Steve Miller - President and CEO Barry Emerson - CFO.

Mike Baker - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods Second Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. With us today are Steve Miller, President and CEO 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 second quarter conference call. Today, we will review our financial results for the second quarter of fiscal 2017 and provide general updates on our 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 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.

After producing solid sales for April and May, second quarter results came in below your expectations as a result of softening sales trends in June as we were challenged by weakness in certain outdoor product categories and we began cycling against some of the benefit from the store closures of Sports Authority and Sports Chalet that concluded early in the third quarter of last year.

Despite falling short of expectations, given the challenging retail environment, we were encouraged by the strength of a number of product areas and pleased to have delivered both improved merchandise margins and earnings growth over the prior year. Now I'll comment on sales for the second quarter.

We generated net sales of $243.7 million, up 0.9% from 241.4 million for the second quarter of fiscal 2016. Same-store sales increased to 2.8% for the period. As anticipated same-store sales comparisons for the quarter were negatively impacted by calendar shifts related to the Easter and Fourth of July holiday.

We estimate these calendar shift negatively impacted same-store sales for the quarter by approximately 100 basis points. We experienced small increases in both the number of customer transactions and average ticket during the second quarter versus the prior-year period. In terms of how the quarter rolled out.

As mentioned, we comped positively and generally on plan in the low mid-single digit range in both April and May, but sales fell short of our expectations and swung to negative low single-digit range for the month of June.

The shipment transfer this period was largely due to weakness in three aspects of our hard disk category, firearm related products, camping and watersports. We mentioned on our last call, the demand for firearm related products declined year-over-year and we've seen that trend continue.

We believe the soft demand for camping and watersports product in June primarily resulted from unfavorable weather comparisons in the colder and dangerously high water flows in many of the rivers in our markets from record spring fall and snow melt, which has led to closures of campgrounds in California and significantly affected recreational activity in these areas.

Additionally, in the back half of the second quarter, we began to cycle some of the benefit from the competitor store closures that occurred last year and a comparative spread between the stores that were impacted by the closures and those that were not impacted by the closures began to tighten over the course of the quarter.

And as also mentioned our June period was negatively impacted by the 4th of July holiday calendar shift. From a product category standpoint, apparel was exceptionally strong throughout the quarter comping up high-single digit. Our footwork category also comped positively throughout the quarter, increasing low single digits.

Sales on our hard goods category comped positively for April and May before turning negative for June and finishing the period down low-single digit essentially due to the factors that I just mentioned related to certain of our outdoor categories.

Excluding firearm, camping and water related products, the rest of our product assortment comped up in the low mid-single digit range for the period.

Our merchandise margins for the quarter increased by 37 basis points from the prior year benefiting from favorable sales mix shift including strong demand for higher margin apparel products as well as our continued efforts to leverage our vendor partnerships.

Now commenting on store activity, during the second quarter, we opened two new stores in Spokane Valley Washington and Montrose, Colorado. We ended the second quarter with 433 stores in operation.

We plan to close one store during the third quarter, for fiscal 2017, our current plan calls for us to open approximately six stores and close approximately three stores. A couple of store openings that we had previously forecasted for this year are now expected to shift into 2018.

Now turning to current trends, we're firmly comping slightly down to the third quarter to date with profit margins running up nicely over the prior-year period.

While we have seen some improvement in demand from watersports products as a result of better weather comparisons over the past few weeks, our camping sales have remained below expectations and we continue to see reduced demand for firearm related products.

Additionally, we continue to cycle the initial benefit from the competitive closures that occurred last year. And as anticipated we are facing a number of new competitive openings in our markets, many in former sports authority location.

As we anniversary the benefit from the competitive closures and the dust begins to settle, it's apparent that we like most retailers are operating in a challenging environment.

We're encouraged by the market share gains that we've worked hard to acquire over the past year as well as by the continued strength that we are seeing across key areas of our product offering.

We are focused on maintaining and building on these market share gains and feel that we are well positioned from both an inventory marking standpoint for the remainder of the summer and for the back to school season.

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 third quarter guidance..

Thanks Steve. Our gross profit margin for the fiscal 2017 second quarter was 32.5% of sales versus 31.6% of sales for the second quarter of fiscal 2016.

The increase in gross margin for the period reflects the 37 basis point improvement in merchandise margins that Steve mentioned as well as the decrease in distribution expense resulting from higher cost capitalized in the inventory.

Our selling and administrative expense as a percentage of net sales was 30.4% in the second quarter versus 29.9% in the second quarter of fiscal 2016. On an absolute basis, SG&A expense increased 1.9 million year-over-year due primarily to higher employee labor expense and costs related to information technology systems and service.

Now looking at our bottom line, we reported net income for the second quarter of 2.8 million or $0.13 per diluted share. This compares to net income in the second quarter of fiscal 2016 of 2.1 million or $0.10 per diluted share including $0.01 per diluted share for the write-off of deferred tax assets related to share-based compensation.

Briefly reviewing our 2017 first half results, net sales were 496.3 million compared to 475.9 million during the first six months of fiscal 2016. Same-store sales increased 4.3% during the first half of fiscal 2017 versus the comparable period last year. Net income for the period was 8.1 million or $0.37 per diluted share.

This compares to net income of 1 million or $0.05 per diluted share including $0.04 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation for the first half of last year.

Turning to our balance sheet, our chain-wide inventory was 328.7 million at the end of the second quarter, up 7.9% from the second quarter of 2016, when chain-wide was down 9.5% from the second quarter of 2015.

The increase in inventory primarily reflects our strategic decision to enhance in-stock inventory levels for key product areas to meet anticipated demand following the market share gains we have achieved over the past year.

While the weaker than anticipated sales of summer recreational hard goods products have had some impact on our inventory levels, we feel comfortable with our inventory assortment heading through the summer and back to school selling season.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled 7.2 million for the first half of fiscal 2017, primarily reflecting investment in IT systems, existing store upgrades and remodeling, and new stores.

We currently expect capital expenditures for fiscal 2017 excluding non-cash acquisitions of approximately 18 million to 22 million.

From a cash flow perspective, our operating cash flow was a negative 19.4 million for the first half of fiscal 2017 compared to a positive 16.4 million last year, largely due to increased funding of merchandise inventory purchases and the timing of payment. In the second quarter, we also paid our quarterly cash dividend of $0.15.

Additionally, during the second quarter, pursuant to our share repurchase program, we repurchased 6,400 shares of our common stock for total expenditure of 0.1 million. We have continued to repurchase shares and in the third quarter through July 31, we have repurchased 373,847 shares of our common stock for a total expenditure of 4.3 million.

As of July 31, we had 19 million available for future repurchases under our 25 million share repurchase program. Like we always do, we will continue to evaluate the best use of our cash whether it's for reinvesting in the company, stock buybacks, dividends or paying down our debt.

Our long-term revolving credit borrowings at the end of the second quarter were 47.9 million which was down 16.5% from 57.4 million at the end of the second 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 third quarter, we expect same-store sales to be in the negative low-single digit range and earnings to be in the range of $0.22 to $0.32 per diluted share. Our guidance reflects a small benefit to same-store sales of approximately 40 to 50 basis point as a result of the calendar shift related to the 4th of July holiday.

For comparative purposes, in the third quarter of fiscal 2016, same-store sales increased 6.8% and earnings per diluted share were $0.38 including $0.03 per diluted share for store closing costs. Operator we are now ready to turn the call back to you for questions and answers..

[Operator Instructions] And we'll take our first question from Mike Baker with Deutsche Bank..

Thanks. So a couple of questions. First, on the same-store sales outlook for the third quarter. If you do comp in the low single digit range, call it 2, that would suggest a pretty sizable acceleration actually in the two year trend, because you're up against a pretty tough comparison.

So I guess what gives you the conviction that you'll be able to show that kind of improvement in the two year trend.

Is it simply what you've seen in the first month or can you sort of help us to have that confidence?.

Well, Michael if I understood the question, I think it's a two-year trend. I think we have the benefit of the competitive closures and we look to maintain the - certainly the bulk, ideally build upon that debt a little. So we comped up Q3 of last year, we're up 6.8%..

Right. So I guess a lot of analysts look at the two-year math. In the second quarter, you did a 0.8 against minus roughly 2% last year. And so now, are you going to do, you're saying low single digits, which isn't that much different than the plus 0.8, but that's against a 7 last year.

So it seems like, so if you just, if you do to your stack out together, it's a pretty big acceleration that you expect? Does that not make sense?.

Well, so we were down 1.7% in the - yeah, Michael. Let me just, you're doing your stacked comp kind of routine here, let us take a quick look at it. So yeah, in Q3 of last year, Q3 of 15, we were down a very slight minus 0.4% in same-store sales. Last year, in the third quarter, we were up 6.8%. All right.

So yeah, your stacked comp is in the low positive single digit range..

Michael, [indiscernible] are you thinking we're guiding to a positive comp?.

Yeah..

In the first quarter, we're guiding low single digit negative.

Do you think we're guiding low single positive?.

No. But even on a low single digit negative, call it minus - even 3 against a plus 6.8, that would be plus 3.8 on a two year basis versus you're just coming off of a period where you were down 0.9 on a two year basis.

So even on your minus low single digits, it's still a pretty sizable acceleration, in other words, some might think that this third quarter might be down mid-single digits..

A couple of things to take in consideration. One, the second quarter was impacted, we've suggested, by roughly 100 basis points by calendar shifts.

We also had we think some unfavorable weather comparisons in the second quarter that affected the results as well as some challenging firearms comparison that were to some degree exasperated by just going against the Orlando shooting tragedy in June of last year as well as from California legislation that phrased some search of activity in that regard..

And Michael, there is a lot of moving parts out there and clearly we missed some sales last year relative to the competitive rationalization. There were categories where we just didn't have the inventory that we needed.

The inventory that - the growth that you've seen now, I mean, the vast majority of that growth was actually planned is to make sure that we have - we are in an inventory position to be able to support some of the missed sales that we had last year.

Also, the impact on our water sports and camping business has been challenged for the reasons that we mentioned in our discussion, campground closures, cold water, running water, really hazardous conditions and we're hoping that that comes back to us a little bit in the August and September timeframe, but we'll have to see if that plays out..

Okay. Yeah. That makes sense. And just to clarify, so you said you're down slightly quarter-to-date. So through at least a month of the third period, you're in line with your down low single digit guidance.

Is that fair to say?.

Absolutely. And we've really seen probably the background, all the noise, some improvement in trends in the third quarter relative to what occurred in June. The issue with the second quarter was primarily a June issue and there are a lot of exogenous factors that business month..

[Operator Instructions] And we'll take our last question from David Magee with SunTrust. Please go ahead..

Actually Mitch in for David. Couple of questions.

Just first on the gross margin and opportunistic buys, how much further runway do you see on that front?.

Well, you say on the growth, you're talking about the product margins?.

Right.

Do you expect any other additional tailwind in the second half of the year from opportunistic buys?.

I don't know that that's a tailwind.

I mean, we had some very strong opportunistic buys that's associated with all the competitive closings last year, so I think the moment we would look at the environment as relatively normal, possibly we can make it better, given some of the challenges that we're hearing out of the market place, but I think where we're driving some of our product margin enhancements is through our continued efforts to leverage the vendor partnerships, not necessarily and exclusively for opportunistic buys, but just that we strengthened our position with a number of vendors and as a result of the competitive rationalizations and we think that works beneficially to us to ultimately enhance product margin..

And then the last time we spoke, I think you were in the midst of throwing out some new POS software. Is that - and how is that going..

Yeah. And it's actually going well. We are in the midst, as you said, we had anticipated rolling it out in the third quarter and we are rolling it out at the third quarter and look to either complete it in the third quarter the complete rollout or early in the fourth quarter. And we're excited about the potential for the new system..

Okay. And then lastly, a while back, I think you engaged some outside consultants to help you find some margin opportunities.

Is that still going on and if so what have you identified from that?.

Yeah. No, I mean, we're not currently working with outside consultants. I think now well over a year ago, and I think we've played through a lot of market share gains, taking advantage of the competitive rationalization.

So I think we've continued to work to enhance the number of aspects of our business and inventory, pinpoint our inventory distributions and logistics and marketing and really just had a whole process to take a holistic look at our business and - but that's ways away in the past right now..

And we do have a follow-up question from Mike Baker. Please go ahead..

Just one quick follow-up on the gross margins. As you flow out the inventory that we saw increase this quarter, will the cost that you capitalized flow through the P&L and negatively impact gross margins such that you wouldn't be able to show year-over-year gross and gross margins even with higher merchandise margins..

I don't know - Mike, I don't anticipate for this year, I mean as our inventory grows, your inventory is growing, you typically are capitalizing, it all boils down how quickly you're turning your inventory. But for this year, I don't anticipate a negative effect if the inventory cost out.

If inventories come down dramatically, say next year for example, then there could be a slight effect of that..

And if there are no further questions, I would like to turn the conference back over to Mr. Miller for any additional or closing remarks..

All right. We thank you for your interest today and look forward to speaking to you on our next call. Have a great afternoon..

Once again, this concludes today's conference. We thank you all for your participation and you may now disconnect..