Big 5 Sporting Goods Corp (BGFV) 2009 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 2009 earnings results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions) This conference is being recorded today, Tuesday, November 3, 2009. On the phone with us today with Big 5 Sporting Goods is Steve Miller, President and Chief Executive Officer; and Barry Emerson, Chief Financial Officer. At this time, I would like to turn the presentation over to Steve Miller. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to our fiscal 2009 third quarter conference call. Today we will review our financial results for the third quarter of 2009 and provide general updates on our business, as well as provide guidance for the fourth quarter. 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 risks and uncertainties include those more fully described in our Annual Report on Form 10-K for fiscal 2008, our quarterly report on Form 10-Q for the second quarter of fiscal 2009, 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. We were pleased to report an outstanding third quarter financial performance. We believe that our ability to improve our key financial metrics in what remains a challenging retail environment reflects the strength of our business model and the commitment and hard work of our dedicated associates.

In the third quarter, we achieved positive same-store sales which, combined with higher product margins and expense reductions, led to an 80% increase in net income. Our performance enabled us to generate over $47 million in operating cash flow for the first nine months of the year, a 61% increase from last year. And we reduced debt by roughly $40 million compared to the end of the third quarter last year.

Now let's get into the details beginning with sales. In the third quarter, we rang the register to the tune of $231.6 million in sales, up 3.8% from $223.2 million for the third quarter of fiscal 2008. Same-store sales increased 1.6%. This was our second consecutive quarter of positive same-store sales growth and our strongest quarterly comp since the fourth quarter of fiscal 2006.

We experienced a slight improvement in customer traffic while our average ticket remained virtually unchanged. Sales were generally consistent throughout the quarter and we comped positively within a relatively tight range in each of the months of July, August and September. We enjoyed nice summer weather in most of our markets during the quarter.

From a product standpoint, our hard goods category continued to be the strongest performer, up mid-single-digits for the quarter as we benefited from the relative strength of our outdoor product categories and summer-related activities. Our footwear and apparel categories were both down in the low-single-digit range, but this represents a nice improvement for apparel which had been down in the high single digits in recent quarters.

I'm also pleased to note that our merchandise margins increased 13 basis points from the same period last year due to a combination of strong sales of higher margin summer product, cycling through product cost inflation, less clearance activity due to our clean inventory position, and a favorable opportunistic buying environment.

On the expense side, our team continues to do a terrific job of controlling costs. For the quarter, we lowered overall selling and administrative expense by $0.6 million despite operating 10 more stores than in the prior year period. We remain pleased with our inventory management efforts with total chain-wide inventories down over 6% at quarter end from the prior year. On a per store basis, inventories were down approximately 8% versus the prior year.

As a result, our inventory turns continue to improve and we believe that we are well positioned for the holiday season with an attractive product assortment. Commenting on store growth. As expected, we did not open any new stores during the third quarter. Currently, we anticipate opening two new stores during the fourth quarter which would lead to a year end store count of 384 stores.

Two stores that we had anticipated opening in the fourth quarter are expected to roll into 2010, likely in the first quarter. While we have not yet finalized our store growth plans for next year, we currently expect to open substantially more stores in 2010 than in 2009.

Turning now to the fourth quarter. We are pleased that the positive sales trends we experienced in the third quarter have not only continued into the fourth quarter, but actually have accelerated. For the first five weeks of the quarter, same-store sales are up low-single-digits over the prior year. We've also been pleased with the direction of our product selling margins thus far in the quarter.

While we are encouraged by this momentum, it is important to note that due to the normal seasonality of our business these past five weeks represent one of our lowest volume sales periods of the year. In terms of the fourth quarter, the key selling dates certainly are still ahead. As we think about the holiday season, we are well aware that the consumer environment remains highly unpredictable and that weather during this period is always an uncertainty.

That said, we believe that we are well positioned for success this holiday season. We are excited about our product assortment and promotional plans and expect to benefit from a number of opportunistic buys. Our buy-it-right and promote aggressively philosophy has been a hallmark of our business and a driver of our success for nearly 55 years.

We believe that our compelling value proposition and proven business model give us a strong competitive advantage in today's market and should serve us well during the upcoming holiday season. 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 cash flows and provide guidance.

Thanks, Steve. Our gross profit margin for the third quarter was 33.9% of sales compared to 33.3% of sales for the third quarter of 2008. The increase was mainly due to slightly higher merchandise margins and lower distribution costs as we benefited from a reduction in the cost of fuel.

These margin upsides were partially offset by an increase in store occupancy costs primarily reflecting costs associated with the new store openings. We operated 10 more stores at the end of the third quarter compared to the comparable period last year.

Our selling and administrative expense as a percentage of net sales improved to 28.2% in the third quarter versus 29.6% in the third quarter last year. The improvement reflects both higher sales and our continued cost management efforts which enabled us to leverage expenses despite the higher store count. As Steve mentioned, on an absolute basis, our SG&A expense was down $0.6 million year-over-year.

This reduction was primarily due to lower advertising expense as we lowered our ad spend by $2 million during the quarter due to a combination of reduced frequency and distribution of ad circulars and lower printing costs. This decrease was partially offset by labor and operating costs to support the increase in store count.

Now looking at our bottom line, net income for the third quarter was $8.0 million or $0.37 per diluted share compared to net income in the third quarter of fiscal 2008 of $4.5 million, or $0.21 per diluted share. Briefly reviewing our results for the first nine months of fiscal 2009, net sales increased 2.0% to $657.9 million from $645.0 million during the first nine months of 2008. Same-store sales decreased 0.8% versus the same period last year.

Looking at our earnings for the first nine months of the year, net income was $15.4 million or $0.72 per diluted share compared to net income of $10.3 million or $0.48 per diluted share for the same period last year including a non-recurring charge of $0.04 per diluted share recorded in the second quarter of fiscal 2008. Turning to our cash flows and balance sheet, we generated cash from operations of $47.4 million for the first nine months of fiscal 2009, up 61% compared to the $29.4 million reported for the comparable period last year.

Despite an increased store count, our continued efforts to manage inventory levels enabled us to reduce total chain inventory by 6.2% to $232.4 million at the end of the third quarter from the end of the third quarter last year. On a per-store basis, quarter end inventories were down approximately 7.7% from the third quarter last year. Looking at our capital spending, CapEx excluding non-cash acquisitions, totaled $3.2 million for the first nine months of 2009 primarily reflecting expenditures for one new store, store remodeling and IT systems.

As Steve mentioned, we did not open any new stores during the third quarter and expect to open two new stores in the fourth quarter of this year. We have purposefully reduced our CapEx investments this year to preserve capital in this economic environment. As a result, we now expect total capital expenditures for the full year excluding non-cash acquisitions of approximately $7 million.

We continue to maintain a very strong financial condition with our long-term debt at the end of the third quarter down 40% to $59.7 million compared with $99.9 million at the end of the third quarter last year. While we continually evaluate the best use of our capital, we believe that preserving our capital and paying down debt represents the best use of our free cash flow in this economic environment.

I want to briefly comment on the situation with CIT, the administrative agent and primary lender under our revolving credit facility. The CIT Group, Inc., the parent company of our lender, filed for bankruptcy protection over the weekend with a prepackaged plan of reorganization. The CIT Group has stated publicly that none of its operating entities, which would include our lender, will be included in the bankruptcy filing and that all operating entities are expected to continue normal operations during the bankruptcy proceeding.

Regardless of what happens with CIT, we believe the commitments from our other lenders under our credit facility, together with our cash on hand and anticipated operating cash flow, should be sufficient to fund our capital requirements for at least the next 12 months. Of course, our full credit agreement is publicly available in our filings with the SEC.

Now I will spend a moment on guidance. First, we acknowledge that there clearly remains a degree of uncertainty about what impact the overall economic environment will have on the upcoming holiday season. That being said, as Steve mentioned, we are encouraged by our sales trends and the manner in which we've positioned ourselves for the season.

Our fourth quarter guidance calls for same-store sales to be in the positive low to low-mid-single-digit range and earnings per diluted share to be in the range of $0.28 to $0.38. This would result in earnings per diluted share for the full fiscal year in the range of $1.00 to $1.10. For comparative purposes, earnings per diluted share for the fourth quarter of fiscal 2008 were $0.17 and earnings per diluted share for the fiscal 2008 full year were $0.64 including a $0.04 one-time charge.

As a reminder, due to the fiscal calendar, the fourth quarter of fiscal 2009 will include 14 weeks and the fourth quarter last year included 13 weeks. Our same-store sales guidance reflects comparable 14-week periods. Operator, we are now ready to turn the call back to you for some questions and answers.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Rick Nelson with Stephens, Inc. Please go ahead, sir.

Thank you and good afternoon, guys.

Hi, Rick.

Question about the guidance. Prior to the downturn, the fourth quarter was always your biggest quarter from a sales and a profit standpoint. Is there something you see now that would put the fourth quarter this year below the third quarter report particularly given the change in the calendar, 14 weeks?

Well, Rick, it's a tough call. In the fourth quarter, of course, the October/November time frame is typically our lowest sales months of the year. And then, of course, we have the holiday in December.

So that kind of offsets one another. We also incur substantially higher costs in the fourth quarter, labor in particular, but also our advertising costs are typically higher in the fourth quarter as well. So that really kind of explains it there.

Could I ask you also how you are thinking about store openings for next year? I know you mentioned that it's substantially higher. Is that defined as going back to your more normal store opening standards of 18 to 20 stores? Or might we think about something substantially higher than that?

Rick, we haven't finalized our plans yet in its entirety for store openings in 2010. As we indicated, we intend to open substantially higher. I expect it to be a double-digit number, whether it is at or more historical growth rate of 6% or not is yet to be determined.

Got you. Also I know you called out opportunistic buys as a contributor to the product margin improvement in the third quarter. How does the availability look there as we head into the holiday season and what are your thoughts about product margins in the fourth quarter?

We are encouraged by both the opportunistic buying arena and as well as the product margins for the fourth quarter. We think the arena for opportunistic buys is healthy. It's better than what I would characterize as typical. We've made a number of what we believe to be great opportunistic buys in preparation for the holidays.

We think that will be a terrific benefit for us, help to, obviously, sales as well as product margins. Certainly this is an area of strength for us where we believe our long-term vendor relations has proven to be very valuable.

And finally if I could ask you about the outdoor category. I know you mentioned that's an area of strength. What -- were firearms the driver there and what are your thoughts against the tougher comparison of fourth quarter?

No, I mean, firearms were positive and helpful to the outdoor product category. But we really experienced positive results in a broad array of outdoor and then summer-related product categories was really a strength of ours for the third quarter. Clearly, we're going to be anniversarying a stronger firearm numbers. Arguably beginning today as we, I guess, comp against the election of a year ago and I think it's widely noted that that had a pretty strong influence on firearm sales.

Although we may be challenged in some regards to comp those numbers, for most of the fourth quarter last year most other categories were running very poorly and we are seeing positive momentum in a number of categories that we think can more than offset whatever impact comes from firearms.

Thanks, Steve, and Barry. And good luck.

Thank you.

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

Hi, guys. Good quarter.

Thank you.

A couple of things. I was intrigued by what you said with regard to advertising, being less frequent and whatnot. Is that, does that maybe change the game a little bit for when things start getting better from a macro sense that you could then maybe be more efficient and advertise less and still hit --hold sales targets?

We'll see. Whether the ad reductions are permanent or not, we aren't certain. I think if we feel we can continue to drive sales with reduced ad dollars, obviously, that's something we would like to do.

I think if the overall climate suggests we can further drive bottom line performance by pressing advertising, then as we've demonstrated historically that's certainly something we are comfortable pursuing as well.

Thanks. And you mentioned that you've made some special buys and that looks good as far as the margin visibility. What are you seeing out there right now with regard to the pricing environment from others? Is it relatively tame or how would you describe that going into the holidays here?

I think it's reasonably consistent. I mean, certainly, last year was -- I think the promotional environment was what I would characterize as highly irrational, wildly irrational. It would seem to be almost hard to outdo that factor this year.

This year we won't be facing the going-out-of-business sales that we did last year. Last year there were a number of going-out-of-business sales, most notably the Mervyns and Shoe Pavilions that were occurring during the fourth quarter. We've certainly heard that a number of retailers have trimmed their inventory positions, so maybe they will be perhaps more rational in their pricing.

But always the fourth quarter and we anticipate we will become pretty promotional and that's what we are expecting.

Great. Thanks a lot, Steve.

Thank you. Our next question comes from the line of Sean McGowan with Needham & Company. Please go ahead.

Hi, guys. I have a couple of questions as well, thanks. Can you give us some help with understanding what the effect is of that extra week? Is the last week that gets tacked on there materially smaller than the week before it?

Yes, Sean, the extra week occurs really once every five to six years based on our fiscal calendar. It's difficult to precisely quantify the impact of that week. The week falls over the New Year's holiday.

So sales volume could fluctuate considerably depending on our winter weather. At the end of the day, this could be in the neighborhood of adding say a penny or two to earnings for the quarter.

It's expected to be a profitable week, right?

Yes. Like we said, it is expected to add a penny or two or so to bottom line profits.

Okay. That's helpful. Thank you. Would you expect at this point, and I know there's a lot of the quarter left to go, but just sort of ballpark, would you expect that the effect of the fourth quarter would be that you could actually have positive same-store sales for the full year?

It's certainly possible, absolutely.

To dovetail on the previous question about advertising, I just want to make sure I'm hearing you correctly. Are you saying that you've shifted some advertising from the third quarter to the fourth quarter? Or you think you might be kind of at least temporarily at a lower overall level even for the fourth quarter?

Yes. I think, although we have not totally finalized our ad spend, I think one of the things we do well is manage our ad budget on a pretty short leash and make appropriate adjustments. We would anticipate that our ad spend in Q4 as it was in Q3 will be less than the prior year.

Okay. That's helpful. Two other quickies then. Looking at, given the extra week in the fourth quarter and the fact that there will be some extra stores, would it be your expectation that you could show any decrease in SG&A in the fourth quarter or should we expect it to be up at least modestly?

Yes, we should expect it to be up in the fourth quarter over the prior year.

Okay. And then last question, the tax rate seems to have fluctuated a bit this year. If we take the nine-month rate, is that the best guess for what the fourth quarter rate would be?

Yes. Sean, I would use 38.2% for the full year.

Full year. Okay. Thank you very much. I appreciate it.

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

Good afternoon. Most of my questions have been answered, but just a couple. First of all, Barry, could you just talk a little bit more about or expand on the idea of a longer-term opportunity to leverage distribution because it sounds like in the third quarter mainly what you saw there was more a function of fuel.

But obviously you've got the new D.C. You've got a lot of potential capacity there. As you start ramping up store growth again, my sense would be there is a nice opportunity there. Can you just talk to that a little bit and remind us what the opportunity might be?

Reed, you just did a good job for me.

You can add the detail then.

Absolutely. We are experiencing improved or lower fuel costs. But we are experiencing lower costs kind of overall at the Distribution Center as we've indicated for the last couple of years. In terms of them reducing on a quarter-by-quarter basis and that's really because we are being, one, more efficient. There's a lot more automation at the Distribution Center.

Of course, with our volume we've been reducing our labor costs at the facility as well. Nevertheless, this facility is almost twice as large as our former facility. Almost a million square feet. At this stage, when we first opened that facility we added about 100 basis points to cost. We've now for the most part brought that back down in line to where it was even pre-distribution.

And we are leveraging -- we're clearly leveraging those costs today, and we think this facility will service our needs for the next five plus years, depending on store growth, but clearly, say, for the next 100 to 120 stores. So we really believe we will be able to leverage this significantly as our sales turn around.

But we are also leveraging our expenses at negative comps today. So I think you are going to see leverage on the bottom line as sales turn here, knock on wood. And we see that playing out pretty well for us from a leverage standpoint.

Okay. That's very helpful. Thank you. And then on inventory, just looking at the timing of when you really started to get the reductions in place here over the past several quarters, my sense would be we'd still see inventory year-over-year down in the fourth quarter. Is that right and if so can you give us a sense of magnitude?

We have done a great job at reducing inventory in 2009 and we think we are in a very strong position for the holidays. We expect our inventory to be down on a per-store basis at year end compared to the prior year.

A lot of this, of course, will depend on how the season plays out and what opportunistic buys we take advantage of between now and the end of the year. There is always room for fine tuning and we will continue to do that.

Okay. Good. Thanks very much. Good luck.

Thank you.

Thank you. Our next question comes from the line of Kristine Koerber with JMP Securities. Please go ahead.

Hi, just a question regarding your store opening plan. The two stores that you are planning in the fourth quarter, where will they be located? I know you haven't finalized your 2010 store opening plan yet, but can we assume that stores are kind of split inside of California and outside of California?

Yes, the latter. There will be stores that will be opening both in and out of California in 2010. The stores that will be opening in the fourth quarter this year, one will be in the Tucson, Arizona. And one will be in Canyon Country in California.

Okay. And then just as far as geographic trends during the quarter, any inconsistencies during the quarter? Or is it pretty much consistent?

Logically we always have some areas that are performing better than others. For competitive reasons we don't ever get overly specific in geographical performance.

Okay. Thank you.

Thank you. (Operator Instructions) One moment, please, for the next question. Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good afternoon, guys. I was wondering if you could just expand a little bit about the product assortment that you talked about in your press release that you -- are you actually planning to have any new products that you are particularly excited about and then also touch on what is your promotional plans? How are they different than a year ago?

Well, we have a lot of product that we are very excited about for the fourth quarter. For competitive reasons we aren't going to be specific in terms of a number of opportunistic buys that we've made that we feel will help drive business in the fourth quarter. What was the second part of the question?

The promotional plans, how different is it or not, or maybe it's not different than a year ago?

No, it's -- I mean we've certainly tweaked and made some adjustments in terms of our ad calendar and moved some promotional days around. It always changes as the Christmas holiday moves from year-to-year. We've made we think some changes in page counts in particular ads and the like and feel we have a very strong promotional calendar that we believe can drive business.

Okay. And then in terms of the advertising, I assume it's still primarily via the newspaper circulars, right?

Newspaper and mail pieces. Primarily print -- putting print pieces in our customers' homes.

Okay. And I may have missed this, but what was the year-to-date free cash flow so far?

Just over $47 million, Anthony.

Okay. Thank you.

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

I guess I've actually had -- all of my questions have been answered. Thank you.

Thank you. Our next question comes from the line of Sean McGowan with Needham & Company. Please go ahead.

Thanks. A follow-up. Could you talk broadly, Steve, about the phenomenon of trading down and how much you think that's helping and how sustainable you think that will be? I know it's a crystal ball-type question. But do you have any kind of data or analysis that suggests you've been a big beneficiary of that?

We certainly believe that our numbers support the fact that we are gaining market share. Given how we are performing, we think the value proposition that we offer is -- has been arguably right for 50 plus years, but certainly very right for the current environment.

The fact that we are, as I mentioned, benefiting from a healthy, opportunistic buying arena it's allowing us to offer our customers, we believe, particularly attractive values. It's not something that we can precisely quantify. We don't exit poll or take exit polls at our store. We think we are clearly in the right place for today's market.

I guess what I'm looking for is, maybe you don't have any way of quantifying it, but are you seeing a recovery in kind of the core traditional consumer? Or are you just seeing a flood of consumers who maybe in the past were not shoppers at Big 5 and now are?

To be honest, Sean, we really can't quantify that. I mean, we think that we are certainly seeing improvements in traffic. I mean, in the third quarter our increase was really traffic driven, thus far we've continued in the fourth quarter to see improvements in traffic.

So we certainly think that our -- what we believe to be our competitive advantages are serving us very well and that's the fact that we don't just open our doors and hope the wind blows customers in. We are aggressive advertisers. We present value to the consumer 52 weeks a year. We believe we have a very unique product mix that allows us to achieve, drive traffic, yet still achieve industry leading gross profit margins.

Certainly I think we are benefiting from a more rational competitive environment. We are facing fewer doors in our marketplace than we were a year ago. I think we have a lot of things that are working well for us. I think it's logical to believe that we are gaining new customers, maybe we are reuniting with what former customers. But clearly we are performing well in this current environment.

Thank you.

But let me clarify one thing. Anthony, you had mentioned free cash flow and I had given you -- what we had mentioned was operating cash flow. So our operating cash flow year-to-date was $47.4 million. And our free cash flow year-to-date through the end of the third quarter was $44.2 million.

Mr. Miller, there are no further questions at this time.

Okay, operator. Thank you. And we certainly thank everybody for their participation today and we look forward to speaking with you again soon. Thank you.

Ladies and gentlemen, this concludes the Big 5 Sporting Goods third quarter 2009 earning results conference call. If you would like to listen to this conference in replay, please dial 303-590-3030 or 800-406-7325 and use conference ID Number 4176116.

Thank you for your participation. You may now disconnect.