worsening. In fact, we think our value proposition is allowing us to limit some of the sales downside that many retailers are experiencing.

One thing is for certain, we're in extraordinary times and there is a lack of visibility as to how consumer demand will play out for the remainder of the year. Therefore, we will continue to focus on reducing our cost structure and managing our cash flow as business conditions warrant. This includes carefully managing our inventories, renegotiating store leases where possible, fine tuning our advertising spend and managing labor costs and capital expenditures. We're also focused on on providing long-term value to our shareholders. After giving careful consideration to the uses of our cash flow, our balance sheet and the current macroeconomic uncertainties, our Board of Directors determined it is prudent to it reduce our dividend to $0.05 per quarter from $0.99 per quarter. This action will enable us to further debt and is consistent with our objective to utilize our capital of maintaining a strong and flexible balance sheet.

Based on today's closing stock price, our dividend offers shareholders a yield of approximately 3.7%. Now I will turn the 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 fourth quarter was 32.5% of sales compared to 34.1% of sales for the fourth quarter of 2007. The decrease was due mainly to a decline of approximately 50 basis points in merchandise margins and deleveraging of store occupancy costs due to the lower sales levels. Our selling and administrative expense as a percentage of net sales was 29.3% in the fourth quarter of fiscal 2008 versus 28.8% in the fourth quarter of the prior year. The higher rate year-over-year was due to the deleveraging of expenses as a result of lower sales volume. On an absolute basis, SG&A expense was actually down $2.6 million year-over-year. As Steve mentioned, this improvement was due to a number of factors, including our ability to effectively reduce our labor expenses through managed attrition.

Now looking at our bottom line, net income was $3.6 million or $0.17 per diluted share, compared to net income in the fourth quarter of fiscal year 2007 of $6.2 million or $0.28 per diluted share. Briefly reviewing our full year results, net sales decreased 3.7% during fiscal 2008 to $864.7 million from $898.3 million in fiscal 2007. Same-store sales decreased 7.0% in fiscal 2008 versus the prior year. Net income for fiscal 2008 was $13.9 million or $0.64 per diluted share compared to net income of $28.1 million or $1.25 per diluted share in fiscal 2007. As a reminder, earnings results for fiscal 2008 include the previously-reported pretax charge of $1.5 million or $0.04 per diluted share recorded in the second quarter to correct an error in our straight line rent expense, substantially all of which related to prior periods.

Turning to our balance sheet. In this challenging business climate, we remain very focused on aligning our inventory with our sales levels. Total chain inventory was $233.0 million at the end of fiscal 2008, which was approximately $20 million below the prior year's level. Looking at our capital spending, CapEx, excluding non-cash acquisitions, totaled $20.4 million for fiscal 2008, reflecting expenditures for 18 net new stores, store-related remodeling, distribution center and corporate headquarters costs and IT purchases. We currently expect total capital expenditures for fiscal 2009, excluding non-cash acquisitions, in the range of 7 to $9 million. In 2009, we will continue to invest in our infrastructure; but our overall CapEx investment will be below previous years as we expect to open substantially fewer stores in fiscal 2009 than we did in fiscal 2008.

From a cash flow perspective, we generated cash flow from operations of $39.5 million for fiscal 2008, compared to $24.7 million for fiscal 2007. The improvement was mainly due to our ongoing efforts to reduce inventories, partially offset by lower earnings for the year. We have historically used our operating cash flow for new store expansion, paying shareholder dividends, reducing debt, or repurchasing the Company's common stock. To date under our share repurchase program, in fiscal 2008, we repurchased 600,999 shares for a total of $5.3 million at the end of the year. At the end the year we had 14.2 million available for stock repurchases under the $20 million stock repurchase program authorized in fiscal 2007 fourth quarter. We evaluate the best use of our free cash flow on a quarter by quarter basis; and as Steve indicated, in light of the challenges and uncertainties in the current economic environment, our Board decided to reduce our quarterly dividend to $0.05 per share of outstanding common stock for an annual rate of $0.20 per share.

Our next dividend will be paid on March 20, 2009 to stockholders of record March 6, 2009. We also expect to reduce or discontinue our share repurchases in fiscal 2009. We believe that preserving our capital and maintaining the financial flexibility to pay down debt is the best way to maintain a healthy financial condition, which is increasingly important for companies today. We will continue to reevaluate our strategy throughout the year. In terms of our debt levels, at the end of fiscal 2008, we had $96.5 million in outstanding borrowings compared to $103.4 million at end of fiscal 2007.

As we discussed in detail on our last call, we have a $175 million financing agreement with the CIT Group and a syndicate of other lenders. Covenants under that facility require us, among other things, to maintain a rolling 12-month fixed charge coverage ratio of not less than one-to-one in the event that the availability under our financing agreement for the three months average for any quarter falls below $40 million. At the end of fiscal 2008, our availability was approximately $52 million, and our fixed charged coverage ratio was 1.15 to 1. We are currently in compliance with all covenants under our financing agreement; and based on our current modeling, we expect to remain in compliance with those covenants for the rest of the year. Now I'll turn to guidance. With economic conditions increasingly difficult to forecast, we believe it is prudent not to provide annual same-store sales guidance or annual earnings guidance at this time.

However, we will continue to provide forward quarter same-store sales and earnings guidance, given the better visibility of near-term results. For the first quarter, assuming that sales will continue to be impacted by weak consumer spending, we expect a decline in same-store sales in the high single digit range. We expect earnings per diluted share for the quarter in the range of $0.01 to $0.07. I should point out that the first quarter will contain one extra day of sales compared to the prior year due to the shift of the Easter holiday on which our stores are closed into the second quarter this year. A material improvement or decline in the overall consumer environment during the quarter could materially impact our performance relative to this guidance. Operator, we're now ready to turn the call back to you for questions and answers.

(Operator Instructions). And our first question comes from the line of Sean McGowan with Needham & Company, please go ahead.

Thank you. A couple of quick housekeeping-type questions and then a bigger one. Barry, what do you think would be a helpful or useful tax rate to use for 2009?

I would use 38%, Sean.

38%. Regarding the timing of the store openings, are there commitments that you already had in place that might skew that opening schedule a little bit more to the beginning the year that we might otherwise expect?

No.

So we should expect it to be back-end loaded?

Reasonably back-end loaded. No anticipated openings -- there will be no openings in the first quarter, and then we'll roll them out from there.

Okay, so like a reasonable -- I mean, a normal pattern there? Okay.

Briefly normal; but take note that we said that there will be substantially fewer openings.

Right, right, okay. Third area then, managing the costs as well as you did in the fourth quarter there, was there anything in the fourth quarter of '07 or '08 that was unusual that might have skewed that? Or is that a straight comparison there that just says you managed to cut the absolute dollars? Was there anything that was unusually high in Q4 '07 or materially lower that would be a one-time item kind of thing?

Really not, Sean. Yes, there's costs going different directions. I mean, obviously our occupancy costs are up and those kinds of things; but other than just trying to manage the cost structure really carefully, there isn't anything in particular we've been doing -- we've been continuing to benefit from favorable Worker's Comp experience; but that's just our internal management of those claims, and so -- but that would be the kind of the only thing that really jumps out at us.

Okay. Well then, with that in mind, how should we look at 2009 then in terms of managing that same line? Should we be looking for flattish numbers there? Or modest -- very, very slight increases? Or if you have done what you can and there's going to be headwinds?

Well, Sean, we're not -- we're certainly not providing full year guidance at this point. We're going to continue the best we can to manage those costs appropriately given the business climate at the time, but we're not giving full year guidance at this stage. It really does depend on our sales levels going forward.

All right, thank you very much.

Thank you. Our next question comes from the line of Mike Baker with Deutsche Bank. Please go ahead.

Thanks. So my question is on balance sheet issues. The inventory, how -- do we expect that to continue to fall at the same level? I guess it could for the next quarter or two, but then you sort of start to cycle against it in the back half the year. So should we expect to flatten out or still be down in this sort of low double digit range on a per store basis? And then I guess related to that, so as the inventories come down what does that due do to the borrowing base of your revolver. So it's a $175 million agreement, but I guess the borrowing base is less than that because you have 96.5 outstanding and only 52 left. I'm assuming that's because the assets -- inventories are down; so as the inventories continue to come down, does the borrowing base come down?

All right. Let me try the first part of the question and let Barry address the second half of your question. We're really pleased where we brought inventories at end of 2008. We don't anticipate that level of reduction in '09 over '08. We think we had our inventories reasonably aligned with sales, and we're going to continue to watch them carefully and keep them aligned with sales going forward. So I think we're looking at some reductions of inventory year-over-year, but not to the degree that we experienced this past year.

Okay.

Mike, on your credit agreement question, yes, certainly the lower your inventory goes, the lower your borrowing base goes. But don't forget, as you reduce your inventories, you're also reducing your debt; and so that's -- frankly, on the borrowing base, they only give you -- well, leave it at that. I mean, you really got to look at both equations.

Okay. So in other words, the base will come down, but you're going to -- you'll be able to generate some cash because your inventories are down, so you're level of borrowings might not be as high?

That's right. That's exactly right.

Okay. Thank you.

(Operator Instructions). Our next question is from the line of David Magee with SunTrust Robinson Humphrey. Please go ahead.

Hi, this is Cris [Rafelty] on the call for David. You mentioned that there were a number of liquidation sales going on in your space during fourth quarter. And I was just wondering where that stands now, and if you feel like -- for now, anyway -- that's materially wrapped up or if you think that's going to continue?

Well, I think the liquidation sales that we experienced in the fourth quarter are mostly wrapped up. I mean, principally the Shoe Pavilion stores, Mervyn's stores. The best I know, I think those are done.

Okay, and no big new ones then on the horizon?

I don't think there's any big new ones that I can speak of at the moment.

Okay. And then secondly, I was wondering, we've heard from some others that they've seen relatively good trends in hunting firearms, and I was wondering if that is your experience as well?

Well, I think it's fairly well documented firearm sales are up nationwide, and we do sell firearms, long guns. We're not in the handgun business, and it's generally been a positive category for us, as it has been for most everyone else.

You mentioned that hard goods were just a little bit higher than the other categories. So is there anything else within that? Any other products that were standouts? Or --

Well, I mean, we had a number of categories that performed stronger within the hard good categories that performed better than others; for competitive reasons, though, we don't get overly specific about some of the -- our sub categories.

Okay, well, thanks very much.

You're welcome.

Sure, Cris.

Thank you. Our next question is from the line of Eric Holloway with Stephens, Inc.

Hi, this is Eric on the phone on Rick Nelson's behalf who is traveling. Earlier in the year, you talked about the the impact of Heelys on your gross margin compression; and I was wondering whether you could quantify how much that was in the fourth quarter and what the outlook is for the early part of '09? As I recall, in the earlier part of '08 you thought that this would be anniversarying in the third or fourth quarter of '08. Could you address that, please?

Certainly. Heelys -- it was much less of an issue for us in the fourth quarter. Our sales -- it was negative for our sales, but less of a hit than it was in the early part of the year. Our margins probably received some benefit from the Heelys or roller shoot category in the fourth quarter, because we were anniversarying real soft margins in the product fourth quarter of 2007. It's an absolute non-issue for us going forward -- just another item.

Okay. Thank you.

Thank you, our next question comes from line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. Relative to your comment in your opening remarks that sales now appear to be steady and don't appear to be worsening, I guess really three questions around that. Number one, could you expand upon that? Number two, could you reconcile that comment with comps being down in the high single digits? That doesn't quite feel like steadying, so I'm not understanding your comments very clearly; and then I'll come to the third point later.

All right, Bill. I mean, I guess steady was a reference to the fact that we comped down 8.6% in the fourth quarter, and we're saying we're comping in similar fashion thus far and guiding to a high single digit comp in the first quarter of this year. So steady meant steady at that level. Certainly not a level we're happy with, so don't interrupt steady as being a level we're real pleased with; but I think in this difficult environment, based on much of what I've heard and read about how others are performing, we feel we're more than holding our own, particularly in our marketplace. So I guess my point was we don't see -- at least our levels of sales performance deteriorating. We're staying reasonably consistent, and we certainly hope that conditions turn more favorable.

And then the third piece of the question that we had is, if we understand correctly, just looking at the different economies that you participate in, it appears as though you had some of your stores in markets that hit the negative comps very early on in the nationwide economic downturn -- and I'm thinking places in Arizona and Nevada and some of of the harder hit California markets. But then later on, you were negatively impacted by markets in Washington and Oregon, Utah and probably other markets in California that weren't as hard hit. So I guess the question is trying to understand, have you seen a mitigation of the rate of decline that you could say fit just across the board on some of those earlier markets that went into a tailspin, or are pretty much all of the markets still struggling?

Well, look, obviously we have some areas that at any given point and time are performing better than others. We're not going to get overly specific for competitive purposes -- we never have. But I think the general statement I'll make is that it's pretty challenging in all markets. I don't think some of markets -- whether it's California, Arizona and Nevada -- I mean, they're all facing issues today as I think virtually every state in the country is -- and may be some of these markets even have tougher issues.

Great, thank you.

You're welcome.

Thank you, our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good afternoon, and thanks for taking the questions. Just to clarify something; as far as a debt covenants, they only kick in if your availability goes below $40 billion, is that correct?

Well, yes, that's right. On a fixed charge coverage ratio, that's really the only covenant that we -- financial covenant that we have, and it does not come into play unless our availability slips below $40 million. That's right, Anthony.

Okay. Have you guys signed any store leases so far for this year?

We have one certain lease store that we'll be opening in the second quarter of the year.

Got you. And as far as you know, your CapEx -- you gave some guidance there. I mean, what's the absolute minimum CapEx that you guys would need to spend in order to keep up the stores and keep up with any IT system upgrades, anything for the corporate office or distribution center? What's the absolute minimum of CapEx?

Oh, Anthony, we've given it a range of 7 to $9 million, and I mean, we could bring that down somewhat. I mean, we do want to continue to support the infrastructures of our stores clearly, and we want to be able to take advantage of opportunities on the new stores front if they make sense for us. But we could bring that down further if we needed to.

Okay, and also you had some comments that you will further reduce your cost structure. What exactly are you doing there to reduce the cost structure? And also, assuming that you only open a handful of stores, can you give us a range as far as where SG&A expense dollars could be for 2009?

Yes, Anthony, I can't -- I'm not going to go to the full year in terms of a guidance at all; but what I can do, just because really it is contingent upon business conditions. I mean, many of the significant costs that we have are directly related to our level of sales volume. And so we've got a -- we really can't go there until we understand what the future looks like. But in terms of -- you know that we have always run a lean business and -- but some of the larger items that we've commented on before is store labor, advertising, distribution center, administrative -- these are all areas that we certainly look at and can continue to look at in 2009 if we need to. Some of the other areas that we'll -- our interest expense, we expect that to be down significantly this year just because of the lower rates, as well as the cash flow and the pay down of debt. We'll continue to look the our advertising. We're doing some things on the freight side to able to source some product that hopefully will save us some freight costs. You've heard us talk about rent renegotiations. We're working hard on that. It's -- we're having a fair amount of success there. It's not a material number, but certainly it's going to help us in 2009 and it will help us going forward; and then, various other areas. We're really looking at all areas of the Company.

Okay, and how many store leases do you have that are up for maturity this year that you could possibly renegotiate those?

I'm not sure I have a precise number; but we have a number of leases coming up for renewal or expiration, and we're actively looking at these as opportunities to renegotiate better terms. And as Barry, said we've achieved some savings in this area already. We have a number of ongoing discussions with our landlords, and we expect these savings to be helpful in 2009. But as Barry said, not overly material to our results, and we're excited also that these are going to help our expenses going forward over a number of years.

Okay, thank you.

You're welcome.

(Operator Instructions). And our next question is a follow-up questions from the line of Sean McGowan with Needham & Company. Please go ahead.

Thank you. Given the reduction in the planned store openings, what impact will that have on what you show for depreciation and amortization in '09?

Yes, Sean, I wouldn't expect much of a reduction. We did -- you know, added really a net 18 stores in 2008. We did have some expenditures for our IT department, the D.C. and things like that. So I mean, these costs are going to hit us next year or in 2009, and they'll be offset by retirements and so on. But I wouldn't expect a significant reduction. In fact, I would not model a significant reduction at all.

And they're amortized straight line, right?

Yes.

Okay, that's helpful. Thank you.

Sure.

Thank you. And at this time, there are no further questions in the queue. I would like to turn it back to Mr. Miller for any closing remarks.

Thank you, operator. We appreciate your interest and you joining us today, and we look forward to speaking to you on our next call. Have a good day.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you, very much, for your participation. You may now disconnect.