Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q3 2019 Earnings Conference Call October 29, 2019 5:00 PM ET
Steve Miller - President & CEO
Barry Emerson - CFO
Conference Call Participants
Greetings and welcome to the Big 5 Sporting Goods Third Quarter 2019 Earnings Results Conference Call. With us today are Mr. Steve Miller, President and Chief Executive Officer; and Mr. Barry Emerson, Chief Financial Officer of Big 5 Sporting Goods.
At this time, for opening remarks and introduction, I'd like to turn the conference over to Mr. Miller. Please go ahead, sir.
Thank you, operator. Good afternoon, everyone. Welcome to our 2019 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2019 and provide general updates on our business as well as provide guidance for the fourth quarter.
I will now turn the call over to Barry to read our Safe Harbor statement.
Thanks, Steve. Except for statements of historical facts, any remarks that we may make about our future expectations, plans and prospects constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results. These risks and uncertainties include those more fully described in our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statements that may be made from time to time by us or on our behalf.
Thank you, Barry. We are pleased to report third quarter earnings significantly ahead of our guidance and more than double the earnings we posted in the prior year. These results were driven by our fourth consecutive quarter of same-store sales growth exceptionally strong merchandise margins, and our successful efforts to mitigate [indiscernible] pressure.
Third quarter net sales were $266.2 million with our same-store sales increasing 0.3% for the period. Looking at the rollout of the quarter, as we noted on our last call, we had a slow start in July as we comped down in the negative low-single digit range. There were two significant headwinds for our July sales, a weak start to summer-related product sales due to a relatively cool start to summer weather, particularly in the Pacific Northwest, and significant softness in our ammunition category that resulted from the pull forward of sales into the second quarter due to regulatory changes in California that became effective at the beginning of July. Although ammunition sales remain challenged over the balance of the quarter, our overall sales picked up in August and September when we produced positive low-single digit comp benefiting from straight across a broad array of product categories. For the quarter, our apparel category comped up low-single digit, our footwear category comped slightly down, our hardgoods category comped slightly up, even with the challenging ammunition sales.
Overall, for the third quarter, we experienced a small increase in our average sales versus the prior-year period, and a slight decrease in customer transaction. As I mentioned, our merchandise margins for the quarter were a strong contributor to our earnings performance, increasing 94 basis points year-over-year. Our merchandise margins were the strongest of any third quarter since we became a publicly traded company in 2002. Multiple factors contributed to the margin gains, including the benefit of a product mix shift, reflecting reduced sales of lower margin firearms and ammunition products and increased sales of higher margin opportunistic buys. Additionally, and quite significantly, our margins benefited from a favorable response to our strategic efforts to optimize our pricing and promotion.
Now commenting on store activity. We closed one store in the third quarter, ending with 433 stores in operation. Additionally, we have one store that has been temporarily closed since July due to a fire, which we expect to be in a position to reopen early next year. During the fourth quarter, we anticipate opening two stores, including the relocation of the store that closed during the quarter. For the 2019 full year, this has us opening three stores and closing five stores including one relocation reflecting our continuous efforts to improve our store base.
Turning now to the fourth quarter. Our business continues to perform well with the year-over-year sales and merchandise margin trends accelerating from the third quarter. Although pleased with the start of the quarter and the momentum in our business, we should note that October and November, pretty much until Black Friday, are generally the lowest volume periods of our year. Thus the real key to the fourth quarter will be the holiday period which is always influenced by the overall retail consumer environment along with winter weather. As a reminder, last year, our holiday sales were relatively soft until the last week of the year when we took advantage of the arrival of very favorable winter weather in our markets, which drove extraordinary sales and ultimately pushed our same-store sales up 1.1% for the full quarter. That winter momentum continued throughout virtually the entire winter season, which resulted in a remarkable sell-through of our winter products. This enabled us to bring a fresh winter product assortment this year, that we believe will resonate with customers over the winter selling season.
To the extent that we have had early glimpses of winter weather in a few of our markets, we are very encouraged by early wind. We are also encouraged by our team's progress in mitigating the expense pressures that we are facing throughout our markets. As part of these efforts, we have been testing adjustments to our store staffing model that meets the impact of ongoing wage pressures without compromising customer service level. The positive impact of these adjustments is reflected in our favorable SG&A results. Moving forward, we will look to expand these adjustments on a broader scale as part of our ongoing focus on actively managing our costs further.
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.
Thanks, Steve. Our gross profit margin for the fiscal 2019 third quarter was 32.3% of sales versus 31% of sales in the third quarter of fiscal 2018. The expansion in gross profit margin versus the prior-year period primarily reflects our 94-basis point increase in merchandise margin and the favorable impact of distribution costs capitalized in the inventory. Our selling and administrative expense as a percentage of sales decreased to 28.9% in the fiscal 2019 third quarter from 29.2% in the third quarter of the prior year. Overall, selling and administrative expense for the quarter declined $0.8 million year-over-year providing meaningful expense leverage for the period.
Now looking at our bottom line, for the third quarter, we reported net income of $6.4 million or $0.30 per diluted share. This compares to net income for the third quarter of fiscal 2018 of $3.1 million or $0.15 per diluted share.
Briefly reviewing our 2019 year-to-date results, net sales increased to $752.4 million compared to net sales of $740.5 million during the first nine months of fiscal 2018. Same-store sales increased 1.8% during the first nine months of fiscal 2019 versus the comparable period last year. Net income for the period was $8.1 million or $0.38 per diluted share including a $0.02 per diluted share charge for the write-off of deferred tax asset. This compared to net income for the first nine months of fiscal 2018 of $1.6 million or $0.07 per diluted share, which included a $0.01 per diluted share charge for the write-off of deferred tax asset.
Operating cash flow for the 2019 year-to-date period was a positive $13.7 million compared to a negative $8.1 million in the prior-year period. This $21.7 million improvement in cash flow primarily reflects reduced funding of merchandise inventory and higher net income.
Turning to the balance sheet; our substantial improvement in cash flow contributed to reduced revolving credit borrowings year-over-year with $60.6 million in borrowings at the end of the third quarter, reflecting a reduction of $22.9 million or 27.4% compared to the same period in the prior year. This reduction in our borrowing levels will substantially strengthen our balance sheet. We continue to focus on maintaining a healthy financial position to ensure that we have the flexibility to invest appropriately in our business.
Our chain-wide inventory was $310.5 million at the end of the third quarter, which reflects a year-over-year reduction in our inventory of $4.3 million or 1.4%. Importantly, as Steve mentioned in his remarks, winter product inventories are fresh and we believe well positioned for this upcoming winter season.
Looking at our capital spending; our CapEx excluding non-cash acquisitions totaled $6.1 million for the first 39 weeks of fiscal 2019, primarily representing store-related remodeling, distribution center investments, new store investments and computer hardware and software purchases. We expect total capital expenditures for fiscal 2019 excluding non-cash acquisitions of approximately $9 million to $12 million.
For the third quarter, we paid a quarterly cash dividend of $0.05 per share, and our Board of Directors also declared a quarterly cash dividend of $0.05 per share for the fourth quarter of fiscal 2019.
Now I'll spend a minute on our guidance which I'll preface with a reminder at our fourth quarter typically represents the lowest quarterly earnings performance of our fiscal year. This is due to a number of factors including our relatively low sales volume in October and much of November before Black Friday, our normally lower merchandise margins during the promotional holiday period in the back half of the quarter compared to the rest of the year, as well as increased expenses during the holidays for store labor and advertising. That said, for the fiscal 2019 fourth quarter, we expect same-store sales to be in the positive low single digit range. And we expect to realize a loss per share in the range of $0.04 to $0.16.
Our earnings guidance for the quarter reflects an anticipated increase in merchandise margins over the prior-year period. For comparison purposes, for the fiscal 2018 fourth quarter, same-store sales increased 1.1% with a loss per share of $0.24 including $0.08 per share of charges primarily related to asset impairment and contract termination costs.
Given our fourth quarter guidance, we expect fiscal 2019 full year earnings to be in the range of $0.22 per diluted share to $0.34 per diluted share.
Steve, I'll now turn the call back to you for some closing remarks.
Thank you, Barry. Our team is working hard to build on the current momentum in our business by continuing to improve sales -- sales and margins. And it's always prudently managing our cost structure. Thank you for joining us on today's conference call. We look forward to speaking with you again after the conclusion of our fourth quarter.
End of Q&A
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.