Big 5 Sporting Goods - Earnings Call - Q4 2018

Transcript

Speaker 0

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

Speaker 1

Thank you, Barry. As we reported back in mid January, our sales at the December and January benefited from favorable seasonal winter weather in our markets, and I'm pleased to report that this momentum has continued to provide us with a very strong start to the year. Our returns team has done an outstanding job of merchandising and operating our stores to take advantage of the opportunity the winter weather conditions have presented. Our success this winter illustrates our model's ability to serve our customers' sporting goods needs by offering a unique combination of product selection, value and convenience, particularly during key periods of seasonal demand. Before we get into our outlook for the first quarter, I'll first touch on the fourth quarter performance.

Net sales for the fourth quarter increased to $247,100,000 from $242,900,000 for the 2017. Same store sales increased 1.1 during the quarter, and we saw improvement in trending over each month of the period. Same store sales decreased in the low single digit range in each of October and November and then increased in the mid single digit range for December on the strength of outstanding winter product sales later in the month. Overall for the quarter, we achieved a slight increase in both customer transactions and average sales. From a product category standpoint, apparel performed very well, up in the high single digit range for the fourth quarter, driven by seasonal outerwear.

Our footwear category was up in the positive low single digit range, and our hardgoods category was down low single digits. We continued to experience softness in firearms related products during the period. Our merchandise margins for the quarter decreased 11 basis points compared to the 2017. Now commenting on store activity. During the fourth quarter, we opened one store in Sacramento, California and closed one store in Paradise, California, unfortunately lost as a result of the tragic Northern California wildfires.

We ended the quarter with four thirty six stores in operation. During the first quarter, we have closed three stores and will not open any new stores. For the full year, we currently anticipate opening approximately five stores and closing approximately four. Turning now to current trends in the first quarter. As I mentioned at the outset, the momentum in our winter business has continued into February as we've experienced favorable winter weather conditions throughout our market.

We are currently comping up in the low double digit range for the quarter to date. We have experienced a tremendous sell through of our winter inventory, including the inventory that we carried over from last year. As a reminder, in the 2018, weather conditions were exceptionally unfavorable during January and February. Winter finally arrived in March, driving extremely strong late season winter sales last year, which will be a headwind to sales comparisons for the balance of the quarter this year. That said, we believe we have an opportunity to largely offset that anticipated negative impact with solid sales of spring related products, particularly in our baseball category.

The key, though, is that we need to see a transition from the strong winter weather conditions that we have been experiencing to more normal spring like conditions that would be more conducive to getting kids out on the field playing ball. Looking more broadly to the future, we remain focused on a number of initiatives that should benefit us as we navigate the dynamic retail environment. We are targeting product categories, which we believe have the greatest opportunities for growth. In some areas, this includes narrowing the overall assortment while increasing the depth of certain key selling SKUs to better position ourselves to fully meet customer demand. We also continue to aggressively pursue opportunistic buys, which drive traffic and profitable sales and reinforce our value proposition to help differentiate us in the marketplace.

We continue to be encouraged by the response to our digital marketing program and expect to further benefit from the expansion of our enhanced customer relationship management capabilities. Along with our merchandising and marketing efforts, we remain very focused on actively managing the cost structure across our business, including strategies that we have implemented in an effort to mitigate the heavy wage pressures that are impacting us along with most retailers. Now I will turn the call over to Barry, who will provide more information about the quarter as well as speak to some of the positive developments with our balance sheet and cash flows and provide first quarter guidance.

Speaker 2

Thanks, Steve. Our gross profit margin for the fiscal twenty eighteen fourth quarter was 28.5% of sales versus 30% of sales for the 2017. The decrease in gross profit margin largely reflects lower distribution costs capitalized into inventory as a result of reduced inventory levels. Additionally, we experienced a slight reduction in merchandise margins, as Steve mentioned earlier. Our selling and administrative expense as a percentage of sales was 30.9% in the fourth quarter versus 33.3% in the 2017.

Overall selling and administrative expense for the quarter decreased $4,500,000 from the prior year, primarily due to asset impairment charges in the prior year totaling $5,000,000 compared to asset impairment and contract termination charges totaling $1,900,000 in 2018. Absent these charges in both periods, the company achieved modest expense leverage in the 2018 due in part to a $1,600,000 reduction in advertising expense. Now looking at our bottom line. For the fourth quarter, we reported a net loss of $5,100,000 or $0.24 per share. Included in this figure are after tax charges of $1,400,000 for asset impairment and contract termination costs and $300,000 for a deferred tax asset valuation allowance for certain income tax credits or $08 per share.

Excluding these charges, fourth quarter loss per share was $0.16 which was at the midpoint of the updated range we provided in January. This compares to a net loss in the 2017 of $13,000,000 or $0.62 per share, which included after tax charges totaling $10,900,000 or $0.52 per share, primarily related to the revaluation of deferred tax assets as a result of the new Tax Act and goodwill impairment. Briefly reviewing our full year 2018 results, net sales were $987,600,000 compared to net sales of $1,010,000,000 during the full year of fiscal twenty seventeen. Same store sales decreased 2.7% in fiscal twenty eighteen, in part due to lower sales of cold weather winter products in the 2018 resulting from unfavorable warm and dry weather conditions in most of our major markets. Net loss for the full year was $3,500,000 or $0.17 per share, including $09 per share related to the after tax charges in the fourth quarter noted previously as well as a $200,000 deferred tax asset write off related to stock compensation in the first quarter.

This compares to fiscal twenty seventeen net income of $1,100,000 or $05 per diluted share, reflecting after tax charges totaling $10,900,000 or $0.52 per diluted share, as I've previously discussed. Turning to the balance sheet. Our chain wide inventory was $294,900,000 at the end of fiscal twenty eighteen compared to $313,900,000 at the end of fiscal twenty seventeen, reflecting a year over year decrease of $19,000,000 which approximates the winter related product carryover from last year due to unfavorable warm and dry weather. On a per store basis, merchandise inventory was down 7.3% versus the prior year. As discussed on prior calls, we reduced our inventory purchases for this season to adjust for the winter related product carryover from last year.

Looking at our capital spending, our CapEx excluding non cash acquisitions totaled $15,500,000 for fiscal twenty eighteen, primarily representing investments in store related remodeling and new stores, IT systems, our distribution center and the purchase of a parcel of land with an existing building adjacent to our corporate headquarters. We currently expect capital expenditures for fiscal twenty nineteen, excluding noncash acquisitions, of approximately 12,000,000 to $16,000,000 This reflects continued investment in store related remodeling, new stores, our distribution center and IT systems. From a cash flow perspective, our cash flow from operations was a positive $24,500,000 in fiscal twenty eighteen compared to a negative $4,400,000 in the prior year period. The increase in operating cash flow primarily reflects the decreased funding for merchandise inventory and prepaid expense largely related to rent. For the fourth quarter, we paid our 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.

Our long term revolving credit borrowings totaled $83,500,000 at the end of the 2018 and totaled $65,000,000 at the end of the year compared to $45,000,000 at the end of the prior year, and we have continued to reduce debt levels during the current period. With our anticipated sales performance and year over year reduction in inventory levels for the first quarter, we expect quarter end debt levels to decline to below $50,000,000 compared to $68,900,000 at the end of the first quarter last year. In other words, we project that over the course of the current quarter, our debt will move from being $20,000,000 above the prior year at year end to roughly $20,000,000 below the prior year at the end of the first quarter, which substantially strengthens our balance sheet. Now I'll spend a minute on our guidance. For the fiscal twenty nineteen first quarter, we expect same store sales to increase in the mid single digit range, and we expect earnings per share in the range of $04 to $0.10 First quarter guidance reflects a small anticipated benefit to sales as a result of the calendar shift of Easter holiday when our stores are closed out of the 2018 and into the 2019.

Operator, we're now ready to turn the call back to you for questions and answers.

Speaker 0

Thank you. And we'll take our first question today from David Schick with Consumer Edge Research.

Speaker 2

Hey there. Thanks for taking my question. A couple of questions.

Speaker 3

On baseball that you mentioned optimism, is that an expansion or new lines for you? Or is that some product cycle stuff you're looking for out of baseball?

Speaker 1

I'm not sure what you mean by I'm not sure I understand the question, David. Is

Speaker 3

it stuff you're bringing in net new footage to baseball? Or is there something in the baseball introductions in the industry this year that has you optimistic about baseball impacting your business?

Speaker 1

Yeah. Well, what we what I tried to imply in prepared remarks is that, you know, a key for the balance of the quarter is the performance of our baseball business. Last year, we had a very difficult January and February due to lack of winter. And then in March, we had a lot of winter business, which will be a headwind to our current quarter as we can't possibly comp the sales last year if for no other reason than our given the strong sell through of winter product based on the strength of our winter business in January and February, our winter inventory is rather depleted. So the key for us is that our baseball business, which has been soft for the first two months, given the significant winter weather that we've had, and there's been rain out over rain out in a number of leagues, yet they're running behind.

They haven't had five outs. They're still trying to just get their season rolling. So the key for us to offset the strength of our winter business this March is that we pick it up in our baseball business, which to a large degree is going to be dependent on getting more normalized weather patterns moving from the winter that we've been experiencing to warmer and drier spring like conditions. Now is primary. Okay.

Speaker 3

So you're talking about weather, and this feels like my chance to insert my mani machado, keep my mani machado streak alive by saying everybody maybe was waiting for Machado. Okay. So we can move to a more second question then, having mentioned Manny. The margin of this depleted winter because it's going so well early, You mentioned you didn't have to buy winter, but you're going to have this more difficult lap. How should we think about that carried over inventory and its impact on the gross margin line for first quarter?

Speaker 1

Well, we sold through that carried over inventory with very little compromise to margins. So the winter business is fairly positive to margins. That said, the baseball business that has been soft for the start of the quarter is also a very strong margin generating business. So I would put that all together and call it relatively neutral.

Speaker 2

Okay. Last question is, I

Speaker 3

know you've been moving to more digital. You mentioned it briefly, the digital engagement on the marketing side. How should we think about the net effect of those changes you're making in calendar 2019 and 2020? Should net advertising come down? Or is it more neutral?

Speaker 1

We would anticipate that much like what has occurred in the last several years, we will continue to bring down our total advertising expense. We continue to reduce print advertising, to some degree, simply because there's less circulation to buy. And we replaced a portion of that with digital advertising, but the economics of the digital are somewhat more favorable. So all things being equal, at this point in time, we would continue that trending to remain.

Speaker 3

Thanks very much.

Speaker 0

That will conclude today's question and answer session. At this time, I'd like to turn the conference over to Mr. Miller for any additional or closing comments.

Speaker 1

All right. Thank you, operator. We appreciate your interest in BIG V and look forward to speaking with you on our next call. Have a great afternoon.

Speaker 0

That does conclude today's conference call. Thank you for your participation. You may now disconnect.