Good day, ladies and gentlemen. Welcome to the Big 5 Sporting Goods Third Quarter 2020 Earnings Results 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 2020 third quarter conference call. Today, we will review our financial results for the third quarter of fiscal 2020 as well as provide an outlook for the fourth quarter. .

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. I am pleased to report remarkably strong third quarter results along with continued sales and margin momentum through the first month of our fourth quarter. From both a sales and earnings standpoint our third quarter performance was by far the strongest of any quarter in our history.

With so many people looking to stay healthy and active in the current environment, our recent sales have benefited tremendously from recreational trends, which corresponds nicely with our product mix. We have seen exceptional sales strength across a broad array of our home fitness and outdoor recreational product categories. .

While we recognize that these surges in demand have been truly extraordinary and are unlikely to continue at this level indefinitely, we do believe that the ongoing consumer shift favoring fitness and recreation should benefit our business in the long run.

Along with the sales and margin strength, our bottom line results reflect adjustments to our cost structure that are producing significant operating leverage. .

Our success driving sales with reduced operating costs has substantially strengthened our balance sheet. Over the course of the third quarter, we have fully paid down our revolving debt, and we had a cash balance of nearly $56 million at the end of the quarter.

This is the first time in our history as a publicly traded company that we have operated with 0 debt. .

Reflecting this balance sheet strength, our Board of Directors has authorized an increase in our regularly quarterly cash dividend to double the prior rate from $0.05 to $0.10 per share. .

Now I'll take a few moments to touch on our third quarter results and then provide some color on our fourth quarter to date. Net sales for the fiscal 2020 third quarter were $305 million compared to net sales of $266.2 million for the third quarter of fiscal 2019.

Same-store sales increased 14.8% for the third quarter of fiscal 2020 compared to a 0.3% increase for the third quarter of fiscal 2019. Our sales strength was broad-based across our geographic markets. .

Looking at the rollout of the quarter, as previously reported, our same-store sales were up 31.9% for July. We then were up 7.9% in August and 5.9% in September. We achieved these sales increases in August and September despite extraordinary headwinds in our team sports and back-to-school related categories as a result of COVID-19.

Sales of team sports products were negatively impacted by widespread suspensions and cancellation of league season, and the shift to virtual schooling across the vast majority of our market led to weak back-to-school related sales. .

Although sales of team sports products were down significantly year-over-year throughout the quarter, the drag was more pronounced in August and September. Excluding team sports product, our comp sales would have exceeded 20% in August and in September.

Additionally, sales in late August and in September were negatively impacted by widespread wildfires throughout our western markets, which caused poor air quality that limited outdoor activity. .

From a product category standpoint, same-store sales in our hard goods category increased nearly 40% for the quarter, driven by extraordinary demand for products related to home fitness and outdoor recreation. Additionally, sales reflect strong demand for firearms-related products. .

Same-store sales for our apparel category decreased in the high single digits, and our footwear category decreased in the high teens. The entire decrease in our apparel category was attributable to weak sales of team sports apparel.

Similarly, lack of team sports activities significantly impacted sales of cleated footwear, which accounted for most of the decrease in overall footwear sales. Footwear was also impacted by weak back-to-school sales. .

On a year-over-year basis, we experienced a significant increase in our average sales driven by increases both in the number of units per sale and in the average price per unit, which was partially offset by a mid-single-digit decrease in customer transactions.

We also achieved a remarkable expansion of our merchandise margins in the third quarter, increasing 277 basis points compared to the third quarter of 2019 when margins were up 94 basis points over the prior year period. A reduction in promotional activity along with favorable product mix shifts were the key drivers of the margin gains. .

Looking at the fourth quarter, we are off to a strong start with sales increasing 15.1% for our fiscal October period, which ended this past Sunday. We are also seeing strong quarter-to-date merchandise margins, reflecting a continuation of recent trends. .

Similar to the third quarter, our sales strength has been broad-based throughout our geographic markets, with virtually all the categories that performed well in the third quarter continuing to perform at elevated levels.

Additionally, although team sports products continued to run below last year in fourth quarter, they are down to a lesser degree than they were in the third quarter, in part because some of our markets are seeing a resumption of organized team sports.

I should also note that our team sports categories comp against much smaller numbers in the fourth quarter as opposed to the third, so they represent a smaller impact to the period. .

While we are certainly pleased with our start to the quarter, as we transition to our seasonal product assortment for the upcoming winter and holiday season, we are mindful that in a typical year, the key to a successful fourth quarter revolves around holiday spending and the start of the winter season.

Although we believe we are well positioned for the balance of the quarter, we certainly recognize that this has been anything but a typical year.

Looking forward, there are a number of factors that can impact our results positively or negatively, the largest of which is likely to be how the COVID pandemic plays out over the period, particularly as it impacts demand for outdoor recreation as well as holiday gifting.

And as always, winter weather, which has a major impact in our business, is unpredictable. .

All that said, we are excited about our merchandise assortments. And as we have done all year, we are approaching the remainder of the quarter prepared to make adjustments as necessary. And we will once again be ready to capitalize on any potential upside opportunities that might arise. .

Stepping back for a moment, I want to express how extremely proud I am of how the entire Big 5 team has adapted to rapidly changing circumstances this year and enabled us to perform so strongly in this environment.

Our team has confronted the challenges and made key strategic and operating decisions designed to capitalize on the tremendous strength of our model. Clearly, customers are recognizing our stores as a convenient place to shop and fulfill their needs.

I'm confident that our team's dedication and experience, which has been critical to our success to date, will continue to serve us well moving forward. .

I will now turn it over to Barry to provide more information about the third quarter as well as speak to our balance sheet, earnings and fourth quarter guidance. .

Thanks, Steve. .

Gross profit for the fiscal 2020 third quarter was $110 million compared to $86 million in the third quarter of the prior year. Our gross profit margin was 36.1% in the fiscal 2020 third quarter compared to 32.3% in the third quarter of last year.

The increase in gross profit margin largely reflects the higher merchandise margins that Steve discussed, which increased 277 basis points versus the prior year period.

The gross profit margin improvement also reflects reduced store occupancy and warehousing costs as a percentage of sales, partially offset by lower distribution costs capitalized in inventory for the quarter. .

Selling and administrative expense decreased $5.6 million in the fiscal 2020 third quarter versus the prior year period, primarily due to lower advertising expense and lower employee labor expense reflecting reduced store operating hours during the period.

As a percentage of net sales, selling and administrative expense decreased to 23.4% from 28.9% in the prior year as a result of our cost containment measures and higher sales volume in the third quarter. .

Now looking at our bottom line, net income for the third quarter of fiscal 2020 increased a healthy 344% to $28.4 million or $1.31 per diluted share, from net income of $6.4 million or $0.30 per diluted share in the third quarter of fiscal 2019. .

Now briefly reviewing our 2020 year-to-date results through the third quarter. As a reminder, our results include the impact of pandemic-related store closures during the first and second quarters. .

Net sales were $750.6 million compared to net sales of $752.4 million in the first 9 months of last year. Same-store sales increased 0.4% in the first 9 months of 2020 versus the comparable prior year period. .

Year-to-date net income through the third quarter of fiscal 2020 was $34.9 million or $1.63 per diluted share, including a $0.13 per diluted share net benefit recorded in the second quarter related to rent abatement savings and a recovery in eminent domain litigation, partially offset by special employee recognition bonus awards.

This compares to net income for the first 9 months of fiscal 2019 of $8.1 million or $0.38 per diluted share, including a $0.02 per diluted share charge for the write-off of deferred tax assets related to share-based compensation. .

Our inventory at the end of the third quarter of fiscal 2020 was down 18% compared to the prior year.

This reduction in inventory was despite the carryover of a significant amount of last season's winter product because of unfavorably warm winter weather and also carrying higher team sports-related inventory due to the delay in suspension of league seasons as a result of COVID-19. .

Our summer seasonal inventory sell-through was excellent, and we should be well positioned with a fresh assortment for next year. For this coming winter season, we believe we have a compelling mix of seasonal merchandise that will help people remain active and healthy.

And we expect our strong value proposition to continue to resonate during a time of economic uncertainties. .

Looking at our capital spending, our CapEx, excluding noncash acquisitions, totaled $5.0 million in the first 9 months of this year, primarily representing investments in store-related remodeling, distribution center investments and computer hardware and software purchases.

After initially scaling back our capital spending in response to COVID-19, we have now resumed our planned capital investments. However, this temporary suspension of capital spending will result in lower-than-normal capital expenditures for the year.

Excluding noncash acquisitions, fiscal 2020 CapEx is expected to be in the range of $6 million to $9 million. .

The combination of very positive trends in sales and margins, expense savings and lower inventory allowed us to generate substantial cash flow for the third quarter. Our cash flow from operations was a positive $136.4 million in the first 9 months of fiscal 2020 compared to a positive $13.7 million in the prior year period.

This strong cash flow generation has translated into further strengthening of our balance sheet.

At the end of the fiscal 2020 third quarter, we had 0 borrowings under our revolving credit facility and cash of $55.7 million, representing a $111.3 million improvement in our net cash position on a year-over-year basis and a $74 million improvement compared to the end of the fiscal 2020 second quarter. .

In consideration of the current strength of the company's business, cash flow and balance sheet, our Board of Directors has declared an increase in our quarterly cash dividend from $0.05 per share of outstanding common stock, to $0.10 per share which will be paid on December 15, 2020 to stockholders of record as of December 1, 2020.

We have a long history of returning value to shareholders, and we are pleased that the strength of our business has provided enhanced financial flexibility and allowed this increase in our dividend. .

As Steve discussed, our positive sales and margin trends have continued into the fourth quarter, with same-store sales for our fiscal October period increasing 15.1%.

We also anticipate a continued benefit during the quarter from certain aspects of our expense reduction initiatives that were implemented in response to the uncertainties surrounding COVID-19. .

These initiatives are contributing to labor expense savings due to reduced store operating hours and advertising expense savings, among other cost reductions. For instance, in October we reduced store operating hours by approximately 10%, which translates into meaningful payroll expense savings.

We are still evaluating the extent to which these expense reductions are sustainable without unduly impacting sales over the long term. But for the fourth quarter, we expect our current lower cost structure to help produce meaningful operating leverage. .

In addition to the more recent cost savings measures implemented in response to COVID-19, we are also benefiting from various other ongoing measures focused on supporting our profitability.

For example, we are pleased with the continued results of our efforts to mitigate wage pressures by reorganizing our store management structure, which has the added benefit of providing additional flexibility in our store labor scheduling. .

Although we are cautiously optimistic that the recent strength in our sales will carry into the holidays and winter season, the uncertainties of these unprecedented circumstances, including any potential impact on consumer spending from stimulus benefits or the elections, uncertainties surrounding consumer demand for the upcoming holiday season, and the potential for increased COVID-19 outbreaks and related shutdowns or other restrictions over the course of the winter, make it unusually difficult for us to forecast the months ahead.

In consideration of the uncertainty in the current environment, for the fourth quarter of fiscal 2020, we are providing wide ranges for sales and earnings guidance. .

So long as conditions relating to the COVID-19 pandemic, including any regulations issued in response to the pandemic or other conditions do not materially impact our ability to continue to operate our stores, we believe it is reasonable to expect same-store sales over the remainder of the fiscal 2020 fourth quarter in the range of minus 5% to plus 5% compared to the same period in fiscal 2019.

Assuming we achieve sales within that range over the remainder of the quarter, we would expect same-store sales for the full fourth quarter of fiscal 2020 to be in the range of flat to plus 7% versus the comparable period in fiscal 2019.

We would also expect earnings per diluted share in the fourth quarter to be in the range of $0.35 to $0.60, which includes an after-tax insurance settlement benefit of approximately $2.1 million or $0.10 per diluted share associated with a fire last year at our Pasadena, California store.

This compares to a same-store sales decrease of 0.6% and earnings per diluted share of $0.02, which included a $0.02 per diluted share charge for asset impairment in the fiscal 2019 fourth quarter. .

Also, as a result of the fiscal calendar, our fourth quarter of fiscal 2020 will include 14 weeks, and the fourth quarter last year included 13 weeks. The same-store sales guidance that I noted earlier reflects comparable 14-week periods. .

Finally, as a reminder, our fourth quarter typically reflects lower quarterly earnings compared to our third quarter due to a combination of seasonally lower sales volumes in the first half of the fourth quarter until the holiday sales period and related promotional environment associated with holiday sales and higher expenses during the holidays for store labor, advertising compared to the third quarter.

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Operator, we are now ready to open it up for questions. .

Our first question is from Mark Smith with Lake Street Capital Markets. .

First one for me, as we look at August and September sales, can you say if you were supply constrained at all with your inventory? And if that had a negative impact?.

Sure. Sure, Mark. Yes. I think we are no different than others. In certain categories, clearly supply did not catch up to demand over the course of the third quarter. And in some categories, it still hasn't caught up. .

So I think fair to say that we were chasing products. I think our team did a phenomenal job of working with our vendors. Lots of experience, great relationships, but it is still very much a chase in a number of categories. .

Okay. And that's kind of my next question is as you look at where you're at today, it sounds like you've carried over some kind of winter apparel and footwear from last year.

But how do you feel about your inventory today and your ability to get kind of resupply of some high-demand items?.

Well, I think we feel good. I mean it's arguably a high-class problem when you're -- we're getting good supplies of the high -- so some of these surge categories, we're selling it, in some cases, almost as quickly as we get it. So that's a high-class problem, and we think we're doing a great job of going after the product. .

In terms of our winter product, I mean we had a -- turned out to be a challenging winter season, the '19/'20 season. It was reasonably solid in the Q4 of '19. And then it was quite dismal, no snow in the first quarter of 2020. So that left us with a pretty hefty winter carryover. .

We've bought around that product and feel that we're in great shape and as we enter the winter season this year, and feel good about the prospects of, all things being equal, of people being as interested to recreate during the winter as they were during the summer outdoors. .

Okay.

And as we look at last year's Q4 and your comp guidance for this year in Q4, can you walk us through kind of the monthly cadence of comps last year in Q4?.

Well, I -- or do you have that? I mean we're -- this year is so distinctly different than last year that... .

Mark, just to remind this. So last year in October, we were up 2%. And in November, we were down 18.1%. .

Which had to do with a shift of the Black Friday holiday. .

And then December, we were up 7.5%. .

Again, shift to Black Friday holiday. .

Okay. No, that makes sense.

And Steve, as we look at team sports in fourth quarter, is there anything that really kind of drives some sales there, basketball or volleyball or anything that kind of drives team sports in Q4?.

Well, I think the upside to this Q4 is that most of the fall sports that drive lots of sales under normal circumstances in Q3, those seasons have been delayed, in some cases perhaps canceled. But lots of schools throughout our markets have postponed the fall sports. There's lots of chatter.

We'll see how it plays out with some of these seasons kicking in, in December and into January. That would be a wonderful scenario for us if there's -- people are driven into our stores right in the heart of the holiday season. .

Under normal circumstances, basketball is kind of coming into prime time in the fourth quarter as football and our primary fall seasons begin to soften. .

Okay. And I think the last one for me, just kind of big picture, the balance sheet looks fantastic here with strong net cash position. You raised the dividend.

Can you talk about other uses of cash as you go forward, potentially putting more investment into unit growth? Or anywhere else where you plan on use of cash?.

Yes, Mark. Well, first and foremost, we're still in the heat of a pandemic. And so we just think it's so critical for us to maintain a strong balance sheet. So that is something that is certainly a priority for us, and we'll continue that on the forefront. .

From an investing in the -- we have -- we have a number of -- there's 4 legs on the stool, right, and we've really been active in all of them in terms of in terms of -- well, certainly we paid down the debt, which is a big plus. We've been investing in the business, the dividend. .

And we also have an active stock buyback program. We have an authorization of $15.3 million. .

When it comes to investing in the business, Steve, did you want to... .

Yes. Mark, in terms of unit growth, for the most part we've never felt that we've been constrained from a capital standpoint to how we've grown our stores. We've grown in a manner that we felt is appropriate for our business. We'll continue to view it that way. .

I think there's certainly potential that from competitive rationalization, from retail space and from a real estate standpoint becoming more available, that could favor us going forward and we'll keep our eye on that.

Certainly, right now we want to sort of play through the pandemic to see how the world normalizes and make appropriate decisions going forward. .

And Mark, of course we announced a doubling of the dividend here in the quarter. And the dividend has been something that our Board has been very focused on for quite some time. And I think it is absolutely very important to our investor base to continue to provide a meaningful dividend. And that's why you saw the increase in the dividend.

And so I think that will be a focus for us. .

Also -- we of course evaluate the best use of our cash on a quarterly basis, if not more often than that. And we're opportunistic, but the dividend is something that's very, very important to our Board. .

Thank you. And that concludes our session and our question-and-answer session. I will now turn the call back over to Mr. Miller for any closing remarks. .

Well, thank you, operator..

In closing, we are extremely pleased with our recent performance and the strong position of our balance sheet. We are excited about the future of Big 5 Sporting Goods. .

We appreciate everyone joining us on today's conference call, and look forward to speaking with you again after the conclusion of the fourth quarter. .

And if I may, I'd like to add, Let's Go, Dodgers. We think it's time to bring a world championship back to Los Angeles. .

Thank you all and have a great afternoon. .

Thank you for joining today's conference. You may now disconnect your lines. Thank you, and have a great day..