Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q2 2023 Earnings Call Transcript August 1, 2023

Big 5 Sporting Goods Corporation beats earnings expectations. Reported EPS is $0.41, expectations were $-0.03.

Operator: Good day, ladies and gentlemen. Welcome to the Big 5 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 5 Sporting Goods. At this time, for opening remarks and introductions, I did like to turn the conference over to Mr. Miller. Please go ahead, sir.

Steve Miller: 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.

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 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.

Steve Miller: 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 topline challenges, we delivered bottomline results ahead of the midpoint of our guidance range. This continued focus on diligently managing expenses, while also closely managing our inventory, which contributed a healthy merchandise margin. 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. 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 some momentum that is carried over into the third quarter, which I will 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 face, our focus on prioritizing merchandise margins to drive gross profit dollars continue 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 continue 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 a 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 4th 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 work along with the Labor Day holiday.

Over the past year, we have 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 access through opportunistic buys to further solidify Big 5’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 bottomline as economic headwinds begin to ease. I will now turn it over to Barry to provide additional details regarding our second quarter performance and third quarter outlook.

Barry Emerson: 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 into inventory as a percentage of net sales. Merchandise margins for the second quarter of fiscal 2023 were consistent with the prior year period and continue to run several hundred basis points ahead of pre-pandemic rates, supported by the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense came in favorable to plan, decreasing $4 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 bottomline, net loss for the second quarter of fiscal 2023 was $0.3 million or a loss of $0.01 per share. This compares to net income of $8.9 million or $0.41 per diluted share in the second quarter of fiscal 2022. EBITDA totaled $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 2020 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 breakeven on a per share basis. This compares to net income for the first half of 2022 of $18 million or $0.81 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 fiscal 2023 decreased 2.2% year-over-year. We feel good about our inventory position as we move through summer into fall.

Reviewing our capital spending. Our CapEx, excluding noncash 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 million 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 $0.25 per share. Now I will 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 a range of $0.10 to $0.20, which compares to fiscal 2022 third quarter earnings per diluted share of $0.29. That concludes our prepared remarks. Operator, we are now ready for any questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our question comes from the line of Mark Smith with Lake Street Capital. Please go ahead.

Mark Smith: Hi, guys. Question for me first, just wanted to look at the SG&A a little bit here, it was good — at a good level here. Maybe discuss kind of what you are actively doing to manage operating expenses versus maybe what just came down as a function of lower revenue?

Barry Emerson: Yeah. Mark, sure. Well, certainly, the biggest expense and key for us is store labor. And we have talked and talked and everybody has 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 minimum wage or competing wage rates surrounding minimum wage. But, so what we have been doing is, focusing on managing store labor in lots of different categories and we have 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 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.

Mark Smith: Okay. And the next one was just looking at the guidance on store growth, especially kind of net store is coming down a little bit here now. Was that a function of kind of where the consumer is and just give them back on growth or was there any delays that just pushed some of these stores in the next year, kind of walk us through those, your thoughts on that?

Steve Miller: Yeah. Yeah. Mark, we had a couple of store openings that previously are planned for this year have slipped into next year due to landlord construction issues. That’s the big factor impacting the store openings for this year. We will hit — should hopefully hit the ground running next year with store openings.

Mark Smith: Okay. And…

Barry Emerson: Hey, Mark. Let me come back and also — Mark, let me — when you are done. I want to come back to on expenses.

Mark Smith: Okay. Okay. Yeah. The last one for me was really, 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, Steven, and that’s including…

Steve Miller: Yeah.

Mark Smith: … what sounds like it was a fairly positive kind of 4th of July period?

Steve Miller: Yeah. I mean the 4th of July kind of hit us really the period the last couple of days of the second quarter, as I mentioned, way too little, too late to influence the second quarter. But — and then the, sorry, with a calendar shift and look forth, moving on day further into the third quarter, we sort of had an extra day, that’s a solid day of pre 4th of July business in the third quarter that defined the third quarter. And you are right, Mark, I said, we are down a low mid-single-digit of quarter-to-date.

Mark Smith: Okay. Perfect. And then, Barry, if you had other thoughts on expenses, but then that’s the last.

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

Mark Smith: Excellent. Thank you, guys.

Steve Miller: Thanks, Mark.

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

Steve 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 after the conclusion of our third quarter.

Operator: Thank you. The conference of Big 5 Sporting Goods has now concluded. Thank you for your participation. You may now connect your lines.