Big 5 Sporting Goods Corp (BGFV) 2017 Q3 法說會逐字稿

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

Thank you. Happy Halloween, and good afternoon, everyone. Welcome to our 2013 -- 2017 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2017 and provide general updates on our business as well as provide guidance for the fourth quarter. At the end of our remarks, we will open the call for questions.

I will now turn the call over to Barry to read our safe harbor statement.

Thanks, Steve. Except for statements of historical fact, any remarks that we may make about our future expectations, plans and prospects constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statements that may be made from time to time by us or on our behalf.

Thank you, Barry. Our third quarter sales and earnings results were in line with our guidance. As we anticipated, sales were challenged during the third quarter as we have fully cycled the benefit of the roughly 200 competitive store closures last year in our markets and we're facing what I would characterize as a larger-than-normal number of competitive openings with approximately 10% of the Sports Authority locations that had closed in our markets now reopened as Dick's stores. Those factors, along with the challenging and promotional retail environment and comparative weakness in our firearm-related business, pressured the top line during the third quarter.

Given these headwinds, we are pleased to have retained a significant portion of the market share gains that we achieved following last year's competitive closures. Our 2-year stacked quarterly same-store sales growth for the third quarter was 3.8%. We are also pleased to deliver our fifth consecutive quarter of improved merchandise margin in a highly promotional environment.

Now I'll comment on sales for the third quarter. We generated net sales of $270.5 million, down 3.1% from $279 million for the third quarter of fiscal 2016. Same-store sales decreased 2.9% from the third quarter of 2016 when same-store sales increased 6.8% following the competitive store closures in our market.

Sales for the third quarter of this year reflect a small benefit from the calendar shift of the Fourth of July holiday further into the third quarter, which resulted in certain holiday-related sales moving from the second quarter to the third quarter. We estimate that shift benefited same-store sales for the quarter by approximately 50 basis points.

We experienced a low mid-single-digit decrease in the number of customer transactions and a low single-digit increase in our average sales during the third quarter versus the prior year period.

In terms of the sales cadence, early in the quarter, we fully cycled last year's competitive store closures while we also were facing the new competitive store openings that I mentioned. We comped slightly down in July and comped down mid-single-digits in August as sales were further challenged by unfavorable weather comparison. In September, same-store sales were down in the low single-digit range.

From a product category standpoint, our hardgoods categories comped down in the mid-single-digit, with the majority of the shortfall resulting from reduced demand for firearm-related products throughout the period compared to the prior year. As a reminder, last year, firearm-related sales surged following the Orlando nightclub shooting in June of 2016 and remained strong through the November presidential election. Same-store sales in both our apparel and footwear categories comped slightly down. We were particularly pleased to have retained the vast majority of the market share gains we had achieved in the apparel category, which comped up in the low double digit range for the third quarter of 2016.

Additionally, despite a highly promotional retail environment, our merchandise margins for the quarter increased by 51 basis points from the prior year, benefiting from favorable sales mix shifts towards higher margin products such as apparel and away from lower-margin product such as firearms and ammunition.

Now commenting on store activity. During the third quarter, we closed 1 store ending the period with 432 stores in operation. We plan to open 3 new stores during the fourth quarter, which would result in 6 store openings for the 2017 full year, and along with the 3 store closures, would give us a year-end store count of 435.

Now turning to current trends. We are currently comping down in the low mid single digits for the fourth quarter to date as we've been impacted by a slow start to fall weather-related product sales as a result of materially warmer weather in our key markets as well as continued reduced demand for firearm-related products compared to last year. As a reminder, last year, October was our strongest month of the quarter on a comp basis, with same-store sales up in the high single digit range over 2015. We comped up in the low single digit range for both November and December of last year. So while our same-store sales for the quarter to date are down in the low mid-single-digit range, our 2-year stacked comp continues to be very positive.

Of course, the key to the fourth quarter will revolve around the holidays and be heavily influenced by winter weather condition. We certainly anticipate another challenging and highly promotional retail environment over the holiday season. While holiday spending and winter weather conditions in our markets are difficult to predict, we feel well-positioned from an inventory and marketing standpoint to drive sales by leveraging the unique combination of convenience and value that our stores provide, which we believe continues to resonate strongly with consumers, as it has for over 60 years.

Now I will turn the call over to Barry who will provide more information about the quarter as well as speak to our balance sheet, cash flows and provide fourth quarter guidance.

Thanks, Steve. Our gross profit margin for the fiscal 2017 third quarter was 32.4% of sales versus 32.2% of sales for the third quarter of fiscal 2016. The increase in gross margin for the period reflects the 51 basis point improvement in merchandise margins that Steve mentioned, partially offset by higher store occupancy expense as a percentage of sales. Our selling and administrative expense as a percentage of sales was 28.6% in the third quarter versus 27.3% in the third quarter of fiscal 2016.

Overall, SG&A expense increased $1.1 million year-over-year due primarily to higher employee labor and benefit-related expense and costs related to information technology systems and services.

Now looking at our bottom line. We reported net income for the third quarter of $6.0 million or $0.28 per diluted share. This compares to net income in the third quarter of fiscal 2016 of $8.2 million or $0.38 per diluted share, including $0.03 per diluted share for store closing costs.

Briefly reviewing our 2017 year-to-date results, which based on the strength of our performance during the first half of the year, is a very positive story. Net sales for the first 9 months were $766.7 million compared to $755.0 million during the first 9 months of fiscal 2016. Same-store sales increased 1.6% during the first 9 months of fiscal 2017 versus the comparable period last year. Net income for the period increased by 53% to $14.1 million or $0.65 per diluted share from net income of $9.2 million or $0.42 per diluted share, including $0.07 per diluted share of charges for store closing costs and the write-off of deferred tax assets related to share-based compensation for the first 9 months of last year.

Turning to our balance sheet. Our chain-wide inventory was $309.3 million at the end of the third quarter, up 6.7% from the third quarter of fiscal 2016 when chain-wide inventory was down 9.0% from the third quarter of fiscal 2015. As we discussed previously, 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. We feel comfortable with our inventory assortments heading into the winter and holiday shopping season.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $11.4 million for the first 9 months of fiscal 2017, primarily reflecting investment in store-related remodeling and new stores, IT systems and our distribution center. We expect capital expenditures for fiscal 2017, excluding noncash acquisition, of approximately $16 million to $20 million.

From a cash flow perspective. Our operating cash flow was a negative $5.6 million for the first 9 months of fiscal 2017 compared to a positive $55 million last year, largely due to increased funding of merchandise inventory purchases and the timing of payment.

For the third quarter, we also paid our quarterly cash dividend of $0.15 and we repurchased shares. Pursuant to our share repurchase program, we repurchased 666,609 shares of our common stock for a total expenditure of $6.8 million during the third quarter. For the year-to-date period through the end of the third quarter, we have repurchased 677,109 shares for a total expenditure of $6.9 million. As of October 1, we had $16.5 million available for future repurchases under our $25 million share repurchase program. Consistent with our past strategy, we will continue to evaluate the best use of our cash, whether it's for reinvesting in the company, dividends, stock buyback or paying down our debt.

Our long-term revolving credit borrowings at the end of the third quarter were $46.4 million, which is up from $22.9 million at the end of the third quarter last year, and up from $10 million at the end of fiscal 2016. Our higher debt levels primarily reflect the funding of inventory purchases to support anticipated (inaudible) demand as a result of the competitive closures in our markets.

I'm pleased to note that at the end of the third quarter, we amended our existing $140 million credit agreement on favorable terms and extended the maturity date of the agreement to September 29, 2022.

Now I'll spend a minute on our guidance. For the fiscal 2017 fourth quarter, we expect same-store sales to be in the negative low single-digit range and earnings to be in the range of $0.16 to $0.28 per diluted share. For comparative purposes in the fourth quarter of fiscal 2016, same-store sales increased 3.1% and earnings per diluted share were $0.35, including $0.02 per diluted share for a tax benefit related to share-based compensation.

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

(Operator Instructions) We'll take our first question from David Magee with SunTrust.

Hello, can you hear me?

Yes, we got you, David.

Guys, can you talk a little about the (inaudible) margin and how you're showing stability in merchandise margins despite the more competitive environment that you're seeing out there?

David, we can't -- if you could try that one more time. You're echoing.

Can you repeat the question, David? Couldn't hear it.

Okay. How is this?

Much better.

Okay. Can you talk about the merchandise margin a little bit in terms of what are some of the pluses there? And as you go into next year, do you expect further stability on that line?

Well, looking at the third quarter, we think the margin increased 51 basis points, it benefited from favorable mix shift [in accordance with] the stronger demand for the higher-margin apparel products, reduced demand for lower-margin firearm-related products. Some less clearance activity helped the margin. Our continued efforts to leverage vendor partnerships, positioning within our sector as demand has been enhanced as a result of the competitive rationalization. We're finding that more vendors are willing to work with us to improve purchase terms all benefiting margin. So we feel good about the margin. Looking forward, Barry?

Yes, David. Our fourth quarter forecast reflects POS margins down just slightly from the prior year, actually. We are anticipating a more promotional environment. We're also cycling some opportunistic buys that we had in the fourth quarter last year that stemmed from the competitive closures. So that's -- and we're not giving guidance obviously, into 2018 at this time.

Yes. We should note, our point of sale margins increased 70 basis points last year in the fourth quarter. So we're up against another tough comp.

But what is your sense about just the inventory levels out there at the wholesale level? Which have been described as sort of a glut and causing all the pain right now amongst the retailers. Are you seeing that cleared up from your perspective?

Well, I think -- look, at the moment, I think from an opportunistic buy standpoint, from our perspective, it's what I would characterize as fairly normal, not too out of the ordinary, and certainly not at the level we saw last year following the competitive rationalization. That was a bit of an outlier year. We think some of the softness that we're seeing and hearing about in the retail environment could perhaps lead to more opportunities on the horizon, and we're certainly positioned from an inventory financial position to take advantage of these opportunities as they arise.

And just lastly, can you comment a little bit about the e-commerce business and what you're seeing there?

Yes, David. Our e-commerce business is continuing to grow nicely. It is -- we continue to evolve it, and I mean our goal, obviously, like many, and certainly ours, is to grow it and make sure it ultimately is accretive to our business. We're continuing to invest in the business including website efficiency, advanced search functionality, enhanced check out and other capabilities. The sales trends have been positive in e-commerce and -- but the profitability is clearly not material to our -- wasn't material to our 2016 financials and certainly not material to our 2017 financials. While we anticipate a healthy improvement in e-commerce sales from the prior year, we still don't anticipate e-commerce to be material to our 2017 sales or profitability. We continue to test and evolve the e-commerce business model, and hopefully, in addition to being accretive, just trying to make sure that we're providing a meaningful shopping channel for our customers.

(Operator Instructions) We'll take our next question from Mike Baker with Deutsche Bank.

Just wondering when in the past, we've had a competitor like Dick's move into the market, how has that typically -- what's the magnitude of the impact and how long has that impact lasted to your business?

Well, the magnitude varies depending on the type of markets they're moving into. And generally, the -- how long it lasts, typically, we feel the pain for a year as we cycle the competition. I mean, in this case, it wasn't unanticipated that Dick's came back into -- it was about 10% of the Sports Authority stores that closed in our market. And so we had the benefit of the gains for the period of time that Sports Authority was out of business. And now, as anticipated, we're feeling sort of giving back much of that gain in those particular stores with Dick's taking the property over.

Okay. That makes sense. And then just one other sort of bigger-picture question. There have been some signs of -- some big signs of a slowdown in the space. You guys are holding in pretty well against a tough comparison. But how much do you think the space is just being impacted by generally slowing demand, consumers not as interested in athleisure as they were in the past; versus maybe a share shift where people are just shopping more from vendor direct channels, all the big vendors are talking more and more about selling more directly to consumers. So it seems like the retailers are being hurt by some combination of those 2 factors and probably a little bit of both. Just wondering how you guys see it.

It's hard to parse out because of various factors. We feel our business is pretty solid. From the -- I think the industry is hurting right now the sector to some degree from a lack of innovation and some freshness to stimulate the sector as a whole. I think the demand for us being pretty stable [in a tough] environment. I'm not sure if the overall -- the health of the consumer is all that we would like it to be. As a whole, we feel the business is solid, although certainly challenging.

That does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Miller for any additional or closing remarks.

All right. We appreciate you listening to our call today and wish you all well and look forward to speaking to you on our next call. Take care.

And once again, that does conclude today's presentation. We thank you all for your participation and you may now disconnect.