Big 5 Sporting Goods Corp (BGFV) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods First Quarter 2021 Earnings Results 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'd like to turn the conference over to Mr. Miller. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to our 2021 first quarter conference call. Today, we will review our financial results for the first quarter of fiscal 2021 as well as provide an outlook for the second quarter of fiscal 2021. 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 excited to report an extraordinary start to fiscal 2021 with first quarter top and bottom line results significantly ahead of our guidance. This marks our fourth consecutive quarter of delivering record quarterly earnings. Our performance was driven by a combination of strong top line sales, merchandise margin expansion and an improved cost structure. The success we have achieved over the course of the past 12 months has significantly strengthened our balance sheet and positioned us to return more value to shareholders.

Today, we announced a 20% increase in our regular quarterly dividend. Additionally, we declared a special cash dividend of $1 per share. Given our strong cash flow and very healthy cash position, we're able to provide these shareholder returns while also maintaining the financial flexibility to continue to invest in our business. Barry will provide more detail on our balance sheet and use of cash, but first, I would like to give some color on our first quarter performance and our momentum in the second quarter to date.

First quarter net sales were a record $272.8 million compared to net sales of $217.7 million for the first quarter of fiscal 2020. Last year's first quarter was impacted by significant pandemic-related store closures over the last 10 days of the period. Year-over-year net sales comparisons are also a bit muddy due to fiscal calendar shifts because last year was a 53-week fiscal year. That said, same-store sales comparisons, which are made on a comparable weight basis and are not materially impacted by the calendar shifts, were up 31.8%.

Looking at the rollout of the quarter, January same-store sales increased approximately 40%, in part driven by very strong sales of winter-related products. February was up mid-single digits as team sports comparisons were heavily impacted by headwinds this year due to widespread league closures, whereas last year in February, team sports activities had not yet been impacted by the pandemic. Excluding products related to team sports, our other product categories were up more than 20% in February.

In March, sales accelerated significantly ahead of our plan and were up over 50%. As expected, sales comparisons were exceptionally strong for the last 2 weeks of the period as we comped against widespread store closures last year. Much of the incremental demand above our plans throughout March was in our team sports categories as leagues throughout our markets began to resume practice and games with the easing of COVID restrictions. The sales acceleration also reflected benefits from school reopenings in our markets and coincided with the distribution of stimulus checks.

With the return of team sports, virtually all categories have been performing at extraordinary levels. In the first quarter, we saw strong demand across all 3 of our major merchandise categories. Apparel, which was up more than 40%, received the largest benefit from the exceptional winter-related sales. Footwear sales were up approximately 25%. And hard goods comped up almost 30%.

On a year-over-year basis, we realized an increase of approximately 20% in our average sale, reflecting increases in both the number of units per sale and the average price per unit. Transactions were up approximately 12%. We also continued to achieve very healthy merchandise margins in the first quarter, up 350 basis points compared to the prior year. A reduction in promotional activity along with favorable product mix shift were the key drivers of the margin gains.

Not only did our results benefit from strong sales and merchandise margins, but we also continued to benefit from an improved cost structure as we continued to operate with store hours and advertising spend significantly below historical levels. Bottom line, in the first quarter, we generated record net income for any first quarter of $21.5 million or $0.96 per share, including $0.06 in nonrecurring benefits.

Given the pace of sales that drove these remarkable earnings, our team has done a tremendous job chasing inventory in numerous hot categories, which has been complicated by the widely reported supply chain disruptions throughout retail. There are certainly categories where we wish we had more inventory. I suspect it will be some time before supply catches up to demand.

Before discussing our second quarter trending, I wanted to take a moment to address some news regarding our business with Nike. We were originally informed of an expansion of Nike's direct-to-consumer initiatives that will impact Big 5 along with certain other large chain retailers. As a result, by the end of this year, we will no longer receive shipments directly from Nike. Although this will lead to a significant reduction in our flow of Nike products, we will continue to purchase certain Nike products from authorized licensees. The products that will be impacted by Nike's decision represented approximately 7% of our 2020 sales. Based on current and expected supply chain of Nike products, we do not expect any material impact on our 2021 sales.

We source products from many vendors, and we have a very diverse and flexible product mix. Although we are disappointed by Nike's decision, we are encouraged by the response of other vendors, both new and existing, about the opportunity to expand their presence in our stores. From a customer standpoint, we believe that many customers enter our stores relatively brand-agnostic and shop us for our value and convenience. I am quite confident in our team's ability to work through this transition to continue to offer a compelling product assortment in 2022 and beyond.

Turning now to current trends. We are very pleased that our second quarter is off to a tremendously strong start by any measure. Compared to 2020, quarter-to-date sales are running up over 100%, but I should point out that year-over-year comparisons benefit from comping against widespread store closures last year, plus the calendar shift of the Easter holiday. Given the unusual circumstances last year, it is more relevant to compare this year's results with the comparable period in 2019, which was obviously not impacted by the pandemic. On that basis, after adjusting for the calendar shift associated with Easter, same-store sales for the start of Q2 are running up approximately 40%, with point-of-sale margins up approximately 450 basis points versus 2019.

As we look at our current trends, what we find particularly encouraging is that as conditions relating to the pandemic had been improving and restrictions have been easing in our markets, the categories that surged through the pandemic are continuing to perform at high levels. We're experiencing customer traffic significantly above historical levels, indicating that Big 5 is at the forefront of people's minds as a convenient and trusted destination to find what they need. This past year has been a catalyst for many to stay healthy and engage or re-engage in recreational activity. Whether it's golf or tennis, family activities in the backyard or going to the lake, mountains, or beaches, the desire to be active is higher than ever, and our product assortment is ideally situated for these trends.

In sum, we are very enthusiastic about our business and feel well-positioned to leverage our trending and improved cost structure to continue to deliver strong results.

Now I will turn the call over to Barry.

Thanks, Steve. First, let me note certain calendar shifts that affected our net sales for the first quarter. The increase in net sales was partially offset by an approximate $10 million unfavorable impact from the calendar shift related to the company's 53-week fiscal 2020 that caused fiscal 2021 to begin 1 week later than fiscal 2020, as well as an unfavorable impact from the calendar shift related to the Easter holiday -- during which the company stores are closed -- from the second quarter of fiscal 2020 to the first quarter of fiscal 2021. However, our same-store sales comparisons are made on a comparable week basis, and therefore, the calendar shifts did not have a material impact on our same-store sales comparisons.

Gross profit for the fiscal 2021 first quarter increased to $97.9 million from $64.6 million in the first quarter of the prior year. Our gross profit margin was 35.9% in the fiscal 2021 first quarter versus 29.6% in the first quarter of the prior year. The increase in gross profit margin largely reflects the 350 basis point expansion of merchandise margins that Steve mentioned, along with reduced store occupancy and warehousing costs as a percentage of net sales, and, to a lesser degree, the favorable impact from an insurance settlement, partially offset by lower distribution costs capitalized into inventory for the quarter.

Selling and administrative expense decreased $1.3 million in the fiscal 2021 first quarter versus the prior year period, primarily due to lower print advertising expense and the elimination of a liability for an employment agreement, partially offset by higher performance-based incentive compensation accruals. Selling and administrative expense as a percentage of net sales was 25.7%, representing a 710 basis point improvement versus the prior year period due to the combination of expense reductions and higher sales volume.

Now looking at our bottom line. Net income for the first quarter of fiscal 2021 increased to $21.5 million or $0.96 per diluted share, including a benefit of $0.06 per diluted share related to the elimination of the employment agreement liability and the insurance settlement. This compares to a net loss of $4.6 million or $0.22 per basic share in the first quarter of fiscal 2020. Adjusted EBITDA for the first quarter of fiscal 2021 was $30.3 million compared to a loss of $2.2 million in the prior year period.

Turning to the balance sheet, our merchandise inventory at the end of the fiscal 2021 first quarter was down 20.8% compared to the prior year. This reduction in inventory reflects a strong sell-through of our winter merchandise combined with broad-based strengths across our product categories. Our buying team continues to work closely with our vendors to obtain key merchandise, but in some instances, we have been impacted by the widely reported disruptions in the supply chain.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $1.7 million in the first quarter of fiscal 2021. For the full fiscal year, we expect to ramp up our CapEx to a more normalized level in the range of $12 million to $16 million, primarily representing investments in distribution center equipment, computer hardware and software purchases, store-related remodeling and new stores.

For the year, we expect to open approximately 5 new stores and close approximately 2 stores.

The combination of sales growth, merchandise margin expansion and improved cost structure allowed us to generate substantial operating cash flow for the first quarter of fiscal 2021. Our cash flow from operations was a positive $42 million for the period.

Our strong operating results continue to positively impact our balance sheet in a substantial way. We ended the fiscal 2021 first quarter with no borrowings under our credit facility, and with cash and cash equivalents of $100.1 million. This compares to 0 borrowings and $64.7 million of cash and cash equivalents as of the end of the 2020 fiscal year, and to $124.3 million of borrowings and $44.2 million of cash as of the end of the fiscal 2020 first quarter. This reflects a $180.2 million improvement in net cash on a year-over-year basis and a $35.4 million improvement in net cash over the course of the first quarter.

As Steve mentioned, in consideration of the strength of the company's business, cash flow and balance sheet, our Board of Directors has declared a 20% increase in our regular quarterly cash dividend from $0.15 per share of outstanding common stock to $0.18 per share, which will be paid on June 15, 2021, to stockholders of record as of June 1, 2021. This annualized dividend rate of $0.72 per share is the highest in our history.

Additionally, our Board of Directors has declared a special cash dividend in the amount of $1 per share, which will be paid on June 1, 2021, to stockholders of record as of May 17, 2021. We have a long history of returning value to shareholders, and we are pleased the strength of our business and financial condition provide us the financial flexibility to increase our regular dividend and also pay a special dividend while continuing to invest in our business.

Now I'll spend a minute on our guidance. For the fiscal 2021 second quarter, we expect same-store sales to increase in the range of 22% to 27%, and earnings per diluted share in the range of a $1.05 to $1.25. This guidance compares to a same-store sales decrease of 4.2% and earnings per diluted share of $0.52 in the second quarter of fiscal 2020, which included a net benefit of approximately $0.13 per diluted share related to rent abatement savings and a recovery in eminent domain litigation, partially offset by expenses associated with special employee recognition bonus awards.

Note that our fiscal 2021 second quarter guidance reflects benefits from both comping against widespread COVID-19-related store closures last year and also from calendar shifts this year compared to last year. We will cycle the majority of last year's store closures by the middle of May this year. And from that point, we will be comping against the ramp-up in sales following our store reopenings.

Turning to the calendar shifts. Our second quarter benefits from 2 holiday shifts. First, the Easter holiday shifted from the second quarter of fiscal 2020 into the first quarter of fiscal 2021. Because our stores are closed on Easter Sunday, we have already picked up a day of sales in Q2 this year. Second, the 4th of July holiday will shift from the third quarter of fiscal 2020 into the second quarter of fiscal 2021. With this shift, our second quarter will benefit from the higher-volume holiday week in the second quarter this year. And although we are not guiding to the third quarter, from a modeling standpoint, keep in mind that our third quarter will be negatively impacted by that shift.

Additionally, our guidance for the second quarter reflects our expectation of continued improvement in our merchandise margins on a year-over-year basis, due primarily to continued strong product demand and a favorable shift in sales mix. Also, we expect to continue to achieve significant operating leverage in the second quarter due to our increased sales and improved cost structure.

That concludes our prepared remarks. Operator, we are now ready for questions.

(Operator Instructions) Our first question today is coming from Mark Smith from Lake Street Capital.

Couple questions here for you. First off, I just wanted to look a little bit at maybe what we would call closure or pandemic categories versus kind of reopening sales categories. You spoke a little bit about it in the call, but can you talk about outdoor space, exercise at home, if you're seeing any ammunition or firearms supply that's helping boost sales? And then, in particular, as we look at reopening team sports, are there any other categories that are doing well as we're starting to see some reopening?

Sure, Mark. As I tried to indicate in the prepared remarks, once the team sports business returned, we had virtually all categories throughout our stores performing at high levels. Throughout much of the pandemic, we -- all the categories other than team sports were doing pretty well, very, very well; and, certainly, the outdoor categories, backyard, home backyard, what I call front yard, whether it's skates or scooters, were performing well, the individual sports, the golfs and the tennis. We pretty much had everything working other than a big hit from team sports over the entire pandemic.

The firearm business has been, as widely reported, has been strong, I'm sure, nationwide. And so once things start to reopen, which really happened, I'd argue, in a hurry, come March, and particularly in our California market where they really flipped the script in dealing with the pandemic, team sports came on very strong. We had baseball seasons, which would traditionally start in some of our markets as early as in January and certainly by February, then into early March, were just kicking in and over the course of March and into April. On top of that, some -- many schools tried to make up a missed fall football season. We had soccer. So we really had everything working for our business in a very positive manner.

Okay. And it sounds like you've kind of said that you haven't seen a slowdown in the categories that were strong over the last 12 months, that kind of front yard, backyard, outdoor exercise category. Have you seen any shift in consumer behavior to where they're doing other things than what they did during the pandemic?

I guess the way to look at it, Mark, I mean, we certainly have seen some slowdown from the levels of pure surge buying, and that occurred, for example, in exercise, which was really one of the first categories to take off at the onset of the pandemic, and whereas we're certainly not seeing the demand at the levels of really a year ago. We still see that category performing meaningfully stronger than pre-COVID levels. [I mean] we saw '19, '18, '17, '16 going backwards. I think the interest in getting outdoors and recreating, particularly when the weather cooperates, is really as strong as ever, and we feel terrific about the trends that we see across the board.

Okay. Anything as we look at the cost side? You guys have done a good job on reduced hours and your new cost structure. Anything inflationary that we should keep our eyes on? Are you seeing any pressure in labor rates or anything that we should be watching for?

Well, actually, yes, Mark. I think that labor pressure, not only minimum wage, which of course is huge for our markets, it's really huge across the nation, but just the labor market in general, surprisingly enough, we are just seeing a lot of challenges really at store level, at distribution center level, really throughout the organization just from an overall labor standpoint. And so that's an impact.

We've talked a lot about how we've been mitigating those costs over time, and we're continuing to -- you say cost pressure. We're also seeing cost pressure from a -- on the product side, so freight costs, just raw materials, other inputs to the product cost, and we're watching that closely. But so far, so good, in terms of being able to make adjustments and increase prices as necessary.

There's still -- demand still certainly exceeds supply. At this point in time, we've been able to pass those kinds of costs along. In some of the other areas, in terms of advertising and store labor and so on, I mean, we're evaluating those costs and levels of investment, depending on sales trending. But we feel very good about being able to continue to manage those costs, as we have recently, and continue to have them trend lower than they were in 2019.

Okay. Great. Then just I think 2 more from me, Steve, just confirm, regarding Nike, I think you said 7% of 2020 sales, and you don't expect any real significant impact this fiscal year. Is that correct?

That is correct.

Perfect. Then the last one for me, if you have it handy, can you give us what the cadence of comps or sales were last year during Q2? And I know the calendar shift moved some things around, but if you've got that handy -- if not, we can discuss it offline.

Yes. I think I can provide that. Give me half a second. Barry...

Well. I can give you...

Yes.

Q2, Mark, we were -- April was down almost 40%, May was up just slightly, and June was up approximately 15%, so you can see the trending. And so that's when we made the comment last year of the first half of the quarter being down significantly and then the second half turning around and being up pretty strongly in the second half of the second quarter.

It really flipped in the middle of May. All of a sudden, we were able to reopen. A lot of stores have been closed, and our business took off very positively, the back half of the second quarter.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Miller for any further closing comments.

All right. Well, thank you, operator, and thank you all for joining us for today's call. We appreciate your interest in Big 5 Sporting Goods. I look forward to speaking with you again after the conclusion of our second quarter. Have a great afternoon.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time. Have a wonderful day. We thank you for your participation today.