Big 5 Sporting Goods Corporation F1Q08 (Qtr End 03/30/2008) Earnings Call Transcript

May. 1.08 | About: Big 5 (BGFV)

Big 5 Sporting Goods Corporation (NASDAQ:BGFV)

F1Q08 Earnings Call

April 30, 2008 5:00 pm ET

Executives

Steven Miller - President and Chief Executive Officer

Barry Emerson - Chief Financial Officer

Analysts

N. Richard Nelson - Stephens, Inc.

Brian Nagel - UBS Warburg

Robert Samuels - JP Morgan

Bill [Dizzlyn] - [Entightening] Capital Management.

Analyst for David Magee - SunTrust Robinson Humphrey

Anthony Lebiedzinski - Sidoti & Company LLC

Operator

Welcome to the Big 5 Sporting Goods first quarter 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Steve Miller, President, and CEO.

Steven Miller

Welcome to our fiscal 2008 first quarter conference call. Today we will review our financial results for the first quarter of 2008 and provide general updates on our business, as well as provide guidance. At the end of our remarks we will open the call for questions.

I will now turn the call over to Barry Emerson to read our Safe Harbor Statement.

Barry Emerson

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, which 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 2007 and other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statement that may be made from time to time by us or for us on our behalf.

Steven Miller

We, like many other retailers, continue to experience a very difficult consumer environment. Although we are disappointed with our first quarter results, our sales, and earnings were in line with the guidance we provided in February.

We are particularly pleased to report that despite the soft sales conditions, we were able to tremendously improve our inventory position during the quarter.

Now for the numbers, in the first quarter sales were $212.9 million down 1.9% from $217 million for the first quarter of fiscal 2007. Our same store sales declined 5.1% for the first quarter.

Favorable weather in many of our markets helped boost sales of winter products, which posted a solid double-digit gain over the prior year. However these gains were not enough to off set a decline in customer traffic and continued weakness in the roller shoe category compared the prior year. This category alone accounted for approximately 40% of the overall decline in same store sales.

Our average transaction was essentially flat for the quarter. Additionally, first quarter same store sales were negatively impacted by approximately 100 basis points, as a result of the loss of a business day during the quarter due to the shift of the Easter holiday, when our stores are closed, out of the second quarter last year and into the first quarter this year.

Our apparel merchandise category comped slightly positive during the quarter, largely due to sales of winter related products. Hard goods was down low single-digits and footwear was down low double-digits due in large part to the roller shoe business.

Our chronic margins declined 83 basis points for the quarter and were negatively impacted by higher sales of winter related products at lower margins versus the prior year, lower sales and margins in roller shoes, and slightly more aggressive promotional pricing in an effort to drive sales and reduce merchandise inventory. I should also point out that our product margins increased 80 basis points during the first quarter of 2007 over the prior year.

Turning now to current trends, in April we’ve seen more of the same softness in the retail environment, but we have not had the benefit of a category helping our business to the degree that winter products did during the first quarter. Roller shoes continue to have a material negative impact on our business, though for the second quarter we expect the impact to be slightly less than in the first quarter, this category will be much less of an issue for us by the time we get into the third quarter.

Overall, while we are certainly taking a hard look at all aspects of our business, we strongly believe that the major factor impacting our sales is the macro economic environment. Housing issues, higher gas prices and inflation, particularly in food items, have to be affecting our customer’s ability to make discretionary purchases.

We continue to work very hard to improve each aspect of our business that is within our control, including the customer experience in our store, our merchandise mix, promotional plans, inventory levels, and our expenses.

We believe that our team has done an outstanding job of improving our inventory position. From the end of the fourth quarter of fiscal 2007 to the end of the first quarter of fiscal 2008 our total inventory comparison versus the prior year improved by approximately $24 million. On a per store basis, quarter end inventories were down 5.3% from the prior year. This improvement has been maintained and actually slightly enhanced, so far in the second quarter.

The process of right sizing our inventories has been particularly challenging given the levels of product inflation we are experiencing. The cost of raw goods, production and associated transportation costs have risen significantly in recent months across a number of our product categories.

In the past, inflation has been a positive phenomenon for our business, because we’ve generally been able to pass along price increases to our customers. However given the current consumer climate, we intend to be careful and measured in evaluating our pricing strategies in an effort to optimize both sales and margins.

In these challenging times we think it’s a real benefit to have a buying team with the depth of experience that ours has. Our buyers average 19 years with us and we draw on that experience as we confront issues such as inflation. Before I turn the call over to Barry, I will comment on our distribution center and store openings.

We continue to be extremely pleased with the productivity and efficiency levels at our distribution center. Controlling expenses is the key to operating in the current environment and during the first quarter our DC team managed to keep expenses flat with the prior year, despite supporting 20 more stores and experiencing significant increases in trucking costs due to higher fuel prices.

During the first quarter, we opened one store in [Redwalk], California and the second; we expect to open four new stores, one of which is a relocation of an existing store. We have two additional stores slated for opening toward either the end of the second quarter or the first part of the third quarter.

Given the current environment, we continue to take a hard look at each potential new store location. This environment is presenting us with some real estate opportunities that are particularly attractive. We are pleased with the locations that we have in the pipeline and we continue to expect to open approximately 20 net new stores during 2008.

At this time, we think that maintain our controlled store growth strategy will allow us to further solidify our market position and benefit us when the consumer climate improves.

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

Barry Emerson

Our gross profit margin for the first quarter was 33.6% of sales compared to 34.95% of sales for the first quarter of 2007. The difference was primarily a result of the 83 basis point decline in product selling margins that Steve discussed, and higher store occupancy costs due mainly to new store openings.

Our selling and administrative expense as a percentage of net sales was 29.75% in the first quarter of 2008 versus 28.4% in the first quarter of the prior year. The higher rate year-over-year was due primarily to lower sales levels and higher store related expenses reflecting an increased store count. Despite the addition of 20 net new stores year-over-year, we maintained our relatively constant levels of advertising expenses.

I’d like to remind everyone that on our fourth quarter 2007 call we announced that we are no longer separately breaking out depreciation and amortization expense. D&A expense associated with our distribution center and store occupancy is now classified in cost of sales and D&A expense associated with our store equipment and corporate headquarters is now classified in selling and administrative expense.

This is a more standard presentation of these items in the retail industry, and all historical results have been reclassified to conform to this presentation. The reclassification had no effect on the company’s previously reported operating or net income.

Now, looking at our bottom line net income for the first quarter was $4.1 million or $0.19 per diluted share compared to net income in the first quarter of 2007 of $7.6 million or $0.33 per diluted share.

Turning to our balance sheet: total chain inventories amounted to $233.2 million at the end of the fiscal 2008 first quarter, basically flat with $233.5 million at the end of the fiscal 2007 first quarter, and down $19.5 million from the end of fiscal 2007.

As Steve discussed, we made great strides in right sizing our inventories during the quarter and on a per store basis quarter end inventories were down approximately 5.3% from last year.

Looking at our capital spending, CapEx excluding non-cash acquisitions, totaled $4.9 million for the first quarter of fiscal 2008, reflecting expenditures for new stores, store remodeling, distribution center costs and IT purchases. We expect capital expenditures for the remainder of fiscal 2008, excluding non-cash acquisitions, to range from $19 to $20 million.

This CapEx will be used primarily to fund the opening of approximately 19 net new stores, store related remodeling, new point of sale terminals at our stores, corporate office and distribution center improvements, and computer hardware and software purchases.

We generated cash flow from operations of $20 million for the fiscal 2008 first quarter compared to $19 million for the fiscal 2007 first quarter. We expect our operating cash flow to improve from the prior year in fiscal 2008 as we benefit from the right sizing of our inventories. We will continue to evaluate the best use of cash including, shareholder dividends, reducing debt, or repurchasing the companies common stock.

Our long-term debt at the end of the first quarter was $97.3 million versus $67.5 million at the end of the first quarter last year and $103.4 million at the end of fiscal 2007. We reduced our debt level by $6 million since the end of the year, while continuing to repurchase stock, pay shareholder dividends, and invest in CapEx.

To update our activity under our share repurchase program, in the first quarter we repurchased 279,768 shares of our stock for a total of $2.8 million. We have $16.7 million of remaining availability under our 20 million share repurchase program authorized in the fiscal 2007 fourth quarter.

Now turning to our guidance, although first quarter results were in line with our expectations, the continuing softness in the consumer environment and the resulting unpredictability of customer traffic and sales, make our ability to forecast the remainder of the year challenging. Based on this uncertain economic environment and our recent sales trends, we are maintaining a cautious outlook.

Our guidance for the fiscal 2008 second quarter and full year assumes that sales will continue to be impacted by a challenging consumer environment through out the year. Based on that assumption we are providing the following guidance. For the second quarter we expect a decline in same store sales in the mid single-digit range and earnings per diluted share in the range of $0.06 to $0.12 and for the full year of 2008 we expect a decline in same store sales in the low to mid single-digit range and earnings per diluted share in the range of $0.60 to $0.85.

A material improvement or decline in the overall consumer environment during the remainder of the year could materially impact our performance relative to this guidance. While the retail environment has remained challenging during the second quarter, we believe that our continued focus on improving the execution of our overall business model will position us well when the consumer climate improves.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rick Nelson - Stephens, Inc.

N. Richard Nelson-Stephens, Inc.

Can you discuss, Steve, the merchandise as in a category where you’re seeing some relative strength and the weaker categories as well, what’s working, what’s not working.

Steven Miller

Certainly the winter products categories was arguably our strongest performing category for the first quarter, but we had other specific areas of strength that I think for competitor reasons we’d just as soon not discuss certain categories.

I think softness for the first quarter, obviously we talked about the roller shoe category, golf business remains somewhat in the doldrums, our baseball business was relatively soft and then some what disappointing to us. We think given the challenging economy, arguably there perhaps is no category that we carry that there’s more hand-me-down products in folk’s closets than baseball. It seemed like this year that people perhaps were not replacing the equipment for the same reasons they had in the past.

N. Richard Nelson-Stephens, Inc.

What’s happening in Footwear X or the Heelys?

Steven Miller

I think our general footwear and non-wear related apparel product was relatively soft, reflecting the weak economy environment.

N. Richard Nelson-Stephens, Inc.

Will you be getting the UA cross trainer in your stores and if so how many stores and what impact might that have?

Steven Miller

We will be getting the product, it will be in roughly half of our stores and we certainly look at it as hopefully a positive.

N. Richard Nelson-Stephens, Inc.

How about the promotional environment, did that intensify from your competitors from fourth quarter to first and what is your expectation there and what plan do you have for advertising?

Steven Miller

I think it’s always relative. I think we always see more competition or everybody being more aggressive in the fourth quarter than the first. I don’t think that currently in the first quarter we really saw what I call more activity in the sense of greater frequency of competitor’s ads. I think in some cases we perhaps see more aggressive pricing, possibly competitor’s efforts to address their inventory issues.

N. Richard Nelson-Stephens, Inc.

How about regional areas of strength, is California softer than your other operating regions? Texas for example, what you hear is actually pretty healthy right now, is that the case at Big 5?

Steven Miller

Rick we’re not going to talk about specific areas and a very specific sense of store performance. What I will say is that generally sales have been recently challenging in most of the markets. I think initially as we start to see softness creep into our business it was something that we can more directly correlate to the housing issues, the areas that have generally been spoken of as having higher foreclosure and default areas.

My sense now is that while the housing issues certainly persist, the more significant issue that we and I think perhaps all retailers are facing are the issues of higher gas prices, higher food prices, and I think that’s affecting all regions of the country and certainly for the most part our market areas as well.

N. Richard Nelson-Stephens, Inc.

Is there any opportunity on the expense? You’re a pretty lean organization as it is.

Barry Emerson

Rick, as you mentioned, we historically operate as a pretty lean business. That being said, some of our larger expense items that we always evaluate, of course, include store labor, advertising, our distribution center, and certainly our administrative departments.

We’ve made a number of advances in expense savings across our business, which individually may not be overly material, but taken together, add up to significant savings for us. Some examples would be, store labor hour reductions in the current environment; safety enhancements favorably impacting our workers comp costs.

We’re out there working on lighting retrofits. We’re reducing supplies because of volumes at our distribution center. We’re working to reduce currier expenses between our corporate office and stores. We are looking at trimming our ad spend and making adjustments to the ad calendar to more efficiently deploy our ad dollars and we’ve been also receiving benefits as we are working with our insurance providers as well.

So, we’re really looking at all aspects of the business.

N. Richard Nelson-Stephens, Inc.

If you hit the earnings guide, where do you see free cash flow for the year?

Barry Emerson

We expect our free cash flow, we really see last year as an anomaly. Inventories were too high, our sales were low, we have worked those off considerably. We expect cash flow for 2008 currently to get back to more normal levels and we would expect free cash flow to exceed $20 million this year.

Operator

Your next question comes from Brian Nagel - UBS.

Brian Nagel -UBS Warburg

How are you thinking about your guidance now? Q1 was soft, but in line with your expectations and you revised down your expectations for enough of the year. Basically you took down your guidance for the year after a soft but in line Q1. We know the environment is weak, but is there anything specific that you saw change in the trends of our business in Q1 to encourage you to put out a more subdued outlook there for the balance of 2008?

Barry Emerson

Our guidance really, we try to be as transparent as we possibly can. The guidance assumes that sales are going to continue to be impacted by the challenging consumer environment through out the year. We certainly hope that the measures taken by the government and the lower interest rates will have some form of positive effect on consumer spending, but we really have no way of predicting how the consumers are going to react to those measures.

Currently we’re not seeing an indication that the consumer-spending environment is improving. The housing issues have worsened, inflation has worsened, gas prices continue to rise. The recent sales trends have reflected this weakness in the consumer environment. For that reason we’re maintaining a cautious outlook for the full year. If the consumer spending materially improves or declines through the year, our performance could certainly change significantly.

As we indicated in our last call, based on the current modeling we would expect each 1% point change in our same store sales for the year to have an EPS impact of approximately $0.10 per diluted share, so you can see the leveraging impact.

Brian Nagel -UBS Warburg

Has weakness in the environment allowed you to find better opportunistic purchases out there?

Barry Emerson

I think the vendor community is being reasonably careful about what they produce. We’re certainly seeing a steady flow of opportunistic buys. I’m not sure if I could characterize it at this point in time as better. I think given this environment we believe that we could see an improvement in the opportunistic buy arena in the months ahead and we’re particularly pleased that with our recent inventory adjustments, we feel we are in an outstanding position to take advantage of the right opportunistic buys when they arise.

Brian Nagel -UBS Warburg

When do we cycle past the difficult roller shoe comparisons?

Steven Miller

Really as we get into Q3 it should be for the most part behind us or way far, far less material than it’s been in Q4 last year and certainly in Q1 and it will be in Q2. Q3 it should be nominal and Q4 it may be an absolute non-issue.

Brian Nagel -UBS Warburg

Barry, that’s factored into the guidance now?

Barry Emerson

Absolutely.

Operator

Your next question comes from Robert Samuels - JP Morgan.

Robert Samuels - JP Morgan

Do you have any comments on the tax rebates, and how you are thinking about them? Should they have any positive impact on the business?

Steven Miller

We certainly hope so, it can’t hurt, but it’s difficult for us to plan or factor into our guidance how people will spend their tax rebate, if it will be spent in stores or go to pay off debt and put into a savings account. Hopefully it’s obviously a positive.

Robert Samuels - JP Morgan

But you’re not factoring in any bump up for the rebates?

Barry Emerson

No, we’re really not factoring that in.

Robert Samuels - JP Morgan

Then second question, excluding the Under Armour launch are there any new brands or upcoming launches that you see on the horizon that you think could help out the business?

Barry Emerson

No, we’ve got individual items that we’re excited about, as we always are in terms of making specific purchases, but no major launch similar to what is going on with the Under Armour product that we can speak of.

We’re certainly very excited about our summer product, we think we worked very hard to optimize our product mix for the summer season, we’ve got a number of fresh items and weather cooperating and economy cooperating we think we’re well positioned for a good summer business.

Operator

Your next question comes from Bill [Dizzlyn] - [Entightening] Capital Management.

Bill [Dizzlyn]-[Entightening] Capital Management

First of all you had mentioned that you’d seen some good deals on the real estate front and I’d like to dial in specifically to real estate locations. Are you finding an ability to get better locations than you had in the past? Not intending to imply that your past locations were poor, but just that you really truly have a step function increase in opportunities.

Steven Miller

Yes, I think to a degree because of other retailers store closures and because of other retailers cutting back in what may have been planned growth, I think some developers are sitting with some excess properties and we think that can only advantage us going forward.

Bill [Dizzlyn]-[Entightening] Capital Management

Then on the inventory front, as you’ve pointed out you’ve made very nice progress from the end of December. Inventories, I believe, were flat versus the end of Q1 ’07 and given that the environment is more challenging today than it was then, are you inclined to bring you inventories down further? What’s the general thought process on the inventories at their current levels, thinking about the future?

Steven Miller

We think certainly if the environment remains as soft as it currently is, we think there are opportunities to continue to bring down our inventory levels relative to the prior year.

Bill [Dizzlyn]-[Entightening] Capital Management

Now I think Barry had mentioned that some of that has already taken place in the month of April and may we interpret your comments at that there’s still more that can be done, even from today’s level even though the reported results are the end of March?

Steven Miller

Yes, we certainly think that there’s more that can be done and we also want to remind you and everyone that we’re also opportunistic buyers and given the right situations we have, we believe, the experience to evaluate opportunities that we believe will be positive for the business, but may be contrary to lowering inventories. Obviously, we’re looking to take the appropriate measures for the long-term success of the business.

Barry Emerson

But Bill, I don’t want to give you the impression that, you really need to look at the inventory levels relative to the prior year. Our inventory levels in the second and third quarters are going to be higher than where they are today, just because of the seasonal purchasing that we’re going to go through. But, at the end of the year, we currently anticipate that our inventories are going to be down significantly from the prior year.

Bill [Dizzlyn]-[Entightening] Capital Management

The product margin, I thought we heard you say, was up 80 basis points, but yet at the same time that you’re being cautious passing the product inflation or cost inflation through. Can you try to pull those two together for us?

Barry Emerson

Bill, I want to make sure this is clear, we said in the first quarter our product POS margins were down 83 basis points.

Bill [Dizzlyn]-[Entightening] Capital Management

Okay, we saw the total gross margin was down, but it sounds like I may have misunderstood you state on the call that product margins.

Steven Miller

I think what you misunderstood was that, this year we were down 83 basis points 2008 over 2007 product selling margins. Last year our margins improved 80 basis points ’07 versus ’06.

Bill [Dizzlyn]-[Entightening] Capital Management

In essence what you’re saying is that your product margins are at the same spot they were two years ago. I’m trying to highlight that this is not a disaster from your perspective.

Steven Miller

Precisely, a lot has to do with the mix of product, the winter business in ’08 relative to ’07, relative to ’06 and so forth.

Operator

Your next question comes from Analyst for David Magee - SunTrust Robinson Humphrey.

Analyst for David Magee - SunTrust Robinson Humphrey

Looking at the second quarter, could you just remind us if there’s anything particular about weather comparisons year-over-year that we should think about?

Barry Emerson

Weather in the second quarter, not overly material as the second quarter played out as I recall. Probably the most significant item in terms of the second quarter, Q2 actually, is the calendar, the impact of Easter, which was in the second quarter last year and the first quarter this year. So that was a positive of business, but for the Fourth of July holiday as our calendar works, the Fourth of July Holiday moves two days further from the end of the quarter and will cost us some business in the second quarter to the benefit of the third quarter.

Analyst for David Magee - SunTrust Robinson Humphrey

Then with the current sales trends do you see anything that makes you concerned that you might be losing some share to other competitors in the region or anybody specific, or do you see it mainly as just an issue of the environment?

Barry Emerson

No, we see this primarily as an issue of the environment. In fact I think if most of what I hear and read, given our geography and trying to follow what’s happening in the competitive environment, I think I can make the case that we’re outperforming a number of players in our marketplace. I just think these are trying times for the American consumer and it’s really difficult conditions for us and all retails.

Analyst for David Magee - SunTrust Robinson Humphrey

I think your CapEx number may be just a bit lower than the number that was given on the last call. Have you had any projects that you’ve decided not to move forward with, or what is behind that reduction?

Steven Miller

Chris, I think our CapEx is in the neighborhood of $23 to $24 million. We really haven’t changed any projects for the year.

Analyst for David Magee - SunTrust Robinson Humphrey

I’m sorry. I thought you said $19 to $20 earlier today.

Barry Emerson

That’s the remaining CapEx for the balance of the year. The total is about $23 to $24 million for the full year.

Operator

Your next question comes from Anthony Lebiedzinski - Sidoti & Company.

Anthony Lebiedzinski -Sidoti & Company LLC

Is it safe to assume that your guidance now assumes more margin pressure than what you said in the first quarter?

Barry Emerson

I think our margin assumptions are pretty consistent from what we saw in the first quarter for the full year.

Anthony Lebiedzinski -Sidoti & Company LLC

What about for the second quarter?

Barry Emerson

Again, I think we’re all pretty consistent, we’re expecting margins to be down on a point of sale basis for the second quarter and for the full year.

Anthony Lebiedzinski -Sidoti & Company LLC

Could you quantify the impact of the Easter shift for the first quarter and also what you expect for the second quarter?

Steven Miller

Roughly probably 75 to 100 basis points.

Anthony Lebiedzinski -Sidoti & Company LLC

Any thoughts on any changes to the promotional marketing plans going forward?

Barry Emerson

No, this is something that we always evaluate and I can’t think of any situation where we don’t make changes, so we believe that we’re going to be really promotional going forward.

We’re watching the ad spend carefully, but historically we’ve had a belief that when times are good you press advertising, first push when times get rough it’s to press advertising. I think we feel in these circumstances, trying to evaluate the situation that it’s prudent to watch our ad spend carefully. And yet we’re still working and I think we have some sound strategies to try to maximize the results of our ad spend and we’re pretty excited about our plans to try and drive business for the Memorial day, Father’s day, Fourth of July time frame.

Operator

There are no further questions.

Steven Miller

Well like most retailers, our business really is facing significant head winds right now. We strongly believe that staying focused on our proven business model, which produced four to five consecutive quarters of positive same store sales growth, until the overall consumer climate softened last year, is the best course of action to weather the storm. We will continue to refine all aspects of our business in an effort to position ourselves for solid growth when the consumer climate improves. We appreciate your interest and look forward to speaking with you again soon.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!