Big 5 Sporting Goods Corp (BGFV) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods second quarter 2012 earnings results conference call. One note that today's call is being recorded. On the call today representing Big 5 Sporting Goods is Steve Miller, President and Chief Executive Officer, and Barry Emerson, Chief Financial Officer.

And now I'd like to turn the conference over to Mr. Steve Miller. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone. Welcome to our 2012 second quarter conference call. Today we will review our financial results for the second quarter of fiscal 2012, 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 now turn the call over to Barry to read our Safe Harbor statement.

Thank you, 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 2011, our quarterly report on Form 10-Q for the first quarter of fiscal 2012, 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 report relatively strong second quarter financial performance after a challenging first quarter that was significantly impacted by an abnormally warm and dry winter. By focusing on better aligning on our product mix and promotional efforts with today's consumer in the current economic environment, we generated positive same-store sales, grew our merchandise margins, and achieved better than expected second quarter earnings. We believe that our results reflect the growing impact of the merchandise and marketing initiatives that we have been implementing over the last several quarters.

Now commenting on sales. Second quarter net sales increased to $226.6 million from $219.6 million for the second quarter of fiscal 2011. Same-store sales increased 1.0% during the second quarter of 2012 representing a reversal of the negative same-store sales reported for the previous six fiscal quarters. As expected, sales were negatively impacted by the calendar shift of the Fourth of July holiday further into the third quarter this year which resulted in certain holiday-related sales moving from the second quarter to the third quarter. We estimate that this shift impacted second quarter same-store sales by roughly 100 basis points.

As we discussed on our last call, sales comped positively in the low single digits for April. These positive trends accelerated in May as sales comped up in the low mid-single digit range. We trended positively in June until the last week, which took the brunt of the Fourth of July holiday shift and pushed our comps to a low single-digit negative for the monthly period.

For the quarter, we experienced a low single-digit increase in average ticket. This was our sixth quarter in a row that we've improved our ticket over the prior year. Although our traffic was down low single digits, it was our best performance relative to the prior year since the fourth quarter of 2010.

From a product standpoint, we saw clear evidence that our merchandising initiatives are gaining traction. During the second quarter, we experienced the strongest quarterly comp store growth since 2006 in both our apparel and footwear categories. The apparel category comped up mid to high single digits and the footwear category comped up low single digits for the quarter driven by adjustments in our product mix with a stronger focus on branded product offerings and higher price points.

Sales of hard goods were down low single digits. We believe that the timing of the Fourth of July holiday was particularly detrimental to this product category as many holiday-related hard good purchases shifted into the third quarter.

We are pleased to report that along with our improved sales, we also were able to improve merchandise margins by 12 basis points for the quarter. We believe that shifts in our product sales mix and adjustments in our promotional activities were the main drivers of our improved margin performance in the second quarter. This increase followed a first quarter decline in merchandise margins of 156 basis points versus the prior year as weather conditions this year had an adverse effect on both sales and margins of winter products.

Now commenting on store openings. During the second quarter, we opened three stores, one of which relates to a relocation, and closed three stores, one of which also relates to a relocation. We opened new stores in Thatcher, Arizona, and Duncan, Oklahoma, and we relocated our store in Chandler, Arizona. We ended the quarter with 407 stores in operation. During the third quarter, we plan to open three stores, one of which relates to relocation, and close two stores, one of which also relates to a relocation. During the fourth quarter, we expect to open approximately nine stores and close one store that relates to a relocation. When all is said and done for the 2012 full year, we currently expect to open approximately 13 new stores, relocate 3 stores, and close 3 stores. This would lead to a year-end store count of approximately 416 stores.

Now turning to current trends. The positive sales momentum that we experienced in the second quarter has continued in the third quarter. Additionally, and as expected, sales over the first week of July benefitted from the calendar shift of the Fourth of July holiday. These factors have our same-store sales up in the mid single-digit range for the quarter to date. We also continue to experience positive trending in our merchandise margins.

We are pleased with the direction of our business and are excited about the many improvements that we have made over the past several quarters. We continue to realize significant benefits from our new business intelligence tool which is enabling us to make better and faster purchasing and allocation decisions. We continue to weed out underperforming products and fine tune our merchandise assortment to better align with today's consumer in the current economic environment.

We also continue to expand our digital marketing efforts, and we are making good progress toward developing a robust, product-intensive website that should enhance our marketing efforts and drive traffic through our stores as well as provide us with the capability to move into an e-commerce platform. We are actively engaged with IBM on a project to help us evaluate the optimal e-commerce strategy for our business, and we would expect to have more to say on this topic on our next call.

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 third quarter guidance.

Thanks, Steve. Our gross profit margin in the second quarter was 32.2% of sales compared to 32.7% of sales for the second quarter of fiscal 2011. The decline was mainly due to higher store occupancy costs and distribution costs partially offset by the 12 basis point increase in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales improved to 30.3% in the fiscal 2012 second quarter from 30.5% in the second quarter of the prior year. On an absolute basis, SG&A increased $1.8 million due primarily to added expense for new stores and higher employee benefit-related costs as well as a pretax charge of $0.7 million related to store closing costs. This was partially offset by lower advertising costs, lower debit card fees as a result of recent federal legislation, and reduced impairment charges compared to the prior year period.

Our effective tax rate for the second quarter was 34.6% compared with 27.7% for the second quarter of fiscal 2011, primarily reflecting higher income tax credits in the prior year.

Now looking at our bottom line, net income for the second quarter was $2.6 million or $0.12 per diluted share, including $0.03 of store closing and noncash impairment charges. This compares to net income for the second quarter of fiscal 2011 of $3.1 million or $0.14 per diluted share, including a noncash impairment charge of $0.02.

Briefly reviewing our 2012 first half results, net sales increased to $445.1 million from $440.7 million during the first six months of fiscal 2011. Same-store sales decreased 1.0% versus the comparable period last year.

Net income was $2.7 million or $0.13 per diluted share, including the $0.03 charge related to store closings and impairment. This includes -- this compares to net income of $5.9 million or $0.27 per diluted share, including a $0.02 impairment charge for the first half of last year. As a reminder, our year-to-date results reflect weak sales conditions in the first quarter as a result of unfavorable winter weather conditions in our markets.

Turning to our balance sheet, total chain inventory was $289.7 million at the end of the second quarter, up 2.9% from the prior year. On a per-store basis, our inventory was flat with last year. We've made meaningful progress on improving our inventory comparisons versus the prior year despite adding certain new merchandise to our mix and managing a larger than normal product carryover following the unseasonably warm and dry winter. We feel good about our current inventory position and product offering for the second half of the year.

Looking at our capital spending, CapEx excluding noncash acquisitions totaled $4.3 million for the first half of 2012, primarily reflecting expenditures for new stores and relocations, existing store maintenance, distribution center equipment, and MIS systems. We expect total capital expenditures for 2012, excluding noncash acquisitions, of approximately $12 million to $15 million reflecting the opening of approximately 13 new stores.

We generated positive cash flow from operations of $6.4 million for the first half of 2012 compared to a reduction of $10.5 million in the same period last year. The increase in cash flow from operations primarily reflects an increase in accounts payable due largely to the timing of inventory purchases partially offset by lower net income for the first six months of this year.

In the second quarter, we continued to pay our quarterly cash dividend of $0.075 per share. Our long-term debt at the end of the second quarter was $71.4 million, up from $64.0 million at the end of the second quarter last year and $63.5 million at the end of fiscal 2011. The increase in debt year over year primarily reflects our higher inventory levels combined with lower accounts payable as a percentage of inventory due in part to the timing of payments.

During the second quarter, we repurchased 131,420 shares of our common stock for a total of $0.9 million. In the first half of fiscal 2012, we have repurchased 303,891 shares for $2.3 million. As of the end of the second quarter, we had approximately $10.9 million available for future stock repurchases under our $20 million share repurchase program.

Now I'll spend a minute on third quarter guidance. For the third quarter, we expect same-store sales in the positive low to mid-single-digit range and earnings per diluted share in the range of $0.28 to $0.34. This guidance assumes that merchandise margin comparisons to the prior year will be positive and includes the favorable sales impact from the calendar shift of the July 4 holiday further into the third quarter this year. This guidance also includes an estimated pretax charge of approximately $0.4 million or $0.01 per diluted share to provide for the closing of one underperforming store that had been expected to close in the second quarter. For comparative purposes, in the third quarter of fiscal 2011, same-store sales decreased 0.1% and earnings per diluted share were $0.27.

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

Thank you. (Operator Instructions) We'll go first to Sean Naughton with Piper Jaffray.

Hi. Thanks for taking my question, and congrats on a solid second quarter and a strong start to Q3.

Thank you.

On the same-store sales guidance for the third quarter, is there something that you're seeing in terms of the customer that is giving you the confidence to guide kind of at the low to mid-single-digit comps for the entire quarter? And maybe you could just remind us of how the comparisons work through the balance of the third quarter.

Barry, do you want to -- second part?

Yes, let me start with the rollout of last year if that -- that's probably helpful. So same-store sales were down 0.1% in, again, Q3 last year. Sales started off slow in the third quarter last year with -- as weather was unseasonably cool in many of our markets in July and the first half of August. Our markets experienced more normal summer weather conditions in the second half of August and in September and our sales comped positively. We comped down in the low single-digit range in July. We comped slightly positive in August last year, and then we comped up in the low single-digit range in September last year.

Yes. Sean, we're really just guiding to a continuation of the positive trending that we experienced certainly over the course of the second quarter absent the calendar shift of the Fourth of July and that we've seen thus far into the third quarter. As we mentioned, our same-store sales were up in the mid single-digit range. That includes the benefit of Fourth of July and we continue to experience positive trending in our margins. So we think the merchandise initiatives that were put into play have been working well and we're optimistic that they're going to continue to work as we roll through the quarter.

That's great. And then just expanding on the merchandise initiatives, how many stores do you think are currently being affected by the merchandise initiatives that you're taking place? Is this all doors or is this a select group of doors that's being impacted here? Any further color on how those are going and the potential to extend those further?

Sure. Well, it's absolutely all doors. I mean, there's many things that we're doing on a global nature that affect all the stores in operation. There's others [in that store] -- we're very excited about the business analytics that we're utilizing to allow us, we think, to do a better job of recognizing opportunities to enhance the performance on really a store-by-store basis.

Okay. And then just maybe a last reminder on the product cost inflation. You mentioned that as a little bit of a headwind in the second quarter. How should we think about that as we get into the back half of the year? Are there things that you're seeing in terms of your buying that there could be a little bit of relief on that in the second half?

Well, I think so. We're definitely seeing an easing of inflationary pressures in the products that we're purchasing or committing to buy today. I think our current product margins continue to be impacted by an inflation that we've experienced and it's [likely through] some of the product that we've purchased over the last year or so. So I think purchase costs are leveling off. I'm not sure that we're to the point of really seeing them coming down in a significant fashion.

Okay. That's great. Thanks for the color, and best of luck in the second half.

Thanks.

Next we'll hear from Chris Rapalje with SunTrust Robinson Humphrey.

Hi there. Congratulations on the quarter.

Thank you, Chris.

Just a couple questions. First of all, I was wondering if you could speak at all to the competitive environment currently, if there's been any change there or anything worth noting.

Well, I mean, I think not -- by historical standards -- not on an irrational basis. We're certainly facing some new openings by competitors in some of the markets. I think from a promotional standpoint I would consider the competitive environment to be reasonably rational, nothing significantly out of the ordinary.

Okay, and looking toward the end of the year, weather was such a challenge last winter. Just wondering how you're currently thinking about that season, if -- I know it's obviously hard to predict what the weather's going to be, but if you see some opportunity for better trends there and how you're planning for the winter merchandise.

We're certainly hoping that the weather will be better than what it was last year. We've -- as a result of the rather dismal weather last season, our winter product carryover was more substantial than normal. We've tailored our purchasing around this carryover product, feel we've got a good assortment to roll out for this winter season. And we're reasonably optimistic about our opportunity to improve sales provided we get improved weather conditions.

Okay. And then just finally, it looks like you have a fair amount of openings planned for fourth quarter. And just wondering how you feel about visibility on all of this falling within the quarter, and then if there's any early thoughts on what your square footage growth plans might look like for next year.

Yes, we're not going to guide for next year at this time. I think we have reasonable visibility into our plans. As always, there's a possibility that a couple stores we're thinking about could fall out. We've got a couple others that could still occur that are works in progress. So we're reasonably confident that we'll approximate or hit the numbers that we spoke to in the call here.

And are any of those openings -- will any of those be in new states or what sort of footprint is planned for them?

We do not intend any of the openings this year to be in new states. They'll be a mixture of -- some in California and others spread throughout the other states that we currently occupy.

Okay. Well, great. Thanks very much.

Thank you.

And from Tieton Capital Management, Bill Dezellem.

Thank you. A couple of different questions. First of all, would you please discuss the shift in product mix that benefitted margins in the quarter?

Sure. I think the apparel -- I think really it's -- our ongoing adjustment to our sales mix benefitted us and some adjustment in promotional activity. I think certainly the focus on branded product offerings and many at higher price points were favorable to margins. Some of the mix shift of apparel performing as our strongest category is generally friendly toward margins. We also eased off some promotional activities, did a little less couponing over the course of the quarter and that was also friendly to our margins.

That actually leads to the second question which is relative to those promotional activities. And would it be fair just kind of thinking -- I'm trying to think as you might -- given that your comps were more favorable this quarter than they were previous quarters that that would have led you to do less couponing since you basically did not need to? Is that the right way to think about that?

Well, I think there's an element of truth in that. I mean, ultimately, I mean, we're trying to maximize gross profit dollars. We're trying to evaluate the use of coupons. Sometimes coupons are sales friendly, but at the end of the day after analyzing it not margin friendly and not gross profit dollar friendly. So ultimately we're trying to create the right mix and promotional cadence that will drive bottom line performance for the business.

Maybe as a follow-up to add some clarity to that, as you went into the second quarter, did you plan even before you knew the results of sales in the quarter to be -- to use fewer coupons and to do less couponing?

Bill, we really adjust our cadence on those on an ongoing basis. Again, I think as we see the results and saw some stronger performance, I think it may be fair to say that we were more comfortable not being as reliant on those to drive business. We're watching how consumers react and the perfect world we'd rather do a little bit less and we're pleased that we were able to head in that direction over the course of the quarter.

Great. Thank you.

You're welcome.

(Operator Instructions) We'll go next to Mark Smith with Feltl and Company.

Hi. This is Shannon Richter on for Mark Smith. Just one quick question on trends. What have you guys been seeing with your running shoe trends in the second quarter?

Well, our running shoes -- we don't talk too product specific, but I think it's safe to say that we, like I suspect everybody in the business, has benefitted from positive trending in running shoes and some of the strength in -- particularly in the lightweight running shoes. It was healthy.

Thank you.

You're welcome.

(Operator Instructions)

Operator? Hello?

We'll take Adam Sindler from Deutsche Bank.

Yes, hi. Good afternoon. Just a quick question on the July 4 shift. I'm not sure -- and I apologize I got on the call a little bit late -- did you comment what the impact was to comps in the swing out of the second quarter both from a negative standpoint and the swing into the third quarter from a positive standpoint?

Well, I guess I commented on the impact to the second quarter was roughly 100 basis points and we think at the end of the day the impact to the third quarter positive will be something in that neighborhood, as well.

Okay. Very good. I appreciate it. Thank you.

You're welcome.

We'll take a follow-up question from Bill.

Thank you. I want to come back to the advertising a bit and there was a reference in the press release that you did have lower advertising costs in the quarter. What was it that led to those lower costs?

Bill, we're selectively evaluating our advertising kind of day in and day out and I would say that we're trying to be very strategic and looking to be able to reduce the least beneficial advertising spend categories as we evaluate our sales performance. We've been doing that for quite a while now. You've seen our advertising costs come down significantly over the last several years. And we continue to evaluate our spend on newspaper print and also what kind of returns we're getting on our digital advertising.

Great. Thanks. And then on a totally different topic, are you relocating and also closing more stores than you have in the past? And, if so, would you discuss the big picture thought process behind that and the factors leading to what appears to be a little bit of a change?

Well, I think certainly in terms of relocation we've been fortunate to be able to in some -- in many cases take advantage of a real estate market that is favorable to relocate and sometimes to better locations and sometimes to -- for some of our older and smaller stores to larger locations. And also there's in some cases a more favorable economic. So that's leading to a number of the I guess what you'd call the increase in some of the relocation activity. From a closure standpoint, we've evaluated our store base and we've determined it's proper to close a couple of our underperforming stores and that's something that we continue to evaluate.

So would you consider the analysis that you're doing as more intensive than it has been in the past or is this simply a natural fallout of the recession?

The latter. Something -- we've always analyzed our store base and looked to improve store locations as leases come up. And I mean the stores that we're vacating are stores where their leases were going to come up in the reasonable future, and evaluating our probability of our renewing the lease and being successful it was proper to conclude that it made sense to close the store.

Great. Thank you both.

Thank you, Bill.

And at this time, there are no further questions. I'll turn the conference back over to Mr. Miller for any additional or closing comments.

Thank you, Operator. We appreciate your interest in Big 5 Sporting Goods, and we look forward to speaking to you at our next call. Have a good afternoon.

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.