Big 5 Sporting Goods Corporation

Good day, ladies and gentlemen. Welcome to the Big Five Sporting Goods First Quarter 2023 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 2023 first quarter conference call. Today, we will review our financial results for the first quarter of fiscal 2023, as well as provide an outlook for the second 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 are 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 the first quarter, we achieved earnings near the midpoint of our guidance range, despite a very challenging operating environment. Not only did macroeconomic headwinds accelerate over the course of the quarter, but the persistence of the cold and wet weather that started as a tailwind in the first half of the quarter turned into a headwind over the back half of the quarter. Our net sales for the quarter were $224.9 million compared to $242 million in the first quarter of 2022. Same-store sales came in near the lower end of our guidance range, down 7.1%. On a year-over-year basis, transactions for the quarter were down mid-single digits, with the average ticket down low single digits. In January, when winter weather acts as a huge driver for our business, same-store sales were up 3.6%. However, in February and March, when non-winter sales become more relevant to our overall results, we were down 7.5% and 13.7% respectively. The unusually wet and cold weather caused widespread delays to the start of our baseball and softball seasons and impacted other spring recreational activities. Additionally, it appeared to us that over the course of the quarter, our consumer was further impacted by macroeconomic conditions, including the regional bank crisis and lower tax refunds. Turning to the performance of our major merchandise categories, our apparel category increased in the high single-digit range on the strength of winter-related sales. Our footwear category was down mid-single digits. Barred goods, which was the category most negatively impacted by the significant rainfall, was down in the mid-teens range for the quarter. In the face of top-line headwinds, we have continued to focus on prioritizing merchandise margins to drive gross profit dollars. Merchandise margins in the first quarter remained healthy, declining just 23 basis points versus the record margins we generated in the first quarter of last year. To put that in context, our merchandise margins were up several hundred basis points versus pre-pandemic levels. We continue to closely manage our inventory, and as a result, we have not needed to be overly promotional for the sake of clearing product. Our winter product sell-through was very good, and our aged inventory is at a historically low level. We feel well-positioned to maintain healthy merchandise margins going forward. Turning to current trends, it remains a tough operating environment, and the second quarter is off to a soft start, with sales running down approximately 11% versus last year. We believe our customers are continuing to carefully monitor their discretionary spending. While we benefited in the second quarter from some catch-up sales in baseball following the rain delays in the prior quarter, it certainly has not been enough to overcome the general softness in discretionary spending. As we look ahead, The key to our second quarter always revolves around the high volume periods surrounding Memorial Day, Father's Day, and the start of summer. The snowpack and rainfall have done wonders for the drought across our footprint, and we are hopeful that this will create favorable summer recreational opportunities, although flooding from excess snowmelt remains a potential concern. In summary, as we're managing through this challenging environment, which is clearly pressuring our top-line sales, we are focused on maintaining our strong merchandise margins and working to mitigate the impact of inflation on our operating expenses. We've kept our inventory in a healthy position, which allows us to be opportunistic with future inventory investments that can drive traffic and sales at healthy merchandise margins. Our balance sheet remains strong, and we believe we are well-positioned to navigate the current environment and capitalize on opportunities as the economy improves. I'll now turn it over to Barry to provide additional details regarding our first quarter performance and second quarter outlook. Barry? Thanks, Steve.

Gross profit for the fiscal 2023 first quarter was $75.1 million compared to gross profit of $85.9 million in the first quarter of the prior year. Our gross profit margin of 33.4% in the fiscal 2023 first quarter declined from 35.5% recorded in the first quarter of last year. The lower gross profit margin year over year primarily reflected higher store occupancy and distribution expense, including cost capitalized into inventory as a percentage of net sales and a decrease in merchandise margins of 23 basis points. As Steve mentioned, although merchandise margins for the first quarter this year decreased slightly versus the first quarter of fiscal 2022, merchandise margins continued to run several hundred basis points higher than pre-pandemic levels, reflecting the evolution of our pricing and promotional strategy. Overall, selling and administrative expense came in slightly favorable to plan, decreasing $0.1 million in the fiscal 2023 first quarter versus the prior year period, primarily reflecting lower performance-based incentive accruals offset by higher labor costs. As a percent of net sales, SG&A expense was 33.4% in the fiscal 2023 first quarter versus 31.1% in the 2022 first quarter, reflecting the lower sales base. we continue to focus on managing our expenses in this challenging high inflation economic environment. Now looking at our bottom line, net income for the first quarter of fiscal 2023 was 0.2 million or one cent for diluted share. This compares to net income of 9.1 million or 41 cent for diluted share in the first quarter of fiscal 2022. EBITDA totaled $4.5 million for the first quarter of fiscal 2023, compared to $15 million in the first quarter of last year. Turning to the balance sheet, our merchandise inventory was up 5.3% year over year at the end of the first quarter of fiscal 2023. We feel good about the level of our inventory in that the increase primarily reflects supply chain disruptions last year, partially offset by strong sell-through of winter inventory this season. Reviewing our capital spending, our CapEx, excluding non-cash acquisitions, totaled $2.5 million for the first quarter of fiscal 2023, primarily representing investments in store-related remodeling, distribution center equipment, corporate leasehold improvements, and computer hardware and software purchases. For the fiscal 2023 full year, we continue to expect CapEx in the range of 15 to 20 million and anticipate opening approximately five new stores, relocating one store, and closing approximately five stores. Now looking at our cash flow, net cash provided by operating activities was 12.3 million for the first quarter of fiscal 2023. This compares to cash used in operating activities of 23.7 million in the prior year period. The improvement in our operating cash flow for the first quarter of fiscal 2023 compared to the prior year primarily reflected reduced funding of merchandise inventory and accrued expenses, mainly related to performance-based incentive accruals, partially offset by lower net income year over year. Our balance sheet at the end of the first quarter of fiscal 2023 was very healthy with zero borrowings under our credit facility, and 27.5 million of cash, which was up 1.9 million from the end of fiscal year 2022. As we look ahead, we continue to 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 25 cents per share. Now I'll spend a moment on guidance. For the fiscal 2023 second quarter, the company expects same-store sales to decrease in the high single-digit range compared to the fiscal 2022 second quarter. The company same-store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the second quarter. Fiscal 2023 second quarter earnings per share is expected in the range of negative 10 cents to positive 5 cents, which compares to fiscal 2022 second quarter earnings per diluted share of 41 cents. That concludes our prepared remarks. Operator, we are now ready for any questions.

Thank you, sir. The first question we have is from Mark Smith from Lake Street Capital Markets. Please go ahead.

Hey, guys. Thank you for the insight into monthly comps. I just wanted to confirm that I kind of heard stuff. It sounds like quarter to date you guys are running down 11%. Did I hear that right?

Q2 to date, yes. That's right.

Okay. And then, you know, this deceleration in comps, especially as we look at it, maybe on a two year or even on a three year stack basis. Um, you know, I don't know if you can quantify or maybe speak to how much of this you think in April was really weather related versus macro pressures on the consumer, uh, in your markets.

Sure. Mark, I think the, uh, Certainly the overriding factor in our minds is the macro pressures in the markets and the discretionary goods that we carry. Weather was still a headwind in April to us, less so than probably it was in March. At least we saw a peak of sun in our markets, in our core California markets today. over the course of April, and we were very encouraged to see, I guess, the pent-up demand when the sun shined. But clearly, the key factor that we're battling is, I think, the macro environment.

Okay. And as we look at the inventory, I think, Barry, you had said you guys were pretty comfortable with it, and I know you guys – typically are comfortable holding inventory for a longer period of time. You know, but how do you feel about what you have? Is there anything, you know, that you think was maybe lost due to weather, any baseball items, softball items, et cetera, that you may have to hold over till next season or, you know, sell at a discount here?

No, we feel very good about our business. I mean, certainly the baseball product is not a – core product is not a fashion-driven business, so whatever we did hold would hold its value very positively. But the truth of the matter is that we're in good shape in baseball. We're generally pleased with our team sports business and our baseball. I mentioned we got some comeback in baseball in – I think that's an area that families and parents are prioritizing in this marketplace. So no concerns whatsoever in terms of our baseball inventory.

Okay. And then it looks like maybe we added one additional closure to the outlook kind of in the guidance for this year. you know, is that maybe a store up against the end of a lease that just doesn't make sense to renew? Or, you know, is there maybe an issue where a store has gone down enough that it just makes sense to close?

No, more, maybe it's just, uh, evaluating as we always do, uh, you know, our store openings, relocations, enclosures, uh, what's really the goal of, you know, continually optimizing our, our store base. Um, And I think trying to reflect on the change from going to, I think we said, four closures for the year to five was just an evaluation of a lease for renewal that we ultimately felt weighed into closing and seeing an opportunity to pick up, we believe, enough sales in adjacent stores to ultimately make it a you know, the correct, what we believe is the correct decision for our store base.

Okay. The last question for me is just as we look at GNA, you know, you've held up pretty well on merchandise margins, but as we look at GNA, you know, down just slightly year over year, and I know you don't guide this number, but as you look at it, big picture is, Is there any, you know, we'll call it fat that's out there that you think you can trim or control in G&A, or do you feel like you're running kind of as lean as you can right now on G&A expenses?

You know, Mark, we're looking at all of our expenses very carefully in this environment. It really is broad-based pressure really throughout the income statement and the balance sheet, really. But no, there's levers that we can pull and are pulling. Again, generally, the pressure is up, but we're taking a hard look at – I mean, when we look at our labor costs, I mean, certainly our most significant expense is labor, and labor rates have gone up year after year after year. So we're doing our best to try and manage our labor hours as best we can, you know, at store level. And that, we've had some success there. Certainly we, and we continue to work, you know, that angle, that's certainly our largest expense. So we'll continue to work on labor hours at the stores. You know, advertising, you know, we continue to look at our advertising and try and, you know, rationalize and make sure that we're you know, we're getting the return on those dollars, whether it's generally, you know, digital in this stage of the game, but we still have, you know, some minor print ads, but certainly looking at that cost. And then really just other areas, you know, kind of throughout. I mean, we've had, you know, people coming to us constantly to try and renegotiate contracts higher and, you know, more expensive, and we're pushing back and doing whatever we can to try and manage. And and working with others to try and, again, on a consulting basis to try to drive down certain costs and things like that. So really kind of turning over all the rocks to manage our expenses.

Okay, great. Thank you, guys.

Thanks, Mark. Thank you. Ladies and gentlemen, there are no further questions at this stage. I will now hand back to Mr. Miller for closing remarks. Please go ahead, sir.

Thank you, Operator, and thank you all for joining us on 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 second quarter. Have a great afternoon.

Thank you. Ladies and gentlemen, that then concludes today's conference call. Thank you for joining us. You may now disconnect your lines.