Welcome to Big 5 Sporting Goods Second Quarter 2018 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 sir..

Thank you, Operator. Good afternoon, everyone. Welcome to our 2018 second quarter conference call. Today, we will review our financial results for the second quarter of fiscal 2018 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 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. Although we comped possibly over the first of the period, our sales softened significantly over the back half of the quarter which led to results that were below our expectation.

Much of the softness resulted from weak sales of camping and water sports products which were negatively impacted by unfavorable weather conditions in our key markets around the high-volume selling periods with Memorial Day, Father's Day and the start of summer.

Although our traffic and topline were challenged, we delivered improved merchandise margins for the period and we are pleased to report that positive sales trends have returned during the third quarter. We’ll talk more about current trends in a moment, but first I will comment on the second quarter.

Net sales were $240 million compared to $243.7 million for the second quarter of fiscal 2017. Same-store sales decreased 2.1% from the second quarter of last year and same-store sales increased 0.9% from the second quarter of 2016.

In terms of how the quarter rolled out, we comped up in the low single-digit range in April which included the benefit of the Easter calendar shift. However, sales were in the negative low single-digit range in May and sales in June were the negative mid-single-digit range.

We were disappointed with the softness over the back half of the quarter given that during this period of last year many of our markets experienced campground closures due to unusually high water flows in rivers resulting from the extraordinary snow pack from the prior winter.

With the return of more normal water levels this year, we believe we were well-positioned to comp positively on our camping and water sports products. Unfortunately, that opportunity was negated by unfavorable weather in our key markets during the peak summer selling periods of the second quarter.

Additionally, June sales were negatively impacted by the shift of 4th of July further into the third quarter this year. Overall for the quarter, we experienced a mid-single digit decrease in the number of customer transactions, a low single-digit increase in our average sales versus the prior year period.

From a product category standpoint, apparel was up in the low single-digit range for the quarter, footwear was down low single-digit and hard goods were down in the low mid-single digit range. The softness in hard goods reflected the weakness in camping and water sports products along with continued softness in firearm related products.

Our merchandise margins for the quarter increased 42 basis points compared to second quarter of fiscal 2017 when merchandise margins increased by 37 basis points over the prior year period.

The increase primarily reflected the sales mix shift towards certain higher margin apparel products and away from low margin products such as firearm, as well as a reduction in our promotional activity due in parts to the timing shift of 4th July holiday.

Now commenting on store activity, during the second quarter we opened two stores San Ysidro, California and Gilroy, California and closed two stores including one related to a relocation. We ended the quarter with 435 stores in operation. In the third quarter, we plan to open one store.

Our current plans for the 2018 full year have us opening approximately five stores and closing approximately three stores. Turning now to the third quarter, we are currently comping in the positive low single-digit range for third quarter to-date on the strength of summer product sales and a benefit from the calendar shift of the 4th July holiday.

Weather conditions are a major geographies turned favorable following the 4th of July holiday, and with that we saw the summer recreational categories that suffered in the back half of the second quarter responded very positively.

Looking at the balance of the quarter, we believe our product assortment is well positioned for the remainder of the summer along with the back-to-school and fall sports season. As always, we remain focused in evolving our model to adapt to the shifting retail environment.

Our efforts include enhancing our digital marketing program aligning our product mix and inventory levels with consumer trends, managing our expenses and improving the in-store experience. We remain committed to delivering to our customers the optimal mix of value, selection, service and convenience.

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 2018 second quarter was 31.4% of sales versus 32.5% of sales for the second quarter of fiscal quarter 2017.

The decrease in gross margin for the period primarily reflects higher distribution and occupancy expense as a percentage of sales partially offset by the 42 basis point improvement in merchandise margins that Steve mentioned.

Our selling and administrative expense as a percentage of sales was 31.1% in the second quarter versus 30.4% in the second quarter of fiscal 2017. Overall SG&A expense increased 0.5 million year-over-year due primarily to a higher employee labor and benefit-related expense partially offset by lower advertising expense.

Now looking at our bottom line for the second quarter we reported a net loss of $0.2 million or $0.01 per share. This compares to net income in the second quarter of fiscal 2017 of $2.8 million or $0.13 per diluted share.

Briefly reviewing our 2018 first half result, net sales were $474.1 million compared to net sales of $496.3 million during the first six months of fiscal 2017. Same-store sales decreased 4.9% during the first half of fiscal 2018 versus the comparable period last year.

Net loss for the period was $1.6 million or $0.07 per share including $0.01 per share of charges for the write-off of deferred tax assets related to share-based compensation. This compares to net income of $8.1 million or $0.37 per diluted share in the first half of last year.

Turning to the balance sheet, our chain wide inventory was $345.6 million at the end of the second quarter compared to $328.7 million last year. On a per store basis, merchandise inventory was up 3.3% versus the prior year.

The increase primarily reflected the carryover of winter related products following the unfavorable warm and dry winter selling season which we have discussed on prior calls.

As we have done successfully in prior years with unfavorable winter weather, we plan to reintroduce this winter product carryover next season and we see little markdown risk associated with it. We would expect to right-size our merchandise inventory levels as buy around this carryover product for the upcoming winter season.

Looking at our capital spending, our CapEx excluding noncash acquisition totaled $5.2 million for the first half of 2018 primarily representing investment in new stores and store-related remodeling, IT systems and our distribution center.

We currently expect capital expenditures for fiscal 2018 excluding noncash acquisition of approximately $14 million to $18 million.

This reflects continued investment in new store, store-related remodeling, our distribution center and IT system, as well as the purchase of a property adjacent to our corporate headquarters, a portion of which we currently use to support our headquarters' operation.

From a cash flow perspective, our operating cash flow was a negative $21.9 million for the first half of fiscal 2018 compared to a negative $19.4 million last year. The decrease in operating cash flow primarily reflects the decrease in income compared to the same period last year.

Our long-term revolving credit borrowings at the end of the second quarter were $90.7 million which compared to borrowings of $47.9 million at the end of the second quarter last year.

Our higher debt compared to the prior year in part reflects our higher inventory levels as a result of the lower than anticipated demand for winter related products following the unseasonably warm winter in our Western markets. Now I’ll spend a minute on our guidance.

For the fiscal 2018 third quarter we expect same-store sales to be in the flat to positive low single-digit range and earnings per diluted share to be in the range of $0.14 to $0.24. In the third quarter of fiscal 2017, same-store sales decreased 2.9% and earnings per diluted share were $0.28.

Third quarter guidance reflects a small sale benefit as a result of the calendar shift of the July 4 holiday further into the third quarter partially offset by lower merchandise margin also related to promotion for the holiday.

Compared to the prior year, third quarter guidance also reflects higher selling and administrative expense primarily from labor and benefit-related costs along with higher distribution and store occupancy expense. Operator, we are now ready to turn the call back to you for questions-and-answers.

[Operator Instructions] We'll hear from Mike Baker with Deutsche Bank..

I was just - two questions, one how much of the rebound in up to low single-digit in July is because of the holiday shift. You said there was a small sales shift in the full quarter guidance. But I’m just wondering how much of that low single-digit increase in July is because of that shift.

And then second question, can you discuss a competitive environment at all - what you’re seeing from competitors. Are they being more or less promotional or I guess you vendors how they’re acting, are they being more competitive with their retail customers et cetera. Thanks..

In terms of your first question, we certainly received a benefit due to the calendar shift irrespective of the benefit to remove what we believe to be the benefit we would still be comping in the low single-digit range for the period to-date.

As far as the competitive environment, I think it's - in terms of new stores I think we’re in a point now where we feel good looking forward that we’re going to be slightly more competitive in opening than we would be facing on the surface of it.

In terms of the marketplace, I think it's been reasonably promotional in our sector which may or may not be reflected with some general softness out there..

I guess a follow-up on that, can you characterize inventory levels.

We know your inventory levels obviously but what are you seeing from competitors, it sounds like you are seeing it - be a little bit more promotional, is that in your mind a reflection of higher inventories from competitors?.

I mean I’m not sure that I can speak definitively to competitor inventory levels, I would be pretty granular details just to speak, I don’t know if I see wholesale differences in inventory levels out there..

[Operator Instructions] We’ll go to David Schick with Consumer Edge Research. Mr. Schick your line is open. Please check your mute button..

This is Dave Novak on for Dave Schick, thanks for taking our questions. Can you give more color on how firearms performed during the quarter? Obviously you mentioned the business was soft.

Just kind of looking to see what your outlook on that business is in the back half seems like the compares are pretty easy just trying to see if you're seeing any improvement there in 3Q or anticipating any improvement in the back half?.

Yes, we’re not just - the trends within - for Q3. We think the category is still soft - feel soft to us. At a short run for eight plus years it’s been trending softly over the last couple of years. I'm not sure we still found the bottom certainly the impact to our business is significantly less than what it was over the past years.

And as you suggested because of the comp become softer but favorable to us over the back half of the year but we’re still looking to establish a bond for the category..

And just two quick follow-ups, can you talk about the performance of e-commerce during the quarter and are you seeing any impact far from wildfires in your California market? Thanks..

Yes, I mean our e-commerce business is growing steadily. We’re pleased with the growth of e-commerce. Again our goal is to grow our - e-commerce business profitably. We still think that the key for us is the convenient of our brick-and-mortar stores. We continue to invest in the e-commerce business.

We’re adding and more products and more functionality at the website. And again as I mentioned it's growing, it’s growing well but of a relatively small base. So we don't - our e-commerce business wasn't material to our overall operating results for 2017 and we don't being material to our results for 2018.

We hope that we’ll be able to again just continue to provide a reasonable sales count to our customers..

Then the second half of your question about the wildfires, so first and foremost our thoughts go out to those that are impacted in the affected areas.

We do have - we operate several stores that are clearly in the areas of the fires and it felt some - that was some impact to those stores not physically in terms of the store location, but just in terms of traffic flows.

Some of our folks have been impacted in their ability in their own issues with their own residences and we have tried to shorten hours in certain areas just given the local position. So we certainly monitor that and hope that the situation improves going forward..

And now I like to turn the floor back over to Mr. Miller for any additional or closing remarks..

All right, we thank you for your interest and I look forward to speaking to you at our next call. Have a great afternoon..

Thank you. Ladies and gentlemen again that does concludes today's conference. Thank you all again for your participation. You may now disconnect..