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.

Our partnership is with our brands remain fantastic. We have lots of focus on our business. We were focused on because of the underserved markets that we cater to and largely, we’re complementary and incremental to the market. So it’s creating a lot of opportunity and focus with our brand partners.

Sam Poser: Just, I mean, just a quick follow-up on that. When the supply chain issues were going on some time ago, you made some decisions to bring in some apparel and other things to — my impression was sort of to fill up the stores. So looking back on what happened then and for the sake of argument 70% of the product is compelling stuff, it’s going to attract that particular customer. Do you — are you just not going to buy the other 30%, even if and sort of make the stores look full with the good stuff instead of trying to fill [multiple Speakers]

Jared Briskin: Yes, I mean, I would say we never just tried about bad stuff. Obviously, we always try to buy just the good stuff. But I think as the consumer now has become a little bit more careful around some other choices, we have to continue to refine that in what we do. We’re following what we see from a pattern standpoint to consumers and we believe we have access to the things that they’re interested in. And those are things we’re making investments in, and we’re pulling back in places that we don’t believe are either on trend or the consumer doesn’t have interest in. But we never try to just buy things that we don’t think are going to resonate with our consumer. But that funnel was a lot wider when there was a lot of cash in the market. And today, the funnel is much more narrow and we’re down our focus around what we put in the assortments.

Sam Poser: Sorry, one last thing. Does that narrow funnel? I mean is the consumer more cautious or more particular? And that narrow funnel, that’s what somebody else I know uses, is a situation where when you have exactly what that consumer wants, they buy it and when they — and if somebody else is exactly what they want or another category or entertainment or something they’ll buy it from them. Is that a side of a weak consumer or just a much more particular consumer?

Jared Briskin: I think it’s some of both, to be frank. And I think Bill has got some information on this that he can talk to.

Bill Quinn: Yes, Sam. Hi Sam it’s Bill. So we’re looking at two different lenses. First of all, the existing customers we have, which is the bulk of our customers are doing well. So we actually saw them have a positive comp here in Q2, but it’s really the new customers that we’re seeing that impact. And it’s just less of them coming in. But when they come in, they’re buying the same amount actually a little bit more. Some of that is economic. We’re in the good time to sell a lot of new customers. And obviously, we’re seeing the reverse of that. And some of that is timing where we saw new customers. We saw a nice increase in July and the start of back-to-school with those customers, because of back-to-school as well as launch.

Sam Poser: Thank you very much. Continued success.

Sam Poser: Thank you.

Jared Briskin: Thank you, Sam.

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

Cristina Fernandez: Hi, good morning. I wanted to see if you can comment more about the composition of the inventory, particularly interested in, I guess, how much age or clearance inventory is still left versus the end of the first quarter. And the excess inventory where it’s more concentrated? Is it still primarily apparel footwear as well? Any color there would be helpful.

Jared Briskin: Yes. Cristina, it’s Jared. Yes, I think we continue to strive to get to not just an optimal level of inventory, but optimal health of inventory. The team has been working incredibly hard at this initially some of the challenges were centered around apparel and that was a significant focus of ours to get that business cleaner and healthier. And we’re largely at that point now. We still have some challenges around secondary brands and franchises. Within the footwear business, that will continue to take a little bit of time to work through. Again, as we said, we feel like we can work those things down during the back half of the year and really get to an optimal level continue to get great support from our vendor partners to help balance that inventory.

We obviously have been more promotional to try and drive through some of that aged inventory. But taking a little bit longer than we’d like, but we are making strides and feel very confident in what we can achieve in the back half based on what the team is getting accomplished.

Cristina Fernandez: And then my second question is on the outlook for the third versus — for the fourth quarter, your sales outlook implies the fourth quarter being a lot better with on my math comped down low single digits versus down mid to high in the past two quarters. So what gives you confidence that the fourth quarter will be better? Is it just the comparisons? Or are you seeing a better product launch calendar?

Jared Briskin: As we said, we’re pretty confident in our assortments as a whole and certainly in the calendar as a whole. I think our expectations are that as we get to a cleaner position on inventory and a more healthy level of inventory, we’ll have more of that excites consumers to further begin into the back half of the year.

Cristina Fernandez: And just one last clarification. I wanted to understand the outperformance in women’s relative to men and kids. Is it because the launch calendar was better for women or it’s just less dependent on the newer launch?

Jared Briskin: The women’s business is a little less dependent on the launch calendar. So there was an outsized impact to the men’s and kids business negatively as a result of the launch calendar. But as a reminder, we’ve had a heavy, heavy focus on the women’s business for a number of years now, including the reorganization of our merchant teams to get more focused around the women’s business and the kids business. So we’re pretty proud of what’s been accomplished in women’s and feel like we have a nice opportunity ahead.

Cristina Fernandez: Thank you.

Operator: Our next question is from John Lawrence with Benchmark Company. Please proceed with your question.

John Lawrence: Good morning, guys.

Mike Longo: Good morning.

Jared Briskin: Good morning.

John Lawrence: First of all, could you talk a little bit about new stores, Mike, the ones you’ve opened in the last couple of years, how are they coming out of the ground and recent openings in this environment? How do they get your [Technical Difficulty]

Mike Longo: Thank you. We’ve been very pleased with our new store performance. As we’ve repeated a couple of times, we’ve got a goal that we’ve talked about 40 to 50 net new stores a year. That includes a handful of closures every year because every retailer does that. The — I think we disclosed last year that Las Vegas was our new market and by Las Vegas. We do not mean on the script where the tourists go, we mean where the people live and those stores are doing really, really well. Very pleased with that. And of course, we’re positioning them for the big event of the Super Bowl in February. Our newest market, the news is broken on is Milwaukee. We like Milwaukee. We’ve been in past retailers been in Milwaukee quite a bit.

It’s a great market for us, and we’ll be breaking that market relatively soon. And then most importantly, so those are new markets. Most importantly, we’ve got pillow markets, which are always more profitable, because you’ve built brand equity in those markets, say, Southeastern Georgia or the Panhandle, Florida, or Arizona or parts of California. When we go fill those markets in between two stores, we can further our culture, our operational culture where we can bring in seasoned veteran players to run the stores. You can take an assistant store manager from one store and make them the store manager of the new store and they bring select members of the crew. So that always works better operationally. And then the logistics of the hub-and-spoke network that we run, we can leverage that as well.

And so all those obvious operational efficiencies are important, but the most important part is the consumer knows us, they trust us. And we hire from the neighborhoods that we’re in. We run that neighborhood store, and we get rewarded for that in those new stores.

John Lawrence: Great, thanks. And follow-up Bob, what kind of level some of the costs we saw, the medical cost, et cetera, what do you need to see to start leveraging some of that or being able to kind of comp increase, would it take to stop some of that deleverage on the cost line?

Bob Volke: Yes. I don’t know if it’s so much like a specific spend category. One of the things we continue to do is invest in not only the consumer experience and the physical and omnichannel store revenue streams is also kind of putting some more infrastructure within the back office. So as you know, we’ve done a lot of upgrades as we’ve mentioned over the last couple of years on providing more tools within, say, the store support center and the distribution facility become more efficient. So we don’t really get into trying to manage to a specific comp number. It’s more about trying to run the business as efficiently and effectively as possible. And again, I think we’ve made some structural changes in our organization over the last 12 to 18 months.

We continue to find ways to leverage these investments that we’ve made in the back office operations to become more efficient. And I think what’s going to happen is you’ll see that, again, we’ll continue to try to strive to keep that SG&A level at a similar levels or declining, obviously, in the future, but not really necessarily tied to a specific comp sales. It’s more about just going after more efficiency and effectiveness.

John Lawrence: Great, thanks guys. Good luck.

Bob Volke: Thank you.

Operator: Our next question comes from Anna Glaessgen with B. Riley. Please proceed with your question.

Anna Glaessgen: Hi, good morning. Thanks for taking my question. I’d like to turn back to guidance. In the prepared remarks, you mentioned that you expect the promotional environment to continue at least through the third quarter. Should we be expecting some improvement in the fourth quarter? Any context around that and what’s in the guidance would be great?

Jared Briskin: Yes. I think the comment, certainly, we expect an environment to be commercial in the back half of the year. I think we feel more confidence in have position in the fourth quarter at with some of the conversations in terms specifically into the third quarter, but we feel like we’ll be largely past the big challenges with regard to some of our composition of our inventory issues by the time we get into the fourth quarter.

Anna Glaessgen: Got it. And we’ve heard other retailers talk about shrink a lot. Is that something you’re seeing as well?

Mike Longo: We are. This is Mike. Thanks for the question. So while we experience a minimal amount of shrink in our omnichannel experience, it’s mostly situated in the brick-and-mortar. And so I’ll let Ben take that question.

Ben Knighten: Yes, I appreciate the question. Similar to most retailers, we’ve seen some elevated strength levels really over the last couple of years. Organized prime is real, and it does impact us. That said, kind of comparing to last year, shrink really hasn’t had a material impact to our gross margin percentage. I’ll also point out that’s included in our guidance for the back half of the year. We really focus on customer service and know that that’s really our biggest deterrent from a shrink perspective and do that each and every day.

Mike Longo: Yes. And let me follow-up on a couple of points. Certainly, topical, it’s an issue that’s come up a considerable amount this week in particular. And just to remind everybody, the biggest component of shrink is theft. And not to bury the lead. It’s clear and obvious that it’s theft. It’s a cost to our companies and it’s a tax on the consumer. It’s something like every cost, whether it’s a tax levy by the government or it’s a problem with operations, all those get passed onto the consumer. I thought Walmart did a very good job this week in their conference call, CFO said, shrink has increased a bit this year and an increase last year. it was uneven across the country. That rises very well with what we’re seeing. And as well, the CEO, Doug McMillon said, and “there needs to be action taken to help protect people from crime, including theft” I felt that was on the money and appreciated them saying it.

And then I’d further add that the CEO of the National Retail Federation, Matt Shay, did a very nice job on CNBC Wednesday morning on Squawk Box and he discussed the issues to include the resale market and marketplaces as being a particular problem and I thought that resonated with us. So if you have a chance to rewatch that, I would encourage it.

Anna Glaessgen: Thanks for that. And just one clarification on the accounting around shrink. Some other retailers have mentioned that they do on annual physical account. Can you remind us your policies around that?

Bob Volke: So we take two physical counts currently in all of our stores. We also use RFID technology to take basically weekly snapshots of some percentage of our inventory. We don’t have 100% of our product tag with RFID. But we are keeping pretty close to shrink levels pretty much on a weekly basis with that RFID and again, kind of locking everything in twice a year with most of our stores, also do cycle counting and some physical accounting within our distribution centers. So we feel our shrink accounting is pretty current and on point at this point.

Anna Glaessgen: Great. Thanks so much.

Bob Volke: Thank you.

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

Alex Perry: Hi, thanks for taking my question. Just first, Jared, maybe could you help us, it seems like the launch calendar was a key driver in the quarter. Can you just talk about how the launch calendar looks for the balance of the year and does it sort of look similar to how it did in July in the back half of the quarter, which really drove a nice acceleration for you guys? And then maybe just remind us the quantity of the launch product that you’re getting sort of year-over-year, is that better given sort of the downsizing we’ve seen from other retailers in the network? Thanks.

Jared Briskin: Hey, Alex, good morning. It’s Jared. I would say it this way. Obviously, the launch calendar always has been somewhat volatile. It will remain volatile. It’s been volatile. I’ll reiterate what I said earlier, I think we’re very confident in what we have in the pipeline, both from a launch perspective and from a non-launch perspective. So I think that there could be movement in the calendar that historically always has been. So we’ll see what occurs. But our confidence level is high with regard to the assortment. Our partnerships with the brands continue to be excellent. We continue to get more and more focus because of the incremental nature of our business. So again, we feel pretty good about where we stand with regard to the quality of our order book.

Alex Perry: Perfect. And then I just wanted to ask, in terms of the lapping of some of the delayed apparel receipts from last year, how are you guys sort of thinking about that and just the composition of the inventory versus sort of what you saw last year? And just remind us how much that affected the business last year? And how — when you really started to promote that product?

Jared Briskin: Yes. So the big challenge last year really was from last year and the prior year, it was just product delivering in the incorrect season, right? So you had spring product delivery in the fall, fall product delivery in the spring, as examples. And those challenges are somewhat difficult to overcome because apparel was very seasonal in nature. That, obviously, now that the supply chain has improved significantly, we’re better, more consistent with what we’ve seen historically with regard to spring and summer liquidations, what we have from a timing perspective coming in around fall and seasonal. We’re getting back to some more historical norms around delivery cadence and seeing some success from it. So we’re a little bit more confident that we won’t have some of those seasonal challenges that really affected the promotions.

Alex Perry: Great. And then just two quick ones. I guess, one, just can you give us a little more color on how you’re thinking about your exposure, the student loan repayments coming back on. I think you layered in commentary about that being an additional headwind. Do you think you have an outsized impact there? Or how are you sort of thinking about that?

Mike Longo: Bill, do you want to take that one?

Bill Quinn: Yes. Alex. So we do a quarterly survey with our customers, and that was one of the questions this quarter that we asked. Definitely a concern overall. We dug further into it, a small portion of customers are highly concerned. So that’s something that we need to watch. There’s definitely headlines out there. There could be some mitigation of what’s going to happen in October. But that’s definitely something that we’re going to continue to monitor and get more information from in terms of our customers.

Alex Perry: Perfect. And then just my last one, maybe Bob, on the margins, any help on sort of 3Q versus 4Q gross margin cadence? Is it fair? I think you had inventory getting better by 4Q. So is it fair to say 3Q gross margins down year-over-year and then some improvement on a Y-over-Y basis, in 4Q? Or how should we be thinking about that?

Bob Volke: Again, I think we’re not going to get into specific Q3, Q4 relationships. Obviously, Q4 is a higher volume sales quarter. So you get a little additional leverage on things like your store occupancy. Again, like Jared said earlier, launch calendars can kind of move a little bit between quarters, between periods. At this point in time, again, I think we’re obviously going to hopefully move through some of that older inventory more efficiently as we get through Q3, maybe a little bit less of that in Q4. I’ll let you kind of predict how that puts out in your own model. But again, I think we see that we’ll see a little bit more better back half in terms of comparison than we saw in the first half of the year.

Alex Perry: Perfect. Best of luck going forward.

Bob Volke: Thank you.

Bill Quinn: Thank you.

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

Sam Poser: Just two quick ones. Thank you. The — in the new market like Las Vegas, what kind of — are you seeing a subsequent e-commerce lift with that? And can you give us some idea of what you’re seeing how that all works, what the relationship is as you go into new markets?

Mike Longo: Yes. This is Mike. So in layman’s terms, we see e-commerce sales go up as we increase the store count in the community. It’s also though a component of why we open a store in a particular geography because we examined the direct-to-consumer sales in those ZIP codes, and we make it part of our algorithm and part of the proof of should we open a store. And so then when we actually open the store, we get an outsized portion of the sales in that ZIP code. And that allows us to continue to go down the path of being incremental and complementary to our major brand partners.

Sam Poser: Thanks. And then, Jared, to follow-up on one of the other questions just directly. With the launch product, are your allocations up year-over-year?

Mike Longo: Even he chuckle.

Jared Briskin: He did chuckle. I’ll answer it the same way I’ve answered, Sam. We’re very confident in our order book and very confident in the support that we’re getting from all of our key brands.

Sam Poser: Right. I understand that. Are they up year-over-year?

Jared Briskin: We’ll let you infer that based on our commentary.

Sam Poser: So if we wrote, yes, your inventories up, your allocations are up year-over-year, that would be correct based on your commentary?

Jared Briskin: We’re getting much more focus from our brand partners, yes.

Sam Poser: Okay. Well, that was easy. You could just have that to begin with. Continued success.

Jared Briskin: Thank you. We appreciate it.

Operator: Our next question is from John Lawrence with Benchmark Company. Please proceed with your question.

John Lawrence: Yes. Mike, when you look at in the history of Hibbett, college football has been important. How — as we start that, especially on the SEC, a lot of teams are expected to do very well. How important is that season for the company at this point?

Mike Longo: It’s — all sports are important to us. It’s part of the DNA of the company. It’s part of the culture of sport — that is part of our major brand partners, Ethos as well as ours. I’m surprised you didn’t leave with Army, but we’ll go with the SEC for just a moment. And yes, it’s important in all the other conferences as well. So college football, it’s interesting because it’s more of an event. It’s less about the game, and it’s more about a gathering of people celebrating the things that they have in common, whether it’s a team or it’s a sport or it’s their family or it’s just an opportunity to get together. And every time people gather they think about their personal appearance and they think about how they want to occur to their peers, their families and to each other and the self-pride that goes with it.

And that’s one of the things that’s just a really interesting business model because it really is an expression of your lifestyle and what you wear, and it starts with the toe and it works upwards. And that’s why we say toe-to-head so often. So football and any other thing that causes people to gather drive sales.

John Lawrence: Great, thank you. Good luck

Mike Longo : Thank you.

Operator: We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mike Longo for closing comments.

Mike Longo: Thank you so much. We appreciate everyone coming on today and taking your time to — and spending it with us. We look forward to reporting Q3. Thanks.

Operator: This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.