Hibbett Inc (HIBB) 2015 Q1 法說會逐字稿

Welcome to the Hibbett Sports Inc. first-quarter 2015 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, (Operator Instructions). As a reminder, this conference is being recorded today, Friday, May 23, 2014.

I would now like to turn the conference over to Tripp Sullivan of corporate communications. Please go ahead, sir.

Thank you, and good morning. 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 the Company's current views with respect to future events and the financial performance. There is no assurance that such events will occur or that any projections will be achieved. The Company's actual results could differ materially from any projection due to various risk factors, which are described in the Company's press release and SEC filings.

At this time, I will turn the call over to Jeff Rosenthal. Jeff?

Thank you, and good morning, everyone. Welcome to the Hibbett Sports first-quarter earnings call. I have with me this morning Scott Bowman, Senior VP and Chief Financial Officer; Becky Jones, senior VP of merchandising, marketing and logistics; as well as Cathy Pryor, senior VP of store operations.

I would like to start off by thanking our associates, who have worked very hard the last several months. Their commitment to excellence not only drove a strong comparable-store sales gain but also allowed the Company to achieve significant milestones necessary for our continued growth. Not only did we achieve a 4.1% comp, we are also pleased to report that we opened 16 new stores, expanded 4 high-performing stores and closed 4 stores, putting us at 939 stores at the end of the quarter, netting 12 new stores in Q1. It is a Q1 record for us and puts us on track to net 65 new stores by the end of the year.

So far this quarter, sales have been slow due to a shift in launched shoes. However, we are very positive that we will have a good second quarter.

Over the last 30 days or so, we have fully transitioned to our new wholesale and logistics facility with very little issues to speak of. We are excited in the potential that this facility will deliver in terms of getting the right product to the right place more efficiently than ever before.

We have also begun executing on the first phase of our omni-channel roadmap. This phase is centered on two important areas that will be needed as we lay down the foundation for a true 360-degree customer experience. Number one, firming up our IT infrastructure by investing in technology, people and processes. Number two, upgrading our store technology and hardware including point-of-sale. Over the coming months, I will continue to share the progress with you on this very important and highly focused endeavor for our Company.

As we continue to work through these and other strategic initiatives, I am confident that we will deliver on our goals, both financial and operational, this year.

I will now turn the call over to Becky Jones.

Good morning. First-quarter comps sales were driven by branded apparel and footwear. All categories of branded apparel comps positive, both men's and women's business remained as growth opportunities. In our fashion stores, Jordan and KD Apparel led the way and Levi's also had a nice positive comp. And men's performance tees and shorts were high performers. Compression was softer compared to last year's Under Armour Compression program launch. Women's performance pants, bras and shorts sales were quite strong. We saw particular strength in the kids' categories, especially in branded boys' products. Girls branded also enjoyed substantial comp growth. Socks, headbands and branded caps remained volume drivers and accessories.

The licensed apparel and headwear business was soft overall. However, the women's apparel business and licenses experiencing strong growth and have continued upside for the year. Licensed headwear remained soft while branded headwear is trending upward and consumers are shifting their choices to brands such as Costa, Nike and Under Armour.

In equipment, we were pleased with the results in baseball and softball including the cleat category. Protective equipment and sports medicine were also highlights. Soccer had a nice quarter with World Cup inflatables leading the way, and Nike is dominating the soccer cleats business.

In the footwear business, basketball had a tremendous quarter, fueled by Jordan, as well as Nike Signature, Lebron, Kobe and KD. Although Jordan Retros performed extremely well, we are just as pleased with the performance of off-court Jordan silo. Total running is stable in our stores with Nike Free Run still the dominant unit driver. However, Roshe Run has also been impactful to the business, and we saw good results in the Nike Free trainer 5.0.

The kids' footwear business is being dominated by the Under Armour running silos.

Inventory levels on a by-store basis is down to last year, and we are in a healthy place going into summer. Back-to-school assortments are robust, with receipts planned to arrive late June/early July. And our marketing initiatives are in place to connect with our customer, and we anticipate a good back-to-school season.

Scott Bowman will discuss our financial results at this time.

Thank you, and good morning. For the first quarter, total sales increased $21.9 million to $261.9 million, an increase of 9.1% over the prior year. Comp sales were up 4.1%. By month, comps were 7.2% in February, 2.9% in March and 0.9% in April. Gross profit rates decreased 38 basis points in the quarter. Product margins decreased 44 basis points, mainly due to markdowns associated with managing our inventory. Warehouse and store occupancy decreased 6 basis points as a percent of sales, which was due to leverage gains from comp sales partially offset by additional costs related to our new wholesale and logistics facility.

SG&A expenses increased 8.5% in the quarter but decreased 11 basis points as a percent of sales. This was mainly due to leverage gain from comp sales and favorable benefit costs. Depreciation and amortization decreased 2 basis points as a percent of sales in the quarter.

I would also like to point out that we capitalized our new wholesale and logistics facility in April, and the quarter reflects one month of depreciation for this facility.

The income tax rate for the quarter was 37.7%, which was lower than last year's rate of 38.2% due to a state tax adjustment last year. Operating income of $45.7 million increased 7.6% from last year and was 17.4% of sales versus 17.7% last year, a decrease of 24 basis points. Diluted earnings per share came in at $1.09 per share versus $1 last year, an increase of 9%.

From a balance sheet perspective, the Company ended the quarter with $110.3 million in cash versus $103.2 million last year with no bank debt. Inventories increased 0.4% over last year and were 6% lower on a per-store basis. We spent $8.6 million in CapEx for the quarter, including approximately $5.2 million for our new wholesale and logistics facility.

Also for the quarter, the Company bought back 198,000 shares for a total of $10.8 million. At quarter-end, we have approximately 219 million remaining under the existing purchase authorization.

With that review, operator, we are now ready for questions.

(Operator Instructions) Peter Benedict, Robert W Baird.

First question is on the product margins. They were down. It sounds like, though, for the year -- correct me if I'm wrong, but you are thinking they still could be slightly up. So how should we think about the cadence over the remaining three quarters? Is there any particular opportunity in any one or two quarters that you are looking at? And how does the markdown management system play into that?

We actually think that from a margin perspective going forward that we will probably see a little bit of improvement in every quarter going forward. MDA -- we really wanted it to address some of our older inventory in the first quarter, so we took advantage of that. And we did clear out some clearance that we needed to get rid of. So our inventories are in pretty good shape, and because of that we think that we will be all right.

We have about -- I think, by the time we get to back-to-school we will have about 70% of our categories on the markdown optimization program. So the impact of bringing on new categories is going to become less and less as the year goes on.

Okay, that's helpful. And then on the back-to-school topic, is there any kind of timing as you look 2Q/3Q in terms of when schools are going to be opening, tax holidays, things like that? And then also just on the timing of product launches, you alluded to that being a bit unfavorable, I think, so far in May. Can you give us a little more color on that? Thank you.

We have a pretty good-sized launch that will be tomorrow. And I think that that's going to level things out a little bit for us comparatively forward, and then we will go forward in the quarter after that.

As far as back-to-school is concerned, we kind of almost look at it as a bridge between July and August because not all of the schools in all of the states made decisions around where they are having their tax-free. And that's always kind of a last-minute thing. So we got some information but we don't have enough yet to say exactly what's going to happen from the tax-free weekend shifts.

Okay, that's helpful. Thanks very much.

Dan Wewer, Raymond James.

Jeff, I may have missed -- did you give the quarter-to-date sales numbers like you all normally do?

Yes. We were down slightly for the first few weeks.

Same-store sales down, what, 5% or low single digits?

Low singles. Low singles.

Down low single digits quarter to date?

Yes.

And then the pace of same-store sales decelerated, it looks like, every month during the first quarter. What were the reasons for that?

I'll start off on that, Dan. I think as you look at February, it was really strong. And as we had that really bad weather at the end of January, I think we saw a little bit of a bounce back after we got into February and the weather cleared for us. Couple that with some tax money flowing into February, helped us out quite a bit. March did moderate a little bit; it was kind of more normal.

But typically, how we look at the business -- we look at January and February together because a lot of the same products are sold during that time period, and you do have some shifts in seasonality and weather events. So we feel really good about February and March.

As we got into April, it did soften a little bit more. But keep in mind, if you look on a two-year basis, know is 4.4%, I think. So it's pretty well in line with the quarter from a two-year stack.

I was just thinking, though, that if April was up low single digit and May is running negative, it looks like the last two months same-store sales have flattened out. Was that due, did you say, to changes in launch of new product? Or is it just a softer demand in the category?

Well, really, this month it is a little bit of a shift on launch. Tomorrow is a very big launch. And at such a low volume in the month of May, some of those shifts could have a pretty dramatic impact because we still have over 80% of our business (inaudible) to for the second quarter.

Do you think that there has been some weakening in demand?

It's really hard to say.

Our branded apparel business is still comping in a strong place quarter today, even today. And we know that certainly in our footwear business our basketball business is still very, very strong. Our running business is pretty stable overall, as well. So early in the quarter, knowing what is impactful in the back part of the quarter with the back-to-school timing coming, as well as the launch. The launches that we know are out there -- we are pretty comfortable with where we are headed for second quarter.

Okay, and then just a last question -- Scott, can you walk us through the sequence of operating margin outlook? It sounds like, on the one hand, merchandise margin trends remain favorable for the balance of the year. But you do have all the infrastructure build from last year and this year. So could you just, going forward, remind us what are the additional headwinds and when we will begin to anniversary this, creating an opportunity for some improvement year over year?

Yes. I think what you will see, Dan, is that merch margins, like Becky said, will improve a little bit compared to last year as we go forward. Keep in mind last year that first quarter was the only quarter we saw an increase in merch margin. Last year in second quarter, it was actually down over 50 points. And so from a comparable standpoint and just based on the current outlook on MBO, we feel that the merch margin will improve a bit as we go through the quarter.

If you look at the new wholesale logistics facility, it is up and running now. And since it's fully operational, those costs will now start hitting cost of goods; whereas, prior, when we were getting ready for the transition, those costs were flowing more into SG&A. Okay? So the depreciation will remain at a higher level for the remainder of the year. And the operational costs of that new facility will start hitting cost of goods sold.

And I would say, going forward, that it will be a pretty even spread on that incremental expense hitting cost of goods. We do finish our lease in December for the old facility, and so you'll see those costs drop off at that point. And until then, it should be a pretty even waiting across the months of the year.

And when you -- this is, I promise, the last question. When you are talking about increasing margin rate going forward, that was referring to merchandise margin, correct? I guess the GAAP gross margin will drop because of the new DC as well as --

That's right.

-- carrying the old lease?

Yes, so the guidance that we gave on the last call of 20 to 25 basis points of impact for the new facility still holds. That looks like it's still within that range. But you may see some slight favorability in January when we get out of the lease for the old facility.

Okay. Thank you.

Mike Baker, Deutsche Bank.

I wonder if you could give us any color on the comps. Any impact of weather, do you think? A lot of retailers actually had a reverse situation, as you did, in terms of the cadence -- blaming weather early and then weather got better. You guys are the opposite. So I'm just curious if weather had any impact. And then maybe help us with that color. And anything stand out regionally that would help us get that color?

I'll start off. We did have some store closures going into the first quarter. And we had about almost 1000 more store days of closures versus the prior year. And most of that was weighted in February, so February would have been even better. From a comp standpoint, it would have added a little more than one point of comp had we not had those closures.

That's one point December or to the quarter?

To the quarter.

Okay. Surprised, I guess, that the business didn't pick up at all in April as weather improved. And again, I guess you think that has to do with the more difficult comparison in April?

It did pick up some. We did have a little bit of weather issues at the end of the quarter with tornadoes and stuff all throughout the Southeast. Really, with the Easter shift and one less day and some of those type things, it definitely had a little bit of an impact also.

Okay. Anything regionally stand out? And I guess related to that, what are you seeing competitively? Are there any competitors in certain regions that are doing anything differently?

Not really. We see pretty much business as usual. Certain states continue to drive -- especially out West, we are doing extremely well. And some of the more Southern states are doing well. So really not seeing an impact from any competition or anything like that.

Okay. Thanks for the color.

(technical difficulty), Merrill Lynch.

Just in terms of the markdown optimization, can you talk about the lift you are seeing in categories where it has been in place for a full year and now you are cycling that initial rollout?

Yes. What I can tell you in general is that, as we have products that have gone through a full cycle under the program or close to a full cycle, we are seeing some good results. And just to give you an example, if you take a category like fleece, it really gives us a good benefit because we have different prices zones and markdown cadences based on those zones. So in Wisconsin, we can take a different approach versus Florida in the cadence and the amount of markdowns that we take on that type of product.

And so we've seen some pretty big wins in those categories that are more regionally focused, and we need to alter the cadence based on regions. And also the benefit of being through the full cycle and taking the early markdowns at the early part of the cycle and then seeing the benefit on the back end.

So that's what I can tell you in general. And so it is working like we had planned, and we'll continue to see those benefits as we get more products towards the end of that cycle.

Can you just give a little bit -- just on the quarter today, can you just give a little bit more color in terms of the traffic versus AUR and maybe how that progressed throughout the quarter? Was it mostly traffic that slowed down in April?

Yes. For the most part, when you see a change in our comps, for the most part it is mostly traffic driven. So if you just look at the full quarter, first quarter versus last year's fourth quarter, the improvement in the comp that we saw was almost all traffic driven. And typically, when you see the comp go up and down, it's mostly traffic.

Thank you. And then just last question -- where is the new store productivity tracking? Are there any markets, like trends in the market you can call out? Thank you.

Yes. Overall, the productivity remains very strong. It's in the high 70s -- 76%, 77%. So we continue to be encouraged not only by the number of new store openings but the productivity that we are seeing on those new stores. And I would say if you look regionally in general, towards the Southwest is probably where we are seeing the biggest productivity and gains out of those new stores.

Great. Thank you.

David Magee, SunTrust.

Do you see any sort of pattern as you look at the comps in terms of those stores that are located close to Wal-Mart and then maybe seeing the more economically distressed consumer pulling back this year relative to the other stores?

David, not really. We still look sometimes, and sometimes it doesn't always go as you would think it would. Some of our highest unemployment areas are some of our best comping stores. So really, it really depends on making sure you have the right products in the right places. But we really -- it's not as big an impact as it looks by store. Certain brands, no matter what type of economy or what's going on, have been selling well. Our Jordan business is probably the best it's ever been, and some of those are some of the more depressed areas, really.

Thanks, Jeff. And then secondly, when you see traffic decelerate, at what point do you decide to pull some levers, whether it's marketing or price or whatnot? And I guess in this case you probably are thinking that it's just really going to reverse itself once you get better product out there.

But are there levers that you might pull if business doesn't respond in the next couple of weeks?

Sure. You know, we look at where it is in the season and stuff. And we definitely see shopping patterns change throughout the year. And a lot of times it really just depends on some of those type things. We definitely see consumers -- and this is not a new trend -- shopping closer to need or what the launch is for that weekend or those things. We see some of the high peak times such as holiday and back-to-school, we definitely have customers coming in that have changed. Sometimes in between it has been a little bit slower, but when they have products -- new products that are coming in, that also drives traffic

There are levers that we can pull if we want. We have over 4 million MVP customers that we can do things. We have text and mobile marketing that we can pull levers if we feel that we need to. But we really have seen a pretty good shopping patterns going around holidays and launches and definitely key periods of the year such as back-to-school.

So the consumer is there but just is more bunched up around the events, and then the valleys between those events might be deeper?

Yes. And we see -- and this has been going on for quite a while, but we see it even more so. But we still see the first and 15th of the month being very important to the business and pay cycles and those type things. Those really haven't changed.

Thanks, Jeff, and good luck here.

Camilo Lyon, Canaccord Genuity.

I wanted to just dig into the traffic and take it discussion a little bit further. So it sounds, Scott, that the traffic was the main driver here in the first quarter. That's a pretty sharp, I think, reversal from what it had been last year, where ticket was the main driver. So my question is, from a pricing perspective are you at the point where pricing is no longer viewed as a main driver of comp and you have stopped out at taking your consumer up this pricing ladder? Or do you see further opportunities to drive price increases?

Yes, let me clarify it a little bit, Camilo. When I made that comment, what I meant was that the change in comp that we saw in the fourth quarter to what we saw in the first quarter -- the main difference in that movement was generated by transactions. Okay? So transactions were still flat to slightly down. So tickle was still the main driver. But the change that you saw in the comp was driven more by improvement in transactions. Okay?

So as we stood in Q1, we still saw fairly flat transaction and being mostly driven by ticket. Okay? The transactions did improve sequentially over the prior quarter.

Looking forward, especially with the strength that we see in basketball and some of the new products coming out in back-to-school, we still see that opportunity to be able to improve our average ticket. And the operations folks continue to work at items per basket. And so they continue to see some opportunity to improve that as well.

Okay. Thanks for the clarification there. So the follow-up to that is then, is there an underlying theme here that maybe your consumer is feeling incrementally more pressure from -- whether it's the macro landscape just being challenging or maybe intensifying competitive pressures as the big boxes start to encroach somewhat on your territories, such that you might want to alter how you view your pricing algorithm?

Not really. We don't see that as being a pressure.

Okay. Thanks, and good luck with the rest of the year.

Rick Nelson, Stephens.

Do you think the slowdown in the comps has anything to do with the DC, that transition? I noted your per-store inventory was down 6%.

No, Rick. We planned it to be exactly where it was. Last year in the first quarter we were up about 8% comp, and we felt it was too high. So we purposely have our inventory levels where we were at.

And we are very excited about going through the transition really with no, really, issues. And we are up and fully functional today, and that's something that we are very proud of. And we plan our inventory to be right about where it's at. So that was not an issue.

All receipts have been completely on time and going through the new facility exactly as they would have been going through the old facility. It's just a more efficient building for us. And that DC is going to have nothing but a positive impact.

Okay, good to hear. I know 2Q is a volatile one. In the past, seasonally it's really tiny. Do you change any of your internal models based on what you have seen of late, at this point?

Well, probably the biggest thing and really the biggest factor really in second quarter is when back-to-schools start and when does tax-free start. So we definitely get ready earlier than most other retailers because we are still -- even though we are in 31 states, we have such a high concentration as schools start early. So as we get -- we will start deliveries -- some pretty big deliveries in June and early July to get ready for that. That's probably where we've shifted a little bit more inventory going that way. That's probably the biggest change in the second quarter.

But really, May and really until you get up to Father's Day, it's mostly T-shirts and shorts and some sandals and some of those type things, which aren't the highest volume. You are kind of in between soccer season and football season. So we really pay the next six weeks or so to really try to get ready for back-to-school.

Okay. Got you. And could I ask you about the mall-based comps versus the strip centers, if there is any difference there? And it looks like some of the mall-based footwear stores are putting up bigger comps. Hibbett tried to (technical difficulty) getting different allocations that would put them at a competitive advantage.

Yes. Our mall stores have performed a little bit better than our strips. Some of our mall stores are definitely a little bit more fashion driven. So we have seen the performance in our mall-based stores a little bit better this time than we have maybe in previous quarters.

Got you. Thanks very much, and good luck.

Sam Poser, Sterne Agee.

A couple questions. Could you give us a detail on traffic conversion, tickets and UPC's for the quarter?

Yes, we don't really track conversion, Sam. But from a ticket transaction standpoint, ticket was up mid-single and then transaction was down low single digit.

Thanks. And then have you seen -- what kinds of changes have you seen in your allocations from -- on the marquee products? Are you seeing better? Are you seeing more product? Are you getting more Jordan shoes and more KD's and Kobe's and so on and so forth? Are you making progress there?

Yes, Sam. We continue to always make progress with Nike. We really don't give it out, but we continue to be a major factor for Nike. And as we continue to grow, we continue to work on that. And it has gotten better.

You got to give it to Nike, too, because they are very good at making sure that they keep demand up in the marketplace. So it's always a negotiation and a work in progress. But you have to appreciate the fact that they keep the demand up.

And then lastly, given the new DC and these ongoing investments in the new POS systems and eventually, I guess, through e-commerce, how much will the benefit from the new DC help to offset -- or offset some of the cost or the deleverage of those other expenses? How do you see the benefits of that on an all-things-being-equal scenario?

We think it will definitely help. And as we get further down the road, we will have more details on how those will all line up. But in general, after we get the new facility up to full speed and get that product warehoused in that new facility, we certainly will see some benefits from the sales and a margin standpoint. We will take it fairly slow as we ramp up just to make sure that we onboard those products efficiently. But especially as we get into next year we should definitely see some benefit from that new facility that will offset any other incremental costs that we are seeing.

So that's part of what we are trying to do, Sam, is to put things in the pipeline like our new wholesale and logistics facility; markdown optimization, as it matures; new allocation system that will be going live here in a couple, two, three weeks; as well as business intelligence. So it's all been thought out to put those things in the pipeline so that when we do invest in other big projects like omni-channel, we do have some offsets.

You would have more offsets next year than you do this year, just because of the amount of initiations this year, so to speak?

That's correct.

Oh, absolutely. And as we go throughout the year, we will start -- as we build inventory in our DC and be able to fill in on sizing, we believe that it's a huge opportunity as we get throughout the year. And really, the biggest benefit really will be next year. But we think we can get some fourth quarter. And we think, between that and MDO, a new allocation system -- all those things are really setting us up for later this year and really into next year. And we feel real excited about that, and we are able to grow stores at a pretty significant pace.

Thanks very much and continued success.

Sean Naughton, Piper Jaffray.

Thanks for taking the question, and I apologize if I missed it. But anything in terms of an e-commerce update, where you guys are, what type of evaluation you guys are still in the process of doing? And then also, to the extent that you think that that's having any impact on the transaction trends of your business and the March-April timeframe?

Yes. As I mentioned in my opening remarks, we have started the people and the processes and getting POS going. So as we get further along the road, we will make more comments on that. But right now, really, most of what we are going to comment on is really our new-store growth and some of the other things such as the logistics facility and the markdown optimization. But as we get further in the year, I will definitely update us on where we are at.

Okay. Anything about what you are seeing on your own site? Are there more people on your site looking for product today? And I know you can't transact with Hibbett today there. But is there anything you guys are learning from that standpoint or anything you can glean from what's happening with some of your most valuable customers that you have in the stores?

Yes. I think one positive trend that I would point out is, if you look at our MVP members, we are over 4 million strong right now. And so the growth in those members has been quite robust. And the percentage of transactions by MVP members is now around 40%. So that percentage has grown quite nicely over the last year as well.

Okay. And then anything in terms of just looking out from an inflation standpoint that you guys are concerned about in terms of product inflation for the balance of the year?

Not really. I think it holds pretty steady this year. It's not as dramatic as I think we've seen in years past. I think it's a little bit more consistent than it has been.

Okay. And I know you've touched on this a couple times. But the inventory per-store number being as low as it is, do you feel like that caused you to miss any sales in that April time period where you were only up 90 basis points? I would have assumed that that would have been a little bit better, given the fact that we had the shift of Easter this year.

We feel really comfortable where our inventory levels are. Obviously, sometimes in some categories you could have a little bit more and some a little bit less. But overall, we thought that we had plenty of inventory to do the sales.

Okay. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

A couple questions. As far as the product launches, I think you guys mentioned that you have a product launch tomorrow. Anything else in the second quarter that we should be aware of as far as new product launches?

Yes. The product launches are relatively consistent year over year as far as what's coming at us. We don't really talk about what exactly they are, in deference to what our agreement is with Nike. We are allowed to talk about it about a week before it happens. And we stand up for that because we want to keep those launches coming.

But when we look at it from a comparative perspective, we are feeling comfortable that we have plenty to do the amount of volume that we need to get out of it.

Got it. Okay. And just a quick question on the store expansions -- you did another four in the quarter. So how many in total do you have in this format? And also how many more do you think you can do down the road?

Right. We will do close to 15 this year. We have identified over 100 more that we would love to expand. Up to today, I'm not exactly sure of that number. Do you have that, Scott?

For the expansions?

Yes.

Yes, we've done four so far.

Just four this year. I don't know how over the length of time -- we could get that for you, Anthony.

Okay, that's fine. And as far as store growth for this year, how should we think about the store growth by quarter? It looks like the first quarter you did more than usual. And typically, I guess, in the past, you have been more back-end loaded. So how should we think about the timing of these store openings?

I think, Anthony, you will continue to see us shift a little bit more of the new stores into the first half, which is a conscious effort on our part. Last year we did better; we were close to 35% of our new stores during the first half. We think we will do a little better than that this year, maybe closer to 40% in the first half.

Okay. Thank you.

Mark Smith, Feltl & Company.

Just real quick, to confirm -- your price optimization tool -- is your rollout complete now?

No, it's not. By back-to-school, we will have about 70% of our categories up on the markdown authorization program. And we intend to have it completed by the end of the year.

Okay, perfect. And then, Scott, any update on tax rate expectations?

Yes, so as we go out throughout the year, a lot of the tax rate will hinge on some of these extended programs -- work opportunity tax credits and those types of things, which is an ongoing discussion in Washington. So that could move the needle a little bit either way.

The other thing is that we should start to see some favorability as some of the tax credits roll in from our new facility that we opened here recently.

Okay, great. Thank you.

Chris Svezia, Susquehanna.

Scott, question for you -- just maybe remind us what was the monthly comp progression for Q2 last year? Just remind us -- I think it started soft, but I'm just trying to remember what it was. Can you just maybe walk through that?

So for May, we did a negative 0.4%. June, 1.7%. July, negative 0.4%.

Okay. Thank you. And then just to follow up on product margin for a second, when you talk about the opportunities and you get markdown optimization really in place, do you think merchandise margin could actually be positive on the year, or do you just think as you flow through the year it could turn positive by the time you get to, call it, fourth quarter? I'm just trying to clarify that.

I think more of the latter. So in our guidance was flat to slightly positive, so we think we will be right in that range. But we think we'll see continued improvement from now to the end of the year.

Okay. And then on the occupancy cost side, is that still in this four-ish -- you've pretty much guided it a 4% comp or pretty darn close. Is that still the thought process as you think about quarterly flow?

Yes, that's pretty close. With some of the extra expenses we have to leverage our fixed expenses, it will be closer to a 5%. We did leverage occupancy in the first quarter, however, with 4% comp.

Okay. All right, fair enough. And then, Becky, just a question for you. Just on the running business in general, just curious your thoughts as you think further out through the balance of the year or just as we head a little further into back-to-school, products -- call that Under Armour, some new product coming to market, just ASP's. Any thoughts about the running business in terms of providing stability and growth in that category as you think about it?

Well, when we look at the running silos in general, Nike Free is still driving a lot of business for us, and we will continue to support that going forward. We've seen some nice pickup with the Roshe Run on the floor. And then we are also expanding our door base a little bit around the Speedform from Under Armour for the back-to-school time frame. We launched that in a limited number of doors early in the year, and it did well enough that we will, in fact, put that to more locations for the back-to-school season. Our consumer really likes that Under Armour brand.

Okay. All right. Thank you very much, and all the best.

Peter Benedict, Robert W. Baird.

Scott, a quick question -- can you isolate the impact of the new DC in the first quarter? I know you are expecting 20 to 25 basis points for the year. How did that look in 1Q?

It was -- keep in mind that was spread a little bit between gross margin and SG&A because once we turned the facility live, and then it switched over to cost of goods. But all in, it was more like 15 basis points or little bit less.

Okay, perfect. And then the ACA impact? I think you were expecting that to hit you by a couple pennies this year. How was that in the first quarter?

Actually, it was a little bit less in the first quarter. And the main reason for that is because claims came in favorable. We did see the membership grow but claims were favorable. And it was up again an elevated number from last year.

Okay, and last question -- you obviously have a sizable amount of cash on the balance sheet here. Are you holding that act to make some of these investments that you guys alluded to earlier? Or how should we be thinking about store growth going forward? You had that record number open the first quarter. Do we see an upside bias to the number of stores you think you can open this year, and then early thinking on next year?

Well, we certainly have a good start on new store openings. And capital usually isn't a big constraint for those openings. It's more about finding those right locations that will hit our pro forma. So we will continue down that path. We do have enough for investments looking forward. We will keep our buyback elevated where that makes sense. As you look at first quarter, our buyback was -- did show an increase. But most of that increase was in the last six to eight weeks of the quarter. So we will continue to take advantage of the buyback as well.

Okay. Thank you.

Sean McGowan, Needham and Company.

One question, Scott, follow-up -- so would you say that the best guess at this point on the tax rate for the full year is still around 38%?

Yes, 38% should be on the high side. And that would be if none of those tax extenders were reinstated.

And if they were all reinstated, would 37% be the bottom end?

It would be a little higher than that, 37.5% or so.

Okay, that's a helpful range. And what do you expect the depreciation and amortization to be for the full year now?

Yes, it should be close to 35 to 40 basis points higher than last year, if you look at the full-year effect.

When you say basis points, do you mean as a percentage of growth or as a percentage of something else?

As a percentage of sales.

Of sales? Okay. And finally, the CapEx budget for the year? You might have said this earlier, but what is that expected to be for the year?

It will be $25 million to $30 million.

Thank you very much.

Mr. Rosenthal, there are no further questions at this time. I will now turn the call back to you. Please continue with any closing remarks.

Thank you very much for being on the call today. We are in the early innings of growth, and we can still be a national retail with over 1500 stores going forward. We look forward to having you on our call on August 22 for our second-quarter results. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.