U.S. markets close in 4 hours 17 minutes

Edited Transcript of BGFV.OQ earnings conference call or presentation 27-May-20 9:00pm GMT

Q1 2020 Big 5 Sporting Goods Corp Earnings Call

EL SEGUNDO Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Big 5 Sporting Goods Corp earnings conference call or presentation Wednesday, May 27, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Barry D. Emerson

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

* Steven G. Miller

Big 5 Sporting Goods Corporation - Chairman, President & CEO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Big 5 Sporting Goods First Quarter 2020 Earnings Results Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to our host, Steve Miller, President and CEO. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good afternoon, everyone. Welcome to our 2020 first quarter conference call. Today, we will review our financial results for the first quarter of fiscal 2020 and provide general updates on our business through the end of our May 2020 fiscal period.

I will now turn the call over to Barry to read our safe harbor statement.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Barry. The COVID-19 pandemic has certainly had an impact on our business, our operations, our employees and the communities we serve. In the face of unprecedented challenges over the last couple of months, I am pleased to report how we have managed through the uncertainties of this crisis thus far in a manner that has allowed us to remain in a strong financial position. It has been quite a journey to get to this point, and I am proud of our team's response.

Our fiscal first quarter ended on March 29. 10 days before that, on March 19, California became the first state to issue a statewide stay-at-home order. Consequently, on March 20, slightly over 1/2 of our stores were forced to close. As the situation rapidly evolved and stay-at-home orders were issued in other states, our team quickly responded. We developed and implemented new social distancing and risk-mitigation protocols in compliance with emerging health guidelines in various jurisdictions. We work with officials in the states, counties and cities in which we operate to confirm that our stores were considered essential so that we could remain open or reopen many of our stores.

Early on, we recognized and responded to the unusual shifts in consumer demand by leveraging our nimble buying and distribution network. And in the face of uncertainties about the duration and financial impacts of the pandemic, we implemented meaningful expense reduction initiatives throughout our organization and took action to enhance our financial flexibility.

There is no question that our business was clearly disrupted in March and April by the COVID pandemic, the related shelter-in-place orders and, of course, the widespread suspension of almost all outdoor recreational activities, including baseball and other team sports. However, in recent weeks, we have been pleased with how our business has transitioned.

As we moved through May, it became progressively more apparent that customers are adjusting to the current circumstances and are seeking products that enable them to keep active and healthy within the social distancing guidelines that are new to all of us. We are well positioned to help satisfy those needs with our full line product assortment that includes fitness and home and outdoor recreational products, along with the convenience that our neighborhood stores provide to our customers. Our stores are easy in, easy out, and we provide the level of customer service that is critical in today's environment.

As a result, our business is in a solid financial position, reinforced by additional capital resources, anticipated operating cash flow -- anticipated positive operating cash flow for the first 2 months of the fiscal second quarter, a disciplined expense reduction strategy and accelerating inventory turns.

Before digging deeper into the pandemic's effect on our business and further commenting on some of the trends we are seeing during the second quarter to date, I'll take a few moments to touch on our first quarter results.

First quarter net sales were $217.7 million compared to $245.3 million for the first quarter of fiscal 2019. Our same-store sales decreased 10.8% for the quarter. Although our merchandise margins were essentially flat, down 8 basis points for the quarter, prior to the COVID disruption, our merchandise margins were trending up approximately 60 basis points versus the prior year period. The favorable margin trending was reversed by a shift in product mix to lower-margin products during the early stages of the consumer response to the pandemic.

Merchandise margin management remains a key priority for us. In the first quarter, the metric was heavily influenced by these unique shifts in our product mix.

For the first quarter, customer transactions decreased in the high teens partially offset by a high single-digit increase in average sale. Much of this decrease in traffic and increase in ticket was driven by COVID-related factors, including the temporary closure of more than half of our retail store locations in response to state and local shelter orders and increased sales of higher-priced hardgoods. Pandemic aside, we experienced a challenging winter season in January and February with warm and dry conditions across many of our key markets, which impacted our same-store sales negatively. As a result, we saw pronounced softness in our apparel category, which was down more than 20% for the first quarter as well as our footwear category, which was down in the high teens for the first quarter. Partially offsetting this weakness was a mid- to high single-digit increase in our hardgoods category due in part to pandemic-related demand in certain categories, including home fitness equipment as well as firearms and ammunition.

In terms of our store activity, excluding the temporary impacts associated with the pandemic, we permanently closed 3 stores during the first quarter, ending with 431 stores in operation. For the full year, we currently anticipate permanently closing an additional 2 stores. All of these store locations were previously selected for closure prior to the COVID-19 pandemic. Additionally, we are looking forward to reopening our Pasadena, California store in the second quarter, which has been closed for an extended period for remodeling following a fire last year.

Now I'll provide some additional color on the trends we've experienced during our second quarter to date. As I mentioned, beginning on March 20, approximately 1/2 of our retail store locations were temporarily closed due to COVID-19. At the end of April, approximately 1/4 of our stores remain closed. And as of today, all of our stores that were temporarily closed due to COVID-19 are now open in some capacity with less than 10% of the open stores operating for curbside business only as required by local regulation.

Due to our product mix, which includes emergency preparedness supplies and other products enabling community members to stay at home and stay healthy, many of the jurisdictions in which we operate recognized our stores as essential. As a result, many of our stores were able to remain open or reopen following temporary closures.

We quickly implemented new operational protocols so our stores could operate in accordance with the evolving social distancing guidelines, which, in many cases, vary from jurisdiction to jurisdiction. This was a remarkable accomplishment by our team and demonstrates Big 5's commitment to serve our customers safely in times of need.

Given the significant temporary store closures, fiscal 2020 second quarter same-store sales through our May fiscal period that ended this past Sunday were down approximately 19%. However, our sales trends have been sequentially improving on a weekly basis in May as shelter orders have loosened, stores are reopened and customer demand has improved. Same-store sales for our April fiscal period declined approximately 39% versus the prior year period. Same-store sales for our May fiscal period were slightly up versus the prior year, with same-store sales increasing approximately 15% for the last 2 weeks of our May period, even though a number of stores remain closed or limited to curbside operation during much of that time.

Similar to the positive trending of our sales, our merchandise margins have also significantly improved over the course of the fiscal 2020 second quarter to date period. Despite a year-over-year decrease in April, our second quarter merchandise margins through the end of our May fiscal period that ended this past Sunday increased approximately 74 basis points on a year-over-year basis, reflecting strong margin acceleration in May, resuming the positive margin performance that we were experiencing in 2019 and early 2020 prior to COVID.

As I referenced earlier, from an operational perspective, we've been focused on developing and implementing social distancing and risk mitigation protocols that meet or exceed local, state and federal guidelines so our stores can remain operational by helping our employees and customers minimize health risk. These measures have included reducing store hours for our opened stores, limiting the number of customers in our stores at any one time, providing enhanced employee training, conducting employee health screenings, performing extra cleaning in our stores, providing hand sanitizer supplies and face coverings, and installing physical barriers between cashiers and customers.

What's less visible but certainly important to our success is the ability of our buying and distribution network to keep up with the evolving demand for inventory across our broad array of categories. We have long viewed the flexibility of our product mix and our nimble distribution capabilities as a competitive advantage that can provide localized assortments that meet demand in our diverse communities. As the pandemic set in, our team was able to rapidly assess inventory levels across our organization, determine areas of peak demand, work with vendors to adjust merchandise orders and quickly bring in new inventory and allocate inventory to our stores to maximize sales and optimize inventory turns. We've been working closely with our vendor partners to replenish key categories as quickly as possible. The customer response has been tremendous.

Taking a step back, I would like to reflect for a moment on how rapidly everything has changed over the last few months. It certainly has been a roller coaster ride, but I am pleased with how our entire organization came together to respond to these unprecedented and difficult circumstances. Our team has done an outstanding job remaining focused in an overall environment that certainly has been stressful and has required a great deal of flexibility and confidence in our organization to persevere in the face of uncertainty. I am extremely proud of our team.

Additionally, I want to personally thank our vendors, our landlords and our other partners who have worked with us to find appropriate solutions to what we all hope is just a short-term disruption.

Finally, I cannot say enough about our store and field team members who are undoubtedly essential in the truest sense of the word. Without their dedication and experience, we would not be where we are today. I'm deeply grateful for the incredible job they have done running our stores and helping our customers, which certainly has not been business as usual for the last couple of months. I could not wish for a better team to have on our side in times like these.

Now I will turn the call over to Barry who will provide more information about the first quarter and provide some commentary about the strength of our overall financial condition.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Steve. Gross profit for the fiscal 2020 first quarter decreased 14.9% to $64.6 million compared to $75.9 million in the first quarter of the prior year. Our gross profit margin was 29.6% in the first quarter versus 30.9% in the first quarter of the prior year. As Steve mentioned, merchandise margins were down just slightly compared to the prior year, decreasing 8 basis points, reflecting strong margin performance through mid-March prior to the impact of COVID-19, which was offset by a shift in sales mix to lower-margin products during the early stages of the consumer response to the pandemic later in March.

The decrease in gross profit margin largely reflects negative leverage of expenses on the lower sales base partially offset by higher cost capitalized into inventory. Our selling and administrative expense decreased $1.2 million in the fiscal 2020 first quarter, primarily due to lower print advertising costs during the period. As a percentage of net sales, selling and administrative expense increased to 32.8% versus 29.6% in the prior year, reflecting the decrease in sales.

Now looking at our bottom line. For the fiscal 2020 first quarter, we reported a net loss of $4.6 million or $0.22 per share. This was consistent with the guidance of a loss in the range of $0.15 to $0.25 per share that we provided on February 25, 2020, and subsequently withdrew on March 24, 2020, due to the uncertainties surrounding COVID-19. This compares to net income for the first quarter of fiscal 2019 of $1.7 million or $0.08 per diluted share.

At the end of the first quarter and into the second quarter, in an effort to address the uncertainty surrounding COVID-19 pandemic and to manage our cash position and preserve capital, we implemented expense reduction and capital management strategies across the organization. We have significantly reduced our store labor and made other workforce reductions to align with changes in our store operations. We have also suspended normal salary increases across the company. Additionally, we have largely suspended our advertising, which has meaningfully contributed to our overall cost savings. We have also worked with our landlords to negotiate rent abatement or deferrals and with our vendors to extend payment terms to help us navigate through this crisis. Additionally, our Board of Directors suspended the company's quarterly cash dividend until further notice.

While some of these efforts are reflected in our first quarter results, the vast majority of the expense reductions will favorably impact our results beginning in the second quarter.

Turning to the balance sheet. We've taken several proactive measures over the last 2 months to support our liquidity in response to the COVID-19 pandemic. These actions include the expansion of our credit facility, the suspension of our quarterly dividend, the scale back of our capital expenditure plans and the cost containment efforts that I mentioned previously. In order to enhance our financial flexibility during the COVID-19 pandemic, on March 27, we drew down additional amounts under our credit facility. And as of the end of the first quarter, we had total borrowings of $124.3 million and a cash balance net of checks outstanding of $44.2 million.

Additionally, on March 30, we exercised the $25 million accordion feature under our credit agreement to increase the aggregate commitments under the credit facility from $140 million to $165 million. As of May 26, we had total outstanding indebtedness under the credit facility of approximately $122 million compared to our highest borrowing level of approximately $143 million on March 31. Our net cash balance as of May 26 was approximately $58 million compared to approximately $61 million on March 31. Accordingly, as our stores have reopened, sales and merchandise margins have increased, and our expense reduction plans were implemented. Our net debt position has improved by approximately $18 million from March 31 to May 26. Assuming sales trends remain positive, we would anticipate further improvements in our debt levels in the weeks ahead.

Our merchandise inventory at the end of the first quarter of fiscal 2020 was up 6% compared to the prior year. However, our sales have been improving, and our buying and merchandising teams have adjusted certain merchandise inventory orders in an effort to optimize our assortment during this unusual period. Consequently, our inventory as of May 26 was actually down approximately 9% versus the prior year, which is remarkable given the seasonal carryover of products in our team sports categories such as baseball, which were impacted by league suspensions due to COVID-19 as well as winter products, which were impacted by the poor 2019, 2020 winter season. We have managed through seasonal inventory carryover in the past, and we will buy around this carryover and reintroduce the product in future seasons.

Looking at our capital spending. Our CapEx, excluding noncash acquisitions totaled $2.3 million in the first quarter, primarily representing investments in store-related remodeling, distribution center equipment, and computer hardware and software purchases. We have reduced our planned capital spending in response to COVID-19 and now expect capital expenditures for fiscal 2020, excluding noncash acquisitions, to be in the range of $5 million to $9 million.

From a cash flow perspective, our cash flow from operations was a negative $5.3 million in the fiscal 2020 first quarter compared to a positive $12.5 million in the prior year period. The decrease in operating cash flow primarily reflected increased funding of merchandise inventory and lower income this year. However, with our improving sales trends, expense reduction measures and lower inventories, we anticipate generating positive operating cash flow for the second quarter through our May fiscal period.

Considering the positive sales and margin trending we are currently seeing in the business, the favorable results of our asset management strategies, our declining debt levels and the steps we have taken to support our liquidity, we feel good about the overall health of our financial condition. However, because of the significant disruption from the COVID-19 pandemic on our store operations and the uncertainty related to its duration and impact on consumers, we are not providing guidance for the fiscal 2020 second quarter at this time other than the quarter-to-date information we have already discussed.

Steve, I'll now turn the call back to you for some closing remarks.

--------------------------------------------------------------------------------

Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [6]

--------------------------------------------------------------------------------

Thank you, Barry. In closing, I'd like to again extend my deepest gratitude to our team of employees for their perseverance and focus through this extremely dynamic period. So far, we have met the challenge head on and have been able to quickly stabilize our business. We are mindful that the future of this pandemic and its effects remain very uncertain. We will continue to remain dedicated to protecting the health of our employees and customers. I'm encouraged by the sales trends in recent weeks, and we will work to keep the momentum moving in the right direction.

Thank you for joining us in today's conference call. We look forward to speaking with you again after the conclusion of our second quarter.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Thank you. That concludes today's conference call. All parties may disconnect. Have a good day.