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Big 5 Sporting Goods Corp  (NASDAQ:BGFV)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Big 5 Sporting Goods Third Quarter 2018 Earnings 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 introduction, I would like to turn the conference over to Mr. Miller. Please go ahead, sir.

Steven G. Miller -- Chairman, President and Chief Executive Officer

Thank you, operator. Good afternoon, everyone. Welcome to our 2018 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2018 and provide general updates on our business, as well as provide guidance for the fourth 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.

Barry D. Emerson -- Senior Vice President, Chief Financial Officer and Treasurer

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-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.

Steven G. Miller -- Chairman, President and Chief Executive Officer

Thank you, Barry. Although the third quarter started with solid sales in July and we ultimately achieved earnings within our guidance range for the quarter, sales in August and September turned negative and were below expectations. While our sales performance was disappointing, we effectively managed both product margins and expenses during the quarter, while making significant progress toward rightsizing our inventory levels.

We certainly recognize that successfully navigating the challenges of operating in the current retail environment, requires that we closely examine all aspects of our business. And as part of this ongoing process, we are testing and implementing initiatives across our organization, an effort to improve our operating results. We'll talk more about these initiatives in the current period in a moment. But first, I will provide some color around our third quarter operating results.

Net sales were $266.4 million compared to $270.5 million for the third quarter of fiscal 2017. Same-store sales decreased 2% from the third quarter of last year. Overall for the quarter, we experienced a low single-digit decrease in the number of customer transactions, a low single-digit increase in our average sale versus the prior-year period.

From a product category standpoint, apparel performed positively, up in the low single-digit range for the third quarter. Our footwear category was below expectations comping down mid-single digits, primarily due to softness in our core athletic footwear assortment. Our casual and lifestyle footwear assortments performed well, but their strength was not enough to offset the weakness in athletic footwear. Our hard goods category was down in the low single-digit range. Although many hard good areas performed positively in the third quarter, the overall category was driven down by the adverse impact of widespread wildfires hurting (ph) sales of our summer products in California and other markets, which experienced severely impacted air quality, which limited outdoor activities.

Additionally, we continued to experience softness in firearms-related products during the period. Our merchandise margins for the quarter decreased 10 basis points compared to the third quarter of fiscal 2017, when merchandise margins increased by 51 basis points over the prior-year period.

Now commenting on store activity, during the third quarter, we opened one store in Clearlake, California, and ended the quarter with 436 stores in operation. We plan to open one additional store in the fourth quarter, which will bring us to four store openings and two closures for the 2018 full year for a total of 437 stores at year-end.

Turning now to the fourth quarter. We are currently comping in the negative low single-digit range for the fourth quarter to-date. October is our lowest volume month of the year, and our sales have been impacted in part by a planned reduction in our advertising in October, compared to last year in an effort to optimize our ad spend. As always, the key to a successful fourth quarter will revolve around holiday spending and the start of the winter season.

We anticipate that the retail environment will, once again, be highly promotional over the holiday season. And of course, winter product sales are heavily influenced by winter weather conditions which are always difficult to predict. As a reminder, last year, winter weather conditions in our markets were highly unfavorable, so we feel there is good opportunity for year-over-year improvement if the weather cooperates this year.

Looking at the fourth quarter and beyond, we are focused on a number of initiatives that we believe can help drive improved performance in our business as we navigate the evolving retail environment. From a product standpoint, we are accelerating the pace of change within our assortments. This includes downsizing certain product categories that does position us to be more aggressive in pursuing product opportunities that we believe have higher growth potential. In some areas, we are narrowing the overall assortment, while increasing the depth of certain key selling skews. And as always, we are aggressively pursuing opportunistic buys that we believe will drive traffic and profitable sales that allow us to reinforce our value proposition, which helps to differentiate us from the field.

We are testing pricing strategies to be more responsive to an increasingly promotional competitive retail environment. Of course, our goal is to achieve the optimal balance between driving sales and maintaining margins that are healthy for our business. We are adjusting our advertising cadence and structure to allow more flexibility to diversify our marketing message across our print and digital platforms. This includes shifting a greater proportion of our marketing budget from print to digital programs and testing a number of digital marketing channels. We are encouraged by recent successes achieved through our digital marketing efforts and we are expanding their scale in an effort to drive traffic and sales.

With our new POS system now in place, we are expanding our customer relationship and management capabilities, which should provide enhanced customer analytics and improve the effectiveness of our marketing efforts. While we have always prided ourselves on operating our business with great efficiency, we are continuing to look for cost reduction opportunities throughout our organization. A key focus is our effort to mitigate the significant wage pressures that we are experiencing across our chain and we are encouraged by the results we have achieved with recent tests of alternative store staffing models. Additionally, we continue to aggressively manage store occupancy costs through negotiated rent reductions across our store base.

As part of our efforts to manage our assets and capital structure in light of the sales-related challenges we have experienced, today we announced the reduction in our quarterly dividend, which we believe is a prudent step to help ensure that we maintain a healthy financial condition and the flexibility to invest appropriately in our business. As we work to implement our operational and expense reduction initiatives, we will continue to look for other opportunities throughout our business to accelerate our performance and improve our operating result. We are optimistic that as these enhancements are rolled out, we will be better positioned to succeed in this challenging retail environment.

Now I will turn the call over to Barry who will provide more information about the quarter, as well as to speak to our balance sheet, cash flows and provide fourth quarter guidance.

Barry D. Emerson -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Steve. Our gross profit margin for the fiscal 2018 third quarter was 31% of sales versus 32.4% of sales for the third quarter of fiscal 2017. The decrease in gross margin for the period, primarily reflects higher distribution and occupancy expense as a percentage of sales, as well as the slight reduction in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales was 29.2% in the third quarter versus 28.6% in the third quarter of fiscal 2017. Overall SG&A expense increased $0.3 million year-over-year, mainly due to higher employee labor and benefit-related expense, partially offset by lower advertising and administrative expense.

Now looking at our bottom line. For the third quarter, we reported net income of $3.1 million or $0.15 per diluted share. This compares to net income in the third quarter of fiscal 2017 of $6.0 million or $0.28 per diluted share. Equally reviewing our 2018 year-to-date results, net sales were $740.5 million compared to net sales of $766.7 million during the first nine months of fiscal 2017. Same-store sales decreased 3.9% during the first nine months of fiscal 2018, primarily reflecting lower sales of cold weather, winter products in the first quarter. This compares to a 1.7% increase in same-store sales for the comparable period last year. Net income for the first nine months of fiscal 2018 was $1.6 million or $0.07 per diluted share, including $0.01 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation. This compares to net income of $14.1 million or $0.65 per diluted share for the first nine months of fiscal 2017.

Turning to the balance sheet, our chainwide inventory was $314.8 million at the end of the third quarter compared to $309.3 million at the end of the third quarter last year. On a per store basis, merchandise inventory was up just 0.4% versus the prior year, which compares favorably to our 2017 year-end when merchandise inventory per store was up 5.6% from 2016 and reflects our ongoing efforts to right-size inventory levels based on recent sales trends.

As discussed on prior calls, we adjusted our inventory purchases for this season to reflect the winter-related product carryover following the unfavorable warm and dry winter selling season last year. As we have done successfully in prior years with unfavorable winter weather, we are reintroducing this winter product carryover now and we see little markdown risk associated with it. Overall, we feel very comfortable with our merchandise inventories and expect the year-end balance to be below the prior year.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $8.4 million for the first nine months of fiscal 2018, primarily representing investments in store-related remodeling and new stores, IT systems, and our distribution center. We currently expect capital expenditures for the fiscal 2018, excluding non-cash acquisitions, of approximately $15 million to $17 million. This reflects continued investment in store-related remodeling, new stores, our distribution center and IT systems, as well as the purchase of property -- of a property adjacent to our corporate headquarters, a portion of which we currently use to support our headquarters' operations.

From a cash flow perspective, our operating cash flow was a negative $8.1 million for the first nine months of fiscal 2018 compared to negative $5.6 million during the comparable period last year. The reduction in operating cash flow primarily reflects the decrease in income compared to the same period last year, partially offset by reduced funding of merchandise inventory. As Steve mentioned, with the objective of allowing financial flexibility and maintaining a healthy financial condition, our Board of Directors has decided to reduce the Company's quarterly cash dividend to $0.05 per share, which compares to the prior quarterly dividend of $0.15 per share.

Our long-term revolving credit borrowings at the end of the third quarter were $83.5 million, which compared to borrowings of $46.4 million at the end of the third quarter last year. Our higher debt compared to the prior year, in part, reflects our higher inventory levels as a result of the winter product carryover from last season that I've already discussed. As we continue to right-size our inventory levels during the fourth quarter, we expect debt levels to come down at year-end from where they were at the end of the third quarter.

Now I'll spend a minute on our guidance. For the fiscal 2018 fourth quarter, we expect same-store sales to be in the range of negative low-single digits to positive low-single digits, and we expect to realize a loss per share in the range of $0.15 to $0.25. For comparison purposes, in the fourth quarter of fiscal 2017, same-store sales declined 9.2%, reflecting unfavorable warm and dry winter weather conditions during the period. Earnings per share for the fourth quarter of fiscal 2017 was a loss of $0.62 per share, which included $0.52 per share of charges for various items, including enactment of the Tax Cuts and Jobs Act and impairment. Compared to the prior year, our fourth quarter outlook anticipates higher employee labor and benefit-related expense along with the negative effect of reduced distribution costs capitalized in inventory as a result of our efforts to reduce inventory levels.

Operator, we are now ready to turn the call back to you for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from David Schick with Consumer Edge Research.

David Schick -- Consumer Edge Research, LLC -- Analyst

Hi, there. Thanks for taking my question. Let's start with the newness comment that you made. You know, it's clear across categories of private (ph) sporting goods as well. So just moving quickly, jumping around, you said you're going to kind of go after that and recognize that. Can you give an example of where you're going to be shrinking the breadth of inventory and where you're going to be, trying to go?

Steven G. Miller -- Chairman, President and Chief Executive Officer

I'm sorry David, you cut out on the start of your question. Can you comment that one more time, please, didn't catch at all?

David Schick -- Consumer Edge Research, LLC -- Analyst

Yeah, so newness, you said newness matters and it does and you're going to be (inaudible) some selection and then you talked about in depth, but also I imagine going after some categories where you may not play as much as you would like to. Could you give us some examples of where you are taking from and going to in categories in the efforts toward newness?

Steven G. Miller -- Chairman, President and Chief Executive Officer

Yeah, I'm not going to be just for competitive reasons overly granular about that, but I mean we're looking to downsize our commitment to certain categories that are performing softly. Examples of that might be our firearms business, invest more aggressively where we feel we have greater -- greater opportunities of growth that we're making adjustments within our footwear offering to take advantage of the strength we're seeing in the casual and lifestyle areas. You know we're seeing that certain aspects of our product offering are performing very positively. Some of it, some of the adjustments and enhancements we're making are digital marketing efforts and we're going to capitalize with investments and those types of products, again, without being overly granular over detail. You know over the last few quarters, we've seen some more headwinds and tailwinds in certain of our categories, so our initiatives are really designed to try and turn some of the areas that are performing softer into area with strength which we think are a way to certainly improved results.

David Schick -- Consumer Edge Research, LLC -- Analyst

Thanks. Another question is the competitive environment. Anybody doing -- you talked a lot about external issues like weather and outdoor participation as a result, but how about competitive environment out in your markets, what are you seeing?

Steven G. Miller -- Chairman, President and Chief Executive Officer

Well, I think from a standpoint of brick-and-mortar stores, I think it's a more rationale -- of becoming a more rationale environment. We've been cycling some more openings or just really the process of cycling more than we're facing. Of course with the news of Sears and what's going on from -- with their chapter-chapter filing, all shake up the competitive environment a little bit, but we're certainly -- I certainly sense there's a lot of promotional -- aggressive promotional activity that's occurring some within our sector. And well, that may speak of some of the general softness that is being experienced. We are actively testing pricing strategies to be more responsive to an increasingly competitive retail environment and we are encouraged by much of what we see in those efforts.

David Schick -- Consumer Edge Research, LLC -- Analyst

Great. Last question is, how do you feel, would you like to see Manny Machado back as a Dodger, just any thoughts around the Dodgers really?

Steven G. Miller -- Chairman, President and Chief Executive Officer

How would we like to see Manny Machado -- you know what, in our prep for this call, we didn't anticipate that question. But I don't think I'm too (inaudible) seeing Manny Machado back-to-back as a Dodger. So --

Barry D. Emerson -- Senior Vice President, Chief Financial Officer and Treasurer

Well, I like Manny Machado, so I guess that helps us offset one another. So --

Steven G. Miller -- Chairman, President and Chief Executive Officer

We're (multiple speakers).

David Schick -- Consumer Edge Research, LLC -- Analyst

You're clearly hedged to Manny Machado. I appreciate that. Okay, thank you very much.

Steven G. Miller -- Chairman, President and Chief Executive Officer

Thanks David.

Operator

And we'll take our next question from Michael Baker with Deutsche Bank.

Harris Niva -- Deutsche Bank -- Analyst

Hi guys, this is Harris Niva (ph) on from Mike, can you hear me?

Steven G. Miller -- Chairman, President and Chief Executive Officer

Yeah. Go ahead.

Operator

It looks like his line has disconnected.

Steven G. Miller -- Chairman, President and Chief Executive Officer

Okay.

Operator

And there are no further questions at this time, I'd like to turn it back to Mr. Miller for any closing remarks.

Steven G. Miller -- Chairman, President and Chief Executive Officer

All right. Well, I'm not sure what happened to the last caller, but we appreciate your interest and we look forward to speak to you on our next call. Have a great afternoon.

Operator

And that concludes today's presentation. We thank you for your participation, you may now disconnect.

Duration: 21 minutes

Call participants:

Steven G. Miller -- Chairman, President and Chief Executive Officer

Barry D. Emerson -- Senior Vice President, Chief Financial Officer and Treasurer

David Schick -- Consumer Edge Research, LLC -- Analyst

Harris Niva -- Deutsche Bank -- Analyst

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