Steve Miller - President & CEO Barry Emerson - CFO.

David Magee - SunTrust Robinson Humphrey Mason Marion - Barrington Research. Seth Sigman - Credit Suisse.

Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Second Quarter 2015 Earnings Results Conference. Today's call is being recorded. On the call today from the Company, we have Mr. Steve Miller, President and Chief Executive Officer; and Mr. Barry Emerson, Chief Financial Officer.

At this time, I would like to turn the conference over to Mr. Miller. Please go ahead..

Thank you, operator. Good afternoon, everyone. Welcome to our 2015 second quarter conference call. Today we will review our financial results for the second quarter of fiscal 2015 and provide general updates on your business as well as provide guidance for the third 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 faster 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 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 deliver improved sales and earnings growth for the second quarter, particularly given that we cycle against soccer related business generated by last year's men's World Cup and continue to be challenged by the recreational and economic impacts of the ongoing drought in our core California market.

For the second quarter, we ranked the register to the tune of $240.4 million, up 4.0% from 231.2 million for the second quarter of fiscal 2014. Same-store sales increased 1.7% for the period. In terms of how sales trended over the quarter, we comped positively in each of the months of April, May, and June.

We experienced a low single-digit decrease in customer transactions and a low mid-single-digit increase in average sale during the period.

From a product category standpoint, all of our major merchandise categories comped positively in the low single-digit range for the quarter with hard goods being our best performing category, followed by footwear and then apparel.

Although difficult to quantify we believe that sales were impacted by the drought that continues to take an economic and recreational tool on California. Additionally, as mentioned we experienced some impact from cycling sales generated by last year's World Cup.

Merchandise margins decreased by 17 basis points for the period compared to the second quarter of last year. Now commenting on store openings, during the second quarter, we opened three stores and closed one store. We opened new stores in Harupa valley and Carlsbad, California, and Woodburn, Oregon. We ended the quarter with 439 stores in operation.

The third quarter we currently plan to open one new store and close one store. For the 2015 full year, we now anticipate that we will open approximately eight to 10 new stores and close approximately six stores.

We're opening fewer stores than previously anticipated due to several deals being challenged by construction delays or landlord issues and we continue to maintain a cautious approach for selecting the right new store opportunities for our business in the current retail environment. Now turning to current trends.

We're currently comping just slightly negative for the third quarter to date. We think several factors have impacted sales for the start of the period. One, as part of our continuing effort to redeploy and reduce our ad spend, we eliminated a midweek print circular this year that we ran in the second week of July last year.

Additionally, over the past few weeks we have faced some of the peak soccer-related sales numbers generated by last year's world cup. And sales of summer-related products have continued to be impacted by the drought in California.

By the drought will continue to impact sales for the remainder of our summer selling season, the impact from world cup will lessen significantly as we move into August. Despite the headwind’s that has led to a relatively soft start to the quarter, we are encouraged by the strength we are experiencing across a number of product categories.

We have a strong promotional plan in place for the remainder of the quarter and we believe that we're in a position to generate positive same store sales for the period. Now I'll 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 third quarter guidance..

Thanks, Steve. Our gross profit margin for the fiscal 2015 second quarter was 32.1% of sales versus 32.7% of sales for the second quarter of fiscal 2014.

The decrease in gross margin for the period reflected the 17 basis point decline in merchandise margins that Steve mentioned, as well as an increase in distribution and store occupancy costs as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 30.2% in the second quarter down 60 basis points from 30.8% in the second quarter of fiscal 2014.

On an absolute basis, SG&A expense increased 1.6 million year over year, primarily reflecting higher employee labor expense resulting from our increased store count, as well as 1.1 million in costs associated with the company's proxy contest, partially offset by a reduction in advertising expense.

As a reminder, SG&A expense for the second quarter of fiscal 2014 included a pretax non-cash impairment charge of 0.8 million. Now looking at our bottom line, net income for the second quarter was 2.6 million or $0.12 per diluted share, including $0.03 per diluted share of expenses associated with the proxy contest.

This compares the net income in the second quarter of fiscal 2014 of 2.5 million or $0.11 per diluted share, including a non-cash impairment charge of $0.02 per diluted share. Briefly reviewing 2015 first half results net sales increased to 484.0 million from 462.4 million during the first six months of fiscal 2014.

Same store sales increased 2.8% during the first half of fiscal 2015 versus the comparable period last year. Net income for the period was 4.9 million or $0.22 per diluted share including $0.06 per diluted share charges for a legal settlement and expenses associated with the proxy contest.

This compares to net income of 4.6 million or $0.21 per diluted share, including $0.02 per diluted share of non-cash impairment charges for the first half of last year. Turning to our balance sheet total merchandise inventory was 336.6 million at the end of the second quarter, up 3.6% from the prior year.

On a per store basis, inventory was up 0.8% versus last year and we feel good about our inventory as we move through the summer selling season.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled 12.9 million for the first half of fiscal 2015 primarily reflecting expenditures for four new stores, existing store maintenance and enhancement, distribution center equipment and computer hardware and software expenses, including investments related to new point-of-sale system.

We currently expect capital expenditures for fiscal 2015 excluding non-cash acquisitions of approximately 26 million to 30 million as we increase investment in our distribution center facilities to support overall growth.

From a cash flow perspective, our operating cash flow was a positive 8.5 million for the first half of fiscal 2015 compared to a negative 2.2 million for the same period last year. The increase in cash flow from operations primarily reflected decreased funding of prepaid expenses and accrued expenses.

For the second quarter we continued to pay our quarterly cash dividend of $0.10 per share. Additionally, during the second quarter we repurchased 20,200 shares of our common stock for a total expenditure of 0.3 million, raising our year-to-date repurchases to 96,273 shares of common stock for a total expenditure of $1.2 million.

As of the end of the second quarter, we had 5.9 million available for stock repurchases under our 20 million share repurchase program. Our long-term debt at the end of the second quarter was 70.5 million, which compared to 68.2 million at the end of the second quarter last year and 66.3 million at the end of fiscal 2014.

Now let's spend a minute on our guidance. For this year's third quarter we are projecting same store sales in the positive low single-digit range and earnings per diluted share in the range of $0.28 to $0.34. Operator, we are now ready to turn the call back to you for questions..

Thank you [Operator Instructions] We'll go to David Magee with SunTrust Robinson Humphrey..

Hi, David..

Hi.

Can you, I guess, confirm that there is a difference I guess, in comps between the stores in California that would be affected by the drought and those outside of California?.

Yes. Certainly, for over the second quarter there was an impact to California, not sure it's a result of the drought. Also, I think, weather relative to the rest of the chain was not particularly favorable in California.

But there's no question that the California market and some of the neighboring to some element, some degree areas of areas of Nevada are clearly affected by the drought, the lack of water in the lakes and the rivers. No question about that..

Thanks, Steve.

And do you think the impact will be the same on you all as you get into the fall and winter months?.

No, I think the drought -- I mean, in terms of the lack of water and summer water recreation that's clearly much more of a summer impact than what the fall and winter. The fall and winter months are going to be dependent on getting fresh snow and weather turning cold at the appropriate time..

Okay. Thank you.

And then, lastly, the guidance for same store sales in the third quarter being low-single digits, but the ESP to be sort of flat to down, are you anticipating more promotions in the third quarter?.

Yes, David. The -- just kind of walking through the forecast here, so you can kind of get from the top to the bottom – we are projecting a low single digit positive comp in the third quarter. And there is the different element of softness in terms of the weather impact, the drought and, certainly, the tailwind from last year's World Cup.

But in addition to that, what we're seeing is our merchandise margins are forecast to be down somewhat in the third quarter. And as we hope to, as you mentioned, drive traffic and sales through some additional promotional activity, our occupancy and warehousing costs are also a little higher year-over-year, due primarily to store growth.

And then our SG&A expense, as we mentioned, was up $1.6 million in the second quarter. We also anticipate it being up again in the third quarter – result of higher employee labor expense, due in parts to the minimum wage pressure, as well as the added expense for new stores..

Great. Thanks, Barry. Good luck..

Yes. David, just as an add-on just to the California issue, I mean, on top of the drought, we're also facing some pretty unique situations in terms of gas prices affecting the California market. I'm not sure how nationally publicized it is, but I think it's a national story.

But the gas prices due in part to refinery issues in California have risen totally in a different direction than what's going on nationally and are significantly – they're always higher. I think the disparity between California and the rest of the country is at near unprecedented, if not unprecedented, levels.

And that's also a pressure in our core California market..

Would you say gas prices are above that of last year?.

They are – I mean, they’ve certainly got to the point near. Whereas they were below last year, I think, in most of the markets, they spiked 40% in California since the beginning of the year. It’s really the largest spike in 2012.

They appear – we’re hopeful that they’ve stabilized and maybe even inching down, but it sort of depends on what day or what week that you’re talking about. But there has been some remarkable activity in terms of the gas prices in the State of California..

Okay. Thank you, Steve..

You’re welcome..

Thank you. [Operator Instructions] We'll go to Kristine Koerber with Barrington Research..

Good afternoon. This is Mason Marion sitting in for Kristine today.

Relating to Q3 guidance, what are the drivers between earnings and gross margins? What pressures are you guys facing there?.

Well, what we mentioned – just what we mentioned was just the promotional environment on margins clearly is – we're pushing to drive some sales here in the third quarter, and it is a promotional environment out there. So we do expect that to take a little bit of a toll.

And then we do have higher expenses that are also impacting margins at a very low single-digit comp positive. Our leverage rate really from an expenses standpoint is really at about a 2 to 3% comp. So we're expecting our rate to be – our leverage rate or our expenses as a percent of sales to be roughly consistent quarter-over-quarter.

But we're not leveraging at a low single-digit comp..

All right. Great.

Also, could you speak about the trends you're seeing in your guns and ammo business?.

Well, I think I'm happy to say that after firearms and ammunition dominating to much of our discussion over the past several years, that the firearms and ammunition -- firearm-related products were really not a major driver of our sales in either direction for Q2. So they were reasonably consistent with the prior year.

I suspect it still remains a volatile category. We'll have to see if that consistency was more coincidental than ongoing. But right now they're running relatively consistent with prior years and really not driving the sales needle in either direction..

Okay, all right.

Last question, concerning your e-commerce business, how many SKUs are you guys offering online now and how many do you see by year end?.

I don't have that specific number. It might -- at my fingertips, in terms of SKUs. We've certainly increased the number of products online over the course of the year that, this year when we've rolled out our e-commerce, but I'm not in a position to give you a precise number. I'd only be taking a bit of a guess..

Okay. Great. Thank you, appreciate it..

You're welcome..

Thank you. And I'd like to go ahead and turn the conference back over to Mr. Steve Miller..

All right. Well, if there's no further questions, I thank you for your interest in Big 5 today and we look forward to speaking to you on our next call..

I'm sorry, Mr. Miller, we did have one question just cued up.

Did you want to take that?.

Certainly..

Thank you and Seth Sigman with Credit Suisse..

Hey guys, good afternoon. Just a couple of quick questions here, one, just in terms of the world cup impact you cited that as a negative impact in the quarter. Can you quantify that? And I just have a quick follow-up..

Well I'm not going to precisely quantify it. It was quite significant. I mean, the men's world cup, started driving business, early -- early in the year with a apparel sales and then definitely became quite significant in the second quarter, as we led up to the actual world cup competition.

The final world cup game, I think was the -- somewhere at the sort of the end of second week in July and it continued as we mentioned to be significant and it's probably a greater impact to the start of our third quarter just because of the influence in a relatively shorter period of time in the third quarter, thus far.

But the sales of the light -- like everyone else, license apparel, the balls and equipment, and I think the halo effect from the interest in soccer was reasonably material to our business..

Okay.

But no way to quantify it explicitly?.

Yes, I mean again the category has been running positively trending in, but I would say somewhere -- in the second quarter it could have been 40, 50, 60, 70 basis points, give or take, give or take..

Okay.

And when does that comparison actually ease? When do those sales start to slow last year?.

Well, it's diminished – as we speak, it's beginning to certainly significant diminish in terms of the headwind and certainly the specific sales related very specifically in terms of license apparel, that's way behind us now.

I think the -- again, as I call the halo effect in terms of equipment, it definitely was a category very strong for several years and it's certainly running today much stronger than what it was running two, three, four years ago.

But, still trending behind what it was a year ago and I think we have to go through a period to see these -- this category normalize. But the true World Cup impact is certainly going to diminish week over week as we move away from the mid-July actually comping against the final event a year ago..

Okay, got it.

And then from an advertising perspective, can you just elaborate on what some of the changes are that you're making? How that change may have impacted sales? And then ultimately what do you see as the cost savings opportunity by reducing, I guess, that midweek circular and any other changes you're making?.

Sure. Well, we've -- this is something that's been ongoing, where we've on a calculated basis, strategically reduced the deployment of some of our print ads, trying to cut back and in the case of what occurred in the second week of July, we eliminated a -- we call it a midweek, called extracurricular circular that we ran last year.

It has a larger impact. Again, when we make a change in our advertising in July the impact for the period is going to be greater than what it will be for the entire quarter once we roll through the entire quarter. But on -- Barry, you might want to talk about the savings we've generated overall in terms of our ad spend..

You've seen it come down. Our advertising has come down consistently over the last three, four, five years and, we continue to really evaluate the newsprint scale that back strategically and opportunistically looking at ROI and shifting some of those dollars to the digital expend. And we're going to continue to do that as its working for us.

It dovetails nicely into obviously the E-commerce and really just trying to reach perhaps a whole new customer with the digital advertising. And to be honest, obviously, some of the distribution on the newspaper print is shrinking as well, so that's certainly helping us move in that direction.

But by and large we're continuing to bring that overall expense number down and we will continue to do that until we see some sort of inflection point on sales..

Okay, that's helpful. And then just one final one. When you look at the California market and the underperformance of those stores versus the rest of the chain this quarter. I know you pointed to weather and maybe some macro factors, including gas.

But any other changes you can point to perhaps on the competitive front that may be skewing those stores?.

Well, I mean, competition is not new to the California market. We've been facing openings over a number of years in California, and I would say there wasn't anything material that changed from, say, Q3 last year, Q4 last year, Q1 this year into Q2 this year, other than the drought, the drought and weather, weather issues.

I mean competition is not -- openings are not a new phenomenon and certainly we're experiencing that in California, but that hasn't changed. We've faced those for a lot of years.

But ultimately we've always found that the -- over time the competitive market rationalizes and we've been -- this is -- now is our 60th year and we've certainly established our ability to withstand new openings and compete in the competitive environment..

Okay. Well, thanks for all the color. Appreciate it..

You're welcome..

Thank you. Again, Mr. Miller, back to you..

All right. Well, this time again, I'll thank you for your interest and look forward to speaking to you on our next call. Have a great afternoon..

Thank you. And again ladies and gentlemen that does conclude today's conference. Thank you all, again, for your participation..