By Eric Smith
Shares of Hibbett Sports Inc. plummeted $8.88, or 30.2 percent, to $20.53 Friday after the company earlier in the day announced a second-quarter loss—Wall Street had expected a profit—and lowered guidance for the rest of 2018.
Net loss for the second quarter ended August 4 was $1.2 million, compared with a net loss of $3.2 million for prior-year Q2. Loss per share was 6 cents for the period, compared with loss per share of 15 cents last year. Net sales for Q2 increased 12.3 percent to $211.1 million compared with $188 million last year, while comparable sales increased 4.1 percent.
Though Birmingham, AL-based Hibbett narrowed the company’s loss in the second quarter as same-store sales grew, Wall Street was expecting earnings of 6 cents while the Street’s consensus target for sales had been $215.6 million and a 6.8 percent same-store gain.
“Although we experienced continued softness in our licensed, equipment and accessories business in the quarter, we see good momentum in branded apparel and footwear, and are very encouraged by the acceleration of our e-commerce business,” Hibbett Sports President and CEO Jeff Rosenthal said on Friday morning’s earnings conference call with analysts. “Additionally, our gross margin rate continues to show significant improvement with cleaner inventory and more full-priced selling. Looking forward, we expect continued improvement in our assortments as we approach the holiday season, and we expect further benefit from our omnichannel initiatives with the rollout of Buy Online, Pick up in Store and Reserve in Store.”
Apparel was a bright spot for Hibbett, posting the company’s third consecutive comp store gain and producing a low double-digit improvement. Men’s and kid’s apparel were both up double digits, while women’s apparel grew in the mid single digits, the company said.
Accessories were down in the mid single digits in Q2, with solid gains in backpacks, sneaker cleaner and incremental sales from phone accessories offset from declines in socks, sunglasses and hydration. The company expects hydration comps to be less of a headwind in the third quarter.
But, as noted by Jared Briskin, senior vice president and chief merchant, the company’s license business remains Hibbett’s “most challenged” with a Q2 decline in the high single-digits.
“While this remains the poor trend, it is improved over our previous trends as we adjust and pivot,” Briskin said. “While the core fan apparel and headwear business remains very challenging, investments made in items that have strong connectivity to our sneaker business are trending and improving results.”
Analysts took note of Hibbett falling short of expectations, with Jim Duffy of Stifel writing in a note to investors: “Hibbett failed to deliver to our above consensus estimates as good momentum in branded apparel and footwear was offset by reported softness in the licensed, equipment and accessories businesses.”
In addition to softness in the licensed, equipment and accessories business cutting into revenue, the company cited investments in omnichannel—a big point of emphasis for Hibbett of late—and marketing as some of the reasons for missing profitability targets in the quarter.
Part of the marketing spend was determining the effectiveness of the company’s efforts, which yielded “positive and negative results,” Rosenthal said. “These findings have allowed us to build more effective plans going into Q3 and Q4 to drive stores and fully optimized our return on advertising spend,” he said. “As we begin the second half year, we feel that we’re in great position to deliver the results.”
Hibbett’s website celebrated its one-year anniversary during the last couple of weeks of the second quarter, and e-commerce sales represented 8 percent of total sales for the quarter, up 1 percent from Q1.
The company’s e-commerce push in the past year is gaining traction, though margins were pressured due to much of the online sales cleaning out aged inventory. That should improve as the company can now strike a better balance between clearance and full-price selling.
“When you look at online margins, obviously, the biggest drag is the freight cost,” CFO Scott Bowman said on the call. “But you do see some benefit, because you don’t have the occupancy and warehouse expenses like you do for store business. It’s not a total offset, but it does help. I think as we go forward that e-com margin will firm up a little bit. It’s always going to be over-weighted on clearance; I mean that’s just a nature of online. But we have seen it tick up as our clearance percentage has gone down, so that’s encouraging.”
Bowman said the “breakeven point” for e-commerce is around $70 million; right now e-commerce sales are around $68 million.
“That will fluctuate a little bit depending on how much effort we put into marketing and our clearance penetration,” he added. “But as I would think that our clearance penetration will continue to decline a bit, our marketing will level off somewhat. … [$70 million is] a pretty good number where we start to get close to that breakeven point.”
But the omnichannel push, including the spring launch of a mobile app, isn’t without its issues, according to Stifel’s Duffy: “Hibbett is a strategic channel partner for key vendors who have reason to keep the business viable. In the long run, however, heritage brick-and-mortar store productivity faces structural pressure, and the e-commerce business is margin dilutive, suggesting earnings progress could prove challenging. Accordingly, we remain guarded on multiple assumptions for valuation.”
For the quarter, Hibbett opened six new stores, expanded, relocated or remodeled three stores and closed 15 underperforming stores, bringing the store base to 1,059 in 35 states as of August 4.
Year to date, net income was $20.3 million, compared with $17.7 million for the first six months of 2017. Year-to-date earnings per diluted share were $1.06, up from 84 cents for the same period in 2017. Net sales increased 4.8 percent to $485.8 million compared with $463.6 million for the same period in 2017. Comparable sales increased 1.7 percent.
The company updated guidance for Fiscal 2019 with the following changes:
- Earnings per diluted share in the range of $1.57 to $1.75, which compares with previous guidance of $1.65 to $1.95.
- Comparable sales in the range of (1) percent to 1 percent, which compares with previous guidance in the range of (1) percent to 2 percent.
- SG&A expense increase of 7 percent to 9 percent, which compares with previous guidance in the range of 6 percent to 8 percent.
- Capital expenditures of approximately $18 million to $22 million, which compares with previous guidance in the range of $20 million to $25 million.
Photo courtesy of Hibbett Sports