Q3 2020 Earnings Call
Greetings and welcome to the Hibbett Sports <unk> third quarter 2020 earnings conference call. During the presentation, all participants will be to listen only mode. Afterwards, we will conduct a question answer session at that time. It. The other question. They supposed to one followed by the four on your telephone if at any time during the conference you need.
Reach an operator, please press star zero.
As a reminder, this conference is being recorded Friday November 22nd 2019, I would now like to turn the conference over to Jason <unk> Director of Finance and Investor Relations. Please go ahead.
Thank you for joining hibbett sports to review the Companys financial and operating results for the third quarter and first nine months of fiscal year 2020, which ended on November 2nd 2019, before we begin I would like to remind everyone that management's comments. During this conference call, which are not based on historical facts, including those in response to your question.
Things 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 should be noted that the company's future results may differ materially from those anticipated.
As discussed in the forward looking statements some of the factors that could cause or contribute to such differences had been just described in the news release issued this morning, and the company's annual report on Form 10-K , <unk> other filings with the Securities and Exchange Commission. We refer you to do sources for more information lastly, I would like to point out that management's remarks.
Works. During this conference call are based on information and understanding is believed accurate as of today's date November 22nd 2018, because of these time sensitive nature of this information is the policy exhibit sports to limit. The archived replay of this conference call webcast for a period of 30 days I'd now like to turn the call over to Scott I'm free our interim.
Chief Financial Officer, Thanks, Jason and good morning, everyone welcome to the Hibbett sports fiscal 2023rd quarter earnings call.
Today, we have with us, Jeff Rosenthal, President and CEO , Jared Briskin, senior VP, and Chief merchant and Cathy Pryor senior VP of store operations.
I'll start todays call what the prepared remarks on the third quarter, followed by Jared with a review of merchandising and then Jeff will cover highlights from the quarter along with the general business update.
As a reminder, we treat city year as an extension of the Hibbett business and the results will be reported on a combined basis as such it's not our intent to provide specific gross margin expense or other profitability metrics for the city gear business. However, I will provide actual revenue for city year until it isn't.
Incorporated into consolidated comp sales starting in the fourth quarter of this year.
The third quarter total net sales increased 27% to 275.5 million an overall comp sales increased 10.7 per cent compared to last year's third quarter of 0.1%. This was our fourth consecutive quarter of positive comparable sales.
Net sales includes 43.7 million for city here.
Our e-commerce sales continue to accelerate representing 10.5% of consolidated sales for the quarter.
We also successfully migrated city gears online platform to the Hibbett digital platform during the third quarter.
Year to date net sales increased 24% to 871.2 million through the first nine months the year compared to 702.7 million last year during the same period.
Year to date comp sales increased 5.4%.
City year sales account for 145.2 million of this increase.
Gross margin increased 20 basis points in the quarter. The increase was principally principally attributable to lower occupancy costs as a percent of sales due to the store closures. We have completed this year.
The occupancy cost reductions more than offset a decrease in project product margin percentage driven by higher E com sales, which tend to run at a lower product margin percentage then store sales.
Yes, GNS expenses predominantly increased from the addition of Citi Your expenses.
On a GAAP basis SGN, a as a percent of sales increased approximately 35 basis points versus last quarter.
Included in that she needs a charge from the contingent earn out valuation for the city your acquisition of 4.1 million in the quarter, which added a 148 basis points to the calculation.
As we discussed in note three of our 10-K the city gear acquisition purchase agreement included two contingent earn out payments based on city gears achievement of certain EBITDA thresholds for fiscal 2020 and 2021.
The preliminary fair value of the liability was included in other liabilities in the fiscal 2019 year and consolidated balance sheet.
Subsequent changes in the liability are recorded through current period earnings.
And based on current forecasts for city gear performance for fiscal 2020, and 2021. The earn out liability was increased 4.1 million as I mentioned previously we expect some continued volatility in this expense as we continue to realize the city year business opportunities.
Additionally, we incurred a net charge of 0.7 million related to the Finalization of the CEO retirement agreement. This amount was not removed from non-GAAP SDMA and represents an additional 25 basis points to SG named four cents to consolidate EPS in the quarter.
Consolidated earnings per share for the quarter was 13 cents per share compared with eight cents per share last year.
Including non-GAAP adjustments, our normalized consolidated earnings per share is 32 cents in the quarter compared to 14 cents per share last year.
A year to date basis, we have delivered fully diluted earnings per share. One dollar an 18 cents through the first nine months versus a $1.15 for the first three quarters of last year.
After non-GAAP adjustments, our normalized diluted earnings per share as $1.82 cents for the first nine months versus $1.21 for the same period last year.
Turning to the balance sheet. The company ended the quarter with 77.4 million in cash versus 121.2 million at the end of last year's third quarter, we had borrowings on our revolving credit facilities of 8 million related to the city gear acquisition and we continue to expect that to be paid off by the end of the fiscal year.
[noise] inventory increased 12.5% from last year's third quarter. The last year's number does not include city gears inventory.
Our aged inventory has improved as a percent of total inventory to 15.3% versus 18.3 at the end of the third quarter last year.
We spent 5.2 million in Capex as we opened four stores rebranded the core hibbett stores to city gear and made further progress on other capital initiatives.
Also the company purchased approximately 372000 shares for a total of $7 million in the quarter under our share repurchase program.
At quarter end, we had about 167 million remaining under the existing authorization.
So turning to our guidance based on the strength of the first nine months of fiscal 2020, and our fourth quarter expectations, we're updating our full year guidance with the following changes.
We now expect full year comparable sales increased in the mid single digits.
For gross margin, we expect the change in our overall rate to be in a range of flat to up 20 basis points, excluding the impact of nonrecurring items in both fiscal years, we expect non-GAAP gross margin to fall within a range of down 10 basis points to an increase of plus 10 basis points.
This estimate includes an assumption of liquidating additional store inventories late in the fourth quarter.
With respect to the S DNA rate as a percent of sales we expect an increase in the range of 60 to 80 basis points. However, excluding nonrecurring cost for both years, we expect non-GAAP EPS DNA rate to improve 60 to 80 basis points from the last fiscal year.
As a reminder, GAAP SG now includes an estimate for additional contingent earn out fair value adjustments.
And finally, we expect diluted earnings per share to be in the range of $1.55 to $1.65, which includes 75 to 85 cents per share for nonrecurring costs associated with the acquisition and integration of Citi year and cost with our accelerated store closure plan.
Excluding nonrecurring costs non-GAAP diluted earnings per share is now expected to be in the range of $2 in 30 cents to due to $2.50.
The company is not included 13 cents reduction in EPS for one time executive compensation costs related to the Ceos transition in its non-GAAP add backs to net income for these projections.
For Capex, we now expect to spend between 15, and 18 million compared with previous guidance of 18 to 20 million I'll now turn the call over to Jared for a review of merchandising. Thank you Scott. Good morning, as a reminder, in my prepared remarks are reflective of comparable store trends. This will not include Citi your stores until the fourth quarter.
We're very excited about the momentum in the business posting our fourth consecutive comp store gave Q3 was exceptionally strong as it relate back to school period impactful launch calendar and early fall apparel selling drove double digit comp improvement our results have been clearly influenced by improved engagement with our consumers investments in the footwear business.
And sharp focus on connecting our other categories back to footwear.
During the third quarter, our footwear business increased mid teens, posting our ninth consecutive quarter of comp sales gains mens womens and kids were all up double digits strength coming from strong loans calendar as well as strong results in our non launch business Nike sportswear. It was exceptionally strong during the quarter led by air.
Force won numerous mix air franchises, a strong launch calendar on Jordan retro and sportswear also led to significant gains.
This business was driven by easy ultra boost and MD.
Strong results were also achieved by Vas Brooks champion is an improvement in under armour footwear for back to school.
Apparel was up low single digits, all genders, and active where were positive, including a double digit gain and men's activewear T shirts in shorts were exceptionally strong early in the quarter, while fleece and base layer were strong with the latter part of a quarter license business was down double digit much of this decrease was plans as we have moved investment dollars.
The other categories accessories were positive mid single digits strong results around key back to school categories, such as backpacks lunch to bags and Sox drove our results.
Team sports business was down low single digits, but was on plan baseball softball, volleyball, and wrestling performed well and were positive soccer football were negative during the quarter.
As we head into the fourth quarter, we have momentum and confidence in our business. We are heavily invested in categories of products that are driving growth and that reduced our investments in declining categories inventory remained significantly fresher than a year ago period, and our assortments are more focused a connected than ever before I'll now turn the call over to Jeff Rosenthal.
Thanks yard and good morning.
We're quite pleased with our third quarter results are 10.7% increase in comparable sales in the third quarter represents our strongest quarter increase since the first quarter fiscal 13.
And our fourth consecutive quarter with positive comparable sales.
The business continues to perform very well as evidenced by the positive comparable performance in both our brick and mortar locations and our E Commerce business.
Sales growth growth has been made possible by our team execution of our strategic focus to lead was sneakers.
Towed ahead concept, so within our apparel team and team sports.
Since year has now been part of the Hibbett for one year and the acquisition will continue to enhance results through synergies as we can complete the integration.
We are very enthusiastic about our business going forward and are pleased to increase our annual sales and earnings guidance.
Our E Commerce business continues to outperform expectations as the business as now delivering over 10% of total sales.
Third quarter.
Was very busy as we can to continue to diligently transform our company.
Including but not limited to large improvements to e-commerce marketing and omni channel programs and the last 90 days, we have refreshed our entire websites and apps combined hibbett and city gear E Commerce added additional payment flexibility for our customer.
First launched same day delivery in several markets and grown our ability to communicate with our customers by double digits across all marketing channels.
The changes, we're making have resonated with our customers both store and digital comps saw sizable growth this quarter with our digital channel growing the fastest at a 52% comp.
Not only are that the changes we are making resonating with existing customers. We are also attracting new customers. This quarter, we saw a 68% increase and loyalty enrollments over the prior year.
We have.
Continuing progress and differentiating our retail experience. We will also continue to double down on providing the best merchandise and the most convenient shopping experience for our underserved markets.
As an example, we currently offer six ways to shop.
Go shopping out of store.
Additional e-commerce was ship to home.
Buy online pickup in store reserve online and pick up in store same day delivery and using our process. So when the rights of purchase coveted launched shoes.
Our seventh way to shop will be buying online and shipping to our stores. This will be available in the first half of next year. We will also considering some technology collaborations where we'll mix and match waves of shopping to produce new and exciting experiences for our customers.
Who knows how long this list will grow in the future.
But one thing is for sure pivot, we'll be ready to help our customers. However, they want or will want to be serves.
I cannot thank all the associates enough for their hard work and dedication to see our strategic vision come to life.
This has never been easy, but we have accomplished so many things together and transforming our company to a true omni channel retailer.
Thank you all.
Operator, we're now ready for questions.
Thank you if you like to Register question. Please press Star one followed by the four on your telephone you will hear with three Tom prompt took knowledge of request. If your question has been answered that you would like to which I registration. Please press star one followed by the speed once again, it's one for if you will like to register for question.
Our first question comes from Sam Poser with Susquehanna You May proceed with your question.
Good morning. Thank you for taking my question I just have a question on the Guy.
I have a question on the guidance.
It looks as if.
Can you give us some idea of how you're thinking about the store versus e-commerce in the fourth quarter I.
I guess number one and then I have follow up.
Yes, I think we're continuing to see growth in E com.
And have some exciting initiatives planned for fourth quarter, So I think.
You know planning on a continuing to be a big part of our growth story.
Understood, but I mean do you expect the stores to be positive.
Yes.
In Q3, yes, yes.
And then so if we so just just make taking the balance in the growth prospects here.
Looks as if you could come in.
Towards the low and of the increase.
Same store sales guide.
And bill.
Reach close if not beyond the to the top end of your guide.
Based on the ranges that you provided.
Gross margin industry.
Am I thinking about that wrong.
No I think that's fair I think we have taken a conservative view on EPS guidance that fourth quarter is going to be a little volatility certainly different than last year with the holiday schedule and the launch schedule and so we wanted to add a little conservatism to our outlook.
Thank you and then Jared how how much has the.
How does the launch.
Calendar for you.
Parents to.
Last year, and how well positioned sitting here now.
With the new.
Product from key vendors that.
They have not been treating them as well prior to your acquisition and sort of what are the expectations coming.
Out of sitting here for them.
Yes, and the volatility that Scott referenced on the launches is really more date changes.
Focused really along with the Thanksgiving shift.
We have some really really strong results during the third quarter, we feel like we're positioned really well when it comes to access the product along with allocations for both banners certainly a lot of work has been done to reinforce citic years positioning we feel like we have a very strong planned for Q4.
Alright.
I'll hop on again, thanks, so much heavier and congrats them.
Thanks, Thank you.
Our next question comes from Peter Benedict Robert You May proceed with your question.
Hey, guys.
First question just around the gross margin can you maybe.
Dive deeper and help us understand maybe how product margins performed in in Threeq, you and then how you're thinking about.
The product margin change within that fourth quarter guidance. That's that's my first question.
Yes, so in in Q3.
Strong.
Product margin on the store side.
Brought down a little bit by the increase in E. Commerce sales ecommerce tends to run a little bit lower on product margin then store sales.
But still a positive comp versus the prior year third quarter.
If you look at Q4 and of last year.
Have a.
About 150 basis point drop from where we came in in Q3 to what the comp is for Q4.
And so we feel really good about the things Jerry just talked about in our our cleaner inventory position going into Q4.
So the guidance is really based on a if all we were able to do was to repeat gross margin from Q3, we'd be we'd be in that range.
That we provided.
Okay. Then then so but the underlying product margins.
He's out because then I'll gross margin at some leverage there on occupancy with the strong with a strong comp but.
Core product margins were I assume are down a little bit and the third quarter and just.
Sounds like they're going to maybe be up in the fourth quarter, just want to make sure I've got that trajectory right.
Yes, so not down a little basically flat.
Okay.
Okay. Okay.
Thats helpful. Thanks, Scott and then I guess my next question is now that now that we're we've got sitting here.
In the business for year.
How how should we think about.
Kind of the pace of M&A growth going forward I'm, even thinking into maybe the next year.
What level of comp is required to.
To kind of either leveraged yesterday or really to maintain EBIT margins I.
I know.
Jeff mentioned, some synergies that are still on tap, but just really trying to figure out what.
How we should be thinking about the expense structure going forward. Thank you and.
So good question.
Our plan is to.
Integrate this city gear.
Corporate headquarters into Hibbett.
Basically at the end of this fiscal year and so we should be able to recognize some SDMA cost synergies from that integration that that's what Jeff was mentioning before.
I think.
So that I think is specific to city year, Yes, I think we're still in the middle of our budgeting process for next year and so taking a look we're taking a hard look at SG Nay certainly have a much.
Deeper discussion on this with you next quarter.
Once we get through that process.
Okay fair enough. Thanks, so much.
Thank you Peter Thanks.
Our next question comes from Jim Chartier, with Moness Crespi and hard to you May proceed with your question.
Thanks for taking my question.
I was just curious give us a little bit of color on how impactful shifting back to school shopping was for third quarter.
You know and back to school any shift in launches.
Tactful that might have been on third quarter as well thanks.
Yes, there was some launch shifting we referenced it on the Q2 call. So we did see some of that but through the quarter was really driven by the strength around our back to school assortment.
It was some of the business shift from July and August some of our key back to school category saw their peak weeks changes, we referenced on our last call, but the business in September and October .
It was a strong accelerator in September and October was very strong as well. So I don't consider the September and October business to be back to school related.
For hibbett with our early back to school. So we feel that was just general strengthen our business and execution of our strategy was very sound during that period.
Great and then on E Commerce, Where's profitability for ecommerce today, and then for city gear.
How quickly can that long term inhibit came out of the good I think I'd like to high single digit become penetration is that a reasonable expectation for sort of year now that it's on the platform.
Yes, I think thats, a reasonable expectation that.
The the numbers there so small and so.
The growth percentages, maybe maybe huge but it's going to take us a little time to get that.
Yet that to a meaningful number.
Yes, I think from a profitability standpoint, what you're talking about on.
On the E business E com business overall.
Yes, it is profitable, we're making money on E com.
As I mentioned earlier the product margin is definitely lower just because you tend to do more clearance.
Online than you do in stores and I mean, that's that's really been a driver for our cleaner inventory position this year as well.
So it's helping us in other ways.
Great Thanks, and best of luck.
We have a follow up question from Sam Poser with Susquehanna You May proceed with your question.
Yes, I was wondering well I don't know if you I might've missed at the beginning to call did you give.
Same store sales increase for the range of increased by month and if so can you give it to us.
No we did not and again, we're trying to get away from providing monthly.
Comp data because its with the.
The launch is moving around from year to year it gets very noisy.
And and so.
We prefer just to talk about the quarter in general because it gives you a much better picture of the overall strength in the business.
Okay and then.
What was every month above your expectations for the quarter.
Yes, it was.
And then can you get.
With BOPUS Opus could you give us some idea of.
How important that is becoming in your business what kind of.
How that may have aided the comp given that they given that they come into the.
Given that that does bring people into the stores.
Yes.
Sam who is running about 7% in the business. The good part of that part of that businesses. We have 20, plus attachment rates when people do come in around the Christmas period.
It.
Runs 20% to 30%.
Persona the business. The other thing that we did two is really the clarida, which we can.
By now and pay later that was also a significant part of our business as we can do to go we're not gonna be separating that out but it has enhanced our whole capability.
And then lastly were like on the continue.
Through all through the integration of sitting here and.
The various digital and.
The channel projects that you're working on.
Where do you think you are on the continuum of sort of.
I will never be exactly where you want to be but sort of.
You know being at a point, where you have like the at that foundation.
That.
Couldn't work off of.
Yeah, we feel like we have the foundation now it's just how how do we serve the customer better it's really about really how can we takeaway friction points for shopping we really have the foundation and delayed.
For the business to continue so it's not really about continuing to build that we're just continuing to add and trying to stay ahead of the market such as such as you know we have same day delivery now those are the type of things that who knows what it's going to be in the future, but it gives us so much we have so much capability.
Now that we have best of class technology that is very easily.
Able to bolt on or do other things and we have lots of ideas and we'll continue to.
Always advance it what are the things that the with the strategy that we've been able to accomplish in the last two to three years is really put that foundation and said that this company can grow not just their digital business, but the store business with a full omnichannel and.
So we're being very far behind word now the leader in some of those things that we can tend to say, we intend to stay there.
Okay and then thank you and then Jared Lastly, you mentioned in your prepared remarks.
Regarding under armour and other footwear business for back to school.
Can you give us some more color on that overall business.
Or.
Or was that mostly kids shoes.
No. It was it was across gender is actually.
It was cross gender and more focused men's and kids than women's.
We had a.
A nice assortment compared to the prior year from under armour in footwear that resonated with our consumer, particularly well it was nice to see some stabilization in that business on the footwear size with under armour.
How about on the other side on the apparel side, which I assume it's bigger.
Yeah, well it is bigger and I think it I referenced in my commentary around base layer.
The under armour apparel for us historically has been stronger as we get the cooler weather, we did see some of that towards both the latter part of the quarter.
But we have seen some stabilization in that business. The business has been is declined for the last couple of years, which we've talked through but we are seeing some stabilization in the apparel business as well, particularly in men's and kids.
Alright, thank you.
Yes.
Thank you. Thank you.
Our next question comes from Alexandra Parry with Bank of America Merrill Lynch. You May proceed with your question.
Hello, Thanks for taking my question and congrats on a really strong quarter.
Just first can you give us a sense of the apparel business and sort of what your expectations are for.
The fourth quarter and within that sort of what product categories seem to be working.
And then specifically have you slow down in a sort of logo, where Sri where type of product. That's that's been strong for while thanks.
No problem I mean, our apparel business was exceptionally strong, particularly on the activewear side men's business was double digit.
The logo, where in some of the trends that have been out there continues to resonate.
We are seeing some some movement between brands, which is normal course of business.
Our street business was exceptional our athletic brand business was exceptional.
Police business in particular was grade as I referenced T shirts in shorts earlier in the quarter were fantastic I think the big thing that's really driving our apparel business has really been sharply to focus around how we ensure that we're connecting with the lion share of our apparel business back to our sneaker business and how those outfit.
Coming to life from an in store perspective, that's the primary driver of our apparel business, we've upgraded our assortment, we're very very trend relevant.
And directly connected back to sneakers.
And our customers are telling us that they like the direction with the strong results.
Got you that's super helpful just to follow up.
Can you give us a sense on how do you think the promotional environment will play out this house holiday season, I guess, specifically sort of given the short and selling season is that sort of baked into your guide.
Yeah, it's baked in I think on via the marketplace, we expected to be promotional.
I wouldn't necessarily comment that it will be more promotion or the last year certainly it feels like it started a little bit earlier.
But our direction has been to really reinforce our assortment to stay as far away from a lot of those promotional categories as possible and really create a strong desirability for our apparel business.
That should not have to be.
Hi to promotional mechanism will certainly have promotions.
Our expectation based off the assortment that we have is that it will be scarcer, there what's out in the marketplace and readily available will not be promoted as hard as the rest of the marketplace. They will tie back to our really really strong sneaker business. So we feel very very good about our apparel business, where we stand today.
Gotcha and then just just one last one for me here.
Just sort of we look into the fourth quarter. It seems that you're sort of lapping a tough launch calendar and that possibly this year. The launches were more spread out between the third quarter in fourth quarter can you give us a sense on sort of how you sort of plan to lap that last year and any sort of nuances I guess between between.
Third or fourth quarters.
Yes, really not going to comment on nuances, we feel good about the loss calendar, we feel good about where we're positioned both from a hit that banner perspective, as well as city gear banner perspective.
Again from a nuance perspective, Theres always nuance there is always change.
There's always focus on certain models, we feel like we have a very strong plant.
That's really helpful best of luck.
Thanks.
As a reminder, if you would like to register for question. Please plus the one followed by the four.
Our next question comes from David North with GMP Capital You May proceed with your question.
Hi, Thank you for taking my question.
How much of the financing program for customers impact central sales in the third quarter.
It was a good percentage of our E com business, but we're not giving out particulars on that.
Okay.
Thank you.
Thank you.
We have no further phone questions at this time.
Great I would like to thank everyone for participating on today's call is a very exciting time to see our strategy come to fruition.
And we are positioned well to continue this into the future. We look forward to having you on our fourth quarter at year end call in March. Thank you.
That does conclude the conference call for today, we thank you for your participation. We ask that you. Please disconnect your lines. Thank you.