Q2 2022 Big 5 Sporting Goods Corp Earnings Call

Okay.

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Good day, ladies and gentlemen, welcome to the Big five sporting goods second 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.

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 2022 second quarter Conference call today, We will review our financial results for the second quarter of fiscal 2022 as well as to provide an outlook for the third quarter 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 forward looking statements involve known and unknown risks and.

Certainties 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 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 very much.

What became increasingly challenging retail climate over the course of the second quarter. We were pleased to achieve earnings that were within our guidance range and higher than in any pre pandemic second quarter in our history.

As we look at our results through the first half of this fiscal year on a year over year basis. It is important to keep in mind that we faced extremely difficult comparisons against last year's record result, when sales surged due to unusual pandemic related factors, including a significant benefit from tremendous pent up demand.

For our products following the resumption of in personal schools and sports leagues, along with the distribution of stimulus checks.

As a result year over year comparisons are highly distorted. So we will provide some pre pandemic comparisons today as additional context.

Net sales for the fiscal 2022 second quarter were $253 $8 million compared to net sales of $326 million for the second quarter of last year.

Same store sales were down 22, 3% versus last year and below our plan that called for a high teens decrease.

From a traffic and ticket perspective on a year over year basis transactions for the second quarter decreased in the high teens with our average sale down approximately 4%.

Looking at our same store sales versus the pre pandemic 2019 period, we were up three 9% on a comparable day basis.

Similar to other retailers, our topline was impacted by macro economic headwinds.

Which became progressively worse over the course of the second quarter.

These macro trends are undoubtedly pulling dollars away from consumers discretionary spending.

Additionally, we have been impacted by the resurgence of Covid cases to began in June , particularly in our key California markets.

Its likely its impacted customer traffic and we certainly experienced an uptick in COVID-19 cases, among our team members.

This compounded the ongoing store staffing issues, we've been battling and the difficult hiring environment.

With the staffing challenges we've been unable to keep all of our stores open for optimal operating hours.

Even with all these headwinds we achieved second quarter sales that were higher than any pre pandemic second quarter sales in our history.

As we have said in the past while it all starts with sales generating healthy margins, there's always been a key focus for us.

In the second quarter, despite sales coming in below plan, our margins remain very strong.

Although our merchandize margins decreased by 102 basis points versus the record margins, we generated in the second quarter of last year.

This year's Q2 margins were 310 basis points higher than in any pre pandemic second quarter in our 20 year history as a public company.

This margin strength demonstrates the flexibility of our model.

Highlights the evolution of our business through the pandemic era that made us a stronger and more resilient company.

Our inventory is current.

So we are well positioned to use promotions strategically rather than relying upon them to drive sales or clear excess inventory.

Yeah.

While we have been more promotional in certain categories, we've been able to do so without meaningfully impacting our planned merchandise margins, which in turn helped us achieve our earnings plan for the second quarter.

Over the course of the pandemic, we have evolved our promotional model and become much less reliant on chain wide print advertising.

Aside from the obvious advertising cost savings there.

[noise] has facilitated a more efficient pricing and promotional strategy that allows us to reduce the inventory depth and breadth that we have historically needed to support planned promotions.

This improved inventory efficiency, that's been a major factor in driving gross margin dollars.

In the second quarter of 2022.

Gross margin dollars, we generated relative to our inventory dollar investment was higher than in any pre pandemic second quarter in our history as a publicly traded company.

Turning to current trends.

In the third quarter, just like in the second quarter, we are copying extraordinary prior year results.

And we continue to battle macroeconomic headwinds.

For the quarter to date, our same store sales were running down in the low teens versus last year.

But are running up low single digits versus the comparable days in 2019.

While supply chain disruption still persist.

Our improved from where they were at this time a year ago.

We believe our product assortment is generally well positioned and we anticipate that sales trends versus last year will improve over the balance of the quarter.

Stepping back.

Over the course of the pandemic, we have enhanced and evolved our model and emerged a stronger company.

We have a strong debt free balance sheet with a healthy inventory position.

We knew fiscal year 2022 would be hard to predict due to the combination of challenging comps from periods of unprecedented demand and the uncertainties of the current environment.

We continue to benefit from enhancements, we have made to our cost structure, which are helping to mitigate extraordinary inflationary pressures and are protecting our EBITDA in the face of new challenges borne by the shifting macroeconomic forces that all retailers are facing.

We have a long operating history and proven track record of managing through challenging conditions.

Which combined with the flexibility that we've created are allowing us to continue to generate healthy operating results.

In closing I'd like to acknowledge and thank our big five team has drawn their years of experience through many economic cycles to help us remain nimble and adapt to new circumstances and an ever changing environment.

I'll now turn it over to Barry to provide additional details regarding our second quarter performance and third quarter outlook.

Thanks, Steve.

As we previously mentioned our net sales for the fiscal 2022 second quarter were $253 8 million, which represented our highest second quarter sales in the company's history.

Compared to the fiscal 2019 period second quarter same store sales increased three 9% on a comparable day basis.

Gross profit for the fiscal 2022 second quarter was $88 9 million compared to $126 9 million in the second quarter of the prior year.

Our gross profit margin was 35% in the fiscal 2022 second quarter, which was down compared to 38, 9% in the record prior year second quarter.

The decrease in gross profit margin year over year, primarily reflected higher store occupancy and warehouse expense as a percentage of net sales, partially offset by a significant increase in cost capitalized into inventory.

Our merchandize margins decreased by 102 basis points for the fiscal 2022 second quarter compared to the second quarter of fiscal 'twenty 'twenty. One however, when compared to the 33% gross profit margin we reported in the second quarter of 2019, our gross margin continues.

To demonstrate strength with an increase of approximately 470 basis points in part, reflecting the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense decreased $1 8 million in the fiscal 2022 second quarter versus the prior year period, primarily due to lower performance based incentive accruals and credit card fees, partially offset by broad based inflationary impacts.

Including increased employee labor and benefit related expenses year over year.

And to a lesser degree higher advertising expense due in part to the Easter calendar shift.

Additionally, we incurred a charge of 1 million or three cents per diluted share for the reevaluation of workers' compensation reserves due to a change in claims assessment methodology.

As a percent of net sales SG&A expense was 32% in the fiscal 2022 second quarter versus 24% in the 2021 second quarter, reflecting the deleveraging effect of lower sales.

Impaired to the second quarter of fiscal 2019, SG&A expense as a percent of net sales. This year was approximately flat.

Okay.

Now looking at our bottom line net income for the second quarter of fiscal 2022 was $8 9 million or 41 cents per diluted share.

After the three set workers' compensation charge. This compares to record second quarter net income of $36 8 million or $1 63 per diluted share in the second quarter of fiscal 2020 one.

And once again for added perspective, this year's second quarter EPS of 41 cents compares to breakeven E. P. S zero that we reported in the second quarter of fiscal 2019.

Adjusted EBITDA continues to be very healthy and totaled $17 7 million for the second quarter of fiscal 2022 compared to $52 9 million in the second quarter of fiscal 2021.

Briefly reviewing our 2022 first half results.

Net sales were $495 8 million compared to a record net sales of $598 8 million in the first 26 weeks of last year.

Same store sales decreased 17, 3% in the first half of fiscal 2022 versus the comparable period last year.

Net income for the first 26 weeks of fiscal 2022 was $18 million or 81 cents per diluted share.

This compares to record net income for the 2021 first half of $558 3 million or $2.59 per diluted share, including a previously reported net benefit of <unk> <unk> per share adjusted.

EBITDA was $32 7 million for the 2022 year to date period compared to $83 2 million in the comparable prior year period.

Turning to the balance sheet, our merchandise inventory at the end of the second quarter of fiscal 2022 increased 26, 8% year over year, primarily reflecting more normalized inventory levels. Following the significant sell through in the prior year period.

To a lesser extent the higher inventory also reflects carryover of winter related inventory following unseasonably warm and dry winter weather in the first quarter, which we will reintroduce next season.

Compared to the end of the second quarter of fiscal 2019, our merchandise inventory this year increased slightly by one 5%.

Factoring out winter related products, our merchandize inventory was well below 2019 levels.

Looking at our capital spending our capex, excluding noncash acquisitions totaled $5 5 million in the first half of fiscal 2022.

For the fiscal 2022 full year, we expect capex in the range of $13 million to $17 million, primarily representing investments in store related remodeling, new stores distribution center equipment, and computer hardware and software purchases.

During fiscal 2022 we expect to open approximately three stores and closed approximately two stores, including one relocation.

From a cash flow perspective, net cash used in operating activities was $39 1 million in the first half of fiscal 2022. This compares to positive operating cash flow of $88 7 million in the prior year period.

The year over year decrease in operating cash flow, primarily reflects increased funding of merchandise inventory and lower net income.

Our balance sheet at the end of the second quarter of fiscal 2022 was very healthy with zero borrowings under our credit facility and a cash balance of $36 6 million.

Our financial condition has strengthened considerably over the past three years and compares to borrowings under our credit facility of $62.4 million and a cash balance of $6 6 million at the end of the second quarter of fiscal 2019.

In the second quarter of fiscal 'twenty, 'twenty, two we repurchased $2 $6 million of common stock under our $25 million share repurchase authorization, bringing our year to date repurchases to $4 $1 million.

Additionally, today, we announced that our board of directors declared a quarterly cash dividend of 25 cents per share.

Now I'll spend a moment on guidance, which reflects our expectation that macro economic headwinds will continue to impact consumer discretionary spending.

For the fiscal 2022 third quarter, we expect same store sales, which are reported on a comparable day basis to decrease in the high single digit range compared to the fiscal 2021 third quarter.

Versus 2019, we expect same store sales to increase.

In the low single digit range on a comparable day basis.

We expect fiscal 2022 third quarter earnings per diluted share in the range of 22 cents to 32 cents.

Which compares to earnings per diluted share of $1 seven in the third quarter of fiscal 2021 and 30 cents in fiscal 2019 realm.

Relative to this year the fiscal 'twenty, 19th third quarter benefited from a shift related to our fiscal calendar.

That concludes our prepared remarks.

Operator, we are now ready for any questions.

Yeah.

Thank you.

At this time, we will be conducting a question and answer session.

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One moment, please while we poll for questions.

We have a question from Mark Smith of Lake Street Capital. Please go ahead.

I guess first off I was wondering if you could walk a little bit through kind of the sequential comps during the quarter. What you saw kind of a month to month.

Yeah.

Oh.

Yes, I mean the.

Yeah again, it's so erratic go into again the.

So what a 2021 results, but we were you know we were down as we said, 22% 22, plus three same stores for the quarter and it was pretty consistent which each quarter being down.

Between 'twenty, and basically 20, 25% down slightly a slightly.

Slightly more in the.

And in April that's compared to last year. If we were comparing to 2019. You know you know April was by far our strongest comparison, it yes, 19, and the comps decelerated.

Again, the 19 for May and June and on that basis, it's somewhat distorted due to.

Yeah extraordinary ammunition sales back at night in June of 2019 in front of a.

A law change in.

And in California, and California.

They basically expectations you know as we mentioned we saw a fundamental deceleration from our plan over the course of the quarter.

Yeah as we look at it you know is there anything one thing that you can tie it to you know how close was a consumer pullback tied to you know perhaps gas prices or is it a much more broad issue hitting your keep consumers said they made them kind of pullback.

Boy, you know Mark I mean, I think Oh, it's the inflation and the impact on our consumers.

Pocket books would be difficult.

Discern how much of its gas how much of its food inflation, how much of it or housing cost and ramps in an end of life, but.

So very difficult to see as a real time, but you'll definitely have an impact for discretionary purchases are amongst our consumers.

Okay.

And then you guys said I think quarter to date comps are down at a low teens I think is what you said to you do you feel like we've.

Your consumer has kind of bottom that it's gotten as bad as it's going to get or you know with with even any rebound or maybe tell us what you're seeing from consumer behavior today.

The market is very difficult to make a judgment on whether our consumers thought of on a real time basis. I mean, there's so many moving parts to our you know our sales on a year over year basis due to seasonality.

Due to impacts impacts of weather.

We in terms of the comparisons against over against 2021 we do anticipate and I think I mentioned in the prepared remarks that our trends will pick up.

And you know we're guiding to a decrease.

Decrease in the quarter against last year of a high single digits, and we're running down low teens.

And that has more to do with sort of the cadence really of what happened last year.

As are our numbers were impacted as we play through the Q3 of last year.

Our stock position being relatively depleted after our remarkable second quarter that we are there.

We achieved and so as we went into the back half of the quarter last year. We were we're missing lots of our products that we wish we had an unquestionably couldn't perform even stronger than our.

Hum.

Our strong Q3 results a year ago.

Well, we got a better inventory position.

Oh yeah.

And as we look at you know margin a little bit here you know any additional insight you can give us on kind of margin deceleration with the decline in sales and I know you guys have kind of a new operating model versus you know a couple of years ago. You know do you feel like you can maintain these comps and.

You know that's called sorry gross profit margin in this.

Low 30% to 35% or you know with decelerating sales is there a chance we see it maybe dropped below those levels.

Well I mean in terms of merchandize margins, you know where our focus is on profitability. We think we've taken significant steps to enhance the.

The profit model of our business and operating our business at stronger merchandise margins than we we we achieved pre pre pandemic and we believe that.

The absolute lions share of that is sustainable.

Not necessarily to the remarkable degrees that we realized last year or so on a year over year basis, you know some some some deceleration on a quarter over quarter basis relatively speaking we're planning for.

Very modest.

Sure.

I guess deceleration of our March of our merchandise margin levels vary in terms of the overall that's right. That's right Mark and then you know and you know and as levels come down you know sales come down we are seeing some deleveraging in our oh in occupancy until it until a lower degree and but on the Oh.

The warehousing side, you know because of the challenges around finding resources staffing you know those kinds of things and in overall freight costs. You know we are seeing some deleveraging on the lower sales on warehouse as well as a little bit on occupancy also.

The other day work, we're always about trying to optimize gross profit dollars and we feel that we're in a very healthy inventory position.

So we don't feel we need to promote just for the sake of clearing inventory and ultimately our decisions are driven by out of town to optimize gross profit dollars.

And appropriately managed costs and unfortunately, you know just from a pre pandemic standpoint, it's nice to see our merchandise margins.

You know kind of you know north of 400 basis points, you know versus the 2019 period for example.

Uh huh.

Steve you just talked about it kind of my last question a little bit as we look at inventory levels. You know the dollar amount up fairly significantly on a year over year and an even a sequential basis.

It sounds like some of that is winter hold over us as we look at kind of late summer months moving into fall do you feel like there's there's discounting that you need to do on some of you know whats called kind of your current inventory or you know where are you. Okay. If we see you know sales at lower levels being able to hold some of that.

Tori over to next year.

Yeah, we feel pretty good overall, I mean about our inventories I mean like always I mean.

During the pandemic pre pandemic and now you know theres always some items that we wish we add had more oven somebody's we wish we had less off but overall, we think our inventories are in good position.

We feel comfortable to the extent that our sales in some areas maybe softer than anticipated you know, we're working to adjust our orders to the extent, we're able to but why a large where we're very comfortable holding product over yeah, we've demonstrated year over year, but they're just like with what are winter.

But you know if the demand isn't there just chasing them with discounting isn't it isn't necessarily the answer and a whole of that product and reintroducing. It works well for us, but overall, we don't see that as a major a major concern.

Unless there's some.

Yeah, more significant deceleration from a demand standpoint.

Perfect. Thank you guys.

The humor.

Yeah.

That concludes our question and answer session I will now turn the call back to Mr. Min, that's what any closing comments.

Alright, well. Thank you operator, and thank you all for joining us on today's call. We appreciate your interest in big five sporting goods and look forward to speaking you with you again after the conclusion of our third quarter.

Great afternoon.

This concludes today's conference. Thank you for joining US you may now disconnect your lines.

Yeah.

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