Steven Miller - Chairman, President and CEO Barry Emerson - SVP, CFO and Treasurer.

Sean McGowan - Needham & Company Linda Gutmann – SunTrust Shannon Richter – Feltl and Company Adam Sindler - Deutsche Bank Mike Baker - Deutsche Bank.

Good day, and welcome to the Big 5 Sporting Goods' third quarter 2014 earnings results conference call. Today's conference is being recorded. On the call today from the company we have Steve Miller, President and CEO; and Barry Emerson, CFO. At this time, I would like to turn the conference over to Mr.

Steve Miller, President and Chief Executive Officer. Please go ahead, sir..

Thank you. Good afternoon, everyone. Welcome to our 2014 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2014 and provide general updates on our business, as well as provide guidance for the fourth quarter. At the end of our remarks, we will open the call for questions.

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 Report on Form 10-K for fiscal 2013, our Quarterly Report on Form 10-Q for the second quarter of fiscal 2014 and 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. We are pleased to report a solid third quarter performance for our business. We realized an improvement in same-store sales, driven by increases in both customer transactions and average ticket and sales trends improved over the course of the quarter.

As a result, we were able to deliver earnings that exceeded the high end of our guidance range. Our sales gains came despite the continued drag on sales from firearm related products as well as the impact of the severe drought over much of our western markets. Now I will comment on sales for the third quarter.

We rang the register to the tune of $265.1 million, up 2.3% from $259.1 million for the third quarter of fiscal 2013. Same store sales increased 1.0% for the third quarter of 2014. This was on top of a 1.4% increase for the third quarter of 2013. There were a couple of factors that affected our sales throughout the period.

Most significantly the reduced demand for firearms, ammunition and related products impacted same-store sales by nearly 300 basis points in the third quarter. In other words, were we to exclude sales of firearm related products, our comps would have been up in the mid-single digit range for the period.

Additionally, although impossible to quantify, we believe that our sales were meaningfully impacted by the ongoing severe drought that has taken an economic and recreational toll across much of our Western markets, particularly California.

Despite these headwinds, for the quarter we experienced increases in both customer transactions and average sales versus the prior year.

In terms of how sales trended over the quarter, we comped in the negative low single digit range for the first half of the quarter but swung to the positive low mid single digit range for the back half of the period.

The improvement was driven largely by strong sales of summer related products as we benefited from relatively favorable warmer weather in many of more markets compared to the prior year, as well as successful summer promotional activities.

From a product category standpoint, apparel was again our strongest performing category, comping up high single digits. This increase was on top of a high single-digit increase in our apparel category for last year’s third quarter.

We believe the continued strength in apparel is a positive reflection of our increased focus on branded products at stepped up price points, the continuing benefits of our business analytics and enhancements to our in-store presentation.

Sales in our footwear category were slightly positive while sales in our hardgoods category comped down low single digits, impacted by the reduced sales of firearm related products. If we were to exclude firearm related products, the rest of our hard-goods categories would have comped up in the mid-single digit range.

Merchandise margins decreased by 47 basis points for the period compared to the third quarter of last year when merchandise margins increased by 12 basis points over the third quarter of fiscal 2012. During the period we did engage in some additional promotional activity, to battle the headwinds and drive sales. Now commenting on store openings.

During the third quarter, we opened four new stores, including one as part of a relocation and we closed two stores as part of prior relocations. The new stores were in Auburn, Washington, Parumpf, Nevada and Delano, California and we opened a store in San Luis Obispo, California as part of a relocation.

We ended the quarter with 429 stores in operation. During the fourth quarter, we plan to open 10 new stores which will result in 439 stores at year end, versus 429 stores at the end of 2013. Now turning to current trends.

Our positive sales have continued into the start of the fourth quarter and we are currently comping up in the low single single-digit range for the period to date.

While we're pleased with our current trending, we should note that October represents the lowest sales volume month in the quarter and obviously the key holiday selling season lies ahead of us.

Although it’s difficult to predict how consumers will be spending during this holiday season, we feel well prepared with our merchandise assortment and promotional strategy. Finally regarding the status of our e-commerce platform. We're pleased to announce that the site went live to the public last week.

As we’ve previously discussed, we are beginning with a phase-in soft launch of our e-commerce offering which means that we will gradually ramp up the product assortment and our marketing efforts surrounding the site.

While we don't expect e-commerce sales to be significant to our fourth quarter, we're excited about this launch and the channel’s potential for the future. With that said, now I will turn the call over to Barry who will provide more information about the quarter as well as speak to our balance sheet, cash flows and provide fourth quarter guidance..

Thanks, Steve. Our gross profit margin for the fiscal 2014 third quarter was 32.5% of sales versus 33.9% of sales for the third quarter of fiscal 2013.

The lower gross margin for the period reflected the 47 basis point decline in merchandise margins that Steve mentioned, along with an increase in distribution and store occupancy costs as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 27.9% in the third quarter, which was unchanged from the third quarter of fiscal 2013.

On an absolute basis, SG&A expense increased $1.4 million year-over-year or 1.9% due primarily to higher employee labor and benefit related expense and added expense for new stores resulting from our increased store count.

The higher expense was partially offset by a decrease in legal expense reflecting a pretax charge of $1.0 million related to legal settlements recorded in the third quarter of 2013, as well as a decrease in print advertising expense. Now looking at our bottom line.

Net income for the third quarter was 7.5 million or $0.34 per diluted share, including $0.01 per diluted share for expenses related to the development of our e-commerce platform.

This compares to net income of $9.1 million or $0.41 per diluted share, including $0.04 per diluted share for a charge for legal settlements and $0.01 per diluted share for expenses associated with the development of our e-commerce platform in the third quarter last year. Briefly reviewing our 2014 first nine months results.

Net sales decreased to $727.5 million from $745.3 million during the first nine months of fiscal 2013. Same-store sales declined 3.7% during the first nine months of fiscal 2014 versus the comparable period last year.

For comparison purposes, the company same-store sales increased 5.3% for the first 39 weeks of fiscal 2013 over the comparable period in fiscal 2012. Net income for the first nine months of fiscal 2014 was $12.1 million or $0.54 per diluted share, including $0.02 of non-cash impairment charges and $0.02 of e-commerce development expenses.

This compares to net income of $22.8 million or $1.03 per diluted share, including $0.04 of legal settlement charges and $0.02 of e-commerce development expenses for the first nine months of last year. Turning to our balance sheet.

Total merchandise inventory was $307.5 million at the end of the third quarter, up 4.8% on a per store basis versus the prior year. Inventory comparisons have continued to improve into the star of the fourth quarter, and as we speak per store inventories are up approximately 3% versus the prior year.

This improved comparison primarily reflects the rightsizing our of inventories following the excessive winter product carryover which resulted from the very poor 2013-2014 winter season. We feel very good about our current inventory position as we enter the holiday and for the winter shopping season coming up. Looking at our capital spending.

Our CapEx, excluding non-cash acquisitions totaled $14.7 million for the first nine months of 2014.

We currently expect total capital expenditures for the full-year, excluding non-cash acquisitions, of approximately $24 million to $26 million primarily to fund the opening of new stores, store related maintenance and remodelling, distribution center equipment and computer hardware and software, including investments related to the development of our new e-commerce platform and a new point-of-sale system.

From a cash flow perspective, our operating cash flow was $25.1 million for the first nine months of 2014 compared to $25.2 million for the same period last year. The slight decrease in cash flow from operations primarily reflects lower net income offset by reduced funding of inventory purchases this year.

For the third quarter, we continued to pay our quarterly cash dividend of $0.10 per share. Additionally during the period, we repurchased 114,200 shares of our common stock for a total of 1.2 million. Year-to-date we’ve repurchased 205,724 shares for 2.4 million.

As of the end of the third quarter, we had 7.3 million available for stock repurchases under our 20 million share repurchase program. Our long-term debt at the end of the third quarter of fiscal 2014 was $55.4 million, up from $37.9 million at the end of the third quarter last year and from $43.0 million at the end of fiscal 2013.

The increase in debt at the end of the third quarter compared to the same period last year primarily reflects increased funding of working capital, higher capital expenditures and share repurchases. Now I will spend a minute on our guidance.

As Steve mentioned, we are pleased with our positive sales trends for October but this is the lowest volume sales month of the quarter and the key holiday selling period lies ahead.

For this year's fourth quarter, we are guiding to a same-store sales increased in the low single digit range and earnings per diluted share in the range of $0.14 to $0.22. Our guidance reflects anticipated expenses of approximately $0.01 per diluted share associated with the development of our e-commerce platform.

For comparative purposes, in the fourth quarter of fiscal 2013, same-store sales decreased 0.5% and earnings per diluted share were $0.23, including $0.01 per diluted share of e-commerce development expenses. Operator, we are now ready to turn the call back to you for questions and answers..

(Operator Instructions) We will take our first question from Sean McGowan with Needham & Company..

Thanks guys. A couple questions if I can.

First, can you give us some sense of what you expect the SG&A expenditure outlook to be for the fourth quarter? Is that – is the trend comparable to last year as a percent of sales, or do you expect it to show some leverage?.

Yes, Sean, we are seeing some expense creep with minimum-wage and the health and welfare and so on. So now I would expect SG&A to be higher year-over-year and I would expect the percent of sales to be slightly higher as well. .

Can you remind us how last year's fourth quarter trended in terms of the year-over-year comparisons as the quarter progressed? If I remember correctly the weather just got less and less favorable as the quarter went on, is that right?.

That is right. October was our strongest period of the quarter.

Then November December gets a little muddied because there was a shift of the Thanksgiving and that affected an awful lot but we really had -- performed quite positively, sort of leading into Christmas following a reasonably successful Black Friday weekend and then our business really came to a relative halt with an absolute lack of winter weather from Christmas, and particularly the week after.

.

Thanks for reminding me, and Steve, do you think that this is kind of it in terms of a negative comparison on firearms? And I know it's not – the year is not over but is the comparison so not meaningful in the fourth quarter that – it’s the last time I am going to hear about it –.

No, I am not sure, I wish I could say that this is it for the negative comparison of firearms but we still suspect that it will be a drag on sales into the fourth quarter. Lessening -- we believe it lessening as the quarter plays off but bottom line, Sean, it's so difficult to predict. I mean this has been our erratic category, unusual consumption.

There was clearly some, I guess, it's called the overconsumption, perhaps ordering of ammunition and I guess until that all works its way through the cycles, it’s very difficult to predict. But we would anticipate in our guidance -- or anticipates that it will still be somewhat of a headwind through the fourth quarter. .

And then last housekeeping question, Barry.

What’s your expectation for the tax rate for the fourth quarter?.

Well, for the full-year, Sean, I have used a 37.5% --.

We will go to our next question from David Magee with SunTrust..

Hey guys, this is Linda Gutmann in for David. First, just a couple of questions about the ecommerce business.

Are we fully done after next quarter with the charges that are going to be associated with the rollout, or should we expect some for next year?.

No, I mean I think that clearly we’re not expecting additional planning and development costs to drag into 2015. I think those costs are going to – clearly in ‘13 and ’14. We will just have operational costs going forward into 2015. .

Okay and then secondly, how long do you think it will take for you guys to rollout the full product assortments? Is that something we could see by the second half of next year or a more slower process?.

Well, we’re just I think a little quicker – sort of little quicker than that. I mean we just launched last week and we’re ramping it up really on an ongoing basis, we would expect by the holiday period that we will have a substantial portion of our product line available and more to come as we proceed forward into 2015. .

And then how do you guys see Christmas playing out this year? Mostly how would your strategy be different compared to last year, especially if the drought conditions kind of stay the same?.

Well, I mean we feel – I mean to say, how do we feel Christmas will play out, we feel very well prepared.

I don't know as far as – I mean a drought, if there is – weather is impactful to our fourth quarter, so we get no winter, clearly that would be a negative to the season but we feel very well situated across a broad array of product categories to combat those conditions. We feel good about the momentum of our business.

Right now as we mentioned we’re running up low single digits for the quarter to date -- with the continued -- recently significant drag from firearm category as well as the weather -- early whether has not been favorable thus far.

So if we back out the winter and back out the winter apparel and winter product and the firearms category, we are performing very positively in a very solid mid-single range and hopefully on the strength that we’re seeing across a broad array categories, will serve us well as we play through the fourth quarter..

And then do you guys see an opportunity to raise ASP next year?.

Do we see an – say it again – an opportunity to raise – well, I think we have been – I mean we have been doing that with some of our initiatives over several years quite positively.

Some of it gets muddied in terms of how it plays out for the whole chain, when we factor in the firearms sales, those are large ticket items that are currently trending down. But all things being equal, we do feel there’s opportunities to raise our averaging selling price..

And then just last question – is there any change to that CapEx guidance?.

The total CapEx for the year, we estimate to be about $24 million to $26 million. .

(Operator Instructions) We’ll go next to Mark Smith with Feltl and Company..

This is Shannon Richter on for Mark Smith. A few questions for him.

First, can you talk about the health of your consumer primarily in California?.

Yeah, I think to a great degree they are still somewhat challenged with – on the issues from the overall economy and unemployment, I would like to believe it’s getting better year-over-year.

I think we’re advantaged with lower gas prices that is certainly helpful, but it shouldn’t be lost that it's hard to quantify the impact the drought is having on our consumers.

It certainly has an impact to our recreational business but there was a CNBC report we just saw that said the drought’s estimated cost to California economy $2.2 billion and 17,000 jobs this year.

So I think there are certainly challenges and that's why we feel very positive about our efforts to drive sales and feel that we’re certainly more than pulling our own when we’re able to report positive transactions in our stores, even facing some of the headwinds that exist in our marketplaces. .

And then a couple more here.

Was it getting more promotional that drove the increase in traffic or was it due to other weather, other circumstances in the second half of the quarter?.

I am sorry, can you say that again? I didn’t quite catch it..

Sorry.

Was it just promotional that drove the increase in traffic or was it due to better weather or what circumstances that drove that traffic – that better traffic in the second half of the quarter?.

Well, I think it was a combination of some – certainly some more favorable weather but absolutely I think we drove traffic through some very positive promotions and we clearly recognize that given the headwinds we’re facing that in today's marketplace we need to do something a little extra to drive sales.

So we were slightly more promotional in the third quarter and we think our efforts were well received. We made some modifications to our ad calendar from a print and digital perspective and offered strong promotions along with some compelling in-store presentations..

And then last question – gross profit margin was down 140 basis points during the quarter.

Was that purely due to promotional activity and it looks like there is a mix – positive mix with strong apparel sales?.

Yes, the primary drivers of the reduction in the gross margin year-over-year were -- as we mentioned it was the lower merchandise margins which was about -- which were down 47 basis points or so. And then we also had a significant deleveraging of our occupancy and distribution costs for the period as well of approximately 50 basis points. .

We will go to our next question from Sean McGowan with Needham & Company..

Yes, a couple of follow-ups, guys, on store openings. So are you seeing a -- the store opening plan for the fourth quarter is a little lower than I would have thought.

Are you seeing a slowdown in that pace? Is that deliberate, or is it just the timing of some availability?.

It still is timing, we had a couple of construction issues that really pushed a couple of planned store openings in the fourth quarter into 2015. So just kind of the way – certain issues played out for us. .

Would that imply that we should expect to see a jump up in the store openings next year, assuming that everything else --.

We haven't guidance to openings but at this point in time I would look for our store openings to be – not too dissimilar – if the real estate works out it could be somewhat more but we haven’t spoken to that and I would think that would be – the fact that we had a couple fall into -- from this year into next doesn't change significantly what next year will be..

Well, last year you opened 15 net, right?.

That’s right..

And this year is looking like 10, so are we at 10 and staying at 10 or could be bounced back to 15? I know you are not guiding but it’s a pretty big difference from last year..

Yes, a lot has to do with how the real estate market plays out, the opportunities that we see, the deals that we feel are accretive to our business. But again we will know about that as we get into next year..

We’ll go next to Adam Sindler with Deutsche Bank..

Yes good afternoon guys. Thanks so much. I am hoping to ask a couple questions about the expenses associated with the e-commerce rollout.

First, one thing that we see with a lot of our companies who are going through this transition is a very significant increase in D&A, as much of the investments are short-lived and, honestly, quite expensive on the technology side. So just wondering, one, if you could confirm that D&A will flow through SG&A.

And then, if you could sort of give maybe a little bit of color of how much of a increase you're looking for in that line item over the next maybe year or two. .

Well, D&A will flow through SG&A and – but in terms of given expectations for next year and so on, we haven't developed those forecasts. I mean it's not – I mean the overall expenditure, the overall CapEx for our e-commerce operation is somewhere in the $3.5 million range.

And so it's not a huge number but it will clearly be amortized over five years or so..

And then staying with SG&A, the e-commerce team, is that generally built out, I guess just with regard to back office and then if you had to hire any additional planners and buyers, things of that nature?.

Yes, certainly from that initial rollout standpoint we’ve got the team fully staffed but as this thing grows we will continue to add staff. But I think we’re certainly where we want to be from a hiring standpoint right now and we will see how the business grows..

And then just lastly, do you have any -- I know you're not giving guidance, but any sort of internal projections or thoughts as to how quickly the business might ramp, sort of how aggressive you're going to get on marketing it? Just to try and get a sense of -- potentially trying to frame where it could go over the next several years. .

Well, that’s really the key. The key – well, I say a key. I mean the key is to see what you can do is the marketing side of the equation. And for now, for this year, as Steve mentioned, we’re really just in the midst of a stopwatch both in the number products that are available-for-sale as well as the marketing.

And that we’re going to continue that phase-in through the fourth quarter and then we will see how, what kind of response we get to our marketing dollars and that will kind of dictate just how much we do see the market -- the promotions and the marketing and so on. You got it – I can’t give you really any guidance for 2015.

We’re really going to have to see how – what kind of a response we get..

We’ll take our last question from Mike Baker with Deutsche Bank..

Hi, this will just follow up on Adam's, on the e-commerce. One other issue that a lot of retailers have dealt with is shipping costs and how you deal with likely what generally ends up being free shipping at some tier.

And so how have you thought about that? And then, I guess tying all that together into Adam's question, we look at your model and we sometimes model getting back to higher operating margins, if not peak, certainly higher than they are now.

But again, what we've seen in a lot of retailers is that as e-commerce ramps up, margins are just inherently lower in that business, primarily because of the shipping costs and some of the things that Adam talked about, headcount, D&A, et cetera.

So does a e-commerce rollout preclude you, in your mind, to getting back to your peak margins over time, is the question?.

Mike, we really haven’t – it really depends on how this thing kicks off and based on our initial models and looking at it, it certainly looked exciting and we hear more stories, some other retailers talking about the profitability and so on.

I mean we are really looking at this to be accretive to the bottom line, is really what we’re pushing for and when it comes to whether it's shipping or any of the other associated costs, we’re going to be looking at that very, very carefully as we roll this thing out.

And we will flex the shipping as we need to and we will flex some of the other expenses as we need to, to try and manage this thing to make a profit. That’s our goal..

Make a profit, sure. But I guess the question is, is it -- and I assume it's accretive to dollars but I guess the margin rate is something that we'll look at. So I mean the way you model out is that –.

I am going to say – I think it’s just really early to make a call on that.

And as Barry said, I mean we are not moving to the e-commerce to be a less profitable company and we would totally expect that our efforts -- and we’re well aware of the challenges that other retailers have had and we’re going to try and navigate e-commerce landscape in a manner that will enable us to be a more profitable and successful business..

At this time I’d like to turn the conference back over to Mr. Steve Miller for any closing or final remarks..

Thank you. We appreciate your interest in Big 5 Sporting Goods and look forward to speaking with you on our next call. Have a great afternoon. .

That does conclude today's conference. Thank you for your participation..