Q4 2022 Big 5 Sporting Goods Corp Earnings Call

Speaker 1: C.

Speaker 1: The.

Speaker 2: Good day ladies and chairman. Welcome to the Big 5 Sporting Goods 4th Quarter 2022 Honing Results Conference Call. Today's call is being recorded.

Speaker 2: 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 just like to turn the conference over to Mr. Miller. Please go ahead, sir. 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.

Speaker 3: 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 quarterly reports on Form 10-Q .

Speaker 3: 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. 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.

Speaker 3: Although 2022 was not the 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 percent, 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,

Speaker 3: 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 products. Although our fourth quarter merchandise margins declined by 129 basis points compared to the record margins in the prior quarter, we have not seen a decrease in the overall market.

Speaker 3: 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.

Speaker 3: Whereas 2021 benefited from a robust economy, including stimulus checks and higher levels of personal savings that helped drive spending on recreational and leisure activities. Over the course of 2022, we've seen a significant softening of consumer sentiment and spending, particularly for discretionary products. While in some respects our business benefits in this environment,

Speaker 3: Due to our price points and values that we provide to our customers, those benefits have been more than offset by the reality of the broader macroeconomic forces in play. Turning now to our current trends. For the first quarter to date, our Saints or Sales are running down in a low single-ditching range versus last year. We saw positive year-over-year sales growth in January , benefiting from favorable seasonal winter weather or markets that drove demand for our winter products. Our ability to capitalize in this opportunity to outfit customers seeking fun in the snow when winter weather hits highlights the advantage of our convenience 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.

Speaker 3: 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 of 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.

Speaker 3: 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 in managing all aspects of the business within our control and 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 2013 outlook. 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 capitalized in the inventory as a percentage of net sales. As Steve mentioned...

Speaker 3: 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 at 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.

Speaker 3: partially offset by lower performance-based incentive accruals. As the 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 8 cents for diluted share. This compares to net income of 19.9 million or 89 cents for 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.

Speaker 3: 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 three cents for diluted share. This compares to record net income for fiscal 2021 of $102.4 million or $4.55 cents for diluted share, including a previously reported net benefit of six cents 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 ballot sheet, our merchandise inventory at the end of fiscal 2022 increased 9.6% year over year, primarily reflecting more normalized inventory levels, so that the price of the year could be $2.5 million. Following the significant self-reu 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.

Speaker 3: 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 to $20 million and anticipate opening approximately six new stores, including one relocation.

Speaker 3: the evolution of our model that allows us to now operate with less inventory as Steve mentions. Reviewing our capital spending, our CAPEX excluding non-Cash acquisitions total 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 to 20 million and anticipate opening approximately six new stores, including one relocation. Now looking at our cash flow.

Speaker 3: Netcash 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. We are in the back of the year over year change in cash. Our inventory purchases were higher in Q4 2021 as supply chain issues ease. While our inventory purchases were lower in Q4 2022, do in part to the carry carry over a winter product.

Speaker 3: 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 become.

Speaker 3: Fiscal 2023 first quarter earnings per share is expected in the range of negative 2 cents to positive 6 cents.

Speaker 3: which compares to fiscal 2022 first quarter earnings per diluted share of 41 cents. That concludes our prepared remarks. Operator, we are now ready for any questions.

Speaker 3: to fiscal 2022 first quarter earnings for diluted share of $0.41. That concludes our prepared remarks. Operator, we are now ready for any questions. Thank you.

Speaker 2: Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Mark Smith from Lake Street Capital Markets. Please go ahead. Hey guys, first one for me just want to look at revenue.

Speaker 3: a pretty significant offset to other products that people recreate outdoors. The start of the baseball season has been very delayed. We've had a, I think if you follow the news, record.

Speaker 3: I think near historical record, rainfalls in California, and 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, the discretionary spending market. Any inventory I know you held over last year due to negative weather.

Speaker 3: Okay, and then just look at inventory. I know you guys said that you are, you know, comfortable and pleased with kind of where your inventory is. As you look at your peers, especially kind of big box retail, you'll be continued here inventory, you know, still pretty heavy and maybe guys getting a little promotional. Are you seeing that? And is that maybe hurting sales at your stores? Yeah, I'm not sure that I can say that I see that and that's impacting sales. I think, you know, the general

Speaker 3: that that's impacting our sales directly, but it's yet to help.

Speaker 3: Okay, and then can 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, you know, what it is that you can control there and maybe what's out of your control and, you know, steps that you're taking to try to.

Speaker 3: maintain and hold on to some decent gross profit margin here as we look at 2023. Yeah, are you looking at the merchandise? Are you speaking to the merchandise margin? Yep. Or merchandise margins? I know you guys call that occupancy as well. That's been some pressure there, you know, maybe shipping freight, things like that, you know, just walk us through kind of what you can control and steps that you're taking to try to maintain and hold margin.

Speaker 3: Yeah, Mark. Yeah, you know, 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. You know, we try and manage, you know, as best we can all free, but you're right, some are easier than others. I mean, just talking about, you know, distribution costs. There's been a lot of pressure, you know, in the distribution because of all the freight and all the transportation challenges and so on. You know, we've, you know, we resources have been an issue for us and we've now, you know, combated that and so now, fortunately, there's more resources available. But the labor cost pressures is pretty significant. So we're seeing.

Speaker 3: market. Prior to that we had significant favorable experience in trying to you know either maintain you know levels of rent or in some cases reduce you know if you've got something on first in Maine you're never going to be able to necessarily reduce that you know that overall cost but I think we've done a good job and we're laser focused on managing occupancy but but with the you know with the the pressure on sale.

Speaker 3: quarter. We mentioned some of the changes for our advertising model that's benefiting our margins and we look for that to continue. 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, you know...

Speaker 3: with much lower levels of inventory that 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 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.

Speaker 3: you know those kinds of things which should help us as we move forward in this environment. I think the last one for me you know as you talked a little bit about operating cash flow and and CAPX is going to come up a little bit this next year but walk us through kind of unlocking some of the value of A here in working capital and the improvements that you expect in 2023. This that takes some time.

Speaker 3: during the year to build or will we see some of that more evident here in Q1? Well, you know, I think that you know, I mentioned on the call the kind of dynamics of the change in the impact on cash from our timing of purchases in, you know, in 2022 with our payables being, you know, much much higher at the end of 2021 and then much much lower at the end of 2022 because we bought around the winner product because we carried it over from the prior year. So, you know, we're starting from a much lower trade payables base, you know at the end of...

Speaker 3: 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 you know did you have any troubled stores that needed to close?

Speaker 3: 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 closed it.

Speaker 3: Great, thank you. Thank you Mark. Thanks Mark. 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. Thank you operator. We appreciate you joining us on today's call and your interest in Big Five Sporting Goods and we look forward to speaking to you when we report our first quarter results.

Speaker 1: Time P it.