Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q4 2022 Earnings Call Transcript

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day, ladies and gentlemen and welcome to the Big 5 Sporting Goods Fourth Quarter 2022 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.

Steve Miller: Thank you, operator. Good afternoon, everyone. Welcome to our 2022 fourth quarter conference call. Today, we will review our financial results for the fourth quarter of fiscal 2022 as well as provide an outlook for the first quarter of fiscal 2023. 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.

Steve Miller: Thank you, Barry. I want to start by recognizing our team and their execution over the last few years, which allowed us to deliver tremendous results in the face of the global pandemic related supply chain disruptions, broad-based inflation and the economic slowdown that we are all watching closely. 2022 was a very dynamic year for the retail industry, transitioning from the challenges of the pandemic to a new set of economic challenges with increasingly cautious consumer sentiment and persistent cost inflation amid growing concern for an economic downturn. Although 2022 was not a blockbuster year that we reported in 2021, when we benefited from unprecedented demand and unique sales drivers. We produced strong earnings in 2022 and our profitability continued to compare favorably to pre-pandemic years reflecting the evolution of our business model.

We ended the year in a solid financial condition with a debt free balance sheet and healthy inventory. Turning to our fourth quarter results. As previously reported, net sales were $238.3 million compared to $273.4 million in the fourth quarter of 2021. Same-store sales for the fourth quarter were down 13.2%, which was toward the low end of our guidance range that called for a high-single to low double-digit decrease. On a year-over-year basis, transactions for the fourth quarter were down high-single digits with average ticket down mid-single digits. Our sales for the quarter were generally on target leading up to Black Friday, but trends decelerated in December as inflationary pressures and economic uncertainty appeared to impact holiday discretionary spending to a greater extent than we had initially anticipated.

In the face of the top line headwinds, we have continued to focus on prioritizing merchandise margins to optimize gross profit dollars. We have closely managed our inventory and as a result, we have not needed to be overly promotional for the sake of clearing profit (ph). Although our fourth quarter merchandise margins declined by 129 basis points compared to the record margins in the prior year, our 2022 fourth quarter merchandise margins increased by over 300 basis points versus the pre-pandemic fourth quarter of 2019. Our merchandise margins were on a positive trajectory prior to the pandemic and we continue to benefit from the merchandising, pricing and promotional changes we have made over the past several years. As we’ve evolved our model by reducing our chain wide print advertising, we’ve been able to significantly expand our merchandise margins, while operating with less inventory.

We now have greater flexibility in a customized product assortment by store, which in turn has reduced our levels of clearance product. And of course, our cost structure benefits greatly from the reduced advertising expense. While the volatility of the current environment is certainly unique, we have a successful track record of weathering many different economic cycles over the course of our long operating history. Whereas 2021 benefited from a robust economy including stimulus checks and higher levels of personal savings that help drive spending on recreational and leisure activities. Over the course of 2022, we’ve seen a significant softening of consumer sentiment in spending particularly for discretionary products. While in some respects our business benefits in this environment, due to our price points and values that we provide to our customers, those benefits have been more than offset by the realities of the broader macroeconomic forces in play.

Turning now to our current trends. For the first quarter to date, our same-store sales are running down in the low-single digit range versus last year. We saw positive year-over-year sales growth in January benefiting from favorable seasonal winter weather in our markets that drove demand for our winter products. Our ability to capitalize on this opportunity to outfit customers seeking fun in the snow when winter weather hits highlights the advantage of our convenient store footprint. However, the strong demand for winter products in January was partially offset by softer trends across other product categories. In February, our winter sales have remained strong but over the course of the quarter, winter products become progressively less impactful to our overall results and our same-store sales have shifted into the negative, reflecting the increasing pressures on discretionary spending that I spoke about earlier.

We anticipate that the environment will remain challenging over the balance of the first quarter. Given the winter seasonal strength, our winter inventory carryover this year will be significantly below that of last year. Overall, we remain pleased with our inventory position. We believe the current environment is setting up positively for opportunistic buys, this is a historical strength of ours and we are closely evaluating our inventories to ensure that we remain well positioned to take advantage of these opportunities as they arise. Although, we are certainly facing pressures both to our top line and to our expenses, we feel well equipped to tackle the challenges. We have the experience of managing through a wide range of economic cycles over many decades.

We are intently focused on managing all aspects of the business within our control, they are taking steps to reduce operating costs in an effort to mitigate inflationary expense pressures. We have a healthy balance sheet, which provides us plenty of flexibility as we navigate the current environment and position the company for solid growth as the overall economy improves. I’ll now turn it over to Barry to provide additional details regarding our fourth quarter performance and first quarter fiscal 2023 (ph) outlook.

Barry Emerson: Thanks, Dave. Gross profit for the fiscal 2022 fourth quarter was $79.8 million compared to record gross profit of $103 million in the fourth quarter of the prior year. Our gross profit margin of 33.5% in the fiscal 2022 fourth quarter declined from the 37.7% recorded in the fourth quarter of the prior year. The decrease in gross profit margin year-over-year primarily reflected a decrease in merchandise margins of 129 basis points, coupled with higher store occupancy and distribution expense, including cost to capitalized into inventory, as a percentage of net sales. As Steve mentioned, although, merchandise inventories for the fourth quarter this year decreased versus the fourth quarter of fiscal 2021, when compared to the pre-pandemic 2019 fourth quarter, merchandise margins increased 308 basis points, reflecting the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense increased $1.4 million in the fiscal 2022 fourth quarter versus the prior year period, primarily reflecting continued upward pressure on labor costs and other broad-based inflationary impacts, partially offset by lower performance based incentive accruals. As a percent of net sales, SG&A expense was 32.5% in the fiscal 2022 fourth quarter versus 27.9% in the 2021 fourth quarter, reflecting the deleveraging effect of increased expense on a lower sales base. Now looking at our bottom line. Net income for the fourth quarter of fiscal 2022 was $1.7 million or $0.08 per diluted share. This compares to net income of $19.9 million or $0.89 per diluted share in the fourth quarter of fiscal 2021. EBITDA totaled $6.9 million for the fourth quarter of fiscal 2022 compared to $31.5 million in the fourth quarter of fiscal 2021.

Briefly reviewing our full year results for fiscal 2022. Net sales were $995.5 million compared to record net sales of $1.16 billion in the prior year. Same-store sales decreased 14.5% for fiscal 2022 versus the comparable prior year period. Net income for fiscal 2022 was $26.1 million or $1.18 per diluted share, including a previously reported charge in the second quarter of $0.03 per diluted share. This compares to record net income for fiscal 2021 of $102.4 million or $4.55 per diluted share, including a previously reported net benefit of $0.06 per diluted share. Adjusted EBITDA was a solid $52.6 million for the 2022 full year compared to a record $152 million in the prior year. Turning to the balance sheet. Our merchandise inventory at the end of fiscal 2022 increased 9.6% year-over-year, primarily reflecting more normalized inventory levels following the significant sell-through and supply chain challenges in the prior year.

Our merchandise inventory at the end of fiscal 2022 was down 5.1% compared with the fourth quarter of fiscal €˜19, reflecting the evolution of our model that allows us to now operate with less inventory as Steve mentioned. Reviewing our capital spending, our CapEx excluding non-cash acquisitions totaled $13.2 million for fiscal 2022, primarily representing investments in store related remodeling, new stores, distribution center equipment and computer hardware and software purchases. For the fiscal 2023 full year, we expect CapEx in the range of $15 million to $20 million and anticipate opening approximately six new stores including one relocation. Now looking at our cash flow. Net cash used in operating activities was $28.4 million for the fiscal 2022 full year.

This compares to positive operating cash flow of $115.5 million in fiscal 2021. The decrease in our operating cash flow for fiscal 2022 compared to the prior year, primarily reflected lower earnings and increased funding of merchandise inventory in efforts to replenish depleted inventory levels resulting from strong consumer demand and supply chain challenges in fiscal 2021. Our balance sheet cash of $25.6 million at the end of fiscal 2022 was down $71.9 million from $97.4 million at the end of fiscal 2021 The timing of our inventory purchases had a meaningful impact on the year-over-year change in cash. Our inventory purchases were higher in Q4 2021 as supply chain issues eased, while our inventory purchases were lower in Q4 2022, due in part to the carryover of winter product, from the prior season because of warm weather.

As a result, our trade accounts payable declined $37 million year-over-year. We also grew our merchandise inventory during the year by $23 million as inventory availability improved and we invested over $13 million in capital expenditures. Additionally, during fiscal 2022, we returned capital to shareholders of over $26 million through cash dividends and share repurchases. Our balance sheet at the end of fiscal 2022 was very healthy with zero borrowings under our credit facility and available cash reserves. As we look ahead, we 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 our guidance. For the fiscal 2023 first quarter, the company expects same-store sales to decrease in the mid-single digit range compared to the fiscal 2022 first 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 first quarter. Fiscal 2023 first quarter earnings per share is expected in the range of negative $0.02 to positive $0.06, which compares to fiscal 2022 first 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: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Mark Smith from Lake Street Capital Markets. Please go ahead.

Mark Smith: Hey, guys. First one for me, just want to look at revenue a little bit. I guess maybe a little surprised that you’re not getting more bumps here in Q1 given some of the weather trends that we’ve seen in your key markets. Do you guys have the inventory that you feel like you needed to hit some of the demand here especially in January and as we’ve seen some positive weather here maybe the last couple of weeks?

Steve Miller: No, by and large, we do feel — Mark that we do have the inventory to capitalize on the winter opportunity. We’ve had so much weather that has been pretty significant offset to other products that people recreate outdoors, the startup of the baseball season has been very delayed. We’ve had a — I think it would be filled new record I think near historical record rate falls in California much of our western markets. So that’s dampened some of the benefits of the winter business. And not to mention just the softness from, I think, discretionary spending market.

Mark Smith: Any inventory, I know you held over last year due to negative weather. Do you feel like you kind of cleaned up that winter inventory and are in a good spot to not have to hold much over into next year?

Steve Miller: We do. Yeah, we do. We think we’re going to wind up the season reasonably clean and be able to buy around that for the next season.

Mark Smith: Okay. And then, just looking at inventory, I know you guys said that you are comfortable and pleased with kind of where your inventory is. As you look at your peers, especially kind of big box retail, we continue to hear inventory is still pretty heavy and maybe you guys getting a little promotional. Are you seeing that and, is that may be hurting sales at your stores?

Barry Emerson: I’m not sure that I can say that I see that and that’s impacting sales. I think the general marketplace is pretty competitive. I mean, in terms of discounting and I think other companies that are not just direct competitors, but from the department stores and we saw footwear and apparel that you can buy in a lot of places. And I think some retailers have heftier inventory situations to try and clean up and we haven’t been recently promotional, but it’s difficult to assert that, that’s impacting our sales directly, but it can help.

Mark Smith: And then could you guys walk through, you gave us a fair amount of color on kind of gross profit margin and the puts and takes and pressures there. Maybe walk us through what it is that you can control there and maybe what’s out of your control and steps that you’re taking to try to maintain and hold on to some decent gross profit margin here as we look at 2023.

Steve Miller: Yeah. Are you looking at the merch? Are you speaking to the merchandise margin, Mark?

Mark Smith: Merchandise margins, I know you guys called out occupancy as well. There’s been some pressure there, maybe shipping freight, things like that. Just walk us through kind of what you can control and steps taking to try to maintain and hold the margin.

Barry Emerson: Yeah, Mark. Yeah. The gross margin, of course, is made up of merchandise margin, it’s made up of distribution costs and it’s made up of occupancy costs. We try and manage as best we can all three, but you’re right. Some are easier than others. I mean just talking about distribution costs, there’s been a lot of pressure in the distribution because of all the freight and all the transportation challenges and so on. Resources have been an issue for us and we’ve now combated that. And so now, fortunately, there’s more resources available, but the labor cost pressure is pretty significant. So we’re seeing some pretty significant deleveraging in our distribution costs. We’re also seeing deleveraging in our occupancy.

Occupancy is an area where we’ve been focused for many, many years and have done quite well in trying to maintain our occupancy, overall occupancy expense remember that 20% or so of our leases come up for renewal every year. And so we have about 80 or so plus or minus options that we negotiate with landlords. And over the last probably three years, two to three years, things have been a lot more difficult. There’s been more — the pendulum has swung back to more of a kind of a landlord market. Prior to that, we had significant favorable experience in trying to either maintain levels of rent or in some cases, reduce if you’ve got something on first in Maine, you’re never going to be able to necessarily that overall cost. But I think we’ve done a good job, and we’re laser-focused on managing occupancy.

But with the pressure on sales, we’re deleveraging the occupancy as well. Merchandise margins?

Steve Miller: We feel good about the efforts to maintain very healthy merchandise margins significantly above pre-pandemic levels, as we reported that we did for the fourth quarter. As we mentioned, some of the changes to our advertising model that’s benefiting our margins, and we look for that to continue.

Barry Emerson: And we’re also really focused on gross profit dollars and not feeding the promotional environment that we kind of see out there. And so our inventory is very clean. Our clearance product is — our aged inventory is incredibly low and it’s well managed. So we feel good about our inventory and the clearance product and again, driving gross profit dollars I think, is key. We feel good about — because of some of the changes in the model, being able to operate our business with much lower levels of inventory than we have in the past. I mean that’s going to help just the strength of our overall balance sheet gives us a lot of flexibility to — from an opportunistic buy standpoint, it gives us flexibility to buy in smaller lot sizes to be able to allocate product with flexibility to different stores, those kinds of things, which should help us as we move forward in this environment.

Mark Smith: Okay. I think the last one for me. As you talked a little bit about operating cash flow and CapEx is going to come up a little bit this next year. But walk us through kind of unlocking some of the value here in working capital and the improvements that you expect in 2023. Does that take some time during the year to build or will we see some of that more evident here in Q1?

Barry Emerson: Well, I think that — I mentioned on the call the kind of dynamics of the change in — the impact on cash our timing of purchases in 2022 with our payables being much, much higher at the end of 2021 and then much, much lower at the end of 2022 because we bought around the winter product because we carried it over from the prior year. So we’re starting from a much lower trade payables base at the end of 2022. Having said that, we do expect over the year to move our inventories lower. I mean that’s our goal. And then commensurate with that, obviously, payables will follow. And anyway, so that’s the primary area that we’re focused on. And again, it feeds from what I said previously, the ability to be able to operate with lower levels of inventory.

Mark Smith: Okay. Great. Maybe I’ll squeeze one more. Just as you were talking about occupancy and leases here, the closures that we saw here in Q1 and you expect a couple more here, it sounds like through the rest of the year. Are these all stores that were at the end of their lease terms or did you have any troubled stores that needed to close?

Steve Miller: One was at the end of its lease term, and we were unsuccessful to renegotiate for extended term there. The other store was a store that we deemed to be underperforming, and we expose it.

Mark Smith: Okay. Great. Thank you.

Steve Miller: Thank you, Mark.

Barry Emerson: Thanks, Mark.

Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll now turn the call back to Mr. Miller for any closing remarks.

Steve Miller: Thank you, operator. We appreciate you joining us on today’s call and your interest in Big 5 Sporting Goods, and we look forward to speaking to you when we report our first quarter results. Have a great afternoon.

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