Big 5 Sporting Goods - Earnings Call - Q2 2020

Transcript

Speaker 0

Good day, ladies and gentlemen. Welcome to the Big five Sporting Goods Second Quarter twenty twenty Earnings Results Conference Call. Today's call is being recorded. With us today are Mr. Mr.

Steve Miller, President and Chief Executive Officer 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 twenty second quarter conference call. Today, we will review our financial results for the 2020 as well as provide an outlook 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 an exceptional second quarter earnings performance along with an outstanding start to our third quarter. Although the first half of the second quarter was heavily impacted by the COVID-nineteen pandemic with widespread temporary store closures, we successfully managed through the disruption. In many of our markets, our stores were recognized as essential, and we developed and implemented new social distancing and safety protocols in order to continue to serve our customers safely. As our stores reopened, we gained tremendous traction in our business.

And over the back half of the second quarter, our same store sales were up 15.5%. In the third quarter, our sales trajectory has accelerated with same store sales up 31.9% for our fiscal July period, which ended this past Sunday. Our strong recent performance is reflected in our balance sheet, which now has zero debt and a very healthy cash position. As a result, we are reinstating our quarterly cash dividend, which Barry will comment on further in his remarks. Now I'll take a few moments to touch on our second quarter results and then provide some color on our third quarter to date trending.

As previously reported, net sales for the fiscal twenty twenty second quarter were $227,900,000 compared to net sales of $241,000,000 for the 2019. Same store sales decreased 4.2% for the 2020 compared to a 0.7% increase for the 2019. Our merchandise margins increased 173 basis points in the second quarter versus the prior year period with strong margin performance in May and June. Favorable product mix shift and a reduction in promotional activity were the key drivers of the margin gain. As a result of the temporary store closures due to COVID-nineteen, we experienced a substantial decrease in customer transactions year over year in the second quarter, but this was nearly offset by a significant increase in our average sale.

Our product category performance for the second quarter was heavily skewed by the store closures as well as significant shift in product demand due to COVID-nineteen. Same store sales for our apparel and footwear categories each decreased by more than 20%. However, sales in our hardgoods category increased in the low teens as the pandemic drove demand for certain hardgoods products, which I will elaborate on in a moment. In terms of store activity, we did not open any new stores or close any stores for the quarter other than the temporary impacts associated with the pandemic and four stores that were impacted by civil unrest. As of the end of the second quarter, all stores that had been temporarily closed due to COVID-nineteen had reopened for in store shopping subject to appropriate social distancing protocols and with reduced operating hours.

Additionally, three of the four stores that had experienced extended closures due to damage incurred in connection with civil unrest were reopened by quarter end with the fourth store reopened early in the third quarter. Late in the second quarter, we did reopen our Pasadena, California store that had been closed for an extended period for renovation following a fire last year. We are currently operating four thirty one stores with one store temporarily closed due to a recent State of California order impacting indoor mall stores. For the full year, we currently anticipate permanently closing one additional store, which we had decided to close prior to the COVID-nineteen pandemic. Now I'll speak to the trends that we've experienced during our third quarter to date.

As I mentioned, the momentum that we saw in our business over the back half of the second quarter has accelerated in the third quarter with our fiscal July same store sales up 31.9%. The strength we are experiencing has been broad based across many of our product categories and throughout our geographic market. For our July fiscal period, sales in each of the 11 states in which we operate comped positively in excess of 20%. We are particularly encouraged by the fundamental retail metrics underlying our sales trends. For the current period, we have seen meaningful year over year increases in the number of sales transactions as well as a higher average transaction size.

The higher average ticket is being driven both by an increase in the number of items in each basket and by a higher average unit retail. Our fiscal July merchandise margins increased in excess of 200 basis points versus the prior year. It is noteworthy that we are generating these results while operating our stores with fewer hours and with substantially reduced advertising. We believe that the fundamental operating principles that have guided Big five for over sixty years convenience, service, value and selection have perhaps never been more relevant than they are today as people are trying to adjust and adapt to new challenges resulting from the COVID-nineteen pandemic. The convenience of our stores is attracting customers seeking a safe, easy in, easy out shopping experience close to their homes.

Our emphasis on customer service and new safety protocols help customers more safely shop our stores and quickly find the products they are looking for. We have built a long standing reputation in our markets for delivering value at compelling price points. And that reputation has continued to resonate with customers throughout the COVID-nineteen pandemic, particularly given the financial challenges that so many are facing right now. And perhaps most important to our recent success is our product selection. Our product assortment is well situated to appeal to today's consumers.

As the pandemic unfolded, our experienced buying team quickly recognized significant shifts in consumer demand and worked closely with our vendors to secure inventory in key product categories. Our experience in opportunistic buys and the flexibility of our product mix has served us well in responding to the needs of customers impacted by the pandemic. People are seeking new ways to stay active and healthy consistent with the current social distancing norms. As a result, we have seen incredible strength in categories such as home fitness and individual sports, especially as gyms and health clubs have been particularly impacted by the pandemic. With people spending more time at home, they are also seeking products to help them play at home.

And as travel plans are being replaced with vacations and other family activities, people are increasingly looking for ways to recreate locally and outdoors. These customers are attracted to our broad selection of outdoor and recreation products. Partially offsetting these positive trends is softness in our team sports sales, which has been negatively impacted by widespread suspension of league seasons and reduced school activities. As we approach the remainder of the third quarter, team sports and back to school sales would normally represent a meaningful portion of our business. Although demand in those categories will likely be very weak this year, we expect to more than make up for that weakness with strength in the other categories that I just mentioned.

One of our biggest challenges in recent months has been keeping up with the robust consumer demand. The pandemic has caused some disruptions in the retail supply chain, but our team is working very hard every day to find inventory in key categories and to distribute it optimally throughout our stores across our markets. We remain incredibly grateful for the tremendous contributions of the entire Big five team to help us navigate the challenges of the pandemic to this point. As we previously announced, we recognized these efforts by awarding special recognition bonuses earlier this month to most of our associates other than senior executives. We are so fortunate to have such a dedicated team.

Although we recognize the ongoing uncertainty surrounding the future impacts of the pandemic and we know that conditions can change quickly, we are excited about the current trajectory of our business. Looking forward, we believe our business is in a vastly improved position, both operationally and financially. Over the past few months, we have engaged new customers and enhanced our product mix. We have implemented cost reduction measures that certainly have helped us in the short term, but aspects of which we believe could be sustainable going forward. And by paying down our debt and increasing our cash position, we are well positioned to benefit from opportunities that arise and from the ongoing competitive rationalization that is occurring in the retail sector.

I will now turn it over to Barry to provide more information about the strength of our overall financial condition and some additional detail about the second and third quarters.

Speaker 2

Thanks, Steve. Gross profit for the fiscal twenty twenty second quarter was $72,200,000 compared to $73,100,000 for the second quarter of the prior year. Company's gross profit margin was 31.7% in the fiscal twenty twenty second quarter versus 30.3% in the second quarter of last year. The increase in gross profit margin largely reflects the increase in merchandise margins year over year of 173 basis points that Steve mentioned. Our higher gross profit margin also reflects reduced warehousing and store occupancy cost attributable to our cost containment efforts, partially offset by lower distribution costs capitalized into inventory for the quarter.

Selling and administrative expense decreased $13,800,000 in the fiscal twenty twenty second quarter versus the prior year period, primarily due to a combination of lower employee labor costs, reflecting reduced store operating hours and lower advertising expense during the period. As a percentage of net sales, selling and administrative expense decreased four forty basis points to 25.6% versus 30% in the prior year. Despite lower sales volume in the second quarter, we were able to leverage expenses as a result of our cost reduction efforts. Now looking at our bottom line, net income for the 2020 was $11,100,000 or $0.52 per diluted share, including a net benefit of approximately $0.13 per diluted share related to rent abatement savings and a recovery of eminent domain litigation, partially offset by the expense associated with our previously announced special employee recognition bonus. This compares to breakeven net income for the 2019 of $00 per diluted share, including a $03 per diluted share benefit for the termination of a software contract.

Briefly reviewing our twenty twenty first half results, net sales were $445,700,000 compared to net sales of $486,300,000 during the first six months of fiscal twenty nineteen. Same store sales decreased 7.5% in the 2020 versus the comparable period last year. Net income for the first twenty six weeks of fiscal twenty twenty was $6,500,000 or $0.31 per diluted share, including the net benefit in the second quarter that I previously noted. This compares to net income for the first twenty six weeks of fiscal twenty nineteen of $1,700,000 or $08 per diluted share, including a net benefit of $01 per diluted share, primarily related to the termination of a software contract. Our merchandise inventory at the end of the 2020 was down 15% compared to the prior year.

This reduction in inventory was despite the carryover of a significant amount of last season's winter product because of warm weather and also higher baseball related inventory due to the suspension of league seasons as a result of COVID-nineteen. We expect to reintroduce this carryover inventory next season as we have done with similar carryover product in prior years. Looking at our capital spending, our CapEx excluding non cash acquisitions totaled $3,400,000 in the first half this year, primarily representing investments in store related remodeling, distribution center equipment and computer hardware and software purchases. We initially scaled back our capital spending in response to COVID-nineteen and now expect to resume our investment plans considering the current strength of our financial condition. Excluding non cash acquisitions, fiscal twenty twenty CapEx is expected to be in the range of 5,000,000 to $9,000,000 The combination of very positive trends in sales and margins, expense savings and lower inventory allowed us to generate strong cash flow for the second quarter.

Cash flow from operations was a positive $58,200,000 in the 2020 compared to a positive $5,600,000 in the prior year period. Our strong cash flow certainly has had a meaningful positive impact on our balance sheet. Our revolving credit borrowings at the end of the fiscal twenty twenty second quarter declined to $35,000,000 with a cash balance of $16,700,000 As of the end of our July fiscal period, we had zero revolving credit borrowings with a cash position of approximately $38,000,000 compared to revolver borrowings outstanding of $57,700,000 for July and $66,600,000 as of the 2019. In light of the current strength of our business and financial condition, we are reinstating our quarterly cash dividend of $05 per share. For the third quarter, we have declared a cash dividend of $0.10 per share,

Speaker 0

which includes an additional $05 per share

Speaker 2

zero in recognition of the second quarter dividend that we previously suspended given the uncertainties of COVID-nineteen. Our favorable sales and margin trends have continued into the third quarter, and we also expect to further benefit from certain aspects of our expense reduction initiatives that were implemented in response to the uncertainties of COVID-nineteen. These initiatives are contributing to labor expense savings due to reduced store operating hours and advertising expense savings among other cost reductions. We are still evaluating the extent to which these expense reductions are sustainable without impacting sales over the long term, but our third quarter but in the third quarter, we expect our lower cost structure to help produce meaningful operating leverage. As we have discussed, our business has experienced dramatic swings in sales trends due to the widespread closure of stores and other disruptions related to COVID-nineteen.

While sales trends have been decidedly positive since our stores reopened, with same store sales up 31.9 for our July fiscal period, the dramatic shifts in consumer demand and the uncertainties of these unprecedented circumstances, including any future impact on consumer spending from the potential expiration of stimulus benefits, make it difficult to accurately forecast the months ahead. In light of the uncertainty in the current environment, for the 2020, the company is providing wide sales and earnings guidance ranges and expects earnings to reflect expense savings, as I previously mentioned. So long as conditions relating to the COVID-nineteen pandemic, including any regulations issued in response to the pandemic, do not materially impact the company's ability to continue to operate our stores, we believe it is reasonable to expect same store sales over the remainder of the fiscal twenty twenty third quarter to increase in the range of 5% to 15% from the comparable period during fiscal twenty nineteen. Based on that performance over the balance of the quarter, we would expect same store sales for the full third quarter to increase in the range of 14% to 20% on a year over year basis and earnings for the quarter to be in the range of $1 to $1.3 per diluted share.

This compares to a same store sales increase of 0.3% and earnings per diluted share of $0.30 in the 2019. Steve, I'll now turn the call back to you for some closing remarks.

Speaker 1

Thank you, Barry. In closing, while we are certainly mindful of the potential future impacts of the COVID-nineteen pandemic, we are extremely pleased with our recent performance and excited about the future of Big five Sporting Goods. Thank you for joining us on today's conference call. We look forward to speaking with you again after the conclusion of our third quarter.

Speaker 0

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.