Hibbett, Inc. (NASDAQ:HIBB) Q2 2024 Earnings Call Transcript

Hibbett, Inc. (NASDAQ:HIBB) Q2 2024 Earnings Call Transcript August 25, 2023

Hibbett, Inc. beats earnings expectations. Reported EPS is $0.85, expectations were $0.68.

Operator: Greeting and welcome to Hibbett Second Quarter Fiscal 2024 Earnings Conference 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: 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 I 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 two 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, August 25, 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: Good morning and welcome to the Hibbett, Inc. Q2 earnings call. For those of you following along with the slides. I’m on the slide three entitled overview. Now we’re pleased to report a solid performance for the second quarter, while the current environment remains challenging, we’re proud of our ability to execute our strategy and reiterate our guidance for the year. Our consumers are still dealing with higher costs for essential items like food, utilities, and gas, and thus have reduced some of their discretionary spending. While our sales have been affected by this, we’ve continued to focus on the aspects of our business that we can control. While we have a proven business model that has served us well through all economic cycles, and we remain focused on our competitive advantages, which I’ll remind you are a compelling product mix, a superior level of customer service, a best-in-class omnichannel shopping experience, in our strategic positioning in underserved markets.

Our footwear business remained consistent in this environment, and we’re encouraged by our customer’s response to our product line. Coupled with our kickoff to the back to school season in Q2, we landed sales in the range of our guidance for the quarter. With the support of our major brand partners, we remain focused on providing a compelling quality product assortment that appeals to our customers and meets current more selective demand trends. We believe in this environment is more important than ever to continue to invest in our business model, and those investments mostly focus on the consumer experience at retail, and online, and the supporting infrastructure that helps deliver a consistent high level of customer service. Of course, one of the more important business model investments we make is in our store footprint.

We’re committed to our previously stated goal to add 40 to 50 net new stores in fiscal ‘24. Above all, we will continue to build upon the strength of the Hibbett and City Gear brands and further enhance our strong competitive position in our current and future markets. In short, we’re investing in our business model for the long term and believe that we will continue to take market share. Before turning the call over to Jared, I’d like to thank our 11,000 team members across the organization for their hard work and support to our customers, whether working in one of our more than 1,100 stores in 36 states, our omnichannel platform or the logistics facilities or our store support center they’re the face of Hibbett and provide consistent, superior service that is synonymous with our brand.

And as I’ve said to the team yesterday, this is my favorite team sport and I wouldn’t trade this team with anyone else’s. Thank you. I’ll turn the call over to Jared.

Jared Briskin: Thank you, Mike. Good morning. Please turn to slide four entitled Merchandising. The second quarter concluded with a strong start to the back-to-school season. Footwear remained our strongest category during the quarter, but did decline low-single-digits versus the prior year. Results in footwear were challenged early in the quarter, due to performance of secondary brands and franchises, as well as an unfavorable launch calendar. The results in the latter part of the quarter were much improved due to an improved launch cadence and the start of back-to-school. Footwear results continue to be driven by product launches, as well as the basketball, lifestyle and casual categories. In addition, we continue to see an improving trend in our running business.

Apparel and Team Sports were both negative for the quarter with apparel down in the high-teens. Apparel continues to be affected by promotional activity, due to elevated inventory levels in the market, while apparel was a challenge overall, early results of seasonal product, as well as back-to-school accessories such as socks and backpacks are encouraging. Specific to Footwear apparel, the men’s and kids business was down, while women’s was positive. The challenges in the launch calendar and secondary franchises had a broader effect on the men’s and kids businesses. Men’s and kids were both down high-single-digits. Women’s was up mid-single digits, driven by strong footwear results. Inventory levels declined slightly in the second quarter versus the first quarter and we’ve made some progress, although we do expect the continued promotional environment and a much more selective consumer 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 continue to be volatile due to the challenges that affected the supply chain during fiscal 2023, our expectations remain the same for our inventory levels as we expect 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: Thanks, Jared, and good morning. We are now moving on to slide five. As a reminder, all financial results are reported on a consolidated basis, that includes both the Hibbett and City Gear brands. Total net sales for the second quarter of fiscal 2024 decreased 4.6% to $374.9 million from $392.8 million in the second quarter of fiscal ‘23. Overall comp sales decreased 7.3% versus the prior year’s second quarter. Brick-and-mortar comp sales declined 7.7%, compared to the prior year second quarter, while e-commerce sales decreased 5.2%, compared to the same period of the prior year. E-commerce sales accounted for 15.1% of net sales during the current quarter, compared to 15.2% in the second quarter of fiscal ’23. Gross margin was 32.8% of net sales for the second quarter of fiscal ’24, compared with 34.4% in the second quarter of last year.

This approximate 160 basis point decline was driven primarily by lower average product margin, which is approximately 215 basis points below the same period last year. This unfavorable product margin performance is attributed to higher promotional activity across both footwear and apparel categories. Higher store occupancy costs, mainly due to deleverage from lower sales volume, accounted for approximately 100 basis points of decline in gross margin versus the prior year period, partially offsetting the unfavorable product margin and occupancy impacts was an improvement in freight, shipping, and logistics costs as a percent of sales. SG&A expenses were 25.3% of net sales for the second quarter of fiscal ’24, compared with 23.3% of net sales for the second quarter of last year.

This approximate 200 basis point increase is primarily the result of deleverage from the year-over-year sales decline. We continue to experience headwinds related to wage inflation and have also incurred higher costs percent of sales and incentive compensation, medical expenses, and data processing versus the prior year second quarter. Depreciation and amortization in the second quarter of fiscal ‘24 increased to approximately $1.1 million in comparison to the same period last year, reflecting increased capital investments on store development, technology initiatives, and various infrastructure projects over the last couple of years. We generated $16 million of operating income or 4.3% of net sales in the second quarter this year, compared to $32.8 million or 8.4% of net sales in the prior year second quarter.

Diluted earnings per share were $0.85 for this year’s second quarter, compared to $1.86 per share in the second quarter of fiscal ‘23. We ended the second quarter of fiscal ‘24 with $33.1 million available cash and cash equivalents on our unaudited consolidated — condensed consolidated balance sheet and $106.9 million of debt outstanding on our $160 million unsecured line of credit. Net inventory at the end of the second quarter was $430.8 million, a 17.6% increase from the prior year second quarter and up 2.4% from the beginning of the fiscal year. Please note that most of the increase in inventory versus a year ago is due to product cost inflation and mix as footwear inventory, which carries a higher average unit cost is a bigger component of the overall inventory balance than it was in the comparable period.

Capital expenditures during the second quarter were $11.4 million with approximately 60% attributed to store development projects, including new stores, remodels, relocations, and new signage. We opened five net new stores in the quarter, bringing the store base to 1,148 in 36 states. We repurchased nearly 300,000 shares under our share repurchase plan in the second quarter at a total cost of approximately $11 million. We also paid a recurring quarterly dividend in the first quarter — in the second quarter, excuse me, in the amount of $0.25 per eligible common share for a total outflow of approximately $3.2 million. Now we’re moving to slide six, year-to-date results. Total net sales for the first six months of fiscal 2024 increased 1.7% to $830.4 million, while year-to-date comparable sales have decreased 1.4% versus the same period last year.

Brick-and-mortar comp sales declined 1.2% and e-commerce comp sales declined 2.2%. Gross margin was 33.3% of net sales on a year-to-date basis versus 35.7% of net sales last year. This approximate 240 basis point decline was due to lower average product margin of approximately 300 basis points and higher store occupancy costs of approximately 45 basis points. This was partially offset by year-over-year improvement in freight, shipping, and logistics costs as a percent of sales. SG&A expenses were 23% of net sales for the first six months, compared to 22.9% in the same period last year. The approximate increase of 10 basis points is primarily the result of higher medical expenses and an increase in data processing costs, partially offset by lower advertising and professional fees.

We have generated $61.9 million of operating income or 7.5% of net sales through the second quarter of fiscal ’24, compared to $83.5 million or 10.2% of net sales in the prior year’s first six months. Net income for the first six months of this year was $46.8 million or $3.61 per diluted share, compared with $64.1 million or $4.77 per diluted share in the prior year comparable period. Capital expenditures for the first six months of the fiscal year were $25.7 million, predominantly related to store initiatives, including new store openings, relocations, expansions, remodels, and technology upgrades. I’ll now turn the call over to Bill to discuss consumer insights.

Bill Quinn: Thank you, Bob. Our consumer research and analysis of loyalty data gives us insight into the mindset and changing shopping patterns of our customers. To start, most customers still have elevated concerns of the general impacts of inflation. Concerns of our gas, grocery, and utility cost remained high. There is also an added concern around resuming student loan payments later this year. Looking at our loyalty purchase data, we saw sales differences through new members and existing members. Sales from new members were down, driving the sales comp decline in Q2. Our concerns around new customer sales were mitigated in the latter part of the quarter, our new customer sales grew significantly due to energy from back-to-school and launch.

For the entire quarter, our existing customers, which are the vast majority of our program continue to spend more than prior year, this was consistent with what we experienced in Q1. Strength in existing customer sales is a validation of our focus on a compelling product mix, superior customer service, a best-in-class omni-channel shopping experience, and our strategic positioning in the underserved markets. Turning to our e-commerce business, in Q2 e-commerce sales were down 5.2% year-over-year. The primary headwinds included customer economic concerns, a highly promotional environment and an unfavorable launch calendar. These factors led to a decrease in traffic and conversion, which were partially offset by higher average [Technical Difficulty].

Digital sales in the latter part of the quarter were much improved due to a favorable launch cadence, a strong start to back-to-school. As always, we remain focused on the long-term in providing the best possible customer experience for online and omni-channel shopping. To that end, we have many planned initiatives for the remainder of this year to drive acquisition, engage customers, and further provide a world-class retail experience. Now, I’ll turn the call back to Bob to discuss our guidance.

Bob Volke: The business outlook for the remainder of fiscal 2024 remains challenging and difficult to predict. Inflation has continued to have a broad impact, not only on consumer sentiment and spending patterns, but it also contributed to increases in our operating costs in the form of higher wages and prices we paid for various goods and services. Our interest rates have driven up the cost of borrowing for us and may also be affecting discretionary purchase decisions, those consumers with variable rate loans or credit card debt. We also expect the heavier promotional environment to continue for the near-term. In summary, economic uncertainty coupled with a more cautious and selective consumer has resulted in this uncertain retail environment.

As you will remember these factors resulted in us lowering our fiscal 2024 outlook at the end of the first quarter as we move beyond the second quarter and embark on the third quarter, we feel our projected fiscal 2024 financial performance continues to be aligned with the expectations we set in May. Therefore, we are reiterating our overall guidance for fiscal 2024. Slide eight summarizes our updated fiscal 2024 guidance. In summary, 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 expected to be approximately 1% of full-year sales, approximately 52% of our total sales will be recognized in the second-half of the fiscal year.

Comparable sales are expected 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 be in the negative low-single-digit range. The net new store growth expectations to open between 40 and 50 units. We anticipate the aggressive promotional environment to continue in the near-term, projected full-year gross margin range is approximately 33.9% to 34.0% of net sales. SG&A as a percent of net sales is expected to be in the range of approximately 23.3% to 23.5% of net sales. Operating margin for the year is 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 fourth quarter benefits from higher sales volume, although the 53rd week is considered near breakeven due to the low sales volume in that extra week.

We still expect to carry debt throughout the year. We project borrowings to moderate in the second-half of the year, as inventory levels decline after the back-to-school season. Diluted earnings per share 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%, an estimated year-end weighted average diluted share count of approximately 12.8 million. We 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. Rob, please open the line for questions.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mitch Kummetz with Seaport Research. Please proceed with your question.

Mitch Kummetz: I guess, I’ve got a few. Maybe to start, can you address the impact that Yeezy had on the quarter? And can you say how much longer, you’re going to have Yeezy product going forward?

Jared Briskin: Yes. Hey Mitch, good morning. It’s Jared. Yeezy product actually launched during the third quarter, so there was no impact during the second quarter and further past the third quarter, we don’t have any additional visibility at this point.

Mitch Kummetz: Okay. And then Jared on the running business you talked about improvements there. Is that a change in trend there or is that more a reflection of some change in your assortment that you’ve kind of cycled through maybe what was bad in that segment and now you’ve got better product there, can you just maybe elaborate on that?

Jared Briskin: Yes, it’s two-fold. I think certainly some changes in the assortment, some new iterations of products that we delivered in preparation for back-to-school performed well. Certainly, it enhanced our focus on the performance running category and then have evolved our Lifestyle running category, some new iterations. So we feel good about the running business. As you said, historically, it’s a smaller portion of our overall business, but the business is trending and performing well.

Mitch Kummetz: Okay. And then maybe one last one, just on the product margin, so 2Q was not down as much as 1Q. It sounds like you expect promotions to continue at least through the third quarter, can you just kind of walk us through how you think about product margin over the next couple of quarters?

Jared Briskin: Yes. So we still expect some pressure from our promotional environment, obviously. Stephani and her team are doing a lot of work on rightsizing [Technical Difficulty] and ensuring that the quality of our inventory gets to an exceptional level. Those are our expectations. So we still think there’ll be some pressure. Some of the early reads on products from our fall assortment that started back-to-school give us some confidence, but we still have some secondary brand pressure, we still have secondary franchise pressure, and we know there still some pressure from a consumer standpoint. But we like where we’re headed with our plans and our values for the back half.

Mitch Kummetz: All right. Thank you.

Jared Briskin: Thank you.

Bob Volke: Thank you.

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

Justin Kleber: Hey, good morning everyone, thanks for taking the question. First, just a follow-up on Mitch’s question on product margin. How much of the pressure — and Bob, you cited about 300 basis points lower over the first-half, how much of that do you think is somewhat temporal, just given the excess inventory across the sector and the promotional activity associated with that?

Bob Volke: Yes, I think it’s a great question, Justin. I think there’s a lot of factors at play here. I mean you have certainly — we’re working to reduce our inventory overall, working to enhance the quality of our inventory overall. There is a lot of product in the marketplace, particular downstream that we believe will still have significant promotional activity, plus we have some of the concerns for the consumer that Bill mentioned. So putting all those things together from an outlook perspective, tends to be a little bit difficult as far as what we have in the pipeline. We’re very, very confident. The questions remains is how fast we get an optimal level in quality of inventory.

Justin Kleber: Got it. Okay, it makes sense, Jared. Bob, question for you on the freight shipping and logistics cost favorability. How much of that is just the external environment versus maybe some internal initiatives or actions on your guys’ part?

Bob Volke: I think it’s probably a combination of both, obviously. We obviously cycled through some higher freight costs in previous periods and some of the comparable periods, and we’ve obviously flowed some of that through the P&L over previous quarters. We continue to always look at ways to make the process more efficient, getting closer to the consumer in terms of delivery cost, obviously running things through our distribution center more quickly and more efficiently. So I’d say it’s probably a little bit, kind of, mix of both about 50/50 if have to guess, and I think we’re continuing to look at how receipt flow impacts that number in the back half of the year and we again think that we’re moving in the right direction in terms of overall freight, shipping, and logistics costs.

Justin Kleber: Okay. Good to hear. Last one for me, guys just on I guess the cadence of comp throughout the quarter, clearly, July it sounds like it was the strongest month given back-to-school. Any comment on the back-to-school strength late in the quarter has kind of carried over here into the first part of 3Q?

Jared Briskin: Yes, Justin, it is Jared. Obviously, as we said, we were pleased to start of back-to-school what occurred in the second quarter. Happy with a lot of other products that we delivered. Certainly, as we mentioned, the seasonal aspect of apparel gave us some confidence and the back-to-school categories performed very well. At this point, it’s really still early to comment on back-to-school in its totality. I think we feel pretty comfortable that we’ve captured our forecast for back-to-school within our guidance.

Justin Kleber: Great. All right. Thanks everyone.

Jared Briskin: Thank you.

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

Sam Poser: Thank you. Thanks for taking my question. Good morning. Can you tell — just to make this simple — could you tell us what the comps were by month by chance?

Mike Longo: Hi, Sam, Mike. Good to hear from you. It’s our custom not to comment on intra-quarter trends and so as…

Sam Poser: We’re looking backwards…

Mike Longo: Yes, got it, but we — I think we followed the most of the trends of the industry. We had a good July. I think it would be the best way to say it.

Sam Poser: We positive in July? How about that question.

Mike Longo: Yes, we were.

Sam Poser: And then, Jared, you talked about — you all talked about the consumer being more particular and how well you did with some of the big launch products. So my question is as you look ahead, is there going to be enough product that to put — for those particular customers and were those particular customers — those customers have, let’s say, bought the launch product, was there any demographics similarity between them or if the product was right they just show up. And again had other products that they just didn’t like as much as they did?

Jared Briskin: Yes, I think Sam, I mean, if the product is right and the consumer perceives value in the product that value creation could come from launch and scarcity, it could come from materials, it could come from the story, it could come from franchise management. A lot of things can drive that value and that demand. Again, as we — as I’ve said, we’re pretty confident in the pipeline of product, as far as what’s coming in from a new perspective. I think Stephani and team continue to refine our assortments and make them as dynamic as we can for our consumer. At the same time, there’s challenges with the consumer, we want to balance our inventory correctly, so there are some other offsets as well but we feel good about the pipeline.