Hibbett Sports reported earnings fell in the first quarter, as projected, on lower sales with continued weakness in legacy sports product. But it also indicated same-store sales are likely to drop again in the second quarter. On the positive side, officials remain hopeful that improved allocations of footwear, its new store-to-home capabilities and the third-quarter launch of e-commerce will provide fresh revenue streams in the back half.
“The retail environment is challenging and we expect second quarter to be negative but better than the first quarter,” said Jeff Rosenthal, president and CEO, on a conference call with analysts. “As we launch e-commerce, we foresee improvement in our sales results in the second half of the year.”
On Thursday, shares closed at $22.90, down 15 cents on the day.
In the first quarter, net profits slumped 25.1 percent to $20.9 million, or 97 cents a share. On April 26, Hibbett reported earnings would come in the range of 94 cents to 97 cents due to softer sales trends to start the year. Analysts’ estimate at the time was $1.15 on average.
Sales in the quarter decreased 2.3 percent to $275.7 million. Comparable store sales fell 4.9 percent. In its updated guidance, the retailer had projected comps would fall between 4 and 5 percent.
Hibbett also on April 26 reduced its guidance for the year to a range of $2.35 to $2.55, down from $2.65 to $2.85 previously. The full-year guidance assumed additional markdown pressure going forward to liquidate aged inventory.
On the call, Hibbett officials noted that February comps tumbled 20.1 percent with the decline mostly attributed to delays in tax refunds. Trends improved with comps up 5.5 percent in March and ahead 3.1 percent in April but it was not enough to offset the drop in February.
Traffic was down high single digits while average ticket was ahead mid single digits, continuing to benefit from a focus on premium product across categories.
Gross margin was negatively affected by markdowns needed to liquidate excess and aged inventory.
Gross margins eroded to 35.6 percent from 37.2 percent in the same period a year ago. Product margin decreased 130 basis points. Logistics and store occupancy expenses increased 29 basis points as a percent of sales due to deleverage against lower comp sales.
SG&A expenses increased 4 percent in the quarter and increased 129 basis points as a percent of sales to 21.2 percent. The increase was mainly due to deleverage associated with lower comparable store sales and continued investments in the company’s omni-channel initiative. “Tight control of expenses” helped the company avoid a steeper drop in profits, said Rosenthal.
Among categories, footwear continued to perform well with comparable store sales in the positive low single-digit range, but apparel and equipment posted negative comparable store sales.
Elaborating on key categories, Jared Briskin, chief merchant and SVP, said that throughout the quarter, Hibbett continued to see further declines in performance apparel, licensed products and equipment – all showing negative comps.
Among its formats, the company’s sports specialty stores “were challenged the most” while its athletic specialty stores “fared better but were still very challenged both by traffic and declining performance categories.” Fashion specialty stores “continued to perform much better than the balance of the chain” and delivered a positive comp.
Apparel was down low double digits due to weakness in performance apparel, socks and team sport-related products. From a gender perspective, women’s and kids were both down double digits in apparel, while men’s was down low-single digits. The license business was down double digits “and remains our most challenged area,” said Briskin. He added, “The core fan license business continues to be very challenging.”
Team sports was also down high-single digits. Cleated was down low singles while the equipment area saw additional pressure, down low-double digits.
Footwear continued to be Hibbett’s best-performing category, up low-single digits for the quarter. Men’s was up mid-single digits, women’s was down mid-single digits and kids was flat. Key styles for the quarter were Retro and Jumpman Pro from Jordan; Huarache and Air Force from Nike; and NMD and AlphaBOUNCE from Adidas.
Inventory wound up down 3.6 percent per store at the quarter’s end, but Briskin noted that there’s “additional pressure on the age of our inventory that we need to continue to address through markdowns.”
He added, “This, coupled with the soft general climate and intensifying promotions in the market, will continue to pressure margins in the near term.”
Listing accomplishments in the period, Rosenthal noted that the company implemented its store-to-home capability in all stores and the early results are “encouraging.” Increased benefits are expected as the technology “gives our stores a great tool to improve sales and to enhance our customers’ experience. This tool is very instrumental in helping us become a full channel omni-retailer.”
At the end of the quarter, Hibbett also launched a new customer loyalty program that allows the retailer to understand its customers better “and more importantly, keep them loyal to Hibbett,” said Rosenthal.
Hibbett also remains on track to launch its e-commerce site in the third quarter that will be fully integrated with its stores.
For the quarter, Hibbett opened 13 new stores, expanded 4 high-performing stores and closed 9, bringing the store count to 1,082 in 35 states as of April 29, 2017. The company also said it continues to see expansion potential to reach 1,500 stores. The comments came as Dick’s Sporting Goods earlier this week indicated it was slowing its expansion over the next few years in expectations that rents would be coming down.
“We feel that going to markets where we’re needed and bringing exceptional service in the long term, we will bring shareholder value for many years to come,” said Rosenthal
The company reiterated its outlook updated on April 26. Earnings in the range of $2.35 to $2.55 compare with a profit of $2.72 in 2016.
Comparable store sales are expected to be in the range of negative 1 percent to positive 1 percent, which compares to previous guidance of an increase in the low single-digit range. Gross margins are expected to decline 55 to 75 basis points compared to last year, which compares to previous guidance of a relatively flat gross margin rate. Expenses are expected to be at or below original expectations.
Asked about the outlook in the Q&A session, second half comps are expected to be helped by the continued ramp-up of its store-to-home capability, the e-commerce launch and some promising allocations, both in apparel and footwear, arriving in the third quarter. The company also faces easy comparisons against a negative 2 percent comp decline in the fourth quarter.
Rosenthal said March and April benefited from the late arrival of tax refunds and the negative comp prediction for the current quarter reflects the overall challenging retail climate that was also reflected in February’s steep drop.
Said the CEO, “Just knowing all the headwinds that are out there and seeing all the promotions and all the things out there, we just want to be a little bit more cautious on how we look at the business through the rest of the second quarter. And then we feel a lot more comfortable as we get store-to-home ramped up and we get e-commerce ramped up, that we can really start getting in at a more positive direction.”
Rosenthal said store-to-home was introduced to all stores in April. In-store staff is still getting “familiar” with the system and “there’s huge opportunity to get even that much better at it,” he said.
Hibbett is moving into a testing phase for its e-commerce launch to avoid any problems. Rosenthal was bullish that adding e-commerce would help drive traffic to stores as most consumers “do most of their homework online before they even go to stores” He also expects e-commerce to provide significant revenues on its own.
“As you look at other retailers, most of their gains are coming from e-commerce,” said Rosenthal. “So we’re working as hard as we can to get it up as soon as possible. And we’re extremely excited because this will get us more on even-playing field with the rest of retail. And as you look at how much business is done online, we’re getting nothing. And we think that, that could be a huge part of our second half.”
Regarding the enhanced allocations, Briskin it’s a combination of greater quantity of product but also innovation. Said the chief merchant, “We do see some newness coming that we’re excited about. We certainly believe that the customer today is looking for newness more often and our vendors are starting to cater to that need from a consumer perspective. But we’ve also done a significant amount of work with our vendors to continue to get additional stores in play for some key driving products.”
Addressing the challenges on the performance apparel side, Briskin said that due to the athleisure trend, “there’s product essentially everywhere,” and it’s harder to differentiate than before. The category is also being hurt by “some of the general apparel softness that’s out there.”
He added, “We continue to make significant changes to the assortment and we continue to roll those changes out to additional stores. And they are certainly trending in the right direction in those stores that we’ve rolled of them out to. We’re just not getting them out fast enough to compensate for some of the declines in the more performance and commodity type product.”
He also said it’s “a little early to tell” if Under Armour’s entry to Kohl’s is having any impact, especially with weakness in the overall performance apparel category.
Briskin said a general challenge across both apparel and footwear categories is the customer is expecting innovation at a faster rate than the industry can deliver. Said Briskin. “I think, as an industry, we’ve somewhat struggled to keep up with some of the changes that they’re requiring. I do think it’s something that all of our vendor partners have recognized and are building plans to try and ensure that they can keep up with the customers’ change in trend and change in taste. So every quarter, I think we’ll see some improvement, but I do think we’re going to continue to chase the customer as they seem to be moving more faster than the product pipeline to keep up with.”
He also noted that the company is working to bring some more in-demand product working at its fashion specialty stores to its other formats when appropriate. Said Briskin, “We’ve seen a lot of success as we’re able to build that up.” Still, he added that it’s been “somewhat surprising that some of the deterioration of some of the other categories is happening at a more rapid pace than we had projected.”
Briskin also indicated that Hibbett doesn’t expect to feel much impact from Nike’s new MAP pricing policy that lets retailers advertise 25 percent discounts on Nike merchandise year round. On the footwear side, Hibbett “still remains very full” on upcoming launch product and is also gaining more allocations in other areas that won’t likely be impacted by any MAP issues. He added, however, “We do see it having more of an impact on the apparel side of the business which has been promotionally challenged for a long period of time anyway.”
Photo courtesy Hibbett Sports
