Big 5 Sporting Goods Corporation

Good day, ladies and gentlemen. Welcome to the Big Five Sporting Goods Second 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. Good afternoon, everyone. Welcome to our 2023 second quarter conference call. Today, we will review our financial results for the second quarter of fiscal 2023, 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 10Q 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. As we anticipated, macroeconomic headwinds continue to impact consumer discretionary spending throughout the second quarter. However, we did not anticipate the unseasonably cool weather conditions that we experienced over the back half of the quarter, particularly in our core California market. The slow start to summer had a significant impact on our sales, which came in slightly below expectations. Despite the top-line challenges, we delivered bottom-line results ahead of the midpoint of our guidance range. This speaks to our continued focus on diligently managing expenses while also closely managing our inventory, which contributed to healthy merchandise margins. Net sales for the second quarter of 2023 were $223.6 million, compared to $253.8 million in the second quarter of 2022, reflecting a 12% decrease in same-store sales. Transactions for the quarter were down high single digits, with the average ticket down low single digits. all of our major merchandise categories were down low double digits. To elaborate a bit on the impact of weather, the extreme heat over the past month has been widely reported in the national news. But as I just mentioned, we experienced an abnormally slow start to summer in our California market. While weather in the late spring, early summer always varies, The cooler than normal temperatures and lack of sunshine across much of California were well beyond normal deviation. Summer recreation becomes increasingly important to our sales starting the week leading up to Memorial Day and continuing throughout June. Unfortunately, during that period this year, nearly every day temperatures were well below historical averages and below last year's temperatures. This had a very noticeable impact on sales of summer-related products across the board, from swimsuits to shorts to sandals, camping products, water sports, and so forth. In markets where weather was more normal, even favorable, such as the Pacific Northwest, Oregon, Washington, and Idaho, and the Southwest, New Mexico, our stores performed significantly better. In fact, our same-store sales performance in those markets for the quarter was roughly 1,000 basis points higher than in California. In the last weekend of the second quarter, we finally saw the true arrival of warm weather across California, and our sales responded very positively. While this was certainly too little too late to meaningfully influence our second quarter results, we are encouraged that the improved trending creates the momentum that is carried over into the third quarter, which I'll speak to in a moment. Moving to our second quarter operating performance, we believe we executed well despite the difficult conditions. Given the sales headwinds we faced, our focus on prioritizing merchandise margins to drive gross profit dollars continued to serve us well. While second quarter merchandise margins were flat compared to the healthy margins that we generated in the prior year period, our margins continued to run several hundred basis points above pre-pandemic levels, a testament to the sustainability of the enhancements we have made to our business. Our team has done an outstanding job of managing inventory in an effort to align our inventory with the challenging sales environment. As a result, we have not needed to be overly promotional for the sake of clearing merchandise. We are also continuing to diligently manage expenses in the face of widespread inflationary pressures. We remain prudent with our ad spending, and we are carefully managing store labor usage and being more targeted in tailoring store operating hours to local shopping patterns. Turning to current trends, As I mentioned, we are encouraged that as weather has improved across our footprint, so has our sales trending, particularly in our core California market. Relative to the second quarter, our third quarter-to-date sales trends have increased significantly, with same-store sales running down low-mid single digits, including a small benefit related to the timing of the Fourth of July holiday. Looking over the balance of the quarter, while we are cautious given that the economic health of the consumer continues to be a challenge, we feel that our product assortment is well positioned to meet demand for the remainder of the summer season, which includes back to school and the start of fall sports, along with the Labor Day holiday. Over the past year, we've closely managed our inventory levels and maintained a healthy balance sheet. We believe there continues to be a buildup of inventory in the retail channel, and we are in a position to take advantage of this access through opportunistic buys to further solidify Big Five's value proposition with our customers. In summary, as we are continuing to manage through a tough environment, we are confident that our focus on sustaining healthy merchandise margins while closely managing both expenses and inventory levels will enable us to maintain a strong balance sheet and enhance our bottom line as economic headwinds begin to ease. I'll now turn it over to Barry to provide additional details regarding our second quarter performance and third quarter outlook.

Thanks, Steve. Gross profit for the fiscal 2023 second quarter was $71.9 million compared to gross profit of $88.9 million in the second quarter of the prior year. Our gross profit margin of 32.2% in the fiscal 2023 second quarter declined from 35% recorded in the second quarter of last year. The lower gross profit margin year over year primarily reflected higher store occupancy and distribution expense, including costs capitalized in inventory as a percentage of net sales. Merchandise margins for the second quarter of fiscal 2023 were consistent with the prior year period, and continued to run several hundred basis points ahead of pre-pandemic rates, supported by the evolution of our pricing and promotional strategy. Overall, selling at administrative expense came in favorable to plan, decreasing 4.2 million in the fiscal 2023 second quarter versus the prior year period. The year-over-year change primarily reflects lower employee labor and benefit-related expense and company performance-based incentive accruals. As a percent of net sales, SG&A expense was 32.4% in the fiscal 2023 second quarter versus 30.2% in the 2022 second quarter, reflecting the lower sales base. Now looking at our bottom line, net loss for the second quarter of fiscal 2023 was 0.3 million, or a loss of one cent per share. This compares to net income of 8.9 million or 41 cents per diluted share in the second quarter of fiscal 2022. EBITDA totals 4.2 million for the second quarter of fiscal 2023 compared to adjusted EBITDA of 17.7 million in the second quarter last year. Briefly reviewing our 2023 first half results, Net sales were 448.5 million compared to net sales of 495.8 million in the first 26 weeks of last year. Same store sales decreased 9.6% in the first half of fiscal 2023 versus the comparable period last year. Net loss for the first 26 weeks of fiscal 2023 was 0.1 million or break even on a per share basis. This compares to net income for the first half of 2022 of 18 million or 81 cents per diluted share. EBITDA was 8.6 million for the 2023 year-to-date period compared to adjusted EBITDA of 32.7 million in the comparable period last year. Turning to the balance sheet, our merchandise inventory at the end of the second quarter of fiscal 2023 decreased 2.2% year-over-year. We feel good about our inventory position as we move through summer and into fall. Reviewing our capital spending, our CapEx excluding non-cash acquisitions totaled 4.7 million for the first half of fiscal 2023, primarily representing investments in store-related remodeling, distribution center equipment, computer leasehold improvements, and computer hardware and software purchases. For the fiscal 2023 full year, We now expect CapEx in the range of 8 to 13 million and anticipate opening approximately two new stores and closing approximately six stores, including two stores that we closed in the first quarter and one pending relocation. Now looking at our cash flow, net cash used in operating activities was 3.3 million in the first half of fiscal 2023. This compares to net cash used in operating activities of 39.1 million in the comparable period last year. The year-over-year improvement in our operating cash flow primarily reflected reduced funding of merchandise inventory and accrued expenses, mainly related to performance-based incentive accruals, partially offset by lower net income this year. Our balance sheet at the end of the second quarter of fiscal 2023 was healthy with zero borrowings under our credit facility and a cash balance of 5.9 million. During the second half of this year, we expect our working capital to decline, which should further help our overall liquidity. 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 third quarter, we expect same-store sales to decrease in the mid single-digit range compared to the fiscal 2022 third quarter. Our same-store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the third quarter. Fiscal 2023 third quarter earnings per diluted share is expected in the range of 10 to 20 cents. which compares to fiscal 2022 third quarter earnings for diluted share of 29 cents. That concludes our prepared remarks. Operator, we are now ready for any questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question 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. Our question comes from the line of Mark Smith with Lake Street Capital. Please go ahead.

Hi, guys. Question for me first, just wanted to look at the SG&A a little bit here. You know, it was good at a good level here, but maybe discuss kind of what you're actively doing to manage operating expenses versus maybe what just came down as a function of lower revenue.

Yeah, Mark, sure. Well, certainly the biggest expense and key for us is store labor. And, you know, we've talked and talked and everybody's experienced the increased overall wage rates. And certainly we on the West Coast in California have got our share of increased wage rates, whether it's, you know, minimum wage or, you know, competing wage rates surrounding minimum wage. But, you know, so what we've been doing is focusing on managing store labor. in lots of different categories, and we've been able to bring our overall labor down, which has allowed us to actually reduce our overall expense year over year. So that's number one. Certainly, the advertising continues to be a focus for us, and our advertising continues to run at rates that are less than half of what they were pre-pandemic. So that's a focus for us. And then really, I mean, there's countless categories that we continue to work on that are being impacted by inflation in many, many areas that we continue to work on. And certainly, obviously, performance-based accruals are down year over year just because of the lower income as well.

Okay. And the next one was just looking at the guidance on store growth, especially kind of net store. It's coming down a little bit here now. You know, was that a function of kind of where the consumer is and just dialing back on growth? Or was there any delays that, you know, just pushed some of these stores into next year? Kind of walk us through your thoughts on that.

Yeah, yeah, Mark. We had a couple of store openings that previously were planned for this year have slipped into next year due to landlord delays. Construction issues, that's the big factor impacting the store openings for this year. We'll hopefully hit the ground running next year with some openings.

Hey, Mark, let me come back to you also. Mark, let me, when you're done, when you're done, I want to come back to them on expenses.

Okay. Okay. Yeah, the last one for me was really, you know, just as we think about quarter-to-date sales and kind of trends, I want to make sure that I heard you right. your third quarter to date down kind of low to mid-single digits. Is that right, Steve? And that's including what sounds like was a fairly positive kind of 4th of July period?

Yeah. I mean, the 4th of July kind of hit us really the period the last couple days of the second quarter, as I mentioned, way too little too late to influence the second quarter. And then the sort of with a calendar shift and the fourth moving one day further into the third quarter, we sort of had an extra day, a solid day of pre-4th of July business in the third quarter that benefited the third quarter. And you're right, Mark, I said we're down a low-mid single-digit quarter to date.

Okay. Perfect. And then Barry, if you had other thoughts on expenses, but then that's of us.

Yeah, Mark, the only other thing I would say is, you know, fortunately, we're seeing reduced overall medical costs. You know, we, like everybody else, had a real big ramp up last year in our medical costs as, you know, the base, you know, postponed procedures and so on because of COVID. And so we saw just a huge ramp up in costs last year And fortunately, we're seeing those come down. We saw the benefit in the first quarter that continued in the second quarter. So that is also a meaningful, you know, positive change for us. And hopefully that will continue, you know, through the balance of the year.

Excellent. Thank you, guys. Thanks, Mark.

Thank you. That completes our question and answer session. I will now turn the call back to Mr. Miller for any closing remarks.

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.

Thank you. The conference of Big Five Sporting Goods has now concluded. Thank you for your participation. You may now disconnect your lines.