Big 5 Sporting Goods Corp (BGFV) 2013 Q2 法說會逐字稿

Good day, and welcome to the Big 5 Sporting Goods Second Quarter 2013 Earnings Results Conference Call. Today's conference is being recorded. On the call with us today from the Company are Mr. Steve Miller, President and CEO, and Mr. Barry Emerson, CFO. At this time I'd like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, Operator. Good afternoon everyone, welcome to our 2013 Second Quarter Conference Call. Today we will review our financial results for the second quarter of Fiscal 2013 and provide general updates on our business as well as provide guidance for the third quarter. At the end of our remarks, we will open the call for questions. I will 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 constitutes 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, our quarterly report on Form 10-Q for the first quarter of Fiscal 2013, 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 a strong second quarter performance with improvements across all of our key financial metrics. Our ability to continue to improve sales, expand margins, control expenses, and grow earnings, is a testament to the excellent execution by our dedicated associates and illustrates the strength of our underlying business.

With our sales and earnings growth we generated strong cash flow for the quarter and reduced our debt by $26.5 million or 37% versus the prior year.

Now, I'll comment on sales for the second quarter. We rang the register to the tune of $239.9 million, up 5.9% from $226.6 million for the second quarter of Fiscal 2012. Same-store sales increased 4.4% during the second quarter of 2013. As anticipated, sales for the quarter benefited from the shift of the Easter holiday when our stores are closed, into the first quarter this year from the second quarter last year. This benefit was partially offset by the impact of the calendar shift of the Fourth of July holiday further into our third quarter this year which resulted in certain holiday-related sales moving from our second quarter to our third quarter.

We experienced a slight increase in customer traffic and a mid-single-digit increase in average ticket during the second quarter versus the prior year period. April was our strongest month of the quarter, comping up in the high-single-digit range, as we benefited from the Easter holiday calendar shift. Sales in May were up mid single digits and sales in June were up low single digits as the Fourth of July holiday shift pushed some pre-holiday sales into our July period.

If we were to exclude what we believe to be the impact of both the Easter and July Fourth calendar shifts, our sales were actually quite consistent throughout the quarter, comping up in the mid-single-digit range.

From a product category standpoint, all of our major merchandise categories comp positively for the quarter. Apparel was again our strongest performing category, comping up low double digits as it continues to benefit from our ongoing merchandising initiatives.

The hard goods category comped up mid single digits for the quarter. As expected, this category continued to receive a benefit from higher sales of firearms and ammunition, although to a much lesser degree than we saw during the first quarter. Sales for our footwear category comped up low single digits for the second quarter.

Along with our strong sales, we increased merchandise margins by 34 basis points for the quarter, largely due to shifts in our merchandise mix as well as a decrease in promotional activity during the quarter.

Now commenting on store openings, during the second quarter we opened two stores including one relocation. We opened a new store in South Lake Tahoe, California, and relocated our store in Puyallup, Washington. We ended the quarter with 416 stores in operation.

During the third quarter, we plan to open four new stores and close one store as part of a relocation. For the 2013 full year, we currently expect to open approximately 15 net new stores.

Now turning to current trends, our positive sales have continued into the third quarter to date and as mentioned, the first week of the quarter did receive a benefit due to the timing of the Fourth of July holiday. While we are pleased to be off to a solid start for the quarter, we should point out that the key weeks of the period lie ahead of us in August and through the Labor Day holiday. This includes the back-to-school period, with the beginning of fall sports, as well as the peak of the summer selling season for many of our markets.

Our business was strong for this period last year, as we benefited from favorable summer weather conditions. This year we believe that we are well-prepared from a merchandise and promotional standpoint to compare against these numbers. Obviously it would be helpful to get the cooperation of the weather.

Looking forward, we remain enthusiastic about our ongoing efforts to refine our merchandise mix and our marketing strategies to drive business. Additionally we are now fully-engaged in the design and development of our e-commerce platform, which we now expect to roll out in 2014.

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

Thanks, Steve. Our gross profit margin for this year's second quarter improved to 33.2% of sales from 32.2% of sales for the second quarter of Fiscal 2012. The increase reflected the 34 basis point improvement in merchandise margins that Steve mentioned, as well as our continued ability to leverage distribution and store occupancy costs.

Our selling and administrative expense as a percentage of sales improved to 28.8% in the Fiscal 2013 second quarter from 30.3% in the second quarter of the prior year. On an absolute basis, SG&A increased $0.6 million. The increase was due primarily to higher employee labor and benefit-related costs, higher credit card fees reflecting higher net sales levels, and added expense for new stores resulting from our increased store count.

In the second quarter of Fiscal 2012, we recorded pre-tax charges of $0.7 million related to store closing costs and $0.2 million related to impairment of certain underperforming stores. Now looking at our bottom line, net income for the second quarter was $6.1 million or $0.28 per diluted share compared to net income of $2.6 million or $0.12 per diluted share including $0.03 of store closing and impairment charges in the same period last year.

Briefly reviewing our 2013 first half results, net sales has increased to $486.2 million from $445.1 million during the first six months of Fiscal 2012. Same-store sales increased 7.4% during the first half of Fiscal 2013 versus the comparable period last year. Net income for the period was $13.6 million, or $0.62 per diluted share. This compares to net income of $2.7 million, or $0.13 per diluted share including $0.03 of store closing and impairment charges for the first half of last year.

Turning to our balance sheet, total merchandise inventory was $293.6 million at the end of the second quarter, down 0.8% on a per-store basis. We feel good about our current inventory position.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $6.7 million for the first half of Fiscal 2013, primarily reflecting increased investment in store remodeling, expenditures for new stores, distribution center equipment and MIS systems. We expect total capital expenditures for Fiscal 2013 excluding non-cash acquisitions of approximately $19 million to $23 million, primarily to fund the opening of approximately 15 net new stores, increases in existing store maintenance and remodeling, distribution center equipment and computer hardware and software purchases including investments related to the development of our e-commerce platform.

We generated cash flow from operations of $10.4 million for the first half of 2013 compared to $6.4 million in the same period last year. The increase in cash flow from operations primarily reflects higher net income year over year partially offset by increased funding of accounts payable related to inventory purchases.

In the second quarter, we used our healthy cash flow to invest in our store base, 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 second quarter was $44.9 million, down $26.5 million or 37% from $71.4 million at the end of the second quarter last year.

Now I'll spend a minute on our guidance. For this year's third quarter, we are projecting same-store sales in the positive low-single-digit range and earnings per diluted share in the range of $0.40 to $0.45. Our third quarter guidance reflects anticipated expenses of approximately $0.02 per diluted share associated with the development of our e-commerce platform. As a reminder we currently expect to launch our e-commerce site during 2014 but we anticipate incurring development costs of approximately $0.05 to $0.06 per diluted share during 2013.

For comparative purposes in the third quarter of 2012, same-store sales increased 5.2% and earnings per diluted share were $0.38 including $0.01 per diluted share for store closing costs.

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

Thank you, sir. (Operator Instructions) We'll take our first question from David Magee with SunTrust.

Hi, good afternoon, guys.

Hi, David.

I just had two questions. One is, what is your assumption for the second half with regard to the ticket size? Do you expect further improvement there?

Well, we look for our ticket to continue to trend positively. It has now really for a number of quarters. We think the ticket continues to benefit from our shift to some more branded products and step up to higher price points.

Is there more work to be done there? Because I know you're sort of lapping the period last year which you began to benefit from that strategy. Is there a meaningful change in the mix this year versus last with regards to the price points?

It continues to be a work in progress. I do believe there is more work to be done. We're still consistently evaluating our product offering and looking to make improvements on an ongoing basis certainly.

Thanks Steven, and then secondly the environment out there I think has certainly been a positive factor so far this year. Do you sense any change with that or does that continue to be sort of a secondary positive factor for you guys in terms of comp visibility?

I'm not sure, when you say the environment, are you saying the economic environment, the weather environment, the competitive environment? Which?

The pace of macroeconomic recovery (inaudible) out there.

Yes, we think it's you know, been generally positive. I think there's still lots of issues that remain in some of our markets, particularly in California, but I think the year-over-year improvement has been positive. We still believe there's a segment of our consumer base that is affected by issues of payroll tax and unemployment benefits running out and the like, but overall we see the environment being reasonably stable and hopefully getting better.

Okay, thanks, Steve.

We'll take our next question from Sean McGowan with Needham & Company.

Hi, I also have a couple questions. I'm going to start with any comments you might offer about the ammunition supply chain. It's been something that's come up on recent calls. Do we take it from the fact you didn't comment on it that it's gotten a lot better?

Well, I think there's still some issues in terms of the supply chain. I think it has gotten better, but we're still not receiving all the ammunition, all the calibers that we would like to see, and the quantities that we would ideally and our consumers would like to see them.

But you don't think it's having a big effect on your ability to register those sales?

Well, the ammunition business still remains very healthy for us.

Okay, good. Barry, would you mind repeating what's the net per share effect of the closings and impairments in the second quarter and any comment you would have on the balance of the year? And I have a follow-up question on that for either one of you, too.

The net per share effect of what, Sean?

Of closings and impairment.

Oh, last year? Okay. Well, okay, so last year included $0.02 a share of impairment charges. It also included -- I'm sorry. $700,000 plus or minus of store closing costs, $0.02 a share as well as $200,000 of impairment costs, about $0.01 a share. So, a total of $0.03, Sean.

Okay. The follow-up question on that is, as your business improves and you make merchandise changes and product selection changes that improve things, do you think that kind of raises the bar on what performance you expect from some of the stores, and might we expect to see maybe more closings as a result of some of them doing better? Or is that not the right way to look at it?

Yes, I don't think that's the right way to look at it. I think the changes that we've made are fundamentally helping, we think virtually all of our stores, so it's generally been positive across the board. So I don't see any thought that the initiatives or changes that we're making would create any more pressures to close stores than have existed in the past. We're always evaluating our store base, but we feel very good about the changes we're making fundamentally benefiting all of our stores.

Okay, thank you.

We'll take our next question from Bill Dezellem with Tieton Capital Management.

Thank you. A couple of questions that are potentially related. I believe in the opening remarks you mentioned that you were less promotional in the second quarter and then in the press release there was a reference to your marketing strategies to broaden your appeal to the customer. Would you discuss both of those and if they are directly related together, link them, and if not you can just take them as separate questions please?

Okay. I mean, we can adjust and the manner in which we market gives us the flexibility to change some of the levels of our promotions on a pretty timely basis depending on the conditions of the business, the tick of the business, and environmental issues. So, given how the business was trending in the second quarter, we backed off some promotional activity, that comping against some promotional activity from the prior year and that's something that we evaluate on a -- and always have, on a very ongoing basis.

Now Bill, we have been taking down our advertising over the last several years and I think maybe what you're seeing is, we've been scaling back some of the advertising from a print standpoint and really evaluating the ROI on that portion of the advertising and shifting dollars from print to digital advertising. And so, the net effect is to actually reduce our cost but really the new marketing shift is toward digital advertising.

And so that, when you reference the new marketing strategies with a focus on broadening your appeal, that's really talking about a shift from print to digital?

Well, the broadening appeal is in conjunction with the merchandise initiatives. So, when we talk about I guess to use the language of broadening our appeal, that more references the type of products that we carry in our stores versus the means of marketing those products.

That's helpful. And then relative to the lower promotional activity in the second quarter, does that in any way help explain the higher gross margin in Q2 versus Q1, even though, and I recognize that's not normally a comparison, but even though the second quarter sales were slightly below the first quarter sales?

Bill, again, I think these -- they're very, very challenging to compare the first quarter, the second quarter, the seasons are just dramatic with the winter impact on the first quarter. So clearly, this year though, the mix impacted the margins as well as the lower promotion activity for the quarter year-over-year.

Thank you both.

Thanks, Bill.

(Operator Instructions) We'll go next to Adam Engebretson with Piper Jaffray.

Good afternoon. Maybe a first question on Q2 traffic. Did the pace of traffic during the quarter follow your pace of sales?

Recently consistent. I mean, as I mentioned in the prepared remarks that if you factor out some of the calendar shifts with Easter and Fourth of July our sales were, trending, was really remarkably consistent throughout the period and the traffic and relationship between traffic and ticket was equally consistent.

Okay, and then maybe clarification. On the quarter-to-date trends did you say that those were tracking positive, and if so would that imply that the quarter-to-date comps were also positive?

Well, I said that we're off to a solid start and you can take away from that is that yes they are tracking positive, and quarter-to-date trends are positive and certainly consistent with the guidance that we provided for the entire quarter.

Okay, and then maybe lastly, on the remodel program, have those stores been open or kind of been -- is there a long enough history there to gauge kind of how those are doing after the remodel, or is it still too early in that program to say?

It's really early. I mean, we're still in the midst of completing the remodels. Again, there are varying degrees of activity that's associated with the individual remodels, but it's very premature to make a comment as to how they're benefiting the business other than to say we feel very positive about what we're doing and certainly look forward to continuing on the program.

Great, thank you.

We'll take our next question from Steven Martin with Slater Capital Management.

Hi there. Could you give us a little more specificity on the third quarter guidance? Because your guidance implies the smallest increase to gross margin and the smallest improvement in SG&A expense that you've had for a while. Is there something specific about this third quarter that would lead to very small improvement in gross margin? Especially when your mix of apparel has been so much stronger?

Right. Maybe Barry, you can add to it, but I think what shouldn't be lost is that we're comping against a very strong Q3 from last year. It was our strongest third quarter in our history, 11-plus year history as a public company. We comped our sales were strong, comping up a 5.2%, we had the benefit of favorable summer weather, and that certainly plays into the comparison which I don't think should be lost on anyone.

Yes Steve, we're -- our guidance for the third quarter is positive, low-single-digit. Of course that's down from what we had in the second quarter and the first quarter and frankly the fourth quarter. So, we are going up against tougher compares. From an SG&A standpoint, we do anticipate leveraging for the third quarter. Now as I've mentioned, we're able to leverage our costs at levels lower than we have historically, so even at a low single same-store sales growth we're able to leverage our expenses and expect to do that.

Now margins for the quarter again, it depends on promotional cadence, it depends on there's an offset to sales growth and things like that. At the high end of our guidance, our POS margins will likely be positive. At the low end of the guidance, our POS margins could be negative.

Okay, and the share count crept up a little this quarter and you didn't buy any stock back. Can you give me some color on where you expect the share count to be for the next two quarters?

I guess I would, well one, I'd run it out at the higher level. I guess I would just at this point, just anticipate kind of see if I'm doing my modeling, I'm just running out the current quarter, out through the balance of the year is what I would just suggest to you. I think changes up or down would -- I wouldn't anticipate any just from a modeling perspective, but even if there were they probably wouldn't be significant.

What I would say is in the -- we had an increased level of stock option exercise that occurred in the second quarter as we saw our stock price rise and so that would attribute the increase in the share count.

Okay, and you didn't buy any stock back or make any comment about share repurchase?

That's true, we did not buy back any shares in the second quarter and we'll continue to evaluate that as we always do with our Board ongoing at least quarterly.

Okay, thanks a lot.

Sure.

It looks like we do have a follow-up question from David Magee with SunTrust.

Thank you. I just had a question regarding the e-commerce business that you will have up and running next year. Can you talk a little bit about the what you sort of envision as the ultimate profitability of that business, and whether there is a risk of cannibalization as well?

Did you say the ultimate profitability, David?

I'm sorry, yes.

Okay.

Relative to the stores.

We're certainly doing this in the belief that it'll be accretive to the profitability of the business. I think it's premature to try to quantify that. We think we're approaching it in an intelligent fashion, roll out in a manner that ultimately will lead to positive sales, accretive to sales, without meaningful cannibalization to the business and hopefully we'll -- by creating an omni channel, multiple ways for our consumers to interact with us, that it'll be positive to our same-store sales.

Are you getting a lot of requests right now from consumers that wish to use that channel with you guys?

We certainly do, absolutely. No question.

David, I would say that one advantage we have, we think in our court, is our distribution facility. Today we're picking eaches from our distribution facility and shipping those to our stores, and so we're -- you know, this is, and a kind of a core competence of ours is picking eaches and we anticipate fulfilling from our distribution center, and hopefully that helps us as we bring this new program up.

Great, thanks, Barry.

Sure.

We have another follow-up question from Bill Dezellem with Tieton Capital Management.

Thank you. I want to circle back to the product assortment aspect of the merchandising strategy and just that evolution of the product assortment. Where would you say that you are at in that process, and is there a specific time frame that you hope to get to, to some I'll call it a soft endpoint as opposed to a true endpoint?

Bill, it's really an ongoing effort and there's certainly no end date. I mean, we've been evolving and refining our product assortments for now 58 years, as long as we've been in business. So, there's never a point where we're going to sit and just say project over, we've now got the absolute ideal product assortments in our stores. I mean, we continue to learn. Not every at-bat is a base hit or a home run and our fundamental way we've driven the business for really forever, is to try and evaluate what's working, to weed out the least productive aspects of our merchandise mix, and take shots and strategic shots to generally improve the assortment. So, we certainly never see an end date.

I think what's been more, more pointed of late, is our efforts just to step up price points, to recognize certain changes in the consumer behavior and ability to spend discretionary dollars, and we looked for that to again, to be an ongoing effort with certainly no end date in mind.

Ultimately we're -- yes, ultimately we're just looking as we always have to provide our customers with what we think is the optimal mix of value, selection, service, along with the convenience that we provide.

And it would be our sense that you felt as though you were playing catch-up maybe, but certainly that there was an accelerated effort and I guess specific to that accelerated effort or catching up process, how far along would you say you are in that?

Well I'm having a hard time, again, as I said there's no end date. We remain, we believe, very much in the middle of the game. Bottom of the fourth to top of the fifth, best I could call it. I mean, it's really ongoing.

That's helpful, thank you.

Sure.

And there are no further questions left in the queue. At this time, I'd like to turn the call back over to our speakers for any closing remarks.

All right, well we certainly appreciate your interest in Big 5 Sporting Goods, and we look forward to speaking to you on our next call. Have a great afternoon.

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