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

David Novak – Consumer Edge Mike Baker – Deutsche Bank Adam Sindler – Deutsche Bank.

Good day, ladies and gentlemen, and welcome to the Big 5 Sporting Goods Fourth Quarter Fiscal 2017 Earnings Conference Call. Today's call 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, Operator. Good afternoon, everyone. Welcome to our 2017 fourth quarter conference call. Today, we will review our financial results for the fourth quarter and full year of fiscal 2017 and provide general updates on our business as well as provide guidance for the first 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 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. Our fourth quarter results and first quarter outlook reflect an extraordinarily challenging winter selling season for our business. While much of the country has endured often extreme winter weather conditions over the past few months our western U.S.

markets have experienced significantly warmer than normal weather and one of the driest periods on record. These conditions have severely impacted winter recreation and substantially reduced demand for winter related products in our market. First, I’ll comment on the fourth quarter.

Our fourth quarter net sales were $242.9 million compared to $266.3 million for the fourth quarter of fiscal 2016. Same store sales decreased 9.4% from the fourth quarter of 2016 when same store sales increased 3.1% from the prior year.

We comped down in the low-mid-single digit range in October and comped down in the low-single digit range in November, which included positive same store sales over the Black Friday weekend.

Sales in December were impacted by extraordinarily warm and dry weather conditions across our market, which led to a near nearly 50% decline in sales of cold weather and snow related products in December and overall comps in the negative low double-digit range for the month.

Additionally, the quarter was significantly impacted by continued soft sales of firearm related products. We have experienced a high-single digit decrease in the number of customer transactions and low single digit decrease in our average sale during the fourth quarter versus the prior year period.

This was the first year-over-year quarterly decline in our average ticket in over three years and resulted from the reduced demand for higher ticket winter related and firearm related products during the quarter.

From a product categories standpoint each of our major merchandise categories was significantly affected by the lack of winter weather with our apparel category down in the low-double digit range. Our hard goods category, which also reflects the weakness of firearm related products down in the high-single digit range.

And our footwear category down in the mid-single-digit range. Our merchandise margins for the quarter decreased 126 basis points compared to the fourth quarter of fiscal 2016, when merchandise margins increased by 68 basis points over the prior year period.

The decrease primarily reflects the sales mix shift away from higher margin winter product category as well as an increase in our promotional activity in an effort to drive traffic and sales.

Additionally, we were comping against favorable opportunistic buys during the prior year, that were associated with the competitor closures that occurred during 2016. Now commenting on store activity, during the fourth quarter we opened three stores including one as part of relocation ending the year with 435 stores in operation.

We opened in new markets of Yucaipa, California and La Grande, Oregon and also opened a new store in Fairfield, California as part of a relocation. In the first quarter of 2018, we will not open or close any stores. Our current plans for the 2018 full-year, have us opening approximately eight stores and closing approximately three stores.

Now turning to current trends, as mentioned the unfavorable winter weather conditions in our markets have continued to impact winter product sales comparisons in the first quarter, particularly during January given how well our winter business performed last year.

As a reminder last year January was our strongest month of the quarter comping up softly in the double-digit range on the strength of outstanding winter product sales driven by highly favorable winter weather conditions. This January same store sales decreased in the high-teens as the sales of winter products remained very soft.

Our sales trends have improved each week throughout, February as other non-winter products have become more significant to our overall sales mix. We finally did see the arrival of favorable winter weather in our markets over the past week and our winter product categories have responded very well.

It would have been nice to have had some winter weather earlier in the season but we're certainly happy to have it now. Having said that it's a bit of a double-edged sword at this point in the season, as the winter business does come at some expense to our spring categories.

As we sit here today, we are currently comping down low-double digits for the first quarter to date. And as a reminder sales for our March period last year were strong up high-single digits as we enjoyed favorable weather conditions in our markets with snow in the mountains and dry ball fields.

But while we continue to face tough comparisons to last year we believe our merchandise assortment is well positioned for the spring selling season and early reads are encouraging with strength across a number of non-winter product categories.

Overall, we believe that our inventories are in very good shape, virtually the entire increase in our inventory over the prior year can be attributed to winter related products. We've been through difficult winters before and we know how to efficiently transition the product to the next season and by around it is appropriate.

Fortunately, the product that we will carry over is not fashion and should play well next year and we see little risk for significant mark downs associated with it.

As we move beyond this challenging winter season, we remain focused on providing our customers with the value, selection, service and convenience that are the hallmarks of Big 5 Sporting Goods.

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 first quarter guidance..

Thanks Steve. Our gross profit margin for the fiscal 2017 fourth quarter was 30.0% of sales versus 32.8% of sales for the fourth quarter of fiscal 2016.

The decrease in gross margin for the period primarily reflects the 126 basis point decline in merchandise margins that Steve mentioned, and higher store occupancy and distribution expense as a percentage of sales.

Our selling and administrative expense as a percentage of sales was 33.3% in the fourth quarter versus 28.2% in the fourth quarter of fiscal 2016.

Overall, SG&A expense increased $5.6 million year-over-year due primarily to higher employee labor and benefit-related expense, as well as non-cash impairment charges of $4.4 million for the write-down of goodwill and $0.6 million related to three underperforming stores. Now looking at our bottom line.

Our operating results were in line with the revised guidance we provided in January.

For the quarter, we reported a net loss of $13.0 million, or $0.62 per share, reflecting after-tax charges totaling $10.9 million, or $0.52 per share, comprised of $0.26 per share to revalue existing net deferred tax assets as a result of enactment of the Tax Cuts and Jobs Act in December 2017, $0.21 per share for goodwill impairment, $0.02 per share for asset impairment related to three underperforming stores and $0.03 per share to establish a deferred tax asset valuation allowance.

This compares to net income in the fourth quarter of fiscal 2016 of $7.7 million, or $0.35 per diluted share, including a favorable $0.02 per diluted share for a tax benefit related to share-based compensation. Briefly reviewing our full year fiscal 2017 results, net sales were $1.01 billion, compared to $1.02 billion in fiscal 2016.

Same-store sales decreased 1.2% in fiscal 2017 versus the comparable period last year. Net income for the full year was $1.1 million, or $0.05 per diluted share, reflecting after-tax charges in the fourth quarter totaling $10.9 million, or $0.52 per diluted share, as I previously discussed.

This compares to fiscal 2016 net income of $16.9 million, or $0.77 per diluted share, including $0.05 per diluted share of charges for store closing costs and the net write-off of deferred tax assets related to share-based compensation.

Our effective tax rate for fiscal 2017 was abnormal due to the impact of the new tax legislation recording a noncash nondeductible provision for goodwill impairment and recording a deferred tax asset valuation allowance. Our effective tax rate for fiscal 2018 is expected to be approximately 20%. Turning to the balance sheet.

Our chain-wide inventory was $313.9 million at the end of the fiscal 2017, up 6.7% from the prior year. On a per-store basis, merchandised inventory was up 5.6% versus the prior year, reflecting an increase in winter products as a result of our warm and dry winter.

As Steve mentioned, we are comfortable of reintroducing any winter product carryover next season. We also feel good about our inventory heading into spring.

Looking at our capital spending, our CapEx excluding noncash acquisitions, totaled $16.5 million for fiscal 2017, primarily representing investment in store-related remodeling and new stores, IT systems and our distribution center.

We currently expect capital expenditures for fiscal 2018, excluding noncash acquisition, of approximately $18 million to $22 million. This reflects continued investment in store-related remodeling new stores and IT systems as well as the purchase of a property adjacent to our corporate headquarters that we currently use as a parking area.

From a cash flow perspective.

Our operating cash flow was a negative $4.4 million in fiscal 2017, compared to a positive $73.7 million last year, the decrease in operating cash flow primarily reflects increased funding of merchandise inventory purchases, reduced accrued expenses primarily for income taxes, increased prepaid expenses mainly for income taxes and rent to accelerate our deduction under the new tax law and lower net income in fiscal 2017.

For the fourth quarter, we paid our quarterly cash dividend of $0.15 per share and we continue to repurchase shares. Pursuant to our share repurchase program, we repurchased 118,609 shares of our common stock for a total expenditure of $0.8 million during the fourth quarter.

In fiscal 2017, we repurchased 795,718 shares for a total expenditure of $7.7 million. As of December 31, we had $15.7 million available for future repurchases under our $25 million share repurchase program.

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

Our long-term revolving credit borrowings at the end of the year were $45 million, which was up from $10 million at the end of fiscal 2016, below our average year-end borrowings over the past five years. Our higher debt levels compared to the prior year, primarily reflects higher inventory levels and the timing of payment.

Now I'll spend a minute on our guidance. For the fiscal 2018 first quarter, we expect same-store sales to be in the negative high single-digit range and loss per share to be in the range of $0.06 to $0.14.

First quarter guidance reflects an anticipated small negative impact as a result of the calendar shift of the Easter holiday, during which our stores are closed, out of the second quarter of fiscal 2017 and into the first quarter of fiscal 2018.

For comparative purposes in the first quarter of fiscal 2017, same-store sales increased 7.9% and earnings per diluted share were $0.24. Operator, we're now ready to turn the call back to you for questions and answers..

Thank you. [Operator Instructions] We’ll first go to David Novak from Consumer Edge..

Hi, good afternoon. It’s Dave Novak on for Dave Schick. Just a question here.

Can you talk about what you're seeing from a wage pressure standpoint right now? Do you anticipate that sort of shifting this year as other retailers have kind of announced some reinvestment into benefits and wages?.

Well, we're certainly experiencing wage pressure. As example in California, they previously approved a $2 increase in the state's minimum wage from $8 to $10. The increase was rolled out into two separate increments with the first dollar increase effective July 1, 2014 and the second in January 2016.

And then recently approved another $5 increase in the state's minimum wage from $10 to $15. And this increase is being rolled out increments through 2022. In 2017 there was an increase of $0.50 and then effect of January 1, 2018 there was another $0.50 increase in minimum wage, and then that increases again for 2019 through 2022 $1 a year.

So there's certainly – and it's not just California it's really throughout many of our states that are being impacted and the effect is it's certainly pretty significant on our business. It represents an increase of about $600,000 to $700,000 per quarter in our store employee wages year-over-year.

In terms of the tax savings that we might get if you're referring to the tax rate savings here on the federal side going from 35% to 21%, some of that benefit of that tax savings is going to go toward investing in the business.

We've stepped up our CapEx in 2018 are expected to in 2018 to approximately $18 million to $22 million from $16.5 million in 2017.

On beyond these plans we will continue to evaluate the best use of our cash at any point in time whether it's for investing further in the business, new stores, remodeling inventory, those kinds of things or paying dividends, repurchasing stocks or paying down our debt just like we always do..

Great, that’s helpful. Thank you..

Thank you..

And we will now take a question from Mike Baker from Deutsche Bank..

Hi, thanks guys. In the past since the last quarter or two you talked about some competitive openings in your markets. I think Dick's is opening some stores in California. Can you talk about what impact that may have had on your business at all or any other impacts outside the weather? Thank you..

Sure. I think we've faced perhaps greater than normal rate of competitive openings this year as Dick's came in and just as we anticipated a number of the former Sports Authority locations in our market. So we’re probably facing about 25 Dick's openings I think 15, 16 of them are related to Sports Authority.

So that certainly has some impact on the business. We will and believe that we will be cycling a number of these openings and far more openings that we will be facing over the course of the year. So we think as the year plays out we will be operating in a more rational competitive environment..

Okay.

And then to follow-up on that, I believe about 50%, a little north of 50% of your stores here in California, but I guess all your stores are in that general region out West, but was there any difference in your sales relative to stores that were outside of California?.

Well, there are certainly variances amongst the various states. California certainly felt the probably greatest impact from the weather from a geography standpoint that we faced. All states were impacted. We now have a number of states performing positively outside of winter product in the first quarter.

But all in all California also felt a little more impact from the firearms sales due to state specific legislation that was asked in the end of 2016..

Understood. If I could slide in one more I think there’s some changes, I use baseball bat regulation. Can you talk about if you play in that market at all and if that has any impact on your business? Thanks..

Indeed it does. Our baseball business has performed originally well for us so far in Q1 and certainly we like I think others in the industry are benefiting from a change in bat regulations of really pertaining to used leaf. So we're certainly seeing a pick up in the baseball bat business..

Okay. Thanks, guys, I appreciate the color..

Thank you, Michael..

And we’ll now go to Adam Sindler from Deutsche Bank..

Hi, guys. I didn’t know the mic was on. All my questions are asked. Thanks..

Okay..

Thank you. And that is all the time we have for questions today. I'll turn the conference back over to management for any additional or closing remarks..

All right, we thank you for being on the call today and we look forward to speaking to you in our next call. Have a great afternoon..

This concludes today's presentation. Thank you for your participation..