Hibbett, Inc. (NASDAQ:HIBB) Q3 2024 Earnings Call Transcript

Hibbett, Inc. (NASDAQ:HIBB) Q3 2024 Earnings Call Transcript November 21, 2023

Hibbett, Inc. beats earnings expectations. Reported EPS is $2.05, expectations were $1.12.

Operator: Greetings. And welcome to the Hibbett Q3 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Gavin Bell, Vice President, Investor Relations. Thank you, Mr. Bell. 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 at 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 two of the earnings presentation and the company’s annual report on Form 10-K and 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 the 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, November 21, 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 will now turn the call over to Mike Longo.

Mike Longo: Good morning. And welcome to the Hibbett, City Gear Q3 earnings call. For those of you following along the slides, I am on slide three, entitled Overview. We are very pleased to report a strong financial and operating performance for the third quarter of fiscal 2024. Our team did an outstanding job with consistent execution of our strategy, as we continue to win market share. While the retail environment remains challenging, as consumers are being more selective in their discretionary spending, we worked very hard to offer compelling product mix that meets this demand. Additionally, our superior customer service, a best-in-class omnichannel shopping experience, strong vendor relationships, in-store placement and underserved markets our distinct competitive advantages that allowed us to continue to gain market share.

Our sales were supported by a strong back-to-school season, which occurred in the first month of the third quarter. Footwear sales, continue to be the key driver of our sales, especially for premium brands. We are fortunate to have strong vendor relationships that support our ability to deliver the latest products that appeal to our fashion conscious consumers. During the quarter, we benefited from a more regular schedule of new product launches, which received a very positive response from our brand loyal customers. As announced earlier in the quarter, we launched our Nike Connected Partnership which connects Hibbett and Nike’s loyalty programs. We are very excited about this new benefit for our customers, what it means for our joint businesses.

Bill will provide some additional detail in his remarks. In addition to our solid sales performance. We are pleased with the progress we have made with respect to improved expense management and disciplined inventory controls, Bob will cover this in greater detail in his remarks. We also continue to make the necessary investments in our business to enhance the customer experience, both in our stores and our expanding omnichannel platform. We believe our store expansion strategy will be a key driver to our continued growth and we are still on track to meet our goal of adding approximately 40 net new stores this year. We are pleased with the trends in our business and look forward to the fourth quarter and a successful holiday sales season in line with our expectations.

We are excited about additional new product launches around the holidays, which will boost sales and we are confident we have sufficient inventory to support these events and our premium Footwear sales. I would like to emphasize, in short, we are investing in our business model for the long-term and continue to take market share. Before turning the call over to Jared, I would like to thank our 11,000 team members across the organization for their dedication and hard work and support to our customers in a relatively challenging environment. We have a passionate and dedicated workforce operating more than 1,150 stores, our omnichannel platform, our logistics facilities and our store support center. They distinguish our brand in the marketplace with outstanding support that continues to drive customer loyalty and extends our market reach.

Thank you. I will now turn the call over to Jared.

Jared Briskin: Thank you, Mike. Good morning. Please turn to slide four entitled Merchandising. The third quarter opened with a strong conclusion to the back-to-school season. Footwear remained our strongest category during the quarter with a low single-digit comp sales increase. Results in Footwear were driven by strength in basketball, lifestyle and running silhouettes. A favorable launch calendar also enables these positive results. Apparel and Team Sports were both negative for the quarter down in the low teens. Seasonal categories were strong during the back-to-school season, but cooled in the latter part of the quarter due to the warm and dry weather patterns. Apparel also continues to be affected by promotional activity due to elevated inventory levels in the market.

While Apparel was a challenge overall, socks and backpacks were strong performers in the back-to-school period. Specific to Footwear and Apparel, the men’s and kids business was down low-single digits, while women’s was positive mid-single digits. Men’s and kids were both down low-single digits, driven by a low-teen decrease in Apparel, Footwear results in both men’s and kids were positive low single-digits. Women’s was up mid-single digits, driven by a mid-teens increase in Footwear offset by weak Apparel results. We continue to make progress on reducing our inventory, inventory levels declined slightly in the third quarter versus the second quarter, as well as year-over-year. We continue to expect the promotional environment through the fourth quarter, our targeted promotional efforts, as well as support from our key brand partners will help us achieve our goals for inventory reduction.

Our expectations remain unchanged. We are on track to deliver a mid-teens year-over-year inventory decline at year end. I will now hand the call over to Bob to cover our financial results.

Bob Volke: Thank you, Jared, and good morning. Please refer to slides five entitled Q3 Fiscal 2024 Results. 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 third quarter of fiscal 2024 decreased 0.3% to $431.9 million from $433.2 million in the third quarter of fiscal 2023. Overall comp sales decreased 2.7% versus the prior year third quarter. Brick and mortar comp sales declined 5.4% compared to the prior year’s third quarter, while e-commerce sales increased 12.6% compared to the same period of fiscal 2023. E-commerce sales accounted for 17% of net sales during the current quarter, compared to 15% in the prior year third quarter.

Gross margin was 33.9% of net sales for the third quarter of fiscal 2024, compared to 34.3% in the third quarter of last year. This approximate 40-basis-point decline was driven primarily by lower average product margin, which is approximately 130 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 the slightly lower sales volume, accounted for approximately 40 basis points of the overall decline in gross margin versus the prior year period. Partially offsetting the unfavorable product margin occupancy impacts was an improvement in freight shipping shrink and logistics costs, as a percent of sales.

SG&A expenses were 23% of net sales for the third quarter of fiscal 2024 compared to 23.9% of net sales for the third quarter of last year. This approximate 90-basis-point decrease is primarily the result of our continued focus on expense management, including improved efficiency of store labor and strategic reductions in discretionary expense categories, such as professional fees and advertising. These initiatives have more than offset the impacts of inflation on wages, goods and services and deleverage from slightly lower sales volume. Depreciation and amortization in the current quarter of fiscal 2024 increased approximately $1.4 million in comparison to the same period last year, reflecting increased capital investment on store development, technology initiatives and various infrastructure projects over the last three fiscal years.

We generated $34.5 million of operating income or 8% of net sales in the third quarter this year, compared to $34.2 million or 7.9% of net sales in the prior year’s third quarter. Diluted earnings per share were $2.5 for this year’s third quarter, compared to $1.94 per share in the comparable period of fiscal 2023. We ended the third quarter of fiscal 2024 with $29.6 million of available cash and cash equivalents on our unaudited condensed consolidated balance sheet and $96.9 million of debt outstanding on our $160 million unsecured line of credit. Net inventory at the end of the third quarter was $398.1 million, a 1.7% decrease from the prior year’s third quarter and down 5.4% from the beginning of the fiscal year. Capital expenditures during the third quarter were $11.5 million with approximately 75% attributed to store development projects, including new stores remodels, relocations and new signage.

We opened 10 net new stores in the third quarter, bringing the store base to 1,158 in 36 states. We repurchased just over 700,000 shares under our share repurchase plan in the third quarter at a total cost of $32 million. We also paid a recurring quarterly dividend during the quarter in the amount of $0.25 per eligible common share for a total outflow of approximately $3.1 million. Now turn to slide six, year-to-date results. Total net sales for the first nine months of fiscal 2024 increased 1% to $1.26 billion, while year-to-date comparable sales have decreased 1.9% versus the first nine months of last year. Brick and mortar comp sales declined 2.7% and e-commerce comp sales increased 2.9% compared to the prior year. Year-to-date, gross margin was 33.5% of net sales versus 35.3% of net sales last year.

This is an approximate 180-basis-point decline. Please note the unfavorable gross margin various on a year-over-year basis has improved since the end of the second quarter, we closed Q2 trailing prior year gross margin by 240 basis points. The decline in year-to-date, gross margin continues to be driven by lower average product margin of approximately 240 basis points. This was 300 basis points at the end of Q2 and higher store occupancy costs of approximately 40 basis points. On the positive side, we experienced year-over-year improvements in freight shipping and logistics cost as a percent of net sales. SG&A expenses were 23% of net sales for the first nine months, compared to 23.2% in the same period last year. The approximate decrease of 20 basis points is primarily the result of lower spend in advertising and professional fees.

We have generated $96.4 million of operating income or 7.6% of net sales for the third quarter of fiscal 2024, compared to $117.7 million or 9.4% of net sales in the prior year’s first nine months. Net income for the first nine months of this year was $72.3 million or $6 — or $5.66 per diluted share, compared with $89.6 million or $6.71 per diluted share in the prior year comparable period. Capital expenditures for the first nine months of fiscal year were $37.2 million, predominantly related to store initiatives, including new store openings, relocations, expansions, remodels and technology upgrades. I will now turn the call over to Bill Quinn to discuss consumer insights.

Bill Quinn: Thank you, Bob. Starting with our loyalty program. I am happy to report continued growth. In Q3, our loyalty sales grew single digits. This was primarily driven by more members shopping and average ticket growth, higher average unit retail drove the growth in average ticket and increased member shopping was driven by continued engagement from our existing members. We continue to make improvements to our loyalty program, we are especially excited to announce the launch of our Connected Partnership, connecting Hibbett to Nike’s loyalty program. This transformative partnership will further distinguish the Hibbett retail experience, customers can now sign up to be a Connected member either in-store or online, also both new and existing customers can sign up to be a Connected member.

Benefits of the program includes exclusive shopping experiences, personalized content and early access to Nike and Jordan member products, integrating the Hibbett rewards and Nike membership will improve the ways we engage and delight our members across all omnichannel touch points. We heavily marketed the launch of the program and we also have a variety of ongoing digital and in-store marketing campaigns. Customers have been very receptive to the program and we are pleased with the results we are seeing. Turning to our e-commerce business, in Q3 sales increased 12.6% versus last year, e-commerce represented approximately 17% of total sales for the quarter versus last year’s 15%. We have seen a propensity of customers return to online shopping, as indicated by our most recent surveys in Q3 sales data.

Traffic, conversion and average ticket all increased in Q3 driven primarily by Footwear, as well as a strong back-to-school sale. Entering Q4, we are continuing to keep a pulse on our customers are feeling, customers continue to have elevated concerns around the economic conditions, including inflation. On a positive note, concerns around resuming student loan payments have declined since the summer, also our customers intend to purchase more this holiday season than last year. I will now hand the call back to Bob to discuss our guidance.

Bob Volke: All right. We are moving forward to slide eight. The business outlook for the fourth quarter of fiscal 2024 remains challenging to predict, inflation has continued to have a broad impact not only on consumer sentiment and spending patterns. But has also contributed to increases in our operating costs in the form of wages and prices we pay for various goods and services. Higher interest rates have driven up the cost of borrowing for us and may also be affecting discretionary purchase decisions for those consumers with variable rate loans or credit card debt. We also expect the heavier promotional environment to continue for the near term. All these factors contribute to an uncertain retail environment as we enter the traditional holiday shopping period.

Despite these headwinds and uncertainties, our strong third quarter results coupled with our fourth quarter outlook that remains consistent with the assumptions supporting our previous guidance has resulted in adjustment of several elements of our fiscal 2024 full year guidance. The most prominent change is increase in our diluted EPS range. We are now anticipating diluted EPS for the full year to be between $8 to $8.30. This is up from $7 to $7.75 range that we provided for earlier. Consistent with prior 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 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.

Total comparable sales are still expected to decline in the low single-digit range for the full year. Full year brick and mortar comparable sales are also still anticipated to be in the negative low single-digit range. However, we now expect full year e-commerce revenue to be flat to up low-single digits. We are anticipating a slight mix shift toward e-commerce that we saw in the third quarter will continue through the holiday season. We expect our net new store count to be approximately 40 units for the year. This is at the low end of the previous range as delays in external approval and longer lead times on inspections and permitting have pushed back some of our construction schedules. We anticipate the aggressive promotional environment to continue in the near-term.

Projected full year gross margin remains unchanged from previous guidance at approximately 33.9% to 34% of net sales. We have lowered the anticipated, SG&A range as a percent of net sales to 23.1% to 23.3%, down from 23.3% to 23.5%, which was provided in our previous guidance. We are actively managing discretionary expenses and continue to focus on identifying efficiencies throughout the organization, which are currently helping us offset inflationary pressures, most notably in labor and benefits. Operating margin for the year is expected to be in the range of 7.6% to 8% of net sales, up from previous guidance 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 not considered a significant driver of incremental operating profit due to the low sales volume projected for that week.

We still expect to carry debt throughout the remainder of the year, although we have lowered the interest expense range as a percent of sales. Consistent with previous commentary, we anticipate the borrowings will moderate as inventory levels decline throughout and after the holiday season. As noted previously, diluted earnings per share are anticipated to be in the range of $8 to 8.30, up from previous guidance of $7 to $7.75. This range assumes an estimated full year tax rate of approximately 23.1% to 23.3%, down slightly from prior guidance and an estimated year end weighted average diluted share count of approximately $12.6 million also down slightly from prior guidance. We continue to 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 will continue 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.

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Q&A Session

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

Mitch Kummetz: Yeah. Thanks for taking my question. Just hoping to get a better sense of consumer spending pattern, it sounds like you guys had a good back-to-school, I am guessing maybe things slowed a bit in September and October, it sounds like from a seasonal standpoint, there were some challenges. And then there was a comment made about the holiday spending outlook that you expect your consumer to spend more for this holiday. Then lastly, can you just maybe elaborate on some of that, I don’t know if you can kind of give us the months for the quarter, but just talk a little bit about what you are seeing in terms of kind of how the consumer’s purchasing sort of peak versus non-peak period?

Jared Briskin: Yeah. Hey. Good morning, Mitch. Its Jared. I will start and then Bill and likely Ben involve in the conversation as well. I think what we saw obviously the peak of back-to-school was really strong for us and we saw that at the tail end of the second quarter into the third quarter, in the month of August. So really pleased with the back-to-school results, really across all categories and we are really excited around what the seasonal Apparel was showing us during the back-to-school. Unfortunately, as we got outside of back-to-school, outside of that peak, thing definitely slowed down some with the biggest impact coming in Apparel and we do believe that is a direct result of the weather patterns not being favorable with regard to warmer temperatures year-over-year and lack of wet weather.

So we feel great again in back-to-school, little bit challenged towards the end of the quarter in Apparel, as I have said, but Footwear was fairly consistent through the quarter. Felt really good about Footwear and in particular the launch cadence throughout the quarter, we felt really strong. So, Bill?

Bill Quinn: Yeah. Good morning, Mitch. So to answer your question around how customers are feeling, they do have elevated financial concerns, but at the same time, they do plan on spending more during the holidays in particular on Footwear, as well as online. When we dig further into our survey results, it’s pretty interesting. We found that, basically the younger you are the more positive you feel, so Gen Z, as well as the millennials are definitely bullish and intend to spend more versus the older population, which is good for us, because Gen Z and millennials are our core customers. Also for those people that have financial challenges, they are planning to make trade-offs. So cutting back things like eating out, entertainment to find a retail spending. Also some customers plan to lean more to credit during the holiday.

Mike Longo: Yeah.

Mitch Kummetz: Okay. Thank you.

Mike Longo: Go ahead, Jared.

Jared Briskin: Go ahead, Michael.

Mike Longo: Obviously, Jared, and Bill summed it up pretty well. We had a really nice strong back-to-school selling season, impacts our business in a big way. The seasonal patterns, Jared mentioned too impacts our outerwear sales. But I feel good about our position of inventory going into the holiday season. Our peak season been strong and really look forward to seeing what Christmas selling season brings in store.

Mitch Kummetz: All right. Thanks. I will go ahead and re-queue.

Mike Longo: Thank you, Mitch.

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

Sam Poser: Good morning, everybody. Thank you very much. Happy Thanksgiving almost. A question on the inventory, Jared you mentioned, it would be down mid-teens at the end of the year, which would get it about as clean from a pure dollar perspective as we have seen it in some sometimes. The promotional activity that you are seeing that’s impacting the gross margin once your inventory gets to that level, regardless of what’s going on out in the marketplace. I mean do you anticipate a significant improvement in your gross margin and I call it, your — let’s say, your product margin going into fiscal 2025?

Mike Longo: Yeah. Good morning, Sam. Happy Thanksgiving as well. Yeah. So it’s really, it’s two-part approach. I mean, obviously, we are hyper focused on the level of inventory and we believe we will get to a more optimal level by the end of the year with regard to the total level of inventory. But we do still have some pressures with regards to content. So we are hyper focused on the content. We will continue with targeted promotions around the content to try and get that our healthiest level with regard to what we are showing to the consumer as we go forward. So likely, there still be a few challenges as we head into next year with regard to the content that we believe will get that resolved pretty quickly as we head into next year.

Sam Poser: Thanks. And then, secondly, the new Nike part — how much is the new Nike partnership and what sounds like better allocations impacting — where does that impact more in stores or online. And then, secondly, you commented that the launch calendar was very favorable in Q3. How does that look going in — within Q, give us any indication, I know it’s early on sort of what 4Q looks like to-date that’s cross your fingers and get an answer question?

Jared Briskin: We will answer that.

Mike Longo: Well, we are not going to answer quarter-to-date, but we do feel good about the launch calendar in the fourth quarter and the support that we have regarding allocations in the fourth quarter. Specific to Nike Connected. It’s really will affect both channels as we go forward. Bill will give a little more color here in a moment on what we did across all the channels from a Connected membership perspective. But specific to the product, there is additional focus around our business with regard to access points that will both impact brick and mortar, as well as digital. We will certainly have an enhanced profile of vendor direct offering that will affect primarily the digital space. And then just a general focus of our business being elevated around additional support of inventory in the most coveted products.

So we feel really good about where we stand. Our relationship and partnership has been incredible. And this will help to reinforce that as we continue to put forth a great experience for consumers. Bill?

Bill Quinn: Yeah. Sam, to give you a little bit more on Connected. So it will definitely help with acquisition and retention for both channels. So what we are seeing is definitely some good sign-up rates for the Connected program, which is positive. We are doing Connected Member events drive engagement at our stores, as well as a member-only products. So we are talking with our customers, customers are happening. The basic gist of it is, it’s more that the program is more valuable, because you are getting more than just Hibbett and as a result of that we are starting to see new customer sign-ups increasing overall.

Sam Poser: Thanks. And just one last thing, can you give us any variation between what you are seeing out Hibbett and City Gear.

Mike Longo: It’s pretty consistent, Sam. I think, obviously, both of our brands are highly focused on the fashion consumers. So it’s been pretty consistent.

Sam Poser: Thanks very much. Continue the success.

Mike Longo: Thank you.

Bill Quinn: Thank you.

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

Cristina Fernandez: Hi. Good morning and congratulations on the better results. I wanted to ask about the channel mix you are seeing, particularly with the strong performance in e-commerce. Do you think it’s more due to the product launches or consumers looking for promotions, which had been more, I guess, significant online? Well, first sort of, yeah, the trends in e-commerce? And then, I guess, what initiatives are you taking to drive more traffic in stores, which has been a challenge for a few quarters now? Thank you.

Jared Briskin: Yeah. Hi. Good morning, Cristina. It’s Jared. I will start. I think from a channel perspective, obviously we are hyper focused on both channels. Our ability to gain additional access and inventory levels and a lot of the most coveted products is certainly driving additional engagement from a digital perspective. So we believe a lot of that is due to the strength of our Footwear business and less about the promotional activity from a digital perspective. Bill, I think, I have hinted to you, I am sure you will have some commentary around this.

Bill Quinn: Yeah. Yeah. Absolutely. So the — as Jared said, the strength of the Footwear business really drove that e-commerce penetration for the quarter. We believe that will continue just based on what we are looking at here for Q4. So we did raise guidance for digital to flat-to-single-digit positive. As far as driving store traffic and what we are doing around that, our biggest acquisition and retention vehicle is our loyalty program and we are doubling down on that. We have a variety of initiatives to continue improving that program, as well as Connected, obviously. We are also doing a lot around launches, particularly in-store to drive higher sell-throughs and more traffic around that as well.

Operator: Our next question comes from Justin Kleber from Robert W. Baird. Please proceed.

Justin Kleber: Hi, guys. This is Justin Kleber. Thanks for taking the questions and congrats on the partnership with Nike.

Mike Longo: Hi.

Justin Kleber: I want to ask a question on margin, kind of two parts. Just first on the product margin decline of 130 basis points in the quarter. Can you parse that out maybe a bit at least directionally between Apparel and Footwear and kind of what’s really driving that decline? And then just longer term, your new operating margin outlook for this year 7.6% to 8%. I guess, barring some economic shock, do you guys feel this level is kind of the new baseline now for operating margins and we can either hold or maybe you can expand as we look out into the future? Thank you.

Jared Briskin: Hey, Justin. It’s Jared. Good morning. Thank you. I will start with regard to the product, it’s really across both Footwear and Apparel. I mean, as we said, we are making great progress. Secondly, the team has done an incredible job of managing the inventory, getting the inventory lower, and as we have said, we feel great about where do you expect the plans in the four quarter. But we still have some work to do to get to an optimal level of content. So that’s across both categories. I would also say that typically the seasonal products early in the season tends to be very margin rich. So some of the challenges around seasonal Apparel in the latter part of the quarter didn’t help us as much as we might have expected with regard to margin from a product standpoint. Bob.

Bob Volke: Good morning, Justin. As far as, obviously, we are not giving any guidance into the future at this point beyond the current fiscal year. But I think, directionally we are, obviously, looking to continue to try to slowly improve performance overtime, nothing’s a complete linear equation. So we are going to see some ebb and flow in margin. We will see some ebb and flow in SG&A. But I think, again, we have kind of — we have talked about this before about established kind of new baseline. We do believe that this is a number we can again be comfortable with probably into the near-term. But again, we will provide more formal guidance, obviously, into the fiscal 2025 after we finish the current year.

Justin Kleber: All right, guys. Thanks and Happy Thanksgiving everyone.

Mike Longo: Thanks. Thanksgiving to you.

Jared Briskin: Thanks. Same to you.

Mike Longo: Thank you.

Operator: Ladies and gentlemen, we apologize for the technical difficulties. We will move onto our next question, which is coming from the line of Alex Perry with Bank of America. Please proceed with your question.

Alex Perry: Hi. Thanks for taking my questions here. I guess, first, I just wanted to ask a little bit more about the guidance and sort of the 4Q implied guidance, it looks like the comp guidance and gross margin guidance remains unchanged. Is that just conservatism or you talked about the launch calendar being strong or are you seeing more cautious consumer behavior that led to not raising the guide? Thanks.

Jared Briskin: Hey, Alex. Good morning. Jared, I will start. Yeah. I mean, I think, all the above, right? I think there’s still a lot of market uncertainty, there certain — uncertainty around the consumer. We still think there is elevated inventory levels in the market, which will likely lead to a pretty heavily promotional environment, the weather at the tail end of the third quarter, obviously, didn’t help that. So I think all of the above. There’s still lot of uncertainty in the market and even though we are confident that our plans and certainly confident about the investments we have made in the business, there is still lot of uncertainty in the market.

Alex Perry: That’s really helpful. And then just a follow-up. Can you maybe talk a little bit more about some of the secondary brand performance? I know that had been a bit softer earlier in the year. Are there any call outs to strong brands outside of Nike and Jordan are continuing to help the business?

Jared Briskin: Yeah. I mean we have a really broad brand portfolio. As you know, we typically don’t talk specifically about a lot of brands on this call. But, historically, we tend to have a pretty significant brand churn. There are some of our secondary brands that are doing a nice job from a pipeline perspective of innovation or at least the newness and innovation in our business doesn’t necessarily mean the technology that can mean something that hasn’t been in the market that’s brought back and put forth in front of the consumers. So some brands are doing a little better with regard to the innovation pipeline and they are succeeding and others are still unfortunately very slow with regard to innovation that’s continuing have challenges. So as brands improve throughout next year and into the future with regard to that newness and innovation profile, we would expect better performance out of our secondary brands.

Alex Perry: Perfect. And then just my last one, could you just talk a little bit more about Apparel inventories, are there still overages that need to be worked through, and I guess, on the seasonal product, does that improved a bit now that the weather has turned? Thanks.

Jared Briskin: Yeah. Hey, Alex. Jared again, we feel really good about where our Apparel inventory is. Obviously, that was a category that we really put — started putting solutions against first. So no real significant challenges with regard to Apparel. Obviously, there’s a lot of business to be done in the fourth quarter and a lot of uncertainty out there. So we will see how that all initiatives up. But again, we feel good about where the inventory is expected to land and really good about where we expected to have content as we get into next year.

Alex Perry: Perfect. That’s really helpful. Best of luck for this holiday season.

Mike Longo: Thank you so much.

Jared Briskin: Thank you.

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

John Lawrence: Great. Thank you. Congrats guys. And Mike, would you talk about a little bit about expenses. I mean, obviously, great strides there and I know you are doing a lot. What inning are we in before you would wonder if you are cutting into muscle on the labor side, whatever. Just some thoughts on how much room you have on the expense cuts?

Mike Longo: Yeah. Good morning. Thanks for the question. Ben will come in after me on this one I think. To set the table on the question, if you will recall several quarters ago we spoke about the fact that sales had accelerated over the past few years and we drug some costs inadvertently as is normal. We drive some costs into our current structure. We went a little too far on a handful of things whether that was a handful of people or handful of projects or particular systems that we didn’t need and so we have been — we began a systematic process to review those about 12 months ago and that has borne fruit and we are pretty proud of that. We don’t think that we are anywhere near cutting into the muscle. We — I would permit more, we are taking the savings and reapplying them to the consumer experience, which has the virtuous circle of improving cost, improving our efficiency and effectiveness, and speed with which we can serve the customer. Ben?

Ben Knighten: Yeah, Mike. Appreciate it, John. It’s Ben Knighten. There’s a little bit rare in retail when you are able to kind of gain both efficiency while increasing your effectiveness, and to your point, not cutting into that muscle. Our big move here to the mobile platform is kind of enabled us to do both, putting those tools in our associates hands has made them even more productive and enable them to do their job better with the customer. It’s kind of elevated that customer experience and the associated experience, I might add to Mike’s point that combined with our sales culture out there has led to really results improved SG&A for Q3 specifically. Just really proud kind of state that of all the hard work done from our associates and being able to do that and really elevating that customer experience in-store and online.

John Lawrence: Yeah. Thanks. And last one for me is, just taking that thought going forward, you get back to more normal weather patterns, et cetera. The Apparel business and there’s no reason with a reasonable positive comp that you can leverage that even further?

Mike Longo: Yeah. We think so. And so to answer your first question, we think we are in the mid-innings. Just know that we are not going to take all that to the bottomline. We are again, we will reiterate, reinvesting much of those savings into the business model, so that we can continue into the future, having that positive consumer experience online and at retail. So thanks for the question.

John Lawrence: Great. Thanks guys. Happy holidays.

Mike Longo: Thank you.

Jared Briskin: Thank you.

Operator: Thank you. The next question is coming from Mitch Kummetz with Seaport Research. Please proceed with your question.

Mitch Kummetz: Yeah. I just had a quick follow-up. On the women’s business, I just want to have a better understanding there, because that was up in the quarter. I think you said it Footwear was up mid-teens. Can you say how much of your business is women’s, can you elaborate on the strength of that business, particularly in Footwear, like how much of it is that, maybe there’s just a better underlying product trend in women’s or that you are better positioned to take market share there. And like what do you see the runway for your women’s going forward, like do you think there is continued opportunity for outperformance of that side of the business?

Jared Briskin: Yeah. Hey, Mitch. Good morning again. Jared. Yeah. I think, look, if we really go back and look at our history and the history of this industry, women’s really hasn’t been focused on. We took a significant approach in 2020 when we went through our merchandising reorganization that put a focus on each gender. We felt like women’s have the broadest opportunity followed by kids, since that point, we have more than tripled the women’s business. So feel great about what we are doing in women’s. Our — we have a hyper focused team specifically on women’s that we have added resources to and we are getting great focus from our brand partners on the women’s business. The women’s business very, very fast and trying to forward for us and our team has done an exceptional job on following those trends and getting the right levels of inventory and getting support from the vendors and we still see it as a big growth vehicle for us.

Mitch Kummetz: All right. Thanks again.

Mike Longo: Thank you.

Jared Briskin: Thank you.

Operator: Thank you. Our final question is coming from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser: Since I am the last one. I got a handful. The inventory cleanup that you are doing that you talked about, Jared, to get the quality better. Is this something where you are sort of being more aggressive during the holiday sort of to take care of it, well, the ducks are flying kind of situation?

Jared Briskin: Yeah. I think it’s really the approach is to remain targeted with regard to promotions. I mean we don’t — we are not in a position where we need to do this mass fire sale with regard to inventory, we are targeting the promotions in the right places and we will do our best to move through as much as we can here in the fourth quarter, put us in the best position as we go forward, but there certainly will be a balance around, how much we want to do versus how much will hold over into next year and then how much of the support we can get from our partners with regard to relief fund inventory. So multi-pronged approach. Again, I feel like the team is executing really well against that and we have made major strides.

Sam Poser: Thanks. And then, secondly, you called out Nike as doing quite well on the Footwear side. Can — do you — is there any positive call out on the Apparel side of the business. You would say, this category brand whatever that is doing well in a very difficult situation?

Mike Longo: Yeah. I’d say, right now our biggest driving category Apparel side is denim, denim has been a significant focus for us for a number of years. We continue to expand our presence in denim along with adding additional cat — additional products within the woven categories, both of those have been exceptional, continue to be a focus for us and we believe continue to be a differentiator in our business.

Sam Poser: Thanks. And then, Bob, on the share count. The currently — the fourth quarter share count, what number should we be using and then I just wanted to know about where you — where everybody sort of the loyalty program as well as far as new members and percent of business. I might have missed that earlier?

Bob Volke: Yeah. The end of the year share count is approximately 12.6 million diluted shares.

Sam Poser: I understand. But Q4 is going to be significantly lower than that. Is that like 11.9 million, is that, I mean, that’s to get you to just under 12.6 million, is that…

Bob Volke: Yeah. We don’t…

Sam Poser: I mean, that’s…

Bob Volke: We don’t give the specific guidance for the quarter. Just you can do the math on the difference.

Sam Poser: Thank you. And then on the loyalty.

Mike Longo: Yeah. Loyalty we saw growth in total active members that have anyone who has purchased within the last 12 months’ year-to-year. So we are continuing to see good growth there. Loyalty is over 60% net sales and as far as the break down, most of the growth in loyalty and a quarter it was driven by existing members shopping. When we look at new customers that number was slightly down, but the sales from new customers was actually up and that’s because of an increase in average ticket.

Sam Poser: Thank you very much and happy holidays again.

Mike Longo: Thank you.

Jared Briskin: Thanks, Sam. Thank you.

Operator: Thank you. Ladies and gentlemen, that does conclude our question-and-answer session. I’d like to pass the floor back over to management for any additional closing remarks.

Mike Longo: Well, thank you so much for your time and attention today. We appreciate it. We are pretty proud of the quarter, more to come and look going into this holiday season, I will leave you with the message, you don’t have enough sneakers or denim yet. So we will see you, your family and friends out in the stores this holiday season. Thank you.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.