Big 5 Sporting Goods Corp (BGFV) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Second Quarter 2016 Results Conference Call. Today's call is being recorded. With us today are Mr. Steve Miller, Chairman and Chief Executive Officer; and Mr. Barry Emerson, Chief Financial Officer 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. Good afternoon, everyone. Welcome to our 2016 Second Quarter Conference Call. Today, we will review our financial results for the second quarter of fiscal 2016 and provide general updates on our business, as well as provide guidance for the third 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 exceed our earnings guidance for the second quarter, despite a highly competitive and promotional environment in our markets. While sales were pressured by the liquidation efforts of Sports Authority and Sport Chalet, our team successfully held merchandise margins flat with the prior-year period and maintained a healthy balance sheet. We ended the quarter with per-store inventories down 9.1% and borrowings under our credit facility down 19% from the prior year. This prudent business management of our business has been a hallmark of our model throughout our 60-year history and has positioned us to take advantage of the competitive rationalization that is occurring in our sector, and we are already beginning to see the benefits in the start of our third quarter. Our confidence in the strength of our business model as well as our continuing commitment to return value to shareholders is reflected in the new $25 million share repurchase program that we announced today.

Now, I'll comment on sales for the second quarter. Second quarter net sales were $241.4 million, compared to $240.4 million for the second quarter of fiscal 2015. As anticipated, net sales comparisons for the fiscal quarter were favorably impacted by the calendar shift and caused fiscal 2016 to begin one week later than fiscal 2015 and resulted 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 a 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 benefited net sales comparisons to the second quarter of fiscal 2015 by approximately $6.8 million.

Same store sales decreased 1.7% during the second quarter of 2016 versus the comparable 13-week period in the prior year. Same store sales comparisons were not materially impacted by the calendar shifts because same store sales comparisons are made on a true comparable week basis. We experienced a low-single digit decrease in customer transactions, a low-single digit increase in average sale during the second quarter versus the prior-year period.

In terms of how sales trended over the quarter, same store sales were down in the low-mid single-digit range in April, down low-single digits in May, and up slightly in June. While sales throughout the period were pressured by Sports Authorities and Sport Chalets going out of business sales, we believe we reached an inflection point toward the end of June when the benefit from competitor stores that had already closed began to offset the impact from competitors that we're still in the process of liquidating.

From a product category standpoint, all of our major merchandise categories were affected by the liquidation sales, with our apparel and hardgoods categories each down low-single digits and our footwear category up slightly for the period. Merchandise margins were flat with the second fiscal quarter of last year. And as I said, we were very pleased with our team's ability to maintain margins in extremely promotional environment.

Now commenting on store activity. During the second quarter, we opened two new stores and closed one store. We opened new stores in Gardena, California; and Nogales, Arizona. We ended the quarter with 435 stores in operation. During the third quarter, we plan to open two new stores and to close five stores. For the 2016 full year, we currently expect to open approximately five to eight stores and close approximately 10 stores. We continue to watch the ongoing developments in our sector and expect that the rationalization that is taking place could create additional opportunities for us.

Now turning to current trends. We are off to a very nice start in the third quarter with same store sales for the quarter-to-date up in the high mid-single-digit range as we are benefiting from numerous competitor store closures in our markets. We believe that these closures are leading more customers to recognize Big 5 Sporting Goods for the right mix of convenience, value, and strong product assortments. To provide some perspective in the opportunity, the competitor liquidation sales were concluded last week and we have seen roughly 210 Sports Authority and Sport Chalet store locations closed within the general trading area of a Big 5 store. These 210 competitor stores impacted approximately 250 of our Big 5 stores, or nearly 60% of our chain.

Although, we are well aware that some of these competitive locations ultimately will be replaced by other competitors, the playing field should be much more rational moving forward than it has been for a number of years. We are working hard to position our merchandise mix and promotional efforts to take full advantage of this opportunity. Among our initiatives, we are leveraging our deep experience with opportunistic buys to take advantage of the surplus product that is becoming available in our sector. We are also pursuing new product lines and expanded assortments where we see opportunity, while actively cultivating new vendor relationships. Additionally, we are implementing marketing plans designed to reach customers who may have been displaced by the competitive closures. We are tremendously excited about the possibilities for our business as we look ahead.

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 third quarter guidance.

Thanks, Steve. Our gross profit margin for the fiscal 2016 second quarter was 31.6% of sales versus 32.1% of sales for the second quarter of fiscal 2015. The decrease in gross margin for the period reflects an increase in distribution and store occupancy costs as merchandise margins were even with the second quarter of fiscal 2015.

Our selling and administrative expense as a percentage of net sales was 29.9% in the second quarter, down from 30.2% in the second quarter of fiscal 2015. On an absolute basis, SG&A expense decreased $0.4 million year-over-year, due to proxy contest costs in 2015, partially offset by higher employee labor and benefit-related expense.

Now looking at our bottom line, we reported net income for the second quarter of $2.1 million, or $0.10 per diluted share, including $0.01 for the write-off of deferred tax assets related to share-based compensation. This compares to net income in the second quarter of fiscal 2015 of $2.6 million, or $0.12 per diluted share, including $0.03 for costs associated with the Company's proxy contest.

Briefly reviewing our 2016 first half results, net sales were $475.9 million compared to $484.0 million during the first six months of fiscal 2015. The calendar shift from a 53-week fiscal year in 2015 benefited net sales comparisons by approximately $2.9 million in the first six months of 2016. Same store sales decreased 1.8% during the first half of fiscal 2016 versus the comparable period last year. Net income for the period was $1.0 million, or $0.05 per diluted share, including $0.04 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation. This compares to net income of $4.9 million, or $0.22 per diluted share, including $0.06 per diluted share of charges for a legal settlement and expenses associated with the proxy contest for the first half of last year.

Turning to our balance sheet, our inventory was $304.5 million at the end of the second quarter, down 9.5% from the prior year. On a per-store basis, merchandise inventory was down 9.1% versus last year and we feel very good about our inventory position as we move through the summer selling season. Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $6.8 million for the first half of fiscal 2016, primarily reflecting existing store maintenance and enhancements, investment in new stores and our distribution center, and computer hardware and software purchases, including amounts related to the development of a new point-of-sale system. We currently expect capital expenditures for fiscal 2016 excluding non-cash acquisitions of approximately $15 million to $18 million.

From a cash flow perspective, our operating cash flow was $16.4 million in the first half of fiscal 2016 compared to $8.5 million for the same period last year, largely due to reduced funding of merchandise inventory compared to last year. For the second quarter, we continued to pay our quarterly cash dividend of $0.125 per share. Additionally, today we announced a new share repurchase program for the purchase of up to $25 million of our common stock. This program replaces our previous share repurchase program, under which $2.9 million remained available for repurchases. Under the current authorization, we may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission. However, the timing and amount of such purchases, if any, would be at the discretion of management and our Board of Directors, and would depend on market conditions and other considerations.

Our long-term revolving credit borrowings at the end of the second quarter were $57.4 million, down 18.6% from $70.5 million at the end of the second quarter last year, and up slightly from $54.8 million at the end of fiscal 2015.

Now I'll spend a minute on our guidance. For the fiscal 2016 third quarter, we expect same store sales to be in the positive mid to high single-digit range and earnings to be in the range of $0.23 to $0.30 per diluted share. We expect third quarter net sales comparisons to the prior year to be adversely impacted by approximately $9 million, or about $0.08 to $0.09 per diluted share, as a result of the calendar shift from a 53-week fiscal year and fiscal 2015, which resulted in pre-Fourth of July holiday sales moving from the third quarter in fiscal 2015 to the second quarter in fiscal 2016. This anticipated net sales impact is reflected in our earnings guidance for the fiscal 2016 third quarter, but does not affect our same store sales guidance for the third quarter because we report same store sales on a comparable week basis as opposed to a fiscal period basis. Our earnings guidance for the third quarter also reflects a charge of approximately $0.04 per diluted share related to store closings. For comparative purposes, in the third quarter of fiscal 2015, same store sales decreased 0.4% and earnings per diluted share were $0.28.

Now I would like to turn the call back to Steve for some additional remarks.

Thank you Barry. In light of all the changes in the competitive environment, before we open the call for Q&A, I'd like to be a bit reflective. Our Company was founded in 1955, which means that we have now been in business for over 60 years. The world has changed plenty over those 60-plus years, and our ability to adapt and evolve our business model over time has allowed us to continue to compete and remain relevant in the markets that we serve. Our business was founded on the principles of sound retailing, [buy it right], promote aggressively and operate our stores and throughout the business with great efficiency. Guided by these principles, we created a business model focused on providing customers with the optimal mix of value, selection, service, and convenience. This philosophy has allowed us to successfully navigate challenging economic cycles and periods when the retail landscape was irrational. This has not been the first time that we have seen a shake out of an overpopulated retail landscape, albeit this is certainly a large shake out.

Two of our major competitors have gone out of business this year, and we remain financially sound and stand to benefit from this rationalization. As we pursue the opportunities presented to us as a result of the competitor closings, we remain, as we always have, focused on continuous improvement across our business. I thank the Big 5 team for their hard work and dedication.

Now operator, we are ready to turn the call back to you for questions and answers.

(Operator Instructions). Mike Baker, Deutsche Bank.

Hi. Thanks. I want to ask a little bit about the liquidations that you're seeing from your competitors. And, I guess, one to start off, you said that 60% of your stores were against competitor liquidations, since you saw your inflection point in mid-June, can you talk about the comp differential in the stores that are against liquidations versus ones that weren't against liquidations?

Well, I'll try. I'm not going be overly granular because effectively the dust -- although this is just a sampling, but we had a situation where a number of competitors were completing liquidations and others were still going through them, and we had stores that were impacted, had a store that had closed and also facing closings. But typically, the impact that we saw, certainly it should vary by market and areas where there is a lot of competition. Not a lot of competition, we received a significant lift. Various flow of our competition, the competitive lift may have been slightly less. But clearly the benefits we're seeing in the third quarter is a result of having moved through the process. I think it's noteworthy that our stores in Q3 that are not directly impacted by these closures are competing positively for Q3 to-date. Beyond that, we're not going to be any more granular as to the impacts of the closing.

So no way to sort of quantify stores were comping down X amount, when the competitors were liquidating? And have you seen a sort of swing factor to be comping up whatever percent since the stores have closed?

No. Again, I don't think we can break it down to decimal points. I mean, clearly we're comping up, we said in the high mid-single digits quarter-to-date after being down, and we said in the low mid-single digits in April, low-single digits in May. We comped positively for the month of June. But I mean there's a number of variables besides the competitor liquidations that always impacted our business, certainly weather playing a role. We had some benefit from our firearm sales that surged somewhat in the back half of the second quarter. We're benefiting across the chain from the introduction of certain opportunistic buys that benefit all stores not just those that are impacted by closings. So, we can't quantify precisely, but we're very excited by the trends that we see emerging.

Understood. Thanks. One more quick one, you said the inventories were down 9% per store. Is that impacted all by the calendar shift, because we're a week later for the quarter ending than we were a year ago?

Not a significant impact by the calendar shift, I think a number of factors that are working positively towards the inventory. One certainly was a great sell down of winter products, some right-sizing of our firearms inventories from the prior year. We're seeing better support from certain vendors in returning of slow-selling products, and we're certainly benefiting from investments and merchandise analytics, and including a roll out of an inventory planning system. So, lots of positives occurring on inventory, but in this case a calendar shift isn't really one of them.

Understood. Really appreciate the time. Thank you.

Thank you, Michael.

Mark Smith, Feltl and Company.

Yes, no problem. You just called up firearms and ammunition being a bit of a boost in the quarter, can you quantify that at all and may be speak to how much that's helping this current quarter?

Yes. Again, I'm not going to be overly granular. It's nothing near to the impact that we saw back in the real surge that followed the Sandy Hook tragedy late 2012 into 2013, but we did see some boost in demand following the Orlando nightclub shooting. Thereafter, there was some new gun legislation that was passed in California that impacted the category, and I think there is a typical step up that (inaudible) frequently goes along with presidential elections. But it's certainly been a positive factor for the end of the second quarter and the start of the third quarter, but way less material than the benefit that we are seeing in the competitive law closures. And also as we distance ourselves from some of the events, it appears to be moderating as we proceed through the third quarter. Hope that helps.

That's helpful. And then just to closures that we have this quarter and kind of through the year, are these kind of typical leases running out or is there anything else going on with any of these stores?

Yes. I mean, they are in some cases typical, but we also are in the process of closing five stores in the Texas market, these are stores that are at isolated one market towns, for the most part, near the end of their leases and were being -- their performances were being hampered by the oil economy. And as we evaluated the go-forward basis of these stores, we determined that our resources would be a best use elsewhere. We have three remaining stores in Texas. And as Barry mentioned, we'll be taking approximately $0.04 charge in the third quarter relating to these closures. Everything else is essentially in the ordinary course of doing business.

And that leads to my next question, just any geographic strength or weakness? It sounds like oil markets obviously are still tough for you and others, but anything else to call out geographically?

I mean, again, not really. I mean, we have basically all geographies that are seeing some benefit to the competitive closures. We have weather factors that always impact some of our geographies, more than others the Northwest. The weather comparisons in the Northwest for the most part through June and July were extremely negative. California, we've benefited somewhat from better weather patterns and some -- particularly Northern California, some better conditions in our lakes and rivers.

Okay. And last question from me. Can you just talk about the distribution -- the pressure that sits on gross profit margins from distribution during the quarter? And is that something that can or is resolved?

Mark, we have -- I mean, our distribution costs are up a little bit, our occupancy costs are up a little bit. Margins were flat. It's just -- some of it's a little -- we're doing some different things out there, we're bringing some services in-house, some of our shipping cost services in-house a little bit, so we're having to hire some labor to bring those drivers in-house. Some of those costs are a little higher right now and we're going to -- we expect to be able to reduce our outside services costs. We're a little off kilter on that distribution right now. We do expect that to write itself in the back half of the year. With our inventory coming down, also we ended up with a benefit from inventory cost capitalization as your inventory comes or hurts you a little bit. Actually, as your inventory comes down, your days of cost and inventory come down as well and that ends up being a little pinch that also impacted the quarter.

Okay, great. Thank you.

Sure.

(Operator Instructions) David Magee, SunTrust.

Yes. Hi, good afternoon guys. This is actually Mitch in for David. First on the third quarter guidance, I'm surprised that the flow through to earnings isn't stronger with the good comp. Is it just merely a function to calendar shift in the store closing costs?

Yes.

Well, it's a huge effect. I mean, that's definitely a huge effect. There is -- as we mentioned in the prepared remarks, there's about a $9 million calendar shift impact on net sales for the period. Again, it doesn't -- it's very confusing, there's no question when your comp is up mid to high-single digits and yet you've got a $9 million net sales shift because of the calendar. Remember, the same stores were on a comparable week basis. So, there's no effect on the calendar shift -- of the calendar shift baked into the same store sales. But if you're just looking at net-net sales on a fiscal basis, we're one week off, and that one week for the third quarter has a negative $9 million estimated sales effect for about $0.08 to $0.09 a share. So when you've got your $0.08 to $0.09 a share, you've got higher expenses year-over-year, you've got workers, you've got some of the minimum wage pressures and those kinds of things; and as Steve mentioned, we've also got the $0.04 charge in the third quarter for the store closings. So frankly, if you think about it, our guidance is $0.23 to $0.30. But really if you make the various adjustments that we just talked about, $0.08 to $0.09 for the calendar shift on sales and then the $0.04, you're really adding back to even the low-point; from $0.23 you're adding in $0.12 to $0.23; and on a pro forma basis, you're closer to $0.35.

I mean just for clarifications, I know it sounds simple, and this has been a source of a lot of misunderstanding of a one-week shift, but this is not a typical slide of one week, we basically trade at a very high volume week going into the Fourth of July holidays, which is one of our -- certainly one of our best non-December Christmas holiday weeks of the year; for a week that crosses the end of September into October, that is one of our very lowest weeks of the year. So that's a significant change and somehow it's gotten loss somewhat in the understanding of our earnings impact.

Right. Okay, thank you for that. And then next, could you discuss the performance of your e-commerce channel, and some of the initiatives that you're doing to grow that?

Sure. Well, what we can say is, for those that are kind of new to this particular offering, our e-commerce site was launched in the fourth quarter of 2014 with a limited product offering. We've been gradually ramping up the product assortment and our marketing efforts surrounding the site. Sales trends have been positive but our e-commerce operating results for 2015 and the first half of 2016 remain immaterial to our overall operating results. We continue to invest in the business, including enhanced checkout capabilities for mobile platforms, but certainly don't expect our e-commerce sales or profitability to be material for our 2016 financial results. We plan to continue to test and evolve the e-commerce business model and expand our online product offering and hopefully provide a meaningful shopping channel for our customers.

Okay. And then last one from me. I believe you're in the process of developing and launching a POS system. Curious as to when that goes into effect and what benefits you expect from that? Thank you.

Sure. We're currently -- let me just again put a little color around it that we're currently developing a new store-wide Oracle-based POS system, which we could launch for a part of our chain in 2016. It kind of depends on the final leg of the development. If it's not in the third quarter of this year, then we would roll it out in early 2017. The new system will have more functionality than our existing system. It will include advanced pricing and promotions ability, loyalty and CRM program capabilities. It can integrate with our e-commerce system. We're excited about the benefits of the system and expect that will really streamline our operations and provide increased efficiencies and overall profitability.

Okay, great. Thank you guys.

Thank you Mitch.

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

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

That concludes today's presentation. Thank you for your participation.