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Edited Transcript of BGFV earnings conference call or presentation 30-Apr-19 9:00pm GMT

Q1 2019 Big 5 Sporting Goods Corp Earnings Call

EL SEGUNDO May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Big 5 Sporting Goods Corp earnings conference call or presentation Tuesday, April 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry D. Emerson

Big 5 Sporting Goods Corporation - Senior VP, CFO & Treasurer

* Steven G. Miller

Big 5 Sporting Goods Corporation - Chairman, President & CEO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Big 5 Sporting Goods First Quarter 2019 Earnings Results Conference Call. Today's call is being recorded. 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 introductions, I'd like to turn the conference over to Mr. Miller. Please go ahead, sir.

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Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [2]

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Thank you, operator. Good afternoon, everyone. Welcome to our 2019 first quarter conference call. Today, we will review our financial results for the first quarter of fiscal 2019, provide general updates on our business as well as provide guidance for the second 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.

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Barry D. Emerson, Big 5 Sporting Goods Corporation - Senior VP, CFO & Treasurer [3]

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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.

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Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [4]

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Thank you, Barry. We are pleased to report a very strong first quarter for our business. On the strength of our 4.6% same-store sales increase, we meaningfully increased earnings and cash flow and substantially strengthened our balance sheet. Our inventory levels at the end of the quarter were down 8.1% versus the prior year, which contributed to our borrowing levels decreasing by 34% year-over-year.

The quarter got off to a phenomenal start. We comped up in the high teens in January by capitalizing on favorable weather trends with our winter-related product sales up in the very high double digits. In February, we comped up in the positive mid-single digit. While the winter weather and resulting winter product sales continued in an extraordinary manner, much of these gains in February were offset by weakness in baseball and other outdoor product categories, which were negatively impacted by the same weather conditions that grow winter product sales.

The strong winter conditions continued into March, but by that point in the quarter, we had largely sold down our winter inventory and the winter conditions served as a headwind to our spring assortment. Thus, March was an overall tough month for us, comping down to the low single digit even with the positive impact of a calendar shift associated with the Easter holiday. The combination of the strong winter-related sales over the first 2 months of the quarter and the softness in spring product sales had considerable influence in our sales mix from a product category standpoint.

For the quarter, footwear increased in the low single digit, hardgoods decreased in the low -- decreased in the low single digit, and apparel increased in the high teens. Apparel was certainly the category most impacted by the winter conditions as it ranged from being our strongest-performing category in January and February to being down low double digit in March.

Our team does an outstanding job of merchandising, promoting and operating our stores to take advantage of demand through these types of seasonal fluctuations that can create strong positive demand. As a result, we achieved an excellent sell-through of our winter merchandise at favorable margins.

Overall for the first quarter, we experienced a mid-single-digit increase in customer transaction and a modest decrease in our average sales versus the prior year period. Our merchandise margins for the quarter were essentially flat compared to the first quarter of fiscal 2018, reflecting strong early quarter high margin winter sales, which were partially offset by softness of high margin spring products.

Now commenting on store activity. We closed 3 stores in the first quarter, ending with a total of 433 stores in operation. In the second quarter, we plan to open 1 new store. Our current plan for the 2019 full year has us opening approximately 5 stores and closing approximately 4 stores.

Turning now to the second quarter. Our quarter-to-date sales were down in the low single-digit range, primarily reflecting 1 less sales day in the period to date as a result of the Easter calendar shift. Given the impact of the calendar shift, along with the weather volatility that we've experienced, it's difficult to get a good read on the underlying run rate of our business. That said, our sense is that the overall consumer environment in our market is a little soft right now.

However, the key to our second quarter always revolves around the high-volume periods throughout the Memorial Day, Father's Day and the start of summer. Comparison should become more favorable for these peak periods, as last year's sales were negatively impacted by adverse colder weather conditions over most of our market areas. Thus, we believe there is upside for us to drive sales through the balance of the quarter. We feel well positioned from a merchandising assortment and promotion standpoint to capitalize on seasonal demand.

As we look ahead and beyond the current quarter, we remain focused on making ongoing enhancements to our product offering, service model and promotional efforts to help us navigate through this dynamic retail environment. From a product standpoint, we are emphasizing and accelerating the penetration of product categories that differentiate us from competition and reinforce the strength of our model.

From a marketing standpoint, we are adjusting our advertising cadence and structure to allow more flexibility to diversify our marketing and messaging across our print and digital platform. This includes continuing to shift a greater proportion of our marketing budget from print to digital program and testing a number of digital marketing channels. We believe we are well served by our continuing focus of actively managing the cost structure of our business to ensure that we maintain a healthy balance sheet, which provides us the flexibility to capitalize on the opportunities as they arise.

Certainly, there's no question that we are operating in a challenging retail environment. As the competitive landscape continues to rationalize, with the ongoing contraction of many retailers representing both direct and indirect competition, we believe that our ability to manage through sector challenges as we've done throughout our more than 60-year history will allow us to emerge from the sector disruption in a manner that will enable us to drive top and bottom line performance.

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 second quarter guidance.

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Barry D. Emerson, Big 5 Sporting Goods Corporation - Senior VP, CFO & Treasurer [5]

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Thanks, Steve. Our gross profit margin for the fiscal 2019 first quarter was 30.9% of sales versus 31.1% of sales for the first quarter of fiscal 2018. Merchandise margins edged up 1 basis point for the quarter compared to the prior year period. The decrease in gross profit margin largely reflects lower distribution costs capitalized into inventory because of reduced inventory levels, which were offset by reduced occupancy and warehouse expense as a percentage of net sales.

Our selling and administrative expense as a percentage of net sales decreased to 29.6% in the fiscal 2019 first quarter from 31.4% in the first quarter of the prior year. Overall, selling and administrative expense for the quarter declined $0.9 million from the prior year primarily due to lower print advertising and employee benefit-related expenses, partially offset by higher store labor expense reflecting minimum wage increases as well as higher payment card transaction fees associated with the higher sales volume.

Now looking at our bottom line. For the first quarter, we reported net income of $1.7 million or $0.08 per diluted share, including an after-tax charge of $0.3 million or $0.02 per diluted share for the write-off of deferred tax assets related to share-based compensation. For the first quarter of fiscal 2018, net loss was $1.3 million or $0.06 per share and was impacted by a charge for the write-off of deferred tax assets of $0.01 per share.

Turning to our balance sheet. Our chain-wide inventory was $296.2 million at the end of the first quarter, down $25.2 million from the first quarter of 2018 or 7.7% on a per-store basis. This significant inventory reduction was driven by the strong winter product sales that Steve discussed.

Our revolving credit borrowings totaled $45.4 million at the end of the first quarter of 2019, reflecting a reduction of $23.5 million or 34% compared to the same period in the prior year. This also reflects a reduction of $19.6 million or 30% compared to the end of fiscal 2018 when our borrowings totaled $65 million compared to $45 million at the end of fiscal 2017.

In other words, as a result of our strong sales performance and year-over-year reduction in inventory levels, over the course of the first quarter, our borrowings moved from being $20 million above the prior year at year-end to $23.5 million below the prior year at the end of the first quarter.

These reductions in our borrowing and inventory levels have substantially strengthened our balance sheet as we continue to focus on maintaining a healthy financial condition and the flexibility to invest appropriately in our business.

We should point out that in the fiscal 2019 first quarter, we implemented the new lease accounting standard -- accounting standards update 842, which generally requires all operating leases to be recorded on the balance sheet. Reflecting our 433 leased store locations and other leases, we recorded an operating lease liability of $266.2 million and a right-of-use asset of $254.6 million as of March 31, 2019.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $1.5 million for the first quarter of fiscal 2019 primarily representing store-related remodeling, distribution center investments and computer hardware and software purchases. We expect total capital expenditures for fiscal 2019, excluding noncash acquisitions, of approximately $11 million to $15 million.

From a cash flow perspective, our cash flow from operations was a positive $12.5 million in the first quarter of fiscal 2019 compared to a negative $8.9 million in the prior year period. The healthy $21.4 million increase in operating cash flow primarily reflects working capital improvements in inventory and accounts payable as well as higher net income.

For the first 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 second quarter of 2019.

Now I'll spend a minute on our guidance. For the fiscal 2019 second quarter, we expect same-store sales to be in the range of negative low single digit to positive low single digits and loss per share to be in the range of $0.04 to $0.12. This compares to a same-store sales decrease of 2.1% and a loss per share of $0.01 in the second quarter of fiscal 2018.

Fiscal 2019 second quarter guidance reflects the combined negative impact of calendar shifts associated with the Easter holiday, during which the company stores are closed, out of the first quarter of fiscal 2018 and into the second quarter of fiscal 2019 and the 4th of July holiday, which moved 1 day further into the third quarter this year.

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

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Operator [6]

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(Operator Instructions) That will conclude today's question-and-answer session. At this time, I'd like to the conference over to Mr. Miller for any additional or closing remarks.

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Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [7]

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Okay. Thank you, operator. We look forward to speaking to you on our next call. Have a great afternoon.

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Operator [8]

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That will conclude today's conference call. Thank you for your participation. You may now disconnect.