Big 5 Sporting Goods Corp (BGFV) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods first-quarter 2015 earnings results conference. Today's call 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. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to our 2015 first-quarter conference call.

Today, we will review our financial results for the first quarter of FY15, and provide general updates on our business as well as provide guidance for the second quarter. At the end of our remarks, we will open the call for questions. I will now turn the call over to Barry to read our Safe Harbor statement.

Thanks, Steve.

Except for statements of historical fact, any remarks that we may make about our future expectations, plans, and prospects constitute forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results.

These risks and uncertainties include those more fully described in our annual 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.

We are pleased to deliver a solid first-quarter performance. With earnings, excluding certain unusual charges, above the high end of the guidance range that we provided during our last call. With our sales and earnings growth, we generated strong cash flow. Which we used to invest in the business, reduce our debt, and continue to return capital to shareholders through our quarterly dividend payment and continued share repurchases.

Now, I'll comment on sales for the first quarter. We rang the register to the tune of $243.6 million, up 5.3% from $231.3 million for the first quarter of FY14. Same-store sales increased 3.9% for the period. In terms of how sales trended over the quarter, January was our strongest month. Comping up in the low double-digit range on the strength of outstanding winter weather conditions in our Western US markets at the very beginning of the period around the New Year's holiday.

Sales were down low single digits in February as the weather turned unseasonably warm, which impacted winter recreational activities over the key Presidents' Day holiday weekend. Sales in March turned positive again, comping up in the low mid single-digit range as we moved into the spring season. We improved both customer transactions and average ticket during the quarter, with each up in the low single-digit range versus the prior-year period.

From a product category standpoint, all of our major merchandise categories comped positively for the quarter. Apparel comped up in the high single digits, and footwork comped up in the mid-single digits. As our ongoing initiatives, including offering more branded products at stepped up price points, benefited both of these categories. Sales in our hard goods category comped up low single digits. Despite the continued drag from firearm related products, although the impact has certainly lessened from last year. If we were to exclude firearm related products, the rest of our hard goods category would've comped up in the mid-single-digit range.

In addition, although difficult to quantify, we believe that sales in all categories have been impacted to a degree by the shipping backlog from the labor dispute at the West Coast ports. As products we were expecting to receive have been delayed. Along with growing sales for the period, we were able to increase our merchandise margins by 14 basis points for the first quarter compared to last year.

Now commenting on store openings. During the first quarter, we closed three stores. One as part of a relocation that began in FY14, and opened one store in Newport, Oregon. We ended the quarter with 437 stores in operation. In the second quarter, we plan to open 3 new stores. For the 2015 full year, we currently plan to open approximately 10 net new stores.

Now turning to current trends. I'm pleased to report that our positive sales trends are continuing into the second quarter. While April is a relatively low volume month and the critical sales period including Memorial Day and Father's Day remains ahead, we are encouraged by our solid start to the quarter.

We continue to experience strength across a broad array of product categories. And although we have some concern about the impact of the ongoing drought might have on summer recreational activities in our markets, we feel very positive about our product assortments and promotional plans as we move into the summer selling season.

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

Thanks, Steve. Our gross profit margin for the FY15 first quarter was 31.5% of sales, versus 31.4% of sales for the first quarter of FY14. The increase in gross margin for the period reflected the 14 basis point improvement in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales was 29.8% in the first quarter, even with the first quarter of FY14. On an absolute basis, SG&A expense increased $3.6 million year-over-year. Due in part to 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 expense. Additionally, our increased selling and administrative expense reflected pretax charges of $0.4 million related to a legal settlement. And $0.5 million in expenses associated with the publicly disclosed proxy contest.

Now looking at our bottom line. Net income for the first quarter was $2.3 million or $0.11 per diluted shale, including $0.03 per diluted share of charges for the legal settlement and expenses associated with the proxy contest. This compares to net income in the first quarter of FY14 of $2.1 million or $0.09 per diluted share.

Turning to our balance sheet. Total merchandise inventory was $305.1 million at the end of the first quarter. On a per store basis, inventory was down 1.1% versus last year, and we feel good about our inventory as we move through the spring and summer selling seasons.

Looking at our capital spending, our CapEx, excluding non-cash acquisitions, totaled $7 million for the first quarter of FY15. Primarily reflecting expenditures for one new store, existing store maintenance and enhancement, distribution center equipment, and computer hardware and software purchases. Including investments related to a new point of sale system. We expect a higher than normal level of capital expenditures for FY15, excluding non-cash acquisitions of approximately $28 million to $32 million. Due mainly to increased investment at our distribution facilities to support overall growth.

From a cash flow perspective, our operating cash flow was $19.5 million for the first quarter of FY15, compared to $3.4 million for the same period last year. The increase in cash flow from operations primarily reflects decreased funding of prepaid expenses, inventory, and other working capital. For the first quarter, we continued to pay our quarterly cash dividend of $0.10 share. Additionally, during this year's first quarter, we repurchased 76,073 shares of our common stock for a total expenditure of $0.9 million. As of the end of the first quarter, we had $6.2 million available for stock repurchases under our $20 million share repurchase program. Our long-term debt at the end of the first quarter was $55.4 million. which was up slightly from $50.2 million at the end of the first quarter last year, but down from $66.3 million at the end of FY14.

Now I'll spend a minute on our guidance. For this year's second quarter, we are projecting same-store sales in the positive low to mid single-digit range, and earnings per diluted share in the range of $0.12 to $0.17. Excluding costs incurred related to the publicly disclosed proxy contest.

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

Thank you, ladies and gentlemen.

(Operator Instructions)

Adam Sindler, Deutsche bank.

Great. Thanks so much.

I was hoping that we could take a moment and maybe get an update on where we are in the e-commerce growth curve. Potentially how the new POS system still needs to play out in order to fully maximize things like shipped from store and ship to store.

And then as you're getting off the ground here, how you view investment in the channel longer-term? Is this a offensive maneuver, is this more of a defensive maneuver?

Some companies in our space that have tried to ramp quickly have found significant growing pains. I just wanted to see how you thought about that process.

Okay. Thank you.

We are certainly hoping to avoid lots of growing pains that others have experienced. Just for recap, we launched our e-commerce site in the middle of Q4. At the time, with a limited selection of our existing products.

As we said, sales from e-commerce were immaterial to 2014, given the launch timing and our phased approach for ramping up the product in the platform. We didn't expect that e-commerce would be a game changer for our business, and it hasn't been a game changer for 2015. Again, we don't expect e-commerce to be material to either sales or income. What our focus in e-commerce was, certainly, to create another sales channel for our customer. We've done that now, and we/re evaluating and measuring the initial customer response.

So far, our major focus in marketing the site has been to what we call our E-team members. Those we communicate with digitally. We are now at a point where we look to strategically step up our marketing efforts in an effort to drive new customers to our site.

But we're going to be analyzing, evaluating, and growing our e-commerce platform over a period of time with the goal to integrate e-commerce with our existing merchandising and promotional strategies. We're really trying to, as we said, avoid some of the growing pains, look to use this channel in a way that will be accretive to our business. But we are looking to move it -- at least, demonstrated in how we've grown our store base slowly, prudently, under control, and evaluate it and make decisions in ramping it up as we proceed forward.

That's great. I'm sorry. Please, yes.

You'd also mentioned the new POS system. Let me kind of highlight that. We do expect to launch a new store-wide Oracle-based POS system, but not until sometime in 2016. We continue to invest in the new POS system in 2015. There's a lot of design development going on.

We'll probably spend a couple million dollars or so in development in 2015. The new system will have more functionality than our existing system, including some more advanced pricing and promotions ability, loyalty program capabilities. And it will also integrate with our e-commerce system. We are very excited about the new system. But it's a little ways off now.

Perfect. Thanks so much. And just to close the loop here. So, you did mention specifically decreased print ad expenses as part of drove the SG&A improvement this quarter. Is that something that we could potentially see maybe a few basis points over the balance of the year, as you shift a little bit more toward digital marketing?

If you track back several years, we've been bringing down our print advertising for a number of years now. And we continue to do that very strategically. And as we're doing that, you're right, we're shifting some of those dollars to digital advertising. And we're excited about the results. I think that, of course, allows us to attract a broader customer base. We've got the print advertising customer, we've also got the digital advertising customer. And of course, that dovetails quite nicely with our e-commerce business. So, yes, we would see that trend continuing.

Perfect. Thanks so much. Congrats on a good quarter.

Thank you.

Kristine Koerber, Barrington Research Associates.

Good afternoon. I have a few questions. First, with respect to the guidance, to get to the high end of the guidance, do trends need to continue at the current pace, what you're seeing in early Q2? Or do they need to strengthen from current levels?

I think we're running -- to get to where we -- high end of our guidance, Christine, we're looking to have our sales come in at the higher end of our guidance range, as you might expect. And we would also expect that our POS margins would be slightly positive for the quarter.

I guess what I'm looking for is that coming out of Q1, did business strengthen or stay the same coming out of Q1?

We are off to a solid start, and were running within our guidance range. There's a number of factors in play. In April the shifts in Easter and like that, everything isn't totally apples to apples. We're very pleased with our business, the trending, very much in line for the range of guidance that we provided. Seeing very positive strength across a broad array of product categories.

Now the key really to the second quarter is the performance of the business, the higher volume days that really surround Memorial Day, start of summer, Father's Day, leading into Fourth of July. We feel very good about being prepared from a product standpoint, and from promotional strategies.

Okay. So with that said, the inventory levels, you'd indicated that you're comfortable with the inventory. But if you look at the inventory levels across some of the categories that are performing well, especially in apparel where you had high single -- or I guess it was double-digit.

I guess you came out of the quarter with a pair of high single digit comps. Are you feeling pretty good about some of these categories as far as inventory that have been performing quite strongly?

Yes, we feel excellent about our overall inventory levels. Short of certain items that we are still affectively issues revolving around the port strike, that [import] issues that we're trying to work through. We feel great about our inventories. And we came out of the winter selling season with our winter carryover at meaningfully lower levels than they were last year. From an inventory standpoint, we feel very prepared.

Okay. And then just lastly, I was going to ask on the West Coast port issues. So are things getting back to normal for you? And this strike, the trucker's strike, is that going to have any impact on your business?

That's pretty fresh and a little early to speak to. That's something that's really just happened. It's not a full strike of all truckers or product moving out of the port, and we're really not in a position to determine what impact that may or may not have on us.

But in terms of the overall port issues, I think we're, certainly, over the most significant impact of it. Products clearly are moving through the ports. There's still some catch-up that I think has to occur. We are still feeling a residual impact. May have some impact in some degree to our spring summer products. We have several items that we think would be helpful to have for Memorial Day that's a bit touch and go whether we'll be receiving those on time.

I don't think as a whole they'll be game changing type of issues. But they are issues. I think our team is doing a great job of really mitigating our way through this situation.

Okay. That's helpful. Thank you and good luck.

Thank you.

David Magee, SunTrust. Mr. McGee, your line is open. Please check your mute function.

Are you there?

Yes, I'm sorry. I had the mute function on. Congratulations on a nice performance, guys.

Thanks, David.

I just had some housekeeping questions really. One is, did you talk about occupancy costs in the quarter and how that trended year to year?

Well, David, our occupancy costs are increasing. We mentioned that, that if you had to pick a category on the income statement, that's one of them that seems to be rising. Really, as some of our older leases come up for renewal, we've had some of these for 35, 40 years. And as they come up for renewal, there's certainly a higher cost element on the renewal side. And then, even our new leases or course are at now at higher levels.

So we've been seeing some pressure on the occupancy side, been working really hard to reduce that. But at this stage, we're leveraging occupancy at about 4% comp or so.

Okay. Thank you.

And then you mentioned drought as being somewhat of a risk factor this year. How does that -- or could you give us a more color about that? How does that come to play, and what do you see out there that could happen that would maybe restrict some activities?

Okay. Well, so out here in the west I think it's pretty well, hopefully, known throughout the country that the drought issues that we are facing, particularly in California, they are -- we're at levels that are -- a situation that's relatively unprecedented. So it's really difficult to quantify.

The drought, certainly, has impact on our sales. One, from the impact it has on the economy. For certain, it's very tough from the farm environment, farm communities, many of which we serve. But certainly from a recreational standpoint, the snowpack this year is down significantly from normal where it should be. Reasonably unprecedented lows. That's not going to help lakes and rivers, which but now dealing with the situation over a number of years. Lower water levels have a diminishing effect on recreational use.

That affects being able to sell items. Water recreation products with the restrictions and the publicity of being mindful of conserving water that's throughout California. I suspect fewer people may be buying items, pool toy, use of pools, inflatable pools, and items of that nature.

Bottom line, we're just going to have to see how it plays out. We are monitoring our inventory levels, and seeing how the drought affects us. There can be some affect in campgrounds, and whether all campgrounds will be open, and whether there will be water -- showers and flushing toilets, et cetera that affect campgrounds. So it's a bit of a wait and see issue. Hopefully, it has a minor impact on our business, but it is certainly not helpful.

But it sounds like at this point, you're not seeing any real impact though, just given --

Pardon me?

It sounds like at this point though, you're not really seeing much of an impact. This all sounds like it may be prospective.

Well it certainly becomes a bigger impact during where periods of recreation, water-based recreation is highest. And that is certainly the summer months.

The economic impact that California in particular may feel is probably already here to some degree. But nevertheless, we're playing through it we think quite well.

Can you remind us what -- how the weather was last year, late spring, early summer?

I think last year, it was relatively neutral. I think on a whole. I don't believe we were -- it was a major factor one way or the other in terms of, as I recall, for Q2.

Great. Thanks, Steve.

Thank you, David.

(Operator Instructions)

Sean McGowan, Needham & Company.

Thank you. Couple of questions.

Do you have any sense at this point, Barry or Steve, what the ongoing expenses this year related to this proxy contest could be? It sounds like it's not over, so would we be expecting to see a similar amount in the second quarter? Any idea how that's going to go for the balance of the year?

Well, Sean, let me just -- what I can say is as indicated in the release, we incur about $500,000 or so of expense related to the proxy contest in Q1. At this stage, we really believe it would be premature to forecast these costs for Q2 given the variety of possible outcomes with the situation. However, we do expect the proxy contest related expense in Q2 to be higher than it was in Q1. That's really all I think we can say at this point.

Okay. That's helpful.

And given -- maybe an update on the leasing trends in guns and ammunition, and any commentary on what impact that's having on the overall gross margin. As that category is a little less negative.

Yes. Our firearm business continues to trend down. We mentioned it was a drag on the business for Q1, although significantly less of a drag than it was over the course of 2014. Currently, we still see some softness in the firearm -- specifically firearm business.

Our ammunition business is trending more favorably. We think in terms of a margin -- from a gross margin standpoint, when firearm business is soft, firearms are significantly lower than our average margin. So it probably results in more favorable point of sale margins.

Right. But I was asking if you cover the relief that isn't down as much, that could have, on balance, an increasingly negative impact on gross margins?

I'm sorry. Sean, we're having a little difficulty hearing you.

I apologize. I'm just saying that as that business improves or at least stops declining as much, that would be a headwind on gross margin, right?

That goes without saying.

Any idea why the firearm side of it is still trending negatively? Is that an industry wide trend, or do you think that there's something going on in your stores?

I don't think where a good barometer for what's happening industry wide. We don't have the breath of inventory in the category that others in the industry have. We only carry long guns. We do not carry handguns center flyer modern sporting rifles. I guess the so-called assault rifles.

It's our understanding that sales of those products are probably more brisk than the more traditional shotguns, the 22 rifles and other products that we stock. So I wouldn't use us, necessarily, as a barometer for the overall industry trends.

Okay. Thank you.

You're welcome.

David Magee, SunTrust.

Thank you. Could you give a little more color regarding the stepped up price points in footwear and apparel?

That's been a positive factor the last couple years. And maybe talk about how much upside you had left with that dynamic. Thanks.

Sure. It's something that has been playing out very positively for footwear now, and apparel for a number of seasons. We still feel we have upside in looking at what's successful, and trying to be more precise in our purchasing and the store allocations.

We think that some of the same concepts we've been working to apply to our footwear category, we think that's been a much bigger ship to turn. And we are excited with the direction it's moving. It's performed positively in Q1, it's continuing to perform positively Q2 to date.

And it's just shifting some more of our buy dollars to certain brand products. Some cases have elevated price points. It's much more of an evolution than a revolution. We're trying to get deeper into the sizes and color offerings, the stronger selling models. And we're excited about the progress, and think we still have runway.

Thanks, Steve. And just one more question I had. Do you have a pretty good feel for what your wage costs were this year? I know there has been some upward pressure on retail in general, but also out West in particular. Can you talk a little bit about what's happening there too? Thanks.

Well, David, of course I think you're aware of the minimum wage impact that we are feeling in California, particularly with over half of our stores in California. And (inaudible) approved a $2 increase in the state's minimum wage from $8 to $10, and the increase is being rolled out in two separate increments with the first $1 increase effective July 1, 2014 and then the second in January of 2016. So we went up to $9 effective July 1, 2014. The overall impact of the first phase of the minimum wage increase on our store employee wages, it's about $400,000 to $500,000 a quarter.

Anyway, so we've been -- once we get through the second quarter, we will then at least be on equal footing beginning in the third quarter at that higher rate. And that will go up, once again, in January of 2016.

Okay, great. Thanks, Barry. Good luck.

Thank you.

At this time, there are no further questions. Mr. Miller, I will hand things back to you for any additional or closing remarks.

All right. We thank you for your interest today, and look forward to speaking with you on our next call. Have a great afternoon.

That does conclude today's conference. Thank you all for your participation.