Hibbett Inc (HIBB) 2005 Q2 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 Chairman of the Board, Mr. Mickey Newsome. Please go ahead sir.

Thank you and Good morning everyone. This is Mickey Newsom and I have with me Gary Smith, our CFO and Jeff Rosenthal, our Vice President of Merchandise. We sincerely appreciate you being on this call today and participating. We appreciate your interest in Hibbett Sporting Goods. Before we get started, Gary Smith will cover the Safe Harbor language.

In order for us to take advantage of the 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 and 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 our sales for the second quarter increased 14.1 percent; same-store sales increased 2.5 percent; earnings per share were 13 cents versus 14 cents 1 year ago. Product margins was hurt because of a more dramatic shift than expected in sales from pro and college licensed apparel to footwear. Margins are much higher in apparel than footwear. We were also very aggressive in taking markdowns and keeping our inventory clean and fresh and we feel good about our inventory position.

We did open 19 new stores and our on track to open 65 new stores this year net of closings. New stores on average are performing above sales plans.

Now for some comments on second-quarter sales. May was actually a very good month. At the time of the conference call, our comp store sales were in the 7 to 8 percent range. And they ended the month in the same range. But remember this May the weather was spectacular versus last year. There was a lot of rain last year and no rain this year. We did take a lot of markdowns in May but we always take a lot of markdowns in May. It's an in between season month; there is no new product flowing from vendors and it's a time to clean your inventory up. And we hope to make our margins back up in June and July as we have in the past.

Strong apparel sales in the previous years hurt our June. June was a tough month. Comps were up just slightly. Apparel was very week especially the pro and college piece. Of course pro is fashioned with Hibbett and college is more fan based. We did have a lot of late deliveries in college from our vendors, which hurt. Exercise was also weak. Footwear was stronger than expected. But overall our gross margin got hurt because of the lower margins in footwear versus the very high margins in apparel of 1 year ago.

July, the most important month of the quarter, comps were down low single digits in pro and college license apparel and in exercise was our problem. Footwear was very strong and I will remind you footwear because becomes a very big piece of the business in August. We were hurt in July by several factors. This year versus last year the weather was not nearly as good. A lot of rain in July this year where we had the rain in May last year. Last year we had tax refunds beginning in July; 3 and 4 and $500 to these young people and that is our customer. We think that probably hurt a little.

The tax free days in the South where several states have tax free weekends, more of those shifted from the second quarter last year into the third quarter this year resulting in softer comps for July.

The calendar shift probably hurt some. If you remember last year the July ended on August 1, this year July ended on July 30th. That change in calendar cost us 4 or $500,000 in comp store sales.

Comments. First quarter, second quarter sales on comps as it relates to strip centers and enclosed malls. Remember 70 percent of our stores are in strip centers, and that is our money focus going forward. Strip centers did outperform the malls. Strip centers were up the neighborhood of 4 percent, the malls were slightly positive. This reflects the fact that you sell more pro licensed products in enclosed malls than you do in strip centers.

Now for some comments on specific areas of the business, our Vice President of MERCHANDISE, Jeff Rosenthal will take over.

We have 3 major areas of business, footwear; apparel, which is broken down into licensed and branded apparel; and equipment which we focus on teams, football, baseball, soccer and volleyball and fitness. Starting off with apparel, college was down low single digits. We had late deliveries in June and July; however, a positive in college apparel were the women's and kid's business which we expect to be good in the third and fourth quarter.

Pro apparel was down double-digits. We were anniversaried against LeBron James, Carmelo Anthony and Michael Jordan retro jerseys from a year ago as the fashion shifted which we expected, it was very difficult to go to against. Also in NFL, Michael Vick had a new jersey out in July that we were also going against. And we're going against last year's very high margins.

Branded was up low to mid single digits. Under Armor continues to be extremely strong and if anything gaining momentum. Urban brands such as Enyce, Dickie's, and Ecko have been very, very strong.

In footwear up high single digits led by ladies and kids up high double digits. Some of the highlights were Nike Shox, Nike Impacts, Adidas 8Q (ph), K-Swiss Classics, Converse and New Balance 574s. We definitely see a shift in more high-priced technical footwear going forward.

Equipment, our equipment is made of two areas, team equipment which is all the baseball, football, soccer, that type of the equipment. Our goods team was up high single digits. Football was up high double digits and baseball was up high single digits. We have a lot of new products from Under Armor, Nike, Easton that are help driving those sales. We continue to struggle with business. One new item that we have in fitness is the ab lounger which is selling for $99 which we see being very good as we go into the holidays.

Thank you, Jeff. Gary Smith will now comment more specifically on our financials.

For the quarter total sales increased 14.1 percent to 81.8 million. Comps were up 2.5 percent. The Company opened 19 new stores in the 13 week period and closed 3. There are 449 stores in operation as of quarter end.

Gross profit decreased from 30.65 percent to 28.94 percent. This was primarily due to increased markdowns to manage inventories and selling a larger percentage of footwear versus apparel.

For the period store, operating selling admin costs decreased from 21.05 to 20.88 percent. The year-over-year reduction in rate was due mainly to the favorable leveraging of corporate salaries as well as other store related costs.

Operating income for the quarter was 5.8 percent versus 7.09 percent for the same quarter last year. Net income for the quarter was 3 million versus last year's 3.2 million. Earnings per diluted share came in at 13 cents, versus 14 the previous year.

Year-to-date results are as follows, total sales increased 17.8 percent to 178.3 million; comp store sales increased 5.8 percent. The company open 27 new stores for the year and 6 stores were closed.

Gross profit improved 5 basis points year-over-year. This was mainly due to be positive leverage of warehouse costs which were offset somewhat bought rising occupancy costs in flattish product margins.

Store operating, selling and admin cost decreased 43 basis points due to the favorable leveraging of salaries both in corporate and stores and other store related expenses. Net income year-to-date was 11.1 million versus last year's 8.5 million an increase of over 30 percent. Earnings per diluted share came in at 46 cents versus 36 -- the previous year 27 percent increase.

From a balance sheet perspective the Company ended the quarter with 44 million in cash versus 22 million last year. While average inventories per store were down approximately 7 percent on a year-to-year comparison.

Thank you, Gary. I might remind you another piece of the press release due to our favorable cash position, and the fact that we feel like our stock is now undervalued, our Board has approved a $30 million stock repurchase plan effective next Tuesday.

Now were ready for questions, operator.

(OPERATOR INSTRUCTIONS) Rick Nelson with Stephens.

Can you talk about the content of inventory as it stands now, do you expect any lingering mark down as we enter the third-quarter?

Rick, we really don't. We probably were a little bit too aggressive in the second quarter on markdowns. Our inventory -- aged inventory is the best it's been in several years. We are in pretty good shape there.

On licensed apparel, how big a proportion of sales is that in the second quarter and does that grow proportionately or contract down in the back end of the year?

It grows a little bit but the college piece gets much larger than the pro piece as we start and that is not as fashion drive, Rick.

And our college business is more consistent. We do have some great teams in the South this year, ranked in the top 15 preseason which our college business should be good.

Comps you mentioned in august to date have improved, any feel for the magnitude?

We're in the 5 to 6 percent range the first 2 weeks of August.

5 to 6. How much of that do you think is the tax-free holiday shift and how much is actual momentum in the business?

I think there is some of that in there -- I don't know exactly how much but I know the last couple of days we're pretty much past that calendar thing. They have been very strong. The trend looks good in August.

Very good. Thanks.

David Magee of SunTrust Robinson Humphrey.

Good morning. Just a couple of questions. One is as you set the range for the current year in terms of EPS expectations, what would you consider as a swing factor there between hitting the bottom or the high end of that range? What piece of business do you see as a flux point there?

I think it would probably be the apparel if we got some more momentum in that. We are pretty conservative in planning our margins and our EPS going forward.

Would it be a pro piece again as the swing factor, do you think?

Yes, we had planned that going forward at current trends. If those improve then we could pick up on that.

Any early read on the NFL licensed apparel?

It's been a little tough, David out of the gates because last year they had Michael Vick jersey in July and June. But expected to get better as it goes more into our outlying markets like cowboys. A year ago they wouldn't sell Cowboy merchandise, then Jerry Jones had a thing with JC Penneys, and Dallas Cowboys alone in the 5 states that we couldn't carry them in last year we expect to gain quite a bit of business.

The third-quarter -- apparel is the question mark and we think activewear is going to be fine, we think college will be fine. It's that pro piece that is the big question. But having said that, our footwear should be good. We need big comps. If we'd have had 7 or 8 percent comps in the second quarter, we'd probably be fine. With all the allocated shoes we've got versus last year, we think footwear could be good. Whether it's enough to offset everything we think we've got a lot better shot at it in the third quarter than we did in the second quarter. A lot better shot.

Jeff you mentioned the urban based business looking pretty good right now. There is some of that fashion. What is the risk there in terms of any volatility with that or your exposure with that business, if it got cooler?

We're hoping just to make up some of the dollars that we're losing. We look at the brands every single week and what we are carrying, right now it's telling us that we're selling it very, very well.

If it got soft all of a sudden, the exposure wouldn't be nearly as big as what you had with pro licensed?

No.

Thank you.

John Shanley, Susquehanna.

This is David Meyer (ph) in for John Shanley. Just a couple questions. It sounds like college, the only real big problem in the second quarter was that you had late deliveries? I mean did you see any other slow down or was it just the fact that you just got the products in late?

That was probably the biggest factor. We were -- our inventory was extremely clean and we were expecting deliveries to come in June and early July and they ran late. That was probably the biggest problem in college.

I was wondering if you could give me an idea of how your merchandise mix for the back half of this year is going to be different from your merchandise mix -- if you could get me some sort of numerical. I know you don't like to give out the percentages but how much will go from (technical difficulty) in the future?

We are in 21 states and we think there is another 400 opportunities in that 21-state area. We're in West Texas and South Texas now we will probably do a couple of stores in Eastern New Mexico right across the border but generally we will stay in that 21-state area because we just don't need to go beyond it. The tighter we can stay the better chance we've got to understand the needs of an individual market. So we don't see ourselves expanding. If and when we do, which is probably some years out, we see ourselves staying in the Sunbelt.

Great, thank you guys.

Sean McGowan, Harris Nesbitt.

Thank you. A couple of questions. Let me start with fitness area. What do you think is behind these trends of weakness there? Is it a product specific thing? Is it a lifestyle thing? What is going on there?

I'll give you my opinion -- Jeff has a strong opinion too. I know here in Birmingham the high schools, if you went and saw their weight rooms, some of them are dramatic. Some of them look like a college weight room. There was an article in the paper yesterday, a very small liberal arts school here in Alabama has this huge facility weight room and there's a chain out there called Curves, its for women only -- they are everywhere., It's a workout place. It's a retail store that's a workout room. Some of that could be it it's just so many places to go workout now.

That could be hurting because the weakness and physical fitness didn't just start recently -- it's been week, Jeff how long has it been week? A couple of years. Jeff, you say what you got to say.

I agree, I think a lot of places are opening where more and more people are working out. Some of the basic type -- a couple of the places that are open up on every corner and the places that we're struggling are just basic things benches and weights. One other thing that we hurt is the Atkins diet -- where we have people that we know that lose 60 pounds and they don't have to workout anymore with the Adkins diet. I know it sounds kind of our far-fetched, but we've heard that as part of it too.

So that business will come back when they realize they can't keep it off?

That's right.

Present company included. Another question, can you talk about the expansion -- you stated that you are in 21 states, what would be the need in the future for additional distribution facilities?

Our existing distribution center is designed for 850 stores. We don't have to do anything for a couple of years. At some point in time it will probably be advantageous to have a second distribution center west of Alabama but we're a little ways off from that.

Right, the capacity of that distribution center is one thing, whether it's the most efficient way to move stuff around is another. Do you still feel like even if you continue to open stores further west you can get another couple of years out of that facility?

Absolutely, no question.

Okay and Gary, last question. Can you give us an idea of how much of the drop in gross margin was due to mark downs versus mix shift?

Probably the majority of it was due to mark downs. Two-thirds to three-quarters.

Thanks, that's helpful. Thanks a lot.

Ralph Jean, Wachovia Securities.

Mickey, one of the things you talked about as a positive for the fall was Nike equipment. What are some of those specific items and do you have an early read on that?

Yes, some of it is football equipment like Nike Shin Shields, receivers gloves. We also had a Ben (ph) ball which is a soccer ball, basketballs and such which we expect to be a very, very big business in our team area and we are getting full price and the sell throughs have been very good.

Thank you.

Dan Wewer, CIBC World Markets.

I was out to your store in Austell, Georgia a couple of days ago. A couple of things I wanted to ask you about. I did confirm that on the licensed apparel there was not any clearance markdown left. But there is still a significant amount of that product on the wall. And it sounds like that business may be trending downward for a year or 2 as you talked about the fashion trends getting a bit more preppy. At the same time, you guys talked about the strength in Under Armour but at least in the store I visited there was only 1 floor side display of Under Armour. In fact, the cashier was apologizing for how little they had in the store.

It got me wondering if maybe there should be some meaningful space reallocation changes in place given some important changes in fashion trend?

I'll address part of that question and then Jeff you address the other. That is a brand new store and sometimes when a store is new you don't have your product in there from day 1. I'll assure you -- you go back in 4 weeks and you will see a lot more Under Armour for sure. It is just because it just opened. We will have that straightened out.

I was trying to find the closest store and it was --.

Let me say this. I wish all of our stores were performing like that store, that store is way above (multiple speakers).

She did indicate that they had a good back-to-school business, the tax-free holiday help -- she said it just slows down after school starts back up. But it did sound like in that it started off well right before back-to-school.

That store is going to be a great store.

Just on the amount of wall display for license apparel. Is there an opportunity to start focusing on another category?

Yes, part of the thing with some of the licenses, we are still selling it; we're still selling a lot to a fan base. We bought it right; we're making money at 39 and 49. The biggest difference is the price last year was a lot higher. It is still selling, it's just not selling at the rate it was. It's not like nobody is wearing jerseys because there is still a big fan base out there and absolutely this floorspace will start turning over as we get more into the fall season.

I had a second question on the discussion of weather. What I was trying to square that with some of the comments that your strips did better than your mall stores. You'd think it would be just the opposite and also if weather was issue why would category's like team sports and footwear be strong? Because you would think those would be more weather sensitive than things like exercise equipment.

Of course strip centers are more destination. Equipment works much better in the strip centers than it does the mall. That's just the way it works. The strip centers absolutely are better at selling equipment than a mall store. I think they always have been. There's just more destination and more convenient if you got especially if a piece of equipment is larger.

What about on footwear strength? How do you square that with -- and team sports doing well if the weather was wet? In other words do you think that participation in team storage would be hurt by poor weather and yet you are showing good sales in that category?

We had a good quarter in team sales. We've had a greater incidence on our inventories as it relates to team sales too. We've worked our way out of golf and tennis essentially over the last 2 years and team stores sports is what we've always represented. That's what we are really emphasizing more and more. I'm going to say all in all in the second quarter weather was not really a factor. The weather was -- it was a positive factor in May and a negative factor in June. To me it's kind of a wash.

The last question I had was just regarding the fairly cautious earnings outlook for the second half of a year. Is that taking into account the fact that you got about 15 percent of your business that will just likely not do well for the balance of the year and maybe in the first quarter of '05?

Certainly like I mentioned before, we had planned part of our business at current trends. I think you are right there is a portion of the business that we have an uptick on and I think we would certainly do better than those estimates because we are being somewhat cautious.

Thanks a lot and good luck.

Ryan Rinteria (ph), (indiscernible) Asset Management.

All of my questions were answered, so thanks.

Eric Tracy, BB&T Capital Markets.

This is Eric Tracy calling in for Dave Turner. Just a follow-up on a question from earlier, it mentioned that two-thirds of the gross margin pressure was due to markdowns. Kind of on a go forward basis with respect to margin implications and the merchandise shift, can you see that being that third going forward or is it the footwear and brand merchandise is going to come in to be improved?

Certainly we have the footwear. There's a good differential in rate between that and licensed apparel, selling it full retail at the higher prices. We're looking at gross margin dollars and certainly earnings per share and the strength we've had in the footwear business and the team business should negate that somewhat.

Just with respect to Nike allocation. Obviously the Footlocker and Nike relationship continues to improve what you all see there going forward?

30 percent of our stores compete with the Footlocker of course that means 70 don't. I don't know a whole lot about their relationship but I know our relationship with Nike is excellent. They really like our approach of we're full price, full-service, we don't promote 50 percent off or anything in the paper. We are full margin and I think for that reason we get favorable allocations from Nike.

Thanks, guys.

Anthony Lebiedzinski with Sidoti.

I apologize. I joined the conference call a little bit late. I think I overheard something about this -- that you had some products coming in late. If you could just go over that one more time, please?

We had some of our college and pro, NFL and college apparel came in 4 to 6 weeks later than we were hoping.

What was the reason for that?

They were just late deliveries coming from our vendors.

With respect to these sales tax holidays that you mentioned in your press release. Is there any way you can quantify that how big that impact was to the shift from July into August?

We think it cost us 4 to $500,000 in comps.

In terms of guidance for the third quarter talking, are you talking about comps thing up to 2 to 3 percent it looks like August is off to a better start than that. Are you just -- I know you guys don't give out monthly sales but as far as the comps trends throughout the quarter, do they get tougher actually throughout the quarter or how should we look at that?

They are really about the same the rest of the quarter.

August is the most important month, third quarter, I might add.

And then it progressively slows down?

Yes.

In terms of the stock buyback, do you actually plan on start to purchase stock on Tuesday?

Yes, if it's consistent with our strategy, we will start buying next week.

Thank you.

Michael Weisberg, ING.

Is the number -- the pro apparel exposure is that about 15 percent? Gary I missed something on the call -- is that about right?

I wouldn't think it would be anywhere near there. It's probably half of that roughly.

Okay, the exposure to the pro side?

Yes.

Are inventories on the pro side -- did you take all the markdowns and clear it out by the end of July or is there -- how much of a linger is there as we go into the third quarter?

We took the majority of markdowns in the second quarter. There is always some lingering product that you will take a little bit of markdowns, but the majority of it we did take in the second quarter.

So the decline in margins going forward in gross margins would be a function of mix shift as much as anything?

Yes.

Is that right?

Yes.

Have you looked -- you've had a great run on the retro stuff which I know you sold at great price points and very good margins. Are you looking at whether that's something that ended and you have to look for a new kicker in that whole area? If you do, what would be -- if in fact that turns out to be that case what would be your strategy in terms of merchandising?

Some of it's not going away because some of it there is still a fan base and some of the kids, especially in youth, they just like wearing jerseys and stuff. There is still some business. It's not completely gone away. The other part is there are some other brands we're selling to an urban customer like Dickies or Enyce, those type brands are doing extremely well in some of those markets we were selling jerseys in last year. We will change some of those dollars towards that. And footwear continues to be extremely strong in those markets.

Great. Thanks very much.

Brian McKinney (ph), Beacon Investment Management.

Good morning gentlemen. Just 3 quick things. One on the buy back at current prices, Gary you might tell me I think it works out to approximately 7 percent of outstanding shares?

That is correct.

Has the company ever bought back stock before?

They had not.

Second item, in Mickey's comments I don't think if you mentioned this Mickey, I missed it -- the impact of gasoline prices as a tax on the consumer?

That could be a factor. Our consumer is young and our consumer is not a wealthy consumer. I'm sure the price of gas is hurting. Of course the price of gas is up in March and April and we did fine. Maybe it's a delayed reaction and it’s hurting more now than it did early. I'm sure that has something to do with it.

Third item -- any impact, positive, negative that you would have expected or not from the Olympics?

I don't think there will be anything negative but we are hoping for something positive to come out of it. Jeff, we just don't have any trends yet. We don't have anything yet, but we know boxing will be good this fall because of the Olympics and we will sell a lot more tumbling mats for little girls that want to be gymnasts. But we don't see any fashion trends come out of it yet. But now the Nike Miler shoe that's being heavily advertised on the Olympics, it's really good, it's strong.

Great, thank you.

John Lawrence, Morgan Keegan.

Good morning guys. Mickey, would you comment a little bit -- if you look at the third and fourth quarter, you mentioned a couple of products that start on that college -- on the college piece of the business, does that start off strong with the beginning of the season and stay strong or does it drop-off and then pick up for holiday?

It stays extremely strong through all of the fall and then it starts -- hopefully as certain teams start winning, some teams get stronger than others, it's pretty much all the second half and in the third and fourth quarter it’s pretty strong.

It's a great Christmas item in our markets.

Gary, would you just comment get on -- give us CapEx expectations for '04 and '05, please?

The budget for this year is close to 10. I imagine the budget next year will be close to 11, 11.5.

Thanks guys.

(OPERATOR INSTRUCTIONS) Sam Poser, Mosaic Research.

Good morning. You said that the footwear business had exceeded your expectations in the second quarter. With that, even with your increased allocations of statement product and so on, do you have enough inventory coming in to be able to support that business if it continues the way it's been going?

Sam, if I said it exceeds our expectations that is probably inaccurate. We expected footwear be good because of the allocations and it was good. In fact, we thought it might have even been better but it was very good. Jeff, you speak to the allocations

We feel like we have enough inventory to sustain it and we think that it will continue to get stronger. There is no reason -- we're not seeing anything that would make us believe anything different.

Great. Then can you walk through your average selling prices of this year versus last year by category?

In footwear?

Yes. In footwear and apparel and so on?

Footwear in the second quarter they were up slightly, they were up.

And apparel was down because of the jersey difference, and team is up.

Great. Do you do things to track the footsteps in the door and if so, can you tell us what's been going on there?

We don't do that.

All right. Thank you.

Mr. Newsome, at time we're standing by with no further questions. I'd like to turn the conference back over to you sir for any additional or closing comments.

Thank you Operator. I want everybody to remember now we have been on an 11 quarter winning streak at Hibbett where we have either met or exceeded expectations. So you could make a case we missed a 9-11 but I think the expectation was lowered also. We think we are on track to get back on a winning streak in the third quarter. We're confident that we can do it. Nothing has really changed at Hibbett. We're going to do 65 new stores this year net of closings. We will do more next year; we're going to continue to go to small markets where nobody else goes. There is 400 additional markets we can do in our 21-state area. We think the future is very bright.

Thanks for being on the call today. We look forward to speaking with you on November the 19th at 9:00 Central Standard Time about our third-quarter results. Thank you.

This does conclude today's conference. We do appreciate your participation and you may now disconnect.