Q3 2022 Big 5 Sporting Goods Corp Earnings Call

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Good day, ladies and.

And won't come to the big five sporting goods third quarter. After <unk> 22 earnings result conference call.

Today's call is being recorded.

Today are Pete Miller, President and Chief Executive Officer.

And Mr. Barry Emerson, Chief Financial Officer of Big five sporting goods.

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Thank you operator.

Afternoon, everyone welcome to our 2022 third quarter conference call today, We will review our financial results for the third quarter of fiscal 2022, as well as to provide an outlook for the fourth 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 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.

Thank you Barry.

Despite facing significant macroeconomic headwinds that accelerated over the course of the quarter, we achieved fiscal third quarter sales and earnings results within our guidance range.

We believe these results underscore our ability to execute in the currently challenging economic climate and reflect the durability and efficiency of our operating model, which we have evolved and improved over the last several years.

In the third quarter of fiscal 2022, our net sales were 261 $4 million compared to net sales of $286 9 million for the third quarter of last year.

Same store sales for the quarter were down nine 8% versus last year consistent with our plan that called for a high single digit increase decrease.

And it's important to keep in mind that we faced extremely difficult comparisons against last year's record results when sales surged due to pandemic related factors, including the significant benefit from pent up demand for our products. Following the resumption of in person school and sports leagues, along with the distribution of.

The stimulus checks.

Comparing to the pre pandemic 2019 third quarter same store sales increased over 2%.

Given the exceptionally challenging operating environment that we along with other retailers have been facing we are pleased that our sales trends continued to exceed pre pandemic levels. Additionally.

Additionally, it should be noted that we achieved these top line sales, while focusing on our bottom line results.

We're driven by a combination of very strong merchandise margins along with efforts to optimize our cost structure by slightly reducing store operating hours and significantly reducing advertising spend versus 2019.

Now I'll provide a little color on our sales.

On a year over year basis transactions for the third quarter were down high single digits with average sale down low single digits.

Each of our major merchandise categories were below last year's strong performance.

In the third quarter with economic conditions.

Additionally, dampening consumer sentiment.

We noticed the distinct bifurcation sales trends as products that are more essential to our sporting goods customer outperform products that might be viewed as more discretionary purchases.

For example, customers continue to buy the equipment, they or their children needed to remain active participants in team sports and recreational activities.

Perhaps they were less inclined to buy an extra pair of shoes or piece of apparel.

Given the challenges surrounding consumer discretionary spending the steps we've taken over the past few years to improve our merchandize margins continue to serve our business very well and in the third quarter. Our merchandise margins came in slightly ahead of plan.

Impaired to last year, when we achieved record margins there were driven by strong consumer demand coupled with a very constrained supply chain. This year's third quarter margins decreased 132 basis points.

However, they were approximately 300 basis points higher than in any prepaid debit third quarter in our history as a public company.

As we've said before maximizing gross profit dollars is a key area of focus.

The third quarter, our merchandise margin performance certainly was key to driving gross profit in a difficult consumer environment.

Turning now to our current trends.

For the quarter to date period, our same store sales are running down in the low double digit range.

Worse last year, but are running up in the low single digit range compared to the pre pandemic 2019 fourth quarter.

October and November prior to Thanksgiving week are typically low volume period and as always this year's holiday season will be the key to our fourth quarter results.

Unlike last year, when we were very supply constrained and missing depth and breadth in our product offerings. This year. We are extremely pleased with our product assortment and believe our inventory levels are right sized for the balance of the quarter.

Our inventory is very current with low levels of clearance product.

Purchasing opportunistically as a core strength of our business.

And given the excess inventory in the market today, we have taken advantage of a number of closeout buys for the holiday season that we believe will resonate with our customers and reinforce our reputation for value.

As a result, we are in a position to be strategically promotional to profitably drive traffic and sales.

Simply put I am pleased with our team's effort, which have us well placed for the balance of the year.

That said, we certainly anticipate the challenges will likely continue to revolve around consumer discretionary spending and an uncertain economic environment.

And as we've experienced over the years winter weather is always a variable that can significantly impact our results.

Taking a step back.

Our model has been tested in a wide range of economic cycles over many decades.

While this cycle will certainly be memorable with its intense challenges our playbook remains the same user.

Use the flexibility of our model to our advantage look to optimize gross profit dollars and relentlessly focus on the areas of expense management that we can control.

Over the past few years, we have made significant enhancements to our model and financial health.

And as a result, we believe we are well positioned to continue to drive results over the balance of the fourth quarter and beyond.

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

Thanks, Steve.

As we previously mentioned our net sales for the fiscal 2022 third quarter were 261 4 million.

Compared to the pre pandemic fiscal 2019 period third quarter same store sales increased two 1%.

Gross profit for the fiscal 2022 third quarter was $86 6 million compared to 108 million in the third quarter of the prior year, which benefited significantly from extraordinary consumer demand, coupled with constrained supply and which really contrast with the tough.

Macro economic environment that we faced in this year's third quarter.

As a result, our gross profit margin of 33, 1% in the fiscal 2022 third quarter was below the 37, 3% reported in the prior year third quarter.

The decrease in gross profit margin year over year, primarily reflected a decrease in merchandise margins, coupled with higher store occupancy and distribution expense, including cost capitalized into inventory as a percentage of net sales.

As Steve mentioned, although merchandize margins decreased by 132 basis points for the third quarter of fiscal 2022 versus the prior year's record merchandise margins.

When compared to the pre pandemic 2019 third quarter merchandise margins increased approximately 300 basis points in part, reflecting the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense increased $3 1 million in the fiscal 2022 third quarter versus the prior year period, primarily reflecting higher labor costs and other broad based inflationary impacts partially offset by lower performance based incentive accruals.

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As a percent of net sales SG&A expense was 29, 9% in the fiscal 2022 third quarter versus 25, 9% in the 2021 third quarter, reflecting the deleveraging impact of increased expense on a lower sales base.

Now looking at our bottom line net income for the third quarter of fiscal 2022 was $6 4 million or <unk> 29 per diluted share.

Above the midpoint of our guidance range of 22 to 32 cents per diluted share.

This compares to third quarter net income of $24 1 million or $1 seven per diluted share in the third quarter of fiscal 2021.

Adjusted EBITDA continues to be very healthy and totaled 13 million for the third quarter of fiscal 2022 compared to $37 3 million in the third quarter of fiscal 2021.

Briefly reviewing our results for the 39 week period ended October <unk> 2022, net sales were $757 2 million compared to net sales of $888 5 million in the first 39 weeks of last year same store sales decreased 14, 9%.

For the first nine months statistical 2022 versus the comparable period last year.

Net income for the first 39 weeks of fiscal 2022 was $24 4 million or $1 10 per diluted share, including a previously reported charge in the second quarter.

A three cents per diluted share.

This comparison net income for the first nine months of fiscal 2021 of $82 5 million or $3.66 per diluted share, including a previously reported net benefit of <unk> <unk> per share.

Adjusted EBITDA was a strong $45 7 million.

For the 2022 year to date period compared to a pre pandemic influenced record $125 million in the comparable prior year period.

Turning to the balance sheet, our merchandise inventory at the end of the third quarter of fiscal 2022 increased 23, 2% year over year, primarily reflecting more normalized inventory levels. Following the significant sell through in the prior year.

To a lesser extent the higher inventory also reflects carryover of winter related inventory after the unseasonably warm and dry winter weather in the first quarter.

Which we have reintroduced for the approaching season.

Despite the winter product carryover compared to the end of the third quarter of fiscal 2019, our merchandise inventory this year decreased by one 3%.

Looking at our capital spending our capex, excluding noncash acquisitions totaled $8 8 million in the first nine months of fiscal 2022.

For the 2022 full year, we expect capex in the range of $10 million to $13 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 three stores and closed two stores, including one relocation.

Now looking at our cash flow net.

Net cash used in operating activities was $29 9 million for the first 39 weeks of fiscal 2022. This compares to positive operating cash flow of $95 2 million in the prior year period, the year over year decrease in operating cash flow primarily reflects increased funding.

Of merchandize inventory with the easing of supply chain issues and lower net income.

Our balance sheet at the end of the third quarter of fiscal 2022 continues to be very healthy with zero borrowings under our credit facility and a cash balance of $34 4 million.

Our financial condition has strengthened considerably over.

Over the past few years after achieving record operating results in 2020 in 2021 and today, we announced that our board of directors declared a quarterly cash dividend of 25 per share.

Now I'll spend a moment on guidance.

For the fiscal 2022 fourth quarter, we expect same store sales to decrease in the high single digit to low double digit range.

Compared to the fiscal 'twenty, 'twenty, one and fourth quarter.

Compared to the pre pandemic 2019 fourth quarter, we expect same store sales to increase in the low single digit range.

Although it is challenging to predict consumer discretionary spending given the current environment. Our guidance reflects our expectation that macro economic headwinds will continue to impact consumer discretionary spending.

In addition winter weather is always a big variable for us over the course of the fourth quarter and certainly has the potential to positively or negatively impact our results.

We expect fiscal 2022 fourth quarter earnings per diluted share in the range of eight to 20 cents, which compares to earnings per diluted share of <unk> 89 cents in the fourth quarter of fiscal 2021, and two cents in the fourth quarter of fiscal 2019.

That concludes our prepared remarks.

Operator, we are now ready for any questions.

Yeah.

Thank you.

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Question comes from.

That's <unk> capital.

Capital market.

Hi, guys a.

A couple of questions for me first just just any additional thoughts that you have as we go into this key holiday selling period.

You know the outlook seems pretty cautious.

I know you talked about why they're just being a big variable and not really knowing where the consumer is going to be you know 30 days from now or so.

But is there anything that's within your control that keeps you a little bit cautious on whether it's your inventory.

You know your assortment or anything like that that that's keeping you more on the cautious side.

Not really Mark I mean, hopefully we turned out to be conservative yeah, we do see the challenges of the consumer headwinds in terms of our inventory.

Couldn't feel better about our our assortments are.

Particularly relative to last year, when we were very supply constrained.

Been able to.

So purchase.

So opportunistically take advantage of.

Excessive inventory in the marketplace and buy Closeouts that we think should resonate positively with our customers.

Last year, we did have you know.

A strong winter season.

Particularly over December it was really one for the ages.

And you know, we're mindful of comping against that and with the you know obviously known for weather, but in terms of our own preparation and positioning we feel very good.

Okay and as we look at the inventory remind me if I'm wrong, but it seems like you guys carried over a fair amount of winter gear from last year can you talk about maybe the potential if you have decent sell through of that inventory.

The potential to have pretty solid margins just given the price at I assume you paid so that inventory a year plus ago.

Yes.

Yeah, I mean, we think our margin.

So potential from from a winter products. This is Pos is positive we don't see any downside from having carried over.

That that inventory and in some cases, we may have one that inventory at more favorable rates than had we purchase it you know fresh for this for this season.

So we really don't see any any consequences to our margins. So we're just hoping for a strong a strong winter season.

Okay.

And I think the last one for me just as we think about store growth says we approached the end of this year.

Can you just talk about your appetite to open new stores or accelerate store growth as we think a little bit about 2023.

Yeah, we feel we feel good I mean, it's pretty consistent with our approach. This year, we're certainly not guiding to Oh openings for 2023 at this time.

No. We've never you know open stores, just we're hitting arbitrary opening numbers yeah. We're looking to find opportunities that we think are good yeah.

Good Richard.

On investments and given the overall economic environment right now and we still want to be cautious that said, we're we've got some sites on the drawing board that we're quite excited about for 2023.

Yeah.

Perfect. Thank you guys.

Thanks, Mark Thank you Mark.

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Gentlemen that concludes our question and answer session I'll turn the call back over to Mr. Mike Malone.

Yes.

Alright, 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 fourth quarter and wish you all very happy holidays.

Take care.

Thank you.

Ladies and gentlemen that concludes today's conference. Thank you for your participation and you may now disconnect your lines.

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