Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q1 2023 Earnings Call Transcript

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q1 2023 Earnings Call Transcript May 2, 2023

Operator: Good day, ladies and gentlemen. Welcome to the Big 5 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 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.

Steven Miller: 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.

Barry Emerson: 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.

Steven Miller : 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 headwind 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. Hard 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 snow melt 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?

Barry Emerson : 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 costs 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 continue 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 $0.01 per diluted share. This compares to net income of $9.1 million or $0.41 per 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 and 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 noncash 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 million to $20 million and anticipate opening approximately 5 new stores, relocating 1 store and closing approximately 5 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 $0.25 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’s 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 $0.10 to positive $0.05, which compares to fiscal 2022 second quarter earnings per diluted share of $0.41.

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

Q&A Session

Operator: The first question we have is from Mark Smith from Lake Street Capital Markets.

Mark Smith : Thank you for the insight into monthly comps. I just want to confirm that I kind of heard stuff. It sounds like year-to-date — sorry, quarter to date, you guys are running down 11%. Did I hear that right?

Steven Miller : Yes. Q2 to date, yes.

Barry Emerson : That’s right.

Mark Smith : Okay. And then this deceleration in comps, especially as we look at it, maybe, on a two-year or even on a three-year stack basis, 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 in your markets?

Steven Miller : Sure, Mark. I think the — certainly, the overriding factor in our minds is the macro pressures to — in the markets and discretionary, 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 over the course of April, and we were very encouraged to see the — 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.

Mark Smith : Okay. And as we look at the inventory, I think, Barry, you’ve said that you guys were pretty comfortable with it. And I know you guys totally are comfortable holding inventory for a longer period of time. How do you feel about what you have, is there anything that you think was maybe lost due to weather, any baseball items, softball items, et cetera, that you may have to hold over until next season or sell at a discount here?

Steven Miller : No. We feel very good about our business. I mean, certainly, the baseball product is not a core product, it is not a fashion-driven business. So whatever we did hold would hold its value very possibly. But the critical factor 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 April. 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.

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

Steven Miller : No, Mark, I mean it’s just evaluate as we always do, our store openings, relocations and closures, with, really, the goal of continually optimizing our store base. And I think trying to reflect the change from going to — I think we’ve had 4 closures for the year to 5, was just 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 — the correct — what we believe is the correct decision for our store base.

Mark Smith : Okay. The last question for me is just as we look at G&A, you held up pretty well on merchandise margins. But as we look at G&A down just slightly year-over-year. And I know you don’t guide this number. But as you look at it big picture, is there any, you’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.

Barry Emerson : 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. It’s, 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 at store level, and that we’ve had some success there. Certainly, we — and we continue to work that angle that’s certainly our largest expense. So we’ll continue to work on labor hours at stores.

Advertising, we continue to look at our advertising and try and rationalize and make sure that we’re getting the return on those dollars, whether it’s generally digital in this stage of the game, but we still have some minor print ads, but certainly looking at that cost. And then really just other areas kind of throughout. And I mean we’ve had people coming to us constantly to try and renegotiate contracts higher and more expensive, and we’re pushing back and doing whatever we can to try and manage 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 turn it over all the rocks to manage our expenses.

Operator: 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.

Steven Miller : 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 at the — after the conclusion of our second quarter. Have a great afternoon.

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