Big 5 Sporting Goods - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Q2 2024 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.

Steve Miller (President and CEO)

Thank you, Operator. Good afternoon, everyone. Welcome to our 2024 Q2 Conference Call. Today, we will review our financial results for the Q2 of fiscal 2024, 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.

Barry Emerson (CFO)

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 Provision in 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.

Steve Miller (President and CEO)

Thank you, Barry. We reported Q2 results that were consistent with our guidance as we continue to feel the impact of sustained pressures to consumer discretionary spending. Net sales for the Q2 were $199.8 million compared to $223.6 million in the prior year, with same-store sales down 9.9%. There were a couple of calendar shifts that impacted our Q2. In April, we benefited from an extra sales day as the Easter holiday, when our stores are closed, occurred in Q1 this year as opposed to the Q2 last year. However, this benefit was offset at the end of the quarter by the shift of the 4th of July holiday further into the third quarter this year versus last.

From a product category perspective, trends were fairly consistent across each of our major merchandise categories, with apparel down approximately 8%, footwear down approximately 9%, and hard goods down approximately 11%. Our average ticket was down low single digits, while our transaction count was down high single digits, which we believe largely reflects the broad-based macroeconomic challenges impacting consumers. Our merchandise margins in the Q2 decreased 27 basis points compared to the prior year, and we closed the quarter with a 10.8% reduction in inventory. Given the sales headwinds, our team is keenly focused on aligning our inventory levels with our current sales trending. This enables us to better optimize gross profit dollars while also keeping us well positioned to take advantage of potential opportunistic buys that may present in the marketplace.

Now commenting on our third quarter, we started the quarter strong as sales not only benefited from the calendar shift of 4th of July but also from exceptional summer product sales over the long holiday weekend when we benefited from a heat wave across much of our geography. Since then, our sales comparisons have softened as we began comping against very favorable summer weather last year, which contributed to July being the strongest month of last year's third quarter. Quarter-to-date same-store sales are currently tracking down approximately 7%. Although we remain cautious given the ongoing economic pressures affecting consumers, we anticipate benefiting from easing year-over-year comparisons as the quarter progresses. This is reflected in our third quarter guidance, which calls for same-store sales to decline in the mid-single-digit range. The current operating environment reflects a continuation of persistent macroeconomic challenges.

There is no question that our core customer is feeling the cumulative impact of inflationary pressures in key areas such as gas, rent, groceries, and interest rates. In these times, we believe that given our attractive price points and strong value proposition, we are likely benefiting from trade down activity. However, these gains have not been large enough to offset the widespread contraction in discretionary spending that is impacting the retail industry at large. We're not simply waiting for the tide to turn. We're actively managing the business with discipline as we navigate through this cycle. Our product assortment is well positioned to meet demand for crucial upcoming periods, including back to school, fall team sports, and the Labor Day holiday.

We expect that as we emerge from this current period of constrained discretionary spending, our current strategies and operational efficiencies will position us to return to sales and earnings growth. At this time, given the uncertainty of the duration of the challenged macroeconomic environment and our priority of maintaining a healthy balance sheet, we believe that the suspension of our dividend is a prudent step to provide added financial flexibility. We remain steadfast in our commitment to maximizing shareholder value, and as we always have, we will continue to evaluate opportunities to return value to shareholders. With that, I'll now turn it over to Barry to provide additional details regarding our Q2 performance and third quarter outlook.

Barry Emerson (CFO)

Thanks, Steve. Gross profit for the fiscal 2024 Q2 was $58.7 million compared to gross profit of $71.9 million in the Q2 of the prior year. Our gross profit margin of 29.4% in the 2024 Q2 compared to 32.2% in the Q2 of last year. The decrease in gross profit margin versus the prior year primarily reflected higher store occupancy and distribution expense, including costs capitalized into inventory as a percentage of net sales. Merchandise margins for the Q2 of 2024 decreased 27 basis points versus the prior year period. Overall selling and administrative expense for the fiscal 2024 Q2 decreased $0.2 million compared to the prior year. The year-over-year reduction primarily reflected lower employee labor and staffing expense and reduced performance-based incentive accruals.

As a percent of net sales, Selling and administrative expense was 36.1% in the 2024 Q2 versus 32.4% in the 2023 Q2, reflecting the lower sales base. We remain committed to diligently managing the expenses within our control, especially against the backdrop of stubborn broad-based cost inflation. We continue to optimize store labor hours, which is particularly important as we navigate substantial increases in minimum wage rates across our markets. Now looking at our bottom line, net loss for the Q2 of fiscal 2024 was $10 million, or $0.46 per basic share. This compares to a net loss of $0.3 million, or $0.01 per basic share in the Q2 of 2023. EBITDA was negative $8.7 million for the Q2 of fiscal 2024 compared to a positive $4.2 million in the Q2 last year.

Briefly reviewing our 2024 first half results, net sales were $393.3 million compared to net sales of $448.5 million in the first 26 weeks of last year. Same-store sales decreased 11.7% in the first half of fiscal 2024 versus the comparable period last year. Net loss for the first half of 2024 was $18.3 million, or $0.84 on a per-share basis. This compares to a net loss for the first half of 2023 of $0.1 million, or break-even on a per-share basis. EBITDA was negative $15.2 million for the 2024 year-to-date period compared to positive EBITDA of $8.6 million in the comparable period last year. Turning to the balance sheet, our merchandise inventory at the end of the Q2 of fiscal 2024 decreased 10.8% year-over-year. As Steve indicated, this reduction reflects our efforts to manage inventory levels lower in response to the soft sales environment.

Reviewing our capital spending, our CapEx, excluding non-cash acquisitions, totaled $6.3 million for the first half of fiscal 2024, primarily representing investments in store-related remodeling, distribution center equipment, and computer hardware and software purchases. For the 2024 full year, we now expect CapEx in the range of $9 million-$14 million. For fiscal 2024, we anticipate opening approximately three new stores and closing approximately 11 stores as part of our ongoing efforts to optimize our store base, resulting in approximately 422 stores in operation at the end of the year. Now looking at our cash flow, net cash used in operating activities was $2.9 million in the first half of fiscal 2024. This compares to net cash used in operating activities of $3.3 million in the comparable period last year.

The decreased cash used in operating activities for the current year primarily reflected reduced funding of merchandise inventory and a smaller decrease in accrued expenses, partially offset by a larger net loss for the period. Our balance sheet at the end of the Q2 of fiscal 2024 remains healthy. We had zero borrowings under our credit facility and a cash balance of $4.9 million, consistent with our position at the end of Q2 2023. As Steve mentioned, the decision to suspend our quarterly cash dividend reflects our capital management objective of maintaining a healthy financial condition as we work through the duration of the current challenging macroeconomic climate.

Now I'll spend a moment on guidance. For the fiscal 2024 third quarter, we expect same-store sales to decrease in the mid-single-digit range compared to the 2023 third quarter. Our same-store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the quarter. Fiscal 2024 third quarter net loss per basic share is expected in the range of $0.15-$0.35, which compares to 2023 third quarter net income per diluted share of $0.08. That concludes our prepared remarks. I will now turn the call back to Steve for closing comments.

Steve Miller (President and CEO)

Thank you, Barry. Thank you all for joining us on today's call. We appreciate your interest in Big 5 Sporting Goods and look forward to speaking with you again after the conclusion of our third quarter.

Operator (participant)

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may now disconnect.