Big 5 Sporting Goods Corp (BGFV) 2011 Q4 法說會逐字稿

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

Thank you, operator. Good afternoon, everyone. Welcome to our 2011 fourth quarter conference call. Today we will review our financial results for the fourth quarter and full-year of fiscal 2011, and provide general updates on our Business, as well as provide guidance for the first 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 actual 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 third 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. While economic climate has remained tough for many of our customers, it was largely the exceptionally poor winter weather conditions in the majority of our markets from Thanksgiving through the end of the year, that derailed our fourth-quarter performance. This was particularly disappointing, given that we generated solidly positive same-store sales during the first half of the quarter.

Despite the lackluster sales during the second half of the quarter, we are encouraged by our team's progress in a number of new merchandising and marketing initiatives that I will speak to shortly, and we remain focused in improving our positioning as a source for quality products at compelling values. As we've previously reported, fourth quarter net sales were $226.7 million, and basically flat with the fourth quarter of fiscal 2010.

Same-store sales decreased from 2.1% during the fourth quarter of 2011. Our sales comped in the positive low mid single digit range in the first half of the quarter, but swung to negative mid single digit range during the second half of the quarter, as the holiday selling season was impacted by a lack of winter weather, and a highly promotional retail environment.

I think it's been well publicized how abnormally lacking in snow this winter season has been. Our winter product sales were down nearly 20% over the last six weeks of the quarter, and this was the major drag on our overall sales during the important shopping period. Excluding sales of winter-related products, same-store sales for the quarter were slightly positive.

For the quarter, we experienced a low mid single digit decrease in traffic. Our average ticket increased in the low single-digit range. From a product standpoint, the adverse weather conditions we've mentioned negatively impacted sales in all of our major merchandise categories, particularly apparel sales, which comped down mid-single digits for the quarter.

Sales in our footwear and hard goods categories decreased in the low single digit range. Our merchandise margins were down 190 basis points for the quarter, reflecting the largely anticipated impact of product cost inflation and increased promotional activity. We also lost some margin due to the shift in our product sales mix away from higher margin winter product categories.

Despite the weaker than anticipated sales, we effectively managed our inventory position during the quarter. At the end of fiscal 2011, our per store inventories were up just 2.2% from the prior year, which is a significant improvement from the end of the third quarter, when per store inventories were up 11.4% over the prior year. In light of the reduced demand for winter products this season, we do anticipate a greater than normal carryover of winter product to next season, and plan to structure our purchasing for next season around this carryover.

Now commenting on store growth. During the fourth quarter, we opened 8 new stores, the new store openings were in La Mirada, Pleasant Hill, Ramona, and Oakhurst, California, Ontario and Warrenton, Oregon, Omack, Washington, and Cottonwood, Arizona. We currently have 406 stores in operation.

During the first quarter, we plan to open one store, a relocation of an existing location that we expect to close later this year. At this time, our plans call for us to open approximately 10 new stores, and relocate approximately 7 stores during fiscal 2012. These relocations are part of our ongoing efforts to take advantage of the current real estate market to improve the location, size, and/or lease economics of some of our older stores. This is something we're quite excited about, particularly given the success we've had with other store relocations.

Now turning to current trends. As I expect most of you are aware, the remarkable absence of winter weather across the vast majority of our markets has continued in the first quarter, and this has had a major impact on sales for the period-to-date. Our winter product same-store sales were running down in excess of 30% for the quarter, while non-winter product is comping positively in the low single digits for the period, and doing even better, up in mid-single digits over the last month.

While the mild weather we have been experiencing may be influencing sales of non-winter products to some degree, we are particularly encouraged by the recent strength we have seen in a number of key non-winter-related categories including footwear, exercise and apparel, which we believe is driven being driven by our new merchandising initiatives.

While we can't control the weather or the macroeconomic environment which remains challenging for many of our consumers, and it certainly isn't helped by the recent run-up of gas prices, we are very focused on implementing a number of merchandising and promotional initiatives, in order to broaden our appeal to today's consumer.

During our 57-year history, we have always made adjustments as necessary to evolve our product mix. From war surplus products marketed to a narrow audience when we began in 1955, to a diverse product mix that now caters to the outdoor enthusiast, the T-baller and everyone in between. For the most part the changes have been gradual, given our history of sales consistency and our successful track record.

However, the economic downturn over the last four years has been particularly challenging, to both the consumer and our Business. As a consequence, we are intensely focused on better aligning our product mix with where we believe the consumer is today.

To review a few of our key merchandising initiatives, we are selectively downsizing certain product categories that are underperforming, expanding other product offerings that we believe have promising potential. We are engaged with a number of top industry brands to expand their offerings in our stores, and also stepping up some of our existing product lines, in an effort to better appeal to those consumers who might be in a position to engage in more discretionary spending in the current environment.

In other words, we are endeavoring to broaden both our product offering and customer base, which should elevate our average sale in many categories. We are identifying certain existing products that are responding positively to everyday value pricing, as opposed to our historic promotional model. We are also expanding existing apparel brands and adding new apparel brands to our mix, with a particular focus on cultivating a stronger core business that can generate customer traffic and sales that might not be so affected by weather patterns.

Our merchandise efforts have benefited significantly from the enhanced retail analytics provided by the business intelligence tool that we implemented late last year. This has allowed us to improve both the efficiency and effectiveness of our product purchasing and store allocation. Customizing our product offering to individual stores has been a long-standing strength of ours, and this analytic tool is enabling us to take that strength to a new level.

Now from a promotional standpoint. We have significantly expanded our e-team e-mail marketing program by growing our subscriber base, and increasing our marketing efforts through this channel. We are developing a robust product and promotionally focused website that will be in place this year, and will give our customers much greater visibility into our merchandise offering. This website design would provide us with a platform that would accommodate e-commerce, if we desire to do that.

We are expanding our digital online and mobile advertising programs to improve the reach of our message to consumers who might not be seeing our print advertisements. These are just some of our ongoing efforts to broaden our appeal to the consumer in the current environment. And as I've said, we are encouraged by what we've seen so far.

Let me make it clear, we are certainly not looking to abandon our proven business model. We intend to maintain and build on the core strengths and competitive advantages that we have developed over half a century. We believe that these core strengths, combined with our ongoing initiatives will broaden our appeal to today's consumer, and position us well for improved performance.

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 first quarter guidance.

Thanks, Steve. Our gross profit margin for the fourth quarter was 31.2% of sales, compared to 33.4% of sales for the fourth quarter of 2010. The decline was mainly due to the 190 basis point decrease in merchandise margins that Steve discussed. Our selling and administrative expense as a percentage of sales was 31.3% in the fiscal 2011 fourth quarter, versus 30.5% in the fourth quarter of the prior year. On an absolute basis, SG&A expense increased $1.7 million, due primarily to an increase in store-related expense, reflecting a higher labor and operating costs to support new stores, and an increase in advertising expense.

SG&A expense for the 2011 fourth quarter including a non-cash pre-tax impairment charge of $1.5 million related to certain underperforming stores. In the fourth quarter, we recorded a credit in our tax provision of $0.9 million to true-up our effective tax rate for the full-year to 29.7%, compared to 36.0% for fiscal 2010. The lower effective tax rate for fiscal 2011 versus the prior year, primarily reflected lower pre-tax income, and an increased benefit from income tax credits for 2011. We expect our effective tax rate for 2012 to be approximately 36%.

Now looking at our bottom line, for the fourth quarter, we reported net loss of $9,000, compared to net income in the fourth quarter of fiscal 2010 of $4.0 million, or $0.18 per diluted share. As I mentioned previously, results for the fourth quarter of fiscal 2011 include a net pre-tax impairment charge of $1.5 million, or $0.05 per diluted share related to certain underperforming stores. Results for the fourth quarter of fiscal 2010 include a net pre-tax charge of $2.3 million or $0.07 per diluted share related to legal matters.

Briefly reviewing our full-year results, net sales increased to $902.1 million for fiscal 2011, from $896.8 million for fiscal 2010. Same-store sales for fiscal 2011 decreased 1.2% versus the prior year. Looking at our fiscal 2011 earnings, net income was $11.7 million or $0.53 per diluted share, including impairment charges of $0.07 per diluted share. This compares to net income of $20.6 million, or $0.94 per diluted share in fiscal 2010, including a net charge of $0.07 per diluted share related to legal matters.

Turning to our balance sheet, total chain inventory was $264.3 million at the end of the fourth quarter, up 4% from the prior year. As Steve mentioned on a per store basis, our inventory was up 2.2% from last year. The increased inventory largely reflects the addition of certain new products, as we evolve our merchandise assortment and product cost inflation, as well as the impact of lower than anticipated sales during the holiday season.

Looking at our capital spending, CapEx excluding non-cash acquisitions totaled $13.0 million for 2011, primarily reflecting expenditures for 11 new stores and 2 relocations, existing store maintenance, and MIS systems. We expect total capital expenditures for 2012, excluding non-cash acquisitions of approximately $15 million to $18 million, reflecting the opening of approximately 10 new stores, and the relocation of approximately 7 stores.

From a cash flow perspective, our operating cash flow was $2.2 million for fiscal 2011, compared to $29.9 million for fiscal 2010. The decrease was primarily due to increased funding of merchandise inventory, the timing of inventory purchases and payments, the funding of certain accrued liabilities, primarily legal settlements, and lower net income.

In the fourth quarter, we continued to pay our quarterly cash dividend of $0.075 per share. Our long-term debt at the end of fiscal 2011 was $63.5 million, up from $48.3 million at the end of fiscal 2010, reflecting the higher inventory levels, and lower accounts payable due to the timing of payments. For fiscal 2011, we increased merchandise inventory levels to add certain new products to stimulate sales, and also purchased inventory earlier in the year to mitigate the impact of product cost inflation and potential delivery delays.

Our reduced inventory purchases in the fourth quarter resulted in lower accounts payable as a percentage of inventory. Our weaker than anticipated sales during fiscal 2011, particularly in the fourth quarter, resulted in higher inventory levels and reduced operating cash flow for the year, contributing to higher debt balances year-over-year.

During the fourth quarter, we resumed activity under our share repurchase program, and we repurchased 109,550 shares of our stock for a total of $1 million. As of the end of fiscal 2011, we had $13.2 million available for stock repurchases under our $20 million share repurchase program authorized in 2007.

Now I'll spend a minute on our guidance. As Steve mentioned, the weather in our markets has been unseasonably warm and dry, negatively impacting sales trends. Based on results to date, we expect same-store sales in the negative low single digit range, and earnings per diluted share in the range of zero to $0.06.

This guidance reflects anticipate continued pressure on merchandise margins, reflecting the impacts of product cost inflation and increased promotional activities, as well as a product sales mix shift away from high margin winter categories due to the unfavorable winter weather conditions. For comparative purposes, in the first quarter of 2011, same-store sales decreased 0.9%, and earnings per diluted share were $0.13. Operator, we are now ready to turn the call back to you for questions and answers.

Thank you very much. (Operator Instructions) And the first question in queue today will be from Sean Naughton from Piper Jaffray. Please go ahead.

Hi, thanks for taking my question this morning -- or this afternoon. Quick question for you on product costs. You mentioned that a number of times on the call, and obviously, the weather is having a big impact on the business. But anything in terms of -- that you're seeing now in, terms of changes and how that's looking, as you look out to the summer and potentially the back-to-school season, that you are seeing on product costs right now?

Yes. We're certainly -- inflation has been a big issue that has affected our cost base. I think we are seeing the inflationary pressures, arguably, ease off a little bit from where it's been. I think of the recent rise in fuel price could result in some further pressure, because that really impacts almost all products that we bring into the system. So I think the bottom-line answer would be, it's still a factor. Probably less so, as we introduce new product going forward than it's been over the last six to nine months.

Okay. That's great. And then you mentioned some interesting things with some top industry brands. You were mentioning that you might increase the buys with them. Can you talk a little bit more, give us a little bit more color about that, is this increasing the assortment, going deeper with certain brands? Anything you can elaborate there would be helpful.

Sure. I mean, we're looking hard, working hard and feeling like we've identified certain categories that lend themselves, and working with vendors to broaden their offering, in some cases existing vendors, to broaden their offerings, to bring up a step up alternative in certain product lines. We're using our business analytics to try to ideally select the stores that have the optimum opportunities to benefit from this offering. We're also working to introduce some new vendors into the mix, broaden the appeal. We're doing this across a broad array of product categories, from footwear, apparel, team sports, fitness, and outdoors. And again, as we mentioned, the goal is recognizing some of the challenges to our existing consumer, arguably at the lower end of our economic spectrum, we think we've identified opportunities to broaden the appeal to those consumers who may be better able to spend discretionary dollars in today's environment.

Okay. And then lastly, any change in traffic trends that you're seeing? Is it -- I don't know if it's getting -- doesn't sound like it's getting much better, but has there been a drop off in traffic in the first quarter that you're seeing here? Or is it more related to the merchandise on the ticket side?

Well, the weather has dominated the story in the first quarter. So the -- as I mentioned, our winter related product categories are down -- are comping down in excess of 30%. And that's a lot of loss of traffic. Take away the winter weather, the rest of the business is performing quite, quite positively. And we're real excited about some of the trending we're seeing in the new merchandising initiatives. But traffic is certainly down, and that's a weather story for Q1 to date.

Got it. All right, well, hopefully we get some cooler weather here, heading into the spring. Take care. Thank you.

Okay. (Laughter).

Your next question in queue will be from Sean McGowan with Needham. Please go ahead.

Hi, Steve, hi, Barry. I was wondering if you could elaborate a little bit more on some of the non-winter products that you seem to think are doing especially well?

Well, it's a broad base. I'm not going to get overly specific, but we're seeing our footwear -- footwear, fitness, apparel, certainly, running shoes. I don't think we're alone in seeing strength in the running shoe category, but we're seeing real positive trending in our overall footwear offering, and across a number of categories, both in hard goods, apparel as well.

Okay. And then a follow-up question on the initiatives to try to go after that consumer that might have a bit more discretionary income. Is that based on observations you had made, or how does that theory you've tested out somehow? Can you give us a little bit on the background of that initiative?

Well, sure. We're -- I mean, it is something that we're -- have tested, and we brought in products, testing it, and building on the successes of what we're seeing. I think our business analytics tool is providing is a very useful tool to evaluate the programs, make quick, quick decisions, and be very specific in how we implement some of the new initiatives. But I think we are recognizing, and it's not lost on too many of us, that those with money, and those catering to a higher end consumer have outperformed the general retail landscape. And we're certainly not walking away from our core customer. But we feel we can maintain our offering to those who we fundamentally built the business with, and seek to broaden our appeal to those that have more discretionary income, particularly in today's environment.

Yes. I'm just wondering why now, and not at some other point in the past?

Well, I think some of the changes in the consumer makes it a more appropriate time. We've always made adjustments. So I mean again, our model, and whom we've, as I mentioned I think in the prepared remarks, we started off just selling war surplus to a very narrow audience. So the changes that we've introduced, it's never that we've always done same old, same old, year after year. Change has always been part of our equation. I would characterize it more as an acceleration of change, given the way the consumer environment has changed over the last several years of the recessionary environment. We're -- we also feel at this time there is a certain categories that have underperformed. Our stores are -- the size of our box really dictates, that in order to really broaden certain categories, we have to reduce others. And I think the environment now has made it clearer that certain decisions make sense. You could argue that we're getting a little tired, like most, of waiting just for the economy to improve. So we think now is I guess the right time, and arguably if, assuming some of these calls are, and we do believe will be very beneficial to the business, I guess, we'd of wished they -- we had done them yesterday, like the Knicks wished they had put Jeremy Lin in a few weeks earlier. (Laughter).

Got it. Thank you.

Moving forward, we'll go to Chris Rapalje with SunTrust Robinson Humphrey.

Hi, good afternoon. A question, you mentioned that you were going to be putting up some changes to your website at some point this year. Can you be more specific about when we should expect to see those?

Well, I think it will be probably targeted toward the third quarter, certainly back half of the year, definitely in place for the holiday season.

Okay. And kind of along those lines, do you feel like there is, as far as the promotional environment goes, that online competition has become a bigger component of that? And is there any particular source that you're feeling that from?

Well, it's difficult to quantify. I think it's logical to think that internet sales have an impact on brick and mortar. I think particularly over the holiday period, where people have more time to plan their purchases, I think it's particularly in issue in states like California, where no sales tax is collected for some purchases made online. But it's not something we can quantify. I think the big issue that we continue to battle is an economy that remains challenging. And certainly, the most immediate issue we face, which I think has trumped the economy is the weather over Q4 and Q1.

And then along the lines of the weather, if it stays warm, do you see some opportunity that it could actually benefit you, by having people get an early start on the spring season? And if so, do you feel prepared to meet that, as far as your inventory and your product offering is concerned?

Well, we certainly do feel prepared. We're excited, very excited about the product that we're bringing into the offering now. And I guess at this stage of the game, we're probably in favor of it getting warm. I think this winter season, I mean there is still -- March still, we do we symbol winter business, typically in March. But I think this has been such an abnormally dismal winter season, that I think a lot of people are kind of beyond the winter, and looking to get into spring activities. So we feel well suited to take advantage of that.

Okay. Well, thanks very much.

Moving forward, we will go to Mark Smith with Feltl & Company.

Hi. Could you give us a quick update on your distribution exposure to fuel costs, as we see those moving higher?

Yes, Mark. Let me -- I mean, our fuel costs for Q4 were up about 13% from the same period last year, about $100,000 or so to about $800,000 for the quarter. We are seeing continued inflationary pressures, and expect fuel costs in Q1 to increase sequentially over Q4. But the gas prices were also high last year at this time, and we expect our fuel costs in Q1 to be about even with what they were last year. We're certainly taking steps to mitigate the impact of these expenses where we can, such as the distribution hub that we opened in the middle of last year in Oregon, to reduce our distribution mileage. But that said, the high fuel costs are also contributing to product cost inflation for us. And we're -- that we're certainly seeing, and also impacting the consumers' ability to make discretionary purchases. So we're exposed not only on the distribution side, but certainly on the product cost inflation side.

Is your hub still running on target?

Yes. Absolutely. It's running fantastic, and it's going to be even better. It's a double-edged sword. Obviously, the benefit for us goes up as fuel prices increase. I think all said and done, we would rather have fuel prices decrease.

Okay. And then lastly, have you continued buying stock during Q1?

Mark, we can't comment on whether or not we're continuing to buy stock. But we can say, that certainly, we were active leading up to the end of the year. And we're going to continue to evaluate the best use of our cash and certainly buying back stock is one option that we're considering.

Great. Thank you.

Sure.

Moving forward, we will go to Bill Dezellum with Tieton Capital Management.

The small increase that you had in inventory per store, which I think was roughly 2 percentage points, how much of that increase was specifically due to the slow winter sales, or the winter product -- I want to say, carryover, but I guess we are still in winter?

Yes. I think -- I'm not sure I can give you a precise quantification of that. At year end, I mean, the winter -- the increase in winter inventory at the end of the year, was certainly a piece of the per store increase. And logically, that's grown some over the course of the first quarter, as the winter season went from -- arguably bad to worse.

If I were to ask you to try to broadly characterize it, would you say maybe half of the increase on a per store basis, was due to the winter product, or some other broad characterization?

Bill, I'm not sure I can come up with an exact answer to that question, other than say we are extremely comfortable with our product position at the end of the year, absent some of the situations that were evolving with our winter product.

That's fair. Thank you.

Sure.

Next question in queue will be from Jonathan Grassi with Longbow Research.

Good afternoon. Thank you for taking my questions. Have you had to return any winter-related products to vendors? Or do you think you might have to still?

Well, we received some support from our vendors in this area. But I'd characterize it more as a little bit of help, far from a cure, given how badly this season has progressed. So we don't have, I guess, the luxury of just carte blanche returning any that we don't want to our vendors. But we have to receive some support from vendors and that's where we're at.

Okay. And then can you give me an idea of the incremental cost associated with the build-out of your e-commerce capabilities? Are we looking -- or can you give me on a quarterly basis, what we're looking as a potential incremental dollars?

Well, it's not -- John, that's not material. It's not a significant number. It's -- so I wouldn't -- some of it's capitalized, some of it is expensed. We are adding resources. We're very excited about the potential and opportunity there. We're adding some headcount clearly, some talent, and also some outsourced third-party resources as well. But the overall amount is not material.

Okay. And I apologize if I missed this, but did you say how much traffic was down?

I did say traffic was down -- for the fourth quarter was down low mid single digits. Our ticket was up low single digits.

Okay. Thank you.

Next question in queue will be from Rick Nelson with Stephens Inc. Please go ahead.

I just wanted to clarify the store opening plans, the 10 new and 7 relocations. Does that imply a net 10 new stores, or does that mean a net 3 stores?

It would imply a --

We see our -- well, net-net, we see our stores going up, it's actually 12.

Well, I think the concept is -- it's probably the way -- 10 -- a couple of the relocations that we anticipate, the store associated -- the closure associated with the relocation will likely occur in 2013. Does that muddy the water, Rick?

It does. (Laughter).

Rick, we're looking at something in the neighborhood of 417, 418, 419 stores, something like that. But some of these stores -- of the 7 relocations, we expect to close approximately 4 of them in 2012. And we expect to close approximately 3 in 2013. But these are a little in flux, and it depends on schedules and things like that.

Got you. Okay. That's clear. How should we think about the cadence of those openings?

Well --

Or the closings? Or both?

Well, we mentioned just one opening in the first quarter. And that will be -- and that's the store that we'll likely -- it's a relocation with the closure to take place later in the year. And then they will be -- for the most part back-end loaded, a little activity in the second quarter, and then probably pretty even between the third and the fourth.

Got you. Okay. Thanks a lot, and good luck.

(Operator Instructions) It appears we have no further questions in the queue. In that case, I will turn things back over to Mr. Miller for any additional or closing remarks.

Thank you, operator. We appreciate your interest in Big 5, and you being on the call today, and we look forward to speaking with you on our next call. Take care, and have a great afternoon.

And again, ladies and gentlemen, that does conclude today's conference call. Thank you all for your participation.