Hibbett Sports, Inc. F3Q09 (Quarter End 11/1/08) Earnings Call Transcript

Nov.21.08 | About: Hibbett Sports, (HIBB)

Hibbett Sports, Inc. (NASDAQ:HIBB)

F3Q09 Earnings Call

November 21, 2008 10:00 am ET

Executives

Michael J. Newsome - Chairman of the Board, Chief Executive Officer

Gary A. Smith - Chief Financial Officer, Vice President

Jeffry O. Rosenthal - Vice President - Merchandising

Analysts

Rick Nelson - Stephens, Inc.

Analyst for John Shanley - Susquehanna Financial Group

Oliver Wintermantle - Morgan Stanley

Sean McGowan - Needham & Company

Sam Poser - Sterne, Agee & Leach

Dan Wewer - Raymond James & Associates

David Cumberland - Robert W. Baird & Co., Inc.

David Magee - SunTrust Robinson Humphrey

Jeff Mintz - Wedbush Morgan Securities, Inc.

[Anthony Lebodzinski] - Sidoti & Company

Reed Anderson - D.A. Davidson & Co.

Rob Wilson - Tiburon Research

Analyst for Mitchell Kaiser - Piper Jaffray

Camilo Lyon - Banc of America Securities

Operator

Welcome to the Hibbett Sports, Inc. conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Mickey Newsome.

Michael J. Newsome

With me also is Jeff Rosenthal, our Vice President of Merchandising, and Gary Smith, our Chief Financial Officer. We appreciate you being interested in Hibbett Sporting Goods today and thanks for being on the call. Before we start, Gary Smith will cover the Safe Harbor language.

Gary A. Smith

In order for us to take advantage of Safe Harbor rules, I would like to remind you that any projections or statements made today reflect our current views with respect to future events and our financial performance. There is no assurance that such events will occur or that any projections will be achieved. Our actual results could differ materially from any projections due to various risk factors which are described from time-to-time in our periodic reports with the SEC.

Michael J. Newsome

As you know from our press release late yesterday, our third quarter earnings per share were $0.26 versus $0.25 one year ago. Also we increased our annual guidance to $0.97 to $1.04 from $0.93 to $1.03. Comp store sales for the third quarter were +0.4%. Total sales increased 8.1%. Overall transactions were up 5.4% indicating slightly less traffic but items per transaction increased 3% to 4%. Our store operations team did a great job of selling each customer more products.

Comp store sales for August were +4%. We had a great month and there are some reasons for it. First of all, in August footwear was a very large percent of the business and footwear’s where our strength has been. Also in August we feel that customers are waiting longer to time of need to buy. It did affect a negatively late July but it certainly helped August. Also in August we had the tax-free holidays as you know and we feel that in a soft economy tax-free holidays are more meaningful. Of course the tax-free holidays were in August last year also.

September was a tougher month; -3.7%. As you know most of our stores are in the Sunbelt. In the Sunbelt this year we had two hurricanes and one tropical storm. We did not have any last year. It affected 78 stores for a total of 330 completely closed days and many partially closed days. Gas shortages and the price of gas hurt traffic late in the month. Footwear becomes less important in September relative to August. Of course the negative news in regard to the stock market was certainly a factor too in September.

In October we did come back versus September. We were down 1%. Cooler weather helped us. It was cooler this October versus last October. We didn’t have any storms of course. We still had gas prices very high early in the month but they come down late in the month and it helped. The gas shortage went away.

Third quarter our non-urban stores outperformed our urban stores which has been the trend for several quarters.

November. The first two weeks of November, we’re pretty positive about it actually. We’re up 1%, that’s non-audited, but we feel good about that. That’s the first two weeks.

Now for some comments on new stores. Third quarter we opened 22 new stores and closed eight for a quarter ending total of 726. For the year we expect to open 75 to 79 new stores and close approximately 12. That gives us a 9.5% store growth rate for the year, less than we had planned. Our landlords have delayed several deals into next year and several deals are delayed indefinitely. In fact we had 22 deals that were going to be this year that got delayed to next year and another 20 that’s put off indefinitely.

Now for some further comments on merchandise, Jeff Rosenthal will speak with you.

Jeffry O. Rosenthal

We have three major areas of business: Apparel, footwear and equipment.

Apparel is broken into two areas: pro and college licensed apparel and active wear. Active wear was up slightly led by Nike and Under Armour technical products. Kids and women’s active wear continues to run up. Urban apparel continues to be very challenging as planned. We expect active wear to be strong through the fourth quarter with the help from our new E3 replenishment system and our focus on key items.

Licensed was down mid-single digits. We are hoping the fourth quarter will improve with some of our key teams such as Alabama and the Tennessee Titans. Mixed martial arts apparel has performed very well and will continue through the fourth quarter.

Footwear was up single digits. All categories were up with the exception of women’s. Key items or vendors were Nike Shox, Air Jordan’s, Air Force One’s, Under Armour Training, Adidas Bounce, DC skate shoes, and A6 Performance running shoes. Our footwear assortment is much fresher this year versus last year and more focused to our customer needs.

Equipment was down low single digits. Our key vendors that performed well have been Nike, Under Armour, Shock Doctor, Wilson and Oakley.

Our branded accessory and footwear accessories have been up high single digits throughout the quarter.

We feel we are in position to take advantage of the opportunities and increase our margins in the fourth quarter.

Michael J. Newsome

Gary Smith, our Chief Financial Officer, will now speak with you.

Gary A. Smith

Third quarter sales were $140.1 million, an 8.1% increase from the previous year. Fiscal comps were up 0.4%. Gross profit rate increased 55 basis points due to improvement in in-bound freight and inventory shrinkage rates and the leveraging of occupancy and warehouse costs. In fact, occupancy cost per store is down about 5% on a year-over-year basis.

Selling and admin costs increased 140 basis points over the prior year due to incentive compensation and the deleveraging of store payroll plus an increase in medical insurance claims.

The quarter tax rate of 35.6% benefited from federal employment tax credits.

Operating income was $12 million and 8.6% versus last year’s $12.5 million and 9.7%. EPS came in at $0.26 diluted versus last year’s $0.25.

From a balance sheet perspective the company ended the quarter with $6.5 million in cash versus $10.8 million last year. Debt was at $14.9 million versus zero debt last year. Inventories increased 9.3% over the previous year but decreased 2.5% on a store-by-store basis. Aged inventory as a percent of total is approximately at the same rate as last year and we spent through the 39 weeks $9.1 million in cap ex for the year versus the $24 million budget.

We did not buy any stock back in the quarter but year-to-date we have repurchased approximately 1 million shares at $16.9 million.

Michael J. Newsome

We’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rick Nelson - Stephens, Inc.

Rick Nelson - Stephens, Inc.

Mickey, how do you think about store growth next year? We’re hearing from a lot of retailers they’re pulling back down opening plans.

Michael J. Newsome

Rick, we’re going to pull back slightly. Our goal is 60 new stores net but we think that’s a conservative goal. We’re going to do our best to beat it. There are plenty of small markets that need a Hibbett Sports store but getting the real estate is getting to be a little bit of a challenge. I don’t know if that’ll ease next year or not but we think we can certainly get 60 because we have a lot of them already done for next year.

Rick Nelson - Stephens, Inc.

How about rents? Are they starting to come down now with the turmoil in the real estate market?

Michael J. Newsome

On existing space it is certainly softening on rent. You can get a far better rent than you could three years ago. On new construction you can’t necessarily do that because it’s more expensive to build. But rents are softening and of course we leveraged occupancy expense in the third quarter with only a 4 of 1% comp store sales gain. We’re getting better rents.

Rick Nelson - Stephens, Inc.

I’m wondering if you could also discuss regional areas of strength and weakness. Are you seeing any slowing in Texas with the lower oil prices?

Jeffry O. Rosenthal

Yes. We’re seeing a lot of our gains coming out of Texas, Arizona, New Mexico, Oklahoma, Missouri, Kansas; a little bit weaker really on the East Coast of Florida, a little bit in Georgia, North Carolina, and South Carolina. Out West it seems to be a little bit better.

Rick Nelson - Stephens, Inc.

One final question for Mickey. How is the search coming for a new president?

Michael J. Newsome

We’re looking very seriously internally. You have to remember now we’ve got a management that’s been here; the top 14 people for the company have been here on average more than 12 years. We’ve got Jeff and Cathy and Gary. They’ve been here since we had less than 100 stores. We’re looking seriously internally. We’re going to keep our eyes open though and we’re going to do what’s best for the company and for the stockholders. We have not made a decision. We certainly hope to have that decision made before next March, probably a lot before next March.

Operator

Our next question comes from Analyst for John Shanley - Susquehanna Financial Group.

Analyst for John Shanley - Susquehanna Financial Group

I was wondering on the comp side, I’d like to see you in positive territory and it looks like November is trending well. With what’s coming out of the rest of the retail world, do you see any risks to that number? And with your easier comparison conversely is there upside if you’re feeling pretty good about it?

Michael J. Newsome

There’s just so much uncertainty out there. We don’t know how good or how bad it might be. We’re a much better company today than we were a year ago and we’re positive quarter-to-date. I think our merchandise is a lot fresher especially in footwear but you just don’t ever know. There’s so much uncertainty. So I guess only time will tell.

Analyst for John Shanley - Susquehanna Financial Group

You didn’t give any next year’s guidance. That’s fine, but with things trending the way they are, can you give kind of a high level view of what you’re seeing moving into the first half of next year?

Michael J. Newsome

We give next year’s guidance in March. We’re not really prepared to address that today.

Analyst for John Shanley - Susquehanna Financial Group

On the systems can you give a little update on where you are? I know you had said the E3 was going well. What impact is that giving and if you have any more enhancements coming to JDS and maybe any kind of margin benefit you might expect next year?

Gary A. Smith

Certainly some of the double-digit improvement we’ve seen in accessories has come as we’ve put a number of those SKUs on E3 and it’s been frankly amazing some of the sell-throughs we’ve gotten with that. We’ve got approximately 15% to 20% of our inventory up on that which would be converting from the old and we plan to double that going into next year. With the rate some of those are running I would think we could get a couple of points in comp just in that when we have that system fully up and fully running.

Analyst for John Shanley - Susquehanna Financial Group

Do you know timing of next year when you think you’d be at full capacity?

Gary A. Smith

We’re going to be putting items on and off as we go through the year but I would think we would probably be 50% ahead of where we are now by the second quarter next year and then we’ll tend to move the rest on throughout the year.

Operator

Our next question comes from Oliver Wintermantle - Morgan Stanley.

Oliver Wintermantle - Morgan Stanley

Gary, could you maybe break down the gross margin performance in a little bit more detail please? Your comp was almost flat but your gross margin improved by 55 basis points. Maybe you could give us some more details about the merchandise margins in footwear and apparel. What drove the margin increase?

Jeffry O. Rosenthal

As we continue to grow we see hopefully margin improvement as we get more important with the vendors. We look to increase our margins every quarter. From a margin standpoint we got a little bit stronger in apparel in the third quarter and kind of maintained where we were in footwear.

Gary A. Smith

3/4 of our gross profit improvement came in leveraging in-bound freight and reduction in shrinkage and the other quarter was in the leveraging of occupancy and warehouse costs. It looks like going into the fourth quarter we should see improved product margin rates from all categories of the business.

Operator

Our next question comes from Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

What can you say that you’ve seen regarding consumer behavior and the fluctuations in the price of gas? Earlier in the year you thought you were kind of an odd beneficiary of higher gas prices. Are you seeing a reversal of that now?

Michael J. Newsome

We had slightly less traffic in the third quarter but we sold each consumer on average more items. Going through that gas shortage and it went to $4 I think it affected everybody. You can’t hide from that. As it came down our business started improving. We think overall long term that when we’re out in these rural markets people are going to take less trips into the big mall in the big city than they would have ordinarily.

Sean McGowan - Needham & Company

So even with gas prices lower you still expect them to be shopping closer to home?

Michael J. Newsome

Probably.

Gary A. Smith

Another part on that, 3/4 of what we do is cash and cash related as part of our business so our customers are very sensitive to having cash in their pockets. We saw that certainly during the stimulus checks and we’ve seen a pickup in sales when gas prices have gone down also.

Sean McGowan - Needham & Company

Can you be more specific about the accessories that you’re seeing that sales strength in?

Jeffry O. Rosenthal

Really the accessories would be socks, shoe care type products, shoe laces, those type of items of being in stock in a much better way just because of our systems allowing us not to be as many stock-outs as we may have had in the past.

Sean McGowan - Needham & Company

On footwear Jeff, is it your expectation at this point that the Under Armour running shoe will provide incremental sales for you guys next spring or is that going to be largely substitution?

Jeffry O. Rosenthal

I think it’ll help the industry just because it’ll bring a lot of awareness towards the running market. I think it’ll help the overall business. I believe maybe a little bit incremental but the majority of it would come from somewhere else.

Sean McGowan - Needham & Company

Do you expect that the average price will be helpful to you?

Jeffry O. Rosenthal

I think so. I think that would drive up the average price a little bit.

Operator

Our next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

Can you talk a little bit about the SG&A? That’s been growing pretty healthy this year so far in pure dollars. Can you talk about what’s driving that increase and if we can expect to see some moderation?

Gary A. Smith

As we’ve talked about through the previous quarters the fact that the incentive compensation part of it where in the third and fourth quarters last year as the company tended to slow down a bit we weren’t meeting our bonus goals. This year we are so that’s where a big chunk of that growth on a quarter-over-basis is. When we get into next year it’ll be more comparable but we’ll have to look at some ways of cutting that SG&A growth going forward.

Operator

Our next question comes from Dan Wewer - Raymond James & Associates.

Dan Wewer - Raymond James & Associates

Mickey, I wanted to follow up on the reduction in rent expense that you’re alluding to. I certainly understand how you’re able to reduce rent expense on your new stores going into existing strips but how do you go about reducing your rent expense on stores that you already have maybe three years left on a lease and if those stores are generating acceptable sales volumes? Are you going back to those landlords and asking for a reduction in rent and they’re acquiescing?

Michael J. Newsome

Absolutely. Typically we sign a five-year lease with five-year options. When we come up on that fifth year, for us to renew that option we are negotiating for a better price than we had and we’re getting that. Of course when we come up on three year kick-outs, we’re doing the same thing. I think in regard to both of those we’ve probably saved over $500,000 this year renegotiating leases.

Dan Wewer - Raymond James & Associates

If you’re on average reducing your rent expense 5% in your existing stores, does that really imply that you’re getting 20% or 25% in rent reductions in maybe 1/5 of the stores?

Michael J. Newsome

That would be a little high, wouldn’t it?

Dan Wewer - Raymond James & Associates

I would think that it would be. I was just trying to make the math work.

Gary A. Smith

Some of that is the fact that we probably have 10% to 15% of our stores now with the retail turmoil out there in some sort of a favorable rent to us because of co-tenancy violations or didn’t turn it over on a prescribed amount of time. So we pay a lot of diligence on the front end making sure we get the best deal we can and then our leases are capped a lot of times for common area. We don’t just take the normal escalatory parts of contracts.

We really do a pretty good job in making our store managers aware of what the co-tenancy is like in their existing center so if there’s a violation of any sort or if anybody closes, then we normally go to a favorable percentage rent.

Dan Wewer - Raymond James & Associates

In the past Gary you talked about needing about a 2% increase in your comp sales to stay even on your occupancy rate. It sounds like going forward that’s going to be maybe 0% or maybe even slightly negative.

Gary A. Smith

Going forward I wouldn’t bet the farm on that but this year on a fairly minimal comp we’ve been able on a year-to-date basis leverage both warehouse and occupancy. I don’t think we need as much sales to leverage those two line items. They just seem to be getting more productive and especially in the rent area it seems to be we’re able to get a little bit better more favorable deals.

Dan Wewer - Raymond James & Associates

Regarding promotional intensity, yesterday Dick’s was indicating that in the Texas market where it’s so competitive where they operate that they have become a little bit sharper in pricing to improve their sales productivity. Now I know in Dallas/Fort Worth your stores are a bit further away than the Dick’s locations, but are you seeing any evidence of promotional intensity increasing either in those markets or elsewhere?

Jeffry O. Rosenthal

Not really. We do see what the other people are doing but most of our stores are pretty isolated from there. Texas is one of our best comping areas. No more than we’re seeing around the rest of the country. We are seeing some more promotional but not anything that really affects us that much.

Operator

Our next question comes from David Cumberland - Robert W. Baird & Co., Inc.

David Cumberland - Robert W. Baird & Co., Inc.

Jeff, you mentioned taking advantage of opportunities. Were you referring to buying on more attractive terms or something else?

Jeffry O. Rosenthal

Yes. With the toughness out in the retail environment we are seeing a lot more opportunity type buys and we’re taking a favorable look towards those where we can increase our margins.

David Cumberland - Robert W. Baird & Co., Inc.

Can those benefit you as soon as the current quarter?

Jeffry O. Rosenthal

Yes. There is some inventory that we’ve seen out there that is available.

David Cumberland - Robert W. Baird & Co., Inc.

Gary, do you have an updated cap ex plan for the year? It looks like you’ll come in well under your budget there.

Gary A. Smith

Yes. I would expect us to come in under $15 million gross.

Operator

Our next question comes from David Magee - SunTrust Robinson Humphrey.

David Magee - SunTrust Robinson Humphrey

Gary, can you tell us what the bonus accrual was in the third quarter?

Gary A. Smith

The year-over-year difference is about $1 million.

David Magee - SunTrust Robinson Humphrey

Would the fourth quarter be roughly the same?

Gary A. Smith

It would.

David Magee - SunTrust Robinson Humphrey

In the second quarter I recall you all having some unique experiences in the health care area that were expenses. What happened in the third quarter to cause [inaudible]?

Gary A. Smith

It got a little worse but our first draws in November are in fact under what we would have last year. It was interesting. First quarter this year our health care expense was about the same dollars it was the year before. Then we saw a significant increase second and third quarter. Now fourth quarter seems to be the first couple of weeks draws is about half of what it was last year. So hopefully we’ve had five or six stop watch cases this year which is very unusual for us. We only have maybe one or two but it looks like we may be past those for the time being.

David Magee - SunTrust Robinson Humphrey

How much flexibility do you all have on the expense side if things really get ugly over the next several months? Do you feel like you’ve got the flexibility and the capability to bring down the expense number? Do you have a go-to plan in place if that became the case, if traffic were to go down say 5%?

Gary A. Smith

We have a jerconian plan in place.

Michael J. Newsome

We’ve got a big list of things we’re doing. One of our Board members challenged me about two months ago. “What are you going to do to be prepared if things get tougher?” There are a lot of expenses we’re going to cut back on. In other words, we’re going to hire less district managers next year than we ordinarily would have. But we’re doing some pretty good cuts. We’re prepared to do it. We don’t waste money, I can tell you that.

David Magee - SunTrust Robinson Humphrey

My perception is that you’re pretty lean already. I’m just curious how much -

Michael J. Newsome

But we can probably get a little leaner.

David Magee - SunTrust Robinson Humphrey

Jeff, do you see the opportunity to lean more towards the functional side of apparel in this environment that’s maybe less discretionary in nature that may be more steady? Is there an opportunity to do that?

Jeffry O. Rosenthal

Yes. One of the things that we really have become like with Under Armour and Nike, a lot of our inventory and stuff has really become more replenishable. We rely a lot less on some of the fashions that we have in the past like urban apparel and some of that. I think we’re more traditional athletic based than we were before so the exposure probably isn’t as high.

Operator

Our next question comes from Jeff Mintz - Wedbush Morgan Securities, Inc.

Jeff Mintz - Wedbush Morgan Securities, Inc.

Gary, can you talk a little bit about where the reduced cap ex is coming from? Obviously some is from store openings but it seems like a pretty big cut from the budget.

Gary A. Smith

A good chunk is because we’re not opening as many stores. The other part is the biggest part we had in there in IT spending both from PCI compliance and some more systems enhancement. Some of those are going to be pushed into next year’s budget. With that being said our budget for next year is $19 million gross, net $13 million. We will probably spend about what we spent this year. Our cap ex spending is going to come down a little bit next year too.

Jeff Mintz - Wedbush Morgan Securities, Inc.

I just want to make sure I understood an answer you gave earlier to Sean’s question. Are you saying only 25% roughly of your business is credit card business and 75% is actually cash sales?

Gary A. Smith

Cash, check, debit card.

Jeff Mintz - Wedbush Morgan Securities, Inc.

So that’s correct? Only 25% credit card?

Gary A. Smith

Right. Visa, MasterCard, American Express and Discover.

Jeff Mintz - Wedbush Morgan Securities, Inc.

Jeff, I was a little surprised the athletic, the college football type product wasn’t doing better given what you cited about who’s doing well this year. Is that a tough comparison issue or do you think something else is going on with that licensed product?

Jeffry O. Rosenthal

I think it’s a little tough out in the market place. For every good team you have now that we’re a little bit further spread out, like Alabama’s doing well but you see like a Georgia or an Auburn not doing quite as well or Tennessee. But if Alabama goes farther, that could turn. Also some of the games are a lot later. This week was rivalry week like Georgia/Georgia Tech and Alabama/Auburn and this year it’s next week. So we’ll see once we get through the next two weeks on where we’ll be.

Jeff Mintz - Wedbush Morgan Securities, Inc.

I don’t know if Mickey you want to take this but what’s kind of the thinking on stock buy-backs here? Obviously the stock has come way down and at the same time there’s a need in a tough environment to hold on to your cash. What are you thinking about that going forward?

Michael J. Newsome

We’re being very conservative. There’s just a lot of uncertainty today and in front of us. We had this discussion at our Board meeting two days ago. We’re holding off today but we could change. We’re going to keep our options open and conserve cash and be very conservative in this environment.

Jeff Mintz - Wedbush Morgan Securities, Inc.

I want to make sure I heard correctly. Were transactions for the quarter up or down 5.4%?

Michael J. Newsome

Transactions were slightly down but items per transaction were up.

Operator

Our next question comes from [Anthony Lebodzinski] - Sidoti & Company.

[Anthony Lebodzinski] - Sidoti & Company

I was wondering if in the third quarter there were any severance costs with your COO departure, if you could just comment on that?

Michael J. Newsome

Not really. Very little.

[Anthony Lebodzinski] - Sidoti & Company

As far as the November trends that you cited with the positive comps, how is the traffic versus ticket trend now going?

Michael J. Newsome

It’s about even.

[Anthony Lebodzinski] - Sidoti & Company

So you’re seeing actually a slight improvement in traffic?

Michael J. Newsome

It’s maybe slightly but it’s pretty close. It might be off just a tick but it’s not bad.

[Anthony Lebodzinski] - Sidoti & Company

Given the challenging environment, I was wondering if you guys have seen any competitors actually close up their stores and what’s sort of your outlook on that? I think Steve & Barry’s is one that comes to my mind. If you could just comment on that.

Michael J. Newsome

Steve & Barry’s closing, that probably will have college apparel because they had a lot of college apparel. That may clean up distribution a little bit but we’re seeing a few locals close. We just got word yesterday that one in Mount Airy, North Carolina is closing. So we’ve got to get on the Hibbett product presentation up there and probably beef it up some to take advantage but we’re seeing some closures and there’s probably going to be more. I know there is going to be more because we keep hearing vendors say that a lot of locals are on credit hold so there’s going to be more closings.

Operator

Our next question comes from Reed Anderson - D.A. Davidson & Co.

Reed Anderson - D.A. Davidson & Co.

Gary, on the stores you closed how long on average would those stores have been opened?

Gary A. Smith

5.42 years.

Reed Anderson - D.A. Davidson & Co.

Basically they got to the end of their first lease cycle and it just didn’t make sense, right?

Gary A. Smith

We had a store that was closed in Nashville that was open for 13.5 years. The mall was demolished. We had a 12-year store in Oxford, Mississippi that the mall was demolished there also. So the number of malls that were in this year versus last year is actually down 200 this year to 205 last year. What we’re seeing is the de-malling of America.

Reed Anderson - D.A. Davidson & Co.

So really if you take out those, there were a handful of stores that more or less didn’t hit the hurdle or didn’t hit the benchmark sort of thing?

Michael J. Newsome

Yes. A lot of them were three years and we had a kick-out in the third year and the landlord wouldn’t get cheap enough on the rent to where we could make it so then we closed. Of course we don’t leave behind a lot of lease-on improvements because we don’t build castles on the front end.

Reed Anderson - D.A. Davidson & Co.

As you think about your store base today based on what you’re seeing, is there any reason to think that your captive pool of potential closures or whatever would spike up dramatically or is that still going to be kind of what we saw this year?

Michael J. Newsome

I think it’ll be kind of like what we have this year.

Reed Anderson - D.A. Davidson & Co.

Back to the comp I just want to clarify because I must have not caught it right. What I heard you say Mickey; I thought that you said that the basket essentially was up 5.4% but the items in the basket were up 3.4%. Is that right?

Michael J. Newsome

Yes.

Reed Anderson - D.A. Davidson & Co.

What was the August comp? I missed that part.

Michael J. Newsome

+4%.

Operator

Our next question comes from Rob Wilson - Tiburon Research.

Rob Wilson - Tiburon Research

I looked back in my notes and I seem to recall every quarter you tend to say that you expect merchandise margins to improve yet also in my notes I’m not seeing merchandise margins improve I think in any quarter the last two years. Why would we expect merchandise margins to improve going forward?

Gary A. Smith

They improved third quarter.

Rob Wilson - Tiburon Research

Merchandise margins?

Gary A. Smith

Yes.

Rob Wilson - Tiburon Research

I didn’t hear that when you were explaining the change in gross profit margin. Maybe I missed that. So you expect meaningful improvement going forward?

Gary A. Smith

We certainly do in the fourth quarter.

Rob Wilson - Tiburon Research

Is that related to systems or is that related to product shift mix or something else?

Gary A. Smith

It’s related to systems.

Operator

Our next question comes from Analyst for Mitchell Kaiser - Piper Jaffray.

Analyst for Mitchell Kaiser - Piper Jaffray

We’ve been hearing some discussion about the use of third parties for your distribution efforts. I was hoping you might be able to provide some insight. If that is true, how that might roll out and whether that would be more beneficial to inventory levels or to reducing that transit costs?

Gary A. Smith

What we’re doing is we’re using a third party to deliver to some of our remote stores. We’re fluid in loading those trucks and sending those to a drop point where they then break it down and deliver to our stores. What that does for us is we don’t have to common carrier but it also gives more life to this building. This building can last 1,100 to 1,200 stores. It could probably last longer than that.

We’re seeing being able to leverage those costs and that’s what we’ve done throughout the year with the warehouse piece being able to offset some of those more distant stores by using somebody else to deliver and not having to stage the product here. So we win in both regards by not having to look at another distribution center which we did last year and also it gets us really out of the delivery business to those remote markets. Their systems integrate with our systems so we have terrific control over our inventory.

Analyst for Mitchell Kaiser - Piper Jaffray

It sounds like you guys are up and running with that now. Is that something that just started recently?

Gary A. Smith

It just started. We’re up with 22 stores and it’s working very well.

Analyst for Mitchell Kaiser - Piper Jaffray

Probably more expansion of stores as you get into next year?

Gary A. Smith

Yes, I would think so that the circle around Birmingham would probably tighten to the point where we’re delivering ourselves and as this proves to be successful we would extend it to more of the outlying areas.

Analyst for Mitchell Kaiser - Piper Jaffray

Would that turn up in the gross profit line? Is it a benefit to gross margin? Is that the way to think about it?

Gary A. Smith

Yes. That cost would be captured in warehouse costs.

Analyst for Mitchell Kaiser - Piper Jaffray

Sticking with the gross margin and a separate question, I note last year there was an unfavorable inventory shrinkage adjustment in the quarter. Just for helping us model out Q4 could you quantify what that was for last year or what type of benefit you might get this year as you anniversary that?

Gary A. Smith

It was $1.2 million.

Analyst for Mitchell Kaiser - Piper Jaffray

That was the entire adjustment? But that should now swing favorably for you this year?

Gary A. Smith

Absolutely.

Operator

Our next question comes from Camilo Lyon - Banc of America Securities.

Camilo Lyon - Banc of America Securities

I just have a question on the traffic if we could dissect that a little bit. Could you talk about how your stores are performing, those that are closer to Wal-Mart locations versus the ones that are maybe in mall locations? Is there a major difference in the traffic trends between those stores?

Michael J. Newsome

Yes. Our strip center stores are up low single digits and our enclosed mall stores are negative low single digits. 90% of our strip center stores are in Wal-Mart influenced centers so being around Wal-Mart is certainly an advantage.

Camilo Lyon - Banc of America Securities

So you’re still continuing to see that benefit from that traffic spillover?

Michael J. Newsome

Yes, and that’s been going on for several quarters.

Camilo Lyon - Banc of America Securities

Has that at all decelerated or has that stayed fairly even?

Michael J. Newsome

It’s stayed fairly even. It’s been consistent. Strips were outperforming enclosed malls. We’re like 72% strips now and most of our new stores are strip centers. I think we’re doing maybe one or two enclosed malls this year and all the others are strip centers.

Camilo Lyon - Banc of America Securities

On the ticket side are those stores that are within the Wal-Mart locations also holding up well on the basket side of the equation?

Michael J. Newsome

Yes.

Operator

Our next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

I just wanted to follow up one more time. You mentioned it was about $1 million for bonus accruals. The remaining money increase on the SG&A, can you just walk through that in more specifics on the increase?

Gary A. Smith

We had a deleveraging of store payroll that’s probably 40 basis points and then the medical cost was about 20 basis points.

Sam Poser - Sterne, Agee & Leach

Can you break that out in dollars?

Gary A. Smith

20 basis points on $140 million is about $300,000 and 40 basis points is like $560,000.

Sam Poser - Sterne, Agee & Leach

So that’s still around $2 million. You still have $2 million more in absolute dollars spend.

Gary A. Smith

That’s all I’m prepared to talk about right now.

Michael J. Newsome

We can get you more detail. We just don’t have it here.

Operator

At this time we have no additional questions. I’d like to turn it back to Mr. Newsome for any closing remarks.

Michael J. Newsome

In summary, we realize that all retailers are faced with a lot of uncertainty in the fourth quarter. We don’t know how good or bad it might be but we do know we are a much improved company over fourth quarter last year. Our systems investments are helping us to please a larger percent of our customers by having the correct product in stock in the correct store. We’re doing a better job of selling each customer more items. Our merchandise team is performing at a very high level with their new systems tools.

Fourth quarter last year we were going with our newly-installed systems and it was hurting us. Remember fourth quarter last year we were -7. We’re not going against tough numbers.

We’re going to continue to grow. We’ve identified over 400 additional markets, small markets, that would need a Hibbett Sports store in our 24-state area. We believe we will have at last 1,000 stores by the end of calendar 2011.

Thanks for being on the call today. We look forward to speaking with you on March 13, 2009 at 9:00 Central Time. Thank you for being on the call.

Operator

Ladies and Gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconferencing. You may now disconnect.

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