Q3 2023 Big 5 Sporting Goods Corp Earnings Call

Good day, ladies and gentlemen, welcome to the Big five sporting goods third quarter 2023 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 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 2023 third quarter conference call today, We will review our financial results for the third quarter of fiscal 2023. It will also 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 file.

<unk> 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 our third quarter results came in slightly below our expectations, reflecting the mounting pressures on consumer discretionary spending.

While the quarter started relatively well as we benefited from warm seasonal weather in July our sales trending softened over the back half of the quarter.

Beginning in August and even more so in September we believe our consumer began to feel increasingly impacted by the ongoing pressures from persistent inflation.

Clothing hygiene gas prices rising interest rates and the resumption of student loan payments.

In the face of these challenges we have continued to focus on the aspects of the business that we can control such as optimizing merchandize margins controlling the operating expenses and managing inventory.

We are pleased with our team's execution and ability to drive to drive improvements across each of these key metrics, which helped generate positive bottom line results. Despite significant top line challenges.

Net sales for the third quarter of 2023 or $239 $9 million compared to $261 4 million in the third quarter of 2022.

<unk>, an eight 2% decrease in same store sales.

Transactions for the quarter were down high single digits, while the average ticket was up slightly.

There were no material differences in sales across our major merchandise categories footwear apparel and hard goods with each down in the high single digit range.

In the face of the ongoing sales headwinds, we remained focused on efficiently managing our inventories and prioritizing merchandize margins to optimize gross profit dollars.

At the end of Q3, our inventory was down 8% versus the prior year, reflecting our efforts to align our inventory with the challenging sales environment.

As a result, we have not needed to be overly promotional for the sake of <unk> merchandise, which has been helpful to our merchandize margin.

For the quarter, we generated a 52 basis point increase in merchandise margins versus the prior year period.

As inflation persists managing operating cost within our control continues to be a key area of focus.

Store labor is our largest operating expense and we are pleased that despite significant wage inflation, we were able to reduce this expense year over year by diligently managing store labor usage and being more targeted and tailoring store operating hours to local shopping pattern.

Yeah.

Additionally, our expense structure continues to benefit from significantly reduced marketing spend.

Expense management has always been one of our strengths and now more than ever we are focused on diligently managing expenses throughout our organization to mitigate widespread inflationary pressures.

Turning to current sales trends.

The challenging consumer environment has persisted into the fourth quarter and our October sales are running down approximately 10%.

Over the balance of the quarter, we anticipate that our customers will continue to feel their wallets being squeezed throughout the holiday shopping season and will be carefully watching their discretionary spending.

With that said, we believe we have a compelling product assortment for the winter and holiday season that should resonate with shoppers.

Our value oriented price points should be particularly attractive in these times.

Before turning the call over to Barry I'd like to briefly comment on the reduction in our dividend that we announced today.

We improved our cash position over the course of the third quarter and have maintained a healthy balance sheet with no debt, we have proactively adjusted our dividend to ensure we have ample financial flexibility given the uncertainty of the duration of the macroeconomic headwinds our customers are facing.

Yeah.

Even with the reduction we believe that our dividend continues to provide a meaningful return for our shareholders.

As we manage through this challenging economic environment, we remain committed to maintaining a healthy balance sheet.

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

Yeah.

Thanks, Steve.

Gross profit for the for the fiscal 2023 third quarter was $79 6 million compared to gross profit of $86 6 million in the third quarter of the prior year.

Gross profit margin at 33, 2% in the fiscal 2023 third quarter compared to 33, 1% recorded in the third quarter of last year.

The slight improvement in gross profit margin year over year, primarily reflected the increase in merchandise margins that Steve noted and extinguishment of certain real estate related liabilities, partially offset by higher store occupancy and distribution expense, including decreased costs capitalized.

Inventory as a percentage of net sales.

Merchandise margins for the third quarter of fiscal 2023 increased 52 basis points versus the prior year period and continued to run several hundred basis points ahead of pre pandemic levels supported by the evolution of our pricing and promotional strategy.

Overall, selling and administrative expense for the fiscal 2023 third quarter decreased $1 6 million versus the prior year the year over year change, primarily reflected lower employee labor and benefit related expense, partially offset by higher legal expense associated with a lawsuit settlement.

As a percent of net sales SG&A expense was 31, 9% in the fiscal 2023 third quarter versus 29, 9% in the 2022 third quarter, reflecting the lower sales base.

Now looking at our bottom line net income for the third quarter of fiscal 2023 was $1 9 million or <unk> <unk> per diluted share.

This compares to net income of $6 4 million or <unk> 29 per diluted share in the third quarter of fiscal 2022.

Adjusted EBITDA totaled $7 4 million for the third quarter of fiscal 2023 compared to adjusted EBITDA of 13 million in the third quarter last year.

Briefly reviewing our 2023 full first nine months results net sales were $688 4 million compared to net sales of $757 2 million in the same period last year.

Same store sales decreased nine 1% in the first nine months statistical 2023 versus the comparable period last year.

Net income for the first 39 weeks of fiscal 2023 was $1 8 million or <unk> <unk> per diluted share.

This compares to net income for the first 39 weeks of 2022 of $24 4 million or $1 10 per diluted share.

Adjusted EBITDA was $16 million for the 2023 year to date period compared to adjusted EBITDA of $45 7 million in the comparable period last year.

Turning to the balance sheet, our merchandise inventory at the end of the third quarter of fiscal 2023 decreased 8% year over year.

This reduction reflects our efforts to manage inventory levels, considering the soft <unk>.

Sales environment.

And we feel good about our inventory position as we move through fall and into the holiday season.

Reviewing our capital spending our capex, excluding noncash acquisitions totaled $8 2 million for the first nine months of fiscal 2023, primarily representing investments in store related remodeling distribution center equipment computer leasehold improvements and computer hardware and software.

<unk> for the.

The fiscal 2023 full year, we now expect Capex in the range of eight to 12 million and anticipate opening two new stores and closing four stores, including one relocation, resulting in 430 stores in operation at the end of the year.

Now looking at our cash flow net cash provided by operating activities was $21 1 million in the first nine months of fiscal 2023.

This compares to net cash used in operating activities of $29 9 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 third quarter of fiscal 2023 remains healthy.

We had zero borrowings under our credit facility and a cash balance of $17 9 million and we currently expect our cash balance at the end of the fourth quarter to be largely consistent with the cash balance at the end of the third quarter.

As Steve mentioned the decision to reduce the dividend to.

To 12, and a half cents per quarter from 25 cents per quarter reflects our prudent approach to capital management in an effort to maintain a healthy financial condition amid an increasingly challenged macro economic backdrop.

Now I'll spend a moment on guidance for.

For the fiscal 2023 fourth quarter, we expect same store sales to decrease in the high single digit to low double digit range compared to the fiscal 2020 to fourth quarter.

Our same store sales guidance.

Reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the quarter.

Fiscal 2023 fourth quarter net loss per share is expected in the range of 20 to 35 cents.

Which compares to fiscal 2022 fourth quarter earnings per diluted share of <unk>.

Finally, I'd like to briefly touch on steel on seasonality factors that typically cause our fourth quarter earnings to be lower than our third quarter earnings.

This dynamic results from a combination of seasonally lower sales volume in the first half of the fourth quarter until after Thanksgiving when holiday sales ramp up.

As well as heightened promotional activity and higher expenses for advertising and increased labor hours during the fourth quarter.

That concludes our prepared remarks, operator, we're now ready for any questions.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask a question you May press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two 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 key.

Our first question comes from the line of Mark Smith with Lake Street Capital. Please proceed with your question.

Hi, guys.

First question for me just as we look at it fourth quarter, what's what are your expectations on promotional environment for you guys and in potential discount to here in Q4.

Oh, yes, Mark our work in our inventories are in great shape. So we don't feel compelled to.

Oh, the overly promotional I would expect that we will be reasonably consistent with.

So with the last the last year, we're going to watch the marketplace and react accordingly, if we sense that thats the correct the step to take.

Okay.

And then you said that kind of all of your different segments. It sounded like during Q3 were all kind of down in that high single digit range.

Our range on a comp basis, and any regions or segments, especially as you look into.

Into Q4 that you're expecting maybe a falloff or any additional weakness.

I don't know that Theres any aspect of our product category that we're anticipating any material falloff or weakness a lot in the fourth quarter.

Always revolves around weather and how that can influence the various categories positive winter weather is always a most favorable to our apparel category.

So it will be obviously, hoping for the weather and watching that carefully.

Operator: Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Third Quarter 2023 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 of Big 5 Sporting Goods.

Okay and then the last question for me as we think about you know you just.

Cut the dividends here to kind of maintain a.

Healthy balance sheet.

As we look at growth in new units next year and I know you haven't guided this but should we expect.

Steve Miller: At this time, for opening remarks and introductions, I'd like to turn a conference over to Mr. Miller. Please go ahead, sir. Thank you, operator. Good afternoon, everyone. Welcome to our 2023 Third Quarter Conference Call. Today, we will review our financial results for the third quarter of fiscal 2023 as well as provide an outlook for the fourth quarter.

Maybe even some some pullback on relocations or any capital expenses expenditures going towards new store growth.

No again, I Wouldnt anticipate a material change from the.

Or.

Directionally that we took this year and really over the last.

Barry Emerson: I will now turn the call over to Barry to read our state 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 Security's 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.

Couple of years, we have several stores in the pipeline honestly a few stores that we anticipated would have opened this year that have rolled over into next so it will be we'll be opening some stores and rationalizing the store count with some closures as well.

Barry Emerson: These risks and uncertainties include those more fully described in our annual reports on Form 10K, our quarterly reports on Form 10Q 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 hour behalf.

Okay, great. Thank you.

Thank you Mark.

There are no further questions in the queue I'd like to hand, the call back to Steve Miller for closing remarks.

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.

Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you.

You may disconnect your lines at this time and have a wonderful day.

Steve Miller: Thank you, Barry. Our third quarter results came in slightly below our expectations, reflecting the mounting pressures on consumer discretionary spending. While the quarter started relatively well as we benefited from warm seasonal weather in July, our sales trending softened over the back half of the quarter.

Steve Miller: Beginning in August and even more so in September, we believe our consumer began to feel increasingly impacted by the ongoing pressures from persistent inflation, including heightened gas prices, rising interest rates and the resumption of student loan payments. In the face of these challenges, we have continued to focus on the aspects of the business that we can control, such as optimizing merchandise margins, controlling operating expenses and managing inventory. We are pleased with our team's execution and ability to drive improvements across each of these key metrics, which help generate positive bottom-line results despite significant top-line challenges.

Steve Miller: Next sales for the third quarter of 2023 were $239.9 million compared to $261.4 million in the third quarter of 2022, reflecting an 8.2% decrease in FAMSTOR sales. Transactions for the quarter were down high single digits while the average ticket was up slightly. There were no material differences in sales across our major merchandise categories, footwear, apparel, and hard goods, with each down in the high single digit range. In the face of the ongoing sales headwinds, we have remained focused on officially managing our inventories and prioritizing merchandise margins to optimize gross profit dollars.

Steve Miller: At the end of Q3, our inventory was down 8% versus the prior year, reflecting our efforts 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, which has been helpful to our merchandise margins. For the quarter, we generated a 52 basis point increase in merchandise margins versus the prior year period. As inflation persists, managing operating costs within our control continues to be a key area of focus.

Steve Miller: Store labor is our largest operating expense, and we are pleased that despite significant wage inflation, we were able to reduce this key expense year over year by diligently managing store labor usage and being more targeted in tailoring store operating hours to local shopping patterns. Additionally, our expense structure continues to benefit from significantly reduced marketing spend. Expense management has always been one of our strengths, and now more than ever, we are focused on diligently managing expenses throughout an organization to mitigate widespread inflationary pressures.

Steve Miller: According to current sales trends, the challenging consumer environment has persisted into the fourth quarter, and our October sales are running down approximately 10%. Over the bounce of the quarter, we anticipate that our customers will continue to feel their wallets being squeezed throughout the holiday shopping season, and will be carefully watching their discretionary spending. With that said, we believe we have a compelling product assortment for the winter and holiday season that should resonate with shoppers. Our value-oriented price points should be particularly attractive in these times.

Steve Miller: Before turning the call over to Barry, I'd like to briefly comment on the reduction in our dividend that we announced today. While we improved our cash position over the course of the third quarter, and have maintained a healthy balance sheet with no debt, we have proactively adjusted our dividend to ensure we have ample financial flexibility given the uncertainty of the duration of the macroeconomic headwinds our customers are facing. Even with the reduction, we believe that our dividend continues to provide a meaningful return for our shareholders. As we manage through the challenging economic environment, we remain committed to maintaining a healthy balance sheet.

Barry Emerson: I'll now turn it over to Barry to provide additional details regarding our third quarter performance and fourth quarter outlook. Very? Thanks, Steve. Gross profit for the fiscal 2023 third quarter was 79.6 million compared to gross profit of 86.6 million in the third quarter of the prior year. A gross profit margin of 33.2 percent in the fiscal 2023 third quarter compared to 33.1 percent recorded in the third quarter of last year. The slight improvement in gross profit margin year over year primarily reflected the increase in merchandise margins that Steve noted, an extinguishment of certain real estate-related liabilities, partially offset by higher-store occupancy and distribution expense, including decreased costs, capitalized and inventory as a percentage of net sales.

Barry Emerson: Merchandise margins for the third quarter of fiscal 2023 increased 52 basis points versus the prior year period, and continued to run several hundred basis points ahead of pre-pandemic levels, subordered by the evolution of our pricing and promotional strategy. Overall selling at administrative expense for the fiscal 2023 third quarter decreased 1.6 million versus the prior year. The year-over-year change primarily reflected lower employee labor and benefit-related expense, partially offset by higher legal expense associated with a lawsuit settlement.

Barry Emerson: As a percent of net sales, SG&A expense was 31.9% in the fiscal 2023 third quarter versus 29.9% in the 2022 third quarter, reflecting the lower sales base. Now looking at our bottom line, net income for the third quarter of fiscal 2023 was 1.9 million or 8 cents per diluted share. This compares to net income of 6.4 million or 29 cents per diluted share in the third quarter of fiscal 2022. Adjusted EBITDA total 7.4 million for the third quarter of fiscal 2023 compared to adjusted EBITDA of 13 million in the third quarter last year.

Barry Emerson: Briefly reviewing our 2023 full first nine months results, net sales were 688.4 million compared to net sales of 757.2 million in the same period last year. Same-store sales decreased 9.1% in the first nine months of fiscal 2023 versus the comparable period last year. Net income for the first 39 weeks of fiscal 2023 was 1.8 million or 8 cents per diluted share. This compares to net income for the first 39 weeks of 2022 of 24.4 million or $1.10 per diluted share.

Barry Emerson: Adjusted EBITDA was 16 million for the 2023 year-to-date period compared to adjusted EBITDA of 45.7 million in the comparable period last year. Turning to the balance sheet, our merchandise inventory at the end of the third quarter of fiscal 2023 decreased 8 percent year over year. This reduction reflects our efforts to manage inventory levels considering the saw sales environment and we feel good about our inventory position as we move through fall and into the holiday season.

Barry Emerson: Reviewing our capital spending, our capex excluding non-cash acquisitions totaled 8.2 million for the first nine months of fiscal 2023, primarily representing investments in store-related remodeling, distribution center equipment, computer lease hold improvements in computer hardware and software purchases. For the fiscal 2023 full year, we now expect capex in the range of 8 to 12 million and anticipate opening two new stores and closing four stores including one relocation resulting in 430 stores in operation at the end of the year.

Barry Emerson: Now looking at our cash flow, net cash provided by operating activities was $21.1 million in the first nine months of fiscal 2023. This compares to net cash used in operating activities of $29.9 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 third quarter of fiscal 2023 remains healthy.

Barry Emerson: We had zero borrowings under our credit facility and a cash balance of $17.9 million and we currently expect our cash balance at the end of the fourth quarter to be largely consistent with the cash balance at the end of the third quarter.

Barry Emerson: As Steve mentioned the decision to reduce the dividend to 12.5 cents per quarter from 25 cents per quarter reflects our prudent approach to capital management in an effort to maintain a healthy financial condition amid an increasingly challenged macroeconomic backdrop.

Barry Emerson: Now I'll spend a moment on guidance for the fiscal 2023 fourth quarter. We expect same-store sales to decrease in the high single digit to low double digit range compared to the fiscal 2022 fourth quarter. Our same-store sales guidance reflects an expectation that macroeconomic headwinds will continue to impact consumer discretionary spending over the balance of the quarter.

Barry Emerson: Fiscal 2023 fourth quarter net loss per share is expected in the range of 20 to 35 cents which compares to fiscal 2022 fourth quarter earnings per deluded share of 8 cents. Finally I'd like to briefly touch on seasonality factors that typically cause our fourth quarter earnings to be lower than our third quarter earnings. This dynamic results from a combination of seasonally lower sales volume in the first half of the fourth quarter until after Thanksgiving when holiday sales ramp up as well as heightened promotional activity and higher expenses for advertising and increased labor hours during the fourth quarter.

Barry Emerson: That concludes our prepared remarks.

Operator: Operator we're now ready for any questions. Thank you. 30s and gentlemen at this time we'll be conducting a question and answer session. If you'd like to ask a question you may press star one on your telephone keypad. The conference may continue to indicate your line is in the question queue. You may press star two 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 key.

Mark Smith: Our first question comes on the line of marksmen with Lake Street Capital. Please proceed with your question. Hi guys. First question for me just as we look at fourth quarter. What are your expectations on promotional environment for you guys and potential discountings here in queue four? You know, Mark, we're going to, you know, our editors are in great shape so we don't feel compelled to, you know, be overly promotional. I would expect that we will be, you know, reasonably consistent with the last, you know, last year and we're going to watch the marketplace and react accordingly if, you know, we sense that that's the correct step to take.

Mark Smith: Okay, and then you said that kind of all of your different segments sounded like during Q3, we're all kind of down in that high single digit range on a comp basis and any regions or segments, especially as you look into Q4 that you're expecting, maybe a fall off or any additional weakness in. I don't know that there's any aspect of our product category that we're anticipating any material fall off or weakness, a lot in the fourth quarter, always revolves around weather and how that can influence the various, you know, categories, positive winter weather is always most favorable to our apparel category.

Mark Smith: So, you know, we'll be obviously hoping for the weather and watching that carefully. Okay, and then the last question for me is, as we think about, you know, you just cut the dividend here to kind of maintain a healthy balance sheet. You know, as we look at growth in new units next year and I know you haven't guided this, but should we expect maybe even some pullback on, you know, relocations or any capital expenses expenditure.

Mark Smith: So, you're just going towards new store growth. No, again, I wouldn't anticipate a material change from the, you know, direction that we, we cut this year and really over the last couple of years, we have several stores that in the pipeline, honestly, a few stores that we anticipated would have opened this year that have rolled over into next. So, you know, we'll be, we'll be opening some stores and, you know, rationalizing the store count with some closures as well. Okay, great. Thank you. Thank you more.

Operator: There are no further questions in the queue.

Steve Miller: I'd like to hand the call back to Steve Miller for closing remarks. All right. Thank you, operator.

Steve Miller: And thank you all for joining us in today's fall. 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. Thank you. Ladies and gentlemen, this does include today's teleconference. Thank you for your participation.

Operator: You may disconnect your lines at this time and have a wonderful day.