Hibbett Inc (HIBB) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Hibbett Sports Third Quarter Fiscal 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Friday, November 17, 2017.

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

Thank you for joining Hibbett Sports to review the company's financial and operating results for the third quarter and first 9 months of fiscal year 2018, which ended on October 28, 2017.

Before we begin, I would like to remind everyone that management's comments during this conference call not based on historical facts, including those in response to your questions, are forward-looking statements. 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, in 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.

Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings believed accurate as of today's date, November 17, 2017. Because of the time-sensitive nature of this information, it is the policy of Hibbett Sports to limit the archived replay of this conference call webcast to a period of 30 days.

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

Thank you, and good morning, everyone. Welcome to the Hibbett Sports Third Quarter Earnings Call. I have with me this morning Scott Bowman, Senior VP and CFO; Jared Briskin, Senior VP, Chief Merchant; and Cathy Pryor, Senior VP of Store Operations.

We were quite pleased with the results for the quarter, which were driven by significant improvement in footwear and branded apparel, along with a strong launch of our e-commerce business. Our e-commerce sales consistently exceeded our expectations, which we believe was driven by our comprehensive marketing plan upon launch, ongoing marketing initiatives to gain traffic and increase loyalty members and the strength of our site navigation and product assortment. Due to these efforts, our e-commerce sales were approximately 5% of our total sales for the quarter. We are speaking to our customers more frequently than ever. The acquisitions of new customers and the reengagement of existing customers remain critical to our success. Rewards have jumped from 46% last year to 57% of total sales this year. Revenue from reward members increased 24% year-over-year, and those customers, we had 19% more transactions. In the last 90 days, we have had a 25% increase year-over-year in the number of people joining the program versus a negative 10% before we relaunched the program. We have also improved our conversion rates with our Save the Sale program by helping our customers find a size from any store at any time. Our store associates have done an outstanding job helping us execute all new systems and embrace our new omnichannel capabilities.

For the quarter, Hibbett opened 13 new stores, expanded 1 high-performing store, closed 11 underperforming stores, bringing the store base to 1,082 in 35 states as of October 28, 2017. As we look forward, we will continue to see a difficult retail environment but are encouraged with our progress on key initiatives to drive our e-commerce business and improve our assortments and rationalize our store base.

Our merchants have done an excellent job getting our inventory in great position to move us into the fourth quarter. Our vendor partnerships have never been better, as they have supported us tremendously to become a true omnichannel retailer. Our team continues to work extremely hard to ensure that our customers have the greatest service and the capabilities of purchasing products both in-store and online. All of this would not be happening without the dedication of all associates and their expertise, knowledge, teamwork and extended hours. I want to thank all of our associates and let them know how much they're appreciated for their continued support and dedication to Hibbett.

I will now turn the call over to Jared Briskin, Senior VP, Chief Merchant, to talk about our merchandise trends.

Thank you, Jeff. Good morning. During the third quarter, we saw a significant improvement from our previous trend. We also saw acceleration throughout each month of the quarter, led by strong results in our footwear business, improvement in our apparel business and our growing e-commerce business. As expected, we were more promotional and took an elevated markdown stance throughout the quarter to improve aging and productivity.

Our apparel business was down low single digits for the quarter, much improved over previous trends. Challenges in the marketplace regarding excess inventory, increased distribution and a lack of strong segmentation continue to pressure the apparel business. During the quarter and especially as the weather turned cooler, our customers responded positively to changes in our vendor mix and assortment. Our apparel business was led by strong performance in men's apparel, with a mid-single-digit comp gain. Women's and kids' apparel were down low double digits but showed improvement late in the quarter.

Investments in transitional-linked products, athletic and denim bottoms, woven jackets and elevated fleece materials offset declines in base layer products. Backpack business was robust during back-to-school but was not enough to offset declines in the sock and hydration businesses.

The license business was down double digits. Decreases in college were broad-based across teens and categories. While a significant amount of the decline was planned, the business deteriorated more than expected. Major League Baseball was positive low single digits for the quarter, as the Astros playoff run and the improved jersey trend impacted results positively.

Team sports business was down mid-single-digits. Fall baseball softball business was up low singles but was offset by declines in football and soccer. Fitness continues to downtrend, and we will continue to rightsize this business to appropriate levels.

Footwear was up mid-single-digits as momentum from back-to-school and strong launches improved throughout the quarter. Men's footwear was up high single digits, followed by kids, up mid-single-digits. Women's was softer, posting declines. Improvement in product access as well as allocations from Nike, Adidas and Jordan led our results. We also saw significant growth from PUMA, New Balance, Brooks and Vans as we increased our investments in these brands.

Inventory was managed well during the quarter as we continued to refine our assortments. Our key vendors continue to be fantastic partners, elevating the level of support in our business through enhanced access, increased allocation, exclusive product opportunities and inventory balancing efforts. Aged inventory at the end of the quarter was significantly improved from the prior year. While we have improved the aging and productivity of our inventory, we are still not at optimum levels. The emphasis on this continued improvement as well as expectations of an extremely promotional holiday season will continue to put pressure on margins during the fourth quarter.

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

Thanks, Jared, and good morning. For the third quarter, total sales increased $828,000 to $237.8 million, an increase of 0.4% over the prior year. Comp sales were down 1.3%. By month, comp sales were negative 4.3% in August, negative 1.3% in September and plus 5% in October. Gross profit rate decreased 337 basis points in the quarter. Product margin decreased 375 basis points, mainly due to markdowns taken to manage inventory and freight costs incurred on store-to-home and e-commerce shipments.

Logistics and store occupancy expenses decreased 3.2% in the quarter and decreased 38 basis points as a percent of sales. This is mainly due to efficiencies gained in store occupancy due to leverage from e-commerce sales and improved productivity of our store base.

SG&A expenses increased 3.8% in the quarter and increased 82 basis points as a percent of sales. This is mainly due to additional marketing on operational expenses associated with the launch of our e-commerce business.

Depreciation and amortization increased 32% from last year and was up 64 basis points as a percent of sales. This was mainly due to the rollout of our new POS system and investments in our omnichannel initiative.

The income tax rate for the quarter was 35.5%, which compares to last year's rate of 36.8%. The reduction in rate was mainly due to an increase in the federal tax credit.

Operating income of $11.8 million decreased 49% from last year and was 5% of sales versus 9.8% last year. Diluted earnings per share came in at $0.37 per share versus $0.66 last year, a decrease of 44%. From a balance sheet perspective, the company ended the quarter with $58 million in cash versus $41 million last year, with no borrowings outstanding on our revolving credit facilities. Inventory decreased 9.2% from last year and was 10.5% lower on a per-store basis.

We spent $4.5 million in CapEx for the quarter, which included spending on our omnichannel initiative, continued investments in new and existing stores and other projects to improve the business. Also, the company repurchased 1.2 million shares in the quarter for a total of $15.9 million. At quarter end, we had approximately $213 million remaining under the existing purchase authorization.

Based on these results for the third quarter, we are updating our full year guidance with the following changes: We expect full year earnings per share to be in the range of $1.42 to $1.50, which compares to previous guidance of $1.25 to $1.35. Comparable store sales for the year are expected to be in the negative mid-single-digit range, which compares to previous guidance in the negative to mid -- negative mid- to high single-digit range.

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

(Operator Instructions) Our first question coming from the line of Rafe Jadrosich with Bank of America Merrill Lynch.

Jared, I was wondering if you could talk a little bit more about what drove the significant comp improvement in October. And then is there any reason to believe -- I think you're still expecting or guiding towards a comp decline in the fourth quarter. Is that conservatism? Is there a reason why the sequential improvement won't continue into the fourth quarter?

Yes. I think from an October standpoint, certainly, the calendar from a launch perspective was favorable along with some weather trends. We were very excited to see our customers like our assortment, I guess, would be the best way to put it. I think that conservative -- conservatism comes from just the backdrop of the business in general. If you think back to April, our business was up 3%, and then in the second quarter, we decreased 12%. So there's still some volatility in the business, and I think we want to ensure that we're prepared for that volatility.

Okay. And then I -- you spoke about the aged inventory obviously improving a lot, but it's still not at optimal levels. Can you talk about how long it will take -- you think it will take before inventory is at the right level?

Yes. We feel like we're moving in the right direction. This year, the progress that we're making has been a little slower than we'd like just with the backdrop of the sales activity. But we feel like we're moving in the right direction. Certainly, a lot of our opportunity with reducing age is going to be dependent on our fourth quarter results, but we like where we are today.

And then one more quickly. I would just want to confirm, e-commerce is included in your total same-store sales?

Yes.

That's correct.

Our next question coming from the line of Camilo Lyon with Canaccord Genuity.

I wanted to just continue on the inventory discussion and have a couple of questions around that. First, as we're into -- as we get into the fourth quarter and into the holiday selling season, can you just talk about the receipts that you are getting and your comfort level around the full-price salability of those receipts? And then if we can talk about how you think the gross margin cadence should unfold in the fourth quarter, balancing the fact you still have more inventory, more aging inventory that you'd like to get through but seems like -- correct me if I'm wrong here, but the mix of full-price product is starting to tip favorably relative to the amount of product that you're looking to mark down and clear out.

Yes. You would be correct. I think from a mix perspective, we get more confident every day with regard to our aging balance. So we feel excited about that. We're certainly very excited about how our assortment resonated towards the end of the third quarter and what that can mean from a fourth quarter perspective. Our emphasis from a merchandising group on scarcity, high-value and segmented product certainly allows us to be in a position to hopefully have a significant portion of our assortment that will be -- may be above the promotional fray. At the same time, there's certainly a very negative and volatile backdrop on the business that we're certainly aware of. From a margin perspective, to answer your second question, there's really tailwinds and headwinds. Certainly the aging of our inventory, the inventory balance as a whole is a positive, but certainly, our increase in e-commerce business, along with the promotional environment, could drag some of that progress that we're making.

So to that point -- or actually to my second question around e-commerce, can you just talk about the margins that you're seeing on that business relative to your stores? And is that consumer more a discount shopper that you're now understanding a little bit better? Or is there just more -- and I'm talking more about the product margins. Or are you talking about the drag on e-com coming from the totality of merchandise margins plus product shipping and all-in margins as it relates to that piece of the business?

Yes, Camilo, this is Scott. You are correct. The online shopper does look for deals. And so we've seen a very high liquidation rate of clearance product online since we went live. And I think a lot of that is the visibility of that product and just some good deals that we have there. So that really has helped our inventory position quite a bit as we've liquidated that clearance product online. So that is a component of the margin that has made it less than the stores, and then certainly, the freight impact has had an effect as well. But consider the other side of it, too. We are seeing some nice leverage in store occupancy that I mentioned, and so that will be somewhat of an offset going forward.

Got it. And my final question, if you can just update us on the results of your store-typing comps and how those performed in the quarter and how that mirrored maybe a change in allocation of product in those stores. So did your fashion stores receive better allocations of the hotter-selling product and that drove the comp lift? Or was there more of a balanced lift across all 3 store types?

Yes, there was a balanced lift. I mean, our fashion stores have exceeded the other store types for a long period of time now. We have made some significant progress in mix shifts in our athletic specialty stores and sports specialty stores that are giving us some confidence and certainly improving the metrics in those store types. But still, our sales are driven at this point from the increases in our fashion stores.

Our next question coming from the line of Peter Benedict with Baird.

First, just on e-commerce, I mean, the 5% penetration you achieved in the third quarter. How are you thinking about that as we look to the fourth quarter and then into next year? I mean, I know you'd spoken in the past about hopefully getting to somewhere around 10%. 5% in the first quarter is a terrific start. How should we be thinking about that?

Yes, Peter. For us, it was helpfully much faster than what we thought. And we go into the fourth quarter without a lot of history on -- basically on what it's going to do, but our look at it is that it will continue to increase. And the eventual goal is to get somewhere where our competitors are, into that double-digit range, and we think we can do it much quicker than we originally planned. But really, without the history and be our first Cyber Monday and Black Friday and all that, so -- but we feel very good that we can execute to what we have out there.

Okay. That's helpful. Scott, maybe the range of comp expectations for 4Q, I mean, how do we think -- I know there's a wide range of outcomes, but as you thought about laying out the guidance, the implied earnings guidance for the fourth quarter, how are you thinking about the comp range to get you to the high end versus the low end?

Yes. I mean, so if you look year-to-date, Peter, we're down 5.7%. So I definitely think we have some opportunity to do better than that, especially with e-commerce ramping up and the penetration of e-com on the fourth quarter. You couple that with just some strong assortments and just being very well positioned from an inventory and assortment perspective. There's a lot of benefits and tailwinds that we see potentially. But the other side of that is just the volatility that we've seen in the marketplace -- like Jared mentioned, consumer demand and things like that -- that is somewhat of a wildcard. And so that does throw some uncertainty on that. But overall, we feel we can do better than we did for the first 3 quarters.

Okay. That's helpful. And then lastly, on the occupancy in warehouse, the leverage you saw. I mean, total sales were up just a little bit. So what's declining in dollars year-over-year? What parts of kind of occupancy warehouse are declining? And is that sustainable? How should we think about that going into next year?

Yes. We've seen a couple of things, Peter. As we continue to close underperforming stores and open newer, higher-volume new stores, we're seeing some good leverage on store occupancy because of that. We're definitely seeing the leverage of e-com sales on store occupancy, so that's another piece of it. And then we've done some cost savings initiatives in our stores around utilities and things like that, that had helped us bring that number down a little as well.

Our next question coming from the line of Dan Wewer with Raymond James.

So Jeff and Scott, as you're aware, DICK's kind of jumped the gun, provided some early guidance for next year, and the earnings results were a lot lower than anyone had expected. Was going to see if you had any thoughts about how Hibbett's operating margin rates will fare next year, maybe just higher or lower relative to the 5% run rate that you're running this year, but if you have any initial thoughts about next year.

Yes. I mean, we're really not prepared to give guidance for next year. But at a high level, so we're running 5%, it shouldn't be materially different from that. I think you'll definitely see our e-commerce percentage grow. We will have some benefit of cleaner inventory, but there's some tailwinds on margin as well. So there's a lot of moving parts right now, but the percentage itself shouldn't change dramatically from what we're seeing this year.

Once you get past the extra clearance product that's selling online, how much lower will operating margin from e-commerce orders compare to your bricks-and-mortar business? Or will they essentially flatten or be comparable between the 2 channels?

Eventually, e-commerce has the potential of being better than our stores. And the reason for that is because the platform that we chose is -- has a fairly high fixed cost component. And so as we grow that business, we'll actually see some nice leverage, and that percentage will continue to increase over time. Now it will take a little while for that percentage to equal brick-and-mortar. It won't be that way next year, but it will continue to get better.

The final question I have now is with the success of the e-commerce lot, how does that impact your plans for future bricks-and-mortar rollout? Are you tempted to maybe dial that back knowing you can reach that customer through a different sales channel?

Really, the biggest thing is just to make sure that we have productive stores, and we'll continue to rationalize some of the stores to the stores that are producing well, but we still see opportunities out there. So there'd be some give and takes both in openings and closings. But we may even open more stores like in California, but we may close some underperforming stores a little bit more aggressively.

And we'll continue just to use the metrics we've used in the past, Dan, on return on invested capital. I mean, that will really be kind of the major guidepost for us as we look to open new stores -- keeping in mind that they do play a large role in our -- kind of our omnichannel thought process with fulfillment of orders but also returns of online orders. Out of the gate, we've seen online orders predominantly come back to our stores. And so that's a good thing for us. From a freight standpoint and a traffic standpoint, close to 80% of our online returns are coming back to our stores today. And so we'll continue to monitor that, but that's a good early sign and a good reason to have those stores out there.

Our next question coming from the line of Patrick McKeever with MKM Partners.

Just a question on the impact of the hurricanes during the quarter, either negative or positive. I know there was some speculation out there that you might see a benefit to sales from wardrobe rebuilding after the storms. So I was wondering if there was anything there that you might comment on. And then on e-commerce, just wondering where sales are coming from geographically, if you're seeing anything notable there and what the mix of sales looks like. I know you mentioned that clearance was -- some of the clearance items were stronger online. Wondering if there are any other call-outs.

Sure. From the hurricane, we got a little affected in Texas, Louisiana and Florida. But as it went on, we saw a little bit of a benefit overall. It was pretty much a wash between -- for the hurricane event. Our e-commerce, we are seeing some markets that we are definitely getting additional business, so we see that as a positive. It also gives us an idea of where we could possibly put stores. So really, as you look at different markets on where things are coming from, it will give us a lot more analytics to make some better decisions around stores. And the other thing that we'll be able to do with the e-commerce data is really -- we're working on an app as we speak. And we think that will also help us give us information about where people are shopping and where we may not have a store. So we think that, that will help us overall, but we are seeing stuff from markets that we don't have stores.

And then just a quick one on the brands, some of the big brands and then some of the retailers. I guess it's more of the retailers have been talking about a lack of innovation across the athletic space. But you saw very strong sales in footwear. The apparel business improved sequentially. So just wondering what your take is or what your view is in terms of current innovation.

Yes. I think from an innovation perspective, I do think there's some improvement, certainly, from previous trends. I still think as an industry -- and all of our vendors are committed to this as well as we are. We have to really increase the speed to which we can impact trends that are occurring in the marketplace. Again, our merchants were extremely focused on product that we felt would be very scarce in the market, had extreme high-value propositions for our customer, and they were very focused on segmentation practices. And I believe that all of those things helped our results, along with some improvement from an innovation perspective.

Our next question coming from the line of Sam Poser with Susquehanna.

I just want to clarify something vis-à-vis the question regarding DICK's. You -- the major brands have designated you as an athletic specialty retailer, not a sporting goods retailer. That is correct?

That is correct.

So you are, in a sense, more similar to Foot Locker and Finish Line than you are to DICK's or Academy or Modell's for that matter.

Yes.

Okay. All right. So a couple of questions here. Timing of the mobile app and sort of what the features you're foreseeing in the mobile app.

Sure. We were very excited. We actually have been working on it since second quarter. And we're -- we'll have features such as raffle capabilities, driving customers to our stores, both physically for such things as launch products and also be able to buy online. Also, we'll have a lot of features tied back to our loyalty program, so it makes sure that we hit our other customers. And then just a full capability -- mobile, e-commerce, those type of things -- that will help to -- we'll have push notifications. We'll have texting ability. So it will really be -- will really help drive our foot traffic and drive our online sales, and we're very excited about it. We expect it to be either late this year or the beginning of next year.

All right. And then Nike, at their Investor Day, spoke about partnering with a certain retailer in their -- in building out their direct-to-consumer business. So I guess, what is the -- how does that partnership involve you? And if you could give us a little color there.

Yes. We continue to have an unbelievable relationship with Nike. They're a key part on being successful both in stores and online. The amount of content, visibility, extra allocations, both Nike, Adidas and some of our other partners have been very good partners. And we continue to see elevated support both from a human resources and others -- human resources and also being able to make sure that we have relative -- relevant products for our customers.

And so that means that both from a -- let's say, a point of purchase display perspective, marketing as well as better product allocation, that they're continuing to work with you on all of that? Is it a fair statement?

Yes. I mean, we couldn't be in a better position, and this is probably the best position we've ever been at Hibbett, especially with our key vendors.

And then lastly, you commented on the previous call that your e-commerce business would lever at about $50 million. We're currently running at 5%. You're basically on track to do that for next year. Does that mean we could see leverage next year? Or is that -- is it looking more like a fiscal '20 story?

I think it's possible next year. I mean, certainly, if we're off to a good start, so we'll continue to push that business and put marketing support behind it and grow that business. So we hope to get there. It's hard to predict that right now, but we're going to work very hard to try to get there.

Our next question coming from the line of Jim Duffy with Stifel.

A couple of questions. First question, on the loyalty program, it seems there's a strong inflection of people joining the rewards program. Can you directly attribute that to e-commerce registrations?

A lot of it is coming from that, but we continue to push very hard in our stores to increase it also. And we do believe it's starting to help with traffic and driving people to our stores. We have capabilities that we never have had before. We can let people know how short they are from getting a reward. We also remind them what they have in their card. We also are giving birthday announcements. So really, the capabilities that we've never had are really just starting to pay off with the relaunch of it. And we are seeing people use it more frequently. And we think it's just the beginning, and we think that's a huge part of why sales are starting to get a little bit better.

Yes. Just to tag onto that, we did see some improvements after we changed the program and made it a little bit richer for our customers earlier in the year. But the real inflection point was when we went online. And there was a good amount of effort put into the design of the website to make it very seamless for a customer to sign up with rewards and also to have the points very visible to them as they go through the checkout process. So it's very easy for them to sign up, and that's one of the reasons why we've been able to capture so many new members here in the last 90 days or so.

Are you willing to share the number of rewards members you have currently?

We have a little over 8 million.

Okay. Great. And then shifting gears some. Notable from today's release was commentary and a change of tone on branded apparel category showing directional improvement. Can you guys speak in more detail on some of the key factors behind that and maybe some of the disparity in trends you're seeing between men's and the women's and children's business?

Yes. I think the -- where we really saw the emphasis, certainly, our men's business outperformed our other genders. However, as we got later in the quarter and started receiving some of our holiday assortment and late fall assortment, we started seeing some improvement in the women's and kids' business as well. The biggest shift would be things that we've talked about for a while is really our emphasis on more lifestyle products versus performance. We put some significant emphasis from an investment standpoint on getting some of those products and brands into our athletic specialty and sports specialty channel of stores, and those are paying dividends for us. So our mix is significantly different than where it has been, so that's what we really feel has driven some of the improvement. At the same time, there's a pretty significant offset with regard to the marketplace and apparel in general that we continue to still fight through.

Okay. And then you'd mentioned the lack of segmentation in the apparel category. Have you seen any evidence that that's improving? Or is there any reason to believe that improves as you look out to 2018?

Yes. I think apparel in general is certainly a more difficult category to segment. We're taking steps to ensure from our perspective that either segmentation is occurring or developing exclusives to ensure that we have segmentation. We still believe that our business improves when a product is properly segmented, we offer a higher value and there's limited distribution in the marketplace.

(Operator Instructions) Our next question is a follow-up question coming from the line of Peter Benedict with Baird.

Scott, just on D&A. The step-up you saw in the third quarter, how should we think about the D&A line going forward, 4Q and then into next year?

Looking forward, the D&A line should be relatively flat for the next few quarters, so we shouldn't see any big increases in the near future.

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 for being on the call today. We look forward to having our next conference call in March. 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 lines. Have a great day.