Greetings and welcome to the Hibbett Sports First Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Friday, May 24, 2019. I’d now like to turn the conference over to Pat Watson with Corporate Communications. Please go ahead.

Thank you for joining Hibbett Sports to review the company’s financial and operating results for the first quarter of fiscal year 2020, which ended on May 4, 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, May 24, 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.

Thank you, Pat, and good morning, everyone. Welcome to the Hibbett Sports fiscal 2020 first quarter earnings call. 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 first quarter, followed by Jared with a 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. I will, however, provide actual revenue for the City Gear business until it is incorporated into the consolidated comp sales starting in the fourth quarter of this year. For the quarter, total sales increased 25% to $343.3 million. This includes $59.4 million for City Gear, which would not have been in the prior year first quarter. Consolidated e-commerce sales were 8.3% of total sales and we continue to see strong trends in our e-commerce business. Overall, comp sales increased 5.1% for the quarter. With respect to the months, comps were positive all months with stronger results as the quarter progressed. Consolidated e-commerce sales increased 49.7%. Gross margin decreased 70 basis points from prior year and includes a $950,000 charge related to the City Gear acquisition. Excluding this charge, non-GAAP gross margin declined 40 basis points from prior year’s first quarter. Product margin decreased due principally to freight associated with e-commerce sales. We’re pleased with our inventory position and experienced less clearance sales this year than the prior year first quarter. Logistics and store occupancy expense improved as a percent of sales primarily due to the strong sales performance to prior year. SG&A expenses predominantly increased from the addition of City Gear expenses. As a percent of sales, SG&A rate improved 80 basis points. This improvement includes $700,000 in non-recurring acquisition costs and a $1.5 million asset impairment charge related to our plan to close 95 underperforming stores. Excluding these charges, SG&A rate improved 140 basis points principally due to leverage from the strong sales performance. SG&A expense also includes an approximate $1 million reduction in stock compensation expense related to the departure of some employees. Depreciation and amortization increased $975,000 due to the addition of City Gear fixed assets. Depreciation improved 20 basis points as a percentage of sales. The income tax rate for the quarter was 25.3% compared to last year’s first quarter rate of 24.7%. We expect the rate to be slightly higher this year due to Section 162(m) permanent differences. Operating income of $36.8 million increased 28% from last year and was 10.7% of sales versus 10.4% last year. Excluding the non-recurring items mentioned, non-GAAP operating income was $39.9 million, or 11.6% of sales. Diluted earnings per share increased 32% to $1.48, excluding the impact of the non-recurring items diluted earnings per share increased 43.8% to $1.61. Turning to the balance sheet. We ended the quarter with $117 million in cash, compared to $116 million last year. We had borrowings on our revolving credit facilities of $26 million related to the City Gear acquisition. We continue to expect that to be paid off by the end of the fiscal year. On a comparable store basis, inventory per store decreased compared to the first quarter of last year. We spent $2.5 million in CapEx for the quarter, which included three new stores, one expansion and two conversions of Hibbett stores to City Gear stores. Turning to the guidance. Based on first quarter results, our updated guidance is as follows: We now expect consolidated comparable store sales to be in the range of positive 0.5% to positive 2%; for gross margin, we expect our overall rate to decrease 25 to 35 basis points; excluding the impact of non-recurring items in both fiscal years, we expect non-GAAP gross margin to decline 35 to 45 basis points. With respect SG&A rate, we expect an increase in the range of 10 to 15 basis points, but excluding non-recurring costs for both years, we expect non-GAAP SG&A to be approximately flat to an improvement of 10 basis points as a percentage to sales. As I mentioned earlier, we expect our full-year tax rate to be 25%. Finally, we expect diluted earnings per share to be in the range of $1.70 to $1.85, which includes $0.25 to $0.35 per share for non-recurring costs associated with the integration of City Gear and costs associated with our plan to improve the productivity of our store base by closing approximately 95 stores this year. Excluding non-recurring costs, non-GAAP diluted earnings per share is now expected to be in the range of $2 to $2.15. I’ll now turn the call over to Jared for a review of merchandising.

Thank you, Christine. Good morning. As a reminder my prepared remarks are reflective of comparable store trends. This will not include City Gear until the fourth quarter. During the first quarter, our footwear business increased high-single digits, posting our seventh consecutive quarter of comp sales gains. Men’s was up double digits, women’s and kids were at mid-single digits. From Nike, our campaign around Air Max month highlighted by the Have a Nike Day Collection drove significant growth across all genders. Heritage models such as Air Max 95 and 97, along with new creations such as Air Max 270, Air Max 720 and VaporMax were all growth drivers. We also had stellar results from the Air Force 1 franchise, including basics as well as fashion executions. Additional drivers for the quarter included retro and retro-inspired franchises from Jordan, Yeezy, Swift and Boost platforms from Adidas and significant growth from New Balance, Brooks and Champion. Our apparel business was up low-single digits for the quarter. Men’s apparel was up high-single digits and women’s was also positive low-single digits. Kids apparel was softer, down low-single digits. Apparel with strong connectivity to our footwear business performed exceptionally well, along with our increased investment in plus sizes and big and tall. Accessories turned positive in the quarter up high-single digits. Focus on sneaker connectivity within our bag and sock business drove significant improvement. License business remains soft, down high-single digits as expected. Team sports business was down mid-single digits as expected. Strong results were seen across softball, volleyball and track, but were offset by declines in other categories, including football, baseball bats and inflatables. We exited the quarter in excellent inventory shape and are fresher than the year ago period. Our focus on improving and scaling our sneaker business while connecting our apparel and accessory business is working and presenting a differentiated experience in our markets. I’ll now turn the call over to Jeff Rosenthal.

Thank you, Jared. We’re excited to see growth in both our store and digital channels as well as continued growth in omni-channel shopping for our – from our customers. The growth is coming from increased sales from existing customers as well as growth in new customers. Sales from existing loyalty members were up 11% in the quarter. This quarter, new members to our loyalty program grew 25% year-over-year, with stores growing at 19% and the digital growing at 64%. The number of omni-channel shoppers grew 119% year-over-year. The combination of growth in the existing members and new members grew loyalty sales to 64% of revenue versus 58% prior year. Regarding our digital channel, we continue to see robust online sales growth with a 46% comp this quarter. Our digital channels will continue to be the growth engine for the company. One area specific opportunity is City Gear, our e-commerce penetration there is very low and we have plans and timelines to quickly advance this business. Our City Gear integration is progressing as planned and we are encouraged by our improved inventory position as we move forward. We are committed to the fundamentals of presenting a differentiated customer experience building the best-in-class teams and driving exceptional executed and – executed in all parts of the business. With City Gear and Hibbett, we believe that we can win for many years to come. Although, Hibbett has made up ground on its digital business and its omni-channel capabilities, we are committed to continuous improvement and innovation. In the retail, the bar continues to be raised on customer expectations. Hibbett has more robust enhancements in the pipeline over the next year that will create experiences to meet and exceed our customers’ expectations. We are very encouraged with the many opportunities that still lie ahead for both Hibbett Sports and City Gear. Our positioning in the athletic specialty space and the city specialty space gives us a strategic advantage. We can have the most innovative sneakers, apparel and equipment in our secondary and tertiary markets. We will continue to innovate both digitally and in our stores, and we will be testing a new store concept in the fall for Hibbett. We also be working hard on speeding up on innovations on how to get products to consumers more efficiently. I would like to thank all of our associates, both at Hibbett and City Gear that are dedicated and making sure that we are very successful. I will now turn the call over to the operator.

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

Hey, good morning. This is Lavesh on for Seth Sigman. We had a couple of questions. So firstly, on the online growth, can you give us some color on what you’re seeing in terms of the mix of SKUs online? Was it in the store and the clearance and full price mix? And also, what is City Gear doing currently? And I have a follow-up. Thank you.

Yes. We continue to move. We do – we are seeing the more full price business growing. And as we first started, clearance was a much higher percentage. So we’re starting to see that clearance is becoming less as things – as we progress in this. And we think that it’s a huge opportunity. And also since our inventory is so clean, we are seeing that our clearance margins are improving, too. We’re being able to get rid of some of our goods at a much higher price. So we see that. City Gear not to get in particulars, but there are much lower penetration in – with our technology and getting them on R-type platform. We expect that to continue to be an opportunity as we get that up, and that will be hopefully sometime in this fall.

Got it. Thank you. Finally, just sticking to like the store closings plan for this year. I mean, as you close these stores in Q1, I mean, can you just share some of the learnings, especially regarding what are you seeing in terms of the sales transfer from closed stores to your existing stores? Thank you.

So, we’ve closed 25 stores this year, and there’s not really – because of the way we place the stores, there’s not really lot of transferability of the sales. Those stores are typically about half the volume of a typical Hibbett store. And so they were running unproductively and we’re closing them for that reason, and we do expect that we’ll pick those – some of the sales up online.

Got it. Thank you.

The next question comes from the line of Camilo Lyon with Canaccord Genuity. Please proceed.

Good morning. How are you, guys? Good start to the year.

Good morning, Camilo.

A couple of questions. First, it looks like your store comps were flattish. First, if you could confirm that my math is right in that regard? And second, do you see an opportunity for store comps to turn positive for the balance of the year, just given a lot of the initiative that you got in place to drive that person, that customer back into your stores? It seem to be working, so I’m curious about your outlook on that?

Right. So store comps were positive low-single digits for the quarter, and we’re very pleased with that. Feel that a lot of the digital improvements that are happening are driving that. We’ve got BOPIS transactions. We’ve got reserve online, pickup at store. About 20% of the time when someone walks in for a BOPIS transaction, they’re buying something else, which is adding volume at the stores. And so that that’s really – as Jeff mentioned, we see digital being the primary growth driver for sales, but we’re very pleased to see the positive comps at the store level.

That’s great. So with the comp guidance as it is, is there an anticipation that the store comps maintain a positive trajectory?

I would say we built in – we didn’t build in a lot of upside on the store base. It’s early in the year, and there’s a lot of – there’s – we’re subject to the whims of the customer and there’s a lot of things that can happen. Q2 is kind of non-activity quarter, Q3 has some potential with back-to-school and then we go into the holiday business. But we’re still watching where that growth will be at the store level, but have driven the majority of the growth to the digital side.

Got it. And Jared, maybe could you talk about any sort of product launch changes that might influence how we should think about the Q2 comp that could have differed 90 days ago? Have you seen anything from that side, on the floor side?

Yes. I mean, there’s certainly some launches during the quarter. I think, as Christine mentioned, it’s a – certainly a much smaller quarter. There’s some volatility historically with second quarter, so that’s where some of our mindset around our plan for second quarter comes from. There’s some noise around some launches and potential movements. And as we get further visibility on that, we’ll have a plan to address it.

Okay, great. And then you mentioned that you converted one Hibbett store to a City Gear store. I’m wondering if you had enough time between that conversion and now to see any changes in the performance of that store?

Yes. We’ve done actually two. One in Murfreesboro, Tennessee and one in Jackson, Mississippi. And we’re very pleased so far on how both stores are performing. We’re doing the analysis right now on how many would we do and those type things, but we’re very encouraged by the results of those two stores.

That’s great. That’s it. I’ll turn it over to the queue. Thanks, guys. Good luck.

Thank you.

Thank you.

The next question comes from the line of Rafe Jadrosich with Bank of America Merrill Lynch. Please proceed.

Hi, good morning. Thanks for taking my question.

Good morning.

Good morning.

Jared, I was hoping that you could just talk a little bit about within footwear and apparel the trends you’re seeing, if you can just talk about basketball versus running? And then on the apparel side, what are you seeing in performance on apparel versus some of the lifestyle product and then how you’re positioning for that?

Yes. From a trend perspective, I think, some of the – looking at the business through the category lens can sometimes be a little bit difficult on the footwear side of the business. We’re little more focused on just what’s trending a little bit, less concerned about what category it comes from. Some of the – specific to some of the categories around the sportswear business we’re very strong. We’re absolutely seeing the – kind of the 80s and even 90s trend continuing at this point, significant improvement around heritage models on the sneaker side of the business and heritage brands frankly. But then we’re also seeing some nice results out of new product creation. So on the apparel side, our focus is continuing to connect our apparel business to the sneaker business and ensuring from a trend perspective that we have the right hookups to sell the outfit. We’re certainly looking at that in our accessory business as well where we’re seeing a nice change in the business. We’re really trying to focus away from fashion versus performance and just stay focused more on what’s trending and what’s relevant to today’s consumer. So we have – sorry, we certainly have numerous platforms that are available for our consumers that are performance-based, but they also have to have some trend to them as well for them to be successful.

Okay. And then one of – one of your key vendors and actually one of your competitors have highlighted today that there has been some supply chain constraints on the apparel side. Have you seen anything in apparel that maybe hurt you or the products you weren’t able to get in the first quarter that you’d expect better availability as you move through the year?

Yes. There has been some supply chain issues overall. Our team has done an incredible job of working with our suppliers to make sure that our business was covered and to try and fast track as much product as we possibly can. Some of the challenges we did anticipate and we did over leverage in some places to try and compensate. So that certainly helped us, but the team has really done a great job of ensuring the we have a strong product flow, and we’ve got newness coming in frequently for our customers.

And then just – my final question. SG&A leverage was pretty strong in the first quarter for the rest of – for the full-year, you’re guiding to sort of flattish SG&A, which would imply deleverage for the the rest of the year. Is there anything that in terms of timing of expenses that drove the leverage in the first quarter, or was it just stronger sales growth? Can you just talk about the dynamic that kind of drove leverage in the first quarter and why you don’t expect that to continue through the year?

Yes, it is. You’re right, it is primarily the leverage of the strength of the first quarter. it’s our strongest sales quarter and a lot of our sales even on the labor side are fixed. So we have some minimum store labor hours at the stores and a lot of the occupancy rent is specs. There is a little bit of timing on some of the acquisition costs. We didn’t incur quite as much. So on a GAAP basis, so the acquisition costs will move into the remainder of the year, but primarily the strength of the first quarter gives us the best leverage opportunity.

Okay, great. Thank you.

Thank you.

Thank you.

The next question comes from the line of Peter Benedict with Robert W. Baird. Please proceed.

Hey, guys. Jeff, you talked about enhancements in the pipeline to improve the experience. And then can you talk a little bit more about that? I mean is it the store format change that you’re working on the delivery side on the other side? Is that what you’re referring to, or are there other things that are coming that you have line of sight, too?

Yes, really there’s a bunch of things that we’re working on to make sure that we have the best customer experience. We work a lot more on just the overall experience in the store. We’re looking at definitely putting in a new format on what a new store should look like for the future. We also are looking at how to get things to customer faster in more efficient ways, and we think that there is lots of opportunity there. It’s really – the customer is always right in today’s world, and you just got to get faster and faster and better and better, and the expectations just have to go up that much more. But have a lot – quite a few things that we’re working on and even improvements in our app and how people shop and how they pay for things. There’s even just payment plans on. There’s a big talk, I think, a lot of people are doing on just financing payments. A lot of our customers, they really want to be able to pay for things on a $200 sneaker, maybe pay $50 every month for it to be able to buy it. So all those things are all in play and we’re looking at things that are going to be the most efficient in running a business. And I think that now that we put all the infrastructure behind the business, we’re in a very good position to play offense. And Hibbett has been for the last four or five years, I believe we’ve been with one hand tied behind our back, and now we can at least go fighting with both hands. And we can actually exceed what some of the things that were holding us back were.

That’s helpful. Thank you. And then given the volatility that can be in the business over the next few quarters, you have calendar shift issues that can impact 2Q and 3Q. Certainly, there’s probably some variability. Christine, you just mentioned that around City Gear and some of the expenses. Can you give us a sense just from a cadence standpoint as we look over the balance of the year? You used to generate positive earnings in the second quarter. In the last couple of years, you’ve not been able to do that. Should we think that positive earnings are possible here in the second quarter, or it doesn’t seem that to be the case, but I just wanted to hear you guys out in terms of the cadence over the balance of the year?

Yes. I would agree with you, Peter. And Q2 and 3 are the smallest quarters. We expect them to run fairly similarly, but Q2 has a less opportunity, and I think that’s a fair assumption. And then Q4, we expect it to be – it will be much less than Q1, but it’s sizeably more than the middle quarters.

Sure. Okay. Thanks, Christine. And my last question is just really around tariffs more broadly speaking. I know you guys don’t bring a ton in directly, but obviously your suppliers do. So what – just where – how you’re thinking about tariffs at this point? Is there anything baked into the outlook for that, or is it kind of a wait-and-see? Thank you.

Yes, Peter, it’s a little bit of a wait-and- see at this point. I still think we’re looking to get as many detail as we can. The overall I think – based off today that we feel like some of the impacts could be moderate. But again, there’s still a lot more to learn from that over the next few weeks and months.

Okay. Now that sounds good. Congrats on a good quarter. Thanks, guys.

Thanks.

Thanks, Peter.

[Operator Instructions] The next question comes from the line of Sam Poser with Susquehanna. Please proceed.

Good morning. Thanks for taking my question.

Good morning.

My first question is, can you tell us what the sales were by month since your sales changed by month?

Sure, Sam. So sales were positive low-single digits in February around 1%. And then as we said, they improved throughout the quarter, so mid-single digits in the – for March and low-double digits in April. And just as a note, there’s a lot of variables that can impact the – not only quarterly comps, but monthly comps. And we will refrain from providing monthly comps on a go-forward basis, but hopefully that gives you some color on the trend for the quarter.

Thank you very much. And then can you talk about – can you talk a little bit about the last – can you give us last year’s revenues for City Gear, so we can get an idea sort of how that’s doing year-over-year, or it’s same – and give us sort of what your e-commerce penetration was ex City Gear?

The City Gear penetration of e-commerce is much lower than at Hibbett. That’s why we’re excited to get them over to that – our platform and be able to help them grow that business, and we don’t have City Gear’s prior year sales.

Okay.

You asked about e-comm, we were double-digit without City Gear.

So it’s double-digit penetration ex City Gear?

Yes.

Thank you. And then I might have missed it, can you give – I might have – I might just be spacing out. So can you just let me know what the – what your merch margin and your BD&O was for the quarter?

So the – so I’ll tell you that logistics and occupancy leveraged and it leveraged around 12 to 13 basis points. So merch margin overall was down – our total margin was down 70 and the logistics and store occupancy side was a positive leverage. Now without the gross margin recognition at City Gear, total margin was down 40 basis points in the logistics and store occupancy was positive around 13. And then – so the margin would be…

On a non-GAAP basis, what was like – what was the merch margin, what was the BD&O as well?

Right. On a non-GAAP basis, margin was down 40 basis points. Logistics and occupancy were positive, so that would put the merch margin down probably around 50, 55 basis points predominantly due to margin on the e-commerce side – I’m sorry, freight on the e-commerce side. Replaced with our gross margins on the digital side, they are improving, but the continued increase of digital sales is creating some freight pressures.

And when you look – when you think about the margin guidance for the balance of the year, do you see that sort of happening the same way, continued pressure on the merch margin and then getting leverage on the – leverage or less deleverage on the BD&O?

I would say so, yes. Again, we get the best leverage in the first quarter, but I would say that’s the trend we’ve expected to continue.

All right. Thank you very much and continue to success.

Thanks, Sam.

Thanks, Sam.

Mr. Rosenthal, there are no further questions at this time. I’ll turn the call back over to you.

I just want to thank everyone for participating today and look that we had a great quarter. And we look to have many more to come and we look forward to having you on our conference call in August. Thank you.

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.