Big 5 Sporting Goods Corp (BGFV) 2011 Q3 法說會逐字稿

Good day everyone, and welcome to the Big 5 Sporting Goods third quarter 2011 earnings results conference call. Today's conference is being recorded. On the call today, representing Big 5, we have Steve Miller, President & CEO and Barry Emerson, CFO. At this time, I would like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to our 2011 third quarter conference call. Today we will review our financial results for the third quarter of fiscal 2011, and provide general updates in 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 for fiscal 2010, our quarterly report on Form 10-Q for the second 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 from time to time by us or on our behalf.

Thank you, Barry. We are pleased to deliver third quarter earnings that exceeded the top end of our EPS guidance. Our sales performance improved over each month of the quarter, and our bottom line benefited from better than expected merchandise margins and favorable operating expenses. As we discussed last quarter, we are taking a number of steps to navigate the challenging environment that we, and our customer base have been battling for over 4 years. We are encouraged by the initial response to our new merchandise, and marketing initiatives, and will continue to focus on driving sales by broadening the reach of both our customer and product base.

Now commenting on sales. Third order net sales were $234.7 million versus $231.8 million for the third quarter of fiscal 2010. Same store sales decreased 0.1% during the third quarter of 2011, from Q3 of 2010, when same store sales increased 2% over the prior year. Sales started off slow in the third quarter, as weather was unseasonably cool in many of our markets in July and the first half of August, which impacted sales of summer related product.

However, as we have often seen, when more seasonally appropriate weather conditions return, our business responds favorably. During the second half of August, and the month of September, our markets experienced more normal summer weather conditions, and our sales comped positively. We comped down in the low single digit range in July, slightly positive in August, and up in the low single digit range in September. For the quarter, we experienced a low single digit increase in average ticket, a low single digit decrease in customer traffic versus the prior year.

From a product standpoint, our apparel category was the strongest performer for the quarter, up in the low mid single digits benefiting from an expanded assortment of certain key branded products, as well as efforts to move through seasonal inventory. We experienced a slight improvement in our footwear category during the quarter, our hard goods category was down in the low single digit range, due in part to softness in golf, tennis and fitness products. Our merchandise margins declined 40 basis points for the quarter, which was an improvement from the second quarter and better than we had anticipated. Margins for the quarter were pressured by an increase in promotional and clearance activities, and product cost inflation.

Last quarter, we discussed the management transition within our buying team. Now that transition was driving us to take a fresh look at our merchandise and buying operations. While we are not looking to make wholesale changes to our valued oriented business model, we are evolving our overall product assortment. We have begun the process of strategically downsizing certain product categories that we feel are underperforming, and increasing our focus in categories that we believe have upside potential in the current consumer environment. In addition to expanding our assortment of some key branded products, we are also selectively stepping up certain product offerings at higher price points, and in some cases, only in selected stores.

It is important to note our investment in these new products have resulted in increased inventory levels for the time being, as we work through merchandise that we have determined will not be part of our go forward assortment. That said, we are comfortable with our inventory position, and the direction our inventories are moving. As of the end of our October period, our inventory comparisons to the prior year improved over 200 basis points from the end of the third quarter, and in fact, also improved from the end of the second quarter. We expect our overall inventory levels to continue to improve as we work through clearance product, and are confident in our ability to rightsize inventory to sales over the coming quarters.

We are also just rolling out a new business intelligence system, and beginning to see the benefits of our retail analytics. We are excited about the wealth of information that this system provides, and believe that it will enable us to improve both the efficiency and effectiveness of our product purchasing and store allocation. We believe that customizing our offering to individual stores has always been one of our strengths, and this tool should enable us to do an even better job in responding to local consumer demand, and optimizing our product offering on a regional and store by store basis.

Now commenting on store growth. During the third quarter, we opened three new stores, one in Covington, Washington, one in San Bruno, California and one in Coalinga, California. We ended the third quarter with 398 stores. In the fourth quarter to date, we have opened 2 stores, 1 in Pleasant Hill, California and 1 in La Verada, California. We anticipate opening 6 more stores before the end of the year. For the 2011 full year, we currently plan to open 11 net new stores, excluding stores closed as part of relocations that began last year.

Turning to the fourth quarter, we are pleased that the positive sales trends we experienced in the back half of the third quarter have continued, and even accelerated in the fourth quarter. Same store sales for the fourth quarter through our October period are up in the low mid single digit range, as we have benefited from a strong inventory position, as well as positive efforts to move clearance product. However, we still are early in the quarter, and October is a low volume period for us. The key selling period of the quarter obviously surrounds the holidays, and there remains considerable uncertainty regarding the consumer's ability and willingness to spend for that period.

An additional complexity for the fourth quarter is the impact that we, like many retailers, have experienced from product cost inflation. While we are carefully evaluating our pricing strategy in this inflationary climate, our sense is that in the near term pressure and point-of-sale margins will continue, and could accelerate. Despite these challenges, we feel well positioned for the holiday season, and believe that the actions we are taking to continue to improve our merchandise, pricing, and promotional strategies, will help us through the current environment, and benefit our business over the long term. 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 flows, and provide fourth quarter guidance.

Thanks, Steve. Our gross profit margin for the third quarter was 32.8% of sales, compared to 33.4% of sales for the third quarter of 2010. The decrease was mainly due to the 40 basis point decline in merchandise margins, that Steve discussed. Our selling and administrative expense as a percentage of sales, was 28.8% in the 2011 third quarter, versus 28.6% in the third quarter last year. On an absolute basis, selling and administrative expense increased $1.2 million year-over-year, largely due to an increase of $1.4 million in store related expense, partially offset by lower administrative expense. The increase in store related expense was primarily due to higher labor and operating costs to support new stores.

Interest expense for the third quarter was $0.6 million, relatively unchanged from last year. While our 2011 average debt levels and interest rates are higher than in 2010, last year's third quarter included a one time early termination fee, and the write off of the remaining deferred debt issuance costs of $0.3 million, associated with the termination of our prior revolving credit financing agreement. Our effective tax rate for the third quarter was 34.4%, compared with 35.1% for the third quarter of 2010, primarily reflecting our lower pretax income and higher income tax credits for the current year. We currently anticipate an effective tax rate for fiscal 2011 to be approximately 33%.

Now looking at our bottom line. Net income for the third quarter was $5.8 million or $0.27 per diluted share, compared to net income for the third quarter of fiscal 2010 of $6.8 million, or $0.31 per diluted share. Briefly reviewing our 2011 first nine months results, net sales were $675.4 million, compared to $670.1 million during the first nine months of 2010. Same store sales decreased 0.9% versus the comparable period last year.

Looking at earnings for the first nine months, net income was $11.7 million or $0.53 per diluted share, including a non-cash impairment charge of $0.02, compared to net income of $16.6 million or $0.76 per diluted share last year. Turning to our balance sheet, total chain inventory was $280 million at the end of the third quarter, up 11.4% from the prior year. The increased inventory largely reflects the addition of certain new products, product cost inflation, bringing in certain seasonal products early to mitigate the impact of potential delivery issues, and purchase cost increases, as well as lower than anticipated sales.

Looking at our capital spending, CapEx excluding non-cash acquisitions totaled $7.8 million for the first nine months of 2011, primarily reflecting expenditures for new stores, existing store maintenance, and MIS systems. As Steve mentioned, we have opened 2 new stores to date in the fourth quarter, and we plan to open 6 more stores before the end of the year. As a result, we now expect total capital expenditures for the full year, excluding non-cash acquisitions of approximately $13 million to $15 million, reflecting the opening of 11 new stores, net of relocations.

From a cash flow perspective, our operating cash flow was a negative $11.6 million for the first nine months of 2011, compared to a positive $12.6 million for the same period last year. The decrease was primarily due to higher merchandise inventory purchases, the timing of inventory purchases and payments, funding of certain accrued liabilities, and lower net income. In the third quarter, we continued to pay our quarterly cash dividend of $0.075 per share.

Our long term debt at the end of the third quarter was $69.1 million versus $55.2 million at the end of the third quarter last year, and $48.3 million at the end of fiscal 2010, primarily reflecting the higher inventory levels, along with lower accounts payable as a percentage of inventory, due in part to the timing of payments. On October 31, we amended the terms of our $140 million credit agreement, to take advantage of the more favorable pricing environment, and to extend the term of the facility to October 2016. The amendment primarily reduces the interest rates charged on borrowings by 50 basis points, reduces the fee charged for the unused portion of the facility, and modifies provisions for restricting certain payments and investments. Additional details on the amendment will be available from our Form 10-Q filing.

Now I will spend a minute on our guidance. As Steve mentioned, the economy remains challenging, and there is a large degree of uncertainty about consumer demand, and expectations for spending this holiday season. As a result, for the fourth quarter, we expect same store sales in the positive low to low mid single digit range, and earnings per diluted share in the range of $0.12 to $0.24. This guidance range anticipates continued pressure on product margins, largely due to the impact of product cost inflation, and increased promotional activities. A material improvement or decline in the overall consumer environment could materially impact our performance relative to this guidance. For comparative purposes, in the fourth quarter of 2010 same store sales decreased 0.7% and earnings per diluted share were $0.18, including a charge of $0.07 per diluted share related to legal matters. Operator, we are now ready to turn the call back to you for questions and answers.

Thank you. (Operator Instructions) The first question is from Rick Nelson from Stephens.

Thank you. Good afternoon.

Hello, Rick.

Apparel and footwear have been drivers, really, across the industry, and that is where you are seeing the strength. What do you think the outlook is for both of those categories as you look forward and look at the forward product?

We are encouraged by the outlook in both of those categories. We think we have taken positive steps to enhance both our offerings in apparel and footwear. We have stepped up some branded -- a little more focus on some of the branded products, at for us, some higher price points, that we think will play very positively for us.

In the categories, Steve, that you are planning to down size, can you tell us what those categories are?

No, for competitive & strategic reasons, we are not going to speak specifically to the nuances of our product realignment. I think the answer is, at this stage, no.

You stated a new strategy to rely less on less opportunistic purchases than you have in the past?

Not at all, Rick. We are not abandoning our value driven strategy, we are not making wholesale changes to our product offering, or strategic or promotional thrust in generating business. We are just taking a very hard look at our product offering, and recognizing that in some cases, those that the -- call it the lower end of the economic spectrum, are more challenged. It seems like -- I don't think it's any secret that those at the higher in the economic spectrum may be performing in a little better position. We are trying to make some slight tweaks and adjustments to our model to just try to broaden our appeal to those that might be somewhat less price sensitive in this environment.

I got you. Any early thoughts on 2012 store openings, or should we anticipate something similar to what we have seen in the recent past?

Rick, we are not prepared to make a definitive comment on our store growth strategy for 2012. We are certainly excited about some of the opportunities we are seeing in the real estate environment. I will say that we are real excited about some opportunities that I think the -- call it the depressed real estate situation has provided for us to relocate some of our stores. We think those are -- we have some real home runs to look forward to in 2012, but not prepared to give a specific number in terms of store openings at this time.

Thanks a lot and good luck.

We will now move to Mark Smith with Feltl and company.

Hello, this is Shawn sitting in for Mark. You talked a little bit about having to be promotional during the quarter. Can you talk a little bit about how much more promotional you had to be over prior quarters, and then how much you think you will need to be in Q4, and going forward as well?

When you say promotional, we were not way more promotional, that I don't know we said that, than prior quarters. We were a little more focused in terms of moving out of some product that we've determined will not be part of our go-forward assortments, so a little more clearance activity, that I think has created some pressures on margins, but not, again, a distinct change from what we have done in the past.

Can you talk about the impact the new distribution center had, and then, also an update on distribution expenses as we go forward?

Just to make sure everybody is up to speed, the new Oregon hub was opened in mid-June, and this is allows us to ship full trailer loads up to the Pacific Northwest, and then divide the loads for shipment to our individual stores. Previously we shipped partial trailer loads, so the new hub saves us trips to the Northwest, and obviously mileage. We have leased approximately 4 acres of total space up there, which includes approximately 12,000 square foot for building space. The net startup costs were approximately $100,000 in the second quarter, and the total CapEx for the new facility was only about $500,000 or so. In the third quarter, we realized approximately $300,000 in savings, and for the 2011 full year, we are expecting relatively modest net savings of approximately $250,000.

We expect the savings relative to last year to be lower in the fourth quarter than in the third quarter, as we ship more full truck loads of product to the Northwest during the holiday season. If you look at it on an annual basis, kind of on a normalized basis, we expect to save approximately $800,000 or so a year, depending on fuel costs, some of which will be a reduction that will get caught up in our inventory cost capitalization. The relatively modest savings for the current year is netted against the $100,000 of startup costs. So, if you look at it on a quarter-by-quarter basis we had a net expense of about $100,000 in the second quarter, the savings of about $300,000 in the third quarter, and then we expect savings of roughly $50,000 or so in the fourth quarter.

Now, that transition is going smoothly for guys?

It really has. It has been a great addition to our logistics and cost savings efforts.

1 last question, you said for the full year you are anticipating a 33% overall tax rate, any insight into what you expect for 2012?

Not at this time. I don't have an estimate for you. We really have not done the calculation, and a lot of that tax rate depends on, of course, your pre-tax and then your tax credits. There has been more tax credits this year. We opened a -- we added some solar panels to our distribution center, and had about a $450,000 credit for the solar panels, and things like that, so from a credit standpoint, this has been a little higher than normal, and we will have to see what next year looks like.

Thank you.

Sure.

(Operator Instructions)

We now go to David McGee from SunTrust Robinson Humphrey.

Hey guys, and congrats on the upside.

Thank you, David.

A couple questions. 1 is, as we get closer to 2012, is your thinking about the same as far as the inflationary impact on the business, or do you see that changing, either good or bad?

We hope it changes for the good, because right now we are still feeling a lot of impact from inflation. It's hard to say how it will play out over the course of 2012, but it's definitely a factor we are wrestling with as we speak.

To the degree to you have already planned for the spring, is that inflationary impact about the same as what you have seen this fall?

For the spring?

Yes.

Yes -- we are feeling significant inflationary pressures and headwinds now, and thinking about the spring buys. It seems pretty consistent going forward at this time.

Okay, thanks, Steven. Secondly, on your same store sales assumption for the fourth quarter, have you assumed any difference in terms of traffic?

We are certainly seeing a very consistent uptick in our average transaction. Our traffic in the third quarter was down, but our ticket was up. In the fourth quarter to date, and early in the fourth quarter, we have seen both our traffic and ticket improve. We are cautiously optimistic that we will continue to see accelerated traffic over the course of the fourth quarter.

You had mentioned during the earlier remarks that you got some new products in the store, are these being featured in your advertising?

In some cases, yes. We always have new -- that's nothing new, we always have new products, and opportunistic buys, and other items in our advertising. Certainly, some of the products that we are bringing in to, in our minds, enhance our merchandise offering, will be featured in advertising. Others may only be in selected stores and less likely to be called out specifically in advertising.

Do you expect those to have an impact on the traffic? Are they the sort of products that will bring traffic in?

We certainly hope so. Besides the traffic, a big part of our plan is to convert more people that are coming into our stores to purchasers. We think by having a broader and more appealing, ideally, product offering, we absolutely will see an uptick in sales.

Great. Thank you, Steve, and good luck here.

We will now go to Adam Sindler from Deutsche Bank.

Good afternoon guys, and congratulations as well. Steve, if we could go back to the decision to bring in some branded product at the higher price points, it is interesting you have made the decision to do that, looking back on the past couple quarters, it seems the macro environments in your local markets was certainly an issue, and yet, clearly the customers responded positively to this new higher price point merchandise. Do you think there are other areas where you can execute a similar strategy where, maybe, there is more of the product offering than the local macro environment, and if you had any comments around that?

Again, we are not making wholesale changes, we are making enhancements to our offering. Ultimately, certainly over the last several years, there has been some significant change in the health of our consumers, and the consumer base, and ultimately, what we are looking to do is evolve our product in a way, shape, and form that is consistent with how to best serve the consumer today, and where they are headed. If that means a little more focus on branded products and higher price points, we are certainly prepared to do that. We are looking to create step up product alternatives in certain areas but, don't misunderstand, we are certainly not abandoning our value oriented business model. That is very much implied.

Okay. Just 2 quick follow ups, if I could. One is, I wanted to make sure, several of our companies have an extra week in this year's fourth quarter, and then secondly, just given that comps aren't trending so positively quarter to date, what is your leverage threshold, given on the extra day line?

Adam, let me take that. Of course, whether we can leverage expenses or not is dependent on multiple factors including store growth, expense fluctuations, and other factors. Historically, we have been able to leverage our expenses at a same store sales growth rate of about 3.5%, but given our cost savings efforts over the last few years, partially offset by today's expense pressures, we think we can leverage our expenses, and our distribution costs at a same store sales growth rate at 2.5% to 3% today. We should be able to leverage our occupancy costs at a slightly lower same store growth sales rate.

And we do not have an extra week.

That's very good. Thanks guys.

We are 52 versus 52.

Wonderful.

We will go to Reed Anderson from D.A. Davidson.

Hello. A couple of questions, Barry, you talked in the inventory comments about some of the increase is related to the products you are going to discontinue. Do you think that will work through in the fourth quarter or will there be some carry over to next year?

There will be carry over into next year. This is a work in progress. I would suspect it will take into next year to certainly fully liquidate products that are not part of the go forward assortment.

Okay. And then a related question, it sounds like margins had a similar impact in the fourth quarter, at least in terms of trend and a merchandise margin basis. Do you think it will be worse in the fourth quarter? Do you think it wouldn't be quite as severe, the margin pressures you would be seeing in the fourth quarter?

I think they will be -- could be a more difficult product margin, if you are talking about product margin.

Yes. Yes.

The pressures in the fourth quarter could be more difficult, and that is not because of moving through product not part of go forward assortments. That is more a -- I think a function of the inflationary environment, and our ability to fully pass on all the price increases that we are dealing with currently.

And then on SG&A, which I actually thought looked pretty good, given where comps were, where are you from an advertising standpoint? Are you comparable? In the third quarter now, were you comparable to, on the spend relative to last year, or has that come down? Up? I'm just curious.

No, Reed, our expenses relative to last year, we are up a little bit. Not too much. We were up 3% to 4%, not too much.

All right. That's it for me. Thanks.

Our next question comes from Sean Naughton from Piper Jaffray.

Thanks for taking my question. On the mix of the business in the box, you have been trending more toward the hard goods category, and you talked about some categories being downsized. If we are thinking about that moving forward, could you potentially have a positive mix shift moving forward as we go into 2012 and 2013?

I'm not sure I follow the question. What do you mean by a positive mix shift?

Are you going to be moving more into apparel and footwear, potentially, as a percentage of total sales?

I'm not looking for a material shift in our overall product mix. We have been pretty consistent over a number of years. It could move a point or 2, if we are looking at the composition of footwear to apparel, and hard goods. At this point in time we are not looking for a significant seat change there.

Okay, then in terms of a -- it seems to be that traffic has improved a little bit in the fourth quarter, obviously November and December are the big months here in the fourth quarter. Any comment on the cadence from last year, if this was a little bit easier? If there is anything in the terms of weather comparisons that were a little bit easier in October this year versus last year?

The weather wasn't very materially different. We had a little snap of cold weather that was kind of helpful in early October, in the last couple of weeks, I would argue that the weather has been negative for our business. While the East Coast has been buried in snow, most of our primary markets have been 80 degrees and sunny. Quite frankly, we think we would have done better if we would have had an earlier start to fall and winter.

Okay. And then just lastly, on the inventory question you were talking about before, when should we expect those inventories to be normalized with a future sales run rate?

I think it's hard to peg a point in time. I think the -- I would look for the inventory relationship this year versus last to be better at the end of the fourth quarter, and continue to improve, and, I guess, hit optimum sometime into the course of next year but I wouldn't cite a specific time.

But I would say that our aged inventories is a very good shape. And down at the end of the third quarter, versus the same period last year. So the product we have is certainly relatively fresh.

Okay. Great, best of luck for the holiday season.

(Operator Instructions)

And it appears there are no further questions, so I will turn the conference back over to you, Mr. Miller, for any additional or closing remarks.

Terrific. Thank you, operator. I appreciate everyone being on today's call, and I look forward to speaking to you on our next call. Thank you.

This concludes today's presentation. Thank you for your participation.