Big 5 Sporting Goods - Earnings Call - Q3 2019

Transcript

Speaker 0

Greetings, and welcome to the Big five Sporting Goods Third Quarter twenty nineteen Earnings Results Conference Call. 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 third 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 fourth quarter. I will now turn the call over to Barry to read our safe harbor statement.

Speaker 0

Thanks, Steve. Except for statements of historical facts, 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 third quarter earnings significantly ahead of our guidance and more than double the earnings we posted in the prior year. These results were driven by our fourth consecutive quarter of same store sales growth, exceptionally strong merchandise margin and our successful efforts to mitigate expense pressure. Third quarter net sales were $266,200,000 with our same store sales increasing 0.3% for the period. Looking at the rollout of the quarter, as we noted on our last call, we had a slow start in July as we comped down in the negative low single digit range.

There were two significant headwinds for our July sales: a weak start to summer related product sales due to a relatively full start to summer weather, particularly in the Pacific Northwest and significant softness in our ammunition category that resulted from the pull forward of sales into the second quarter due to regulatory changes in California that became effective at the July. Although ammunition sales remained challenged over the balance of the quarter, our overall sales picked up in August and September when we produced positive low single digit comps, benefiting from strength across a broad array of product categories. For the quarter, our apparel category comped up low single digits, our footwear category comped slightly down, and our hardgoods category comped slightly up even with the challenging ammunition sales. Overall, for the third quarter, we experienced a small increase in our average sales versus the prior year period despite decrease in customer transactions. As I mentioned, our merchandise margins for the quarter were a strong contributor to our earnings performance, increasing 94 basis points year over year.

Our merchandise margins were the strongest of any third quarter since we became a publicly traded company in 02/2002. Multiple factors contributed to the margin gains, including the benefit of a product mix shift, reflecting reduced sales of lower margin firearms and ammunition products and increased sales of higher margin opportunistic buys. Additionally, and quite significantly, our margins benefited from a favorable response to our strategic efforts to optimize our pricing and promotion. Now commenting on store activity. We closed one store in the third quarter, ending with four thirty three stores in operation.

Additionally, we have one store that has been temporarily closed since July due to a fire, which we expect to be in a position to reopen early next year. During the fourth quarter, we anticipate opening two stores, including the relocation of a store that closed during the quarter. For the 2019 full year, this has us opening three stores and closing five stores, including one relocation, reflecting our continuous efforts to improve our store base. Turning now to the fourth quarter. Our business continues to perform well with year over year sales and merchandise margin trends accelerating from the third quarter.

Although pleased with the start of the quarter and the momentum in our business, we should note that October and November, pretty much until Black Friday, are generally the lowest volume periods of our year. Thus, the real key to the fourth quarter will be the holiday period, which is always influenced by the overall retail consumer environment along with winter weather. As a reminder, last year, our holiday sales were relatively soft until the last week of the year when we took advantage of the arrival of very favorable winter weather in our markets, which drove extraordinary sales and ultimately pushed our same store sales up 1.1% for the full quarter. That winter momentum continued throughout virtually the entire winter season, which resulted in a remarkable sell through of our winter product. This enabled us to bring in fresh winter product assortment this year that we believe will resonate with customers over the winter selling season.

To the extent that we have had early glimpses of winter weather in a few of our markets, we are very encouraged by early reads. We are also encouraged by our team's progress in mitigating the expense pressures that we are facing throughout our markets. As part of these efforts, we have been testing adjustments to our store staffing model to ease the impact of ongoing wage pressures without compromising customer service levels. The positive impact of these adjustments is reflected in our favorable SG and A results. Moving forward, we will look to expand these adjustments on a broader scale as part of our ongoing focus of actively managing our cost structure.

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 fourth quarter guidance.

Speaker 0

Thanks, Steve. Our gross profit margin for the fiscal twenty nineteen third quarter was 32.3% of sales versus 31% of sales in the 2018. The expansion in gross profit margin versus the prior year period primarily reflects our 94 basis point increase in merchandise margin and the favorable impact of distribution costs capitalized into inventory. Our selling and administrative expense as a percentage of sales decreased to 28.9% in the fiscal twenty nineteen third quarter from 29.2% in the third quarter of the prior year. Overall selling and administrative expense for the quarter declined $800,000 year over year, providing meaningful expense leverage for the period.

Now looking at our bottom line. For the third quarter, we reported net income of $6,400,000 or $0.30 per diluted share. This compares to net income for the 2018 of $3,100,000 or $0.15 per diluted share. Briefly reviewing our 2019 year to date results, net sales increased to $752,400,000 compared to net sales of $740,500,000 during the first nine months of fiscal twenty eighteen. Same store sales increased 1.8% during the first nine months of fiscal twenty nineteen versus the comparable period last year.

Net income for the period was $8,100,000 or $0.38 per diluted share, including a $02 per diluted share charge for the write off of deferred tax assets. This compared to net income for the first nine months of fiscal twenty eighteen of $1,600,000 or $07 per diluted share, which included a $01 per diluted share charge for the write off of deferred tax assets. Operating cash flow for the twenty nineteen year to date period was a positive 13,700,000 compared to a negative $8,100,000 in the prior year period. This $21,700,000 improvement in cash flow primarily reflects reduced funding of merchandise inventory and higher net income. Turning to the balance sheet.

Our substantial improvement in cash flow contributed to reduced revolving credit borrowings year over year with $60,600,000 in borrowings at the end of the third quarter, reflecting a reduction of $22,900,000 or 27.4% compared to the same period in the prior year. This reduction in our borrowing levels has helped to substantially strengthen our balance sheet. We continue to focus on maintaining a healthy financial condition to ensure that we have the flexibility to invest appropriately in our business. Our chain wide inventory was $310,500,000 at the end of the third quarter, which reflects a year over year reduction in our inventory of $4,300,000 or 1.4%. Importantly, as Steve mentioned in his remarks, our winter product inventories are fresh and we believe well positioned for this upcoming winter season.

Looking at our capital spending, our CapEx excluding non cash acquisitions totaled $6,100,000 for the first thirty nine weeks of fiscal twenty nineteen, primarily representing store related remodeling, distribution center investments, new store investments and computer hardware and software purchases. We expect total capital expenditures for fiscal twenty nineteen, excluding non cash acquisitions, of approximately 9,000,000 to $12,000,000 For the third 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, which I'll preface with a reminder that our fourth quarter typically represents the lowest quarterly earnings performance of our fiscal year. This is due to a number of factors, including our relatively low sales volume in October and much of November before Black Friday, our normally lower merchandise margins during the promotional holiday period in the back half of the quarter compared to the rest of the year as well as increased expenses during the holidays for store labor and advertising. That said, for the fiscal twenty nineteen fourth quarter, we expect same store sales to be in the positive low single digit range, and we expect to realize a loss per share in the range of $04 to $0.16 Our earnings guidance for the quarter reflects an anticipated increase in merchandise margins over the prior year period.

For comparison purposes, for the fiscal twenty eighteen fourth quarter, same store sales increased 1.1% with a loss per share of $0.24 including $08 per share of charges primarily related to asset impairment and contract termination costs. Given our fourth quarter guidance, we expect fiscal twenty nineteen full year earnings to be in the range of $0.22 to $0.34 per diluted share. Steve, I'll now turn the call back to you for some closing remarks.

Speaker 1

Thank you, Barry. Our team is working hard to build on the current momentum in our business by continuing to improve sales and margins and as always prudently managing our cost structure. Thank you for joining us on today's conference call. We look forward to speaking with you again after the conclusion of our fourth quarter.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your