Q1 2020 Earnings Call

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At this time, all participants are in listen only mode.

Once you require operator assistance during the conference Press Star Zero honor telephone keypad.

Please note this conference is being recorded.

I will now turn the conference over to our hosts Steve Miller, President and CEO. Thank you Sir you may begin.

Thank you good afternoon, everyone welcome to our 2021st quarter Conference call Today, We will review our financial results for the first quarter of fiscal 2020 for Y. Gen updates in our business through the end of our May 2020 fiscal period I will now turn the call over to Barry to read our safe.

Harbor statement.

Thanks, Steve except for statements of historical facts and he 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 Britain in 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 Oh on our behalf.

Thank you Barry.

The Cobot 19 pandemic has certainly had an impact on our business. Our operations are employees in the communities we serve.

In the face the one precedented challenges over the last couple months I'm pleased to report how we've managed through the uncertainty for this crisis, thus far in a manner that this allowed us to remain in a strong financial position.

It's been quite a journey to get to this point and I am proud of our teams response.

Our fiscal first quarter ended on March 29.

Today's before that on March 19th, California became the first state to issue a statewide stay at home order.

That's importantly on March Twentyth slightly over one half worst stores were forced to close.

As the situation rapidly evolved and stay at home orders were issued the other states our team quickly responded.

We developed and implemented new social Distrusting in risk mitigation protocols in compliance with emerging help guidelines in various jurisdictions.

We work with officials in the states counties and cities in which we operate confirmed that our stores were considered a central so that we could remain open reopened many of our stores.

What do we aren't we recognized an responded to the unusual shifts in consumer demand by leveraging our nimble buying distribution network.

And in the face when certain these about the duration and financial impacts is a pandemic, we implemented a meaningful expense reduction initiatives throughout organization and took action to enhance our financial flexibility.

There's no question that our business was thoroughly disrupted in March and April by the covert pandemic related shelter in place orders and of course, the widespread suspension of almost all outdoor recreational activities, including baseball and other team sports.

However in recent weeks.

We've been pleased with how our business has transition.

As we move through May it became progressively more apparent that customers are adjusting to the current circumstances and are seeking products that enable them to keep active and healthy within the social distancing guidelines that are new to all of us.

We are well positioned to help satisfy those needs with our full line product assortment and includes fitness and a home and outdoor recreational products along with the convenience that our neighborhood stores provide to our customers.

Our stores are easy in easy out and we provide the level of customer service that is critical in today's environment.

As a result, our businesses in a solid financial position.

Reinforced by additional capital resources anticipated operating cash flow.

Dissipated positive operating cash flow for the first two months the fiscal second quarter, a disciplined expense reduction strategy and accelerating inventory turns.

Before digging deeper into the pandemics affecting our business and further comedy and some of the trends we're seeing during the second quarter to date, we'll take a few moments to touch on our first quarter result.

First quarter net sales were $217.7 million compared to 245.3 million for the first quarter fiscal 2019.

Our same store sales decreased 10.8% for the quarter.

Although our merchandise margins were essentially flat down eight basis points for the quarter prior to the cold weather disruption our merchandise margins were trending up approximately 60 basis points versus the prior year period.

The favorable margin trending was reversed by a shift in product mix to lower margin products. During the early stages of the consumer response to the pandemic.

Merchandise margin management remains a key priority for us.

First quarter the metric was heavily influenced by these unique shifts in our product mix.

So the first quarter customer transactions decreased in the high teens, partially offset by a high single digit increase in average sale.

Much of this decrease in traffic and increase in ticket was driven by cobot related factors, including the temporary closure of more than half of our retail store locations in response to state and local shelter orders and increased sales of higher priced hard goods.

And demick aside we experienced a challenging winter season in January and February with warm and dry conditions across many of our key markets, which impacted our same store sales negatively.

As a result, we saw a pronounced softness in our apparel category, which was down more than 20% for the first quarter as well as our footwear category, which was down in the high teens for the first quarter.

Partially offsetting this weakness was a mid to think to high single digit increase in our hard goods category.

In part to pandemic related demand in certain categories, including home fitness equipment, as well as firearms and ammunition.

In terms of our store activity, excluding the temporary impacts associated with a pandemic we permanently closed three stores during the first quarter ending with 431 stores in operation.

For the full year, we currently anticipate permanently we currently anticipate permanently closing an additional two stores.

All of these store locations were previously selective for closure prior to the cobot 19 pandemic.

Additionally, we are looking forward to reopening our Pasadena, California store in the second quarter, which has been closed for an extended period for remodeling following a fire last year.

Now I'll provide some additional color and the trends we've experienced during our second quarter to date.

As I mentioned beginning in March Twentyth, approximately one half of our retail store locations were temporarily closed due to cold wet 19.

At the end of April approximately one quarter of our stores remain closed.

And as of today all of our stores were temporarily closed due to covert 19 are now open in some capacity with less than 10% of the open stores operating for curbside business only as required by local regulation.

Due to our product mix, which includes emergency preparedness supplies and other products, enabling community members to stay at home and stay healthy many of the jurisdictions in which we operate recognized our stores as essential.

As a result, many of our stores were able to remain open reopened following temporary closures.

We quickly implemented new operational protocols, so were sourced could operate in accordance with the evolving social distancing guidelines.

Which in many cases vary from jurisdiction to jurisdiction.

This was a remarkable accomplishment by our team and demonstrates big fives commitment to serve our customers safely and times with me.

Given the significant temporary store closures fiscal 2022nd quarter same store sales through our May fiscal period that ended this past Sunday were down approximately 19%.

However, our sales trends have been sequentially improving on a weekly basis in may as shelter orders of loosened stores to reopen and customer demand has improved.

Same store sales for our April fiscal period declined approximately 39% versus the prior year period.

Same store sales for our me fiscal period were slightly up versus the prior year with same store sales increasing approximately 15% for the last two weeks of our may pure yet, even though a number of stores remain close are limited to curbside operation during much of that time.

Similar to the positive trending in of our sales our merchandise margins have also significantly improved over the course of the fiscal 2022nd quarter to date period.

Despite a year over year decreased in April our second quarter merchandise margins through the end of our May fiscal period that ended this past Sunday increased approximately 74 basis points on a year over year basis.

Reflecting strong margin acceleration in may resuming the positive margin performance that we were experiencing in 2019 in early 2020 prior to cope it.

As I referenced earlier from an operational perspective, we've been focused in developing and implementing social distancing and risk mitigation protocols that meet or exceed local state and federal guidelines. So our stores can remain operational by helping our employees and customers minimize risk.

These measures have included reducing store hours for open stores limiting the number of customers in our stores at any one time.

Providing enhanced employee training conducting employee health screenings, performing extra cleaning in our stores, providing hand, sanitizer supplies and face coverings and installing physical barriers between cash shares and customers.

What's less visible, but certainly imports into our success this ability of our buying and distribution network to keep up with the evolving demand for inventory across our broad array of categories.

We have long viewed the flexibility of our product mix and our nimble distribution capabilities as a competitive advantage that can provide localized assortments that meet demand in our diverse communities.

It's the pandemic said in our team was able to rapidly assess inventory levels across our organization determine areas of peak demand worked with vendors to adjust merchandise orders and quickly bring in new inventory and allocate inventory to our source to maximize sales and.

Optimize inventory terms.

We've been working closely with our vendor partners to replenish key categories as quickly as possible.

The customer response has been tremendous.

Taking a step back I would like to reflect for a moment on how rapidly everything has changed over the last few months.

It's certainly has been a rollercoaster ride, but I am pleased with how our entire organization came together to respond to these unprecedented and difficult circumstances.

Our team has done an outstanding job remaining focused and an overall environment. That's certainly has been stressful as required a great deal of flexibility and confidence in our organization to persevere and the face of uncertainty.

Hi, I'm extremely proud of our team.

Additionally, I wanted to personally thank our vendors are landlords and our other partners. We've worked with us to find appropriate solutions to what we all hope is just a short term disruption.

Finally, I cannot say enough about our store and field team members, who are undoubtedly essential in the truest sense of the word.

Without their dedication and experience, we would not be where we are today.

I'm deeply grateful for the incredible job they've done running our stores and helping our customers, which certainly has not been business as usual for the last couple months.

I could not wish for better team to have on our side in times like these.

Now I will turn the call were to Barry who will provide more information about the first quarter and provide some commentary about the strength of our overall financial condition.

Thanks, Steve.

Gross profit for the fiscal 2021st quarter decreased 14.9% to 64.6 million compared to 75.9 million in the first quarter. The prior year. Our gross profit margin was 29.6% in the first quarter versus 30.9% in the first quarter of the prior.

Here.

As Steve mentioned merchandise margins were down just slightly compared to the prior year decreasing eight basis points, reflecting strong margin performance from mid March prior to the impact of Cobot 19.

Which was offset by a shift in sales mix to lower margin products. During the early stages of the consumer response to the depth and Dentek later in March.

The decrease in gross profit margin largely reflects negative leverage of expenses on the lower sales base, partially offset by higher cost capitalized into inventory.

Our selling and administrative expense decreased 1.2 million in the fiscal 2021st quarter, primarily due to lower print advertising costs during the period.

As a percentage of net sales selling and administrative expense increased to 32.8% versus 29.6% in the prior year, reflecting the decrease in sales.

Now looking at our bottom line.

Fiscal 2021st quarter, we reported a net loss of 4.6 million or 22 cents per share.

This was consistent with the guidance of a loss in the range of 15 to 25 cents per share that we provided on February 25, 2020, and subsequently with drew on March 24th.

2020.

Due to the uncertainties surrounding cobot 19.

This compares to net income for the first quarter fiscal 2019 of 1.7 million or eight cents per diluted share.

At the end of the first quarter and into the second quarter in an effort to address the uncertainty surrounding cobot 19 endemic and to manage our cash position and preserve capital, we implemented expense reduction and capital management strategies across the organization.

We had significantly reduced our store labor and made other workforce reductions to align with changes in our store operations.

We have also suspended.

Normal salary increases across the company.

Additionally, we have largely suspended our advertising, which has meaningfully contributed to our overall cost savings.

We have also worked with our landlords to negotiate rent abatement or deferrals and with our vendors to extend payment terms to help us navigate through this crisis.

Additionally, our board of directors suspended the company's quarterly cash dividend until further notice.

Well some of these efforts are reflected in our first quarter results.

Asked majority of the expense reductions will favorably impact our results beginning in the second quarter.

Turning to the balance sheet, we've taken several proactive measures over the last two months to support our liquidity in response to the cobot 19 pandemic.

These actions include the expansion of our credit facility.

The suspension of our quarterly dividend the scale back of our capital expenditure plans and the cost containment efforts that I mentioned previously.

In order to enhance our financial flexibility during the covet 19 pandemic on March 27th we drew down additional amounts under our credit facility and as of the ended the first quarter. We had total borrowings of 124.3 million.

And the cash balance net of checks outstanding of 44.2 million.

Additionally on March Thirtyth, we exercised the 25 million accordion feature under our credit agreement to increase the aggregate commitments under the credit facility from 140 million to 165 million.

As of May 26, we.

We had total outstanding indebtedness under the credit facility of approximately a 122 million.

Compared to our highest borrowing level of approximately 143 million on March 31st.

Our net cash balance as of May 26 was approximately 58 million compared to approximately 61 million on March 31st.

Accordingly, as our stores have reopened sales in merchandise margins have increased.

And our expense reduction plans were implemented.

Our net debt position has improved by approximately 18 million from March 31st to May 26.

Assuming sales trends remain positive we would anticipate further improvements in our debt levels in the weeks ahead.

Our merchandise inventory at the end of the first quarter fiscal 2020 was up 6% compared to the prior year.

However, our sales have been improving and our buying and merchandising teams have adjusted certain merchandise inventory orders in an effort to optimize our assortment during this unusual period.

Consequently.

Our inventory as of May 26 was actually down approximately 9% versus the prior year.

Which is remarkable given the seasonal carryover of products and our team sports categories such as baseball.

Which were impacted by leagues suspensions did a cobot 19.

As well as winter products, which were impacted by the poor 2019 2020 winter season.

We have managed through seasonal inventory carry over in the past and we will buy around this carryover and reintroduced the product in future seasons.

Looking at our capital spending our cap ex excluding noncash acquisitions.

Totaled 2.3 million in the first quarter, primarily representing investments in store related remodeling distribution center equipment, and computer hardware and software purchases.

We have reduced our planned capital spending in response to covert 19, and now expect capital expenditures.

For fiscal 2020, excluding noncash acquisitions to be in the range of five to 9 million.

From a cash flow perspective, our cash flow from operations was a negative 5.3 million in the fiscal 2021st quarter compared to a positive 12.5 million in the prior year period.

The decrease in operating cash flow, primarily reflected increased funding of merchandise inventory and lower income this year.

However, with our improving sales trends expense reduction measures and lower inventories, we anticipate generating positive operating cash flow for the second quarter through our may fiscal period.

Considering the positive sales and margin trending we're currently seeing in the business.

Favorable results of our asset management strategies are declining debt levels and the steps we have taken to support our liquidity.

We feel good about the overall health of our financial condition.

However, because of the significant disruption disruption from the cobot 19 pandemic on our store operations and the uncertainty related to its duration and impact on consumers.

We're not providing guidance for the fiscal 2022nd quarter at this time other than the quarter to date information we have already discussed.

Steve I'll now turn the call back to you for some closing remarks.

Thank you Barry.

In closing I'd like to again extend my deepest gratitude to our team of employees for their perseverance and focus through this extremely dynamic period.

So far we have met the challenge head on and have been able to quickly stabilize our business.

We are mindful that the future of this pandemic and its effects remained very uncertain.

We will continue to remain dedicated to protecting the health of our employees and customers.

Urged by the sales trends in recent weeks.

We will work to keep the momentum moving into right direction.

Thank you for joining us on todays conference call. We look forward to speaking with you again after the conclusion of our second quarter.

Thank you that concludes today's conference call. All parties may disconnect have a good day.