Big 5 Sporting Goods Corp (BGFV) 2015 Q3 法說會逐字稿

Good day, and welcome to the Big 5 Sporting Goods third-quarter 2015 earnings results conference. Today's conference is being recorded. On the call today from the Company, we have Mr. Steve Miller, President and Chief Executive Officer; and Mr. Barry Emerson, Chief Financial Officer. As this time, I would like to turn the conference over to Mr. Miller.

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

Today, we will review our financial results for the third quarter of FY15, and provide general updates on 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 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. Although we delivered earnings in line with the guidance we provided for the third quarter, our sales fell slightly short of our expectations.

For the quarter, net sales were $270.1 million, up 1.9% from $265.1 million for the third quarter of FY14. Same-store sales decreased 0.4% for the period.

We were unable to overcome the drag to our business from cycling against strong soccer-related sales that were influenced by the men's World Cup last year, as well as softer than anticipated sales of firearms-related products, and the continuing impact of the drought in our major markets.

In terms of how sales trended over the quarter, we comped slightly negative in July, and comped down in the low single-digits in August. Same-store sales swung to the positive low single digits in September, as we benefit from promotions celebrating Big 5's 60th anniversary. We experienced a low single-digit decrease in customer transactions, and a low single-digit increase in average sales during the period.

From a product category standpoint, our footwork category comped positively in the low single digits for the period, while our apparel and hard good categories each comped down low single digits. As expected, each of these major merchandise categories experienced some impact from cycling last year's strong soccer-related sales. Our hard goods category also was negatively impacted by the reduced sales of firearms-related products, which we believe was due in part to some recently enacted legislation in California.

Merchandise margins decreased by 51 basis points for the period compared to the third quarter of last year. This reduction was a reflection of product mix shifts along with our promotional efforts to drive sales.

Now commenting on store openings. During the third quarter, we opened one store in San Jose, California and closed one store. We ended the quarter with 439 stores in operation.

We now expect that this will be the number of stores at year end, as we don't anticipate opening or closing any additional stores during the current period. We have had certain store openings delayed by construction and landlord issues, and would expect those openings to move into next year. We are also reevaluating certain locations that we had anticipated for store openings earlier this year, as we continue to maintain a cautious approach toward selecting the right new store opportunities for our business in the current retail environment.

Now turning to current trends. We are currently comping down low single digits for the fourth quarter to date. While October represents the lowest volume sales month of the quarter and the holiday period is always somewhat unpredictable, we feel well-positioned from a product and promotional perspective for the balance of the quarter. However, we do expect that this will be another highly promotional holiday period, and weather conditions over the winter selling season will be critical to the performance of our winter product business, and hence, our fourth-quarter results.

We should note that last year, weather was not particularly favorable over most of the quarter, but turned remarkably positive during the last week of the period, and remained so during the first week of the first quarter, which produced extraordinary winter product sales for us.

Given that we are in a 53-week fiscal year with a 14-week fiscal fourth quarter, same-store sales for the last week of our fourth quarter this year will compare against the first week of the first quarter of FY15, the week in which our sales were up very strong double digits. In other words, we're hoping for a lot of snow during the winter and particularly over the New Year's holiday period.

Before I turn it over to Barry, I'd like to note that September marked Big 5's 60th year in business. Since our founding in 1955, we have successfully evolved from selling army surplus products to being a leading sporting goods retailer in the Western United States. We have weathered many challenges along the way, difficult macroeconomic conditions, changes in the competitive environment, changes in the consumer, and not to mention, highly variable weather patterns.

Looking forward, to help ensure that we are best positioned to succeed in the constantly evolving retail environment, we have engaged consultants to help us evaluate our store growth strategies, and identify potential avenues for profit enhancement. We look forward to working on these initiatives, while at the same time continuing to focus on driving sales, margins, and controlling expenses.

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 the FY15 third quarter was 31.5% of sales, versus 32.5% of sales for the third quarter of FY14. The decrease in gross margin for the period reflected the 51 basis point decline in merchandise margins that Steve mentioned, as well as an increase in store occupancy costs as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 27.7% in the third quarter, down 20 basis points from 27.9% in the third quarter of FY14. On an absolute basis, SG&A expense increased $1.1 million year-over-year, primarily reflecting a higher employee labor expense and operating expense resulting from our increased store count, partially offset by a reduction in advertising expense.

Now looking at our bottom line. Net income for the third quarter was $6.1 million or $0.28 per diluted share. This compares to net income in the third quarter of FY14 of $7.5 million or $0.34 per diluted share.

Briefly reviewing our 2015 first nine months results. Net sales increased to $754.1 million from $727.5 million during the first nine months of FY14. Same-store sales increased 1.7% during the first nine months of FY15 versus the comparable period last year.

Net income for the current period was $11 million or $0.50 per diluted share, including $0.06 per diluted share of charges for the Company's publicly disclosed proxy contest and a legal settlement. This compares to net income of $12.1 million or $0.54 per diluted share, including $0.02 per diluted share of non-cash impairment charges for the first nine months of last year.

Turning to our balance sheet. Total merchandise inventory was $318.4 million at the end of the third quarter, up 3.5% from the prior year. On a per store basis, inventory was up 1.6% versus last year, and we feel good about our inventory as we enter the holiday and winter selling season.

Looking at our capital spending. Our CapEx, excluding non-cash acquisitions, totaled $18 million for the first nine months of FY15, primarily reflecting investment in our distribution center, expenditures for new stores, existing store maintenance enhancement and computer hardware and software purchases including investments related to a new point-of-sale system.

We currently expect capital expenditures for FY15, excluding non-cash acquisitions, of approximately $26 million to $28 million as we increase investment in our distribution center facilities to support overall growth.

From a cash flow perspective, our operating cash flow was a positive $25.3 million for the first nine months of FY15, compared to $25.1 million for the same period last year. The slight increase in cash flow from operations primarily reflected a smaller decrease in accrued expenses, and decreased prepaid expenses, partially offset by increased funding of inventory purchases.

For the third quarter, we continued to pay our quarterly cash dividend of $0.10 per share. Additionally, during the third quarter, we repurchased 181,969 shares of our common stock for a total expenditure of $2 million raising our year-to-date repurchases to 278,242 shares of common stock for a total expenditure of $3.2 million. As of the end of the third quarter, we have $3.9 million available for stock repurchases under our $20 million share repurchase program.

Our long-term debt at the end of the third quarter was $65.3 million which compared to $55.4 million at the end of the third quarter last year, and $66.3 million at the end of FY14. The increase in debt at the end of the third quarter compared to the same period last year primarily reflected our higher level of capital expenditures this year, along with the funding of shareholder dividends and share repurchases.

Now I will spend a minute on our guidance. For this year's fourth quarter, we are projecting same store sales in the low negative single-digit to low positive single-digit range, and earnings per diluted share in the range of $0.10 to $0.20. Our guidance reflects anticipated expenses of approximately $0.01 per diluted share associated with consulting fees for the evaluation of store growth strategies and potential profit improvement opportunities.

As a reminder, the FY15 fourth quarter will include 14 weeks, and the fiscal fourth quarter last year included 13 weeks. Our same-store sales guidance reflects comparable 14-week periods. Operator, we are now ready to turn the call back to you for questions and answers.

Thank you.

(Operator Instructions)

We'll take our first question from Mark Smith with Feltl and Company.

Hello, guys. You guys might have given this in the past, but how much does the 53rd week add to earnings?

I'm sorry, can you speak up a little?

How much does the 53rd week add to earnings?

Yes. In your guidance, how much is from that extra week?

Mark, I would say that we've estimated about $0.02 to $0.03 for the extra week. Remember, we have got extra sales, but of course we've got all the extra expenses along with that extra week as well.

That week is very, very dependent on winter weather. So it's really a call on how you believe winter will be over the New Year's holiday, and hopefully if our best guess at normal would suggest $0.02 to $0.03.

Okay. And then looking at your near-term strategy on openings, it sounds like you do have some delays that maybe you will open up here in Q1. Are you guys aggressive or excited to open new stores, or is it something that's really you are waiting to see what consultants really say about new store growth?

Well, I think we've -- I believe we've always maintained a strategy of growth, growth under control, always being cautious in trying to open up the right new stores. Not so fixated at just hitting a number, or just for the sake of hitting a number. That said, we're excited in trying to find properties that do fit the prescription for a successful Big 5 store.

We've got some stores that were clearly delayed. We wish we were to have opened this year that have come under delay that we will be opening as we roll into the next year, and other opportunities that we're moving forward on.

Okay. And then lastly, you guys said that you were comfortable with your inventory levels. If I remember right, it seems like you guys held over a fair amount of winter inventory from last year. If we don't see a shift into colder weather here, how bad could the situation be with the inventory?

I guess if we have no winter weather, we will again be in a position of having some excess winter product that we have become pretty experienced at carrying over from season to season. We bought around our carryover inventory from last year.

We feel very good about the inventory as we enter the season. But certainly, if we have no winter weather, we'll have inventory to carry over into the following year.

Mark, we actually had pretty good winter weather the last week of last year, and into the first week of this year. So although it was only a couple weeks, it was pretty significant for us. So we were able to sell down our winter products pretty good at the beginning of this year.

I think it's a little early in the season to be thinking about not having winter weather. We have got to believe that we are going to get some winter weather. We believe we are more than due for it.

Perfect. Thanks, guys.

Yes.

(Operator Instructions)

We'll take our next question from Kristine Koerber with Barrington Research.

Hello, this is Mason Marion sitting in for Kristine. So your earnings per share guidance is $0.10 to $0.20. That's a pretty broad gap. What is driving that variance there?

We've certainly had in the fourth quarter -- well, first of all, to answer your question, the fourth quarter for us is -- with all the different dynamics of the holidays and the dynamics of weather, whether or not we'll have an El Nino or yes or no. Will it be warm, will it be cold?

What is the promotional activity and cadence going to be for the holidays, which we expect it to be very competitive and promotional. And then just the overall consumer, and the level of demand, and so on. So we've clearly had ranges that have been at this level previously, and in fact, larger than this in the fourth quarter. So this really isn't out of the ordinary for us.

(Operator Instructions)

With no further questions, I will turn it back to Steve Miller at this time.

All right. We appreciate those of you on the call, and we will look forward to speaking to you on our next call. Have a good afternoon.

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