Big 5 Sporting Goods Corporation

Good day, ladies and gentlemen. Welcome to the Big Five Sporting Goods third 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 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2023, 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.

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. Our third quarter results came in slightly below our expectations, reflecting the mounting pressures on consumer discretionary spending. While the quarter started relatively well as we benefited from warm seasonal weather in July, our sales trending softened over the back half of the quarter. Beginning in August, and even more so in September, we believe our consumer began to feel increasingly impacted by the ongoing pressures from persistent inflation, including heightened gas prices, rising interest rates, and the resumption of student loan payments. In the face of these challenges, we have continued to focus on the aspects of the business that we can control, such as optimizing merchandise margins, controlling operating expenses, and managing inventory. We are pleased with our team's execution and ability to drive improvements across each of these key metrics, which helped generate positive bottom line results despite significant top line challenges. Net sales for the third quarter of 2023 were $239.9 million compared to $261.4 million in the third quarter of 2022. reflecting an 8.2% decrease in same-store sales. Transactions for the quarter were down high single digits while the average ticket was up slightly. There were no material differences in sales across our major merchandise categories, footwear, apparel, and hard goods, with each down in the high single-digit range. In the face of the ongoing sales headwinds, we have remained focused on officially managing our inventories and prioritizing merchandise margins to optimize gross profit dollars. At the end of Q3, our inventory was down 8% versus the prior year, reflecting our efforts 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, which has been helpful to our merchandise margins. For the quarter, we generated a 52 basis point increase in merchandise margins versus the prior year period. As inflation persists, managing operating costs within our control continues to be a key area of focus. Store labor is our largest operating expense, and we are pleased that despite significant wage inflation, we were able to reduce this key expense year over year by diligently managing store labor usage and being more targeted in tailoring store operating hours to local shopping patterns. Additionally, our expense structure continues to benefit from significantly reduced marketing spend. Expense management has always been one of our strengths, and now more than ever, we are focused on diligently managing expenses throughout our organization to mitigate widespread inflationary pressures. Turning to current sales trends, the challenging consumer environment has persisted into the fourth quarter and our October sales are running down approximately 10%. Over the balance of the quarter, we anticipate that our customers will continue to feel their wallets being squeezed throughout the holiday shopping season and will be carefully watching their discretionary spending. With that said, we believe we have a compelling product assortment for the winter and holiday season that should resonate with shoppers. Our value-oriented price points should be particularly attractive in these times. Before turning the call over to Barry, I'd like to briefly comment on the reduction in our dividend that we announced today. While we improved our cash position over the course of the third quarter and have maintained a healthy balance sheet with no debt, We have proactively adjusted our dividend to ensure we have ample financial flexibility given the uncertainty of the duration of the macroeconomic headwinds our customers are facing. Even with the reduction, we believe that our dividend continues to provide a meaningful return for our shareholders. As we manage through this challenging economic environment, we remain committed to maintaining a healthy balance sheet. I'll now turn it over to Barry to provide additional details regarding our third quarter performance and fourth quarter outlook. Barry?

Thanks, Steve. Gross profit for the fiscal 2023 third quarter was $79.6 million compared to gross profit of $86.6 million in the third quarter of the prior year. A gross profit margin of 33.2% in the fiscal 2023 third quarter compared to 33.1% recorded in the third quarter of last year. The slight improvement in gross profit margin year-over-year primarily reflected the increase in merchandise margins that Steve noted and extinguishment of certain real estate-related liabilities partially offset by higher store occupancy and distribution expense, including decreased costs capitalized into inventory as a percentage of net sales. Merchandise margins for the third quarter of fiscal 2023 increased 52 basis points versus the prior year period and continued to run several hundred basis points ahead of pre-pandemic levels supported by the evolution of our pricing and promotional strategy. Overall selling at administrative expense for the fiscal 2023 third quarter decreased 1.6 million versus the prior year. The year-over-year change primarily reflected lower employee labor and benefit-related expense, partially offset by higher legal expense associated with a lawsuit settlement. As a percent of net sales, SG&A expense was 31.9% in the fiscal 2023 third quarter versus 29.9% in the 2022 third quarter, reflecting the lower sales base. Now looking at our bottom line, net income for the third quarter of fiscal 2023 was $1.9 million or $0.08 per diluted share. This compares to net income of $6.4 million or $0.29 per diluted share in the third quarter of fiscal 2022. Adjusted EBITDA totaled $7.4 million for the third quarter of fiscal 2023 compared to adjusted EBITDA of $13 million in the third quarter last year. Briefly reviewing our 2023 full first nine months results, net sales were $688.4 million compared to net sales of $757.2 million in the same period last year. Same-store sales decreased 9.1% in the first nine months of fiscal 2023 versus the comparable period last year. Net income for the first 39 weeks of fiscal 2023 was $1.8 million or $0.08 for diluted share. This compares to net income for the first 39 weeks of 2022 of $24.4 million or $1.10 per diluted share. Adjusted EBITDA was $16 million for the 2023 year-to-date period compared to adjusted EBITDA of $45.7 million in the comparable period last year. Turning to the balance sheet, our merchandise inventory at the end of the third quarter of fiscal 2023 decreased 8% year-over-year. This reduction reflects our efforts to manage inventory levels considering the soft sales environment, and we feel good about our inventory position as we move through fall and into the holiday season. Reviewing our capital spending, our CapEx excluding non-cash acquisitions totaled $8.2 million for the first nine months 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 $12 million and anticipate opening two new stores and closing four stores, including one relocation, resulting in 430 stores in operation at the end of the year. Now looking at our cash flow, net cash provided by operating activities was $21.1 million in the first nine months of fiscal 2023. This compares to net cash used in operating activities of $29.9 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 third quarter of fiscal 2023 remains healthy. We had zero borrowings under our credit facility and a cash balance of $17.9 million. and we currently expect our cash balance at the end of the fourth quarter to be largely consistent with the cash balance at the end of the third quarter. As Steve mentioned, the decision to reduce the dividend to 12.5 cents per quarter from 25 cents per quarter reflects our prudent approach to capital management in an effort to maintain a healthy financial condition amid an increasingly challenged macroeconomic backdrop. Now I'll spend a moment on guidance. For the fiscal 2023 fourth quarter, we expect same store sales to decrease in the high single digit to low double digit range compared to the fiscal 2022 fourth quarter. Our same store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the quarter. Fiscal 2023 fourth quarter net loss per share is expected in the range of $0.20 to $0.35, which compares to fiscal 2022 fourth quarter earnings per diluted share of $0.08. Finally, I'd like to briefly touch on seasonality factors that typically cause our fourth quarter earnings to be lower than our third quarter earnings. This dynamic results from a combination of seasonally lower sales volume in the first half of the fourth quarter until after Thanksgiving when holiday sales ramp up, as well as heightened promotional activity and higher expenses for advertising and increased labor hours during the fourth quarter. That concludes our prepared remarks. Operator, we're now ready for any questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 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 key. Our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hi, guys. First question for me, just as we look at fourth quarter, what are your expectations on promotional environment for you guys and potential discounting here in Q4?

Mark, our inventories are in great shape, but we don't feel compelled to – be overly promotional. I would expect that we will be reasonably consistent with the last year. We're going to watch the marketplace and react accordingly if we sense that that's the correct step to take.

Okay. And then you said that kind of all of your different segments sounded like during Q3 were all kind of down in that high single-digit range on a comp basis. Any regions or segments, especially as you look into Q4, that you're expecting maybe a fall-off or any additional weakness in?

I don't know that there's any. Aspect of our product category that we're anticipating any material fall off or weakness a lot in the fourth quarter always revolves around weather and how that can influence the various categories. Positive winter weather is always most favorable to our apparel category. So we'll be obviously hoping for the weather and watching that carefully.

Okay. And then the last question for me is, as we think about, you know, you just cut the dividend here to kind of maintain a healthy balance sheet. As we look at growth in new units next year, and I know you haven't guided this, but should we expect maybe even some pullback on, you know, relocations or any capital expenditures going towards new store growth?

No, again, I wouldn't. anticipate a material change from the direction that we took this year and really over the last couple years. We have several stores in the pipeline. Honestly, a few stores that we anticipated would have opened this year that have rolled over into next. So we'll be opening some stores and rationalizing the store count with some closures as well.

Okay. Great. Thank you. Thank you, Mark.

There are no further questions in the queue. I'd like to hand the call back to Steve Miller for closing remarks.

All right. 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 fourth quarter. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.