Big 5 Sporting Goods Corp (BGFV) 2013 Q3 法說會逐字稿

Good day, and welcome to the Big 5 Sporting Goods third 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 Chief Executive Officer, and Mr. Barry Emerson, Chief Financial Officer. At this time, I'd like to turn the conference over to Mr. Miller. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to our 2013 third quarter conference call. Today we will review our financial results for the third quarter of fiscal 2013 and provide general updates in our business, as well as provide guidance for the fourth quarter. At the end of our remarks we will open the call for questions.

I will now turn the call over to Barry to read our Safe Harbor statement.

Thanks, Steve.

Except for statements of historical fact, any remarks that we may make about our future expectations, plans and prospects constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our Annual Report on Form 10-K for Fiscal 2012, our Quarterly Report on Form 10-Q for the second 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 for the second year in a row to report our strongest third-quarter earnings per share in our history as a public company. Despite being challenged by unfavorable summer weather during the heart of our summer selling season we grew same-store sales, expanded product margins and, as always, remained very focused on managing expenses.

Now I'll comment on sales for the third quarter. We rang the register to the tune of $259.1 million, up 2.9% from $251.8 million for the third quarter of fiscal 2012. Same-store sales increased 1.4% during the third quarter of 2013. As anticipated, sales for the quarter received a small benefit from the 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 low single-digit decrease in customer traffic and a mid-single-digit increase in average ticket during the third quarter versus the prior year period.

Our sales comped in the positive low single-digit range in July, but swung to the negative low single-digit range during August as unfavorable summer weather in many of our markets impacted sales of summer related products. Additionally, during much of the same time period sales comparisons in certain product categories were challenging as we cycled the benefit from the 2012 London Summer Olympic Games.

In late August, when weather comparisons were more normal, our sales returned to positive trending and they continued positively into September in the low single-digit range, which was our strongest month of the quarter on a comp store basis.

From a product category standpoint the unseasonably cool weather during the heart of our summer selling season negatively impacted sales of summer related products in each of our three major merchandise categories. Apparel was again our strongest performing category, comping up high single digits. We believe the continued strength in apparel, particularly given the less than optimal summer weather, is a positive reflection of our ongoing merchandising initiatives.

Sales in our hard good category comped up low single digits, while sales in our footwear category decreased in the low single-digit range for the third quarter.

Merchandise margins increased by 12 basis points for the period. This increase comes on top of a 25-basis point increase in merchandise margins that we achieved during last year's third quarter.

Now, commenting on store openings, during the third quarter we opened five stores, including two as part of relocations, and we closed one store as part of a relocation that began in the second quarter. We opened new stores in Poway and Barstow, California and Phoenix, Arizona. We also opened stores in Merced, California and Longview, Washington as part of relocations. We ended the quarter with 420 stores in operation.

For the fourth quarter we opened a new store in Gallup, New Mexico last week. We will be opening in Coachella, California later this week. We anticipate opening seven additional stores before yearend, which will give us nine new stores for the quarter and 15 net new stores for the 2013 full year and result in a yearend store count of 429.

Now turning to current trends, we are off to a strong start in the fourth quarter as we've seen our positive sales trends continue and actually accelerate in October. Our same-store sales are running up in the low mid single-digit range for the quarter to date. We are encouraged by these sales trends, particularly given that much of what we've been hearing on the news suggests that there has been a fair degree of softness in the overall consumer environment. Although pleased with our start to the quarter it should be noted that October is a relatively low volume period for sales. Our results for the full quarter will depend largely on our success during the holiday season when consumer shopping behavior is challenging to predict.

We had strong fourth quarter sales last year, in part due to the national surge in demand for firearms and ammunition. That said, we believe we can positively comp last year's performance on the strength of a number of product categories, which we believe are positioned to perform well as a result of our ongoing merchandising initiatives and enhanced business analytics, along with what we feel will be a strong promotional campaign.

We are particularly excited about the opportunity to grow our winter and cold weather related sales because this will really be the first winter season that we will have the opportunity to benefit from our merchandise initiatives and enhanced retail analytics. As you might recall, our winter purchasing last year was limited as we bought around the winter inventory carryover from the 2011, 2012 winter season when we experienced very poor winter weather conditions. This year, following the favorable sell-down with the 2012, 2013 winter season product we now have a nice fresh assortment of winter merchandise. Obviously, it will be helpful to have the cooperation of winter weather to maximize our sales.

Finally, I should note that we are progressing positively on the design and development of our new e-commerce platform, which we continue to expect to roll out in 2014.

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

Thanks, Steve.

Our gross profit margin for this year's third quarter improved to 33.9% of sales from 33.3% of sales for the third quarter of fiscal 2012. This increase reflected our ability to leverage distribution costs, as well as the 12-basis point improvement in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales was unchanged year-over-year at 27.9% in the fiscal 2013 third quarter and fiscal 2012 third quarter. On an absolute basis SG&A expense increased $2.0 million. This increase was due primarily to a pretax charge related to legal settlements of $1.3 million, of which $1.0 million was classified as expense and $0.3 million was classified as a reduction in net sales. The higher SG&A expense also reflected costs of approximately $0.6 million associated with the development of our new e-commerce platform and added expense for new stores resulting from our increased store count, partially offset by a reduction in advertising expense. SG&A expense for the third quarter of fiscal 2012 included a pretax charge of $0.4 million related to store closing costs.

Now looking at our bottom line, net income for the third quarter was $9.1 million or $0.41 per diluted share, including $0.04 per diluted share for a charge for legal settlements compared to net income of $8.2 million or $0.38 per diluted share, including $0.01 per diluted share for a store closing charge in the same period last year.

Briefly reviewing our 2013 first nine months results, net sales increased to $745.3 million from $696.9 million during the first nine months of fiscal 2012. Same-store sales increased 5.3% during the first nine months of fiscal 2013 versus the comparable period last year.

Net income for the period was $22.8 million or $1.03 per diluted share, including $0.04 per diluted share for a charge for legal settlements. This compares to net income of $10.9 million or $0.50 per diluted share, including $0.04 per diluted share of store closing and impairment charges for the first nine months of last year.

Turning to our balance sheet, total merchandise inventory was $287.9 million at the end of the third quarter, up 0.7% on a per-store basis compared to the same period last year. We feel good about our current inventory position as we enter the holiday shopping season.

Looking at our capital spending, our CapEx excluding noncash acquisitions totaled $12.6 million for the first nine months of fiscal 2013. We plan to open nine new stores and continue investing in the development of our new e-commerce platform during this year's fourth quarter. We expect full year capital expenditures in fiscal 2013 excluding noncash acquisitions of approximately $19 million to $23 million, primarily to fund the opening of 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 new e-commerce platform.

We generated cash flow from operations of $25.2 million for the first nine months of 2013 compared to $28.5 million in the same period last year. The decrease in cash flow from operations primarily reflects increased funding of inventory purchases, partially offset by higher net income year-over-year.

In the third quarter we used cash to pay our quarterly cash dividend of $0.10 per share and to pay down borrowings under our revolving credit facility. Our long-term debt at the end of the third quarter was $37.9 million, down $14.7 million or 28% from $52.6 million at the end of the third quarter last year.

Now I'll spend a minute on our guidance. As Steve mentioned, we are encouraged by our positive sales trends for October and are confident in our product and promotional plans for the fourth quarter, but it's still early in the quarter and the consumer spending trends over the holiday season are unpredictable. Additionally, over the last several weeks of the quarter we will be cycling the benefit received last year from the national surge in demand for firearms and ammunition.

With that in mind, for this year's fourth quarter we are projecting same-store sales in the positive low single-digit range and earnings per diluted share in the range of $0.20 to $0.28. Our fourth quarter guidance reflects anticipated expenses of approximately $0.02 per diluted share associated with the development of our new e-commerce platform. For comparative purposes, in the fourth quarter of 2012 same-store sales increased 6.5% and earnings per diluted share were $0.19.

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

Thank you. (Operator Instructions)

And we will take our first question from Sean McGowan with Needham & Company.

Hi, guys. Thank you. A couple questions here. First, can you talk about what you're seeing now regarding firearm trends and just how important was it to the fourth quarter, you know, how much of that comp came from firearms a year ago?

Yes, I mean I think you've got to talk -- look at firearms and ammunitions, both of them.

Yes, of course.

We're seeing -- yes, we're seeing, I think firearms I think the surge has recently moderated and I would say it's pretty normal business, probably the demand is still above historical norm. Our ammunition business continues to remain healthy. Last year our firearm business picked up some following the Presidential Election, and then the real surge took place following the tragedy at Sandy Hook.

The firearms, ammunition sales certainly had a meaningful benefit on our Q4 2012 sales, but it's really difficult to quantify because those categories have been running still strong kind of going into the period. We clearly would have had a very strong fourth quarter last year without the benefit of firearms and ammunition, and the guidance that we provide this year assumes that there'll be some softer demand this year for those categories than we experienced last year.

Okay. Thank you. A couple of others then. Can you talk a little bit more specifically about categories that, other than the winter merchandise, which you did call out, categories that you think will benefit from your analytics and merchandising? And then, secondly, a little bit more color on what the legal settlement issue was, and is that fully behind us now? Thanks.

Sure. I mean we think, you know, we have a broad array of categories that are benefitting from our initiatives and our analytics. Certainly, our entire apparel, which as we mentioned we're very excited about the opportunities to generate very positive winter apparel sales, but across hard goods I mean it's a broad array of categories, from fitness to team sports and many others. We're not going to get terribly granular in discussing product categories. And our footwear business, we're optimistic in that area, as well.

Yes, Sean, and on the legal charge -- okay, yes, the charge includes an accrual for settlement of the zip code lawsuits, which have been previously disclosed in the filings, in our filings with the SEC.

Okay, just wanted to make sure it was that same issue, and do you think this is the last we'll hear about that?

Well, I mean we hope so. I hope so, I mean we've accrued the best estimate that we have and, hopefully, there isn't anything further, but as you read the disclosure you'll see that there's certain -- the court still needs to approve the settlement, et cetera.

Right, I didn't mean to put you on the spot for unpredictable things, but as far as you know you've accrued what you know, and if you're right then this is it, it's not like it's going to be an ongoing thing if you've accrued the right way, is that right?

Yes, yes, that's absolutely right.

Okay. Thank you.

And we will now go to Sean Naughton with Piper Jaffray.

Hi, just a couple questions for you guys. On the margins, you guys did a nice job again in Q3, expanding the merchandise margin. Just wondering if you could delve into the buckets a little bit more on the distribution cost and occupancy and the buying pieces of that margin, as well?

Well, Sean, yes, as we've mentioned, at least we got the 12 basis points on the merchandise margins, and we're able to leverage our distribution expenses at a rate of same-store sales growth of about, frankly, flat to down 1%. So, and when we're positive we're certainly leveraging our distribution costs, and we're able to leverage our occupancy at a rate, at a same-store sales growth rate of about 3% or so. So, yes, we're seeing some margin benefit, certainly as our comps continue to grow.

So is it fair to say that the little bit of maybe negative impact a little bit on the occupancy and we'll see that the additional benefit outside of the 12 basis points came from the distribution side?

Right, yes, there was a little deleveraging on the occupancy, not much but a little bit.

Right, understood. Okay, and then I guess on the categories, good to see that the hard goods are still performing well. Apparel obviously remains strong. Footwear did dip down, just curious anything on the ASPs inside of footwear and are there any trends there that you're seeing in that particular business that caused some of the weakness in the quarter?

I think our ASPs are I think edging up slightly in our footwear. I think our footwear business was impacted by the lack of favorable summer weather, which has certainly had, you know, we saw some softness in the sandal sales and items that are clearly strongly when you have warmer weather and driving people to lakes and beaches and so forth.

Our footwear business comped up nicely in the low single-digit range, and last year's third quarter they would be positive on a two-year basis. So I think we're fighting some of the positive trending of the lightweight running that was a little bit stronger and driving some sales last year, and don't see anything quite of that like benefitting us at this time, but we feel quite positive about our footwear business going forward.

Okay, that's great. Just one last question. On the weather comparisons, you talked about it being a little bit challenging in August. Did things turn around a little bit over the last maybe six, seven weeks, where it's been a little bit more normalized at least instead of some of the weather that you were seeing in August?

Yes, I mean the real softness in our quarter really occurred over about a three-week period from really the end of July through the first roughly two-and-a-half weeks of August. And it was strange weather, I mean we had a period of I believe it was 29 consecutive days where the high temperature in LA was at or below normal. It was that way across a number of our markets, primary markets. After that I think weather was generally normal, and we saw our business respond much more positively. As we mentioned, September was our strongest period of the quarter.

That's great. Thank you and best of luck.

Go ahead?

Sorry, Steve, I didn't mean to interrupt you. Go ahead?

Yes, I was saying that we seen our sales accelerate thus far in the fourth quarter in October.

That's great. Thanks for taking the questions.

And we will now go to Mark Smith with Feltl & Company.

Yes, this is [Shannon Richter] on for Mark Smith. The first question is what is the state of the California consumer versus your other markets where you operate?

I'm sorry, can you speak a little louder? I did not hear the question.

Yes, I'm sorry about that. What is the state of the California consumer versus the other markets that you operate in?

Well, I'm not sure that I've got a great answer to that. I think there's a number of challenges that have faced the California market compared to others for a number of years, generally speaking, higher unemployment, higher gas prices, typically amongst the highest. That's nothing particularly new. I think there's hopefully been some recovery in the housing markets that can benefit California, but all in all I mean our performance in California is never too far away from our overall performance because it does comprise a significant share of our business.

Okay, perfect. And then one last question, can you just remind us when you have the twenty-third week?

Say that again?

The twenty-third week?

Can you just remind us when you have a fifty-third week, excuse me?

Fifty-third week.

Yes?

Well, not this year and not next year, maybe the year after.

Yes, 2015 will have the fifty-third week.

Okay, perfect. Thank you so much.

Sure.

And we will now go to David Woodyatt with Keeley Asset Management.

Yes, it looks like for the full year your net growth in stores will be somewhere in the 3% to 4% area, is that a good educated guess that your likely growth of stores in the foreseeable future, in the next few years, or are you hoping to do more than that?

Well, we haven't announced our plans for the next years, let alone beyond that. The 15 net new stores, it's the most net openings for us since 2008. Although we haven't announced our plans, I would anticipate that next year will be similar or somewhat accelerated from that, and we're really not guiding beyond that or speaking to that at this time.

Okay, just one quick follow-up question on the guns and ammo area. Would it be fair to say that even though it will be a fairly tough comparison in the fourth quarter, that the first quarter will be an even tougher comparison because it was even --

That would definitely be fair to say.

Okay, good.

The peak of the [ban] was in the first quarter of 2013.

Right. Okay, good. Thank you very much.

You're welcome.

(Operator Instructions)

And we will now go to David Schick with Stifel.

Thanks. This is Taylor LaBarr on for David Schick. I was just wondering if you could go into a little more detail on your merchandising initiatives and improved business analytics, specifically what part of those programs do you think had the biggest impact in the quarter either on sales or gross margin?

And then, secondly, as you think about what you've done, what's been implemented so far, and what's still left to do, generally what inning are we in in that process and seeing those, the impact of those changes flow through? Thank you.

Yes, well, we think we're -- this is certainly an ongoing effort. No end date, and I think the effectiveness of our program is reflected in how if you look at, for example, our apparel business comped up a high single-digit. It was going against a high single-digit gain in the Q3 of 2012 over 2011. The improvement was made despite the loss, in our minds, clearly of summer related sales due to the unseasonably cold summer.

So I think it's an effort that we can absolutely build on and it really involves just taking our analytics and making better decisions in store-by-store merchandise allocations and the timing and pricing of our promotions. And we feel we've got wonderful opportunities to continue to benefit from our investment in the analytics.

Great. Thanks.

And we have no further questions at this time.

Okay, well, we thank you for your interest today and look forward to speaking with you on our next call. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.