Hibbett, Inc. (NASDAQ:HIBB) Q1 2023 Earnings Call Transcript May 26, 2023

Hibbett, Inc. misses on earnings expectations. Reported EPS is $2.74 EPS, expectations were $3.

Operator: Greetings. Welcome to Hibbett Incorporated First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Gavin Bell, Vice President of Investor Relations. Thank you. You may begin.

Gavin Bell: Thank you, and 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 hibbett.com via the Investor Relations link found at the bottom of the homepage or investors.hibbett.com and under the News and Events section. These materials may help you follow along with our discussion this morning. Before we begin, I’d 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 refer you to those sources for more information. Also to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website. Lastly, I’d 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, May 26, 2023.

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 to a period of 30 days. The participants on this call are Mike Longo, President and Chief Executive Officer; Jared Briskin, Executive Vice President, Merchandising; Bob Volke, Senior Vice President and Chief Financial Officer; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations. I’ll now turn the call over to Mike Longo.

Mike Longo: Thank you, Kevin. Good morning, and welcome to the Hibbett Q1 earnings call. For those of you following along, I’m on Slide 3. Our financial and operating results for the first quarter reflect the challenging retail environment. Our consumers face difficulties ranging from inflation to fears over job loss. This and other factors have combined to lower consumer sentiment, and we think this adversely affect sales. Also, the important tax season in the first quarter was negatively affected by lower tax returns versus last year and caused sales come in lower than our expectations. Having said that, we still achieved a 7.4% year-over-year sales growth and a 4.1% comp sales increase, we believe these sales results in increased share for Hibbett and our reason for confidence in our business model.

Also our strong relationships with our brand partners give us the ability and confidence to continue to execute our store opening plan. We continue to invest in our already best-in-class consumer experience and business model while still taking costs out of the business. In the first quarter, we managed to produce leverage on SG&A of 140 basis points versus last year. And all the while, we believe we increased our market share. We believe we have a proven operating model that will support our business regardless of market conditions, and we remain committed to executing our strategy of focusing on our distinct competitive advantages, namely our customer service, a compelling product selection, best-in-class omnichannel experience and our positioning in underserved markets.

In summary, we believe Hibbett is well positioned for the short and long-term to continue to grow and increase market share. Before turning the call over to Jared, I’d like to thank our approximately 11,000 team members across the organization, whether they’re working in our stores or on our omnichannel platform, our logistics facilities or our Store Support Center. They’re the face of Hibbett providing consistent superior service that’s synonymous with our brand. I’ll now turn it over to Jared.

Jared Briskin: Thank you, Mike. Good morning. The first quarter started strong with double-digit gains in the first half of the quarter. As March progressed, we began to see some deceleration in our comp performance and this deceleration continued to pressure the business into April, leading to our total comp of just over 4%. Footwear was the strongest category during the quarter, growing high teens versus the prior year. Our strong footwear results continue to be driven by several solid launches as well as strength across basketball, lifestyle and casual categories. In addition, we saw an improving trend in our running business. Apparel and Team Sports were both negative for the quarter with Apparel down in the low 20s. Approximately half of the decline in Apparel came from winter carryover in the prior year that we did not anniversary.

This was planned in order to ensure that our inventory was seasonably appropriate now that the supply chain is more predictable. Sales of spring and summer apparel started the season slowly and remain under pressure due to the consumer environment. Specific to Footwear and Apparel, men’s, women’s and kids all comped positively driven by our footwear results. Men’s and women’s both were up in the low single digits. Kids was up in the high teens. Slowdown in sales in the back half of the quarter, the continued promotional environment and a much more selective consumer, prompted additional markdowns and promotional activity during the back half of the quarter. We expect this to continue at least through the third quarter as we work to reduce our inventory.

These promotional efforts as well as support from our key brand partners will help us to achieve our goals for inventory reduction. While year-over-year inventory compares will still be volatile due to the challenges in the supply chain during fiscal ’23, our expectations remain the same for our inventory levels. We will have growth in the first half of the year and year-over-year declines in the second half of the year. I’ll now hand it over to Bob to cover our financial results.

Bob Volke: Thank you, Jared, and good morning. Please refer to Slide 5. As a reminder, our first quarter results are reported on a consolidated basis that includes both the EBIT and City Gear brands. Total net sales for the first quarter of fiscal 2024 increased 7.4% to $455.5 million from $424.1 million in the first quarter of fiscal ’23. Overall comp sales increased 4.1% versus the prior year first quarter. Brick-and-mortar comp sales were up 4.7% compared to the prior year’s first quarter, while e-commerce sales increased 0.6% compared to the prior year. E-commerce sales accounted for 13.7% of net sales during the current quarter compared to 14.6% in the first quarter last year. Gross margin was 33.7% of net sales for the first quarter of fiscal ’24, compared with 37% in the first quarter of the prior year.

This approximate 330 basis point decline was driven primarily by lower average product margin. Average product margin in the first quarter of fiscal ’24 was approximately 375 basis points lower than the prior year first quarter due to higher promotional activity across both footwear and apparel. Store occupancy was relatively flat as a percent of sales year-over-year, while both freight and logistics operations were favorable as a percent of net sales. Our operating, selling and administrative expenses were 21.1% of net sales for the first quarter compared with 22.5% of net sales for the first quarter last year. This approximate 140 basis point improvement is primarily the result of expense reduction initiatives, lower discretionary advertising spend and reduced incentive compensation expense, partially offset by wage inflation.

Depreciation and amortization in the first quarter of fiscal ’24 increased approximately $1.2 million in comparison to the same period last year, reflecting increased capital investment on store development and infrastructure projects. We generated $45.9 million of operating income or 10.1% of net sales in the first quarter compared to $50.7 million or 12% of net sales in the prior year’s first quarter. Diluted earnings per share were $2.74 for this year compared to $2.89 per share in the prior year first quarter. We ended the first quarter of fiscal ’24 with $26.9 million of available cash and cash equivalents on our unaudited consolidated balance sheet and $103.6 million of debt outstanding on our $160 million line of credit. Net inventory at the end of the first quarter was $438 million, a 39.1% increase from the first quarter of fiscal ’23 and up 4.1% from the beginning of the year.

Please note that the majority of this increase year-over-year is due to inflation and product mix. Inventory units are up approximately 8%, and we have a heavier mix of footwear, which carries a higher average unit cost. Capital expenditures during the first quarter were $14.2 million, with over 60% of that focused on store development projects, including new stores, remodels and relocations. We opened 10 net new stores in the first quarter, bringing the store base to 1,143 in 36 states. We also completed 16 store remodels and three relocations. The remainder of our capital expenditures for the quarter were related to technology and infrastructure projects. We bought back nearly 160,000 shares under our share repurchase plan in the first quarter at a total cost of $10.2 million.

We also paid a recurring quarterly dividend in the amount of $0.25 per eligible share for a total outflow of $3.2 million. I’ll now turn the call over to Bill to discuss the latest consumer insights.

Bill Quinn: Thank you, Bob. Despite a challenging retail environment and pervasive inflationary impacts, our customers continue to increase their shopping with us during the first quarter. In Q1, our loyalty sales were up low double digits. This growth was driven by increased sales from our existing customers. Our total customer base grew, increased their average purchase, and made more visits. However, we have started to see a slowdown in new customer shopping and our consumer research indicates that there will be ongoing challenges to discretionary spend this year. In particular, customers have grown more cautious as concerns over inflation continue and also fears over job loss are rising. Turning to our e-commerce business.

In Q1, e-commerce sales were essentially flat versus the prior year. The primary headwinds included in macroeconomic environment, a highly promotional online environment and greater inventory availability in stores, which drove more in-store shopping. These factors led to decreases in traffic and conversion, which were offset by higher average purchases. As always, we remain focused on the long term and providing the best possible customer experience for online and omnichannel shopping. To that end, we have many planned investments in improving our loyalty program, our core customer e-commerce experience, and further evolving our omnichannel offerings. We believe these efforts will continue to attract and retain customers. I will now turn the call back to Bob to discuss our guidance.

Bob Volke: The business outlook for the remainder of fiscal ’24 continues to be complex and difficult to forecast. There are several significant headwinds to consider as we proceed through the year. Inflation has a broad impact not only on consumer sentiment and spending patterns, but also contributes to operating cost increases in the form of wages and prices paid for goods and services. Higher interest rates have driven up the cost of borrowing for us that may also be affecting discretionary purchase decisions for those consumers with variable rate loans and credit card debt. We also expect the heavier promotional environment we have seen over the last two quarters to continue for the near term. In summary, economic uncertainty, coupled with a more cautious and increasingly stressed consumer, has resulted in lower expectations for the remainder of this fiscal year.

As noted previously, we still have confidence in our business model and our ability to track new customers while providing exceptional customer service and product assortment to our existing customers. We continue to make investments in the most critical elements of our business, new store development, the consumer experience and operational efficiencies. Our inventory mix and assortments have become healthier over the last several months, and we have made progress on reducing the ongoing operational costs of the organization. I’ll now turn to Slide 7 that summarizes our guidance. Net sales for the full year, including the impact of the 53rd week are anticipated to be flat to up approximately 2% compared to our fiscal 2023 results. The 53rd week is still expected to be approximately 1% of full year sales.

The breakdown of sales by quarter remains unchanged from the previous guidance provided. We believe that the first quarter represented approximately 26% of full year sales with approximately 22% in the second quarter approximately 24% in the third quarter and approximately 28% in the fourth quarter, including the 53rd week. Comparable sales are now expected to decline in the low single-digit range for the full year. Full year brick-and-mortar comparable sales and full year e-commerce revenue are also anticipated to both be in the negative low single-digit range. Net new store growth remains unchanged with an expectation to open between 40 and 50 units. We anticipate the aggressive promotional environment to continue in the near term with a heavier impact on the second quarter.

The lower forecasted annual sales volume will also create additional deleverage of store occupancy costs. As a result, we revised — the revised projected full year gross margin rate is approximately 33.9% to 34.0% of net sales. We expect the second quarter will yield the lowest gross margin results of the year with improvement anticipated in the back half of the year. Although we were able to generate SG&A leverage in the first quarter this year compared to last year and are making good progress on cost savings initiatives, we anticipate the quarterly comparisons to the prior year to be more difficult due to fixed cost deleverage resulting from lower sales expectations as well as ongoing inflationary pressure in wages and other goods and services.

SG&A as a percent of net sales is now expected to be in the range of approximately 23.3% to 23.5% of net sales. Once again, the second quarter will be more heavily impacted and is expected to be the lowest sales quarter of the year. Due to the factors mentioned previously, operating margin for the year is now expected to be in the range of 7.4% to 7.8% of net sales. Operating profit as a percent of net sales in the first quarter and fourth quarter benefit from higher sales volume, although the 53rd week is considered near breakeven due to the low sales volume in that extra week. We expect that operating profit as a percent of sales will be modestly higher in the second half of the year compared to the first half of the year. We still expect to carry debt for the majority of the year.

We project borrowings will be higher in the first half of the year as current inventory levels are not expected to decline significantly until after the back-to-school season. The lower full year sales guidance is anticipated to result in a higher interest expense than communicated in our previous guidance. Interest expense for the full year is now projected to be approximately 40 to 45 basis points of net sales, peaking in the second quarter and declining as the year progresses. Diluted earnings per share are anticipated to be in the range of $7 to $7.75 using an estimated full year tax rate of approximately 23.5% to 23.7% and an estimated year-end weighted average diluted share count of approximately 12.8 million. We still project capital expenditures in the range of $60 million to $70 million, with the largest allocation focused on new store growth, remodels, relocations, new store signage and improving the consumer experience.

Our capital allocation strategy continues to include share repurchases and recurring quarterly dividends in addition to the capital expenditures noted above. That concludes our prepared remarks. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Mitch Kummetz with Seaport Research. Please proceed.

Mitch Kummetz: I guess, Mike, just to start on the quarter. Can you kind of walk us through metrics like traffic ticket conversion? I’m curious, it sounds like the back half of the quarter was tougher than the first half. I’m curious how some of those metrics might have evolved as the quarter transpired?

Mike Longo: Sure. Thanks for the question. Thanks for being on today. In the beginning of the quarter, we were seeing really good results, and we were seeing an increase in both transactions as well as AUR, and therefore, average ticket. As the quarter continued, however, it did get significantly negative with regards to transactions. We tie that back directly to the overhang, of course, of consumer sentiment, but more directly, the tax returns being down. And as you know, tax returns are disproportionately going to affect our customer and our business in Q1, which we, as you know, typically refer to as tax season.

Mitch Kummetz: And then, Bob, on the guide for 2Q, it sounds like you expect some pretty heavy margin pressure there on the product margin side. I know that in the first quarter, it was down 370 bps. Are you looking for something similar there in 2Q?

Bob Volke: I’ll start, and then Jared can add some color. The expectation is that the trends we’ve seen here in the second half of the first quarter kind of continues into Q2. Q2 is notoriously kind of a quiet quarter for us. There’s not a lot of big events or holidays that kind of drive the business. So, the expectation is that we’ll still be working through some of our higher inventory levels, and that will require us to continue to be in somewhat promotional mode at this point. Jared?

Jared Briskin: Yes, Mitch. It’s Jared. I think Bob’s got it exactly right. I mean we still expect some pressure very similarly to what we saw in the first quarter, but we have recently seen some pretty significant incremental promotions over and above what we saw first quarter from the marketplace as a whole. So, it will likely continue to put some pressure. We’ve been pretty clear around our inventory aspirations with — from our first half and second half perspective. So obviously, we want to ensure that we can maintain that projection with regard to inventory. So what’s happening externally from a marketplace perspective could put some additional pressure on Q2.

Mitch Kummetz: Okay. And then lastly, I just want to get your thoughts on back-to-school. I mean, it seems like you expect the consumer to remain fairly pressured. But how are you feeling about kind of your inventory and your access to product for back-to-school? And I also heard somewhere that maybe the tax-free day outlook could be better this year than a year ago, and I don’t know if you’re the least bit optimistic that, that could maybe drive some traffic and conversion?

Jared Briskin: Yes, Mitch, I think we’re confident in our — first of all, the inventory that we have heading into back-to-school, while the inventory is elevated over where we’d like it to be. The team has been extremely careful with regard to receipts that are coming in for back-to-school, ensuring that we’re only looking at what we like to call A players. So, we feel very good about those investments and that we’ll have what the consumer is looking for. Typically, from a back-to-school season, Q2 and Q3 kind of have a blend between our back-to-school. Historically, it starts at the end of July and runs through the middle of August. We believe historically, what we’ve seen pressured consumer that tends to drive the business more and more last minute.

So, our expectations are that some of that back-to-school flow will likely fall more into Q3 than Q2. But we do feel from a product perspective, we’ll have enough products and energy to drive the business that is outlined in our guidance.

Operator: Our next question is from Alex Perry with Bank of America. Please proceed.

Alex Perry: I guess just first, can you maybe talk about the more recent run rate of the business as you move further away from some of the tax refund headwinds?

Jared Briskin: Yes, Alex, it’s Jared. As we said, we got off to a really hot start in the first quarter, strong, strong, double-digit increases, and that really started to falter as we got towards the end of the quarter. We really haven’t seen anything change at this point. A level product launches still performing extremely well, but nothing from a step change perspective based on what we saw towards the back end of the quarter.

Alex Perry: Great. That’s really helpful. And then just on the top line, can you just talk about how you’re thinking about the second quarter versus the rest of the year? I think the guide implies like a sort of negative mid-single digits to high single-digit comp in the second half. I guess first part of the question, is that right? And then in the press release, you said that these headwinds will be more impactful on our second fiscal quarter than in the back half of the year. Is that implying that you’re sort of expecting the consumer to come back in the back half of the year?

Jared Briskin: Alex, I think that’s hard to say. I mean I think specific to the second quarter, obviously, the run rate at the end of the first quarter was not where we would like it to be. So that presents a concern. The conversation with regard to back-to-school and potentially some more back-to-school business moving into third quarter, based on the pressure that the consumer is under and more last minute, along with the elevated promotional activity, that’s going on in the marketplace. I mean, all of those things cause us to be really conservative with regard to second quarter specifically. As far as the outlook for the rest of the year, we’re really trying to work towards what our new normal is, what these new quarterly and monthly splits look like.

Obviously, we have information from a pre-pandemic perspective, but the new information from a post standpoint. So really understanding how that looks quarter-over-quarter, period-over-period, has become quite the forecasting challenge. Then you add in the volatility of the consumer and the volatility of our back-to-school business, which always crosses between the second and third quarter. So, all of those things are causing us to be very conservative.

Alex Perry: Great. And then my last one was just — I just want to clarify sort of the monthly cadence on the quarter. So it sounds like maybe comps were — April was the worst month of comps. I think, there’s a better launch calendar. That’s where the launch calendar improved the most in April. So is it that like your casual footwear business and apparel business really — and you said the liquidation times in the launch is still good. So, is it like the casual apparel and footwear business, just — you just saw more precipitous declines in those businesses in April? Is that sort of a fair assessment?

Jared Briskin: Yes, that’s how we define it. I’m not sure if I would use casual, but we saw no deceleration at all in the launch product from a liquidation perspective, what we call the day players again. But secondary franchises, secondary brands, as we’ve called out in previous quarters, have gotten really challenging and has slowed down. The consumer is being extremely selective what they’re interested in and what they’re willing to purchase. And that continues to put some pressure on some of our liquidation efforts in those products, where we’re increasing promotions and markdowns to try and accelerate it.

Operator: Our next question is from Sam Poser with Williams Trading. Please proceed.

Sam Poser: Can you talk a little bit about how you planning the business, any evolution in the process of planning? Because while same-store sales are going to decelerate for the rest of the year, which you talked about before, you’re expecting some margin improvement in the — margins going to get less worse than the back half. So I’m wondering sort of from a planning process, taking the macro out of it, what can you guys do better to get there in the face of the environment?

Jared Briskin: Yes, Sam, it’s Jared. I’ll start. So obviously, first and foremost, we’re obviously not happy with where we are. We’re not happy with the composition of the inventory right now, but we are happy with our continued access to high liquidation, highly scarce product that we call A players. So we still see that providing a lot of momentum, and we’re making a lot of consumers very happy when we provide that inventory. As we go through into the back half of the year, really starting in the second quarter, we were significantly more conservative with regard to our buying, not only with how much we were buying, but also what we were buying with just an intense focus on only those A players as we described. So we believe that’s going to help us significantly our inventory liquidation efforts that we’ve had underway with regard to secondary brands and secondary franchises are going a little slower than we like, again, based on the consumer environment and based off the consumer being very selective.

But that’s all we have coming in through the balance of the year is what we believe to be that high-grade product. And we do expect, as we get our inventory levels back below last year levels in the back half of the year, we’ll see some improvements in our aged inventory. And that, we believe, put a little less pressure from a markdown and promotional cadence that we’ve been doing.

Sam Poser: And when you say your inventory is going to be below last year, to what degree, I mean — because I thought you ended Q4, probably about $50 million heavy. I think it may have gone up to about $90 million now. And I figure you still got to get it to about at least 10% below last year from a pure dollar perspective to sort of be optimum. Am I thinking about that right?

Jared Briskin: I think you’re on the right track. I don’t know if we will land any exact same place from an optimum perspective, but we are tracking to get below last year level, likely more in the single-digit range by the end of the third quarter and then a significant reduction by the end of the fourth quarter at a similar level to what you just described. Again, I think we want to be very careful with getting real specific here. We have our aspirations of where we want to be from an inventory perspective. We’re confident in our plan, but there’s a lot of unknowns at this point that we want to make sure that we take into account. But your thought process around optimal level of inventory is not that far off from where ours is.

Sam Poser: Mike, can I ask one thing?

Mike Longo: Of course.

Sam Poser: Over the last, I think, four or five quarters, you’ve missed — the numbers have moved around, you’ve missed The Street estimates and so on. So have you taken sort of a — I mean, what makes you feel comfortable you’ve sort of taken the draconian enough view of this year in the — in what you’ve now put out there?

Mike Longo: Thank you. I think you have to track back to the cause, right? What’s the cause of change? The approximate cause of change in Q1, the biggest contributor was the fact that tax returns came in significantly unfavorable. And I haven’t found anybody who had that in their guidance. I haven’t found anybody who said, “Well, yes, you should have known that.” So we didn’t know that. We were surprised we didn’t stand around and wait for it to happen to us. We began to take action very rapidly. In anticipation of risk in the year, we also, as we communicated, took on a systematic review of our costs, which are in the early innings, but we’re certainly doing that. So — okay, so get back to the question. So what happened? In the backdrop of pretty serious macroeconomic challenges, we had a specific pinpoint Q1 problem.

And that being a significant part of our year was part of the downdraft. In addition to that then going forward, we still have the overhang of the consumer, the consumer sentiment, the macro pressures, et cetera, along with a somewhat higher inventory level entering into Q2 than we anticipated, which is directly related to the lower sales than our expectation. So that allows us — doesn’t allow us, forces us to change some of our thinking around gross margin, more inventory, lower gross margin. Now these are not huge changes, but they’re material in the plan. So now you’ve got fewer sales, a little bit less gross margin, and as a result, we have to be prudent. We believe will be included on the SG&A line and the interest lines. So interest being one of those things that we’ve talked a little bit about.

Interest is going to be slightly higher, somewhat higher than we anticipated because, again, sales, then leads to inventory, which then leads to debt, which then leads to interest, and debt and money has a cost now. So, we’re managing all those things. We put them together. I think this is a prudent way to approach the guidance.

Operator: Our next question is from Cristina Fernandez with Telsey Advisory Group. Please proceed.

Cristina Fernandez: I wanted to ask about your view of the industry with a lot of the brands and retailers already having reported. What is your view as far as the inventory in the marketplace, how long would all take inventory to normalize in the level of promotions, where do you see the now versus pre-pandemic?

Jared Briskin: Christine, it’s Jared. I think that from an expectation perspective, I think we felt fairly confident that by the second — by the midway point of this year, a lot of the promotional environment from an industry perspective would be a lot better. I think since that point, the consumer health has certainly changed and specifically for our industry. Their focus has narrowed significantly around what they’re engaging with, what they’re going to purchase. So that I think, as I called out in my commentary, I think that moves the line at least through the end of the third quarter, where I would expect that we’ll see significant promotions, but it could be longer than that, depending on what happens with the consumer through the rest of the year. But recently, we’ve seen significantly more promotions in the marketplace, which certainly indicates to us that the cleanup of the industry as a whole could take a little bit longer than we were expecting.

Cristina Fernandez: And then my second question is around the cost-cutting initiatives across the organization. Last call, you talked about SG&A reigning that in. Can you give more color and update of where you are in your cost-cutting initiatives? And anything incremental you’re doing now based on the lower sales outlook?

Mike Longo: Yes. Thank you. And we did talk about that last time. We brought it up this time. It is a systematic review. We’re relatively early in it, but it has yielded some results, some of that contributed to the SG&A, but there are other reasons for the SG&A leverage in Q1 that are called out in the press release. But I think it is also worth noting that those investments that we’ve made over the past few years are bearing fruit and some of it in SG&A. So Ben, you want to speak to some of the things that you’re doing?

Benn Knighten: As Mike mentioned, we have invested in the business over the last few years and particularly in respect to the mobile environment, a mobile platform at a store level. That’s helped us in a couple of things. Obviously, enhanced experience inside the store, very similar to our experience on the web and bringing the omnichannel in the store, but it’s also allowed us to become more productive and more engaged with — more engagement between our associates and our consumers. That’s allowed us to take some of the cost out of the business, quite honestly, from a labor perspective at store level, and we become more productive. And we’ve accelerated some of those efforts. We’ve got more on the table, but really through those investments over the last few years, allow us to kind of push that a little bit.

Bob Volke: Kristina, this is Bob. Just to kind of finish that kind of thought off. One of the things we are still dealing with as much as we are working actively to reduce some kind of ongoing structural costs within the organization, also taking advantage periodically of some discretionary opportunities to reduce spend. But one thing we can’t forget about is as we have obviously lowered our revenue guidance, there is still real inflation affecting wages and the goods and services that we need to support the organization. So as much as we are doing right at the moment, I think this is going to pay bigger dividends into future years. But this year, still a little bit under pressure from a leverage standpoint, again, just because we’ve got that tough sales environment as well.

Operator: Our next question is from Justin Kleber with Baird. Please proceed.

Justin Kleber: It’s Justin Kleber. Jared, I wanted to follow up on the promotional environment. Last year, we’re talking about Apparel and now it’s Footwear. So just can you talk about where the Footwear promotions are concentrated? Is it just broad-based outside of the launch product? And then is this really are you guys driving promotions? Or are you simply responding to what some of your competitors are doing in the marketplace?

Jared Briskin: Yes. Thanks, Justin. It’s actually both. As we talked a lot in the back half of last year, we moved and we were very focused on getting our Apparel seasonally appropriate, getting Apparel cleaned up, getting to the right inventory level and we accomplished all that. We feel good about where our Apparel inventory is today, although Apparel continues to be under significant pressure from a sales standpoint, just due to the consumer environment and general trends. So our focus now has shifted on the Footwear side. It’s not as simple as just launch and non-launch. There are many products that are not launched that we would consider to be highly scarce and high that are still performing extraordinarily well. But some of the secondary franchises, tertiary franchises, secondary brands has really been a significant slowdown.

So some of our promotional engagement has been a response from a marketplace perspective, but some of it’s also been a deterioration in what we saw at the back end of the first quarter and our ability to really obviate some of that inventory. So it’s a combination of both.

Justin Kleber: Okay. Bob, can you help me a bit on the gross margin. If I look at your first quarter gross margin rate, it’s always been above the full year rate by at least 100 basis points, if not more, outside of the calendar ’20 with the pandemic and stores being closed. But your full year gross margin guide this year, it’s above what you just delivered in the first quarter despite more promotions and you have occupancy that’s going to flip to a headwind given the comp outlook. So why would that be the case?

Bob Volke: Yes. I think, again, we kind of feel like with the heavy promotional environment in the first half of the year, we think that’s going to drag down margins for that first two quarters, but then there’s some lift coming in the back half of the year. Again, harder to predict exactly how quickly or how significant that lift will be, but the goal is that as inventory gets cleaned up, again, Jared touched on this earlier, less need to promote and reduce price in the back half of the year. The other thing is we are starting to get some other leverage in terms of our freight and logistics operations costs, so that’s helping to offset some of the pure product margin headwinds that we’re dealing with. So again, it’s kind of like we feel like we’re kind of dealing with a little bit heavier kind of challenge in the first part of the year and hopefully get some lift, like I said, as the year goes on. So that’s the thinking as we look at the full year outlook.

Justin Kleber: Okay. That’s helpful. Last question, just on new stores. Can you guys just comment given the environment, I mean, how new stores are performing? Or are they hitting your internal hurdle rates? I mean does it make sense to slow the pace of store growth until the environment, I guess, returns to some form of normal, whatever that’s going to look like into next year?

Jared Briskin: Justin, it’s Jared. Obviously, we continue to look at this in great detail. And our stores are performing exceptionally well. So, we still see it as a real strong use of capital. New store performance along with remodels along with new storefront signs, are having a really significant payout on our investments. So, we do not plan at this point to slow the growth down that we’ve already committed to.

Operator: Our last question is from John Lawrence with The Benchmark Company. Please proceed.

John Lawrence: Jared, would you talk a little bit about that basket, I mean, in normal times without this pressure, somebody picks up a pair of shoes and maybe the attach rate for apparel. Can you just talk about how that’s changed from a basket perspective? Or is somebody just waiting for a promotion on the apparel side? Or just dive into that a little bit, please.

Jared Briskin: Yes, John. We’re seeing it go down some. I mean, obviously, our teams continue to focus on products that connect and continue to deploy our toe-to-head strategy which we still believe is the right strategy. Some of those opportunities around those connected outfits are now happening over multiple transactions. But at the same time, the primary driver of the business is footwear, the average retail price of footwear has skyrocketed over the last few years, and that’s putting a lot of pressure on apparel. So, we are absolutely seeing less apparel being sold in conjunction with footwear in the current environment.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Mike Longo: Well, again, thank you for being here today. We appreciate it. None of these results were according to our expectations. You’ve heard everything we had to say about our business model, and we believe in it. So, again, we appreciate it, and we hope everyone has a safe, long weekend and celebrate Memorial Day. Thank you.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.