Q3 2022 Hibbett Inc Earnings Call
[music].
Greetings and welcome to habits third quarter earnings results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during todays conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn this conference over to your host Mr. Jason Foothill director of Finance and Investor Relations. Thank you Sir you may begin.
Good morning, everyone. Please note that we have prepared a slide deck that we will refer to during our prepared remarks.
Dec is available inhibitor <unk> com via the Investor Relations link found at the bottom of the homepage Orient investors that hibbett dot com under the news and events section. These materials may help you fall along with our discussion. This morning before we begin I would 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 view 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 and discussed in the forward looking statements. Some of the factors that could cause or contribute to such differences have been disk.
Scribed in the news release issued this morning in the company's annual report on Form 10-K, most recent quarterly 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 would like to point out that management's remarks. During this conference call are based on information and understandings believed accurate as of today's date December 3rd 2021, because of the time sensitive nature of this information is the policy of hibbett to limit the archived replay of this conference call and webcast to a period of 30 days.
The participants on this call are Mike Longo, President and Chief Executive Officer, Bob Wilkey, Senior Vice President and Chief Financial Officer, Jared Briskin Executive Vice President merchandising Bill Quinn Senior Vice President of marketing and digital and been Knighton Senior Vice President of operations I will now turn the call over to Mike long ago.
Thanks, Jason Good morning, and welcome to the Hibbett Q3 earnings call if you're following along using the slide to come on the third slide entitled introduction.
I'll be relatively brief this morning, so that the team can go into greater detail on sort of topics of interest.
This quarter's financial performance was a strong outcome for the company.
Third quarter is always the hardest of the year. So we're very proud of the results we were able to deliver.
Specifically the Q3 comp sales increased 13%. This came from a combination of a double digit increase in both brick and mortar and omnichannel.
The two year Q3 comp increased 37%.
We also delivered operating income of $33 million and a diluted earnings per share of $1 68 and.
In spite of the much publicized global supply chain problems, we still managed to grow inventory nearly 23% versus the prior year and 19% just since the end of Q2.
We put capital to work through a combination of capital expenditures invested in our business model and the consumer experience by.
A substantial share buyback of one 4 million shares and of course our dividend.
Most importantly, we continue to attract high quality talent and continue to develop our people.
And that is after all of the most critical component of the business. The people that couldnt be prouder of the team whether they're in the stores or the distribution centers or the store support center. They all delivered on their commitment to the consumer and we're proud to represent them here today.
On slide four as we showed you in Q2 and previous to that we have a number of factors that we believe will have a lasting impact into the future.
Including continued improvements to our business model. Those are represented by a highly coveted selection of merchandise our enhanced customer service and further developments and our best in class Omnichannel experience.
Second additional investments in the consumer experience puts his store remodels and new store designs website innovations et cetera.
And new customer retention, which has been driven by improvements of the loyalty program and our marketing programs to include significant investments in our social media program.
Capitalizing on competitive closures and a reduction in distribution of key brands and by that we mean, our stores are in underserved communities, which effectively limits the amount of competition in our trade areas, but I'm going to come back to this in a minute and give you some further detail.
And then finally, an improved inventory position, which has benefited from the work we've done on our supply chain to increase capacity and the close coordination with our valued brand partners. This lift hasnt changed since the last few times, we discuss it and we are delivering on these factors now and in the future.
Again, we are excited to report these strong results and are bullish on our future.
But I do also want to put a finer point on that underserved community comment.
And so we're going to give you some data that we havent previously disclosed that I think would be interesting.
As of January 22, a couple of months in the future we are forecasting that better than half of our stores will have no competition within three miles they carry product from our key brands.
If you expand that and look at the stores with one or less competitors within three miles, let's figure increases to almost 70%. So I'll repeat that because this is new news and we haven't actually disclosed. This previously come January better than half of our stores will have no competition within three miles.
Does that carry product from our key brands and when you look at one or less that number jumped to 70%.
So remember these effects really don't begin in a meaningful way until January of 2022. So.
So we believe that this will be a significant factor for our success going forward I'll now turn the call over to Jared to go into greater detail on our merchandising performance. Thank you.
Thank you Mike good morning.
Turn to the merchandising slide.
For the third quarter, our merchandise categories.
Skus me of apparel footwear and team sports were all up double digits. Our focus on total head merchandising continues to drive results as we saw strong cross category connectivity drives improvement in items per sale and average ticket with a very strong back to school season across all categories and genders, when compared to last year's third quarter.
When compared to the third quarter of fiscal 2020, the results are even more impressive.
All genders and categories were up double digits to fiscal 2020 with the kids business just below 50% growth in the women's business more than doubling.
We're very proud of these results and believe this achievement is coming as a direct result of the strategic shift in our merchandising organization that we deployed last year.
As a reminder, we evolved from a traditional category structure of footwear apparel and team sports two focused teams and leadership over our men's women's kid's and city gear businesses.
Our apparel business increased in the mid teens drivers in the apparel business remained color and material connected tops and bottoms sneaker connectivity and Paul to small connectivity from adults to kids sizing from the athletic brands, we continue to see strong demand for lifestyle product, especially fleece tops fleece bottoms and.
T shirts.
Our fashion brand performance continued to be very strong fleece tops and bottoms were drivers in the category, but our performance in denim was the standout we made a significant investment in denim and supported the investment through a strong cross functional effort with our visual operations and marketing teams leading to a fantastic results.
Licensed business continued to perform extremely well our merchants did an exceptional job connecting the licensed products back to sneakers and to our seasonal stories van business also improved in the quarter as some of our local teams such as the Atlanta Braves, and Georgia Bulldogs performed well socks, sneaker accessories bags and sunglasses.
Had strong results during the quarter offset by a pandemic related items, such as masks in the year ago period.
But we're business increased in the low teens.
Man for classics, and basketball footwear remains incredibly strong and then short supply across the market. We're running continues to perform well as more consumers continue to explore the category sandals in slide show significant growth in the quarter as we broadened our assortment and investment casual fall footwear was also exceptionally strong.
During the quarter.
Specific to footwear and apparel all genders were positive led by growth in the twenties for women's and kids.
Inventory ended the quarter up 22% to last year and is very fresh we are very confident with our inventory position to deliver the results outlined in our guidance and are incredibly proud of our efforts to improve our inventory position in the current environment.
We accomplish this by working closely with our vendor partners to secure a substantial increase in our order book.
Securing incremental product from our vendor partners in season, improving our priority with our vendor partners regarding shipping and increasing our capacity by more than 50% within our own supply chain.
We expect to end the fiscal year with year over year inventory growth in the mid to high single digit range, and we'll continue to prioritize inventory growth and consumer experience over cost.
As we look forward into the first quarter of fiscal 'twenty three we expect the supply chain to remain challenged and very fluid, we're working tirelessly to mitigate these challenges.
While we continue to believe the challenges will persist and achieving our optimum level of inventory might be a challenge, but we are expecting to deliver a significant increase in new receipts compared to the first quarter of fiscal 2022.
I will turn the call over to Bob Bogey.
Thanks, Jared and good morning, if you will please refer to the sixth slide titled third quarter fiscal 2022 result.
As a reminder, our results include both Hibbett and city gear and all results are reported on a combined basis.
For the third quarter total net sales increased 15, 2% to $381 7 million in consolidated comp sales increased 13%. This compares to third quarter fiscal 2021 sales of $331 4 million and a comp sales increase of 21, 2% over two year period, our comp sale.
<unk> have increased 37, 4% brick and mortar comp sales were solid during the third quarter coming in at 11, 6% increase versus fiscal 2021, and a 31, 6% increase relative to the third quarter of fiscal 2020.
E Commerce comp sales were up 22, 3% compared to last year's third quarter and reflected an 84, 2% comp versus the third quarter of fiscal 'twenty.
E Commerce sales accounted for 14% of net sales in the most recent quarter compared to 13, 2% in the prior year third quarter and comparing the third quarter of this year to the third quarter of fiscal 'twenty. The mix of ecommerce sales was approximately 350 basis points higher or.
Our GAAP gross margin declined to 36, 3% of net sales compared to 38, 3% in the prior year third quarter. This approximate 200 basis point decline was primarily due to increased freight and transportation costs, which more than offset leveraged from store occupancy expenses.
<unk> adjustments to a noncash inventory valuation reserve last year. The current year gross margin of 36, 3% is comparable to the non-GAAP growth margin of 38, 1% in the prior year.
Our operating selling and administrative expenses, excluding depreciation and amortization were 25, 2% of net sales in the third quarter, which was approximately 90 basis points below the 26, 1% reported in the third quarter of last year. This decrease was primarily the result of leverage gained from the strong sales increase and improved labor.
Management, excluding certain city gear acquisition integration expenses that occurred last year SG&A expenses of 25, 2% of net sales for the most recent quarter decreased by approximately 80 basis points from adjusted SG&A expenses of 26% of net sales in the prior year quarter dipped.
Depreciate depreciation and amortization increased approximately $1 4 million from last year, reflecting increased capital investments on organic growth opportunities in infrastructure project.
On a GAAP basis, we generated $33 4 million of operating profit or eight 8% of net sales, which compares to last year's operating profit of $33 2 million or 10% of net sales, excluding all non-GAAP adjustments during last year's third quarter or $33 4 million of operating income this year compared to operating income of $32 seven.
In the third quarter of fiscal 'twenty one.
GAAP diluted earnings per share were $1 68 for this year's third quarter and did not include any nonrecurring items in last year's third quarter GAAP diluted earnings per share were $1 47.
And adjusted diluted earnings per share were $1 45.
I will now have you move forward to the year to date results page on slide seven on the <unk>.
Year to date basis sales increased 25, 4% to 131 billion, which is up from $1 $4 billion over the first nine months of the prior year and compares to 87 eight.
<unk> hundred $71 $2 million reported over the first nine months of fiscal 'twenty compared to fiscal 2021 comparable sales increased 24, 1% brick and mortar comparable sales were up 29, 6% and ecommerce sales reflected a slight decrease of two 9%.
E Commerce represented 12, 8% of total sales during the first nine months of the current year compared to 16, 6% of total sales in the comparable period last year relative to two years ago total comparable sales increased 51, 9% brick and mortar comparable sales increased 45, 4% in E. Commerce sales grew 111.
One 8% over that same two year time period.
Our year to date GAAP gross margin was 39, 1% of net sales compared to 35% for the first nine months of fiscal 2021, reflecting product margin strength, a lower mix of ecommerce sales and leverage of store occupancy costs, excluding adjustments to a noncash inventory valuation reserves last year. The current year gross margin.
A 39, 1% is comparable to the non-GAAP gross margin of 35, 3% in the prior year for.
For the first nine months of fiscal 2022, SG&A expenses were 21, 5% of net sales compared with 26, 4% of net sales in the first nine months of last year, excluding 30, certain city gear acquisition and integration expenses and pandemic related impairment and valuation costs that occurred last year current year SG&A expense.
A 21, 5% of net sales reflected an improvement of approximately 110 basis points from adjusted SG&A expense of 22, 6% over the first nine months of last year.
On a GAAP basis, we produced $205 $1 million a year to date operating profit compared to last year's operating profit of $67 4 million, excluding all non-GAAP adjustments in the prior fiscal year, our year to date operating profit of $205 1 million, representing 15, 7% of net sales is comparable to adjusted operating profit of 100.
$10 2 million or 10% 10, 6% of net sales over the first nine months of last year.
GAAP year to date diluted earnings per share were $9 74 for the current year compared to $2 98 in the first nine months of fiscal 'twenty, one excluding all non-GAAP adjustments in the prior year to 974 of diluted earnings per share. This year compares to $4 74 for the same period of fiscal 'twenty one.
Driven by strong sales robust margins and leverage of SG&A expenses, we generated operating cash flow of approximately $112 million on a year to date basis, and we spent $43 9 million in capital, which was largely related to new relocated remodeled and expanded stores plus various infrastructure projects. During the first nine months of fiscal 2020.
Two we've returned over $245 million in cash to our shareholders. We have spent $238 3 million repurchasing nearly 3 million shares and paid out seven five.
$7 5 million via our regular recurring quarterly dividend that was initiated in June of the current year.
Specific to the third quarter the company repurchased just over one 4 million shares at a cost of $117 8 million.
Turning to the balance sheet, we ended the quarter with $29 8 million in cash and cash equivalents, which was down from $176 8 million at the beginning of the quarter and $177 7 million a year ago, our entire $100 million of borrowing capacity remains available to us as of the end of the third quarter net.
Net inventory ended the quarter at 258, 8 million or 19, 4% increase from the beginning of the quarter and a 22, 8% increase from last year's third quarter ending balance consistent with comments. We've made previously we continued to strengthen our relationships with our vendor partners and work collaboratively with the entire vendor community to build and strengthen our.
<unk> position.
Next I'll review, our updated fourth quarter and fiscal 'twenty two guidance on the eighth slide entitled updated guidance.
Given the strong performance experienced year to date, we are updating our financial guidance for the fourth quarter of fiscal 'twenty, two which ends on January 29, 2022. This update is influenced by several factors as we have previously mentioned, we attract and retain new customers throughout fiscal 'twenty, one due to pent up demand market disruption and government stimulus.
We have continued to attract and retain new customers for the first nine months of fiscal 'twenty, two and feel that our business model will provide us the opportunity to continue building on this trend in the future. We expect that accelerating consumer adoption of E. Commerce will continue to drive growth across our best in class Omnichannel platform. Both factors. In addition to our strong vendor relationships.
And ships and targeted purchases by our merchandising team have us well positioned to take advantage of expected increases in our business.
Net double digit unit store growth improving the in store consumer experience. In addition to supply chain and selling initiatives should also help drive sales growth.
We are now forecasting comp sales for the fourth quarter to be in the positive high single digit range, which is an upward revision from previous guidance and implies full year comp sales percentage growth in the positive high teens.
We expect gross margin performance will be lower in the fourth quarter of fiscal 'twenty two in relation to the fourth quarter of fiscal 'twenty, one which is consistent with previous guidance due to headwinds on freight and shipping costs and a potential increase in promotional activity. We continue to expect gross margin will be favorable to both the GAAP and adjusted fiscal 'twenty, one gross margin percentages on a full year basis.
SG&A is expected to decline as a percentage of sales in the fourth quarter of fiscal 'twenty two in comparison to the fourth quarter of fiscal 'twenty. One and is also anticipated decline as a percent of sales in comparison to both GAAP and adjusted SG&A in fiscal 'twenty, one on a full year basis, which is also consistent with prior guidance.
Lastly, diluted EPS for the fourth quarter is forecasted to be in the range of $1 85 to 205, which implies full year diluted EPS of $11 70 to $11 97. This is an upper revision versus our previous outlook for projected diluted EPS of $11 to $11 50.
Our full year diluted EPS forecast assumes an effective tax rate of approximately 24% and a weighted average diluted share count of approximately $15 $7 million, we do not anticipate the difference between our GAAP and non-GAAP results will be material for the current fiscal year.
From a capital expenditure capital expenditure perspective, we remain committed to investing in our business.
<unk> built a pipeline of attractive investment opportunities for the remainder of the year for the full year of fiscal 'twenty. Two we reiterate our plan to invest approximately $70 million focused on a granite organic growth opportunities that we believe will lead to incremental sales and profitability in future periods and also on strategic infrastructure projects that will enhance our.
Store operations distribution and back office efficiency.
We believe that these investments will assist in attracting new customers, retaining both new and existing customers enhance the customer experience in stores and online and modernize our technology and processes.
In addition to our capital expenditure plans, we intend to opportunities Opportunistically allocate capital to share repurchases and currently have approximately $398 million available under our share repurchase program. We also remain dedicated to returning capital to our shareholders in the form of our regular recurring quarterly dividend of <unk> 25 per share.
That concludes our prepared remarks, operator, please open the line for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is another question queue. You May press Star two if you would like June will be a question from the queue for participants using speaker equipment and may be necessary for you to pick up your handset before pressing the star keys.
And to the usual Q&A, we'll also be taking questions over the webcast participants on the webcast can ask a question by clicking on the question Mark icon typing the question in cooking.
One moment, while we poll for questions.
Our first question comes from the line of Sam Poser with Williams trading you May proceed with your question.
Good morning, everybody. Thank you for taking my questions happy holidays.
Can we talk a little bit about the gross margin and can you give us some details or some more details on.
It's sort of the merchandize margin versus the fixed cost versus thats great.
So we can understand sort of the overall health please.
Hey, Sam it's Bob.
So we don't get into specific percentages on those buckets, but again I guess as we've said before just to remind everyone. We kind of break things down into kind of product margin.
The transportation piece as well as the.
Store occupancy so I would say it on the product margin piece.
Pretty solid we've been pretty consistent from quarter to quarter on the product margin side. This is a little bit of a lower sales our quarter. So we do get a little less leverage from the store occupancy side, and where we really saw kind of the headwinds as we expected and we've been talking about over the last several quarters is starting to see some of that transportation and freight costs.
Increased a little bit as we get.
Deeper into the year, so that's kind of how how margin breakdown for the current quarter.
So if we compare Q3 to Q2.
Your merch margin was product margins.
Remained high or did they improve from Q2.
I'd say they were pretty flat.
And then so that's up significantly year over year, you're you've got a little less leverage on your.
Occupancy.
And then to what degree was transportation.
As an impact to gross margin worse.
In Q3 than it was in Q2.
Again, I think that when you look at kind of the decline from Q3 to Q3 from Q2 to Q3 that would we would say most of that is driven by the freight and transportation component.
Okay. Thanks, and then.
When were looking ahead into fiscal 'twenty three.
You're not guiding but you did mention I think Jared mentioned that.
The closure that youre going to get some benefit from.
Some vendor decisions.
And you know your store your.
Stores less less stores with competition around you would.
Would you anticipate that looking into 'twenty three that you could.
But you could get close to a positive comp for the year given sort of the extraordinary comps that you've run this year.
Absolutely. Good morning, Sam This is Mike and happy holidays to you as well the answer to your question is yes.
So.
We are.
Not going to go into a great.
Deal of detail on next year, but I am very comfortable <unk>.
Looking about this part of next year on the sales line.
So if you were to look at the headwinds that <unk> puts and calls the pluses or minuses.
So on the headwinds the negatives, we're gonna comp as everyone knows against stimulus, which was significant and it impacted Q1 and to some degree Q2. So those are headwinds we have a little bit of.
Concern over share of wallet, the rotation out of buying goods and it moving into services and experiences.
We're not that worried about that but it certainly will be a factor over the mid and long term. So those are the headwinds the tail winds are what we spoke to on the competitive set and the changes in distribution, which you yourself have written extensively about so if you take those and you extrapolate them out.
We think that that is a significant tailwind for us and as I went to some pains to detail in my earlier remarks that really won't and a substantial amount show up until January of 2022, which of course is next this will be at the beginning of next fiscal year.
I'd add to that the tail winds of our customer and our ability to retain that customer in our loyalty programs and the marketing that we're doing around it to include the social media I'd.
I'd add to that a third point, which is all of the improvements in the business model.
The capital expenditures that we basically tripled over our run rate. This year are being reinvested in the business. Some of that's for sure a catch up.
Most of it has to do with an improved consumer experience, both at brick and mortar as well as the Omnichannel and digital experience.
Additionally, that will drive some digital strength part of the digital strength will come from we've got a better mousetrap. We just have a better experience. We've got a better website, we rank very highly if not at the top of all the websites.
In our universe and in the country and I say that with no degree of modesty.
I will also point out that our inventory position is not only going to help our brick and mortar sales, but our e-commerce sales as well because we were significantly impacted last year. So we want the inventory to recover and we're working very hard to do that as our major brand partners.
That's going to have a great effect on ecommerce sales and brick and mortar sales next year. So when you sum all that up and you do the puts and the calls we've got a positive comp next year and we feel very confident about that.
Thank you.
If I could just follow up on.
Look priority.
With your vendors.
The supply chain delays and <unk>.
And everything else and with some of the vendors increasing their focus on direct to consumer how are you.
Asia Europe, how to what degree is your priority changing with the major vendors and.
And and.
If you could just.
Expand on that.
Jared probably had something to say about.
Yeah.
Yeah, Hey, Sam Good morning, happy holidays to you.
Thirdly, we're very confident in our positioning with the vendors and how our priority has been elevated in Mike's opening remarks, he talked a lot about our focus on underserved markets in an underserved consumer.
And that's very valuable for our brand partners in conjunction with all of the distribution changes that the brands are deploying.
That leaves us in a very very strong position to recapture sales and to essentially in the majority of our market to be the only distribution point for all of our primary brands and that has significantly elevated our positioning with the brands and to focus on our business, especially with regard to inventory and some of it.
The impacts and supply chain.
Thanks, and if I can do one last one changing the subject.
Of.
Your payroll costs at store level.
Oh.
And the ability to.
Appropriately staff the stores.
Two.
To optimize the sales in the stores.
My checks on some markets there may have been some issues in regard to.
In regard to that.
Yes, Sam this is been 19, and I think I can speak to that a little bit.
To your point, you have individualized markets going to react differently and we face those challenges.
General tightening of the labor market, but thats not really new riders retail began reopening.
Everybody's going after after that labor component and so we've seen some incremental cost in wage because of that.
But we've also put in place some tactics to mitigate that and specifically you know with our sole school in which we partner.
With our vendors on.
That really opens us up to a little bit younger aged employee right and so we lowered our minimum.
Hiring H to 17, which allows us not only to.
Go into our sole schools and talk about EBITDA in retail in general, but to give them the opportunity to come and actually experienced that and work with us and that's been a huge success for us. They are also our customer of course, and you know our target consumer and so that's.
That's been received very well.
You also have to kind of take a look at the overall compensation rider is not only the the wage itself, but the other components the benefits associated with that including the discount quite honestly and the consumer or the employee that we go after.
What they value wage being a big piece of that no doubt, but also the other environmental factor of where you work and so you know.
We're actively managing that our wage and our payroll is in line with kind of our expectation.
And we think we can manage that on a go forward basis.
Thank you very much and all the best happy holidays again.
Thank you.
Our next question comes from the line of.
Jim Chartier with <unk> Crespi and hard you May proceed with your question.
Good morning, Thanks for taking my questions.
First Bob I was wondering if you know the.
The freight and the transportation cost headwinds how do you see those trending over the next two or three quarters.
Again I think.
Okay.
My expectation is that we are going to still continue to see a little bit of pressure on that I don't think it's going to be significantly more than where we are today. We are doing a lot of things internally to try to mitigate some of that we've got some ways to move product through the system internally to our own business.
Again, we've been saying this for a couple of quarters kind of waiting for some of these.
Trends to kind of kick in as.
As far as.
Wade or rates.
Rates and things like that I think we might see some additional price increases into fiscal 'twenty three but again don't think it's going to be a substantial headwind beyond that.
Great.
Yes.
Share repurchase clearly very significant this quarter.
Are you guys willing to take on debt to buy back more stock.
I think that's to be determined we obviously have we look at capital allocation around here on a regular basis first and foremost is we want to invest in our business.
Want to continue to put money into projects that are going to generate additional opportunities for revenue and profitability in the future.
If we feel that there is an attractive opportunity out there to buy back shares we will certainly do that.
When it's prudent.
Do have that backstop, if we need it but at this point in time, Thats again still to be determined.
Okay.
Then like you said third quarter is the toughest quarter of the year. Just wondering if you could give a little bit more detail around why that is.
Why things might get better in fourth quarter.
My General comments about Q3, or just having been in this industry for over a decade, it's just a lowe's relatively low sales period was relatively lower gross margins.
Back to school is the only single event in the whole thing Youll have a homecoming game here or there, but events drive business and back to school is.
Skews towards Commoditized business away from a fashion business and so it's just a little less exciting.
Don't make too much of a comment. It's just that Q2 Q3 are typically you look every year as it is the combination or the low sales period. So Q1 dominated by tax season Q3 dominated by the holidays, Jerry do you want to jump in there.
Yes, I think that.
It's pretty accurate I just would highlight one additional comment.
From Bob's remarks, with regard to the freight but the other thing to keep in mind is we are processing a significant increase.
Receipts coming through our facilities, obviously the work we've done with our vendor partners in securing inventory is helping us to build the inventory at a significantly higher revenue level that we've been at historically, so that is necessitating us the process a significant level of receipts, which is also having an impact on our freight and transportation costs.
Alright, that's very helpful. Thanks, and best of luck and add to that the fact that outbound was significantly higher than both inbound as well as sales. So you've got a rate increase which we've done a good job talking about in this conversation, but Gerry brings up a great point the volume part of freight was significantly higher in Q3 than any.
Time in recent history. So you had a rate problem as well as a volume problem. The right problem will continue into the near future at some point that'll normalize everything comes back to the mean at some point, but the volume problem won't persist at this level. So that's a great callout by Jerry Thank you.
Alright, thank you.
Our next question comes from the line of Cristina Fernandez with Telsey Advisory Group you May proceed with your question.
Hi, Good morning. Thank you for taking my question I wanted to see if you could talk about.
The composition of the inventory incentives the flow of receipts over the next year.
Two quarters I think Jarrod name. It's interesting you mentioned that you expect to have more fresh inventory receipts in the first quarter of next year, but perhaps you can.
Expand on that and how that will affect us.
There is a high tech product launches over the next two quarters.
Yes.
Yes, certainly good morning.
Thank you for the question, Yes, I think first and foremost.
Our teams collectively and working with our partners have done just an incredible job of reacting to our higher sales volume to continue to get access to inventory. We are certainly very proud of what we were able to achieve with regard to our increase in inventory in the third quarter year over year, but as well as our increase in <unk>.
Centaury from the third quarter relative to the second quarter.
There are certain leasing challenges as everyone is aware of with regard to the supply chain, but we continue to have a substantial flow of inventory coming in.
And based off of our expectations of when product will deliver in conjunction with our heightened order book and priorities that we've gotten from the vendors. We expect to have a significant level of increased fresh receipts in the first half of next year compared to where we were last year. As a reminder, we had stimulus occur.
Early in the year last year that drove inventory levels significantly down we've had to use the second quarter in the third quarter of this year to catch those inventory levels up, but we expect to enter into the period of low inventory levels next year in a much better level. This year on top of the fact that as being very clean very fresh.
<unk>, what we believe will be on trend.
And then one for Mike.
The data you gave on the competitors.
Really interesting.
I mean are there any callouts between.
What the.
Where the product is being taken out from our competitors and this.
This year that will benefit 2023.
Last year, which was more department stores, I know last year, which skewed more to apparel and perhaps more mid price point.
Where do you see the benefit will be in 2020.
Okay.
So we're all similarly on the apparel side.
Ryan This is Mike So as you know last year. The thing that we spent a lot of time.
Detailing for you what are the very specific instances of stage stores.
Liquidation as well as some known closures of Jcpenney stores.
What that did for US was in those smaller markets and in some of those medium sized markets. The competition went away in whole or part we saw an uptick in those markets. We didn't see it immediately but it took a number of weeks where the consumer because of the consumer doesn't show up every week. They don't know about the closure.
And they walk next door when they do finally come back.
And so the frequency of shopping drive some of that so you know if you have a customer that basically coming in four to five times a year as your average consumer it's going to take a little while for them to make that discovery. So when stage stores close back to your point that was much more of an apparel sort of driven.
<unk> phenomenon and I would say Jcpenney is similar and while we focus on our key brand partners. In these conversations I will also point out that Levi's in denim and other apparel that we sell was a significant portion of the inventory and sales of stage and Jcpenney. So.
We've tracked that we understand that phenomenon and we have pretty good idea of what that meant to us and so we have seen a handful of moderate price department stores.
To begin to lose distribution over the course of this year. The most meaningful set of that will come January of 'twenty two when some of that distribution drives up in December of 'twenty. One. So we believe that the lion's share of this will show up in the next fiscal year.
Not sure if I'm getting to the heart of your question.
P to heavier redirected the direct you want to go but <unk> got a couple of things to add.
Yes, Thanks, Mike.
<unk>, Mike certainly referenced the apparel opportunity that we saw early.
From stage and Jcpenney, and we feel great about our reaction to that and what's that how that's impacting our business.
But I'd also like to say I think more specific to your point a lot of the competitive set and distribution certainly is more at the good and better level. When you talk about product our focus from a product standpoint standpoint remains best level product and our expectations are we will continue to grow our offering with regard.
The best level of product, but we also have taken this as an opportunity to reinforce our positioning at the better level.
That's where we do expect some consumers that we will pick up some consumers at a better level that in most cases will not have another opportunity or destination to shop in the markets that we serve.
That's very helpful. Thank you.
Thank you.
Our next question comes from the line of.
John Lawrence with benchmark you May proceed with your question.
Yes. Thank you good morning, guys.
Good morning, John.
Mike would you just.
Were those call outs about the smaller markets in your competition would you just take a minute and.
Talk about the differences of that customer maybe that you see in that demographic in that small market.
Versus that same customer.
And more of a metro market more of an urban market.
And how that plays to your advantage with that product set.
Sure John Thank you. So we were recently we had a trip.
In the Houston Metro area, and we ended up in a store because most of our stores are in these underserved markets were in I believe it was El Campo, Texas was one of the ones I can remember, but there were dozens of these examples so we're standing in a store in El Campo, Texas.
And you begin to ask the obvious questions of the store manager and safe.
Who's your consumer what's your staff, where do they come from it's neighborhood neighborhood neighborhood and we talk about that and then you inevitably as well who's your competition.
And they start lapping.
45 minutes away, there's a mall over in that city and then they start to scratch our head because they can't come up with any other answer so our nearest competitor whose sales product that looks like us anywhere close to US is 45 minutes away. So we basically are the only point of distribution for <unk>.
Nike Jordan Puma Adidas under armour, Hilfiger, accrue pink dolphins et cetera et cetera in this county.
45 minute radius around the store so we're pulling that entire trade area plus the trade areas around it.
And.
That's part of our competitive differentiation.
Under served market consumer.
And so then your next question ought to be and will be well, how do you compare and contrast that when you when you drive into Houston and you're in the actual city well.
Well inside Houston, and if Youre familiar with Houston you go to a lease for example will inside a leaf.
<unk> Mesa and Ted will or all these other places and you go look at the trade areas. Those trade areas may be five miles across in terms of a radius 10 mile diameter.
And within that you start talking about dry distances and you're talking about the consumers that are addressable within that trade area, which is well defined by and if you've done any trade area work you know what defines trade areas and so within that trade area, where the only thing going.
There is no competition within that trade area in a lease we are the point of distribution and so we do talk about this a lot and that the economics of the trade area in an underserved market or identical whether they're in a metro market or a rural market.
The only difference is the geography that you cover that.
The customers that you are pulling are relatively the same certainly your your big gun stores have more consumers.
And your smaller stores, but on average those economics are the same and so we like that business model a lot we prosper in that environment and were incremental and complementary to the major brands business as a result, and we think that that's a big part of what we do so I'll pause.
For a minute and let you redirect where you want to go with that question.
Yeah.
Our next question comes from the line of Alex Perry with Bank of America. You May proceed with your question.
Hi, Thanks for taking my question and congrats on a strong quarter and happy holidays.
I just.
Thanks.
I just wanted to circle back to the inventory.
A little bit here, so it sounds like your inventory position for holiday remains strong.
But could you maybe talk a little bit about.
If you are too.
<unk> seen an impact from the <unk>.
The Vietnam closures from a lot of your brand partners when that when that inventory would hit and then I think Jan may have made a comment on sort of classics in the ball.
And in short supply and maybe talk a little bit about sort of the composition of the inventory and differences.
That.
And I think the.
It sounds like receipts versus last year.
And in the first half of next year going to be up.
Nicely.
But I think inventory was down.
Pretty significantly so maybe could you just characterize it in sort of versus a normalized level that'd be super helpful. Thank you.
So I'll start this is Mike and then Jared I'll come in.
To highlight.
We're not overly concerned about our inventory position in a matter of fact, we think is one of our strengths going forward. Both this quarter next quarter next year. So.
While it is.
Breathlessly reported in the media that the supply chain is a problem. This is not news to the retailers. It's been like this for some time and if you go back into our recent history. When the tariffs were put in place that was the first big slug of inventory and that bubble of inventory.
Aim through the supply chain that caused disruption now this disruption is bigger for sure and has lasted longer but none of this is news we've been dealing with us and for two years, we've been working on our own supply chain and I'll point out one of the things that may be obvious, but sometimes we don't talk about it.
Is when you have volatility and if you looked at that graph of receipt and you look at the amplitude of the changes and the severity of the.
The tops and the bottoms the troughs in the peaks than amplitudes increase well the only reason the only way to deal with variances to increase your capacity and the best way to increase your capacity is to do it in a flexible way no. One wants support tens of millions of dollars and a capacity that you're only going to use a few weeks of the year.
So Jared and Mike Mccabe, who works with them along with their partners in the business have done a masterful job in adding flexible capacity and Ron blahnik and the folks that have done a great job in giving them pieces of systems and different ways of executing processes.
That allow them to do things that they were unable to do previously so we're really excited about those things, but this is not a this is not a today sort of thing and so I just wanted to point out that none of this is a surprise to us so I'm going to hand this over to Jared. Thanks, Yes. Thanks, Mike.
Ill try and get a little bit deeper here, maybe in the question over over demand and what's happening within classics and lifestyle in basketball. So obviously, we have a very consistent and strong business and launch product and we continue to see extremely strong liquidations, there bill and team have done a fantastic job of continuing to update on.
<unk> program and then doing.
Doing an excellent job in the stores are getting the products sold through where we've seen the biggest difference from a rate of sales standpoint is in our what we would call high heat product not necessarily in a launch date, but very very high demand.
Not getting too technical essentially product that historically may have lasted a 60 days now last thing a 30 product that maybe would have lasted a 30 days is now lasting us seven to 10 and product that historically it might have lasted a week is now selling out in the day that the stores receive it.
So that's not the best customer experience and that's why we're working to really improve the level of inventory to take advantage of that but what it has done is that product selling through as fast as it has had elevated other parts of our business typically associated with the Monday through Friday business. So.
So as we broadened our investment <unk> made investments in categories that haven't been large categories for us historically these demand patterns have helped us and again, we're very confident.
Footwear business was up double digit for the back to school period. So we're we feel great about what we had to offer for our consumers. They obviously reacted positively and we were able to build inventory.
Mike mentioned the supply chain challenges in.
Not a new story as he mentioned so our focus has been on the things that we can control from an expectation standpoint, we've been dealing with late deliveries for upwards of 18 months now so that's not new and we do expect that there'll be some convergence of delivery based off the Vietnam shutdown here during the first quarter.
So we're excited about that that's why we believe that our receipt levels will be significantly higher during the first quarter and our inventory levels will be significantly higher as you referenced our inventory last year was quite compressed due to the big ramp up of stimulus.
So all of that we're confident there's certainly lots of products that we would like to have a lot more.
We would like to have more product available on our shoe on a day in day basis in some of our apparel categories as well, but very confident in how the consumers reacting and our ability to serve them.
Oh that was it.
Really really helpful. I appreciate that.
Could you maybe talk about the.
The promotional commentary and the guidance.
In terms of it sounds like embedded in the <unk> guide as a potential increase in promos, but just maybe talk through if you've seen that.
It kind of seems like the way it was phrased maybe you haven't seen that but you are.
There could be some of that embedded in the guidance. Thank you.
Yes, we're always.
Focused on it certainly we want to be very cognizant of what competition is doing again, our inventory is extremely healthy.
Certainly it is the holiday periods. So there are some promotions that were going around but it is a significantly lower level than what we've done historically, but at the same time, we want to make sure that should competition to react from a promotional standpoint that we're prepared and we can do that accordingly.
I think certainly we follow it closely as Mike mentioned, we have a significant reduction in competition and we will have a further reduction as we get into January so some of that from a reactionary standpoint can become less important over time, but we wanted to ensure that we are putting our best foot forward with the consumer every day and understanding.
It's occurring in the market.
Perfect and just one last one if I could.
Could you maybe help us parse out the differences you're seeing in sort of traffic versus ticket. It sounds like both were were up nicely this quarter.
Maybe just.
If you could give us a little more detail on sort of what youre seeing there.
Is that.
A quick sell through rates is that do you find that in a way like increasing traffic within the stores as people are revisiting the CFS products back in stock just just any help there would be really helpful. Thanks.
Alex Good morning, This is bill Clinton.
So I'll start with just traffic in general we have a record amount of active customers.
And that has really been driven by just continuing to add new members.
Into our loyalty program on top of that our existing member base has grown significantly and thats from the new members as well as just a lower attrition rate.
With more customers of course, youre going to get more purchases.
So we're very happy to see those trends.
As far as the average purchase.
We're definitely seeing the average purchase amount go up that's a result of two components, the AUR going up and Sharon spoke a little bit to that as.
As well as our Ips.
Just how many items we have per sale.
<unk> team has done a wonderful job driving that through a variety of initiatives.
Couple of other thing you mentioned is that our fastest growing customer segment is our omnichannel customer who shops in both channel.
They purchased twice as much and we've seen that segment grown considerably and then on top of that we relaunched our loyalty program this quarter and we've seen a dramatic increase in.
New customers from that as well as a shift in customer behavior.
So we need to actually easier to get points and awards and that's driving a higher purchase rate.
In particular, we've got two levels to our program MVP, which is the base level and VIP, which is a top level and we're seeing a lot more VIP customers, who purchased three times the amount of an MVP customer yeah, just to summarize we're seeing good trends at the ticket level.
Some of that is being driven by just the increased number of <unk>.
Remember that all stages Vips more vips and also more omni channel customers now.
Turn it over to Dan to talk a little bit more about that yeah, just to tag on that a little bit.
Yeah.
Bill's point, we've seen nice increases in AUR on nice increases in customer traffic, both online and in store.
A lot of that can be attributed to the assortment.
Have in store and some of them.
Terry talked about earlier.
We're able to offer that that underserved consumer and El Campo, Texas and assortment not only can you not find.
Those specific items that you can't find them together in one spot except inhibits.
Without having to go 45 minutes and so.
That's a big piece of what drives that for us and our investment in denim and other things.
And we also have to reach out to let our customers know how that.
First.
We've made some increases in ore and the investments in supply chain frequency delivery things like that to get stuff to stores faster, but then we have to let consumers know that its there bill and his team have done a great job of that and we've done some things with local social media that are really kind of accelerated.
How we are able to reach out and engage with our consumers, let them know that their product a product that they want us in our store or online and so we've done a really good job of doing that and you see that in those metrics.
That's really helpful best of luck going forward.
Thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Mike long ago for closing remarks, well. Thank you as you can tell we're very excited to report. These strong results. We had we had a great Q3 or four is forecasting a great Q4, we like our business model, we like our inventory position.
We like it now we like it next quarter and we like it next year.
We love our team we love the people that would go to work with and we play this game with <unk>.
And we can imagine having.
Anyone else on our team. So we will always like to talk about that we always like to highlight the fact that we have great teammates and they're doing a fantastic job, but we look forward to sharing our results next quarter and speaking to next year. So again. Thank you. We appreciate it and we look forward to speaking with the with all.
Have you very very soon.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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