Big 5 Sporting Goods Corp (BGFV) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods Second Quarter 2017 Earnings Results Conference Call. Today's call is being recorded. With us today are Mr. Steve Miller, President and CEO; 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.

Thank you, operator. Good afternoon, everyone. Welcome to our 2017 Second Quarter Conference Call. Today, we will review our financial results for the second quarter of fiscal 2017 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. After producing solid sales for April and May, second quarter results came in below our expectations as a result of softening sales trends in June as we were challenged by weakness in certain outdoor product categories and we began cycling against some of the benefits from the store closures of Sports Authority and Sport Chalet that concluded early in the third quarter of last year.

Despite falling short of expectations, given the challenging retail environment, we were encouraged by the strength of a number of product areas and pleased to have delivered both improved merchandise margins and earnings growth over the prior year.

Now I'll comment on sales for the second quarter. We generated net sales of $243.7 million, up 0.9% from $241.4 million for the second quarter of fiscal 2016. Same-store sales increased 0.8% for the period. As anticipated, same-store sales comparisons for the quarter were negatively impacted by calendar shifts related to the Easter and Fourth of July holidays. We estimate that these calendar shifts negatively impacted same-store sales for the quarter by approximately 100 basis points. We experienced small increases in both the number of customer transactions and average ticket during the second quarter versus the prior year period.

In terms of how the quarter rolled out, as mentioned, we comped positively and generally on plan in the low mid-single-digit range in both April and May, but sales fell short of our expectations and swung to negative low single-digit range for the month of June.

The shift in trends for this period was largely due to weakness in 3 aspects of our hardgoods category: Firearm-related products, camping and water sports. We mentioned in our last call the demand for firearm-related products had declined year-over-year, and we've seen that trend continue. We believe the soft demand for camping and water sport product in June primarily resulted from unfavorable weather comparisons and the colder and dangerously high water flows in many of the rivers in our markets from record rainfall and snow melt, which has led to closures of camp grounds in California and significantly affected recreational activities in these areas.

Additionally, in the back half of the second quarter, we began to cycle some of the benefits from the competitor store closures that occurred last year, and a comparative spread between the stores that were impacted by the closures and those that were not impacted by the closures began to tighten over the course of the quarter. And as also mentioned, our June period was negatively impacted by the Fourth of July holiday calendar shift.

From a product category standpoint, apparel was exceptionally strong throughout the quarter, comping up high single-digit. Our footwear category also comped positively throughout the quarter, increasing low single-digits. Sales on our hardgoods category comped positively for April and May before turning negative for June and finished in the period down low single-digit essentially due to the factors that I just mentioned related to certain of our outdoor categories. Excluding firearms-, camping- and water-related products, the rest of our product assortment comped up in the low, mid-single digit range for the period.

Our merchandise margins for the quarter increased by 37 basis points from the prior year, benefiting from favorable sales mix shift, including strong demand for higher-margin apparel product as well as our continued efforts to leverage our vendor partnerships.

Now commenting on store activity. During the second quarter, we opened 2 new stores in Spokane Valley, Washington and Montrose, Colorado. We ended the second quarter with 433 stores in operation. We plan to close 1 store during the third quarter. For fiscal 2017, our current plan calls for us to open approximately 6 stores and close approximately 3 stores. A couple of store openings that we had previously forecasted for this year are now expected to shift into 2018.

Now turning to current trends. We are currently comping slightly down for the third quarter to date with product margins running up nicely over the prior year period. While we have seen some improvement in demand for water sports products as a result of better weather comparisons over the past few weeks, our camping sales have remained below expectations and we continue to see reduced demand for firearm-related product. Additionally, we continued to cycle the additional benefit from the competitive closures that occurred last year. And as anticipated, we're facing a number of new competitive openings in our market, many in former Sports Authority location.

As we anniversary the benefits from the competitive closures and the dust begins to settle, it's apparent that we, like most retailers, are operating in a challenging environment. We are encouraged by the market share gains that we've worked hard to acquire over the past year as well as by the continued strength that we are seeing across key areas of our product offering. We are focused on maintaining and building on these market share gains and feel that we are well-positioned from both an inventory and marketing standpoint for the remainder of the summer and for the back-to-school season.

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 2017 second quarter was 32.5% of sales versus 31.6% of sales for the second quarter of fiscal 2016. The increase in gross margin for the period reflects a 37 basis point improvement in merchandise margins that Steve mentioned as well as a decrease in distribution expense resulting from higher-cost capitalized in the inventory.

Our selling and administrative expense as a percentage of net sales was 30.4% in the second quarter versus 29.9% in the second quarter of fiscal 2016. On an absolute basis, SG&A expense increased $1.9 million year-over-year, due primarily to higher employee labor expense and costs related to information technology systems and services.

Now looking at our bottom line. We reported net income for the second quarter of $2.8 million or $0.13 per diluted share. This compares to net income in the second quarter of fiscal 2016 of $2.1 million or $0.10 per diluted share, including $0.01 per diluted share for the write-off of deferred tax assets related to share-based compensation.

Briefly reviewing our 2017 first half results. Net sales were $496.3 million compared to $475.9 million during the first 6 months of fiscal 2016. Same-store sales increased 4.3% during the first half of fiscal 2017 versus the comparable period last year. Net income for the period was $8.1 million or $0.37 per diluted share. This compares to net income of $1 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 the first half of last year.

Turning to our balance sheet. Our chain-wide inventory was $328.7 million at the end of the second quarter, up 7.9% from the second quarter of 2016, when chain-wide inventory was down 9.5% from the second quarter of 2015. The increase in inventory primarily reflects our strategic decision to enhance in-stock inventory levels for key product areas to meet anticipated demand following the market share gains we have achieved over the past year. While the weaker-than-anticipated sales of summer recreational hardgoods products have had some of the impacts of our inventory levels, we feel comfortable with our inventory assortment heading through the summer and back-to-school selling seasons.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $7.2 million for the first half of fiscal 2017, primarily reflecting investment in IT systems, existing store upgrades and remodeling and new stores. We currently expect capital expenditures for fiscal 2017, excluding noncash acquisitions, of approximately $18 million to $22 million.

From a cash flow perspective, our operating cash flow was a negative $19.4 million for the first half of fiscal 2017 compared to a positive $16.4 million last year, largely due to increased funding of merchandise inventory purchases and the timing of payments.

For the second quarter, we also paid our quarterly cash dividend of $0.15.

Additionally, during the second quarter, pursuant to our share repurchase program, we repurchased 6,400 shares of our common stock for a total expenditure of $0.1 million. We have continued to repurchase shares, and in the third quarter through July 31, we have repurchased 373,847 shares of our common stock for a total expenditure of $4.3 million. As of July 31, we had $19 million available for future repurchases under our $25 million share repurchase program.

Like we always do, we will continue to evaluate the best use of our cash whether it's for reinvesting in the company, stock buybacks, dividends or paying down our debt.

Our long-term revolving credit borrowings at the end of the second quarter were $47.9 million, which was down 16.5% from $57.4 million at the end of the second quarter last year and up from $10 million at the end of fiscal 2016.

Now I'll spend a minute on our guidance. For the fiscal 2017 third quarter, we expect same-store sales to be in the negative low single-digit range and earnings to be in the range of $0.22 to $0.32 per diluted share.

Our guidance reflects a small benefit to same-store sales of approximately 40 to 50 basis points as a result of the calendar shift related to the Fourth of July holiday. For comparative purposes, in the third quarter of fiscal 2016, same-store sales increased 6.8% and earnings per diluted share were $0.38, including $0.03 per diluted share for store closing costs.

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

(Operator Instructions) And we'll take our first question from Mike Baker from Deutsche Bank.

So a couple of questions. First, on the same-store sales outlook for the third quarter. If you do comp in the low single-digit range, call it a 2%, that would suggest a pretty sizable acceleration, actually, in the 2-year trend because you're up against a pretty tough comparison. So I guess, what gives you the conviction that you'll be able to show that kind of improvement in the 2-year trend? Is it simply what you've seen in the first month? Or can you sort of help us to have that confidence?

Michael, if I understood the question, I think in the 2-year trend, I think we have the benefit of the competitive closures. And we look to maintain the -- certainly, the bulk, and ideally build upon that benefit. So we comped up Q3 of last year, we're up...

6.8%.

6.8%.

Right. So I guess -- and I'll also look at the 2-year math, in the second quarter, you did a 0.8% against a minus roughly 2% last year. And so now you're going to do, you're saying, low single-digits, which isn't that much different than the plus 0.8%. But that's against a 7% last year. So it seems like -- so if you just add -- if you do the 2-year stack, add them together, it's a pretty big acceleration that you expect. Does that not make sense?

So we were down 1-7 in the -- Yes, Michael. Let me just -- you're doing your stacked comp kind of routine here. Let us take a quick look at this. So in -- yes. In Q3 of last year, Q3 of '15, we were down a very slight minus 0.4% in same-store sales. Last year, in the third quarter, we were up 6.8%.

Right.

All right. So your -- yes. Your stack comp is in the low positive single-digit range.

Michael, I'm a little confused. Maybe we're a little confused. Are you thinking we're guiding to a positive comp...

Too aggressively. Yes, in other words...

In the first quarter, we're guiding low single-digit negative. Do think we're guiding low single positive?

No. But even on a low single-digit negative, call it minus -- even minus 3% against a plus 6.8%, that would be plus 3.8% on a 2-year basis versus you're just coming off of a period where you were down 0.9% on a 2-year basis. So even on your minus low single-digits, it's still a pretty sizable acceleration. In other words, some might think that this third quarter might be down mid-single digits.

Yes. A couple of things to take into consideration. One, the second quarter was impacted, we've suggested by roughly 100 basis points by calendar shifts. We also had, we think, some unfavorable weather comparisons in the second quarter that affected the results as well as some challenging firearms comparisons that were, to some degree, exasperated by just going against the Orlando shooting tragedies in June of last year as well as some California legislation that created some surge of activity in that regard.

Michael, there're a lot of moving parts out there. And clearly, we missed some -- we missed some sales last year relative to the competitive rationalization. We were -- there were categories where we were -- just didn't have the inventory that we needed. The inventory that -- the growth that you've seen now, I mean, the vast majority of that growth was actually planned just to make sure that we are in an inventory position to be able to support some of the missed sales that we had last year. Also, the impact on our water sports and camping business has been challenged in -- for the reasons that we mentioned in our discussion: Camp ground closures, cold water, running water, really hazardous conditions. And we're hoping that that comes back to us a little bit in the August and September timeframe. But we'll have to see if that plays out.

Okay, yes. That makes sense. And just to clarify. So you said you're down slightly quarter-to-date. So through at least a month of the third period, you're in line with your down low single-digit guidance. Is that fair to say?

Absolutely. And we really think, trying to factor out all the noise, some improvement in trends in the third quarter relative to what occurred in June. The issue of the second quarter is primarily a June issue. And there are a lot of exogenous factors impacting that specific month.

(Operator Instructions) And we'll take our last question from David Magee with SunTrust.

It's actually Mitch in for David. A couple of questions. Just first on the gross margin in opportunistic buys. How much further runway do you see on that front?

Well, you say on the gross -- you're talking about the product margins?

Right. Do you expect any additional tailwind in the second half of the year from opportunistic buys?

I don't know that that's a tailwind. I mean, we had some very strong opportunistic buys associated with all the competitive closings last year. So I think right at the moment, we would look at the environment as relatively normal. Possibly, we can -- it may get better, given some of the challenges that we're hearing out of the marketplace. But I think where we're driving some of our product margin enhancements is through our continued efforts to leverage the vendor partnerships not necessarily and exclusively through opportunistic buys, but just that we've strengthened our position with a number of vendors, and as a result of the competitive rationalizations, then we think that works beneficially to us to ultimately enhance product margins.

And then the last time we spoke, I think you were in the midst of rolling out some new POS software. Is that true? And how is that going?

Yes, Mitch. It's actually going well. We are in the midst, as you said, of -- we -- I think we'd anticipated rolling it out in the third quarter. And we are rolling it out at the third quarter and look to either complete it in the third quarter, the complete rollout, or early in the fourth quarter. And we're excited about the potential for the new system.

Okay. And then lastly, a while back, I think you engaged some outside consultants to help you find some margin opportunities. Is that still going on? And if so, what have you identified from that?

Yes. No, I mean, we're not currently working with outside consultants. That was, well, I think now well over a year ago. And I think we've played through lots of market share gains by taking advantage of the competitive rationalizations. So I think we've continued to work to enhance the -- a number of aspects of our business and inventory, trying to pinpoint our inventory distributions and logistics and marketing and really just add a whole process to take a holistic look at our business. And -- but that's a ways away in the past right now.

And we still have a follow-up question from Mike Baker.

Just one quick follow-up on the gross margins. As you flow out the inventory that we saw increase this quarter, will the cost that you capitalize flow through the P&L and negatively impact gross margins such that you wouldn't be able to show year-over-year growth in gross margins even with higher merchandise margins?

I don't -- Mike, I don't anticipate it for this year. I mean, as our inventory grows -- your inventory is growing, you typically are capitalizing. It all boils down to how quickly you're turning your inventory. But for this year, I don't anticipate a negative effect at the inventory cost gap. If inventories come down dramatically, say, next year for example, then there could be a slight effect of that.

And if there are no further questions, I'd like to hand the conference back over to Mr. Miller for any additional or closing remarks.

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

Once again, that concludes today's conference. We thank you all for your participation, and you may now disconnect.