Q2 2020 Earnings Call
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Well the answer to any border advisory fees.
First name David.
The last name Brown.
Okay.
May I have your company name.
A year.
A I.E.R.A.
I eat or a okay.
Yes perfect.
Alright, and <unk> is Oh, sorry are you with the President we did not.
No no.
Okay may I have a telephone number.
Sure two one too.
960 3697.
697, Thank you Oh place you on music hold until the call begins Oh actually started already l. Please.
I think it started yet.
Yes, ive to hopefully see through all those things.
Yes.
Payments based on city gears achievement of certain EBITDA thresholds for fiscal 2020 and 2021.
The preliminary fair value of the liability was included in other liabilities in the fiscal 2019 year end consolidated balance sheet.
Subsequent changes in the liability are recorded through current period earnings and based on current forecasts for city gear performance for fiscal 2020 and 2021.
The earn out liability was increased $7.1 million, which has an impact of 300 basis points to sales in the current quarter. We expect some continued volatility in this expense as we continue to realize the city gear business opportunities.
GAAP EPS DNA also includes a charge of $900000 of 35 basis point impact of sales related to our accelerated store closure plan. We're moving forward with the plan to close previously identified stores with the majority of the remaining closures expected to occur late in the fourth quarter.
The impact of these two charges have been adjusted in the non-GAAP tables included in the earnings release.
Additionally, we incurred a net charge of $1.9 million related to the finalization of the CEO retirement agreement.
This amount was not removed from non-GAAP SDMA and represents an additional 74 basis points to SDMA and nine cents to consolidate EPS on a normalized basis current SDMA was 27.7% of sales compared to 29.4% in the prior year second quarter.
We experienced strong leveraged in SDMA due to normal payroll leverage and improved insurance expenses as well as positive leverage in advertising as we continue to move toward more productive advertising programs.
The income tax rate for the quarter was 24.1%, which compares to last year's rate of 28.9%.
We expect full rate to be approximately 25.5% due to the lower expected full year taxable income caused by the contingent earn out adjustments and the resulting impact of section 162 and permanent differences.
Consolidated loss per share for the quarter was 49 cents per share compared with a loss of six cents per share last year, excluding the impact of the three items in SDMA mentioned previously normalized consolidated loss per share will be four cents compared to a loss of six cents per share last year.
Turning to the balance sheet. The company ended the quarter with $978 million in cash versus $119.6 million at last year's second quarter, and we had borrowings on our credit revolving credit facilities of $17 million related to the city gear acquisition.
We continue to expect that to be paid off by the end of the fiscal year.
Inventory increased 9% from last years second quarter.
That does include the city gears inventory and sales as a reminder were up 19.6%.
We spent $3.4 million in Capex as we opened two stores rebranded to hibbett stores. The city gear relocated three stores expanded an existing store and made further progress on other capital initiatives also the company purchased 304000 shares for a total of six point.
$4 million in the quarter under our share repurchase program at quarter end, we had about $174 million remaining under the existing authorization.
So turning to our guidance based on the strength of the first half and our second half expectations. We're updating our full year guidance with the following changes we now expect full year comparable sales between positive one and 2%.
For gross margin, we expect our overall rate to increase 30 to 40 basis points.
Excluding the impact of nonrecurring items in both fiscal years, we expect non-GAAP gross margin to decline 40 to 50 basis points. This estimate includes an assumption of liquidating more store inventories late in the fourth quarter.
With respect to SDMA rate, we expect an increase in the range of 50 to 70 basis points.
Excluding nonrecurring costs for both years, we expect non-GAAP SGN a rate to improve 40 to 60 basis points from the last fiscal year. As a reminder, GAAP SDMA includes an estimate for additional contingent earn out fair value adjustments.
Our full year tax rate will be approximately 25.5%.
And finally, we expect diluted earnings per share to be in the range of $1.35 to $1.50, which includes 75 to 80 cents per share for nonrecurring costs associated with debt associated with the acquisition and integration of city gear and costs with our accelerated store closure plan. We previously expected nonrecurring costs to be approximately 25 to 35 cents per diluted share and the increase is the result of the greater expected impact from the valuation of the city gear contingent earn out liability.
Excluding nonrecurring costs non-GAAP diluted earnings per share is now expected to be in the range of $2.15 to $2.25 and does include the nine cent impact from the CEO transition costs.
For Capex, we expect to spend 18% to $20 million compared with previous guidance of $18 million to $22 million.
I'll now turn the call over to Jarrod for a review of merchandising. Thank you Christine good morning.
As a reminder, in my prepared remarks are reflective of comparable store trends. This will not include city gear stores until the fourth quarter.
We're very pleased with our business during the quarter as we had two significant headwinds to overcome the first was changes to the launch calendar, which impacted the second quarter, while impactful to the quarter, we do not expect the changes to impact our full year results negatively.
Secondly, we have seen changes to back to school shopping patterns not only do we continue to see volatility in school start dates. We are also seeing shoppers wait until the very last minute to make their back to school purchases often resulting in peak volume days occurring as close to the school start date as possible.
This volatility did impact our July results negatively, but it is having a positive impact to August .
During the second quarter, our footwear business increased low single digits, posting our eighth consecutive quarter of comp sales gains men's was up low single digits women's up double digits in kids were up mid single digits. Nike sportswear was exceptionally strong during the quarter led by Air Force, one basics and fashion executions.
Max Air was also a key driver of our business as both heritage models, such as Air Max 97, an air Max 90 performed exceptionally well along with new product creation, such as Vapormax and mix to 70. During July two additional emax or models were released the react to 70 and air Max 200, which are both performing well Jordan business performed well during the quarter. However, the launch calendar changes mentioned earlier were significant challenges to overcome increased investments from champion FILO Brooks and Reebok were also key contributors to the quarter.
Our apparel business was down low single digits for the quarter at to where it was up low single digits, including a double digit gain in men's apparel.
Womens and kids apparel were both down primarily due to the later back to school season, you referenced earlier.
We've seen a nice acceleration in these businesses during August accessories were positive low single digits, driven by strong results in bags had base and water bottles.
License business remains soft and was down high single digits.
Team sports business was down high single digits baseball softball, invaluable all performed well and we were positive soccer was down low single digits, the largest impact to the team sports business was football, which was down double digits, while the second quarter had its challenges we executed our strategy well, we exited the quarter and a very clean inventory position and are excited about the product investments we've made for the balance of the year.
I'll now turn the call over to Jeff Rosenthal.
Thanks Jerry.
We are quite pleased with our second quarter results. We believe our strategic initiatives are taking hold as we recorded positive comparable sales and three consecutive quarters.
We expect a solid finish to the back to school fees that along with momentum from a strong product offering for the second half of the year.
Through the gears early results are encouraging and we expect a strong finish to the year as they enter the back half with.
A strong assortment of fresh in fashion forward inventory.
We also expect the planned migration of 50 years website to the head Hibbett digital platform will create an elevated shopping experience for all for all of our customers as it will increase access to product, regardless of which side the customer visits.
We have updated our annual guidance due to our strong first half results and confidence in the second half of the year, we will continue to drive the business with our strategic focus on leading with sneakers and connecting the toe to head concept with active apparel and accessories and footwear.
We will continue to make progress in optimizing the effectiveness of our marketing portfolio as we are growing our online and Omnichannel business digital sales for the second quarter increased 25% over last year.
New loyalty enrollments were up 17% over last year loyalty sales were 64% of the total company sales this year versus 61% last year.
We will continue to make strategic improvements may may two.
Our email program at our new email sign ups, which increased 51% year over year. Our emails are more targeted with increased personalization and more customized content.
We will continue to improve digital gross margins through the careful management of full and comp and clearance price offerings, we will continue to test and implement strategic.
Digital projects and we will deliver in the third quarter.
Our merchants have done an excellent job in getting our inventory in great position to move us into the second half our vendor partnerships have never been better as they supported us tremendously to improve our omnichannel offerings and integrate city you're into the Hibbett operations. Our team continues to work extremely hard to ensure our customers have the greatest service and the capability to purchase products both in stores and online.
August could not be done without the dedication of all our associates and their expertise knowledge teamwork and extended hours I would like to thank all of our associates and let them know their continued support and dedication to hibbett does not go and noticed operator, we're now ready for questions.
Thank you.
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Okay.
Our first question comes from the line of Seth Sigman with Credit Suisse. Please proceed.
Hey, guys. Good morning, Thanks for taking the question so for the quarter you highlighted a couple of issues that weighed on the comps for the full quarter talked about the launch calendar impact back to school sales being delayed any way to quantify the impact that that may have had on the second quarter and how do we think about that coming into the third quarter.
Yes, I think you are quantifying good we've certainly seen the business moves on the launch calendar perspective, I mean, we have movements on a quarterly basis fairly often.
So there were some challenges there certainly with them a large launch moving out of the quarter and into the third quarter. That's one of the reasons why we feel positively about the third quarter and the full back half of the year regarding the back to school as far as quantifying the business as far as what's moving the ticker key back to school category like Backpacks, we've seen our peak week move for the last week of the second quarter. We 26 to the first week of August and week 27, So we're seeing that movement across multiple categories and multiple geographies as the back to school dates shift. So I think quantifying that at the end of the period will be a little easier than it is today as we're still seeing some of that movement.
Moved from four of July two week one of August we won two week two of August and so on.
Got it Okay. That's helpful. And then you did raise your full year comp guidance by 50 basis points at the low end any more color on that are you effectively raising your second half expectations or does that reflect the first half performance.
And then sort of related city gear as that starts to come into the comp base later in the year, how do we think about the impact that has thanks.
Yes, so the raise to the comps was predominantly from the strength of the first half if you remember at the beginning of the first quarter. We indicated we want to wait until we finished the first half to fully assess the rest of the year, where we thought the comps sitting here comes in the fourth quarter and they were roughly 20% of sales. So one quarter impact on full year comps is not going to be significant but we are pleased with sitting here I am pleased with our inventory position and how we think their performance will be in the fourth quarter.
Okay. Thanks, guys. Good luck.
Thank you.
Thank you.
Our next question.
Comes from the line of Sam Poser with Susquehanna. Please proceed.
Thank you very much good morning, I have a a handful can you tell us what your comfort by month normally have given that in the past.
Yeah, as we mentioned on the last quarter, we're not going to be providing monthly comps just because of the noise that can be between months. Jared did mention that July was negatively impacted due to back to school, but it's having a positive impact to August and May and June were low single digit positive.
Thank you and then just Jared I missed what you said about the apparel can you just say that again, because you were moving fairly quickly there in the quarter.
Yes apparel was down low single digits, our activewear business remains very strong highlighted by double digit performance in men's we did see some softness in women's and kids a lot of that coming in the July period, which we have attributed to some back to school shifts based on the early August results. The other impact on the apparel side is the license business remains fairly tough which has been a trend for the last.
Couple of quarters.
Thank you and then lastly can you give I mean, you didn't mention the tariff threat of tariffs and everything else can you give us some idea of what you're seeing.
What your how your <unk>.
How you're planning for what you're seeing how you're planning for you might not be seeing.
Yes, and so on.
Yeah, I mean, I think right now we're really not seeing much in the way of any impact that will hit us for this year.
There's been some talk in some noise regarding next year, but I still think it's very early to really dissect what that full impact will be.
But for this year, we're pretty confident that there will be much of an impact if any at all.
Okay, Alright, thank you very much.
Good luck.
Hey, Sam.
Thank you.
Our next question comes from the line of Peter Benedict with Baird. Please proceed.
Hi, guys. Thanks.
First question just for clarification, so Christine that the second quarter earnings the loss of 13 cents that did not include the ore that does include the nine cents.
CEO severance hit which presumably is nonrecurring. So if that was if you were to back that out or would have been negative force a loss of four cents. That's my first question is that right.
Correct on a normalized basis. It was a loss of four compared to a loss of six last year.
Okay, and then and the same on the guidance. The 215 to 225 that includes a nine cents hit from the severance. So you gross that up nine cents. If you wanted to back it out fair correct.
Correct, Okay, all right. Thank you.
Question on kind of the e-commerce growth outlook from here.
Still grew kind of high Twentys.
Percent, but no that was a bit of a slowdown from where it's been running I know you talked a little bit about focused on full price selling less clearance. How do we think where do you think that lands as you look out over the back half of the year.
Is that a is that a is that a business that can continue to grow north of 20% or do you kind of feel like that maybe gets more towards industry growth in the mid teens.
Yes, I mean, I think it can still.
Continue to go into that into that 20% 20 plus percent range for a while.
We're doing a lot of initiatives around it we're we're.
In the third quarter were doing a lot to updates to the site. We're spending a lot of time on our App. So we got a lot of things that we feel that will help drive traffic and conversions both in store and on digital so we feel very excited about at least through the second half of being.
Up there you know we're going to this will be our.
Starting our third year.
You know in August , which we just went through so.
Maybe not to the 50% level, but the 20 plus percent level, we feel very good.
And also.
One of the things that we looked at two is as the product releases shift from second quarter into third quarter into fourth quarter, we feel very confident in what.
The capabilities just both from a sales and in store.
Oh, that's great that's helpful, Jeff and just shifting over to the expense line I mean, clearly the outlook for expenses continued to kind of improve.
Maybe give us a sense as to what's giving you the confidence of the visibility into the second half expense structure that.
That has it.
Leveraging more than maybe you thought at the beginning of the year.
Sure.
And I'd say part of the improvement in leverage is fully recognizing that Q1 leverage from the strong sales, we probably had a little bit of that back as we wanted to wait and see how Q2 progress. So first half we're pleased with the leverage and then we will continue to see improvement in productivity at city here as we're continuing to integrate more processes, where we're able to continue to.
Have cost savings at city gear as well.
Okay. That's all and last question just on city gear.
Just trying to understand kind of the pace of growth you're seeing there.
Seems like maybe it had been running more flattish, but this quarter it looks like that number might have been.
Maybe a mid single digit or better kind of increase year over year I'm not sure. If there was some clearance related to that but just how do we think about kind of the underlying growth rate of city gear.
As we look into the back half of the year.
Yes, I think Peter as we get through the year and we get closer to the fourth quarter.
We see tremendous.
Support from our vendors so as we get inventory in line.
And it's getting better every day.
We expect.
It to improve their top line.
Last year before we bought.
Before we got through the acquisition on H. product that was one of the things that drove their margins up. So I think there is an opportunity to increase our product margins second half of the year for sure. Because we are really trying to get a clean for this year and and Thats, where we will see some gross margin improvement.
Okay, great. Thanks, so much guys.
Thanks Peter.
Thank you.
As a reminder to register a question you May press. The one followed by the four on your telephone keypad. Our next question comes from the line of Alexander pairing with Bank of America Merrill Lynch. Please proceed.
Hey, good morning for taking my question good morning.
Maybe just first Jerry can you give us a little more color on the shift in the launch calendar into the third quarter.
Is that more of a retro Jordan focus comment and then maybe off.
What is your outlook for easy on the year and has there been any shifts there. Thanks.
Yes regarding the second quarter shift into third quarter. It was Jordan retro specific.
Keep in mind that changes from a date perspective, and retro is whether it be or other products in general whether it be weeks or months or could cross quarters. So it's not a new developments it becomes a little bit more impactful during the second quarter due to the lower volume.
So not something that were not accustomed to dealing with with regard to the back half from all of our vendor partners. We feel like we're in an excellent position.
From a release and product flow standpoint, so we're pretty excited about the back half.
Thanks, and then maybe just a follow up.
Can you talk to the more per Doctor advertising that you mentioned is that more of a digital advertising comment.
And then you mentioned an improvement in the digital gross margin can you shed some more color on on what gives you confidence there. Thanks.
Sure you know a lot of.
A lot more of what we're doing is digital marketing.
We're getting a lot smarter, we're using artificial intelligence, we're trying to do more personalization on who we speak to and what they buy so definitely getty.
Effective at doing that we're not spending as much money on on print like we did before but we definitely see that were at more personal lives with our consumer.
And then on the digital margins.
A couple of things there one.
We have.
Taken a little bit of a shift in clearance strategy. When we don't have low dollar clearance on line because from a shipping perspective, it just wasn't making sense. So thats shifted to a little bit more full price product, it's broader AIU ours up and as a result, it's leverage some freight expense as well and those those things have done.
Haven't haven't for the digital margin and we've done that with out an impact to our aged inventory our aged inventory is extremely clean heading into the second half of the year.
Great. Thanks, that's really helpful best of luck.
Thank you. Thank you thanks, Alex.
Okay.
[laughter]. Thank you that is all the time for questions. We have today I will now turn the call over to Mr. Rosenthal for any closing remarks.
Yeah, I want to thank you everybody for participating today, we look forward to having a great second half and look forward to updating you in the third quarter in November . Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.