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Executives

R. Todd Noden - Chief Financial Officer

Terrance G. Finley - Chief Executive Officer, President and President of American Internet Services Inc

Analysts

Harsha Gowda

Books-A-Million (BAMM) Q4 2013 Earnings Call March 27, 2013 5:00 PM ET

Operator

Good afternoon and welcome to the Books-A-Million quarterly conference call. This call is being recorded today, March 27. At this time, I'd like to turn the conference over to Mr. Todd Noden, Chief Financial Officer of Books-A-Million. Please go ahead, sir.

R. Todd Noden

Thank you. Good afternoon, everyone. With me today is Terry Finley, Chief Executive Officer and President of Books-A-Million. We're pleased to host this conference call regarding the company's fourth-quarter results, which were issued earlier this afternoon.

Before we begin, I would like to remind everyone that management's comments in this conference call, which are not based on historical facts, are forward-looking statements. It should be noted that the company's future results, may differ materially from those anticipated and discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in periodic reports filed with the SEC.

Next, I will begin this afternoon with a discussion of our financial performance for the fourth quarter, and then Mr. Finley will provide a discussion of current business trends. At quarter end, we are operating 257 stores. During the quarter, we opened 1 superstore -- and closed 1 superstore and 1 traditional store. In the third quarter of fiscal 2012 -- in the fourth quarter of fiscal 2012, we closed 5 stores in trade areas in which we no longer operate and are considered discontinued operations. As a result, we reported discontinued operations for fiscal 2012. All amounts that I quote today will exclude discontinued operations except comparable store sales.

Net sales for the 14-week period ended February 2, 2013, decreased 0.8% to $165.6 million compared with sales of $166.9 million in the year-earlier period. Comparable store sales for the fourth quarter decreased 6.1% compared with fourth quarter in the prior year. Comparable store sales, excluding eReader devices and accessories, decreased 4.2%.

Our gross margin, as a percent of sales after occupancy cost and warehouse operating expense, was 32.6% compared with 30.4% last year. This increase was a result of higher merchandise margins and lower occupancy cost. Operating, selling and administrative expenses increased $0.7 million during the fourth quarter, compared to the Q4 fiscal year 2012. This increase is primarily driven by higher selling in store expenses and higher corporate expenses due to the additional week in the quarter when compared to last year.

As a percentage of sales, operating, selling and administrative expenses for the fourth quarter were 21% versus 20.5% last year. Depreciation and amortization expense decreased $66,000 to $4.4 million from $4.5 million in the prior year. Net interest expense remained relatively flat to last year, at $396,000 for the quarter versus $399,000 in the prior year quarter.

For the fourth-quarter, our net income from continuing operations was $8.1 million, or $0.52 per diluted share, compared with a net income of $7.5 million, or $0.48 per diluted share, in the fourth quarter of fiscal year 2012.

Now I'd like to provide you with some balance sheet highlights for the quarter and the following figures are compared to balances at the end of fiscal year 2012. Our inventory was $201.5 million, compared to $201.2 million in the prior period. Accounts receivable and related party receivables were $3.4 million, compared with $3.7 million in the prior period. Net property plant and equipment was $65.3 million, compared with $66.5 million. Total debt was $5.7 million, compared with $5.4 million in the prior-year period. And stockholders' equity was $116.5 million, which compared to $114.6 million in the prior-year period.

And finally, year-to-date capital expenditures for fiscal year 2013 decreased to $19.1 million versus $24.3 million in the prior year, due to new store openings in the fourth quarter of fiscal year 2012. And I would like to note that approximately $6 million of fiscal year 2013 purchases were related to fiscal 2012 new store openings that were accrued at prior year end.

And now, I will turn the call over to Terry Finley for a general business update.

Terrance G. Finley

Thank you, Todd, and thanks, everyone, for participating on the call today. We're pleased with our sales results for the quarter and for the year. While November and early December sales were somewhat sluggish and adversely impacted by several bouts of inclement weather, including Hurricane Sandy, sales rebounded nicely enough just prior to the holidays to allow us to exceed budgeted projections for the quarter. Our core book business continued to outperform expectations. Our gift department delivered significant year-over-year sales growth, and our cafe and media departments compared favorably to last year and planned, as well.

In the core book business, our performance was the beneficiary of declining sales industry-wide for eReaders and tablets and the resulting decline in the rate of digital channel sales growth. While certain categories and genres continues to move strongly into the digital sales arena, the tail of physical book sales was longer and stronger than expected and our physical book business is growing more stable, as the rate of digital sales growth continues to slow.

Book categories with the strongest performance included adult fiction, where the continued success of E.L. James' Fifty Shades of Grey trilogy, as well as additional romance titles that have piled on to this phenomenon, drove sales growth. Graphic novels, driven by the continued interest in The Walking Dead series based on the hit AMC television series, and our children's area, where exceptionally strong sales on seasonal titles, drove the results.

Our gift and general merchandise sales continue to grow both in absolute terms and as a percentage of our overall business. Adjustments to store layouts and fixtures completed earlier in the year positioned us well to make the most of this growth area over the holiday period. Positive results were seen across several categories:

In Apparel, where a wide assortment of T-shirts in pop culture categories such as Dr. Who and The Big Bang Theory drove sales; in Toys led by Lego, Furby and strong license properties like Star Wars, Angry Birds and Minecraft; Novelty Gifts, where media related properties like Dr. Who and Big Bang again joined with strong non-branded merchandise to drive positive sales; and Electronics, driven by our Electronics Accessories business, including headphones and cell phones and tablet accessories.

As we look forward to the first quarter, the publishing lineup looks fairly modest and we do face material headwinds from last year's success with Hunger Games in the period, as well as the beginning of last year's Fifty Shades phenomenon in April. Highlights include new fiction from David Baldacci and James Patterson and new nonfiction offerings from Dr. Phil and Facebook's COO, Sheryl Sandberg.

We expect that the pop culture trends that were so successful this past quarter will continue to drive sales in the coming months and we look forward to offering our customers novelty gift and book items from the newest media-driven phenomenon Duck Commander, related to the hit A&E television series Duck Dynasty.

Now I'll be happy to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to Harsha Gowda with Blue Shore Capital Management.

Harsha Gowda

So just a few questions for you. First of all, great job. When you mentioned the balance sheet metrics, you guys didn't mention anything about cash. Could give us an idea what your cash balance is right now?

R. Todd Noden

Cash is approximately $5 million and just consistent with what we have for general operating cash levels.

Harsha Gowda

So, I mean, just using the numbers provided, including the CapEx, which was about $5 million less than last year and the fact that inventory numbers seem consistent, is it right for us to calculate that cash flow from operations net of CapEx was roughly about $15 million? Is that the right number?

R. Todd Noden

Not quite. But I don't want to get into all the details of the components. It's a little bit higher than that and those numbers -- we'll publish a full cash flow in the K that's coming up and the numbers are going to be in there.

Harsha Gowda

Can I have an idea of what the CapEx is looking like going forward?

R. Todd Noden

I'm sorry, your question was?

Harsha Gowda

What is your expected CapEx for the coming year?

R. Todd Noden

Appreciate the question, Harsha. And as you know, we don't make projections on any of the financial metrics going forward.

Harsha Gowda

The last couple of years, with all the big changes, the number has been running pretty high compared to historical levels. Are we going to see maybe a little bit more reversion to the mean?

R. Todd Noden

Well, that's one of the reasons why what we put in the comments prior to this is I think there's some confusion with the prior-year that's got that $6 million from when we did a lot of the positioning of the Borders stores, so really the right number this year was $13 million approximately.

Harsha Gowda

Great. And finally, we've been hearing about this a lot, we see it in the industry data, but it seems like the stabilization in physical book sales is much greater than a lot of people have expected. It sounds like you guys are seeing the same impact on your core book business. Do you see this as something sustainable, something that possibly it continues surprising on the upside with physical sales?

Terrance G. Finley

Well, a couple of things I would say about that. First of all, the trend continues currently. So, in that regard, I would have confidence in saying that I do think that the low-hanging fruit has been picked as it relates to digital. There's nothing on the horizon from a technology perspective that leads us to conclude that there would be technology to push dramatically different consumption levels of digital book, and prices are already very low. So all of that being said, we do think we've reached a certain stabilization point. Our business, as you may note, though, is very hit driven. Always has been and is certainly that way today, so as we look ahead, we're merchants, we're looking for the next thing. And Fifty Shades, as an example from last year, was an almost unprecedented phenomenon and one never knows when you're going to see those.

Operator

With that, I'd like to turn the program back over to Mr. Noden for any additional or closing comments.

R. Todd Noden

If there's no other questions, I would like to just thank everyone for joining the call. And we look forward to talking to you in the future. Thank you.

Operator

That does conclude today's call. Thank you for your participation.

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