Steve Miller - President and Chief Executive Officer Barry Emerson - Chief Financial Officer.

David Magee - SunTrust Michael Baker - Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods' Third Quarter Fiscal 2017 Earnings Results Conference Call. Today's conference is being recorded. With us today are Mr. Steve Miller, President 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. Happy Halloween, and good afternoon everyone. Welcome to our 2017 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2017 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 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. Our third quarter sales and earnings results were in line with our guidance. As we anticipated, sales were challenged during the third quarter as we had fully cycled the benefit of the roughly 200 competitive store closures last year at our market.

And we're facing what I would characterize as a larger than number of competitive opening, with approximately 10% of the Sports Authority locations that had closed in our market now reopened in six stores.

Those factors along with the challenging and promotional retail environment and compared weakness in our fire alarm related business firearm related business pressured the top line during the third quarter.

Given these headwinds, we're pleased to have retained a significant portion of the market share gains that we achieved following last year's competitive closures. Our two-year stacked quarterly same-store sales growth for third quarter was 3.8%.

We're also pleased to deliver our fifth consecutive quarter of improved merchandise margins in a highly promotional environment. Now, I'll comment on sales for the third quarter. We generated net sales of $270.5 million, down 3.1% from 279 million for the third quarter of fiscal 2016.

Same-store sales decreased 2.9% from the third quarter of 2016 and same-store sales increased 6.8% following the competitive store closures in our market.

Sales from the third quarter of this reflects a small benefit from the calendar shift of the Fourth of July holiday further into the third quarter, which resulted in certain holiday related sales moving from the second quarter to the third quarter. We estimate this shift benefited same-store sales for the quarter by approximately 50 basis points.

We experienced a low mid single digit decrease in the number of customer transaction, a low single digit increase in our average sales during the third quarter versus the prior year period.

In terms of the sales cadence, early in the quarter we fully cycled last year's competitive store closures, while we also were phasing the new competitive store openings that I mentioned. We comped slightly down in July and comped down to mid-single digits in August, as sales were further challenged by unfavorable weather comparison.

In September, same-store sales were down in the low single digit range. From a product category standpoint, our hardgoods category's comped down in the mid single digit, with the majority of the shortfall resulted from reduced demand for firearm related products through alpha period compared to the prior year.

As a reminder, last year firearm related sales surged following the Orlando night club shooting in June of 2016 and remained strong through the November Presidential election. Same-store sales in both our apparel and footwear categories comped slightly down.

We were particularly pleased where we gained the vast majority of the market share gains we had achieved in the apparel category, which comped up in the low double digit range for the third quarter of 2016.

Additionally, despite highly promotional retail environment, our merchandise margins for the quarter increased by 51 basis points from the prior year, benefiting from favourable sales mixed shifts towards the higher margin products such apparel and away from lower margin products such as firearm and ammunition.

Now, commenting on store activity, during the third quarter we closed one store, ending the period with 432 stores in operation. We plan to open three new stores during the fourth quarter, which would result in six stores openings for the 2017 full year and along with the three foreclosures with give us a year-end store count of 435.

Now, turning to current trends, we're currently comping down in the low mid single digit for the fourth quarter to date, as we have been impacted by slow start to fall weather related product sales, as a result of materially warmer weather in our key markets as well as continued reduced demand for firearm related products compared to last year.

As a remainder, last year October was our strongest month of the quarter on a comp basis, with same-store sales up in the high single digit range over 2015. We comped up in the low single digit range for both November and December of last year.

So while our same-store sales for the quarter to date are down in the low mid single digit range, our two-year stacked comp continued to be very positive. Of course the key to the fourth quarter will revolve around the holidays and be heavily influenced by winter weather condition.

We certainly anticipate another challenging and highly promotional retail environment over the holiday season.

The holiday spending and winter weather conditions at our markets are difficult to predict, we feel well positioned from an inventory and marketing standpoint to drive sales by leveraging the unique combination of convenience of value that our stores provide, which we believe continues to resonate strong and rich consumers that it has over 60 years.

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 flow and provide fourth quarter guidance..

Thanks, Steve. Our gross profit margin for the fiscal 2017 third quarter was 32.4% of sales versus 32.2% of sales for the second quarter of fiscal 2016.

The increase in gross margin for the period reflects the 51 basis point improvement in merchandise margins that Steve mentioned partially offset by higher store occupancy expense as a percentage of sales. Our selling and administrative expense as a percentage of sales was 28.6% in the third quarter versus 27.3% in the third quarter of fiscal 2016.

Overall, SG&A expense increased 1.1 million year-over-year due primarily to higher employee labor and benefited related expense and cost related to information technology systems and services. Now looking at our bottom line, we reported net income for the third quarter of 6.0 million or $0.28per diluted share.

This compares to net income in the third quarter of fiscal 2016 of 8.2 million or $0.38 per diluted share including $0.03 per diluted share for store closing costs. Briefly reviewing our 2017 year-to-date results, which based on the strength of our performance during the first half of the year, it's a very positive story.

Net sales for the first nine months were 766.7 million compared to 755.0 million during the first nine months of fiscal 2016. Same-store sales increased 1.6% during the first nine months of fiscal 2017 versus the comparable period last year.

Net income for the period increased by 53% to 14.1 million or $0.65 per diluted share from net income of 9.2 million or $0.42 per diluted share including $0.07 per diluted share of charges for store closing costs and a write-off of deferred tax assets related to share-based compensation for the first nine months of last year.

Turning to our balance sheet, our chain-wide inventory was 309.3 million at the end of the third quarter, up 6.7% from the third quarter of fiscal 2016, when chain-wide inventory was down 9.0% from the third quarter of 2015.

As we discussed previously, 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.

We feel comfortable with our inventory assortment heading through the winter and holiday shopping season.

Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled 11.4 million for the first nine months of fiscal 2017, primarily reflecting investment in store related remodelling, and new stores, IT systems in our distributor centre.

We expect capital expenditures for fiscal 2017, excluding non-cash acquisitions of approximately 16 million to 20 million.

From a cash flow perspective, our operating cash flow was a negative 5.6 million for the first nine months of fiscal 2017 compared to a positive 55 million last year, largely due to increased funding of merchandise inventory purchases and the timing of payment.

For the third quarter, we also paid our quarterly cash dividend of $0.15 and we repurchased shares. We are still into our share repurchase program. We've repurchased 666,609 shares of our common stock for total expenditure of 6.8 million during the third quarter.

For the year-to-date period to the end of the third quarter we have repurchased 677,109 shares for a total expenditure of 6.9 million. As of October 1, we had 16.5 million available for future repurchases under our 25 million share repurchase program.

Consistent with our past strategy, we will continue to evaluate the best use of our cash whether it's for reinvesting in the company, dividends, stock buybacks or paying down our debt.

Our long-term revolving credit borrowings at the end of the third quarter was 46.4 million, which was up 22.9 million at the end of the third quarter last year and up from 10 million at the end of fiscal 2016.

Our higher debt levels primarily reflect the funding of the inventory purchases to support anticipated customer demand as a result of the competitive closures on our market.

I am pleased to note that at the end of the third quarter we amended our existing 140 million credit agreement on favourable terms and extended the maturity date of the agreement to September 29, 2022. Now I'll spend a minute on our guidance.

For the fiscal 2017 fourth quarter, we expect same-store sales to be in the negative low-single digit range and earnings to be in the range of $0.16 to $0.28 per diluted share.

For comparative purposes in the fourth quarter of fiscal 2016, same-store sales increased 3.1% and earnings per diluted share was $0.35 including $0.02 per diluted share for a tax benefit related to share based compensation. Operator we are now ready to turn the call back to you for questions-and-answers..

Thank you. [Operator Instructions] We will take our first question from David Magee with SunTrust. Please go ahead. Dave your line is open, if you can hear me talk..

Hello, can you hear me..

Yeah, we got you David..

Hi, David..

Yeah, you're talking about some mark to margin at the higher shows the ability of merchandise [ph] margin despite a more competitive environment to stay out there?.

Hey Dave, we can't hear - try it out one more time. You are echoing..

Will you repeat the question David, couldn't hear?.

Okay, I'll do..

Much better..

Okay, can you talk about the merchandise margin a little bit in terms of what are some of process there and as you go into next year do you expect further stability in that line..

Well, looking at the third quarter, we think the margins increased 51 basis points, it benefitted from favourable mix shifts with a quarter of the stronger demand for the higher margin apparel products that reduced demands for lower margin firearm related products.

Some less clearance activity helped the margin, our continued effort to leverage vendor partnership consisting within our sector and demand has been enhanced as a result of the comparative rationalization. We are finding that more vendors who want to work with us, they've improved purchase firms all benefiting margin.

So we feel good about the margins, looking forward Barry?.

Yeah, David, our fourth quarter forecast reflects few less margins, down just slightly from the prior year actually.

We are anticipating a more promotional environment, we are also cycling some opportunistic buys that we had in the fourth quarter of last that stems from the competitive closures and we're not giving guidance obviously into 2018 at this time..

Yeah, we should not call our - want to say our margins increased 70 basis points last year in the fourth quarter, so we're up against another tough comp..

What is your sense about just the inventory levels our there at the wholesale level which, doesn't describe this from the glut and causing all the pain right now amongst the retailers.

Are you seeing that carry up from your perspective?.

Well, I think - at the moment I think from an opportunistic wide stand point, from our perspective it's what I would characterize as fairly normal. Not two out of the ordinary, it's certainly not the level we saw last year following the competitor rationalization and that was a bit of an outlier year.

We faced some of the softness that we are seeing and hearing about in the retail environment, could perhaps lead to more opportunities from the horizons and we are certainly positioned from an inventory and financial condition to take advantage of these opportunities as they arrive..

Thanks Steve and just lastly on - can you comment a little bit about the e-commerce business and what you are seeing there?.

Yeah David, our e-commerce business is continuing to grow nicely. We continue to evolve it and I mean our goal obviously like many and certainly ours is to grow it and make sure it ultimately is accretive to our business.

We are continuing to invest in the business including website efficiency, advanced search functionality, enhance check out and other capabilities. And the sales trends have been positive in e-commerce, but the profitability is clearly not material to our - wasn't material to our 2016 financials and certainly not material to our 2017 financials.

While we anticipate a healthy improvement in e-commerce sales from the prior year, we still don't anticipate e-commerce to be material to our 2017 sales or profitability.

We continue the testing all of the e-commerce business model and hopefully - in addition to being accretive just trying to make sure that we are providing a meaningful shopping channel for our customers..

Alight, thanks Barry. Good luck, guys..

Thank you..

[Operator Instructions] We will take our next question from Mike Baker with Deutsche Bank..

Hi, thanks.

Just wondering when - in the past we've had a competitor like Dick's move into the market, how is that typically - what is the magnitude of the impact and how long has that impact lasted to your business?.

Well the magnitude varies depending on the type of markets they're moving into and generally the - how long it last is, typically we feel a pain for a year as we tackle the competition, I mean in this case - what's unanticipated that Dick's came back into - it's about 10% of the Sports Authority stores that closed in our market and so we had the benefit of the gain for the period of time that Sports Authority was out of business and now as anticipated we're feeling - given back much of that gain in those particular stores with Dick's taking the property over..

Okay, so makes sense. And then just one other sort of bigger picture question, there have been some signs of - some big signs of slowdown in this space.

You guys are holding in pretty well against tough comparison, but how much do you think these space is shifting, in fact the generally slowing demand, consumers not as interested in athleisure as they were in the past versus maybe a shear shift I think with just [shopping more from vendor direction, as you know all the big vendors are talking more and more about selling more directly to consumer.

So a few other retailers are being hurt by some combination of those two factors and probably a little bit of both, I'm just wondering how you guys see it?.

As far as that part's out there, the various factors - yeah we feel our business is pretty, pretty, pretty solid. From the - I think the industry is hurting right now, the sector to some degree from a lack of innovation, some freshness to stimulate the sector as a whole.

I think the demand for our stream is still pretty stable, with the type of environment. I am not sure if the overall - the health of the consumer is all that we would like to be on - as a whole we feel the businesses is solid although certainly challenging..

Okay, I appreciate the comments. Thanks..

That does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Miller for any additional or closing remarks..

All right, we appreciate you listen to our call today. And wish you all well and look forward to speak to you on our next call. Take care..

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