Hibbett, Inc. (NASDAQ:HIBB) Q4 2023 Earnings Call Transcript

Hibbett, Inc. (NASDAQ:HIBB) Q4 2023 Earnings Call Transcript March 3, 2023

Company Representatives: Mike Longo – President, Chief Executive Officer Jared Briskin – Executive Vice President, Merchandising Bob Volke – Senior Vice President, Chief Financial Officer Bill Quinn – Senior Vice President of Marketing and Digital Ben Knighten – Senior Vice President of Operations

Operator: Greetings, and welcome to the Hibbett Inc. Fourth Quarter Fiscal Year 2023 Earnings Call. At this time all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now like to turn the call over to Gavin Bell, Vice President of Investor Relation and Treasury. Thank you. You may begin.

Gavin Bell: Thank you, and good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the homepage or at investors.hibbett.com and under the News & 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-Q, 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.

Because of the time sensitive nature of this information, it is the policy of Hibbett Inc. to limit the archived replay of this conference call 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 City Gear Q4 earnings call. For those of you following along the slides, I’m on the slide three entitled results. Now before we get started, I would note that we’ve used FY’20 calendar 2019 as a basis of comparison for some time now because of the effects of the pandemic stimulus and all the other effects that you already know. Now that we’ve experienced a relatively normal seasonality last year, this quarter will be the last time we need to make these types comparisons. Q4 was a strong performance with a comp sales increase of 15.5% versus last year, an almost 40% increase versus FY’20. Operating margin for the quarter was 11.1% and diluted earnings per share was $2.91, an increase of 133% last year and up eight-fold versus FY’20.

Photo by Ashkan Forouzani on Unsplash

These results came from strong demand for popular footballer brands and a recovery in inventory levels. Despite that, these results did not meet our high expectations for ourselves and fell short of our guidance. We are going to address that particular issue through the course of this call, but first some history around the results. So I’m moving on to slide four entitled history. The last four years as you well know, have been eventful for all of us and Hibbett in particular, and while nobody needs a history lesson, it is instructed to review it through the Hibbett point of view. By the end of FY20 Hibbett was substantially complete with the transformation from a sporting goods retailer to a fashion retailer. A retailer that was squarely focused on a narrower, well-defined customer base in underserved markets, selling athletically inspired Footwear and apparel.

In FY21 of course, the pandemic struck and changed everything. Hibbett made some good decisions on how to navigate through the crisis, but those decisions drove the business higher, much higher. In FY’22, the reopening of the economy coupled with stimulus and market disruptions drove us another leg higher. And last year we dealt with the aftermath of the supply chain prices and its uneven effects, including inventory shortages. Since FY20 we have rebased the business at a higher level with sales 50% higher, gross margin percentage 300 basis points higher, non-GAAP EBIT dollars 3x times higher and non-GAAP earnings per share 4x four times higher. Last year we were able to consolidate those gains to produce sales of $1.7 billion and earnings per share of $9.62.

We achieved that by focusing on our three competitive advantages and by now are very familiar with them, but I’ll say them again. Superior customer service, a compelling assortment of hard-to-access product and a best-in-class omni-channel experience. It was our investment in these advantages and our strategy that drove our results, but none of this is inexpensive. With these investments came incremental cost, especially regarding managing in a chaotic environment. Now that we’re operating in a somewhat more than normal environment, it’s time to address our SG&A and some areas where costs have increased. As a result, we are conducting a systematic review of our operating expense structure with a particular focus on SG&A. In other words, we’re committed to improving operating cost leverage while still investing in the business model.

These investments are outlined in somewhat greater detail on slide five, entitled Strategic Imperatives. Our focus within that is to drive effectiveness and efficiency of the existing franchise and to drive growth in the future. And of course the four pillars category offense, increasing traffic, improving conversion and leveraging our investments are our strategic imperatives. So in summary, before I move on, I would like to thank all of our teammates in the stores, the distribution centers and the store support center. They are the ones who make all of these results possible. I’ll now turn the call over to Jared.

Jared Briskin: Thank you, Mike. Good morning. Please turn to slide six titled Merchandising. Our Category Offense continued to yield strong results in the fourth quarter. Intense focus on toe to head merchandising while leading with sneakers through the lens of Men’s, Women’s, Kids and City Gear has proven successful, and we see additional opportunities to optimize our business as we move into the future. We continue to believe that for the fourth quarter, due to the impacts of COVID and stimulus, the comparative fiscal took 2020 calendar 2019 is still irrelevant. Beginning in fiscal ’24 as Mike mentioned, we will no longer provide detailed commentary regarding the comparison to fiscal 2020. From a year-over-year category standpoint when compared to fiscal €˜22 calendar 2021, we saw strong results in Footwear and Team Sports.

This was offset by a weak performance across apparel. Footwear was our strongest category during the quarter, growing in the mid-40’s. Footwear sales were driven by strong launches, as well as strength across our Lifestyle, Basketball and Casual categories. Team Sports was driven by strong results in Cleats and Cold Weather accessories. Apparel was negative mid-teens of the quarter, up against significant increases in the prior year and a more challenging and promotional apparel environment. When compared to fiscal €˜20 calendar 2019, we saw positive comp results across all merchandise categories, but what drove the largest increase pumping in the mid-50’s. Apparel was up in the mid-20’s and Team Sports was up mid-single digits. Specific to Footwear and Apparel, Men’s, Women’s and Kids all showed significant growth when compared to fiscal ’22, calendar 2021.

Kids was our standout area growing in the high 20s. Men’s and Women’s, both through in the mid-teens. When compared to fiscal ’20 calendar ’19 Women’s grew in the mid-70’s, Kids in the low 50’s and Men’s in the mid-30’s. Investments in leadership, process improvement and technology in our supply chain have helped to mitigate challenges and product delivery and flow of inventory. These investments have increased our capacity and speed to market, enabling our strong inventory position and sales results. As a reminder, the prior year was significantly impacted by supply chain delays, primarily in Footwear, are in stock position of key Footwear franchises and launch products drove our strong Footwear results. Due to the supply chain disruption in fiscal 2022, we believe the most meaningful comparison regarding inventory is comparing to fiscal €˜20 calendar €˜19.

When compared to fiscal €˜20 calendar €˜19, inventory levels were up 46% at the end of the quarter, roughly imbalanced with our 40.9% sales gain. This increase is largely due to price inflation, as well as positive impacts on our mix of inventory and Footwear. When compared to fiscal 2020 calendar 2019 unit inventory levels were plus-4%. Our focus over the last three years was to secure enough for the most relevant inventory to provide a strong consumer experience, both in store and online. The chaos of the last three years certainly was challenging, but our team delivered and our results have been outstanding. As we look forward to fiscal €˜24, we believe that the supply chain will be more predictable, allowing more precision regarding delivery timing and inventory levels.

Year-over-year inventory compares will be volatile due to the challenges in the supply chain during fiscal 2023. Our expectations are for year-over-year inventory growth in the first half of the year and year-over-year declines in the second half of the year. I will now hand the call over to Bob to cover our financial results.

See also 12 High Growth Healthcare Stocks to Buy and 11 High Growth High Margin Stocks to Buy.

Q&A Session

Bob Volke: Thank you, Jared. Please refer to slide seven, entitled Q4 Fiscal ’23 Results. Our results are reported on a consolidated basis that includes both the Hibbett and City Gear brands. Total net sales for the fourth quarter of fiscal 2023 increased 19.6% to $458.3 million from $383.3 million in the fourth quarter of fiscal ’22. Overall comp sales increased 15.5% versus the prior year fourth quarter. In comparison to the fourth quarter of fiscal 2020, the most relevant period prior to the pandemic, comp sales have increased by 39.6%. Brick-and-mortar comp sales were up 14.3% compare to the prior year’s fourth quarter and have increased by 32.6% versus the fourth quarter of fiscal ’20. E-commerce sales have increased 21.4% compared to last year’s fourth quarter and have increased by 79.8% on a three year stack.

E-commerce sales accounted for 17.4% of net sales during the current quarter compared to 17.1% in the fourth quarter of last year and 14.2% in the fourth quarter of fiscal ’20. Gross margin was 35.2% of net sales for the fourth quarter of fiscal 2023 compared with 35.1% in the fourth quarter of last year. This slight increase was driven by approximately 30 basis points of store occupancy leverage, approximately 25 basis point resulting from lower freight costs and approximately 15 basis points of efficiency gains in our logistics operations. These favorable factors were primarily offset by a decline in average product margin for approximately 50 basis due to increased promotional activity. Store operating, selling and administrative expenses were 21.6% of net sales for the fourth quarter of fiscal €˜23 compared 26.4% of net sales for the fourth quarter of last year.

This approximate 470 basis point decrease is primarily the result of leverage from the higher current quarter revenue. Although wage inflation continues to be a headwind, other spend categories that were favorable to the prior years as a percent of sales included inventive compensation, professional fees, advertising and repairs and maintenance. Depreciation and amortization in the fourth quarter of fiscal €˜23 increased approximately $1 million in comparison to the same period last year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. We generated $50.7 million of operating income or 11.1% of net sales in the fourth quarter compared to $23.1 million or 6% of net sales in the prior years’ fourth quarter.

Diluted earnings per share were $2.91 for this year’s fourth quarter compared to $1.25 per share in the fourth quarter of fiscal 2022. We did not have any non-GAAP items in either period. Next, I will discuss the fiscal full year €˜23 results. I’m now referencing slide eight, so please move forward to that page. Thank you. Total net sales for the fiscal 2023 were $1.71 billion compared to $1.69 billion in the fiscal 2022, an increase of 1%. Overall comp sales decreased 2.2% versus last year. In comparison to fiscal 2020, comp sales have increased by nearly 41%. Brick and mortar comp sales decreased 4.9% for the year, but are up 31.5% compared to fiscal ’20. E-commerce sales increased 14% compared to fiscal ’22 and have increased by 115.5% over a three year period.

E-commerce sales account for 15.6% of net sales in fiscal ’23 compared to 13.8% in the prior year and 10.4% versus fiscal ’20. Gross margin was 35.2% of net sales for the full year fiscal €˜23 compared with 38.2% in fiscal ’22. The approximate 300 basis point decline was primarily due to the following factors; lower average product margin of approximately 195 basis points due to promotional activity, primarily in apparel and a higher mix of e-commerce sales which carry a lower margin than brick and mortar sales; increased cost of freight and transportation were approximately 65 basis points. This is driven by higher fuel costs and an increase in our e-commerce mix. Deleverage of store occupancy costs of approximately 65 basis points, mainly due to higher utilities and store security costs.

These unfavorable impacts to gross margin were partially offset by expense leverage of approximately 25 basis points in our logistics operations. SG&A expenses were 22.8% in fiscal 2023 compared with 22.6% of net sales in fiscal ’22. This approximate 20 basis point increase is primarily the result of deleverage in wages and employee benefits. Depreciation and amortization in fiscal ’23 increased approximately $8.1 million in comparison to the last year, reflecting our ongoing commitments to invest in organic growth opportunities and infrastructure improvement projects. We generated $168.4 million of operating income or 9.9% of net sales in fiscal ’23 compared to $228.2 million or 13.5% of net sales in fiscal ’22. Diluted earnings per share were $9.62 for fiscal €˜23 compared to $11.19 per share in fiscal ’22.

We did not have any non-GAAP items in either fiscal year. Now, a few comments on the balance sheet and cash flow. We ended the fourth quarter of fiscal ’23 with $16 million of available cash and cash equivalents on our unaudited condensed consolidated balance sheet and $36.3 million of debt outstanding. Effective February 28, 2023, we replaced our former $125 million unsecured credit facility with a new $160 million unsecured credit facility. This new credit facility increases our financial strength and provides us with greater operational flexibility. Net inventory at the end of fiscal €˜23 was $420.8 million, a 90.2% increase from the end of fiscal ’22. Much of this dollar increase has been driven by product cost increases, and unit volumes have grown at a much slower pace.

We also had a higher transferrable balance at year end compared to previous periods due to timing of inventory receipts throughout the fourth quarter. Capital expenditures during the fourth quarter were $15.4 million bringing the full year total to $62.8 million. Capital spend consists primarily of store development, technology and infrastructure projects. For the year our store count increased by a net of 37 units, comprised to 43 new locations and six closures. Our total store count stands at 1,133 as of the end of fiscal ’23. During the fourth quarter we did not repurchase shares as we focused our cash flow on investments and inventory and capital expenditures. On a full year basis, we bought back approximately 797,000 shares under our share repurchase plan at a total cost of $38.5 million.

We paid a recurring quarterly dividend during the fourth quarter in the amount of $0.25 per eligible common share for a total outflow of $3.2 million. For fiscal ’23 dividend payments amounted to $12.9 million. I’ll now turn the call over Bill Quinn to discuss our customer.

Bill Quinn: Thank you, Bob. Despite pervasive inflationary impacts, our customers continue to increase their shopping with us during the fourth quarter. Loyalty sales increased double digits, driven by double digit increases in shoppers and average unit retail. We see both increased customers and higher AUR as structural in nature, keeping our business rebaseline, well above FY’20. In Q4 we continue to see increased sales from new shoppers and most notably, large growth from our existing customers. We had more existing customer shop and who spent more per visit and they increased their visits. We believe these results were driven by our continued investments in the customer experience. Regarding this upcoming year, our consumer research indicates that our customers, like most U.S. consumers are concerned about various financial aspects of life, most notably food and utility cost.

When it comes to discretionary spend, we anticipate that customers will make reductions in entertainment, travel and eating out before reducing retail expenditures. Also, our research indicates that customers likely plan to spend the same or more as last year on Footwear and specific key brands. Turning to our e-commerce business, in Q4 sales increase 21.4% versus last year and 79.8% versus FY’20. These results were driven by increases in traffic, average order value and investments in our digital customer experience. Last year and this year our focus has been and will continue to be improving the digital customer experience by reducing friction points on two dimensions; one, improving the pre-purchase experience; and two, improving the post purchase experience.

Improvements to the pre-purchase experience include making it easier to find and discover products and making it easy to purchase. Our post purchase efforts remain focused on improving fulfillment speed and enhancing customer service capability to resolve issues quickly, as well as intercepting and preventing issues from occurring. I will now turn the call to Ben to discuss our store experience.

Ben Knighten : Thanks Bill. Our store culture is sales focused. The last two years, we’ve focused on developing and implementing tools to drive that culture. This includes investing heavily in creating a true mobile experience for both our consumers and our associates. Our store level infrastructure and systems required an overhaul to go mobile. This included ensuring every store had high speed internet, WiFi, multiple mobile devices and the apps required to deliver on that experience. The investments were significant, but were also required to achieve increased sales while lowering operating costs over time. The mobile environment enables process improvements to both customer facing and non-facing tasks. We’ve reengineered the way we operate.

This includes not only what tasks are done, but also how they are completed. Most importantly, we’ve redefined how we interact with the consumer on the sales floor. The things Bill mentioned about driving the e-commerce business also hold true for the in-store consumer. The investments we made allow associates to leverage the inventory process supply chain. They also improve the conversion rate, which lead to an improved consumer experience. This year is a payoff year. Much of the costs were front loaded. Now we can begin to leverage these investments. The productivity gains will allow us to take costs out of our model while improving our best-in-class omni-channel experience. I will now turn the call back to Bob to discuss our guidance.

Bob Volke : Thanks, Ben. The business outlook for fiscal ’24 is complex and constantly evolving. There are a number of challenges considered, but also a handful of tailwinds that will help to mitigate these headwinds as noted on slide 11. Inflation has a broad impact not only on consumer sentiment and spending patterns, but also contributes to operating cost increases in the form of wage pressure and higher prices paid for goods and services. We expect the promotional environment to be more significant than in fiscal €˜23 and we’ll be dealing with higher costs of borrowing and some intermittent lingering supply change disruptions throughout the year. On the flip side, low unemployment and higher wages provides consumers with more purchasing power.

We feel our inventory assortment has become much healthier in the past several months, and the unique and hard to find products we offer is expected to attract more customers to our stores and website. In addition, investments in store development, the customer experience and to back office infrastructure will begin to yield operating cost leverage as we move forward. Slide 12 summarizes fiscal 2024 guidance. Total net sales for the full year, including the impact of the 53rd week, are anticipated to increase mid-single digits compared to our fiscal 2023 results. The 53rd week is expected to be approximately 1% of full year sales. We anticipate full year sales will break down as follows: Approximately 26% in the first quarter, approximately 22% in the second quarter, approximately 24% in the third quarter, and approximately 28% in the fourth quarter.

Comparable sales are expected to grow in the low single digit range for the full year. Full year brick and mortar comparable sales are expected to grow in the low single digit range, while full year e-commerce revenue growth is anticipated in the high single digit range. It is anticipated that total comparable sales in the first half of the year will increase in the low to mid-single digit range and will be flat to up low single digits in the second half of the year. Net new store growth is expected to be in the range of 40 to 50 stores. We anticipate that fiscal 2024 will be more promotional than the prior year. In addition to higher mix of e-commerce sales, intermittent supply chain challenges and inflationary pressures on some elements of store occupancy costs will result in anticipated gross margin decline of approximately 20 to 30 basis points compared to fiscal ’23 results.

The projected full year gross margin rate of 34.9% to 35.0% as a percentage of net sales exceeds pre-pandemic levels. SG&A as a percent of net sales is expected to increase by approximately 40 to 50 basis points in comparison to the fiscal ’23 results due to new store growth, wage inflation and increased incentive compensation costs and higher data and transaction processing fees. The expected full year SG&A expense range of 23.2% to 23.3% of net sales is favorable to pre-pandemic levels as well. SG&A as a percent of sale will vary depending on the quarter as higher sales volumes allow us to more effectively leverage the fixed cost components of SG&A. Operating margin for the year is expected to be in the range of 9% to 9.3% of net sales, also remaining above pre- pandemic levels.

We do not expect operating margin as a percent of sales to vary significantly between the first half and second half of the year. And looking more specifically in the first half of the year, we anticipate first quarter operating profit percentage will be similar to the first quarter of fiscal ’23, while the second quarter will be a more challenging comparison to the prior year. Additional operating margin guidance for the third and fourth quarter will be provided at a later date. It is anticipated that there will be debt outstanding on our line of credit for a majority of the year. We believe borrowings will be more significant in the first half of the year as current inventory levels are not expected to decline significantly until after the back to school season.

Interest expense for the full year is projected to be approximately 25 to 30 basis points of net sales. Diluted earnings per share is anticipated to be in the range of $9.50 to $10 using an estimated full year tax rate of 24% and an estimated weighted average diluted share count of 12.7 million shares. We are projecting 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 our customer experience. Our capital allocation strategy continues to include share repurchases and recurring dividends in addition to the capital expenditures noted above. That concludes our prepared remarks. Operator, please open the lines for questions.

Operator: Thank you. . Our first questions come from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser : Thanks for taking my questions. Just a little – I have a couple. Just a little color on the inventory. It sounds to me, just based on what you said Jared, it sounds like the apparel inventory is €“ are you heavier in apparel right now, than in Footwear relative to need. Is that accurate?

Jared Briskin: Yes Sam, I think there’s obviously a little more struggle in Apparel right now. Consumer demand for Apparel in the fourth quarter . We certainly don’t see that necessarily changing anytime soon based off the level of inventory in the market and the promotional environment. So we certainly have some things that you know to work through. But the biggest impact of our inventory certainly is the price inflation and we want to ensure that we have an appropriate level of units to provide the best consumer experience that we can. So that’s where we sit today. The team is certainly focused on inventory productivity as the supply chain becomes, hopefully more normalized and more predictable. But Apparel is our toughest area at the moment with regard to liquidations of inventory.

Sam Poser : And just to follow up on that, you mentioned the supply chain. The supply chain in ’20, I mean, I understand there is going to be ongoing issues with the supply chain potentially in fiscal ’24. But isn’t it €“ I mean given all the craziness that happened last year, isn’t it probably still going to end up being a tailwind rather than a headwind.

Jared Briskin: Well, I think that this year as I mentioned, I think the predictability and the normalizing is something that our team is really looking forward to. The last couple of years with the chaos, you know planning inventory levels, tracking inventory, ensuring we have enough units for a positive customer experience was really, really difficult. As we go forward, we can be way more precise based on that predictability that will give the team a little bit more of a luxury to make decisions in a more timely manner than we have in the past. So yeah, I would agree with you. We would expect that to be a tailwind as we move forward.

Sam Poser : And then just two more things. Number one, you mentioned you know specific year-over-year numbers on the various merchandise categories. But you didn’t, you sort of gave a more vague one on team sports year-over-year. I wonder if you could just give us a more specific, what the change for year-over-year was in the fourth quarter for team?

Jared Briskin: Yeah, it was up in the mid mid-single digit area, largely driven by Cleats and then a positive impact around accessories for cold weather. Some of that frankly is due to some chaos and some of the cold weather accessory inventory the year prior from a compare standpoint, but it was in the mid-single digit area.

Sam Poser : Okay. And then lastly, in the gross margin and I’m not sure who this one’s for. In the gross margin, are you seeing some of your larger accounts basically cutting your margins like charging you more or cutting a discount or anything like that? And is that also impact €“ is that impacting the margins that you’re seeing or the gross margin items I guess.

Rob Volke : Yes, there’s some impact that we started experiencing last year, but I would say the bigger impact to the growth at this point is certainly the promotional environment and some of our liquidation efforts to ensure that our inventory remains healthy. As well as with the marketplace, as you know that the marketplace has been extremely promotional. So certainly in categories that have pressure on them, we want to ensure that we’re competitive.

Sam Poser : Okay. And then last, I’m sorry. Bob, in the first quarter you sort of gave a little direction. I’m assuming you’re expecting an increase €“ are you expecting an earnings €“ an EPS increase in Q1 and then a decrease in Q2. Is that sort of a way to think about it? The specific as you want to get would be greatly helpful.

Bob Volke: Yeah, I guess I’m not quite ready to be that specific Sam, but again, thanks for the question. I mean, I think we’re looking at here is again as we kind of feel like seasonality is starting to more normalize. Again, I think you go back and you look at that previous year’s, excluding kind of a couple pandemic years, and we did see that you know the first quarter is a fairly profitable quarter for us. So we expect that we’ll see you know a little bit of returning to that normalized, that’s what I said. Our guidance says, from our EBIT percentage you definitely will see something fairly similar to what we saw in Q1 of last year, but we do have a little bit, you know obviously additional interest as I mentioned as well going in, so there will be some impact on EPS as we move throughout the year.

Sam Poser : Thanks very much. Good luck.

A – Mike Longo: Thanks.

Operator: Thank you. Our next questions come from the line of Alex Perry with Bank of America. Please proceed with your question.

Alex Perry : Hi! Thanks for taking my questions. Just first, Jared I think like you just said marketplace extremely promotional. Is that all apparel and is there any buildup of footwear inventory; you know is there €“ are there pockets for footwear’s requiring discount. And then you know maybe on the gross margin guidance for the year, the expectation that 1H declines will be more significant than 2H as you work through that sort of elevated apparel inventory.

Mike Longo: Yes, the first part of the question Alex. Yeah, I mean the marketplace obviously has been very promotional around apparel, but really it’s been promotional around everything. There’s certainly been pressure on you know secondary or tertiary brands and franchises and footwear, and we expect that to continue as we go throughout the year, and the marketplace gets a little bit more balanced inventory levels. As far as the margin is concerned, I don’t think we’re seeing a huge difference between the first half and the second half of the year, so there’s a lot of moving parts obviously. We are you know talking about as Jared said, some of the promotional stuff, but we’re also going to continue trying to get more efficient with some of our other costs.

Obviously, store occupancy is one thing that we think that there’s you know still some headwinds when it comes to utility costs, but also if we can you know get to the sales figures we’re talking about, there’s some opportunity to get some leverage there as well. So I don’t think there’s a wide discrepancy between the margin as we work throughout the year.

Alex Perry : Great! So it’s fair to say that the sort of launch, you know the high heat footwear franchises from like a Nike or some of your largest vendors aren’t requiring a lot of markdowns. It’s more sort of the secondary tertiary brands. Is that fair?

A – Mike Longo: That’s fair, yeah. I mean the primary focus of ours is seeing excellent throughput, phenomenal liquidations, and we would expect that to continue, but there is some pressure on some secondary and some of the tertiary investments that you know we’ll need to work through it.

Alex Perry : Yeah, and then my last question is, can you just maybe talk about how the launch calendar for the first quarter stacked up versus last year or I guess another way of putting it? I think you were still dealing with some inventory issues on the footwear side through the later part of March last year. Is that sort of correct? So how should we think about you know will 1Q be driven by the same sort of unevenness of the inventory compares that 4Q is driven by?

A – Mike Longo: That’s correct. I mean, last year as inventory levels, you know where we began a year from the first quarter standpoint was not acceptable to deliver the experience that we looked to deliver to our consumers. That inventory really did not build and started getting to the latter part of the quarter, so that’s certainly a part of this year’s comparison, and the comparison and inventory will be you know significantly heavier to the prior year. As we get throughout the balance of the year that will level off as we get back to normal expectation of declines and inventory in the back half of the year.

Alex Perry : Perfect! That’s really helpful. Best of luck going forward!

A – Mike Longo: Thank you.

Operator: Thank you. Our next questions come from the line of Justin Kleber with Baird. Please proceed with your questions.

Justin Kleber : Yeah, good morning, everyone. Thanks for taking the questions. Just a follow-up on the gross margin. Bob, you’re expecting more promotions, higher digital mix, same store occupancy cost inflation, but you’re only forecasting gross margin down 20 to 30 basis points. So two questions there, what’s embedded from a product margin perspective in that guide, and then what are some of the offsetting levers you see in gross margin this year that will only allow the margin to dip 20 to 30 basis points.

Bob Volke: Yeah, so obviously Jared touched that. I think you know the promotional environment is clearly the biggest headwind against us this year so we’ve worked through some of the product categories. The flip side is, you know we are still looking at pretty significant sales growth year-over-year, and so we’re probably going to get €“ we expect, we anticipated that we’ll get some leverage out of store occupancy, and also we peaked in freight rates you know the middle of last year and we can €“ if I need to see you know some additional lowering of those costs, more efficiency within our own operations, so we think there’s some, you know some good news in the freight component as well. And so I think what you see is you know, despite the fact just a little bit of your product margin or register margin pressure, I think we can do some offsetting with continued efficiency in our logistics operation, store occupancy and some freight costs.

Justin Kleber : Got it! That’s very helpful color. And then just a bigger picture question on EBIT margins. Mike you talked about this focus on delivering operating leverage. I guess I’m just curious, you know if I go back a couple of years ago you had an investor meeting and you talked about 15 to 25 basis points of annual EBIT expansion. So, I mean do you think the business has reached an EBIT margin level that is sustainable and perhaps you can grow off this base after this fiscal year, or do you think operating margins are going to continue to drift lower here?

Mike Longo: Thank you. Yes, we did address that in the Investor Day. We do expect to continue to grow EBIT. But as you know, it’s not linear and so we believe that we have reached a new rebase in that 9% range and we grow from here, and we’ll continue to grow it towards 10%. So Bob, any additional color on that?

A – Bob Volke: Yeah, yeah, again I think there’s a lot of factors that have played into this over the last two to three years that obviously we would not have been able to foresee as we did our, you know that investor conversation a couple of years back. I agree with Mike. I think we are making a lot of investments in the business over the last year and with that came some additional costs of operations. Inflation has clearly been impactful across a number of different expense categories. Also, just kind of returning to more normalized business operations where people are traveling a little bit more and getting out into the €“ into events and meeting with the vendors. So a lot of that stuff has kind of come to roost now over the last 12 months.

We think we’re going to start again building back toward a higher EBIT percentage as we move forward. I don’t think it’s going to be an overnight you know significant blip, but again the commit we’re making is to continue to evaluate our cost structure and move that number up slowly toward as Mike said, into that 10% range again.

Justin Kleber : Got it. Okay, no that’s great to hear. And then just last question Bob, do you have any estimation on just what you’re thinking about free cash flow this year?

Bob Volke: Again, I think you know we still have plenty of cash necessary to execute the strategy, which is, you know buying back shares as we see the opportunity in the marketplace, intimidating as I said to invest $60 million to $70 million in CapEx. With our sales growth, with a declining inventory in the back half of the year, I mean I feel pretty comfortable with our cash flow position as the year progresses.

Justin Kleber : Great! Alright guys, thanks so much, and best of luck!

A – Mike Longo: Thank you.

Operator: Thank you. Our next questions come from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.

Mitch Kummetz: Yes, thanks for taking my questions. Mike, I guess my first question is for you. Using your prepared remarks you talked about falling short of plan in the quarter. I just want to make sure I am totally clear as to kind of where and why you had that shortfall, because it looks like it’s more on the sales side than the margin side, and then kind of the split between footwear and Apparel. I know there’s been a lot of talk on this call about how Footwear had a good quarter, at least the year-over-year increase with strong Apparel was down. But I imagine that was sort of expected as well. So I’m not sure that was €“ you know Apparel was worse than expected and so we’re sort of in line, but maybe just a little bit more color on kind of where and why you miss planned in the quarter?

A – Mike Longo: Thank you. So Footwear, we were very pleased with the performance. We continue to see good sell through as high heat is high heat; nothing’s really changed with that. There maybe fractionally lower sell-throughs, but still the compelling product assortment works. Apparel was a bit of a disappointment, not only in terms of units, but in terms of the price and the growth of it. So I think Jared did a good job of going through that a couple of times, but I think he’s going to follow me up in just a moment. In the terms of the total revenue, what we had modeled as everyone knows, and we talked about a higher AUR and a somewhat higher transaction number. So the shortfall really was you know in the transactions number. So Jared, do you want to

Jared Briskin: Yeah, that’s exactly right. When the shortfall came in the transaction number and we believe primarily attributed to the Apparel business, which was worse than our expectations. Certainly we’re not expecting a robust apparel business, but it was €“ it had a lot more pressure on it. Certainly as we talked earlier, the market was incredibly promotional, and you know consumers were spending their money in other categories with us. So I think, God! That added some pressure, to the Apparel business especially when we compare it to the prior year where there wasn’t much inventory available in the footwear.

Mitch Kummetz: Okay, that’s helpful. And then second question, I know you mentioned going forward you’re going to stop anchoring against 2020, but I hope you might indulge my question anyways, because when I look at the comp guide on ’24, its low singles. That implies a four year, like the low 40’s. And then when I kind of run your quarterly spreads in terms of kind of percentage of sales by quarter, I kind of back into at least or kind of pencil into like a Q1 comp on a four year, like you know in the low 30’s and then the balance of the year kind of in the mid-40’s. That’s a pretty big difference and I was hoping you might be able to address that a little bit?

A – Mike Longo: Yes, so I think you know again, every year has got a little bit of a different unique cadence than we over the last three or four years. So last year again as we’ve touched on a couple of times, inventory was not in a great position as we entered the first quarter. So as you think about tax season being one of our big kind of seasonal peaks, we didn’t have a great assortment for the customer. We didn’t do a great job of meeting the needs. So if we feel this first quarter is going to be stronger, and I do think that that’s why we’re kind of looking at the mix of sales being a little bit, you know heavier here as far as the first quarter is concern. So I think that does give you a little bit more ammunition as far as leverage in the first quarter, and we will see a little bit of lowering as the year goes on again.

Fourth quarter is a big year, we’re having a big quarter for us as well, but I also want to remind everyone the 53rd week is in that fourth quarter of this year, so that’s going to give a little bit of lift to the fourth quarter. But we do not see that 53rd week as being a very accretive week for us. It’s a relatively low sales week. We’re considering closer to a roughly breakeven type of scenario. So again, I think that your original question I do see for this quarter being a little bit stronger this year than last year clearly.

Mitch Kummetz: Okay, and then lastly, you know a lot of vendors have already reported their Q4 given their December year-end or not all of them are on a December year end, but a lot. Some of them have talked about having too much inventory and kind of working through that, through the first half of the year; a lot of that going kind of through their direct channels. I’m wondering if you’re seeing any impact from vendor discounting and a lot of them have talked about how that should improve in the back half of the year as they get their inventory kind of right sized by the back half. So I guess maybe just a two part question. One, are you seeing much competition from the vens being on sale direct, and I guess if so, does that actually kind of ease up in your plans as you kind of go through the year.

A – Mike Longo: Yes so €“ I mean the vendor direct pricing cadence, you know certainly during holidays was aggressive, but €“ you know so were the partner pricing promotion. So it really was a barking place. Overall that was heavily dependent on promotions and very active, again, especially in apparel. So overall there’s a significant impact with regard to the promotional environment. Certainly, the direct businesses are having an impact on that and my expectation would be as inventory does start to get a little bit more cleaned up and level out across the marketplace, reduced promotions, not just from the direct channels but also from our competitors, can hopefully put a little less pressure on the Apparel business in particular.

Mitch Kummetz: All right, that’s helpful. Thanks and good luck!

Mike Longo: Thank you.

Bob Volke: Thank you.

Operator: Thank you. Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.

Cristina Fernandez: Hey! Good morning and thank you for taking my question, I have a few. The first one is, I wanted to see if you could talk about how you approach the guidance for the fiscal year different than last year in light of not being able to meet your targets. Do you feel like you have enough cushion or conservatism in the outlook, you know in case the consumer environment remains as it is today’s through the rest of the year.

Mike Longo: Yeah, I mean, you know I think we go into each period with guidance thinking that we’ve got a good answer. You know we’re obviously not purposely targeting being overly aggressive or overly conservative. I think as we saw how the fourth quarter played out as we started to look at what we were seeing in the marketplace from some of the other companies that were putting out results and some of the commentary we made. Clearly we felt that there were some things that we needed to be a little bit more careful of pushing too far beyond the envelope, so to speak. So again, we still think that the guidance we are giving is fair and reasonable. I don’t want to say it’s going to be overly aggressive on one end or like sand bathing on the other end.

Again, we feel this is a reasonable approach for our business based on what we’re seeing for fiscal ’24. So obviously, a lot of assumptions into those numbers. Still some level of volatility, especially when it comes to consumer behavior and pricing and inflation, etc. So again, this is what we think is a reasonable approach for now. Obviously, if circumstances change, we will continue to update and modify that that guidance as necessary.

Cristina Fernandez: Thank you. And pushing a little bit more on the low single digit comp outlook, how are you thinking about that level of growth in relation to industry growth? I also wanted to touch on market share gains. Are you seeing those market share games from competitors who left the market, maybe you can pass out that outlook for the year in more detail?

Bob Volke: Yes, I think what we’ve seen so far in estimates is a lower growth rate overall for the next few years, than what €“ you know certainly what we’re guiding to for this year. And obviously what we’ve seen over the last four years since pre-pandemic has been a very significant increase in our business that is outsized compared to the market. So we certainly believe we picked up some share. We paid lots of investments in the business model to continue to pick up share. But again, based off the consumer environment and all the pressure points that are out there and inflation, we want to ensure that we don’t get too far over our skis with regard to expectations.

Cristina Fernandez: Okay, thanks. And then the last question I had was, I mean you mentioned that the higher e-commerce sales are headwind to the gross margin. Can you update us, I mean where €“ what’s difference in profitability between those two channels, between the store sales and the online sales?

Bill Quinn : Yeah, I can take that. So, this is Bill. We’re very pleased with the level of profitability of our e-commerce business. Profit grew in Q4 for our e-commerce business. A few things to mention €“ actually quite a few things we mention. So our product margin expanded in Q4. We managed our advertising very well. We leveraged our fixed costs that as Bob mentioned earlier, fulfillment costs were reduced and that was largely a function of AUR going up. So our freight expense was lower as a percent of sales. But overall, e-commerce will not be a drag on the company EBIT.

Mike Longo : So Cristina, just to kind of close that gap again, it’s pretty traditional that you’d expect at the margin level that e-commerce is going to have a lower overall gross margin level. Yes, overall gross margin result, then the brick and mortar becomes a fulfillment component. So even though we’re getting better and more efficient at fulfilling the e-commerce orders, we do believe that there’s a little bit of headwind, at least in terms of the mix change on the gross margin level. Again, as Bill touched on, once we kind of factor that growth in sales for the rest of the P&L, you start to gain that leverage back. So by the time you get down to the operating profit EBIT level, it’s pretty close to the same when you look at brick and mortar versus e-comm.

Cristina Fernandez: Thank you. That’s very helpful.

Mike Longo: Thank you.

Operator: Thank you. Our next question has come from the line of John Lawrence with The Benchmark Company. Please proceed with your question.

John Lawrence : All right, thanks guys. When you’ve been in the stores last few weeks and Jared you maybe can help me here, looking at the promos and one manufacturer I guess for a period of time was 50% off across the board, anything you buy. Some other guys, I guess your largest guys were just picking select shoes and putting them off at a $39.99 or but very limited skews. Is there anything changing in promo strategy, and is that across the board or just select story.

Gavin Bell : There’s definitely some changes with regards to the promo strategy. I mean, first and foremost we will have promos now where if you go back a few years, there weren’t any based on what was going on during the pandemic and post pandemic. But our strategies change some, where we’re looking at shorter periods, deeper marks to try and reflect the way the consumers are behaving now. And all these things are things that we’re testing to assure that the model we use for promotions gives us the right level of margin and the right level of liquidation as we move forward. But there are absolutely challenges with regard to our promotional strategy that we’re currently executing.

John Lawrence : Great, thanks. And lastly, just how much has the customer been able to split up the payments for payments for a period of time? Has that helped sales at all to reach some of those customers?

Bill Quinn : Yeah, this is Bill. I’ll take that question. We haven’t seen a major increase in that. Certainly, I don’t know if that’s a service we offer both in stores and online. I spoke earlier about customers being concerned about various financial aspects, grocery, utility, but a few things to re-mention or actually something I didn’t, which is the concern of unemployment is lower, so that is good. Also, our customers are going to cut back in other areas before they cut back in retail; travel, entertainment, eating out, and we €“ customers can continue to plan to buy more footwear than last year. And also, we’re confident in customer demand for our primary brands.

John Lawrence : Right, thanks. Congrats guys, and good luck!

Mike Longo: Thank you.

Operator: Thank you. Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt. Please proceed with your questions.

Jim Chartier : Good morning. Thanks for talking my questions. I wanted to follow up on first quarter. You know just given kind of a three year trend in fourth quarter, will kind of imply that first quarter comp should be up more like mid-teens and again, given the seasonality that you’ve talked about in the guidance, it looks like you know guidance applies something more like high single digits in the first quarter. So just curious, anything in terms of timing of launches or shifts that we should be thinking about, where again that three or four year comp trend should be softer in the first quarter.

Bob Volke: Yes, good morning. Yes, we feel like we haven’t modeled appropriately. I mean certainly launch calendar changes, all these things, you know that we have to deal with and look at. So we feel you know reasonably confident with where we sit today in the guidance that we’ve given, that we understand that calendar well, and we’ve anticipated any potential changes.

Bob Volke : Jim, one other thing I’d add to that is, we’ve probably all see the staffs comes out from the IRS. There was obviously some concern that the average refund might be a little bit lower this year. So I think again that’s also part of the factory we looked at in the first quarter.

Jim Chartier : Okay, make sense. And then, you mentioned you’re conducting a systematic review of the cost structure. I guess first, when do you expect to complete that review and then does your guidance assume any benefit from cost savings related to this year.

Mike Longo: It does. This is Mike. We began the process mid-Q4. We were able to achieve some of the results in late Q4 and of course, those trend began the year in week one. So it’s certainly helpful. All of the other things that we have on the table are in the plan and part of the guidance. So if we’re able to find additional cost savings, we’ll consider that upside from here.

Jim Chartier : Okay, and then finally, any thoughts or observation on the kind of new store performance that you kind of gotten to more of 3% to 4% store growth rate out of the new stores performance.

Jared Briskin : Yes, this is Jared. Our store development team, you know working with our merchants and ops groups that really doesn’t an incredible job of our new stores, our site selection has been fantastic. We continue to focus on the underserved areas that are very, very complementary to the market or incremental to our vendor partners and we’ve been very successful. So we do plan to take up the new store openings during the fiscal ’24.

Jim Chartier : Great. Thanks and best of luck!

Mike Longo: Thank you.

Bob Volke: Thank you.

Operator: Thank you. Our final questions will come from the line of Sam Poser with Williams Trading. Please proceed with your questions.

Sam Poser : Mike, I’ll apologize ahead of time for ending on this note. Last year, you missed guidance sort of consistently throughout the year. And so the question really is, is when we look, has there been a change in the way you’re approaching full year guidance now, sort of all things being equal compared to the way you looked at it last year. I guess that’s the best way to ask the question.

Mike Longo : Well, thanks for the question. I think we’ve weaved that answer into our script ,as well as hopefully the thinner of the answers to the questions that you’ve asked today. Certainly, no one puts guidance out there and expects to miss it. So our modeling and our forecasting and all the things that we believed going into the year, we continue to believe and we’re trying to hit it right down the middle of the fairway. We’re not trying to be conservative, we’re not trying to exaggerate. We’re not trying to poke the stock price. We are trying to give you a range that we think is within reasonable estimates. When we entered Q4, we had a lot of confidence. By the end of Q4 we were going to the systematic SG&A review for a reasonable, because we wanted to make sure that we can deliver on our commitments to this year.

We believe that our estimates and our guidance are reasonable. They’re within a reasonable range. No one’s happy about the performance. We put in writing, and we said again that we had high goals. I think you would prefer us to be someone who is attempting to attain those high goals, we’ll continue that. The guidance we put forth in for the future for FY’24 is believable, reasonable, and something we’re going to deliver on because that’s our commitment.

Sam Poser : I guess, Mike. Thank you, and I think my question really is the way you approach it this year versus the way you approached it last year. Are you taking sort of a more €“ I would say, are you talking a less optimistic. Are you taking a less optimistic outlook that you did. Again, if all things being equal than you did a year ago, that’s really the question or have you approached it differently. If you felt the same way you did last year. So this year, you did this time last year. I gather, you probably would’ve guided a little more aggressively a year ago. And so, I’m just trying to understand how things have changed with the way you’re looking at things internally now versus this time last year. How are you delivering messages?

Mike Longo : I think these €“ we are delivering messages in a similar fashion. You would note that the range of the guidance would be lower than you would have expected, right. So why? Because the situation has changed and the lack of clarity around the consumer has changed somewhat. So we’re operating a macroeconomic environment that’s a little different this year. So we are being more conservative this year.

Sam Poser : All right, okay, thanks very much. I Appreciate it.

Mike Longo: Thank you.

Operator: Thank you. There are no further questions at this time. I would now like to hand the call back over to Mike Longo for any closing remarks.

Mike Longo : Thank you for everyone attending today. Thank you to the management team. Again, thank you to our teammates to make all of it possible. We look forward to sharing with you in the near future of our Q1 results as we continue to invest in our business. We continue to invest in financial capital, human capital, and most importantly the consumer experience, both online and in stores. And that’s the thing that we’ll continue to focus on going forward. It’s the thing that delivers the results and the thing that’s uppermost in our mind. So thank you again, and we look forward to speaking again soon.

Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy your weekend!