Big 5 Sporting Goods Corp (BGFV) 2014 Q4 法說會逐字稿

Good day, and welcome to the Big 5 Sporting Goods' fourth-quarter 2014 earnings results conference call. Today's conference is being recorded.

On the call today from the Company we have Mr. Steve Miller, President and CEO, and Mr. Barry Emerson, CFO. At this time, I would like to turn the conference over to Mr. Steve Miller.

Thank you, operator. Good afternoon, everyone. Welcome to our 2014 fourth-quarter conference call.

Today we will review our financial results for the fourth-quarter and full-year of FY14, and provide general updates on our Business, as well as provide guidance for the first 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 reports on Form 10-K, our quarterly reports on Form 10-Q, and our 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. Our fourth-quarter earnings came in within the range of our expectations, excluding certain one-time charges, despite what turned out to be a very challenging holiday season. As we previously announced, our fourth-quarter net sales were $250.3 million, up 0.9% from $248 million for the fourth quarter of FY13. Same-store sales decreased 0.5% for the period.

We comped positively and very much on plan in the low-single-digit range in both October and November, but sales fell short of our expectations during the holiday selling period, and swung to the negative low-single-digit range for the month of December. The shortfall was largely due to weaker-than-expected sales of firearm-related products, and soft sales of winter-related products, as temperatures throughout virtually all of our markets were substantially warmer than normal prior to Christmas. When winter weather finally did arrive over the last few days of the quarter, our Business responded very positively.

In addition, we believe that our holiday sales were impacted by a highly promotional brick-and-mortar and online retail environment. We experienced a low-single-digit decrease in customer transactions, and a low-single-digit increase in average ticket during the fourth quarter versus the prior year.

From a product category standpoint, apparel and footwear comped up in the low-single digits, despite the negative impact of the adverse weather on sales of winter-related apparel and footwear. Sales in our hard goods category comped down low-single digits, primarily due to the continued impact of reduced demand for firearm-related products. If we were to exclude firearm-related products, the rest of our hard goods categories would have comped up in the low-single-digit range.

Merchandise margins decreased by 13 basis points for the period compared to the fourth quarter of last year, when merchandise margins increased by 47 basis points over the fourth quarter of FY13. As the holiday season played out, we did step up some of our own promotional activities in an effort to drive traffic and sales. We were pleased that we were able to generally protect merchandise margins, given the highly promotional retail environment.

Now, commenting on store openings: During the fourth quarter, we opened 10 stores, ending the year with 439 stores in operation. The new store openings were in Cathedral City, Lincoln, Paradise, Crescent City, Highland Park, Torrance and Tujunga, California; Canby, Oregon; and Everett and Redmond, Washington.

In the first quarter, we have closed three stores, one as part of a relocation that began in FY14, and we anticipate opening one store. Our plans for 2015 call for us to open approximately 10 net new stores. In addition, we plan to continue our program of enhancing our store base, and investing in fixtures that we think will better showcase our evolving product mix.

I'm also pleased to report that we launched our eCommerce platform midway through the fourth quarter. Sales from eCommerce were immaterial to 2014, given the timing of the launch, and our phased approach to ramping up our online products and selection. We look forward to analyzing and growing our eCommerce platform, as we integrate eCommerce with our existing merchandising and promotional strategies over the course of 2015 and beyond.

Now turning to current trends: We got off to a great start for 2015, as same-store sales increased in the low-double-digit range for January on the strength of outstanding winter weather conditions in our western US markets over the New Year holiday period. Unfortunately, winter weather conditions turned extremely unfavorable for us, meaning significantly warmer-than-normal temperatures and a tremendous lack of snowfall throughout our markets beginning in mid-January, and remained that way through much of February, including the Presidents Day holiday, which is a key period for winter product sales. As a result, our winter business has been negatively impacted, which has led to a same-store sales decline in the low-single-digit range for our February period.

Combining out strong January with our soft February has our same-store sales running up in the low, mid-single-digit range for the quarter to date. We are encouraged by the strength we are seeing across a number of key non-winter-related categories, which has enabled each of our three major merchandise categories, footwear, apparel and hard goods, to comp positively for the quarter to date.

While we believe that we are positioned for positive sales in March, the shipping backlog from the now tentatively resolved labor dispute at west coast ports, through which most of our products travel, has created uncertainty about product availability and the resulting impact to sales. We are actively working to mitigate the impact of the port dispute, but given our concentration in the western United States, we are highly exposed to disruptions in west coast port traffic. While we are hopeful that the product flow through the ports can get back to normal as quickly as possible, we recognize that there are a number of factors at play, and it will take some considerable time to work through them.

Before I turn the call over to Barry, I am pleased to report that we recently signed a lease for a roughly 170,000-square-foot warehouse facility across the street from our existing 953,000-square-foot distribution center in Riverside, California. This new facility will house our returned goods, recalls, and floor fixture functions, which will open up more space in our existing distribution center to support our ongoing merchandise initiatives, including SKU growth for greater store merchandised customization, as well as eCommerce. The new facility will also allow us to bring in-house certain pricing and repacking services that we have been outsourcing, which should offset a portion of the cost of the new facility. We're excited to be able to capitalize on this opportunity, and stretch the capacity of our existing distribution facility to support our continued growth.

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 first-quarter guidance.

Thanks, Steve. Our gross profit margin for the FY14 fourth quarter was 31.6% of sales versus 32.6% of sales for the fourth quarter of FY13. The lower gross margin for the period reflected the 13-basis-point decline in merchandise margins that Steve mentioned, along with an increase in distribution and store occupancy costs as a percentage of sales.

Our selling and administrative expense, as a percentage of sales, was 29.7% in the fourth quarter versus 28.9% in the fourth quarter of FY13. On an absolute basis, SG&A expense increased $2.6 million year over year, or 3.6%, due partly to a pre-tax charge of $1.4 million related to legal accruals and a $0.4-million non-cash impairment charge. The legal accrual was higher than we expected when we provided updated guidance in early January, as a result of events subsequent to the quarter in ongoing litigation involving the Company. Our increased selling and administrative expense also reflected higher employee labor and benefit-related expense, and added expense for new stores resulting from our increased store count, partially offset by a decrease in print advertising.

Now looking at our bottom line: Net income for the fourth quarter was $2.8 million, or $0.13 per diluted share, including $0.04 per diluted share for the pre-tax charge for legal accruals, $0.01 per diluted share for the non-cash pre-tax impairment charge, and $0.01 per diluted share in expenses associated with the development and operation of our eCommerce platform. This compares to net income in the fourth quarter of FY13 of $5.2 million, or $0.23 per diluted share, including $0.01 per diluted share for expenses associated with the development of our eCommerce platform.

Briefly reviewing our 2014 full-year results, net sales decreased to $977.9 million from $993.3 million during FY13. Same-store sales declined 2.9% during FY14 versus the prior year. For comparison purposes, Company same-store sales increased 3.9% in FY13 over FY12. Net income for FY14 was $14.9 million, or $0.67 per diluted share, including $0.04 per diluted share from legal accruals, $0.03 of non-cash impairment charges, and $0.03 of eCommerce development and operation expenses. This compares to net income for FY13 of $27.9 million, or $1.27 per diluted share, including $0.04 for legal accruals and $0.02 of eCommerce development expenses.

Turning to our balance sheet: Total merchandise inventory was $310.1 million at the end of FY14, up 3.0% from the prior year. On a per-store basis, inventory was up 0.5% versus the prior year, which is a meaningful improvement from our third-quarter, year-over-year comparison, when per-store inventories were up 4.8% versus the prior year, and reflects the right-sizing of our inventories following the excessive winter product carryover, which resulted from the very poor 2013/2014 winter season.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $22.6 million for FY14, primarily reflecting expenditures for 16 new stores, increases in existing store maintenance and enhancements, and computer hardware and software purchases, including investments related to the development of our new eCommerce platform and a new point-of-sale system. We currently expect total capital expenditures for FY15, excluding non-cash acquisitions, of approximately $28 million to $32 million, primarily to fund the opening of new stores, store-related maintenance and enhancements, distribution center equipment, and computer hardware and software, including investments related to the development of a new point-of-sale system.

From a cash flow perspective, our operating cash flow was $28.5 million for FY14 compared to $26.3 million for FY13. The increase in cash flow from operations primarily reflects reduced funding of inventory purchases this year, partially offset by lower net income.

For the fourth quarter, we continued to pay our quarterly cash dividend of $0.10 per share.

Additionally, during FY14 we repurchased 223,051 shares of our common stock for a total expenditure of $2.5 million. We have continued our share repurchasing in FY15; and year to date through February 20, we have repurchased 74,873 shares of our common stock for a total expenditure of $0.9 million. As of February 20, we had $6.2 million available for stock repurchases under our $20-million share repurchase program.

Our long-term debt at the end of FY14 was $66.3 million, up from $43.0 million at the end of FY13, primarily reflecting funding of working capital, capital expenditures, cash dividends and share repurchases.

Now I'll spend a minute on our guidance. As Steve mentioned, same-store sales are currently running up in the low, mid-single-digit range for the quarter. While we believe that we should be positioned to produce positive same-store sales for March, the shipping backlog from the tentatively resolved labor dispute at west coast ports has created uncertainty about product availability and sales. We have attempted to reflect the anticipated impact of the port dispute in our outlook for the first quarter. For the period, we are guiding to same-store sales increase in the low- to mid-single-digit range, and earnings per diluted share in the range of $0.06 to $0.13.

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

(Operator Instructions)

Sean McGowan with Needham & Company.

Afternoon. I have a couple of questions if I can? Steve, can you talk a little more about what trends you are seeing in the firearm business? What your outlook is for that segment throughout 2015?

Separately then, if you look historically, there's been a wide range of earnings results in the first quarter, how much of the weakness do think is just related to winter merchandise? If you had what you characterize as a more normal winter, do you think the earnings could be back up in the $0.20 plus range?

Okay, let me take the first question first.

In terms of trending of firearms, these categories, I think as you know, trended significantly down throughout 2014 as well as in Q4, our recently reported Q4, where it had nearly a 220 base impact to same-store sales. This impact was actually somewhat less than what it was in Q3 and Q2.

Performance of these categories, really, has been difficult to predict given the -- we've lost touch with what the normal cadence of the category is. We still have lingering supply issues or surrounding 0.22 ammunition.

That said, we are highly confident that we are beyond the most difficult comparisons to the prior year. We expect that the categories will be an overall drag to Q1, but to a much, much less degree than it was over the course of 2014. Over the recent weeks, the trending has been more positive, and we certainly believe that we are -- we are certainly hopeful and do believe we are likely to get to a place where we are not going to be signaling out these categories as a real issue in our Business every single quarter.

Thank you.

In terms of the volatility in Q1, I'd already -- probably most of the volatility, or a large portion of the volatility, over the last few years in Q1 relates to the surge in firearms and that business -- and the impact in that business, certainly along with the weather. This year, as we mentioned, the weather was highly favorable for us at the start of the quarter. We mentioned that we comped up double digit in the month of January on the strength of really getting sensational weather over the New Year's holiday, a key period of winter recreation.

That was significant enough to sustain interest in the category throughout the early part of January, the Martin Luther King holiday, another period of meaningful winter recreation. Unfortunately, following that, the weather turned not just higher than normal, but really higher in a rather epic way, where we were facing some of the highest and warmest temperatures throughout our entire market in many years, and in some cases all years, as well as a tremendous lack of snowfall that tremendously impacted the opportunity to sell winter products over the February and the very important Presidents' Day holiday.

I think it's -- on a normal basis, weather wasn't particularly favorable last year for most of the first quarter. It started off good and got very unfavorable this year. We think if weather performed in the manner in which it probably has historically over most years, our first quarter absolutely would benefit. I think a more normalized earnings rate would be certainly in the higher than what we are today, and talking about today, and hopefully in the $0.20 and excess of $0.20.

What I guess I am puzzled by is that you had really negative same-store sales in the first quarter of last year, and sounds like firearms are at least not worst than last year, maybe a little bit more of drag but not as much as last year. And, you are talking, at least quarter to date, that you with the merchandise is down, but the overall should be -- ?

(multiple speakers) Okay. Let me correct your statement. We didn't say that our winter merchandise is down quarter to date, nor our comps. We are comping up in a low mid-single digit range, a period to date. Our winter business for the period is comping positively on the strength of its tremendous performance in January.

Last year, we had absolutely no winter business effectively in January. The huge issue last year, when we comped down, was the firearms. The firearm business had, as I recall, a 650 basis point negative impact to our comps last year. And, for good measure, the winter was highly unfavorable in Q1 of 2014 over 2013, as well. So we've got --

I guess what I'm curious about is, how would you have the bottom end of your guidance range be lower than last year, if it sounds like things were -- these extraneous, non-normalized factors were a lot worse last year?

Sean, let me jump in here, a little bit here. Let me try and shed a little bit light. The sales is one thing, of course, and then there is the margins. At this point in our guidance, we are anticipating margins to be relatively flat with last year, and last year they were down about 28 basis points.

We have been seeing, certainly, some pressure on occupancy costs and our warehousing costs as our store growth has continued, and as some of our leases come up for renewal. So there is pressure on the occupancy side.

One thing to point out though is we are also anticipating a reduction in distribution costs capitalized into inventory of approximately 40 basis points in the first quarter. Because of a larger Q1 2015 reduction in our inventory and increasing sales in that quarter. In other words, to simplify it, increasing inventory turns, and with increasing inventory turns for the period, it will likely result in fewer days of cost capitalized in inventory. So that's got a $0.02 to $0.03 impact, also, on the quarter.

Sean, just a couple other factors that are affecting our top line this quarter. We are focusing entirely on guns, firearms and the winter. Let me make clear, we still see firearms as being somewhat of a drag to our comps this quarter.

Additionally, we had a football game that didn't exactly go our way. In one heartbeat of a second-and-goal call, we lost the opportunity to have a Super Bowl champion in our region and we're comping against the positive results of the Seahawks winning last year. Additionally, and I don't think it's insignificant, is the impact of the port strike. That has been, and we think, impacting our Business and will certainly continue to represent a headwind over the remainder of the period and potentially beyond.

Thank you.

You're welcome.

Mark Smith with Feltl and Company.

Hi, this is Shannon Richter-John for Mark Smith. Just a couple of questions for him. Can you talk about early results from your e-commerce that you are seeing so far?

Sure, it's early. As we mentioned, we launched our e-commerce site in the middle of Q4 with a limited selection of our existing products. The sales, as mentioned, were immaterial to 2014 given that the timing of the launch. We are looking to analyze, evaluate, grow our e-commerce platform over a period of time as we integrate the e-commerce with our existing merchandise and promotional strategies.

Our philosophy is to grow our e-commerce business much in the same fashion as we have grown our stores over our near 60-year history. We're moving slowly and prudently. We're evaluating product selection, shipping options in a careful manner, and we are not anticipating that this could be material to our current quarter nor for, in all likelihood, to our current year, in terms of sales or income. What we are trying to recognize is the -- and avoid some of the -- be certain of this, we rollout our e-commerce, we do it in a manner that is accretive to profits, and that suggests that we do it carefully.

Okay. Then, just one other question. What is your expectation for tax rate in 2015?

Go ahead and use -- for the full year, I would use 39% even.

Perfect. Thank you so much for taking my questions.

You're welcome.

(Operator Instructions)

Bill Dezellem with Tieton Capital Management.

Thank you. Couple questions.

First of all, in your opening remarks you made reference to the legal expense being higher than what you had originally anticipated, which I think had originally been $0.01. I didn't catch quite why that was and hoping you can go into a little more detail on that, please?

Sure, Bill. In Q4, we recorded a pretax charge for legal accruals of $1.4 million. The charge includes a settlement accrual for the ZIP code lawsuits, which had been previously disclosed in our filings with the SEC. The charge also includes a provision related to a wage and hour lawsuit involving certain distribution center personnel, which will be discussed in our 10-K to be filed later this week. That provision was determined after the issuance of our revised guidance from early January.

So that's the incremental piece?

Right.

And that puts all litigation now behind you, or do you still have some outstanding litigation of note? And not the little minor stuff, someone slipped on a toy doll or whatever.

Bill, anything that is material will be disclosed in our 10-K that is going to be filed in the next -- actually tomorrow. But the answer is, there is nothing that we are aware of that would be -- again, anything significant will be in the 10-K, but there is always little things that you have to deal with as a public company, and frankly in California.

Understood.

Then, I'd like to shift the next line of thought back to the weather. Clearly, the weather has been much, much warmer than normal, which is bad for skiing, but it's actually very good for spring outdoor activities. At what point does that start to work in your favor, that you get people out that maybe aren't winter and sports enthusiasts but do get out and that they are now finding that this is really appealing and it starts to benefit you?

One, you can't make up lost winter business because people buy -- if people aren't going, if there is no snow, nobody is going to buy thermal underwear, a toboggan, et cetera, so that's business that you can't recapture. Spring and summer business, if you have sometimes if you have better weather you may fast-forward a purchase of running shoes. I'm not sure you get the net gain.

From a calendar standpoint, we are at the point of time where baseball becomes a bigger and bigger part and spring sports becomes a bigger and bigger part of our sales mix. Probably, if we have severe winter weather now, probably the downside to losing immediate baseball sales is probably larger than the upside of capturing whatever winter sales there are. Generally, most baseball purchases ultimately happen, they may just happen on different timing, depending on weather.

Clearly, we are at the point now where if we could have anything we want, we would probably have a little snow falling in the mountains during the week and baseball fields dry for weekend recreation.

Understood. Given that you did have carryover winter inventory last year, and you normally do sell winter inventory in the first quarter, which you did that in January, how are you feeling about your winter inventory? How is a carryover looking, like it will likely be, et cetera?

We feel pretty good about it. Again, last year we -- after a bad winter that virtually for the entire quarter, we had a very significant winter carryover, we bought around it this year. I think the benefit we received at the very end of the year and certainly the beginning of this current fiscal year, pretty much assured us of ending the winter season with significantly less winter carryover than last year.

Great. Thank you both.

You're welcome. Thank you, Bill.

Sean McGowan with Needham & Company.

Thanks, a couple of additional questions. Barry, would you expect that for the full year will the e-commerce effort be a drag on earnings, or will it be basically a breakeven or positive?

Yes, Sean, we are not expecting it. We mentioned not material. We don't expected at this point. We hope we're wrong. We hope it goes through the roof.

But at this stage, we're not expecting our sales to be material or the profit impact to be material. If I was to think about it, I would think about it more or less a breakeven for the year.

Are you -- as you are going forward -- I know the numbers so far are pretty small, but are they hitting your internal milestones as you measure your own progress on the e-commerce, I am talking about?

Sean, we are just rolling this out in a slow, in a direct way, trying to test things as we go. So I don't know that we had huge expectations. I think we are satisfied with the progress, but we are not in this to -- we don't see this as being a make or break. It really is -- we're looking at it as an additional sales channel for our customers and just to support the overall brick-and-mortar convenience aspect of our Business.

Okay.

We are gradually expanding, marking the efforts, testing different methods to drive consumer awareness, and drive people to our site for online purchasing. All of our efforts really revolve around a unified approach to better serve our customers, both online and through and in, obviously, our brick-and-mortar outlets. Very much a work in progress.

Thank you. I think I can infer from an earlier answer, the answer to this one, but I will ask it anyway. If you talk about being cautious on the outlook for the first quarter because of delays in receipts related to the port, does that mean that those sales cannot be made up later in the year? Is that the nature of what you are waiting to receive?

Yes, I suspect some of it could be made up, and some of it possibly is lost. It's a good question; I think it's very difficult to quantify. In some cases, we are definitely experiencing significant delays in receiving lots of product. In some cases, it means that we are out of -- if you are out of size 9 1/2 of a shoe that a customer would have bought, will he buy that shoe later? Did he buy another pair in lieu of the fact that we didn't have that size? That's certainly difficult to quantify.

If somebody was going to buy a product for the Presidents' Day weekend and we didn't have that product, I suspect that's a lost sale that can't be made up. Hopefully, this will become a bigger issue. If we are real late getting some of our seasonal product in to ramp-up for the summer selling season, and the like. We are cautiously optimistic that this issue is going to certainly get solved and the catch-up will be reasonably prompt and we will hopefully not miss too many sales.

Great.

Then, the last question is on store openings. You are talking about 10 net for the year. Can you talk about that in new versus closing? Is the number of stores you are looking to open, is that a number that you would have wished to be higher but some things set you back, or is that your target number that you would have liked?

I think it's a number that we are comfortable with now and just looking at the real estate opportunities that we are seeing. We anticipate that it may mean 13, 14, 15, 16 openings plus or minus, offsetting closures to get us to 10. It is still early in the year. From our experience, we often have opportunities to open stores later in the year that don't exist today. It's always difficult to predict, but it's a number that we think is our best estimate with all the information we have today.

Okay, thank you very much.

Thanks Sean.

Mike Baker with Deutsche Bank.

Thanks. I wanted to follow up on the West Coast port issue and understand. Is the impact in sales, and if so, correct me if I'm wrong, but you said you are running low- to mid-single digit costs and that is your expectation for the quarter? So where is the impact for the West Coast port strikes? Is there also an impact on any of your expense lines? In other words, if you have to air freight things in or pay more to get product through the ports? Thanks.

Again, it's very difficult to quantify the impact, as I tried to explain, of products being delayed. There is absolutely no question that whatever our sales are and whatever we -- what we've reflected in our guidance is negatively impacted by the West Coast port dispute. We have a -- we think there is a bigger impact -- we think it will be a bigger impact in March than what we received, seen thus far.

We've had to change a number of products within our promotional campaigns to accommodate late shipments. Again, it's difficult to quantify what the impact is of replacing an item that you thought you would have with essentially the next best item that you could put in the spot, but we've factored that all in our thinking. We've provided guidance as best we could given the situation at the port.

Mike, there could be a little bit of elevated cost in terms of, they are really cranking it up at the port and we're going to try and open our doors and work some overtime to get the product into our DC and then allocate it to our stores. There could be some demur costs at the ports and some overtime on our end, but that's been Incorporated into our guidance.

Understood. So if I could just clarify? You would have expected an acceleration in March relative to your low- to mid-single digit run rate, quartz date if not for the West Coast port strike? Is that fair? Again, I'm just try to figure out you said, it is reflected in your guidance, so your comp estimate for the quarter is lower than you otherwise would have had if not for these strikes?

Again, would it have changed the range? I'm not sure we can speak to that. I think our result would have been higher. We feel we have a strong plan. We are excited about how much of our inventory is performing.

If we could just neutralize, get normal weather, we can get over the hump of the combating firearms, again as I mentioned, we think we are at a point where we believe that should be much less of an issue for us. Strong promotional plans, so we are feeling pretty good about our prospects for March, offset by the unknown quantification of the impact of the port strike.

Understood. If I could ask one more follow up on it? If you can't get some product in, can you cancel products or divert it? What happens to some of those goods that if this thing lingers or if the delays continue that will be too late for you to take? Do you take them in and hold them all until next year or can you cancel them or divert them somehow?

Fortunately, most of our product that we sell is not so trendy that we are not going to miss having Easter dresses in our stores if the shipment is late, so I think the vast majority of the product, we will take it. We still need it. We will still want it.

The work in progress is to make adjustments in future orders, because if we received this late, we need to and we're working -- it is a constant process between our buying team and our vendors to try to adjust future orders in recognition of the impact of the port strike. Certainly, if there is some product that we received and it is just way after the fact, we will deal with our vendors on a one-by-one basis to try and ultimately do the right thing.

Okay, great. Great color, I really appreciate it. Thank you.

You're welcome.

That does conclude today's question-and-answer session. At this time, I will turn the conference back to Mr. Miller for any additional or closing remarks.

All right. Thank you, operator. We appreciate all your interest in Big 5 Sporting Goods, and we look forward to speaking with you on our next call. Have a great afternoon.

Thank you for your participation. This does conclude today's call.