Big 5 Sporting Goods' (BGFV) CEO Steven Miller on Q4 2016 Results - Earnings Call Transcript

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Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q4 2016 Results Earnings Conference Call February 28, 2017 5:00 PM ET

Executives

Steven Miller - Chairman, President and CEO

Barry Emerson - SVP and CFO

Analysts

David Magee - SunTrust Robinson Humphrey

Michael Baker - Deutsche Bank

Mark Smith - Feltl and Company

Brian Nagel - Oppenheimer

Operator

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Fourth Quarter and Full-Year 2016 Results Conference Call. Today’s call is being recorded. With us today are Mr. Steve Miller, Chairman 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 would like to turn the conference over to Mr. Miller. Please go ahead, sir.

Steven Miller

Thank you, operator. Good afternoon, everyone. Welcome to our 2016 fourth quarter conference call. Today, we will review our financial results for the fourth quarter and full year of fiscal 2016 and provide general updates on our business, as well as provide guidance for the first 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 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 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.

Steven Miller

Thank you, Barry. We're very pleased with our fourth quarter performance which enabled us to produce a strong year of earnings growth in 2016. During the quarter we generated solid growth in same-store sales, expanded gross margins, leveraged expenses and improved earnings per share by 75% as we continue to benefit from the competitive rationalization in the retail sporting goods sector.

We also strengthened our balance sheet as our healthy operating cash flow allowed us to reduce year-over-year borrowings under our credit facility by 82% and returned over $13 million to shareholders for cash dividends and stock repurchases in 2016. And as we will discuss in a moment we're very encouraged that the profit and sales momentum has continued and actually accelerated into the first quarter of fiscal 2017.

But first I'll comment on sales for the fourth quarter. As a reminder our fiscal 2016 fourth quarter was a 13-week period and our fiscal 2016 full year was 52-week period compared to 14 weeks and 53 weeks respectively in the prior fiscal year period. When speaking of same-store sales comparisons for fiscal 2015 we use comparable 13-week and 52-week periods.

As we previously announced, our fourth quarter net sales were $266.3 million compared to $275 million for the fourth quarter of fiscal 2015. The calendar shift from a 14-week fiscal fourth quarter in 2015 negatively impacted fourth quarter net sales comparisons by approximately $15.5 million. On a comparable 13-week basis same-store sales increased to 3.1% for the period.

Our same-store sales comped up in the high single digit range in October and comped up in the low single digit range in both November and December. While we enjoyed a strong Black Friday November sales were impacted by very unfavorable winter weather conditions in our markets. In December, we like many retailers experienced the challenges of a generally soft holiday shopping environment. We finally saw the arrival of favorable winter weather over the last week or so of the quarter which drove strong winter product sales a very nice finish to the period.

For the quarter we increased both customer transactions in our average sale with the growth in average sale being the primary driver of the sales increase we experienced for the period. From a product category standpoint, our hardest category comped up mid single digits for the quarter. Our apparel category was up low single digits and our footwear category was slightly down for the period. All major merchandise categories benefited from the competitive store closures offset to some degree by softer winter product sales during much of the period.

Our merchandise margins for the quarter increased by 68 basis points from the prior year benefiting from opportunistic fixed price resulting from the competitive rationalization along with a less promotional environment during the period.

Now commenting on store activity, during the fourth quarter we opened one new store in Maricopa, Arizona and closed one store. We ended the year with 432 stores in operation. In the first quarter of 2017 we have relocated one store and have closed one store as a result of the lease expiration. Our current plans for the 2017 full year have us opening approximately 8 stores and closing approximately three stores. In addition we plan to continue our program of upgrading and investing in our existing store base this year.

Now turning to current trend. It is nice to report that we're off to a strong start in the first quarter with same-store sales for the period to date up in the mid single digit range as we continue to benefit from the Sports Authority Sport Chalet, sport closures that occurred during the second and third quarters of last year. Additionally, the favorable winter weather conditions that we experienced at the tail end of the fourth quarter have continued into the first quarter creating strong demand for winter related products across many of our Western markets.

Our merchandise margins also have continued to move in the right direction during the first quarter benefiting from favorable sales mixed shift and decreased [indiscernible] activity as well as opportunistic buys and a less promotional environment following the competitive store closures.

While the favorable winter weather has been a huge benefit to our winter product categories this season, some of that benefit has been offset by softness in our non-winter product categories which have been impacted by the heavy rains we've experienced over the past several weeks, particularly in California. These non-winter categories become more important over the balance of the quarter, so at this point we are rooting for warmer and dryer conditions so that our customers are able to take advantage of our spring sports offering.

We believe our merchandise assortment is well-positioned for the spring selling season and we remain focused on providing our customers with the optimal mix of the value, selection, service and convenience.

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 first quarter guidance.

Barry Emerson

Thanks, Steve. Our gross profit margin for the fiscal 2016 fourth quarter was 32.8% of sales versus 31.2% of sales for the fourth quarter of fiscal 2015. The increase in gross margin for the period reflects a 68 basis point improvement in merchandise margins as Steve mentioned as well as a decrease in store occupancy and distribution costs as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 28.2% in the fourth quarter, down from 28.5% in the fourth quarter of fiscal 2015. On an absolute basis SG&A expense decreased $3.2 million year-over-year due primarily to the extra week in the fourth quarter of fiscal 2015 and a decrease in print advertising expense partially offset by the incremental impact of minimum wage rate increases in our markets.

Now looking at our bottom line we reported net income for the fourth quarter of $7.7 million or $0.35 per diluted share including a favorable $0.02 per diluted share for a tax benefit related to share-based compensation. This compares to net income in the fourth quarter of fiscal 2015 of $4.3 million or $0.20 per diluted share including $0.02 per diluted share of expense related to the evaluating store growth strategies and potential profit improvement opportunities and non-cash impairment.

Briefly reviewing our full-year fiscal results, net sales were $1.02 billion for the 52 weeks fiscal 2016 compared to net sales of $1.03 billion for the 53 weeks fiscal 2015. The calendar shift from a 53-week fiscal year in 2015 negatively impacted net sales comparisons by approximately $21.5 million in 2016. Same-store sales increased 1.7% in fiscal 2016 versus the comparable period in the prior year.

Net income for fiscal 2016 was $16.9 million or $0.77 per diluted share including $0.05 per diluted share of charges for store closing costs and the net write off of deferred tax assets related to share-based compensation. This compares to net income in the prior year of $15.3 million or $0.70 per diluted share including $0.07 per diluted share of charges for expenses associated with our publicly disclosed proxy contest, our legal settlement, evaluating store growth strategies and potential profit improvement opportunities and non-cash impairment.

Turning to our balance sheet our chain wide inventory was $294.3 million at the end of fiscal 2016 down 1.7% from the prior year. On a per store basis merchandise inventory was down 0.6% versus the prior year. We've been pleased with the sell down of our winter merchandise this season and feel good about the inventory heading into our spring selling season.

Looking at our capital spending, our CapEx excluding non-cash acquisitions total $14.1 million for fiscal 2016, primarily reflecting existing store enhancements, investment in new stores in our distribution center and computer hardware and software purchases including amounts related to the development of a new point-of-sales system. We currently expect capital expenditures for fiscal 2017 excluding non-cash acquisitions of approximately $18 million to $22 million.

From a cash flow perspective, our operating cash flow was a healthy $73.7 million for fiscal 2016 compared to $39.6 million for the prior year, largely due to reduced funding of merchandise inventory purchases including the timing of payments. For the fourth quarter we also paid our quarterly cash dividend of $0.15 per share. Our long-term revolving credit borrowings at the end of fiscal 2016 for $10 million down 82% from $54.8 million at the end of fiscal 2015 reflecting our healthy operating cash flow.

Now I'll spend a minute on our guidance. For the fiscal 2017 first quarter we expect same-store sales to be in the positive mid single-digit range and earnings to be in the range of $0.12 to $0.18 per diluted share. We expect first quarter same-store sales comparisons to the prior year to be positively impacted by approximately 50 basis points as a result of the calendar shift of the Easter holiday during which our stores are closed out of the first quarter of fiscal 2016 and into the second quarter of fiscal 2017.

Our earnings guidance for the first quarter also reflects anticipated higher merchandise margin compared to the prior year as a result of favorable sales mixed shift, decreased clearance activity, opportunistic buys and less promotional activity following the competitive rationalization. For comparative purposes in the first quarter of fiscal 2016 same-store sales decreased 1.9% and we reported a loss of $0.05 per share.

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 David Magee of SunTrust.

David Magee

Yes, hi guys, good afternoon and nice quarter.

Steven Miller

Thanks David.

David Magee

Could you, now that you've delevered the balance sheet are you thinking about next year maybe growing the units faster, I know that you've had a lot of competition removed from the marketplace and does it makes sense to you?

Steven Miller

Yes, I mean as we said our plans call first also the approximately eight stores, there were a few closures there. We do feel completely the rationalization in the space where it has taken place as well as some of the general planned retail store closures that we are hearing about could create additional opportunities for us.

We are going to let the dust settle, watch out the existing store base is impacted as we play through this cycle of closures and then really take a hard look at how that might impact our sales our tranches going forward. We still think there are opportunities to grow the store base because of footprint, but we're really focused on the right locations, not just turning our stores and hitting the solid growth market for the sake of hitting out target numbers. So we're going to continue to grow and continue to follow our longstanding philosophy of positive growth and growth under control.

David Magee

Thanks Steve. Do you think that the amount of opportunistic inventory buys will stay constant going forward or do you see it total lapping this year and normalizing somewhat?

Steven Miller

Well, I think we've had with the closures of significant competitors that certainly created a positive arena for opportunistic buys. I think with some of the turmoil that has taken place in the general retail environment as we speak I would anticipate that there will continue to be opportunities that will present themselves going forward. So in general we feel pretty positive about the opportunities that positively lap what has been a pretty good season for opportunistic buys.

David Magee

Thank you and lastly can you give some color about how the e-commerce business has been doing?

Steven Miller

Sure, I mean the – as we've said before that the e-commerce business was not material to our overall results in 2016. We don’t believe it will be material in 2017 as well. It is continuing to grow albeit off a small base. Let me say this David, this is really the strength of our model regards around the convenience of our stores. It has been that way for over 60 years and we believe that it will remain that way going forward.

So our real focus has been to particularly from a digital perspective it has been to drive traffic into our stores, in terms of e-com we're focused on trying to build an e-com model that is accretive for our business, but not one that cannibalizes our store business. It is certainly not lost on us that much of the retail world has been struggling with I guess the omnichannel current debt investing huge sums of money and at the end of the day seemingly just transferring sales from stores to e-com at less profit.

But we believe as retailers shut doors we're going to be there for the customers who appreciate our convenience and they are – of the products that we offer. If we're able to focus on all that and evolve our e-commerce, as I said our e-commerce business in a manner that is helpful to that process we're all for it. We'll make it into a modest investment in terms of building out our e-commerce capabilities, but again just like from a store growth standpoint doing it in a – we think in a controlled and prudent manner for our business.

David Magee

Thanks Steve and good luck here.

Steven Miller

Thank you.

Operator

And we will take our next question from Michael Baker of Deutsche Bank.

Michael Baker

So can you talk about the gap in the stores that were in competitive situations versus ones that are not perhaps call it the control group, what was the difference in those two groups in the third quarter and did that change at all in the fourth quarter with the overall comp being weaker?

Steven Miller

Yes, I mean we're not going to get overly granular in the level of detail, I mean I always say although certainly a meaningful disparity as one would expect for the benefit of the stores that were impacted by the closures. And the gap changed our results in the fourth quarter were not as strong as the third quarter so reasonably consistent.

Michael Baker

Well so, I guess I'll just ask it more directly. I guess what I'm trying to get out is the slowdown in comps by nearly 400 basis points in the fourth quarter, from the third quarter does that signal that you're picking up less market share from the stores that have of closed?

Steven Miller

Okay, I get the question, no I would say the answer to that is absolutely not, it really signifies a challenging holiday environment that just not everybody in retail alluded to and the fact that weather wasn't particularly helpful for us over the course of the fourth quarter as I mentioned it turned very favorable really the last week to 10 days of the period and has been, has continued to snow with the first quarter, but the spirit here is between the stores impacted by closures and those that are not has remained significant and helpful.

Michael Baker

Okay understood. If I could ask two more quick ones, guns and ammo, some of the back out checked it is really falling off a cliff since the elections, how big if we minus those how big a percent of sales is that business for you and have you seen any significant change in trends since the election?

Steven Miller

As we've said in the past the firearm and ammunition in the related business is significantly less than 10% of our sales. We certainly like that going by the business some pick up in that business going into the election it certainly tapered following the election and then everybody combating the tragedies in [indiscernible] in December of last year. So I mean we saw some of that as well. But to our exposure to this business is way less than many I suspect others that you may speak to.

Michael Baker

Yes okay, that makes sense. And then one more if I could, can you talk about opportunistic buys, I'm wondering though outside of opportunistic buys have you guys sort of moved up the call list from vendors as some of your competitors go away, so not necessarily with left over goods or excess, but just in terms of regular goods have you guys moved up in terms of your importance to vendors and are therefore getting better product?

Steven Miller

Well, I think the short answer to that is, yes I think as, the shakeup that occurred in our industry I mean as one would expect, we've become more significant that many of our vendors and that can only be beneficial in establishing relationship and various programs and opportunity, absolutely.

Michael Baker

Okay, understood, I appreciate the color. Thank you.

Steven Miller

Thank you.

Operator

And we will take our next question from Mark Smith of Feltl and Company.

Mark Smith

Hi guys, first off can you just walk us through how many relocations you expect this year and in those relocations are we seeing some downtime in between the closure of an old restaurant and the opening of a new one?

Steven Miller

Yes, Mark not a lot, not a lot of relocations. There is one that has already occurred this year and they marked in the fourth quarter and in the first quarter that was a store in Las Vegas area. Thinking forward I don’t know that we have to find another relocation that is likely to occur this year, it is possible.

Mark Smith

Okay and then can you give us any insight into the cadence of openings and perhaps closures?

Steven Miller

We’re more backend loaded. I think we mentioned the Q1 will allow really one relocation that occurred and then another store that's closing as part of basically a lease expiration, so that's one opened two closed. I spread the rest of the stores out the little backend loaded, but I would anticipate stores opening throughout the in any stuff with quarter one or two stores opening and may be round it up a one for the fourth quarter.

Mark Smith

Okay and then last from me, could you just give us a reminder, since like it’s been well, since we’d had a really good winter and just remind us kind of what the impact is from mix shift with good winter weather is it primarily apparelled or do you mix in some hard goods, snowboard gears installed and what impact that has on merchandized margin?

Steven Miller

There are aspects of all three of our major mechanized category that benefit from a good winter, but far in a way our apparel is the leader of the pack, probably followed by footwear when it relates to footwear and then hard goods. And from a margin standpoint it is favorable, we get the early weather as we did, but this winter season it’s very positive from a margin mix view point.

Mark Smith

Okay, great thank you.

Steven Miller

Thank you.

Operator

[Operator Instructions] And we will take our next question from Brian Nagel of Oppenheimer.

Brian Nagel

Hi, good afternoon.

Steven Miller

Hi Brian.

Brian Nagel

Congratulations on a nice quarter.

Steven Miller

Thank you.

Brian Nagel

So I had a couple of questions, first off may be just drill down a bit more on the weather commentary and particularly which you were talking about late in Q4 then into Q1, so I think the question I have there is, as I said, so you had this winter coming up that was a benefit, but I would assume it would be a negative too just given the rain and flooding in the West Coast, so may be help me understand better how they will be offsets of those two?

Steven Miller

Sure, okay well we had, I mean just to put the whole weather in prospective, and over the fourth quarter, we saw up in November was very, very warm. So we had warm weather in November that was a negative and that sort of hit and miss by more miss from trying to transition into winter over December. And then we had extraordinarily favourable winter weather that hit right around Christmas time and provided really favourable winter conditions that really have remained throughout the first quarter in January with the winter hit it's really much about winter. So I think good winter weather in January is pretty much all positive.

As we transitioned into February and I'm sure everybody has followed the news stories of the rain, that was pretty much like a good for winter but not to the point where too much water was washing out opportunities to transition into spring sports and baseball in many of our markets really get stolen [ph] and fairly as early as January, but certainly significant in February.

So much of the benefit of the winter weather was offset, in some cases more than offset in February by the crazy rains that we have had. At this point as I mentioned in the prepared remarks we're are really hoping for dry and warmer weather as we transition into spring. But what we're encouraged about is the fact that this winter season is vigorous with the snow pack that has much, much improved, higher water levels in our rivers and lakes and as I think you all are aware we have been playing the draft additions for the better part of the last four years.

So we see that as a very positive as we move even beyond spring and into summer as rivers and lakes should provide for a better atmosphere for recreational activity during these periods.

Brian Nagel

So let's Steve if you look at this so, initially I would guess with the cold winter there is an apparel component and then skiing and that transitions into water activities, is that what is, I just want to make sure I understand how the – with this weather set of how the product demand trends will transition?

Steven Miller

Well from the weather, the snow, the positive snow path and the water levels will create a better recreational platform for summer activities that revolve around lakes and winters, lakes and rivers in our marketplace. So it's not there is a little bit of gap between winter and summer water sport recreation and that all of us spring time and so forth.

But the last year, a number of lakes were really closed. I mean camp around [indiscernible] lakes with no water, so that we think represents upside really to be experienced when we get us more into getting into the Memorial Day and beyond. So that can also help with employment, California is big in agriculture and really putting many of these, many of these folks were put out of business, so had to scale way back and so we are looking for some of our communities in the Northern – Central and Northern Canada to really hopefully pickup employment as well which will help our business hopefully.

Brian Nagel

Right, that's really helpful lot of color. The second question I had on the merchandize margin, so it was improved by 68 basis points in the fourth quarter. Can you, is there a way to help me understand if you look at that improvement how much of that pertains directly to the competitive rationalization that has happened in the marketplace over the last three or four quarters versus would it just reflect the ongoing strength of your business?

Steven Miller

I don’t know that we can totally quantify it, but certainly we benefitted from opportunistic buys many of which and we all have opportunistic buys, but we've certainly had an increase in opportunistic buys that were directly related to the competitive rationalizations and these opportunistic buys rub off in more favorable margins.

But also the fact that it would be less promotional environment, particularly in our sector when a year ago looking backwards, we had two significant chains that were doing most any most any transaction that they could to try to avoid bankruptcy and that included some irrational pricing and promotion and we were in the position about a year ago, well facing that had forced our hands to perhaps be a little more responsible than might be healthy for our business is those circumstances. So I think this year we were able to be a little more rational in our own promotion and that certainly rubbed off favorably in point of sale margin.

Barry Emerson

But I was hearing that actually carry forward into the first quarter and I mean because the combination of with the higher winter content, the higher margins on the winter products that we have got some favorable sales mixed shift, we have also got an element of decreased clearance activity in the first quarter, opportunistic buys are still benefiting the period and then reduced promotions really due to the competitive rationalization is also impacting our first quarter margin.

Brian Nagel

Got it. Thanks again for all the color, that was great. Thank you.

Steven Miller

Thank you, Brian.

Operator

And ladies and gentlemen, this does conclude our question-and-answer session for today. I would like to turn the call back over to Mr. Miller.

Steven Miller

Thank you, Operator. We appreciate everyone's interest in our business today and we look forward to speaking to you in our next report. Have a great afternoon. Thank you.

Operator

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.

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