Big 5 Sporting Goods (BGFV) Q3 2021 Earnings Call Transcript

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Big 5 Sporting Goods (BGFV 4.53%)
Q3 2021 Earnings Call
Nov 02, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods third quarter 2021 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.

You may begin.

Steve Miller -- President and Chief Executive Officer

Thank you. Good afternoon, everyone. Welcome to our 2021 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2021, as well as provide an outlook for the fourth quarter.

I will now turn the call over to Barry to read our safe harbor statement.

Barry Emerson -- Chief Financial Officer

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.

Steve Miller -- President and Chief Executive Officer

Thank you, Barry. We are pleased to report another quarter of strong earnings driven by a combination of solid sales, margin expansion, and an improved cost structure. Over the past one and a half years plus, we've clearly demonstrated our ability to capitalize on evolving consumer demand and recreational trends. Given the sustained strength, cash flow generation, and positive outlook of our business, we have declared another special cash dividend of $1 per share in addition to our regular quarterly cash dividend of $0.25 per share.

We are pleased to be able to provide these shareholder returns while also maintaining the financial flexibility to invest in our business. Barry will provide more detail on our balance sheet and use of cash, but first, I would like to provide an overview of our third quarter results and then touch on our trending in the fourth quarter to date. During the third quarter, we saw broad-based sales strength across our diverse product mix. Although we faced challenges from supply chain disruptions to continued pandemic-related issues to nature wildfires in our markets, we nonetheless delivered sales that largely kept pace with last year's extraordinary pandemic-related sales surge while comping very positively against pre-pandemic 2019 sales.

Third quarter net sales were $289.6 million, compared to net sales of $305 million for the third quarter of fiscal 2020. Much of the year-over-year difference in sales was expected due to the unfavorable impact from a calendar shift related to our 53-week fiscal 2020 that resulted in pre-4th of July holiday sales moving from the third quarter in fiscal 2020 to the second quarter in fiscal 2021. Same-store sales, which are recorded on a comparable day basis and were not impacted by the calendar shift, comped relatively flat down 0.7% versus the 2020 period, which was a very challenging comp given the strong pandemic-driven sales in the summer of 2020. We believe we would have comped comfortably up in the low single digits if were not for the massive wildfires in our Western markets.

The impact of these fires was particularly significant over August and into September. All national forests in California were closed to the public for multiple weeks, including the key Labor Day holiday period, which obviously impacted sales of outdoor recreational products. Given the dynamic environment over the last couple of years, in addition to reporting year-over-year comparisons against 2020, we believe a two-year comparison with 2019 third quarter provides relevant context to evaluate our results relative to pre-pandemic period. On that basis, this year's third quarter net sales of $289.6 million compares to net sales of $266.2 million for the third quarter of fiscal 2019.

Same-store sales increased 13.2% versus the 2019 third quarter. Turning to the cadence of our monthly sales. Our July same-store sales comped down 9% against 2020 as we were comping against the peak of the pandemic sales surge last year. On a two-year basis compared to 2019, our July sales were up 17.7%.

August comped up 3.8% compared to 2020 and up 6.4% compared to 2019. Although August benefited from the return of school and youth sports, much of the benefit was offset by the negative impacts of the wildfires. In September, same-store sales were up 4.5% versus 2020 and up 15.9% versus 2019. Each of our three major merchandise categories benefited from the healthy return to team sports in our markets.

Apparel was up more than 20% versus 2020 and up more than 10% versus 2019. Footwear was up more than 25% versus 2020 and up mid-single digits versus 2019. Hardgoods was down low teens versus 2020, but up nearly 20% versus 2019. Hardgoods by far was the biggest beneficiary of pandemic-related demand in the prior-year period driven by products such as home fitness and outdoor recreation.

Hardgoods was also the category that was most impacted by wildfires during this year's third quarter. What we think is particularly noteworthy is that we continue to generate these strong sales while operating our stores with significantly less advertising and reduced operating hours compared to the pre-pandemic period, which, of course, have enhanced our operating cost structure. On top of the solid sales for the third quarter, we continue to achieve very healthy merchandise margins. Versus the prior-year period, merchandise margins were up 152 basis points.

Versus 2019, margins were up 429 basis points on a comparable day basis. Unquestionably, our third quarter results would have been even stronger but for the fact that our ability to procure and deliver products to our stores was constrained by the widely reported supply chain disruptions facing virtually all retailers. If those challenges have continued into the fourth quarter and we may not have all the products on hand that we would ideally want to have, we believe our inventory should be sufficiently well-positioned to produce solid fourth quarter results that significantly exceed pre-pandemic levels. Looking at our fourth quarter to date, same-store sales are running slightly positive on a year-over-year basis versus 2020 and up in the mid-teens on a two-year basis versus 2019.

We continue to see strength across a broad array of product categories. That said, October is historically a low-volume month. And as always, the key to the quarter is the holiday period, which will be heavily influenced by winter weather and the overall retail consumer environment, not to mention the ongoing supply chain challenges. Before I turn it over to Barry to provide additional details, I would like to take a moment to thank our entire Big 5 team for their dedication and hard work over the course of this year.

Through their efforts, 2021 will almost certainly prove to be another year of record sales and earnings for Big 5 Sporting Goods. Now I will turn the call over to Barry to provide additional details.

Barry Emerson -- Chief Financial Officer

Thanks, Steve. Net sales for the fiscal 2021 third quarter were $289.6 million, compared to net sales of $305 million for the third quarter of fiscal 2020 and $266.2 million for the third quarter of fiscal 2019. Sales for this year's third quarter were impacted by the unfavorable fiscal calendar shift that Steve mentioned. Same-store sales, which are reported on a comparable day basis and not -- and were not impacted by the calendar shift, were relatively flat versus 2020, decreasing 0.7%.

Compared to the 2019 third quarter before COVID-19, same-store sales increased 13.2%. Gross profit for the fiscal 2021 third quarter was $108 million, compared to $110 million in the third quarter last year. The company's gross profit margin was 37.3% in the fiscal 2021 third quarter versus 36.1% in the prior year. The increase in gross profit margin largely reflects a 152-basis-point increase in merchandise margins, partially offset by the deleveraging of store occupancy costs compared to the prior year.

Our higher merchandise margins primarily reflect the continuation of reduced promotional activities, higher sales prices in response to increases in product purchase costs and a shift in our product sales mix. Overall, selling and administrative expense for the quarter increased by $3.8 million compared to the prior-year period, primarily due to increased store-related costs such as labor, benefits, and facility costs versus the 2020 third quarter when our store operating hours were reduced due to COVID-19. While our store operating hours have increased in fiscal 2021 compared to the same period last year, store operating hours remain below pre-pandemic levels. We also increased our advertising expense in the third quarter this year compared to last year during the height of the pandemic, but advertising expense remained substantially below pre-pandemic levels.

As a percentage of sales, SG&A expense was 25.9% in the fiscal 2021 third quarter versus 23.4% in the fiscal 2020 third quarter. A portion of this deleveraging was due to our fiscal calendar shift, which had an unfavorable impact on net sales without the equivalent corresponding favorable impact to costs. Compared to the pre-COVID third quarter of fiscal 2019, our SG&A expense in the fiscal 2021 third quarter decreased by $1.7 million with SG&A expense as a percent of sales improving by approximately 300 basis points. Now looking at our bottom line.

Net income for the third quarter of fiscal 2021 was $24.1 million or $1.07 per diluted share. This compares to net income for the third quarter of fiscal 2020 of $28.4 million or $1.31 per diluted share, which at the time was the highest earnings of any quarter in the company's history. Earnings per diluted share for the third quarter of fiscal 2021 compared to the prior year reflects an approximate $0.20 unfavorable impact from the company's fiscal calendar shift, as we mentioned earlier. For comparison purposes, for the third quarter of fiscal 2019, net income was $6.4 million or $0.30 per diluted share.

Briefly reviewing our results for the first nine months of 2021. Net sales were $888.5 million, compared to net sales of $750.6 million in the prior-year period and net sales of $752.4 million in the 2019 period. Year-to-date 2021 same-store sales increased 18.9% versus the comparable period last year and increased 19.7% versus the comparable period in 2019. Net income for the first nine months of fiscal 2021 was $82.5 million or $3.66 per diluted share, including a net benefit in the first quarter of $0.06 per diluted share related to an insurance settlement and the elimination of an employment agreement liability.

This compares to net income for the first nine months of fiscal 2020 of $34.9 million or $1.63 per diluted share, including a previously reported net benefit of $0.13 per diluted share. For the first nine months of fiscal 2019, net income was $8.1 million or $0.38 per diluted share, including a previously reported net charge of $0.02 per diluted share. Adjusted EBITDA continues to be very healthy as we generated $37.3 million for the third quarter of fiscal 2021 and $120.5 million for the 39-week period ended October 3, 2021. Turning to the balance sheet.

Our merchandise inventory at the end of the fiscal 2021 third quarter was up just slightly compared to the prior year. On a two-year basis, from the end of the fiscal 2019 third quarter, our merchandise inventory is down approximately 18%. Our inventory is a little lower than we would like to see right now. And as Steve mentioned, we are managing through supply chain disruptions as demand continues to outpace supply.

That said, one not so obvious benefit of our reduction in print advertising is that we are able to operate with less inventory now than we have historically carried. With the reduced print advertising, we have more flexibility to source product in smaller lots and more flexibility to allocate products strategically to stores, both of which have proven to be an advantage in the current environment. Additionally, our inventory is very fresh, and we are operating with considerably less clearance inventory than we were last year and in 2019. Looking at our capital spending.

Our capex, excluding noncash acquisitions, totaled $7.3 million for the year-to-date fiscal 2021 period. For the full fiscal year, we now expect capex to be in the range of $9 million to $12 million, primarily representing investments in store-related remodeling, new stores, distribution center equipment and computer hardware and software purchases. During the third quarter, we opened one store in Park City, Utah and closed two stores. In the fourth quarter to date, we have opened one store in Glenwood Springs, Colorado.

Over the balance of the fourth quarter, we expect to open one new store in Arizona, along with two stores in Southern California, both of which are relocations of stores we expect to close in the quarter. With these openings and closings, for the full year, we expect to open approximately five new stores and close approximately four stores, including the two relocations, bringing us to a year-end store count of 431 stores. Now looking at our cash flow. The combination of sales growth, merchandise margin expansion, and improved cost structure allowed us to generate substantial positive operating cash flow of $95.2 million in the first nine months of fiscal 2021.

This compares to positive operating cash flow of $136.4 million in the prior-year period. The year-over-year decrease in cash flow primarily reflects increased funding of merchandise inventory. Our strong operating results continue to support our healthy balance sheet and our financial flexibility. We ended the fiscal 2021 third quarter with zero borrowings under our credit facility and with cash and cash equivalents of $114 million.

Over the course of the year-to-date period through the end of the fiscal third quarter, we improved our cash position by $49.4 million. And during that time, we returned to stockholders $36.8 million in value through a combination of regular and special cash dividends, as well as share repurchases. Additionally, as Steve mentioned, today, we announced that our board of directors has declared another special cash dividend of $1 per share in addition to our regular quarterly cash dividend of $0.25 per share. With these dividends, both of which will be paid in the fourth quarter, we will have returned more than $64 million to shareholders over the course of 2021.

Now I'll spend a moment on our guidance. For the fiscal 2021 fourth quarter, we expect same-store sales compared to the prior-year period to be in the range of negative low single digits to positive low single digits with earnings per diluted share in the range of $0.55 to $0.70. Compared to a pre-pandemic period, our guidance at the midpoint of the range implies an approximate 10% increase in same-store sales versus the fiscal 2019 fourth quarter. Fiscal 2021 fourth quarter guidance compares to a same-store sales increase of 10.5% and earnings per diluted share of $0.95 in the fourth quarter of fiscal 2020, which included a previously reported net benefit of $0.12 per diluted share.

As a reminder, due to our fiscal calendar, our 2020 fourth quarter included 14 weeks while our 2021 fourth quarter only includes 13 weeks. The same-store sales guidance reflects comparable 13-week periods. Our guidance assumes that any new conditions relating to the COVID-19 pandemic will not materially impact our operations during the period. Finally, as a reminder, our fourth quarter typically reflects lower quarterly earnings compared to our third quarter due to the combination of seasonally lower sales volumes in the first half of the fourth quarter until the holiday sales period, the related promotional environment associated with holiday sales and higher expenses during the holidays for store labor and advertising compared to the third quarter.

That concludes our prepared remarks. Operator, we are now ready for any questions.

Questions & Answers:

Operator

Now, we will be conducting a question-and-answer session. [Operator instructions] One moment while I pull for questions. Our first question comes from the line of Mark Smith with Lake Street Capital Markets. You may proceed with your question.

Mark Smith -- Lake Street Capital Markets -- Analyst

Hi, guys! First question for me is just looking at the supply chain, and you guys spoke to it a little bit in your remarks. Any additional insight you can give us on supply chain headwinds or other inflationary pressures that you're seeing today?

Steve Miller -- President and Chief Executive Officer

Sure, Mark. We're certainly facing all the issues that we believe are well documented that most others are facing. As I think I mentioned in the prepared remarks, in some categories, we wish we had more products. But bottom line is that we are well-positioned, we think, for the balance of the quarter and certainly the holiday season.

We continue to receive product every day, and at this point, we have the lion's share of what we need for Black Friday and the holidays. You know, in terms of inflation, it's a very real issue right now. You know, we're in a situation where given certainly the strong demand relative to supply. We've been able to adjust prices to maintain our margins, something we're keeping a close eye on.

And, you know, at the end of the day, we're all about maximizing gross profit dollars. We would anticipate at some point in time as supply begins to catch up with demand, that will pivot to be somewhat more promotional, certainly with the goal of ultimately maintaining and enhancing gross profit dollars.

Mark Smith -- Lake Street Capital Markets -- Analyst

Perfect. And then this year, we've talked a lot about calendar shift with the extra week last year. Anything that we should have on our radar here as we go into Q4 or besides the extra week?

Barry Emerson -- Chief Financial Officer

Well, I guess last year, Mark, you know, we did have a benefit that we recorded related to an insurance settlement. It was a big number. It was about $2.8 million. So that -- a portion of that was in cost of sales, about $1.1 million.

And a portion of it was in SG&A, which was about $1.7 million. These are -- this is a benefit. So I just want to make sure, I guess if there was anything I'd point out, it would just -- you know, it would be that, not to mention, you know, the 14 weeks versus 13 weeks and all of those kinds of things.

Mark Smith -- Lake Street Capital Markets -- Analyst

Perfect. And the last question for me is, you know, I love to see the special dividend again, but you guys did come back for the first time in quite a while and buy back stock. You know, any updated thoughts on share repurchases and how you kind of view them as we go forward? And if you can speak to if you guys have bought any stock so far in Q4.

Barry Emerson -- Chief Financial Officer

Yeah, Mark, you know, I can't specifically talk to our plans for stock buyback. We do have a $13 million -- we have $13 million left on our authorized stock buyback program. Historically, you know, we've been active. We slowed down.

We've been opportunistic. We've been very focused on the dividend in terms of returning value to shareholders, and I really can't speak to our future plans on the stock buyback. It is something that's, you know, part of our use of cash, and we'll continue to evaluate it, but I really can't speak to any fourth quarter plans with regard to share repurchases.

Operator

That concludes your question-and-answer session. I would like to turn this call back over to Mr. Miller for closing remarks.

Steve Miller -- President and Chief Executive Officer

Thank you, operator, and 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 fourth quarter.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Steve Miller -- President and Chief Executive Officer

Barry Emerson -- Chief Financial Officer

Mark Smith -- Lake Street Capital Markets -- Analyst

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