Big 5 Sporting Goods Corp (BGFV) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods first-quarter 2016 results conference call. Today's call is being recorded. With us today are Mr. Steve Miller, President and CEO; and Mr. Barry Emerson, CFO of Big 5 Sporting Goods.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to our 2016 first-quarter conference call. Today we will review our financial results for the first quarter of fiscal 2016, 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.

Our first quarter got off to a very strong start, as we benefitted from extremely favorable winter weather conditions. However, sales softened significantly mid-quarter, when the weather turned warm and we did not receive the lift in our non-winter-product categories that we might have anticipated.

We believe that our performance for the quarter reflects the challenging retail environment, and in particular, the increased promotional activity in the sporting goods sector, in connection with the liquidation, sales, and promotional efforts associated with two of our major competitors, Sports Authority and Sport Chalet, either commencing or preparing to commence bankruptcy proceedings.

Despite these challenging conditions, we continue to maintain a very healthy balance sheet and our overall financial condition, which we believe position us very positively for the future.

Now I'll comment on sales for the first quarter. First-quarter net sales were $234.5 million, down 3.7% from $243.6 million for the first quarter of fiscal 2015. As anticipated, net-sales comparisons for the fiscal quarter were meaningfully impacted by the calendar shift that caused fiscal 2016 to begin one week later than fiscal 2015, as well as the calendar shift of the Easter holiday, during which our stores are closed, from the second quarter last year to the first quarter this year. These calendar shifts negatively impacted net-sales comparisons for the first quarter of fiscal 2015 by approximately $3.9 million.

Same-store sales decreased 1.9% during the first quarter of 2016, versus the comparable 13-week period in the prior year. Same-store sales comparisons were not meaningfully impacted by the calendar shifts I mentioned because same-store sales comparisons are made on a true comparable-week basis. We experienced a low-single-digit decrease in customer transaction and a low-single-digit increase in average sale during the first quarter versus the prior-year period.

In terms of how sales trended over the quarter, January was our strongest month, comping up in the high-single-digit range, on the strength of outstanding winter-weather conditions in our western markets. Same-store sales for February and March were down mid-single-digits. We largely lost the benefit of winter-product sales by mid-February, as the weather turned warm in our markets, and as I mentioned, we did not receive the lift in our non-winter-product categories that we would have anticipated.

In addition to a generally challenging retail environment, we believe the extraordinary levels of promotional activity in our sector, as a result of the Sports Authority and Sport Chalet situations, had, and continue to have, an impact on our sales.

From a product-category standpoint, our apparel category comped positively, in the high-single-digit range for the period, largely on the strength of winter-apparel sales in the first half of the quarter. Footwear sales comped up in the low-single-digit range, and hard goods comped down in the high-single-digit range for the period.

Merchandise margins decreased by 86 basis points for the fiscal period compared to the first fiscal quarter of last year, due to the impact of the calendar shift, as well as our increased promotional and clearance activity, in an effort to drive traffic and sales in the challenging environment.

Now commenting on story activity. During the first quarter, we closed four stores, one as part of a prior relocation, and three as a result of lease expirations. We ended the quarter with 434 stores in operation.

During the second quarter, we plan to open two new stores and to close one store. For the 2016 full year, we currently expect to open approximately five to eight stores and close approximately ten stores. We are closely watching the ongoing developments in our sector and expect that the rationalization that is taking place could create additional opportunity for us.

Now turning to current trends. Sales in the second quarter have remained soft, as we have faced increased promotional activity associated with the ongoing competitors' liquidation sales. We are currently comping down in the low-mid-single-digit range for the second quarter to date.

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 Day, Father's Day, and the lead up to the Fourth of July.

With respect to the Sports Authority and Sport Chalet bankruptcies, we want to provide some color on the competitive overlap, which may give you a sense of both the near-term pressures that we are experiencing and the potential opportunity for our business once the liquidation process has run its course.

Currently, there are roughly 210 Sports Authority and Sport Chalet stores within the general trading area of a Big 5 store. These 210 stores impact approximately 250 of our Big 5 stores, or nearly 60% of our chain.

Although we certainly do not know at this time what the ultimate outcome will be for all of the Sports Authority and Sport Chalet store locations, we believe that our stores stand to benefit once the competitive landscape rationalizes.

Fortunately, our healthy financial condition offers us the flexibility to take advantage of this opportunity. We are actively working with the vendor community on opportunistic buys, as well as preparing for potentially increased consumer demand. We are also developing market initiatives aimed at introducing Big 5 to consumers who may soon need a new place to shop for sporting goods.

While our results may be challenged in the near term, we believe that as conditions in the sporting goods space normalize, our proven business model, which focuses on providing customers with the optimal mix of value, selection, service, and convenience, will enable us to resume positive sales growth and create value for our shareholders.

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 flow, and provide second-quarter guidance.

Thanks, Steve. Our gross-profit margin for the fiscal 2016 first quarter was 30.3% of sales, versus 31.5% of sales for the first quarter of fiscal 2015. The decrease in gross margin for the period reflects the 86 basis-point decline in merchandise margins that Steve mentioned, along with deleveraging of occupancy costs.

Our selling and administrative expense as a percentage of sales was 30.4% in the first quarter, up from 29.8% in the first quarter of fiscal 2015, as a result of lower sales. On an absolute basis, SG&A expense decreased $1.3 million year over year, primarily reflecting legal-settlement and proxy-contest costs in 2015.

Now looking at our bottom line, we reported a net loss for the first quarter of $1.1 million, or $0.05 per share, including $0.03 for the write-off of deferred-tax assets related to share-based compensation. This compares to net income in the first quarter of fiscal 2015 of $2.3 million, or $0.11 per diluted share, including $0.03 for costs associated with the legal settlement and the Company's proxy contest.

Turning to our balance sheet, our inventory was $286.4 million at the end of the first quarter, down 6.1% from the prior year. On a per-store basis, merchandise inventory was down 4.3% 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 noncash acquisitions, totaled $3.2 million for the first quarter of fiscal 2016, primarily reflecting existing-store maintenance and enhancements; investment in our distribution center; and computer hardware and software purchases, including investments related to the development of a new point-of-sale system. We currently expect capital expenditures for fiscal 2016, excluding noncash acquisitions, of approximately $15 million to $19 million.

From a cash-flow perspective, our operating cash flow was $9.6 million for the first quarter of fiscal 2016, compared to $19.5 million last year, largely due to changes in working capital and lower earnings. For the first quarter, we paid our quarterly cash dividend, which we previously announced was increased to $0.125 per share.

Our long-term debt at the end of the first quarter was $56.5 million, which was up slightly from $55.4 million at the end of the first quarter last year, and from $54.8 million at the end of fiscal 2015.

Now I'll spend a minute on our guidance. For the fiscal 2016 second quarter, we expect same-store sales to be in the negative low-single-digit to flat range and earnings to be in the range of $0.00 to $0.06 per share.

We expect second-quarter net-sales comparisons to the prior year to benefit by approximately $7 million as a result of the calendar shift from a 53-week fiscal year in fiscal 2015, which will result in pre-Fourth of July holiday sales moving from the third quarter in fiscal 2015 to the second quarter in fiscal 2016; as well as by the calendar shift of the Easter holiday, during which our stores are closed, from the second quarter in fiscal 2015 to the first quarter in fiscal 2016.

This anticipated benefit is reflected in our earnings guidance for the fiscal 2016 second quarter but does not affect our same-store sales guidance for the second quarter because we report same-store sales on a comparable week basis, as opposed to a fiscal-period basis.

Our earnings guidance for the second quarter also reflects a charge of approximately $0.01 per diluted share for the write-off of deferred tax assets related to share-based compensation.

For comparative purposes, in the second quarter of fiscal 2015, same-store sales increased 1.7%, and earnings per diluted share were $0.12, including $0.03 per diluted share of charges associated with the proxy contest.

As Steve indicated, although our operating results are currently being impacted by competitor liquidation sales, once these promotional activities conclude, we believe we will be positioned well for the future.

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

Thank you. (Operator Instructions) Mark Smith, Feltl and Company.

Hi, this is Aaron Steele on for Mark Smith. I was just wondering if you guys saw any opportunity in maybe buying some real estate from either Sports Authority or Sport Chalet?

Given the differences in box size -- you know, the Sports Authority and Sport Chalet stores are typically 40,000 square feet up, and our box averages around 11,000 square feet -- we don't think there's a great opportunity from their specific real estate situation. We do think that the closing of a number of those stores may create some advantageous opportunities to fill in with our own box.

Great, thanks.

David Magee, SunTrust.

Hi. Good afternoon, guys.

Hi, David.

The fact that the business didn't really pick up when the weather turned warm the way you thought -- do you think that's entirely because of the promotions from these competitors, or do you feel like you were in sync from a style perspective? Any further color or thought there would be nice.

I think we were in sync from a style perspective. I think a lot had to do with the timing of what the weather was doing. It turned warm over the President's Day holiday for most of our markets, and that was not advantageous to trying to sell winter weather. We had a fair amount of rain in March that wasn't particularly helpful for our business.

But I think the overwhelming factor was, one, a general softness in the overall consumer environment, but certainly the impact of the promotional environment with the beginning of liquidation sales, the preparation for commencing bankruptcy proceedings, the other competitors ramping up their promotional efforts in response to the TSA and Sport Chalet liquidation sales. So I think it just got to be a very competitive market, impacted certainly a number of our categories.

Are you still seeing the departments perform about the same in terms of apparel being the best and hard goods not so much?

No, it's -- there's certainly been some shifts. The positive impact to apparel was primarily driven by the start of the winter that really drove some sensational winter sales.

I think we're seeing -- our footwear category performed most positively quarter-to-date. I think apparel and a number of the hard-good categories are those that are most impacted by some of the competitive activity.

I know this is hard to answer, but any idea how long this might last? Is it something that might be done by back to school, or do you think it persists into more the fall?

Well, I think it's a relatively interesting phenomena and reasonably unprecedented. As we sit here today, we're currently facing approximately 80 competitive liquidations. It began with The Sports Authority stores, about 35 of them in our market. Then the entire Sport Chalet chain went into liquidation mode. So now we have sort of overlapping liquidation sales.

Some of those are going to, I suspect, come to an end, and we face, I suspect, now the likelihood, based on certainly what I'm sure we all read, of additional liquidation sales commencing potentially within the next several weeks. But at that point in time when some commence, we're going to have a number of stores closing. And it's kind of difficult to figure out exactly how the -- what the timing of the overall impact would be.

But we do suspect that certainly -- as you say, by the time we get back to the back-to-school period, my gut instinct tells me that most of the liquidation activity will be certainly gone or strongly subsiding. And we certainly stand to benefit from a way more rationalized playing field.

Thank you, Steve. Last question -- how do you combat that? Do you try to match promotions out there, or do you just sort of sit tight and suffer the traffic being pulled away?

I would maintain that you truly can't combat a peer going-out-of-business sale. But understand that as these businesses are going out of business, in some -- they're running out of basic products. In the case of one or maybe both of these competitors, they haven't been receiving fresh inventory. So I do think we have positives.

We're going to combat it by being -- certainly staying focused on our strategy. We may step up our promotional activity, but we're certainly going to operate rationally, looking to balance sales and margin, expense control and inventory management, to really ensure that we're best positioned to benefit from a competitive rationalization, once this effectively is done and over.

We are going to be proactive in messaging to the consumer base, to hopefully let them know there's a new play -- another player opportunity to shop sporting goods, if they previously weren't a Big 5 customer. We think that the convenience and value proposition and product selection that we offer will certainly work to our advantage.

Great. Thanks, Steve, and good luck, here.

Thank you, David.

(Operator Instructions) Kieran McGrath, Credit Suisse.

Hi, guys. Good afternoon. Two questions for me. Firstly, are you able to quantify the impact on your Q1 comps from these closures? And what kind of impact are you embedding for Q2?

There's so many moving pieces to it all that I don't know that we can precisely quantify it. We can say that we clearly see that our stores operating in areas without the competitive impact are performing better. I think it certainly could be a 200 or 300 basis-point impact, perhaps more. We've certainly seen in some instances where competitors have already vacated a space that we've seen a meaningful lift in sales in neighboring stores.

Thank you, very clear. And just a followup question -- in the past, you have benefitted from periods of elevated firearms demand. I'm just curious, could you discuss what are you seeing today? And is this any different from what you saw in prior periods of this elevated firearms demand? Thank you.

I think things are more normal, in terms of the firearm business. We're not going to -- we spoke quite a bit about firearms during the surge of activity. I think as this category becomes less significant to driving the overall direction of our comps, it's not really meaningful to break it out.

I think the category is pretty normal to us right now. There's still probably some catch-up that needs to occur, in terms of the flow of .22 ammunition. Some of our results are a little inconsistent, based on the flow of .22 ammunition that -- of a year ago. But all in all, this category is pretty normal to us. We'll see how it plays out over the course of this Presidential election year, which in the past has been reasonably influential to the category.

Perfect. Thank you. I appreciate it.

Mike Baker, Deutsche Bank.

Thanks, guys. Just to follow up on a couple of questions. To Dave Magee's question, he asked about how long the liquidation sales might take. I understand you don't know exactly when the competitive stores are going to liquidate. But how about this? From the day -- how long does a liquidation take per store?

So for instance, when The Sports Authority started liquidating their 35 stores, how long does it typically take for them to get through that, on a per-store basis? How many weeks or months should we expect there to be pressure?

Well, I can't give you a precise answer because they're not done, and I'm unaware of any of their stores that have started a liquidation sale that has concluded that liquidation process. I'm thinking that they've probably been at it for maybe about five weeks, now -- four, five, or six weeks.

I think they've moved through a lot of their inventory, but I'd be guessing if I tried to tell you whether it's another two or three or four weeks. I would suspect that in general, it's a two- to three-month process in round figures, per store.

Okay, that's helpful. But just to follow up, because my followup question was going to be, and now it's related to that -- I thought you had said that in stores where the liquidations are fully complete, you're seeing a lift in sales. So I guess, square that with the comments that you just said that none are complete. Were you referring to Sport Chalet stores, perhaps? And then once you --?

I understand the question. There were a handful of stores that were closed by competitors, but they did not choose to go through the liquidation process in that store. I could guess that maybe that had to do with a lease situation that was particular to that store. But a handful of stores have closed, and when that's occurred -- as we would expect -- we have seen a positive benefit.

Understood. And so then my question was going to be, then -- thank you for that clarification -- what kind of lift do you see? And typically what would you expect your share of the [raw] sales or the disgorged sales, if you will -- what would you expect to pick up in a market?

The impact that we see when a competitor closes -- and some of this is historical because, I mean, this isn't the first time that we've seen competitors close -- but it truly varies market by market. And a lot has to do with what the overall competitive landscape is for that marketplace, as one would -- it's reasonably logical. In markets that are highly competitive or there's lots of establishments to buy a similar product, the pick-up is less than in a marketplace where there is less competition. So there's really a wide variance that can occur with competitive closings. But in all cases, it's positive.

Okay. And if I could ask one more -- you had said in your prepared remarks that you're getting some support from vendors as your competitors liquidate. So what exactly does that mean? Are they giving you better product, better pricing, more product as you become more important to those vendors?

Well, I think -- if you think about the vendor community, they need to replace the lost business. That promotes a positive conversation. In some cases it's looking at opportunistic situations, where they have products in their pipeline that may have been built, intended to go to one of the competitors that are in the process of liquidation, and that can create, and is creating, opportunities. And I suspect there'll be more of those as time marches on.

We're also working with them to try and, as best we can, determine potential product demand. We know we have consumers that are looking for product and maybe were accustomed to buying from stores that are no longer going to exist, then we need to try to work carefully with them to best estimate what that might mean for our stores. So we're pretty excited about working with the vendors to drive this process.

Great. Thank you. Understood. Appreciate the color.

You're welcome.

David Magee, SunTrust.

Hi, guys. Just one followup question. I was curious how the labor-cost side of things were playing out this year relative to expectations. You guys did a good job of cost control in the first quarter.

David, obviously a lot of dynamics in California, here. So just to level-set -- California had previously approved a $2 increase in the State's minimum wage, from $8 to $10. The increase was rolled out in two separate increments, with the first $1 increase effective back in July 1, 2014, and then the second tranche here, the second $1, in January 2016, so impacting us here for the first quarter.

The overall impact of the first phase of the minimum-wage increase on our store-employee wages was about $400,000 to $500,000 a quarter. That is very similar to what we're seeing here now with the second increase of $1, about $400,000 to $500,000 a quarter.

And then California recently approved another $5 increase in the State's minimum wage, from $10 to $15. Of course, that's not impacting us yet. But this increase is going to be rolled out in separate increments through 2022: 2017 and 2018, $0.50 each per year; and then in 2019 through 2022, $1 each per year.

But there's other -- but we're also seeing other cities consider minimum-wage adjustments, and we're analyzing the impact of these anticipated changes. And we will continue to evaluate, of course, our store-staffing model, as we consider how to best adjust to these increases and what we can do to kind of mitigate the impact.

And how are you doing that so far? You must be doing something to save money to offset that increase.

Well, what we can do is -- I mean, our largest expense is our store labor, and a significant portion of this is part-time labor. And while we certainly have been impacted by the minimum-wage increases, we have systems in place that allow us to effectively adjust our part-time staffing to current business levels. And we'll continue to evaluate that store-staffing model and try and make adjustments as we can.

But there's only so many people in a store, and you've got to make sure you're running the cash register. So there's an impact to the business, for sure.

Great. Thank you, Barry.

Sure.

And there are no further questions in the queue at this time. Mr. Miller, I'd like to turn the call back over to you for any closing or additional remarks.

Thank you, operator. We appreciate everybody's interest in today's call and look forward to speaking with you at our next earnings call. Have a great afternoon.

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.