Steve Miller - Chairman & CEO Barry Emerson - CFO.

Mike Baker - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods first quarter fiscal 2017 earnings conference call. Today's conference is being recorded. With us today is Mr. Steve Miller, Chairman and Chief Executive Officer; and Mr. Barry Emerson, Chief Financial Officer of Big 5 Sporting Goods.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Miller. Please go ahead..

Thank you, operator. Good afternoon, everyone. Welcome to our 2017 first quarter conference call. Today, we will review our financial results for the first quarter of fiscal 2017 and provide general updates on our business as well as provide guidance for the second 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 facts, 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, 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 an extraordinarily strong first quarter performance, driven by increases of same-store sales across each of our major merchandise category, improvement in customer traffic and average sale, and healthy margin expansion.

We generated a 17.8% increase in gross margin dollars on a 7.9% increase in same-store sales and produced earnings per share of $0.24 for the period.

Our strong results reflect our team's continued effort to expand our market share gain following the competitive store closures that occurred in our sector last year and capitalized on the favorable weather conditions in our market during the first quarter. These efforts allowed us to produce results meaningfully ahead of our guidance for the period.

Now I'll comment on sales for the first quarter. During the period, we rang the register to the tune of $252.6 million compared to net sales of $234.5 million for the first quarter of fiscal 2016. And as I just mentioned, our same-store sales increased 7.9% during this first quarter.

The same-store sales comparison for the period benefited by approximately 50 basis points from the calendar shift to the Easter holiday, when our stores are closed, into the second quarter this year from the first quarter last year.

We experienced a mid-single-digit increase in customer transaction and a low single-digit increase in average ticket during the first quarter versus the prior year period.

In terms of how sales trended over the quarter, January was our strongest month, comping up probably in the double-digit range on the strength of highly favorable winter weather conditions in our Western market.

Sales during February comped up in the low single-digit range as the continued strength in our winter product category was largely offset by softness in our non-winter product category as a result of heavy rains in our markets, particularly in California.

March comped up in a high single digit range as we enjoyed generally favorable early spring weather with snow in the mountain and, for the most part, dry field condition. This helped facilitate both late season winter product sales as well as sales of spring related products.

Additionally, our March period benefited from the Easter holiday calendar shift that I mentioned. From a product category standpoint, all of our major merchandise categories benefited from both the competitive store closures that occurred last year and the favorable winter weather conditions during the first quarter.

Apparel was our best performing category, comping up strong double digit from the strength of increased demand for winter-related products. Our footwear category comped up mid-single digits, and our hard goods category comped up low single digits for the quarter.

Our hardgoods category was impacted in part by decreased demand for firearms and ammunition-related products compared to the prior year.

Our merchandise margins for the quarter increased by a very healthy 228 basis points from the prior year, benefiting from a favorable sales mix shift, driven by strong demand for higher-margin winter products and reduced demand for lower-margin firearms and ammunition products as well as reduced clearance activity, a less promotional environment resulting from the competitive store closures in our market.

Now commenting on the store activity. During the first quarter, we relocated one store in Las Vegas, Nevada, and closed one store as a result of a lease expiration. And we ended the first quarter with 431 stores in operation.

In the second quarter of 2017, we have opened one store in Spokane Valley, Washington, and plan to open one additional store during the quarter. For fiscal 2017, we currently expect to open approximately 8 stores and close approximately 3 stores. In addition, we are continuing our program of heightened investment on our existing store base this year.

Now turning to current trends. I'm pleased to report that we are off to a solid start in the second quarter with same-store sales for the period to date up in the low mid-single-digit range despite having 1 less sales day this year due to the calendar shift this Easter into the second quarter.

We are projecting same-store sales to be up in the mid-single-digit range for the second quarter as we expect sales comparisons to continue to benefit from store closures of Sports Authority and Sport Chalet that concluded early in the third quarter of last year.

We also believe that water recreation conditions in the lakes and rivers in our markets should be much improved this summer following the significant snow and rainfall that we experienced this year, which, we hope, will lead to increased recreational activity and increased demand for related products.

As we look ahead, we remain focused on maximizing the benefit from the competitive store closures and highlighting the convenience and value that Big 5 Sporting Goods offers. We continue to work with our vendors to provide great products and tremendous values for our customers.

We also continue to strategically enhance our inventory position in key product areas, which are at a high level of in-stock availability of the products that customers want when they shop in our stores.

We believe that these efforts, along with our strong financial condition, should position us well as we move into the summer selling season and beyond. 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 flow and provide second quarter guidance..

Thanks, Steve. Our gross profit margin for the fiscal 2017 first quarter was 33.1% of sales versus 30.3% of sales for the first quarter of fiscal 2016.

The increase in gross margin for the period reflects the 228 basis point improvement in merchandise margin that Steve mentioned as well as a decrease in store occupancy and distribution cost as a percentage of sale.

Our selling and administrative expense, as a percentage of sale, was 29.5% in the first quarter, down from 30.4% in the first quarter of fiscal 2016. On an absolute basis, SG&A expense increased $3.4 million year-over-year due primarily to higher employee labor and benefit related expense partially offset by a decrease in print advertising expense.

Now looking at our bottom line, we reported net income for the first quarter of 5.3 million or $0.24 per diluted share. This compares to a net loss in the first quarter of fiscal 2016 of 1.1 million or $0.05 per share, including $0.03 per share for the write-off of deferred tax assets related to share-based compensation.

Turning to our balance sheet, our chain-wide inventory was 296.5 million at the end of the first quarter, up 3.5% from the prior year.

On a per-store basis, merchandise inventory was up 4.2% versus the prior year, reflecting the strategic decision that Steve mentioned to enhance in-stock inventory levels for key product areas in order to meet anticipated customer demand.

We were very pleased with the sell-down of our winter merchandise and feel good about our inventory heading through the spring and into the summer selling season.

Looking at our capital spending, our CapEx, excluding noncash acquisition, totaled 4.4 million for the first quarter of fiscal 2017, primarily reflecting investment in IT systems, existing store upgrades and remodeling and new stores.

We currently expect capital expenditure for fiscal 2017, excluding noncash acquisitions, of approximately 18 million to 22 million.

From a cash flow perspective, our operating cash flow was a negative 1.1 million for the first quarter of fiscal 2017 compared to a positive 9.6 million for the prior year, largely due to increased funding of merchandise inventory purchases, including the timing of payments.

For the first quarter, we also paid our quarterly cash dividend of $0.15 per share. Our long-term revolving credit borrowings at the end of the first quarter were 21.8 million, which was down 62% from 56.6 million at the end of the first quarter last year and up from 10 million at the end of fiscal 2016. Now I'll spend a minute on our guidance.

For the fiscal 2017 second quarter, we expect same-store sales to be in the positive mid-single-digit range and earnings to be in the range of $0.14 to $0.20 per diluted share.

We expect second quarter same-store sales comparisons for the prior year to be negatively impacted by approximately 60 to 70 basis points as a result of the calendar shift for the Easter holiday and the 4th of July holiday this year.

Our earnings guidance for the second quarter also reflects anticipated higher merchandise margins compared to the prior year although to a much lesser degree than realized in the first quarter. For comparative purposes, in the second quarter of 2016, same-store sales decreased 1.7% and earnings per diluted share were $0.10.

Operator, we are now ready to turn the call back to you for questions and answers..

Thank you. [Operator Instructions] And we'll take our first question from Mike Baker with Deutsche Bank. Please go ahead..

So a couple.

First and foremost, can you differentiate between comp in stores that were previously against either a Sports Authority or a Sport Chalet compared to the same-store sales for stores that were not in competitive situations?.

Yes, Michael, Yes. Certainly, the lion share of the gains we've seen over the last couple of quarters have come from the stores that have benefited from the competitive closures at roughly 250 stores or 60% of our chain. The stores that have not been impacted by the closure as a group are comping relatively flat.

There are exogenous factors that are impacting our sales performance throughout the chain, which can make it difficult to get a clear read. Certainly the weather conditions especially during Q1. There's some [state]and specific economic issues, the firearm and ammunition trends that impact the 2 groups of stores that you alluded to..

Okay. And then I guess sort of related to that, as you start to comp up against The Sports Authority disappearing a year ago really in the third quarter, sort of what are your plans or what do you think you guys can do to continue to comp positively? I don't think anyone expects you to continue to comp in the 8% range.

But should we expect there to be a reversing back to sort of a low single-digit comp or flatter down? How will we think about the second half of the year?.

Well, I think, obviously, the comps get tougher, and we're certainly doing everything we can to regain the market share and doing things that, going forward. So we expect to be in a better inventory position this year than we were last year to really take, last year, the manner in which the closures occurred, they came upon us quite abruptly.

We weren't in a position to take full advantage. This year, we've been able to plan. We now recognize the opportunities that the rationalization has created. So I think we're going to be in a much better inventory position to continue to have positive traction into those stores.

Basically, we adjusted a number of our store allocation efforts to ensure that we're prepared when customers come in. We continue to leverage a very positive level of opportunistic buys. We continue to evaluate new product lines, new better opportunities that we think will benefit all stores going forward.

We've enhanced the relationships with existing vendors. And so we've become a more important channel for our vendor base, and we continue to develop and implement marketing plans to retain and ideally continue to gain market share..

[Operator Instructions] We'll take our next question from David Magee with SunTrust..

This is actually Mitch on for David. Just on the current outlook for the second quarter, I just want to make sure I understand the guidance.

Slight deceleration from the first quarter, is that all a function of the calendar shift? Or is there something else contemplated in the outlook?.

Well, there is some impact, certainly, from the calendar shift, but I mean, I think it's a, arguably a deceleration from an extraordinary performance in the first quarter that was, in part, driven by extraordinarily favorable winter weather..

Right, okay, okay. I know it's just nitpicking on my part for the most part. But maybe just, maybe you can discuss some of your recent in-store initiatives and the benefits you're seeing from those. I think you recently introduced a new POS system, which followed some demand forecasting tools that you have implemented in the past..

Okay. I mean, well, I'll let -- maybe Barry, you want to speak to the POS.

But I mean, in terms of in-store initiatives, I mean, we've been -- really over the last several years, been investing more than in the past in terms of improving the look and feel of our stores certainly in an effort to improve customer experience as we certainly attempt to build on the market share gains that we've made over the past year, primarily focused upon just improvements and everything from the exterior look of our stores, signage, window display, adding fixtures to better show our product, a number of branded fixtures, a stronger presence of branded fixtures, remerchandising efforts, flooring, painting, lighting and generally just enhancing the shopping environment for our customer..

Yes. And Mitch, on the POS system, we are in the final stages of developing that new storewide, Oracle-based point-of-sale system, which we currently expect to roll out to the full chain beginning in the second quarter of this year, some time.

On the new system, we'll have more functionality certainly than our existing system, including advanced pricing and promotions capability, CRM program capability. It's an Oracle-based system. So it will integrate with our Oracle e-commerce-based system as well.

And we're excited about the benefits of the system and expect it will help streamline our operations and provide increased efficiencies and, knock on wood, profitability..

Okay. And one more if I may.

Just shifting gears to the gross margin, obviously very strong in the first quarter, but as you lap some of these benefits that you received in the second half of last year, do you expect to grow the rate during that period this year?.

Well, we're not guiding for the second quarter, second -- or second half of the year margin. We anticipate an increase in point-of-sale margin in the second quarter albeit to a much smaller level than what we experienced in the first quarter.

The first quarter benefited tremendously from the favorable mix shift driven by the winter weather, to some degree lower demand for lower-margin firearms and ammunition, less clearance activity in the first quarter this year compared to last and a quieter promotional environment relatively speaking..

And it appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Miller for any additional or closing remarks..

All right. Well, we appreciate your interest in Big 5 Sporting Goods and look forward to speaking to you on our next call. Thank you..

And once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect..