Big 5 Sporting Goods Corp (BGFV) 2010 Q3 法說會逐字稿

Good day, and welcome to the Big 5 Sporting Goods third quarter 2010 earnings results conference call. Today's conference is being recorded. On the call today from Big 5 Sporting Goods will be Steve Miller, President and CEO; and Barry Emerson, CFO. I would now like the turn the call over to Steve Miller. Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone, welcome to our fiscal 2010 third quarter conference call. Today we will review our financial results for the third quarter of fiscal 2010 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/A for fiscal 2009, our quarterly report on Form 10-Q for the second quarter of fiscal 2010, and other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update forward-looking statements that may be made from time to time by us on our behalf.

Thank you, Barry. Big 5 was founded in September of 1955 and during the third quarter we celebrated our 55th anniversary. We are pleased that our time-tested model which is dedicated to delivering value and quality merchandise in convenient neighborhood locations continues to produce solid results. For the third quarter, we delivered another healthy financial performance in line with our guidance.

While our fiscal reported third quarter results were significantly impacted by a calendar shift that we will discuss in a moment we are encouraged by the consistency we are seeing in our underlying business, particularly given the challenging economic conditions over much of our geography. Now let's talk about sales. For the fiscal third quarter, net sales were $231.8 million, up slightly from $231.6 million for the third quarter of fiscal 2009.

Same-store sales increased 2.0%, over the comparable calendar day period last year. This increase is on top of a 1.6% increase in same-store sales during Q3 of 2009 over Q3 of 2008. As we've previously discussed, fiscal 2010 third quarter comparisons to the prior year were negatively impacted by the transition back to a 52-week fiscal year in 2010 from a 53-week fiscal year in 2009. As a result, a high volume sales week which included the Fourth of July Holiday shifted out of the third fiscal quarter into the second quarter, and a lower volume sales week at the beginning of October shifted into the third fiscal quarter of 2010.

We estimate that this shift affected third quarter net sales comparisons to the prior year by approximately $7 million. Our sales were generally consistent throughout the quarter as we comped positively in each of the months of July, August and September. These positive comps were generated by an increase in customer traffic during the quarter. Our average ticket was slightly negative versus the prior year.

Throughout much of the quarter, sales were hindered by summer weather that was significantly cooler than normal across many of our markets. This cooler weather had a direct impact on sales of apparel, which was our softest product category and comped down in the mid-single-digit range. Footwear was up low-single-digits and hard goods was our strongest category, up mid-single-digits. Our merchandise margins were down approximately 50 basis points for the quarter, primarily reflecting shifts in our product sales mix. Certainly the lack of summer weather resulted in fewer sales of higher margin products particularly in the apparel category. Additionally, we slightly increased promotional pricing activity during the quarter to support our 55th anniversary celebration in September and the launch of social media sites on Facebook and Twitter.

Now commenting on store growth. During the third quarter, we opened three new stores, one in Beaverton, Oregon, one in Las Vegas, Nevada, and one in Seattle, Washington. We ended the third quarter with 391 stores. In the fourth quarter to date, we have opened two new stores, in Dinuba, California and Renton, Washington and we anticipate opening five more stores before the end of the year.

Three of the seven new stores slated to open in the fourth quarter are part of relocations that are expected to result in existing stores closing in early 2011. For the fiscal 2010 full year, we currently plan to open 11 new stores, plus four relocations. Of the four relocations, one replaced store has closed and as mentioned three existing stores are currently scheduled to close in early 2011.

Turning to the fourth quarter. We are pleased that the positive trends we experienced in the third quarter have continued into the fourth quarter. Same-store sales for the fourth quarter to date are up low-single-digits even as we compare against a strong start to our fourth quarter last year. However, we are still very early in the quarter and, of course, the important holiday period lies ahead.

Although there remains uncertainty surrounding the economic environment and the health of the consumer we believe that our focus of providing value and quality merchandise will position us well for the holiday season. With that said, 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, cash and provide fourth quarter guidance.

Thanks, Steve. As a reminder, our fiscal third quarter profitability and expense comparisons with the prior year are somewhat muddied due to the calendar shift that Steve mentioned. Keeping that in mind, I will run through some of the numbers.

Our gross profit margin for the third quarter was 33.4% of sales compared to 33.9% of sales for the third quarter of 2009. The decline was mainly due to the approximately 50-basis-point decrease in merchandise margins that Steve discussed as well as increased store occupancy costs, as a percentage of sales, due in part to the calendar shift. Our selling and administrative expense as a percentage of sales was 28.6% in the third quarter versus 28.2% in the third quarter last year. The increase was primarily due to higher labor and operating costs to support new stores along with the negative impact of the calendar shift.

On an absolute basis, selling and administrative expense increased $1.0 million year-over-year including $1.4 million of store-related expense that was partially offset by a decrease in advertising expense. We are continuing to experience expense pressure in certain areas such as employee health and other benefits costs. Interest expense for the third quarter, up $0.6 million was up slightly from the prior year and included a one-time early termination fee and the write-off of remaining deferred debt issuance costs of $0.3 million associated with the termination of our prior revolving credit financing agreement with the CIT Group and a syndicate of other lenders which I will discuss further in a moment.

Our effective tax rate for the third quarter was 35.1% compared with 36.5% for the third 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 third quarter was $6.8 million or $0.31 per diluted share compared to net income in the third quarter of fiscal 2009 of $8.0 million, or $0.37 per diluted share. Again, the calendar shift had a significant impact on our fiscal third quarter comparisons to the prior year. We estimate that the shift had a negative effect on third quarter earnings per diluted share of approximately $0.07 relative to the prior year.

Briefly reviewing our 2010 first nine months results, sales increased 1.9% to $670.1 million from $657.9 million for the first nine months of 2009. Same-store sales increased 1.3% versus the comparable calendar day period last year. Looking at earnings for the first nine months of the year, net income was $16.6 million, or $0.76 per diluted share compared to net income of $15.4 million, or $0.72 per diluted share for the same period last year.

Turning to our balance sheet, as expected total chain inventory was $251.3 million at the end of the third quarter, up approximately 8.1%, from the prior year. The increased inventory partly reflects the calendar shift as a week when we are building inventory for the holiday season shifted into the third quarter. On a comparable calendar day basis, inventory was up 6.0%, due in part to operating nine additional stores through the third quarter and our plans to open another seven stores during the fourth quarter.

Our inventory growth also reflects the other factors that we have previously discussed, namely our strategy to increase inventory over last year's levels in anticipation of improving year-over-year sales, increased availability of certain products, opportunistic buying and earlier than usual purchasing of certain seasonal products to avoid potential delivery issues, chiefly out of China. Our inventory remains below historical levels on a per-store basis, and we are comfortable with our inventory position.

Looking at our capital spending, CapEx excluding non-cash acquisitions totaled $8.6 million for the first nine months of 2010, primarily reflecting expenditures for seven new stores and one relocation. We expect total capital expenditures for the full year excluding non-cash acquisitions of approximately $15 million to $16 million, reflecting the opening of 11 new stores plus four relocations.

From a cash flow perspective, we generated cash flow from operations of $12.6 million for the first nine months of fiscal 2010 compared to $47.4 million for the comparable period last year. The decrease was primarily due to changes in working capital including our strategic decision to increase inventory this year and the calendar shift that resulted in one extra week of holiday inventory buildup during the quarter. In the third quarter, we continued to pay our quarterly cash dividend of $0.05 per share.

Our debt at the end of the third quarter was $55.2 million, down from $59.7 million at the end of the third quarter last year. Following the close of the quarter, we were pleased to enter into a new $140 million credit agreement with Wells Fargo and a syndicate of other leaders. The details are in the Form 8-K filing that we made relating to the agreement, but to summarize briefly, the new agreement provides for a revolving credit facility with aggregate availability up to $140 million. We have the option to increase availability to $165 million, and to request additional increases on an uncommitted basis up to $200 million.

Interest is at LIBOR plus a margin of 200 to 225 basis points, or a base rate, generally the Wells Fargo prime rate, plus a margin of 100 to 125 basis points. All costs associated with entering into the new agreement have been capitalized and will be amortized over the next four years, the initial term of the agreement. We currently expect our interest expense for the fourth quarter to be in the range of $700,000 to $800,000, reflecting higher costs associated with our new credit agreement and consistent with historical practice increased borrowings over the course of the quarter as we build our inventory for the holidays.

Now I will spend a moment on guidance. For the fourth quarter, we expect same-store sales in the low-single-digit range and earnings per diluted share in the range of $0.25 to $0.33. For comparative purposes, in the fourth quarter of 2009 same-store sales increased point 0.1% and earnings per diluted share were $0.29, including a net charge of $0.03 per diluted share related to legal matters. As a reminder, the fiscal 2009 fourth quarter included 14 weeks and the fiscal fourth quarter this year includes 13 weeks. Our same-store sales guidance reflects comparable 13-week periods. Operator, we are now ready to turn the call back to you for questions and answers.

Thank you. Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions) We will pause for just a moment. Our first question today comes from Michael Baker with Deutsche Bank.

Yes, this is actually [Steven Gregory] with [Newberry Research]. Couple of things. Congratulations on a good quarter there.

Thank you.

Regarding eCommerce over the next couple of years, the Wall Street Journal had an article projecting eCommerce sales to grow significantly and a lot of brick and mortar companies are looking to turn in that direction. Can you provide some color as to where your vision is, if you are looking to expand the Big 5 Sporting Goods presence to try to sell more product online to reach a broader customer base?

Our focus right now is to use the Internet to drive customers into our stores. We launched a presence in the social media, in Facebook and Twitter this past quarter. We are building out what we call our e-team customers who have provided us an e-mail address so we can communicate directly to drive them into our stores. We continue to think about and explore opportunities to sell on the Internet and when we feel that that's something that will clearly be accretive to our bottom line we will pursue that strategy more aggressively.

You mentioned over the quarter you guys developed some social media initiatives on Facebook and Twitter. Are you doing anything regarding mobile, developing apps so customers can remotely get your (inaudible) the products and go directly to a store if they are out in the field?

We are exploring some of those avenues and we do have some initiatives to communicate with customers [mobilely] to direct them into our stores and we will be talking about that sometime in the future.

Final question going forward for 2011 what would you say is your biggest challenge that you face with a struggling high unemployment rate, the economy, what have you, to drive more revenue to your top line, to bring more customers to your Company, and get them more aware that Big 5 Sporting Goods (inaudible)?

Well, I think our focus is on pursuing a strategy that we think that's worked very effectively for us for our 55-plus-year history and in terms of driving traffic, we're putting out over 13 million circulars every week, pretty much saturating the markets telling them the Big 5 store story, showing a compelling array of products at terrific values. We think the manner in which we've weathered the difficult economic storms speaks very positively to our business model and our focus is to continue to enhance the product assortment and drive traffic very successfully into our stores.

Our next question today will come from Sean McGowan with Needham & Company. Mr. McGowan, your line is open. Mr. McGowan, please check your mute function. And due to no response, we will now take a question from Rick Nelson with Stephens Incorporated.

Thank you, good afternoon.

Hi, Rick.

Do you have any early thoughts on 2011 store openings at least directionally. Should we expect the same number of stores?

Yes, we are still fine tuning our store growth strategy for 2011. We mentioned in 2011 we will be closing three stores that are part of relocations scheduled for openings of this fourth quarter, yet we think our growth rate next year will probably be similar to or perhaps slightly accelerated from what we are doing this year, and we'll certainly have more to say about our 2011 store growth on our next call.

Okay. Thank you. Also, I'd like to ask about the Giants and their win last night, is that providing a lift to your sales?

It's certainly positive. We are very happy to have the World Series winner on our coast this year. It will be positive for sales. It's not something that in our business will be overly material to our results, but certainly we are going to make some nice incremental sales as a result of the Giants winning and we will be selling the Giants hats and shirts, et cetera, in our stores, absolutely.

You got a nice comp increase, it looks like in the equipment category. What was the driver there?

Boy, we had a number of categories performing very, very strongly. We are not going to get too category specific but our team sports was very positive, soccer, football, camping, we had a good camping this summer, our fitness equipment was strong along with a number of other subcategories.

And then if we could get some comment on the promotional environment. I know you launched your 55-year promotion but any expectation for the fourth quarter, I know things got pretty ugly out West last year?

Every holiday season, they are always very promotional. Last year's holiday season, as you mentioned, was particularly promotional certainly in some of our markets. I guess it's still early in the quarter to determine how exactly this holiday season will play out from a promotional standpoint ,whether it will be less or more promotional than the last year only time will tell. We are certainly -- feel that we've got a strong promotional plan and our buyers are consistently evaluating our strategies on an item-by-item basis to [top] both sales and margins.

How about the availability of opportunistic inventory. How does the current environment compare to a year ago?

Pretty, I think on the whole pretty similar. I mean, if you'd asked me that question a few weeks ago I would probably answer that it seemed like things were tightening up a little bit and of late, in the last couple, three weeks, we are seeing a pretty good flow of opportunities that we are pretty enthused about. I think it remains, it's something that clearly ebbs and flows over time and it remains a portion of our business model and we feel overall pretty positive.

Great. Thanks a lot. Good luck.

Thanks, Rick.

We will take our next question from Mark Smith with Feltl and Company.

Hi, guys. This is Shawn Bitzan in for Mark Smith. As you built inventories up into the fall, partially due to the calendar shift and also the store openings, looking back on that do you still feel that this is the best decision and also what is your level of confidence on selling through the inventory that has built up?

We feel absolutely comfortable with our inventory position. I mean, I think our inventories are just slightly up a on a per-store basis, again considering the fact that we are opening seven stores in the fourth quarter. I think our inventories are very much in line with sales levels and we are very excited about the inventory, we are excited about the upcoming holiday business, that the assortment of product we have is very right on.

We feel very -- we are deep in products that have historically been winners for our holiday. We have a number of fresh promotions that we are optimistic about. Our winter product, we feel, is absolutely terrific. Last year we enjoyed an excellent sell down of winter product and the product we are rolling out this winter is very fresh and, I think, quite compelling. We feel absolutely outstanding about our inventory position.

Sounds good. And when looking at the tax rate, there is a little bit of fluctuation this quarter, what should we look for on a go-forward basis?

I would use 36.6% as the tax rate for this year.

Okay. And the same for 2011 going forward?

I guess I would probably bump it up a little bit. We had some nice hiring credits this year, and I would probably say -- I probably wouldn't say the same level next year but I might run it out at 37.5% or so.

Okay. Thanks, guys,.

Sure.

Our next question today comes from Anthony Lebiedzinski with Sidoti & Company.

Good afternoon. Could you remind us, guys, as to how the fourth quarter of last year progressed in terms of the same-store sales by month, perhaps?

I can, Anthony. Last year, October, fourth quarter got off to a real sound start in October, it was our strongest period. And then things flattened and really over the back half of the quarter and were particularly soft over the last two weeks leading up to the Christmas when we got hit with weather that was very contrary to our business. Warm weather, lack of cold and lack of snow. So we feel positive in the fact that we've already comped against the toughest comps of the period. That being said, it's October which is a very low volume period relative to the quarter.

Okay. And also could you reminds us as to how much the extra week last year helped your fourth quarter EPS?

Yes. Anthony, the last year's, let me just answer it with the impact that we expect on the fourth quarter of this year. I think it's probably a relevant comparison. In the fourth quarter of 2010, this fourth quarter will be a normal 13-week period compared to a 14-week period in fiscal 2009. However, the fourth quarter lost a low-volume week that was not particularly accretive to earnings. So the transfer that went from the beginning of October into the third quarter was not particularly accretive to earnings. Therefore, we really don't expect the net effect of the calendar shift to be particularly significant for our fourth quarter earnings comparison.

Okay. And also in response to the earlier question, the first question, in regards to the social networking and mobile media, as you look at your advertising strategy of advertising through newspaper circulars, going forward, I mean, do you still expect to do that? Nowadays it seems that there is less and less people actually reading newspapers, what are your thoughts longer term about your advertising strategy, and specifically to the circulars?

Yes. We are not solely dependent on newspaper circulation to put our print message in our customer's hand. We mail to millions of customers who are not subscribers to the papers and find that to be an important part of our overall advertising reach. We don't see that going away.

We -- long term, I mean, we look to supplement our print reach with the electronic and digital communications and that's why we are enthused about our entry in to social media and building out the network of people that we communicate with electronically.

Okay. All right, thank you.

Okay.

(Operator Instructions) We will now hear from Bill Dezellem with Tieton Capital Management.

Yes, thank you. I would like to circle back to the apparel results in the quarter and how you are feeling about your exit of the summer inventory in apparel and what extra promotions you did maybe to clean up some of that inventory given that the weather did not cooperate this year?

Yes, I mean, relatively minimal, a little bit in certain items. For the most part, we are not -- we don't have an extensive carryover of summer product. The weather started turning contrary, it was cool from the get go, so we held off in certain reorders and then how we might otherwise have been building the category. So we are really not situated with any extreme amount of inventory carryover, that which we are carrying over it's not high fashion product, it's product that will play very positively if we have to pack it away and roll it out next season. We don't see significant markdown risk to the business as a result of the softer than ideal apparel performance.

And did we hear that that bit of softness impacted gross margin to the tune of about 50 basis points?

No. We said our gross margin, our point-of-sale margins were down 50 basis points. We wouldn't pin it all on the apparel category, I think there were other shift mixes that were part of that impact. We were arguably slightly more promotional in certain pricing decisions. Several factors have played into that. It wasn't solely apparel but certainly that was a piece of it.

Maybe a question I should asking then is of the 50 basis points what is the single largest impact on gross margin?

I think it's sales shift mix, just some of the categories that performed more positively, and some of the items that performed more positively, were items that were at below average point-of-sale margins and some of the items that were softer than average were products that maintained higher than average product margins.

Bill, just so you know for example, certainly last year there was, from a firearm and ammo standpoint, ammunition was very difficult to come by, and so now they've brought on more product on line and as an example and so the supply is higher and so we are able to get more and sell more at lower margins. So that would be another example, other than the warm weather product example.

Thank you both.

You're welcome.

Sure.

Our next question will come from Jonathan Grassi with Longbow Research.

Good afternoon, guys, just one question, was it any region in particular that you saw the cooler weather patterns that created some of the headwinds?

Well, certainly much of California, and particularly up and down the coast of California was probably the most dramatic impact to our business in terms of weather patterns. There was, this wasn't just a cooler than normal summer. This was one of the coolest summers in recorded history over the West Coast. And particularly through California where we have a significant portion of our chain.

Okay. Thank you.

You're welcome.

And with no questions remaining, I would like to turn the call back over to Steve Miller for any additional or closing comments.

Well, we thank you all for your participation today and we look forward to speaking with you again shortly. Have a great afternoon.

Ladies and gentlemen, that does conclude today's conference call and we thank you for your participation.