Big 5 Sporting Goods Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Big 5 (BGFV)

Big 5 Sporting Goods (NASDAQ:BGFV)

Q3 2013 Earnings Call

October 29, 2013 5:00 pm ET

Executives

Steven G. Miller - Chairman, Chief Executive Officer and President

Barry D. Emerson - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Sean P. McGowan - Needham & Company, LLC, Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Shannon Richter

David Woodyatt

Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, and welcome to the Big 5 Sporting Goods Third Quarter 2013 Earnings Results Conference Call. Today's conference is being recorded. On the call with us today from the company are Mr. Steve Miller, President and CEO; and Mr. Barry Emerson, CFO.

At this time, I'd like to turn the conference over to Mr. Miller.

Steven G. Miller

Thank you. Good afternoon, everyone. Welcome to our 2013 Third Quarter Conference Call. Today, we will review our financial results for the third quarter of fiscal 2013 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.

Barry D. Emerson

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 report on Form 10-K for fiscal 2012, our quarterly report on Form 10-Q for the second quarter of fiscal 2013 and 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.

Steven G. Miller

Thank you, Barry. We are pleased, for the second year in a row, to report our strongest third quarter earnings per share in our history as a public company. Despite being challenged by unfavorable summer weather during the heart of our summer selling season, we grew same-store sales, expanded product margins, and as always, remain very focused on managing expenses.

Now I'll comment on sales for the third quarter. We rang the register to the tune of $259.1 million, up 2.9% from $251.8 million for the third quarter of fiscal 2012. Same-store sales increased 1.4% during the third quarter of 2013. As anticipated, sales for the quarter received a small benefit from the shift of the July 4 holiday further into our third quarter this year, which resulted in certain holiday-related sales moving from our second quarter to our third quarter. We experienced a low-single-digit decrease in customer traffic and a mid-single-digit increase in average ticket during the third quarter versus the prior year period.

Our sales comped in the positive low-single-digit range in July, but swung to the negative low-single-digit range during August as unfavorable summer weather in many of our markets impacted sales of summer-related products. Additionally, during much of the same time period, sales comparisons in certain product categories were challenging as we cycled the benefit from the 2012 London Summer Olympic Games.

In late August, when weather comparisons were more normal, our sales returned to positive trending and they continued positively in September in the low-single-digit range, which was our strongest month of the quarter on a comp store basis.

From a product category standpoint, the unseasonably cool weather during the heart of our summer selling season negatively impacted sales of summer-related products in each of our 3 major merchandise categories. Apparel was again our strongest performing category, comping up high-single digits. We believe the continued strength in apparel, particularly given the less-than-optimal summer weather, is a positive reflection of our ongoing merchandising initiatives.

Sales in our hard good category comped up low-single digits, while sales in our footwear category decreased in the low-single-digit range for the third quarter. Merchandise margins increased by 12 basis points for the period. This increase comes on top of a 25 basis point increase in merchandise margins that we achieved during last year's third quarter.

Now commenting on store openings. During the third quarter, we opened 5 stores, including 2 as part of relocations, and we closed 1 store as part of relocation that began in the second quarter. We opened new stores in Poway and Barstow, California, and Phoenix, Arizona. We also opened stores in Merced, California and Longview, Washington as part of relocations. We ended the quarter with 420 stores in operation.

For the fourth quarter, we opened a new store in Gallup, New Mexico last week. We will be opening in Coachella, California later this week. We anticipate opening 7 additional stores before year end, which will give us 9 new stores for the quarter and 15 net new stores for the 2013 full year and result in a year-end store count of 429.

Now turning to current trends. We are off to a strong start in the fourth quarter, as we've seen our positive sales trends continue and actually accelerate in October. Our same-store sales are running up in the low-mid-single-digit range for the quarter-to-date. We're encouraged by these sales trends, particularly given that much of what we've been hearing on the news suggests that there has been a fair degree of softness in the overall consumer environment. Although pleased with our start in the quarter, it should be noted that October is a relatively low-volume period for sales. Our results for the full quarter will depend largely on our success during the holiday season when consumer shopping behavior is challenging to predict.

We had strong fourth quarter sales last year, in part due to the national surge in demand for firearms and ammunition. With that said, we believe we can comp -- positively comp last year's performance on the strength of a number of product categories, which we believe are positioned to perform well as a result of our ongoing merchandising initiatives and enhanced business analytics, along with what we feel will be a strong promotional campaign.

We are particularly excited about the opportunity to grow our winter and cold weather-related sales because this will really be the first winter season that we will have the opportunity to benefit from our merchandise initiatives and enhanced retail analytics.

As you might recall, our winter purchasing last year was limited, as we bought around the winter inventory carryover from the 2011, 2012 winter season when we experienced very poor winter weather conditions. This year, following the favorable sell down of the 2012, 2013 winter season product, we now have a nice, fresh assortment of winter merchandise. Obviously, it will be helpful to have the cooperation of winter weather to maximize our sales.

Finally, I should note that we are progressing positively on the design and development of our new e-commerce platform, which we continue to expect to roll out in 2014.

With that said, 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.

Barry D. Emerson

Thanks, Steve. Our gross profit margin for this year's third quarter improved to 33.9% of sales from 33.3% of sales for the third quarter of fiscal 2012. This increase reflected our ability to leverage distribution costs, as well as the 12 basis point improvement in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales was unchanged year-over-year at 27.9% in the fiscal 2013 third quarter and fiscal 2012 third quarter. On an absolute basis, SG&A expense increased $2.0 million. This increase was due primarily to a pretax charge related to legal settlements of $1.3 million, of which $1.0 million was classified as expense and $0.3 million was classified as a reduction in net sales. The higher SG&A expense also reflected costs of approximately $0.6 million associated with the development of our new e-commerce platform and added expense for new stores resulting from our increased store count, partially offset by a reduction in advertising expense. SG&A expense for the third quarter of fiscal 2012 included a pretax charge of $0.4 million related to store closing costs.

Now looking at our bottom line. Net income for the third quarter was $9.1 million, or $0.41 per diluted share, including $0.04 per diluted share for a charge for legal settlements compared to net income of $8.2 million, or $0.38 per diluted share, including $0.01 per diluted share for a store closing charge in the same period last year.

Briefly reviewing our 2013 first 9 months results, net sales increased to $745.3 million from $696.9 million during the first 9 months of fiscal 2012. Same-store sales increased 5.3% during the first 9 months of fiscal 2013 versus the comparable period last year.

Net income for the period was $22.8 million, or $1.03 per diluted share, including $0.04 per diluted share for a charge for legal settlements. This compares to net income of $10.9 million, or $0.50 per diluted share, including $0.04 per diluted share of store closing and impairment charges for the first 9 months of last year.

Turning to our balance sheet. Total merchandise inventory was $287.9 million at the end of the third quarter, up 0.7% on a per-store basis compared to the same period last year. We feel good about our current inventory position as we enter the holiday shopping season.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $12.6 million for the first 9 months of fiscal 2013. We plan to open 9 new stores and continue investing in the development of our new e-commerce platform during this year's fourth quarter. We expect full year capital expenditures in fiscal 2013, excluding noncash acquisitions of approximately $19 million to $23 million, primarily to fund the opening of 15 net new stores, increases in existing store maintenance and remodeling, distribution center equipment and computer hardware and software purchases, including investments related to the development of our new e-commerce platform.

We generated cash flow from operations of $25.2 million for the first 9 months of 2013 compared to $28.5 million in the same period last year. The decrease in cash flow from operations primarily reflects increased funding of inventory purchases, partially offset by higher net income year-over-year.

In the third quarter, we used cash to pay our quarterly cash dividend of $0.10 per share and to pay down borrowings under our revolving credit facility. Our long-term debt at the end of the third quarter was $37.9 million, down $14.7 million, or 28%, from $52.6 million at the end of the third quarter last year.

Now I'll spend a minute on our guidance. As Steve mentioned, we are encouraged by our positive sales trends for October and are confident in our product and promotional plans for the fourth quarter. But it's still early in the quarter and the consumer spending trends over the holiday season are unpredictable.

Additionally, over the last several weeks of the quarter, we will be cycling the benefit received last year from the national surge in demand for firearms and ammunition. With that in mind, for this year's fourth quarter, we are projecting same-store sales in the positive low-single-digit range and earnings per diluted share in the range of $0.20 to $0.28. Our fourth quarter guidance reflects anticipated expenses of approximately $0.02 per diluted share, associated with the development of our new e-commerce platform. For comparative purposes, in the fourth quarter of 2012, same-store sales increased 6.5%, and earnings per diluted share were $0.19.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Sean McGowan with Needham & Company.

Sean P. McGowan - Needham & Company, LLC, Research Division

A couple of questions here. First, can you talk about what you're seeing now regarding firearm trends and just how important was it to the fourth quarter? How much of that comp came from firearms a year ago?

Steven G. Miller

Yes. I mean, I think you got to talk -- look at firearms and ammunitions, well, both of them. We're seeing -- I think, firearms -- I think the surge is recently moderated and I would say it's pretty normal business, probably demand is still above our historical norm. Our ammunition business continues to remain healthy. Last year, our firearm business picked up some following the presidential election, and then the real surge took place following the tragedy at Sandy Hook. The firearms and ammunition sales certainly had a meaningful benefit on our Q4 2012 sales. But it's really difficult to quantify because those categories have been running still strong kind of going into the period. We clearly would've had a very strong fourth quarter last year without the benefit of firearms and ammunition. And the guidance that we provide this year assumes that there'll be some softer demand this year for those categories than we experienced last year.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. A couple of others then. Can you talk a little bit more specifically about categories that, other than the winter merchandise, which you did call out, categories that you think will benefit from your analytics and merchandising? And then secondly, a little bit more color on what the legal settlement issue was and is that fully behind us now?

Steven G. Miller

Sure. I mean, we think we have a broad array of categories that are benefiting from our initiatives and our analytics. Certainly, our entire apparel, which we're, as we mentioned, very excited about the opportunities to generate very positive winter apparel sales. But across hard goods, I mean, it's a broader array of categories from fitness to team sports and many others. We're not going to get terribly granular discussing our product categories. And our footwear business, we're optimistic in that area as well.

Barry D. Emerson

Yes. And Sean, on the legal charge, the charge includes an accrual for settlement of the ZIP code lawsuits, which have been previously disclosed in the filings -- in our filings with the SEC.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. Just wanted to make sure that's the same issue. And do you think this is the last we'll hear about that?

Barry D. Emerson

We hope so. We hope so. I mean, we've certainly accrued the best estimate that we have, and hopefully, there aren't anything further. But well, as you read the disclosure, you'll see that there's certain -- the court still needs to approve this settlement, et cetera.

Sean P. McGowan - Needham & Company, LLC, Research Division

Right, I didn't mean to put you on the spot for unpredictable things, but as far as you know, you've accrued what you know, and if you're right, then this is it. It's not like it's going to be an ongoing thing, if you accrued the right way, is that right?

Steven G. Miller

Yes, yes, that's absolutely right.

Operator

And we will now go to Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Just a couple of questions for you guys. On the margins, you guys did a nice job again in Q3, expanding the merchandise margin. Just wondering if you could delve into the bucket a little bit more on the distribution costs and occupancy and the buying piece of that margin as well.

Barry D. Emerson

Well, Sean, yes, as we've mentioned, at least -- we got the 12 basis points on the merchandise margins, and we -- we're able to leverage our distribution expenses at a rate of same-store sales growth of about, frankly, flat to down 1%. So when we're positive, we're certainly leveraging our distribution costs and -- at a -- we're able to leverage our occupancy at a rate -- at a same-store sales growth rate of about 3% or so. So yes, we're seeing some margin benefit, certainly, as our comps continue to grow.

Sean P. Naughton - Piper Jaffray Companies, Research Division

So is it fair to say that the little bit of -- maybe negative impact a little bit on the occupancy and mostly the additional benefit outside of the 12 basis points came from the distribution side?

Barry D. Emerson

Right. Yes, there was a little negative -- a little deleveraging on the occupancy, not much, but a little bit.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Right, understood. Okay. And then, I guess, on the categories, good to see that the hard goods is still performing well. Apparel, obviously, remained strong. Footwear did dip down. Just curious, anything on the ASPs inside of footwear? And are there any trends there that you're seeing in that particular business that caused some of the weakness in the quarter?

Steven G. Miller

I think our ASPs are, I think, edging up slightly in our footwear. I think our footwear business was impacted by the lack of favorable summer weather, which certainly had -- we saw some softness in the sandal sales and items that are apparently stronger when you have warmer weather and driving people to lakes and beaches and so forth. Our footwear business comped up nicely in the low-single-digit range in last year's third quarter. They will be positive on a 2-year basis. So I think we're fighting some of the positive trending of the lightweight running that was a little bit stronger and driving some sales last year and don't see anything quite of that like benefiting us at this time. But we feel quite positive about our footwear business going forward.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay, that's great. Just one last question. On the weather comparison, you talked about it being a little bit challenging in August. Did things turn around a little bit over the last maybe 6, 7 weeks where it's been a little bit more normalized at least instead of some of the weather that you were seeing in August?

Steven G. Miller

Yes. I mean, the real softness in our quarter really occurred over about a 3-week period from really the end of July through the first 2 -- roughly 2.5 weeks of August. And it was strange weather. I mean, we had a period of, I believe, it was 29 consecutive days where the high temperature in L.A. was at/or below normal. It was that way across a number of our markets, primary markets. After that, I think weather was generally normal. And we saw our business respond much more positively. As I mentioned, September was our strongest period of the quarter. I didn't mean to interrupt you, but I was saying that we've seen our sales accelerate thus far in the fourth quarter in October.

Operator

And we will now go to Mark Smith with Feltl and Company.

Shannon Richter

Yes, this is Shannon Richter on for Mark Smith. First question is, what is the state of the California consumer versus your other markets where your operate?

Steven G. Miller

I'm sorry, can you speak a little louder? I did not hear the question.

Shannon Richter

Yes, I'm sorry about that. What is the state of the California consumer versus the other markets that you operate in?

Steven G. Miller

Well, I'm not sure that I've got a great answer to that. I think there's a number of challenges that have faced the California market for -- compared to others for a number of years, generally speaking, higher unemployment, higher gas prices, typically amongst the highest, that's nothing particularly new. I think there's hopefully been some recovery in the housing markets that can benefit California. But all in all, I mean, our performance in California is never too far away from our overall performance because it does comprise a significant share of our business.

Shannon Richter

Okay, perfect. And then one last question, can you just remind us when you have the 23rd week?

Steven G. Miller

Say that again?

Barry D. Emerson

When we had the 23rd week.

Shannon Richter

Can you just remind us when you have a 53rd week, excuse me?

Steven G. Miller

53rd week? Well, not this year and not next year, maybe the year after.

Barry D. Emerson

Yes, 2015, we'll have the 53rd week.

Operator

And we will now go to David Woodyatt with Keeley Asset Management.

David Woodyatt

Yes. It looks like for the full year, your net growth in stores will be somewhere in the 3% to 4% area. Is that a good educated guess at your likely growth of stores in the foreseeable future and next few years? Or are you hoping to do more than that?

Steven G. Miller

Well, we haven't announced our plans for the next years, let alone beyond that. The 15 net new stores was the most net openings since -- for us, since 2008. Although we haven't announced our plans, I would anticipate that next year will be similar or somewhat accelerated from that. And we're really not guiding beyond that or speaking to that at this time.

David Woodyatt

Okay. Just one quick follow-up question on the guns and ammo area. Would it be fair to say that even though it will be a fairly tough comparison in the fourth quarter, that the first quarter will be an even tougher comparison? Because it was even...

Steven G. Miller

That would definitely be fair to say. They absolutely -- the peak in demand was in the first quarter of 2013.

Operator

[Operator Instructions] And we will now go to David Schick with Stifel.

Taylor G. LaBarr - Stifel, Nicolaus & Co., Inc., Research Division

This is Taylor LaBarr on for David Schick. I was just wondering if you could go into a little more detail on your merchandising initiatives and improved business analytics. Specifically, what part of those programs do you think had the biggest impact in the quarter, either on sales or gross margin? And then secondly, as you think about what you've done, what's been implemented so far and what's still left to do, generally, what inning are we in, in that process and seeing those -- the impact to those changes flow through?

Steven G. Miller

Yes. Well, we think we're -- this is certainly an ongoing effort, no end date, and I think that the effectiveness of our program is reflected in how, if you look at, for example, our apparel business comped up a high-single digit, it was going against a high-single-digit gain in the Q3 of 2012 over 2011. The improvement was made despite the loss, in our minds, clearly, of summer-related sales due to the unseasonably cold summer. So I think it's an effort that we can absolutely build on, and it really involves just taking our analytics and making better decisions in store-by-store merchandise allocations and the timing and pricing of our promotions. And we feel we've got wonderful opportunities to continue to benefit from our investment in the analytics.

Operator

And we have no further questions at this time.

Steven G. Miller

Okay. Well, we thank you for your interest today and look forward to speaking with you on our next call. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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