Hibbett Inc (HIBB) 2006 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 would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead.

Thank you and good morning, everyone. I am Mickey Newsome. With me also is Gary Smith, our Chief Financial Officer; Brian Priddy, our President, and Jeff Rosenthal, our Vice President of Merchandise. We appreciate you being on the call today and 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 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, Hibbett Sporting Goods had an outstanding third quarter. Earnings per share increased 41.2%. Sales increased 20%. Comp store sales increased 8.4% with 5% less comp store inventory. We are very proud of that. We had 28 stores affected by Katrina that were temporarily closing anywhere from two to 10 days. But these stores came back very strong after they reopened and they added 2 to 3% to our comps.

Now remember we don't have any stores in New Orleans. It is too large a city for us. All of our stores are in small towns north of New Orleans and in Southern Mississippi, and this is where everyone fled to, and sales just really boomed in those 28 stores.

Now comments on second-quarter sales by month. August was slightly over 7% comps. Footwear was very strong. Remember we said the last 10 days of the second quarter were a little bit weak because we thought that there was going to be later and later back-to-school buying, and that's exactly what happened. August started very strong and continued to be strong throughout the month. September was up 8%. October was our strongest month. Of course, we did get lots of help from Katrina in November -- and October I should say.

New stores continue to perform above our model year-to-date. We opened 19 new stores in the third quarter. Our goal is 65 to 70 new stores this year net of any closings. We did lose four stores -- four new stores to Katrina. Waveland, Mississippi we have lost permanently, or at least it will be a couple of more years before we get it back. Three others we lost because the landlord could not deliver the real estate because of damage to the construction or to his (inaudible).

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

We have three major areas of business -- footwear, equipment and apparel. Starting off with apparel, apparel activewear was up double-digits. Ladies, youth and men's were all up in comp. Highlights for the apparel activewear are Nike, Under Armour, Adidas, and urban brands such as Dickies and Enyce. License was down double-digits. However, college was flat, teams that are performing very well are Alabama, LSU, Georgia and Texas. Oklahoma and Tennessee have been down because of their records. Ladies' college apparel has been very good across the board.

Losses came as expected and as planned from Major League Baseball and MBA apparel. However, we have some good news. Pro NFL, which was unexpected, is performing very well, and it is up positive single digits.

Footwear up double-digits. Men's, women's, kids and cleats were all up for the quarter. Key styles -- Nike's Impax, Nike Shox, New Balance and K-Swiss Classics, Vila F13s (ph), Asics and Mizuno's Technical Footwear. Cleats from Nike, Reebok and Adidas all performed well.

Team sports, up single digits. All categories were up. Some of the key items were Shock Doctor's Mouthpieces, McDavid Sports/Medicine (inaudible).

Fitness was down low single digits. Inventories are very clean, and improvement in margin will continue through the fourth quarter.

Thank you, Jeff. Our CFO, Gary Smith, will now comment on our financials.

For the third quarter, total sales increased 20% to 110.6 million, while comp store sales grew 8.4%. The Company opened 19 new stores and closed one hurricane-related store. There are now 526 stores in operation as of quarter end.

Gross profit remained basically flat with last year. Product margin rate decreased slightly year-over-year as there was a change in mix as lower margin footwear outpaced the other categories, and we sped up the liquidation cycle somewhat to be in an advantageous open to buy position. Our inventories are in great shape.

Occupancy and warehouse costs also leveraged. For the period, selling and admin costs decreased 63 basis points due to favorable leveraging of retail salaries, insurance, advertising and compliance fees. This was offset somewhat by growth in corporate payroll and increased in our bonus accrual and hurricane-related expenses. Operating income grew over 100 basis points to 11.45%. Net income for the quarter was 8.2 million versus last year's 6.1 million, and earnings per diluted share came in at $0.24 versus a restated 0.17 the previous year.

For the year, total sales increased 18% to 319 million, and comp store sales grew 6.7, while each class of Hibbett stores has positive comp store sales. The Company opened 50 new stores and closed six, and gross profit rate increased due to less retail reductions, improved sell-throughs and the positive leveraging of both occupancy and warehouse costs.

For the period, selling and admin costs improved also basically in retail salaries, insurance costs and again compliance-related fees. Operating income are 11.5 versus 9.9 on a year-to-date basis. Net income for the year is 23.7 million versus last year's 17 million, and earnings per diluted share came in at $0.68 versus the restated 0.47 the previous year.

From a balance sheet perspective, the Company ended the quarter with 34 million in cash versus 45 million last year. We spent approximately 30 million on the stock buyback for the quarter and over 55 million since inception while buying back over 2.8 million total shares. Also, the board has authorized the stock repurchase of an additional $40 million. And also, as Jeff mentioned, our average inventories were up less than 7% on a total basis, while per store inventories were down approximately 5%.

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

(OPERATOR INSTRUCTIONS). Rick Nelson, Stephens.

Congratulations. A question for you, Mickey, on the stores. You are talking about 65 to 70 stores now. That is a little bit of a reduction from the 70 to 73 we were talking about previously.

Yes, we did lose four to Katrina that -- well, three of them will flip into the next year. But we had to lower it because of that basically.

I see. Okay. The three to five comp guidance, the last couple of quarters you have guided more toward the mid single digit comp. Is there something you are seeing in the business, or is it just a desire to be more conservative?

Rick, part of it is just we want to be a little bit conservative, and we're really not sure about the effect how long the hurricane-related effect will go into the fourth quarter.

And how are you tracking in the early going of the quarter?

Well, the last two days have been very very strong because the weather turned cold, but we are up low single digits. But remember nothing really counts in the fourth quarter until the Friday after Thanksgiving and then December 15 forward. The first two to three weeks of November are fairly insignificant. In fact, this first 17, 18 days is about 14% of the quarter. So we think we will be fine. It is all about the Friday after Thanksgiving and that last six weeks of the quarter. That is when all the business comes, and it is probably going to come late.

Right. And the growth that you are seeing with Under Armour, Nike, Pro, etc., how long do you think those trends can remain in place?

We feel pretty confident. There is always new products coming out, and there is some new technology and stuff coming out even in the fourth quarter like from Nike, they have the 360 Air product which we feel very strong about. And we feel very good about the quality and the way they are doing about the technology in fabrics and innovation. We feel that it is going to be for awhile.

And then the fitness side, I know you mentioned it was down. Some of the other retailers are talking about growth in that category.

We think we will turn it around fourth quarter. Some of the things is we revamped a lot of our benches and stuff, and they have just delivered and are performing very well, and we have increased our weight sales and some of that type thing. We are comping against the ab loungers which we think we can do. So we think the fourth quarter will be better.

Any plans for the Nautilus Bowflex product?

No, our stores are so small, we really don't have the space to do that.

Dan Wewer, CIBC World Markets.

I was curious as to how you measure the benefit from the hurricane. Was it just simply the sales lift that you achieved in those 20-odd stores, or is there some other way that you go about measuring the benefits?

Well, of course, the 28 stores, the sales lift was unbelievable. And you don't do any sales while they are closed, of course, but once you reopen and the money starts flowing, it is just unbelievable how much money people have in their pockets. And, of course, the population swelled in those 28 communities and that cost it also.

The same thing happened last year with Ivy. If you remember, we had about the same number of stores affected, and I think some of those stores have -- it jumped started them. It exposed us to a lot more people, and those stores have remained strong to date since Ivy.

So just that I understand, if you were to exclude the 28 stores, the comps were up 5.5%?

Yes, that is right.

Got you. Fair enough. And then when you looked at the benefits from a year ago, it sounds like it lasted longer than one quarter.

Well, it did not stay at the same level, but it did -- it has continued to be strong. But, you know, not at the levels of 25, 30% comped, which most stores ended up doing.

A different question. The clearance markdowns that you took in the third quarter of this year, when would that markdown activity have taken place last year? Would it have been in the third quarter or the fourth quarter?

Some of it would have been in the fourth quarter. We decided to clean our inventory up sooner to be ready for fourth quarter for good buys and closeouts or whatever is available. We are in a very good buying situation.

I guess it nice to understand to simply take a reserve for markdowns of that inventory, but it has not yet been sold, or has that product actually been liquidated and is out of the system?

We liquidated it.

It is gone. We flooded those 28 stores with clearance apparel because we knew we could move it and move it fast, and that probably accelerated the markdowns a little bit.

Probably helped the comp sales as well I guess?

Yes.

And so when you think about markdown risk in the fourth quarter, would it be fair to say it could be less than it was a year ago because you took the clearance in Q3?

It could be really depending on the comps.

So, as you say, if they are in line in that 3 to 5 range that you're talking about?

Yes.

Do you think will you have less markdown exposure than last year?

Yes.

Shawn McGowan, Harris Nesbitt.

A question for you, Mickey, back on the comment you made regarding the stores. Some of those stores that you had expected to open this year are getting delayed and put into next year from the hurricane. Does that lead you to expect that next year would be a strong -- considerably stronger year of store openings or any comment you can offer on expectations on that?

Well, it could mean we could open a little more stores than we would have. Of course, our goal next year is 15% store growth, and we are confident we can do that.

Okay. So this does not bump that up to a number higher than 15%?

Not really. That will just help us to get that -- it will help us to make the 15. I don't think we will go over the 15.

John Shanley, Susquehanna.

Congratulations on a good quarter. I was just wondering -- a couple of questions. I was wondering maybe you can just give us color on what the comps were roughly by month during the fourth quarter a year ago?

(multiple speakers) -- strong January.

We don't have that right her with us, but January was strong I know.

I think November was 4 or 5; December (multiple speakers) pretty consistent. January was a little stronger.

All three months were positive, but I think January was probably the strongest month.

Okay. But is January typically more of a kind of clearance month (multiple speakers)?

It has really changed because of all the gift cards and all the tax rebates. January has become more of a full-price type business because there's a lot of new product introductions and a lot more fresh product. It used to be a lot more clearance, but January has become more of a full-price business.

Okay. I see. And with regard to the fact that you kind of sped up some of the clearing out of some of the inventory, is it fair to say, as you look at the fourth quarter, that we could return to see improvement in merchandise margins? Or is that dependent on what happens with regard to athletic footwear?

Well, it depends on sales, of course. You know, right now we think we will have improvement, but it all depends on getting through the last six weeks like Mr. Newsome said.

Okay. And then on the license business, license apparel business, you know the NFL side of the business is doing pretty nicely. I guess what is your expectations as you look out for the balance of this year and maybe into next year for the entire license category?

I think next year and possibly getting into the third and fourth quarter, I think we will start seeing some positive results. I think first quarter we are still going to get a little bit of cleaning up from the year before. So I see some positive results really going into the third and fourth quarter next year.

Okay.

Of course, he is talking probably more pro than college.

Right, okay. And then on some of the urban apparel brands, is it fair to say if you can comment, are they to some degree offsetting some of the margin weakness you might be seeing on the license side of the business?

Yes and that was all of what we planned. Yes.

And then just on -- Gary, a question for you and also for Mickey. With regard to the share repurchase effort, pretty aggressive here. I know you have roughly $44 million remaining on the authorization. Given the fact that you generate a pretty sizable amount of your free cash flow in Q4, do you have the opportunity somewhere along the lines to kind of ramp that share repurchase up again I mean given kind of the course that you're taking at this point and how quickly you are kind of going through it. What is your thought on that?

I thought we did pretty good third quarter buying it back. I'm not sure we're going to be at the same levels we were at third quarter, but I think we would be at higher levels than we were prior to that.

Okay. Right. It is good to hear. Congratulations, gentlemen.

Ryan Ronteri (ph), Garsh Capital (ph).

Congratulations on a great quarter. I just wanted to follow-up on Rick's question, Jeff, if you could expand a little bit more on this technical performance piece that has been driving footwear and apparel for several years and the legs you see to that?

Well, we see there is a lot more product innovation. Nike, for instance, is launching new Air product, and they are bringing it back in a big way starting in January or really starting in the next few weeks, and they are spending a lot of money on that.

We see innovation coming out from Under Armour on new fabrics, new performance type things, and a lot of that type of stuff is worn for performance, so we feel pretty strong about it. And as brands such as Asics Technical Running get stronger, we see it is a good trend, and we see more good things coming from it.

Got you. Thanks. The second question for Mickey or Gary, just on sort of longer-term operating margin targets, have you guys thought big picture about consistently beating operating margins, and I am sort of curious over time as you open more stores and you get better buying and you continue to leverage SG&A, were you might see those going big picture?

Well, big picture our next major goal is certainly in the midteens category.

Okay. Thanks very much.

Anthony Lebiedzinski, Sidoti.

Good morning. A couple of questions actually just to follow-up on the last question and the midteens operating margin. When do you think that is achievable?

Three to five years.

Okay. I think I heard that earlier during the call that it sounds like the new store productivity is up. I was wondering what you attribute that to?

Well, I think we have gotten better at selecting real estate. We have gotten better at putting the right product in the right stores based on the demographics, and I think our training program and our customer service is really improving. I think our personnel is better. I think we just improved all the way around.

Have you actually hired more people in your real estate department?

Yes.

Okay. As far as the comp sales, what was the breakdown between traffic and ticket during Q3?

It is about half and half. Of course, we have continued to try to push those price points, but it was roughly half and half.

And you done a nice job of also decreasing your inventory per store. How much further do you think you can drive down the inventory per store?

I think we could still drive down some, and we are getting to the point where we are just fine-tuning certain departments or categories. And yes, we have got a new software program to help us be able to identify what stores need what and what inventory levels. So as we get more into that next year, I think there will still be some wins.

Okay. A question for Gary. The tax rate it looks like has jumped around quarter to quarter this year. What should be sort of a normalized tax rate on an annualized basis?

37.

37, okay. And as far as my last question regarding the hurricane-related expenses, how much was that in Q3 of this year, and how does that compare to Q3 of last year?

Well, last year it was nothing. This year it was less than 200,000.

Okay. All right. Very good. Thanks.

David Magee, SunTrust Robinson-Humphrey.

Great quarter. A couple of questions. One, I am just curious, what is the mix the business like, the stores that have the increased hurricane activity?

What is the mix by category, David?

Or just is the mix similar on the breakdown to a normal store --

Yes, it is more apparel than footwear.

Okay. And then secondly, Jeff, on the equipment side, you guys have benefited from people kind of trading up for quality in the last couple of years. Do you see innovations in 2006 that will continue that trend?

Yes. There is such a thing as Easton is coming out with some new bats, which we feel very strong with. There's a lot of new baseball innovation from companies like a Wilson. You know, Under Armour is getting more into hard goods, and Nike continues to expand their product offerings in hard goods. So we see more innovation and more new products.

Great. And then lastly, Mickey, with regards to the upcoming season, what is your best feel about how it's going to try to play out? Do you feel good about it given your momentum coming into the season? Do you see stuff out there that is worth noting as far as the success of how you guys might do?

I think it is going to be good. I think it is going to come late. It is going to continue to trend later and later. That Friday after Thanksgiving will probably be great. Then it is going to be kind of normal until about the 15th of December, and I think it will come hard and strong. I think we're in a great position. We are in a great position to make some opportunistic buys, some great closeouts because we've got the open to buy, and I think we will be okay.

Were do you think you will see those opportunistic buys, which kind of category?

Well, probably mainly apparel. Jeff, you might want to answer that?

Yes, apparel and footwear.

Great. Well, good luck. Thank you.

(OPERATOR INSTRUCTIONS). John Lawrence, Morgan Keegan.

Would you comment just a little bit more on the real estate, and I guess most of the markets you are in, Wal-Mart has already moved to the Supercenter. Would some of the markets that you're looking at now look differently because of those Supercenters that have been transferred?

you know, some of them may be. Of course, Wal-Mart is building stores almost daily, and they continue to open stores, and we think every time they open a new Wal-Mart Supercenter, that is a prospect for Hibbett Sporting Goods. And we think our best bet is to stay in the Sunbelt, and that is where a lot of the growth is related to the sheer numbers of people, and we think we're in a great position to take advantage of it.

I mean people like this warm weather in the Greater Atlanta area, and Texas is growing fast, and you know, Florida is exploding. And every time you see population growth, you see more Wal-Mart Supercenters, more big box centers, and we think we have got well over 400 additional markets identified in the 22 state area that we operate stores in. So we feel good about the real estate piece.

(OPERATOR INSTRUCTIONS). And at this time, we have no further questions. Mr. Newsome, I will turn the call back to you.

Okay. Thank you, operator. Well, as you all know, we are having our best year ever at Hibbett, and we feel most of our growth and success is in the future. Our small market approach continues to be very successful. New stores are performing well above the model, and we have identified well over 400 markets that we can put stores in in the future. In the 22 state area that we currently operate in, we think that is very important.

Thank you for being on the call today, and we look forward to speaking with you again on March 10th at 9:00 Central Standard time related to our fourth-quarter results. Thank you.

This does conclude today's conference. Thank you for your participation. You may disconnect at this time.