Q1 2021 Big 5 Sporting Goods Corp Earnings Call
Good day, ladies and gentlemen, welcome to the Big five sporting goods first quarter 'twenty 'twenty. One earnings results Conference call. Today's call is being reported 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 2021 first quarter conference call today, We will review our financial results for the first quarter of fiscal 2021 as well as provide an outlook for the second quarter of fiscal 2021, 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, well at.
We're 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 are coordinating 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 we are excited to report in the extraordinary start to fiscal 2021 with first quarter top and bottom line results significantly ahead of our guidance.
This marks our fourth consecutive quarter of delivering record quarterly earnings.
Our performance was driven by a combination of strong top line sales merchandise margin expansion and an improved cost structure. The success. We have achieved over the course of the past 12 months has significantly strengthened our balance sheet and position us to return more value to shareholders.
Today, we announced a 20% increase in our regular quarterly dividend. Additionally.
Additionally, we declared a special cash dividend of $1 per share GAAP.
Given our strong cash flow and very healthy cash position, we are able to provide the shareholder returns while also maintaining the financial flexibility to continue to invest in our business.
We will provide more detail on our balance sheet and use of cash, but first I would like to give some color on our first quarter performance and our momentum in the second quarter to date.
First quarter net sales were a record $272 8 million compared to net sales of $217 7 million for the first quarter of fiscal 2020.
Last year's first quarter was impacted by significant endemic related store closures over the last 10 days of the period.
Year over year net sales comparisons are also a bit muddied due to fiscal calendar shifts because last year was at 53 week fiscal year.
That said same store sales comparisons.
Which are made on a comparable week basis and are not materially impacted by the calendar shifts were up 31, 8%.
Looking at the roll out of the quarter January same store sales increased approximately 40% in part driven by very strong sales of winter related products.
February was up mid single digits as team sports comparisons were heavily impacted by headwinds this year due to widespread Lee closures, whereas last year end February team sports activities had not yet been impacted by the pandemic.
Excluding products related to the team sports or other product categories were up more than 20% in February.
In March sales accelerated significantly ahead of our plan and we're up over 50%.
As expected sales comparisons were exceptionally strong for the last two weeks of the period as we comped against widespread store closures last year.
Much of the incremental demand above our planned throughout March was in our team sports categories as leaks throughout our markets began to resume practice and games with the easing of COVID-19 restrictions.
The sales acceleration also reflected benefits from school reopening some of our markets and coincided with the distribution of stimulus checks.
With the return of the team sports virtually all categories have been performing at extraordinary levels.
In the first quarter, we saw strong demand across all three of our major merchandise categories.
Apparel, which was up more than 40% received the largest benefit from the exceptional winter related sales footwear sales were up approximately 25% and hard goods comped up almost 30%.
On a year over year basis, we realized an increase of approximately 20% and our average sale reflecting increases in both the number of units per sale and the average price per unit transactions were up approximately 12%.
We also continue to achieve very healthy merchandise margin from the first quarter up 350 basis points compared to the prior year.
The reduction in promotional activity along with favorable product mix shifts were the key drivers of the margin gains.
Not only did our results benefit from strong sales and merchandise margins, but we also continued to benefit from an improved cost structure as we continue to operate with store hours and advertising spend significantly below historical levels.
Bottom line in the first quarter, we generated record net income for any first quarter of $21 $5 million are at 96 cents per share, including six cents and non recurring benefits.
Given the pace of sales that drove these remarkable earnings our team has done a tremendous job chasing inventory of numerous hot categories, which has been complicated by the widely reported supply chain disruptions throughout retail.
There are certainly categories, where we wish we had more inventory at <unk>.
Suspect there will be some time before supply catches up to demand.
Before discussing our second quarter trending I wanted to take a moment to address some news regarding our business with Nike.
We were recently informed of an expansion of Nike direct to consumer initiatives that will impact big five along with certain other large chain retailers.
As a result by the end of this year, we will no longer receive shipments directly from Nike.
Although this will lead to a significant reduction in our flow of Nike products. We will continue to purchase search of Nike products from authorized licensees.
The products that will be impacted by Nike's decision represented approximately 7% of our 2020 sales.
Based on current and expect the supply chain of Nike products, we do not expect any material impact on our 2021 sales.
We source products from many vendors and we have a very diverse and flexible product mix.
Although we are disappointed by Nike's decision. We are encouraged by the response of other vendors, both new and existing about the opportunity to expand their presence in our stores from.
From a customer standpoint, we believe that many customers enter our stores relatively brand agnostic and shop us for our value and convenience.
I am quite confident in our team's ability to work through this transition to continue to offer a compelling of product assortment in 2022 and beyond.
Turning now to current trends.
We are very pleased that our second quarter is off to a tremendously strong start by any measure.
Compared to 2020.
Quarter to date sales are running up over 100%.
But I should point out that year over year comparison benefit from Comping against the widespread store closures last year, plus the calendar shift of the Easter holiday.
Given the unusual circumstances last year is more relevant to compare this year's results with the comparable period in 2019, which was obviously non impacted by the pandemic.
On that basis after adjusting for the calendar shift associated with Easter same store sales for the start of Q2 are running up approximately 40% with point of sale margin is up approximately 450 basis points versus 2019.
As we look at our current trends, what we find particularly encouraging is that as conditions relating to the pandemic had been improving and restrictions have been easing in our market the.
Of the categories the surge through the pandemic are continuing to perform at high levels.
We are experiencing customer traffic significantly above historical levels.
Indicating the big five that's at the forefront of People's minds is the convenient and trust the destination to find what they need.
This past year has been a catalyst for many of the stay healthy and engage the reengage and recreational activity.
Whether it's golf or tennis family activity from the back of yard or going to the lakes mountains of beaches. The desire to be active is higher than ever and our product assortment is ideally situated for these trends.
In sum, we are very enthusiastic about our business and feel well positioned to leverage our trending and improved cost structure to continue to deliver strong results.
Now I will turn the call over to Barry.
Thanks, Steve.
First let me know at certain calendar shifts that affected our net sales for the first quarter.
The increase in net sales was partially offset by an approximate $10 million unfavorable impact from the calendar shift related to the company's 53 weeks fiscal 2020 at cause fiscal 2021 to begin one week later in fiscal 2020 as.
As well as an unfavorable impact from the calendar shift related to the Easter holiday during which the company stores are closed.
From the second quarter of fiscal 2020 to the first quarter of fiscal 2021.
However, our same store sales comparisons are made on a comparable week basis, and therefore, the calendar shifts did not have a material impact on our same store sales comparisons.
Gross profit for the fiscal 2021 first quarter increased to $97 9 million from $64 6 million in the first quarter of the prior year.
Our gross profit margin was 35, 9% in the fiscal 2021 first quarter versus 29, 6% in the first quarter of the prior year.
The increase in gross profit margin largely reflects the 30 350 basis point expansion of merchandize margin that Steve mentioned, along with reduced our occupancy and warehousing costs as a percentage of net sales and to a lesser degree the favorable impact from an insurance settlement partially offset.
By lower distribution costs capitalized into inventory for the quarter.
Selling and administrative expense decreased $1 3 million in the fiscal 2021 first quarter versus the prior year period, primarily due to lower print advertising expense.
And the elimination of the liability for an employment agreement, partially offset by higher performance based incentive compensation accruals.
Selling and administrative expense as a percentage of net sales was 25, 7%, representing a 710 basis point improvement versus the prior year period due to the combination of expense reductions and of higher sales volume.
Now looking at our bottom line net income for the first quarter of fiscal 2021 increase the $21 5 million or <unk> 96 per diluted share.
Cleaning of benefit of <unk> <unk> per diluted share related to the elimination of the employment agreement liability.
And the insurance settlement.
This compares to a net loss of $4 6 million or 22 per basic share in the first quarter of fiscal 2020.
Adjusted EBITDA for the first quarter of fiscal 2021 was $30 3 million compared to a loss of $2 2 million in the prior year period.
Turning to the balance sheet, our merchandise inventory at the end of the fiscal 2021 first quarter was down 28% compared to the prior year.
This reduction in inventory reflects a strong sell through of our winter merchandise.
Bind with broad based strength across our product categories.
Buying buying team continues to work closely with our vendors to obtain key merchandise, but in some instances we have been impacted by the widely reported disruptions.
In the supply chain.
Looking at our capital spending our capex, excluding noncash acquisitions totaled $1 7 million in the first quarter of fiscal 2021.
For the full fiscal year.
We expect to ramp up our capex to a more normalized level in the range of $12 million to $16 million, primarily representing investments and distribution center equipment computer hardware and software purchases store related remodeling of new stores.
For the year, we expect to open approximately five new stores and close of approximately two stores.
The combination of sales growth merchandise margin expansion and improved cost structure allowed us to generate substantial operating cash flow for the first quarter of fiscal 2021.
Our cash flow from operations was a positive $42 million for the period.
Our strong operating results continue the positive positively impact our balance sheet and of substantial way.
We ended the fiscal 2021 first quarter with no borrowings under our credit facility and with cash and cash equivalents of $100 1 million.
This compares to zero borrowings.
And $64 7 million of cash and cash equivalents as of the end of the 2020 fiscal year.
And to $124 3 million of borrowings and $44 to $44 2 million of cash as of the end of the fiscal 2021st quarter.
This reflects a $180 2 million improvement of net cash on a year over year basis, and at $35 $4 million improvement of net cash over the course of the first quarter.
As Steve mentioned in consideration of the strength of the Companys business cash flow and balance sheet. Our board of directors has declared at 20% increase in our regular quarterly cash dividend from <unk> 15 per share of outstanding common stock to <unk> 18 per share.
Which will be paid on June 15th 2021 to stockholders of record as of June <unk> 2021.
This annualized dividend rate of 72 per share is the highest in our history.
Additionally, our board of directors has declared a special cash dividend in the amount of.
Of $1 per share, which will be paid on June one 2021 to stockholders of record as of May 17th 2021.
We have a long history of returning value to shareholders and we are pleased the strength of our business and financial condition provide us the financial flexibility to increase our regular dividend and also pay a special dividend, while continuing to invest in our business.
Now I'll spend a minute on our guidance.
For the fiscal 2021 second quarter, we expect same store sales to increase in the range of 22% to 27% and earnings per diluted share in the range of $1 five to $1 25.
This guidance compares to a same store sales decrease of four 2% and earnings per diluted share of <unk> 52.
In the second quarter of fiscal 2020, which included a net benefit of approximately <unk> 13 per diluted share related to rent abatements savings.
And the recovery and eminent domain litigation, partially offset by expenses associated with special employee recognition bonus awards.
Note that our fiscal 2021 second quarter guidance reflects benefits from both comping against widespread COVID-19 related store closures last year and also from calendar shifts this year compared to last year.
We will cycle the majority of last year's store closures by the middle of May This year.
And from that point, we will be comping against the ramp up in sales following our store reopening.
Turning to the calendar shifts or second quarter benefits from two holiday shifts.
First the Easter holiday shifted from the second quarter of fiscal 2020 into the first quarter of fiscal 2021.
Our stores are closed on Easter Sunday, we have already picked up a day of sales in Q2 of this year.
Second the fourth of July of holiday will shift from the third quarter of fiscal 2020 into the second quarter of fiscal 2021.
With this shift our second quarter will benefit from the higher volume holiday week in the second quarter. This year.
And although we are not guiding to the third quarter from a modeling standpoint keep in mind that our third quarter will be negatively impacted by that shift.
Additionally, our guidance for the second quarter reflects our expectation of continued improvement at our merchandize margins on a year over year basis, due primarily to continued strong product demand and a favorable shift in sales mix.
Also we expect to continue to achieve significant operating leverage in the second quarter due to our increased sales and improved cost structure.
That concludes our prepared remarks, operator, we are now ready for questions.
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First question today is coming from Mark Smith from the true capital Your line of has gone live.
Yeah.
Hi, guys.
Couple of questions here for you.
The first off I, just wanted to look a little bit at maybe what we would call <unk>.
Sure or pandemic categories versus kind of reopening our sales categories.
Can you you spoke a little bit about at in the call, but can you talk about outdoor space.
Exercise of at home.
You know if you're seeing any ammunition of firearms supply that's kind of helping boost sales and then you know in particular should we look at reopening team sports are there any other categories that are doing well as we're starting to see some some reopening.
Sure Mark.
As I tried to indicate in the prepared remarks.
Once the team sports business return, we had virtually all categories throughout our stores performing at high levels throughout much of the pandemic, we all of the categories other than team sports we're doing.
Pretty well at very very well and certainly the the outdoor categories.
Backyard own backyard, while at the front yards whether escapes their scooters.
We're performing well of the individual sports the golf and the tenants. So we pretty much at everything working at all.
Other than the big.
A big hit from team sports over the end.
[noise] tire pandemic the the firearm business has been widely reported the.
<unk> has been strong.
I am sure nation nationwide end.
So once the.
Things start to reopen what's really happened I'd argue in a hurry come March.
And particularly in our California market, where they really flipped the script on the dealing with the pandemic.
It seems sort of came on very strong.
We had baseball seasons, which would traditionally start and in some of our markets as early as in January and certainly by February into early March were kind of just kicking in over the course of March and into April and top of that some of.
Many schools tried to make up of missed fall football season, we had soccer. So we really had everything working for our business in the very positive manner.
Okay, and it sounds like you've kind of said that you haven't seen a slowdown in the categories that were strong over the last 12 months at kind of front yard backyard outdoor exercise categories have you seen any shift in consumer behavior, where there.
Doing other things and what they did during the pandemic.
Yeah.
I guess the way to look at at Mark I mean, we certainly have seen some slow down from the levels of pure surge buying in that occurred for example, an exercise which was really one of the first categories. The kicked off at the onset of the pandemic and whereas we're certainly not same.
The demand.
It's the old at the levels of really a year ago.
We still see that category per four made.
Meaningfully stronger than <unk>.
Pre COVID-19.
Levels in the number was what we saw at 1918, 17, 16 going going backwards. So.
<unk>.
I think the interest in getting the outdoors and recreating the when the particularly when the weather cooperates is really the strong as strong as ever.
<unk>.
So we feel terrific about the the trends that we see across the board.
Okay.
As we look at the cost side, you guys have done a good job on reduced hours and the new cost structure anything inflationary that we should keep our eyes on are you seeing of any pressure in labor rates or anything of that we should be watching for.
Well actually yes mark.
I think that the labor pressure not only minimum wage which of course is huge for our markets, it's really huge across the nation.
But just the labor market in general surprisingly enough we are just seeing.
A lot of challenges really at store level of distribution center level at you know really throughout the organization.
Just from an overall labor standpoint.
And so that's an impact the.
We're we talked a lot about how we've been mitigating those costs over time, and we're continuing to yeah.
Zinc cost pressure, we're also seeing cost pressure from a on the product side right. So free freight cost just raw materials.
The other inputs to the to the product cost.
And we're watching that closely and are you now, but so far so good in terms of being able to make adjustments and an increased prices as necessary.
The demand is still certainly exceed supply and at this point in time, we've been able to par at past those kinds of costs along.
And some of the other areas.
In terms of advertising end store labor and so on and we're evaluating those costs.
And levels of investment depending on sales trending, but we feel very good about being able to continue to.
The manage those costs as we have recently and continue to have them trend lower than they were in 2019.
Okay, Great and then just I think two more from me, Steve just confirm regarding Nike I think you said, 7% of of 2020 sales and you don't expect any real significant impact this fiscal year is that correct.
That is correct.
And then the last one from me if you have it handy.
Can you give us what the cadence of comps or sales were last year during Q2, and I know the calendar shift.
Moving some things around but if you've got the handy if not we can discuss it offline.
Yeah.
Yeah, I think I can.
Yes provided.
Provided at give me half half of the second berries.
I can give you.
Q2.
In March we were.
April was down.
Almost 40% May was up just slightly.
At June was up.
Approximately.
<unk>, 15%. So you can see the trending and if so that's when we made the comment last year of.
The first half being down significant first half of the quarter being down significantly in the second half turning around end being up pretty strongly in the second half of the second quarter at really flipped in the middle of May we all of a sudden we were able reopened a lot of stores have been closed end.
Our business took off very positively in the back half of the second quarter.
Okay.
That's helpful. Thank you guys.
Thank you Mark.
Thank you we reached the end of our question and answer session I would like to turn the floor back over to Mr. Miller for any further of closing comments.
Alright, well. Thank you operator, and thank you all for joining us of 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 second quarter of a great afternoon.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.