Big 5 Sporting Goods - Earnings Call - Q2 2019

Transcript

Speaker 0

Ladies and gentlemen, welcome to the Big five Sporting Goods Second Quarter twenty nineteen 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 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 nineteen second quarter conference call. Today, we will review our financial results for the 2019 and provide general updates on our business as well as provide guidance for the third quarter. 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.

Speaker 1

Thank you, Barry. We are pleased to report second quarter twenty nineteen results that reflect our third consecutive quarter of positive same store sales along with earnings that exceeded our guidance for the period. With our sales execution over the course of the quarter, combined with our continued focus on managing expenses and inventory, we delivered year over year improvements in earnings, operating cash flow, inventory levels and revolving credit borrowings and further strengthened our balance sheet. Second quarter net sales were $241,000,000 compared to February in the prior year period. Same store sales increased 0.7% during the quarter.

Sales comparisons year over year reflect a small negative impact on the 2019 as a result of the calendar shift of the Easter holiday when our stores were closed. Looking at the rollout of the quarter, as previously reported, we had a slow start in April with comp sales down in the low single digit range, primarily due to the negative impact of the Easter calendar shift. In May, although we comped positively in the low single digit range for the first three weeks of the month, sales for the high volume week leading up to the Memorial Day holiday were soft, primarily because summer related products were adversely impacted by significantly cooler than normal temperatures across virtually our entire geography. While cooler weather remained a headwind over most of June, we were able to comp positively in the mid single digits for the month, mainly on the strength of strong demand for ammunition in California in advance of new legislation that took effect on July 1. For the quarter, our hardgoods category was up low mid single digits on a same store basis, benefiting from the strong ammunition sales that I just mentioned.

Our apparel category was down low single digits, impacted by soft licensed apparel sales compared against the strength we saw last year related to the Las Vegas Golden Knights, Golden State Warriors and Men's World Cup Soccer. Excluding licensed apparel, our apparel category comped positively for the quarter. Our footwear category was down in the low mid single digit range for the period. Although this was our softest category for the second quarter, footwear sales trends improved over the course of the period and that improvement has continued into the third quarter. Overall, for the second quarter, we experienced a slight decrease in customer transactions and a modest increase in our average sale versus the prior year period.

Our merchandise margins for the quarter were down 80 basis points compared to the second quarter of last year when margins increased 42 basis points. The margin contraction in the second quarter was primarily a function of a shift in our sales mix during the period, reflecting decreased sales of certain higher margin warm weather seasonal products and increased sales of lower margin ammunition products. Now commenting on store activity. We opened one store in the second quarter in Grand Junction, Colorado ending with four thirty four stores in operation. Our current plan for the 2019 full year has of opening approximately four stores and closing approximately five stores reflecting our continuous efforts to optimize our store base.

Turning now to the third quarter. Our quarter to date sales are running down low single digits versus the prior year. The stronger sales of ammunition in California in June pulled forward some sales in that category, which has impacted our July sales. Additionally,

Speaker 2

we

Speaker 1

were facing more challenging comparisons in July as it was our strongest month of the quarter last year, benefiting from very favorable summer weather. Compared to last year, summer weather this year has been relatively slow to arrive, particularly in the Pacific Northwest. Over the remainder of the quarter, our sales comparisons become more favorable given the sales last year during the period impacted by wildfires as well as generally unfavorable weather in many of our market areas. A strong positive for the start of our third quarter is that our July merchandise margins are running up nicely from the prior year period. A key strength of our business model is our ability to position our product assortments to satisfy seasonal consumer demand through the convenience of our store format.

Our strong sales last winter season clearly illustrated this strategic advantage. With much of the summer season still ahead of us, we believe our promotional plans and inventories are well positioned to drive positive sales over the remainder of the quarter. In addition to capturing seasonal demand, we are focused on continuously fine tuning our merchandise assortment to reflect product trends as well as aggressively pursuing opportunistic buys. We are pleased that these efforts are generating positive response across a broad array of product categories throughout our store. We are also very encouraged by the steps our team is taking to mitigate the cost pressures that our business is facing, which are reflected in our favorable SG and A results.

We will continue to focus on actively managing the cost structure, inventory and other assets of our business to ensure that we maintain a healthy balance sheet, which should provide us with the flexibility to capitalize on opportunities as they arise. Now I will turn the call over to Barry, who will provide more information about the quarter as well as speak for our balance sheet, cash flows and provide third quarter guidance.

Speaker 2

Thanks, Steve. Our gross profit margin for the fiscal twenty nineteen second quarter was 30.3% of sales versus 31.4% of sales for the 2018. The reduction in gross profit margin largely reflects an 80 basis point contraction in merchandise margins, primarily due to the shift in sales mix that Steve discussed, as well as lower distribution costs capitalized in new inventory. Our selling and administrative expense as a percentage of sales decreased to 30% in the fiscal twenty nineteen second quarter from 31.1% in the second quarter of the prior year. Overall selling and administrative expense for the quarter declined $2,500,000 from the prior year, primarily due to a favorable settlement related to the termination of a software contract along with lower print advertising expense and employee benefit related costs, partially offset by higher employee labor expense.

Now looking at our bottom line, for the second quarter, we reported net income of 28,000 or $0.00 0 per diluted share, including a $03 per diluted share net benefit related to the favorable settlement of a software contract termination that I just mentioned. This compared to a net loss for the 2018 of $200,000 or $01 per share. Briefly reviewing our twenty nineteen first half results, net sales were $486,300,000 compared to net sales of $474,100,000 during the first six months of fiscal twenty eighteen. Same store sales increased 2.7% during the 2019 versus the comparable period last year. Net income for the period was $1,700,000 or $08 per diluted share, including a $03 per diluted share net benefit related to the favorable settlement of a software contract termination and a $02 per diluted share charge for the write off of deferred tax assets.

This compared to a net loss for the first twenty six weeks of fiscal twenty eighteen of $1,600,000 or zero seven dollars per diluted share, including a $01 per diluted share charge for the write off of deferred tax assets. Turning to the balance sheet. Our team continues to do an outstanding job managing inventory levels. Chain wide inventory was $318,600,000 at the end of the second quarter, which reflected a year over year reduction in our inventory of $27,000,000 or 7.5% on a per store basis. Our revolving credit borrowings totaled $62,400,000 at the end of the 2019, reflecting a reduction of $28,200,000 or 31% compared to the same period in the prior year.

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. Looking at our capital spending, our CapEx excluding non cash acquisitions totaled $4,000,000 for the 2019, primarily representing store related remodeling, distribution center investments and computer hardware and software purchases. We expect total capital expenditures for fiscal twenty nineteen excluding non cash acquisition of approximately 9,000,000 to $13,000,000 From a cash flow perspective, our cash flow from operations was a positive $5,600,000 in the 2019 compared to a negative twenty one point nine million dollars in the prior year period. This $27,500,000 year over year improvement in operating cash flow in the 2019 reflects our working capital improvements in inventory and accounts payable as well as higher net income. For the second quarter, we paid a quarterly cash dividend of $05 per share and our Board of Directors also declared a quarterly cash dividend of $05 per share for the 2019.

Now I'll spend a minute on our guidance. For the fiscal twenty nineteen 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 $0.15 to $0.23 Our fiscal twenty nineteen third quarter guidance reflects an anticipated increase in merchandise margins over the prior year period. For comparison purposes, for the fiscal twenty eighteen third quarter, same store sales decreased 2% and earnings per diluted share were $0.15

Speaker 1

Steve, I'll now turn the call back to you for some closing remarks. Thank you, Barry. Our team is working hard to continue the current momentum in our business. Thank you for joining us on today's call. We look forward to speaking with you again after the conclusion of our third quarter.

Speaker 0

This concludes today's call. Thank you for your participation today.