Big 5 Sporting Goods Corp. reported earnings rose 4.0 percent in the second quarter on a 1.7 percent comp-store gain. Results were in line with previous guidance but management indicated that drought conditions in its core California markets was continuing to have an impact on sales.
“There's no question that the California market, and some of the neighboring to some element, to some degree areas of Nevada are clearly affected by the drought, the lack of water in the lakes and the rivers,” said Steven Miller, Big 5’s president and CEO, on a conference call with analysts. “No question about that.”
For quarter ended June 30, net sales increased 4.0 percent to $240.4 million.
Gross margins decreased to 32.1 versus 32.7 percent, reflecting a decrease in merchandise margins of 17 basis points.
SG&A expense was trimmed to 30.2 percent of sales versus 30.8 percent a year ago. The overall SG&A increase was due primarily to higher employee labor expense reflecting an increased store count, as well as expenses of $1.1 million related to the company's proxy contest which was settled prior to its annual meeting, partially offset by a decrease in advertising expense. In resolving the proxy contest, Big 5 agreed to add three independent directors to its board.
Net income reached $2.6 million, or 12 cents a share, including 3 cents per share of charges associated with the company's proxy contest, compared to net income of $2.5 million, or 11 cents, including a non-cash impairment charge of 2 cents per share.
In reporting first-quarter results, the company said it expected same-store sales to increase in the low to mid-single-digit range while EPS was expected in the range of 12 to 17 cents a share, excluding costs incurred related to the proxy contest.
Miller said the company was pleased to deliver improve sales and earnings despite the drought situation and challenging comparisons cycling strong soccer related sales generated by last year's men's World Cup.
Comps were positive in each of the months of April, May, and June. A low-single digit decrease in customer transactions was offset by a low mid-single digit increase in average sale during the period. All of its major merchandise categories comped positively in the low-single digit range, led by hardgoods, followed by footwear and then apparel.
Regarding expansion, Big 5 now anticipate it will open approximately eight to ten new stores, and close approximately six stores in 2015. Previously, it had planned to open 10 stores. Said Miller, “We are opening fewer stores than previously anticipated, due to several deals being challenged by construction delays or landlord issues, and we continue to maintain a cautious approach for selecting the right new store opportunities for our business in the current retail environment.”
It opened three stores in the quarter and closed the period with 439.
Looking ahead, Big 5 is currently comping just slightly negative for the third quarter to date.
Miller said several factors are impacting sales for the start of the period. As part of its continuing effort to redeploy and reduce its ad spend, a mid-week print circular was eliminated this year that had ran in the second week of July last year. Additionally, over the past few weeks Big 5 faced some of the peak soccer sales numbers generated by last year's World Cup, and sales of summer related products have continued to be impacted by the drought in California. While the drought will continue to remainder of its sales summer season, the impact from World Cup will lessen significantly in August with the final game played in mid-July.
“Despite the headwinds that have led to a relatively soft start to the quarter, we are encouraged by the strength we are experiencing across a number of product categories,” said Miller. “We have a very strong promotional plan in place for the remainder of the quarter, and we believe that we're in a position to generate positive same store sales for the period.”
For the third quarter, the company expects same store sales to increase in the low single-digit range and EPS to be in the range of 28 to 34 cents a share, which compared to 34 cents a year ago. Barry Emerson, Big 5’s CFO, said the guidance includes promotions to drive top-line growth.
Asked further about the drought conditions, Miller said the lack of water is particularly impacting summer water recreation and is expected to have a lesser impact come fall. He added, “The fall and winter months are going to be dependent on getting fresh snow and weather turning cold at the appropriate time.”
He also noted that gas prices have spiked 40 percent in California since the beginning of the year due in part to refinery issues in the state. Added Miller, “We are hopeful that they've stabilized and maybe even be inching down, but it sort of depends on what day, or what week that you're talking about. But there's been some remarkable activity in terms of the gas prices in the state of California.”
But Miller doesn’t believe the weakness in the California market reflects competitive pressures with Dick’s Sporting Goods in particular moving into more of its markets in recent years. Said Miller, “Ultimately we've always found that over time the competitive market rationalizes, and this is now our 60th year, and we've certainly established our ability to withstand new openings, and compete in the competitive environment.”
