Hibbett Inc (HIBB) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Hibbett Sports Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Friday, November 20, 2020.

I would now like to turn the conference over to Jason Freuchtel, Director of Finance and Investor Relations. Please go ahead, sir.

Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the home page. These materials may help you follow along with our discussion this morning.

Before we begin, I would like to remind everyone that some of management's comments during this conference call are forward-looking statements. These statements, which reflect the company's current views in respect to future events and financial performance, are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.

It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and the company's annual report on Form 10-K, the most recent quarterly report on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to those sources for more information.

Also to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website.

Lastly, I would like to point out that management's remarks during the conference call are based on information and understandings believed accurate as of today's date, November 20, 2020. Because of the time-sensitive nature of this information, it is the policy of Hibbett Sports to limit its archived replay of this conference call webcast to a period of 30 days.

The participants on this call are Mike Longo, President and Chief Executive Officer; Bob Volke, Chief Financial Officer; Jared Briskin, Senior Vice President and Chief Merchant; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations.

I will now turn the call over to Mike Longo.

Thanks, Jason. Good morning, and welcome to the Hibbett Q3 Earnings Call. If you're following along using the slide deck, I'm on the third slide, entitled introduction. This quarter was a great outcome from a financial perspective for the company. As you saw in the press release, we reported a 21% sales comp.

Our brick-and-mortar comp was almost 18%, and e-commerce was 50%. This resulted in a non-GAAP operating income of almost $33 million and a non-GAAP earnings per share of $1.45. These results were made possible by the hard work of our 10,000 teammates in the stores, the store support center and the distribution center.

As always, they put in the effort and they helped lead us through another quarter in a challenging business environment. Those of us on the call are proud to represent our teammates today, and we wanted to make sure to thank them all for what they do, each and every day.

And as I have said before, retail is the ultimate team sport, and I couldn't have picked a better team to compete with. And speaking of our team, I did want to highlight the press release from last week about recent changes to our merchandising team. The new VP Structure, reporting directly to Jared Briskin allows us to better align our business around our consumer.

This new focus on the men's, women's, kids and the City Gear business will allow a much higher degree of connectivity through the lens of the consumer. We're very excited that Varetta Banks, Lauren Portera, Stephanie Smith, Brooke Frankel and Alicia Kahn have taken these critical positions.

Let's move on to the next slide, entitled COVID response. Much of this you've heard before, so I won't belabor the point. But as a reminder, Hibbett adopted a stance that we would remain open in stores and online, as long as we were in compliance with state and local restrictions with regards to the coronavirus.

While running our stores during these last several months, we made several -- we made sure we followed federal state and local guidelines in order to ensure the safety of our consumers as well as our employees. As a result of these actions, we believe that consumers felt safe and continue to feel safe to shop, and our employees feel safe to work. This is pertinent to our current situation, since we'll probably experience some short-term disruptions through the winter due to the anticipated increases in virus cases being reported around the country. We've seen this before, and we believe we know what to do.

Moving on to the next slide, sales drivers. We wanted to give you a little bit of background on the factors that we believe drove Q3 sales and continue to produce results. As we discussed in our Q2 earnings call, we believe the increases in sales were driven by several factors, including a time earlier in the year, we saw temporary closures of competitors, accelerating consumer adoption of e-commerce, rotation of spending from travel and leisure and entertainment into our business and the boost from fiscal stimulus.

And that gave consumers new and existing, even more reasons to shop with us. That manifested itself by driving traffic to our stores and to our website and yielded what we believe to be increased market share and higher sales. This gave us an opportunity to retain many of those customers and drive higher sales volumes into the future.

In fact, our data shows that we've done a good job retaining these consumers so far. We believe we have tailwinds in the future as well. In Q3, we did begin to see the effects of the closures of JCPenney, some JCPenney stores and all of the Sage stores. This presents an upside opportunity for us, both in fashion and athletic categories. And in order to capitalize on those opportunities, I'll remind you, the merchandising team made specific buys for those stores to handle the additional business that we anticipate.

Additionally, we see what we believe is continued consumer adoption of the omni-channel experience. This plays to our strength with our best-in-class omni-channel platform.

And finally, we believe that many of the new consumers we attracted last quarter and continue to attract, will continue to shop with us in the future.

In total, we believe that these changes in the competitive landscape and changes in the consumer behavior will result in approximately $20 million to $40 million in incremental sales opportunity that really has only just begun.

But before we go any further on the future, I would like to ask Jared Briskin to provide some detail on our merchandising performance. Jared?

Thank you, Mike. Good morning. if you please turn to the merchandising slide. Our strong comp sales performance was driven by apparel and footwear with significant gains in sales and share of our mix. Team sports continued to be impacted by COVID and was down low double digits. Our toe to head merchandising strategy is working. As we continue to see additional items in the basket leading average transaction growth.

The apparel business is up in the mid-30s. This increase was driven by gains in athletic branded apparel, fashion apparel, licensed products and accessories. All genders were significantly positive. From the athletic brands, we saw acceleration in our performance business as well as the lifestyle business. Consumers responded positively to our fall assortment upon delivery and early selling of fleece, jackets and athletic bottoms were very strong.

Our fashion brand performance was exceptional, as our focus on denim and fleece and our fall assortment were strong performers. Quick turn tees also performed well as our vendor partners worked with us on securing additional inventory.

License business was a growth driver for us. Caps and jerseys performed exceptionally well and offset declines in the traditional fan business. Accessory business also achieved significant growth as socks, hydration, underwear and sunglasses, all were significant gainers during quarter.

Footwear business was up in the low 20s. This increase was driven by strong gains across performance, lifestyle, basketball, sandals and boots. All genders were significantly positive with women's growth, outpacing men's and kids. In the performance business, our investments in technical running performed very well as we take advantage of the wellness trend.

Lifestyle and basketball results remained robust during the quarter. During the quarter, the launch business was exceptionally strong. Slides and sandals remain very strong as our team did an excellent job of chasing inventory during what's historically a sell-down period.

Fall deliveries in our boot category also performed incredibly well. Specific to footwear and apparel, our women's business was our fastest-growing area with comp sales gains in the low 50s.

Men's grew in the mid-20s and kids in the high teens. We're very excited about future opportunities across all genders. Inventory at the end of the quarter remained down with age levels approaching historic lows. Increased sales and shipment delays continue to pressure our inventory position. With that said, we're very confident in the quality of our inventory and our outstanding deliveries. We continue to expect inventory levels to improve throughout the fourth quarter.

Our sales performance and inventory composition give us a lot of confidence, as we head into the fourth quarter. Increased confidence is also coming from the visual and merchandising improvements we've made in our stores this year. By the end of the fiscal year, we will have remodeled 25 City Gear stores as well as 54 Hibbett stores remodeled to our new prototype.

We're seeing exceptional results from this prototype, thus far, as our ability to highlight and sell toe-to-head looks has been elevated. Increased focal points, improved graphics, numerous manikins and elevated sneakers walls are the highlights of this premium new store design.

During the fourth quarter, we'll also be deploying our store refresh plan. This refresh project focuses on elevating stores to a level similar to the new prototype with substantially less cost than a full remodel. The refresh consists of new tables and manikins, new sneaker walls as well as in wall systems for the balance of the store, which will eliminate the look of dated slatwall. Our test rollout of this refresh not only looked incredible, but improved our performance.

I'll now turn the call over to Bob Volke.

Thanks, Jared, and good morning. If you will, please refer to the third quarter results slide. As a reminder, we treat City Gear as an extension of the Hibbett business, and these results are reported on a combined basis.

For the third quarter, total net sales increased 20.3% to $331.4 million and consolidated comp sales increased 21.2%. This compares to third quarter fiscal 2020 sales of $275.5 million and a comp sales increase of 10.7%.

Brick-and-mortar comp sales remains and came in at 17.5%, e-commerce sales grew at over 50% in the quarter, representing attractive expansion in our omnichannel platform. For the quarter, e-commerce sales accounted for 13.2% of net sales compared to 10.5% in the third quarter of last year.

Our GAAP gross margin expanded significantly to 38.3% of net sales compared to 32.7% in the prior year third quarter. This approximates 560 basis point improvement, was due to higher initial sell through, a low promotional environment, a reduction of inventory reserves and leverage of store occupancy costs that are included in our gross margin calculation.

There's a slight offset due to the higher volume of e-commerce sales, which carry a slightly lower margin due to the incremental shipping costs associated with these sales. Excluding the reduction of inventory valuation reserves in the current period, adjusted gross margin was 38.1% this year to adjusted gross margin of 32.4% last year.

Store operating, selling and administrative expenses were 26.1% of net sales in the third quarter compared to 29.1% in the third quarter of fiscal 2020. This decrease of approximately 300 basis points was primarily due to the leverage from the strong sales performance as well as lower cost of acquisition integration activities associated with City Gear.

Excluding certain City Gear acquisition and integration expenses, adjusted SG&A was 26% of net sales compared to adjusted SG&A of 27.2% in the prior year third quarter.

On a GAAP basis, we generated $33.2 million of operating income, which compares to last year's operating income of $2.6 million. Excluding all non-GAAP adjustments for the quarter, adjusted operating income was $32.7 million or 9.9% of sales compared to operating income of $6.9 million in the third quarter of last year.

GAAP earnings per share were $1.47 for this year's third quarter, and non-GAAP earnings per share were $1.45, primarily as a result of improving our inventory position over the last 3 months, we generated an operating cash outflow of $33.6 million during the quarter. We also spent approximately $8.3 million in capital expenditures, which were largely related to new, relocated and remodeled stores.

In the prior year's third quarter, operating cash flow was approximately $900,000, and capital expenditures were $5.2 million.

I'll now have you move forward to the year-to-date results page. On a year-to-date basis, sales increased 19.7% to $1.043 billion from $871.2 million over the first 9 months of the prior year. Comp sales on a year-to-date basis are 22%, and with brick-and-mortar expanding 11.6% and e-commerce growing 118.2%.

On a year-to-date basis, e-commerce sales represent 16.6% of our total net sales compared to 9.1% for the first 9 months of last year. Our GAAP gross margin was 35% of net sales compared to 32.7% in the first 9 months of 2020, excluding year-to-date inventory reserve adjustments in the current year, and City Gear acquisition and strategic alignment costs in the prior year, adjusted gross margin was 35.3% this year compared to 32.7% for the first 9 months of last year. Year-to-date, GAAP SG&A expenses were 26.4% of net sales compared to 26.9% in the first 9 months of last year.

This modest decline was primarily driven by increased revenue. Adjusted SG&A was 22.6% for the first 9 months of the current year compared to 25.2% for the same period last year.

On a GAAP basis, we produced $67.4 million of year-to-date operating profit compared to last year's operating profit of $28.3 million. Excluding all non-GAAP adjustments in both years, adjusted operating income was $110.2 million this year compared to adjusted operating profit of $43.7 million for the first 9 months of last year. GAAP year-to-date earnings per share were $2.98 for the current year compared to $1.18 in the prior fiscal year, and non-GAAP earnings per share were $4.74 this year compared to $1.82 for the comparable period in fiscal 2020.

We have generated $145.3 million of operating cash flow on a year-to-date basis and have spent $20.8 million in capital, once again, with a focus on new, relocated and remodeled stores. Over the first 9 months of the prior year, operating cash flow was $75.1 million and capital expenditures were $11 million.

Turning to the balance sheet. We ended the quarter with $177.7 million in cash versus $77.4 million a year ago, and we currently remain debt-free. We have a $75 million borrowing capacity available to us, but do not anticipate the need to borrow under our secured credit line based on our current cash projections.

Inventory ended the quarter at $210.9 million, a 27% decline from last year's third fiscal quarter. The continued strong sales in both the brick-and-mortar and online channels drove the year-over-year decrease. However, despite the strong sales growth in the quarter, our inventory position increased over $28 million or nearly 16% from last quarter, representing a focused effort on execution as well as our strong vendor relationships.

We did not purchase any shares during the third quarter under our authorized share repurchase plan. We have just over $143 million of remaining authorization through January 29, 2022, for future share repurchases at management's discretion.

Now I'll review our updated guidance on the slide titled, future. Our anticipated results for the fourth quarter of fiscal 2021 are influenced by multiple factors. As Mike mentioned earlier, we have attracted and retained new customers throughout fiscal 2021. Permanent closures in the third quarter and any additional closures in the future should provide opportunities to capture new market share. Our strong vendor relationships and targeted purchases by our merchandising team will allow us to take advantage of the expected results and increase in business. Other supply chain and selling initiatives as well as continued accelerating adoption of e-commerce should help drive sales growth as well.

While we continue to experience a great deal of economic uncertainty at the beginning of the holiday season due to the recent surge in COVID-19 case counts, we are confident in our business model and the trends we have recently seen. As a result, we are providing limited GAAP guidance for the fourth quarter of fiscal 2021.

First, we anticipate comp sales will be in the high single-digit to low double-digit range. Gross margin is expected to improve by 380 to 400 basis points in comparison to the fourth quarter of fiscal 2020.

SG&A as a percent of sales is projected to be approximately 40 to 60 basis points below the comparison in the fourth quarter of last year. Diluted EPS is forecasted to be in the range of $1.0 to $1.10, with an assumption that the effective tax rate will be approximately 25% and and the diluted share count will be approximately $17.2 million.

We do not anticipate the difference between our GAAP results, and our non-GAAP results will be material in the fourth quarter.

That concludes our prepared remarks. Operator, please open the line for questions.

(Operator Instructions)

Our first question. Our first question comes from Sam Poser with Susquehanna.

Well, let me ask you this. You have about $10 of share in cash right now. Can you give us some idea, are you looking at any M&A right now? And if so, what could you tell us?

Certainly, we always -- Sam, this is Mike. Certainly, we're always going to look at strategic alternatives. And what we're doing with capital allocation is always a subject of great debate, Bob?

Yes, Sam. Again, as you heard in the prepared remarks, we are continuing to build our inventory balance. We still feel that there's an opportunity for us to continue to to get that to more of an optimal level. I think, again, as Mike said, we're always kind of keeping our options open. We're looking at how we can best deploy capital to get the return for shareholders.

I think, again, there's a lot of options on the table, whether it be potential M&A, share repurchase, investment in new store units. But we're going to keep our options open going forward.

Okay. And then you've got a situation where, I think as of March, Belk and Dillard's are no longer going to be carrying Nike. And you mentioned that you're already seeing some benefit from Sage stores and JCPenney closings.

If you think about that on top of, I guess, your new customer retention and so on. How does that -- how do you think about that going into next year? How might that help you?

Sam, it's Jared. We certainly we believe it will help us. There's certainly disruption continuing to go on in the market. We obviously have our work for you to understand based off that timing and based off on-hand inventories, when that will occur. But our team without question is focused on our ability to take advantage of that disruption.

And just to add to that, we have been testing marketing programs to target displays customers in those areas. So that is something that we're prepared to do in the future.

And then I mean -- and then you've had 2 fairly significantly strong quarters in the last 2 quarters. We sort of talked about it. Can you give -- can you say something that -- why you're confident that weather there's probably going to be some headwinds just because of the extraordinary comps in Q2 and Q3 next year, that you feel comfortable that a lot of the business you've done so far is going to be sticky or the new customers are going to stick next year or not.

I mean, I think that's -- what gives you the confidence that that you're going to be able to build on what's going on this year?

Thanks, Sam. Mike, again. So certainly, we have had a very good experience this year. We all understand the challenge of an 80% comp Q2 next year and what that 2-year comp is going to look like. But for the full year, we do have confidence and that confidence comes from a combination of factors. One, the experience that we've gained this year and the playbook that we've written and have been executing against. For the tactical side, the strategic plan, the broader scope of what we're doing. We have a great deal of confidence in what we're executing against there. And as this quarter goes by, we'll gain additional visibility.

And as you've noted and we said, we have the confidence to give guidance for Q4, which is unusual, I think, for retailers. In the recent past and currently, many retailers are opting not to give guidance. We at least have the confidence to look ahead 90 days.

And while we didn't do a perfect job forecasting this quarter, and this is a miss, whether it's high or low. Regardless, we have the confidence to put something out there, and we did it again.

So to your central question, what makes us feel good about next year. You hit on some of those points. And certainly, new customer retention is a big deal. And our experience and our capabilities. Bill, would you like to add anything to that?

Yes, absolutely. So in Q2, we surveyed our new customers, and they said they had a great experience, and they will shop with us again. We looked at their behavior in Q3, and they did what they said they came back in shop. A lot of that really is about providing a great in-store customer experience and a great online customer experience.

Also, part of that is having a loyalty program that naturally incentivizes them to shop, and we've got a great loyalty program. And also what we've learned with new customers is, it's critical that you communicate to those new customers within that first 90 days, it's all about getting them back into the store and online to shop.

And that shopping experience with online and the pressure testing we've had from the pandemic has never been better. Also, we've made great strides with our in-store shopping experience as well. And I'll turn it over to Ben to comment.

Yes. Thanks, Bill. We're laying the groundwork, obviously, to make those customers stick, as you mentioned, Sam. Jared talked about our store remodels and our refresh project where we went out there and touching and refreshing every location. In the stores, it's all about blocking and tackling, right?

We've doubled down on our sales culture in stores and are taking all of our team members to extensive training there. During the quarter, we also conducted leadership training with our entire field management team, and it's our intention obviously, to give that in-store experience to make those customers and those new customers that we've seen come in our doors stick for next year.

And then lastly, how has your relationships with key vendors changed throughout this year? As far as just, I mean, allocations plus just general -- just, I guess, all...

We're extremely confident in our positioning with the vendors' support. Throughout the year it continued to improve. We continue to see numerous opportunities with a large portion of our vendor partners, and they're mobilizing against opportunities they have, with both the Hibbett brand as well as the City Gear brand.

So we're very confident around how we're positioned, and we're very confident about our opportunities, in particular, as there are some marketplace disruptions that we believe will be occurring.

Our next question comes from Alex Perry with Bank of America.

Perfect. Congrats on a great quarter. I guess, just first, what gives you confidence in the high single-digit to low double-digit comp outlook in the fourth quarter, especially in the absence of any stimulus programs. And then just separately on that point, how do you see sort of the recent surge in COVID potentially impacting the business in the fourth quarter?

Thanks for the question. This is Mike. I'll lead off and then I'll dish to Jared to follow-up. We do have confidence in this quarter, and some of that is an extension of trends and experience that we see today.

And obviously, you've got the results from Q3. While there was a, I believe, Ben will cover this in a moment. There was a slight -- a small amount of stimulus that eke out into the market in Q3. We don't have any visibility or reason to believe that there will be any stimulus in Q4 and did not model that in our guidance.

This is simply an extension of our current experience, our -- the math that we're doing around the new customer, and Bill will touch on that in a minute. And what we're seeing in trends in brick-and-mortar and e-commerce. Jared?

Yes, I think most importantly, the quality of our inventory is exceptional at this point. So that gives us a lot of confidence in our ability during the fourth quarter. Our ability to enhance some trends that we've seen during the third quarter, our team has really done an incredible job of securing the right inventory.

And in particular, not only what we have on hand, but also in our order book. So we're very confident in our opportunities in the fourth quarter. We're very confident around the cadence of launches and very confident about the position we'll be in with inventory.

Yes. And this is Bill. I'll add to that. So from a customer perspective, we do have more new customers. Those new customers are shopping more frequently than us -- with us than prior new customers. If you look at last year, they're also buying more during those visits. So we're encouraged by their behavior. We're also seeing just a huge increase in omnichannel activity, which is very positive for us.

So that is customers who are buying both online and in stores. And those customers are worth more than any of our other customers, and we're seeing that improvement or increase in behavior there.

Also add from an online perspective, we are seeing large increases in traffic as a result of gathering customer information, so all of our files, whether it's e-mail, text, push, et cetera, we can market to those customers easily. We have a best-in-class omnichannel offering, which also drives traffic and sales. And lastly, our online experience is better than it ever has been. I'll turn it over to Ben to talk about the store.

Yes. Thanks, Bill. As Mike mentioned earlier, we did see some additional state unemployment benefits in a few markets, but that was quite honestly limited to September timeframe and kind of had a minimal impact.

The quarter obviously was strong, absent any meaningful stimulus out there. And our focus is obviously on increasing our sales through the culture in our stores. That won't go away in Q4. I'm very confident in our team to execute at store level. And partnering with Jared and obviously, Bill, I think we can continue that in the quarter.

Perfect. That's really helpful. And I guess, just my last one here. Can you give us an update on sort of the unit -- how you're thinking about unit growth across both banners, both for this year and then maybe longer term? I think you sort of last quarter moved the cadence of unit growth from being sort of a net closer to a net opener? And what's driving that? Is some of that being helped by your vendor partners cutting their number of distribution partners or just white space you see in the market? Just any other color there would be really helpful.

Yes, you're correct. We did tell you until the market that we intended to go back to net double-digit new store growth, net of closures. In the recent past, there were multiple quarters where the closures were more than the openings. We expect that to -- we are reversing that. We have confidence around our new store model, and we have confidence in where we're opening those stores and how we're opening those stores.

So the where we're opening the stores is a fair amount of math and science around the new model that we put in place and new ways of looking at how to approach that and taking some of the best practices from other retailers that we're in contact with and then, frankly, we've worked for. And then how we open the stores, I think, is as important. And the efforts of Jared and Bill and Ben on top of our best-in-class IT support inside the stores and the supply chain changes that we've made to improve our speed to market, meaning this is product that's fashion. It has a shelf life. The faster it gets to the street, the faster we begin to turn it and lowers the likelihood of other markdown.

We like all of those things that we're doing and so when you combine them all together, it gives us a great deal of confidence to go back to net openings in the double-digit range. We have a lot of white space on the Board across the country. We won't go into any detail as to where that white space is.

I would also say we're also going to be judicious in how we do it. There will be a combination. And this is just Retail 101, it would be a combination of targeted markets where we're going into backfill and add to a market density, where we've got an underserved customer, whether that underserved customer is in the middle of Houston or in Alexandria, Louisiana. The value, the economic value of that underserved consumer and the economic value of that net new door can be equivalent, whether it's in a dense urban market or a relatively rural market.

We are picking those sites very carefully. And the unbelievably good work that Ben and his crew are doing on how to change the culture in the stores with a laser focus on the consumer and the consumer experience, that then supports the laser focus that Bill Quinn's area has on the omnichannel experience, those things go hand-in-hand.

And as Bill said, and I'll repeat, the brick-and-mortar consumer is a great consumer and worth a lot. The pure-play e-commerce consumer is a great consumer and worked a lot. The omnichannel consumer, however, is more valuable in terms of their total spend. And that's the consumer that we have the best relationship with. They're in our markets, our brick-and-mortar market and they're on our website and they're participating in BOPIS and ROPIS and buy online, ship to store, curbside delivery and all those services that our team have put together. And finally, I will tell you that Jared and his group have done a terrific job on selection of product and where that product goes. Because a market -- a store is not a store, right? And so every store has a micro merchandising slant. There is commonality of inventory between stores, but one of the examples that we give often is, we have a store on Bullard in New Orleans and a store on Clay Board in New Orleans, and they couldn't be more different.

They're different in terms of that consumer taste. They're different in terms of the brands that we should carry and they're different in terms of sizes that we should put in those stores by style. So that math and science and all that goes into that goes through Jared's team, and they've done a fantastic job with that.

So I'll pause and let you redirect the question where you want it to go.

(Operator Instructions)

Our next question comes from the line of Peter Benedict with Baird.

Mike, you mentioned the miss is in this, but I think we can all agree a high miss is better than a low miss. Well done. So I guess the first question, just maybe, Bob, around the gross margin improvement in the quarter. I don't know if you can untangle kind of the product margin contribution there relative to the fixed leverage on occupancy and warehouse and distribution?

And then how you're thinking about the product margins, clearly they're going to be strong again in the fourth quarter, but just maybe the sustainability of those when we get back to maybe a more normalized promotional level what are some of the puts and takes as you think about product margin longer term? That's my first question.

Peter, it's Jared. Yes, I think first and foremost, as we mentioned, we're at historic lows on aged inventory. So that, without question is having impact on the product margin positively. The rate of sale based on our assortment has certainly accelerated. Which is translating into limited markdowns. That along with all the work that Bill's team and Ben's team have done. Product is being sold faster than we have historically without question.

On top of that, with the quality of our inventory, our ability to limit our promotions is something we've been able to take advantage of without question.

And then lastly, as we continue, we're really confident in the quality of our upcoming deliveries. And that's where we feel that we do have upside from a product margin perspective as we head into Q4.

(Operator Instructions)

Our next question comes from Jim Chartier with Monness, Crespi, Hardt.

Just kind of following up on the previous question. I guess, there's been limited supply in the marketplace, and everyone's been kind of chasing the athletic product. So as we get into next year, do you expect to have to increase promotional activity and then in terms of categories, how has gross margin this year benefited from a sales mix away from team sports and to apparel and footwear?

Yes. Thank you. I think first and foremost, our focus on maintaining a clean inventory position is incredibly important as we think about how we go forward into next year. From a mix perspective, obviously, we've seen significant acceleration in both footwear and apparel. But our team sports margin in normal years is very strong as well.

So I don't really see that being a dramatic impact due to mix. The big impact that we're seeing now is the health of the inventory, the limited clearance, both from an in-store selling and then online selling and the quality of our inventory.

Great. And then in terms of store remodels and refreshes, how many stores do you think you'll refresh in fourth quarter? And then what's the remodel and refresh plan for next year? And then can you help us understand what kind of sales lift you're seeing in those stores? Or what kind of payback period you're expecting for the remodels and refreshes?

Yes. So we'll complete the refresh project in all Hibbett Sports stores during the fourth quarter. So we're very excited about that project. As mentioned, it's -- economically, it's significantly lower than the cost of doing a full remodel, but gives us a strong impact in the look and feel of the store. From a remodel perspective, the new store designs, we are seeing significant comp acceleration over and above our overall comp. And we have a similar plan for next year with regard to the number of remodels that we did this year.

Okay. And then just want to understand. Have you seen any change in your sales trends or mix between e-commerce or stores, given the recent spike in COVID cases? Or is that just something you think is a possibility or likelihood later in the quarter?

Yes. I think we'll see. It's probably too early to talk about that.

Our next question comes from Peter Benedict with Baird.

The other question I wanted to ask was just more around your supply chain and systems, how they sit today? I mean, obviously, you're experiencing an elevated level of demand. Hopefully, that's going to continue. Are there investments that need to get pulled forward here to support that in the next few years?

And how should we be thinking about capital investment around supply chain systems? Anything else that you might need to support the higher level of sales in the business?

Yes. This is Mike. I'm intimately involved in what we're doing on the strategy and supply chain. So I'll take that one. We have a very good distribution center, and it is completely outfitted. I would say what we're doing today is less about capital and more about reengineering processes.

So we're going through the process. There is a modest amount of capital needed, but it's in the $100,000 here and there range, not millions at a time. Moving from a process that was more focused on loading trucks and having, once a week, deliveries and transitioning from that more into a fluid load, live load, dispatch multiple times a week to a store.

Those changes don't actually require tons of capital equipment. It's more about the application of knowledge and reengineering resources. And so far, all of the investments that we've made are expenses and those expenses, you can see in the P&L today. So they're paying out. They have high ROIs. And we really like what we're doing.

I would say we're in the early innings of those improvements. But I don't see any material impact to cash flow or to the balance sheet or to the P&L as a result of it, except adding to sales. And the faster we get -- again, I'll repeat, something I said earlier, the faster we get that product to market, the higher, ultimately, our gross margin will be and our sales.

Excellent. And I guess one follow-up to that, Mike, maybe it's just how you're thinking about the store labor model. I know you're changing the culture in the store a lot on the merchandising front. How is the store labor model evolving, if at all? And how are you thinking about kind of compensation there and any changes to that structure?

I'll take the first part of that. The compensation, we think, we're in the right range. There might be, and underlying, might be an upward bias on wages in the future, but we'll see. Certainly, there are some statutory changes that we've experienced. Those are all well chronicled in the news. And generally, when those happen, it doesn't have a material impact on us. So we don't see a spiraling out of control of wage inflation, nor do we see the other side of the ledger on compensation on the benefit side, we don't see that spiraling out of control, either. So while we're not saying about it, we are watching it.

We don't have deep and great concerns about it. To the first part of your question about the actual labor model and how we run the stores, I will tell you that Ben Knighten and his staff have a deep knowledge on labor scheduling. And we're going through a process now of putting in a best-in-class labor scheduling system. Ben?

Yes. To Mike's point, we have begun the process of rolling out electronic labor scheduling to all stores to replace an existing system that we had in our Hibbett locations. And that whole effort is really about maximizing the in-store experience of the customer. Obviously, labor is our largest controllable expense in the stores, but it's how you use that labor and how you can maximize that labor. And I think we're in an environment where we can make sure that we get the right people in the right place, at the right time. And from a labor scheduling standpoint, actually increase our ability to service that customer with the process changes Mike's talking about with frequency of delivery to stores, that actually aids us at store level, not only to get the product in front of the customer quicker. But even from being able to stock those items on our shelves and display them in the appropriate way.

It actually helps us there. And so our efforts around a labor model are really focused on the sales side of things, trying to take those friction points away from customers, minimize the task that we have to do and put the person in front of the customer more than in front of a box or before the stores open, doing those types of tasks. We think that's much more valuable having that interaction with customer. And so the more things that we can streamline in that way, the better. And the labor model that we put in place, and we continue to refine, that's the basis of it.

Our next question comes from Sam Poser with Susquehanna.

Your inventory, you say you're going to bring your inventory levels up. But your inventory levels at the end of the third quarter, the lowest they've been since the -- in the third quarter since -- in fiscal '13. And your revenue you did in the quarter was 60% above that inventory level -- the revenue you did back in fiscal '13.

On a -- like what -- in the quarter, had you had it the way you wanted it, where would your inventory be? What is the optimum inventory level that sort of you're building back to? Or you feel you should have been at, at the end of Q3.

Sam, it's Jared. Our expectation from inventory. We're about 10 points away from where we'd like to be from a year-over-year perspective. I think we absolutely believe we can turn our inventory faster, and that's part of the reason why our margins are improving. Is our ability to keep our inventory clean. We also feel that our sell-through during the third quarter was a little bit too fast in certain places and potentially left some opportunity on the table.

So that balance is what we're really looking to strike, is how do we ensure that we capitalize on as many of the opportunities as we possibly can, while continuing to improve our rate of sale.

As you mentioned, there's a lot of disruption from a marketplace perspective, and we want to make sure that we balance our ability to take advantage of all of those things with inventory, while ensuring that we turn our inventory faster than we have in the past.

So that means you think that like you should have been around $240 million at the end of the quarter, that would have been sort of where you would have like to have been, if -- am I thinking about that right?

Yes. A little higher than that, but you're not terribly far off.

Okay. And then, secondly, have you -- did you guys see any difference or what was the difference in your -- in your brick-and-mortar performance from your mall-based stores versus strip center?

Sam, it's Jared. I mean our mall stores performed very well, but they were not as strong as our non-mall locations. The non-mall stores absolutely perform better than our mall locations as a whole.

And were you up double digits at the malls too, just not to the degree? Or was that a single digit number?

It was approximately there. Again, sales were very strong in the mall, just not at the levels of the strip center stores.

(Operator Instructions)

Mr. Longo, there are no further questions at this time. Please continue with your presentation or closing remarks.

Well, thank you so much. We appreciate everyone's time and attention today. We are proud of the team that delivered these results. And I can't say it enough. We thank them for what they do each and every day. We appreciate everyone being on the call today. We love talking about our business. The only thing we love more than that is going out and doing business. So I hope everyone has a great holiday season, and we'll see you again very soon. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.