Hibbett Inc (HIBB) 2007 Q3 法說會逐字稿

Good day, everyone 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 and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead, sir.

Thank you, operator and good morning, everyone. This is Mickey Newsome and I have with me our CFO, Gary Smith, our President, Brian Priddy and our VP of Merchandise, Jeff Rosenthal. They will certainly be available when we get to the questions. We appreciate you being on the call today and appreciate 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 in our financial performance. There's 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, and we were going against an outstanding third quarter of one year ago. Earnings per share increased 29.2%. Last year, earnings per share increased over 41%. Comp store sales increased 7.1% on top of 8.4% 1 year ago. We opened 20 new stores and closed 2 in the third quarter. We expect to open approximately 25 stores in the fourth quarter and close one. For the year we expect to open 74 new stores and close nine bringing the year-end total to 614.

We are very happy with our new store performance. We're happy with our real estate and happy with the quality of the leases. We're not happy with the number of new stores. We, the Real Estate committee, approved 112 new store deals for this year knowing we would have some fallout because we always do. Remember, we deal with a lot of mom and pop and small landlords. Well, of the 112 deals, 13 of them got moved to next year by the landlord. He couldn't get the space ready on time. 12, after we agreed on the deal with a landlord, the landlord never built the space. He may somewhere out in the future build it but it's not any time soon. Seven of our deals we killed ourselves before we signed the lease because we got additional information or had second thoughts.

We think it's very important that we maintain the quality of our Real Estate and our leases and we won't sacrifice that. We know there's at least 400 additional markets that we can put new stores in in the 23 State area that we operate in. We think the answer is, we've got to continue to build the Real Estate staff even faster. We did add two people this year. This should help us next year. We're going to add another one before year-end that should help us probably year after next. We're starting to network with brokers and use them to supplement our deal makers. We think this could help our new store count next year and in the future. Our goal for next year is 92 new stores. We're ahead of last year's pace on new store deals for next year and because of the transfer of some of the stores this year into next year, we should open more stores in the First Quarter than we have in the past.

Now, some comments on Third Quarter sales. August was double digit comp. September was single, mid single digit comp store sales increase. October was low single digit, but our trend was very good because, listen to this. Remember last year from September 10 through October 28, 62 Katrina-affected stores were up 63%. Without those 62 stores this year, September and October would have comped over 10%. All three months were double digit positive without the 62 Katrina-affected stores. The first 19 days of November or the fourth quarter were positive mid single digits. Katrina is still affecting us some in November. It will be less effect in December and again less in January. The first 19 days without the Katrina stores, we are positive mid to high single digits.

Now, for some specifics on the third quarter, we'll go to Jeff Rosenthal, our VP of merchandise.

Third Quarter key trends, apparel is divided into two business, active wear and license. Branded was up double digits, led by Under Armour and Nike. Youth, lady, and men's activewear were up double digits. License business is broken into the pro business and the college, up double digits. Key drivers for the quarter are NFL jerseys, such as Reggie Bush, Peyton Manning, and Michael Vick. Also, the St. Louis Cardinals with the World Series was a very big positive. College, led by women's and kids was up double digits. Footwear was up mid single digits, led by kid footwear and cleated footwear up double digits.

Key styles and brands for the quarter were Nike Shox, Jordans and Air Force Ones, New Balance Zips, Heely's, Under Armour and Nike football cleats, Asics running shoes and DC Skateboard shoes. Equipment were made up of mostly team sports up double digits, led by baseball, football, and soccer up double digits. Football was led by Shock Doctor, Under Armour and Nike. Soccer, coming off the World Cup, was up with Adidas and Nike. Baseball was up double digits led by Mizuno East and Nike and Under Armour. Our inventory is in great shape for the fourth quarter and we look forward to the rest of the year.

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

For the third quarter, total sales increased 17.2% to $129.7 million, while comp store sales improved a robust 7.1%. More than half the Hibbett states had double digit comps for the quarter. In fact, the outer ring of Hibbett states showed surprising strength. The core business remains strong and continues to show improvement. Gross profit rate decreased slightly due mainly to increased promotional activity early in the quarter to offset the prior year Katrina effect.

For the period SG&A cost decreased 69 basis points. This is inclusive of the stock option expense of 51 bps; however the improvement was also aided by prior year hurricane expenses and some JDA-related expenses which were accelerated in the Second Quarter. The Company had a beneficial income tax rate due to increased State tax credits in Louisiana and Mississippi and EPS came in at $0.31 versus last year's $0.24, a plus 30% adjusted for 123 increase.

For the year, gross profit remained relatively flat for the 39 weeks, with slight improvement in product margin. For the period, selling and admin costs increased 42 basis points, stock option expense accounted for 58. Operating margins on a 123R-adjusted basis are running ahead of last year's record pace. Earnings per diluted share came in at $0.78 versus a pro forma $0.68 the previous year. Adjusted for 123R this represents a plus 20% increase.

From a balance sheet perspective, the Company ended the quarter with over $13 million in cash versus $40 million at last year-end. We spent approximately $7 million on the stock buyback for the quarter and $94.6 million since inception, buying back approximately 4.2 million shares. Inventory increased 16.5% over the previous year which is below the quarter's sales growth. This is, this inventory is somewhat inflated by the front loading due to the JDA planned implementation. We spent $4.1 million in CapEx for the quarter and $10.9 million year-to-date.

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

Thank you, Mr. Newsome. [OPERATOR INSTRUCTIONS]. We'll go first to Rick Nelson with Stephens.

Thank you, good morning, and congratulations.

Thank you, Rick.

Can you separate -- you got a comp left from the tax free holiday and then this Katrina effect was certainly a headwind. Is there a way to look at the comp ex-those two factors?

Minus the transfer of business and minus Katrina --

Yes.

We were double digit all three months without Katrina. Gary? We don't have that number?

I think if you took the tax free out and you took the Katrina out we would be up at least high single digits.

Okay. Thank you for that. Also, any impact on the financials for the tax rate? What do you think for the fourth quarter and what should we be looking at for next year?

I think 38 for the tax for the fourth quarter and I would use that rate for next year.

Okay. And the stores you talked about for next year, 92 stores, is that a net number or a gross number and how will that shake out by quarter if you could provide some guidance there?

It's a net number, Rick.

Okay. And you said front end loaded. How many stores?

Well first quarter will be more -- we think first quarter will have more than normal, but it will still be mostly third and fourth quarter.

Okay. Thank you very much.

And we'll go next to Dan Wewer with Raymond James.

Hi, good morning. Mickey, you'd noted that you were a bit more promotional during the first three weeks of August. I was curious as to what you guys were thinking, at that point in time given that you were already getting the lift from the tax exempt shopping holidays.

That's a good question. Of course, we made the decision in June to be more promotional in August because we knew we were going against those Katrina numbers in September and October. We also knew that August is by far the largest month of the third quarter. If we didn't do it in August, we were going to have, possibly we were going to have a tough third quarter.

Now, we had no idea about the strength of the transfer business on that tax free issue from July to August. Had we known it was going to be that strong we would not have promoted as much, I can assure you but you have to make those decisions a few weeks in advance and the last of July was not that good and so we stuck with our decision and looking back, we would have promoted less, but sometimes you have to make those decisions in advance and go ahead and execute.

I know your strategy is to be a full line concept. Is there a risk that since you got more promotional in the last back-to-school season that your customers will expect something similar next year or their memory is so short that you're not necessarily committed to that?

You know, not really. I mean, the only thing we really did was send out more bounce back coupons than we did the year before. You get $10 off on a $50 purchase during a certain period of time. We sent more out than we did the previous year. That's about the only price promotion we ever do is something similar to that so we don't think it will be a big deal.

And then just the other question that I have, Gary. Could you explain how the delay in the JDA implementation impacted the third quarter inventory levels and also just want to make sure, did I understand correctly that the JDA implementation expenses were in the prior Second Quarter or the implementation doesn't take place until next year?

Yeah, we had decided early on that if there was any problem with the JDA that we were going to front load and bring in receipts earlier in September and probably October to try to forestall any problem that we would have had and then on the JDA expenses because it was coming up in September and October, that's usually big inventory taking times for us, so we took a lot of our inventories in the Second Quarter as opposed to in the third quarter and probably that plus the hurricane-related expenses not coming up against those was probably 20-30 bps favorable.

Great; thanks and good luck.

Thank you.

We'll go next to Nancy Hoch of JP Morgan.

Great, thank you. Jeff at the analyst meeting you mentioned a little softness in urban trends. Have you seen any change in the quarter?

It's gotten a little bit better in apparel. It's still a little bit soft overall from a footwear and an apparel standpoint but it has gotten a little better.

It looks like the footwear trend is improving. Is that a function of the underlying trend getting a little stronger or more the mix being more appropriate for your guests?

I think we had a very strong back-to-school and there's a lot more -- we had a lot more traffic and we sold a lot more and I think that was the main driver of that.

Okay, great. And then any change planned to your promotional cadence or your coupon rate for Q4 relative to last year?

Not really.

Okay. And any comments on Under Armour's performance in the quarter? I know you were bringing in some --- had a little larger open buy this year as I remember.

Yeah, Under Armour performed exceptionally well.

Nancy, everything they come with seems to sell very well, unbelievable.

Great. Well, thank you very much.

We'll go next to David Magee with SunTrust Robinson Humphrey.

Yeah, hi. Good morning.

Hi, David.

Good quarter. A couple questions. One, on the gross margin, I guess we should expect a flatter gross margin maybe in the fourth quarter and going forward, or flat to higher. Is that a fair assumption?

Gosh, for the fourth quarter we always plan an uptick in the gross margin, we have to see how the sales fall.

That's what's embedded in your guidance for the fourth quarter. And with regard to the JDA implementation, can you remind us what the timetable is beyond I guess that into the next couple years on the systems front and what do you expect to really benefit the EBIT margin the most in terms of what you're doing on that side of the business?

Well, certainly, JDA will go in the beginning of the next fiscal year. After that, we're looking at replenishment and certainly price optimization, but I'll tell you, some of the strengths in the businesses that we've seen is when our people are able to drill down to an individual store level and analyze their business, and we expect to get that from JDA, so I know Jeff and his people in the Company are excited about that. And we certainly expect to get to mid-teen operating margins, that that's going to be a big component of how get there.

And that benefit is a 2007 benefit? Not that goal per se, but that --

Yeah, I think we're going to start to see some benefit from it then, but the full impact, it should probably be in the next year after that.

And then lastly, what is your thought at this point, Mickey, about the ASPs for next year, or Jeff, I guess, on the footwear side of the business relative to 2006? You think it would be flat or--?

I would say that it may be flat or slightly down from where it is today. I think that there are some other price points a little bit less than, so I don't think it will be quite as high.

But at the same time you're feeling incrementally better about that some of the technical footwear product, is that fair?

Yes, that is fair.

Great. Thank you.

Thank you, David.

And we'll go next to Sujata Shekar, with CIBC World Markets.

Had a question about licensed apparel. Did I hear you right it was up double digits?

Yes.

Could you talk a little bit more about was that just easier comparisons or there was a fundamental improvement in that business?

From the college side, it was just -- we had improvements just in overall product that we carry and some of the teams. NFL was up positive and MLB was up positive, so we have seen a slight shift to run positive.

So there is improvement in product as well that is driving demand?

Yeah.

And then second on the fitness equipment side, I didn't catch it, if you had mentioned how that had trended and more importantly, I know that last year, there were some delays in receiving some of that inventory and I know that it is in the stores and on time this year, so what do you expect for the holidays for that category?

We were up single digits and we expect and we flowed in our inventory in earlier for that very reason, so we expect to have a good fourth quarter in it.

Okay. And then on the women's athletic footwear, is that still trending soft or has there been improvement there as well?

We were up single digits in the third quarter. Athletic women's footwear is still a pretty tough business, so we're optimistic about it, but we had a good third quarter with it but we think it's still a little bit soft out there for the future.

And then my last question was, in your mall stores, are you seeing the effect of cycling against Foot Locker's increased assortment coming through or how are the trends in the mall stores versus the strip center stores?

The strip centers again outperformed the malls and it's mainly in footwear but we're hopeful that the malls will perform better in the fourth quarter because we'll be going against the time when Foot Locker did have that much better presentation of a year ago so we've got a chance to get better there, but strips are outperforming malls.

Okay, great.

I might add that suburban stores are outperforming urban stores.

Suburban, so what percentage of your stores would be suburban stores?

Yes, in other words, the urban, the African American Markets are underperforming the others. That gets back to that urban apparel and footwear.

Oh, I see. Okay, great. Congratulations.

Thank you.

Bye-bye.

And we'll go next to John Shanley with Susquehanna Financial.

Hi, this is David Meyer on behalf of John. Quick question, what was the breakdown of traffic versus ticket for the quarter?

Good question. It was some of both. We did have increased transactions and increased comp store items and but a little bit more than half came from price increases.

Okay. Also the sales breakdown in the third quarter, was that any different significantly from the year ago period in terms of the different product categories?

Not really.

No? Just pretty much the same? All right, as far as your gross margin being a little bit down for the quarter, could you possibly break out the product margin part of that?

We don't do that.

Oh, because I remember last quarter I think you said product margin had been up like 40 basis points. I was just curious if you had it for --

The majority of the decrease would be related probably to the product margin.

Okay. And I guess just one last question. The extra week in the fourth quarter, how will that benefit -- any idea of the sales and EPS impact for the quarter?

It could be plus $0.01. And it's a big week for us.

Okay. Great and great quarter guys, thank you.

Thank you.

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

Good morning, a couple of questions. Regarding the comment about the mid-teen operating margin, at what point did you expect to achieve that level?

Three to five years.

Okay, and in terms of your excess cash flow, are you still looking to be buying back stock at these levels or would you possibly be perhaps looking at a dividend at some point?

As the stock continues to increase, it becomes less accretive for us to buy the stock back. I don't -- I think we would have other uses of cash other than dividends.

Would it be just accelerated store growth? Stores or other uses?

Yeah.

And then also you guys put in place recently a preferred customer program called MVP and any early insight into how that's going, any comments you could provide? That would be helpful, thanks.

It's going well. We're building it faster than we thought we would, so we're pretty excited about getting our database built.

It's probably a little too early to tell but we like it.

Okay, thanks.

And we'll go next to Jason West of Deutsche Bank.

Yeah, thanks a lot. I was wondering if you could talk a little bit about where license stands now as a percent of your total business and maybe if you think that business will be up in '07?

From a percent standpoint, we really don't give that out; however, we're pretty positive on the license business going forward.

So you think that you've kind of gotten through the worst of it there?

We think so.

And did you say if that is up in the fourth quarter?

We plan it to be.

Okay. And one other separate question. Looks like we may see a minimum wage increase next year. Do you guys have any thoughts on what that might mean for the business on the demand side and the cost side and any historical trend you've seen there?

Yeah, hi. This is Brian Priddy. We really do not see us having any kind of an impact to our wages because in those states that we've looked very specifically at, the starting wage that we have today would be above that new rate that will come into play.

Okay. And any pick up on the demand side you might see?

Demand side? Just what do you mean by that?

If your customers, you know, in some of the lower income communities had more money in their pockets?

Sure, I think that could be a possibility.

Okay. And then one other one. You guys mentioned that the urban markets had been underperforming the other markets. Can you give us what percent of your stores would you consider the urban markets?

It's about 40%.

Perfect. Thanks, guys.

[OPERATOR INSTRUCTIONS]. And we'll go next to Sean McGowan with Wedbush Morgan Securities.

Just a question about any detail you can give us on plans for another distribution center and what's the timing looking like on that?

It would probably be 15 to 18 months. We expect it to be around Dallas. It would be a leased facility, half the size of this one, and the CapEx before credits would probably not exceed $4 million.

Great. And any idea of what the incremental operating cost would be and what the effect could do to your margin goals?

Well, putting another facility out certainly takes away some of the leverage opportunities we have here. This facility will be going into a second shift mid December. I would think that it would be either be flat or uptick four or five basis points.

Great. Okay, thank you very much.

Thank you.

And just as a final reminder if you'd like to signal to ask a question, please press star one. And we'll go next to John Lawrence with Morgan Keegan.

Good morning, guys.

Good morning, John.

Mickey, would you comment, you made some comments about you're happy with the new stores and some of the geography of I guess some of the outer band. Would you go into a little more detail there and what do you think is driving that?

Well, I think the main thing driving it is we're getting the right merchandise in those stores. We're really digging down and getting the right merchandise based on what the consumer wants and the demographics of the consumer. And by outer band -- we've opened some stores in New Mexico and a couple in Arizona and we feel good about them. We're doing better in the lower Midwest and I think that's absolutely a credit to our buying staff. They're getting the right merchandise in there because it's certainly a different want and need in the lower Midwest than it is in the Deep South. This is one thing that JDA is really going to help us with. It's going to help automate this and it won't be so manual, we'll be getting the right product in the right store based on the demographics and the geographics is just a big key, no question. I mean, that's the key to our future.

And as you look at that and with that sort of enabling you, does that change your mix of how many stores you would put outside of your core area?

Well, we hope to certainly get more stores in those outlying areas. It gives us more encouragement because the more successful we can be out there, the more we're going to spend, more time we're going to spend looking for new stores in those areas.

Great. Thanks.

Thank you, John.

And we'll go next to John Curti with Principal Global Investors.

Kind of an early read on 2007 CapEx based on the 92 net stores and how many stores would you anticipate closing next year?

We probably, the CapEx would be in the $20 million range gross. We would probably open 100 to 105 stores and close 5 to 10.

Thank you very much.

Thank you.

And we'll go next to Jim Chartier with Monness, Crespi & Hardt.

Good morning. Just a question on SG&A. Looks like SG&A is growing a little bit slower than it has in the past few years. This year looks like it's going to be up about 13.5% versus 15.5% last year and also similar improvement on a per square foot basis. I was wondering if you could just talk about what's going on there and if this is kind of the rate of growth we should expect to see going forward?

Well, I think last year we mentioned in the second half of the year we made some additions to the infrastructure of the Company, especially in governance and especially in IT and that's the time when Brian joined the Company so we've lapped some of those investments we've made so I think our run rate would be at the lower end going forward.

Okay, and then just to make sure I heard you right, the options expense you said was 71 basis points?

No, I think I said 51 for the quarter.

51? Okay. Thank you.

And we'll go next to [Craig Dibb of Jasper Funds].

Hi. Could you go back to the MVP program? What are the costs associated with that in terms of benefits and discounts for those customers?

Really, the costs are very minimal. We're putting them out and we're giving them more as information to the customers on benefits of product and there are very minimal costs involved.

So there's no straight line discount for signing up for the program, or--?

No.

Great. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. And we'll go next to Dan Wewer with Raymond James.

Jeff, you had noted the strong growth in some of the performance brands like Nike Dri-FIT and Under Armour. Are you adding selling space inside your stores to those brands as well as dollar of inventory and if so what are you talking out of the store to make room for those two brands?

We're just fine tuning our assortments. We're looking more at being a little bit more key item driven, and as we continue, we just look at by store and breaking down so we're making adjustments in assortment planning.

How many of your stores have the new fixtures that Under Armour has created for small box formats like Hibbett?

We have Under Armour fixturing at over 300 doors.

These stores with those fixtures outperform those without?

Yeah.

Is there, would there be plans to put those fixtures in all stores or is there some demographics of some stores that Under Armour is not as relevant?

There are some stores that it isn't as relevant but we will be increasing that next year.

Next year, great. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. And Mr. Newsome, we have no further questions, sir. I'll turn the call back over to you for any additional or closing remarks.

Thank you. We feel good about our start in the fourth quarter. November is much stronger than we had expected. In recent years, November has been getting weaker as has the first two weeks of December and the strength has come from the middle of December through the end of January. We expected this to continue but November has been much better than expected.

Now, because January has become very strong and it does move the needle on the comps, remember we reminded you back on March 10th that we would no longer have an announcement in the early January about our Christmas sales, because January can move the needle, so we will not have that press release this year in early January. We appreciate you being on the call today. We look forward to speaking with you on March 15th, 2007, at 9:00 Central Time on a Thursday. That's another change, and of course this will be concerning our fourth quarter results. Thanks for being on the call today.

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