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Hibbett Sports Inc (HIBB) Q2 2020 Earnings Call Transcript

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Hibbett Sports Inc (NASDAQ: HIBB)
Q2 2020 Earnings Call
Aug 23, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and thank you for standing by. Welcome to the Hibbett Sports' Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 23rd, 2019.

I would now like to turn the conference over to Jack Drapacz with Corporate Communications. Please go ahead.

Jack Drapacz -- Investor Relations

Thank you for joining Hibbett Sports to review the Company's financial and operating results for the second quarter and first half of fiscal year 2020, which ended on August 3rd, 2019. Before we begin, I would like to remind everyone that management's comments during this conference call not based on historical facts, including those in response to your questions 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 earlier this morning, in the Company's Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings believed accurate as of today's date, August 23rd, 2019, 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.

I'd now like to turn the call over to Christine Skold, Interim Chief Financial Officer. Please go ahead, Christine.

Christine E. Skold -- Interim Chief Financial Officer

Thanks, Jack, and good morning, everyone. Welcome to the Hibbett Sports fiscal 2020 second quarter earnings call. And today we have with us Jeff Rosenthal, President and CEO; Jared Briskin, Senior VP and Chief Merchant; and Cathy Pryor, Senior VP of Store Operations. I'll start today's call with prepared remarks on the second quarter, followed by Jared with the review of merchandising and then Jeff will cover highlights from the quarter along with the general business update. As a reminder, we treat City Gear as an extension of the Hibbett business and the results will be reported on a combined basis. As such it's not our intent to provide specific gross margin, expense or other profitability metrics for the City Gear business. However, I will provide actual revenue for City Gear until it is incorporated into consolidated comp sales starting in the fourth quarter of this year.

For the second quarter, total net sales increased 19.6% to $252.4 million and overall comp sales increased 0.3% compared to last year's second quarter of 4.1% achieving our third consecutive quarter of positive comparable sales. Year-to-date comparable sales increased 3.1%. Net sales includes $42.1 million for City Gear and e-commerce sales continue to accelerate representing 8.6% of consolidated sales for the quarter and 10.1% of sales excluding City Gear.

We are progressing on our initiatives to migrate City Gear's online platform to the Hibbett digital platform with completion targeted in the third quarter. Gross profit rate decreased 110 basis points in the quarter approximately half of the margin decline was attributable to margin pressures from the complete inventory liquidation of 32 of the 40 stores that we closed this quarter. Near the half [Phonetic] of the margin decline to prior year was due to some limited markdown activity, which resulted in the strong ending inventory position. The shift of product releases from the quarter resulted in a reduction in full price sales in the second quarter. Logistics and store occupancy expenses increased slightly as a percent of sales which is a result of City Gear's higher store costs as a percent of sales.

SG&A expenses predominantly increased from the addition of City Gear expenses. On a GAAP basis, SG&A as a percent of sales increased 240 basis points included in the GAAP, SG&A is a charge from the contingent earnout valuation for the City Gear acquisition. As we discussed in Note 3 of our 10-K, the City Gear acquisition purchase agreement included two contingent earnout payments based on City Gear's 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 earnout liability was increased $7.1 million, which is 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 SG&A also includes a charge of $900,000, a 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 SG&A and represents an additional 74 basis points to SG&A and $0.09 to consolidated EPS. On a normalized basis current SG&A was 27.7% of sales compared to 29.4% in the prior year second quarter.

We experienced strong leverage in SG&A 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 the full rate to be approximately 25.5% due to the lower expected full year taxable income caused by the contingent earnout adjustments and the resulting impact of Section 162(m) permanent differences. Consolidated loss per share for the quarter was $0.49 per share compared with a loss of $0.06 per share last year. Excluding the impact of the three items in SG&A mentioned previously, normalized consolidated loss per share will be $0.04 compared to a loss of $0.06 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 -- our revolving credit facilities of $17 million related to the City Gear acquisition. And we continue to expect that to be paid off by the end of the fiscal year. Inventory increased 9% from last year's second quarter that does include City Gear's inventory and sales as a reminder were up 19.6%. We spent $3.4 million in capex as we opened two stores, rebranded two Hibbett stores to City Gear, relocated three stores, expanded an existing store and made further progress on other capital initiatives. Also, the Company purchased 304,000 shares for a total of $6.4 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 are updating our full year guidance with the following changes. We now expect full year comparable sales between positive 1% and 2%. For gross margin, we expect our overall rate to increased 30 basis points to 40 basis points. Excluding the impact of non-recurring items in both fiscal years, we expect non-GAAP gross margin to decline 40 basis points to 50 basis points.This estimate includes an assumption of liquidating more store inventories late in the fourth quarter.

With respect to SG&A rate we expect an increase in the range of 50 basis points to 70 basis points. Excluding non-recurring costs for both years we expect non-GAAP SG&A rate to improve 40 basis points to 60 [Phonetic] basis points from the last fiscal year. As a reminder, GAAP SG&A includes an estimate for additional contingent earnout 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 $0.75 to $0.80 per share for non-recurring costs associated with the acquisition and integration of City Gear and costs with our accelerated store closure plan. We had previously expected non-recurring costs to be approximately $0.25 to $0.35 per diluted share and the increase is the result of the greater expected impact from the valuation of the City Gear contingent earnout liability. Excluding non-recurring 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 $0.09 impact from the CEO transition costs. For capex, we expect to spend $18 million to $20 million compared with previous guidance of $18 million to $22 million.

I'll now turn the call over to Jared for a review of merchandising.

Jared S. Briskin -- Senior Vice President and Chief Merchant

Thank you, Christine. Good morning. As a reminder, in my prepared remarks, 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 and kids were up mid-single digits.

Nike sportswear was exceptionally strong during the quarter led by Air Force 1 basics and fashion executions. Max Air was also a key driver of our business as both heritage models such as Air Max 97 and Air Max 90 performed exceptionally well along with new product creation such as VaporMax and Max 270. During July, two additional Max Air models were released, the React 270 and Air Max 200 which are both performing well. Jordan business performed well during the quarter. However, the launch calendar changes mentioned earlier with significant challenges to overcome. Increased investments from Champion, Fila, Brooks and Reebok were also key contributors to the quarter.

Our apparel business was down low-single digits for the quarter. Activewear was up low-single digits, including a double-digit gain in men's apparel. Women's and kids apparel were both down primarily due to the later back-to-school season 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, head bands and water bottles. License business remains soft and was down high-single digits. Team sports business was down high-single digits. Baseball, softball and volleyball performed well and 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 in 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.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Thanks, Jared. We are quite pleased with our second quarter results. We believe our strategic initiatives are taking hold as we recorded positive comparable sales in three consecutive quarters. We expect a solid finish to the back-to-school season along with momentum from a strong product offering for the second half of the year. City Gear's 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 and fashion forward inventory. We also expect the planned migration of City Gear's website to the Hibbett digital platform will create an elevated shopping experience for all -- for all of our customers as it will increase access to products regardless of which site 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 made to our email program and 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 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 Gear 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. All this 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 unnoticed.

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Seth Sigman with Credit Suisse. Please proceed.

Seth Sigman -- Credit Suisse -- Analyst

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?

Jared S. Briskin -- Senior Vice President and Chief Merchant

Yeah, I think you're quantifying it. We've certainly seen the business move, from a launch calendar perspective, I mean we have movements some on a quarterly basis fairly often. So there were some challenges that are certainly with 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, take a key back-to-school category like backpacks, we've seen our peak week move from the last week of the second quarter and week 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 date shift. So I think quantifying that at the end of the period will be a little easier, than it is today as we are still seeing some of that movement move from week 4 of July to week 1 of August, week 1 to week 2 of August, and so on.

Seth Sigman -- Credit Suisse -- Analyst

Got it. Okay, that's helpful. And then you did raised 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.

Christine E. Skold -- Interim Chief Financial Officer

Yeah. So the raise in the comp [Phonetic] 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 finish the first half to fully assess the rest of the year and where we thought the comps would come. The City Gear comes in the fourth quarter, if 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 City Gear and pleased with our inventory position and how we think their performance will be in the fourth quarter.

Seth Sigman -- Credit Suisse -- Analyst

Okay. Thanks, guys. Good luck.

Jared S. Briskin -- Senior Vice President and Chief Merchant

Thank you.

Operator

Thank you. Our next question comes from the line of Sam Poser with Susquehanna. Please proceed.

Sam Poser -- Susquehanna Financial Group, LLLP -- Analyst

Thank you very much. Good morning. I have a handful. Can you tell us what your comps were by month? You normally have given that in the past.

Christine E. Skold -- Interim Chief Financial Officer

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 mentioned, 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.

Sam Poser -- Susquehanna Financial Group, LLLP -- Analyst

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 please?

Jared S. Briskin -- Senior Vice President and Chief Merchant

Yeah. Apparel was down low-single digits, our activewear business remains very strong highlighted by a double-digit comp 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.

Sam Poser -- Susquehanna Financial Group, LLLP -- Analyst

Thank you. And then lastly, can you give, I mean, you didn't mention the tariffs or threat [Phonetic] of tariffs and everything else. Can you give us some idea of what you're seeing? What you're -- how you're planning for what you're seeing? How you're planning for it? You might not be seeing just the added so on.

Jared S. Briskin -- Senior Vice President and Chief Merchant

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 has been some talk and 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.

Sam Poser -- Susquehanna Financial Group, LLLP -- Analyst

Okay, and all right, thank you very much and good luck.

Jared S. Briskin -- Senior Vice President and Chief Merchant

Thank you.

Christine E. Skold -- Interim Chief Financial Officer

Thanks, Sam.

Operator

Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed.

Peter Benedict -- Robert W. Baird -- Analyst

Hi, guys. Thanks. First question, just a clarification. So Christine, the second quarter earnings, the loss of $0.13, that did not include the -- or that does include the $0.09 CEO severance hit which presumably is non-recurring. So if that was, if you were to back that out, it would have been negative for a loss of $0.04. That's my first question. Is that right?

Christine E. Skold -- Interim Chief Financial Officer

Correct. On a normalized basis, it's a loss of $0.04 compared to a loss of $0.06 last year.

Peter Benedict -- Robert W. Baird -- Analyst

Okay. And the same on the guidance, the $2.15 to $2.25, that includes a $0.09 hit from the severance. So you gross that up $0.09 if you wanted to back it out, fair?

Christine E. Skold -- Interim Chief Financial Officer

Correct.

Peter Benedict -- Robert W. Baird -- Analyst

Okay, all right, thank you. Question on kind of the e-commerce growth outlook from here, still grew kind of high 20%, but 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 business that can continue to grow north of 20%? Or do you kind of feel like that maybe gets more toward industry growth in the mid-teens?

Jeffry O. Rosenthal -- Chief Executive Officer and President

Yeah. I mean I think it can still continue to go into that -- into that 20%, 20% plus range for a while. We're doing a lot of initiatives around it. We're in the third quarter, we're doing a lot of 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. We're going -- this will be our -- starting our third year in August which we just went through. So maybe not to the 50% level, but the 20% plus level we feel very good. And also one of the things that we looked at too is as the product releases shift from second quarter into third quarter, into fourth quarter, we feel very confident in what the capabilities, both from a sales and in-store.

Peter Benedict -- Robert W. Baird -- Analyst

That's great. That's helpful, Jeff. And just shifting over to the expense line. I mean, the outlook for expenses is continue to kind of improve, maybe give us a sense as to what's giving the confidence, the visibility into the second half expense structure that has it leveraging more than maybe you thought at the beginning of the year?

Christine E. Skold -- Interim Chief Financial Officer

Sure. And I'd say, part of the improvement in leverage is fully recognizing the 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'll continue to see improvement in productivity at City Gear as we're continuing to integrate more processes, we're able to continue to have cost savings at City Gear as well.

Peter Benedict -- Robert W. Baird -- Analyst

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. It seems like maybe, 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 is 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?

Jeffry O. Rosenthal -- Chief Executive Officer and President

Yeah, I think Peter, as we get through the year and we get closer to the fourth quarter, we've seen 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 age product [Phonetic], that was one of the things that drove their margins up. So I think there is an opportunity to increase our product margin in second half of the year for sure. Because we are really trying to get it cleaned for this year and that's where we will see some gross margin improvement.

Peter Benedict -- Robert W. Baird -- Analyst

Okay, great. Thanks so much guys.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Thanks, Peter.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Alexander Perry with Bank of America Merrill Lynch. Please proceed.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Good morning.

Alexander Perry -- Bank of America Merrill Lynch -- Analyst

Hey, thanks for taking my question. Good morning. Maybe just first, Jared, 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 also, what is your outlook for EC [Phonetic] year-on-year and has there been any shifts there? Thanks.

Jared S. Briskin -- Senior Vice President and Chief Merchant

Yeah, I mean, regarding the second quarter shift into third quarter it was Jordan retro specific. Keep in mind that changes from the date perspective on retros whether it'd be or other product in general, whether it be weeks or months or could cross quarter. So it's not a new development. It becomes a little bit more impactful during the second quarter due to the lower volume. So, not something that we are not accustomed to deal 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.

Alexander Perry -- Bank of America Merrill Lynch -- Analyst

Thanks. And then maybe just a follow-up. Can you talk through the more productive advertising that you mentioned? Is that more of a digital advertising common? And then you mentioned an improvement in the digital gross margin, can you just shed some more color on what gives you confidence there? Thanks.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Sure. 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 getting more and more effective at doing that. We're not spending as much money on prints like we did before, but we definitely see that we're being able to get more personalized with our consumer.

Christine E. Skold -- Interim Chief Financial Officer

And then on the digital margin, a couple of things there, one we have taken a little bit of a shift in clearance strategy where we don't have low dollar clearance on line, because from a shipping perspective, it just wasn't making sense. So that's shifted to a little bit more full price product. It has brought our AURs up. And as a result, it's leveraged some freight expense as well. And those things have improved the digital margin. And we've done that without an impact to our aged inventory. Our aged inventory is extremely clean heading into the second half of the year.

Alexander Perry -- Bank of America Merrill Lynch -- Analyst

Great, thanks. That's really helpful. Best of luck.

Jared S. Briskin -- Senior Vice President and Chief Merchant

Thank you.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Thank you.

Christine E. Skold -- Interim Chief Financial Officer

Thanks, Alex.

Operator

Thank you. That is all the questions we have today. I will now turn the call over to Mr. Rosenthal for any closing remarks.

Jeffry O. Rosenthal -- Chief Executive Officer and President

Yeah. I want to thank 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.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Jack Drapacz -- Investor Relations

Christine E. Skold -- Interim Chief Financial Officer

Jared S. Briskin -- Senior Vice President and Chief Merchant

Jeffry O. Rosenthal -- Chief Executive Officer and President

Seth Sigman -- Credit Suisse -- Analyst

Sam Poser -- Susquehanna Financial Group, LLLP -- Analyst

Peter Benedict -- Robert W. Baird -- Analyst

Alexander Perry -- Bank of America Merrill Lynch -- Analyst

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