Big 5 Sporting Goods Corporation

Good day, ladies and gentlemen. Welcome to the Big Five Sporting Goods second 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 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.

Thank you, Operator. Good afternoon, everyone. Welcome to our 2022 second quarter conference call. Today, we will review our financial results for the second quarter of fiscal 2022, as well as provide an outlook for the third quarter. I will now turn the call over to Barry to read our safe harbor statement.

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.

Thank you, Barry. In what became an increasingly challenging retail climate over the course of the second quarter, we were pleased to achieve earnings that were within our guidance range and higher than in any pre-pandemic second quarter in our history. As we look at our results through the first half of this fiscal year on a year-over-year basis, it is important to keep in mind that we faced extremely difficult comparisons against last year's record results when sales surged due to unusual pandemic-related factors, including the significant benefit from tremendous pent-up demand for our products following the resumption of in-person schools and sports leagues, along with the distribution of stimulus checks. As a result, year-over-year comparisons are highly distorted, so we will provide some pre-pandemic comparisons today as additional context. Net sales for the fiscal 2022 second quarter were $253.8 million, compared to net sales of $326 million for the second quarter of last year. Same store sales were down 22.3% versus last year and below our plan that called for a high teams decrease. From a traffic and ticket perspective, on a year-over-year basis, transactions for the second quarter decreased in the high teams with our average sale down approximately 4%. Looking at our same store sales versus the pre-pandemic 2019 period, we were up 3.9% on a comparable day basis. Similar to other retailers, our top line was impacted by macroeconomic headwinds, which became progressively worse over the course of the second quarter. These macro trends are undoubtedly pulling dollars away from consumers' discretionary spending. Additionally, we have been impacted by the resurgence of COVID cases that began in June, particularly in our key California market. This likely has impacted customer traffic, and we've certainly experienced an uptick in COVID cases among our team members as it's compounded the ongoing store staffing issues we've been battling in the difficult hiring environment. With the staffing challenges, we've been unable to keep all of our stores open for optimal operating hours. Even with all these headwinds, We achieved second quarter sales that were higher than any pre-pandemic second quarter sales in our history. As we have said in the past, while it all starts with sales, generating healthy margins has always been a key focus for us. In the second quarter, despite sales coming in below plan, our margins remained very strong. Although our merchandise margins decreased by 102 basis points versus the record margins we generated in the second quarter of last year, this year's Q2 margins were 310 basis points higher than in any pre-pandemic second quarter in our 20-year history as a public company. This margin strength demonstrates the flexibility of our model and highlights the evolution of our business through the pandemic era that made us a stronger and more resilient company. Our inventory is current, so we are well positioned to use promotions strategically rather than relying upon them to drive sales or clear excess inventory. While we have been more promotional in certain categories, we've been able to do so without meaningfully impacting our planned merchandise margins which in turn helped us achieve our earnings plan for the second quarter. Over the course of the pandemic, we have evolved our promotional model and become much less reliant on chain-wide print advertising. Aside from the obvious advertising cost savings, this has facilitated a more efficient pricing and promotional strategy that allows us to reduce the inventory depth and breadth that we have historically needed to support planned promotions. This improved inventory efficiency has been a major factor in driving gross margin dollars. In the second quarter of 2022, the gross margin dollars we generated relative to our inventory dollar investment was higher than in any pre-pandemic second quarter in our history as a publicly traded company. Turning to current trends, in the third quarter, just like in the second quarter, we are comping extraordinary prior year results. And we continue to battle macroeconomic headwinds. For the quarter to date, our same store sales are running down in the low teams versus last year, but are running up low single digits versus the comparable days in 2019. While supply chain disruption still persists, they are improved from where they were at this time a year ago. We believe our product assortment is generally well positioned, and we anticipate that sales trends versus last year will improve over the balance of the quarter. Stepping back. Over the course of the pandemic, we have enhanced and evolved our model and emerged a stronger company. We have a strong debt-free balance sheet with a healthy inventory position. We knew fiscal year 2022 would be hard to predict due to the combination of challenging comps from periods of unprecedented demand and the uncertainties of the current environment. We continue to benefit from enhancements we have made to our cost structure, which are helping to mitigate extraordinary inflationary pressures and are protecting our EBITDA in the face of new challenges borne by the shifting macroeconomic forces that all retailers are facing. We have a long operating history and proven track record of managing through challenging conditions, which combined with the flexibility that we've created, are allowing us to continue to generate healthy operating results. In closing, I'd like to acknowledge and thank our Big Five team that has drawn on their years of experience through many economic cycles to help us remain nimble and adapt to new circumstances in an ever-changing environment. I'll now turn it over to Barry to provide additional details regarding our second quarter performance and third quarter outlook.

Thanks, Steve. As we previously mentioned, our net sales for the fiscal 2022 second quarter were $253.8 million, which represented our highest second quarter sales in the company's history. Compared to the fiscal 2019 period, second quarter sales to our sales increased 3.9% on a comparable day basis. Gross profit for the fiscal 2022 second quarter was $88.9 million compared to $126.9 million in the second quarter of the prior year. Our gross profit margin was 35% in the fiscal 2022 second quarter, which was down compared to 38.9% in the record prior year second quarter. The decrease in gross profit margin year over year primarily reflected higher store occupancy and warehouse expense as a percentage of net sales partially offset by a significant increase in cost capitalized into inventory. our merchandise margins decreased by 102 basis points for the fiscal 2022 second quarter compared to the second quarter of fiscal 2021. However, when compared to the 30.3% gross profit margin we reported in the second quarter of 2019, our gross margin continues to demonstrate strength with an increase of approximately 470 basis points in part reflecting the evolution of our pricing and promotional strategy. Overall, selling at administrative expense decreased $1.8 million in the fiscal 2022 second quarter versus the prior year period, primarily due to lower performance-based incentive accruals and credit card fees, partially offset by broad-based inflationary impact, including increased employee labor and benefit-related expenses year over year, and to a lesser degree, higher advertising expense due in part to the Easter calendar shift. Additionally, we incurred a charge of $1 million, or $0.03 per diluted share, for the revaluation of workers' compensation reserves due to a change in claims assessment methodologies. As a percent of net sales, SG&A expense was 30.2% in the fiscal 2022 second quarter versus 24% in the 2021 second quarter, reflecting the deleveraging effect of lower sales. Compared to the second quarter of fiscal 2019, SG&A expense as a percent of net sales this year was approximately flat. Now looking at our bottom line. Net income for the second quarter of fiscal 2022 was $8.9 million, or 41 cents for diluted share, after the $0.03 workers' compensation charge. This compares to record second quarter net income of $36.8 million, or $1.63 for diluted share, in the second quarter of fiscal 2021. And once again, for added perspective, this year's second quarter EPS of 41 cents compares to breakeven EPS of zero that we reported in the second quarter of fiscal 2019. Adjusted EBITDA continues to be very healthy and totaled 17.7 million for the second quarter of fiscal 2022, compared to 52.9 million in the second quarter of fiscal 2021. Briefly reviewing our 2022 first half results, net sales were 495.8 million, compared to record net sales of 598.8 million in the first 26 weeks of last year. Same store sales decreased 17.3% in the first half of fiscal 2022 versus the comparable period last year. Net income for the first 26 weeks of fiscal 2022 was 18 million or 81 cents for diluted share. This compares to record net income for the 2021 first half of $558.3 million, or $2.59 for diluted share, including a previously reported net benefit of $0.06 per share. Adjusted EBITDA was $32.7 million for the 2022 year-to-date period, compared to $83.2 million in the comparable prior year period. Turning to the balance sheet, our merchandise inventory at the end of the second quarter of fiscal 2022 increased 26.8% year-over-year, primarily reflecting more normalized inventory levels following the significant sell-through in the prior year period. To a lesser extent, the higher inventory also reflects carryover of winter-related inventory following unseasonably warm and dry winter weather in the first quarter, which we will reintroduce next season. Compared to the end of the second quarter of fiscal 2019, our merchandise inventory this year increased slightly by 1.5%. Factoring out winter-related products, our merchandise inventory was well below 2019 levels. Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $5.5 million in the first half of fiscal 2022. For the fiscal 2022 full year, we expect CapEx in the range of 13 to 17 million, primarily representing investments in store-related remodeling, new stores, distribution center equipment, and computer hardware and software purchases. During fiscal 2022, we expect to open approximately three stores and close approximately two stores, including one relocation. From a cash flow perspective, Net cash used in operating activities was $39.1 million in the first half of fiscal 2022. This compares to positive operating cash flow of $88.7 million in the prior year period. The year-over-year decrease in operating cash flow primarily reflects increased funding of merchandise inventory and lower net income. Our balance sheet at the end of the second quarter of fiscal 2022 was very healthy with zero borrowings under our credit facility and a cash balance of $36.6 million. Our financial condition has strengthened considerably over the past three years and compares to borrowings under our credit facility of $62.4 million and a cash balance of $6.6 million at the end of the second quarter of fiscal 2019. In the second quarter of fiscal 2022, we repurchased $2.6 million of common stock under our 25 million share repurchase authorization, bringing our year-to-date repurchases to $4.1 million. Additionally, today we announced that our Board of Directors declared a quarterly cash dividend of 25 cents per share. Now I'll spend a moment on guidance, which reflects our expectation that macroeconomic headwinds will continue to impact consumer discretionary spending. For the fiscal 2022 third quarter, we expect same store sales, which are reported on a comparable day basis, to decrease in the high single digit range compared to the fiscal 2021 third quarter. Versus 2019, we expect same store sales to increase in the low single-digit range on a comparable day basis. We expect fiscal 2022 third quarter earnings for diluted share in the range of 22 cents to 32 cents, which compares to earnings for diluted share of $1.07 in the third quarter of fiscal 2021 and 30 cents in fiscal 2019. Relative to this year, the fiscal 2019 third quarter benefited from a shift related to our fiscal calendar. That concludes our prepared remarks.

Operator, we are now ready for any questions.

Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 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 keys.

One moment, please, while we poll for questions.

We have a question from Mark Smith of Lake Street Capital. Please go ahead.

Hi, guys. First off, I was wondering if you could walk a little bit through kind of the sequential comps during the quarter, what you saw kind of month to month.

Yes. I mean, again, it's so erratic going against the 2021 results, but we were down – we said 22 percent point two plus point three same stores for the quarter and it was pretty consistent which each quarter being down you know between 20 and basically 20 25 percent down slightly you know slightly more in in in April that's compared to last year if we were comparing to 2019 You know, April was by far our strongest comparison against 19, and the comps decelerated against 19 for May and June. And on that basis, it's somewhat distorted due to, you know, extraordinary ammunition sales back in June of 2019 in front of a – a law change in California. Based on expectations, as we mentioned, we saw a fundamental deceleration from our plan over the course of the quarter. Hope that helps.

Yeah, as we look at it, is there anything, one thing that you can tie it to? How close was the consumer pullback tied to you know, perhaps gas prices, or is it a much more broad issue hitting your key consumers that made them kind of pull back?

Boy, you know, Mark, I mean, I think, you know, the inflation and the impact on our consumers' pocketbooks would be difficult to, you know, discern how much of it's gas, how much of it's food inflation, how much of it's, you know, housing costs and rents and the like. But, you know, Very difficult to see in real time, but definitely an impact for discretionary purchases amongst our consumers.

And then you guys said, I think quarter to date comps are down low teens, I think is what you said. Do you feel like your consumer has kind of bottomed, that it's gotten as bad as it's going to get? or with any rebound, or maybe tell us what you're seeing from consumer behavior today.

Mark, it's very difficult to make a judgment on whether our consumers bought on a real-time basis. I mean, there's so many moving parts to our sales on a year-over-year basis due to seasonality, due to impacts of weather. In terms of the comparisons against 2021, we do anticipate, and I think I mentioned in prepared remarks, that our trends will pick up, and we're guiding to a decrease in the quarter against last year of high single digits, and we're running down low teens. And that has more to do with sort of the cadence really of what happened last year as our numbers were impacted as we played through the Q3 of last year by our stock position being relatively depleted after our remarkable second quarter that we achieved and so as we went into the back half of the quarter last year we were missing lots of products that we wish we had and unquestionably could have performed even stronger than our strong Q3 results a year ago were we in a better inventory position.

As we look at margin a little bit here, any additional insight you can give us on margin deceleration with the declining sales? I know you guys have a new operating model versus a couple of years ago. Do you feel like you can maintain these gross profit margin in this low 30% to 35% or with decelerating sales, is there a chance we see it maybe drop below those levels?

In terms of merchandise margins, our focus is on profitability. We think we've taken significant steps to enhance the you know, the profit model of our business and operating our business at stronger merchandise margins than we achieved pre-pandemic, and we believe that the absolute lion's share of that is sustainable, not necessarily to the remarkable degree that we realized last year. So on a year-over-year basis, you know, some... some deceleration on a quarter-over-quarter basis, relatively speaking. You know, we're planning for, you know, very modest, I guess, deceleration of our merchandise margin levels. Barry, in terms of the overall... That's right, Mark.

And then, you know, as levels come down, you know, sales come down, we are seeing some deleveraging, in our occupancy to a lower degree, but on the warehousing side, because of the challenges around finding resources, staffing, those kinds of things, and overall freight costs, we are seeing some deleveraging on the lower sales on warehouse, as well as a little bit on occupancy also.

At the end of the day, Mark, we're always about trying to optimize gross profit dollars, and we feel... that we're in a very healthy inventory position. So we don't feel we need to promote just for the sake of clearing inventory. And ultimately, our decisions are driven by how to optimize gross profit dollars and appropriately manage costs.

And fortunately, just from a pre-pandemic standpoint, it's nice to see our merchandise margins up. north of 400 basis points versus the 2019 period, for example.

Okay. And then, Steve, you just talked about it, kind of my last question a little bit. As we look at inventory levels, the dollar amount up fairly significantly on a year-over-year and even a sequential basis. Sounds like some of that is winter holdover. As we look at kind of late summer months moving into fall, do you feel like there's discounting that you need to do on some of, you know, what you call kind of your current inventory? Or, you know, are you okay if we see, you know, sales at lower levels being able to hold some of that inventory over to next year?

Yeah, we feel pretty good overall, I mean, about our inventories. I mean, like always, I mean... During the pandemic, pre-pandemic and now, you know, there's always some items we wish we had more of and some items we wish we had less of. But overall, we think our inventory is in good position. We feel comfortable to the extent that sales in some areas may be softer than anticipated. You know, we're working to adjust orders to the extent we're able to. But by and large, we're very comfortable holding products over time. We've demonstrated year over year that they're just like with winter product, that if the demand isn't there, just chasing it with discounting isn't necessarily the answer. And holding that product and reintroducing it works well for us. But overall, we don't see that as a major concern unless there's some more significant deceleration from a demand standpoint.

Perfect. Thank you, guys.

Thank you, Mark.

That completes our question and answer session.

I'll now turn the call back to Mr. Miller for any closing comments.

All right. Well, thank you, Operator, and thank you all for joining us in today's call. We appreciate your interest in Big Five Sporting Goods and look forward to speaking with you again after the conclusion of our third quarter.

Have a great afternoon.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.