Big 5 Sporting Goods Corp (BGFV) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods first quarter 2013 earnings results conference call. Today's conference is being recorded. On the call with us today from the Company, we have Steve Miller, President and CEO, and Barry Emerson, CFO. At this time, I will turn the conference over to Mr. Steve Miller. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to our 2013 first quarter conference call. Today we will review our financial results for the first quarter of fiscal 2013 and provide general updates on our business, as well as provide guidance for the second quarter. At the end of our remarks, we will open the call for questions. I will now 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 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 first quarter earnings significantly ahead of the guidance we provided during our last call in late February. Our strong results were driven by a double-digit increase in same-store sales, improvements in customer traffic and average sale, and healthy margin expansion. This performance reflected a combination of ongoing enhancements to our merchandise and marketing programs, the continued high demand for firearms and ammunition products, and more favorable weather conditions versus the prior year in a majority of our markets.

Our results enabled us to generate $24 million in operating cash flow and reduce our debt by $28 million, or 47%, from the prior year's levels.

Now I'll comment on sales for the first quarter. We rang the register to the tune of $246.3 million, up 12.7% from $218.5 million for the first quarter of fiscal 2012. Same-store sales increased 10.5% during the first quarter of 2013. 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 are closed, into the first quarter this year from the second quarter last year. We experienced a low single-digit increase in customer traffic and a high single-digit increase in average ticket during the first quarter versus the prior year period.

The quarter got off to a great start, with sales in January comping up strong double digits. Sales during January received the most significant benefit from the favorable winter weather conditions in many of our markets, especially when compared to the lack of winter weather during the same period last year. In January, we also experienced the strongest benefit from the increased demand for firearm and ammunition products.

Sales during both February and March comped up in the mid-single-digit range. We were particularly pleased with our March performance, which was above our forecast, as we enjoyed generally favorable early spring weather and experienced strength in a number of our spring product categories.

From a product category standpoint, apparel and hard goods comped up in the mid to high teen range for the quarter, with apparel being our strongest category. Favorable weather conditions certainly benefited apparel sales, but we are especially pleased with how our efforts to realign this category by focusing on branded products and higher price points are influencing sales. Sales in the footwear category were slightly negative for the quarter, although they would have comped positively if we factored out the Easter shift.

Along with our strong sales, we increased merchandise margins by 113 basis points for the quarter. A number of factors contributed to this increase, including strong sales of higher-margin winter and apparel products and the fact that we were somewhat less promotional during this year's first quarter compared to the prior year, when our sales were challenged by a lack of favorable winter weather in our markets.

Now, commenting on store openings. During the first quarter, we opened one store in Richfield, Utah, and closed one store as part of a relocation that began in 2012. We currently have 414 stores in operation, and we anticipate opening two new stores during the second quarter. For the 2013 full year, we currently expect to open approximately 15 to 20 net new stores.

We are also excited about an expanded store remodeling program that we have underway this year. We will be enhancing significantly more stores than we do in a typical year in an effort to leverage our merchandising initiatives by investing in fixtures that we believe will better present our products.

Now, turning to the current quarter. I'm pleased to report that the positive sales trends have continued into the second quarter. While the most critical period of our quarter lies ahead of us with Memorial Day and Father's Day, we remain encouraged by the customer response to our evolving product assortment and marketing efforts.

We continue to expand our use of digital advertising and communications to drive traffic to our stores and are moving forward in our efforts to develop a full e-commerce platform for our business. We now believe that although it is still possible that we will be in a position to launch our e-commerce site in 2013, it is far more likely that we will go live in 2014.

All in all, we are excited about our merchandise and marketing plans and believe that we are well positioned to deliver strong top and bottom line results as we move through the spring and into the summer season.

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 second quarter guidance.

Thanks, Steve. Our gross profit margin for the first quarter improved 180 basis points, to 32.7% of sales from 30.9% of sales for the first quarter of fiscal 2012. The increase was mainly due to our higher merchandise margins of 113 basis points that Steve mentioned, as well as our ability to leverage store occupancy and distribution costs.

Our selling and administrative expense as a percentage of sales improved to 27.6% in the fiscal 2013 first quarter from 30.5% in the first quarter of the prior year. On an absolute basis, SG&A increased $1.3 million. The increase was due primarily to added expense for new stores, reflecting an increased store count, higher employee labor- and benefit-related costs, and higher credit card fees, partially offset by a decrease in advertising expense.

Now, looking at our bottom line, net income for the first quarter was $7.5 million, or $0.34 per diluted share compared to net income of $156,000, or $0.01 per diluted share, in the same period last year. The first quarter of fiscal 2013 included a tax benefit of $0.01 per diluted share, reflecting recently enacted tax legislation.

Turning to our balance sheet, total merchandise inventory was $271.9 million at the end of the first quarter, up 0.7% on a per-store basis. We feel good about our current inventory position and are particularly pleased with the healthy sell-down of winter products in the first quarter.

Looking at our capital spending, our CapEx, excluding non-cash acquisitions, totaled $3.2 million for the first quarter of fiscal 2013, primarily reflecting an increased investment in store remodeling, expenditures for new stores, distribution center equipment, and MIS systems. We continue to expect total capital expenditures in fiscal 2013, excluding non-cash acquisitions, of approximately $18 million to $22 million, primarily to fund the opening of approximately 15 to 20 new stores, increases in existing store maintenance and remodeling, distribution center equipment, computer hardware and software purchases, and corporate leasehold improvements.

We generated healthy cash flow from operations of $23.8 million in the first quarter of 2013 compared to $11.4 million in the same period last year. The increase in cash flow from operations primarily reflects higher net income year over year.

In the first quarter, we used our healthy cash flow to pay our quarterly dividend of $0.10 per share and pay down borrowings under our revolving credit facility. Our long-term debt at the end of the first quarter was $31.9 million, down $28.3 million, or 47%, from $60.2 million at the end of the first quarter last year, and also down from $47.5 million at the end of fiscal 2012.

Now I'll spend a minute on our guidance. As Steve mentioned, sales continued to trend positively in the second quarter to date, and we are encouraged by the consumer response to our merchandise and marketing initiatives. We believe that we are well positioned to deliver strong year-over-year results in the second quarter, but keep in mind that the economy remains challenging, and variances in weather and calendar make forecasting difficult.

In addition, while the demand for firearms and ammunition products remains elevated, we do not expect the same level of benefit in the second quarter that we saw in the first quarter, due in part to supply issues surrounding these products.

For the second quarter, we are projecting same-store sales in the positive mid-single-digit range and earnings per diluted share in the range of $0.20 to $0.26. Our guidance reflects the previously mentioned variables and the benefit of the calendar shift of the Easter holiday, when our stores are closed, out of the second quarter and into the first quarter this year, as well as increased expenses of approximately $0.01 per diluted share associated with the development of our e-commerce platform. We currently anticipate incurring development costs related to our e-commerce platform of approximately $0.05 to $0.06 per diluted share during 2013.

For comparative purposes, the second quarter guidance we are providing of same-store sales in the positive mid-single-digit range and earnings per diluted share in the range of $0.20 to $0.26 compares to a same-store sales increase of 1.0% and earnings per diluted share of $0.12, including $0.03 per diluted share of store closing and non-cash impairment charges for the second quarter of 2012.

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

Thank you. (Operator Instructions.) Sean Naughton, Piper Jaffray.

Congratulations on a very strong first quarter. A quick question for you on the margin front. Your gross margins, obviously very nice to get that going in the right direction at around 32.7%. But it's really more just in line with that Q1 2011 levels. Is there anything that prevents you from getting back toward that historical 35% range that you used to generate in Q1? Or has there actually been a shift in your business in the mix to the point where structurally that may be a bit of an issue? And then, I guess the follow-up is, is more of the opportunity on the merchandise margin or the fixed expenses?

Sean, I think that from a margin standpoint, it's really broken down between merchandise margins, our distribution costs, as well as our occupancy costs. And we certainly, over the last several years, although our merchandise margins have come down, they've held up reasonably well. We think we clearly have seen improvement in merchandise margins now over the last several quarters and feel like we can continue to drive those higher.

From a DC standpoint, our distribution costs, again, we think we've got a distribution center that we feel we can leverage now for a number of years. Even with normalized store growth of 20-plus stores, we shouldn't have to add additional capacity to our distribution center for at least the next five years. And frankly, we're leveraging that distribution center at flat to negative same-store sales growth today.

On the occupancy front, again, we used to leverage that something closer to 3.5%. Today we're probably leveraging our occupancy in the 3% to 3.5% range, so slightly lower. But no, we think we can continue to drive margins higher, certainly, over time.

Okay, that's great to hear. And then just one other question on the margin front, just on the SG&A side. Obviously, you didn't have much growth there, but you had a little bit of an offset in advertising. Was that just a timing shift, or is there something structurally that you've changed and that you're doing within that particular department to lower the spend there, but continue to drive customers to the store? And could that potentially be a benefit moving forward over the next few quarters as well?

Sean, we think it can be a benefit. You know, we've been strategically shifting some of our budget from print to digital. We're certainly not walking it all away from print. It's still by and large the lion's share of our ad spend. But we've seen that we can clearly drive sales, traffic and sales digitally, and do it in a more cost -- in some cases, on a more cost-effective basis -- than print.

Okay, great. Best of luck in the second quarter, and thanks for taking my questions.

Sean McGowan, Needham and Company.

I also have a couple of them. Steve or Barry, does the number of stores that you're now expecting for the year, is that a slight increase from the net number that you had talked about a couple of months ago?

No, not really, pretty much the same target that we spoke of in our last call.

Okay. I thought it was a couple higher. Now, you're saying that your expectation for the second quarter is for comps in mid single digits. Did you say what it was so far in April?

We didn't say, and it's certainly consistent with that guidance that we provided for the full quarter. The April contains the benefit, but that month is a little deceptive in the sense that we received the entire benefit of the Easter shift in April, so it has a disproportionate positive benefit to April than the quarter as a whole.

And have you seen -- I know a number of retailers are talking about weather in April that maybe wasn't so favorable. Have you seen any kind of impact from that one way or the other?

I think weather's been reasonably normal in April; I would say generally favorable.

Okay, thank you. And are there any issues coming up for comparative purposes to last year, special things that were there a year ago, positively or negatively, that we should be aware of, looking out over the next few months? Special events or special product categories that may not repeat?

There's no meaningful calendar shift. The Fourth of July moves one day further into the third quarter from the second quarter. I don't think that's a game-changer for us. The firearm and ammunition demand remains certainly strong and won't be nearly as impactful in the second quarter as it was in the first, but it still -- we suspect it will be a positive to the quarter, unquestionably.

Okay. And any thoughts on why footwear would be so much weaker than the other categories?

I'm sorry. Say again?

The footwear? Any thoughts on why footwear is lagging the other categories?

Yes, for the first quarter, the footwear, it was slightly negative. It would have been comp, possibly if we had factored out the negative impact of the Easter shift. I can tell you that we've seen a generally positive start to footwear sales in Q2. It was our strongest-performing category in Q1 of 2012.

I think some of the factors that are negative, we've seen some leveling off in the reduction from the strength of lightweight running shoes that we experienced last year. I think some of the industry generally appears to be a little soft at the moment as well, and possibly that represents potential opportunistic buys for us.

I think what I would call our core value-oriented footwear customer may be somewhat more susceptible to the economic challenges that many are facing. I think the winter business, when we were enjoying real strong winter sales, I would believe that some of that was detrimental, the conditions were detrimental to footwear sales. And also, some of the changes to our promotional cadence. We were somewhat less promotional this year than we were a year ago, when we were really trying to overcome the impact of a very negative winter. And I would think that that probably created more softness in footwear than other categories.

All in all, we're not feeling bad at all about our ability to drive our footwear business.

Okay, great. And then a final question for Barry. Can you talk about what depreciation and amortization was in the quarter and what your forecast is for the full year?

For the full year, I would estimate D&A at about $19 million. And for the quarter, let me give you that. Yes, for the quarter, it was $4.8 million.

Okay. Thank you very much.

David Schick, Stifel Nicolaus.

Congrats on the quarter as well. First question, with all these improvements in the systems you guys are implementing to drive the business, is your sense that you're driving new customers into your stores or doing more with your existing customers?

It's hard to precisely quantify, but I think, unquestionably, we're doing more with existing customers. And I would have to believe that we're seeing the benefit of bringing new traffic into our stores as well. But there's no question that, based on our average ticket, that our existing customers are spending more money with us.

Okay, thanks. I think you've said in the past that your prior operating margin, which had been north of 6%, looked doable -- potentially doable -- based on some of the work you were doing. Would you like to update any thoughts on what you think the right, or the potential operating margin of the business could be, given what you're seeing?

Dave, I think that, really, the operating margin, again, we've seen -- as you mentioned, back in pre-recession, we were in the 7% range kind of a thing. Whether the drop in same-store sales, the decline in margins, and so on, certainly have impacted the last several years. But as we see the business turning here from a sales perspective, and looking at the overall model, we don't see a reason why we can't get back to our historical range.

Now, for the first quarter, our operating margin was 5.1%, and that compares to 0.4% last year. So clearly, the dynamics of the shifting same-store sales and the merchandise margins are huge. And our ability to leverage our same-store sales, as I suggested a little earlier, we feel pretty good about being able to drive the operating margin, clearly, up from where it is today.

Thanks. That's helpful. Lastly, I might have missed it, but did you, or could you, quantify the comp and maybe the gross margin impact of the benefit of firearms?

We didn't mention that precisely. I think what I will tell you, the firearms were certainly significant to our results. But were we to exclude all firearms and ammunition sales from our business, we would have still comped up a very solid mid-single-digit for the quarter.

Okay, and were they gross margin accretive as well? Better than mix?

No, the margins, merchandise margins for those categories are below our average selling margins.

Okay, great. That's very helpful. Thanks, and congrats again.

Mark Smith, Feltl and Company.

Just one quick question. Can you talk about, your ticket obviously was up pretty strong here during the quarter. How much of that was due to the merchandising strategy, and can you talk about how successful that's been?

I'm not sure that we can, again, distinguish exactly how much of that was a result of new merchandising strategies, stronger sales of firearms products, our high-ticket sales. And that clearly benefits average ticket. What we'd like to tell you is that we're really excited about the efforts in place to step up some price points in our product offering. And clearly, that is driving a higher ticket for us. And we've been really seeing positive improvements in our average ticket, for the most part now, over a number of quarters.

Is it fair to say that maybe that had more of a positive impact on merchandise margins?

I think, to the degree we're seeing this success in apparel products; apparel products typically carry higher margins than most of our other categories. So that, sort of by definition, would be quite positive for the margin picture.

Mark, our average ticket has actually increased over the last nine quarters.

Perfect. Thank you.

(Operator Instructions.) Matt Dhane, Tieton Capital Management.

I was hoping to discuss a little bit about your remodeling strategy. And how many stores are going to be impacted by your remodeling program that you're rolling out this year? And what's your remodeling strategy over the next several years?

We do plan to touch significantly more stores than in a typical year. Depending on how we define the degrees of remodeling, it could be somewhere in the neighborhood of, I think, 50 stores or so that we will meaningfully be investing in this year. As far as what that means going forward, we'll evaluate the results that we see from this year's efforts, make adjustments as we go, and assuming we see all the successes that we're expecting to see, I would look for something similar and/or accelerated going forward.

But Matt, just in order of magnitude, for 2012, for example, we remodeled 13 stores. So it's a pretty big increase for us.

And I'm trying to, I guess, understand the scope of the remodeling. Whenever you're remodeling a store, what's the range? What's a minimum that you do, versus are we talking basically a full gutting of the store and a redoing? Help me understand what you're doing exactly, I guess.

It's a good question. It's a range from just some space reconfiguration and new fixtures, at a minimum, to a complete remodeling, which could include new flooring, wall treatment, cabinetry, et cetera. So our general focus is trying to reconfigure store space and try and showcase branded products more positively. And that's something we're quite excited about.

Thank you both.

David Magee, SunTrust Robinson Humphrey.

Congratulations for May. Two quick questions. One is, can you talk about the analytics software that you have now and how that's contributed to the current momentum? And then secondly, can you talk about what you see with regard to the supply of firearms for the next quarter or so? Do you see that becoming more available as we get further down the year?

In terms of the business analytics, we remain extremely enthusiastic about the benefits that we're receiving and how it's helping us analyze our business, fine-tune purchasing and allocation decisions on a store-by-store basis. We're adding new applications to the software, really, as we speak. So I think it's a very positive and meaningful tool for driving our business.

In terms of the supply of firearms, it is probably more or just as meaningful, really, to speak to the ammunition supply as well. And it's difficult to comment about how the supply chain will play out going forward. The industry still appears to be in a bit of a catch-up phase, and we really are seeing the supply, really, on a week-to-week basis, is how we're learning, effectively, about exactly how the channel will be filled.

Do you get a sense there's a lot of pent-up demand out there that you have to sell in your stores?

We certainly get a sense that the supply hasn't caught up with the demand. So we do think there is some excess demand out there. It's very difficult to predict how the supply chain will play out and how the demand curve will play going forward.

Great. Thanks, guys.

And at this time, there are no further questions in the queue. I'd like to turn the conference back to Mr. Steve Miller for any additional or closing remarks.

Thank you. We appreciate your interest in Big 5 and look forward to speaking to you on our next call. Have a great afternoon.

Thank you. Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.