Hibbett Inc (HIBB) 2023 Q2 法說會逐字稿

Greetings, and welcome to the Hibbett Second Quarter Fiscal 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Gavin Bell, Vice President, Investor Relations. Thank you, sir. You may begin.

Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbet.com via the Investor Relations link found at the bottom of the home page or investors.hibett.com and under the News and Events section. These materials may help you follow along with our discussion this morning. Before we begin, I would like to remind everyone that some of management's comments during this conference call 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 risks. 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 this morning and are noted on Slide 2 of the earnings presentation and the company's annual report on Form 10-K and in other filings with the Securities and Exchange Commission. We'll refer you to those sources for more information. Also to the extent non-GAAP financial members measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website. Lastly, I would like to point out that management's remarks during the conference call are based on information and understandings believed accurate as of today's date, August 25, 2022. Because of the time-sensitive nature of this information, it is the policy of Hibbett to limit the archived replay of this conference call webcast through a 30-day period.

The participants on this call are Mike Longo, President and Chief Executive Officer; Bob Volke, Senior Vice President and Chief Financial Officer; Jared Briskin, Executive Vice President, Merchandising; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations.

I will now turn the call over to Mike Longo.

Good morning. Our team delivered a solid second quarter, and we are well positioned as we enter the second half of the year. We are increasing our full year total and comparable sales guidance and reaffirming our previously stated full year diluted earnings per share guidance. As discussed on the first quarter call, we improved our inventory position, and I'm pleased to report sell-through of this inventory was strong. We had a compelling selection of in-demand product that was supported by excellent execution in the stores and on our omnichannel platform.

Overall, our team did an outstanding job executing this quarter. We successfully managed the aspects of the business that are under our control and adjusted as necessary to respond to external macroeconomic pressures. Moving on to Slide 4. I'd like to reiterate a handful of things. Our success in rebasing our sales and profits at higher levels versus pre-pandemic levels is to be noted. While the last 2 fiscal years were positively impacted by stimulus and changes in the competitive landscape, we've also improved the underlying business model, which positions us for growth over the long term.

Looking in the back half of the year, we believe we are well positioned to meet our full year goals. We ended the quarter with inventory of $366 million, which we believe is ample to meet back-to-school demand. In addition to the amount of inventory, we are very positive about the quality of our inventory. We're ready with fresh in-demand products that will excite our customers. As mentioned in today's press release, we're seeing favorable sales trends for the back-to-school shopping season, and we're pretty excited about that. This includes a timing shift that favors Q3. We saw customers wait until closer to the start of school to begin their back-to-school shopping. Historically, customers have started their back-to-school shopping 2 to 3 weeks prior to the start of school.

This year, we saw these purchases shift somewhat and as results and sales shifted from Q2 into Q3, and we're seeing those trends take place now. As a result, we are increasing our second half comparable sales guidance to the positive low double digits from the positive high single digits in the full year comparable sales guidance to the positive low single digits from the negative low single digits. In addition to these positives for the top line, we expect an improvement from a supply chain perspective and look forward to easier [comps] in the second half.

We expect higher year-over-year sales, which will result in a return to leveraging our fixed costs. As we move through the year, we remain committed to executing our proven business model to optimize our performance over the long run. Our best-in-class omnichannel business model, our superior customer service in stores and our compelling merchandise assortment, creates differentiation in the marketplace provides us with a competitive advantage in the eye of the consumer and our vendor partners and puts us in a position to deliver strong sales and profitability in the coming years.

And finally, I'd like to thank our approximately 11,000 team members across the organization. Whether they're in the stores, the logistics facilities or the Store Support Center, it's their efforts that represent our brand and our values to our customers, vendors and our communities. It's their daily commitment to excellence that will propel us forward, and I appreciate their efforts.

I'll now turn the call over to Jared.

Thanks, Mike. Good morning. If you turn to Slide 5, the merchandising slide. For the second quarter, our overall performance was in line with our expectations across merchandise categories. We continue to believe that due to the impact of Covid and stimulus during the last 2 fiscal years that compared to fiscal '20, calendar 2019 is the most meaningful comparison. When compared to the second quarter of fiscal 2020, comp sales were up 54%.

From a category standpoint, when compared to fiscal '22, calendar 2021, all categories declined as expected, going up against the stimulus impact of last year period. Footwear and Team Sports declined in the low single digits, while apparel declined in the high teens. When compared to fiscal '20, calendar 2019, Footwear was our standout category with growth in the high 60s, followed by apparel growing in the low 40s and teen sports growing in the low single-digit range. Specific to footwear and apparel, men's, women's and kids all showed significant growth when compared to fiscal '20, calendar 2019. Women's growth was in the upper 70s, kids grew with the low 60s and men's grew in the high 50s.

As Mike referenced earlier, we're confident in our inventory position. The increased inventory levels are largely attributed to a better in-stock position of key franchises and footwear and are appropriate for the results we are seeing during back-to-school. As I referenced in my sales commentary, we also believe the most meaningful comparison regarding inventory as compared to fiscal 2020, calendar 2019. When compared to fiscal 2020, calendar 2019, inventory levels were up 35% at the end of the quarter in balance with our 54% sales gain. This increase is largely due to positive impacts to our mix of footwear inventory as well as price inflation. When compared to fiscal 2020, calendar '19, our unit inventory levels were up 10%. Our results in the second quarter, combined with our strong quarter and inventory position, continue to give us confidence that our toned merchandising strategy is working and elevating how to serve our consumers.

I'll now hand it over to Bob to cover our financial results.

Thanks, Jared, and good morning. Please refer to the Slide 6 entitled Q2 FY '23 results. As a reminder, we report our results on a consolidated basis that includes both Hibbett and City Gear brands. Total net sales for the second quarter of fiscal '23 decreased 6.3% to $392.8 million from $419.3 million in the second quarter of fiscal '22. However, looking back 3 years to fiscal 2020, the last relevant comparable period prior to the pandemic, first quarter sale was $392.8 were 55.6% higher than $152.4 million reported in the second quarter of fiscal 2020. Overall comp sales decreased 9.2% versus the prior year second quarter. In comparison to the second quarter of fiscal 2020, comp sales decreased by 54.4%.

Brick-and-mortar comp sales decreased 11.9% versus the same period in the prior year, although they have increased by 42% versus the second quarter of fiscal 2020. E-commerce sales increased 8.3% compared to the second quarter of the prior year and have increased by 174.4% on a 3-year stack. E-commerce sales accounted for 15.2% of net sales during the current quarter compared to 13.1% in the second quarter of fiscal 2022 and 8.6% in the second quarter of fiscal 2020. Gross margin was 34.4% of net sales for the second quarter of fiscal 2023 compared to 39% in the second quarter of the prior year.

The approximate 160 basis point decline was primarily due to the following factors: decline in chronic margin of approximately 225 basis points due to cost increases, a higher mix of e-commerce sales in security of lower margin and [breaking] water sales, general shifts in product mix and delays in launch events. Increased cost of [grave] and transportation of approximately 125 basis points and deleverage of store occupancy costs of approximately 110 basis points, mainly due to the year-over-year decline in total sales, coupled with higher rent expense and utility costs. Store operating and selling and administrative expenses were 23.3% of net sales for the second quarter of fiscal '23 compared to 22.3% of net sales for the second quarter of last year. This approximately 100 basis point increase is primarily the result of deleverage on the lower current year revenue expense categories such as wages, employee benefits, repairs and maintenance and general supplies and a (inaudible) support in a larger store base and increased e-commerce activity were negatively impacted by the sales decline.

Depreciation and amortization in the second quarter of fiscal '23 increased approximately $2.5 million in comparison to the same period prior year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. We generated $32.8 million of operating income or 8.4% of net sales in the second quarter compared to $61.5 million or 14.7% of net sales in the prior year second quarter. Diluted earnings per share were [valued at] $1.86 year second quarter compared to $2.86 per share in the second quarter of fiscal 2022. We did not have any non-GAAP items in the period. 

Next, I will discuss the fiscal 2023 year-to-date results, and I'm now referencing Slide 7. Total net sales for the first 6 months of fiscal 2023 decreased 11.8% to $86.9 million from $926.1 million in the first 6 months of fiscal '22. Compared to the fiscal '20, current year-to-date sales of $816.9 were 37.1% higher than the $595.7 million reported in the first half of fiscal '20. Overall comp sales decreased 14.5% versus the same period in the prior year. In comparison to the first 6 months of fiscal '20, comp sales increased by 36.2%. [Breaking water] comp sales decreased 17.4% versus the first half of fiscal '22, but it increased by 25.6% versus the 6 months of fiscal '20. E-commerce sales increased 6.2% compared to the same period of fiscal '22 and have increased by 141.7% on the 3 years [stack]. E-commerce sales accounted for 14.9% of net sales during current fiscal year compared to 12.4% in the first 6 months of fiscal '22 and 8.4% in the first half of fiscal '20. Year-to-date gross margin was 35.7% of net sales in fiscal '23 compared with 40.3% in the same period last year.

This approximate 450 basis points [follows] primarily due to the same factors I mentioned in the second quarter; a decline in product mix of approximately 190 basis points due to cost increases a [hermes] e-commerce sales, lower margin than -- sorry, general shifts in product mix and delays in launch. Deleverage on store occupancy cost of approximately 140 basis points, mainly due to the year-over-year decline in total sales, again, against the higher rent and utility costs and then increased cost of freight and transportation of approximately 130 basis points.

SG&A expenses were 22.9% of net sales for the first half of fiscal '23 compared with 20% of net sales from the same period of last year. This approximately 290 basis point increase is primarily the result of deleveraging from the lower current year revenue. Expense categories such as lasers and professional fees, advertising and general supply that are to support the partner store base and increased e-commerce activity were negatively impacted.

Appreciated in amortization in the first 6 months of fiscal '23 increased approximately $5 million in comparison to the same period last year, reflecting increased capital investment on our organic growth opportunities and infrastructure projects. We generated $83.5 million of operating income or 10.2% of net sales in the first 6 months of this year compared to $171.6 million or 18.5% of net sales from the prior first 6 months. Year-to-date diluted earnings per share were $4.77 for fiscal '23 compared to $7.90 per share in the same period of fiscal '22. We did not have any non-GAAP items in either fiscal year. 

Turning to the balance sheet. We ended the quarter with $28.4 million in cash and cash equivalents, higher than the $17.1 million balance at the beginning of the fiscal year. Net inventory at the end of the second quarter of fiscal '23 was approximately $366 million or 65.6% higher than the beginning of the fiscal year and about 58.9% higher than the same period last year. We have a short-term debt of $88.5 million outstanding and our $125 million line of credit at quarter end, mainly as a result of our inventory build over the first half of the year. Capital expenditures during the second quarter were $14.5 million, bringing the year-to-date total of $30.5 million. Capital expenditure is primarily store development, technology and infrastructure projects.

During the second quarter, our store count increased by a net of 12 units comprised of 13 new locations and 1 closure. On a year-to-date basis, we have increased store count by net of 21 with 22 new locations, 1 rebrand and 2 closures. Our total store count stands at 1,117 as of the end of the second quarter. In the second quarter, we repurchased just over 145,000 shares under our open share repurchase program for a total cost of approximately $7 million. On a year-to-date basis, we have purchased approximately 636,000 shares at a total cost of $29.4 million. We paid a recurring quarterly dividend during the [more] amount of $0.25 per [valued] common share for a total outflow of $3.2 million. For the first 6 months of fiscal 2023 dividend payments have amounted to $1.5 million.

I'll now turn the call over to Bill Quinn to discuss some consumer insights.

Thanks, Bob. Entering Q3, we are continuing to keep a pulse on how our customers are feeling. Through recent research, we know that a majority of customers plan to spend more this year on back-to-school, in particular, on [clothing]. Also, a significant portion of customers shifted the timing of back-to-school purchases versus last year. Longer-term customer trends have not changed, keeping us pre-baselined above pre-pandemic sales. Comparable sales increased 54.4% versus Q2 of FY '20. From a customer perspective, we're seeing 2 fundamental differences versus [FY one]. One, number of shoppers in our customer base has grown. And 2, the average ticket has increased substantially due to gains in average unit retail. We see these 2 factors are structural in nature, keeping our business [pre-baselined] well above FY '20. Turning to our e-commerce business. In Q2, sales increased 8.3% versus last year and 174% versus FY '20. E-commerce represented approximately 15.2% of total sales for the quarter versus last year's 13.1%.

Continued improvements to our customer experience and gains in total customers increased traffic for our website and app by over 20% year-over-year. Our back-to-school, digital sales have accelerated versus our Q1 and Q2 run rate. Key drivers include strong traffic, robust footwear sales and gains in average unit retail. We expect that our continued investments in digital will produce low double-digit growth for the remainder of this year.

I will now turn the call back to Bob to discuss our guidance.

Thanks, Will. Slide 9 summarizes updated fiscal 2020 guidance. Although there continues to be some potentially significant business and economic challenges and the impact the remainder of fiscal 2023, with 6 months of the year behind us, we feel certain elements of our full year guidance need to be updated. Sales, gross margin, SG&A updates are as follows: Total net sales are now expected to increase in the low single-digit range in dollars compared to fiscal '22. This implies comparable sales are expected to be in the range of flat positive low single digits for the full year. [Holier brick-and-mortar] comparable sales are expected to be in the flat to positive low single-digit range while full year e-commerce revenue growth is anticipated to be in the positive high single-digit range. Comp sales are projected to be in the positive low double-digit range in the back half of the year.

Our sales forecasts are based on assumptions that as the year progresses, supply chain constraints continue to ease, timing of inventory receipts becomes more consistent and predictable, and our overall inventory decisions remains strong. Fiscal 2023 gross margin percent of sales are anticipated to be in the range of 35.1% to 35.3%, down approximately 290 to 310 basis points in fiscal '22. This level of gross margin is still above pre-pandemic levels. Potential supply chain challenges, [bright headwinds], higher mix of e-commerce sales, carry a lower margin than brick-and-mortar sales, inflationary pressures and deleverage in store occupancy will all contribute to this anticipated decline. We continue to believe gross margin results in comparison to fiscal '22 will become more favorable as the year [ends]. 

SG&A as a percent of net sales is projected to be in the range of 22.7% to 22.8% higher than the fiscal 2022 level by approximately 10 to 20 basis points, although, again, it's still favorable to pre-pandemic levels. Wage inflation, costs associated with growth in e-commerce, a larger store count and annualization of back office infrastructure investments made in fiscal '22 contributed to this year-over-year increase. The following declines are consistent with guidance provided previously. That new store growth is [outmanaged] in the range of 30 to 40 stores with new units proved relatively evenly throughout the year. Operating income is still expected to be in the low double-digit range as a percent of sales. Diluted [EBS] is expected to remain in the range of $9.75 to $10.50 using an estimated full year tax rate of 24.5% and a slightly adjusted estimated weighted average share count of 13.3 million. Capital expenditures are still projected in a range of $60 million to $70 million with a focus on new store growth [and pre-models] and additional technology and good infrastructure investments. Our capital allocation strategy continues to include the expectation that we will repurchase shares throughout the remainder of the year and pay recurring quarterly dividends. That concludes our prepared remarks.

Operator, please open the line for questions.

(Operator Instructions) Our first question comes from the line of Sam Poser with Williams Trading.

On back-to-school, how far -- What percentage of back-to-school is in right now? And can you give us -- Please give us more specific as to sort of the run rate that you're seeing right now?

I'll handle the first part of that. So we believe about 2/3 of the back-to-school sales have occurred. The shape of the curve has changed a little bit. Not only did it shift to the right in terms of timing, the amplitude of the curve has changed somewhat overall, we think that back-to-school, when you sum it all up, it's going to be -- we know it's going to be a net positive for us. There are some behaviors that Bill will talk about in a few minutes that were -- and then will that we're seeing in the stores and through surveys of how consumer behavior has changed. But net-net, it's going very well. So you know and everyone on the call knows that we very rarely talk about intra-quarter results. The exception being historically this Q2 to Q3 shift because of the volatility of back-to-school in terms of how the calendar moves it.

And so typically, and historically, we mentioned in our comments that the timing of back-to-school could be meaningful. And in this case, it was, so remember, we're setting up for back-to-school at the end of Q2. You put in your sales plan, you put in your payroll, you move the inventory and you set up for it, and if it shifts, you still got the cost, but you don't get the sales. And those incremental sales, as you know, are incredibly profitable for us. So not only the sales, but some of the operating profit moved into Q2 or into Q3 from Q2 rather. So Bill, you want to talk for a couple of minutes about what we've seen on the consumer behavior and then, if you will, follow that up with what you saw in the stores.

So some of the customers have been impacted by inflation, but they've found ways to manage through it. So a few of the behaviors that we're seeing right now, the customers are shopping for deals a little bit more. They're delaying their purchases until they absolutely need it. We're seeing that shift in back-to-school. And then also, they're cutting back in other discretionary spend outside of retail. But the net-net is that customers plan to spend more for back-to-school. They have new current plans to cut back for holiday spending at all and we have very few customers trading down. I'll turn it over to Ben for more commentary.

Yes. Just to tag on to what Bill said, I had the opportunity to visit some stores in Arkansas last week and it happened to be in the middle of kind of their back-to-school season. And so what we saw there is exactly what Bill is reporting, some counter shifts in the actual back-to-school dates but also just shifts in behavior. And so starting to see some consumers where they normally might have going to shop a few days prior to back-to-school, maybe even waiting until after school goes back, so they can understand a little bit about what's going on in the school system and then able to understand a little bit about how the spend needs to go there, but felt pretty good about what I saw from those towns and talking to those -- talking to the consumers and to our associates there.

Yes. And one of the things that we didn't talk a lot about yet was there has also been some calendar shift with regards to some meaningful heat product. Jared, do you want to follow up on that?

Yes. Thanks, Mike. So as we started running all the impacts of the supply chain [data and our costs]. As Mike mentioned, as we're putting our plans together for Q2, both our promotional calendar as well as all of our sales forecast, [getting the expectation] of that leverage ending volume coming at the end of Q2, along with some launches that unfortunately around that pushing into Q3. So all those things had somewhat of an impact on Q2 negatively, but now we're having a pretty positive impact on Q3. The other thing I would mention as Bill said, it does not appear that our consumers are trading down, although they do have certainly some inflational pressure going on. The number of launches that we've been able to digest during the second quarter and the early part of the third quarter from a liquidation perspective, has been incredible. And we've also seen no slowdown. In fact, we've seen significant increases in products that like-for-like had some price increases obviously franchises. So we're very confident and comfortable with where we stand right now.

If I just have 2 follow-ups there. One, how are you impacted by one of your larger vendors doing their map holiday? And did that do anything for the business? And two, are you seeing a benefit from that same large vendor chain? Are you seeing allocation benefits further in the year because of that? And lastly, because based on the way the comp falls, Bob, do you anticipate that the comps in Q3 just because you're up against a harder comparing to levels should be better that your comp stronger in the fourth quarter than you will in the third quarter? Or am I thinking about that wrong?

All right, Sam. So I'll start with the promotional activities. So certainly, the last 2 years, we've had essentially 0 promotional activity. So certainly been --somewhat of a shift. We have some promotional activity in the second quarter primarily revolving around apparel. I don't expect that to slow down at least in the near term. So all that said, the promotional activity is still and are still expected to be significantly less than what we saw from pre-pandemic standpoint. With regard to inventory, fighting the inventory battle for a couple of years, really just not having enough inventory in particular footwear. And then frankly, our consumer experience within the stores and conversion from an online perspective and footwear is not mitigate experience for our consumers. So our team working really closely with our vendors has really done an excellent job of getting our pipeline for that and not just get getting a pull in the right things, but things that are driving traffic, the things that are hiked, and that sell through quickly. So we're very confident with where we stand now as well as our plays for the back half.

I guess just to follow up, we're proactive cost guidance in the individual quarter, but I think if you think about some think just heard over the last couple of minutes with some of the shared into Q3 with some of the consumer sentiment as far as holidays, we'd expect both Q3 and Q4 to be very strong. If you do remember last year, Q4 was a little bit less than we would have liked maybe because again, we had a little trouble with the inventory balance. So I think can be coupled the consumer sentiment that the shifting of sales of the Q3 and the [initiation], I can feel pretty confident that both Q3, Q4 from...

Our next question comes from the line of Cristina Fernandez with Telsey Advisory.

I wanted to understand better the increased outlook for the comp in the back half. Is it mostly the back-to-school sales being better? Or are we also thinking about better inventory availability or the high heat launch calendar shifting. It would be helpful if you can give us a little bit better explanation of why raise the outlook this early in the year?

Thank you, Cristina. This is Mike. I'll lead it off and then everyone else has a piece of this. So part of the increase in the comp in the second half of the year, for sure, is the back-to-school shift. That is how it's going to start. That has led to a very good start to the quarter. But it's also more than that. So if you think about the things that we've been talking about our business model and the significant improvements we've made to the business model and the compared to differentiation that we've established, we really like our business model.

So with that in the context of the competitive changes that have occurred with regards to the distribution of the value products that are out there, the major brands have made decisions on who carries the product and who doesn't, that favors us. When you combine that with the fact that we've significantly improved our inventory that's high-quality, fresh inventory that the consumer covets and wants. When you combine those 2 together, that turns into increased transactions. And so those increased transactions manifest themselves in a couple of ways. And Bill has talked a little bit about that. Do you want to amplify any of those comments, Bill?

Yes, absolutely. First of all, I think we've got some pretty incredible omnichannel programs, a couple in particular, our loyalty program, which we revamped last year. We've actually seen year-over-year growth in loyalty sales, and that's the result of having more members and also greater purchases for members. So it's a very positive sign as well to continue to grow for us. Also our launch process continues to be extremely fair focused on customers. That continues to do very well, also draw new customers to us. So we're very confident in the back half, that those 2 programs can deliver from an e-commerce perspective, we have very good inventory. We have very good traffic. As Mike said, we're focused on the customer experience, and we feel very confident there as well.

Yes. So that's the transaction side. Jared, do you want to comment on the AUR and how that impacts ticket?

Yes, we've got a couple of additional things that are happening. Mike referenced the distribution changes that have shown in the marketplace. And our expectation for this year is that we would be a significant beneficiary of those distribution changes. And that's kind of happened a little later than we would have expected just with all the supply chain challenges that are out there in the inventory, but absolutely saw during the second quarter, our store locations have been impacted by a distribution change from one of our vendors did come much better than [still goes] without the distribution chain. So if we do feel that, that is starting to have an impact.

On top of that, with the increase in inventory, we're certainly seeing an increase at AUR. It's really due to 2 things. The risk of price inflation that is driving [some increases] are not seeing our consumers trade down or not respond to some of those price increases. But more importantly, a very, very significant shift toward best-in-class premium hiking footwear. So that's a large component of the current inventory and will be a very significant portion of the back half of the year, along with what we believe is be a very, very strong and excellent launch calendar, all on the backdraft of really not having near the footwear inventory necessary to satisfy our consumers during the back half of last year, especially in the fourth quarter.

That's very helpful color. And then I wanted to also if you can provide more color on the incremental gross margin pressure, particularly on the product average product margin. How much of it is -- I guess for the quarter, is it promotions or mix. You noted apparel underperformed. I guess that perhaps carries a higher product margin or cost inflation? Any color there would be helpful in understanding that.

Sure. Thank you. It's Jared. I'll take that one. So a couple of things. Absolutely, there's more promotional activity going on in the marketplace right now, and certainly, we have some more than we had over the last 2 years where we essentially had none. But as we discussed it earlier in my reference the shift in back-to-school along with some of the launch shifts that occurred in the end of the quarter into Q3, put some pressure on the margin line. We had made some decisions to run some promotions earlier in the quarter to take advantage of some of our earlier holidays and traffic, particularly focused around apparel, and we expected some offset to the margin at the end of the quarter brings on some of those peak back-to-school sales.

Along some of those launches and then that did materialize in the third quarter. That put a little pressure. As we look ahead into the second half, we're starting to see more of a promotional environment than last year. But again, nothing anywhere close to what we saw in fiscal '20 and the health of our inventory from the age perspective is really exceptional. So not something that has us terribly concerned. Don't expect to [maintaining] product margin levels that we saw over the last year or 2 years, but we certainly expect to significantly rebase above fiscal '20.

And can you expand the apparel performance during the quarter relative to [full work]? Is it mostly related to the inventory receipts or anything else to note?

Yes. I would say if you think about our apparel business compared to last year, a decline in the high teens. So at first look, you would say, well, that's really, really disappointing. But when you really look at apparel compared to fiscal '20, it's greater the 40s. So we absolutely have an outsized apparel business last year, frankly, because consumers had money from stimulus, and we really had no footwear inventory and there's certainly not enough but more inventory. So we're seeing that balance back with again footwear becoming more meaningful categories. We got into the second quarter and certainly expect that to be the same in the back half of the year. So apparel is an area that we have some concerns about just based off the year-over-year comps. But again, overall, our inventory is incredibly clean, very, very focused at premium levels. So it's not as susceptible to promotions. We feel like we have it under pretty good control.

Our next question comes from the line of Justin Kleber with Robert W. Baird.

First one is just -- I'm struggling here a bit with the math on the full year comp guide. If you guys do a 12 over the back half of the year, which, I guess, to me, is low double digits, but correct me if I'm wrong there. That puts the full year down a couple of percent. You're guiding flat to up low single digits for the full year. So I mean, the simple math assumes you need to run about a 17% or 18% comp over the back half of the year just to be flat. So what am I missing there?

Justin, it's Bob. First of all, we do have (inaudible) not equal. So it's not a specific average of the 2. We do have a little bit heavier sales mix in the back half of the year, so you do have to account for that. So again, we felt that if you kind of do the [back of the envelope math], we're thinking about how we do this, the [weighting] between Q1 or first half, second half, that low double digits, the math still comps out. So I think your numbers might be just a little bit higher than what we would have anticipated. But again, I think we still feel comfortable that the guidance is accurate.

Okay. Maybe we can follow up off-line there, Bob. And then a question on how you guys think about the risk of a shopping [roll] after back-to-school is completed. We're hearing from several retailers back-to-school is strong. Obviously, that is a distinct shopping event. So once that path, how do you handicap the risk that the consumer hunkers down a bit here, just given all these well-documented macro pressures?

Well, certainly, we know that there's macro pressures and then we all live in the same world. We see what's happening and our consumer is paying inflated prices with inflated wages. We get all that. But the product that we have, again, hard to get compelling assortment. People enjoy the experience of coming in our stores. And what we're witnessing is not all back-to-school. What we're seeing is the high heat product which we have in good supply, and there are lots of launches coming in this quarter and the next, along with, again, a business model that we're very proud of. I think that, that all is pretty compelling. Jared?

Yes. Thanks for the question. Certainly, the (inaudible) question, the right question. I think one of the things that really gives us a lot of confidence is, frankly, our results compared to fiscal '20 in Q2. Historically, when you think about second quarters, you don't get off to an early back-to-school Q2s are typically really, really difficult. And in this case, we posted a 54% comp on top of fiscal '20 that comp was driven by a lot of the similar products that we have right now and based off of our inventory position. So we have a lot of confidence coming into Q3. From the results in Q1, actually Q1 and Q2, but then also what we're seeing for back-to-school gives us a lot of confidence.

Okay. That makes sense. Sorry, I didn't mean to cut you off there.

Justin, this is Bill. So just to add to that, we've obviously rebaselined above FY '20. So we have more customers than ever through our acquisition and retention efforts. On top of that, we have more customer information than ever through text, social media push, e-mail, et cetera. So we're able to communicate with our customers than ever before. On top of that, just the unlocated purchases that we have through increased AUR, which is structural gives us confidence as well. And also just doing more surveying with customers, some depend to shop early for holidays, and that's the spread at their expenses to avoid future inflation. And also, there's still some product availability concerns out there.

Okay. And then just last one for me on freight and transportation cost increases. Can you just remind us when you started to see the step up in those costs last year. Just as we think about the lap over the back half of this year and when the pressure might subside on that line item?

Yes, sure. This is Bill. So just kind of talking about rate, and we see that pressure declining here going into the back half of the year for a couple of different reasons. The first one is we worked with multiple carriers and that gives us an opportunity to reduce expenses. The second big reason is the AUR increase we really decrease that freight as a percent of sales. So if you think about the unit economics of shipping out a box with a higher AUR in it, that works very favorably for us.

Our next question comes from the line of Alex Perry with Bank of America.

I just wanted to follow up on a few questions that were asked earlier, but maybe asked in a slightly different way. I guess when you think about the comp guidance sales guide for the year, what changed versus your expectations 90 days ago that led you to take up the guide? Is it better visibility in terms of inventory seats like more launch product versus your initial expectations? Or is that what you're seeing from back-to-school is very encouraging. And so you sort of are thinking that, that sort of flows through the year. Just trying to get more clarity on the guidance raise for sales.

Yes, thank you. So versus last time we spoke, what has changed is the essence of your question. So first and foremost, we'll do them chronologically. The first thing that happened was a bit of an unexpected shift in back-to-school. You could say, well, you should have been able to figure that out from the past history from 2017, '18, et cetera, well, I don't think it was just us. So sales shifted. That is a meaningful number. That moves some sales. Second thing was there were some launch products that were due to arrive and sell in Q2 that pushed into Q3. On top of that, we have been able to opportunistically buy some really good inventory that's going to help us drive some sales.

And so then that allows us to do an even better job capitalizing on our competitive differentiation. The other thing that I would say is in spite of the fact that we didn't see a lot of the pickup that we anticipated from changes in the competitive landscape did not show up in Q3, that actually was a drag on Q2 rather. It didn't show up in Q2, but it will begin to help us in Q3. I think those are the big changes, Jared, you've got a couple of others?

Yes. I think the only thing that I would also add to that is just our comps with [visibility] around the inventory. Obviously, there's still volatility in the supply chain. But what we've been able to accomplish and the improvement in visibility, you get improvement in delivery time lines also gives us a lot of confidence as we get to the back half of the year.

And then ask Ben to speak to in terms of our ability to hire people in the stores and wages and staffing in general then. Ben?

Yes. We spent a lot of time over the last really couple of years, the labor market being as tight as it is, and a lot of focus there and seeing that mitigate a little bit. And so that's been helpful as we've gone along here. Wages are kind in line with our (inaudible), and we're seeing that kind in line with expectations really doing a lot of work on our scheduling and things of that nature at store level and meeting demand and we've gotten a little bit better there and controlling overtime and some of the things that we're doing in store and so offer pretty good on a go-forward basis, maybe relative to the first half of the year.

Perfect. That's really helpful. And just as a follow-up, I think you talked a bit about product margins in the quarter. It looks like the implied QH gross margin came down versus your prior expectations. What's the key driver there? What does that sort of contemplate in terms of promotions in the back half?

Alex, it's Bob. I would say probably one of the things, and even though Bill just touched on that. When you talk about freight to the customer, obviously, I think we're going to see some benefit there. But when you talk about the break between distribution stores didn't have to get too much in the accounting rules, but we have to capture that on the balance sheet, recognize that as the inventory gets sold. So some of those costs from when the period or price was higher, still need to flow through the back half of the year. So that's one of the things that kind of gave us a little bit of maybe headwind going forward.

The other thing is, again, we have seen -- it was a fair day platform summer across the South and Southeast, and we have seen a higher run rate when it comes to utility cost, which again, something that we just kind of baked a little bit extra assumption to the back half as well as far as the deleverage on the store occupancy piece. But I would say those are probably 2 of the components. Again, I think Jared and Bill touched on some of the other positives when it comes to mix product I think, so it's a little bit of mitigating there going on in the back half.

And this is Mike. I'd like to weigh in and put a finer point on a couple of things so that they don't get lost. Remember, comparing to first half and comparing to Q3 last year, Q4 last year, we didn't have product at a level that was sufficient for a good customer experience. We were selling through at rates that I haven't seen before. And those rates drove an extraordinarily high gross margin. Now we don't expect and don't want that to happen again because we don't [trankle] what our brands want.

And so as a result, when that sell-through comes back to more normal levels, not going back to fiscal '20, but rather going back to a good consumer experience, you would expect for gross margin to come down some. And we want it too. We don't want a 50 gross because that means we're selling through the rate that the consumer is just not being serviced properly. So we feel very good about where we're at in that inventory. If you were to listen to other general merchants out there who sell other types of products, who've gotten very -- their inventories have gotten long, they're going to get promotional. I don't think that's what you're going to see in with us. Our inventory is on target. It's fresh, it's new and it's selling through. And we don't expect -- we do expect clearance to be more than last year. We do not expect for it to be significant.

That's extremely helpful. And then maybe just one last one for me. It looks like the SG&A expense ratio sort of came down a bit. What were the key drivers there? Are there any areas where you're seeing sort of less expenses versus your original expectations?

Bob, why don't you start and then Ben come in and talk about store labor, which is a significant portion of what we do.

Yes. I was going to say that's kind of perfectly in. So there are some categories that we've kind of kept very static year-over-year, of course, with the higher sales in the back half of the year, you start to get back some of that leverage. We had some of the sales out of Q2 into Q3, pretty tough in the last 2 or 3 weeks a quarter to start making meaningful changes. The other big piece that is we are much, much better at managing, especially store labor. And I think, again, we're going to see some benefit from that in the back half of the year. So ultimately, as we look at the second 6 months, we felt that our run rate was a little bit more variable than our previous guidance. And again, for mostly due to the fact we can deleverage a little bit more in the second half. Ben?

Yes, just tagging on to that, as we said earlier, it is what we're planning for sales, not sure exactly where things are going to show up in your planning and you do that with labor in the stores do and you're hiring. And so you get ready and set for that, and you see that shift a little bit. And so we're going to get a little bit of cost there. And then of course, then as it shifts over, you're able to gain leverage on a go-forward basis, and that's what we're kind of seeing and expect to kind of the remainder of the back half of the year.

Our next question comes from the line of Mitch Kummetz with Seaport Research.

On the back-to-school and the loan shift, Mike, you mentioned earlier that the back-to-school piece was pretty meaningful. I know you don't like to give the intra-quarter data, but is it possible to quantify that shift from Q2 to Q3? Anything you can help us out there?

I'm going to be a little reticent to go past what I've said. But as you would imagine, the peak weeks in back-to-school are significantly higher in the range of an average week in the quarter, they'll be anywhere from 50% to 60% higher and so when you move 2 or 3 of those weeks, it can be meaningful. And one more time. I know I've said this a couple of times, it's an incremental revenue dollar that falls through at a great rate. And when it doesn't come in, it falls through the opposite way on the EBIT line. So yes, it's meaningful. And we look forward to seeing it in Q3 and talking about it when we speak again in November.

Got it. And then on the comp, on a 3-year, you saw a substantial step-up from Q1 to Q2 and you said you're at a 54% in Q2. As we think about the full year guide now, and is there any way you can say what kind of 3-year comp is embedded in your -- in the back half?

Yes. So if we go back to full year results on the 3-year comp, we're at 36%. And for Q2, we were 54%. So you're right, the trend is taking and you're putting your finger on the right trend. I haven't actually done the math on what that 3-year comp in Q3 and Q4 would be, but suffice it to say that trend continues.

Okay. And then you mentioned in some remarks about the distribution changes that it didn't have much of an impact on Q2, but you expect more so in Q3. Can you kind of just walk us through how you expect that to kind of flow. So Q3 more so than Q2? Is it -- does that build into the fourth quarter? And then, obviously, I would think it would continue into the first half of next year as well? How do you sort of think about that?

So I'll take you back in time. When stage stores went out and JCPenney closed several stores, we went to some pains to quantify what we thought that sales effect would be. And I think we were in that average of a $30 million impact, $20 million to $40 million, I think. And so when we witnessed that, we were in the stores at the end of August, the day that said stores close their doors. And what we saw was the consumer is bouncing off the doors, but if you take the consumer experience in them and extend it into what's happening today, those consumers typically shop anywhere from 3 to 4 times a year with those retailers. And so now you have to go through one cycle where they bounced off the door and figured out, hey, the Nike, Jordan, Under Armor, Adidas, Puma, et cetera, are not available in those stores.

So then that has failed a ton. So then if they shop with us multiple times a year, you have to go through that cycle. So there's always a lag effect between the absence of the inventory and the consumer showing up in our stores and realizing we're the place to get it. And on top of that, the supply chain difficulties that we all witnessed at the -- in the first half of the year and the end of last year meant that some of that inventory struggled in over time, and it took even longer for it to disappear from the shelf. So when you combine those 2 things together and compare and contrast that to what we saw with stage and JCPenney pull back, it extended it anywhere from 3 to 6 months later than we expected and anticipated. I think Jared pointed out that in the latter stages of Q2, we began to see that effect. And Jared...

Yes, that's correct, Mike. Certainly, as the inventory got depleted at a lot of these competitors that have lost distribution, we saw the run rate improve in the markets where a competitor lost distribution. As a reminder, as we've said this before, it's all of the distribution changes have occurred more than half of our stores do not have a relevant competitor inside 3 miles, selling effects of products and brands that we carry. And almost 3/4 of our stores may have 1 or 0. So that gives us a lot of confidence as we go forward. When you combine that with the increased customers that Bill referenced, our ability to get inventory item we have with the vendor community and our partners, and we feel like that is absolutely something we can really take advantage in the back half.

Next question comes from the line of John Lawrence with the Benchmark Company.

Jared, would you take a couple of minutes and talk a little bit about the women's business. I know a couple of years ago, you made a real, I guess, a focal point on that part of the business, and it just seems like it's been really strong ever since. Can you comment there, please?

Yes. Thanks, John. I appreciate that call out. Obviously, we made a very significant change to our merchandising organization and all the support teams within merchandising a few years ago to move away from a department-focused category base but where [apparently sports] an example and get more focused on each gender within our business. So as a result of that work, that change of the entire organization, again, and all of our support teams, we put a significant emphasis on both the women and the kids business. So the year-over-year compares obviously have lots of noises, but I'm very, very excited based off the results compare back to fiscal '20, that widens was our fastest-growing area. Again, in those upper 70s, followed by kids in the low 60s. So really, really incredible. We're obviously growing the men's business as well as that this buyback growth, but super, super excited about what we're seeing in the women's and kids business based on the change of focus.

Great. And the last question from me. Did you see any correlation across the regions with differentiating with different gas prices. And we saw that little spike down in gas price, did it have any impact on the business?

This is Mike. Hard to tell. We didn't see significant regional variation. Again, we think that our consumer has done a pretty good job economizing and making different choices like all of us do, depending upon how much you make and whether it impacts you or not, whether that's decreasing the trips and increasing the amount per purchase or -- Bill, I know you've got some actual data there.

Yes. So the customers are managing through the inflation in several different ways. First of all, a little bit more deal-seeking than what we've seen historically, also billing in purchases and [felt that a] product is that really needed to some of that we see in the back-to-school and the delay there. And then also just cutting back other discretionary spending outside of retail. But as a reminder, our customers tend to spend more on the back-to-school. They don't have any plans to cut back spending from holidays and we have very few customers trading down.

Thank you, Bill. Great.

Congrats.

Our final question comes from the line of Sam Poser with Williams Trading.

Well, all my questions are answered. So thank you very much.

Thank you, Sam. We appreciate it.

I would now like to turn the floor back over to management for closing comments.

Thank you. We appreciate everyone's time and attention today. We're very proud of our results. We look forward to reporting Q3. And again, thank you to all our teammates who made all of this possible. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.