Edited Transcript of HIBB earnings conference call or presentation 20-Mar-20 2:00pm GMT

For the full year, comparable sales increased 5.3%, total net sales for fiscal 2020 increased 17.4% to $1,184.2 million compared to $1,008.7 million the previous year. Our e-commerce sales increased 41.3% compared to the prior year. Our gross margin increased 46 basis points as a percent of sales in the quarter on a GAAP basis, mostly attributable to lower occupancy costs due to the store closures we have completed this year.

However, on an adjusted basis, our gross margin decreased by 41 basis points as we closed 23 more Hibbett stores in January, and there are accelerated add-backs to the occupancy expense when store closures occur.

For the full year, our gross margin decreased by 21 basis points as the increase in e-commerce as a percentage of our total sales mix reduced our overall margin. SG&A

(technical difficulty)

acquisition. As we discussed in Note 3 of our 10-K last year, the City Gear’s acquisition purchase agreement included 2 contingent earn-out payments based on City Gear’s achievement of certain EBITDA thresholds for fiscal 2020 and 2021.

The preliminary fair value of the liability is 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 $3.3 million, which is an impact of 105 basis points as a percent of sales in the fourth quarter.

We expect some continued volatility in this expense as we continue to realize the City Gear business opportunities. Additionally, we incurred a net charge of $0.9 million related to the finalization of the former CEO’s retirement agreement. This amount was not removed from adjusted SG&A and represents an additional 29 basis points to SG&A and $0.05 to consolidated EPS.

On an adjusted basis, fourth quarter SG&A as a percent of sales was 85 basis points higher than the prior year quarter due to a combination of the former CEO’s retirement agreement and higher e-commerce sales, which typically drive our SG&A costs higher.

For the full year, our SG&A expenses as a percent of sales were 67 basis points higher than the prior year due to the City Gear contingent earn-out expenses, which I discussed previously. On an adjusted basis, our SG&A expenses constituted 25.21% of sales compared to 25.73% of sales in the prior fiscal year.

The income tax rate for the quarter was 23.3%, which compares to last year’s rate of 22.8%. And for our full year, the tax rate was 24.7% compared to 24.3% in the prior fiscal year. Consolidated earnings per share for the quarter was $0.34 per share compared with $0.36 per share last year. Including adjustments, our normalized consolidated earnings per share is $0.51 compared to $0.57 per share last year.

On a full year basis, we have delivered earnings per share of $1.52 per share versus $1.51 per share during last fiscal year. After adjustments, our normalized earnings per share was $2.33 per share for fiscal 2020 versus $1.77 for fiscal 2019, a 32% increase.

Turning to the balance sheet. The company ended the year with $66.1 million in cash versus $61.8 million at the end of our last fiscal year. We ended the year with 0 borrowings on our revolving credit facilities as we paid off $35 million in debt related to the City Gear acquisition during the year, with no debt and substantial cash on hand, we feel well positioned to be able to withstand the potential for any slowdown in business activity related to the coronavirus pandemic.

Inventory increased 2.8% from the end of our last fiscal year. Our aged inventory has improved as a percentage of total inventory to 16.8% versus 21.4% of our total inventory at the end of last year. We spent $17.4 million in CapEx in fiscal 2020 as we opened 13 stores, rebranded 11 Hibbett stores to City Gear, relocated 7 stores, expanded 2 existing stores and made further progress on our other capital initiatives. Also, the company purchased approximately 533,000 shares for a total of $14.1 million in the quarter under our share repurchase program. At year-end, we had about $153 million remaining under the existing authorization. I’ll now turn the call over to Jared for a review of merchandising.

——————————————————————————–

Jared S. Briskin, Hibbett Sports, Inc. – Senior VP & Chief Merchant [4]

——————————————————————————–

Thank you, Scott. Good morning, everyone. As a reminder, my prepared remarks are reflective of comparable store trends and now include City Gear.

During the fourth quarter, our momentum continued posting our fifth consecutive comp store gain. Our sharp focus and investment in our strategy of leading the sneakers is driving results. While excited about our results, the quarter had some challenges that we were able to overcome. These included calendar shifts, launch date changes, and unfavorable weather.

Our fourth quarter performance was driven by strong results in footwear, posting a low double-digit comp. This performance is our tenth straight quarter of comparable sales gains in footwear. We had double-digit gains across our men’s, the women’s and kids business. These results were made possible by a strong launch calendar and continued improvements in our non-launch business.

Nike sportswear continued to perform exceptionally well as broader investments in models such as Air Force 1 and Air Max platform was resonated.

We had a strong quarter with the Jordan brand as models such as 6 Rings and J1 retro models performed well.

Other strong performances came from Champion, Brooks, Reebok and Converse.

Apparel was down low single digits. Strength in men’s apparel was offset by challenges in women’s and kids’ apparel and licensed products. Challenges in seasonal categories across activewear and license drove our results down. Apparel products that showed strong connectivity to sneakers continued to perform exceptionally well.

Team sports business was down low single digits, but was on plan. Wrestling, softball and track performed well but were offset by other categories, including a planned reduction in the fitness business. I will now turn the call over to Mike Longo.

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [5]

——————————————————————————–

Thank you, Jared. Good morning, everyone. We’re very proud of the results the team turned in for quarter 4. More importantly, I’m very proud to lead this team in the terrific sales associates in our stores who serve our customers each and every day. As you all know, I recently took on the role of CEO at Hibbett Sports. I was asked to spend a few minutes on my background. So in short, I had a very successful career in the U.S. Army, starting at West Point, then as an infantry officer, and a Paratrooper in the 82nd Airborne, and I finished out my 13-year career teaching economics back at the academy.

When I left military, I was lucky enough to have exactly one interview with exactly the right company. And that was AutoZone. The fit was perfect for me, great people with a mission. So in my 13 years at AutoZone, I ran the supply chain, all the stores and merchandising. And that provided me an education in all disciplines of retail.

Following that, in 2006, my business partner, Jeff Presley and I bought City Gear. And in those 13 years, we turned a 40 store chain into 150 store chain that we eventually sold to Hibbett. That brings us to the present day, where I accepted the CEO position in December. I’m proud to be here. I’m proud to be at Hibbett Sports. I’m proud to be a member of the team, and I’m proud to be the leader of that team.

But that’s enough about me. Let’s move on to what I’ve learned in the past 90 days at Hibbett. I’ve learned that we have a great team dedicated to serving our customers, and we have a great business model. We believe that our success going forward will be based on our sales culture in the stores, our product selection, our customer service and our ever-improving ability to deliver products and services to our customers whenever and wherever they choose to consume it. And that is a key to our success and will set us apart even further from our competition now and in the future. But reality creeps in, and I’m sure you’re also going to want to hear more about our current situation with respect to the coronavirus.

First things first though. We’re deeply concerned about those directly affected by this virus. Our thoughts and our prayers go out to them. Many people are affected physically and some economically. And in equal part, our concerns are with them, and we hope the best, and we’re trying our best to assist them to get to a better place.

There are a few things I would like to point out that help Hibbett Sports remain resilient in the face of this problem. For one, we’re in smaller markets, mostly in the South and Midwest with less exposure to major population centers. We’re also a small-box retailer. And that means we don’t have concentrations of a great number of people at any given time in a store and over a week’s period as opposed to a big box retailer who has a different set of issues. And obviously, it goes without saying, but I don’t want it to go unsaid, we’re taking a great deal of care and disinfecting services in the stores — and disinfecting services in the stores and practicing social distancing between the staff and the customers, and following CDC guidelines and every other common sense measure that you would imagine an operator would put in place.

I do want to also make the point that currently our stores are open. They’re open with reduced operating hours and reduced staffing. And that decision has come as a result of careful deliberation and thought. And that thought with regards to staff safety and welfare. Our employees want us to stay open, but we have to balance that with precautions necessary to ensure their safety. And those precautions also help ensure customer safety. Our customers have expressed their desire for us to remain open, too. And I saw that yesterday in the stores waiting on customers.

As well, we continue to utilize our best-in-class e-commerce platform to pick orders from our retail locations as well as our distribution center. And at the same time, we continue to execute our BOPIS and ROPIS services to great effect. Our new curbside service is yet another demonstration of a way to utilize our strong digital platform and integration with our brick-and-mortar business. The digital platform continues to perform and remains open for business and will remain so.

Our store support center, you might refer to it as an office or corporate, is operating on reduced staffing, and we’re able to work remotely with our strong cyber security controls. Our DC, our distribution center, is also operationally doing a great job supporting our stores and the digital business.

The next topic I want to cover is liquidity. In our case, it is not an issue. Scott gave some facts and figures earlier in the presentation. I will also remind you again, we have cash on the balance sheet and an available line of credit. Our liquidity can withstand a shutdown for a long period of time. Our model indicates our liquidity will take us well past the short-term crisis, and we have the ability to manage for the foreseeable future, well in excess of any projected disruption time frames. Additionally, we have the ability to make some adjustments to our model to preserve liquidity if it becomes necessary to do so. And they’re all the obvious ones that you would already have ticked off. CapEx can be reduced, terms on POs can be extended. We’re managing our inbound, and we have great relationships with our landlords. And a reminder, all of our locations are leased, all of our store locations are leased. We have a great relationship with the landlords and our leases are relatively short term, where we can — we have 15% to 20% coming up on renewal every year.

And of course, we can always reduce staffing to match demand. So in conclusion, I’m confident in our plan. I’m confident in our ability to withstand the set of circumstances we find ourselves in. I’m excited to be here. I’m excited to lead this great team, and we are up to the task of delivering on our commitments to our customers, employees and owners.

Operator, we are ready for questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Our first question comes from the line of Peter Benedict with Baird.

——————————————————————————–

Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [2]

——————————————————————————–

I guess, the first one, would you be willing to kind of speak to how the first quarter has gone so far? I know you guys don’t typically like to do that, but obviously, this is a bit of a unique situation. So just getting a feel for maybe how the business was in February and then thus far in March, so at least we know kind of what’s been accomplished to date?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [3]

——————————————————————————–

Sure. This is Mike. I’ll cover the first part of that, and Jared can chime in and Scott as well. Results up until mid-week last week were very, very good. We were — we had a positive comp. We were hitting on all cylinders, all regions, all of our brands were doing well, and e-commerce remains strong.

Obviously, that has changed over the last week. But prior to that, a very, very good result. Jared, any color you’d like to add to that?

——————————————————————————–

Jared S. Briskin, Hibbett Sports, Inc. – Senior VP & Chief Merchant [4]

——————————————————————————–

No, I think you know that, Mike, I think we were very confident in our plan, very confident in the positioning of our inventory, wealth of our inventory, and we’re really pleased with the results we were seeing before the demand slowdown.

——————————————————————————–

Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [5]

——————————————————————————–

No, that’s helpful. And so does that mean that — I mean, the e-commerce has gone negative as well? I mean, the stores are probably down, but has the e-commerce tipped down as well?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [6]

——————————————————————————–

E-commerce continues to operate depending upon the day and a — normally positive territory. So we’re still seeing good results there.

——————————————————————————–

Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [7]

——————————————————————————–

Okay. And then just — you mentioned CapEx flexibility. Can you give us a sense for maybe what the base plan is for CapEx this year? And if you had to cut back, how much you could and your thoughts on buyback. Is there any thought of kind of holding off on that for the time being?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [8]

——————————————————————————–

We’re going to review all those options. As you can imagine, things are changing on a moment-by-moment basis. If you hear us pause in an answer, it’s because we’re probably checking an e-mail or text in dealing with the situation in the current time frame. So things are changing.

Yes, we’re going to modify our CapEx spending. Some of it is already determined and in place, and you can’t get out of it and you shouldn’t get out of it because they’re wise investments in the future in the current business and in the future business.

We’ll examine buybacks, and we’ll look at all those. We’re just not willing to go forward and tell you the modifications to the plan yet.

——————————————————————————–

Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [9]

——————————————————————————–

That’s fair, Mike. My last question, maybe, Jared, I don’t know if you can weigh in on this, but it seems as though the — at least the footwear supply chain looks reasonably good and operational at this point. Any change to the launch calendars, though, as we look out over the first and second quarter, let’s kind of take that as the time frame that might be taking shape here as people start to — some of your suppliers start to think about where the demand will be over the next few months?

——————————————————————————–

Jared S. Briskin, Hibbett Sports, Inc. – Senior VP & Chief Merchant [10]

——————————————————————————–

Yes, Peter. As of right this second, and I want to be careful when I say right this second, obviously, the situation is fluid, and as I’ve mentioned, we’re dealing with a lot of changes almost minute-by-minute. From a supply chain perspective, at least through the first quarter, we felt pretty confident with regard to mitigation there. From a launch date perspective, we have not seen any changes to this point.

Again, the situation is fluid. But as of right this second, we have not seen any changes.

——————————————————————————–

Operator [11]

——————————————————————————–

Our next question comes from the line of Jim Chartier with Monness, Crespi, and Hardt.

——————————————————————————–

James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [12]

——————————————————————————–

Following up on the first question, how much of the quarter is still left? What percentage of sales, to date, have you had in the quarter?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [13]

——————————————————————————–

I’m sorry…

——————————————————————————–

Jared S. Briskin, Hibbett Sports, Inc. – Senior VP & Chief Merchant [14]

——————————————————————————–

I think your question is, we’re halfway through the quarter. I think it’s the answer to that…

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [15]

——————————————————————————–

Yes.

——————————————————————————–

James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [16]

——————————————————————————–

Okay. And then in terms of inventory planning, how are you guys thinking about the rest of the year? Are you starting to maybe dial back some purchases and plan more conservatively for the back half of the year as well?

——————————————————————————–

Jared S. Briskin, Hibbett Sports, Inc. – Senior VP & Chief Merchant [17]

——————————————————————————–

Yes. As we discussed, very fluid situation. We’re working with our partners by the minute on what the future looks like from a supplier perspective, as well as ensuring that we’re trying to mitigate as much of inventory commitment while we see some potential demand slowdown.

Again, very, very fluid situation and constant conversation with our partners. We have incredible partnerships with our vendors and incredible support. So we think here like we have some significant flexibility to manage the inventory appropriately as we go through the balance of this cycle.

——————————————————————————–

James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [18]

——————————————————————————–

Okay. And then just on the e-commerce rollout at City Gear. What have you seen there? What is the adoption rate there have been? And any reasons City Gear e-commerce can’t be as successful as what Hibbett has done?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [19]

——————————————————————————–

The City Gear e-commerce transition has gone very, very well. Our digital platform, as we continue to reiterate, is the best in the business, bar none, and City Gear to it has seen some phenomenal results. We’ve also added most of the City Gear stores to the fulfillment process, and that has gone very, very well. And Scott will correct me, but I don’t think we break it out below that level.

——————————————————————————–

Scott Randall Humphrey, Hibbett Sports, Inc. – Interim CFO [20]

——————————————————————————–

No. Correct.

——————————————————————————–

James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [21]

——————————————————————————–

Okay. And then, Mike, what do you see, I guess, the biggest opportunities going forward for the 2 businesses? And I guess, in terms of store opportunity, what do you see for City Gear and Hibbett’s longer term?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [22]

——————————————————————————–

Great question. Thank you. We see the 2 brands operating, running down parallel tracks. Keeping the separation of the brands is super important to us, at least on the customer-facing piece. There are 2 brands that stand for different things, both of them very successful with the consumer.

Our job is to take the best of all and the best ideas in Hibbett, put them in City Gear, the best ideas in City Gear and put them in Hibbett.

Meanwhile, consolidating and we have consolidated the back office for the savings and the synergies that we were looking for. And that also allows us to leverage our best-in-class merchandising team for lessons learned and other things that we can do to expand categories. So we like our strategy. We — it has been very successful. The City Gear acquisition, if I may say so myself, was — has been a great success, and we’re capitalizing on it, and there’s more room to grow in the future.

Your specific question was store count as well. We are continuing to grow the City Gear brand at a modest level and the same answer for the Hibbett Sports’ brand.

——————————————————————————–

Operator [23]

——————————————————————————–

Our next question comes from the line of Sam Poser with Susquehanna.

——————————————————————————–

Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [24]

——————————————————————————–

Welcome to the party, Mike. Can you give — how many — given that some mall folks have closed like Simon, and can you tell me how many stores right now are closed, sort of the out-of-your-control closed?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [25]

——————————————————————————–

The majority of the stores are open. We have a dozen — let’s say, a few dozen that are closed overnight as a result of the Simon move. We had some localities that had closed prior to that. But it’s less than — it’s in the 60 to 70 range, upwards of 100 after Simon. The majority of stores are still open.

And as I said, I was in stores yesterday and saw decent graphic. We’re not — and just to jump ahead, we’re not going to characterize our current sales percentages in the current quarter, but — so…

——————————————————————————–

Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [26]

——————————————————————————–

Let me — I’m wondering if — I mean, the decision to keep the stores open, I’m wondering you’re encouraging people to come out of their house when the government is telling people to stay in their houses and while that may be good for short-term sales and people might want to make sure that they’re getting paid and people might want to buy the latest sneaker. At the end of the day, couldn’t this do a lot more harm than good?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [27]

——————————————————————————–

That’s certainly your point of view. Our point of view is that we’re keeping our customers safe, and we’re keeping our employees safe. And what I saw with my own 2 eyes yesterday is that’s the case.

You’re in the store, and there’s 2 customers in the store, upwards of 4 customers in the store and the staff’s keeping it clean. So I understand your point of view. And you heard my statement.

——————————————————————————–

Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [28]

——————————————————————————–

I mean, the staff has to still has to come and go to work, as the customers are going out saying, it’s okay. You’re telling the customers, it’s okay to go out. I understand you keep the stores clean and all that, but I mean, there’s sort of a little more to it than that, isn’t there?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [29]

——————————————————————————–

I’m assuming you got out today, too, at some point. So look, our — your point of view is good, and I appreciate it, and we take it for how you intended it. My statement stands.

——————————————————————————–

Operator [30]

——————————————————————————–

(Operator Instructions) We now have a question from the line of Alex Perry with Bank of America.

——————————————————————————–

Alexander Thomas Perry, BofA Merrill Lynch, Research Division – Equity Research Analyst [31]

——————————————————————————–

Welcome, Mike. Just first, can you comment on how much Klarna, the buy now, pay later solution helped e-commerce this quarter? And then just separately, can you help us parse out the difference between City Gear and the Hibbett banner for the quarter? And sort of your more fashion focused stores versus the rest of the chain? That’s my first one.

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [32]

——————————————————————————–

Good question. Klarna continues to be an important part of our digital strategy. We’re very appreciative of what they do and how they do it. And it’s been a great success for us, and it helps amplify our digital platform and make those products available to more customers than would have otherwise been able to purchase.

In terms of specifics, I’m going to lateral to Scott and let him handle those, since he’ll know historically what we have and have not disclosed.

——————————————————————————–

Scott Randall Humphrey, Hibbett Sports, Inc. – Interim CFO [33]

——————————————————————————–

Yes. And — so typically, we had given out some numbers on City Gear saying — just from a revenue standpoint, just saying that was until we had them rolled into the comp, which they now are. I mean, City Gear comped positive in Q4. They continue to perform very well, but we’re not segmenting our business, and so we’re kind of rolling everything together and moving forward as one big company now.

——————————————————————————–

Alexander Thomas Perry, BofA Merrill Lynch, Research Division – Equity Research Analyst [34]

——————————————————————————–

Great. That’s really helpful. And then I guess, just my last one. What are the other offsets to SG&A that you could sort of pull here in terms of like marketing expense? And then just on some of the rent clauses, like is there a chance where if other sort of tenants around you begin closing, the days, the landlords help share some of the rent burden?

——————————————————————————–

Michael E. Longo, Hibbett Sports, Inc. – President, CEO & Non-Independent Director [35]

——————————————————————————–

Good question. We’re taking a look at that, and I’ll let Scott finish the question.

Certainly, we have a great relationship. Many of our landlords have multiple locations with us. We’re all in conference right now with the landlords trying to work through the issues. It’s a great question, and we don’t think we know all the answers yet. So Scott?

——————————————————————————–

Scott Randall Humphrey, Hibbett Sports, Inc. – Interim CFO [36]

——————————————————————————–

Yes. No, I think, as Mike said, I think we’re looking at the leases and the situations on a case-by-case basis. As far as your other question, yes, I think there’s a lot of different areas where a slowdown in business or potentially kind of a worst-case scenario going forward that you have lots of different things where SG&A would be significantly reduced. I mean, you mentioned marketing. I would talk more travel expenses, maintenance in the stores, supplies, the list goes on and on to what would be reduced store cutout together kind of in a slowdown situation for us. So yes, I think, a good question, I think we’re evaluating this and looking at scenarios, as Jared and Mike both mentioned, really, multiple times a day just to react to what’s going on and trying to prepare for the future.

But I think a good hypothesis for what may happen going forward.

——————————————————————————–

Operator [37]

——————————————————————————–

And there are no further questions. This does conclude today’s conference call. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day.