Q2 2023 Big 5 Sporting Goods Corporation Earnings Call

Good day, ladies and gentlemen, welcome to the Big five sporting goods second quarter 'twenty to 'twenty three on <unk> results Conference call.

Today's call is being recorded.

With us today are Mr. Steve Miller, President and Chief Executive Officer.

And Mr body M S Chief financial officer of Big five sporting goods.

At this time for opening remarks, I'm introductions I'd like to turn the conference over to Mr. Mello.

Please go ahead Sir.

Thank you.

Good afternoon, everyone welcome to our 2023 second quarter Conference call today, We will review our financial results for the second quarter of fiscal 2023, as well 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 $19 95 forward looking statements involve known and.

Known 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.

As we anticipated macroeconomic headwinds continued to impact consumer discretionary spending throughout the second quarter. However.

However, we did not anticipate the unseasonably cool weather conditions that we experienced over the back half of the quarter, particularly in our core California markets.

We'll start to summer had a significant impact on our sales which came in slightly below expectations.

Despite the top line challenges, we delivered bottom line results ahead of the midpoint of our guidance range.

This speaks to our continued focus on diligently managing expenses, while also closely managing our inventory, which contributed to healthy merchandise margin.

Net sales for the second quarter of 2023 or $223 $6 million compared to $253 8 million in the second quarter of 2022, reflecting a 12% decrease in same store sales.

Transactions for the quarter were down high single digits with the average ticket is down low single digits.

All of our major merchandise categories were down low double digits.

To elaborate a bit on the impact of weather.

The extreme heat over the past month has been widely reported in the National News brands.

As I just mentioned, we experienced an abnormally slow start to summer in our California market.

While the weather in the late spring early summer always varies.

The cooler than normal temperatures and lack of sunshine across much of California, where well beyond normal deviation.

Some are recreation becomes increasingly important to our sales starting the week, leading up to memorial day and continuing throughout June .

Unfortunately during that period this year nearly everyday temperatures were well below historical averages and below last year's temperatures.

This had a very noticeable impact from the sales of summer related products across the board from swimsuits to short the sandals camping products water sports and so forth.

In markets, where weather was more normal even favorable such as the Pacific Northwest, Oregon, Washington, and Idaho, and the southwest New Mexico, our stores performed significantly better in.

In fact, our same store sales performance in those markets for the quarter was roughly 1000 basis points higher than in California.

And the last weekend of the second quarter. We finally saw the true arrival of warm weather across California, and our sales responded very positively.

While this was certainly too little too late to meaningfully influence our second quarter results.

We are encouraged that the improved friendly increased some momentum that has carried over into the third quarter, which I'll speak to in a moment.

Moving to our second quarter operating performance, we believe we executed well despite the difficult conditions.

Given the sales headwinds we face are focused on prioritizing merchandize margins to drive gross profit dollars continue to service well.

Well second quarter merchandise margins were flat compared to the healthy margins that we generated in the prior year period, our margins continued to run several hundred basis points above pre pandemic levels, a testament to the sustainability of the Hansman, we have made to our business.

Our team has done an outstanding job of managing inventory in an effort to align our inventory with the challenging sales environment.

As a result, we have not needed to be overly promotional for the sake of clearing merchandise.

We're also continuing to diligently manage expenses in the face of widespread inflationary pressures.

We remain prudent with our AD spending and we are carefully managing store labor usage and being more targeted and tailoring store operating hours to local shopping patterns.

Turning to current trends.

As I mentioned, we are encouraged that as weather has improved across our footprint. So has our sales friend days, particularly in our core California market.

Relative to the second quarter or third quarter to date sales trends have increased significantly with same store sales running down low mid single digits, including a small benefit related to the timing of the fourth of July holiday.

Looking over the balance of the quarter, while we are cautious given that the economic health of the consumer continues to be a challenge we feel that our product assortment is well positioned to meet demand for the remainder of the summer season, which includes back to school and the startup fall sports along with the Labor day holiday.

Today.

Over the past year, we've closely managed our inventory levels and maintained a healthy balance sheet.

We believe there continues to be a buildup of inventory in the retail channel and we are in a position to take advantage of this excess for opportunistic buys to further solidify big fives value proposition with our customers.

In summary, as we are continuing to manage through a tough environment. We are confident that our focus on sustaining healthy merchandise margins, while closely managing both the expenses and inventory levels will enable us to maintain a strong balance sheet and enhance our bottom line as economic headwinds begin to ease.

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

Thanks, Steve.

Gross profit for the fiscal 2023 second quarter with $71 9 million compared to a gross profit of $88 9 million in the second quarter the prior year.

Our gross profit margin of 32, 2% in the fiscal 2023 second quarter declined from 35% recorded in the second quarter of last year.

The lower gross profit margin year over year, primarily reflected higher store occupancy and distribution expense, including costs capitalized into inventory as a percentage of net sales.

Merchandise margins for the second quarter of fiscal 2023 were consistent with the prior year period and continued to run several hundred basis points ahead of pre pandemic rates supported by the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense came in favorable to plan decreasing $4 2 million in the fiscal 2023 second quarter versus the prior year period.

The year over year change, primarily reflects lower employee labor and benefit related expense and company performance based incentive accruals.

As a percent of net sales SG&A expense was 32, 4% in the fiscal 2023 second quarter versus 32% in the 2022 second quarter, reflecting the lower sales base.

Now looking at our bottom line net loss for the second quarter of fiscal 2023, with 0.3 million or a loss of one cents per share.

This compares to net income of $8 9 million or <unk> 41 per diluted share in the second quarter of fiscal 2022.

EBIT Dod totaled $4 2 million for the second quarter of fiscal 2023 compared to adjusted EBITDA of $17 7 million in the second quarter last year.

Briefly reviewing our 2023 first half results.

Net sales were $448 5 million compared to net sales of $495 8 million in the first 26 weeks of last year same store sales decreased nine 6% in the first half of fiscal 2023 versus the comparable period last year.

Net loss for the first 26 weeks of fiscal 2023 was 0.1 million.

Or breakeven on a per share basis.

This compares to net income for the first half of 2022 of the $18 million or <unk> 81 per diluted share.

EBITDA was $8 6 million for the 2023 year to date period compared to adjusted EBITDA of $32 7 million in the comparable period last year.

Turning to the balance sheet, our merchandise inventory at the end of the second quarter of fiscal 2023 decreased.

2.2% year over year.

We feel good about our inventory position as we move through summer and into fall.

Reviewing our capital spending our capex, excluding noncash acquisitions totaled $4 7 million for the first half of fiscal 2023, primarily representing investments in store related remodeling distribution center equipment computer lease hold improvements.

And computer hardware and software purchases.

For the fiscal 2023 full year, we now expect Capex in the range of eight to 13 million and anticipate opening approximately two new stores and closing approximately six stores, including two stores that we closed in the first quarter and one pending relocation.

Now looking at our cash flow.

Net cash used in operating activities was $3 3 million in the first half of fiscal 2023. This compares to net cash used in operating activities of $39 1 million in the comparable period last year.

The year over year improvement in our operating cash flow, primarily reflected reduced funding of merchandise inventory and accrued expenses, mainly related to performance based incentive accruals, partially offset by lower net income this year.

Our balance sheet at the end of the second quarter of fiscal 2023 was healthy with zero borrowings under our credit facility and a cash balance of $5 9 million.

During the second half of this year, we expect our working capital to decline, which should further help our overall liquidity.

Today, we announced that our board of directors declared a quarterly cash dividend of <unk> 25 per share.

Now I'll spend a moment on guidance for the fiscal 2023 third quarter. We expect same store sales to decrease in the mid single single digit range compared to the fiscal 2022 third quarter.

Our same store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the third quarter.

Fiscal 2023 third quarter earnings per diluted share is expected in the range of 10 to 20 cents, which compares to fiscal 2022 third quarter earnings per diluted share of 29 cents.

That concludes our prepared remarks.

Operator, we are now ready for any questions.

Okay.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star and one.

On the telephone keypad, a confirmation tone will indicate your line is in the question queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Yeah.

Our question comes from the line of Mark Smith with Lake Street Capital. Please go ahead.

Hi, guys.

Of course, we would be first just wanted to look at the SG&A in a little bit here you know it was good at good level here.

Maybe discuss kind of what you're actively doing to manage operating expenses versus maybe what just came down as a function of lower revenue.

Yeah, Mark sure well certainly the biggest the biggest expense.

And key for US is store labor and.

We've talked and talked and everybody has experienced the increased our overall wage rates and certainly we on the West Coast and California has got our share of increased wage rates, whether its minimum wage or or are you now competing competing wage rates surrounding minimum wage, but so what we've been doing is <unk>.

Focused are focusing on managing store labor and lots of different categories, and we've been able to bring our overall labor down which has allowed us to actually reduce our overall expense year over year.

So that's that's number one.

Certainly the advertising continues to be a focus for us.

Our advertising.

Continues to run at rates that are less than half of what they were pre pandemic. So that's a focus for us.

And then really I mean, there's there's you know countless categories that we continue to work on that are being impacted by inflation.

In many many areas that we continue to work on and certainly.

Do you see performance based accruals are down year over year, just because of the lower income as well.

Okay.

And the next one was just looking at the guidance on store growth, especially kind of in that store it.

It's coming down but right here now.

Was that a function of kind of where the consumer is and just dialing back on growth or was there any delays that you were just pushed some of these stores into next year kind of walk us through your thoughts on that.

Yeah, Yeah, Mark we had a couple of store openings that previously were planned for this year have slipped into next year due to landlord construction issues, that's the big factor Oh impacting the.

The store openings for this year.

Well, if it should hold hopefully hit the ground running next year with opening.

Hey, Mark let me come back to you also.

Mark let me when you're done when you're done I want to come back to him on expenses.

Okay. Okay.

But the last one for me it was really just as we think.

About quarter to date sales and kind of trends I want to make sure that I heard you right. Your third quarter to date down kind of low to mid single digits is that right Steven and and that's included in what sounds like was it fairly positive kind of fourth of July period.

Oh, Yeah, I mean, the fourth of July kind of it is really the period. The last couple days of the second quarter as I mentioned on way too little too late to influence the second quarter, but and then the sort of with a calendar shift in the fourth moving one day firm.

Or into the.

Third quarter, we sort of had an extra day.

Good day of pre fourth of July business sort of a third quarter that benefited the third quarter and you're right Mark I said, we're down a low mid single digit of quarter to date.

Okay.

Perfect and then Barry Yeah. If you had the other thoughts on expenses for that not so much yeah, Mark the only other thing I would say in and it is you know Fortunately, we're seeing reduced our overall medical cost you know, we like everybody else had a real big ramp up in <unk>.

Last year in our medical costs as you know as as you know the.

The base postponed procedures and so on because of Covid and so we saw it just a huge ramp up in costs last year and unfortunately were seeing those come down we saw the benefit in the first quarter that continued in the second quarter. So so that is also a meaningful you know.

Positive change for us and hopefully that'll continue.

Through the balance of the year.

Yeah.

Excellent. Thank you guys.

Thanks Mark.

Okay.

Thank you.

That completes our question and answer session I will now turn the call back to Mr. Miller for any closing remarks.

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

Yeah.

Thank you.

Conference of Big five Sporting goods has now concluded. Thank you for your participation you may now disconnect your lines.

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