Big 5 Sporting Goods Corp (BGFV) 2014 Q1 法說會逐字稿

Good day and welcome to the Big 5 Sporting Goods' first quarter, 2014 earnings results conference call. Today's conference is being recorded. On the call today from the Company we have Steve Miller, President and CEO; and Barry Emerson, CFO.

At this time I would like to turn the conference over to Mr. Steve Miller, please go ahead, sir.

Thank you, operator. Good afternoon everyone, welcome to our 2014 first quarter conference call. Today, we'll review the financial results of 2014, and provide general updates on our business as well as provide guidance for the second quarter. At the end of our remarks, we'll open the call for questions.

I'll now turn the call over to Barry to read our Safe Harbor statements.

Thanks, Steve. Except for statements about historical facts, 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 describe in our Annual Report on Form 10-K for fiscal 2013 and other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update forward-looking statements that may be made from time to time by us or on our behalf.

Thank you, Barry. As expected, the first quarter of 2014 was very challenging, particularly when compared to our exceptionally strong performance for the first quarter of fiscal 2013, which to a large extent was driven by extraordinary demand for firearm and ammunition products.

In addition to the challenge of comping against the strength of those categories, this year we were also meaningfully impacted by abnormally warm and dry conditions in most of our western markets throughout the winter season. Despite reduced demand for firearm and winter related products, we were encouraged by the strength we experienced in many of our other product categories during the period.

Now I'll comment on sales for the first quarter. First quarter net sales were $231.3 million down 6.1% from $246.3 million for the first quarter of FY2013. Same store sales decreased 7.9% for the first quarter of 2014 compared to a 10.5% increase for the first quarter of last year. Sales received a small but expected benefit from the calendar shift of the Easter holiday during which our stores are closed, out of the first quarter and into the second quarter this year.

As I mentioned, the comparative softness in the quarter was very much driven by two product categories on which I'll try to provide a little color. Firearms ammunition and related accessories which represented well over 10% of our sales during last year's first quarter declined approximately 45% for the period.

Our winter related products, which also represented well over 10% of our sales during the first quarter of last year declined approximately 25% for the period. The rest of the store, in other words, everything but these two categories, performed positively with same store sales increasing in the solid low single digit range for the quarter.

The reduced demand for firearm and winter related products impacted both of our traffic and our ticket. We realized a mid-single digit decrease in customer transactions, below single digit decrease in average sales for the quarter. The decline in ticket was to a large extent due to the loss of higher ticket firearms sales and was our first quarterly decline in average sale since the 4th quarter of 2010.

The soft sales of winter products impacted all three of our major merchandise categories for the quarter, while the reduced sales of firearm related products slowly impacted our hardgoods category. Consequently, our hardgood sales comped down in the low double digit range for the quarter. Footwear comped down to the low, mid, single digit range, and apparel comp downed low single digits for the period. Merchandise margins decreased by 28 basis points for the period compared to the first quarter of last year when merchandise margins increased by 113 basis points over the first quarter of FY12.

Now, commenting on store activity. During the first quarter, we closed four stores, two as part of relocations and two at the end of lease terms. We ended the quarter with 425 stores in operation.

During the second quarter, we planned to open two new stores. For the 2014 full year, we currently expect to open approximately 12 to15 net new stores. In addition, we are continuing our program of upgrading or remodeling our store base to better support our evolving merchandise mix.

Now turning to current trends. The second quarter has started off softly, but given the later timing of Easter this year and a related shift of spring recreational and sports activities, current sales trends have been somewhat difficult to evaluate. That being said, we do sense that we are experiencing some slight softness in our overall consumer environment, perhaps due in part to the rather dramatic recent rise in gas prices in our markets.

Additionally, while we anticipated the comping against last year's firearms sales in the second quarter would be challenging, the drop-off that these categories are experiencing has been greater than expected. However, it should be noted that April is a relatively low volume period for us and the key to the quarter will be how we perform over the back half of the period, which includes Memorial's day, Father's day, and the start of summer. We feel well positioned from a merchandise and promotional standpoint to maximize our results over this key selling period.

Finally, I'll provide a brief update on our new e-commerce platform. Development of this site essentially completes and we are currently engaged in an extensive testing process. We anticipate beginning a phased in soft launch of the e-commerce platform this summer.

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 the balance sheet, cash flows and provide second quarter guidance.

Thanks, Steve. Our gross profit margin for the fiscal 2014 first quarter was 31.4% of sales versus 32.7% of sales for the first quarter of FY13. This reduction reflected the 28 basis decline in merchandise margin that Steve mentioned along an increase of store occupancy cost as a percentage of sales.

Our selling and administrative expense as a percentage of sales increased to 29.8% in the first quarter from 27.6% of sales for the first quarter of fiscal 2013. On an absolute basis SG&A expense increased $1.0 million year-over-year due primarily to added expense for new stores and costs associated with the development of new e-commerce platform.

Now looking at our bottom line. Net income for the first quarter was $2.1 million, or $0.09 per diluted share including $0.01 per diluted share of expense related to the development of our e-commerce platform. Compared to net income of $7.5 million or $0.34 per diluted share in the first quarter last year.

Turning to our balance sheet, total merchandise inventory was $294.1 million at the end of the first quarter. Up 5.7% on a per store basis versus the prior year. This was a reduction from inventory comparisons at the end of FY13 when merchandise inventory totaled $301 million and per store inventories were up 7.4% over the prior year. The increase in first quarter inventory levels over the prior year largely reflects the impact of lower than anticipated sales of winter products and more normalized firearm and ammunition inventory versus last year.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $3.8 million for the first quarter of 2014 primarily reflecting expenditures for existing store maintenance and remodeling. And computer hardware and software purchases including investments related to the development of the new e-commerce platform. We currently expect capital expenditures for 2014 excluding non-cash acquisitions of approximately of $26 million to $30 million for new stores, store related maintenance and remodeling, distribution center equipment, and computer hardware and software, including investments related to the development of our new e-commerce platform.

We generated cash flow from operations of $3.4 million for the first quarter of 2014, compared to $23.8 million compared for the same period last year. The decrease in cash flow from operations primarily reflects the funding of higher merchandise inventory levels including the timing of payments year-over-year, increased prepaid expenses related to rent and income taxes as well as lower net income for the first quarter of 2014.

For the first quarter, we continued to pay our quarterly cash dividend of $0.10 per share. Our long-term debt at the end of the first quarter of FY14 was $54.2 million, up from $31.9 million at the end of the first quarter last year, and from $43.0 million at the end of fiscal 2013. The increase in debt at the end of the first compared to the same period last year primarily reflects higher inventory levels as a result of lower than anticipated sales combined with reduced accounts payable due to the timing of payments.

During the first quarter pursuant to our share repurchase program, we repurchased 28,512 shares of our stock for a total of $0.4 million. As of the end of the first quarter, we had approximately $9.2 million available for stock repurchases under our $20 million share repurchase program.

Now I'll spend a minute on our guidance. As Steve mentioned, sales in the second quarter to date remain challenged, by lower than expected demand for firearms and ammunition products compared to the prior year, as well as what appears to be some slight softness in our overall consumer environment. Based on results to date, for this year's second quarter, we are projecting same store sales comparisons in the low negative to low positive single digit range and earnings per diluted share in the range of $0.12 to $0.20.

Our guidance reflects the previously mentioned variables and the negative effect of the calendar shift of Easter holiday when our shores are closed out of the first quarter and into the second quarter this year. As well as expenses of approximately $0.01 cent per diluted share, associated with the development of our e-commerce platform. For comparative purposes in the second quarter of fiscal 2013, same store sales increased 4.4% and earnings per diluted share were $0.28.

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

(Operator Instructions)

Sean McGown, Needham & Company

Thank you, guys, good afternoon, I have a couple questions, first, regarding the second quarter guidance, can you give us a little color on what it is that is pressuring the operating margin most? Is it the gross margin pressure, occupancy expense, or is there deleverage at the SG&A line? What's the big contributor there?

Sean, the big thing is on our sales being, you know, slightly negative, to slightly positive, there's clearly a deleveraging of occupancy costs, as well as SG&A. We are also anticipating, lower merchandise margins for the quarter, as well.

That's helpful. That's what I was getting at. Second, could you recap for us, has it been a penny per share for the last several quarters on the e-commerce effort?

Yes, it has, Sean.

And that's what you said before, that that is what you expect that to continue to be the case through the balance of the year?

For the first quarter and second quarter, and then the third quarter and fourth quarter, what we're seeing for the full year, we expect the impact to be about a negative $0.03 to $0.06 for the full year.

Okay. So, maybe a little heavier then. And would you expect it shortly thereafter to not be a drag anymore, that the profits you're getting are offsetting? Or do you think that will still be a negative drag well into next year?

Well, we are certainly not giving guidance into next year. It's a new program for us and we're really going to have to see how it produces for the current year.

Okay. And the last question, just for the balance of this year, a big part of the narrative over the last couple of years has been the ability and hope that you'd get back to the level of operating margins that we have seen in the past. Is it still your view that you're on track to see margin improvement in the second half of this year, year-on-year?

Well again, Sean, we are not giving guidance beyond the second quarter here. And again, our goal obviously is to get back to our historical operating margin levels, which has been in the 6% to 8% margin range. It really depends on, you know, on our sales. We do know, we do find and expect that as we grow our sales, we see a significant leverage fall to the bottom line, and we would expect that to continue.

We certainly feel we're in a position to produce positive comps and the balance of the year beyond Q2, based on the strength of the number of product categories that we're seeing our comps ease as we get beyond Q2, and particularly April. So we feel stronger sales are ahead of us. And we certainly look forward to a good summer for our business. We think there's up sides. If we can get anything resembling normal weather after a summer that was relatively cool and disappointing to sales for last year.

Okay, very good, thank you very much.

Adam Sindler, Deutsche Bank

Yes, good afternoon guys, this is Adam calling in for Mike Baker, just a couple questions. I wanted to focus a little bit more on some of the other categories that performed well in the quarter, and some things you're excited about for the summer time.

I was wondering if you could maybe talk to us a little about what you have added in the apparel, on the apparel side and what you have added on the footwear side relative to last year? And then how you see, you know, that playing out as long as weather normalizes?

Yes. I think we have continued our efforts to evolve our apparel, as well as our footwear offering, with a little stronger focus, and some branded products as in many instances that stepped up price points. We continue to use our business analytics, to do a better job of fine tuning the allocation of product.

We feel -- we are excited about World Cup, and what we think that will represent to the business, and hopefully drive traffic into our stores as that becomes a bigger headline over the course of the year. And we're seeing strong results in our team sports, fitness product categories, again, are particularly excited about the opportunities to drive summer, basically outdoor products, other than the firearm category over the course of summer.

Then for some of us on the east coast, could you remind us how weather played out last summer, and then going to this summer, I think we all read about the drought conditions out in California, can that be a risk as you get into summer, if it's too hot and dry, or is that more as it relates to the ski outdoor business in the winter time. Thanks.

As far as how weather played out, I would say that weather was reasonably in the large picture normal over the second quarter, but clearly through the heart of summer and much of July into early August over much of our key geography, California in particular, it was a cooler than normal summer. And not really conducive to driving some of the summer-related products that is important to our product mix.

As far as the drought, and it's a real issue, and one that's quite news worthy in California. I mean, this -- I think some of the stats, it was the third warmest and third driest January in 120 years. The second driest December in 120 years. The snowfall that provides so much of the water to California is below, you know significantly below normal levels. And that could impact the lakes and rivers and some restrictions on water usage. We see that as potentially, you know, some risk to the business.

I don't think overly material to the larger picture, but it's certainly not a good thing. We'll have to see how it plays out as we move further into the spring and summer selling season. Certainly if we can get warm weather, I think that can shed more than a reasonably normal weather, I think should counter act any negative issues, revolving around the drought. But, you know, clearly we'll have to play it out to see how it works out.

Okay. I appreciate it. Thank you very much.

Mark Smith, Feltl and Company

Good afternoon, guys, first, just wanted to dig into merchandise margins just a little more.

Mark, can you speak a little louder, I don't think we're catching you.

No problem. With the merchandise margins with your all other businesses outside of winter, firearms and ammunition comping slightly positive, is there a difference in merchandise margins that we're seeing with some of the new apparel and things that you have in that we didn't see that drive enough to make up for the lost sales in firearms.

I think the issue in this first quarter, in terms of merchandise margins, which declined 28 basis points following 113 basis points improvement in Q1 really revolves around several factors. Certainly the lower sales of higher margin winter product was a hindrance to our margins. We stepped up our promotional activity versus the prior year.

In 2013, given the, really the remarkable strength that we were seeing in the firearms-related product, not to mention positive winter sales we were, I would say less than, we backed off some of our normal promotional cadence. This year I would categorize our promotional activity as reasonably normal over the second quarter, but more so than in 2013. And those impacts were partially offset by a benefit that we're seeing to margins from lower sales of firearms-related products, which typically come at a lower mark.

And how promotional were you when you look at that winter category, as we got late in the quarter, and it was still hot and dry. How promotional were you compared to how you felt like you could carry that inventory over to next year.

We really had no choice, and we have been through this before. When there's no snow, when people aren't going to the mountains, you almost can't give the product away. So we were, you know, we were our promotional mark down activity was reasonably normal, you may argue it was perhaps more aggressive, but it didn't matter, there was no real demand for the product.

So what we do in those situations is to, basically, pack the product up. Hold it over for next year, we have been through this a number of times in our history, mMost recently to a great degree just in 2012, and we rebounded very positively from that. The positive is that, you know, the product was very fresh this year.

I think when we saw, you know, reasonable winter conditions, and in some markets we have favorable winter conditions, the product performed very positively. So, we're confident that we can reallocate the product next year, and hope for, certainly, better weather.

And then it sounds like you're sticking by, we will call it, a goal instead of guidance, positive comps in the second half of the year. How confident are you if you can have positive comps for the entire year.

Well, we're not guiding to the full year. Obviously, we have started the year in a reasonable hole. We feel reasonably confident that we can comp positively, and resume positive comps over the back half of the year. Whether that will be sufficient to pull the year into a positive, we're not commenting at that point in time.

Thank you.

Thanks, Mark.

(Operator Instructions)

David Magee, SunTrust.

Yes, hi everybody, good afternoon.

Hi, David.

Just a couple of questions, one with regard to sales momentum, would it be worth mentioning how your stores performed outside of California, versus those in that state?

You know, we don't get very granular about geographic performance. I think the, you know, certainly in the first quarter, the weather impact -- I would say the weather impact, lack of winter, was most significantly felt in California, Arizona, Nevada, our markets outside of that geography clearly performed more positively.

Obviously, those were still the gun comparisons, though, so it wouldn't be perfect,.

Look, I think the firearms affected all of our -- that's pretty much across the board, that all geographies were affected by firearms, but there were certainly distinctions as to how the winter affected us. The lion's share of our stores are located in California, Arizonas, Nevadas, and those markets were most adversely affected by the winter weather comparisons.

Are you all being impacted, do you think, by new competition on the West Coast, I noticed that Dick's Sporting Goods had opened some stores in the Bay area recently. Anything happening there that you think is impactful.

Not out of the ordinary. Competitive openings in our markets is certainly not a new phenomenon for us. We always look at the drag to the business as we cycle through new competitive openings. It's nothing new.

I'd characterize the drag this year is not more significant than what it has been over the last few years, or really much of our lengthy history. Over much of that time, we weren't comping positive, we still had the drag as we cycled through a competitive opening.

We really believe the recently softness in sales is very directly related to the drop-off in demand of firearms and ammunition, clearly the lack of winter weather and it's not lost on us that we could be experiencing some slight softness in the consumer environment. You know, we see the, you know, besides all the pressures on the consumer, from higher taxes, the impact to many from the potential Affordable Care Act, and insurance issues, you think there's a reasonably meaningful food inflation that's affecting the consumer, and very, I think, profoundly now, gas prices, which have risen quite dramatically.

I think across the country, but California really leads the league, in a league of its own, other than the state of Hawaii, which is really a one-off in terms of the level of gas prices.

It's roughly about $0.30 higher than the next highest state, and the ramp up in prices has been pretty significant. It has gone up about 20%, roughly, over the last three months. It I think it's now about 10% higher than last year, and it's hard to imagine that that is not affecting some segment of our consumer base.

You know that said, as we look at our figures and our trending over the last, you know, number of weeks, it's very muddied by the Easter shift. And when Easter went from March into the late, late April, it changed around a whole bunch of figures, it changes around our promotional cadence, and we're just now really getting to what I would call a level playing field, and I think we'll get a better feel of trending as we move forward.

Assuming that the same store sales can move back into the you know, low single digit area in the second half of the year, maybe better. What do you think the break down would be between ASP and traffic in the second half? Do you expect ASP's to be higher? If you could exclude the firearm comparison.

Yes, we absolutely see that. I mean, the impact to the ASP's in the first quarter was due to the reduced firearms sales was quite dramatic. We're still going to feel some pressures from firearms, and particularly ammunitions, as we move through the year. The relative impact will lessen. And we would expect that our ASPs will resume their upward trajectory: really the trajectory we have enjoyed now for several years.

Alright thanks, Steve. Good luck.

Thank you, David.

Adam Engebreston, Piper Jaffray.

Good afternoon, sorry if I missed this earlier, but did you give the comp by month for Q1.

No, we did not give the comp by month, but it got better as the quarter rolled out, and January was by far and I mean, by far, the most challenging month as we faced both the peak of demand for firearms and ammunition, and favorable winter weather conditions last year, and really a tremendous lack of winter weather this year.

We basically missed the winter business over the critical New Year's period, Martin Luther King period, and it wasn't all that it should have been even by the time we got to President's Day, all which are key winter weekends.

Moving on, in terms of the new store growth for 2014, I see now you are saying net new stores of 12 to 15. I think you talked about 15 before. Is that different, closing a few more stores or maybe just opening not quite as many as you had initially anticipated.

Yes, it's mostly just not opening quite as many as we anticipated, just as we're moving through the process of signing up the new stores, and in seeing some stores are taking a little bit longer to get off the ground and up and running.

So it's a range, but it's based on our best guess as to the pace and timing of the openings and the change has -- last year we opened 15 stores, that was the largest number of new stores we opened since 2008, and you know, we'll see how it turns out at the end of the year. But our best guesstimate at this stage would be 12 to 15 net openings.

Okay. Makes sense. And then lastly, with the e-commerce launch here coming up this summer, are you willing to share how many e-mail addresses you have, what that growth rate has been, and the number of e-mail addresses you have been picking up over the last couple of years?

Yes, we're not going to share the number. It's in the millions, and we continue to grow that list as we speak.

So you feel those are pretty healthy group of people that you can e-mail once that's all live.

We certainly think it give us a great base to begin with. Absolutely.

Great. Thank you very much.

Thanks, Adam.

And it appears there are no further questions at this time. I would like to turn the conference back over to Mr. Miller, for any closing remarks.

Well, we thank you for your interest today, and we look forward to speaking to you on our next call. Have a great afternoon.

And that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.