Q2 2024 Hibbett Inc Earnings Call
Greeting and welcome to Hibbett second quarter.
Fiscal 'twenty 'twenty four earnings 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 the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd like to turn the conference over to your host Gavin Bell Vice President of Investor Relations. Thank you you may begin.
Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks.
Dec is available inhibit dotcom via the Investor Relations link at the bottom of the homepage bored investors don't inhibit dotcom and under the news <unk> events section. These materials may help you follow along with our discussion this morning.
Before I begin I'd like to remind everyone that some of management's comments. During this conference call are forward looking statements. These statements, which reflect the company's current views with respect to future events and financial performance are made in reliance on the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 and are subject to uncertainties and risks.
It should be noted as 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 files.
<unk> 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 in this call you may find a reconciliation to the most directly comparable GAAP measures on our website.
Lastly, I'd like to point out that management's remarks. During this conference call are based on information and understandings believed accurate as of today's date August 25, 2023, because of the time sensitive nature of this information is the policy of hibbett to limit the archived replay of this conference call webcast to a period of 30 days.
Participants on this call are Mike Longo, President and Chief Executive Officer, Jared Briskin Executive Vice President merchandising, Bob Bulky Senior Vice President and Chief Financial Officer, Bill Quinn Senior Vice President of marketing and digital and Ben.
Senior Vice President of operations I'll now turn the call over to Mike Malone.
Good morning, and welcome to the Hibbett, Inc. Q2 earnings call for those of you following along on the slides on slide three entitled Overview. We're pleased to report a solid performance for the second quarter, while the current environment remains challenging we're proud of our ability to execute our strategy and reiterated our guidance for the year.
Our consumers are still dealing with higher costs for essential items like food utilities and gas and thus have reduced some of their discretionary spending.
While our sales have been affected by this we've continued to focus on the aspects of our business that we can control.
While we have a proven business model that has served us well through all economic cycles, and we remained focus on our competitive advantages, which I'll remind you are a compelling product mix a superior level of customer service, our best in class Omnichannel shopping experience and our strategic positioning and underserved markets.
Our footwear business remained consistent in this environment and we're encouraged by our customers' response to our product line, coupled with our kickoff to the back to school season in Q2, we landed sales in a range of our guidance for the quarter.
With the support of our major brand partners, we remain focused on providing a compelling quality product assortment that appeals to our customers and meets current more selective demand trends.
We believe in this environment is more important than ever to continue to invest in our business model.
And those investments mostly focus on the consumer experience at retail and online and the supporting infrastructure that helps deliver a consistent high level of customer service.
Of course, one of the more important business model investments, we make is in our store footprint. We're committed to our previously stated goal to add 40 to 50 net new stores in fiscal 'twenty four above.
Above all we will continue to build upon the strength of the hibbett and the city gear brands and further enhance our strong competitive position and our current and future markets and short we're investing in our business model for the long term and believe that we will continue to take market share.
Turning the call over to Jarrett I'd like to thank our 11000 team members across the organization for their hard work and support to our customers whether they're working at one of our more than 1100 stores in 36 states our omnichannel platform.
Or the logistics facilities or our store support center. They are the face of hibbett and provide consistent superior service that is synonymous with our brand.
And as I've said to the team yesterday. This is by favorite team sport and I wouldn't trade. This team with anyone else's. Thank you I will turn the call over to Jerry.
Thank you Mike Good morning, Please turn to slide four entitled merchandising.
The second quarter concluded with a strong start to the back to school season footwear remained our strongest category during the quarter, but did decline low single digits versus the prior year results. So footwear were challenged early in the quarter due to performance of secondary brands and franchises as well as an unfavorable launch calendar.
The results in the latter part of the quarter were much improved due to an improved launch cadence and the start of back to school.
But where results continued to be driven by product launches as well as the basketball lifestyle and casual categories. In addition, we continue to see an improving trend in our running businesses.
Apparel and team sports, where both negative for the quarter with apparel down in the high teens apparel continues to be affected by promotional activity due to elevated inventory levels in the market. While apparel was a challenge overall early results a seasonal product as well as back to school accessories, such as socks and backpacks were encouraging.
Specific to footwear apparel and men's and kid's business was down while women's was positive the challenges and the launch calendar and secondary franchises at a broader effect on the men's and kids businesses.
Men's and kids were both down high single digits Womens was up mid single digits driven by strong footwear results.
Inventory levels declined slightly in the second quarter versus the first quarter and we've made some progress. Although we do expect the continued promotional environment and a much more selective consumer at least through the third quarter as we worked to reduce our inventory. These.
These promotional efforts as well as support from our key brand partners will help us to achieve our goals for inventory reduction.
The year over year inventory compares will continue to be volatile due to the challenges that affected the supply chain during fiscal 2023, our expectations remain the same for our inventory levels as we expect year over year declines in the second half of the year I will now hand, it over to Bob to cover our financial results.
Thanks, Jared good morning.
Now moving on to slide five.
As a reminder, all financial results are reported on a consolidated basis that includes both the hibbett and city gear brands.
Total net sales for the second quarter of fiscal 2024 decreased four 6% to $374 9 million from $392 8 million in the second quarter of fiscal 'twenty three.
Overall comp sales decreased seven 3% versus the prior year's second quarter.
Brick and mortar comp sales declined seven 7% compared to the prior year second quarter, while E Commerce sales decreased five 2% compared to the same period of the prior year.
E Commerce sales accounted for 15, 1% of net sales during the current quarter compared to 15, 2% in the second quarter of fiscal 'twenty three.
Gross margin was 32, 8% of net sales for the second quarter of fiscal 'twenty four compared with 34, 4% in the second quarter of last year. This approximate 160 basis point decline was driven primarily by lower average product margin, which is approximately 215 basis points below the same period last year with some favorable product margins.
Performance is attributed to higher promotional activity across both footwear and apparel categories.
Higher store occupancy costs, mainly due to deleverage from the lower sales volume accounted for approximately 100 basis points of decline in gross margin versus the prior year period, partially.
Partially offsetting the unfavorable product margin and occupancy impacts was an improvement in freight shipping and logistics cost as a percent of sales.
SG&A expenses were 25, 3% of net sales for the second quarter of fiscal 'twenty four compared with 23, 3% of net sales for the second quarter of last year. This approximate 200 basis point increase is primarily the result of deleverage from the year over year sales decline, we continued to experience headwinds related to wage inflation and have also incurred higher costs in <unk>.
Sent a sales and incentive compensation medical expenses and data processing versus the prior year second quarter.
Depreciation and amortization in the second quarter of fiscal 2004 increased approximately $1 1 million in comparison to the same period last year, reflecting increased capital investments on store development technology initiatives and various infrastructure projects over the last couple of years.
We generated $16 million of operating income or four 3% of net sales in the second quarter of this year compared to $32 8 million or eight 4% of net sales in the prior year second quarter diluted earnings per share were <unk> 85 for this year's second quarter compared to $1 86 per share in the second quarter of fiscal 'twenty three.
We ended the second quarter of fiscal 'twenty, four with $33 1 million of available cash and cash equivalents on our unaudited consolidated condensed consolidated balance sheet and $106 $9 million of debt outstanding on our $160 million unsecured line of credit.
Net inventory at the end of the second quarter was $130 8 million, a 17, 6% increase from the prior year second quarter and up two 4% from the beginning of the fiscal year. Please note that most of the increase in inventory versus a year ago is due to product cost inflation and mix as footwear inventory, which carries a higher average unit cost is a bigger component of the overall.
Tori balanced than it was in the comparable period.
Capital expenditures during the second quarter were $11 4 million with approximately 60% attributed store development projects, including new stores, Remodels relocations and new signage, we opened five net new stores in the quarter, bringing the store base to $1148 36 states, we repurchased nearly 300000 shares under our share repurchase plan and the <unk>.
Second quarter at a total cost of approximately $11 million. We also paid a recurring quarterly dividend in the first quarter in the second quarter excuse me in the amount of 25 per eligible common share for a total outflow of approximately $3 2 million.
Our move to slide six year to date results.
Total net sales for the first six months of fiscal 2024 increased one 7% to $83 $830 4 million while year to date comparable sales have decreased one 4% versus the same period last year brick and mortar comp sales declined one 2% and e-commerce comp sales declined two 2%.
Gross margin was 33, 3% of net sales on a year to date basis versus 35, 7% of net sales last year. This approximately 240 basis point decline was due to lower average product margin of approximately 300 basis points and higher store occupancy costs of approximately 45 basis points. This was partially offset by year over year improvement in freight.
Shipping and logistics cost as a percent of sales.
SG&A expense expenses were 23% of net sales for the first six months compared to 22, 9% in the same period last year. The approximate increase of 10 basis points was primarily the result of higher medical expenses and an increase in data processing costs, partially offset by lower advertising and professional fees.
We have generated $61 9 million of operating income or seven 5% of net sales through the second quarter of fiscal 'twenty, four compared to $83 5 million or 10, 2% of net sales in the prior year's first six months.
Net income for the first six months of this year was $46 8 million or $3 61 per diluted share compared with $64 1 million or $4 77 per diluted share in the prior year comparable period capital.
Capital expenditures for the first six months of the fiscal year were $25 7 million predominantly related to store initiatives, including new store openings relocations expansions Remodels and technology upgrades I'll now turn the call over to bill to discuss consumer insights.
Thank you Bob our consumer research and analysis of loyalty data gives us insight into the mindset and changing shopping patterns of our customers to start most customers still have elevated concerns of the general impacts of inflation.
<unk> of our gas grocery and utility costs remain high.
Also an added concern around resuming student loan payments later this year.
Looking at our loyalty purchase data, we saw sales difference between new members and existing members sales from new members were down driving the sales comp decline in Q2, our concerns around new customer sales were mitigated in the latter part of the quarter, our new customer sales grew significantly due to energy from back to school and launch.
For the entire quarter, our existing customers, which are the vast majority of our program continued to spend more than prior year. This was consistent with what we experienced in Q1.
And existing customer sales is a validation of our focus on our compelling product mix superior customer service, our best in class Omnichannel shopping experience and our strategic positioning and underserved markets.
Turning to our e-commerce business in Q2 E. Commerce sales were down five 2% year over year. The primary headwinds included customer economic concerns a highly promotional environment and unfavorable launch counter these factors led to a decrease in traffic and conversion, which were partially offset by higher average purchases.
Digital sales in latter part of the quarter were much improved due to a favorable launch cadence a strong start to back to school as always we remain focused on the long term and providing the best possible customer experience for online and Omnichannel shopping.
To that end, we have many planned initiatives for the remainder of this year to drive acquisition engage customers and further provide a world class retail experience.
Now I'll turn the call back to Bob to discuss our guidance.
The business outlook for the remainder of fiscal 2024 remains challenging and difficult to predict inflation has continued to have a broad impact not only on consumer sentiment and spending patterns. But has also contributed to increases in our operating costs in the form of higher wages and prices, we pay for various goods and services are interest rates.
Have driven up the cost of borrowing for us and May also be affecting discretionary purchase decisions those consumers with variable rate loans or credit card debt.
We also expect the heavier promotional environment to continue for the near term in summary, economic uncertainty coupled with a more cautious and selective consumer has resulted in this uncertain retail environment. As you will remember these factors resulted in us lowering.
Lowering our fiscal 2020 outlook at the end of the first quarter as we move beyond the second quarter embark on the third quarter, we feel our projected fiscal 2024 financial performance continues to be aligned with the expectations. We set in May. Therefore, we are reiterating our overall guidance for fiscal 2024 slide eight summarizes our updated.
In fiscal 2020 for guidance.
In summary, net sales for the full year, including the impact of the 50 <unk> week are anticipated to be flat to up approximately 2% compared with fiscal 2023 results. The 50 <unk> week is expected to be approximately 1% of full year sales approximately 52% of our total sales will be recognized in the second half of the fiscal year comparable.
Sales are expected to decline in low single digit range for the full year full year brick and mortar comparable sales in full year E. Commerce revenue are also anticipated to be in the negative low single digit range. The net new store growth expectations to open between 40% and 50 units.
We anticipate the aggressive promotional environment to continue in the near term projected full year gross margin range is approximately 33, 9% to 34.0% of net sales SG&A as a percent of net sales expected to be in the range of approximately 23, 3% to 23, 5% of net sales.
Operating margin for the year is expected to be in the range of seven 4% seven 8% net sales operating profit as a percent of net sales in the fourth quarter benefits from higher sales volume, although the 50 <unk> week is considered near breakeven due to the low sales volume and that extra week.
We still expect to carry that throughout the year, we project borrowings to moderate in the second half of the year as inventory levels decline. After the back you will see.
Diluted earnings per share anticipated to be in the range of $7 to $7 75.
Using an estimated full year tax rate of approximately 23, 5% to 23, 7% and an estimated year end weighted average diluted share count of approximately $12 $8 million, we project capital expenditures in the range of $60 million to $70 million with the largest allocation focused on new store growth Remodels relocations, new store signage and improving the.
<unk> experienced.
Our capital allocation strategy continues to include share repurchases and recurring quarterly dividend dividends. In addition to the capital expenditures noted above.
That concludes our prepared remarks, Rob Please open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue 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.
Our first question comes from Mitch <unk> with.
Seaport Research. Please proceed with your question.
I guess I've got a few.
Maybe start can you address the impacted easy add on the quarter and can you say how much longer youre going to have you.
Z product going forward.
Yeah, Hey, Matt Good morning, it's Jaret.
<unk> EZ product actually launched during the third quarter. So there was no impact during the second quarter.
And further past the third quarter, we don't have any additional visibility at this point.
Okay.
And then.
Darren on the running business you talked about improvements there.
Is that a change in trend or is that more of a reflection of some change in your assortment that you've kind of cycled through.
Maybe what was bad in that segment now you've got better product. There can you just maybe elaborate on that.
Yes, its two fold I think certainly some changes in the assortment.
New iterations of product the liberators preparation for back to school for.
Were formed well.
We certainly have enhanced our focus on the performance running category.
And then have evolved our lifestyle running categories, some new iterations.
We feel good about the running business.
As you said historically, it's a smaller portion of our overall business, but the business is performing well.
Okay, and then maybe one last one just on the on the product margin.
So <unk> was not down as much as one Q. It sounds like you expect promotions to continue at least through the third quarter can you just kind of walk us through how you think about.
Product margin over.
Over the next couple of quarters.
Yes, so we still expect some pressure from a promotional environment, obviously, Stephanie and her team are doing a lot of work on right sizing. This.
And to ensure that the quality of our inventory.
<unk> exceptional level those are our expectations. So we still think there'll be some pressure.
Some of the early reads on product from our fall assortment that started with back to school and will give us some confidence, but we still have some secondary brand pressure and we still have secondary franchise pressure.
And we know Theres still some pressure from a consumer standpoint, but we like where we're headed.
Here with our plans and our guidance for the back half.
Sure.
Alright, thank you.
Thank you.
Our next question is from Justin Kleber with Baird. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the question.
First just a follow up there I mentioned his question on product margins, how much of the pressure I think Bob decided about 300 basis points lower over the first half how much of that do you think is somewhat temporal.
Given the excess inventory across the sector.
Promotional activity associated with that.
Yes, I think it's a great question, Justin I think Theres a lot of factors at play here I mean, you have certainly we're working to reduce our inventory overall, but we're going to enhance the quality of our inventory overall there is a lot of product in the marketplace particular downstream.
Dream.
We believe we will still have significant promotional activity plus we have some.
Some of the concerns for the consumer that Bill mentioned so.
Putting putting all of those things together from an outlook perspective.
Tends to be a little bit difficult.
As far as what we have in the pipeline, we're very very confident.
The questions remain just how fast enough.
An optimal level and quality of inventory.
Got it okay. Thank you.
Thanks.
Bob question for you on free shipping and logistics.
<unk> cost favorability, how much of that is just the external environment.
Yes.
Maybe some internal initiatives or actions on your guys part.
I think it's probably a combination of both obviously.
We obviously cycled through some higher freight costs in previous periods and some of the comparable periods in that we've obviously some of that through the P&L over previous quarters.
We continue to always look at ways to make the process more efficient getting closer to the consumer in terms of <unk>.
Delivery cost, obviously running things through our distribution center more quickly and more efficiently. So I'd say, it's probably a little bit kind of mix of both about 50 50, if I had the guests and I think we are continuing to.
Look at how receipt flow impacts that number in the back half of the year and we again think that we're moving in the right direction in terms of overall freight shipping logistics costs.
Okay. Good to hear last one for me guys just on.
I guess, the cadence of comps throughout the quarter clearly.
July it sounds like it was the strongest month, given giving back to school any comment on the back to school strength.
Late in the quarter has been kind of carried over here into the first part of <unk>.
Yes, Justin this is Jared obviously as we said we were pleased to the start of back to school or the what occurred in the second quarter.
We are happy with a lot of the product that we deliver certainly as we mentioned the <unk>.
Seasonal aspect of apparel and gave us confidence some of the back to school categories performed very well.
At this point, it's really still early to comment on back to school in its totality.
I think we feel pretty comfortable that we've captured our forecast for back to school within our guidance.
Great Alright. Thank.
Thank you everyone.
Thank you.
Okay.
Our next question is from Sam Poser with Williams trading. Please proceed with your question.
Thank you. Thanks for taking my question good morning can.
Can you tell us just to make the simple can you tell us what the comps were by months.
Hi, Sam.
Hi, Sam.
Good to hear from you.
Our custom not to comment on intra quarter trends.
And so as we look all backwards, yes got it but I think we followed the most of the trends of the industry. We had a good July I think would be the best way to say it.
Were you positive in July how about that question.
Yes, we were.
And then.
Jared you talked about you also asked about the consumer being more particular.
And how well you did with some of the big launch products. So my question is as you look ahead is there going to be enough.
Product.
For those particular customers.
More of those particular customers.
So those customers, let's say bought the launch product was there any demographic similarity between them or if the product was right. They just show up.
And again had other products that they just didn't like as much and they did.
Yes, I think Sam I mean, the product is right and the consumer perceived value in the product.
That value creation coming from launch and scarcity could come from materials could come from this story.
Could come from franchise management, a lot of things can drive that value in that demand.
And again as we as I've said.
Pretty confident in the pipeline of products as far as what's coming in from a new perspective, I think Stephanie and team continue to refine our assortments and make them as dynamic as we can for our consumer at the same time, there's challenges with the consumer we want to balance our inventory correctly. So there are some other offsets as well.
We feel good about the pipeline.
Our partnerships with our brands remains fantastic, we have lots of focus on our business.
We're focused on because of the underserved markets that we cater to largely were complementary and incremental to the market. So.
Meaning a lot of opportunity and focus with our brand partners.
Just one just a quick follow up on that.
When the supply chain issues were going on some time ago.
You made some decisions to bring in some apparel and other things too.
My impression was sort of to fill up the stores. So looking back on what happened then and.
Sake of argument.
70% of the product is compelling stuff, that's going to attract that particular customer.
Or you're just not going to buy the other 30 even.
Sort of makes the stores look for with the good stuff and instead of.
Yes, well.
I would say, we never just try to buy bad stuff, obviously, we always try to buy just the good stuff.
But I think as the <unk>.
<unk> now has become.
A little bit more careful around some other choices, we have to continue to refine that in what we do.
We're following what we see from a pattern standpoint to consumers and we believe we have access to the things that they're interested in.
Those are things, where we're making investments in and we're pulling back on places that we don't believe are either on trend or the consumer doesn't have interest in.
But we never tried to just five things that we don't think are going to resonate with our consumer.
But that funnel was a lot wider when there was a lot of cash in the market today. The funnel is much more narrow.
And we're narrowing down our focus around what we put in the Assortments.
Sorry, one last thing does that narrow funnel.
<unk> is the consumer more cautious or more particular.
And that narrow funnel, that's somebody else I know uses.
<unk> is a situation where when you have exactly what that consumer wants they buy it and when.
And if somebody else is exactly what they want or another category or entertainment or something to buy it from them is that a sign of a weak consumer or just a much more particular consumer.
I think it's some of both to be Frank I think Bill has got some information on the steady upward, yes, Sam Hi, Shannon.
We were looking at two different lenses first of all the existing customers, we have which is the bulk of our customers are doing well.
So we actually saw them have had a positive comp here in <unk>, but it's really the new customers that we're seeing that impact and that's just less of them coming in but when they come in they are buying the same that actually a little bit more.
Some of that is economic we're in a good time to sell a lot of new customers and obviously, we're seeing a reverse of that in some of that is timing, where we saw new customers. We saw a nice increase.
In July and the startup back to school.
With those customers because at back to school as well as launch.
Thank you very much continued success.
Thank you. Thank you Sam.
Our next question is from Cristina Fernandez with Telsey Advisory Group. Please proceed with your question.
Hi, Good morning, I wanted to see.
Jim you can comment more about the composition of the inventory.
Particularly interested in I guess, how much each of clearance inventory.
Alright.
The end of the first quarter and the excess inventory, where it's a more concentrated is it still primarily apparel.
Footwear as well any color there would be helpful.
Yes, Hi, Christine it's jaret.
Yes, I think we continue to strive to get to not just an optimal level of inventory, but optimal health of inventory.
The team has been working incredibly hard at this initially some of the challenges were centered around apparel and that was a significant focus of ours to get that business cleaner and healthier.
And we're largely at that point now we still have some challenges around the secondary brands and franchises.
Within the footwear business that will continue to take a little bit of time to work through.
Again, as we said we feel like we can work those things down during the back half of the year to really get to an optimal level.
Continue to get great support from our vendor partners to help balance that inventory. We're obviously have been more promotional to try and drive through.
Some of that aged inventory, but.
Looking a little bit longer than we'd like but we are making strides and feel very confident in what we can achieve in the back half based on what the team is getting accomplished.
Okay.
And then my second question is on the.
Outlook for the third versus towards the fourth quarter the shells outlook implies.
The fourth quarter being a lot better.
Based on my math, Comped down low single digits versus.
Mid to high the past two quarters. So what gives you confidence that the fourth quarter will be better is it just the comparisons are you seeing a better product launch calendar.
As we've said we're pretty confident.
In our in our Assortments as a whole and certainly in the calendar as a whole I mean, I think our expectations are that as we get to a cleaner position on inventory in a more healthy level of inventory.
We will have more of that excites consumers. The further we get into the back half of the year.
And just one last clarification I wanted to understand the outperformance and women's while up to two men and kids. It said because the launch calendar was better for women.
Just less dependent on the new one.
The women's business is a little less dependent on the launch calendar. So there was an outsized impact to the men's and kid's business negatively as a result of the launch calendar.
As a reminder, we've had a heavy heavy focus on the women's business for a number of years now.
Including reorganization of our merchant teams to get more focused around.
The women's business and the kids business. So we're pretty proud of what's been accomplished in womens.
We.
I feel like we have a nice opportunity ahead.
Thank you.
Okay.
Our next question is from John Lawrence with Benchmark Company. Please proceed with your question good morning, guys.
Good morning.
First of all could you could you talk a little bit about.
New stores Mike.
The ones you've opened in the last couple of years, how are they coming out of the ground recent openings in this environment.
How did I get your comment.
Thank you.
Very pleased with our new store performance as we repeated a couple of times. We've got a goal that we've talked about 40 to 50 net new stores a year that includes a handful of closures every year because every retailer does that.
I think we disclosed last year that Las Vegas was our new market and buy Las Vegas, we do not mean on the strip where the tourists go we mean, where the people live and those stores are doing really really well very pleased with that and of course, we're positioning them.
For the big event of the Super Bowl in February our newest market news has broken on its Milwaukee, we like Milwaukee, we've been.
Past retailers been in Milwaukee quite a bit and it's a great market for us.
And we'll be we'll be breaking that market relatively soon.
And then most importantly, so those are new markets. Most importantly, we've got till end markets, which are always more profitable because you've built brand equity in those markets say, southeastern Georgia, or the panhandle of Florida, or Arizona or.
Or parts of California, where we go fill those markets in in between two stores. We can further our culture, our operational culture, where we can bring in seasoned veteran players.
To run the stores and you can take an assistant store manager from one store and make them the store manager of the new store and they bring select members of the crew. So that always works better operationally and then the logistics of the hub and spoke network that we run we can leverage that as well and so all of those obvious opt.
<unk> efficiencies are important but the most important part is the consumer knows us They trust us.
And we hire from the neighborhoods that we're in we run that neighborhood store.
And we get rewarded for that in those new stores.
Great. Thanks follow up.
Bob what.
What kind of a level some of the cost we saw the medical cost et cetera.
What do you need to see to start.
Leveraging some of that or being able to kind of comp increase.
What would it take to stop some of that deleverage on that on the cost line.
Okay.
Yes, I don't know if its so much like a specific spend category one of the things. We would continue to do is invest in that on the <unk>.
<unk> experience in the physical and Omnichannel store.
Revenue streams is also kind of putting some more infrastructure within the back office. So as you know we've done a lot of upgrades as we've mentioned over the last couple of years on providing more tools within say the store support center and the distribution facility to become more efficient. So we don't really get into trying to manage to a specific.
The comp number it's more about trying to run the business as efficiently and effectively as possible and again I think we've made some structural changes in our organization over the last 12 months to 18 months, we continue to find ways to leverage these investments that we've made in the back office operations to become more efficient and I think what's going to happen is youll see that.
Again, we'll continue to try to strive to keep that SG&A level.
<unk> or <unk>.
Similar levels or declining obviously in the future, but not really necessarily tied to a specific comp sales more about just going after more efficiency and effectiveness.
Great. Thanks, guys. Good luck.
Thank you.
Okay.
Our next question comes from Amit <unk> with B Riley. Please proceed with your question.
Hi, Good morning, Thanks for taking my question I would like to turn it back to guidance in the prepared remarks, you mentioned that you expect the promotional environment to continue at least through the third quarter should we be expecting some improvement in the fourthquarter any context around that.
Guidance, Okay great.
Yes, I think the.
Comment certainly we expect the environment to be promotional in the back half of the year.
Neil.
Comparable we are well positioned.
For the fourth quarter.
With some of the.
Conversation turns to.
Typically end of the third quarter, but we feel like will be largely past.
The big challenges with regard some of our.
Composition of our inventory issues by the time, we get into the fourth quarter.
Got it and we've heard.
Other retailers talk about shrink a lot is that something youre seeing as well.
Sure.
We are this is Mike. Thanks for the question. So while we experienced a minimal amount of shrink in our omnichannel experiences, mostly situated in the brick and mortar and so I'll, let Ben take.
That question Yeah I appreciate the question similar to most retailers we've seen some elevated shrink levels really over the last couple of years well organized crime is real and it does impact us.
Kind of comparing to last year shrink really hasn't had a material impact to our gross margin percentage.
I'll also point out Thats included in our guidance for the back half of the year.
We really focus on.
Customer service and know that that's really our biggest deterrent from a shrink perspective and do that each and every day.
Yeah, and let me follow up on a couple of points certainly topical and it's an issue that's come up.
General amount this week in particular.
And just to remind everybody the biggest component of shrink and staff.
And not to Bury the lead.
It's clear clear and obvious that had stuff that's a cost of our companies and it's a tax on the consumer it's something like every cost whether it's.
A tax levied by the government or it's a problem with operations all those get passed onto the consumer that's all Walmart did a very good job. This week in their conference call as CFO said shrink has increased a bit this year and an increase last year. It was uneven across the country that that Orion is very well with what we're seeing in as well.
Doug Mcmillon said and I quote there needs to be action taken to help protect people from crime, including theft I felt that was on the money and appreciated im saying it and then I would further add that the CEO of the National Retail Federation, Matt Shea 10, a very nice job on CNBC Wednesday morning on Squawk box.
<unk>.
And he discuss the issues to include the resale market and marketplaces as being a particular problem.
And I thought that resonated with us so.
So if you have a chance to to Rewatch that I would encourage it.
Thanks for that and just one clarification on the accounting around shrink some other retailers have mentioned that thank you one annual.
Physical count can you remind us.
Our policies around that.
So we we take two physical counts currently in all of our stores. We also use RFID technology.
To take basically weekly snapshots of some percentage of our inventory, we don't have 100% of our product a tag with RFID, but we're keeping pretty close to shrink.
Levels pretty much on a weekly basis with that RFID and again kind of lock in everything in twice a year with most of our stores also do cycle counting and some physical counting within our distribution centers. So we feel our shrink accounting is pretty current and on point at this point.
Great. Thanks, so much.
Okay.
Thank you.
Our next question comes from Alex Perry with Bank of America. Please proceed with your question.
Hi, Thanks for taking my questions. Just first Jeremy can you help us it seems like the launch calendar was a key driver in the quarter can you just talk about how the launch calendar looks for the balance of the year end and three Q does it sort of looks similar to how it did in July in the back half of the quarter, which really drove a nice acceleration for you.
Guys.
And then maybe just remind us the quantity of the launch product that youre getting sort of year over year is that is that matter given sort of the downsizing we've seen from other retailers in the network. Thanks.
Hey, Alex Good morning, it's Jaret.
I would say it this way obviously the launch calendar always has been somewhat volatile it will remain volatile it's been volatile.
To reiterate what I said earlier I think we're very confident that what we have in the pipeline both from a launch perspective and from a non launch perspective.
So I think that there could be movement in the calendar. There historically always has been so well see what occurs but our confidence level is high.
Regard to the assortment.
Our partnerships with the brands.
To be excellent we continue to get more and more focus.
Because of the incremental nature of our business. So again, we feel pretty good about where we stand with regard to the quality of our order book.
Perfect and then I just wanted to ask in terms of the lapping of some of that delayed apparel receipts from last year. How are you guys sort of thinking about that and just the composition of the inventory versus.
Sort of what you saw last year and just remind us.
How much that affected the business last year end.
How when you really started to promote that product.
Yeah. So the big challenges last year really was from last year and the prior year was just product delivering in the incorrect season right. So you had spring product delivery in the fall fall product delivery in the spring as examples those challenges are somewhat difficult to overcome because apparel was very seasonal.
Nature.
That obviously now that the supply chain has improved significantly.
We are even better.
We're consistent with what we've seen historically with regard to spring and summer liquidations will.
What we have from a timing perspective coming in around fall and seasonal.
We're getting back to some more historical norms around delivery cadence.
<unk> seen some success from it so we're a little bit more confident that we won't have some of those seasonal challenges.
That really affected the promotions.
Great and then just two quick ones I guess, one just can you give us a little more color on how youre thinking about your exposure.
The student loan repayments coming back on I think you layered in commentary about that being an additional headwind do you think you have an outsized impact there or higher eastern thinking about that.
Bill do you want to take that one yes, Alex good morning, So we do a quarterly survey with our customers and that was one of the questions. This quarter that we asked.
Definitely a concern overall.
And when we dug further into it a small portion of customers are highly concerned.
So that's something that we need to watch.
Definitely headlines out there there could be some mitigation of what's going to happen in October .
But that's definitely something that we're going to continue to monitor and get more information from in terms of our customers.
Perfect and then just my last one maybe barb on the on the margins any help on sort of <unk> versus <unk> gross margin cadence is it fair.
Inventory getting better by <unk>. So is it fair to say <unk> gross margins down year over year, and then some improvement in NOI over wide basis, and <unk> or how should we be thinking about that.
Yeah again, I think we're not going to get into specific Q3, Q4 relationships. Obviously Q4 is a higher volume sales quarter. So you do get a little additional leverage on things like your store occupancy.
Again, as Jared said earlier.
Launched calendars can kind of move a little bit between quarters between periods. At this point in time again, I think we're obviously going to hopefully move through some of that.
Older inventory more efficiently as we get them through through Q3, maybe a little bit less of that in Q4, I'll, let you kind of predict how that plays out in your own model, but again I think we see that we will see a little bit more better back half in terms of comparison than we saw in the first half of the year.
Perfect.
Going forward.
Thank you. Thank you.
Our final question is from Sam Poser with Williams trading. Please proceed with your question.
Just two quick ones. Thank you.
The new market like Las Vegas, what kind of are you seeing a subsequent e-commerce lift with that.
Can you give us some idea of what youre seeing.
How that all works what the relationship is as you go into new markets.
Yes. This is Mike.
So in layman's terms, we see e-commerce sales.
Go up as we increase the store count in the community. It's also though a component of why we open a store in a particular geography, because we examined.
The direct to consumer sales in those ZIP codes, and we make it part of our algorithm and part of the proof of should we open a store and so then when we actually opened the store we get it we get an outsized portion of the sales in that ZIP code and that allows us to continue to go down the path of being incremental and complementary to our major.
Brand partners.
And then Jared.
To follow up on one of the other questions just directly with the launch product or your allocation up year over year.
Even each other.
You did chuckle.
I'll answer it the same way I've answered it and we're very confident in our order book and very confident in the support that we're getting from all of our key brands.
Right I understand that are they up year over year.
I will let you infer that based on our commentary.
So if we wrote yes your inventories up your allocations are up year over year that would be correct.
Based on your commentary.
We're getting much more focus from our brand partners yes.
Okay, well that was easily you could adjust that that to begin with thank you and continued success.
Thank you we appreciate it.
Yes.
Our next question is from John Lawrence with Benchmark Company. Please proceed with your question, yes, thanks for taking them at the end here.
Mike when you look at.
College football has been important.
Teams are expected to do very well how important is that season for the company at this point.
It's all sports are important to us as part of the DNA of the company as part of the culture of sport.
That is part of our major brand partners.
<unk> as well as ours I'm surprised you didn't leave with army, but we'll go with the SEC for just a moment and.
Yes, it's important and all the other conferences as well So college football it's interesting because it's more of an event, it's less about the game and it's more about a gathering of people celebrating the things that they have in common whether it's a team or it's a sport or their family or it's just an opportunity to.
Get together every time people gather they.
They think about their personal appearance as they think about how they want to occur to their peers their families and to each other and the self pride that goes with it and Thats one of the things that just really interesting business model because it really is an expression of your lifestyle and what you were.
And it starts with the toe and it works upwards and that's why we say toe to head so often.
So football and any other thing that causes people together drive sales.
Great Thanks, and good luck.
Thank you.
We have reached the end of the question and answer session I would now like to turn the call back over to Mike <unk> for closing comments.
Thank you so much we appreciate everyone coming on today and taking your time to and spending it with US we look forward to reporting Q3. Thanks.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.