Big 5 Sporting Goods - Q4 2022

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods fourth quarter 2022 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 just 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 2022 fourth quarter conference call. Today, we will review our financial results for the fourth quarter of fiscal 2022, as well as provide an outlook for the first quarter of fiscal 2023. 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 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-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. I want to start by recognizing our team and their execution over the last few years, which allowed us to deliver tremendous results in the face of the global pandemic, related supply chain disruptions, broad-based inflation, and the economic slowdown that we are all watching closely. 2022 was a very dynamic year for the retail industry, transitioning from the challenges of the pandemic to a new set of economic challenges with increasingly cautious consumer sentiment and persistent cost inflation amid growing concern for an economic downturn. Although 2022 was not the blockbuster year that we reported in 2021, when we benefited from unprecedented demand and unique sales drivers, we produced strong earnings in 2022, and our profitability continued to compare favorably to pre-pandemic years, reflecting the evolution of our business model.

We ended the year in a solid financial condition with a debt-free balance sheet and healthy inventory. Turning to our fourth quarter results. As previously reported, net sales were $238.3 million compared to $273.4 million in the fourth quarter of 2021. Same-store sales for the fourth quarter were down 13.2%, which was toward the low end of our guidance range that called for a high single to low double-digit decrease. On a year-over-year basis, transactions for the fourth quarter were down high single digits with average ticket down mid-single digits. Our sales for the quarter were generally on target leading up to Black Friday, but trends decelerated in December as inflationary pressures and economic uncertainty appeared to impact holiday discretionary spending to a greater extent than we had initially anticipated.

In the face of the top-line headwinds, we have continued to focus on prioritizing merchandise margins to optimize gross profit dollars. We have closely managed our inventory. As a result, we have not needed to be overly promotional for the sake of clearing product. Although our fourth quarter merchandise margins declined by 129 basis points compared to the record margins in the prior year, our 2022 fourth quarter merchandise margins increased by over 300 basis points versus the pre-pandemic fourth quarter of 2019. Our merchandise margins were on a positive trajectory prior to the pandemic. We continue to benefit from the merchandising, pricing, and promotional changes we have made over the past several years. As we've evolved our model by reducing our chain-wide print advertising, we've been able to significantly expand our merchandise margins while operating with less inventory.

We now have greater flexibility to customize product assortment by store, which in turn has reduced our levels of clearance product. Of course, our cost structure benefits greatly from the reduced advertising expense. While the volatility of the current environment is certainly unique, we have a successful track record of weathering many different economic cycles over the course of our long operating history. Whereas 2021 benefited from a robust economy, including stimulus checks and higher levels of personal savings that helped drive spending on recreational and leisure activities, over the course of 2022, we've seen a significant softening of consumer sentiment and spending, particularly for discretionary products. While in some respects our business benefits in this environment due to our price points and values that we provide to our customers, those benefits have been more than offset by the realities of the broader macroeconomic forces in play.

Turning now to our current trends. For the first quarter to date, our same-store sales are running down in the low single-digit range versus last year. We saw positive year-over-year sales growth in January, benefiting from favorable seasonal winter weather in our markets that drove demand for our winter products. Our ability to capitalize on this opportunity to outfit customers seeking fun in the snow when winter weather hits highlights the advantage of our convenient store footprint. However, the strong demand for winter products in January was partially offset by softer trends across other product categories. In February, our winter sales have remained strong, but over the course of the quarter, winter products become progressively less impactful to our overall results, and our same-store sales have shifted into the negative, reflecting the increasing pressures of discretionary spending that I spoke about earlier.

We anticipate that the environment will remain challenging over the balance of the first quarter. Given the winter seasonal strength, our winter inventory carryover this year will be significantly below that of last year. Overall, we remain pleased with our inventory position. We believe the current environment is setting up positively for opportunistic buys. This is a historical strength of ours, and we are closely evaluating our inventories to ensure that we remain well-positioned to take advantage of these opportunities as they arise. Although we are certainly facing pressures, both to our top line and to our expenses, we feel well-equipped to tackle the challenges. We have the experience of managing through a wide range of economic cycles over many decades.

We are intently focused on managing all aspects of the business within our control and are taking steps to reduce operating costs in an effort to mitigate inflationary expense pressures. We have a healthy balance sheet, which provides us plenty of flexibility as we navigate the current environment and position the company for solid growth as the overall economy improves. I'll now turn it over to Barry to provide additional details regarding our fourth quarter performance and first quarter fiscal 2023 outlook.

Barry Emerson (CFO)

Thanks, Steve. Gross profit for the fiscal 2022 fourth quarter was $79.8 million, compared to record gross profit of $103 million in the fourth quarter of the prior year. Our gross profit margin of 33.5% in the fiscal 2022 fourth quarter declined from the 37.7% recorded in the fourth quarter of the prior year. The decrease in gross profit margin year-over-year primarily reflected a decrease in merchandise margins of 129 basis points, coupled with higher store occupancy and distribution expense, including cost capitalized into inventory as a percentage of net sales.

As Steve mentioned, although merchandise inventories for the fourth quarter this year decreased versus the fourth quarter of fiscal 2021, when compared to the pre-pandemic 2019 fourth quarter, merchandise margins increased 308 basis points, reflecting the evolution of our pricing and promotional strategy. Overall, selling and administrative expense increased $1.4 million in the fiscal 2022 fourth quarter versus the prior year period, primarily reflecting continued upward pressure on labor costs and other broad-based inflationary impacts, partially offset by lower performance-based incentive accruals. As a percent of net sales, SG&A expense was 32.5% in the fiscal 2022 fourth quarter versus 27.9% in the 2021 fourth quarter, reflecting the deleveraging effect of increased expense on a lower sales base.

Now looking at our bottom line, net income for the fourth quarter of fiscal 2022 was $1.7 million, or $0.08 per diluted share. This compares to net income of $19.9 million, or $0.89 per diluted share in the fourth quarter of fiscal 2021. EBITDA totaled $6.9 million for the fourth quarter of fiscal 2022, compared to $31.5 million in the fourth quarter of fiscal 2021. Briefly reviewing our full year results for fiscal 2022, net sales were $995.5 million compared to record net sales of $1.16 billion in the prior year. Same-store sales decreased 14.5% for fiscal 2022 versus the comparable prior year period.

Net income for fiscal 2022 was $26.1 million, or $1.18 per diluted share, including a previously reported charge in the second quarter of $0.03 per diluted share. This compares to record net income for fiscal 2021 of $102.4 million, or $4.55 per diluted share, including a previously reported net benefit of $0.06 per diluted share. Adjusted EBITDA was a solid $52.6 million for the 2022 full year compared to a record $152 million in the prior year.

Turning to the balance sheet, our merchandise inventory at the end of fiscal 2022 increased 9.6% year-over-year, primarily reflecting more normalized inventory levels following the significant sell-through and supply chain challenges in the prior year. Our merchandise inventory at the end of fiscal 2022 was down 5.1% compared with the fourth quarter of fiscal 2019, reflecting the evolution of our model that allows us to now operate with less inventory, as Steve mentioned. Reviewing our capital spending, our CapEx, excluding non-cash acquisitions, totaled $13.2 million for fiscal 2022, primarily representing investments in store-related remodeling, new stores, distribution center equipment, and computer hardware and software purchases. For the fiscal 2023 full year, we expect CapEx in the range of $15 million-$20 million and anticipate opening approximately six new stores, including one relocation. Now looking at our cash flow.

Net cash used in operating activities was $28.4 million for the fiscal 2022 full year. This compares to positive operating cash flow of $115.5 million in fiscal 2021. The decrease in our operating cash flow for fiscal 2022 compared to the prior year primarily reflected lower earnings and increased funding of merchandise inventory in efforts to replenish depleted inventory levels resulting from strong consumer demand and supply chain challenges in fiscal 2021. Our balance sheet cash of $25.6 million at the end of fiscal 2022 was down $71.9 million from $97.4 million at the end of fiscal 2021. The timing of our inventory purchases had a meaningful impact on the year-over-year change in cash. Our inventory purchases were higher in Q4, 2021 as supply chain issues eased.

While our inventory purchases were lower in Q4 2022, due in part to the carryover of winter product from the prior season because of warm weather. As a result, our trade accounts payable declined $37 million year-over-year. We also grew our merchandise inventory during the year by $23 million as inventory availability improved, and we invested over $13 million in CapEx. Additionally, during fiscal 2022, we returned capital to shareholders of over $26 million through cash dividends and share repurchases. Our balance sheet at the end of fiscal 2022 was very healthy, with zero borrowings under our credit facility and available cash reserves. As we look ahead, we anticipate our working capital to decline in 2023, which should further help our overall liquidity.

Our financial condition has strengthened considerably over the past three years, and today we announced that our Board of Directors declared a quarterly cash dividend of $0.25 per share. I'll spend a moment on our guidance. For the fiscal 2023 first quarter, the company expects same-store sales to decrease in the mid-single digit range compared to the fiscal 2022 first quarter. The company's same-store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the first quarter. Fiscal 2023 first quarter earnings per share is expected in the range of -$0.02 to $0.06, which compares to fiscal 2022 first quarter earnings per diluted share of $0.41. That concludes our prepared remarks. Operator, we are now ready for any questions.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Mark Smith from Lake Street Capital Markets. Please go ahead.

Mark Smith (Senior Research Analyst)

Hey, guys. First one for me, just wanna look at revenue a little bit. I guess maybe a little surprised that you're not getting more bumps here in Q1, given some of the weather trends that we've seen, you know, in your key markets. Do you guys have the inventory that you feel like you needed to hit some of the demand here, especially in January and as we've seen some positive weather here maybe the last couple weeks?

Steve Miller (President and CEO)

You know, by and large, we do feel, Mark, that we do have the inventory to capitalize on the winter opportunity. You know, we've had so much weather that there's been a pretty significant offset to, you know, other products that folks recreate outdoors. The start of the baseball season has been very delayed. We've had a, I think if you follow the news, record, I think near historical record rainfalls in California and much of our Western markets. That's dampened some of the benefits of the winter business. You know, not to mention just the softness, from, I think, the discretionary spending market.

Mark Smith (Senior Research Analyst)

Any inventory I know you held over last year due to, you know, negative weather, do you feel like you've kind of cleaned up that winter inventory and are in a good spot to not have to hold much over into next year?

Steve Miller (President and CEO)

We do. Yeah, we do. We think we're gonna, you know, wind up the season, you know, reasonably clean and, you know, be able to buy around that for the next season.

Mark Smith (Senior Research Analyst)

Okay. Then just looking at inventory, I know you guys said that you are, you know, comfortable and pleased with kind of where your inventory is. As you look at your peers, especially as kind of big box retail, you know, we continue to hear inventory, you know, is still pretty heavy, and maybe you guys getting a little promotional. Are you seeing that? Is that maybe hurting sales at your stores?

Steve Miller (President and CEO)

Yeah. I'm not sure that I can say that I see that and that's impacting sales. I think, you know, the general marketplace is, you know, pretty competitive, I mean, in terms of, you know, discounting and I think other companies that are, you know, not just, you know, direct competitors, but I mean from the department stores. I mean, we sell, you know, footwear and apparel that you can buy at a lot of places. I think, you know, some retailers have, you know, heftier inventory situations to try and clean up than we have and have been reasonably promotional. It's difficult to ascertain that that's impacting our sales directly, but it can't help.

Mark Smith (Senior Research Analyst)

Okay. Can you guys walk through? You gave us a fair amount of color on kind of gross profit margin and the puts and takes and pressures there. Maybe walk us through, you know, what it is that you can control there and maybe what's out of your control and, you know, steps that you're taking to try to maintain and hold on to some decent gross profit margin here as we look at 2023.

Steve Miller (President and CEO)

Yeah. I mean, are you looking at the merchandise margins more?

Mark Smith (Senior Research Analyst)

Yep. Merchandise margins. I know you guys call that occupancy as well. There's been some pressure there, you know, maybe shipping freight, things like that. You know, just walk us through kind of what you can control and steps that you're taking to try to maintain and hold margin.

Barry Emerson (CFO)

Yeah, Mark. Yeah. You know, the gross margin, of course, is made up of merchandise margin, it's made up of distribution costs, and it's made up of occupancy costs. You know, we try and manage, you know, as best we can all three, but You're right, some are easier than others. I mean, just talking about, you know, distribution costs, you know, there's been a lot of pressure, you know, in the distribution because of all the freight and all the transportation challenges and so on. You know, we've, you know, resources have been an issue for us and we've now, you know, combated that. Now fortunately there's more resources available, but, you know, the labor cost pressure is pretty significant.

We're seeing some pretty significant de-leveraging in our distribution costs. We're also seeing de-leveraging in our occupancy. You know, occupancy is an area where, you know, we've been focused for, you know, many, many years and have done quite well in trying to maintain our occupancy, overall occupancy expense. Remember that 20% or so of our leases come up for renewal every year, we, you know, we have about 80 or so plus or minus options that we, you know, negotiate with landlords. You know, over the last, you know, probably three years, two to three years, things have been a lot more difficult. There's been more. It's. You know, the pendulum has swung back to more of a kind of a landlord's market.

Prior to that, we had significant favorable experience in trying to, you know, either maintain, you know, levels of, of rent or in some cases reduce. You know, if you've got something on First and Main, you're never gonna be able to, necessarily, reduce that, you know, that overall cost. I think we've done a good job, and we're laser focused on managing occupancy, but with the, you know, with the pressure on sales, we're de-leveraging the occupancy as well. Merchandise margins...

Steve Miller (President and CEO)

You know, we feel good about the efforts to maintain very healthy merchandise margins, significantly above pre-pandemic levels, you know, as we reported that we did for the fourth quarter. You know, as we mentioned some of the changes to our advertising model that's benefiting our margins, and we look for that to continue.

Barry Emerson (CFO)

We're also, you know, really focused on gross profit dollars and not feeding the promotional, you know, environment that, you know, that we kind of see out there. Our inventory is very clean. Our clearance product is. You know, our aged inventory is, you know, incredibly low and it's well managed. We feel good about our inventory, you know, and the clearance product. Again, driving gross profit dollars I think is key. We feel good about, you know, because of some of the changes in the model, being able to operate our business with much lower levels of inventory than we have in the past.

I mean, that's gonna help just the, you know, the strength of our overall balance sheet. Gives us a lot of flexibility to, you know, from an opportunistic buy standpoint, it gives us flexibility to buy in smaller lot sizes, to be able to allocate, you know, product with flexibility to different stores, you know, those kinds of things, which should help us, you know, as we move forward in this environment.

Mark Smith (Senior Research Analyst)

Okay. I think the last one from me, you know, is you talked a little bit about operating cash flow and CapEx is going to come up a little bit this next year. Walk us through kind of unlocking some of the value here in working capital and the improvements that you expect in 2023. Does that take some time during the year to build, or will we see some of that more evident here in Q1?

Barry Emerson (CFO)

Well, you know, I think that, you know, I, I mentioned on the call the kind of dynamics of the change in the impact on cash from our timing of purchases in, you know, in 2022 with our payables being, you know, much, much higher at the end of 2021 and then much, much lower at the end of 2022 because we bought around the winter, the winter product 'cause we carried over from the prior year. You know, we're starting from a much lower, trade payables base, you know, at the end of 2022. Having said that, you know, we do expect, over the year to move our inventories lower. I mean, that's our, that's our goal. Commensurate with that, obviously, you know, payables will follow.

Anyway, so that's, you know, the primary area that we're focused on. Again, it, it feeds from what I said previously, you know, the ability to be able to operate with lower levels of inventory.

Mark Smith (Senior Research Analyst)

Okay, great. Maybe I'll squeeze one more. Just as you were talking about occupancy and lease this year, the closures that we saw here in Q1, and you expect a couple more here, it sounds like through the rest of the year. Are these all stores that were at the end of their lease terms or, you know, did you have any troubled stores that needed to close?

Steve Miller (President and CEO)

One was at the end of its lease term, and we were unsuccessful to, you know, renegotiate for extended terms there. The other store was a store that we deemed to be underperforming, and we closed it.

Mark Smith (Senior Research Analyst)

Okay, great. Thank you.

Steve Miller (President and CEO)

Thank you, Mark.

Barry Emerson (CFO)

Thanks, Mark.

Operator (participant)

Thank you. Ladies and gentlemen, that completes our question-and-answer session. I'll now turn the call back to Mr. Miller for any closing remarks.

Steve Miller (President and CEO)

Thank you, operator. We appreciate you joining us on today's call and your interest in Big 5 Sporting Goods, and we look forward to speaking to you when we report our first quarter results. Have a great afternoon.

Operator (participant)

Thank you, sir. The conference of Big 5 Sporting Goods has now concluded. Thank you for your participation. You may now disconnect your line.