Steven Miller - Chairman, President & CEO Barry Emerson - SVP, CFO & Treasurer.

David Schick - Consumer Edge Research.

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Big 5 Sporting Goods Third 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'd like to turn the conference over to Mr. Miller. Please go ahead, sir..

Thank you, Operator. Good afternoon, everyone. Welcome to our 2018 Third Quarter Conference Call. Today, we will review our financial results for the third quarter of fiscal 2018 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 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 the third quarter started with solid sales in July, and we ultimately achieved earnings within our guidance range for the quarter, sales in August and September turned negative and were below expectations.

While our sales performance was disappointing, we effectively managed both product margins and expenses during the quarter while making significant progress toward rightsizing our inventory levels.

We certainly recognized that successfully navigating the challenges of operating in the current retail environment requires that we closely examine all aspects of our business, and as part of this ongoing process, we are testing and implementing initiatives across our organization in effort to improve our operating result.

We will talk more about these initiatives and the current period in a moment. But first, I will provide some color around our third quarter operating results. Net sales were $266.4 million compared to $270.5 million for the third quarter of fiscal 2017. Same-store sales decreased 2% from the third quarter of last year.

Overall for the quarter, we experienced a low single-digit decrease in the number of customer transactions, a low single-digit increase in our average sale versus the prior-year period. From a product category standpoint, apparel performed positively, up in the low single-digit range for the third quarter.

Our footwork category was below expectations, comping down mid-single digits, primarily due to softness in our core athletic footwear assortment. Our casual and lifestyle footwear assortments performed well, but their strength was not enough to offset the weakness athletic footwear. Our hardgoods category was down in the low single-digit range.

Although many hardgood areas performed positively in the third quarter, the overall category was driven down by the adverse impact that widespread wildfires had on sales of our summer products in California and other markets, which experienced severely impacted air quality, which limited outdoor activities.

Additionally, we continued to experience softness in the firearms-related products during the period. Our merchandise margins for the quarter decreased 10 basis points compared to the third quarter of fiscal 2017, when merchandise margins increased by 51 basis points over the prior-year period. Now commenting on store activity.

During the third quarter, we opened one store in Gilroy, California and ended the quarter with 436 stores in operation. We plan to open one additional store in the fourth quarter, which will bring us to four store openings and two closures for the 2018 full year for a total of 437 stores at year-end. Turning now to the fourth quarter.

We are currently comping in the negative low single-digit range for the fourth quarter to date. October is our lowest-volume month of the year, and our sales have been impacted, in part, by a planned reduction in our advertising in October compared to last year and in effort to optimize our ad spend.

As always, the key to a successful fourth quarter will revolve around holiday spending in the start of the winter season. We anticipate that the retail environment will, once again, be highly promotional over the holiday season.

And of course, winter product sales are heavily influenced by winter weather conditions, which are always difficult to predict. As a reminder, last year, winter weather conditions in our markets were highly unfavorable. So we feel there is good opportunity for year-over-year improvement if the weather cooperates this year.

Looking at the fourth quarter and beyond, we are focusing a number of initiatives that we believe can help drive improved performance in our business as we navigate the evolving retail environment. From a product standpoint, we are accelerating the pace of change within our assortment.

This includes downsizing certain product categories to position us to be more aggressive in pursuing product opportunities that we believe have higher growth potential. In some areas, we are narrowing the overall assortment while increasing the depth of certain key selling SKUs.

And as always, we are aggressively pursuing [indiscernible] that we believe will drive traffic and profitable sales and allow us to reinforce our value proposition, which helps differentiate us from the field. We are testing pricing strategies to be more responsive to an increasingly promotional competitive retail environment.

Of course, our goal is to achieve the optimal balance between driving sales and maintaining margins that are healthy for our business. We are adjusting our advertising cadence and structure to allow more flexibility to diversify our marketing message across our print and digital platforms.

This includes shifting a greater proportion of our marketing budget from print to digital programs and testing a number of digital marketing channels. We are encouraged by recent successes achieved through our digital marketing efforts, and we are expanding their scale in an effort to drive traffic and sales.

With our new POS system now in place, we are expanding our customer relationship management capabilities, which should provide enhanced customer analytics and improve the effectiveness of our marketing efforts.

While we have always prided ourselves on operating our business with great efficiency, we are continuing to look for cost reduction opportunities throughout our organization.

A key focus is our effort to mitigate the significant wage pressures that we are experiencing across our chain, and we are encouraged by the results we have achieved with recent test of alternative store staffing models. Additionally, we continue to aggressively manage store occupancy costs through negotiating rent reductions across our store base.

As part of our efforts to manage our assets and capital structure in light of the sales-related challenges we have experienced, today we announce the reduction of our quarterly dividend, which we believe, is a prudent step to help ensure that we maintain a healthy financial condition and the flexibility to invest concurrently in our business.

As we work to implement our operational and expense reduction initiatives, we will continue to look for other opportunities throughout our business to accelerate our performance and improve our operating result.

We are optimistic that as these enhancements will roll out, we will be better positioned to succeed in the -- this challenging retail environment. Now, I will turn the call over to Barry, who will provide more information about the quarter as well as to speak to our balance sheet, cash flows and provide fourth quarter guidance..

Thanks, Steve. Our gross profit margin for the fiscal 2018 third quarter was 31% of sales versus 32.4% of sales for the third quarter of fiscal 2017.

The decrease in gross margin for the period primarily reflects higher distribution and occupancy expense as a percentage of sales as well as the slight reduction in merchandise margins that Steve mentioned. Our selling and administrative expense as a percentage of sales was 29.2% in the third quarter versus 28.6% in the third quarter of fiscal 2017.

Overall, SG&A expense increased $0.3 million year-over-year, mainly due to higher employee labor and benefit-related expense, partially offset by lower advertising and administrative expense. Now looking at our bottom line. For the third quarter, we reported net income of $3.1 million or $0.15 per diluted share.

This compares to net income in the third quarter of fiscal 2017, a $6.0 million or $0.28 per diluted share. Briefly reviewing our 2018 year-to-date results, net sales were $740.5 million compared to net sales of $766.7 million during the first 9 months of fiscal 2017.

Same-store sales decreased 3.9% during the first 9 months of fiscal 2018, primarily reflecting lower sales of cold-weather winter products in the first quarter. This compares to a 1.7% increase in same-store sales for the comparable period last year.

Net income for the first 9 months of fiscal 2018 was $1.6 million or $0.07 per diluted share, including $0.01 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation. This compares to net income of $14.1 million or $0.65 per diluted share for the first 9 months of fiscal 2017.

Turning to the balance sheet. Our chain-wide inventory was $314.8 million at the end of the third quarter compared to $309.3 million at the end of the third quarter last year.

On a per-store basis, merchandise inventory was up just 0.4% versus the prior year, which compares favorably to our 2017 year-end, when merchandise inventory per store was up 5.6% from 2016, and reflects our ongoing efforts to rightsize inventory levels based on recent sales trends.

As discussed on prior calls, we adjusted our inventory purchases for this season to reflect the winter-related product carryover following the unfavorable warm and dry winter selling season last year.

As we have done successfully in prior years with unfavorable winter weather, we are reintroducing this winter product carryover now, and we see little markdown risk associated with it. Overall, we feel very comfortable with our merchandise inventories and expect the year-end balance to be below the prior year. Looking at our capital spending.

Our CapEx, excluding noncash acquisitions, totaled $8.4 million for the first 9 months of fiscal 2018, primarily representing investments in store-related remodeling and new stores, IT systems and our distribution center.

We currently expect capital expenditures for fiscal 2018, excluding noncash acquisitions, of approximately $15 million to $17 million.

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

From a cash flow perspective, our operating cash flow was a negative $8.1 million for the first 9 months of fiscal 2018 compared to negative $5.6 million during the comparable period last year.

The reduction in operating cash flow primarily reflects the decrease in income compared to the same period last year, partially offset by reduced funding of merchandise inventory.

As Steve mentioned, with the objective of allowing financial flexibility and maintaining a healthy financial condition, our Board of Directors has decided to reduce the company's quarterly cash dividend to $0.05 per share, which compares to the prior quarterly dividend of $0.15 per share.

Our long-term revolving credit borrowings at the end of the third quarter were $83.5 million, which compared to borrowings of $46.4 million at the end of the third quarter last year.

A higher debt compared to the prior year, in part, reflects our higher inventory levels as a result of the winter product carryover from last season that I have already discussed.

As we continue to rightsize our inventory levels during the fourth quarter, we expect debt levels to come down at year-end from where they were at the end of the third quarter. Now I'll spend a minute on our guidance.

For the fiscal 2018 fourth quarter, we expect same-store sales to be in the range of negative low single digits to positive low single digits, and we expect to realize a loss per share in the range of $0.15 to $0.25.

For comparison purposes, in the fourth quarter of fiscal 2017, same-store sales declined 9.2%, reflecting unfavorable warm and dry winter weather conditions during the period.

Earnings per share for the fourth quarter of fiscal 2017 was a loss of $0.62 per share, which included $0.52 per share of charges for various items, including enactment of the Tax Cuts and Jobs Act and impairment.

Compared to the prior year, our fourth quarter outlook anticipates higher employee labor and benefit-related expense along with the negative effect of a -- of reduced distribution cost capitalizing the inventory as a result of our efforts to reduce inventory levels. Operator, we're now ready to turn the call back to you for questions..

We'll take our first question from David Schick with Consumer Edge Research..

Let's start with the newness comment that you made. It's clear across categories, applies to sporting goods as well. Consumers moving quickly, jumping around, you said you're going to, kind of, go after that or recognize that.

Can you give an example of where you're going to be shrinking the breadth of inventory? And where you're going to be trying to go?.

I'm sorry, David, you cut out in the start of the question. Can you come with that one more time because I didn't catch at all..

Yes. So newness. You said newness matters, and it does, and you're going to be flipping some selection. And then you talked about depth but also, I imagine, going after some categories where you may not play as much as you would like to.

Could you give us some examples of where you're taking from and going to in categories in the efforts towards newness?.

Yes. I'm not going to be -- just for competitive reasons, overly granular about that, but I mean, we're looking to downsize our commitment to certain categories that are performing softly, examples of that might be our firearms business, invest more aggressively where we feel we have greater opportunity of growth.

We were making adjustments within our footwear offering to take advantage of the strength we're seeing in the casual and lifestyle areas. We're seeing that certain aspects of our product offering are performing very positively.

Some of it -- some of the adjustments and enhancements we're making are digital marketing efforts, and we're going to capitalize with investments in those types of products, again, without being overly granular or detailed. Over the last few quarters, we've seen some more headwinds and tailwinds in certain of our categories.

So our initials are really designed to try and turn some of the areas that are performing softer into areas with spring, which we think can lead to certainly improved results..

Another question is the competitive environment. Anybody doing -- you've talked a lot about external issues, like whether and outdoor participation as a result.

But how about competitive environment out in your market? What are you seeing?.

So I think from a standpoint of brick-and-mortar stores, I think it's a more rational or becoming a more rational environment. We've been cycling.

Some of our openings are just really the process of cycling more than we're facing, a course -- we've -- the news of Sears and what's going on from -- with their chapter -- chapter five, and it'll shake up the competitive environment a little bit, but we're -- certainly sense there's a lot of promotional or aggressive promotional activity that's occurring, some within our sector, and that may speak to some of the general softness that is being experienced.

We are actively testing pricing strategies to be more responsive to an increasingly competitive retail environment, and we are encouraged by much of what we see in those efforts..

Great.

Last question is how do you feel? Would you like to see Manny Machado back as a Dodger? Just any thoughts around the Dodgers really?.

How would we like to see Manny Machado -- you know what, in our prep for this call, we didn't anticipate that question. But I don't think I'm too personally interested in seeing Manny Machado back as a Dodger..

Well, I like Manny Machado. So I guess that helps us offset one another. So..

We're divided..

Yes. You're clearly hedged to Manny Machado. I appreciate that..

And we'll take our next question from Michael Baker with Deutsche Bank..

This is Harrison Livos [ph] on for Mike.

Can you hear me?.

Yes. Go ahead, Harris..

His line has disconnected. And there are no further questions at this time. I'd like to turn it back to Mr. Miller for any closing remarks..

All right. Well, I -- actually -- what happened to the last caller? But we appreciate your interest. And we look forward to speak to you on our next call. Have a great afternoon..

And that concludes today's presentation. We thank you for your participation. You may now disconnect..