Hibbett Inc (HIBB) 2006 Q2 法說會逐字稿

Good day, everyone 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 turn the call over to the Chairman and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead, sir.

Good morning, everyone. I'm Mickey Newsome. I have with me also Gary Smith, our Chief Financial Officer; Jeff Rosenthal, our VP of Merchandise and Brian Priddy, our President. We appreciate you being with us today and your interest in Hibbett Sporting Goods. Before we start, Gary Smith will cover the Safe Harbor language.

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 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. It should also be noted that earnings per share presented in this press release are on a fully diluted pre-stock split basis.

Thank you, Gary. As you know from our press release late yesterday, Hibbett Sporting Goods had its most outstanding second quarter ever. Earnings per share increased 75%, net income increased 66.9. Sales increased 15. Comp store sales increased 3.1 with three less major promotions versus the second quarter last year. For instance last year in late April, we distributed coupons, bounce back coupons, to be redeemed in May. We got a lot of sales out of that but it really hurt our margins. Then our margins further got hurt in June with the pro licensed products problem. With this year with our inventory very clean, we went for product margin and I think it worked. We did our earnings. Product margin was up almost 200 basis points.

Now for some comments on second quarter sales. May was in the mid single digit range, positive in spite of going against the bounce back coupon promotion. June was in the mid single digit range and July was in the low single digit range. Now last year in July, we had two major promotions the last two weekends of the quarter. The last two weeks of a quarter are 20% of a quarter’s sales. This year we did not repeat the BOGO sales that we had one year ago. In other words, on all footwear last year, two consecutive weekends, we had a buy one shoe at regular price get a clearance shoe at half-price. Again, we got a lot of sales out of that but our margins were not good. So we think that hurt July.

Now also something that was not good for July, people are absolutely waiting longer to buy back to school just like they are Christmas. Also in the state of North Carolina for instance, school is starting two to three weeks later. It's not that way in many states but in some states it is that way in our area and that affected July some. Now to prove that this did affect July, August has started very strong. We are over 7% comps the first 19 days of August and this is very important because the first two weeks of August are 25% of the business for the third quarter. August, the four weeks of August, are 42% of the third quarter. So we have gotten off to a great start in the third quarter. Footwear is very strong reflecting later back to school purchases.

New stores are performing well. The number is well ahead of last year. We have added to our staff and will continue to add at a faster rate than in the past to support our ongoing goal of 15% new store growth annually. Now Jeff Rosenthal, our VP of Merchandise will comment on our comps related to specific areas of our business.

We have three major areas of business; apparel, footwear and hard goods. We talk hard goods as team sports; football, baseball, soccer, and fitness. Let's start off with apparel which is broken into two parts; branded and licensed. We were up single digits in overall apparel. Branded was up, led by Nike and Under Armour, which are technical fabrics. Urban brands such as Enyce and Dickies and large graphic Ts led the way in branded apparel. Ladies and urban were up double digits in apparel.

License was down double digits; however, college for the month of August was a positive trend and we are on plan. Also headwear in these particular categories are running up very positive as well as branded headwear.

Footwear was up single digits led by kids and cleats, up high single digits. Nike Shox, Nike Impact and Nike cleats have been very good for this quarter. Technical shoes, such as Asics and Mizuno, Fila basketball shoes, some of the slowdown has come in classics have slowed down somewhat but price points have continued to run up.

Hard goods are up single digits led by football, Under Armour and Nike Receivers Gloves, Shock Doctor mouth pieces, which range from $10 to $20, and all miscellaneous accessories in football. Fitness continues to be up single digits. Fitness accessories, ab loungers and boxing, which has been good since the Olympics. So as we continue, our strategy of higher price points continue, cleaner inventory and better turns.

Thank you, Jeff. Gary Smith, our Chief Financial Officer, will now comment on our financials.

For the second quarter, total sales increased 15% to 94 million while comp store sales grew 3.1%. The Company opened 16 new stores and closed one. There are now 508 stores in operation as of quarter end. Gross profit increased approximately 200 basis points due to improved margins in all three areas due to reduced markdowns, improved sell throughs, higher turns and a slight shift in mix. Occupancy and warehouse costs also leveraged positively.

For the period, selling and admin costs increased 14 basis points year-over-year due in part to comp sales, which came in below our internal plan, a higher bonus accrual as the Company's performance improves, increased new store costs due to lease accounting and increased store transportation costs. Operating income was 7.7% versus 5.6 for the same quarter last year. The Company also received a tax benefit for the quarter as we adjusted to our anticipated annual run rate of 37%. Net income for the quarter was 4.9 million versus last year's 2.9. Earnings per diluted share came in at $0.21 versus a restated 12 the previous year.

For the year, total sales increased 18%, $209 million. Comp store sales grew 6% while each class of Hibbett stores had positive comp store sales. We opened 31 new stores and closed five. Gross profit increased 146 bips due to reduced markdowns, improved sell throughs and accelerated turn and also occupancy and warehouse cost also leveraged positively.

For the period, selling and admin costs improved slightly year-over-year. Operating income was 11.5 versus 9.7% on a year-to-date basis. Earnings per diluted share came in at $0.67 versus a restated $0.45 the previous year. From a balance sheet perspective, the Company ended the quarter with 49 million in cash versus 44 million last year. We spent approximately 6 million on the stock buyback for the quarter and 25.5 million since inception while buying back over 1 million shares. The Board has also authorized the stock repurchase of an additional $20 million.

From an inventory standpoint, average inventories per store were basically flat from a dollar perspective. Also it should be noted that the Company continues to improve its industry-leading return on assets as well as its return on invested capital. Also the Company has declared a three for two stock split to take place around the 27th of September and we have also increased our second-half guidance.

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

(OPERATOR INSTRUCTIONS). David Magee, SunTrust Robinson Humphrey.

Good quarter. Two quick questions. First, as you contemplate the consumer's behavior during back to school, do you anticipate similar behavior as we go through the balance of the year and into the holidays or is there a way to determine that?

There's just no way to really determine it. I think it will remain basically the same. Now in regard to the price of gasoline, that's not going to help anybody, including Hibbett. We are mostly in small towns, 30, 40, 50 miles from a major mall. I think if it does become a factor, I think more people will stick closer to home and buy rather than drive that 50 miles to the major mall where that is our number one competitor really is 40 or 50 miles away. It might not hurt us that much. It might even increase our marketshare in that local market.

Secondly, as you look to 2006 and hopefully we will see even further improvement with the operating profit margin. If you had to rank the factors that would be driving that next year, the top say two or three factors, Gary, what would they be?

Comp sales, product -- and product margin expansion.

You were ready for that one. Thank you.

Dan Wewer, CIBC World Markets.

Mickey, is there any change in the promotional activity in August of this year compared to last year?

No, we're doing exactly the same thing. We did a promotion the first weekend of August this year to match last year's and Jeff, we don't have any other big promotions left in the third quarter to anniversary. We're trying to get out of that business. We're trying to get into doing that when we need to do it in regard to aged inventory and not doing it if aged inventory is not there.

Could you remind me why a year ago the catalyst for the extra promotions, did you see a buildup in aged inventory this time a year ago?

Somewhat. The second quarter last year, we were struggling and we were trying to do something to save it.

But I thought the struggle was on the apparel side of the business, not footwear.

It absolutely was on apparel but we were trying to get footwear sales up to make up for some of that apparel loss.

So that was the reason for running the extra event a year ago?

Right.

I think you mentioned Brian was there on the call.

Yes.

It might be helpful for us if you could just talk about some of your prior experiences, your skill sets and how you think those can help Hibbett's performance you know going forward.

First off, I have spent right around 25 years in retail and I think that the first question would be how do those years apply to a Hibbett Sporting Good model. Close to 16 of those years were spent selling footwear, which is certainly a large part of our business. Another 18 years was spent in apparel and nine years, including the last seven, was in specialty retail. Ten years have also included selling various sporting good products. Much of my retail experience has been in the Sunbelt yet I have worked for two national organizations with a real estate presence throughout the U.S. and Canada.

First, it's important to recognize that I am joining a team that has established a winning tradition. It is obviously a very capable and talented group. With that said, my contribution is going to be in the form of value adding, not reinventing. I will bring a broad retail perspective with a specialty in store operations, real estate and supply chain management. I have been part of a growing organization that has been adding stores to its real estate portfolio and as you know, that is something that is a vital part of Hibbett's growth strategy.

Great. Good luck. And are you learning the trivia questions I guess?

Well, the only reason why I almost did not get hired is I am a graduate of the University of Texas. And one of the Board members asked me if I was hired would I bring in a lot of apparel from the University of Texas and I answered it correctly by saying only if it sells.

Well, good luck.

Rick Nelson, Stephens.

I see inventory turns were stable in the quarter versus what we have become used to seeing the last several quarters where we have seen year-over-year improvement. Are we reaching any sort of ceiling there in terms of where that can go?

I think not. Part of that was we brought in a little bit more in July than we probably had in the past. Part of that is our retails and our costs are moving up a little bit and are units are down. Actually from a unit standpoint, we did see some improvement.

On the tax rate, 35.5%, that is below the first-quarter rate and below the year-ago rate. Is that something we should be looking at over the remainder of the year?

We adjusted in the second quarter to annualize the year-to-date tax rate at approximately 37%.

And on store openings, you're now talking about 70 to 73. I think the last conference call you had talked about 73 stores. Is there some slippage there?

We have had three or four stores fall out of this year into next year. Of course, we're going to try to replace them and we may well replace them. But we thought we better bring it down slightly.

It sounds like footwear sales are quite helping out, Mickey. I'm wondering about the outlook as we move beyond the back to school, over the balance of the year.

Of course footwear is very important in August because of back to school. It's important to the entire third quarter but it does come down a little bit in September and October and licensed products becomes a little more important. We are glad to report that college license has turned positive, is positive pretty good and that will be important for the third quarter. We expected apparel -- it has been weak now for a year with that pro licensed products thing. I didn't think it would turn positive till probably August but it did turn positive overall in the second quarter. I think that speaks well for the back half of the year because in the fourth quarter, apparel does become a much bigger percent of the business.

Thank you.

Chris Bisia (ph), Susquehanna.

Good morning, everyone and I'll add my congratulations as well. It's a very strong quarter. I guess first question is just on any changes in terms of product mix as a percent of sales. I know typically we have talked about as analysts 40% in apparel, 40% footwear and I think 20% hard lines. In the quarter, it looks like you saw a little bit of a shift in terms of gross margin improvement due to product mix. I was just wondering maybe if you can talk a little bit about that. What was the driver and kind of how you see that playing out in the back half of the year?

Well, we really don't give out percentages of business. Really our gross margin, we're seeing it across all three categories of business. As we get bigger, we're leveraging better discounts and we're getting better at logistics and that type of thing. We really don't give out exactly the specifics on each category of business.

But on a percent basis, I don't think it hasn't really moved much. It has been pretty stable.

And then on the urban side of the business, in terms of urban apparel and what you're doing there, I guess can you just talk about your outlook for this category in terms of how you build that category out and any thoughts in terms of how many doors you might be in at this point with regard to urban apparel?

Well, being in the deep South, there is a lot of very urban type doors. One of the things we do is try to get the right assortment for the right demographics in the store. It's in about 200 of our doors and it's a much closer end business than the rest of the apparel. We are not as far out as six months as we are in like with the Nike or something like that. So we can react to trends much closer in.

The last question I guess is for Mickey. Just on -- outside of the couple of stores that might be slipping into next year, just in terms of your perspective on real estate opportunities as you look further out, do you still see an opportunity for another 400 or so, 350 or so, Hibbett locations? I mean how does the real estate kind of play out as you look further out into next year in terms of the availability of site locations?

Of course we've got on paper 400 additional locations in the 22 state area that we operate in. That does not mean real estate is available. We think there is another 400 markets to go to and we don't see that we have got to get out of the states that we're in anytime soon. We may put one store or something in another state. Generally, we're going to stay in exactly the states we're in because the opportunities are there. There is no need to spread out and we will continue to stay in our 22 state area for the foreseeable future.

Any changes in terms of real estate costs that you're seeing at this point in time?

Not really. Small markets -- you're going to pay less rent. If you get close to a large market, 30 miles out in a suburb of Atlanta, you're going to pay a little more rent and it hasn't really changed.

Sounds good. Congratulations.

Ralph Jean, Wachovia.

A couple of quick questions. One, you guys increased your repurchase authorization by 20 million with the stock at about $36 versus most of the repo you did at about $25 and given you just announced a three for two stock split, which is pretty bullish, why do you feel the need to increase the repo amount?

Well a couple of things, Ralph. We expect the stock to be at a higher price six months from now than it is now. We also think it is accretive to earnings.

So you would buy the stock at a higher price –- oh, you are saying you buy it with now and six months, it would still be up?

Yes.

Next question, your openings are heavily weighted to the fourth quarter based on the guidance you have given for the third quarter. Are you confident that you can make that fourth-quarter number of somewhere around 24, 25 openings?

Yes, we're confident we can do that.

And any new items for fall that you're excited about at this point that weren't there last year?

One of the -- probably the biggest thing is Under Armour. They have a lot of new categories that they are in that they weren't in before with fleece and some other categories that they have not been in. Nike has a new technology coming out in January which would be in the fourth quarter. So there is a lot of positive type things that are coming out.

I know you guys are in markets where you have very limited competition. I believe a small percentage of your stores do go head-to-head with Finish Line or Footlocker in some malls, maybe 10% of your stores. Are you seeing an increase in promotional activity from those guys in footwear?

Not really. It's about the same as we saw last year.

We actually compete with Footlocker or Finish Line in about 30% of our stores.

Sean McGowan, Harris Nesbitt.

A couple of questions, guys. One, could you talk generally about the plan in the future for a unit expansion? Has there been any change there? Are you still looking at about 15% per year?

Yes, our ongoing goal is 15% a year and I might add that we have added to our real estate staff this year. We're going to add to it faster in the future because it's all about the size of the staff and how many deals we can get done. The deals are there to be made but it takes a long time on a lot of them because we don't like to take big chances on leases. We are very conservative.

And Gary, can you comment on capital expenditures in the quarter and what the outlook is for the whole year?

I believe we spent -- we are 6 6 for the entire year. Netting out the first quarter, it's either 3 million or so. We gave a forecast of -- 11 -- I forget what we gave. We will probably be around $10 million.

Anthony Lebiedzinski, Sidoti & Company.

Can you comment on the same-store sales increase whether that was driven more by average ticket or traffic and maybe you could just give some more color on that.

I think it was some of both. It's was probably a little more average ticket than traffic. We have made a very distinct effort to get our average tickets up and to get our price points up and have less of a lower-priced product and more of the higher price and I think it has worked.

You mentioned the high gas prices before. I was wondering if you know how far does your typical customer drive to your store.

We would be guessing but -- we're pretty convenient in a small town. We are very convenient. I don't think it would be very far.

Just a few miles?

Just a few miles (multiple speakers) small town.

As you ramp up your store openings, obviously you have to find the right real estate. But what about finding the right people to be store managers and the store personnel? Is that something of a challenge?

It's always a challenge. I think it's probably (indiscernible) market because we are needed for employment purposes in small markets. Believe me, it is a challenge and just this week we had a Hibbett University here at the corporate office. It started last Sunday afternoon, it finished last night where we put 17 new store managers through the paces. This is something we do on a monthly basis and we spend a lot of time and effort in training. We think it pays off in new store performance.

And lastly with the -- any idea what the stock option expense might be for next year?

We are investigating all the options and alternatives out there, Anthony and we don't have it nailed down yet.

John Lawrence, Morgan Keegan.

Can you comment just a little bit on I guess when you look at some of the stores I have been in, is there any expansion of the SKU base in some of the college apparel business at all?

Not really. It's pretty much apples-to-apples. We're making a bigger effort to be in what is worn on the sidelines and authentic. We're looking at taking our price points up. But a SKU expansion, not really.

Secondly, would you comment about -- I have got a son playing football and all these accessories just keep going up in price accessory-wise. Can you talk about some of those? I know in the summer the bats were moving up in price and now mouthpieces. Do you see that trend just continuing for a lot of these accessories sort of got-to-have items?

We hope.

We see a lot of, especially parents, wanting to spend more money for protection. They think it is going to make their sons perform or daughters perform better. We don't see that going away. We see more and more technology going into it. And the brands getting more involved like an Under Armour who wasn't in it two years ago.

Michael McTighe, Brean Murray.

With pro hockey finally now getting its act together and looking like they are going to play a season again. I know it's not a huge business for you guys but do you think this could give you a little bit of a boost in the back half of the year?

Really, we are not in any major hockey venues. We don't expect it to help us that much. It really never has been a big emphasis in our stores.

(indiscernible) hockey. We would love for that fashion trend to return that hit of about ten years ago where the hockey sweater was a real fashion item. We haven't seen any evidence of that coming back.

And then just maybe more generally about your expectations for this -- the pro license business for the second half.

We expect it to still be tough. I think the NFL business will be better but it will still -- we are still planning it to be down and the NBA business we're planning way down. So it is hitting our expectations as we plan it but it's a downtrending business.

Lastly, I know you guys had some things going on in terms of increased selling expenses during the quarter. Were you a bit surprised that you didn't get leverage at 3% and how should we be looking at the expense line in the back half of the year? Has that threshold of I think 2% to 3% changed in terms of where you leverage on a comp?

I was a little disappointed that we didn't do a little bit better on the expense line because we're coming up against some of those high Sarbanes-Oxley 404 costs in second, third and fourth quarters. We have added to our staff definitely to support our infrastructure but if we're in the 4% to 5% comps, I would expect to leverage SG&A.

Jason West, Deutsche Bank.

I wonder if you guys could talk a little bit about potential implications from the Adidas Reebok merger?

Did you say murder?

The merger.

Merger. It's really early to tell. I know both companies are kind of being run separate right now. It will be interesting as we continue. We really -- they kind of complement each other. Adidas is strong in one area and Reebok in another area. It's really too early to tell what the impact is going to be.

And then one other issue. I know that UNC winning the national championship this year thankfully may have helped in the quarter. Any impact you guys saw from that?

No. We don't have any stores out there so -- no.

(OPERATOR INSTRUCTIONS). Dave Turner, Branch Banking and Trust Company.

I was just curious about the 7% comp month to date thus far. What does that compare against last year?

5%.

Jeff touched on this previously. Just curious about the product pipeline. We're in the third year of the Shox technology and you said that Nike is coming out with a new launch in January. Is there anything for holiday in footwear I guess since that has been -- the pricing dynamic there has been so strong, that is going to be -- you can merchandise around and promote a little bit?

There is some newer Shox, some newer Impacts. Those are -- and the Asics line gets much stronger. We have also found some success with Fila basketball. So there are some very good positives out there.

And there's no sense of a shift in fashion or that there has been -- conventional wisdom is that there is a swing in footwear towards darker hues. I guess you are not picking any of that up now but you are not merchandising around that either, correct?

Correct. Because it's such a small brown shoe business.

(OPERATOR INSTRUCTIONS). Gentlemen, at this time, no one else has signaled. I'll turn the conference back to you for any additional remarks.

Thank you, operator. We're glad to get the second quarter behind us successfully. It has always been our most challenging quarter of the year. The third quarter is absolutely starting strong. We're encouraged by that. I can promise you that new stores are performing well. We will continue our small market approach. We will stay tight geographically and we will be very careful not to take major risks with our store leases. Thank you for being on the call today. Please join us again on November 18th at 9:00 Central time to hear our results for the third quarter. Thank you.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.