Big 5 Sporting Goods Q3 2023 Earnings Call Transcript

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October 31, 2023

There are 4 speakers on the call.

Operator

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.

Operator

Barry Emerson, Chief Financial Officer of Big 5 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.

Speaker 1

Thank you, operator. Good afternoon, everyone. Welcome to our 2023 Q3 Today, we will review our financial results for the Q3 of fiscal 2023 as well as provide an outlook for the Q4. I will now turn the call over to Barry to read our Safe Harbor statement.

Speaker 2

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 Such uncertainties include those more fully described in our annual reports on Form 10 ks, 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 On our behalf.

Speaker 1

Thank you, Barry. Our Q3 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, 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.

Speaker 1

We are pleased with our team's execution and ability to drive improvements Net sales for the Q3 of 2023 were $239,900,000 compared to 261 $400,000 in the Q3 of 2022, reflecting an 8.2% 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 hardgoods, with each down in the high single digit range. In the face of the ongoing sales headwinds, We remain focused on officially managing our inventories and prioritizing merchandise 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 clearing merchandise, which has been helpful to our merchandise margins.

Speaker 1

For the quarter, we generated a 52 basis point increase 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 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 our organization to mitigate widespread inflationary pressures. Turning to current sales trends.

Speaker 1

The Challenging consumer environment has persisted into the 4th 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 we'll be carefully watching their discretionary spending. With that said, we believe we have a compelling product 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 Q3 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 The macroeconomic headwinds our customers are facing. Even with the reduction, we believe that our dividend continues to provide maintaining a healthy balance sheet.

Speaker 1

I'll now turn it over to Barry to provide additional details regarding our Q3 performance and 4th quarter outlook. Barry?

Speaker 2

Thanks, Steve. Gross profit for the fiscal 2023 Q3 was $79,600,000 Compared to gross profit of $86,600,000 in the Q3 of the prior year, our gross profit margin of 33.2% in 2023 Q3 compared to 33.1% recorded in the Q3 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 in inventory as a percentage of net sales, Merchandise margins for the Q3 of fiscal 2023 increased 52 basis points versus the prior year period And continue to run several 100 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 Q3 decreased $1,600,000 versus the prior year. In the fiscal 2023 Q3 versus 29.9% in the 2022 Q3, reflecting the lower sales base.

Speaker 2

Now looking at our bottom line, net income for the Q3 of fiscal 2023 was $1,900,000 or $0.08 per diluted share. This compares to net income of $6,400,000 or $0.29 per diluted share in the Q3 of fiscal 2022. Adjusted EBITDA totaled $7,400,000 for the Q3 of fiscal 2023 compared to Adjusted EBITDA of $13,000,000 in the Q3 last year. Briefly reviewing our 2023 full 1st 9 months results, Net sales were $688,400,000 compared to net sales of $757,200,000 in the same period last year. Same store sales decreased 9.1% in the 1st 9 months of fiscal 2023 versus the comparable period last year.

Speaker 2

Net income for the 1st 39 weeks of fiscal 2023 was $1,800,000 or $0.08 per diluted share. This compares to net income for the 1st 39 weeks of 2022 of $24,400,000 or $1.10 per diluted share. Adjusted EBITDA was $16,000,000 for the 2023 year to date period compared to adjusted EBITDA of 45.7 fiscal 2023 decreased 8% year over year. This reduction reflects our efforts to manage inventory levels considering the soft 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 non cash acquisitions totaled $8,200,000 for the 1st 9 months of fiscal Computer leasehold improvements in computer hardware and software purchases.

Speaker 2

For the fiscal 2023 full year, we now expect CapEx in the range of $8,000,000 to $12,000,000 and anticipate opening 2 new stores and closing 4 stores, including 1 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 $21,100,000 in the 1st 9 months of fiscal 2023. This compares to net cash used in operating activities of $29,900,000 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 Q3 of fiscal 2023 remains healthy.

Speaker 2

We had 0 borrowings under our credit facility and To be largely consistent with the cash balance at the end of the 3rd quarter, as Steve mentioned, the decision to reduce the dividend To $0.125 per quarter from $0.25 per quarter reflects our prudent approach to capital management Now I'll spend a moment on guidance. For the fiscal 2023 Q4, we expect same store sales to decrease in the High single digit to low double digit range compared to the fiscal 2022 Q4. 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 4th quarter net loss Per share is expected in the range of $0.20 to $0.35 which compares to fiscal 2022 4th quarter earnings per diluted share of $0.08 Finally, I'd like to briefly touch See on seasonality factors that typically cause our 4th quarter earnings to be lower than our 3rd quarter earnings. This dynamic results from a combination of seasonally lower sales volume in the first half of the fourth quarter That concludes our prepared remarks.

Speaker 2

Operator, we're now ready for any questions.

Operator

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

Speaker 3

Hi, guys. First question for me, just as we look at 4th quarter, what are your expectations on promotional environment for you guys and potential discounting here in Q4.

Speaker 1

Mark, we're going to our inventories are in great shape, so we don't feel compelled to The overly promotional, I would expect that we will be reasonably consistent With the last year, we're going to watch the marketplace and react accordingly if we sense that that's the correct step to take.

Speaker 3

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. Any regions or Especially as you look into Q4 that you're expecting maybe a fall off or any additional weakness in?

Speaker 1

I don't know that there's any aspect of our product category that we're So, Padeen, any material falloff or weakness? A lot in the Q4 always revolves around weather And how that can influence the various categories. Positive winter weather is always Most favorable to our apparel category. So we'll be obviously hoping for the weather and watching that carefully.

Speaker 3

Okay. And then the last question for me, as we think about you just cut the dividend 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 Maybe even some pullback on relocations or any capital expenditures going towards new store Growth?

Speaker 1

No. Again, I wouldn't anticipate a material change from the Direction that we took 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 we'll be opening some stores and Rationalizing the store count with some closures as well.

Speaker 3

Okay, great. Thank you.

Speaker 1

Thank you, Mark.

Operator

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

Speaker 1

All right. Thank you, operator, and thank you all for joining us in today's call. We appreciate your interest in Big 5 Sporting Goods and look

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Key Takeaways

  • Net sales for Q3 dropped 8.2% year-over-year to $239.9 million with same-store sales down high single digits as customers felt inflationary pressures such as gas prices, rising rates, and student loan repayments.
  • Inventory levels were reduced 8% year-over-year, enabling the company to limit promotions and achieve a 52 basis point improvement in merchandise margins over the prior year.
  • Despite significant wage inflation, Big 5 lowered store labor expenses and cut marketing spend, demonstrating continued strength in expense management amidst a challenging environment.
  • The quarterly dividend was cut by 50% to $0.125 per share to conserve cash and maintain financial flexibility amid uncertain macroeconomic headwinds.
  • Fourth quarter same-store sales are guided to decline high single to low double digits with an expected net loss of $0.20–$0.35 per share, compared to earnings of $0.08 per share in Q4 2022.
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Earnings Conference Call
Big 5 Sporting Goods Q3 2023
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