Hibbett Inc (HIBB) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Hibbett Sports Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Mickey Newsome. Please, go ahead, sir.

Thank you, operator.

This is Mickey Newsome. I have with me Gary Smith, our Chief Financial Officer, Jeff Rosenthal, our President and Chief Operating Officer, and Cathy Pryor, our VP of Store Operations. We appreciate you being on the call today and your interest in Hibbett Sporting Goods. But before we start, Gary Smith, our CFO, will cover the safe harbor language.

In order for us to take advantage of safe harbor rules, I would like to remind you that any projections or statements made today reflect our current views with respect to future events and our financial performance. There is no assurance that such events will occur or that any projections will be achieved. Our actual results could differ materially from any projections due to various Risk Factors which are described from time to time in our periodic reports with the SEC.

Thank you, Gary.

As you know from our Press Release yesterday, we had a very challenging quarter. We believe last years second quarter stimulus checks affected our second quarter comps this year approximately 5%. Also, the tax free holidays are very important in this economy, and ten of the twelve states in our area that have tax free holidays shifted from the second quarter last year to the third quarter this year. We believe this affected our comps another 1% to 2%.

Overall, comp store sales in the third quarter have improved to negative low single digits and we have not comped the tax free holiday in the state of Texas from last year because that state moved the holidays back one week. 10% of our stores are in the state of Texas. We believe the consumer is absolutely buying closer to need.

Several states, including Arkansas, North Carolina, and parts of Florida have moved school start dates back one to two weeks. This negatively affects comps in the first part of August and helps in the last part of August we will know a lot more about our comp store sales next week, after all this is comped.

Now for further comments we'll go to Jeff Rosenthal, Our President and Chief Operating Officer.

Looking at merchandise in the second quarter, we had three major areas of business, apparel, equipment and footwear. Apparel is broken into two areas, license and active wear. License is broken into college and pro. College was off low single digits. Pro was off double digits and active wear was off low single digits. Active wear was off low single digits. Women's and kids apparel both comped up.

Our accessory business was excellent, up double digits, which consists of socks, shoe care, sunglasses and miscellaneous accessories. Our store operations team did a great job in selling items per transaction up mid-single digits. Equipment was off low single digits; however, we comped up in fitness, football, basketball and volleyball. Our most difficult business was footwear off mid- to high teens with all genders off; however, our cleated footwear was up low single digits. All in all we had a very tough quarter.

We are looking forward to third quarter as we are pleased with our inventory levels and the age of our inventory. We have many product initiatives that should be very positive. Our E3 automatic replenishment system has continued to be a major force in apparel and equipment and accessories.

We expect that we will get better and look forward in helping footwear with replenishment as we go forward. Our average price was down mid-single digits. Our strips out performed malls, and our non-urban out performed our urban. We have approximately 75% of our stores are strip centers and 25% are mall.

Thank you, Jeff. Now for our real estate and new store report. In the second quarter, we opened nine new stores and closed three. For the year, we now plan to open 50 to 52 new stores and close 20, and expand 18 to 20 high performing stores. We have expanded 21 stores in the last three years and results have been very positive. Now, we're not changing our store model and expansion means from going from 5,000 to 7,500 square feet, or approximately a 50% expansion.

Now, we primarily operate in small towns with county populations of 30,000 to 80,000 people. We primarily deal with small mom and pop landlords. They're having big problems financing in this economy. Year-to-date, we and the landlords have committed to 87 new store deals just for this year. 37 of the 87 or 42% of our deals have fallen out. It will not be done this year, because the landlord cannot deliver the states. Now most of the new stores of the 37 fall-outs will still happen in the next one to three years. There are markets we need to be in and they are not lost. An example, Monroeville, Alabama, a perfect Hibbett market, in south Alabama, very isolated, 35 miles east of Thomasville, Alabama where we have a very successful store.

We'll have three different real estate deals done in Monroeville, Alabama in the last two years, and we still do not have a store because of fall-outs; local landlords cannot deliver the space. We believe we can open at least another 350 to 400 stores in the 23 state area we currently operate in. When the economy improves, we plan to increase our new store opening rate. Now, for some financial information let's go to Gary Smith.

Second quarter sales were $123.1 million, which is a 5.5% decrease from the previous year. Fiscal comps were down 10.5%. Gross profit rate decreased over 250 basis points, mostly in footwear as customers opted to purchase more product off price and warehouse and occupancy costs de-levered.

SG&A was well controlled increasing 1.9% over last years dollars but down 4.4% on a per store basis. Depreciation and amortization was under last year's dollars due to the decline in lease hold improvements as a cost of significant less to get into a store. Operating income was at $1.9 million and 1.5% versus last year's $7.6 million and 5.8%. The tax rate was slightly elevated in the quarter, due to the fact that all returns were filed in the second quarter this year versus third quarter last year and the trueup was done in this quarter.

Diluted EPS came in at $0.04 versus last years $0.17, and from a balance sheet perspective the Company ended the quarter with $15.6 million in cash versus $14 million last year. Short-term debt was at zero versus $29.5 million last year. While inventories increased 5.2% over the previous year, they decreased 1.3% on a store by store basis. We spent $4.7 million in Capex for the year versus the $17 million budget.

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

Certainly. (Operator Instructions). Our first question comes from the line of Dan Wewer from Raymond James. Please proceed with your question.

Thanks. Hi, good morning. Mickey or Jeff, can you remind us the last time that Hibbett went through a cycle where footwear sales were down in this mid to high teen rate and how long that last cycle, how long that weakness lasted?

Dan, I really don't remember one being down this low. We have gone through some down cycles in footwear, but not to the extent that this one is, and we really believe a lot of it is coming from the stimulus and the shift in back-to-school. August, we are seeing some rebound back in footwear, not that it's at the levels we want it to be, but it is a lot better than it was.

I agree with what Jeff is saying. I don't ever remember one that was this tough. Now in the early 2000's it got a little bit soft in footwear but not to this degree.

So as I recall we began to see the weakening footwear sales at the end of March, right?

Yes, we had in February, we were up almost in the double digits at the end of February and that has started dropping in March. We were still up, but it dropped some.

So that was taking place before we had issues with stimulus check comparison or shift in back-to-school shopping holidays?

Yes, but not to the degree. It got certainly more negative in May, June, and July than it did.

And I know you've talked in the past about the benefits of becoming a preferred customer of Nike, the efforts they're making to improve margin rate for Hibbett and Nike products. Can you give some examples of what they're doing to help Hibbett in this current cycle either in terms of protecting margin, taking extra product returns, etc.?

Well, you know, with Nike, we have a very good relationship. We always work on margin and different types of containers and special products and we always look at the financial pieces of it and we work very closely to monitor that. Sometimes it doesn't always come in the quarter that you want it to come, but we always manage to get to a field where we both could live with and we still see lots of opportunities on how we go to market and how much allocations and those type of things that will help our business, and we're told, we're still the place to go to, especially since we go to small markets and we're needed.

And just a last question I had, I know that a lot of your challenges in footwear are more industry related and we're certainly seeing impact of weak employment on your business, but aside from that, what can Hibbett, what are your plans, what levers do you plan to pull to help rejuvenate footwear sales?

Well we're still going to be a premium, have premium shoes, and we're still looking at selling marquis type product. We are shifting a little bit to become a little bit more performance, not fashion, and we're also looking at we should have a little bit more of a mix when it comes to value pricing.

Okay. Thank you.

Thank you.

Our next question comes from the line of Oliver Wintermantel from Morgan Stanley. Please proceed.

Yes, good morning. Mickey maybe that's a question for you. We expect that the second quarter will be weak due to the cycling of the stimulus checks and the shift of tax free days; however, what changed your outlook for the rest of the year between the first quarter conference call and today that you reduced your full year guidance by around 20%?

You know, we want to be absolutely conservative. There's just so much uncertainty in front of us and we don't want to have to keep changing things. We just want to be very conservative and beat what we put out there.

Okay, that's very helpful, thank you. And within the different categories, did you see a trade down only in footwear or was that across-the-board?

We actually had a slight increase I think in apparel. Footwear was down low single digits. The reason we had such a shift is the percentage of footwear business went way down so it brought down the average price quite a bit. But we feel very good on where we are in apparel and equipment being down low single digits with going against the stimulus and the tax free, we're very positive for the third and fourth quarter, and apparel becomes a bigger part of the business going forward.

So we're encouraged by that. We're encouraged by our replenishment that we've been doing in apparel and equipment and we perform relatively well in the second quarter, considering going into the stimulus and tax free shifts that we feel very good about what we have going in the second half of the year.

Okay, and can you just remind us what the performance was throughout the quarter per month?

We were down high single digits in May, high single digits in June and mid to high teens in July.

Okay, great. Thanks very much.

And our next question comes from the line of David McGee from Suntrust Robinson Humphrey. Please proceed.

Yes, hi, good morning guys.

Good morning.

Just a couple of questions. One is how are your stores performing in areas that have been back-to-school now for maybe a couple of weeks? Is there a way to break that out at that performance which takes some of the noise out of the year to year?

Well, I think absolutely people are buying closer to need. In other words, the State of Arkansas started the school this year on Wednesday two days ago. Last year, they started on Monday, and it was a huge difference in sales this weekend. We were down big in Arkansas this weekend but on Monday and Tuesday and Wednesday we were up big. Just amazing start of school can really make a difference in buying patterns and habits.

But David for the month, those stores that have comp tax free and back-to-school are up low single digits.

So in Georgia, here, where all of school has been back since last Monday, would these stores be running low singles?

Yes.

And about what percent of the store base would that be roughly?

We're approximately about 60% or already gone back-to-school, and about 40% will be next week.

Of course, the big difference is the ones that push school opens back this year, relative to last year, and several states do.

And the ones that have improved because of taking some of the noise out of the numbers from a timing perspective, are you seeing better footwear? Is that also swinging more positive?

Yes. It's much better than it was obviously in the second quarter.

And Jeff, is there a difference in kind of the shopping dynamic for footwear, which kind of gets passed back-to-school, it seems like you got a lot of moms and the kids and they might be opting to go to Wal-mart right now for back-to-school but when you get into say october, you get more of the athlete buying for their own needs. Is that stretching too much?

Maybe. Really what we've seen is a lot more things are needed, maybe not quite as much fashion. Obviously with our cleat business being good, it's a need with somebody absolutely who wants to play baseball or football or soccer, so we're seeing some pretty good increases there and we expect that to continue. I think our mix needs to shift a little bit more towards performance, which performance running in Asics, you know, a Brooks, those type of, a Nike performance type running shoes, so we see shifting a little bit more of our inventory towards that which is a little bit more basic and not driven as much on fashion.

Thanks and just lastly, Gary, how is the lease renegotiation process going so far at this point in time?

Yes, we took a look at our lease hold; it's costing us less to get in the stores. Lease negotiations, we're seeing a downward trend in rents.

Is it happening about the pace that you thought?

Probably the dynamics are coming at different places on the financial statement, but we're getting close to what we thought.

Great. Thank you.

Thank you, David.

Our next question comes from the line of Shawn McGowan from Needham & Company. Please proceed.

Thank you. A couple questions. Was there anything in any of the markets weather wise that you think might have contributed one way or the other, either rain or hot or whatever?

No.

So no trends there and then I don't know if this is for Mickey or you, Jeff. Just certainly the outlook has been reduced and I think on the last couple calls you were trying to be conservative, but the last time we had a call like this you were looking for positive single digit comps for the balance of the year and just circling back to that question saying where did you see changes that would you were looking for positive single digit comps for so negatively?

Yeah, you know, even second quarter even though we know it was going to be tough it was a little bit worse than we thought and footwear to come off at such a high run rate from first to second quarter we were just conservative about that because where footwear is today. We're still very high on apparel and equipment and we do believe footwear will be better on the second half of the year.

So it's more a function sounds like of the latest data points are negative, and you don't know why that would change so you're just being conservative because the most recent trends are negative?

Yes.

Okay, all right, thank you.

Thank you.

Our next question comes from the line of Rick Nelson from Stephens. Please proceed.

Good morning. I wanted to follow-up on footwear and what comp guidance assumes about the footwear category in the back end of the year?

It would be mid to high single digit decrease.

Okay, and the inventory situation in the footwear category, I know you took a lot of markdowns in the second quarter and you talk about the shift to more function and less fashion. How long does that take to get the inventories right for the demand picture as you see it?

You know, I think it's a work in progress; we feel very good of where our aged inventory is in footwear and where our inventory levels are in footwear so we've managed this pretty well considering that we had such a shortfall and we'll continue to do that through the back half. As we come into other buys I think you'll see a significant shift in some of the buys.

Given the weakness across the industry in this segment, are you seeing more opportunistic buys and what are your thoughts about participating that way?

We see some. I think right now the vendors don't want inventory, the retailer don't want inventory so everybody is trying to play it down, so we do see some from time to time, but I wouldn't say there's answer overabundance of close up out there.

And if I could also ask you about geographic areas of strength and weakness.

The strength is like the lower midwest, Oklahoma, Nebraska, Kansas, Missouri, Illinois, Kentucky, in that area. It's pretty good. The weakness is Arizona, New Mexico, south Texas, Florida, the Carolinas and parts of Georgia.

Great. Thank you, and good luck.

Thank you.

Our next question comes from the line of Sam Poser from Sterne Agee.

Good morning, can you tell us what your comp, can you go through your inventory level on a comp basis?

We're down close to low single digits in apparel. I don't have all of that off hand. I can tell you in just a second, Sam, but it's down across all categories for the most part. I don't know what, specifically, you'd like to know.

Well I guess you're guiding to flat to negative for the balance of the year. On a comp basis are the inventory levels relatively in line with that guidance?

Yes.

And then how are your new stores operating as a percent to the existing to the comp right now?

A legal less than 70%, Sam?

And then just to follow-up on the other question, could you give us a footwear and apparel by month? You might have done it, I may have just missed it.

By month?

Are you talking for the second quarter?

Yeah, for the second quarter just comps.

Yeah, apparel down low single digits in May and June, mid In July. Footwear was mid to high May and June and a little bit higher than that in July.

Okay, and then what percentage, you commented about 150 stores would be on percent rents or were on percent rents this year. How is that looking right now and is that number going up?

It's not going up. It's staying pretty steady. I think it's 145 to 150 today and now a year ago it was like 80, but we think it's going to, and unless somebody else has a big closing it's going to pretty well remain in that area for the foreseeable future.

And then on a rent reduction, what are you seeing as you renegotiate the leases then?

Well, of course, it depends on the store, if you have an option coming up and it's an overperforming store you don't get any additional rent reductions, but if it's an under performing store and prospect for a closure you get a lot better rent reduction. On new store deals, we're getting a little better rent but where we're getting help is the landlord is doing more of the work and we have less investment in new stores.

And then for Jeff, what percent of the business now is on replenishment in total, is it about around the end of the year and you're aiming for 30 by the end of this year?

I'd say it's about 24%, 23% or 24% and as we ramp up more footwear, I will get closer to the 30 mark and a lot of that is work in progress, a lot of that will be in in spring, so but we feel that's a good number to at least get to in the beginning.

And you comped down significantly in the quarter and in Q2. Where are you month-to-date for comps right now?

We're at low single digit month-to-date, but we have improved significantly in the last week because we're beginning to, we still haven't comped all the tax free states yet like Texas is this weekend, last year it was last weekend and 10% of our stores are in Texas. Plus this year we've had several states with later school opening dates and that affects comps. We could tell you a lot more this time next week about comps than we can today. We anticipate it's going to improve.

When we look at Georgia, somebody brought it up before, which has had the earliest tax free days, and I presume the earliest back-to-school as well, could you walk us through where it started, where it went to during the tax free, what happened during when people went back-to-school and where it is today?

We really can't, Sam. That's just too granular, and we really don't want to get into that now.

I tried. Jeff, one last thing. Can you give us a break down by category in footwear; outside of cleated what are the ranking of best ball running, cross-training, etc.?

Yes, really the biggest negative really was the women's piece and men's running and really men's running you have to break it down. The technical piece is very good. We're comping there, but we have some fashion in running too so if you took the fashion part, it's not as bad. That's where we see the most deterioration though.

Okay. Well thank you. Good luck.

Thank you, Sam.

Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Please proceed.

Yes, good morning. Could you guys remind us how the same-store sales progressed last year in the third quarter?

Fairly strong in August. Weak somewhat in September because of the hurricanes and the gas shortage in the southeast and was fairly flattish to down a little bit in October and I think we were up marginally in the third quarter.

Right, okay. So basically you're down low single digits versus a pretty good same-store sales number?

It's really hard to tell, Anthony, until after the later labor day this year exactly where you are with -- license should probably take a hit because NFL opens a little bit later this year, so really this call would be a lot more meaningful in two weeks than it is today.

Okay, got you. And as far as expenses are concerned, do you guys have any opportunities to further streamline. I know you're a lean operator but are there opportunities for perhaps expense reductions?

Well, at the beginning of the year we took about 2% or so out of the expense structure and we're below that right now, so I think there's still some opportunities going forward.

Okay, and as far as expanding some of these higher performing stores, what's the typical investment in such a project for you guys and what kind of a comp lift do you usually get after doing such a project?

The typical investment -- landlord -- depending on the situation, typically the landlord does most of it, but we do have to do some of it. Gary do you know what the number is?

It all depends, Anthony, but it could be anywhere from $25,000 to $50,000 and we usually see at least in the first 12 months a high single digit lift in comps and probably in the second year, we could see a double digit lift in comps.

Okay, thank you.

Thank you.

Our next question comes from the line of Eric Tracy from BB&T Capital Markets. Please proceed.

Thanks, good morning. If I could just follow-up on the footwear piece a bit. In addition to getting more focused on performance, opportunities again just from a more moderate priced product as consumers clearly looking to trade down a bit, just again from an assortment standpoint there and then remind us footwear where it is. I know it's early but what percentage on replenishment?

Okay, really, probably a thing to let you know about is that we really need to do a much better job internally in store and call out some of the values; we have a lot of values but there may be some shift in some inventory, but we need to do a much better job letting customers know inside our box on where that is and to answer your second question on E3, it's less than two or 3% of our footwear is on replenishment.

Okay, and maybe the expectation where that goes by year-end?

Year-end has some slight improvement and really where we should make the most improvement would be next Spring. Hopefully next year we can get it into the double digit range. That's which I think we can.

And then maybe just turning to the real estate piece and in terms of kind of having difficulty closing some of these lease deals. Mickey, how should we think about just next year unit growth. I know the visibility isn't there in lumpiness, but should be somewhat similar to this year which is net 30 to 32 door opening?

I think it will be a little bit more. I think it will be 32 to 36 in that range but we'll still close some stores and of course we will try to do more new stores, but we got to expect 40% to 45% dropout again.

And just on that note, I mean, using the Monroeville as an example, is there anything, just a concern that there is something more systemic from a commercial real estate perspective that, even though the opportunities from a market standpoint are there, that it at least tempers your overall thinking of the overall market opportunity?

Well, what happens is it will be a small strip center maybe four or five stores and the landlord can't get it leased. He has a deal with Hibbett and a couple more, but he needs to get more leased to get his bank financing, that's one big problem and then he has to have financing to get it built also and he's having trouble there. I think that will pass, we just got to get through this downturn in the economy to get things levels off and I think we can get our new store count back up big.

And, then, just on the other side of that, rationalizing market I would imagine some of the smaller independence struggling to survive. Can you talk about the opportunities for share grab there and what you're seeing?

Yes, absolutely. For instance, we are in Arab, Alabama, we had a small independent close and all of a sudden we got a lot smaller in Arab, Alabama. Our comps are up big, and we've had the same thing happen to us in Fort Pain, Alabama and just this week there's a bankruptcy in Athens, Tennessee, a small local; we're seeing some of that, but it's not big. They're typically into school and hard core, and that team and school business where you have a salesman going out to the schools. It's pretty good. We have a little division that does about $10 million and their sales are good. Of course, that's all driven by gate receipts, and I don't think people will stop going to high school football games and that's a cheap form of entertainment. And that's what most of the locals are, but we're seeing some close.

And then just other real estate in terms of liquidations and possibly recycling of some of those doors, is there any of that opportunity?

There will be some but in small markets like in Hazard, Kentucky, you got the one strip center, and it's mostly leased, not like the outskirts of a large market where you may have several strip centers that are malls that are virtually vacant. It's a little bit different in small markets. There's not as much vacancy.

Fair enough. Thanks guys. Best of luck.

Thank you.

Our next question comes from the line of Christine Corper from JMP Securities.

Yes, hi. Just another follow-up on the footwear category. Can you just elaborate on the mix? You talked about focusing more on performance, less on fashion. What does a mix look like now, and where do you expect the shift -- what do you expect the shift to look like?

I think some of it's a little bit in lifestyle which lifestyle can mean a lot of different things. Part of it is urban, part of it is suburban with skate shoes, and I just think we have some opportunities to get more of the performance piece. I know it will be a little bit more basic that you can cover and there will always be a fashion element to our business, and we're still selling, it's still our best selling shoes. We're just not selling it at the rate we were a year ago and that's all just economic issues that we're having in our country right now, but we still see that as a big part of our business, so it's just shifting a few of those dollars to get the inventory in line with the sell-throughs.

But is performance a majority of the category now?

No, I would say more is fashion, and the cleated business, obviously, is all performance, but part of our running category is fashion and technical. We just see giving a lot more dollars to the technical piece going forward than the fashion piece.

Okay, that's helpful and then just talk about performance of the new brands you've added, like Northface, how is it doing in some of the stores and how many stores are you in now?

Yes, we'll have a significant increase in the second half of the year in Northface. We're very excited about it. They really perform well in the second half of the year so it will be a significant increase and we're counting on a lot of that to help our apparel sales in the second half of the year and also the accessories that go along with it, so we feel very good about that. We're seeing a lot more niche brands that maybe just in the southeast or in certain states, so we do have a lot of new brands but we really don't want to give out those brands for competitive reasons.

And number of stores you're in with Northface?

We really don't want to give that out, but it's significantly higher than it was last year.

Okay, thank you.

(Operator Instructions). Our next question comes from the line of Chris Svezia from Susquehanna Financial Group.

Good morning, everyone. I was wondering, Mickey, if you could just clarify? You asked a question regarding month to date trend. I think you said low singles. Is that down low singles you were talking about?

Yes, down low singles.

And then either Jeff or Mickey. Just in terms of the trends that you've seen for those areas that have gone back-to-school, you said 60% or so by the end of this week would have been back-to-school.

Can you maybe just add color about what people, not so much what they are buying, whether it's pricing, trading down through apparel or footwear or just in terms of how they're buying product and what they're looking for? You talked a little bit about shopping closer to need, but I'm curious in terms of a pricing perspective and trade down perspective what they're looking at?

Yes. We're not seeing quite as small a price issue at back-to-school because I think here, people are buying it because they need it right now so we're not seeing as much pressure as we saw in the second quarter where maybe there wasn't such a need at the time and there was a little bit more need at that time. From a margin in those type of things, we do see that it's better than last year.

Okay, and then when you guys think about being a little bit more -- you talk about on the footwear side at least shifting a little bit of open to buy to more performance footwear and I think you mentioned to some degree maybe looking at some incrementally, opportunist being buys maybe talking about a little more showing that value presentation.

Is there enough opportunistic buys out there because you mentioned there really wasn't that much to get into where you guys could at least still kind of support the overall margin rate even if you needed to become a little bit more value-oriented in some categories?

Yes, I mean, Chris, we're not going to play there unless we can make money at it, so whatever we buy in those price ranges, we expect at least or more of what we're making now from a margin standpoint.

Okay. Very helpful. Thank you very much. Appreciate it.

Thank you.

We've got a follow-up question from the line of Shawn McGowan from Needham & Company. Please proceed.

Hi, Mickey. I just wanted to get some clarity on something I think I heard you say earlier regarding the level of high school sports business. You gave a number of $10 million. Was that annual or quarterly?

We have a little team division that's how we started in the mid '60s, Team and School, and it's a separate corporation and we operate it totally separate. They have an old warehouse that has nine outside salesmen. They don't do any retail business. I think their occupancy expense is like 1%. It's a whole different model, but their business is good. It's real interesting. I think high school sports is still going to be there and their business has been very good this year.

And that's about a $10 million a year business?

Yes, it's a small piece of our business, but it's where we started; and we still have it; and I wish it was about $200 million now

All right, thank you.

Thank you.

We've got a follow-up question from the line of Sam Poser from Sterne Agee. Please proceed.

Jeff, you mentioned with potentially bringing in more price point products and footwear. How does that-- and given that you're continuing to plan the footwear business down aggressively going forward and orders for Spring are beginning to be due -- how does this work with your more premium brands as you plan the business from a mix basis, because are you going to them to get the deals or where are you going and is this something where can you be planning any of these businesses up at this time?

Sam, we still expect to sell premium products. We'll shift some of our dollars towards that. And from an open to buy situation, it's really -- we work with all of the vendors on making sure our inventory levels are correct and we'll make sure that we make the proper adjustments on where we see that business going.

It's just going to be a piece of, we're not changing what we're doing. We really want to stick to what we are, but we do need to make some changes, obviously, to get the business better.

But, given the current trend and your current outlook, the lower price points notwithstanding, it would probably necessarily mean that everybody is going to take a hit of some sort due to open to buy constraints and turn constraints and so on and so fourth?

Well, there are some categories that we're playing up and for instance, if we're looking at technical running we're planning it up so they will get more open to buy.

There may be some areas that will get left open to buy but it's just that we're making some adjustments, we're analyzing what vendors we do business with, and if we should do as much or not at all, so it's just, we're just taking a bigger scope on the way we look at the business.

Okay, and then Gary one last question. Can you on a negative, on a flat to negative floor could you lever occupancy in the balance of the year?

At the higher end probably. At the lower end, no.

Okay. Thank you, good luck again.

Thank you.

Our next question comes from the line of Seth Cohen from Valinor. Please proceed with your question.

Hi guys. My question is around with the follow-up to last quarter with Wal-mart coming in with Starter and Danskin, and that impacts your view, how you're adopting your strategy, if at all, and even if you think it's a competitive threat?

I remember the question last time and I really don't think it's a threat at all. Really with Danskin and Starter is mostly apparel, and our apparel business is very good. I really don't think it affects us at all. I know they have a little bit of footwear, but I think you're talking appeals and oranges and really don't feel like that's a threat at all.

We see Wal-mart as our ally. They are not the enemy.

So are you looking at any strategy changes or how to monitor it or is it going to be sort of reactive here?

We're always making adjustments. We do have some private label in apparel, and it's doing very well so we look at that but I really don't think that's a factor at all.

Okay, thanks very much.

Thank you.

Our next question comes from the line of John Lawrence from Morgan Keegan & Company.

Good morning, guys.

Hi, John.

Just real quick, Jeff, would you comment a little bit on replenishment? The last time you had this cycle, and these types of trends, remind us of how that replenishment system helps you today on that markdown cadence and all those types of things?

Well, the more stuff you have on replenishment, it's more stable items, it's not really susceptible to markdowns as much. We stay in inventory positions more. The vendors hold most or almost all of the inventory, so it builds just a better base for us and a more consistent business going forward.

And that's what gives you the confidence of getting margins better as you continue to go forward?

Correct. We need top line, too, to help, but that's one of the factors that's key to us in making sure that it's ex percent of our business.

And another factor in building margins is our inventory is cleaner and less aged and lower per store.

And then secondly, Mickey, obviously with some of these fall outs, and you mentioned catch up over the next couple years. I mean, if things come back to normal, etc., how high would you take that unit growth rate?

I think we can take it to 75% to 85% pretty quick.

And some of those would be catch up and some would be new markets?

Right.

Okay, great. Thanks a lot. Good luck.

Thank you.

Our final question comes from the line of Mitch Kaiser from Piper Jaffray. Please proceed.

Thanks, guys, good morning. Maybe we could have the conference call a couple weeks later to just get an update and get a sense for how the back-to-school shifted. Just kidding. On the gross margin, Gary, you talked about it down 250 basis points. Could you give us a sense for what the merchandise margins, how they performed and then just a break out of whether it was performance or mix related to footwear, please?

Half the decrease in the gross profit line was due to the deterioration in product margin; it was mostly in footwear, and the warehouse and occupancy was due to de-leveraging.

Okay, so kind of half and half between the two?

Yes.

Okay. Sounds good. Thanks.

Mr. Newsome?

Yes.

There are no further questions at this time. I'll turn the call back to you.

In summary, we feel much better about the third quarter and we have many positive things going on at Hibbett sporting goods.

Number one we ended the quarter with $15.5 million in cash and no debt. Vendors and landlords love that.

Number two, we ended the second quarter with less aged inventory and less inventory per store which could result in increased product margins in the future.

Number three, we've greatly improved in systems. The automatic replenishment is really helping us and it shows up that in apparel, in equipment, and accessories, we were much better in the second quarter than footwear.

Number four, we will continue to grow our store count opening 50 new stores this year and at least another 50 next year.

We'll continue to cut cost whenever possible. We have a solid store model going to smaller markets, where we're needed by customers, landlords, and vendors. We're in a great position to take full advantage of growth opportunities in the future.

Thanks for being on the call today. We look forward to speaking with you on November 20th at 9:00 central standard time with our third quarter results. Thanks for being on the call.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.