Q2 2023 Hibbett Inc Earnings Call
Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks, a slide deck is available on inhibit dot com the investor Relations link found at the bottom of our homepage or at investors Dot Hibbett Dot com and under the news <unk> events section. These materials may help you follow along with our discussion of 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 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 1095 and are subject to uncertainties and risks.
It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and are noted on slide two of the earnings presentation and the company's annual report on Form 10-K and in other filings.
With the Securities and Exchange Commission we.
We refer you to those sources for more information also to the extent non-GAAP financial members.
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 the conference call are based on information and understandings believed accurate as of today's date August 25, 2022, because of the time sensitive nature of this information it is <unk>.
<unk> inhibitors to limit the archived replay of this conference call webcast to a 30 day period.
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 Ben <unk> Senior Vice President of operations I will now turn the call over to Michael Good morning Art.
Team delivered a solid second quarter or we are well positioned as we enter the second half of the year.
We're increasing our full year total and comparable sales guidance and reaffirming our previously stated full year diluted earnings per share guidance.
As discussed on the first quarter call, we improved our inventory position and I am pleased to report sell through this inventory was strong we had a compelling selection of in demand product that was supported by excellent execution in the stores and on our Omnichannel platform overall, our team did an outstanding job executing this quarter we successfully.
Manage the aspects of the business that are under our control and adjusted as necessary to respond to external macroeconomic pressures moving on to slide four I'd like to reiterate a handful of things.
Our success in re basing our sales and profits at higher levels versus pre pandemic levels.
Has to be noted while the last two fiscal years were positively impacted by stimulus and changes in the competitive landscape.
Also improve the underlying business model, which positions us for growth over the long term.
Looking into the back half of the year, we believe we're well positioned to meet our full year goals. We ended the quarter with inventory of $366 million, which we believe is ample to meet back to school demand.
In addition to the amount of inventory we are very positive about the quality of our inventory, we're ready with fresh in demand products that will excite our customers as mentioned in today's press release, we're seeing favorable sales trends for the back to school shopping season, and we're pretty excited about that this includes a.
Timing shift that favors Q3, we saw customers wait until closer to the startup school to begin their back to school shopping historically customers have started their back to school shopping two to three weeks prior to the start of school. This year, we solve these purchases shift somewhat and as a result, some sales shifted.
From Q2 into Q3, and we're seeing those trends stay in place now as a result, we are increasing our second half comparable sales guidance to the positive low double digits from the positive high single digits and the full year comparable sales guidance for the positive low single digits from the negative low single digits.
In addition to these positives for the top line, we expect some improvement from a supply chain perspective, and look forward to easier comps in the second half, we expect higher year over year sales, which will result in a return to leveraging our fixed costs as we move through the year, we remain committed to executing our proven.
Business model to optimize our performance over the long run our best in class Omnichannel business model, our superior customer service in the stores and our compelling merchandise assortment creates a differentiation in the marketplace provides us with a competitive advantage in the eyes of the consumer and our vendor partners and.
Puts us in a position to deliver strong sales and profitability in the coming years.
And finally I'd like to thank our approximately 11000 team members across the organization, whether theyre in the stores the logistics logistics facilities or the store support center. It's their efforts that represent our brand and our values to our customers vendors and our communities et.
It's their daily commitment to excellence that will propel us forward and I appreciate their efforts I'll now turn the call over to Gerry Thanks, Mike.
If you turn to slide five for merchandising slide.
For the second quarter, our overall performance with good line with our expectations across our merchandising categories. We continue to believe that due to the impacts of Covid stimulus during the last two fiscal years, the comparative fiscal 'twenty calendar 2019 is the most meaningful comparison.
Compared to the second quarter of fiscal 2020 comp sales were up 54%.
From a category standpoint, when compared to fiscal 'twenty two calendar 'twenty, one all categories declined as expected coming up against the stimulus impact with last year period.
But we're in team sports declined in the low single digits, while apparel declined in the high teens.
When compared to fiscal 'twenty with the calendar 2019 footwear was our standout category with growth in the high <unk>, followed by our apparel growing in the low forties sports.
Sports growing in the low single digit range.
Specific to footwear and apparel men's women's and kids all showed significant growth when compared to fiscal 'twenty calendar 'twenty legacy women's growth was in the upper seventies kids agree with <unk> and many of the group.
As Mike referenced earlier, we are confident that our inventory position. The increased inventory levels are largely attributed to a better in stock position of key franchises footwear and are appropriate for the results. We are seeing during back to school.
As I referenced in my sales commentary. We also believe the most meaningful comparison regarding inventory as compared to fiscal 2020 calendar 2019, when compared to fiscal 2020 calendar 2019 inventory levels were up 35% at the end of the quarter and balance with our 54% of the sales team.
This increase is largely due to positive impact to our mix of footwear inventory as well as price inflation.
Compared to fiscal 2020 calendar 18, our unit inventory levels were up 10%.
Also in the second quarter combined with our strong quarter end inventory position continue to give us confidence that our total had merchandising strategy is working and elevating how we serve our consumers.
And over to Bob to cover our financial results.
Thank you Jeremy and good morning, please refer to the slide six entitled Q2, FY 'twenty three results.
Minor to report our results on a consolidated basis that includes both the dividend and indeed you are correct.
Total net sales for the second quarter of <unk>.
Three decreased six 3% the printer to $92 8 million from $419 3 billion in the second quarter of fiscal 2002.
However, looking back three years, the critical 2020, the last relevant comparable period required in the current quarter sales of $392 850.
<unk> 55, 6% higher than $152 4 million reported in the second quarter of fiscal 2020 overall.
Overall comp sales decreased nine 2% versus the prior year second quarter in comparison to the second quarter.
Comp sales increased by 54, 4% or.
More comp sale decrease of 11, 9% versus the same period in the prior year, although they have increased by 42% versus the second quarter of fiscal 2020.
E Commerce sales increased eight 3% compared to the second quarter of the prior year and have increased by 174, 4% on a three year stack E. Commerce sales accounted for 15, 2% of ethanol during the current quarter compared to 13, 1% in the second quarter of fiscal 2022 and eight six.
Percent in the second quarter of fiscal 2020.
Gross margin was 34, 4% of net sales for the second quarter fiscal 2023, compared with 39% from second quarter of the prior year.
Proximately 160 basis point decline was primarily due to the following factors.
Decline in product margin of approximately 225 basis points.
Cost increases a higher mix of ecommerce sales, which carry a lower margin than brick and mortar sales general shifts in product mix and delays in launch event.
Green coffee break and transportation of approximately 125 basis points and deleverage of store occupancy costs of approximately 110 basis points, mainly due to the year over year decline in total available coupled with higher rent expense and utility costs.
So our operating selling and administrative expenses were 23, 3% of them that's available in the second quarter of fiscal 2003 compared to 22, 3%.
The second quarter of last year with approximately 100 basis point increase was primarily the result of deleverage on the lower current year revenue expense categories, such as wages and employee benefits repairs and maintenance and terminals acquired surgeon support Department store base.
E Commerce activity were negatively impacted by the sales decline.
Depreciation and amortization in the second quarter fiscal 'twenty threes increased approximately $2 5 million comparison to the same period prior year, reflecting increased capital investment on organic growth opportunities and infrastructure projects.
Generated $32 $8 million of operating income or eight 4% of net sales in the second quarter compared to $61 5 million or 14, 7% of net sales in the prior year second quarter diluted earnings per share were $1 86 for this year's second quarter compared to $2 86 per share in the second quarter of fiscal 2022.
We did not have any non-GAAP items in either period.
Next I will discuss the fiscal 2023 year to date results now referencing slide seven.
Net sales for the first six months of physical 2003, a decrease of 11, 8% to $816 9 million from $926 $1 million in the first six months of fiscal 'twenty two.
The fiscal 'twenty current year to date sales of $816 nine or 37, 1% higher than the $595 7 million reported in the first half of fiscal 'twenty.
Comp sales decreased 14, 5% versus the same period in the prior year in comparison with the first six months of fiscal 'twenty comp sales increased by 36, 2%.
Brick and mortar comp sales decreased 17, 4% versus the first half of fiscal 'twenty, two but have increased by 25, 6% versus the six months of fiscal <unk>.
Right.
E Commerce sales increased six 2% compared to the same period of fiscal 'twenty, two and have increased by 141, 7%.
Mm three year stack.
E Commerce sales accounted for 14, 9% of Invesco, great current fiscal year compared to 12, 4% in the first six months of fiscal 2002, and eight 4% in the first half of fiscal 'twenty.
Year to date gross margin was 35, 7% of net sales in fiscal 'twenty, three compared with 43% in the same period last year.
Approximately 460 basis points combined with primarily due to the same factors I mentioned.
In the second quarter, the client product mix of approximately 190 basis points through the cost increases are making e-commerce sale.
The lower margin or I'm, sorry in general shifts in product mix and delays in launch.
Deleverage in store occupancy cost of approximately 140 basis points, mainly due to the year over year decline in total sales again against the higher rent and utility costs, and then increased cost of freight and transportation of approximately 130 basis points.
SG&A expenses were 22, 9% of net sales for the first half of fiscal 'twenty, three compared with 20% of net sales for the same period of last year was approximately 290 basis point increase was primarily the result of deleverage from the lower current year revenue expense categories, such as wages and professional fees and advertising in general supply that's all.
To support the Department store base and increased e-commerce activity were negatively impact.
Depreciation and amortization in the first six months of fiscal <unk> three increased approximately $5 million of comparison at the same period last year, reflecting increased capital investment in our organic growth opportunities.
Construction projects.
We generated $83 5 million of operating income were 10, 2% of net sales in the first six months of this year compared to $171 6 million or 18, 5% of net sales in the prior year first six months.
Year to date diluted earnings per share were $4 77 for fiscal 'twenty three compared to $7 97 per share in the same period in fiscal 'twenty. Two we did not have any non-GAAP items in either fiscal year.
Turning to the balance sheet, we ended the quarter with $28 4 million cash and cash equivalents.
$17 1 million balance at the beginning of the fiscal year net inventory at the end of the second quarter of fiscal 'twenty, three was approximately $366 million or <unk> 65, 6% higher than the beginning of the fiscal year about 58, 9% higher than the same period last year, we have short term debt of $88 5 million outstanding on our 125 million.
Dollar client credit in the quarter and mainly as a result of our inventory build over the first half of the year.
When interest rate second quarter were $14 $5 million, bringing the year to date over $35 million capital expenditures is primarily the store development technology and infrastructure projects.
During the second quarter, our store count increased by net of all units comprised of 13, new locations and one closure on a year to date basis, we have increased store count quite a 'twenty one 'twenty two new locations one rebrand to motivate our total store count stands at 1117 as at the end of the second quarter.
In the second quarter, we repurchased just over 145000 shares under our operation our repurchase program for a total cost of approximately $7 million on a year to date basis, we repurchased approximately 636000 shares at a total cost of $29 4 million.
We paid a recurring quarterly dividend during the quarter of about 25 miles per hour per common share for a total outflow of $3 2 million.
First six months of fiscal 2023 dividend payments of our moments included $5 million.
I'll now turn the call over to Bill Clinton to discuss some consumer insights.
Thanks, Bob.
During Q3, we are continuing to keep a pulse on how our customers are feeling through.
Through recent research, we know that a majority of customers plan to spend more this year on back to school in particular on the Butler.
Also a significant portion of customers shifted the timing of that and back to school purchases versus last year.
Longer term customer trends have not changed.
That's a rebase line about pre pandemic sale.
Comparable sales increased 64, 4% versus Q2 of FY 'twenty from a customer perspective, we've seen two fundamental differences versus that pipeline what number of shoppers in our customer base has grown.
And two the average ticket has increased substantially due to gains in average unit retail.
<unk> seen a few factors that is structural in nature, keeping our fitbit rebate volume well above FY 'twenty.
Turning to our e-commerce and.
<unk> sales increased eight 3% versus last year at 174% versus FY 'twenty.
Commerce represented approximately 15, 2% of total sales for the quarter versus last year's $13, 1% continued improvements to our customer experience gains in total customers increased traffic to our website and app by over 20% year over year.
For back to school digital sales have accelerated versus our Q1 and Q2 run rate.
Drivers include strong traffic robust footwear sales and gains in average unit retail we expect that our continued investments in digital will produce low double digit growth for the remainder of this year I will now turn the call back to Bob to discuss our guidance.
Thank you Bill.
Slide nine summarizes our updated fiscal 2020.
Although there continue to be some potentially significant business and economic challenges that may impact the remainder of fiscal 2023 with six months of the year behind us we feel certain elements of our full year guidance needs to be updated sales gross margin FG Havent G&A updates are as follows.
Total net sales are now expected to increase in the low single digit range compared.
Compared to fiscal 'twenty, two does imply comparable sales are expected to be in the range of flat to positive.
Mid low single digits for the full year.
Oh, you are brick and mortar comparable sales are expected to be in the flat to positive low single digit range, while you're all your conference revenue growth is anticipated to be in the positive high single digit rate comp.
Comp sales are projected to be in the positive low double digit range in the back half of the year. Our sales forecasts are based on assumptions for growth by chain constraint.
Timing of inventory receipts and becomes more consistent and predictable and our overall inventory position remains strong.
Fiscal 2023 gross margin as a percent of sales are anticipated to be in the range of 35, 1% to 35, 3% down approximately $290 to 310 basis points in fiscal 'twenty. Two this level of gross margin is still above the pre pandemic levels potentially supply chain challenges brave headwind.
Heartbreaking e-commerce sales that carried a lower margin than brick and mortar sales inflationary pressures.
Pressures and deleverage in store occupancy will all contribute to that.
State of decline we continue to believe gross margin result comparisons in fiscal 'twenty to become more favorable as the year progresses.
SG&A as a percent of net sales are projected to be in the range of 22, 7% to 22, 8% higher than the fiscal 2022 level by approximately 10 to 20 basis points, although again, it's still a favorable to pre pandemic levels.
Wage inflation costs associated with growth growth in E Commerce, a larger store count and annual inflation of back office infrastructure investments made in fiscal 'twenty to contribute to the year over year increase.
Following declines are consistent with guidance provided previously.
That new store growth without being in the range of 30 to 40 stores with new unit spread relatively evenly throughout the year operating income is still expected to be in the low double digit range or a perspective of sales.
Diluted EPS incentives paid to remain in the range of $9 70 $510 50.
Using an estimated full year tax rate of 24, 5% kind of slightly adjusted estimate weighted average share count of $13 $3 million.
Capital expenditures are still projected in the range of $60 million to $70 million with a focus on new store remodel and additional technology.
Construction and development.
Our capital allocation strategy continues to include the expectation that we will repurchase shares throughout the remainder of the year and a recurring quarterly dividend.
That concludes our prepared remarks, operator, please open the line for questions.
Thank you we will now be conducting a question and answer session.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question comes from the line of Sam Poser with Williams trading. Please proceed with your question.
Good morning, everybody. Thanks for taking my questions.
On back to school, how far what percentage of back to school is in right now and can you give us please give us more.
Terrific as to sort of the run rate that youre seeing right now.
Hey, good morning, Sam Mike I'll handle the first part of that so.
We believe about two thirds of the back to school sales have occurred.
The shape of the curve has changed a little bit not only did it shift to the right in terms of timing.
The amplitude of the curve has changed somewhat overall, we think the back to school when you sum it all up it's going to be.
No it's going to be a net positive for US there is some behaviors that bill will talk about in a few minutes of network and then will that we're seeing in the stores and through surveys of how consumer behavior has changed but net net.
Going very well, so you know and everyone on the call knows that.
Very rarely talked about intra quarter results the exception being historically this Q2 to Q3 shift because of the volatility in back to school in terms of how the calendar moves it and so typically.
Historically, we mentioned in our comments the timing of back to school to be meaningful and in this case. It was so remember.
We're setting up for back to school at the end of Q2, you put in your sales plan you put in your payroll new inventory and you set up for it and if it shifts you've still got the cost, but you don't get the sales in those incremental sales as you know are incredibly.
Profitable for us so so not only the sales, but some of the operating profit moved into Q2.
Into Q3 from Q2, rather so bill do you want to talk for a couple of minutes about what we've seen on the consumer behavior and it's been if you will follow that up with what you saw in the stores.
Yes, hi, good morning, Dan.
Some of the customers have been impacted by inflation.
On ways to manage through it.
Interest that we're seeing right now the customers are shopping for deals a little bit more they're delaying their purchases until they absolutely need it and we're seeing that shift in back to school and then also they are cutting back in other discretionary spending.
Outside of retail.
But the net net is that customers plan to spend more for back to school.
No current plans to cut back our holiday spending at all.
Very few customers trading down.
I'll turn it over with that to more complex yes.
Just to tag on to what Bill said I had the opportunity to visit some stores in Arkansas last week and it happened to be in the middle of kind of their back to school season, and so what we saw there is exactly what bill is reporting.
Some calendar shifts in the actual back to school dates, but also just shifts in behavior and so starting to see some consumers where they normally about a full.
A few days prior to back to school, maybe even wait until after school looks absolutely understandable.
Rolling all of the school system and then.
It will to understand a little bit about how the spending to go there, but felt pretty good about what a solid lift from those towns and talking to those talking to consumers and to our associates there.
And one of the things that we didn't talk a lot about yet was there has also been some calendar shifts with regards to some meaningful heat product, which area do you want to follow up on that.
Yeah. Thanks, Mike for the Sandwich. So as we started will continue to work with all of the impacts of the supply chain data some of your cost.
Mike mentioned.
Putting our plans together for Q2 promotional calendar as well as all of our sales forecast and you have an expectation of that coverage.
India volume coming at the end of Q2, along with some launch.
Unfortunately roundup pushing into Q3, so all those things had somewhat of an impact on Q2 negatively but now are having a pretty positive impact.
The other thing I would mention as Bill said this does not appear that our consumers are trading down, albeit you have certainly some inflation pressure going on.
<unk> launches that we've been able to digest during the second quarter and the early part of the third quarter from a liquidation perspective has been incredible and we've also seen no slowdown in fact, we saw significant increases in products that like for like at some price increases.
Sizes.
Very confident and comfortable with where we stand right now.
Thanks.
Two follow ups there one.
How are you impacted by that.
One of your larger vendors.
During their map holiday.
And did that do anything for the business.
And two.
But are you seeing a benefit from the.
From that same large vendor.
Chain are you seeing allocation benefits.
Further in the year.
Because of that.
Lastly.
Based on the way the comp falls, Bob do you anticipate that the.
Comps in Q3.
Just because you're up against a harder compare inventory levels should be better that youll comp stronger in the fourth quarter than you will in the third quarter am I thinking about that wrong.
Alright, Sam so I'll start with the promotional activity. So certainly the last two years.
We've had essentially zero cross sell activities.
And somewhat of a shift we have some promotional activity in the second quarter, primarily to remarket around apparel.
Don't expect that to slow down at least in the <unk>.
Near term I'm sure all of that.
That said the promotional activity is still when I still expect it to be significantly less than what we saw.
Thanks again.
With regard to inventory.
Citing the inventory data for a couple of years really just not having enough inventory in particular footwear.
And frankly, our consumer experience in the store.
<unk>.
Conversion from a room perspective in the footwear, what mitigates periods for our consumers.
Our team working really closely with our vendors has really done an excellent job of getting growth pipeline.
Just getting your full of getting all the right things.
Things that are driving traffic and sales that are hiking.
And that sell through quickly so we're very confident with where we stand now.
As well as our plans for the back half.
I guess just a follow up.
It cannot give any guidance.
Getting a bit this quarter, but I think you're thinking about coming up can you just turn over the last couple of minutes.
Some of the shifting into Q3 with some of the consumer sentiment as far as the holiday. We would expect both Q3 Q4 would be very strong.
You remember last year Q4 was a little bit.
But then we would have liked to see because again, we had a real struggle with the inventory balance I think we decoupled the consumer sentiment of the shifting of sales into Q3, and the inventory position again feel pretty confident that Q3 Q4 being fairly strong.
Got you. Thank you very much appreciate it.
Christine.
Our next question comes from the line of Cristina Fernandez with Telsey Advisory. Please proceed with your question.
Hi, Good morning, and thank you for taking my question I wanted to understand better the increased outlook for the comp in the back half.
It's mostly the back to school sales being better or.
I would also thinking about better inventory availability or or the.
Launch calendar shifting it would be helpful. If he can.
Give us a little bit better explanation of.
Why.
Look.
This early in the year.
Thank you Kristina this is Mike I'll lead it off and then.
Everyone else's.
A piece of this so part of the increase in the comp in the second half of the year for sure is the back to school shift that is how it is going to start that.
<unk> has led to a good very good start to the quarter.
But it's also more than that.
So if you think about the things that we've been talking about our business model and the significant improvements we've made to the business model the competitive differentiation that we've established we really like our business model, so and with that in the context of the competitive changes that have occurred with regards to distribute.
<unk> of the value products that are out there. The major brands have made decision to carriers for product and who doesn't that favors us when you combine that with the fact that we significantly improved our inventory that's high quality fresh inventory that the consumer covets and once when you combine those two together.
It turns into increased transactions and so those increased transactions manifest themselves in a couple of ways and bill has talked a little bit about that you want to amplify on any of those comments bill.
Yes, absolutely.
First of all we've got some pretty incredible Omnichannel private brands a couple in particular, our development program, which we read them.
Last year was actually equal to year over year growth in loyalty and Thats, a result of having tomorrow members and ultimately greater purchases are remember that's a very positive sign that well to continue to grow for US also our launch process.
We're extremely focused on customers.
And that continues to do very well also drive new customers to us.
We're very confident.
In the back half about those two programs can deliver from an e-commerce perspective, but we have very good inventory of very good traffic as Mike said, our focus on the customer experience and we feel very confident there as well.
That's the transaction side Gerry do you want to comment on the AUR and how that impacts ticket. Yes. We've got a couple of additional things that are happening Mike referenced the distribution changes that have gone on in the marketplace.
Our expectation for this year was that we would be a significant beneficiary of this distribution changes.
That's kind of happened a little later than we would've expected just with all the supply chain challenges that are out there to be honest with inventory, but absolutely saw during the second quarter.
Our store locations that had been impacted by a distribution change from one of our vendors.
Much better.
Without a distribution channel so that we do feel that that is starting to have an impact.
All of that with the increase in inventory.
<unk> seen an increase of EUR, it's really due to two things. There is some price inflation that is driving some AUR increases are not seeing our consumers trade down or not respond to some of those price increases, but more importantly, a very very significant shifts.
Best in class premium support.
So that is a large component of the current inventory.
And we will be a very significant portion of the back half of the year along with what we believe to be a very very strong and excellent launch calendar on the backdrop of backdraft of really not having near the footwear inventory necessary to satisfy our consumers during the back half of last year, especially in the fourth quarter.
Thank you that's very helpful color and then I wanted to also.
So he can provide more color on the incremental gross margin pressure, particularly on the product.
Average product margin.
Sure.
I guess for the quarter it did.
Ocean or.
<unk> noted apparel underperformed.
Perhaps carries a higher product margin or cost inflation any color there would be helpful.
Sure.
So I think your comments Jared I'll take that one so a couple of things.
Absolutely there's more promotional activity going on in the marketplace right now and certainly we have some more than we had over the last two years, where we essentially had done.
But as we discussed earlier and microelectronics.
Shifting back to school.
One with some of the launch shifts that occur at the end of the quarter into Q3.
Put some pressure on the margin line.
Made some decisions to run some promotions earlier in the quarter to take advantage of some of the earlier holidays in traffic.
Particularly focused around apparel and we expected some offset to the margin at the end of the quarter. So some of those key back to school sales along with some of those launches and the net.
Materializes in the third quarter that put a little pressure as we look ahead into the second half.
We're going to see more of a promotional environment to last year, but again nothing anywhere close to what we saw in fiscal 'twenty and.
And the health of our inventory from an age perspective is really exceptional so not something that has what's terribly concerned.
We would expect to maintain.
Towards the levels that we saw in the last year or two years, but we certainly expect to significantly rebase above fiscal 'twenty.
And can you expand on the apparel performance during the quarter relative to footwear, it's mostly related to the inventory receipts or anything else to note.
Yes, I would say if you think about our apparel business compared to last year a decline.
And the hydrogen so.
First look you would go well that's really really disappointed.
But when you really look at apparel compared to fiscal 'twenty early forties.
So we absolutely have an outsized apparel business last year, frankly, because consumers have money for stimulus and we really had their footwear inventory, but certainly not enough footwear inventory so were seeing that balance back.
We'll begin with footwear, becoming one of the four categories, we got into the second quarter, and certainly would expect that to be.
The same in the back half of the year. So apparel is an area that we have some concerns about just based off the year over year comps, but again overall.
Tories are incredibly clean very very focused at premium levels. So it's not as susceptible to promotions.
We feel like we have it under pretty good control.
Thank you.
Our next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed with your question.
Yes, good morning, everyone. Thanks for taking the questions.
First one is just I'm struggling a bit with the math on the full year comp guide.
If you guys do it 12 over the back half of the year, which I guess to me is low double digits, but correct me if I'm wrong there.
So that puts the full year down a couple percent youre guiding.
Flat to up low single digits for the full year or so.
I mean, the simple math assumes you need to run about 17 or 18% comp over the back half of the year just to be flat, so what am I missing there.
Adjustments Bob.
First of all to half of the year not equal so a simple average of the two we do have a little bit heavier sales.
Sales mix in the back half of the year, so you'd be able to account for that so again, we felt as if you kind of do the back of the envelope in half when we're thinking about how we do this the.
The weighting between Q1 <unk>.
First half second half that low double digits, the math still comes about so.
I think your numbers might be just a little bit higher than what we would have anticipated.
Again, I think we still feel comfortable that the guidance is factoring.
Okay.
Maybe we can follow up offline there Bob and then.
Question on how you guys think about the risk.
Shopping lull after back to school is completed we are hearing from several retailers back to school was strong.
Obviously that is a distinct shopping events so once that passes.
How do you handicap, the risk that the consumer hunkered down a bit here.
Given all of the <unk>.
Well documented macro pressures.
Well certainly we know that there is macro pressures and when we all live in the same world, we see what's happening.
And our consumer is paying inflated prices with inflated wages, we get all of that.
But the product that we have again hard to get compelling assortment of people enjoy the experience of coming in our stores and what we're witnessing is not all back to school. What we're seeing is the high heat product, which we have been good supply.
And there are lots of launches coming in this quarter and the next.
Along with again, a business model that we're very proud of.
I think that that all is pretty compelling jarrett.
Yes, thanks for the question.
The question the right question.
I think one of the things that really gives us a lot of confidence is frankly, our results compared to fiscal 2000 and <unk>.
Q2, historically, we think about second quarters.
We don't get off to an early back to school Q2s are typically really really difficult.
In this case.
The 4% comp on top of fiscal 'twenty.
The Congress.
It's driven by a lot of the civil guard products coming up right now and based off of our inventory position. So we have a lot of confidence coming into Q3 from the results. In Q1 Q1 Q2, but then also what we're seeing for back to school.
It gives us a lot of confidence.
Okay. Thank you both that makes it makes sense.
Alright, I didn't mean to cut you off there.
Hey, Jeff.
Estimates.
So just to add to that we've obviously re baseline above FY 'twenty.
But we have more customers than ever through our acquisition and retention efforts.
Top of that we have no customer information and efforts with tax social media.
E mail et cetera, so we're able to communicate with our customers than ever before.
On top of that just the elevated purchases that we have an increasing structural gives us confidence as well.
And also just doing some are surveying with customers.
Some good independent shop early for holiday.
Out there competitively.
To avoid future inflation and also theres still some product availability concerns out there.
Okay, and then just last one for me on freight and transportation cost increases can you just remind us when you started to see the step up in those costs last year, just as we think about the lap over.
For the back half of this year and when the pressure.
Sign on that line item. Thank you.
Bill.
Good Bill.
Yes sure.
So just kind of talking about trade.
That pressure declining here going into the back half of the year for a couple of different reasons. The first one is the environment for carriers and that gives us an opportunity to reduce expenses.
The second thing reason as the AUR increase.
Clearly decreased that freight as a percent of sale. Let me think about unit economics of shipping out of box at the higher AUR in a minute that market very favorably for us.
Alright, thanks, everyone best of luck over the back half of the year.
Thank you.
Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.
Hi, Thanks for taking my questions.
Just wanted to follow up on a few questions that were asked earlier, but maybe asked in a slightly different way I.
I guess when you think about the comp guidance sales guide for the year for the year what changed versus your expectations 90 days ago that led you to take up the guide is it better visibility in terms of inventory receipts like more launch products versus your initial expectations or is that.
What youre seeing from back to school is very encouraging and and so you sort of our thinking.
Thinking that that sort of flows through the year, just trying to get more clarity on the.
Guidance range for sales.
Yes. Thank you so versus last time, we spoke what has changed is the essence of your question. So first and foremost we'll do it chronologically. The first thing that happened was a bit of an unexpected shift in back to school you could say well you should have you should have been able to.
Figure that out from the past history from 2017, 18 et cetera, well I don't think it was just us so sales shifted.
That is a meaningful number that moves from some sales second thing was there were some large products that were.
Due to arrive and sell in Q2 that pushed into Q3.
On top of that we have been able to opportunistically buy some really good inventory that's going to help us.
Drive some sales.
And so then that allows us to do an even better job capitalizing on our competitive differentiation. The other thing that I would say is in spite of the fact that we didn't see a lot of the pickup that we anticipated from changes in the competitive landscape did not show up in Q3.
That actually was a drag on.
Q2, whether it didn't show up in Q2, but it will begin to help us in Q3.
I think those are the big changes Jared you've got a couple of others.
Yes, I think the only thing that I would also add to that is to start our comprehensive visibility around inventory.
Obviously, there is still volatility in the supply chain, but what we've been able to a comp ratio as the improvements in visibility improves.
The delivery timeline.
Also gives us a lot of confidence as we get into the back half of the year.
There is a couple of changes that I'll highlight.
It's been to speak to in terms of our ability to hire.
People in the stores and wages.
Staffing in general Yes, we spent a lot of time over the last couple of years, the labor market being as tight as it is.
Focus there Jim that mitigated a little bit and so that's been helpful. As we've as we go along here wages are coming in line with our expectations. We knew that there would be higher this.
This year when the cloud run rate historically and plan for that and we're seeing that.
With expectations.
We're really doing a lot of work to all our on our scheduling and things of that nature at store level and meeting demand.
And I've got a little bit better there and controlling overtime and some of the things that we're doing in store and so off of a pretty good on a go forward basis, maybe rail relative to the first half of the year.
Perfect. That's really helpful and just as a follow up I think you talked a bit about product margins in the quarter. It looks like the implied Q H gross margin came down versus your prior expectations. What was what's the key driver there what is that sort of contemplate in terms of.
Promotions in the back half thanks.
<unk>.
Alex It's Bob.
I would say probably one of the things and even though bill just touched on kind of when you talk about the freight to the customer obviously, they're going to see some benefit there, but when you talked about the break between.
Distribution in stores.
And not to get too much into the carnivals, but we have to capture that on our balance sheet recognize that as the inventory gets sold so some of those costs from from when the period fragrance higher still need to flow through the back half of the year. So that's one of the things that kind of give us a little bit of.
Maybe a headwind going forward. The other thing is again, we have seen.
It was a fairly hot warm summer across the south and southeast and we haven't seen a higher run rate when it comes to utility cost, which again is something that we just kind of baked a little bit extra assumptions into the back half as well as far as the <unk>.
Deleverage on store occupancy piece, but I would say those are property to the components again, I think Jerry and Phil touched on some of the other positive when it comes to the mix of product and things. So there's a little bit of mitigating theyre going on within the back half and this is Mike I would like to put a finer point on a couple of things so that they don't get lost remember comparing to.
First half and comparing to Q3 last year Q4 last year, we didn't have product at a level that was sufficient for a good customer experience, we were selling through at rates that I haven't seen before and those rates.
Drove an extraordinarily high gross margin.
Now, we don't expect I don't want that to happen again, because we don't think thats a good consumer experience. So the inventory that we have now and that we have been working very hard to get and put in the stores to put in front of the consumers is making that consumer experience, what we want and what they want and frankly.
What our branch one and so as a result, when that sell through comes back to more normal levels not going back to fiscal 'twenty, but rather going back to a good consumer experience you would expect for gross margin to come down some and we wanted to right. We don't want a 50 growths because that means we're selling.
Through the rate that the consumer is just not being serviced properly.
So we feel very good about where we're at on that inventory.
If you were to listen to other general merchants out there who sell other types of products, who have gotten very their inventories have gotten long theyre going to get promotional.
I don't think Thats, what youre going to see with us our inventories on target, it's fresh it's new and it's selling through and we don't expect we do expect clearance to be more than last year, we do not expect for it to be significant.
Thank you.
That's extremely helpful. And then maybe just one last one for me.
It looks like the SG&A expense ratio came down a bit what were the key drivers. There are there any areas, where you're seeing sort of less expenses versus your <unk>.
Original expectations.
Bob Why don't you start and then come in and talk about store labor, which is a significant portion of what we do.
Segments.
So there are some categories.
Kind of kept pretty static year over year of course was the higher.
Sales in the back half of the year, you start to get back some of that leverage.
Have some of the sales slip out of Q2 into Q3 pretty tough in the last two or three weeks of the quarter to start making meaningful changes.
<unk> said that we are much much better at managing a specialty store labor and I think again, we're going to see some benefit from that in the back half of the year. So ultimately as we look at the second six months, we felt that our run rate was a little bit more favorable than our previous guidance and again, mostly due to the fact, we can deleverage a little bit more of a second half event.
Yes, it's taken all of that and as we said earlier.
We're planning for sales not sure exactly where things are going to show up with Geneva planning and you can do that with labor in the stores do and you're hiring and so as you get ready and set for that and you'll see that shift a little bit and so youre going to get a little bit of cost there.
And it just shifts over youre able to gain leverage.
All forward basis, and that's what we're kind of seeing and expect that the remainder of the back half of the year.
Perfect. That's all incredibly helpful best of luck going forward.
Thank you.
Mitch.
Our next question comes from the line of Mitch <unk> with Seaport Research. Please proceed with your question.
Yes, thanks for taking my questions.
On the back to school and the launch shifts and Mike you mentioned earlier that the back to school piece was pretty meaningful I know you don't like to give the intra quarter.
Data, but is it possible to quantify.
That shift from Q2 to Q3, you can help us out there.
I don't know if I'm going to be a little reticent to go past, what Ive said, but as you would imagine the peak weeks of back to school are significantly higher in the range of an average week in the quarter there'll be anywhere from 50% to 60% higher and so when you move two or three of those weeks it can be meaningful and one more time I know I've said this a couple of times.
It's incremental revenue dollar that falls through at a great rate and when it doesn't come in it falls through the opposite way on the EBIT line. So yes, it's meaningful.
We look forward to seeing it in Q through Q3 and talking about it.
Speak again in November .
Got it and then on the comp on a three year you saw.
Substantial step up from Q1 to Q2, and you said Youre at 54.
In Q2, as we think about the full year guide now and is there any way you can say what kind of three year comp is embedded in your.
In the back half.
Yes, so if we go back to full year results on the three year comp were 36% for Q2, we were 54 right. So you are right.
But the trend is that when you're putting your finger on the right trend.
I haven't actually done the math on what that three year comp in Q3, and Q4 would be but suffice it to say that trend continues.
Okay, and then you mentioned.
Some remarks about the distribution changes.
It didn't have much of an impact on Q2, but you expect more so in Q3 can you kind of just walk us through how you expect that to kind of flow. So Q3, more so than Q2 as it does that build into the fourth quarter and then obviously I would think it would continue into the first half of next.
Here as well how do you how do you sort of think about that.
So I'll take you back in time.
When stage stores went out and Jcpenney closed several stores, we went through some pains to quantify what we thought that sales effect would be and I think we were in that average of a $30 million impact 20 million to 40, I think and so when we witness that we were in the stores at the end of August .
That stays stores closed their doors.
What we saw was the consumers' bouncing off the doors, but if.
If you take the.
The consumer experience in them and extend it into what's happening today those consumers typically shop anywhere from three to four times a year with those retailers and so now you have to go through one cycle, where they bounced off the door and figure it out.
Nike Jordan and under armour, Adidas, Puma et cetera are not available in those stores. So that's a failed attempt. So then if they shop with us multiple times a year you have to go through that cycle. So there is always a lag effect between the absence of the inventory and the consumer is showing up in our stores are realizing what are the place to get it.
And on top of that the supply chain difficulties that we all witnessed in the first half of the year and the end of last year meant that some of that inventory straggled in over time and it took even longer for it to disappear from the shelves. So when you combine those two things together and compare and contrast that to what we saw a stage.
Jason Kenney pullback.
Extended it anywhere from three to six months later than we expected and anticipated I think Jared pointed out that in the latter stages of Q2, we began to see that effect.
And Jared.
Yes, that's correct Mike.
Certainly.
Inventory you got succeeded at a lot of these competitors have lost distribution.
We saw a run rate improve in the markets where.
A competitor lost distribution.
Later, we said this before is all of that distribution changes have occurred where the half of our stores do not have a relevant competitor inside of three miles selling the types of products and brands that we carry.
And almost three quarters of our stores made up one zero. So that gives us a lot of confidence as we go forward when you combine that with the <unk>.
Increased customers that bill referenced our ability to get inventory.
We have with the vendor community and our partners.
And we feel like that is absolutely something.
In the back half.
Okay, Great I appreciate that color, thanks, and good luck.
Thank you.
Our next question comes from the line of John Lawrence with the Benchmark Company. Please proceed with your question.
Yes, thanks, good morning, guys.
Terry would you.
Take a couple of minutes and talk a little bit about the women's business I know a couple of years ago, you might have a real.
I guess, a focal point on that part of the business and it just seems like it's been really strong every sense can you comment there. Please.
Yeah, Thanks, John I appreciate that call out.
We made a very significant change to our merchandising organization in the Gulf of support teams within merchandising a few years ago to move away from the Bartlett focus.
The category based footwear apparel and sports as an example, I get more focused on each gender within our business. So as a result.
That work does that change the entire organization again in all of our support teams, we put a significant emphasis on both the women's and kids business.
So the year over year compares obviously have lots of noise.
Very very excited based off the results compare back to fiscal 'twenty that windows was our fastest growing area in those upper seventies, followed by kids.
Over 60%, so really really incredible.
Obviously.
Growing the men's business as well as that business up by that growth.
Super excited.
About what we're seeing in the women's and kids business based on the change in focus.
Great. Thanks for that and the last question for me.
Did you see any.
Correlation across the regions.
With differentiating with different gas prices and.
So that little spike down in gas prices that didn't have any impact on the business.
Sure.
This is like hard to tell.
See significant regional variation.
Again, we think that our consumer has been a pretty good job of economizing and making different choices like all of us do Brian depending upon how much you make and whether it impacts you or not whether thats.
Decreasing the trips and increasing the amount for purchase or Bill I know you've got some some actual data there.
Yes.
<unk> are managing inflation several different ways.
First of all though the Mach E mail, what we've seen historically.
After delaying purchases and self funded product that definitely need some of that we see in that back to school and the delay there and then also just cutting back on their discretionary spending outside of retail.
But as a reminder, customers intend to spend more of a SaaS to school. They don't have any plans to cut back spending for holidays, and we have very few customers trading down.
Thank you Bill.
Great. Thanks, guys congrats.
Thank you.
Yes.
Our final question comes from the line of Sam Poser with Williams trading. Please proceed with your question.
All my questions were answered so thank you very much.
We appreciate it.
I would now like to turn the floor back over to management for closing comments.
Thank you, we appreciate everyone's time and attention today.
Very proud of our results were we look forward to reporting Q3 and again. Thank you to all our teammates who makes all this possible. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.