Big 5 Sporting Goods Corp (BGFV) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods fourth quarter and full-year 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, operator. Good afternoon, everyone. Welcome to our 2016 fourth quarter conference call. Today, we will review our financial results for the fourth quarter and full year of fiscal 2016 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. We are pleased with our fourth quarter performance, which enabled us to produce a strong year of earnings growth in 2016. During the quarter, we generated solid growth in same-store sales, expanded gross margins, leveraged expenses, and improved earnings per share by 75% as we continue to benefit from the competitive rationalization in the retail sporting goods sector.

We also strengthened our balance sheet, as our healthy operating cash flow allowed us to reduce year-over-year borrowings under our current facility by 82% and return over $13 million to shareholders through cash dividends and stock repurchases in 2016. And as we'll discuss in a moment, we're very encouraged that the positive sales momentum has continued and actually accelerated into the first quarter of fiscal 2017.

But first, I'll comment on sales for the fourth quarter. As a reminder, our fiscal 2016 fourth quarter was a 13-week period, and our fiscal 2016 full year was a 52-week period, compared to 14 weeks and 53 weeks, respectively, in the prior fiscal year period. And speaking of same-store sales comparisons to fiscal 2016, we used comparable 13-week and 52-week periods.

As we previously announced, our fourth quarter net sales were $266.3 million, compared to $275 million for the fourth quarter of fiscal 2015. The calendar shift from a 14-week fiscal fourth quarter in 2015 negatively impacted fourth quarter net sales comparisons by approximately $15.5 million. On a comparable 13-week basis, same-store sales increased 3.1% for the period.

Our same-store sales comped up in the high single digit range in October and comped up in the low single digit range in both November and December. Although we enjoyed a strong Black Friday, November sales were impacted by very unfavorable winter weather conditions in our markets.

In December, we, like my retailers, experienced the challenges of a generally soft holiday shopping environment. We finally saw the arrival of favorable winter weather over the last week or so of the quarter, which drove strong winter product sales for a very nice finish to the period.

For the quarter, we increased both customer transactions and our average sale, with the growth in average sale being the primary driver of the sales increase we experienced for the period. From a product category standpoint, our hard goods category comped up at mid single digits for the quarter, our apparel category was up low single digits, and our footwear category was slightly down for the period. All major merchandise categories benefitted from the competitive store closures, offset to some degree by soft winter products sales during much of the period.

Our merchandise margins for the quarter increased by 68 basis points from the prior year, benefiting from (inaudible) resulting from the competitive rationalization along with a less promotional environment during the period.

Now, commenting on store activity, during the fourth quarter, we opened one new store in Maricopa, Arizona, and closed one store. We ended the year with 432 stores in operation. In the first quarter of 2017, we relocated one store and we closed one store as a result of the lease expiration.

Our current plans for the 2017 full year have us opening approximately eight stores and closing approximately three stores. Additionally, we plan to continue our program of operating and investing in our existing store base this year.

Now, turning to current trends, it's nice to report that we're off to a strong start in the first quarter with same-store sales for the period to date up in the mid single digit range as we continue to benefit from the Sports Authority and Sport Chalet store closures that occurred during the second and third quarters of last year.

Additionally, the favorable winter weather conditions that we experienced at the tail end of the fourth quarter have continued into the first quarter, creating strong demand for winter-related products across many of our Western markets.

Our merchandise margins also have continued to move in the right direction during the first quarter, benefiting from favorable sales mix shifts and decreased clearance activity as well as optimistic buys and a less promotional environment following the competitive store closures.

While the favorable winter weather has been a huge benefit to our winter product categories this season, some of that benefit has been offset by softness in our non-winter product categories, which have been impacted by the heavy rains we've experienced over the past several weeks, particularly in California.

These non-winter categories become more important over the balance of the quarter, so at this point, we are rooting for warmer and drier conditions so that our customers are able to take advantage of our spring sports offering. We believe our merchandise assortment is well-positioned for the spring selling season, and we remain focused on providing our customers with the optimal mix of value, selection, service and convenience.

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 fiscal 2016 fourth quarter was 32.8% of sales, versus 31.2% of sales for the fourth quarter of fiscal 2015. The increase in gross margin for this period reflects the 68-basis-point improvement in merchandise margins that Steve mentioned as well as the decreases to our occupancy and distribution costs as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 28.2% in the fourth quarter, down from 28.5% in the fourth quarter of fiscal 2015. On an absolute basis, SG&A expense decreased $3.2 million year-over-year, due primarily to the extra week in the fourth quarter of fiscal 2015 and a decrease in print advertising expense partially offset by the incremental impact of minimum wage rate increases in our markets.

Now, looking at our bottom line, we reported net income for the fourth quarter of $7.7 million, or $0.35 per diluted share, including a favorable $0.02 per diluted share for a tax benefit related to share-based compensation. This compares to net income in the fourth quarter of fiscal 2015 of $4.3 million, or $0.20 per diluted share, including $0.02 per diluted share of expense related to evaluating store growth strategies and potential profit improvement opportunities and non-cash impairments.

Briefly reviewing our full-year fiscal results, net sales were $1.02 billion for the 52-week fiscal 2016, compared to net sales of $1.03 billion for the 53-week fiscal 2015. The calendar shift from a 53-week fiscal year in 2015 negatively impacted net sales comparisons by approximately $21.5 million in 2016.

Same-store sales increased 1.7% in fiscal 2016 versus the comparable period in the prior year. Net income for fiscal 2016 was $16.9 million, or $0.77 per diluted share, including $0.05 per diluted share of charges for store closing costs and the net write-off of deferred tax assets related to share-based compensation. This compares to net income in the prior year of $15.3 million, or $0.70 per diluted share, including $0.07 per diluted share of charges for expenses associated with our publicly-disclosed proxy contest, a legal settlement, evaluating store growth strategies and potential profit improvement opportunities, and non-cash impairments.

Turning to our balance sheet, our chain-wide inventory was $294.3 million at the end of fiscal 2016, down 1.7% from the prior year. On a per-store basis, merchandise inventory was down 0.6% versus the prior year. We've been pleased with the sell-down of our winter merchandise this season and feel good about the inventory heading into our spring selling season.

Looking at our capital spending, our CapEx, excluding non-cash acquisitions, totaled $14.1 million for fiscal 2016, primarily reflecting existing store 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-sales system. We currently expect capital expenditures for fiscal 2017, excluding non-cash acquisitions, of approximately $18 million to $22 million.

From a cash flow perspective, our operating cash flow was a healthy $73.7 million for fiscal 2016, compared to $39.6 million for the prior year, largely due to reduced funding of merchandise inventory purchases, including the timing of payments.

For the fourth quarter, we also paid our quarterly cash dividend of $0.15 per share. Our long-term revolving credit borrowings at the end of fiscal 2016 were $10 million, down 82% from $54.8 million at the end of fiscal 2015, reflecting our healthy operating cash flow.

Now I'll spend a minute on our guidance. For the fiscal 2017 first quarter, we expect same-store sales to be in the positive mid single digit range and earnings to be in the range of $0.12 to $0.18 per diluted share. We expect first quarter same-store sales comparisons to the prior year to be positively impacted by approximately 50 basis points as a result of the calendar shift of the Easter holiday, during which our stores are closed, out of the first quarter of fiscal 2016 and into the second quarter of fiscal 2017.

Our earnings guidance for the first quarter also reflects anticipated higher merchandise margins compared to the prior year as a result of favorable sales mix shifts, decreased clearance activity, opportunistic buys, and less promotional activity following the competitive rationalization. For comparative purposes, in the first quarter of fiscal 2016, same-store sales decreased 1.9% and we reported a loss of $0.05 per share.

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

Thank you. (Operator Instructions). And we will pause for just a moment to allow everyone an opportunity to signal for questions. David Magee, SunTrust.

Good afternoon, and nice quarter.

Thank you, David.

Could you -- now that you've delevered the balance sheet, are you thinking about, next year, maybe growing the units faster now that you've had a lot of competition removed from the marketplace? Does that make sense to you?

Yes, I mean, our -- as we said, our plans call for us to open approximately eight stores, a few closures there. We do continue to believe the rationalization in this space has taken place as well as some of the general planned retail store closures that we're hearing about could create additional opportunities for us. We're going to let the dust settle, watch how the existing store base is impacted as we play through this cycle of closures, and then really take a hard look at how that might impact our sales strategy going forward.

We still think there are opportunities to grow the store base within our footprint, but we're really focusing on the right locations, not just (inaudible) hitting the third in growth target for the sake of hitting a targeted number. So we're going to continue to grow and continue to follow our long-standing philosophy of positive growth and growth under control.

Thanks, Steve. Do you think that the amount of opportunistic inventory buys will stay constant going forward, or do you see it sort of lapping this year and normalizing somewhat?

Well, I think we've had a -- with the closures of two significant competitors, that certainly created a positive arena for opportunistic buys. I think what some of the turmoil that has taken place in the general retail environment as we speak, I would anticipate that there will continue to be opportunities that'll present themselves going forward. So in general, we feel pretty positive about the opportunities to positively lap what's been a pretty good season for opportunistic buys.

Thank you. And lastly, can you give some color about how the e-commerce business has been doing?

Sure. I mean, the -- as we've said before, the e-commerce business was not material to our overall results in 2016. We don't believe it'll be material in 2017, as well. It is continuing to grow, albeit off a small base.

But let me say this, David -- really, the strength of our model revolves around the convenience of our stores. It's been that way for over 60 years, and we believe it's going to remain that way going forward, so our real focus has just been to -- particularly from a digital perspective, is to drive traffic into our stores. In terms of e-com, we're focused on trying to build an e-com model that is accretive for our business, but not one that cannibalizes our store business.

It's certainly not lost on us that much of the retail world is struggling with, I guess, the omni-channel concept and investing huge sums of money, and at the end of the day, seemingly just transferring sales from stores to e-com and less profit. So we believe that as retailers shut doors, we're going to be there for customers to appreciate our convenience and the immediacy of the products that we offer.

If we're able to focus all of that and evolve our e-commerce -- as I said, our e-commerce business in a manner that is helpful to that process, we're all for it. We're making modest investments in terms of building out our e-commerce capabilities, but, again, just like from a store growth standpoint, doing it in a -- we think in a controlled and prudent manner for our business.

Great. Thanks, Steve, and good luck here.

Thank you.

Mike Baker, Deutsche Bank.

So can you talk about the gap in the stores that were in competitive situations versus ones that are not? Perhaps call those the control group. What was the difference in those two groups in the third quarter, and did that change at all in the fourth quarter with the overall comp being weaker?

Yes, I mean, we're not going to get overly granular in the level of detail. I mean, at least that's certainly a meaningful disparity, as one would expect for the benefit of the stores that were impacted by the closures. I don't know that the gap changed. Our results in the fourth quarter were not as strong as the third quarter, so reasonably consistent.

So I guess I'll just ask it more direct. I guess what I'm trying to get at is the slow-down in comps by nearly 400 basis points in the fourth quarter from the third quarter. Does that signal that you're picking up less market share from the stores that have closed?

Oh, okay, I get the question. No. I would say the answer to that is it's absolutely not. It really signified a challenging holiday environment that just about everybody in retail alluded to, and the fact that weather wasn't particularly helpful for us over the course of the fourth quarter. As I mentioned, it turned very favorable really the last week to ten days of the period and has been -- has continued so in the first quarter. But the disparity between the stores impacted by closures and those that are not has remained significant and helpful.

Okay. Understood. If I could ask two more quick ones -- guns and ammo. Some of the background check data has really fallen off a cliff since the election. How big -- remind us, please, how big of a percent of sales is that business for you, and have you seen any significant change in trends since the election?

Well, yes. As we've said in the past, the firearm and ammunition and the related business is significantly less than 10% of our sales. We certainly, like everybody in the business, saw some pick-up in that business going into the election. It's certainly tapered following the election, and then everybody combatting the tragedies in San Bernardino in December of last year, so, I mean, we saw some of that as well, but our exposure to this business is way less than many, I suspect, others that you may speak to.

Yes. Okay, that makes sense. And then one more, if I could. You keep talking about opportunistic buys. I'm wondering, though, outside of opportunistic buys, have you guys sort of moved up the call list from vendors as some of your competitors go away? So not necessarily with leftover goods or excess, but just in terms of regular goods, have you guys moved up in terms of your importance to vendors and are, therefore, getting better product?

Well, I think the short answer to that is yes. I think with the shake-ups that occurred in our industry, I mean, as one would expect, we've become more significant to many of our vendors, and that can only be beneficial in establishing relationships and various programs and opportunities. Absolutely.

Okay. Understood. Appreciate the color. Thank you.

Thank you.

Mark Smith, Feltl and Company.

First off, can you just walk us through how many relocations you expect this year? And in those relocations, are we seeing some downtime in between the closure of an old restaurant and the opening of a new one?

Yes, Michael, not a lot of relocations. There's one that has already occurred this year in the -- Mark, in the fourth quarter. In the first quarter, that was the store in the Las Vegas area. Thinking forward, I don't know that we have defined another relocation that is likely to occur this year. It is possible.

Okay. And can you give us any insight into the cadence of openings and, perhaps, closures?

It looks like the -- it's a little more back-end loaded. I think we mentioned the Q1 will have really one relocation that occurred and then another store that's closing that's part of basically a lease expiration, so that's one opened, two closed. I'd spread the rest of the stores out a little back-end loaded, but I would anticipate stores opening throughout the -- in each subsequent quarter one or two stores opening and maybe round it up one for the fourth quarter.

Okay. And then last from me, can you just give us a reminder? It seems like it's been a while since we've had a really good winter, and just remind us kind of what the impact is from mix shift with good winter weather. Is it primarily apparel, or do you mix in some hard goods, ski or snowboard gear, that's sold, and what impact is has on merchandise margin?

Yes, there are aspects of all three of our major merchandise categories that benefit from a good winter, but far and away, apparel is the leader of the pack, probably followed by footwear, winter-related footwear, and then hard goods. And from a margin standpoint, it's favorable. When we get the early weather as we did this winter season, it's very positive from a margin mix viewpoint.

Okay. Great. Thank you.

Thank you.

(Operator Instructions). Brian Nagel, Oppenheimer.

Congratulations on a nice quarter.

Thank you.

So, a couple questions. First off, maybe we can just drill down a bit more on the weather commentary, particularly what you were talking about late in Q4 and even into Q1. So the question I have there is, as I see it -- so you had winter come, and that was a benefit, but I would assume it would be a negative, too, just given the rain and flooding in the West Coast, so maybe help me understand better there kind of the offsets of those two.

Sure. Okay, well, we had -- I mean, just the whole weather in perspective, over the fourth quarter, we started off and November was very warm, so when we had warm weather in November, that was a negative and that was sort of hit-and-miss, probably more miss, from trying to transition into winter over December. And then we had extraordinarily favorable winter weather that hit right around Christmastime and provided really favorable winter conditions that really have remained throughout the first quarter.

In January, winter -- it's really much about winter, so having good winter weather in January is pretty much all positive. As we've transitioned into February and where you -- I'm sure everybody has followed the news stories of the rain -- that was pretty much like a -- good for winter, but it got to the point where too much water was washing out opportunities to transition into spring sports, and baseball in many of our markets really gets going really as early as January, but pretty significantly in February, so much of the benefit of the winter weather was offset -- in some cases, more than offset in February by the crazy rains that we've had.

At this point, as I mentioned in the prepared remarks, we're really hoping for dry and warmer weather as we transition into spring. But what we're encouraged about is the fact that this winter season is leaving us with a snow pack that is much, much improved, higher water levels in our rivers and lakes, and as I think you're all well aware, we've been playing in drought conditions for the better part of the last four years, so we see that as a very positive as we move even beyond spring and into summer, as the rivers and lakes should provide for a better atmosphere for recreational activities during these periods.

If you look at this, initially, I would guess with a cold winter there's an apparel component, and then ski, and then that transitions into water activities? Is that what it -- I just want to make sure I understand how the -- with this weather setup, how the product demand trends will transition.

Well, from the weather, the snow -- the positive snow path and the water levels will create a better recreational platform for summer activities that revolve around lakes and winters -- lakes and rivers in our market points.

Got it.

It's not -- there's a little bit of gap between winter and summer water sport recreation, and that's all of the springtime and so forth, but last year, a number of lakes were closed. I mean, campgrounds suffer as there are lakes with no water. So that we think represents upside, really to be experienced when we get -- that's more into getting into the Memorial Day and beyond.

And Brian, that can also help with employment. California is big in agriculture, and really putting many of these -- many of these folks were put out of business or had to scale way back, and so we're looking for some of our communities in the central and northern Cal to really, hopefully, pick up employment as well, which will help our business, hopefully.

No, that's really helpful, the color. The second question I had, on the merchandise margin, it was 60 -- it improved by 68 basis points in the fourth quarter. Is there a way to help me understand, if you look at that improvement, how much of that pertained directly to the competitive rationalization that's happened in the marketplace over the last three or four quarters versus what just reflects the ongoing strength of your business?

I don't know that we can totally quantify it, but certainly we benefited from opportunistic buys, many of which -- I mean, we always have opportunistic buys, but we've certainly had an increase in opportunistic buys that were directly related to the competitive rationalization, and these opportunistic buys rub off to more favorable margins, but also the fact that it was a less promotional environment, particularly in our sector, when a year ago -- looking backwards, we had two significant chains that were doing most anything, I suspect, that they could to try to avoid bankruptcy, and that included some irrational pricing and promotion, and we were in the position a year ago of facing that.

It forced our hand to perhaps be a little more responsive than might be healthy for our business in those circumstances. So I think this year, we were able to be a little more rational in our own promotions, and that certainly rubs off favorably in the point-of-sale margins.

And Brian, we're seeing that actually carry forward into the first quarter, and it's a combination of what's the higher winter content, the higher margins on the winter products, so we've got some favorable sales mix shift. We've also got an element of decreased clearance activity in the first quarter. Opportunistic buys are still benefiting the period, and then reduced promotions really due to the competitive rationalization is also impacting our first quarter margins.

Got it. Well, thanks again for all the color. It was great. Thank you.

Thank you, Brian.

And ladies and gentlemen, this does conclude our question-and-answer session for today. I would like to turn the call back over to Mr. Miller.

Thank you, operator. We appreciate everyone's interest in our business today, and we look forward to speaking to you on our next report. Have a great afternoon. Thank you.

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.