Hibbett Inc (HIBB) 2020 Q2 法說會逐字稿

Greetings, and thank you for standing by. Welcome to the Hibbett Sports Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Friday, August 23, 2019.

I would now like to turn the conference over to Jack Drapacz with Corporate Communications. Please go ahead.

Thank you for joining Hibbett Sports to review the company's financial and operating results for the second quarter and first half of fiscal year 2020, which ended on August 3, 2019.

Before we begin, I would like to remind everyone that management's comments during this conference call not based on historical facts, including those in response to your questions, are forward-looking statements. These statements, which reflect the company's current views with 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 earlier this morning, in the company's annual report on Form 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings believed accurate as of today's date, August 23, 2019. Because of the time-sensitive nature of this information, it is the policy of Hibbett Sports to limit the archived replay of this conference call webcast to a period of 30 days.

I'd now like to turn the call over to Christine Skold, Interim Chief Financial Officer. Please go ahead, Christine.

Thanks, Jack, and good morning, everyone. Welcome to the Hibbett Sports fiscal 2020 second quarter earnings call, and today we have with us Jeff Rosenthal, President and CEO; Jared Briskin, Senior VP and Chief Merchant; and Cathy Pryor, Senior VP of Store Operations.

I'll start today's call with the prepared remarks on the second quarter, followed by Jared with a review of merchandising, and then Jeff will cover highlights from the quarter along with the general business update.

As a reminder, we treat City Gear as an extension of the Hibbett business, and the results will be reported on a combined basis. As such, it's not our intent to provide specific gross margin, expense or other profitability metrics for the City Gear business. However, I will provide actual revenue for City Gear until it is incorporated into consolidated comp sales starting in the fourth quarter of this year.

For the second quarter, total net sales increased 19.6% to $252.4 million, and overall comp sales increased 0.3% compared to last year's second quarter of 4.1%, achieving our third consecutive quarter of positive comparable sales. Year-to-date, comparable sales increased 3.1%.

Net sales include $42.1 million for City Gear, and e-commerce sales continued to accelerate, representing 8.6% of consolidated sales for the quarter and 10.1% of sales excluding City Gear. We are progressing on our initiative to migrate City Gear's online platform to the Hibbett digital platform with completion targeted in the third quarter.

Gross profit rate decreased 110 basis points in the quarter, approximately half of the margin decline was attributable to margin pressures from the complete inventory liquidation of 32 of the 40 stores that we closed this quarter. And the other half of the margin decline to prior year was due to some limited markdown activity, which resulted in the strong-ending inventory position.

The shift of product releases from the quarter resulted in a reduction in full price sales in the second quarter. Logistics and store occupancy expenses increased slightly as percent of sales, which was the result of City Gear's higher store costs as a percent of sales.

SG&A expenses predominantly increased from the addition of City Gear expenses. On a GAAP basis, SG&A as a percent of sales increased 240 basis points. Included in the GAAP, SG&A is a charge from the contingent earn-out valuation for the City Gear acquisition.

As we discussed in note 3 of our 10-K, the City Gear acquisition purchase agreement included 2 contingent earn-out payments based on City Gear's achievement of certain EBITDA thresholds for fiscal 2020 and 2021. The preliminary fair value of the liability was included in other liabilities in the fiscal 2019 year-end consolidated balance sheet. Subsequent changes in the liability are recorded through current period earnings. And based on current forecasts for City Gear performance for fiscal 2020 and 2021, the earn-out liability was increased $7.1 million, which is an impact of 300 basis points to sales in the current quarter. We expect some continued volatility in this expense as we continue to realize the City Gear business opportunities.

GAAP SG&A also includes a charge of $900,000, a 35 basis point impact to sales related to our accelerated store closure plan. We are moving forward with the plan to close previously identified stores with the majority of the remaining closures expected to occur late in the fourth quarter. The impact of these 2 charges have been adjusted in the non-GAAP tables included in the earnings release.

Additionally, we incurred a net charge of $1.9 million related to the finalization of the CEO retirement agreement. This amount was not removed from non-GAAP SG&A and represents an additional 74 basis points to SG&A and $0.09 to consolidated EPS.

On a normalized basis, current SG&A was 27.7% of sales compared to 29.4% in the prior year second quarter.

We experienced strong leverage in SG&A due to normal payroll leverage and improved insurance expenses as well as positive leverage in advertising as we continue to move toward more productive advertising programs.

The income tax rate for the quarter was 24.1%, which compares to last year's rate of 28.9%. We expect the full rate to be approximately 25.5% due to the lower expected full year taxable income caused by the contingent earn-out adjustments and the resulting impact of Section 162(m) permanent differences.

Consolidated loss per share for the quarter was $0.49 per share compared with a loss of $0.06 per share last year. Excluding the impact of the 3 items in SG&A mentioned previously, normalized consolidated loss per share would be $0.04 compared to a loss of $0.06 per share last year.

Turning to the balance sheet. The company ended the quarter with $978 million in cash versus $119.6 million in last year second quarter. And we had borrowings on our revolving credit facilities of $17 million related to the City Gear acquisition, and we continue to expect that to be paid off by the end of the fiscal year.

Inventory increased 9% from last year's second quarter but does include City Gear's inventory. And sales, as a reminder, we're up 19.6%. We spent $3.4 million in CapEx as we opened 2 stores, rebranded 2 Hibbett stores to City Gear, relocated 3 stores, expanded an existing store and made further progress on other capital initiatives.

Also, the company purchased 304,000 shares for a total of $6.4 million in the quarter under our share repurchase program. At quarter end, we had about $174 million remaining under the existing authorization.

So turning to our guidance. Based on the strength of the first half and our second half expectations, we're updating our full year guidance with the following changes: We now expect full year comparable sales between positive 1% and 2%. For gross margin, we expect our overall rate to increase 30 to 40 basis points. Excluding the impact of nonrecurring items in both fiscal years, we expect non-GAAP gross margin to decline 40 to 50 basis points. This estimate includes an assumption of liquidating more store inventories late in the fourth quarter.

With respect to SG&A rate, we expect an increase in the range of 50 to 70 basis points. Excluding nonrecurring costs for both years, we expect non-GAAP SG&A rate to improve 40 to 60 basis points from the last fiscal year. As a reminder, GAAP SG&A includes an estimate for additional contingent earn-out fair value adjustments. Our full year tax rate will be approximately 25.5%.

And finally, we expect diluted earnings per share to be in the range of $1.35 to $1.50, which includes $0.75 to $0.80 per share for nonrecurring costs associated with the acquisition and integration of City Gear and costs with our accelerated store closure plan. We previously expected nonrecurring cost to be approximately $0.25 to $0.35 per diluted share, and the increase is the result of the greater expected impact from the valuation of the City Gear contingent earn-out liability.

Excluding nonrecurring costs, non-GAAP diluted earnings per share is now expected to be in the range of $2.15 to $2.25 and does include the $0.09 impact from the CEO transition cost.

For CapEx, we expect to spend $18 million to $20 million compared with previous guidance of $18 million to $22 million.

I'll now turn the call over to Jared for a review of merchandising.

Thank you, Christine, and good morning. As a reminder, my prepared remarks are reflective of comparable store trends, this will not include City Gear stores until the fourth quarter.

We were very pleased with our business during the quarter as we had 2 significant headwinds to overcome. The first was changes to the launch calendar, which impacted the second quarter. While impactful to the quarter, we do not expect the changes to impact our full year results negatively.

Secondly, we have seen changes to back-to-school shopping partners. Not only do we continue to see volatility in school start dates, we are also seeing shoppers wait until the very last minute to make their back-to-school purchases, often resulting in peak volume days occurring as close to the school start date as possible. This volatility did impact our July results negatively but is having a positive impact to August.

During the second quarter, our footwear business increased low single digits posting our eighth consecutive quarter of comp sales gains. Men's was up low single digits, women's up double digits and kids were up mid-single digits. Nike Sportswear was exceptionally strong during the quarter led by Air Force 1 basics and fashion executions. Max Air was also a key driver of our business as both heritage models such as Air Max 97 and Air Max 90 performed exceptionally well, along with new product creations such as VaporMax and Max 270. During July, 2 additional Max Air models were released, the React 270 and Air Max 200, which are both performing well. Jordan business performed well during the quarter, however, the launch calendar changes mentioned earlier were significant challenges to overcome. Increased investments from Champion, Fila, Brooks and Reebok were also key contributors to the quarter.

Our apparel business was down low single digits for the quarter. Activewear was up low single digits, including a double-digit gain in men's apparel. Women's and kids apparel were both down, primarily due to the later back-to-school season referenced earlier. We have seen a nice acceleration in these businesses during August.

Accessories were positive low single digits driven by strong results in bags, headbands and water bottles. Licensed business remained soft and was down high single digits.

Team sports business was down high single digits. Baseball, softball and volleyball performed well and were positive. Soccer was down low single digits. The largest impact to the Team sports business was football, which was down double digits. While the second quarter had its challenges, we executed our strategy well. We exited the quarter in a very clean inventory position and are excited about the product investments we've made for the balance of the year.

I'll now turn the call over to Jeff Rosenthal.

Thanks, Jared. We are quite pleased with our second quarter results. We believe our strategic initiatives are taking hold as we recorded positive comparable sales in 3 consecutive quarters. We expect a solid finish to the back-to-school season, along with momentum from a strong product offering for the second half of the year.

City Gear's early results are encouraging, and we expect a strong finish to the year as they enter the back half with a strong assortment of fresh and fashion-forward inventory. We also expect the planned migration of City Gear's website to the Hibbett digital platform will create an elevated shopping experience for all of our customers as it will increase access to products regardless of which site the customer visits. We have updated our annual guidance due to our strong first half results and confidence in the second half of the year.

We will continue to drive the business with our strategic focus on leading with sneakers and connecting the toe-to-head concept with active apparel and accessories and footwear. We will continue to make progress in optimizing the effectiveness of our marketing portfolio as we are growing our online and omnichannel business.

Digital sales for the second quarter increased 25% over last year. New loyalty enrollments were up 17% over last year. Loyalty sales were 64% of the total company sales this year versus 61% last year. We will continue to make strategic improvements made to our e-mail program and our new e-mail sign-ups, which increased 51% year-over-year. Our e-mails are more targeted with increased personalization and more customized content. We will continue to improve digital gross margins through the careful management of full and clearance price offerings. We will continue to test and implement strategic digital projects, and we will deliver in the third quarter.

Our merchants have done an excellent job in getting our inventory in great position to move us into the second half. Our vendor partnerships have never been better as they supported us tremendously to improve our omnichannel offerings and integrate City Gear into the Hibbett operations. Our team continues to work extremely hard to ensure our customers have the greatest service and the capability to purchase products both in-stores and online. All this could not be done without the dedication of all our associates and their expertise, knowledge, teamwork and extended hours. I would like to thank all of our associates and let them know their continued support and dedication to Hibbett does not go unnoticed.

Operator, we're now ready for questions.

(Operator Instructions) Our first question comes from the line of Seth Sigman with Crédit Suisse.

So for the quarter, you highlighted a couple of issues that weighed on the comps for the full quarter, talked about the launch calendar impact, back-to-school sales being delayed. Any way to quantify the impact that, that may have had on the second quarter and how do we think about that coming into the third quarter?

Yes. I think quantifying it, we've certainly seen the business move. From a launch calendar perspective, I mean, we have movements on a quarterly basis fairly often. So there were some challenges there, certainly, with a large launch moving out of the quarter and into the third quarter. That's one of the reasons why we feel positively about the third quarter and the full back half of the year.

Regarding back-to-school, as far as quantifying the business, as far as what's moving, when you take a key back-to-school category like backpacks, we've seen our peak week move from the last week of the second quarter and week 26 to the first week of August and week 27. So we're seeing that movement across multiple categories and multiple geographies as the back-to-school date shifts. So I think quantifying that at the end of the period will be a little easier than it is today as we're still seeing some of that movement move from week 4 of July to week 1 of August, week 1 to week 2 of August and so on.

Got it. Okay. That's helpful. And then you did raise your full year comp guidance by 50 basis points at the low end. Any more color on that? Are you effectively raising your second half expectations or does that reflect the first half performance? And then sort of related, City Gear as that starts to come into the comp base later in the year, how do we think about the impact that has?

Yes. So the raise in the comps was predominantly from the strength of the first half. If you remember, at the beginning of the first quarter, we indicated we want to wait until we finish the first half to fully assess the rest of the year where we thought the comps would come. So City Gear comes in the fourth quarter. They were roughly 20% of sales, so 1 quarter impact on full year comps is not going to be significant. But we are pleased with City Gear and pleased with their inventory position and how we think their performance will be in the fourth quarter.

Our next question comes from the line of Sam Poser with Susquehanna.

I have a handful. Can you tell us what your comps were by month? You normally have given that in the past.

Yes. As we mentioned in the last quarter, we're not going to be providing monthly comps just because of the noise that can be between months. Jared did mention that July was negatively impacted due to back-to-school, but it's having a positive impact to August. And May and June were low single-digit positive.

And then just, Jared, I missed what you said about the apparel, can you just say that again? Because you are moving fairly quickly there in the quarter.

Yes. Apparel was down low single digits. Our activewear business remains very strong, highlighted by a double-digit comp performance in men's. We did see some softness in women's and kids, a lot of that coming in the July period, which we have attributed to some back-to-school shifts based on the early August results. The other impact on the apparel side is the licensed business remains fairly tough, which has been a trend for the last couple of quarters.

And then lastly, can you give a -- I mean you didn't mention the tariffs or threat of tariffs and everything else. Can you give us some idea of what you're seeing? What you're -- how you're planning for what you're seeing? How you're planning for you might not be seeing just yet and so on?

Yes. I mean I think right now, we're really not seeing much in the way of any impact that will hit us for this year. There's been some talk and some noise regarding next year, but I still think it's fairly early to really dissect what that full impact will be. But for this year, we're pretty confident that there won't be much of an impact if any at all.

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

First question, just a clarification. So Christine, the second quarter earnings, the loss of $0.13, that did not include the -- or that does include the $0.09 CEO severance hit, which presumably is nonrecurring. So if that was -- if you were to back that out, it would have been negative -- a loss of $0.04. That's my first question. Is that right?

Correct. On a normalized basis, it's a loss of $0.04 compared to a loss of $0.06 last year.

Okay. And the same on the guidance, the $2.15 to $2.25 that includes a $0.09 hit from the severance. So you grossed out at $0.09 if you wanted to back it out, fair?

Correct, correct.

Okay. All right. Question on kind of the e-commerce growth outlook from here. Still grew kind of high 20s percent, but that was a bit of a slowdown from where it's been running. I know you talked a little bit about focused on full price selling, less clearance. How do we think -- where do you think that lands as you look out over the back half of the year? Is that a business that can continue to grow north of 20%? Or do you kind of feel like that maybe gets more towards industry growth in the midteens?

Yes. I mean, I think it can still continue to go into that 20%, 20-plus percent range for a while. We're doing a lot of initiatives around it. We're -- in the third quarter, we're doing a lot of updates to the site. We're spending a lot of time on our app. So we've got a lot of things that we feel that will help drive traffic and conversions, both in-store and on digital. So we feel very excited about at least in the second half of being up there. We're going -- this will be our -- starting our third year in August, which we just went through. So maybe not to the 50% level, but the 20-plus percent level, we feel very good. And also, one of the things that we looked at too was as the product releases shift from second quarter into third quarter into fourth quarter, we feel very confident in what the capabilities, both from a sales and in-store.

That's great. That's helpful, Jeff. And just shifting over to the expense line, I mean the outlook for expenses is -- continued to kind of improve. Maybe give us a sense as to what's giving you the confidence or the visibility into the second half expense structure that has it leveraging more than maybe a thought at the beginning of the year?

Sure. And I'd say, part of the improvement leverage is fully recognizing the Q1 leverage from the strong sales. We probably held a little bit of that back as we wanted to wait and see how Q2 progress. So first half, we're pleased with the leverage. And then we'll continue to see improvement in productivity at City Gear. As we're continuing to integrate more processes, we're able to continue to have cost savings at City Gear as well.

Okay. And last question just on City Gear. Just trying to understand kind of the pace of growth you're seeing there. It seems like maybe it had been running more flattish, but this quarter, it looks like that number might have been maybe a mid-single digit or better kind of increase year-over-year. I'm not sure if there's some clearance related to that. But just how do we think about kind of the underlying growth rate of City Gear as we look into the back half of the year?

Yes. I think, Peter, as we get through the year and we get closer to fourth quarter, we've seen tremendous support from our vendors. So as we get inventory in line and it's getting better every day. We expect it to improve the top line. Last year, before we bought -- before we got through the acquisition on aged product, that was one of the things that drove their margins up. So I think there's an opportunity to increase their product margin in second half of the year for sure, because we are really trying to get it clean for this year and that's where we'll see some gross margin improvement.

(Operator Instructions) Our next question comes from the line of Alexander Perry with Bank of America Merrill Lynch.

Maybe just first, Jared, can you give us a little more color on the shifts in the launch calendar into the third quarter? Is that more of a Retro Jordans-focused comment? And then maybe also, what is your outlook for Yeezy on the year and has there been any shifts there?

Yes. Regarding the second quarter shift into third quarter, it was Jordan Retro specific. Keep in mind that changes from a date perspective on Retros, whether it be -- or other product in general, whether it be weeks or months or could cross quarters, so it's not a new development. It becomes a little bit more impactful during the second quarter due to the lower volume. So not something that we are not accustomed to dealing with.

With regard to the back half from all of our vendor partners, we feel like we're in an excellent position from a release in product flow standpoint. So we're pretty excited about the back half.

And then maybe just a follow-up. Can you talk to the more productive advertising that you mentioned? Is that more of a digital advertising comment? And then you mentioned improvement in the digital gross margin. Can you just shed some more color on what gives you confidence there?

Sure. A lot of -- a lot more of what we're doing is digital marketing. We're getting a lot smarter. We're using artificial intelligence. We're trying to do more personalization on who we speak to and what they buy. So definitely getting more and more effective at doing that. We're not spending as much money on prints like we did before but we definitely see that we're being able to get more personalized with our consumer.

And then on the digital margins, a couple of things there. One, we have taken a little bit of a shift in clearance strategy where we don't have low dollar clearance online because from a shipping perspective, it just wasn't making sense. So that's shifted to a little bit more full-priced product. It's brought our AURs up. And as a result, it's leveraged some freight expense as well. And those things have improved the digital margin. And we've done that without an impact to our aged inventory. Our aged inventory is extremely clean heading into the second half of the year.

That is all the time for questions we have today. I will now turn the call over to Mr. Rosenthal for any closing remarks.

Yes. I want to thank everybody for participating today. We look forward to having a great second half and look forward to updating you in the third quarter in November. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.