Hibbett Inc (HIBB) 2004 Q3 法說會逐字稿

Good day and welcome to the Hibbett Sporting Goods Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the President and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead sir.

Good morning everyone. This is Mickey Newsome. I have with me also Gary Smith, our VP of Finance and Jeff Rosenthal, our VP of Merchandise. We appreciate your interest in Hibbett Sporting Goods and your participation in this call today. Before we get started, Gary Smith will cover the Safe Harbor language.

Good morning. In order for us to take advantage of Safe Harbor rules, I would like to remind you that any projections or statements made today reflect our current views. With respect to future events in our financial performance, there is no assurance that such events will occur or that any projections will be achieved. Our actual results could differ materially from any projections due to various risk factors which are described from time to time in our periodic reports with the SEC.

Thank you, Gary. As you know from our press release, late yesterday, Hibbett Sporting Goods had another outstanding quarter. It was an outstanding day in Hibbett land in general. Income increased 65 percent in the third quarter. Comp store sales increased 6.9 percent. We opened 17 new stores and closed 3 underperforming stores. We expect to open a net of 55 to 60 new stores this year. Now for some comments on the second-quarter sales.

We had 6.9 comps with a 8.5 percent less comp store inventory. We are proud of that. The months in the quarter which were August, September, October were very consistent -- all in the 7 percent range on comp store sales. And in the fourth quarter the same trend has continued. Now in the third quarter, of course, we are mall operators and strip centers. We're about 25 percent in closed malls, 75 percent strip centers. The strip centers were slightly above 7 percent in comp store sales increases and the malls were slightly below. And most of our new store openings are in strip centers.

Now for some comments on specific areas of the business, Jeff Rosenthal will speak with you.

We have three major areas of our business -- athletic apparel, athletic footwear and hard goods. Our hard goods is made up of team sports -- football, soccer, basketball and baseball. It is not about fishing, hunting, or camping. Our gains were led by apparel which posted a double-digit gain. Our product was fresher, we sold more things at regular price and our margins are up. The suit (ph) areas of business in apparel are active and licensed. Active was led by Nike [indiscernible] profits and underarmor products, both moisture management fabrics that are used for performance and function. Licensed products was up double-digit led by [indiscernible] schools in Georgia, Oklahoma, LSU and Ole Miss. Long sleeve tees and replicate jerseys were very good. Nike outfield authentic products such as Coaches, polos, and [indiscernible] [indiscernible] were also very good. Ladies and youth were very good in college -- ladies was a big emphasis which we didn't have a year ago in the college area.

We have some new items -- retro college jerseys that sell from $70 to $200 were extremely good. Lawrence Taylors North Carolina jersey, Charles Wilson's Michigan jersey and Earl Campbell's Texas jersey.

Pro licensed apparel also posted double-digit gains. Major league baseball was a little bit soft. NBA, however, was outstanding -- led by Nike and Reebok. Retro jerseys from the old Celtics 76ers and Lakers were good. We also have as we mentioned in the second-quarter LeBron James and Carmel Anthony were very good. We also have some new products such as old high school jerseys for Magic Johnson and East Lansing high school Jersey and Tracy McGrady's (ph) high school Jersey.

NFL projects produced double-digit gains still led by Michael Vick (ph) even though he's not playing. Plus there's a new (indiscernible) coming out for our fourth quarter that's a red one, that we think will be very good.

Footwear posted positive low to mid single digits. Margins were up over 2 percent from a year ago. Our inventory is much cleaner than it ever has been. Fleece in kids led the way with mid single digit gains, men's and women's low single digits. Top brands are Nike, New Balance, Reebok, K-Swiss and Converse. Plastic retros shoes are still driving the market -- such as Air Force 1s, Jordan's, Reebok derivative.

Performance also did very well. We had Nike Spirit [indiscernible] and Nike Shocks (ph) at $100 that did extremely well. Equipment was up low single digit. This is the first time in almost 18 months that we were up. We expect this to drive our business going into next year. Exercise and fitness was up, based on basic items like 110 pounds Olympic sets in dumbbells.

Football was extremely good, led by accessories and inflatables. Also football equipment and basketballs were extremely good.

Now Gary Smith will give you some financial data.

For the quarter total sales increased 17 percent to 78.4 million from 67 million in the prior year. Comps were up 6.9 percent. The Company opened 17 new stores in the 13 week period and three stores were closed. There are now 404 stores in operation as of quarter end. Gross profit improved from 30.74 percent to 33.72 percent. This was achieved by a decrease in markdown rates plus improved mark on, improvement in inventory shortage, and the leveraging of warehouse and occupancy cost.

For the period, store operating selling and administration costs increased 19 basis points. The increase was due to costs associated with store closings, adjustments to bonus accruals, new store cost -- we had seven new stores this quarter versus last year and the timing of the inventory taking (ph) expense versus last year. This was somewhat offset by reductions in store four wall (ph) expenses. The Company had interest income versus expense last year due to no borrowings for the quarter and net income for the quarter was 5.4 million versus last year's 3.3 million -- a 65 percent increase.

Earnings per diluted share came in at 34 cents versus 21 the previous year, a plus 61 percent increase.

Year-to-date results are as follows. Total sales increased 12.8 percent to 229.7 million versus 203.7 million in the prior year. Comp store sales for the year have increased 4.2 percent. The Company opened 41 new stores and 8 stores were closed. Gross profit improved 116 basis points year-over-year due to a decrease in markdowns, improvement in inventory shrinkage, and the leveraging of warehouse cost. Store operating, selling, and admin cost decreased. This is due to the favorable leveraging of salaries and advertising expense.

Net income year-to-date was 13.9 million versus last year's 10 million -- an increase of 36.9 percent.

Earnings per diluted share for the year -- 89 versus 66 the previous year, a 34 percent increase. From a balance sheet perspective, the Company ended the quarter with 26 million in cash versus 2 million in debt last year. And average inventories per store down approximately 9 percent on a year-to-year comparison.

Thank you, Gary. Operator, we're now ready for questions.

[Operator Instructions].

David Magee with SunTrust Robinson Humphrey.

Obviously, an excellent quarter, guys. Can you comment on how the Nike shops are helping this kind (ph) of performance? What you're seeing there?

Yes, David, we've increased it from about up to about 40 stores and those stores are performing with Nike Apparel at much better rate than the rest of the stores.

Is it enough to move the needle in terms of what you're seeing at those stores?

Just a tiny bit right now -- hopefully, as we grow this, it will move it more than it has.

And then you did say business so far in the fourth quarter is also strong. And that's in spite of obviously unseasonably warm weather right now.

It's been good, it's been about like it was in the third quarter.

Good, great. Congratulations.

Robbie Alms (ph) with Bank of America.

Fantastic quarter. Couple of quick questions. First the -- I'm looking at the fourth quarter. Could you comment a little bit more on the operating expense growth that you guys had in the third quarter? And how much of it does or does not repeat in the fourth? I'm actually surprised, given the comps were almost 7 percent you didn't get a little more expense leveraged? The second question. You're doing a great job on inventory levels, can you give us some guidance on where you think inventory per square foot will be at the end of this year? Thanks.

Robbie I would expect us to leverage expenses into the -- in the fourth quarter. As you know last year we had a 3 cent gain for the disposition of an operating lease and with the stock split it's a 2 cent [indiscernible] and that is in our SG&A with some of the closings. But I don't expect to close any stores in the fourth quarter. And we should have -- we should be able to leverage expenses.

And then, inventory.

We would expect inventory to be down about the same as it was into the third quarter.

Rick Nelson with Stephens.

Congratulations, too, a follow-up on the SG&A question Gary. If you hold out the store closing expense would you have leveraged SG&A in the third quarter?

Yes.

And a question, also, on cash flows. You've got no debt and a growing cash position -- great position to be in but you're not earning great returns on the cash balance. Can you accelerate store openings? And what is your plan for next year and beyond in terms of store openings?

We certainly added to our real estate staff in terms of deal chasers and we hope to open a lot more stores next year than we did this year but this year we will probably open between 55 and 60 net new stores. We certainly intend to open at least 65 net new stores next year. You know if the deals are there we will accelerate it beyond that.

And you got the staff [indiscernible] infrastructure to support even more store openings in that?

Yes.

Sean McAllen with Harrison Nesbitt and Gerard.

Question on the gross margin. Sounds like from your comments that it was not really driven by mix, but could you confirm that and how sustainable would a margin be at around this level if it's driven by mostly operational efficiencies?

We picked up certainly about 30 basis points in warehouse efficiencies and we had some good improvement in inventory shrinkage, but, certainly, we had improvement because of the mix of the apparel and our shoe margins are showing couple of points -- 2 points increase versus last year. So I would expect this to continue into the fourth quarter because apparel's pretty big in the fourth quarter.

Okay, very good. Any discussion that you can share with us about new markets that you haven't already identified before?

Well we're pretty well going to stay in the 21 states that we operate in. We think there's plenty of opportunity in those 21 states and there's a great advantage staying reasonably tight, geographically, in terms of holding expense down but more importantly in terms of understanding the product to put in those markets because they can vary greatly from state to state even region to region. We want to stay generally tight geographically for the next two or three years.

Okay, so any plans, then, for additional distribution facilities?

We do not need an additional distribution center. Our existing facility of course is supporting 400+ stores today. We think we can double the chain and stay in the same distribution center.

Anthony Lebezinsky (ph) with Sidoti and Company.

A couple of questions. You said -- I think Mickey said earlier in the call that sales trends thus far in the fourth quarter have been on par with the 7 percent comp increase in the third quarter. Any reason why your guidance is 4 to 5 percent for the entire fourth quarter?

Just being conservative. I guess we're a little surprised at the strength of November so far but it gets promotional out there getting up to Christmas and we're just being a little on the cautious side.

We're a little surprised (indiscernible) good sales in November. I think the first three weeks of November have been a struggle for five years and of course the ten days before Christmas has been great for many years and we're just a little bit surprised that it's this good early and we're a little cautious.

Okay, so you just mentioned that the fourth quarter tends to be more promotional so would the gross margin be lower than it was in the third quarter?

Historically, that's the case.

But, still, year-over-year you do expect some good improvement, right?

We do, yes.

Also just to follow-up on that -- I think it was Rick Nelson's question about the use of cash -- looking at your balance sheet you're doing a great job with [indiscernible] no debt, you generate cash and your capital expenditures are still fairly low. Looking at maybe perhaps fiscal 5 and beyond would you say that then maybe you'd consider paying a dividend to shareholders?

Well we discussed it with the board. It is down on the priority list. We think the best thing is to try to invest it in ourselves and grow more stores.

John Shanley with Wells Fargo Security.

Mickey or Jeff I wonder if you could drill down a little bit more on those gross margin issues; it was such an impressive improvement. Was part of it due to a lower promotional environment in the third quarter of this year versus what you experienced last year and do you have a sense in terms of promotional activity that may take us through the holiday selling season?

John (indiscernible) are absolutely on it. It just seems a lot less promotional to us in general [indiscernible] article in The Wall Street Journal last week talking about this very subject, how it was less promotional out there. I think the consumer has gotten immune to somebody being 50 percent off -- I don't think they believe it's a deal anymore and we sell more product at regular price then we have in years during the third quarter. Of course our merchandise is fresher and we're on target. We sell a lot more at regular price. We did do some bogos (ph) last year in footwear on weekends matching the Footlocker stores and [indiscernible] stores. We didn't even have to do those this year. I mean -- we -- our sales were fine without doing it so we've pretty much got out of the Bogo business in the third quarter which -- we're glad to do that. We weren't much into it, anyway, but I think the environment is just much better out there right now than it has been in a few years as far as promotions go.

That's great to hear. Were the merchandised margins up in all three major product categories?

Yes, they were up in all three.

Was there any, Jeff, that was a real standout in terms of margin improvement? You mentioned apparel did well for you. Was that the one category that hit the cover off the ball?

They did real well but footwear margins were up 2 percent, because we didn't have to promote it as [indiscernible].

Turning to the real estate issues again. Mickey, are the 65 stores -- excuse me that you're planning for next year, are they still going to the in the same 5,000 square foot box?

Yes, John, we're committed to that.

And the -- again it's still the power strip center focus. Any change in terms of channel distribution that you are primarily going to go into?

Not really any change. Still going to be a small market focus, 5,000 square feet, number one center in a market that dominates the counties' retailing. We will go on the outskirts of a larger market maybe within 30 miles out of Atlanta which we have already done -- we probably have about 13 stores within 30 miles of Atlanta. And we can get within 30 minutes of a big mall or a big box. But we'll basically be in the small markets.

Will it still be primarily Wal-Mart type of locations or are you going into any other types of formats like regional malls or anything else?

Not any regional malls. There's not many regional malls that need another sporting goods operator. There will be a handful about 65 maybe we'll do five or six but for the most part they're going to be Wal-Mart centers. Maybe an handful of Targets when we get a little bit close to a larger market but for the most part it is going to be Wal-Mart centers.

Is there any additional numbers of big box sporting goods guide that you may be bumping heads against as you fill in some of these 21 state market locations that you are going into?

I don't think so, John. We don't see much happening there. They're just not really interested in our markets.

Dan Wewer with CIBC.

Mickey I hope you pay your people big bonuses. They deserve it this year.

Well, I think that's one thing that happened to us in the third quarter -- we had bonus accruals.

I think Jerry said he had a forfeit [indiscernible] SG&A.

A couple of questions on yesterday's announcement with Footlocker and Nike and just curious to your perspective -- what's going on there and if that could have any impact on the 80 Hibbett stores that compete with Footlocker in 2004?

We compete with Footlocker in about 80 stores out of our 400. And of course that 80 is dropping as a percent but we just -- it's two different animals. We can certainly coexist with the Footlocker. We're a sporting goods store of course, and we've got hard goods and a lot more apparel. We do have footwear but some of our footwear may be a little more performance, a big pleated (ph) presentation. So we're clearly different and we don't -- you know, a Footlocker is a great competitor but we can certainly coexist with one.

I just didn't know -- it sounded like there are some initiatives there where there's going to be a bigger or Nike assortment in the Footlocker stores next year -- you know. It's something we should think about and how it impacts of it (ph).

It really won't affect us much -- our allocations and things of Nike keep going up and we get all the premium products so we don't think it will affect us.

Also question Gary on the shrink you indicated, making progress there. I may have missed how much improvement you achieved. And, curious, is that being driven by the 8 percent reduction in your inventory per store and the fact that that leads to fewer shrink opportunities?

Yes I think so, there's less merchandised to handle, less merchandise to move around. We're showing a better run rate this year than we did last year. Yeah, I think the whole merchandise planning has led to the improved shrink and we put an emphasis on that here at the Company and a lot of people's bonuses are tied to the shrink rate. So we're happy with where it's going.

We got a very strong loss prevention department. They do a great job.

Last question I had. I know you brought in some consultants from Parisian or Profitts or Saks group, I guess what a year ago? Little over a year ago and what type of initiatives they're working on as far as next year and how much of an improvement in [indiscernible] will those initiatives lead to next year?

We've added to the staff here this year some seasoned people. We would expect the turn (ph) to improve another 15 basis points or so next year. And the emphasis is to work down at the store level and assortment planning at the store level. Which we've been pretty much a top-down company and now we're going to build from the bottom up. And we think there's some good opportunities there.

And is that already taking traction? Is that one of the key reasons we're seeing the improvements in turns this year or do you really begin to see the big benefits of that next year?

I think it's starting to take effect now with some of the planning but I think next year we should see the fruits of that, really.

[Operator Instructions]

Sam Poser with Mosaic Research.

Good morning. Congratulations. A couple of questions -- I am following up on that last question about turns. Would that also -- that would also lead to improved margins going into the next year? Or vice versa?

Yes. I would think so, yes.

Any guidance towards what you're looking for there?

We're looking at maybe 15, 20 basis point improvement in margins next year.

Great and can you talk more towards the shortages -- clearly, the shortages were also better than you expected or as you expected. Could you talk to what exactly you're doing differently to get there, besides the inventory reductions?

Well, we've increased the number of stores that are on the Sensormatic -- the electronic electronic surveillance in the tagging and that's proved to be a real quick payback for us.

Of course our loss provision regional managers have got another year's experience. And they've had a lot of schooling and education in the last 12 months and I think they're more effective. We've just improved in that area.

And one last question. I assume you guys are going to [indiscernible] a handful of stores in about 80 stores or so are going to see a Le Brons (ph) shoe for the holiday? Is that about right, Jeff?

Probably more than that - yes.

Is that -- will that affect [indiscernible] for you [indiscernible] ?

I think it's going to be a good release - yes.

Murray Weinstraub (ph) with Hibernia [indiscernible] Capital.

I want to focus on what seems to be maybe an opportunity and that's in equipment. Last couple of quarters you have been reducing your inventory via taking out SKUs in the equipment category. If you could highlight maybe more specifically what's going on there and what you're seeing that led to the positive turn in that group? And what you think you can do going forward?

We have changed our philosophy in hard goods. We're doing -- we're going to lot more vendor managed inventory so they're holding our inventory so we're filling in as needed from sales. We've cut out categories such as tennis and gold which were slow movers, and slow turns and slow margin.

We're absolutely going to drive our price points in the core business -- baseball, softball, football, basketball, soccer, baseball. We're going to put the emphasis on the middle and higher price points, the higher quality goods and -- of course that's where we've always put our emphasis but it's going to be even more so. We want to drive our price point.

Well, typically, that's one of your higher margined items.

Yeah, it's usually our leader.

So, you're taking SKUs from the nonselling and refocusing on the team sports?

Yes.

All right. So what's -- how are you -- is that what's going to continue to lower your inventory going forward? Further emphasis in that area? Are you going to return it, start shifting your focus to something else?

Our biggest reduction in inventory's really come out of apparel and we've had our biggest gain. So it's really all three avenues of the business. We're reducing inventory and just taking a closer look at our assortments and what we need to do to make things move faster -- it's not just hard goods, it's apparel [indiscernible].

All right, great, what I wanted to question is how are your newer stores performing in the recently entered regions such as Nebraska?

Our Nebraska stores are fine, our Arkansas stores are good. In fact, this year's group of new stores is about 5 percent above the new store model in sales, year-to-date.

Gentlemen, at this time, we have no further questions in our queue. I'd like to turn the call back to you for concluding remarks.

Okay. Thank you, Operator. We're excited about our results in the third-quarter (indiscernible) 6.9 comps with 8.5 percent less inventory. We think that's a great job. Our product margins are up. We're selling more product at regular retail prices. We've had a $28 million turnaround in our cash position versus last year. We think the future is very bright in Hibbetts. We're going to stay in small markets where we are absolutely and sincerely needed by the consumer and by the landlord and by the vendor. We think we can go forward and be successful. We're going to stay tight geographically.

Thanks for being on the call today. We look forward to to reporting on our fourth-quarter results on March the 12th at 9:00 Central Standard Time. We will have a press release on January the 9th as it relates to our holiday sales. Thanks for being on the call.

This concludes today's conference call. We thank you for your participation and you may disconnect at this time.