Big 5 Sporting Goods Corp (BGFV) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the Big 5 Sporting Goods Corporation second quarter 2010 earnings results conference call. Today's conference is being recorded. Joining us today from Big 5 Sporting Goods are 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, President and CEO. Please go ahead.

Thank you, operator. Good afternoon, everyone. Welcome to our 2010 second quarter conference call. Today we will review our financial results for the second quarter of fiscal 2010, and provide general updates on our business, as well as provide guidance for the third 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 a historical fact, any remarks we 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 and 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/A for fiscal 2009, our quarterly report on form 10-Q for the first quarter of fiscal 2010, 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.

Our second quarter earnings are in line with the revised guidance that we wished in early July. While the quarter was challenging, given the continuation of a difficult consumer environment, along with unfavorable weather conditions in many of our markets, we remain pleased with our solid execution and the soundness of our business model.

Now, let's talk about sales. For the second quarter, net sales were $219.8 million, up 1.8% from $216 million for the second quarter of fiscal 2009. Same-store sales decreased 0.5%. This slight miss was our first quarter of negative same-store sales, after posting four consecutive quarters of positive same-store sales. As we discussed in our preannouncement, sales comped in April and June and were down in May. Sales during May were meaningfully impacted by softness in summer categories, as we experienced unfavorable weather comparisons in most of our major markets, particularly leading up to Memorial Day. While last year during that time period, we enjoyed a nice, early heat wave in the west, this year temperatures were below normal. For the quarter, our customer traffic was slightly positive, and the average sale was slightly negative versus the prior year.

From a product category standpoint, foot goods, footwear, hard goods, and apparel all performed within a relatively tight range of one another. Apparel was slightly stronger than the other two categories, primarily due to the strength in team sports apparel early in the quarter. Sales of summer products were, for the most part, soft for the quarter due to the unfavorable weather comparisons I mentioned. Our merchandise margins were slightly up for the quarter, increasing approximately 10 basis points from last year.

Commenting on store growth, during the second quarter we opened two new stores, one in Poulsbo, Washington, and another in Santa Rosa, California. We intend for the new Santa Rosa store to replace an existing store in Santa Rosa that we expect to close at a later date. We ended the second quarter with 388 stores, and we anticipate opening two, possibly three stores in the third quarter. We're still on target to open between 10 and 15 new stores, net of relocations during fiscal 2010.

Now, I will comment briefly on the third quarter. While the economic environment in our markets remains challenging, our sales trends have been relatively stable. The positive sales that we experienced in June have continued into the third quarter to date. We have realized an improvement in our sales of summer-related product. We still haven't experienced what I would characterize as particularly favorable weather. All in all, we feel cautiously optimistic about the back half of the quarter.

As we have discussed previously, a big impact on our third quarter net sales and earnings comparison is a calendar shift from a 53-week to a 52-week year, which Barry will elaborate on in his remarks. With that said, I will turn the call over to Barry who will provide more information about the quarter and speak to our balance sheet, cash flows and provide third quarter guidance.

Thanks, Steve.

Our gross profit margin for the second quarter improved to 33.2% of sales, from 33% of sales for the second quarter of 2009. The increase was mainly due to an approximately 10 basis-point increase in merchandise margins and increased sales leverage on distribution costs. Our selling and administrative expense as a percentage of sales was 29.6% in the second quarter, versus 29.2% in the second quarter last year. The increase was primarily due to higher labor and operating costs to support new stores. On an absolute basis, selling and administrative expense increased $2 million year-over-year, of which 1.6 million was store-related expense. We are also experiencing some expense pressure this year, particularly in the areas of health benefits and fuel costs. Our effective tax rate for the second quarter was 37.5% compared to 39.5% for the second quarter of fiscal 2009, primarily reflecting an increased benefit from income tax credits for the current year.

Now looking at our bottom line, net income for the second quarter was $4.8 million, or $0.22 per diluted share, compared to net income in the second quarter of fiscal 2009, of $4.7 million or $0.22 per diluted share. As we discussed on our last conference call, the transition from a 53 to a 52-week fiscal year moved most of the form business into the second fiscal quarter this year. We estimate that this shift, along with the extra sales day in the second quarter, due to the shift of Easter, benefited the second quarter earnings per diluted share by approximately $0.03 relative to the prior year. Briefly reviewing our 2010 first half results, sales increased 2.8% to $438.3 million from $426.3 million during the first six months of 2009. Same-store sales increased 0.9% versus the same period last year. Looking at earnings for the first half of the year, net income was $9.8 million, or $0.45 per diluted share, compared to net income of $7.4 million, or $0.35 per diluted share last year.

Turning to our balance sheet, total chain inventory was $252 million at the end of the second quarter, up approximately 4.5%, or 3.2% on a per-store basis from the prior year. As we discussed last quarter, the increased inventory reflects a buildup over last year's levels in anticipation of improving year-over-year sales, as well as increased availability of certain products, opportunistic buyings, and earlier-than-usual purchasing of certain seasonal products to avoid potential delivery issues, chiefly out of China. Our inventory remains well below historical levels, and we are comfortable with our inventory position.

Looking at our capital spending, CapEx excluding non-cash acquisitions totalled $5 million for the first half of 2010, primarily reflecting expenditures for four new stores and one relocation. We continue to expect total capital expenditures for the full year, excluding non-cash acquisitions of approximately $14 million to $17 million, reflecting the opening of between 10 and 15 new stores net of relocations.

From a cash flow perspective, we generated cash flow from operations of $0.4 million for the first half of fiscal 2010, compared to $28.5 million for the comparable period last year. The year-over-year variance, which is certainly not typical of our business for the first half of the year is primarily a function of our decision to decrease inventories last year in response to the economic recession and restore inventories to more historically normal levels this year as sales trends stabilized. Also, our accounts payable leverage at the end of the second quarter was below last year, due in part to the timing of inventory receipts and payments. Although we're not providing guidance for the year, we currently expect our operating cash flow for the full year to remain healthy, as it has in the past.

Our debt at the end of the second quarter was $64.1 million versus $72.6 million at end of the second quarter last year and $55 million at the end of fiscal 2009. The increase from year-end is primarily related to the seasonal increase in inventories that we discussed. As a reminder, our outstanding debt is now classified as a current liability, given that our existing financing agreement expires on March 20, 2011. We're pleased with our progress toward negotiating a new revolving credit financing agreement to replace our current facility, and we expect to have the new agreement in place by year-end.

Now, I will spend a moment on guidance. For the third quarter, we expect same-store sales in the flat to positive low, single-digit range, and earnings per diluted share in the range of $0.27 to $0.34. As Steve mentioned, our calendar shift will have a significant impact on our fiscal third quarter top and bottom line comparisons to the prior year. The reason for this impact is that a high volume sales week, the week leading up to the July 4 holiday has shifted out of third fiscal quarter into the second fiscal quarter for 2010, and this week will be replaced by a historically low volume sales week at the beginning of October that will shift out of the fourth fiscal quarter. We estimate that this shift will impact third quarter net sales comparisons to the prior year by approximately $7 million, and third quarter earnings per share comparisons to the prior year by approximately $0.07. The impact of the calendar shift has been factored into our earnings guidance for the quarter.

Keep in mind that the shift is not reflected in the same-store sales guidance for the third quarter because we report same-store sales on a comparable calendar day basis as opposed to a fiscal period basis. For comparative purposes for the third quarter of 2009, same-store sales increased 1.6% and earnings per diluted share were $0.37.

I will now turn the call back to Steve for some more additional remarks.

Thank you, Barry.

Hopefully we have not muddied the waters too much in speaking to these calendar shifts. Fortunately, this type of shift only occurs once every five or six years. It does, however, have a profound reflect on our quarterly reporting. Dusting off the impact of these calendar shifts, as well as vagaries of weather, we feel very good about how our business is performing, particularly given the macroeconomic conditions in our markets.

Despite having the lion's share of our stores in some of the most challenged areas of the country, including California, Arizona, Nevada, our businesses performed a stable and fundamentally positive basis now for the past five plus quarters. Unlike many other retailers, we comped last quarter, and will again this quarter, against positive same-store sales from 2009. Our ability to manage through this period is a credit to the strength and experience of the Big 5 team. We look forward to the challenges ahead, and to producing strong results as our overall environment improves. Operator, we are now ready to turn call back to you for questions-and-answers.

(Operator Instructions)

We'll go first to Sean McGowan with Needham and Company.

Hi, a couple of questions here. First, Barry, can you let us know if you expect the tax rate for the balance of the year to be materially different. If I'm modeling 38% or slightly below that so far, is it going be below 38% for the year?

Sean, I would probably use the same 37.5% that we reported for this last quarter.

Okay, thank you. And just a little curious as to why at this point, at the beginning of August, you wouldn't have any commentary on your expectations for the full year. What uncertainty is there that's holding you back?

Sean, I think that just the uncertainty in the environment today, the economy in general. We have been doing the forward quarter now for awhile, and think that basically looking into the future here, it's still difficult to predict. It's still choppy, and the economy, particularly in our markets, it's still pretty challenging, and I just think from a visibility standpoint, it makes sense to just look out one quarter. Now having said that, because of the calendar shifts that we've been experiencing, we have been trying to give even guidance beyond that to help with modeling purposes.

And can you just help us, I remember we talked about this last time. There is nothing of material shift like that going on in the fourth quarter, is there?

We don't -- given the -- if you think about it, we're taking a slow, relatively slow first week of October out of the fourth quarter and putting it into the third quarter, which actually is a slight benefit to the fourth quarter. Having said that, the fourth quarter last year had 14 weeks.

Right.

And this year has 13 weeks.

Right.

So those, more or less offset one another to some degree. So, we don't really expect a large change in the fourth quarter from a calendar shift perspective.

Okay, thanks. And, can you provide maybe a little bit more color on footwear, are you seeing anymore particular trends in there that are noteworthy?

Our Footwear business has been reasonably stable, pretty consistent with our overall business. Solid, not -- nothing really extraordinary from the footwear.

Are you participating in the whole toner thing yet? We are in the toning business. We're encouraged -- it's positive. The category is obviously new. I think a number of the sales and toning shoes probably are in place of what may have been a running or walking shoe that the customer might otherwise have been buying. I think it's still early to see how long-lasting this category will be, but we're certainly participating in it. We're watching it carefully, and certainly going to participate more meaningfully if the category shows solid staying power.

We'll go next to David Magee with SunTrust Robinson Humphrey.

Hi, guys, good afternoon.

Hi, David.

Any early readings in terms of back-to-school specifically. Sounds like your sales are relatively stable and I'm glad to hear that, considering the weather is remaining sort of gloomy out there. But as far as, what it might look like in the near-term and back to school, what was your latest thinking there.

I guess for true back-to-school, it's still relatively early in most of our markets, but I think early indications feel good to us. We think, from a product standpoint, we're well positioned. We're encouraged by our sales in the team sports associated with back-to-school. We feel we're situated very positively for strong sales. But for us, back-to-school really happens over a very elongated period of time. Maybe it's beginning to happen now in a few of our markets, but the real heart of back-to-school for us typically occurs in late August and into the first week, week-and-a-half of September.

How meaningful is weather to your business in the September, October time frame? Is that -- this year do want to just stay hot to work down the summer stuff, or are we looking for a change of seasons? What is your thinking there?

Yes, I think generally speaking our thinking is that it's nice to have an elongated summer. It's usually not so cold in the month of September in most of our markets that we're going to be selling a lot of fall and winter products. So realistically, the best that we can hope for is to have lots of warm, sunny days and elongate summer. In our case, we have plenty of summer ahead of us. Although we -- weather's really been abnormal in most of our markets and certainly in Southern California and up and down the California coast. It's still relatively early. August -- typically we enjoy good summer weather well through, obviously, August and September and often times into October. And arguably, we'd be rooting for favorable summer weather.

Thanks, Steven. Just one last question if I may. Several months ago we talked about the prospects for product inflation maybe later this year into early next year, and recently it seems like there's been more talk about deflation. I'm curious what you think about your category and what might be happening there. Is the inflation scenario pushed out a bit now?

No, I think it's more inflation for us and then our category than deflation. I think certainly product coming out of China, as so much of our products does, is facing inflationary pressure from the labor issues in China as wells as fuel and transportation costs. So, we do think there is some inflation headwinds that we could be facing. I don't know that it will have a very materially impact in our sales throughout most of this year, but may have an impact in 2011 beyond.

Great, thanks Steve. Good luck.

Thank you, David.

We'll go next to Mitchell Kaiser with Piper Jaffray.

Thanks, guys, good afternoon.

Hi, Mitch.

Could you just talk about just what you're seeing from a consumer perspective. You talked about the choppiness. But, could you talk about response to promotions or shopping for events, or just kind of what you've broadly seen. It might be helpful. Thanks.

I characterize the consumer environment as remaining challenging. We're pushing very hard to drive sales and we're getting strong response, but I think it's -- my analogy is like playing golf. You're hitting the ball into the wind and you can hit the ball the same, but when you're hitting it into the wind, it does not go quite as hard or far. And so, we think we've got to push real hard, which we feel we are, and that's what's enabling us to perform on a stable and positive, fundamentally positive basis, despite operating in, clearly, some of the most troubled geography in the country.

Okay, and I can appreciate your analogy there, Steve. Just thinking about May, I didn't hear. Did you quantify what the impact to May was? Certainly we saw the weather patterns, particularly in California with the coolness and wetness. But, did you quantify?

We didn't give -- we don't report comps specifically by month, but we comped positively in April, we comped positively in June and we wound up down from a quarter. So obviously, that suggests that we were a negative in May, and we think that negative was directly related to

Okay. Sounds good. And then, just as you think about potentially new stores for next year, is there -- do you have any updated thoughts at this point or should we be thinking similar levels to what you're doing this year?

I think it's early for us to comment too specifically about our store growth plans. I think, thinking similarly at this point, it's the best we can say. We're certainly proceeding, we're very active in the real estate market and something similar to what we're looking at this year is probably a good starting point at this place.

Okay. Sounds good, guys. Thanks and good luck.

Thank you.

Next from Stephens, we'll hear from Rick Nelson.

Thank you. Good afternoon.

Hi, Rick.

I would like to ask you about promotional activity in your markets, what you're seeing from a competitive standpoint, and what is your expectation for the back half of the year? I know things got pretty rough there late in the year, a year ago.

I think, right now, I don't think I would characterize the promotional environment as very unusual. I think -- to me, it's hard to predict, it's a guessing game for me what competitors may or may not do over the back half of the year and for a holiday. I imagine the world usually turns very promotional and aggressive during the holiday period, and we would expect it to be that way this year, but it's hard to be specific on that.

I would like to ask you about how about the equipment category. Is that the team sports is that is the driver there? What exactly -- and how is that golf equipment category doing?

Well, when you say equipment, are you talking about hard goods?

Hard goods. Yes.

Yes. I think we have -- yes, there is a lot of components to our hard goods category. We have been pleased with our team business, not going to be too specific but I will say that golf has been a challenged category for us.

And the slight downtech in ticket. Is there a specific categories that that's related to? And, how does that jive with the increase in inflation that you talked about earlier?

I don't know that we felt any impact. The inflation is more -- headwinds we're seeing that could develop for the future. I don't know that we have been experiencing, in our product assortments, currently reflect any significant inflation. The ticket was, for all intensive -- very, very close to flat, I mean so, obviously, we saw a lot of items, a lot of categories, and some were slightly up and some were slightly down. There is no one category or one item that probably is driving the ticket.

And then the remaining stores that are part of your plan. How do you see those coming in the third and fourth quarter?

Well, we see -- we expect to open two to three stores in the third quarter. There is one that is a little early. It's just hovering around the end of the quarter, whether we'll get it open or not for the second quarter. And the balance of the stores will open in the fourth quarter. We anticipate, that what's all said and done, we'll open between 10 and 15 stores net of relocations.

Okay.

And, we have already opened five, we opened five stores this year, including two relocations, although one relocation will occur at a later date and possibly into next year.

Got you. Thanks a lot, Steve. Good luck.

Take care.

We'll go next to Mike Baker at Deutsche Bank.

Hi, thanks guys. So, one or two questions. Just first, on the calendar shift. So, you lose $0.07 this quarter, you gained $0.03 last quarter. The net result is a loss of $0.04. Is that the annual net result and is that a result of having 52 weeks versus 53 weeks?

Yes, the net result -- just walking through the quarters here, Michael, for you, maybe that will help a bit. The first quarter, we saw it being relatively flat and not -- maybe a penny or so impact on the first quarter with Easter moving in into the first quarter. As you mentioned, the second quarter, a positive $0.03, and then the third quarter a negative $0.07. And so, the way we're look at it is -- we probably got a favorable -- because of the week that transfers out of the fourth quarter into the third quarter, we have -- it's a very low volume week for us. So, we actually expect that to benefit the fourth quarter to the tune of $0.02 or so, and that ends up with a net effect of a negative $0.02 or so, and that really represents the one week that we're going to -- the 14 weeks versus the 13 week in the fourth quarter.

Right. Okay, perfect. Yes, that's what I was trying to get at. And then, should we interpret the guidance like this, that if you add back this $0.07, I think, I get margins to be about flattish on a slightly positive low single-digit comp, which is pretty similar to the second quarter. Is what you're saying, is if you add back the $0.07, if not for the calendar shift, then things are pretty consistent in the third quarter, relative to where they were in the second quarter, or are they, in fact, maybe even a little bit better?

No, I wouldn't say they're better. I would say -- I would think the flattish is probably the best way to look at it.

Okay.

It obviously depends where the sales -- how the sales come in.

That's what I'm saying. It sounds like the sales are a little bit better. That's why I would have taken it to mean that the profitability would be a little better as well, if not for this calendar shift.

I think so, and basically --

Yes, that makes sense.

So again, basically when you factor in the benefit of the calendar to the second quarter.

Yes, okay. That makes sense. If I could ask one more. On the toning business, I know it's already been asked, but it sounds like so -- it is a positive contributor and is it something that you think -- is it continuing to grow and ramp up as a category or is it sort of hit the level where you think it's going to be?

Yes, I mean we're not going be overly specific in our own performance within a specific product line. I mean we brought in more products, so in some cases it's the fact, we've added some new lines of product. The sales will improve in that category, but we're not going to be overly, just for competitive reasons, detailed in our specific performance and in one product line.

Okay. If I could sneak in one more, can you talk about the third quarter year-over-year monthly comparisons? Does it get harder or easier through the quarter, adjusting for the calendar shift?

It was -- last year, we were up 1.6% for the third quarter last year, and we comped positively in each of the three months and none of them were too far removed from the 1.6%. So, I would call it relatively consistent throughout the quarter.

But Michael, that's a key, but from a fiscal standpoint, it's important to know that the calendar shift does not impact what we're guiding to from a same-store sales comparison basis. We're using comparable days when we're giving our guidance for same-store sales.

Right, right. Understood.

But our performance was steady and solidly positive throughout each of the three reporting periods last third quarter.

Got it. Okay. Thank you very much.

Thank you, Michael.

We'll move on to Anthony Lebiedzinski with Sidoti & Company.

Good afternoon. I was wondering if you could perhaps quantify what your same-store sales would have been in the quarter if you were to exclude the summer-related merchandise. In other words, anything that was affected by the cold weather.

We really can't break it out. It's just -- somewhere there is a fine line between what is a warm weather item and what's not, and we feel we would have comped positively for the quarter had we received weather that was closer to normal and certainly equivalent to what we had last year. But we're not in position to give a hard specific number.

And what is your inventory positive position with respect to the summer goods. Do you feel like you may need to discount some of that to move that inventory?

We feel good about this summer inventory. We still have lots of summer selling ahead of us, and we feel good about our chance to sell down this product if we receive what I call just normal weather, let alone any favorable weather.

As I said, most of our markets in selling -- summer selling goes through September and often into October. And, even we're we to carry over some product, one, it won't be meaningful dollars, and it's certainly not going to be product that will go out of style or lose any value between now and next summer. So, we have really no issues whatsoever. Quite frankly, we're happy to have a solid base of summer inventory to help drive sales over the remainder of the quarter.

And Anthony, just from a logistics standpoint, there is some challenges getting product from China here -- really from a shipping standpoint, and not to mention the inflation. So, we brought some product in early to help avoid any inflationary impact, but also, just to make sure that we can get product on the shelves. You've heard of many retailers actually having shortages because of shipping delays.

And is ocean freight the biggest inflationary item that you're seeing right now?

It's not -- it's one of, including labor and materials, but certainly ocean freight is an important part of it.

Okay. Any ideas, as far as the free cash flow, in the past, your Company has done a pretty good job [Inaudible] free cash flow, and you did mention some of the issues, so far first half, impacting the cash flow, for the year, would you expect to generate positive free cash flow?

Yes, we absolutely do, Anthony. I think, as I try to describe, this is more a strategic decision on our part to bring in more inventory, whereas last year, of course, we had decided to reduce the inventory given the economy at the time. Although we're not giving guidance for the year, we currently expect our operating cash flow for the full year, certainly to remain healthy as it has in the past.

Okay, thank you.

Thank you.

(Operator Instructions)

Dan Meyers at D.A. Davidson has our next question.

Hi thanks, it's Dan on for Reed. Just wondering if you could provide any other additional details on gross margins? Were there any other puts or takes such as rent expense? And then also, do you expect to raise your prices going forward? If you see inflation? Thanks.

From a gross margin standpoint, Dan. We increased gross margin in the second quarter to 33.2% from 33% even last year and the margin improvement for Q2 was really driven by merchandise margins, which were up about 10 basis points, and then lower distribution costs as a percent of sales. Compared to, if we look out, I think at this stage, we're anticipating margins to be relatively flat and maybe potentially down slightly depending on some of the effects that we have described.

In terms of adjusting prices as a result of inflation, it remains to be seen to what degree we'll absorb price increases in the short run given challenge in the economics, or be able to pass these along to the consumer. Historically, inflation has generally been a good thing for our business and for retailers. All in all, we're confident in our buying team's ability to (Inaudible)evaluate pricing strategy on an item-by-item basis as we always do, and ultimately try to optimize both our sales and our margins.

Alright. Thank you.

Sure.

We'll go next to Jonathan Grassi with Longbow Research.

Hi, good afternoon. You guys have touched briefly on the equipment side. Can you just talk about the trends that you have seen in the team sports equipment in the back half of July and early August here, and if there is anything in there looking either positive or negative?

I think the only thing again, we don't get too category specific, but what I will share is our soccer business definitely seems to have gotten one heck of a boost from the World Cup, and there does seem to been increased interest in soccer, and hopefully that carries over throughout the entire soccer, and particularly the youth soccer season that's really just kicking into gear in many of our markets now. We're excited about the football season. So, in general, we're pleased with the potential of the team sports categories.

And, when you said the apparel was one of the stronger categories due to team sports, is that because of soccer?

No, the apparel, I mentioned the apparel sales in the second quarter benefited due to team sports apparel, really in the early part of the second quarter, and that was primarily baseball apparel.

Okay. All right. Thank you.

You're welcome.

(Operator Instructions)

It appears that is all the time we have for questions today. Mr. Miller, I'll turn the conference back to you.

Okay, thank you, operator, and we thank everyone for their participation today and look forward to speaking with you again soon. Take care.

Again, that does conclude our conference, we thank you for joining us.