Hibbett Sports [HIBB] Conference call transcript for 2021 q1
2021-05-28 13:39:06
Fiscal: 2022 q1
Operator: Greetings and welcome to Hibbett Sports First Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Friday, May 28, 2021. It is now my pleasure to turn the conference over to Jason Freuchtel, Director of Finance and Investor Relations. Please go ahead.
Jason Freuchtel: Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the home page or at investor.hibbett.com. These materials may help you follow along with our discussion this morning. Before we begin, I would like to remind everyone that some of management's comments during this conference call are forward-looking statements. These statements, which reflect the company's current views with respect to future events and financial performance, are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. 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 the company's annual report on Form 10-K, the most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. We refer you to those sources for more information. Also to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website. Lastly, I would like to point out that management's remarks during the conference call are based on information and understandings believed accurate as of today's date, May 28, 2021. Because of the time-sensitive nature of this information, it is the policy of Hibbett Sports to limit the archived replay of this conference call webcast to a period of 30 days. The participants on this call are Mike Longo, President and Chief Executive Officer; Bob Volke, Senior Vice President and Chief Financial Officer; Jared Briskin, Senior Vice President and Chief Merchant; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations. I will now turn the call over Mike Longo.
Mike Longo: Thanks Jason. Good morning and welcome to the Hibbett's Q1 earnings call. If you're following along using the slide deck, I'm on the third slide entitled Introduction. This quarter was a terrific outcome from a financial perspective for the company. And as you saw in the press release, we reported an increase of 87% for comparable sales and the components of that were a 113% for brick-and-mortar and e-commerce was 1%. This resulted in operating income of just over $110 million and diluted earnings per share of $5. These results were made possible, of course, by the hard work of our 10,000 teammates in the stores, the store support center, and the distribution center. As always, they help lead us through another quarter in a challenging business environment. We are proud to represent our teammates today and wanted to make sure to thank them for a job well done. We believe that our results put us on track to significantly outperform our previously announced fiscal year guidance. Later, Bob Volke will address that new guidance. But first, I want to highlight some of the reasons for the strong Q1 performance. Several factors last year gave both new and existing customers even more reasons to shop with us. This included competitive closures, increased e-commerce adoption, spending rotation into our product categories, and a course, fiscal stimulus. As a result, we believe we have increased our market share. The momentum from these factors gave us even more opportunities to attract and retain new consumers and our data shows that we've done a good job retaining them so far. Let's talk a little bit more about sales drivers on slide four. As we stated previously, our competitive advantages of service, selection, and a best-in-class omnichannel capability provide us with a strong and resilient business model that continues to satisfy our existing customers, while also attracting and retaining new customers without sacrificing our ability to deliver a premium consumer experience. We continue to update and expand our product assortments, improve our supply chain capabilities and enhance our overall consumer experience both in-store and online. Our first quarter results exceeded expectations both in sales growth as well as a strong gross margin performance. Some of the key contributors to these results included, first of all, delivering a number of business model improvements earlier than anticipated, those include things like supply chain innovations, continued emphasis on the store culture, and numerous other investments that will provide future benefits. Another of those factors were that we continue to see large increases in new customers and gains in customer retention. Next, we saw existing consumer shopping frequency and continued order value increases. As well competitive closures and limited distribution had a larger impact than projected. And finally, of course we had stimulus payments that not only came on early but were more significant than anyone probably forecast. And as a reminder, we did not put that in our guidance previously. The combination of these factors drove higher sales, which allowed us to maintain a high gross margin and provide significant leverage on our SG&A. So, moving on to slide five, I wanted to give you a little bit of insight into the next few quarters. Of course, some of the factors mentioned previously are temporary, while others will persist into the future and could significantly improve our opportunity to drive incremental sales and profitability. We believe these factors that will have a lasting impact into the future include, continued improvements in our business model, additional investments in the consumer experience, new customer retention, capitalizing on competitive closures, and reductions in distribution of key brands and improved inventory position. That last factor, improved inventory position, warrants a little bit of additional discussion. We estimate our inventory position at the end of the first quarter was approximately $80 million to $100 million below where we wanted it to be in order to support customer demand and that shortfall cost us sales. We expect to make progress toward achieving our desired inventory levels in the coming months. When our inventory position improves, we expect that the increased revenue from a higher in-stock position will provide the opportunity to deliver incremental sales that will help mitigate much of the drag when the benefit of the temporary factors fade. I'll now turn over the call to Jared to discuss our merchandising performance.
Jared Briskin: Thank you, Mike. If you turn to the merchandising slide, we have incredible results across all categories, including triple-digit gain in apparel. Team sports recovered nicely from the COVID declines in the year ago period, also achieving triple-digit growth. All genders saw significant growth led by our women's business, which grew triple-digits. Our toe-to-head merchandising strategy and consumer focus continue to impact our results positively. Strong cross-category connectivity led to increases in average unit retail and items per sale. As a reminder, we announced the structural change to our merchandising organization last November, realigning our leadership and teams to be more consumer-focused across categories, organized by men's, women's, kids and team Sports, and City Gear. This structural change throughout our buying, planning, and allocation teams has enabled us to more closely align and focus our assortments to our consumers. We believe that we have made significant progress in our execution and while our results have been fantastic, we are just starting to deliver assortments driven from this organizational change, which gives us confidence as we look forward. Apparel business was up triple-digits. All apparel categories included branding apparel, fashion apparel, licensed apparel, and accessories, all were up triple-digits. All genders were significantly positive. From the athletic brands, we continue to see strong demand for athleisure, loungewear, and performance product. Flooded color connectivity between tops and bottoms, tall-to-small connectivity, and sneaker connectivity were our primary drivers. Our fashion brand business continue to be exceptional. Continued expansion of denim and collections with strong connectivity to sneakers drove our results. License business was explosive during the quarter as investments in jerseys and hats tied to our toe-to-head merchandising strategy continued its recent strong performance. Accessory business remained very strong with sunglasses, socks, underwear, and sneaker accessories driving the business. Footwear business was up in the low-70s with strong results across basketball, lifestyle, slides, and performance. All genders were significantly positive with women's growth outpacing men's and kid's. Basketball, lifestyle and slides were the standout categories in the quarter. Classic footwear and lounge product continue to be in high demand. Casual shoes as well as slide and sandals were also standouts for the quarter. Specific to footwear and apparel, our women's business was our fastest growing area with triple-digit sales. Men's grew in the low-80s and kid's in the high-60s. The increased sales and supply chain disruption continue to pressure inventory. While our results are fantastic, our inventory levels are not allowing us to provide the consumer experience to our standards and have likely led to missed opportunity. Our merchants continue to work to fill this void and we receive significant focus from our vendor partners regarding opportunities to improve our inventory position. Based on current projections, we expect inventory levels to be up in comparison to fiscal 2020 as we head into back-to-school but still below fiscal 2019 levels. And now, Bob will take you through the financial results.
Bob Volke: Thanks Jared and good morning. If you will, please refer to the seventh slide titled first quarter fiscal 2022 results. As a reminder, our results include both Hibbett and City Gear and are reported on a combined basis. For the first quarter, total net sales increased 87.8% to $506.9 million and consolidated comp sales increased 87.3%. This compares to first quarter fiscal 2021 sales of $269.8 million and a comp sales decline of 19.5%. Over a two-year period, our comp sales increased 51.4%. Brick-and-mortar comp sales were robust during the first quarter and came in at 113.5% versus fiscal 2021 and a 45.7% increase relative to the first quarter of fiscal 2020. e-commerce comp sales were essentially flat with a 1% increase compared to last year's first quarter, but reflected a 106.4% comp versus the first quarter of fiscal 2020. As a reminder, our stores were only open to the public for approximately 60% of the available days in the prior year first quarter, which drove a significant amount of business to the online channel. As a result, e-commerce sales accounted for 11.7% of net sales in the current quarter compared to 22.3% in the prior year first quarter. However, the current quarter mix of e-commerce sales is still approximately 340 basis points higher than the first quarter of fiscal 2020. Our GAAP gross margin expanded significantly to 41.4% of net sales compared to 27.5% in the prior year first quarter. This approximate 1,390 basis point improvement was due to higher initial sell-through, a low promotional environment, a mix shift away from e-commerce sales, which carry a lower margin due to incremental fulfillment cost, leverage of store occupancy expenses, and a decline in non-cash inventory valuation reserves related to a lower of cost or market -- lower of cost or net realizable value consideration. In the prior year, incremental non-cash inventory reserve expenses were recorded as a result of uncertainty brought about by the pandemic. Our current quarter gross margin of 41.4% is comparable to the non-GAAP gross margin of 29.4% reported in the prior year which was adjusted to exclude $5.1 million of non-cash inventory reserve adjustments. Store operating, selling, and administrative expenses, excluding depreciation and amortization were 18.1% of net sales in the first quarter, which was well below the 33.1% reported in the first quarter of fiscal 2021. In addition to leverage gained from the strong sales performance, the prior year included significant non-cash impairment expenses for goodwill, trade name, and select store assets brought about by uncertainty related to COVID, plus several hundred thousand dollars of City Gear acquisition and integration activities. Excluding these pandemic-related impairment and valuation costs and certain City Gear acquisition and integration expenses, prior year SG&A expenses on a non-GAAP basis were 23.9%. Thus, the current year SG&A expense rate of 18.1% represents an approximately 580 basis point decrease versus the adjusted prior-year first quarter results. This decrease was primarily due to leverage from the significant sales increase. Depreciation and amortization increased approximately $1.2 million from last year, reflecting increased capital investments on organic growth opportunities and infrastructure projects. On a GAAP basis, we generated $110.2 million of operating profit or 21.7% of net sales, which compares to last year's operating loss of $22.1 million. Excluding all non-GAAP adjustments during last year's first quarter, our $110.2 million of operating income this year compares to operating income of $7.8 million in the first quarter of fiscal 2021. GAAP diluted earnings per share were $5 for this year's first quarter and we did not identify any non-recurring items in our current quarter results. In last year's first quarter, GAAP loss per share was $0.92 and adjusted diluted earnings per share were $0.31. Driven by strong sales, robust margins, leverage of SG&A expenses, and a reduction in our inventory balance over the last three months, we generated operating cash flow of $107.1 million during the current quarter compared to $3.9 million of operating cash flow in the prior year first quarter. We spent approximately $7 million in capital expenditures, which were largely related to new, relocated, and remodeled stores. In the prior year first quarter, capital expenditures were approximately $4.1 million. Turning to the balance sheet, we ended the quarter with $270.9 million in cash and cash equivalents, up from $209.3 million at the beginning of the quarter and $106.2 million a year ago. Our entire $75 million of borrowing capacity remains available, but we do not anticipate the need to borrow from our secured credit line based on current cash projections. Net inventory ended the quarter at $182.4 million or 9.7% down from the beginning of the quarter and a 24.6% decline from last year's ending balance. The continued strong sales in both the brick-and-mortar and online channels, in addition to ongoing constraints in the supply chain drove the decrease in our inventory position. As Mike mentioned earlier, we feel we will start to see inventory balances rise over the next several months. During the first quarter, the company repurchased 541,283 shares of common stock at a cost of $37.3 million under our authorized share repurchase plan. As disclosed earlier this morning, our Board has increased our share repurchase authorization by $500 million in response to confidence in our projected financial performance and the related cash flow generation. Next, I'll review our updated fiscal 2022 guidance on the eight slide titled updated guidance. Given the strong results for the first quarter, we are revising our full year outlook for fiscal 2022, which ends on January 29th, 2022. This update is influenced by several factors. As we have previously mentioned, we attracted and retained new customers throughout fiscal 2021 due to pent-up demand, market disruption, and government stimulus payments. We feel we continue to attract and retain additional new customers in fiscal 2022. We expect that accelerating consumer adoption of e-commerce will continue to drive growth across our best-in-class omnichannel platform. Those factors in addition to our strong vendor relationships and targeted purchases by our merchandising team have us well-positioned to take advantage of expected increases in our business. Double-digit store growth, improving the in-store consumer experience, in addition to supply chain, and selling initiatives should also help drive sales growth as well. We are now forecasting comp sales for the full year in a range from positive high single-digits to positive low double-digits. This is up from previous guidance of negative low single-digit to positive low single digits. Relative to last year, the first quarter represented the easiest comp for the year and earlier guidance did not include government stimulus payments that landed during the quarter. Also as a reminder, the benefit we expect to experience from the closure of JCPenney and Sage Stores will lap during the third quarter. We now expect gross margin performance will be lower over the next three quarters than what we experienced in the first quarter of fiscal 2022 due to an expected increase in our inventory position, headwinds on freight and shipping costs, and a potential increase in promotional activity. However, we expect gross margin will be favorable to both GAAP and adjusted fiscal 2021 gross margin percentages on a full year basis. Our previous guidance indicated a year-over-year decline in gross margin performance on a GAAP basis. We continue to expect to deliver SG&A leverage on a full year basis compared to both GAAP and adjusted SG&A reported in fiscal 2021. But we believe SG&A as a percent of sales will increase over the next three quarters in comparison to the first quarter of fiscal 2022 due to wage and related benefit impacts, performance-based incentive and equity costs, and increased costs in categories such as travel and insurance. Lastly, diluted EPS is now forecasted to be in the range of $8.50 to $9 versus our previous outlook that projected diluted EPS of $5 to $5.50. Our diluted EPS forecast assumes an effective tax rate of approximately 25% and a weighted average diluted share count of approximately 16.9 million. We do not anticipate the difference between our GAAP results and non-GAAP results will be material for the current fiscal year. From a capital expenditure perspective, we continue to target investments of $45 million to $50 million focused on organic growth opportunities that we believe will lead to incremental sales and profitability and also on strategic infrastructure projects that will enhance our distribution and back office efficiency. We believe that these investments will assist in attracting new customers, retaining new and existing customers, enhance the consumer experience in-stores and online, and modernize our technology and processes. In addition to our capital expenditure plans, we intend to opportunistically allocate capital to share repurchases and currently have approximately $599 million available under our expanded share repurchase program following the expansion of our share program earlier today. We expect to provide longer-term financial and operational targets and additional insight into our compelling product offerings and customer-centric culture during our first formal Investor Day that will take place on June 24th. We look forward to your attendance at that event. That concludes our prepared remarks. Operator, please open the line for questions.
Operator: Thank you. [Operator Instructions] The first question comes from Sam Poser of Williams Trading. Please go ahead.
Operator: Thank you. Our next question comes from Alex Perry, Bank of America.
Operator: Thank you. [Operator Instructions] The next question comes from Peter Benedict of Baird. Please go ahead.
Operator: Thank you. The next question comes from Cristina Fernández, Telsey Advisory Group. Please go ahead.
Operator: Thank you. The next question comes from Sam Poser, Williams Trading. Please go ahead.
Operator: That was our final question. I'll turn back over to our host for any closing remarks.
Mike Longo: Well, thank you everyone for attending the call. We are very proud of our team. We are very excited about our results and that's enough celebration for us and it's back to work. So, we hope that everyone has a safe weekend, while we honor Memorial Day. We look forward to getting back together soon. Thank you so much.
Operator: Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.
