Hibbett Inc (HIBB) 2006 Q4 法說會逐字稿

Good day and welcome to the Hibbett Sporting Goods, Incorporated conference call. [OPERATOR INSTRUCTIONS] At this time for opening remarks and introductions I'd like to turn the call over to Chairman and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead, sir.

Thank you, good morning Everyone. This is Mickey Newsome. Gary Smith or CFO is also with us, as is Brian Priddy, our President and Jeff Rosenthal our VP of Merchandise. They will be available for questions later. We appreciate you being on our call today. 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 I'll describe 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 fourth quarter. And we had our greatest year ever with a 40% increase in earnings per share for the year. For the fourth quarter, earnings per share increase 26.1%. The year before, fiscal 2005, we increased 29.6% in the fourth quarter, and the year previous to that, we increased 36.7%.

Comp store sales increased -- I should say 2.5%. November was slightly up. We're again seeing later and later buying during the fourth quarter, and December proved that by picking up, it was up 2%. And January was up 5%. We think one of the reasons January was so strong is gift card redemptions.

Fiscal 2006 new stores continue to perform above our model. We opened 74 new stores, closed seven underperforming stores. Remember we sign very conservative leases and we don't build castles in small towns. We can close an underperforming store and not take a big financial hit. We think it's a real positive to get rid of problem stores.

Our goal this year is 80 to 85 new stores. We're adding to our real estate department, and we feel that we can hit our goal. We will continue to stay in the Sunbelt, small markets and stay tight geographically. Jeff Rosenthal our VP of Merchandise will comment more specifically on our sales performance in the fourth quarter.

We have three major areas of business, footwear, hard goods and apparel. First with apparel, is broken up into license and activewear. License was down slightly however, college, which is our most important business, was up low single digits. The University of Texas, Alabama, and Georgia were the best schools we had. Pro apparel was down low single digits as we had planned.

However, a pleasant surprise with NFL, which ran up single -- which ran up high double digits led by Steelers, Bengals and Colts. Footwear was up single digits, led by kids' footwear and fleet. Some of the key vendors in footwear that we had very positive results were Nike, Fila, K-Swiss and Asics. They continue to drive the market. Higher marquee footwear such as Nike 360, Nike Shox, F 13, brand Jordans are still performing very well.

Hard goods was down low single digits but we had some very good team sports that performed very well. Baseball was up mid-single digits. Volleyball, football and soccer were up double digits. Basketball was down due to one of their strong items from a year ago, bollinger bands, which caused the decrease. Fitness was down slightly. Key vendors in hard goods are Easton, Nike, Under Armour, Mizuno and Wilson Equipment.

Our comp store inventory was down 7%, a little lower than we wanted. However, our inventory is clean and fresh receipts are flowing into our DC. We will continue to improve our inventory turn and improve our margins as we implement our new merchandise system sometime this year. We will continue to look into the future for price optimization help, and allocation help. And that is where we ended for the fourth quarter.

Thank you, Jeff. For the year, comps increased 5.6%. Now the year before in fiscal 2005, we increase 5.7 and in 2004 we increased 5.2. Remember, earnings per share did increase 40% last year. Operating margins were a record 11.8%.

As it relates to first quarter comps to date, we're comfortable with our 2% to 4% guidance that we had in our press release yesterday. February was not as good as we would have liked but March has been very strong. The reason for the shift in comp store sales from February to March was because of some marquee footwear that was available from key vendors in February last year, but was not available until March of this year. And our comp store sales in the first 12 days of March have certainly gotten stronger because of the shift. And again, as Jeff said, our comp store inventory was down more than we would have liked for it to have been beginning February and that probably had some effect. We're comfortable with the 2% to 4% guidance of comp store sales in the first quarter. Now, Gary Smith will comment further on our financials.

For the fourth quarter, total sales increased 12.8% to 120.8 million, while comp store sales grew 2.5%. The Company opened 24 new stores and closed one. There are now 549 stores in operation as of our year end. Gross profit rate increased approximately 100 basis points due to less promotional activity in the quarter as well as cleaner inventories. Occupancy and warehouse costs were flat.

For the period, selling and admin. costs increased 60 bips due to increased rates in store and corporate payrolls and increases in legal and business insurance accruals. This was offset somewhat by the favorable leveraging of Sarbanes-Oxley costs, our medical insurance and advertising related costs. Operating income grew 65 bips and 2.2 million to 12.4% for the quarter. The Company also received an income tax benefit for the quarter as certain state issues were resolved. Net income was 9.9 million versus last year's 8.1 million. And earnings per diluted share came in at $0.29 versus $0.23 the previous year, a 26% increase.

For the year, total sales increased 16.6% to 440 million. While comp store sales grew 5.7%, our third straight year of plus 5 comps. Again, all classes of Hibbett stores had positive comps. The Company opened 74 new stores and closed 7. Gross profit increased due to improvements in all major components; initial mark-up, mark-downs and shrinkage in freight. We leverage occupancy and warehouse 19 basis points. For the period, selling and admin costs were flat. The increase in corporate salaries were somewhat offset by medical insurance, Sarbanes-Oxley fees and store salaries.

Operating income, again, was 11.8% versus 10.4 for the previous year. Net income for the year was 33.6 million, versus last year's 25.1 million. Earnings per diluted share were $0.98 versus a restated $0.70 the previous year. From a balance sheet perspective, the Company ended the quarter with 39.2 million in cash versus 58.3 million last year. We spent approximately 9 million on the stock buyback for the quarter and 64 million since inception, while buying back over 3 million shares. As of our year end, we have approximately 36 million left on the stock buyback agreement.

Now, just a few words on fiscal '07 guidance. The Company expects to have another outstanding year. Excluding 123 expense, we plan to expand our operating margins and increase our earnings per share at a plus 20% growth rate. The option expense increased due to the comp committee's enhancement of our equity plans, which previously did not take into account vesting provisions for debt, disability or retirement. Also, the Company issued more options of and restricted stocks units than in previous years.

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

[OPERATOR INSTRUCTIONS] We'll take our first question from John Shanley of Susquehanna.

Good morning and congratulations on a nice quarter, guys.

Thank you.

Mickey or Jeff you mentioned that your inventory levels were a little lighter in the quarter than you would likely have preferred. Could of an idea of where -- was that across the board in terms of all three major merchandise categories? And are you able to ramp-up your inventory levels to meet your business plan for the first half of '07 to sufficient levels for the ongoing business?

John, most of the inventory levels were lower in footwear, the majority of it. And we have been able to catch up our inventory to where we're very good shape and we feel very confident on where we're at right now.

Was that due, Jeff, just to being more cautious about the footwear category or was there something else going on that caused the lower inventory levels?

There was a little -- there was a shift in some of the marquee product from being available in January, to then the delivery in February for really March sales. So, that was probably the biggest part of it.

Okay. But you got the full amount that you originally ordered? There wasn't any partial shipments or anything like that?

No. No problems.

Okay. Mickey with the strong ramp-up of new stores that you announced, the 80 to 85 stores that are planned for the current fiscal year, are you going into any new markets or new states that Hibbett's has not previously been servicing?

John, there's a possibility we might add southern Arizona, but otherwise it will be the same states.

Okay. You are getting pretty far outside that 500-mile rim around Birmingham, can your DC center support stores that are that far afield?

Yes, we will have no problem doing that.

Okay. And the last question I have is on the merchandise plans for '06, is there any change in terms of hoping to buy dollars allocations between footwear, apparel and hard lines that you are planning based on your results in '06?

John, we will kick up our apparel inventories a little bit but we will continue to increase our turns and margins.

Is there a difference, Jeff, in terms of your current product margins on that category versus hard lines or apparel, for example?

Well, apparel's margins are doing extremely well right now and we're getting more return from there. So, that's why we're investing a little more inventory there.

Okay. How about the -- any change in the product margins on the hard lines?

They continue to go up. As we get bigger and do more containers and get more leverage with our vendors, our margins continue to go up in hard goods.

Super. Okay. Thank a lot guys appreciate it.

And we'll go next to Dan [Waver] of Raymond James.

Hi good morning. Mickey the 3% to 4% comp sales forecast for 2006 forecast, if that's accurate, that would be your slowest rate of growth since 2002. I'm curious as to which categories would you expect the rate of same store sales growth to decelerate somewhat?

Of course our guidance for the first quarter is 2% to 4% because of our weaker February than expected. But probably the big piece, is Katrina added 2% to 3% full percentage points to our comps third quarter of last year. And we know we're going to be going against that, so we wanted to be as realistic and conservative as possible.

Jeff, you had mentioned that footwear was up single digits, was that low or high single digits?

It was low to mid.

Low to mid. And then Gary I got a question for you, last year the expense rate was flat with a 5.6% comp sales gain. If your comp sales increased 3% to 4% in the 2006 year, what is the plan on expenses to keep that from delevering?

Well, the initial plan was we planned to leverage those expenses. We would expect for the corporate salary group that had spiked a bit this year to come back more to historical means. And we think that versus last year, at least on some of the fuel issues, that that should at least be flat or better.

And that's the reason -- expecting to lever on a lower comp gain than a year ago for those reasons?

Yes.

Open. Thanks a lot.

We'll take our next question from Robby Ohmes of Bank of America.

Just two quick questions. When you do the simple math, the store productivity levels looked a little lower, the new store productivity levels than I think they had been. I think they still looked fine but they were lower than how they had been tracking. And I wanted just to ask if there was a timing of openings shift there, or are you opening stores in less productive markets? Or if there's a change in the model there? And the other question is just on the marquee launch schedule as you look through the rest of '06, are there any more timing shifts similar to what you guys saw in February versus March that you just talked about? Thanks.

The store part, Robby is that we opened a bunch of stores the last weekend of January. And as we have seen those mature, February and March, it's -- their run rate for the year is really better than what we have had the last two years. So, we feel pretty good about that-- this class of '06 stores. So, I think I was a little bit later in the year. Jeff?

Yes, we really don't see the shift in the marquee products throughout the rest of the year. We feel pretty good about where it lands for the rest of the year. So, we just thought it was a one-time occurrence.

So, can you just -- what was it exactly? Was it Nike Jordan or what happened?

There was some shoes that the key colors were selling in early February this year, the key colors are coming in in March and that's probably think biggest reason. It's like Nike Shox and Nike Impax. Some of those things -- some of the colors have shifted and it was just a flow of inventory on the marquee product.

And it was a planned?

Yes, it was.

Okay. All right. Thank you very much.

And we'll go next to Rick Nelson of Stephens.

Thank you, and good morning. You saw gross margin improvement Mickey in the fourth quarter of 100 basis points. I'm wondering about the sustainability of that given some of the mix shifts you were talking about?

Well we feel pretty good about our gross margins. In the fourth quarter we sold -- we're not promotional at all. We sold stuff at regular price and we were pretty much on target with the right merchandise and the right stores. And we felt real good about our gross margin. Jeff did a great job of buying the right stuff and it was just there. Gary, do you want to comment further on that?

I think moving forward, like Jeff mentioned, that we're going to put JDA in in in the third quarter. And that's going to give us the ability to plan and allocate to the store level. In the past we've been more of a push-down. So, this will give us the ability to manage the scope of the business to a detailed level. And then after we get that platform in, I think we'll move, maybe not in this order, to a more refined replenishment model and to price optimization. We think there's 200 to 300 bips to be gained from those systems over the next three to five years.

And we'll go next to Ralph Jean of Wachovia Securities.

Great. Thanks. What tax rate should we be using going forward?

Approximately 37.

Okay. And then can you talk about what you did in the fitness category that kind of improved things from Q4 levels?

We were down slightly in the fourth quarter in fitness. And fitness is one of our smaller categories. The Ab Lounges from two years ago have continued to comp negatively. However, we're doing well in boxing from Everlast. We're doing well in weight benches and that. But we don't have a lot equipment per se like home gyms and that type of thing or treadmills, so it's a very small part of our business.

Okay. And then lastly, how is lacrosse going so far?

We're pleased. We're continuing to learn about it. It will be the fastest growing team sport in our building since it's all brand new. But there's a lot of areas that it's really really taking off. So, we see that as a great opportunity for the future.

Will that typically have a higher ticket? Higher margin?

Yes, it's high ticket and high gross margin, which is very good for us.

Thank you.

And we'll go next to Anthony Lebiedzinski of Sidoti & Company.

Good morning. Couple of questions. Aside from the possibility of expanding to southern Arizona this year, when do you think you would be going into other territories, as far as your store expansion is concerned?

Anthony, we don't see a need to really get out of our 22, 23-state area. We have identified more than 400 additional markets that we can go to. And we just have tremendous population growth in the Sunbelt and it just created more and more opportunities going forward. And I would think for the foreseeable future, there's no need to get out of that area.

Okay. And as far as operating margin expansion potential I think Gary mentioned about the merchandising system price optimization, software that will drive better margins. Aside from that, are there any other potential drivers of operating margin expansion and where do you think that could ultimately wind up being?

Well, Anthony I think it's -- we're talking about 15%. We can see that, I think, in three to five years. But certainly if you look at our P&L's we've been able to leverage that depreciation line and also the net income interest line, even though we're buying the stock, as we're generating a lot of cash.

And as far as the share buyback program is concerned, are you still going to be actively in the market for -- to repurchase your stock?

Yes, if you look, we bought it back at a very advantageous price. And certainly I expect the stock to be higher two to three months from now than it is today.

Okay. Thanks.

We'll go next to Pete Benedict with CIBC World Markets.

Good morning guys. Just a couple of questions. First, I was hoping you might be able to speak a little bit to the performance apparel trends in the store, what you are seeing there? Secondly, Gary can you confirm the $0.10 to $0.13, if that's the right option number we should be thinking about for this year? And then lastly, just give us a sense of what the CapEx we should be expecting in 2006? Thanks.

The apparel, we continue to do very well with Under Armour and Nike. Our urban apparel is doing extremely well with [Aniche], [Rocketwear]. We're also doing well in the kids area. Kids across the board is doing extremely well both Nike and Under Armour, especially in apparel.

Peter, the CapEx for next year is about 18 million gross. We would -- under the old format on the landlord contribution would probably give us down to 11 or 12 million net. So, the 18 gross and that's compared to about 15 or 16 this year gross, which netted down to about a 9 or 10. Then -- yes, we feel pretty comfortable about that $0.10 to $0.13 number on the options but we'll be refining that as we go ahead quarter to quarter.

Great. Thanks, good luck guys.

Our next question comes from Sean Mcgowan of Harris Nesbitt.

I got a question on what we could expect of the pattern of store openings this year, by quarter? Do you have that?

It's going to be pretty similar to what it has been in the past Sean. It's probably more back end loaded to the third and fourth quarter.

Thank you.

Closings usually come, usually in the first and second quarters. And our more store openings are more in the back end of the year.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Sam Poser of Mosaic Research.

Good morning. Can you go a little more detail, Jeff, into the new systems with JDA and the other allocation systems and how you see that rolling out?

Well, right now we're in the midst of implementing JDA, which will be ready sometime in the third quarter. We're looking at price optimization two maybe years down the road. Maybe sooner. We're looking at planning at allocation systems probably next year sometime. And we're continuing to look for things to enhance our business as we go the next two or three years. And just to follow-up on JDA how are you you rolling that out?

Do you see any potential hiccup on the roll-out there or how are you protecting yourself from that?

Yes, we're running parallel to both our current system and we'll make sure that everything is 100% correct before we try to roll it out.

We have spent a lot of time and effort and money in terms of people and systems and equipment for this rollout and we have been very careful. We have been working on it a year now. And we think it's really going to enable us to get the right product in the right store and the right demographics at the right time. And hopefully sell more merchandise at regular price and increase our product margins.

And then Jeff, one last question on the footwear business. Can you sort of give us an idea of -- besides kids and cleats about where -- can you talk about the other categories running, cross-training and so on?

Yes, basketball continues to be extremely strong. Running has picked up recently. Probably the biggest shift in product was really in the running categories on the flow of inventory. So we see that continuing from a Nike or an Asics or a Brooks. We can continue to see that type of business continuing to get better.

Great. Thank you very much.

And we'll go next to John Lawrence of Morgan Keegan.

Thank you. Good morning guys. Would you comment, Jeff on a little bit on -- a little higher inventories on apparel, would that just be just expanding the categories a little bit or just being a little deeper in what you already have?

Just really more being a little deeper in some of the things we're already doing. And just turning it and flowing it a little bit quicker and getting a little more depth in some key items.

Okay. Thank you. And Gary, would you comment just a little bit -- some of the late openings in January, were those that you are talking about being better than before, are those fill-in markets around sort of a -- more of a urban area or would those be just new markets?

Well, it's some of both, John but they are mostly fill-in.

Okay.

Markets, and probably more in the strips.

More of the strips. Thank you.

And we'll take a follow-up question from Dan Waver of Raymond James.

Jeff, you had noted the success of Under Armour apparel. I'm curious if you can talk about their football cleat? I believe it will be in your stores in June. And what impact, if anything, it will have on your business? And if you think that's going to cannibalize the sales of your other cleated brands, or if this will be new business?

Well, we feel like it's going to be a very good positive because Under Armour gets full margins and people don't advertise price. So, for us I think it's a key thing. It will probably take away -- it's not going to be all plus business because it will take away because a football cleat is a football cleat. But we think it's very good for us in general, just because the amount of exposure and advertising in the marketplace should be at an all-time high. So, we feel very good about it. It won't be all pluses but I think it will help our sales.

In addition to that, Under Armour is very cleanly distributed and we like that piece of it.

Mickey, is this a business that will be allocated to the most important retailers like Hibbett so that no one will get a full allocation?

They have allocated the product -- I believe there's only like seven or eight accounts in the country that are getting the first launch of it. So, that should help tremendously.

Will it be on your Website at the same time it's in the stores?

We'll have it on our Website but we don't sell on our Website.

Okay. And then Jeff, I had one other question on the pro license business, we're coming up on two years now that that business has been weak. Do you think it begins to stabilize perhaps in the third quarter?

That's what we're counting on. We think that's when it will stabilize the most and hopefully we can start comping those numbers again.

Yes. Okay. Great thanks.

Thank you. [OPERATOR INSTRUCTIONS] We'll go next to Sean McGowan of Harris Nesbitt.

Hi, I forget to ask this question before. Looking at the press release, the commentary regarding the option expense or equity award expense; it says 4.1 to 4.4 million on a pre-tax basis. But if I just take those numbers and divide them by the shares, I do get around $0.13. So, can you tell me what I'm not reading right or whatever?

Yes, couple of things one is they're -- not all classes are tax affected like that and there are some differences between tax and book.

Is that to say you don't get a tax benefit from that expense, you mean?

We do on some of those when they are exercised.

Okay. I got it. So, that really is pre-tax and post tax are kind of the same, in the year that they are granted?

For some classes, not for others.

It looks like it's off by a bit.

Yes.

And we'll go next to Jim [Chartea] with [Monis, Crespy and Hart].

Good morning. Just curious was there any hurricane related benefit to comps in the fourth quarter?

It probably was -- maybe a little bit. Nothing like the third quarter, probably a little bit. We don't have that specific number but there would be some.

And that's subsided by now, there's nothing in first quarter all then?

Well, you have to remember we weren't in the greater New Orleans area. We were outside of New Orleans and in Louisiana, southern Mississippi. And all of those towns have increased populations now. And I think it's just going continue to get better in places like Picayune, Mississippi. The population has expanded and I think a lot of those people will stay there.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS] And we'll go to Paul [Swinen] of Stephens Inc.

Rick actually was -- he just got dropped off of the call. So, I just had a follow-up for him here. I just wanted to get a little more color on the SG&A. You did say that there was a legal and I think insurance accrual but that was offset by some improvement in Sarb-Ox. Is there any reason that your -- had to up those accrual now, since it sounds like it would have been higher had you not had the offset?

Well, we had certainly planned -- hello?

Sorry my phone is ringing there.

We had certainly planned to send about half of what we spent in Sarbanes-Oxley. The thing of course when you get into the year end and you true-up all of your accruals, last year we had a very advantageous fourth quarter accrual reversal in business insurance. And this year it was pretty much -- we just increased it a little bit.

Just kind of went different than last year. Okay.

Because as we become more financially stable and proved we take on more self insurance.

I see.

And so the accruals increase but the premiums goes down somewhat.

Got it. And then -- I think I heard-- you talked a little bit about the cost of the JDA and you have been working on it for a year now in people, systems equipment. Obviously, a lot of that is going to get capitalized, right? And so it's going hit depreciation over three to five years. Or how does that work out?

Well, it's interesting part of the reason that our depreciation amortization has gone down as a rate is; if you take a look because of lease accounting, some of our leases now are going more to probably more of a 10 instead of a 5 and 5 with still the same amount of kick outs in them. So, our lease term has gone up a bit. We had been very aggressive in the past on depreciating our IT investment almost to the point of like three years for some of that. We took a look at some of the literature and decided that we could move that up almost up to 10 years. Because we just use our investments for quite a while, so it looks like our JDA will be over seven years.

Okay. But like the consulting costs, the people that all gets capitalized, right?

It does, yes.

So there's no real cash expense -- either on a cash or expense basis, none of that is hitting the current year? Or very little.

Well, we're paying our bills but we're capitalizing them.

Right. Are there any additional head count that you have added that is just run rate expenses?

We've made an good investment an our IT staff in the back.

Okay. Fair enough. Okay. Thanks very much guys, congratulations again.

And it appears there are no further questions at this time. Mr. Newsome, I'd like to to turn the conference back over to you for any additional or closing remarks.

Thank you. We had a successful fourth quarter and our greatest year ever and we're off to a solid start in fiscal 2007. Now, there's going to be one small change going forward. Typically, we'll announce sales for November and December the first week of January, which we did this past January. Because January sales have become much more important and can move our November, December comps substantially, we will no longer have an early January sales press release going forward. Thanks for being on the call today. We'll look forward to speaking with you again on May 19 about our first quarter results at 9:00 a.m. Central Standard time. Thank you.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. And you may disconnect at this time.