Hibbett Inc (HIBB) 2005 Q3 法說會逐字稿

Good day and welcome to the Hibbett Sporting Goods Incorporated 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, President and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead, sir.

Thank you operator. This is Mickey Newsome and I have with me Gary Smith, our CFO and Jeff Rosenthal, our Vice President of Merchandise. We appreciate all of you joining us today. 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 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 a solid third quarter. Sales increased 17.5 percent. Comp store sales increased 5.4 percent. Net income increased 6.5 percent, and I will remind you we were going against a very tough comparison of one year ago. On year ago in the third quarter, our net income was plus 65 percent.

We opened 21 new stores in the third quarter. We expect to open 18 to 20 new stores in the fourth quarter. New stores on average are performing above the new store model. We did open 2 new stores in a new state for us. We opened in Clovis, New Mexico and Roswell, New Mexico, which are in the eastern part of the state.

Now for some comments on our third-quarter sales. All 3 months were positive in the mid single digit range. I'm very proud of the fact that comp store inventory was down 9 percent, and we planned for it to be down because we are on a mission to turn our inventory faster. Of course, that resulted in a lot of cash which Gary Smith will give you more information on in just a minute. But we did get our annual -- at our quarterly meeting yesterday approved an additional $10 million stock repurchase on top of the $30 million that we approved in our August meeting.

Our buying staff did a great job of having the right products in the right markets at the right time. The customer service continues to be a very strong point of Hibbett Sporting Goods. August comps were in the 5 to 6 percent range. September's comps were in the 4 to 5 range, down slightly from August, but October comps were in the 6 to 7 percent range and that was our strongest month in terms of comp store sales. November's first 19 days continue to be in the 4 to 5 percent range in comp store sales increased.

Now I will remind you that the first 19 days of November are not overly meaningful to the results of the fourth quarter. The 10 days before Christmas and the week after are the most important time frames.

Now Jeff Rosenthal, our Vice President of Merchandise, will comment more specifically on sales in the third quarter.

We have 3 major areas of business; apparel, footwear and hard goods. Hard goods is made up of team sports, football, baseball softball and soccer and we also do fitness. Starting off with apparel, we break it off into 2 different businesses; branded active wear and licensed business. Our branded active wear was down low single digits. What drove the business during this time were Nike athletic apparel, urban brands such as Enyce and Dickies and technical products such as Under Armour.

Our licensed business we break it into 2; college and pro. College was down in August due to late deliveries and it was -- the football season started after Labor Day this year which caused it to be a week later. So we were up at September and October. What' driving the business in the college world is women's and kids. The pro business continues to be down double digits and continues to be very soft.

Footwear. Footwear was up double digits. Men's women's and kid's were all up double digits. Cleats were up high single digits. Some of the trends that are happening in footwear are that technical and performance footwear continued to be extremely strong. Price points continue to rise. Some of the key shoes for the third quarter were the Nike Land Shark which is a football cleat. Adidas provided TRX, which is a soccer cleat. Nike Shox and Nike Impacts were extremely strong. Also K-Swiss and New Balance Classics did extremely well during the back-to-school period.

Hard goods. Team sports were up double digits as we continued to put our focus into higher price points. It was up double digits. Overall hard goods was up mid single digits. The team was led by football accessories such as Shock Doctor which is a mouthpiece that runs from 10 to $20. We used to sell a lot of mouthpieces below $5 but now with our emphasis on more high-end product and better performance, we're starting to see dividends for that.

Receiver's gloves were good for Nike and Under Armour from 30 to $40. Also skateboards from 69 to 99 continued to be extremely strong. We are well positioned for the fourth quarter with cleaner and fresher inventory.

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

Thank you. For the third quarter, total sales increased 17.5 percent to 92.1 million, while comp store sales grew 5.4 percent. The Company opened 21 new stores and closed 2. There are now 468 stores in operation as of quarter end.

Gross profit rate decreased 70 basis points due to reduced apparel margins, especially in pro license and a shift towards footwear. This was however offset by reduced rates in occupancy and warehouse.

For the period, selling an admin costs decreased from 20.65 percent to 20.32 percent. The reduction in rate was due mainly to the leveraging of salaries as well as other store and corporate related costs.

Operating income for the quarter was 10.67 percent, versus 10.75 for the same quarter last year. Net income grew to 6.3 million versus last year's 5.4 million. And earnings per diluted share came in at 26 cents versus 23 cents the previous year.

Year-to-date results are as follows. Total sales increased 17.7 percent, to 270.5 million, while comp store sales increased 5.6 percent. The Company has opened 48 new stores for the year and 8 stores were closed.

Gross profit decreased 21 basis points year-over-year, due mainly to reduced apparel margins as well as the shift towards footwear. These however were offset by reduced occupancy and warehouse cost.

Again selling an admin costs decreased 57 basis points year-over-year, due to the favorable leveraging of salaries as well as other store and corporate related cost.

Net income year-to-date was 17.4 million versus last year's 13.9 million, an increase of plus 25 percent. Earnings per diluted share came in at 72 cents versus 59 the previous year, a 22 percent increase. From a balance sheet perspective, the Company ended the quarter with 44.5 million in cash versus 26 million last year.

Average inventories per store were down a little over 9 percent on a year-to-year comparison. And as part of the Company's recently announced stock repurchase program, we repurchased approximately 365,000 shares during the quarter.

Thank you, Gary. Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS) David Magee with SunTrust.

Great quarter. A couple questions on the apparel side. Does apparel grow in importance going to the fourth quarter and if it does, does that worry you vis-à-vis your guidance for the fourth quarter?

David, it does grow but we have planned for it in footwear and in team sports to make up for some of the losses in pro license.

And then secondly, given the success you've had in terms of going more technical with regard to accessories in the footwear, is there opportunity to do the same on the active wear side in apparel?

Yes, we are looking to grow our average price per hanger and be a little bit more technical. We are to some degree with Nike and Under Armour already.

As far as some other lines, would you expect that to be kind of a first-quarter impact as you do that?

I think it will be an ongoing thing but we are gradually growing that and we're looking to sell better product.

Thanks, good luck.

Thanks David.

Dan Wewer with CIBC.

Question on the gross margin rate -- I think Mickey or Jeff could answer this. I understand how the mix works against you with footwear growing and I think it is a little over a 40 percent margin business but I believe you had indicated that apparel margins have weakened as well. I guess I was under the impression that most of the clearance on that was taken care of during the 2Q?

Part of it -- our footwear margins continue to increase and part of the reason in apparel is we're just not doing as many sales that we did a year ago at full price. Not that we're doing a lesser margin, but we're not selling as much apparel as we were a year ago.

Additionally the team sports area is up substantially. Now that carries nice gross margin. That makes up a lot of ground.

Just within the apparel category, maybe I misunderstood, but are margins where they were a year ago or are they realized margins running lower than a year ago in apparel?

Yes, they are less.

Because of more clearance?

Part of it is because the license fee was such margin and it's not that way this year.

Right. And then just a follow-up on the license it sounds like it's not just the pro license that's weak, but maybe the collegiate business is not quite as good as it was as well?

No we were down in August from some late deliveries and the season starting but we have run up September and October in college.

We feel good about our college business going into the holidays because we have a chance for Oklahoma and Auburn to be in the national championship picture. Our greatest hope is we will have a split national championship and then it would really be good.

And just the last question I have, given that the outlook for the pro license business has remained soft, what are you doing in terms of changing mix to make up for that? Will it be focusing more on Dry Fit (ph) and Under Armour or are will you maybe grow footwear at a faster rate?

We'll grow footwear at a faster rate and we will also grow some other areas of the business such as Enyce, Dickies and some of that will make some of it. It won't make up all of it. In our team sports we're growing at a faster rate also.

Great. Good luck.

Rick Nelson with Stephens.

Thank you and good morning. Mickey, it looks like you've scaled back store opening targets a bit, 58 to 62 now, prior guidance was 65. I'm wondering what's causing that and how should we think about next year?

Some of what is causing that is landlords not delivering the space on time and they are flipping into next year. Several leases and our goal next year is 15 percent new store growth.

Okay. Your balance sheet is pretty solid, debt free and building cash position, 45 million now in cash compared -- up about 20 million year-over-year. How should we think about that cash and your priorities -- store openings versus buybacks and dividends and various options you have?

Rick, this is Gary. We now see -- and the Board announced additional $10 million for stock repurchase. And that will take it to 40. We repurchased approximately $7 million in the third quarter. We're going to be repurchasing stock as long as it's accretive to us. We certainly can fund new store growth internally and have excess left to repurchase stock. And we have not crossed that dividend barrier yet and we're not quite there are from that standpoint. We will be in the market on an accretive basis buying stock and looking to build stores.

What is required to accelerate that store opening plan for next year or beyond?

What is required today we had 6 deal chasers, 3 of them are relatively new, meaning less than 18 months experience. In fact one of them only has 3 months experience so they are not up to speed yet. As they gain experience along with the 3 experienced deal chasers in real estate that we have, we think we can get our store openings.

Thank you. Congratulations.

Thanks.

Sean McGowan with Harris Nesbitt.

Hi guys. A couple of questions. Inventories reductions, you said same-store inventories were down 9 percent, was that concentrated in any particular area or was that spread evenly?

I'll let Jeff speak to that.

It's really across the board. We're down in all 3 categories and it was a concentration effort across the board. We're down a little bit stronger in apparel than we are the others.

So it wasn't all apparel?

No.

Second question, could you comment on the impact that the weather may have had during the quarter, positively or negatively?

Our September was a little bit weaker than August and of course October was our strongest month. It was not that much weaker. We had a lot of stores closed. I think we had closings, if you multiply the days closed times the stores affected it was like 350 days versus about 30 days last year. At the end of the day, those stores came back pretty strong in October and they also, as a group, had nice comps because of people starting to get that insurance money, getting those pre-paid credit cards from the Red Cross. Sometimes they don't build something back as far their house, they come and buy stuff at a sporting goods stores. So it didn't hurt us that bad. It probably cost us 1 percentage point on comps, which would be like 1 penny. That would be the most it would have hurt us.

Pretty good. Last question on apparel. The comment I think I heard was in the license area -- or rather in branded was down low single digits. Any thoughts there on what's going on?

It just started off, it got much better in September and October. August was just a tough month in apparel. And we feel pretty good about it going forward.

Were you surprised at the performance in the quarter in that area?

We were hoping to be up slightly, and we were a little surprised, yes.

Thank you.

Chris Svezia (ph) with Susquehanna Financial Group.

Good morning gentlemen. And I will add my congratulations as well. Not to beat this to death, but just on the apparel business, it seems like going off of Jeff's comments, it seems like both the license college business and your branded business picked up toward the latter portion of the quarter, is that correct?

Yes.

And what in branded is driving the business and where you are seeing the growth? Is it mostly coming from the new urban brands that you are putting in the store, and I assume it's also coming from Nike and also Under Armour as well?

Yes, some of it is coming from the urban brands and really all 3 of what you said, Nike and Under Armour is starting to get a little bit stronger again too as the weather has gotten cooler.

Is some of the branded and I would say some of the branded business is that taking some of the business from the pro license business that you are losing? As that continues to trend down double digits? (multiple speakers) and the importance in apparel? Is the branded side taking a little bit more of that open to buy?

It's taking a little bit more of the open to buy from apparel, but it's really coming from footwear and team hard goods. Most of the dollars are switching too.

While we are talking about footwear real quick, just the increases in ASPs, can you quantify that by any chance? In footwear?

We were up double-digit in footwear, and I think probably 25 percent of it was price points.

Okay. That's great. Just two other questions, one on the gross margin. Gary, I was wondering if you can break out how much of that 70 basis point decline was between mix and how much was of it was based on markdowns in your apparel business?

Off the top of my head, I think about a third of it was due to mix and the other was due to the change in apparel margins.

Okay. And then the last question, you talked about the 10 days before Christmas and the days shortly thereafter Christmas being so important to your Q4 results. I was just wondering if you can possibly quantify it from a topline perspective, how important it is for your business?

We could get you that number but it's important. It can really move the needle. I'm not sure what it is. Do you all have a feel for it?

Something that is unique about EBIT is the fact that our Januarys for the last 3 or 4 years we've had double-digit comps on top of double-digit comps which have driven the quarter business from the hot -- we announced holiday in early January. We've moved up probably to whole percentage points just on the strength of January business which really starts the week after Christmas.

Okay. Thank you very much, gentlemen. Congratulations again.

Michael McTighe with First Albany Capital.

As far as the license apparel category is concerned, I know you guys said the college mix of that I think grows in Q3 versus the pro component of that. What does that trend look like in the Q4? Does that reverse itself or is that mix somewhat stable?

College comes in even little bit stronger in the fourth quarter than it did in third quarter and it does in the fourth quarter also.

Okay and as far as the bit equipment and the footwear business is concerned, what types of strategic initiatives did you guys undertake during the quarter, if any did you guys take to drive that strength?

One of the things as we narrowed our assortments in footwear, we become more important on certain SKUs, made sure we were in better sizing and really focused on exact assortments and lowering the overall SKUs. We also did a similar thing there. We've cut our vendor base back quite a bit in hard goods and concentrated on hiring our average price per unit. It seems to be paying dividends both in footwear and hard goods.

Okay. One final question, as far as the gross margin was concerned was there any spill over markdown pressure from Q2? And that kind of pressure on the gross margin?

There is some. Our inventory is as clean as it's ever been but there was a little bit that spilled over into the third quarter.

Thanks. Congratulations.

Anthony Lebiedzinski with Sidoti & Co.

I joined the call late so you may have answered these questions already. As far as your trend so for in the fourth quarter, maybe you could comment on that, please?

We are up on a comp store basis in the 4 to 5 range, Anthony. Its running pretty close to what it was the third quarter.

Got it. There have been some retailers that have complained about the delays on the West Coast with the ports out there. Have you had any issues with that, with getting merchandise?

We really haven't had any issues. Maybe 1 or 2 shipments that I've heard. Maybe are 3 or 4 days late but nothing major. Most of our stuff is here. We're ready.

Okay. That's all I have, thanks.

Stephen O'Brien (ph) with Wellington Management.

A couple of questions. I guess one thing I'm wondering about is if we look at your gross margin in the last two years, this year and last year it's way above what you guys have been doing from 2000 to 2003. Is there something going on seasonality or is there a mix or what would account for that?

Part of it is that we've increased our initial markup with our vendor's. We've become more important. We've gotten additional discounts. But also with that, a couple years ago we put an emphasis on logistics and our warehousing costs have declined probably 15 to 20 basis point year-over-year over the last couple of years. And leveraging occupancy which is part of that. But certainly the main driver in that category is product margin. As we turned our inventories, they have been fresher, selling more at regular price and we become more important to vendors.

Another thing that could have affected that a little bit is around 3 years ago we started a greater emphasis on our team sports category and equipment. And less emphasis on the dual and individual sports equipment. Dual and individual sports equipment in general carried a little less gross margin versus the team sports. So that has probably helped some.

So we should see in, again, going back to 2000, 2003 area, your margins and quarters going forward, that should carry through for kind of like all 4 quarters then? There's nothing going on just on a seasonal basis?

We expect improvement in the topline at 15 to 20 basis points on an annual basis and also about the same rate on the expense line. So certainly we expect sequential improvement.

And then your inventory trends, you guys have been improving those for a couple of years on a fairly consistent basis. And the same thing if I look at your sales to fixed asset ratio and you've made big progress. Can you keep -- is there room left to improve those?

We think so. We think that maybe 15 basis points improvement in turn and the same thing with sales. The fixed asset ratios keep improving those.

So over the next year or two then, you guys should be generating ROEs in excess of 20 percent?

That is our plan.

Thank you.

(OPERATOR INSTRUCTIONS) Eric Tracy (ph) with BB&T Capital Markets.

Most of my questions have been asked. Just real quick with respect to store productivity. It seems new stores have been significantly outpacing the comp store base. At least on a trailing 12 month basis. I'm just wondering is this a function of the retooled store format or more just better awareness of the concept as you continue to backfill existing markets?

Well our new store's performance this year is certainly above our new store model. I think that the real estate department is probably doing a better job of choosing the markets and I think we're getting smarter hopefully. Not making mistakes and going to places where we are needed. We are just very careful on new store locations and we put a big emphasis on them. The most important meeting we have of the week is usually 2 o'clock on Friday afternoon, the real estate meeting. We put a lot of emphasis on this.

So more a function of location as opposed to actual retooled store format?

Probably, I would think so.

Great. Thanks.

Dan Wewer with CIBC.

Mickey, when you were looking at the stock buyback, I was curious if you considered implementing a cash dividend as well?

Yes. We considered dividends and stock buyback. But I guess we asked a lot of you guys what we should do and I'd say 90 percent of you said we should buy the stock back. And that is what our Board thought we should do. And that's what we did.

Never listen to analysts on how to run your business. Thinking that with the stock trading in excess of 4 times book value, that a dividend might be a more attractive way to redeploy your excess cash.

It will be considered in the future.

Second question, on allocated product from Nike. If you could update us as to how those quantities are growing year-over-year. And I was curious as to where you think those increases may be coming from, in other words, which retailers are getting less allocated products than in the past?

Well, I can only speak for Hibbett and I think we're becoming more and more important to our vendor's as we grow. Nike has certainly I think they think we are more important to them now and we're getting our share of allocations.

Just curiosity, Phil Knight's retirement, will that have any implications for retailers like yourselves?

It just happened and I really haven't thought it through. I don't think so. I don't think it will have an implication.

Right now, what about 40 percent of your purchases is from Nike?

Right.

Thanks.

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

Think you. We had a solid third quarter and we're going against an outstanding third quarter of one year ago. Fourth quarter has started strong. We feel we have the right merchandise for the fourth quarter and the right stores. We think we are ready.

New stores are above plans. We're going to continue to go to small markets. That is our future; that is our past. Our goal next year is 15 percent new store growth, 20 percent earnings growth. We've got a bright future in this Company and we appreciate your participation today in this conference call. And we look forward to speaking with you in March about our fourth quarter results. Thank you.

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