Big 5 Sporting Goods - Earnings Call - Q2 2018

Transcript

Speaker 0

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Big five Sporting Goods Second Quarter twenty eighteen Earnings 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 five 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.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to our twenty eighteen second quarter conference call. Today, we will review our financial results for the 2018 and provide general updates on our business as well as provide guidance for the third 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.

Speaker 2

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 ks, 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.

Speaker 1

Although we comped positively over the first half of the period, our sales softened significantly over the back half of the quarter, which led to results that were below our expectations. Much of the softness resulted from weak sales of camping and water sports products, which were negatively impacted by unfavorable weather conditions in our key markets around the high volume selling periods of Memorial Day, Father's Day and the start of summer. Although our traffic and top line were challenged, we delivered improved merchandise margins for the period, and we are pleased to report that positive sales trends have returned during the third quarter. We'll talk more about current trends in a moment, but first, I will comment on the second quarter. Net sales were $240,000,000 compared to $243,700,000 for the 2017.

Same store sales decreased 2.1% from the second quarter of last year, and same store sales increased 0.9% from the 2016. In terms of how the quarter rolled out, we comped up in the low single digit range in April, which included the benefit of the Easter calendar shift. However, sales were in the negative low single digit range in May and sales in June were in the negative mid single digit range. We were disappointed with the softness over the back half of the quarter given that during this period last year, many of our markets experienced campground closures due to unusually high water flows and rivers resulting from the extraordinary snowpack from the prior winter. With a return of more normal water levels this year, we believe we were well positioned to comp positively in our camping and water sports products.

Unfortunately, that opportunity was negated by unfavorable weather in our key markets during the peak summer selling periods of the second quarter. Additionally, June sales were negatively impacted by the shift of July 4 further into the third quarter this year. Overall, for the quarter, we experienced a mid single digit decrease in the number of customer transactions, a low single digit increase in our average sales versus the prior year period. From a product category standpoint, apparel was up in the low single digit range for the quarter, footwear was down low single digits, and hardgoods were down in the low mid single digit range. The softness in hardgoods reflected the weakness in camping and water sports products, along with continued softness in firearms related products.

Our merchandise margins for the quarter increased 42 basis points compared to the 2017, and merchandise margins increased by 37 basis points over the prior year period. The increase primarily reflected a sales mix shift towards certain higher margin apparel products and away from lower margin products such as firearms as well as a reduction in our promotional activity due in part to the timing shift of the fourth of July holiday. Now commenting on store activity. During the second quarter, we opened two stores, Yucidro, California and Gilroy, California, and closed two stores, including one related to a relocation. We ended the quarter with four thirty five stores in operation.

In the third quarter, we plan to open one store. Our current plans for the twenty full year have us opening approximately five stores and closing approximately three stores. Turning now to the third quarter. We are currently comping in the positive low single digit range for the third quarter to date on the strength of summer product sales and a benefit from the calendar shift of the July 4 holiday. Weather conditions in our major geographies turned favorable following the fourth of July holiday.

And with that, we saw the summer recreational categories that suffered in the back half of the second quarter respond very positively. Looking at the balance of the quarter, we believe our product assortment is well positioned for the remainder of the summer, along with the back to school and fall sports seasons. As always, we remain focused on evolving our model to adapt to the shifting retail environment. Our efforts include enhancing our digital marketing program, aligning our product mix and inventory levels with consumer trends, managing our expenses and improving the in store experience. We remain committed to delivering to our customers the optimal mix of 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 third quarter guidance.

Speaker 2

Thanks, Steve. Our gross profit margin for the fiscal twenty eighteen second quarter was 31.4% of sales versus 32.5% of sales for the 2017. The decrease in gross margin for the period primarily reflects higher distribution and occupancy expense as a percentage of sales, partially offset by the 42 basis point improvement in merchandise margins that Steve mentioned. Our selling and administrative expense as a percentage of sales was 31.1% in the second quarter versus 30.4% in the 2017. Overall, SG and A expense increased $500,000 year over year due primarily to a higher employee labor and benefit related expense, partially offset by lower advertising expense.

Now looking at our bottom line. For the second quarter, we reported a net loss of $200,000 or $01 per share. This compares to net income in the 2017 of $2,800,000 or $0.13 per diluted share. Briefly reviewing our twenty eighteen first half results, net sales were $474,100,000 compared to net sales of $496,300,000 during the first six months of fiscal twenty seventeen. Same store sales decreased 4.9 during the 2018 versus the comparable period last year.

Net loss for the period was $1,600,000 or $07 per share, including $01 per share of charges for the write off of deferred tax assets related to share based compensation. This compares to net income of $8,100,000 or $0.37 per diluted share in the first half of last year. Turning to the balance sheet. Our chain wide inventory was $345,600,000 at the end of the second quarter compared to $328,700,000 last year. On a per store basis, merchandise inventory was up 3.3% versus the prior year.

The increase primarily reflected the carryover of winter related products following the unfavorable warm and dry winter selling season, which we have discussed on prior calls. As we have done successfully in prior years with unfavorable winter weather, we plan to reintroduce this winter product carryover next season, and we see little markdown risk associated with it. We would expect to rightsize our merchandise inventory levels as we buy around this carryover product for the upcoming winter season. Looking at our capital spending. Our CapEx, excluding noncash acquisitions, totaled $5,200,000 for the 2018, primarily representing investments in new stores and store related remodeling, IT systems and our distribution center.

We currently expect capital expenditures for fiscal twenty eighteen, excluding noncash acquisitions, of approximately 14,000,000 to $18,000,000 This reflects continued investment in new stores, store related remodeling, our distribution center and IT systems as well as the purchase of a property adjacent to our corporate headquarters, a portion of which we currently use to support our headquarters operations. From a cash flow perspective, our operating cash flow was a negative $21,900,000 for the 2018 compared to a negative $19,400,000 last year. The decrease in operating cash flow primarily reflects the decrease in income compared to the same period last year. Our long term revolving credit borrowings at the end of the second quarter were $90,700,000 which compared to borrowings of $47,900,000 at the end of the second quarter last year. Our higher debt compared to the prior year in part reflects our higher inventory levels as a result of the lower than anticipated demand for winter related products following the unseasonably warm winter in our Western markets.

Now I'll spend a minute on our guidance. For the fiscal twenty eighteen third quarter, we expect same store sales to be in the flat to positive low single digit range and earnings per diluted share to be in the range of $0.14 to $0.24 In the 2017, same store sales decreased to 2.9%, and earnings per diluted share were $0.28 Third quarter guidance reflects a small sales benefit as a result of the calendar shift of the July 4 holiday further into the third quarter, partially offset by lower merchandise margin also related to promotions for the holiday. Compared to the prior year, third quarter guidance also reflects higher selling and administrative expense, primarily from labor and benefit related costs, along with higher distribution and store occupancy expense. Operator, we are now ready to turn the call back to you for questions and answers.

Speaker 0

Thank you. We'll hear from Mike Baker with Deutsche Bank.

Speaker 3

I was just two questions. One, how much of the rebound in up to low single digits in July is because of the holiday shift? You said there was a small sales shift in the full quarter guidance, but I'm just wondering how much of that low single digit increase in July is because of that shift? And then second question, can you discuss the competitive environment at all? Are you seeing what are seeing

Anyone being more or less promotional? Or I guess, vendors, how are they acting? Are they being more competitive with their retail customers, etcetera?

Speaker 1

Okay. In terms of your first question, we certainly received a benefit due to the calendar shift. Irrespective of benefit, if we remove what we believe to be the benefit, we would still be comping in the low single digit range for the period today. As far as the competitive environment, I think it's in terms of new stores, I think we're at a point now where we feel good looking forward that we're going to be cycling more competitive openings than we would be facing on the surface of it. In terms of the marketplace, I think it's been reasonably promotional in our sector, which may or may not be reflective of some general softness out there.

Speaker 3

Well, guess to follow-up on that, can you characterize inventory levels? We know your inventory levels, obviously, but what are you seeing from competitors? It sounds like you are seeing it be a little bit more promotional. Is that, in your mind, a reflection of higher inventories from competitors?

Speaker 1

Well, I mean, I'm not sure that I can speak definitively to competitive inventory levels. Would be a pretty granular detail to speak to. I don't know if I see wholesale differences in inventory levels out there. Thank you, Michael.

Speaker 0

We'll go to David Schick with Consumer Edge Research. And Mr. Your line is open. Please check your mute button.

Speaker 4

Hi, there. This is Dave Novak on for Dave Schick. Thanks for taking our questions. Can you give more color on how firearms performed during the quarter? Obviously, you mentioned the business was soft.

Just kind of looking to see what your outlook on that business is in the back half. It seems like the compares are pretty easy. Just trying to see if you're seeing any improvement there in 3Q or anticipating any improvement in the back half.

Speaker 1

Yes. We're not going to speak to trends within for Q3. We think the category is still soft, feels soft to us It had a sort of a strong run for eight plus years. It's been trending softly over the last couple of years. I'm not sure we've still found the bottom.

Certainly, the impact to our business is significantly less than what it was over the past years. And as you suggested, the comps become softer, more favorable to us over the back half of the year, but we're still looking to establish a bottom for the category.

Speaker 4

Got it. And then just two quick follow ups. Can you talk about the performance of e commerce during the quarter? And are you seeing any impact so far from wildfires in your California markets? Yes.

Speaker 2

I mean our e commerce business is growing steadily. We're pleased with the growth of e commerce. Again, goal is to grow our e commerce business profitably. We still think that the key for us is the convenience of our brick and mortar stores. We continue to invest in the e commerce business.

We're adding more products, the more functionality of the website. And again, as I mentioned, it's growing well but off a relatively small base. So we don't our e commerce business wasn't material to our overall operating results for 2017, and we don't see it being material to our results for 2018. We hope that we'll be able to, again, just continue to provide a reasonable sales channel to our customers.

Speaker 1

All right. And the second half of your question about the wildfires. First and foremost, our thoughts go out to those that are impacted in the affected areas. We do have we operate several stores that are clearly in the areas of the fires, and it felt some definitely some impact to the to those stores, physically in terms of the store locations, but just in terms of traffic flows. Some of our folks have been impacted in their abilities and their own issues with their own residences, and we have had to shorten hours in certain areas just given the local conditions.

So we certainly monitor that and hope that the situation improves going forward.

Speaker 2

And

Speaker 0

now I'd like to turn the floor back over to Mr. Miller for any additional or closing remarks.

Speaker 1

All right. We thank you for your interest, and I look forward to speaking to you at our next call. Have a great afternoon.

Speaker 0

Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.