Hibbett Sports Inc. slightly lowered its full-year earnings guidance after reporting third-quarter earnings that just missed Wall Street’s targets. But e-commerce continues to outperform and Hibbett officials are hopeful footwear growth will accelerate in the fourth quarter with promising offerings from Nike, Adidas and a number of smaller brands. Apparel, helped by the addition of Champion and Fila, is expected to continue to see robust growth.
Hibbett officials also continued to speak bullishly on the new acquisition of City Gear.
“As we move into the fourth quarter, we are optimistic with our City Gear acquisition, our sought-after assortments, our brand partnerships, and our omnichannel capabilities that will connect with our customers that Hibbett and City Gear,” said CEO Jeffry Rosenthal on a conference call with analysts.
In the quarter November 3, earnings tumbled 80.3 percent to $1.5 million, or 8 cents a share, from $7.6 million, or 37 cents, a year ago. The decline largely reflected continued investments supporting its recent launch of e-commerce.
Net earnings in the period were only slightly impacted by the acquisition of City Gear, the Memphis, TN-based “city specialty” retailer with 135 stores in 15 states. On October 30, Hibbett said it agreed to acquire City Gear for $88 million plus an additional $25 million if certain financial targets are met. The company has more than 1,000 Hibbett Sports stores. The deal closed in the quarter.
Excluding the costs related to the acquisition of City Gear, non-GAAP net income was down 65.8 percent to $2.6 million, or 14 cents a share. Earnings were short of Wall Street’s consensus target of 16 cents.
Total sales decreased 8.8 percent to $216.9 million. Wall Street’s consensus estimate had been $217.4 million. The year-over-year decrease included a decrease of approximately $17.3 million due to a week shift resulting from the 53rd week last year, and a decrease of $2.4 million due to the sale of the company’s Team Division to BSN Sports in December 2017.
Comparable sales inched up 0.1 percent. E-commerce sales vaulted 62.2 percent, and represented 8.8 percent of total sales for the quarter.
The tumble in earnings reflects a hike in store operating, selling and administrative expenses to 28.7 percent of sales from 24.4 percent a year ago. The increase was due to higher operating expenses related to e-commerce, $1.5 million in non-recurring costs related to the previously announced acquisition of City Gear, LLC and de-leverage associated with lower net sales. Excluding the acquisition costs, non-GAAP store operating, selling and administrative expenses were 28.0 percent of sales.
Gross margin improved to 32.5 percent of sales compared with 32.0 percent a year ago. The increase was mainly due to fewer clearance markdowns. Logistics and store occupancy expenses declined 3.3 percent for the third quarter, but increased as a percentage of net sales due to the week shift.
Inventory for the quarter decreased 3 percent from last year and was up 1 percent on a per store basis.
Among major categories, Rosenthal said branded apparel saw “good momentum” that helped offset softness in licensed, equipment, and accessory business in the quarter.
“Footwear comparable sales were relatively flat, although we see upside in the fourth quarter as our depth of premium products continues to improve,” said Rosenthal.
Elaborating on category performance, Jared Briskin, SVP and chief merchant, said positive comp store sales in apparel, footwear, and cleated business were but declines in accessories, equipment and licensed products impacted comps for the quarter by two percentage points.
Addition of Fila And Champion Boost Apparel
The apparel business posted its fourth consecutive comp store gain, up high single-digits. Men’s apparel was up double-digits, women’s apparel up high single-digits, and kids’ apparel declined slightly.
“Sportswear that is trend relevant and connects with our sneaker business continue to drive our trend, especially in fleece, tees and bottoms,” said Briskin. “Increased investments in extended sizes in both men’s and women’s apparel also performed well in the quarter. “
In the Q&A session, Briskin said Hibbett improved its core assortments, primarily with Nike and Adidas, and realized “some nice gains there.” Additions of new brands like Champion and Fila also bolstered the apparel growth. He added, “Really excited about the results there.”
He also added, “As I mentioned in my commentary, we felt like there was a significant whitespace opportunity around extended sizes of women’s and big and tall in men’s, and we made some pretty substantial investments in both genders and extended sizes and are seeing some nice results from it.”
Asked whether the gains in apparel are all lifestyle-driven, Briskin said “it’s still a lifestyle trend without question,” but performance has shown some pick up. He added, “We have seen some stabilization on the performance side in particular in some of the core products, like compression, and we’re seeing somewhat of resurgence there, but we’re still seeing the marketplace more as a sportswear driven category, at least for the foreseeable future.”
The accessory category remains challenged, down mid-single digits. Strong gains and backpacks, cross-body bags and sneaker cleaner items were offset by declines in socks.
The licensed business was also down high single-digits. While the college business and NFL businesses showed notable improvement during the quarter with a decline in the low single-digits. But this was offset by a significant loss in Major League Baseball due to the Houston Astros World Series win in the year-ago period.
Teamsports business was down mid-single digits. Cleated business was positive overall for the fourth consecutive quarter. Solid comp gains in baseball cleats, soccer cleats, tracks, bikes and volleyball shoes were offset by significant declines in football cleats. Equipment business remains soft, down high single-digits. Positive business in baseball, softball and volleyball on the equipment side was unable to offset declines in fitness, basketball and football.
Nike Air Max And Air Force Platinum Seen Boosting Footwear
Footwear was slightly positive in the quarter and marked its fifth consecutive quarterly comp store gain. Said Briskin, “Men’s business was up high single-digits and there is a strong pipeline of product and we continue to improve our access points and allocations.”
Women’s and kids were down for the quarter. Kids’ footwear was significantly impacted by product availability compared to the prior year. Added Briskin overall on the footwear category, “From an inventory perspective, we remain much fresher than a year-ago and are confident that our assortments will resonate with our consumer.”
In the Q&A session, Briskin sad Hibbett sees some upside in the fourth quarter for footwear.
Briskin stated, “We believe we stabilized on some inventory position on some real key trend-relevant models. We do see somewhat less of a headwind with regard to the Jordan business as well as we get into the fourth quarter and into next year. But our access points continue to significantly improve, and our allocations are significantly improved. Our vendors have been great partners. So our expectations for fourth quarter and moving forward, we do see a pretty full pipeline of product and are excited to take advantage of it.”
Specifically, Briskin said Hibbett has seen “significant improvement” in its Nike business, primarily around the Air Max platform across numerous model. He cited “very strong results” for the VaporMax 270, 97s, 95s as well as continued “very, very strong” trends for the Air Force Platinum platform.
Briskin added, “And then we’re seeing real significant gains with some of our smaller vendors, including Timberland, Puma, New Balance, Vans, Reeboks and Brooks. So real excited about the opportunities really across the board. And then certainly from an Adi perspective, still seeing some nice results across platforms like NMD and Yeezy. So we feel like we have a very full portfolio of products that could help drive this quarter and going forward.”
E-commerce continued to exceed expectations with the 62 percent gain reflecting enhancements to Hibbett’s mobile app as well as the introduction in September of Buy Online, Pick Up in Store (BOPIS) and Reserve in Store (ROPIS) capabilities.
Rosenthal also said e-commerce margins have “significantly improved” year-over-year. He added, “We have significantly shifted from being a clearance vehicle to selling a majority of full-price merchandise.”
Rosenthal noted that the company’s omnichannel customer spends more than twice as much per year as store-only customers. Continued growth in e-commerce is expected as more customers use the website and apps, as well as the new BOPIS and ROPIS programs.
Hibbett’s loyalty program, launched late in the second quarter of last year, continues to support growth., Members’ sales totaled 60 percent of sales versus 56 percent last year.
Hibbett doesn’t expect any material contribution to earnings from the City Gear business in the fourth quarter due to clean up of inventory and other activities to prepare the business for next year. But Rosenthal remains optimistic about the chain’s potential.
“We believe that with their superior customer service, a compelling merchandise assortment, we will add shareholder value for years to come. Our vendor partners are also very excited with the opportunity for growth in the future. Strategically with the City Gear team, we will grow profitably together.
Fiscal 2019 Outlook
For the current year:
- EPS is now expected in the range of $1.35 to $1.48, which includes 17 to 20 cents per share for non-recurring costs associated with the acquisition of City Gear.
- Excluding the acquisition costs, non-GAAP EPS is expected to be in the range of $1.55 to $1.65, which compares with previous guidance of $1.57 to $1.75. Hibbett has also lowered its guidance when reporting second quarter results after starting the year with guidance in the range of $1.65 to $1.95
- Comparable sales are now expected in the range of flat to 1.0 percent, an improvement versus previous guidance in the range of negative 1.0 percent to positive 1.0 percent. The company began the year expected comps to in the range of negative 1.0 percent to positive 2.0 percent and changed its view in the second quarter.
- Hibbett now expects approximately 30 new store openings and 82 store closures, which includes two closures due to hurricane impact and 25 anticipated closures in the fourth quarter. This compares with previous guidance of approximately 30 to 35 new store openings and approximately 55 to 60 store closures.
- SG&A expense is expected to see an increase in the range of 8.8 percent to 11.2 percent, including City Gear acquisition costs, and an increase of 7.0 percent to 9.0 percent, excluding such acquisition costs.
- Share buybacks are now expected in range between $18.0 million to $23.0 million, well down from previous guidance of approximately $40.0 million to $50.0 million. The change is related to the City Gear acquisition that involves the taking on debt.
Shares of Hibbett closed at $17.96, unchanged in trading, on Tuesday.
Image courtesy Hibbett Sports