Big 5 Sporting Goods Corp (BGFV) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Fourth Quarter 2020 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. Good afternoon, everyone. Welcome to our 2020 Fourth Quarter Conference Call. Today, we will review our financial results for the fourth quarter of fiscal 2020 as well as provide an outlook for the first 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. 2020 was a remarkable year for Big 5 Sporting Goods. Our strong fourth quarter results highlight an exceptional 2020, in which we achieved record earnings driven by top line sales growth, merchandise margin expansion and an improved cost structure.

This year's performance enabled us to meaningfully strengthen our balance sheet, which has reflected in increases in our dividend over the past year, including the most recent we announced today.

While 2020 presented a unique set of challenges, we successfully navigated the evolving environment by focusing on executing our model, which has built an offering a broad assortment of sporting goods products with a convenient shopping experience. Customers certainly recognize the value of our offerings and the convenience and familiarity of our stores as they look for ways to stay active and healthy in the face of the pandemic.

We are pleased with all we accomplished in 2020, and we are even more excited by the prospects that many of the recreational and product trends initially driven by the pandemic will prove to be sustainable even as the disruption of the pandemic subsides. These trends are working in our favor now, and we believe that many aspects will continue into the future.

Demand for home fitness products and other outdoor recreational activities remain strong. People have made significant investments in equipment for home gyms and have newly engaged and perhaps reengaged in activities such as golf, tennis, hiking, camping, fishing, amongst others.

We believe that even once the world begins to normalize, many customers will continue to pursue these activities and shop with us as they look to make further investments in their equipment.

Importantly, over the past year, we have expanded our customer base, and we believe we are very much in the forefront of customers' minds when it comes to sporting goods.

Now I'll take a moment to review the results of our fourth quarter.

I should note that due to our fiscal calendar, our 2020 fourth quarter and full year each included 1 extra week compared to 2019. That said, our same-store sales results reflect a comparable year-over-year period.

Looking at our fourth quarter, net sales were $290.6 million compared to $244.1 million for the fourth quarter of fiscal 2019. Same-store sales increased 10.5% for the fourth quarter compared to a 0.6% decrease for the fourth quarter of fiscal 2019.

Our sales were solid throughout the quarter. We were up in the mid-teens in October. Sales were up in the high single digits in November, which included a comparatively challenging Black Friday. We did not seek to create a door-busting crowd given the COVID environment. Sales for December were up low double digits.

From a product category standpoint, during the fourth quarter, we continued to see tremendous momentum in our hardgoods category, which increased nearly 40%, driven by extraordinary demand for products related to home fitness along with outdoor and home recreation.

Additionally, hardgoods sales reflect continued strong demand for firearms related products. Same-store sales for our apparel category decreased in the mid- to high single digits and our footwear category decreased in the high teens.

Both apparel and footwear were negatively impacted by ongoing suspension of team sports seasons due to COVID. Additionally, apparel was negatively impacted by generally unfavorable winter weather until the end of the fourth quarter, when winter-related product sales responded positively to favorable weather.

On a year-over-year basis, we realized an approximately 20% increase in our average sale, driven by increases both in the number of units per sale and in the average price per unit, which was partially offset by a high single-digit decrease in customer transactions.

The lower traffic reflects the impact of less team sports activity due to COVID-19, along with the fact that customers are choosing to make fewer shopping trips but with larger purchase.

We also continue to expand merchandise margins in the fourth quarter, increasing 243 basis points compared to the fourth quarter of 2019 when margins were up 239 basis points over the prior year. A reduction in promotional activity along with favorable product mix shifts were the key drivers of the margin gain.

Our strong sales and margin performance, along with an improved cost structure, enabled us to achieve our third successive quarter of record net income, which for the fourth quarter was $21 million or $0.95 per share including $0.12 in nonrecurring benefits.

Turning now to current trends. We are very pleased that the strong 2020 momentum has continued. The first quarter of 2021 is off to a very strong start with sales running up approximately 20%. Virtually all categories that drove last year's results have continued to perform at a high level.

Additionally, sales of winter-related products have responded exceptionally well to favorable winter weather in our Western market.

Clearly, customers continue to look for opportunities to recreate outdoors. Our strong winter season has led to very positive sell-through of our winter inventory, which should position that category nicely with a fresh assortment for next seasons.

Partially offsetting these categories of sporting is the significant impact from the continued loss of team sports, particularly baseball, which is historically a huge contributor to Q1 sales.

That said, we are excited to see restrictions starting to ease in many of our markets, which should lead to more school openings and a start-up of various use sports programs.

Before I turn the call over to Barry to provide more information about the quarter, our balance sheet and first quarter guidance, I want to take this time to express how extremely proud I am of the entire Big 5 team and thankful for their dedication and focus over the course of 2020.

With their contributions, not only were we able to weather the pandemic, but we also posted a year of -- a record year of earnings for the company in a very challenging environment.

Looking forward, we are very enthusiastic about our future and feel well positioned to continue to leverage our product momentum and improved cost structure to deliver another banner year.

Barry?

Thanks, Steve. Let me take a moment to discuss the year-over-year fiscal calendar differences that Steve noted at the onset. Our fourth quarter of fiscal 2020 included 14 weeks, while the fourth quarter of fiscal 2019 included 13 weeks. Similarly, for the full year, our fiscal 2020 included 53 weeks and our fiscal 2019 included 52 weeks.

However, same-store sales comparisons for the fourth quarter are reported on a comparable 14-week basis and for the full year are reported on a comparable 53-week basis.

Gross profit for the fiscal 2020 fourth quarter increased 33% to $102.4 million compared to $77.0 million in the fourth quarter of the prior year. Our gross profit margin was 35.2% in the fiscal 2020 fourth quarter compared to 31.6% in the fourth quarter of last year.

The increase in gross profit margin largely reflects the higher merchandise margins that Steve mentioned, which increased 143 basis points versus the prior year period.

200.

243 basis points versus the prior year period. The gross profit margin improvement also reflects reduced store occupancy and warehousing costs as a percentage of net sales and, to a lesser degree, the favorable impact of an insurance settlement, partially offset by lower distribution costs capitalized into inventory for the quarter.

Selling and administrative expense decreased $1.1 million in the fiscal 2020 fourth quarter versus the prior year period, primarily due to lower print advertising expense and the favorable impact of an insurance settlement, partially offset by higher performance-based incentive compensation accruals.

Selling and administrative expense as a percentage of net sales was 25.6%, representing a decrease of 530 basis points versus last year due to the combination of expense reductions and higher sales volume.

Now looking at our bottom line. Net income for the fourth quarter of fiscal 2020 increased to $21 million or $0.95 per diluted share, including a benefit of $0.10 per diluted share related to a favorable insurance settlement and a benefit of $0.02 per diluted share related to a reduction in deferred tax asset valuation allowance.

This compares to net income of $0.4 million or $0.02 per diluted share in the fourth quarter of fiscal 2019, which included charges of $0.02 per diluted share.

Now briefly reviewing our fiscal 2020 full year results. As a reminder, these full year results include the negative impact of periods of significant store closures during the year associated with the COVID-19 pandemic.

As previously reported, net sales were $1.04 billion compared to net sales of $996.5 million for the fiscal 2019 full year. Same-store sales increased 3.0% in fiscal 2020 versus the prior year despite the pandemic-related store closures.

Net income for fiscal 2020 was $55.9 million or $2.58 per diluted share, which compares to net income for fiscal 2019 of $8.4 million or $0.40 per diluted share.

Turning to the balance sheet. Our merchandise inventory at the end of fiscal 2020 was down 19.2% compared to the prior year. This reduction in inventory reflects a strong sell-through of summer products, combined with the dynamic that demand continues to outpace supply for many of our high-performing product categories.

Our buying team works closely with our vendors to obtain key merchandise. But like many other retailers, we are managing through widely reported disruptions in the supply chain.

As Steve noted, during the first quarter to date, we have had a strong sell-through of our winter-related product inventory. As a result, our inventory levels continue to trend lower on a year-over-year basis.

Looking at our capital spending, our CapEx, excluding noncash acquisitions, totaled $7.3 million in fiscal 2020. Our capital spending for the year was lower than what we spent traditionally because we reduced our 2020 capital expenditures to maintain flexibility at the onset of the pandemic.

For fiscal 2021, we expect a higher level of CapEx in the range of $12 million to $16 million, primarily representing investments in store-related remodeling, new stores, distribution center equipment and computer hardware and software purchases.

The combination of sales growth, merchandise margin expansion and improved cost structure allowed us to generate substantial operating cash flow for the year.

Our cash flow from operations was a positive $148.7 million for fiscal 2020 compared to a positive $14.3 million in 2019. Our strong operating results for the year, of course, also positively impacted our balance sheet.

We ended fiscal 2020 with 0 borrowings under our credit facility and a cash balance of $64.7 million. This compares to $66.6 million of borrowings and $8.2 million of cash at the end of fiscal 2019, representing a $123.1 million improvement in our net cash position on a year-over-year basis.

Also, as announced last week, we have further enhanced our financial flexibility by recently entering into a new loan agreement with Bank of America. The new revolving credit facility has a 5-year term maturing February 2026 and provides an aggregate committed availability of up to $150 million.

In consideration of the strength of the company's business, cash flow and balance sheet, our Board of Directors has declared a 50% increase in our quarterly cash dividend from $0.10 per share of outstanding common stock to $0.15 per share, which will be paid on March 26, 2021, to stockholders of record as of March 12, 2021.

We have a long history of returning capital to shareholders, and we are pleased that the momentum of our business provides the financial flexibility to increase our dividend while continuing to invest in the business.

Now I'll spend a moment on our guidance. As Steve discussed, our quarter-to-date sales are off to a strong start through February. For the fiscal 2021 first quarter, we expect same-store sales to increase approximately 20% and expect to realize earnings per diluted share in the range of $0.47 to $0.53, which includes expected nonoperational benefits of approximately $0.06 per diluted share related to an insurance claim and elimination of a liability for employment agreement. This compares to a same-store sales decrease of 10.8% and a loss per basic share of $0.22 in the first quarter of fiscal 2020.

Our first quarter guidance reflects anticipated continued expansion of merchandise margins compared to the prior year period due to a favorable product mix shift along with less promotional activity. We also expect to continue to achieve operating leverage in the first quarter due to reduced store operating hours and a significant reduction in print advertising expense versus last year.

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

(Operator Instructions)

And our first question is from Mark Smith with Lake Street Capital Partners.

I wanted to ask first just a little bit about the comps as we look at this quarter versus a year ago. Comps are, obviously, very strong right now through the first 2 months. Can you walk us through last year in the March quarter, kind of how the sequential comps moved month-to-month last year?

You say through the quarter?

Yes, through the quarter last year. Just I assume that March you get pretty easy comps.

Yes. Compared -- well, we had a difficult start to last year because we essentially had no winter weather in January and February, so we were comping down...

Minus [7.4%] in January, minus [13%] even in February.

In February. Then our business started -- rebounded as weather sort of normalized. We finally saw, I think, the first snowflake last year in early March. Our team business was responding positively. Then we entered into a period really probably the second week of March that I would call the pre-pandemic phase, when there was a surge of buying, not that different than people hoarding toilet paper in the grocery stores when people were buying wildly, I guess, in anticipation of the pandemic and potential store closures or whatever they saw coming.

And then around the -- for the back half of March, around March 20, roughly half of our stores were closed overnight in California. And then over the subsequent remainder of the quarter, a number of those stores were able to reopen, and so we were designated essential while other stores closed. And so we wound up the quarter with approximately 200 of our stores or slightly less than half of our stores closed at the end of the quarter.

So there was a lot of moving parts to last year, and certainly, there's lots of moving parts to this year as we think about what's in front of us over the balance of the quarter.

Bottom line, we were -- I think, for the March period last year, we were down about 10%.

Yes, we were down 11.5% last year.

11.5%.

Okay. Perfect. And then you gave us some guidance on new openings in 2021. Any guidance you can give us on kind of the timing of these? I think you said potentially 5 stores that will open?

Yes. None Q1. We think could be evenly distributed through the remainder of the quarter could be, well, 1 or 2 in the second and similarly in the third and the fourth at this time would be our best goal.

Okay. And then, Steve, you talked about it a little bit in your commentary. But just walk us through your comfort today on inventory. It sounds like you've cleared through pretty well on the winter inventory. If you can just kind of confirm that and how much of that was really apparel and soft goods driven? And then kind of how you feel about inventory and shipments that you're getting into stores today for -- in some of these high-demand categories?

Sure. Sure. In terms of the winter, we've had an extraordinary sell-through of our winter product. And our winter product, I mean, apparel is the largest component of winter, but there's a footwear component and as well as a hardgoods component and the sell-through has been significant in all those categories. So we're coming out, I think, as clean as from a winter as we perhaps ever have. And of course, that bodes well for next season when we can bring all new products into play.

In terms of the other categories, we're still chasing inventory in some of the hot categories. There's certainly, I think it's been widely reported, significant supply chain disruptions. So we're -- obviously, we're getting lots of inventory. We couldn't be generating the positive sales without inventory, but it's a bit a rather uneven flow in a number of categories, issues from whether it's factory issues with raw material shortages or vessel issues or certainly significant issues, getting products through the port.

We're seeing a number of deliveries that are later than ideal, so we're working hard with our vendors and managing through this and certainly optimistic that conditions will improve over the coming months.

Okay. And then the last 1 for me. Just curious, your views as we look at potential for another round of stimulus checks coming out. How much you feel like maybe you benefited and got any bump in prior stimulus packages that were given out as checks to consumers?

Honestly, Mark, it's hard to quantify. I mean it certainly can't hurt. But as strong as our sales have been, and so many strong categories, certainly, we have positive weather in the start of the first quarter, it's very difficult to parse out how much of that is related to stimulus. But again, obviously, it can't hurt it's got to be helping us somewhat.

And ladies and gentlemen, we've reached the end of the question-and-answer session. I would like to turn the call back over to Steve Miller for closing remarks.

All right. Thank you, operator, and thank you all for joining us on today's call. We appreciate your interest in Big 5 Sporting Goods and look forward to speaking with you again after the conclusion of our first quarter.

Have a great afternoon.