Big 5 Sporting Goods Corp (BGFV) 2011 Q1 法說會逐字稿

Good day and welcome to the Big 5 Sporting Goods first quarter 2011 earnings results conference call. Today's conference is being recorded. On the call today are Steve Miller President and CEO and Barry Emerson, CFO. And, at this time, I would now like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone. Welcome to our fiscal 2011 first quarter conference call. Today, we will review our financial results for the first quarter and provide general updates on our business, as well as provide guidance for the second quarter. At the end of our remarks, we will open the call for questions. I will now to turn the call over to Barry to read our Safe Harbor statement.

Thanks, Steve. Except for statements of historical fact, any remarks that 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 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 2010 and other filings with in 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 sales results for the first quarter were at the lower end of our guidance range and reflect continued macroeconomic weakness. The top line was negatively impacted by a decrease in customer traffic, which we believe is largely a result of a challenging economic environment in the Western geographic markets that we serve, along with the discretionary nature of our product assortment.

It is clear our consumers have become more sensitive to the adverse economic positions prevalent in our markets, such as rising gas prices and high unemployment and have adjusted their spending at our stores accordingly. In the first quarter, we also experienced higher than an anticipated expenses associated with employee benefits that caused our earnings to come in lower than our previous expectations. Of course, we are disappointed in our results, but we are taking a number of steps to produce better sales and earnings in the current environment.

Now, commenting on sales. First-quarter net sales were $221.1 million versus $218.5 million for the first quarter of fiscal 2010. Same-store sales decreased 0.9% during the first quarter of 2011. As expected, we benefited from the calendar shift of Easter holiday, when our stores are closed, out of the first quarter and into the second quarter this year. As a reminder, we comp'd against a 2.4% increase in same-store sales for the first quarter of 2010. For the quarter, we experienced a low single-digit decrease in customer traffic, and a low single-digit increase in average ticket.

From a product standpoint, our apparel and footwear categories comp'd slightly positive for the quarter, while our hard goods category comp'd down in the low single-digit range. Our merchandise margins were up 12 basis points for the quarter, primarily reflecting shifts in our product sales mix. Now, commenting on store growth. During the first quarter we opened two new stores, both of which were relocations, and closed two stores as part of the relocations that began in late 2010. The new relocated stores are in Huntington Beach, California and Carson City, Nevada.

We currently have 396 stores in operation, and we anticipate closing one store during the second quarter, as part of the relocation from last year. We currently expect to open between 10 and 15 net new stores during fiscal 2011, excluding stores closed as part of relocations that began in 2010.

Now, turning to the second quarter. Sales will remain under pressure, as our customers continues to be adversely affected by the challenging economic environment. Which arguably has worsened of late due to the significant rise in gas prices. While we were able to refine all aspects of our business in order to best drive sales and earnings, we're taking additional steps to enhance our merchandise pricing and promotional strategies. And, we will obviously expand these efforts if they prove successful in improving sales and per gross profit dollars.

In addition, we recently signed a lease for a small distribution hub in Oregon, which we intend to open in the second quarter to help mitigate the rising fuel costs. This facility will enable us to ship full trailers of product from our Riverside, California distribution center to the Pacific Northwest, where we will separate the products for regional delivery, greatly reducing the number of transportation miles that we log to the Northwest. We anticipate that we will start to see savings from this effort during the third quarter.

In summary, although economic headwinds clearly remain, we are pleased with the manner in which we successfully navigated the economic downturn of 2008 and 2009 and are confident that our continued emphasis on improving the execution of our overall business model will enable us to weather the current environment, and position us well within the consumer climate improves. With that said, 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 flows and provide second quarter guidance.

Thanks, Steve. Our gross profit margin for the first quarter was 32.6% of sales compared to 32.7% of sales for the first quarter of 2010. The slight decline was mainly due to an increase in store occupancy costs related to new store openings. This was partially offset by the 12 basis point increase in merchandise margins that Steve mentioned. Our selling and administrative expense, as a percentage of sales, was 30.4% in the 2011 first quarter, versus 28.8% in the first quarter of last year.

On an absolute basis, our SG&A expense increased $4.2 million, largely due to an increase in store related expenses, which reflected a higher store count and increased employee benefit costs including workers' compensation, health and welfare, and California unemployment taxes. Our higher workers' compensation and health and welfare costs were impacted by the abnormally high claims rates for the quarter. And, our California unemployment taxes are running up double digits year-over-year. In addition, we increased our advertising expense $0.8 million during the first quarter to support sales.

Interest expense for the first quarter was $0.6 million, up $0.2 million from last year, reflecting the higher costs associated with our new credit agreement, partially offset by the favorable impact of a slight reduction in our average debt levels. Our effective tax rate for the first quarter was 36.1%, compared with 37.7% for the first quarter of 2010, primarily reflecting our lower pre-tax income for the current year.

Now, looking at our bottom line. Net income for the first quarter was $2.8 million or $0.13 per diluted share, compared to net income for the first quarter of fiscal 2010 of $5 million or $0.23 per diluted share. Turning to our balance sheet. Total chain inventory was $255.5 million at the end of the first quarter, up 6.4% from the prior year. On a per store basis, our inventory was up 4.7% from the same period last year. Remember that our inventory per store was up 7.8% over the prior year at the end of 2010. So, we have made good progress in managing our inventory levels despite lower than anticipated sales. We feel good about our inventory levels and product mix as we look forward to the summer months.

Looking at our capital spending. CapEx excluding non-cash acquisitions totaled $2.5 million for the first quarter of 2011. Primarily reflecting expenditures for two store relocations and existing store maintenance. We currently expect total capital expenditures in 2011, excluding non-cash acquisitions, of approximately $11 million to $15 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 $4.2 million for the first quarter of 2011 compared to $16.3 million in the same period last year. The decrease was primarily due to lower net income and the timing of inventory receipts and payments.

In the first quarter, we continued to pay our quarterly cash dividend of $0.075 cents per share. As a reminder our quarterly dividend was raised from $0.05 per share, or $0.20 on an annual basis, to $0.075 per share, or $0.30 an annual basis, in the first quarter of 2011. Our debt at the end of the first quarter was $51.8 million, versus $45.5 million at the end of the first quarter last year, and $48.3 million at the end of fiscal 2010.

The increase in debt at the end of the first quarter compared to the same period last year primarily reflects higher inventory levels due to lower than anticipated sales, combined with lower accounts payable as a result of reduced inventory purchases for the current year, along with the timing of payments. Cash balances were also $1.2 million higher year-over-year, which were used together with operating cash flow to pay down debts subsequent to the end of the first quarter. As of the end of April this year, our debt was down approximately $3 million versus April 2010.

Now, I'll spend and a minute on our guidance. As Steve mentioned, we continue to be impacted by a challenging economy. And we are also experiencing increasing expense pressures, particularly in the areas of employee benefits and fuel costs. Additionally, compared to the second quarter last year, our second quarter 2011 results will have a slight negative impact from the shifted Easter, when our stores were closed out of the first quarter and into the second quarter this year.

Based on sales trends to date, and including the impact of the Easter shift, for the second quarter we expect same-store sales in the flat to low negative single-digit range and earnings per diluted share in the range of $0.06 to $0.14. For comparative purposes, in the second quarter of 2010 same-store sales decreased 0.5% and earnings per diluted share were $0.22.

Operator, we are now ready to turn the call back to you for questions and answers.

Thank you, sir.

(Operator Instructions)

We'll take our first question from Rick Nelson from Stephens.

Thank you. Good afternoon.

Hi Rick.

Steve, can you talk about the merchandise and the categories where you felt strength and weakness in the period?

Well, Rick, we're not going to be -- for competitive reasons -- very specific. We have -- our comps were down 0.9%. Obviously we had a number of categories that perform positively, unfortunately a few more that were slightly negatively. Beyond breaking out our major categories, we are not going to be detailed on that.

Got you. You refer to a merchandise mix possibly impacting a margin. Maybe you can just give us a thumbnail on what that was.

Well just shifts and some of the product you know categories that performed well. We were able to push up some margins in. There's not lots of story. Our margins were up to 12 basis points for the quarter, on a POS basis.

Got you. I'd like to ask you also about the SG&A. Got you. What sort of -- what we should expect going forward and what sort of comp you think you need to leverage SG&A?

Rick, we experienced higher than expected expenses primarily related to employee benefits, including the health and welfare, workers' compensation, and state unemployment taxes.

We were impacted by abnormally high claims costs for both health and welfare as well as the workers' compensation. We anticipated a high single digit increase for medical costs, but ended up, you know, in the mid-teen range. We are looking carefully at claims experience for workers' comp and health and welfare to determine if the fluctuations were really one-time factors, or whether they are expected to be at higher going forward into Q2.

Okay. And do you have a conclusion on that, or are you still looking at that?

We don't have a formal conclusion. We are looking at it carefully. Our guidance anticipates that the expense run rates that we saw on the first quarter are going to run into the second quarter. So I can tell you that.

From a leverage stand point, whether, again, whether we can leverage expenses or not is dependent on various factors, including our store growth, expense fluctuations, and of course other factors.

Historically we've been able to leverage our expenses at a same-store sales growth rate of about 3.5%. Given today's expense pressures, we believe that this is about right, maybe slightly less, for us to achieve expense leverage. We would expect to leverage occupancy and distribution costs at a slightly lower same-store sales growth rate.

Okay. Thank you, that's helpful. I'd like to ask you about the overall sporting goods industry. How do you think that is faring -- the pressures you're seeing, do you think exclusive to the West Coast market? Or do you think you know the industry is seeing some overall pressures in this period?

Well, I'm not sure I can speak overall for the industry. I think our -- our markets are clearly amongst or arguably the most challenged in the market and the marketplace.

We have roughly 90% of our stores are located in states with unemployment rates above the national average; 55% of them are in the two states, California and Nevada, that have the highest unemployment rates in the nation. So I'm not sure that our performance is necessarily a great proxy for the industry as a whole.

I think -- there are certain categories that I think are, arguably, might impact everybody. Infomercial products -- that is one category I would suspect is difficult for all involved. Last year there were some items that were being driven by TV exposure that were high ticket items. This year some of those items have matured.

The items that seem hotter right now are -- that have been in the $100 to $200 range are more in the $19 to $29/$30 range. That may be a drag to others.

Our big issue is a great extent the -- the challenging economy that we are in, and I think when you compound the housing issues and the employment issues that we've really been fighting with for several years, with the gas prices that are, I think, now up something over 35%, 36%, 37% From a year ago.

Gas prices have risen almost one penny a day, and it seems like in most of our markets since the time we last spoke, you know, that is a burden. Perhaps that is a burden that impacts everybody in the industry.

How about the weather in your markets? I know it's been pretty nasty here and other lot of other places.

Weather was certainly a big issue. I mean, the variations in whether in the first quarter were -- were significant. And whether it's all right for the first couple of weeks for the quarter, then we had extremely warm conditions through -- most of our -- most of our market through January and into February, very warm unseasonably dry.

And then in March we had extreme weather of rainfall and you know, I think virtually record -- record snowfall in Mammoth Mountain. However, we would have been a lot better off if we had that kind of weather early in the quarter rather than late in the quarter, were there has been sort of the positive that it does to winter business is offset by the impacting spring sports.

Got you. Thanks a lot, and good luck.

Thank you Rick,.

Next we will go to Sean McGowan with Needham & Company.

Thank you. I want to follow up on a couple of Rick's questions. Regarding hard goods. Would you say that there was anything, kind of out of the ordinary that would cause that segment to be weaker than apparel and footwear?

I mean, again. I mentioned the some of the exercise products that are driven by TV. But we were -- hard goods covers a broad array of subproduct categories. We were down low single digits. We have a number of hard goods categories that performed positively. Some obviously -- some others that were negative, but it's not coming out of one category department.

Okay, and can you characterize the apparel and footwear, how much that was up, kind of the range there?

Yes, the low -- slightly up. The low, very low single digits.

Okay. Again, trying to look at how much of this is the economy versus competition. How you parse that out? You know what -- what leads you to believe that the isn't just greater competition? You know, by not taking care of that in a better economy?

Well we think there is a huge issue the economy, I mean the fact that -- we've got a number of our stores are in competitive markets. We monitor -- we have a number of stores that are in smaller markets, noncompetitive.

You know the fact that we don't see a significant disparity between the performance of stores with and without competition makes us sense that it's much more an economy issue than a specific competitive issue.

That's what I was looking for, Steve. Thanks.

Okay.

Now we have a question from Mike Baker with Deutsche Bank.

Thanks. I guess really three questions.

One, can you just quantify of the SG&A increase, how much was from the health care and workers' comp and those initiatives which may prove to be one time?

And then I guess related to that, should we expect the advertising SG&A to go up in reference to your comment that you're going to try a couple of different things in terms of pricing and promotion?

I guess that's two questions, and also more on inflation. Are you seeing issues there yet ,or do you expect to see any product inflation issues later in the year?

Mike, in terms of the SG&A expense. If you just isolate the employee benefits that we talked about. First is prior year, again we'd assume some level of increase certainly in medical, et cetera. But those costs that growth a raw dollar increase between $1.4 million $1.5 million this year?

In terms of advertising. We are seeing we are seeing a modest increase in the second quarter again through a combination of just increase of ad frequency and also some investments that we are making. You know, in driving the delivery of ads you know to our -- to our customer base. But it will be dramatic increase.

In terms of inflation. I mean, you know that certainly is becoming a think a more significant factor. I would suspect not just for us but for all retailers. We're certainly seeing -- product out of China, significant pressures from a number of causes. Raw materials, the labor costs, you know clearly the transportation fuel prices affects the cost of not just what we bring in from China but products that is freighted in domestically.

So it's definitely going to be in play, and it's going to have a more I think significant impact as the year plays out.

Okay. I assume that's something that -- well, I guess you haven't given a full year guidance, so it wouldn't necessarily be in the guidance yet.

If I could ask clarification. That $1.4 million to $1.5 million increase. That's the total increase year-over-year, or that's the overage relative to what you would've expected?

That is total increase.

The total increase year over year.

So some part of that was expected in your guidance. Some smaller part was what was expected.

Yes. The lion's share of that -- we had reasonable growth assumptions, but it was nothing like we experienced. So, yes, it was significantly higher than what we had forecasted, and like I said for medical expenses we had forecasted high single digits and we came in in the mid-teens, and it is a pretty big number for us.

So that -- just one more clarification. That $1.4 million to $1.5 million includes what you just described for healthcare costs? Or is that in addition?

Yes.

You keep saying that it is significantly higher, but so it it's less than $1.4 million, $1.5 million in terms of the overage, relative to your sales, then we can then figure out the basis point impact.

Right.

Okay. Thank you.

Sure.

(Operator Instructions). Our next question will come from Anthony Lebiedzinski with Sidoti & Co.

Good afternoon. I was wondering if you saw any notable differences in same-store sales in your California stores versus stores in other states.

You know we don't comment specifically on geographical performance. I mean, you know clearly California is a very significant part of our chain, and its never -- the performance in California is never that dramatically different, almost by laws of mathematics, from how the chain as a whole performs.

Clearly California is a big state. I mean -- there is arguably a number of variable economies within California. So parts of California perform better than other parts of California.

Okay, then I was wondering if you could quantify that Easter shift. In terms of same-store sales?

Yes, I think it's hard to be real, real precise, but I would argue that it probably benefited our comps by you know approximately maybe 90 -- 80 or 90 basis points, over in that ball park.

All right. Now you mentioned you would open this distribution hub in Oregon to cut down on your transportation cost. What other steps are you taking to -- in order to try improve your profitability?

Certainly, you know, certainly you know Anthony, we look at all expense categories routinely. And try and make adjustments that we feel are right for the business. So on the expense category that's you know, that's certainly important.

Look, I think the big driver of our profitability will come from improving our sales. And trying to overcome the consumer headwinds that we are facing, and we are working hard to take what we think our appropriate adjustments that will be effective.

I mean we've always made adjustments to our business but certainly in the current environment, we are now taking what I would call a more aggressive steps to enhance merchandise pricing and promotions.

We've had some recent successes in some of the things that we have been testing and working on, and certainly expand on them as appropriate. And we are trying to recognize the certain categories and stepping up our focus in some of the category performing better and -- and downsizing other categories that are struggling.

I mean stuff that we've always done, but right now I'd say there is maybe a little bit more change in the air. You know we were working hard realign some of our advertising efforts and promotions, and we will be conducting our radio -- a pretty meeting for us -- radio test in certain markets, and certainly increasing the focus on our e-team, customers we can indicate the electronically.

Certainly we are wrestling every expense we can, but we think the big driver moving our bottom line performance is getting through these consumer headwinds.

Okay. Thank you.

Next question comes from David Magee from Sun Trust Robinson Humphrey.

Hi, thank you. Just a couple of questions. One is, can you remind us what the weather comparisons you might have in the second quarter? That you were up against?

Yes. We think that's -- that's a plus for us. Really, given how crazy weather has been, we haven't factored into our guidance, but we think we've got a lot to hopefully be excited about as we move towards summer.

I mean last year most of our markets experienced a very cool summer. A lot of us talked about the summer that never happened last year. So we'd like to think that any heat this year would be comparative advantage. We also are pretty excited about the fact that our lakes and rivers in our markets should be filled, due to the heavy snow packs.

You know we think weather and hopefully summer should be a positive for us.

Thank you. And then secondly, with regard to the fuel cost being hire, does that manifest in just the average ticket price being less? Are you seeing traffic impacted by that?

Our traffic was down -- was down low single digits. Whether that's higher fuel prices, meaning that people are making fewer trips, or in some cases passing on a trip, or because of the higher fuel prices they you know they can no longer afford what it is that they would have been buying.

So I think fuel prices have a direct impact on traffic one way or the other.

Great, thank you.

Our next question comes from Matt Dhane with Tieton Capital Management.

My question has been answered, thank you though.,

Right. With no further questions in queue at like to turn the call back over to Mr. Miller for any closing or additional comments.

Thank you, Operator. We appreciate you all being on the call today and look forward to speaking with you in a few months. Take care.

Once again ladies and gentlemen that does conclude our conference call for today we thank you for your participation.