Hibbett Inc (HIBB) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Hibbett Sports 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, Sir.

Thank you, operator, and good morning, everyone. Also with us today is Nissan Joseph, our President and Chief Operating Officer; Gary Smith, our Chief Financial Officer; and Jeff Rosenthal, our VP of Merchandise. They will be speaking to you. We appreciate your interest in Hibbett Sporting Goods and being on the 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's no assurance that such events will occur or that any protections 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, our second quarter earnings per share was $0.17 versus $0.15 one year ago. And as you know we increased our annual guidance but we remain very conservative with guidance. Overall sales increased 13.9%. Same-store sales increased 5%. [Comp] store sales by month were as follows. May was up mid single digits; June was up high single digits; but keep in mind the last week of June which ended 7/5, July the 5th this year was up 20% comp because July 4th fell on a Friday this year versus a Wednesday last year. This had the effect of pulling comp store sales out of July into June in the first week of July. July comps were positive low single digits partly because of the shifting of the holiday, but also because the stimulus checks slowed or stopped; people are waiting longer and buying closer to back to school needs especially in the last two weeks of the month; tax-free holidays are getting more and more important. People are waiting for those and they come in August. Many school systems, in fact in eight of our 23 states many of the school systems push back back-to-school start dates one to two weeks. This drove some sales from July into August. August month-to-date sales on a comp store basis are positive mid single digits and August is the most important month in the third quarter. It is approximately 40% of the business for the quarter. This supports our belief that people are waiting longer and buying closer to need. Second quarter comps, our urban stores underperformed our nonurban. Our nonurban were up mid single digits. Urban stores were up low single digits.Now for some additional comments, Nissan Joseph, our President and Chief Operating Officer, will talk with you.

Thank you, Mickey, and good morning. Our performance in Q2 is driven by various internal and external factors. Internally we continue to maximize and leverage the investments in our merchandise systems. We launched E3, a replenishment program, late in the quarter and plan on seeing momentum from this program build into the third and fourth quarter of this year. Improved visibility of data this year has enabled us to meaningfully segment our stores and customers to better suit our product assortments and offerings. Externally our real estate strategy of being located in small markets benefited with the consolidating of trips by shoppers that place a greater value on proximity and convenience. Our stores in the agriculture and oil belts continued to perform well. We are on pace to open 80 to 90 new stores this year and close approximately 10 to 12 stores. We did see our unit sales increase in the 2 to 3% range which is a key indicator of traffic; and as anticipated, we saw steady increases in average selling prices, especially in footwear and rising costs -- especially in footwear's rising costs from overseas manufacturing flowthrough to retail. We expect ASPs to increase for the remainder of the year. We continue to grow the strategic partnerships we have with our key vendors, which helped us drive sales in the footwear, apparel and accessories categories. Our ability to provide brand experiences to consumers in small markets remains a critical part of our strategy. The merchandise initiatives launched this year are performing well. We are pleased with our sales at the start of the third quarter, which is a reflection of our focus on the execution of our tactical plan. The increase in our guidance is a reflection of our performance, combined with our attitude of responsible conservatism. We remain internally optimistic but externally cautious about the rest of the year, given the pressures on our consumer.

Thank you, Nissan. Jeff Rosenthal, our VP of Merchandise, will speak with you.

We have three major areas of business. Apparel, footwear and equipment. The two areas of apparel business are branded and licensed. Our branded apparel was up mid single digits with men's, women's and kids all up. Men's lifestyle, which is mostly urban, remains challenging. However performance apparel from Nike and Under Armour remain very strong. License business is up low single digits. Key areas of the license business has been [MLB] headwear and [MMAA] apparel. Our accessory business has been very good, up double digits. Key brands driving the business has been Nike, Under Armour and [Oakley]. Footwear was up mid single digits. Men's and kids are driving the business. Women's and cleats have been a little bit more challenging. Key drivers Shocks Air Force One's Jordans, Asics and Under Armour cross training shoes. Equipment was down mid single digits. We went live with E3 during the quarter and were very encouraged with the opportunity to grow our replenishment business. Our (inaudible) inventory is much cleaner than last year and our inventory is down to last year. And we are well positioned to take advantage for the second half of the year.

Thank you, Jeff. Gary Smith, our Chief Financial Officer, will speak with you.

Thank you. Second quarter sales were $130.3 million, a 13.9% increase from the previous year. Fiscal comps were up a robust 5%. Gross profit rate decreased slightly due to fuel costs related to both inbound and outbound freight. And in the prior year, the Company had a favorable gross margin adjustment in the second quarter as we took all store inventories due to the installation of [JDA] and the actual run rates were better than the accrued rates. However, product margin rates on a comparable basis improved year-over-year from second quarter to second quarter. Selling and admin costs increased over the prior year due to sales and bonus sensitive-related expenses that were somewhat accelerated in the quarter, and medical insurance claims that were running higher than anticipated. A quarter tax rate of 36.6% benefited from federal employment tax credits that were certified by the States. From a balance sheet perspective, the Company ended the quarter with $14.3 million in cash versus $9.2 million last year. That was at $29.5 million versus last year's (inaudible). Inventories increased 10.8% over the previous year. It decreased over 1% on a store by store basis. [Aged] inventory as a percent of total is approximately 5% less than last year. Working capital needs decreased as AP growth outpaced inventory build and we spent $5.4 million in CapEx for the year versus a $24 million budget. We did not buy any stock back in the quarter, but year-to-date we've repurchased approximately $17 million worth in one million shares. However just a word on guidance. While the Company's official position in this environment is to be both cautious and conservative, we expect to beat the upper end of the range.

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

(Operator Instructions) John Shanley with Susquehanna International Group.

Good morning, everybody. Mickey, with the strong comp performance the Company turned in in the second quarter and the comp sales running ahead mid single digits so far in August, I'm curious as to why guidance for the back half of the year is so [conservative] in terms of comp. I think you are guiding us to flat to up only 2%. Is that just being overly conservative or is there something else that you anticipate happening in the second half of the year that causes you to be more conservative at this point?

I think we are being very conservative. (technical difficulties) We don't like running around here doing emergency press releases and we just want to be very conservative and there's a lot of uncertainty out there. I mean you never know what is going on with wars and all that's going on and we just want to be conservative. We were standing here this time last year thinking that third and fourth quarters was really going to be robust and it was not. But we feel a lot better this year about it. We got a lot of good things going on, but the bottom line is we just want to be very conservative and beat guidance.

That's fair enough, but there's nothing that you foresee in terms of either merchandising or operational issues that are causing you concern at this point in time?

Absolutely not. We feel pretty good about what is going on out there. We think we are well-positioned. We think we are going to have gross margin improvement in the merchandise and we've got more face this year we didn't have last year. And there's just a lot of good things going on, but we need to be conservative in this environment.

Fair enough. I'm also curious about the operating gross margin levels which were both down and the Company did not seem to be able to leverage the 5% comp gain that it achieved in the second quarter. Were merchandise margins the culprit that caused the pullback in the gross and operating margins for the period?

Not really, John. The Company was battling an unfavorable comparison with last year. We took a number of our inventories in the second quarter; and as the second quarter is the lowest volume, we had a favorable inventory adjustment and it affected the second quarter more significantly than it would other quarters because of the low sales volume. In fact, the merchants ran a gross margin rate higher than they did last year. And we expect that to continue through the back half of the year.

What's driving that, Gary? Is it apparel and footwear? Or is it another component of the Company's operation that is turning in favorable merchandise margins?

It's really both. It's apparel and footwear.

Yes, part of it is that we are so much cleaner than we were last year and the systems have really aided us by being able to segment the business and drill down into it from a detail level. And we are just excited about what we are seeing from the replenishment side of E3.

That's great to hear.

We are a much improved company over last year because of this system's issue. Our merchants have just got a lot more to work with and are much more on target and we are just an improved Company in that area.

Super. Sounds great. Last question I have is for you, Jeff. Are the product margins that you are getting from the marquee business comparable or better than what you are achieving with the rest of the footwear merchandise mix? And are marquee becoming a bigger component of your overall footwear merchandise assortment?

Yes, really, we have seen a lot of improvement really on the high-end marquee products. We are seeing a lot of the business go that way. ASPs, especially in footwear, are a lot higher than they were a year ago.

What about the margins?

Pretty good because we are getting through it and not having to mark it down really.

(technical difficulties) higher than the rest of the footwear (technical difficulties).

I would say, in general, probably yes.

That's [pretty dear]. Thank you very much. Good job.

Rick Nelson with Stephens Inc.

Good morning and congratulations as well. You mentioned the shift in the tax-free holidays from July to August as being one of the drivers. Is there a way to look at the August comp in states maybe that were not affected by this tax-free holiday shift?

The tax-frees didn't shift. They are in the same timeframe as they were last year. What shifted was the back-to-school starting dates. In eight of our 23 states they backed them up one to two weeks. The tax-frees were the same. I think the consumer is just more dialed into the importance of waiting and buying when tax-frees happen so they can save that money.

I see.

But, Rick, the run rate in those states that are not experienced back to school is still positive and good.

Good. You've got 40% approximately of the quarter now under your belt. How could the compares shake out going forward, September and October? I know you reported the negative comp last year --?

We lost steam in September, October, the comps got increasingly worse as the quarter moved on. So the comparable during the rest of the quarter become more favorable because I think we were up almost what 6% at the call this time last year.

How do you see the Olympics impacting your business?

So far we have seen just a little bit. Our swimming like goggles and stuff, we've seen a little bit pickup there. Boxing has been a little bit better. So, so far that's what we've seen.

And a lot of times you get the real effect in the weeks and months afterwards.

Thank you for that. I wanted to follow up on the equipment category which has lagged here for a little bit. Anything you can do to combat that counterpressure?

We've made some changes. E3 replenishment should help us get a little bit better about staying in stock. We've made a few changes from a buying standpoint. We are really looking where we are successful and trying to increase our presence in some of those areas. So sometimes, these things take a little bit of time, but hopefully we will get there.

Are you seeing any resistance to the higher price points in the footwear category?

Not at all.

Thank you.

Dan Wewer with Raymond James.

Jeff, urban sportswear, I guess it would be fair to say that's been an inconsistent performer the last few years. Have you guys considered any strategies in reducing your dependence on that category which I think is about half of your stores and replacing it with more core sporting goods inventory?

Yes. We've already made a lot of adjustments and we are going against some of the numbers from just a comp basis, but we are seeing a little bit of opportunity, especially in footwear. So even though the apparel part is a little bit tough, the footwear part is good. So we have made some adjustments there. And that's something that just a fashion shift and you really can't fight it so you just have to put your dollars were they're at.

And equally while we are lowering our dependence on them today, we do plan on fully capitalizing on it if and when that urban apparel does make its comeback again. It's just the cyclical nature of the urban business.

That's the reason I thought it would be a benefit in just reducing overall dependence on that category. And then, Nissan, I have one question for you. I guess you've been with the Company, what? Eight months now? Can you discuss what parts of the operation you think that you have had the biggest impact and when those items may become visible to investors?

Hibbett's is a great solid company to begin with and the strategies and the competitive advantages that they have had over the last 20 years continue to be its strength. It is not a question of in any way changing anything that Hibbetts is doing, but it is definitely adding onto it. You know over the next 12 months I think we will see improvements in our inventory turn as we improve our supply chain processes -- execution in stores from a selling perspective, assortment in stores, the leveraging of technologies both as a system to help us analyze our business, but also what the technologies start speaking to each other right from the consumer back to the associate in the (technical difficulty) back to our back office here where we integrate those three things. You know for the full effect of that it's probably another 12 to 18 months out, but in the meantime we are saying that the process improvement that the team already had in place prior to my joining. And [they've] just continued to build on it.

And then I think the last question I had, I understand that Nike is showing stronger momentum for you than the other leading brands. It looks like purchases at Nike (inaudible) over 50% for Hibbett. I think it is the first time ever. But when you think about Michael Porter's competitive framework, that kind of dependence on one supplier also presents a number of risk and if you (multiple speakers) just elaborate on that. How you manage that kind of concentration with one supplier.

Yes sure, well, obviously, when you have the five forces working as Michael Porter has talked about that is definitely dependence that we watch. However we're very comfortable with the way Nike manages their brand; that if it were to be anybody that (technical difficulty) equally we do value the relationships that we have with our other vendors. To name a few, it would definitely be on an Under Armour, an Adidas, a New Balance. We valued those relationships. We continue to look for ways to leverage that, but we feel very comfortable given the way Nike manages their business as they grow their business internally that we are not too much at risk. You know if you use the [threat] from suppliers.

Great. Thank you.

Let me add to that comment. We are very comfortable with Nike. Our philosophies really match. They love dealers that are full price, full service, go to markets where they don't have distribution. We fit perfectly and we're just not concerned about that.

Yes. I was actually thinking more just the other part of the equation, Mickey, if for some reason Nike's performance were to be less impressive.

Well, there's always somebody filling in that void at some point. And you know if and when that ever should happen we would be poised to move and move with the market too.

Great. Thank you.

Sean McGowan with Needham & Co.

Two questions I think also for Nissan, in your systems area. One, are you contemplating any additional significant investments in a systems beyond the upkeep and basically (inaudible) that we ought to be aware of. And second, how -- in terms of magical improvements at least something that we can see on the outside how far can you go with improvement from E3?

Let me answer your second question first. E3 could impact 20% to 30% of our business by the time we are up and running with all the vendors and programs that we want on it. We are seeing extremely good results come through, markedly different results from what we were running pre-E3 to post-E3. So we hope for that to continue and we think that could be pretty significant in our growth towards our goal -- our five-year goal. To answer your second question, we are looking at investments in numerous other technologies, keeping in mind we want to see payback very quickly on it. To name a few it would be absence management, labor management, markdown management, inventory visibility in stores. There's a lot of other software that we are considering and it's about integrating all of it towards the same goal that's a challenge. It is not about the availability of software, which is plentiful, but picking the right ones and the right steps is the challenge for us.

Thank you.

David Magee with SunTrust Robinson Humphrey. David Magee:Good morning. Just a couple of questions that are a little bit of follow-up in nature. One is on the men's lifestyle apparel. It would seem to me there would be opportunities for you all to benefit from consolidation that is taking place out there, smaller independents or other retailers who are trenching in that space. Are you seeing any of that for that category or for other categories?

In that category there definitely is a lot of independents going out of business. We definitely do see that. I think that consumer though it is really just not spending the money on some of those brands. That are really are -- those brands are -- the distribution has got a little bit wider, so there really hasn't been a new trend out of there. But we definitely see that consolidation even if a lot of brands are hurting also.

What about other categories? Are you seeing any consolidation that would benefit you at all across the store?

Not particularly.

Well since the independents [have] fragmented it's hard for us to really realize any significance which shift in our business because of the fragmentation of them.

With regard to the Nike relationship being enhanced year-over-year, you mentioned new balance and under armor. Are you seeing a definite change in terms of their allocation and/or pricing or are you seen other retail -- or are there vendors stepping up to try to prevent their share from being taken by Nike?

We are definitely -- as our relationship and as we became strategic with Nikem we have also seen the other brands step up also. And we are at the time we are a desirable play especially with the amount of stores that we have. So we see the Under Armours of the world and the New Balances and Asics all trying to do that same type of thing.

Is this a process that could continue to benefit you throughout, say, 2009?

Absolutely.

Then, with regard to the equipment category, Jeff, do you -- if you had to pick one or two areas where you might see some strength and second half of the year going into holidays could you do so?

You know we probably -- boxing. We really have seen a tremendous amount with the mix martial arts and boxing and that type of thing. We've seen a little bit of growth there.

Great. Thanks a lot.

Sam Poser with Sterne, Agee.

Good morning. I just have a couple of questions. No. 1, how much would you attribute the improvement in the sales to the change of systems right now? On a rate basis?

We've talked about that, you and me have talked about that a little bit. That is just such a hard one to say. I think it's pretty significant, but how you put a number to that would be pretty difficult. So it's definitely Valley that we are getting a lot better at seeing visibility a lot quicker.

And the key thing there is that we continue to feel good that we could leverage it through next year also.

Right and then, you had spoken in the past about price optimization or markdown optimization being the next stage. And you're talking about that later this year. What is your current timetable there?

It is really a staged timetable as opposed to a calendar timetable. There is planning and allocation software that now we are trying to install at a different level which looks at clusters and (inaudible) stores by SKU level. We need to launch that and leverage that. So it's a matter of launching and digesting before we put something else on. The learning curve on these things depend from company to company in their readiness to absorb it. So to come up with an actual calendar timetable is a little hard to do, Sam. But equally I can tell you that it is on the radar, but it is a stage -- I can only tell you it's a stage of the process, not necessarily a calendar against it.

When you mention the planning and allocation software, you are talking about enterprise planning. Is that correct or is there something else there?

No. The enterprise planning has already been done. We are now taking enterprise planning down to the next step, which is by store, by SKU, by cluster.

Yes and there is a lot of assortment planning. (inaudible).

Then you also talked, changing the subject a little bit, you talked about your unit growth and in conjunction with the ASPs going up. Are you expecting to continue to see unit growth? And are you finding that with these new systems you are doing -- how much of a better job are you doing, getting the right item to the right store at the right time now as it compares to last year or a couple of years ago?

Quantifying a number against its systemically versus traffic consumer patternwise is a little bit of an ambiguous way to do it. What I can tell you is that as we get visibility of our stores better than last year, we hope to see unit sales go up. Equally we also believe that consumer is now consolidating these shopping trips and values proximity much more than they used to given the gas price situation. And we think we are benefiting from that, being in locally driven marketplaces and small towns. So both those factors would tell me that. going forward, we should expect to see some unit growth.

And just one last thing. In your -- in the malls, in the stores that have closer adjacencies to Wal-Mart which is a large group of your non mall stores, did those outperform the ones that were not in as close proximity to Wal-Mart?

So I guess we don't specifically look at that. Most of them are Wal-Mart influenced either with Wal-Mart or across the street and strip centers in general certainly outperform the closed malls. But that has been the case for a while now.

Yes and then you did say, though, that your urban stores did comp up for the first time. What was the most attributable thing that attributed to that the most?

It would be footwear.

Thank you very much. Continued success.

Anthony (technical difficulty). Sidoti & Co.

Good morning. I just wanted to follow-up in regard to your comments regarding the June and July comps. And now if you were to adjust for the Fourth of July holiday, would you say that both the June and July were up mid single digits?

Closer. June would probably still be stronger than July. But July would have been up a little bit more. Probably the -- did we run any numbers. Maybe a percent more. It would have been up some more. The main thing that affected July probably was people waiting longer. There's a history of that in the last two weeks. They are waiting longer. The last three years we have been negative the last two weeks of July, but it clips into August real positive.

Now the trends that you are seeing so far in the third quarter, are you still seeing the same type of increased traffic versus ticket that you've seen from the second quarter or is that comp sales a number of about 5% (multiple speakers) --?

We are seeing a combination, increased traffic and increased asps.

Got you. And I was wondering if you guys could talk a little bit more about your strategic relationship with Nike? How do you see that evolving over time and some of the benefits that you have seen so far?

I think it really helps from a lot of different fronts. You know, one thing is allocated footwear on being able to get proper allocations. It's going to what we do in store with them all the way to doing grass-roots marketing with them.

And further they have a dedicated team just to hit it. We were the only account they work and that is very helpful.

Thank you.

[David Cumberland] with Robert W. Baird.

Jeff, are you seeing more opportunistic purchase offers due to the difficult backdrop?

You know, it's funny. Really not seeing that much more. I think a lot of the vendors have paid pretty close attention to their inventories. There's not an overabundance of it out there. David Cumberland:It would be also related to the difficult environment if someone could comment on what you are seeing lately in the real estate environment?

We are seeing it getting tougher on the sites that are greenfield sites where credit facilities are hard to find. And also cotenants are hard to find on a greenfield site. Equally we feel that is going to be offset by other retailers that exit existing leases, either through bankruptcies or through planned closures. So we are seeing the upside there, but needless to say that's changing the landscape a little bit. We still feel confident that we should be hitting on our goal of 80 to 90 new stores this year.

And in existing properties we are seeing a softening of rent. If you negotiate pretty hard, you can do a little better in existing properties.

Sounds good. Thank you.

[Rob Wilson] with Tiburon Research.

Thank you. I don't know if I heard earlier in the call. Did you give the AUR, the sales metrics like average unit retail, UPT and traffic?

We gave some of it. Our UPTs are up in the 2% to 3% range. I said our units were up 2 to 3% so also on top of that and I didn't know what was the other thing you needed there?

Average unit retail and traffic.

Average unit retail was up. Correct. By about the remainder of the -- we were up five in comps. 2 to 3% of that was driven by greater units. The rest was driven by increase in price of average units.

So traffic was flat?

No. Traffic was up a little because we drove more units as the core sales.

Okay. Did you mention also strip centers versus mall stores, the same-store sales in those two respective venues?

Yes. Strip centers outperformed enclosed malls and they have in recent quarters. In the last couple of years, really.

One more question. I am a little confused. You guys seem to be doing really well on the top line. Doing a great job there. Your systems are improved. Your inventory is cleaner. Yet your operating margin this year looks like it might be quite a bit lower than last year. So I'm just curious. What am I missing here? Are your new stores underperforming from a profitability perspective?

No, our new stores are performing above our model at this point in time. I would expect in the back half of the year our operating margins to do better than they did last year.

When you say new stores are outperforming, is that from a top-line or bottom-line perspective or both?

Both.

Okay. Thanks for taking my call.

Jeff Mintz with Wedbush Morgan.

Jeff, I guess, a question for you. As we head into college football on the licensed product is there anything unusual that happened in Q3 last year that we should look for as a comparison either easy or more difficult?

You know, I really don't think there's a tough comparison for the second half of the year. You know, hopefully, to start -- Georgia is rated No. 1. We have a lot of stores in Georgia so hopefully that will drive a little bit of business. But from a comparison standpoint we didn't have anything really favorable the whole second half of the year. So hopefully, the ball bounces our way sometime in the second half.

Great. Thanks. Then, Gary, just a couple of technical questions. On the tax rate, what are you looking for or modeling for the rest of the year or for the full year?

38 5 for the back half.

38 5 for the back half. Okay. Great.On use of debt, it looks like the debt level -- obviously it is up a little here and you didn't buy back stock in the quarter. Can you just talk a little bit about where you say those debt levels going for the rest of the year ex any stock buybacks that you do?

I would expect the debt levels to progressively decrease from this level and that, at the end of the year, we should be probably $10 million or less.

Great. Thanks very much and good luck.

John Lawrence with Morgan Keegan.

Good morning. Just real quick on the systems thing to sort of go over it one more time. Some of the different types of stores with the merchandise, is it very simplistic that if you just don't have to take some of that merchandise into the store the markdown cadence will be less and you save money there by what doesn't go into the store?

Yes, absolutely. The more we get better at segmentation and that we understand what each store stands for the better off we'll be. And hopefully some of these systems are allowing us to find them quicker so that we don't put merchandise where it doesn't belong.

Then going forward, just give us some kind of a sense if you would, Jeff, of labor scheduling, as far as in baseball terms are we still in the second or third inning of this?

We haven't even stepped on the field as far as that goes.

Great. Congratulations. Thanks, guys.

[Jeff Feinberg] with [JLF Funds].

Thank you very much. Congratulations. Couple of quick follow-up questions. I apologize, I was a little bit late on the call. Can you provide a little bit of detail in terms of the SG&A? Why on the good sales? That was up a little bit.

Certainly. More than the increase was the fact that we had our -- sales and bonus goals we started the first quarter we were not achieving nose. So the accruals related to that was down. When you look at the second quarter, the cadence picked up and so we had to increase those, those accruals in the second quarter. And then our medical claims were up more than anticipated. So if you take those we would have leveraged that SG&A line nicely.

And if I heard correctly, more importantly, in the back half of the year you do expect your operating margin to begin to expand?

Correct. Now we are going to have some challenges on the SG&A line because the differential and the bonus accrual what I would expect with the sales volume that we should be able to make it up and also with the gross margin dollars.

Terrific. Obviously -- and forgive me again I was a little late on the call, but I had heard that you had made some comments that perhaps the approach with the guidance was conservative here?

Cautious and conservative.

Okay. Because the implication of the guidance would not be -- it would be hard to have margins extend.

Correct. We understand the math.

Okay. Thank you very much.

Mitch Kaiser with Piper Jaffray.

Good morning. On the gross margin sid, could you go through the drivers of the erosion? I think you talked about fuel costs inbound and outbound hurting a little bit but could you (multiple speakers).

Not in outbound. Freight was probably half of the adjustment, but we certainly with fuel costs coming down we would expect that to turn around. And then the unfavorable comparison to last year was worth -- could be worth up to 60, 70 [bips]. So the merchants did a good job in managing their inventory and their gross margin, rates. And so we are past that uncoverable comparison now. It should be favorable moving forward.

Okay. Because I think if I go back to the first quarter transcript, Jeff was suggesting that it was probably going to be up on a year-to-year basis. Were you kind of -- were you just talking about product margins or forgetting about the unfavorable -- the unfaverable adjustment (multiple speakers) .

This is yet to come, Mitch.

What's that?

The best is yet to come. Talking on year-over-year basis and by the end of January he will be there.

Okay. And then on the SG&A you mentioned some bonus accruals for the third and fourth quarters, then, as well, is kind of the thinking?

Yes, last year we paid out very little in bonus and this year certainly with the full bonus accrual we could expect to pick up $2 million in year-over-year expenses, and most of that will be reflected in third and fourth quarters and some of it has been reflected in the second quarter.

Sounds good. Thanks good luck.

Sam Poser.

Just real quick. A follow-up on the margins. X in Q2 X the freight and the unfavorable compare. Can you just sort of break out the improvement in the merchandise margin, Jeff? Can you quantify what that was?

It was North of 70 basis points.

And now that we have more apples to apples, is that the kind of rate we should be looking at?

That would be be a pretty big hurdle to overcome. So I would expect and we would on a minimum would get 20, 30 basis points.

Thank you very much.

Ladies and gentlemen, this concludes our question-and-answer session for today's conference. I would like to turn it back to Mr. Newsome for any closing remarks.

As we said on our conference call on March 14th of this year and on May 23rd, we believe we are very conservative with our annual guidance. Our goal is to beat guidance. Comps have been strong in recent months. We are a much improved Company versus one year ago because of our systems investment, which has allowed our merchandise department to perform at a much higher level. This year's new stores are performing above the model. We are confident that there are at least 400 additional markets that we could put stores in, in our current states in the future. Hibbett has a strong solid future. Thanks for being on the call today and we look forward to speaking with you on November 21st, at 9:00, Central Standard Time about our third quarter results. Thank you.

Thank you. Ladies and gentlemen, this concludes the Hibbett (inaudible) conference call. Thank you for your participation. You may now disconnect.