Hibbett Inc (HIBB) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Hibbett Sports second-quarter 2016 conference call. (Operator Instructions) As a reminder, this conference is being recorded Friday, August 21, 2015.

I would now like to turn the conference over to Pat Watson with Corporate Communications. Please go ahead, sir.

Thank you, Suzy, and thank you, everyone, for joining Hibbett Sports to review the Company's financial and operating results for the second quarter and first half of fiscal 2016, which ended on August 1, 2015.

Before we begin, I would like to remind everyone that management's comments in this conference call that are not based on historical facts are forward-looking statements. Management may make additional forward-looking statements in response to your questions. These statements, which reflect the Company's current views with respect to future events and financial performance, are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risk. It should be noted that the Company's future results may differ materially from those anticipated and discussed in the forward-looking statements.

Some of the factors that could cause or contribute to such differences have been described in the news release issued earlier this morning and the Company's annual report on Form 10-K, and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

I'd now like to turn the call over to Jeff Rosenthal, Chief Executive Officer. Good morning and go ahead, Jeff.

Thank you, and good morning, everyone. Welcome to the Hibbett Sports second-quarter earnings call. I have with me this morning Scott Bowman, Senior VP and CFO; Jared Briskin, Senior VP of Merchandising; and Cathy Pryor, Senior VP of Store Operations.

Second-quarter comparable-store sales were not as expected. Although we anticipated the shift in tax-free weekends in 10 states, we did experience softness in other states as well, the biggest impact being felt the last two weeks of July.

Quarter-to-date for the third quarter, we are up high single digits through the first 20 days of August. This gives us confidence that the assortment changes we made are on track and have set us up for a smooth transition into a successful fall and holiday season. We have also seen positive trends in gross profit as our inventory position has improved.

For the quarter, Hibbett's opened 16 new stores, expanded four high-performing doors, closed three underperforming locations, bringing the store base up to 1,014 in 32 states as of August 1, 2015. There are still many opportunities to expand our footprint throughout the United States. We could have at least 1,300 stores in the 32 states that we currently operate in, and over 1,500 stores as we expand into more states.

We are moving forward with our strategic initiatives and are confident that the investments in our infrastructure and the omnichannel roadmap will be key to the Hibbett success for many years to come. I would like to thank all of our associates for their hard work and dedication to Hibbett Sports.

And now I'd like to turn the call over to Jared Briskin, our Senior VP of Merchandise, to talk about our merchandise trends.

Thank you, Jeff. Good morning. We are certainly disappointed in our second-quarter results. The last two weeks of the quarter had a significant negative impact on all product categories due to the tax-free shifts, the continued trend to later back-to-school shopping patterns, and a later Labor Day holiday.

For the second quarter, our apparel business was negative mid-single digits. While the shift certainly had an effect on our apparel business, there was underlying softness due to assortment issues in branded apparel, difficult comparisons and a weaker trend in socks, and continued softness in the licensed product business.

Our team sports business was also down mid-single digits. We expected and planned decreases in soccer due to comping last year's World Cup; however, we expected some offset from the Women's World Cup this year that did not materialize. Football also got off to a very slow start for the season, impacting Q2 results.

Our footwear business remains our most consistent business and was positive mid-single digits. Prior to the shifts we have mentioned, we were achieving high-single-digit gains and were gaining momentum.

All genders were positive, with the men's and kids' business up mid-single digits and our women's business up low single digits. We're also pleased that our growth was across multiple categories as basketball, lifestyle, casual, and running all posted positive results.

As we move into the back half of this year, we've made many changes that we feel will impact our results. We expect year-over-year improvement in conversion due to these initiatives, as well as our process improvements in markdown management, assortment planning, and distribution. Overall, we're very focused on maximizing volume drivers and using our logistics facility to improve our in-stock rates on these items.

In apparel, we made significant changes to our assortment, incorporating more trend-appropriate silhouettes that appeal to the consumer that's fueling our footwear growth. In footwear, we have many programs that are currently working in limited stores that will expand to a broader store base. We expect that these growth platforms, combined with our ability to fill sizes in at the door level, will be our most meaningful volume contributor as we move forward.

In equipment, we will upgrade our assortment by entering the fitness tracker and sport headphone business to offset some of the losses coming from the traditional fitness business.

Our vendor partners have done an excellent job in working with us to build these programs and address slow-moving inventory. Our strongest partners continue to make significant investments in our business, and we truly appreciate their support.

Our results thus far in August give us reason for optimism. However, the volatility in our recent results does temper that, until we feel we have crossed all the mentioned shifts and we truly quantify our improvement as a trend.

I'll now turn the call over to Scott Bowman to discuss our financial results.

Thanks, Jared, and good morning. For the second quarter, total sales increased $5.3 million to $199.3 million, an increase of 2.8 percentage of the prior year. Comp sales were down 1.1%.

Gross profit rate decreased 50 basis points in the quarter. Product margin decreased 17 basis points, mainly due to markdowns taken early in the quarter to sell through excess inventory after a slow start in the first quarter. Product margin in June and July was positive versus last year as inventory levels normalized.

Warehouse and store occupancy increased 33 basis points as a percent of sales, which was due to deleverage of these expenses associated with lower comp sales. SG&A expenses increased 7.6% in the quarter and increased 114 basis points as a percent of sales. As expected, we experienced higher costs related to healthcare and IT spending, but also experienced overall deleverage due to lower comp sales.

Depreciation and amortization increased 6 basis points as a percent of sales in the quarter, mainly due to IT initiatives and the addition of new stores.

The income tax rate for the quarter was 34% versus 38.6% last year. This is mainly due to a favorable true-up entry and federal tax credits realized in the quarter.

Operating income of $10.7 million decreased 21.9% from last year and was 5.4% of sales versus 7.1% last year, a decrease of 170 basis points. Diluted earnings per share came in at $0.28 per share versus $0.32 last year, a decrease of 12.5%.

From a balance sheet perspective, the Company ended the quarter with $85.3 million in cash versus $81.4 million last year, with no bank debt. Inventories increased 10.2% over last year and were 3.3% higher on a per-store basis.

We spent $4.4 million in CapEx for the quarter. Also for the quarter, the Company bought back 601,000 shares for a total of $27.9 million. At quarter end, we have approximately $138 million remaining under the existing purchase authorization.

Based on these results for the second quarter, I would now like to provide some updates to our full-year guidance. We expect comparable-store sales to be flat or an increase in the low-single-digit range, which compares to previous guidance of comparable-store sales in the low-single-digit range. We expect earnings per share to be in the range of $2.80 to $2.90, first previous guidance of $2.95 to $3.04.

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

(Operator Instructions) Rafe Jadrosich, Bank of America.

Hi, good morning; thanks for taking my question. Jared, can you give a little more color on the assortment changes that you made from the second quarter that are driving the improvement into back-to-school?

Yes. I think we certainly have been very focused on the assortment changes, and we do feel like they're starting to take effect. Based on the timeline of some of the changes that we've made internally, as we get later into the fall season we'll see more and more of the assortment changes take effect.

I think a lot of the changes are based on trying to capitalize on our consumer that's shopping our footwear business for apparel that we haven't maximized in the past. So there are some items, and certainly on key products there are conversion opportunities which start to flow and timing of deliveries, along with some product opportunities specific to our consumer.

So as we continue to get deeper into the fall and holiday period and then certainly into spring, we'll see continued refinement in all of our assortments and making sure that we're capitalizing on our core consumer.

Are there any specific categories that you can call out? Is it more casual athletic? Is it more bottoms? What are you trying to get a bigger position in for the back half of the year?

Casual athletic will certainly be the overall driver, but certainly positioned for the bottoms area. There is definitely a significant opportunity in the bottoms business. Historically, we have always been a strong bottoms company; and with that certainly being a dominant trend currently, we fully expect to take advantage of that.

Great, thank you.

Peter Benedict, Robert W. Baird.

Hey, guys; thanks. I guess first question, just maybe diving into the cadence of comps, maybe a little more color if you had it, monthly, how things trended. Trying to understand how much you think the timing of back-to-school cost you in July and maybe how much it's contributing so far in August?

It's hard to tease out. But any thoughts there would be appreciated.

Sure, Peter; this is Scott. We got started off in the quarter pretty strong. I'll just give the monthly cadence and give some commentary.

May was 6.2%; June was negative 2.1%; and July was negative 5.8%. If you remember on our last call, we had a Jordan launch shift that shifted into early May, and that's one of the reasons why we were up in the call last time in May. So we did finish strong in May at a 6% comp, so that was part of it.

I've got to believe that some of it -- some pent-up demand probably shifted into May. So turned out to be a good month for us.

June fell off a little bit. Over the last couple years, June has been a little tough for us. I think we experienced a little bit of a lull, and maybe part of that was from the strong sales we saw in May.

July started off okay. The first couple weeks in July collectively, it's about a 2% comp or so. So low-single-digit range.

But those last two weeks really declined quite a bit. The 10 states that shifted for tax-free was a big part of that. But there was -- other states were down as well.

So as we got started into early August I think what we're seeing is definitely the shift of the tax-free, but I think we're picking up some of those sales from those other states that we saw softness in, in late July.

So I think there is a bit of a timing thing going on there with later Labor Day and some of the things that Jared mentioned. So as we stand today, with comps in the high-single-digit range so far in August, I think without that tax-free shift we'd be in the low-single-digit range.

Okay. No, that's fair; that's great. As we look out, taking your guidance for the year probably implies back-half comp somewhere in the 1% to 5% range, I guess, to get you that flat to plus, call it may be plus 2% or so. You've got obviously markedly different comparisons; tougher in the fourth quarter versus the third; third is going well.

Are you envisioning -- are you planning on positive comps in the fourth quarter? I know it's probably hard to say at this point. But as you guys see it and as you are planning it, how are you thinking about comps versus margin in that holiday fourth quarter?

We do expect to be positive in the third and the fourth, and we think our margins will be much more in line to what we said, flat to slightly up.

Okay, thanks, Jeff. Then just the second question would be just the status of the POS upgrade effort: timing, costs, benefits, when they accrue. What can you help us with that?

We're on track with our original timeline. The big portion of that POS upgrade we're working on right now is just the initial version which will give us inventory visibility across our chain and some CRM capability.

So the programming configuration is well underway. What we're doing right now is trying to set ourselves up to be in pilot at the end of this year and then start the rollout in first quarter of next year for that first phase. Okay?

By the end of next year, what we're looking to do is install additional functionality that will allow us to ship a product from a store to a person's home. That does involve some other supporting things like customer notification and how to handle returns and taxes and things like that. But that's what we're shooting for by the end of next year.

Then the following year is when we'll do work on the website to connect into the store infrastructure that we're creating now and next year.

All right; perfect. That's helpful. Thanks, Scott.

Dan Wewer, Raymond James.

Thanks. I wanted to follow up on the assortment challenges a little bit further. Historically, Hibbett has done a great job in adopting the stores to meet the needs of your core customer, which can change from store to store.

What's changed? What created the misstep during the summer of 2015?

Yes, I think overall, we've been very, very focused on the performance customer; have done a very good job there. I think where we've been able to fuel businesses, in particular in our footwear business, has been a younger consumer base and a more fashion-forward consumer base. And from an apparel perspective, we haven't followed that trend to this point.

I think that that's where our biggest opportunity is. Our customer has changed to a degree. It's gotten a little bit younger, a little bit faster, and some of our assortments are not appropriate for that consumer today.

Along with the assortment changes, some of the general blocking and tackling on key items and ensuring that we don't have stock outages on the most important parts of our business are significant opportunities as well. So those would be the two main challenges that we're facing that we're looking forward to have changed.

Is the product that you did not have carried by your key brands, Nike, Under Armour, North Face? Or does it require you to do more business with smaller vendors?

No, it's carried by our key brands. There are assortment changes we can make with our key partners to leverage that business.

I know in the past you guys have talked about the close relationship with Nike. They have 12 or 13 people who work on just the Hibbett account. Were they calling to your attention the need for this product that wasn't being carried before?

Sure. You know, Dan, one of the things -- and Jared just got in place in October, and we're buying seven, eight months out, so he really -- this is his first really big impact on the business. So as we go forward -- and Jared has run our apparel business before, and we've had some really good runs with that, and he really understands our customer.

So we've made lots of changes, and we are starting to see some of that results. Nike continues to be one of our key partners as well as Under Armour.

Nike continues to invest a lot of money into us and a lot of time here. Corporately in Birmingham they just opened a gigantic office just for Hibbett.

Others are going to follow that. So everybody really believes on our strategy as we continue to grow, and we're seeing many opportunities open with our key vendors such as Nike and Under Armour and adidas and those type things.

Just the last question I had, Jeff. Since this is product that I guess Nike and Under Armour carry, are they able to quickly get that product to your distribution center so that maybe by October you're where you need to be? Or does this take more until, say, the first part of next year?

Oh, no. A lot of this has already started to deliver. That's part of our back-to-school. We're starting to see early signs it was definitely the right moves.

But we are starting to deliver it now. Really it started really in August, and it will be a little bit better in third, really good in fourth; and really by next spring it should really be that much better. But it is already starting to happen.

Okay, great. Thank you.

David Magee, SunTrust.

Yes, hi, everybody. Are you all making changes with your marketing plans as well, or any initiatives there at the loyalty program to go along with the merchandising changes that you've made?

Yes, we have made a lot of changes, and we have refocused significantly on the loyalty program. We're seeing significant, significant growth continue through our loyalty programs, both through our MVP rewards program as well as our mobile alerts program.

So we feel very good about the growth there. I think there are continued opportunities in the way we utilize those, and certainly how we increase our frequency, and the way we communicate with our customers and become more personal, and the way we communicate with our consumers.

So a lot of strategy changes with the way we do that to try and drive traffic, primarily with regard to frequency and the way we engage with our consumers to drive traffic to the stores.

David, one of the other really parts on -- we'll continue to make those improvements. And as we lay out POS we really will be able to drive into the customer data much more than we are today. So with the new POS we do have those CRM capabilities which will help us drive even further down into our customers' buying habits.

Are you spending more money on marketing right now than last year at this time?

It's really about the same, David. We have increased it a bit, corresponding with sales. But as a percent of sales it hasn't really increased too much.

Okay, thank you. Last question, maybe for Jared. Do you see wearables as being a big opportunity for Hibbett over the next year?

We do. I think admittedly we are late to that category. I think some of our equipment categories that we've been in business with for a long time have grown stale, and that certainly is a driving category in the marketplace.

We will enter that business this quarter, so we'll see some benefit this quarter but more of an impact as we get into fourth quarter and first quarter. But absolutely believe that is a category that we can win in. Absolutely.

Do you think you'll have a meaningful assortment by the holiday this year?

We feel like we will.

Great. Thank you, guys.

Seth Sigman, Credit Suisse.

Okay, thanks; hey, guys. Just a couple follow-up questions here.

One on the assortment issues that you experienced in the quarter. I think you're pretty clear on some of the dynamics there, but just want to clarify. Is there an allocation challenge here, or is it just mostly just internal planning and things that you're working through right now?

I would say it's internal planning and assortment.

Okay. Then you outlined some demographic changes that you need to respond to here. Where does that customer shop today? And how do you think about ways to better target them over time?

I think the consumer -- I don't necessarily think it's that the consumer is changing. I think the wants and needs of the consumer are changing, and they are expecting instant gratification.

So one of the reasons why we feel the emphasis we have on conversion and the emphasis we have on improving our stock levels on these key items are that the customer is no longer willing to buy what they don't want to buy. They are going to buy what they want, when they want it; and we have to understand that better and be more prepared for that conversation with our consumer as the consumer changes.

We do feel our customer has gotten younger. Our customer is a little bit more fashion-forward, a little more trendy, and we're not leveraging that to its fullest extent across all categories at this time.

That doesn't mean we need to change our entire business to a fashion business. We still have a very, very strong performance business that's very, very sport-related and fitness-related. But there's an incremental opportunity for that customer to drive some additional business, similar to the way we've done in footwear.

Okay. Maybe as a follow-up to that, it seems like there's been a little bit more volatility in traffic and in the business for the last several quarters. Can you help us understand what drives that?

Weeks where the traffic picks up, what drives that? Is that specific product launches, or is it the team sports season picking up? How do we think about that and then ways you can actually stabilize that traffic over time?

Yes, I think it's a combination of both. Certainly launch traffic certainly has an impact. Team sports certainly has an impact.

But also from a product category perspective, that's one thing that we're focused on, is ensuring that we've got drivers within categories for every season that we're doing business in. And unfortunately we're a little bit deficient from a second-quarter category standpoint, so we're working very diligently on trying to improve assortments for that season in particular, that are more appropriate to that time period, since we are in the South. Late from a team sports standpoint; it's camp season; so there are some things we can do from an assortment standpoint there.

But every week that goes by that the traffic patterns do change, and there are a lot of dynamics, whether it be launch, whether it be weather, whether it be team sports. We've got to try and capitalize on all of these.

Okay, thank you.

Rick Nelson, Stephens.

Thanks; good morning. When you see the benefits from POS, do we have to wait for the ship-to-home? And also if you could address the anticipated cost to implement ship-to-home capabilities.

Hi, Rick; this is Scott. The way that we've laid it out, the first implementation of the POS upgrade will give us some benefit. Having that inventory visibility across the chain will allow some stores to trade product back and forth, where they have some stockouts and they are trying to meet a customer need. We feel that that will give us some boost.

Certainly more of an inflection point will be when we can ship to a customer's home. But between now and then we will have the inventory visibility when that comes live, but also our DC capability will continue to improve -- our ability to fill in those stockouts in the stores.

So really as we said before, improving our conversion rate is really a big theme for us the rest of this year and next year. DC will help us more immediately; and then the POS will follow. So we feel like we have room for improvement between now and when that store-to-home capability comes online.

Any early thoughts on the cost of implementing ship-to-home?

Yes. We'll provide more detailed guidance as that comes closer, but this year I guided that the POS upgrade would cost us about $0.05 a share. So as we move into next year -- that was mostly an SG&A cost, and that will be at or slightly above that mark for next year.

I think next year one of the bigger changes you'll see is, as we start to capitalize some of this equipment that we're going to deploy in our stores, you'll see our depreciation tick up when that happens. So I think that will be more the bigger change you'll see next year.

Got you; thanks. Also like to ask you August, I know is the biggest month in the quarter. Can you remind us what proportion of the quarter it accounts for?

August is about 44% of our quarter.

Great. Thanks a lot and good luck.

(Operator Instructions) Sam Poser, Sterne Agee.

Good morning, guys and thanks for taking my question. Jared, can you talk a little bit about, given the stockout issues that you mentioned, how you might have been narrowing the -- how much assortment narrowing you're doing as you go forward? Because you just can't add inventory; you've just probably got to go deeper on key items and so on.

Yes, you're absolutely correct. In every category we have opportunities for narrowing the assortment and getting more focused. In some categories those reductions are certainly more impactful than others.

So we're really trying to take a look at it at a very granular level, category by category, and trying to look at where those opportunities are and really understanding what that SKU base is more from our mindset of ensuring our first step is maximizing those key products and not having stockouts in those key products, and then building the assortment from there.

So on average, over time we'll see in some categories upwards of 20% to 25% reduction; in some categories there are some reduction that are single-digit; some categories it's 10%. But it's really -- and unfortunately very inconsistent and we're just trying to take a real strategic approach to it and looking at building at the item level and ensuring that we have the right depth to start with, and the right amount of product to fill in with, to try and capitalize on those stockouts and build it that way.

That's how we're looking at reducing the assortment. But you're absolutely correct; it will necessitate us reducing the assortment to build the key item strategy.

Just a couple of follow-ups. Number one, I guess your new DC is helping you do that by being able to hold goods back and then attacking, as long as you buy it properly; coupled with, I guess, the updates to the allocation system.

Then also you made a change apparently in some of your footwear accessory businesses. I wonder how that has helped, though, your shoelaces, shoe care products and that stuff.

It's high margin. From my own experience, those guys could help you a lot look at other things differently as well. If you want to go into that, you know what I'm talking about.

Yes. The first part of your question, absolutely for us to execute the distribution part of the plan properly and utilize the DC correctly and the allocation pools that we have correctly: it really starts with the buy and the assortment plan. So a lot of time has been spent with regard to the assortment plan and the buy, and looking at it with a more holistic approach across all departments to ensure that we have alignment and then we can execute the distribution.

So that's first and foremost, because we have to have those units in place to be able to drive those fill-ins. And then certainly we did make an adjustment there from a vendor standpoint, and we'll continue to look for those opportunities. And we feel very good about that change at this point.

All right, thanks. Have a great one.

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

Thank you very much for being on the call today. As we have told you, we are working on many things to improve our business. There are many opportunities in what we're doing, and we look forward to having you on our third-quarter conference call November 20 and thank you for participating today.

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. Have a great day.