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Edited Transcript of BGFV earnings conference call or presentation 26-Feb-19 10:00pm GMT

Q4 2018 Big 5 Sporting Goods Corp Earnings Call

EL SEGUNDO Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Big 5 Sporting Goods Corp earnings conference call or presentation Tuesday, February 26, 2019 at 10:00:00pm 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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Conference Call Participants

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* David Adam Schick

Consumer Edge Research, LLC - Senior Retail Analyst, Managing Partner & Chief Strategist

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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 Fourth Quarter 2018 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 2018 fourth quarter conference call. Today, we will review our financial results for the fourth quarter of fiscal 2018 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.

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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. As we reported back in mid-January, our sales at the end of December and beginning of January benefited from favorable seasonal winter weather in our markets, and I'm pleased to report that this momentum has continued to provide us with a very strong start to the year. Our Torrance team has done an outstanding job of merchandising and operating our stores to take advantage of the opportunity the winter weather conditions have presented. Our success this winter illustrates our model's ability to serve our customers' sporting goods needs by offering a unique combination of product selection, value and convenience, particularly during key periods with seasonal demand.

Before we get into our outlook for the first quarter, I'll first touch on the fourth quarter performance. Net sales for the fourth quarter increased to $247.1 million from $242.9 million for the fourth quarter of fiscal 2017. Same-store sales increased 1.1% during the quarter, and we saw improvement in trending over each month of the period. Same-store sales decreased in the low single-digit range in each of October and November and then increased in the mid-single-digit range for December on strength of outstanding winter product sales later in the month. Overall, for the quarter, we achieved a slight increase in both customer transactions and average sale.

From a product category standpoint, apparel performed very well, up in the high single-digit range for the fourth quarter, driven by seasonal outerwear. Our footwear category was up in the positive low single-digit range, and our hardgoods category was down low single digits. We continued to experience softness in firearms-related products during the period.

Our merchandise margins for the quarter decreased 11 basis points compared to the fourth quarter of fiscal 2017.

Now commenting on store activity. During the fourth quarter, we opened 1 store in Sacramento, California and closed 1 store in Paradise, California, unfortunately lost as a result of the tragic Northern California wildfires. We ended the quarter with 436 stores in operation. During the first quarter, we have closed 3 stores and will not open any new stores. For the full year, we currently anticipate opening approximately 5 stores and closing approximately 4.

Turning now to current trends in the first quarter. As I mentioned at the outset, the momentum in our winter business has continued into February as we've experienced favorable winter weather conditions throughout our market. We are currently comping up in the low double-digit range for the quarter to date. We have experienced a tremendous sell-through of our winter inventory, including the inventory that we carried over from last year. As a reminder, in the first quarter of 2018, weather conditions were exceptionally unfavorable during January and February. Winter finally arrived in March, driving extremely strong, late-season winter sales last year, which will be a headwind to sales comparisons for the balance of the quarter this year. That said, we believe we have an opportunity to largely offset that anticipated negative impact with solid sales of spring-related products, particularly in our baseball category. The key though, is that we need to see a transition from the strong winter weather conditions that we have been experiencing to more normal, spring-like conditions that would be more conducive to getting kids out in the field playing ball.

Looking more broadly to the future, we remain focused on a number of initiatives that should benefit us as we navigate the dynamic retail environment. We are targeting product categories, which we believe have the greatest opportunities for growth. In some areas this includes narrowing the overall assortment, while increasing the depth of certain key selling SKUs to better position ourselves to fully meet customer demand. We also continue to aggressively pursue opportunistic buys, which drive traffic and profitable sales and reinforce our value proposition to help differentiate us in the marketplace.

We continue to be encouraged by the response to our digital marketing program, expect a further benefit from the expansion of our enhanced customer relationship management capabilities. Along with our merchandising and marketing networks, we remain very focused at actively managing the cost structure across our business, including strategies that we have implemented in an effort to mitigate the heavy wage pressures that are impacting us along with most retailers. Now I will turn the call over to Barry who will provide more information about the quarter as well as speak to some of the positive developments with our balance sheet and cash flows and provide first 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 2018 fourth quarter was 28.5% of sales versus 30% of sales for the fourth quarter of fiscal 2017. The decrease in gross profit margin largely reflects lower distribution costs capitalized into inventory as a result of reduced inventory levels. Additionally, we experienced a slight reduction in merchandise margins, as Steve mentioned earlier. Our selling and administrative expense as a percentage of sales was 30.9% in the fourth quarter versus 33.3% in the fourth quarter of fiscal 2017.

Overall selling and administrative expense for the quarter decreased $4.5 million from the prior year, primarily due to asset impairment charges in the prior year, totaling $5 million compared to asset impairment and contract termination charges totaling $1.9 million in 2018. Absent these charges in both periods, the company achieved modest expense leverage in the fourth quarter of 2018, due in part to a $1.6 million reduction in advertising expense.

Now looking at our bottom line. For the fourth quarter, we reported a net loss of $5.1 million or $0.24 per share. Including in this figure are after-tax charges of $1.4 million for asset impairment and contract termination cost and $0.3 million for a deferred tax asset valuation allowance for certain income tax credits for $0.08 per share. Excluding these charges, fourth quarter loss per share was $0.16, which was at the midpoint of the updated range we provided in January. This compares to a net loss in the fourth quarter of fiscal 2017 of $13 million or $0.62 per share, which included after-tax charges totaling $10.9 million or $0.52 per share, primarily related to the revaluation of deferred tax asset as a result of the new Tax Act and goodwill impairment.

Briefly reviewing our full year 2018 results, net sales were $987.6 million compared to net sales of $1.01 billion during the full year of fiscal 2017. Same-store sales decreased to 2.7% in fiscal 2018, in part due to lower sales of cold weather winter products in the first quarter of 2018 resulting from unfavorable warm and dry weather conditions in most of our major markets. Net loss for the full year was $3.5 million or $0.17 per share including $0.09 per share related to the after-tax charges in the fourth quarter noted previously as well as a $0.2 million deferred tax asset write-off related to stock compensation in the first quarter. This compares to fiscal 2017 net income of $1.1 million or $0.05 per diluted share, reflecting after-tax charges totaling $10.9 million or $0.52 per diluted share, as I previously discussed.

Turning to the balance sheet, our chainwide inventory was $294.9 million at the end of fiscal 2018 compared to $313.9 million at the end of fiscal 2017, reflecting a year-over-year decrease of $19 million, which approximates the winter-related product carryover from last year due to unfavorable warm and dry weather.

On a per-store basis, merchandise inventory was down 7.3% versus the prior year. As discussed on prior calls, we reduced our inventory purchases for this season to adjust for the winter-related product carryover from last year.

Looking at our capital spending, our CapEx, excluding noncash acquisitions, totaled $15.5 million for fiscal 2018, primarily representing investments in store-related remodeling and new stores, IT systems, our distribution center and the purchase of a parcel of land with an existing building adjacent to our corporate headquarters. We currently expect capital expenditures for fiscal 2019, excluding noncash acquisitions, of approximately $12 million to $16 million. This reflects continued investment in store-related remodeling, new stores, our distribution center and IT systems.

From a cash flow perspective, our cash flow from operations was a positive $24.5 million in fiscal 2018 compared to a negative $4.4 million in the prior year period. The increase in operating cash flow primarily reflects the decreased spending for merchandised inventory and prepaid expense largely related to rent. For the fourth quarter, we paid our 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 first quarter of 2019. Our long-term revolving credit borrowings totaled $83.5 million at the end of the third quarter of 2018 and totaled $65 million at the end of the year compared to $45 million at the end of the prior year, and we have continued to reduce debt levels during the current period. With our anticipated sales performance and year-over-year reduction in inventory levels for the first quarter, we expect quarter-end debt levels to decline to below $50 million compared to $68.9 million at the end of the first quarter last year. In other words, we project that over the course of the current quarter, our debt will move from being $20 million above the prior year at year-end to roughly $20 million below the prior year at the end of the first quarter, which substantially strengthens our balance sheet.

Now let's spend a minute on our guidance. For the fiscal 2019 first quarter, we expect same-store sales to increase in the mid-single-digit range, and we expect earnings per share in the range of $0.04 to $0.10. First quarter guidance reflects a small anticipated benefit to sales as a result of the calendar shift of Easter holiday when our stores are closed out of the first quarter of fiscal 2018 and into the second quarter of fiscal 2019. Operator, we're now ready to turn the call back to you for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from David Schick with Consumer Edge Research.

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David Adam Schick, Consumer Edge Research, LLC - Senior Retail Analyst, Managing Partner & Chief Strategist [2]

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A couple of questions. On baseball that you mentioned optimism, is that an expansion or new lines for you? Or is that some product cycle stuff you're looking for out of baseball?

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

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I'm not sure what you mean by -- I'm not sure I understand the question, Dave.

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David Adam Schick, Consumer Edge Research, LLC - Senior Retail Analyst, Managing Partner & Chief Strategist [4]

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So is it stuff you're bringing in net new footage to baseball? Or is there something in the baseball introductions in the industry this year that has you optimistic about baseball impacting your business?

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

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Yes. Well what we -- what I tried to imply in prepared remarks is that the -- a key for the balance of the quarter is the performance of our baseball business. Last year, we had a very difficult January, February due to lack of winter and then in March, we had a lot of winter business, which will be a headwind to our current quarter as we can't possibly comp the sales last year if for no other reason that our given the strong sell-through of winter products based on the strength of our winter business in January and February, our winter inventory is rather depleted. So the key for us is that our baseball business, which has been soft for the first 2 months given the significant winter weather that we've had, and there's been rain out over rain out in a number of weeks, though has yet to -- although running behind, they haven't had tryouts, so trying to just get their [space at] rolling. So the key for us to offset the strength of our winter businesses in March is that we pick it up in our baseball business, which to a large degree, is going to be dependent on getting more normalized weather patterns moving from the winter that we've been experiencing to warmer and drier spring-like conditions. Now that was my reference for baseball.

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David Adam Schick, Consumer Edge Research, LLC - Senior Retail Analyst, Managing Partner & Chief Strategist [6]

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That makes -- okay. So you're talking about whether -- and it feels like my chance to insert my Manny Machado -- keep my Manny Machado streak alive by saying everybody maybe was waiting for Machado. Okay. So we can move to a more -- second question then. Having mentioned Manny. The margin of this depleted winter -- because it's going so well early, you did -- you mentioned you didn't have to buy winter and are you going to have this more difficult -- how should we think about that carried over inventory? And its impact on the gross margin line for first quarter?

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

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Well, we sold through that carried over inventory with a very little compromise to margins. So the winter business is barely positive to margins. That said, the baseball business that has been soft for the start of the quarter is also a very strong margin-generating business. So I would put that all together and call it relatively neutral.

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David Adam Schick, Consumer Edge Research, LLC - Senior Retail Analyst, Managing Partner & Chief Strategist [8]

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Okay. Last question is, I know you've been moving to more digital -- you mentioned it briefly you have -- been digital engagement on the marketing side. How should we think about the net effect of those changes you're making in calendar '19 and '20? Should net advertising come down? Or is it more neutral?

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Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [9]

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We would anticipate that much like what is the current in the last several years, we will continue to bring down our total advertising expense. We continue to reduce print advertising and then to some degree simply becomes there's less circulation to buy. And we replaced a portion of that with a digital advertising, but the economics of the digital are somewhat more favorable. So all things being equal at this point in time, we would continue that trending to remain.

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Operator [10]

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

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Steven G. Miller, Big 5 Sporting Goods Corporation - Chairman, President & CEO [11]

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All right. Thank you, operator. We appreciate your interest in Big 5 and look forward to speaking with you on our next call. Have a great afternoon.

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Operator [12]

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