Big 5 Sporting Goods Corp (BGFV) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods fourth quarter 2009 results conference call. Today's call is being recorded. With us today are Mr. Steve Miller, Chairman and Chief Executive Officer, and Mr. Barry Emerson, CFO of Big 5 Sporting Goods. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Miller. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to our fiscal 2009 fourth quarter conference call. Today we will review our financial results for the fourth quarter and full-year of fiscal 2009 and provide general updates on our business, as well as provide guidance for the first 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 2009 and other filings with the Securities & Exchange Commission. We undertake no obligation to revise our update any forward-looking statements that may be made from time to time by us or on our behalf.

Before turning the call over to Steve, I want to note that our Form 10-K for fiscal 2009 was inadvertently filed earlier today, a day earlier than planned, due to an error by our filing service. We expect to be filing an amendment to our Form 10-K to align the date references to the actual filing date. We do not expect any other changes to the Form 10-K than the correction of these date references.

Thank you, Barry. We are pleased to deliver strong earnings growth for both the fourth quarter and full year of fiscal 2009. During the year, we increased net income by 57%, and generated operating cash flow of $54.1 million, a 37% increase from the prior year. This enabled us to pay down over $40 million of debt year-over-year, increase our store count, and return shareholder value in the form of quarterly dividends. We believe this performance and the current economic environment underscores the strength and flexibility of our business model and solid execution by our team. As we previously reported fourth quarter sales, I will now provide a brief recap of the numbers. As a reminder, due to the fiscal calendar, the fourth quarter of fiscal 2009 included 14 weeks, and the fourth quarter the prior year included 13 weeks.

In the fourth quarter, net sales were $237.6 million, versus $219.6 million for the fourth quarter of fiscal 2008. On a comparable 14-week basis, same-store sales increased 0.1%. This was our third consecutive quarter of positive same-store sales growth. For the quarter, we experienced a low single-digit improvement in customer traffic, and offsetting decrease in average ticket. From a product standpoint, we experienced strength in our hard goods and footwear categories, which comped positively in the low single-digit range for the quarter. Our winter product categories comped negatively in the high single-digit range for the quarter, due to unfavorable winter weather comparisons for the prior year in most of our markets. This led to our apparel category, which is heavily influenced by the sale of winter products, being down mid-single digits for the quarter.

We are very pleased with our merchandise margins for the quarter, which increased 89 basis points from the prior year, due to a combination of favorable shifts in our product sales mix, a beneficial opportunistic buying environment, cycling through product cost inflation, and less clearance activity due to our clean inventory position. Our team continues to do a terrific job of controlling costs and managing inventories. For the quarter, our SG&A expense increased only slightly as a percentage of sales, despite a $1 million charge due to legal matters. At the end of fiscal 2009, our inventories were down approximately 1%, despite our higher store count.

Commenting on store growth, during the quarter, we opened two new stores, one in Tucson, Arizona, and the other in Canyon Country, California. We ended fiscal 2009 with three new stores, a total of 384 stores, which was in line with our cautious approach to store growth in 2009. Looking in to fiscal 2010, while we recognize that there remains uncertainty in the consumer environment, we are encouraged by opportunities we are seeing in the real estate market, with increased availability of quality locations and attractive leases. We plan to strategically increase our store growth, and we currently anticipate opening between 10 and 15 new stores, net of relocations during fiscal 2010. We expect to be able to take advantage of the favorable real estate environment to relocate approximately five stores over the course of the year. We view this as an ideal opportunity to pursue improvements in the size or location of stores in a number of our established markets. We anticipate opening three new stores, including one relocation during the first quarter. This Friday, we will expand into our 12th state, as we open a store in Cheyenne, Wyoming. Later this month, we will open a new store in Tehachapi, California and relocate our store in Oxnard, California.

Turning now to the first quarter, we are pleased that we are off to a very nice start for 2010. Order to date, our same-store sales are up in the mid-single-digit range. We have performed solidly across a broad array of product categories, with particular strength in our core winter products, which have benefited from favorable weather conditions in many of our markets. That said, with we do anticipate that March will be a more challenging month, given that we will be facing more difficult sales comparisons and will lose a day of sales due to the shift of the Easter holiday when our stores are closed into the first quarter this year.

Now before turning the call over to Barry, I want to take a moment to acknowledge the entire Big 5 team. It's our team's solid execution of our proven business model that has enabled us to positively navigate through the economic recession, which has been particularly severe across much of the geography in which we operate. As we enter our 55th year in business, we feel fortunate to have a model that has performed so well for so many years, and I believe is particularly ideal for these economic times. While we certainly recognize the ongoing unpredictability of today's consumer environment, we are confident that our continuous focus on enhancing execution will position us well in 2010 and beyond. 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 cash flows, and provide guidance.

Thanks, Steve. Our gross profit margin for the fourth quarter improved to 34.0% of sales from 32.5% of sales for the fourth quarter of 2008. The increase was mainly due to an 89 basis point increase in merchandise margins, as Steve mentioned, and lower distribution costs as a percentage of sales. Our selling and administrative expense as a percentage of sales was 29.4% in the fourth quarter, versus 29.3% in the fourth quarter last year. A slight increase as a percentage of sales was due to recording a net pre-tax charge of $1 million, or $0.03 after-tax per diluted share, which reflects the establishment of a legal settlement accrual, offset by proceeds received from the settlement of a lawsuit relating to credit card fees. Excluding the charge, our selling and administrative expense as a percentage of sales was 29.0%, which reflects our higher sales and continued cost management efforts.

Now looking at our bottom line, net income for the fourth quarter was $6.4 million, or $0.29 per diluted share, compared to net income in the fourth quarter of fiscal 2008 of $3.6 million, or $0.17 per diluted share. Results for the fourth quarter of fiscal 2009 include the net charge of $0.03 per diluted share. Briefly reviewing our full-year fiscal 2009 results, net sales increased 3.6% to $895.5 million, from $864.7 million for fiscal 2008. Same-store sales for fiscal 2009 decreased 0.6%, versus the comparable period in the prior year. Looking at our fiscal 2009 earnings, net income was $21.8 million, or $1.01 per diluted share, including the net charge of $0.03 per diluted share. This compares to net income of $13.9 million or $0.64 per diluted share for fiscal 2008, including a charge of $0.04 per diluted share, related to lease accounting.

Turning to our cash flows and balance sheet, we generated cash from operations of $54.1 million in fiscal 2009, up 37% compared to $39.5 million last year. We are very comfortable with our inventory position, and at the end of fiscal 2009, our inventory on a per-store basis was down approximately 2.5% from the prior year. Looking at our capital spending, CapEx, excluding non-cash acquisitions, totaled $5.8 million for fiscal 2009, primarily reflecting expenditures for three new stores, store remodeling, and IT systems. In 2009, we purposefully reduced our CapEx investments to conserve capital in response to the economic recession. As we strategically increased our store growth in 2010, we expect total capital expenditures for the full year, excluding non-cash acquisitions, of approximately $14 million to $17 million, reflecting the opening of at least 10 new stores, plus five relocations. We continue to maintain a strong financial condition, with our long-term debt at the end of fiscal 2009, down 43% to $55.0 million, compared with $96.5 million at the end of fiscal 2008.

During the second half of fiscal 2010, we expect to negotiate a new revolving credit financing agreement to replace our current financing agreement, which expires on March 20, 2011. Accordingly, beginning in the first quarter of 2010, outstanding debt associated with the existing revolving credit facility will be classified as a current liability. While we continually evaluate the best use of our capital, we currently believe that preserving our capital, paying down debt, funding the strategic opening of new stores, and paying our quarterly dividend represent the best use of our free cash flow in this economic environment.

Now I will spend a moment on guidance. Given the degree of continued uncertainty regarding the overall economic environment, we are maintaining our practice of only providing forward quarter same-store sales and earnings guidance. For the first quarter, we are projecting same-store sales to be in the positive low single-digit range, and earnings per diluted share to be in the range of $0.17 to $0.23. For comparative purposes, earnings per diluted share for the first quarter of fiscal 2009 were $0.13. I want to point out that while our same-store sales for the first quarter to date are running up in the mid-single-digit range, we have guided to low single-digit sales for the quarter. As Steve mentioned, March sales comparisons are much more challenging than we have faced during the first two months of the quarter. And we will have one less business day in the first quarter this year than last year, due to the shift of the Easter holiday. Operator, we are now ready to turn the call back to you for questions and answers.

(Operator instructions). First in our queue we have from SunTrust Robinson Humphrey we have David Magee.

Hi, good afternoon, guys.

Hi, David.

My question has to do with your comp expectation in the first quarter of, I think it was 2.5. What is your assumption with regard to the average ticket in that scenario? At this point, have you turned positive or flat with that number?

I'm sorry, you said our comp expectation for Q1?

I'm just saying what is your average ticket assumption behind your comp expectation for the first quarter?

Yes, for the quarter to date, I will comment that we're seeing most of our gains coming from traffic. We're seeing a small uptick in our average ticket is pretty much what we're thinking.

And what is your general expectation regarding inventory at the end of the first quarter ?

Yes. We're pretty consistent with how we have been running. Our inventory -- we wound the year with inventories slightly down from the prior year, and certainly on a per-store basis, and I would expect us to be not too dissimilar from that number at the end of Q1.

We feel our inventory, David, it's in great shape, and we're particularly pleased with our winter product sell-down that we've experienced quarter to date. During 2010, we're going to continue fine tune our inventory levels depending on business conditions and the opportunistic buying environment.

Great. Thank you, and good luck.

Thank you.

Okay. Let's go to Kristine Koerber with JMP Securities.

Yes, hi. Can you talk about the difficult comparison that you are up against in the month of March? And with that, you mentioned the inventory is in great shape, especially winter product. Do you feel as though you are too light on winter products, given storms that are still going across the country?

Well, we're getting to the tail end of the season. It's a -- what I call a high-class problem to be too light on inventory at the end of the season. We have had a really, pretty phenomenal weather patterns for -- in winter in January and February. After disappointing weather comparisons in the fourth quarter, particularly in December. So, we have sold down very well. I think our business logically could have been a little stronger. At certain times, had we had more inventory. But in the retail business and the winter business, that's a nice position to be in.

And the year, last year, March, what type of comparison are you up against?

Well, March -- yes, last year in the first quarter, we were down -- we were running down in the high single digits over January and February, and comped positively in March. So began to see clearly -- see change in our run rate beginning in March of last year. Additionally, last year we had -- weather was generally favorable in March, and this year, we also lose a day of business due to the shift of the Easter holiday out of the second quarter last year into the first quarter this year. So collectively, that's going to create some additional pressures in March that we haven't experienced -- didn't see in January and February.

And what is the impact of the Easter -- impact on sales?

Yes, it's hard to be totally precise on that. Losing the day of sales costs us roughly 100 basis points to our comps. There is some extra business associated with the days leading up to Easter, so that maybe mitigates some of that impact. But, it's something less than 100 basis points, and hard to be totally precise.

Thank you.

Next from Needham we have Sean McGowan.

I have a couple of questions if I can. Do you have any research taken from consumers that would indicate the extent to which you are benefiting from some consumers trading down, or are you seeing a return of spending among your more legacy consumers?

We don't have any research that tells us that. We certainly sense that we are gaining market share, and believe that our value proposition is very much the right place to be in the current environment. But we don't have any specific research to --

Okay. Okay. On the question of the charge, could you just tell us -- talk a little bit about what the legal issue is, and whether it is something that is going to linger?

Sure, Sean. The -- as we discussed in our press release, in the fourth quarter we recorded a net pre-tax charge of $1 million, or $0.03 per diluted share, reflecting the establishment of a legal settlement accrual, offset by the proceeds received from the settlement of a lawsuit related to credit card fees. The legal settlement accrual related to a lawsuit that we have previously disclosed in our SEC filings, and of course it is fully disclosed -- the update is fully disclosed in our 10-K that was recently filed. And we, of course, discuss all material litigation involving the Company in our SEC filings.

Thank you. Last question, Steve, if you can address -- there must be a bit more merchandise available than normal over the course of last year, from some of the manufacturers who maybe didn't anticipate the downturn. Is that creating any potential opportunity to accelerate promotions, or to see a big bump up in sales in some categories in the next year.

This is -- opportunistic buying and closeout is an area of the business that has been key to us for many, many years. We would characterize the opportunistic buying arena to be healthy. It was last year. It's, I think, remaining encouraging this year, so, certainly that does increase our opportunities to drive -- this is what we do -- to drive traffic through our doors with a very value-driven promotions.

It doesn't have any impact on your store-opening plans, does it?

I don't know that our -- our store-opening plans are not based on current opportunistic buying availability. So I would say, no, it doesn't.

Okay. All right. Thank you.

Next we have Anthony Lebiedzinski with Sidoti & Company.

Good afternoon. Just wondering if the margins in the -- merchandise margins in the winter product areas, are they meaningfully higher than some of the other product categories?

Well, it depends on when you are selling the product. During the beginning of the season, yes. At the end of the season, no.

Okay. Thanks. And just curious, do you think you perhaps got any benefit, maybe from the winter Olympics, or is that really not much of an issue?

Oh, it's not really measurable on the real-time basis. I would like to believe that over the long haul, we get benefit because of the winter sports and exposure to skiing and snowboarding is good for folks in our business, but it's not anything that we can relate to on the register on a day-by-day basis.

How many store leases do you have up for renewal this year? And how do you see you guys being able to renegotiate the more favorable store leases?

Typically we -- in any given year, we might have 10% to 15% of our leases come up for option exercise or expiration, so we have been actively involved where it's opportune to renegotiate leases. And we think it's something that can be beneficial, and will be beneficial to some degree to this year and beyond, not necessarily a game changer, but certainly helpful.

And so -- my last question question -- how do you think philosophically as far as usage of cash flow between debt reduction and possibly increasing the dividend? What would your preference be? Can you just talk a little bit about that, please.

Sure, Anthony. Our position is pretty consistent here, in that we're still looking at a pretty challenging environment out there right now, so we're going to be conservative. We did indicate that we're going to open 10 to 15 net new stores this year. We're going to continue to focus on paying down our debt and paying our dividend. I think those will be our priorities this year, and like always, we'll evaluate the stock price, we'll evaluate the interest rates on our debt, and the opportunities we see in the real estate market, and try to do the best job we can in allocating the cash.

Okay. Thanks.

Sure.

(Operator instructions). Moving on now to Michael Baker with Deutsche Bank.

Hi, thanks, guys. So, I have three questions. One, can you discuss trends in your MO business as you cycle up against, I think the big bump that occurred in November of last year? Secondly, was there any impact in the fourth quarter from competitor increased promotions, and perhaps is that sort of slowed down a little bit, and could that have contributed to your better first quarter trends versus your fourth quarter trends. And then the last questions, particularly the March comparisons being (inaudible) same-store sales, should we have a similar outlook over the next couple of quarters, as the comparisons look similar to -- or at least more difficult than they were, probably in January and February? Thank you.

All right. Let me try to start from the beginning. I think the first question was firearms related. And we started to anniversary the initial jump in firearms and ammunition sales in Q4. We are facing tough comparisons in those categories this year. They'll probably have somewhat of a negative impact on our sales, probably a favorable impact on product margins. These sales in those categories are below our average maintained margins. We certainly feel that the performance in many other categories can more than make up for any impact that these firearms and ammunition sales might have on our comps. And certainly our guidance for Q1 reflects the anticipated impact of cycling these numbers. I think the second question was promotional?

Correct.

The promotional environment in Q4, I think was reasonably normal, with the notable exception of clearly increased promotional activity by a couple of our competitors in southern California. This promotional activity does seem to have slowed down, or normalized into the first quarter. I think the shift in impact of our business trends in Q1 versus Q4 has an awful lot more to do with the winter weather comparisons than impact from competition.

So do you think the competition -- did it therefore not really have a material impact on the fourth quarter is that -- or you think it did, just not as big as the weather.

Oh, I don't think it --look, all competition or anything going on competitively has some impact. And I think the extent of the promotional activities in southern California certainly had some impact on our business, but a whole lot less than the impact we felt from winter weather comparisons. Help me out again, what was the third part of your question?

Just discussing -- you had said that March was probably down a little bit because the comparisons become more difficult. It looks like the comparisons remain more difficult versus January and February at least through the second and third quarter, and even in to the fourth quarter, so do we -- how do we think about that when we try to think about our 2010 outlook?

We're not guiding really beyond the first quarter, but what's significant -- besides, the trends and the sales comparisons, March is also going to have the impact of losing the Easter holiday, which puts pressure on March. And also some of the impact from the fire -- or the impact from the firearms ammunition, although it was strong out there most all of the year in 2009. It was probably at peak levels through March and into April, so we'll feel a little more impact in those categories there.

I maybe take this opportunity to point out, we do have some other calendar shifts that will impact how the whole year -- just try to give you a little help, although we're not guiding full year, to help your modeling. We have a significant change that will affect our third quarter, in that the Fourth of July holiday, which was in Q3 last year will fall into Q2 this year, and this has to do with our 52, 53-week calendar shift, where effectively each quarter is kind of one week off the comparable cycle of a year ago. And that will shift business out of Q3 because we'll lose the Fourth of July holiday. We'll pick up a week that ends in October, that is arguably one of our softer weeks of the year, so that is probably the biggest calendar impact that we'll see over the course of the year.

Excuse my ignorance, but the Fourth of July helps or hurts sales?

The Fourth of July holiday helps sales, our business, just the start of summer. It's a big holiday, a lot of activity going on, and people going camping and doing water sports over Fourth of July, so it's a strong --

What about an issue of a store being opened or closed, or is that not really an impact?

No, we're open on Fourth of July holiday.

Thank you. Understood. Thank you for all of the color.

Sure.

We'll move on now to Jonathan Grassi with Longbow Research.

Good afternoon, guys. I guess first can you just tell us how much the extra week in the fourth quarter contributed to sales?

Yes, just over $17 million or so, Jonathan.

Thanks. And when we look at SG&A cost for -- I guess first quarter and 2010, can you give us any like -- any guidance on where we should expect those to go, or how we should expect those to trend?

Well, for the first -- for the first quarter, we expect further savings in advertising and interest expenses as well as lower depreciation. Depending on business conditions, we would also continue to look at our labor-related costs throughout the organization and other expenses as well. We expect the SG&A expense as a percent of sales in Q1 this year to be lower than Q1 last year due to improved sales levels and our expense-reduction efforts. But on an absolute basis, we expect SG&A expense for Q1 to increase year-over-year due in part to the higher store count.

Okay. Thank you. That's helpful. And then, you guys said that winter apparel was pretty strong so far in 1Q. When you strip out winter apparel from the overall apparel sales, how is the rest of the apparel segment trending in 1Q so far?

Well, yes -- I'm not sure I can give you that number, but I really can't totally strip winter out from the overall apparel sales because when it is cold and rainy,clearly you are going to sell more winter apparel, and less shorts and T-shirts, so I suspect that the -- I don't have that figure, but I suspect it's probably trending down. But the key in winter is how you are selling winter apparel, for us.

Okay. Fair. Thank you.

And gentlemen, we have time for one final question question. Actually, that does conclude today's conference call. At this time -- I'm sorry today's question-and-answer session. I'll turn the call back over to Mr. Miller.

All right. Thank you, operator, and I would like to thank everyone for their participation today, and we look forward to speaking with you again soon. Have a great afternoon.

Once again, that does conclude today's conference call. Thank you for your participation.