Big 5 Sporting Goods Corp (BGFV) 2011 Q2 法說會逐字稿

Good day. Welcome to the Big 5 Sporting Goods second quarter 2011 earnings results conference call. On today's call will be Steve Miller, President and Chief Executive Officer, and Barry Emerson, Chief Financial Officer of Big 5 Sporting Goods.

Now I would like to turn the call over to Mr. Steve Miller. Please go ahead, sir.

Thank you Operator. Good afternoon everyone. Welcome to our 2011 second quarter conference call. Today we will review our financial results for second quarter 2011 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 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 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 for Form 10-K for fiscal 2010, our quarterly report on Form 10-Q for the first quarter of fiscal 2011, 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 by time to time by us or on our behalf.

Thank you Barry. Although we continue to battle a very difficult environment during the second quarter, we are pleased to deliver earnings at the high end of the guidance range that we provided on the last call. During the quarter our consumers continue to struggle with high unemployment and foreclosure rate, inflation and a slow economic recovery in the western US markets that we serve. Sales were impacted by a decline in customer traffic, which we believe was due again to our consumer again reducing purchases of discretionary items, along with less than ideal weather conditions in many of our markets. In this challenging environment, we continue to focus on enhancing our merchandise, pricing and promotional strategies in an effort to optimize our results.

Now commenting on sales. Second quarter net sales were $219.6 million versus $219.8 million for the second quarter of fiscal 2010. Same-store sales decreased 1.7% during the second quarter of 2011. For the quarter we experienced a low mid single digit decrease in customer traffic, a low single digit increase in average ticket.

As anticipated sales for the quarter were negatively impacted by the fact that we lost a day of sales due to the shift of the Easter holiday when our stores were closed into the second quarter this year from the first quarter last year. Excluding the impact of this calendar shift, sales were relatively flat in April. However sales trended negatively throughout most of May and early June when on top of the headwinds, weather in our markets was unseasonably cool, and in some cases wet, particularly during the key selling period leading up to the Memorial Day holiday. Trends improved toward the end of the quarter when we finally saw the arrival of some favorable summer weather. This change in trends allowed us to comp slightly positive for the full June period.

From a product category standpoint footwear, hard goods and apparel all performed within a remarkably tight range of one another comping down in the low single digits. Softer sales of summer related products due to the generally unfavorable weather comparisons impacted each of our major merchandise categories. For the quarter our merchandise margins declined 75 basis points, largely due to an increase in promotional activities and product cost inflation. As we faced the challenging sales environments, we continue to focus on expense management.

In June we successfully opened our small distribution hub in Oregon, in order to help offset rising fuel costs, this facility enables us to ship full trailers of product from our Riverside California distribution center to the Pacific Northwest, where we separate the product for regional delivery to approximately 70 stores. This move will significantly reduce the trips from southern California to the Pacific Northwest, which will cut our total distribution miles driven by approximately 1 million miles per year. Based on current fuel prices we expect the annual cash savings from this distribution hub to be approximately $800,000. Obviously, if fuel prices were to increase the savings would be even greater.

Now commenting on store growth. During the second quarter we closed one store as part of a relocation that began in late 2010. We currently have 395 stores in operation, and we anticipate only three new stores during the third quarter, and seven to nine new stores in the fourth quarter. We now expect to open between 10 to 12 net new stores during fiscal 2011, excluding stores closed as part of relocations that began in 2010.

Now turning to the third quarter. The economic and weather related factors that influenced sales trends in the second quarter continue to be key factors in thethird quarter. Unfortunately we have yet to see any indication of an economic recovery in our primary western markets. California and Nevada have the highest unemployment rates in the nation, and over 80% of the stores are in states with unemployment rates at or above the national average.

Even with the economic challenges our businesses performed positively when weather has done what it is supposed to do, namely being seasonably warm during the summer as we saw with our June results. However while much of the country experienced extreme heat throughout most of July, temperatures in the West were largely below normal particularly in the Pacific Northwest. As we speak, we are comping down in the low single digits for the third quarter to date. While we can't control the macroeconomic environment or the weather, we are very focused on positively impacting the factors within our control that can move the sales dial, namely our merchandise, pricing, and promotional strategies.

Recently we announced a change in our buying and merchandising team, with the appointment of Bud Clark as Senior Vice President of Buying. Bud will have responsibilities for the overall strategic direction of our product offerings. We believe that this move will enable us to take a fresh look at our entire buying operation and merchandise offering. We are also in the process of adding resources both by expanding our buying team and also enhancing our retail analytics through a new business intelligence system.

We believe that this investment in our business at this time will enable us to make adjustments to our merchandise offering, to better align with today's consumer. We believe that over the long-term our proven business model has served us and our customers well, while we continue to refine our operating strategies to more effectively navigate these challenging times, and position us best for when the economic environment improves.

With that said, now I will turn the call over to Barry, who will provide information about the quarter as well as speak to our balance sheet, cash flows, and provide third quarter guidance.

Thanks, Steve. Our gross profit margin for the second quarter was 32.7% of sales compared to 33.2% of the sales for the second quarter of 2010. The decrease was mainly due to the 75 basis point decline in merchandise margins that Steve mentioned. Ourselling and administrative expense as a percentage of sales was 30.5% in the 2011 second quarter versus 29.6% in the second quarter last year.

On an absolute basis our SG&A expense increased $1.8 million year-over-year, of which $1.3 million was higher store related expense, reflecting our increased store count, and $0.4 million was higher advertising expense to support sales. We also recorded a noncash pretax impairment charge of $0.6 million related to certain underperforming stores.

Additionally I want to mention that after the abnormally high Workers' Compensation and health and welfare claims rates experienced in the first quarter, these expenses returned to more normalized levels in the second quarter. Interest expense for the second quarter was $0.6 million compared to $0.4 million last year, due mainly to higher costs associated with our new credit agreement. Our effective tax rate for the second quarter was 27.7%, compared to 37.5% for the second quarter of 2010, primarily reflecting our lower pretax income for the current year. We currently anticipate an effective tax rate for fiscal 2011 to be approximately 32%.

Now looking at our bottom line, net income for the second quarter was $3.1 million, or $0.14 per diluted share, including the noncash impairment charge of $0.02 per diluted share, this compares to net income for the second quarter of fiscal 2010 of $4.8 million,or $0.22 per diluted share. Briefly reviewing the 2011 first half results sales increased 0.5% to $440.7 million from $438.3 million during the first six months of 2010. Same store sales decreased 1.3% versus the same period last year.

Looking at our earnings for the first half of the year net income was $5.9 million, or $0.27 per diluted share, including the noncash impairment charge of $0.02 compared to net incometo $9.8 million, or $0.45 per diluted share last year.

Turning to our balance sheet total chain inventory was $281.5 million at the end of the second quarter, up 11.7% from the prior year. On a per store basis inventory was up 9.7% from the same period last year. The increased inventory largely reflects the addition of certain new products, opportunistic buying, product cost inflation, bringing in certain seasonal products early to avoid potential delivery issues, and to avoid purchase cost increases as well as lower than anticipated sales.

Looking at our capital spending, CapEx excluding noncash acquisitions totaled $3.9 million for the first half of 2011 primarily reflecting expenditures for store relocations and existing store maintenance. As Steve mentioned, we plan to open three new stores during the third quarter. As a result we now expect total capital expenditures for the full year excluding noncash acquisition of approximately $11 million to $13 million, reflecting the opening of between 10 and 12 new stores net of relocations.

From a cash flow perspective our operating cash flow was negative $10.5 million for the first half of 2011, compared to a positive $0.4 million for the same period last year. The decrease was primarily due to the funding of higher merchandise inventory along with lower net income. In the second quarter we continued to pay our quarter cash dividend of $0.075 per share.

Our debt at the end of the second quarter was $64.0 million versus $64.1 million at the end of the second quarter last year, and $48.3 million at the end of fiscal 2010. Despite the year-over-year increase in inventories and cash used for capital expenditures and to pay cash dividends, our debt levels have remained relatively flat compared to the same period last year.

Now I will spend a minute on our guidance. As Steve mentioned the retail environment particularly in our markets, and for our consumer remains very challenging. For the third quarter, we expect same store sales in the negative low single digit to positive low single digit range and earnings per diluted share in the range of $0.12 to $0.20. For comparative purposes, in the third quarter of 2010 same-store sales increased 2.0% and earnings per diluted share were $0.31.

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

Thank you. (Operator Instructions). We will pause for just a moment to assemble the queue. First question from Mark Smith with Feltl and Company. Mr. Smith,your line is open.

Hi guys, this is Shawn Bitzan sitting in for Mark Smith. Will you expect the workers comp charges to normalize here in the second quarter, three quarters throughout the rest of the year?

Yes, Shawn in terms of the employee benefit costs, I would just say that we are self funded primarily on our employee benefits for our workers comp as well as a portion of medical costs. I think realistically looking at the way these played out, I think our costs were probably abnormally high in the first quarter, and then they came down a little bit clearly in the second quarter, and so they probably average out about what the normal run rate would be for the first half, so I think trending out we would expect to see just more normalized rates. The rate of our medical cost increase the trend that we are seeing is up about 12% year-over-year, and that was significantly higher in the first quarter, and then came down again in the second quarter.

Anything built into your third quarter guidance on the cost side of things we should look at that you think will change materially?

I think what we typically do Shawn, is just see how our business is ticking and what those expenses, the expense run rates, and do our best to just trend those out with any changes in the business that we are anticipating. I would not say there is anything that we are aware of that is going to be abnormal in the third quarter, and certainly any of the trending is incorporated into the guidance range that we provided.

Thanks.

Next we will go to Jonathan Grassi with Longbow Research.

Hi, good afternoon guys. You had mentioned that footwear apparel and hard goods all kind of trended within a pretty close space of one another. Was there anything along the pricing spectrum that stood out, where you were seeing stronger sales at the lower price points, or was there pretty even demand throughout it?

I am not sure I totally follow the question. I mean our average ticket was up for the quarter, which I think the contributing factor there was some promotions to drive couponing to drive higher tickets, which we think was successful in driving sales, increasing our average ticket.

I guess what I was trying to say. On the footwear side, were you seeing accelerated demand for footwear at the lower price points, or did that stay pretty consistent from what you have seen in the past few quarters?

Pretty consistent on an item by item basis. No major movement in that regard.

I guess in relation to Bud Clark, can you just talk about the opportunities you are seeing right now to improve the product assortment on the floors? How quickly can we expect his fingerprint will be felt in adjusting the merchandising?

We are going through as part of the transition a very comprehensive review of our buying department and practices. We are excited about this effort. We are in the process of realigning certain responsibilities within our buying department. We are adding resources. It is going to enable us to take a fresh look at product with the goal of enhancing the merchandise offering. We think looking to improve some specialization within the product categories, making some adjustments in some cases, and stepped up prices to try to appeal to certain customers. We perhaps weren't shopping our stores.

We are looking to take a deeper dive into certain branded apparel items, focusing on greater regionalization of our product offering. Those are some of the initiatives that are in place. Bud officially took charge of the department yesterday. It is very much a work in progress.

Okay. That is understandable. Then I guess finally we are hearing some vendors have offered some pretty good deals on toning footwear in the market. Have you guys had an opportunity to take advantage of any of these deals?

We have.

Are you going to be carrying more toning footwear than you have in the past?

Well, yes, we think from an opportunistic bases, we are players in that arena. We have taken advantage, have been taking advantage of certain opportunities, and expect to continue to do so.

Okay. Thank you.

Next we will hear from Adam Sindler with Deutsche Bank.

Good afternoon this is Adam calling in for Mike. I justwanted to go over a couple of questions real quick. Looking at the guidance for the third quarter, looking at the sales and assuming some improvement in comps, you may be down one offset by square footage growth, basically flattish sales year-over-year, not too dissimilar from the second quarter, using the midpoint of guidance at $0.16, what do you think changes between the second quarter and third quarter? Just looking at the model,the margins would have to be down significantly from the second quarter to get to that midpoint. Just wondering what you are seeing out there, do you think there will be more discounting in the Back-to-School season. I was wondering what the thoughts were there?

Well, on the merchandise margins as you mentioned, merchandise margins were down 75 basis points in the second quarter, again due primarily to an increase in promotional activities and product cost inflation. We are anticipating merchandise margins to be down again in the third quarter for similar reasons. Our expenses are also typically higher in the third quarter. We are seeing advertising expenses are anticipated to be up a little bit with the new stores. We will see occupancy growth, and some of the DC costs go up a little bit. It typically generates, that is a from in terms of the second half, the third and fourth quarters obviously are our largest sales and incur the largest costs in terms of store labor, and those kinds of things. I guess we would expect pressure on the margins, we would expect higher expenses, and that is really what is driving it.

Okay. Then to follow-up quickly. Looking at the current sort of results on the sales line, if you are looking at sort of the merchandising and your go to market strategy versus maybe more weather and the impact of the local economy, given that not much is expected to change from a macro perspective, and certainly perhaps not localized on the West Coast, what kind of opportunities do you think that Bud could bring, given a steady state in the macro environment? How much do think was self directed versus how much was influenced from the outside on the sales line?

We think the primary issue has been the economy. Far and away. We are not looking to make wholesale changes in our business model. We believe our business model and how we have bought has served us well for 50-plus years. Arguably it has enabled us to weather this storm. We think quite positively, clearly we are not satisfied with the results, but we think the economy is a significant issue.

I think there is probably not another retailer of any significance, especially a retailer that is operating in as geographically disadvantaged arena as we have been, our 80% of our stores are located in states with unemployment at or above the national average. I just read that over 1 million jobs have been lost in California alone in the last five years. We are certainly not the only retailer facing challenges in the current environment. Obviously everybody has read that Walmart's environment is particularly challenging. The fact of the matter is the economy is not treating all retailers and all consumers equally. Clearly those dealing at the luxury product and the upper end have outperformed those with greater appeal to the value customer.

But obviously at the same time you feel like there is enough internal opportunities to where this change would make sense?

Sure. Look, we think there are things to look at and improve upon. We are along with the appointment of Bud Clark, we have also just sealed a deal in the process of implementing a business intelligence tool, which is analytics that allow us to take a harder and closer look at product performance, by SKU, by size, data that we have had, but it is going to be much more accessible to our buying team. It allows us to do even a better job of customizing product by region, better analysis of lost sales, stock outs, overstocks, it also allows us to provide better visibility of product performance to field personnel, who can use that information to optimize sales focus and sales displays in other stores. We have got a lot of tools at our disposal to allow us to fight through the challenging times, and certainly tools that will position us for better success as the environment improves.

Excellent. Thanks guys, I appreciate it.

Next we will hear from Bill Dezellem with Tieton Capital Management.

Thank you. Relative to the comments that you made about inventory, you referenced the very first item was if I heard correctly, some special merchandise that brought into the store, that sounds like maybe it was a different product set than you have had in the past. Would you please expand upon that?

I mean I guess I am not totally? Can you clarify the question?

Unfortunately, I don't recall the words that were used it was in the script, Barry's part of the script, identifying the reasons that inventory was up. I believe it was the first item noted.

Okay. I think I follow where you are coming from. Yes. Certainly we have taken positions in expanding certain product categories, trying to bring in some products in some cases at different price points, adding in some cases sizes and extending sizes and color offerings of other products in an effort to stimulate sales.

So is the implication that you don't actually have different products than were in the store previously?You simply have a broader assortment of the same products, so instead of only yellow, you have yellow and green.

No, both. Broader assortment within styles and some additional products in some cases additional price points and items at stepped up price points. We have brought in a number of new items and enhanced a number of our product categories.

Was that something that Bud had kind of early, given an early directive to give a try to, or was that already in the works prior to that personnel change?

These are initiative that have been in the works prior to that specific personnel change.

Thank you. One additional question. You referenced the weather being poor and living in the Northwest we certainly recognize that. The weather was also poor in the first quarter. So the question we have, is given the length of time this wasn't a week or two of poor weather, but it seems like the entire season so far of poor weather. To what degree are you feeling like the results that you are demonstrating this year are more impacted by weather than the economy?

That is a great question. We certainly can't precisely quantify the balance between weather and economy. I don't think, the economy is certainly an overriding factor that is there day in and day out. That said, the weather has been usually contrary to our best interest for a good portion of the year. I think I read an article where the Pacific, Oregon and Washington experienced the coldest April, May, June than they have experienced in recorded history, 117 years. That is certainly not good for our business. We have seen that when weather is reasonably normal, and certainly well our businesses has trended significantly better and arguably flat to positive. It certainly would be nice, I hate to be here whining about the weather, but as you pointed out, it has been more than a little ugly for us for some period of time.

You may want to try selling eskimo parkas in August and see how that works out, that might be more successful.

We may not go quite that far. I hear where you are coming from.

Thank you for your time.

Next we hear from [Chris Rapalje] from SunTrust Robinson Humphrey.

Good afternoon. Just building on that weather question, going forward can you remind us what the weather comparison looked like for the third quarter, I think you started out with some cold temperatures last year, but it got better as the quarter played out?

Last year the weather wasn't particularly favorable in the third quarter. This year it started I think clearly worse than last year particularly in the Pacific Northwest, but throughout much of California and some of our other markets. On top of the issues with the weather, we have had situations where campgrounds have been closed in some cases due to drought conditions, and some of our Southwest markets we have had rivers that have been closed to aquatic activities, due to excess runoff from late season snowfall. We are hopeful that the weather comparisons will be improved over the balance of the quarter, but given our experience with the weather, it is certainly difficult to count on that.

Okay. Then the Back-to-School season this year, when do you expect to see that kickoff? What timing is there across your territory?

There is tremendous variance to when the season kicks off. Regionally it sort of begins shortly in some of our markets, and arguably extends to the second week of September in a number of our markets as well. It really rolls out over about a six week period beginning shortly.

To the extent that is maybe a little bit less discretionary is it an opportunity for better momentum?

We feel we are well positioned from a product standpoint. Hopefully the parents will be digging into their pocketbooks for their children's benefit.

One final question. We have heard some news flow in the space that maybe some of the product inflation is starting to pull back and stabilize. Are you seeing any signs of that? How are you feeling on that front as far as margin visibility for the back half of the year?

I think what you said is a correct statement. I think there is certainly a slowing of the inflationary pressures. I don't know that will have a major impact to, most of the back half of the year we are reasonably committed from a product standpoint for the most part, but certainly we are encouraged by the fact that some of the rampant inflation is easing.

Good luck with the rest of the year. Thanks very much.

Thank you.

Thank you. (Operator Instructions) Next we will hear from Joseph Edelstein with Stephens.

Good afternoon. I think I heard someone mention that you are using more coupons. I just wanted to find out if I did hear that correctly, and to also get a sense how your advertising and promotion schedules or just the events themselves may have changed, or expected to change, given the changes in the buying department?

I don't think that in terms of our basic ad cadence significant changes. We always have refined and enhanced and tweaked efforts to enhance our timing of ads and page counts, and certain weeks, and so forth. We have stepped up our use of coupons particularly in our e-mail marketing initiatives that we feel quite positive about.

That is helpful. Thank you. Second question relates to some of the things last quarter where I think you said you were running certain tests on certain product categories. Can you share any of the results of those tests, and maybe at what point you might consider rolling those out on a broader scale?

We are not going to be very specific on specific marketing initiatives from a product standpoint.

Okay. That is fair enough. Maybe last question relates to the analytics model. Were there any costs embedded in the SG&A line this quarter, or should we expect that to ramp up more in the third quarter and maybe fourth?

Are you talking about the business intelligence system?

Yes.

The answer is there is no cost in the second quarter, and probably would be very little if any in the third quarter. Most of those costs are going to be implementation costs and then software costs, and those will all be capitalized and then amortized over the term or over the useful life of that system.

Great. That is all for now. Thanks.

Sure.

(Operator Instructions). And sir, there are no more questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

Thank you Operator. We appreciate your interest, and look forward to speaking to you on our next call.

And that does conclude today's conference, we thank you for your participation, you may now disconnect.