Hibbett Sports, Inc. F2Q10 (Qtr End 08/01/09) Earnings Call Transcript

Aug.21.09 | About: Hibbett Sports, (HIBB)

Hibbett Sports, Inc. (NASDAQ:HIBB)

F2Q10 Earnings Call

August 21, 2009 10:00 am ET

Executives

Michael J. Newsome – Chairman and Chief Executive Officer

Gary Smith – Chief Financial Officer

Jeffry O. Rosenthal – President and Chief Operating Officer

Cathy E. Pryor – Vice President of Store Operations

Analysts

Dan Wewer - Raymond James

Oliver Wintermantel - Morgan Stanley

David Magee - Suntrust Robinson Humphrey

Sean McGowan - Needham & Company

Rick Nelson - Stephens Inc.

Sam Poser - Sterne, Agee & Leach

Anthony Lebiedzinski - Sidoti & Co.

Kristine Koerber - JMP Securities

Chris Svezia - Susquehanna Financial Group

Sean McGowan - Needham & Company

[Seth Cohen – Valennor]

John Lawrence - Morgan Keegan & Company

Mitchell Kaiser - Piper Jaffray

Operator

Good day everyone and welcome to the Hibbett Sports conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Chairman and Chief Executive Officer, Mr. Mickey Newsome. Please go ahead sir.

Michael J. Newsome

Thank you, operator. This is Mickey Newsome. I have with me Gary Smith our Chief Financial Officer, Jeff Rosenthal our President and Chief Operating Officer, and Cathy Pryor our VP of Store Operations. We appreciate your being on the call today and your interest in Hibbett Sporting Goods.

But before we start, Gary Smith our CFO will cover the Safe Harbor language.

Gary 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

Thank you, Gary. As you know from our press release yesterday we had a very challenging quarter. We believe last year’s second quarter stimulus checks affected our second quarter comps this year approximately 5%. Also the tax-free holidays are tax-free holidays are very important in this economy and 10 of the 12 states in our area that have tax-free holidays shifted from the second quarter last year to the third quarter this year. We believe this affected our comps another 1 to 2%.

Overall comp store sales in the third quarter have improved to negative, low single digits and we have not comps the tax-free holidays in the state of Texas from last year because that state moved the holidays back one week. Ten percent of our stores are in the state of Texas. We believe the consumer is absolutely buying closer to need. Several states including Arkansas, North Carolina and parts of Florida have moved school start dates back one to two weeks. This negatively affects comps in the first part of August. It helps in the last part of August. We will know a lot more about our comp store sales next week after all this is comped.

Now for further comments we’ll go to Jeff Rosenthal, our President and Chief Operating Officer.

Jeffry O. Rosenthal

Looking at merchandise in the second quarter we had three major areas of business, apparel, equipment and footwear. Apparel is broken into two areas, licensed and active wear. Licensed is broken into college and pro. College was off low single digits. Pro was off double digits. Active wear was off low single digits. Women’s and kid’s apparel both comped up.

Our accessory business was excellent, up double digits, which consists of socks, shoe care, sunglasses and miscellaneous accessories. Our store operations team did a great job in selling items per transaction up mid single digits.

Equipment was off low single digits. However, we comped up in fitness, football, basketball and volleyball.

Our most difficult business was footwear, off mid to high teens with all genders off. However our cleated footwear was up low single digits. All in all, we had a very tough quarter.

We are look forward to third quarter as we are pleased with our inventory levels and the age of our inventory. We have many product initiatives that should be very positive. Our E3 Automatic Replenishment System has continued to be a major force in apparel and equipment and accessories. We expect that we will get better and look forward in helping footwear with replenishment as we go forward.

Our average price was down mid single digits, our strips outperformed malls and our non-urban outperformed our urban. We have approximately 75% of our stores are strip centers and 25% are mall.

Michael J. Newsome

Thank you, Jeff. Now for our real estate and new store report. In the second quarter we opened nine new stores and closed three. For the year, we now plan to open 50 to 52 new stores and close 20 and expand 18 to 20 high performing stores. We have expanded 21 stores in the last three years and the results have been very positive.

Now we’re not changing our store model. An expansion means going from 5,000 to 7,500 square feet or approximately a 50% expansion. Now we primarily operate in small towns with county populations of 30 to 80,000 people. We primarily deal with small Mom-and-Pop landlords. They are having big problems financing in this economy. Year-to-date we and the landlords have committed to 87 new store deals just for this year, 37 of the 87 or 42% of our deals have fallen out. It will not be done this year because the landlord cannot deliver the space.

Now most of the new stores of the 37 fall outs will still happen in the next one to three years. There are markets that we need to be in and they are not lost. An example Monroeville, Alabama, a perfect Hibbett market. It’s in south Alabama, very isolated, 35 miles east of Thomasville, Alabama where we have a very successful store. We have had three different real estate deals done in Monroeville, Alabama in the last two years and we still do not have a store because of fall outs, local landlords cannot deliver the space. We believe we can open at least another 350 to 400 stores in the 23 state area we currently operate in. When the economy improves we plan to increase our new store opening rate.

Now for some financial information let’s go to Gary Smith.

Gary Smith

Second quarter sales were $123.1 million, which is a 5.5% decrease from the previous year. Fiscal comps were down 10.5%. Gross profit rate decreased over 250 basis points, mostly in footwear as customers opted to purchase more product off price and warehouse and occupancy costs de-levered.

SG&A was well controlled, increasing 1.9% over last year’s dollars but down 4.4% on a per store basis. Depreciation and amortization was under last year’s dollars due to declining lease hold improvements as it costs us significantly less to get into a store.

Operating income was at $1.9 million and 1.5% versus last year’s $7.6 million and 5.8%. The tax rate was slightly elevated in the quarter due to the fact that all returns are filed in the second quarter this year versus third quarter last year. And the true up was done in this quarter.

Diluted EPS came in at $0.04 versus last year’s $0.17 and from a balance sheet perspective the company ended the quarter with $15.6 million in cash versus $14 million last year. Short term debt was at $0 versus $29.5 million last year.

While inventories increased 5.2% over the previous year, they decreased 1.3% on a store by store basis. We spent $4.7 million in CapEx for the year versus a $17 million budget.

Michael J. Newsome

Thank you, Gary. Operator we are now ready for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from Dan Wewer - Raymond James.

Dan Wewer - Raymond James

Mickey or Jeff, can you remind us the last time that Hibbett went through a cycle where footwear sales were down in this mid to high teen rate? And how long that weakness lasted?

Jeffry O. Rosenthal

Dan, I really don’t remember one being down this low. We have gone through some down cycles in footwear but not to the extent that this one is. And you know we really believe a lot of it is coming from the stimulus and the shift in back-to-school. You know August we are seeing some rebound back in footwear. Not that it’s at the levels we want it to be but it is a lot better than it was.

Michael J. Newsome

I agree with what Jeff is saying. I don’t ever remember one that was this tough. Now in the early 2000’s it got a little bit soft in footwear but not to this degree.

Dan Wewer - Raymond James

As I recall we began to see the weakening footwear sales I guess it was like at the end of March, right? So before we had the problem.

Jeffry O. Rosenthal

We had in February, we were up almost in the double digits at the end of February and then it started dropping in March. We were still up but it dropped some.

Dan Wewer - Raymond James

So that was taking place before we had issues with stimulus check comparisons or shift in back-to-school shopping holidays.

Michael J. Newsome

Yes, but not to the degree. It got certainly more negative in May and June and July than it did in March and April.

Dan Wewer - Raymond James

And I know you’ve talked in the past about the benefits of becoming a preferred customer of Nike, you know efforts there making to improve margin rate for Hibbett and Nike product. Can you maybe give some examples of what they’re doing to help Hibbett in this current cycle, either in terms of protecting margin, taking extra product returns, etc.?

Jeffry O. Rosenthal

Well you know with Nike we have a very good relationship. You know we always work on margin and different types of containers and special products, and we always look at the financial pieces of it. And we work very closely to monitor that. Sometimes it doesn’t always come in the quarter that you want it to come but we always manage to get to a field where we both can live with. And you know we still see lots of opportunities on how we go to market and how much allocations and those type of things that will help our business. And you know we’re told we’re still the place to go to, especially since we go to small markets that we’re needed.

Dan Wewer - Raymond James

I know that a lot of the challenges in footwear are more industry related and we’re certainly seeing the impact of weak employment on your business but aside from that, what are your plans? What levers do you plan to pull to help rejuvenate footwear sales?

Jeffry O. Rosenthal

Well you know we’re still going to have premium shoes and we’re still looking at selling marquee type products. You know we are shifting a little bit to become a little bit more performance not fashion. And we’re also looking at maybe we should have a little bit more of a mix when it comes to value pricing.

Operator

Your next question comes from Oliver Wintermantel - Morgan Stanley.

Oliver Wintermantel - Morgan Stanley

Mickey, maybe that’s a question for you, we expected that the second quarter will be weak due to the cycling of the stimulus checks and the shift in tax-free days. However, what changed your outlook for the rest of the year between the first quarter conference call and today that you would reduce your full year guidance by around 20%?

Michael J. Newsome

You know we want to be absolutely conservative. There is just so much uncertainty in front of us and we don’t want to have to keep changing things. We just want to be very conservative and we want to beat what we put out there.

Oliver Wintermantel - Morgan Stanley

And within the different categories did you see a trade down only in footwear or was that across the board?

Jeffry O. Rosenthal

We actually had a slight increase I think in apparel. Footwear was down low single digits. The reason that we had such a shift is the percentage of footwear business went way down so it brought down the average price quite a bit. But we feel very good on where we are in apparel and equipment being down low single digits with going against the stimulus and the tax-frees, we’re very positive on it for the third and fourth quarter. And apparel becomes a bigger part of the business going forward. So we’re encouraged by that. We’re encouraged by our replenishment that we’ve been doing in apparel and equipment. And we performed relatively well in the second quarter considering going against stimulus and tax-free shifts that we feel very good about what we have going in the second half of the year.

Oliver Wintermantel - Morgan Stanley

And can you just remind us what the performance was throughout the quarter per month?

Jeffry O. Rosenthal

We were down high single digits in May, high single digits in June and mid to high teens in July.

Operator

Your next question comes from David Magee - Suntrust Robinson Humphrey.

David Magee - Suntrust Robinson Humphrey

Just a couple of questions. One is how are your stores performing in areas that have been back-to-school now for maybe a couple of weeks? Is there a way to kind of break that out, that performance which takes some of the noise out of the year-to-year?

Michael J. Newsome

Well I think absolutely people are buying closer to need. In other words the state of Arkansas started to school this year on Wednesday, two days ago. Last year they started on Monday and it was a huge difference in sales this weekend. We were down big in Arkansas this weekend but on Monday and Tuesday and Wednesday we were up big. Just amazing. The start of school can really make a difference in buying patterns and habits.

Jeffry O. Rosenthal

But David for the month those stores that have comped tax-free and back-to-school are up low single digit.

David Magee - Suntrust Robinson Humphrey

So like in Georgia here where all the schools been back since last Monday, would these stores be I guess running low singles?

Jeffry O. Rosenthal

Yes.

David Magee - Suntrust Robinson Humphrey

And about what percent of the store base would that be at this point, just roughly?

Jeffry O. Rosenthal

We are approximately 60% are already gone back-to-school and about 40% will be next week.

Michael J. Newsome

Of course the big difference is the ones that pushed school openings back this year relative to last year, and several states did.

David Magee - Suntrust Robinson Humphrey

And the ones that have improved because of taking some of the noise out of numbers from a timing perspective, are you seeing you know better footwear? Is that also swinging more positive?

Jeffry O. Rosenthal

Yes, it’s much better than it was obviously in second quarter.

David Magee - Suntrust Robinson Humphrey

And Jeff is there a difference in the kind of shopping dynamic for footwear, once you kind of get past back-to-school? You know it seems like you’ve got a lot of moms and their kids and they might be optioning to go to Wal-Mart right now for back-to-school but when you get into say October you get more of the athlete buying for their own needs and stuff. Is that stretching too much?

Jeffry O. Rosenthal

Maybe. You know really what we’ve seen is you know a lot more things are needed, maybe not quite as much fashion. Obviously with our cleat business being good it’s a need you know when somebody absolutely wants to play baseball or football or soccer. So we’re seeing some pretty good increases there and we expect that to continue. I think our mix needs to shift a little bit more towards performance, which performance running like an ASICS, a Brooks and a Nike performance type running shoes. So we see shifting a little bit more of our inventory towards that which is a little bit more basic and not driven as much off fashion.

David Magee - Suntrust Robinson Humphrey

And just lastly Gary, how’s the lease renegotiation process going so far at this point in time?

Gary Smith

Yes, we see like we took a look at our lease hold. It’s costing us less to get into stores. Lease negotiations we’re seeing a downward trend in rents.

David Magee - Suntrust Robinson Humphrey

Is it kind of happening about the pace that you thought?

Gary Smith

The dynamics are coming at different places on the financial statement but we’re getting close to what we thought.

Operator

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

Sean McGowan - Needham & Company

Was there anything in any of the markets weather wise that you think might have contributed one way or the other? You know either rain or hot or whatever?

Jeffry O. Rosenthal

No.

Sean McGowan - Needham & Company

And then I don’t know if this is for Mickey or you, Jeff, certainly the outlook has been reduced here and I think on the last couple of calls you said you’re just you know trying to be conservative but I think the last time we had a call like this you were looking for positive single digit comps for the balance of the year. And I’m just circling back to that question saying where did you see changes that would swing it so negatively?

Jeffry O. Rosenthal

Yes, you know even second quarter even though we would know it was going to be tough it was a little bit worse than we thought. And footwear did come off at such a high run rate from first to second quarter. We were just conservative about that because of where footwear is today. You know we’re still very high on apparel and equipment and we do believe footwear will be better on the second half of the year.

Sean McGowan - Needham & Company

So it’s more a function sounds like of you know the latest data points are negative and you don’t know why that would change so you’re just being conservative because the most recent trends are negative?

Michael J. Newsome

Well put. Yes.

Operator

Your next question comes from Rick Nelson - Stephens Inc.

Rick Nelson - Stephens Inc.

I wanted to follow up on footwear and what comp guidance assumes about the footwear category in the back end of the year.

Jeffry O. Rosenthal

Yes. It would be mid to high single digit decrease.

Rick Nelson - Stephens Inc.

Inventory situation in the footwear category, I know you took a lot of markdowns in the second quarter and you talk about the shift to more function and less fashion. How long does that take to get the inventories righted for the demand picture as you see it?

Jeffry O. Rosenthal

You know I think it’s a work in progress but we feel very good of where our aged inventory is in footwear and where our inventory levels are in footwear. So we’ve managed it pretty well considering that we had such a shortfall and we’ll continue to do that through the back half. You know as we come into other [buys] I think you’ll see a significant shift in some of the buys.

Rick Nelson - Stephens Inc.

[Inaudible] a weakness across the industry in this segment, are you seeing more opportunistic buys and what are your thoughts about participating that way?

Jeffry O. Rosenthal

We see some. You know I think right now the vendors don’t want inventory, the retailers don’t want inventory so everybody’s trying to play it down. So we do see some from time to time, but I wouldn’t say that there’s an over abundance of close outs out there.

Rick Nelson - Stephens Inc.

If I could also I want to ask you about geographic areas of strength and weakness.

Michael J. Newsome

The strength is like the lower Midwest, Oklahoma, Nebraska, Kansas, Missouri, Illinois, Kentucky, in that area its’ pretty good. The weakness is Arizona and New Mexico, south Texas, Florida, the Carolinas and parts of Georgia.

Operator

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

Sam Poser - Sterne, Agee & Leach

Mickey or Jeff, can you tell us what your comp? Like can you go through your inventory level on a comp basis?

Jeffry O. Rosenthal

You know we’re down close to 1 point or low single digits in apparel. I don’t have all of that off hand. I can tell you in just a second, Sam, but it’s down across all categories for the most part. You know I don’t know specifically what you’d like to know.

Sam Poser - Sterne, Agee & Leach

Well I guess you’re guiding to flat to negative four for the balance of the year. Are the inventories on a comp basis, are the inventory levels relatively in line with that guidance?

Jeffry O. Rosenthal

Yes.

Sam Poser - Sterne, Agee & Leach

And then how are your new stores operating as a percent to the existing, to the comp right now?

Gary Smith

A little less than 70%, Sam.

Sam Poser - Sterne, Agee & Leach

Just to follow up on the other question, can you give us the footwear and apparel by month? You may have done it I may have just missed it.

Jeffry O. Rosenthal

By month?

Gary Smith

You’re talking for the second quarter?

Sam Poser - Sterne, Agee & Leach

Yes. For the second quarter. Just comps.

Jeffry O. Rosenthal

Yes, apparel down low single digits in May and June, mid in July. Footwear was mid to high May and June and a little bit higher than that in July.

Sam Poser - Sterne, Agee & Leach

You commented that about 150 stores would be on percent rents or expect to be on percent rents this year. How is that looking right now and is that number going up?

Michael J. Newsome

It’s not going up. It’s staying pretty steady. I think it’s 145 to 150 today. Now a year ago it was like 80. But we think it’s going to, unless somebody else has a big closing it’s going to pretty well remain in that area for the foreseeable future.

Sam Poser - Sterne, Agee & Leach

And then what kind of deal on a rent reduction what are you seeing as you renegotiate the leases?

Michael J. Newsome

Well of course it depends on the store. If you have an option coming up and it’s an over performing store you don’t get any additional rent reductions. But if it’s an under performing store and a prospect for closure, you get a lot better rent reduction. But on new store deals you know we’re getting a little better rent but where we’re getting some help is the landlord is doing more of the work and we have less investment in new stores.

Sam Poser - Sterne, Agee & Leach

And then for Jeff, what percent of the business now is on replenishment in total? It was around 20 at the end of the year and you were aiming for 30 by the end of this year I think.

Jeffry O. Rosenthal

Yes. I would say it’s probably about 24, 23, 24% and you know as we ramp up more footwear you know I will get closer to the 30 mark. And you know a lot of that is work in progress. A lot of that will be in in spring but we feel that’s a good number to at least get to in the beginning.

Sam Poser - Sterne, Agee & Leach

You’ve comped down significantly in the quarter and in Q2. Where are you month-to-date for comps right now?

Michael J. Newsome

We’re at low single digit month-to-date but we have improved significantly in the last week because we still haven’t comped all the tax-free states yet. Texas is this weekend. Last year it was last weekend and 10% of our stores are in Texas. Plus this year we’ve had several states with later school opening dates and that affects comps. We could tell you a lot more this time next week about comps than we can today. We anticipate it’s going to improve.

Sam Poser - Sterne, Agee & Leach

When we look at Georgia, somebody brought it up before, which had the earliest tax-free days and I presume the earliest back-to-school as well, can you sort of walk us through you know where it started, where it went to during the tax-frees, how it stand or what happened when people went back-to-school and then sort of where it is today?

Gary Smith

We really can’t, Sam. That’s just too granular and we don’t want to get into that now.

Sam Poser - Sterne, Agee & Leach

And then Jeff one last thing, can you give us a breakdown by category in footwear, sort of was it outside of cleated, sort of the ranking by you know basketball, running, the cross training, etc?

Jeffry O. Rosenthal

Yes. Really the biggest negative really was the women’s piece and men’s running. And really men’s running you kind of have to break it down. The technical piece is very good. We’re comping there but we have some fashion in running, too. So if you took the fashion part it’s not as bad. That’s where we see the most deterioration though.

Operator

Your next question comes from Anthony Lebiedzinski - Sidoti & Co.

Anthony Lebiedzinski - Sidoti & Co.

Can you guys remind us how the same-store sales progressed last year in the third quarter?

Jeffry O. Rosenthal

Fairly strong in August, weakened somewhat in September because of the hurricanes and the gas shortages in the southeast and was fairly flattish to down a little bit in October. And I think we were up marginally in the third quarter.

Anthony Lebiedzinski - Sidoti & Co.

So basically you’re down low single digits versus a pretty good same-store sales number a year ago.

Gary Smith

Well it’s really hard to tell, Anthony, until after the later Labor Day this year to exactly where you are with license should probably take a hit because NFL opens a little bit later this year. So really this call would be a lot more meaningful in two weeks than it is today.

Anthony Lebiedzinski - Sidoti & Co.

And as far as expenses are concerned, you guys have any opportunities to further streamline your, I know you’re a lean operator but are there opportunities for some perhaps expense reductions?

Gary Smith

Well at the beginning of the year we took about 2% or so out of the expense structure and we’re below that right now. So I think there’s still some opportunities going forward.

Anthony Lebiedzinski - Sidoti & Co.

And as far as expanding some of these higher performing stores, what’s the typical investment in such a project for you guys and what kind of a comp lift do you usually get after doing such a project?

Michael J. Newsome

The typical investment you know the landlord, depending on the situation, typically the landlord does most of it but we do have to do some of it. Gary, do you know what the number is?

Gary Smith

Yes, it all depends, Anthony, but it could be anywhere from $25 to $50,000 and we usually see at least in the first 12 months a high single digit lift in comps. And probably in the second year we could see a double digit lift in comps.

Operator

Your next question comes from Eric Tracy - BB&T Capital Markets.

Eric Tracy - BB&T Capital Markets

If I could just follow up on the footwear piece a bit, in addition to sort of the [audio impairment] getting more focused on [audio impairment] opportunities again just from a more moderate priced product as consumers clearly looking to trade down a bit, just again from an assortment standpoint there. And then remind us again footwear where it is, I know it’s early, but where it is what percentage on replenishment?

Jeffry O. Rosenthal

Okay. You know really probably as big a thing to let you know about is that we really need to do a much better job internally in store and call out some of the values. We have a lot of values. There may be shift in some inventory but we need to do a much better job in letting customers know inside our box where that is. And to answer your second question you know on E3 it’s less than 2 or 3% of our footwear is on replenishment.

Eric Tracy - BB&T Capital Markets

And maybe the expectation where that goes by year end?

Jeffry O. Rosenthal

Year end makes some slight improvement. Really where we should make the most improvement would be next spring. You know hopefully next year we can get it into the double digit range, which I think we can.

Eric Tracy - BB&T Capital Markets

And then maybe just turn to the real estate piece in terms of kind of having difficulty closing some of these deals. Mickey, how should we think about one just next year, unit growth? I know the visibility isn’t there in lumpiness but as far as should it be somewhat similar to this year which I think is net kind of 30 to 32 door openings?

Michael J. Newsome

I think it will be a little bit more. I think it will be 32 to 36 in that range net. But we’ll still close some stores. Of course we will try to do more new stores but we’ve got to expect 40 to 45% drop out again.

Eric Tracy - BB&T Capital Markets

And just on that note, I mean is it using the Monroeville as sort of the example is there anything just a concern that there is something more systemic from a commercial real estate perspective that even though the opportunities from a market standpoint are there, that at least just tempers your overall thinking of the overall market opportunity?

Michael J. Newsome

Well what happens, you know there will be a small strip center of maybe four or five stores and the landlord can’t get it leased. I mean he’s got a deal with Hibbett and he’s got a deal with a couple more but he needs to get some more leased to get his bank financing. That’s one big problem. And then he’s got to have financing to get it built also and he’s having trouble there. I think that’ll pass. We’ve just to get through this downturn in the economy and get things leveled off and I think we can get our new store count back up big.

Eric Tracy - BB&T Capital Markets

And then maybe just on the other side of that, of sort of a rationalizing market I would imagine some of the smaller independents struggling to survive. Can you sort of talk about sort of the opportunities for share grab there and what you’re seeing?

Michael J. Newsome

Yes, absolutely. For instance we had a small independent. We’re in Arab, Alabama and we had a small independent close. And all of a sudden we got a lot smarter in Arab, Alabama where our accounts are big. And we’ve had the same thing happen to us in Fort Payne, Alabama and just this week we saw there’s a bankruptcy in Athens to the [sea] a small local. We’re seeing some of that but it’s not big. They’re typically in the school and teen business hardcore and that teen and school business where you have a salesman going out to the schools, it’s pretty good. We have a little division that does about $10 million and their sales are good. Of course that’s all driven by gate receipts and I don’t think people are going to stop going to high school football games. That’s a cheap form of entertainment and that’s what most of those little locals are. But we’re seeing some close. We’ve seen a lot of them.

Eric Tracy - BB&T Capital Markets

And then just other real estate in terms of liquidations and possibly recycling of some of those doors. Is there any of that opportunity?

Michael J. Newsome

There’ll be some but in small markets like a Hazard, Kentucky you’ve got the one strip center and it’s mostly leased. It’s not like the outskirts of a large market where you may have several strip centers or malls that are virtually vacant. It’s a little bit different in small markets. There’s not as much vacancy.

Operator

Your next question comes from Kristine Koerber - JMP Securities.

Kristine Koerber - JMP Securities

Just another follow up on the footwear category, can you just elaborate on the mix? I mean you talked about focusing more on performance, less on fashion. What does the mix look like now and what do you expect the shift to look like?

Jeffry O. Rosenthal

I think you know a little bit of it’s in lifestyle which lifestyle can mean a lot of different things. You know part of it’s urban, part of it’s suburban with skate shoes and I just think you know we have some opportunities to get more of the performance piece and it’ll be a little bit more basic that you can cover. And there will always be a fashion element to our business. And you know we’re still selling. It’s still our best selling shoe we’re just not selling it at the rate we were a year ago. And that’s all just economic issues that we’re having in our country right now but we still see that as a big part of our business so it’s just shifting a few of those dollars to get the inventory in line with the sell throughs.

Kristine Koerber - JMP Securities

Is performance a majority of the category now?

Jeffry O. Rosenthal

No I would say more it’s fashion. And you know the cleat business obviously is all performance but part of our running category is fashion and technical. We just see giving a lot more dollars to the technical piece going forward than the fashion piece.

Kristine Koerber - JMP Securities

And then you just talk about performance of the new brands you’ve added, i.e. North Face and how is North Face doing in some of the stores? And how many stores are you in now?

Jeffry O. Rosenthal

Yes, we’ll have a significant increase in the second half of the year in North Face. We’re very excited about it. They really perform well in the second half of the year so it’ll be a significant increase. And we’re counting on a lot of that to help our apparel sales through the second half of the year. And also the accessories that go along with it. So we feel very good about that. You know we are seeing a lot more niche brands that may be just in the southeast or in certain states, so we do have a lot of new brands but we really don’t want to give out those brands for competitive reasons.

Kristine Koerber - JMP Securities

And number of stores you’re in with North Face?

Jeffry O. Rosenthal

We really don’t want to give that out but it’s significantly higher than it was last year.

Operator

Your next question comes from Chris Svezia - Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

I was wondering, Mickey, maybe you could just clarify you answered a question regarding months-to-date trend. I think you said both singles. Is that down low single you were talking about?

Michael J. Newsome

Yes, down low single.

Chris Svezia - Susquehanna Financial Group

And then I guess either Jeff or Mickey, just in terms of the trends that you’ve seen for those areas that have gone back-to-school you said 60% or so or I guess by the end of this week would have been back-to-school, can you maybe just add some color about what people, not so much what they’re buying but how they are buying? Whether it’s pricing, trading down through apparel or footwear, just in terms of how they’re buying product and kind of what they’re looking for. You talked a little bit about shopping closer to need but I’m just curious in terms of from a pricing perspective and trade down perspective what they’re looking at.

Jeffry O. Rosenthal

Yes, we’re not seeing quite as small a price issue at back-to-school because I think here people are buying it because they need it right now. So we’re not seeing as much pressure as we saw in the second quarter where maybe there wasn’t such a need at the time. And there was a little bit you know need at that time. You know from a margin and those type of things you know we do see that it’s better than last year.

Chris Svezia - Susquehanna Financial Group

And then on when you guys think about maybe being a little bit more, you talk about on the footwear side at least shifting a little bit, of open to buy a little to more performance footwear and I think you mentioned to some degree maybe looking at some incrementally you know opportunistic buys, maybe talking a little bit more about showing that value presentation. Is there enough opportunistic buys out there? Because you mentioned there really wasn’t that much to get into, where you guys could at least support your overall margin rate even if you maybe needed to become a little bit more value oriented in some categories.

Jeffry O. Rosenthal

Yes, I mean Chris we’re not going to play there unless we can make money at it. So whatever we buy in those price ranges you know we expect at least or more of what we’re making now from a margin standpoint.

Operator

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

Sean McGowan - Needham & Company

Hi, Mickey, I just wanted to get some clarity on something I think I heard you say earlier regarding the level of high school sports business. Did you give a number of $10 million? Is that annual or quarterly?

Michael J. Newsome

We have a little Team division. That’s how we started back in the mid-60s, Team and School. It’s a separate corporation and we operate it totally separate. You know they have an old warehouse. They have nine outside salesmen. They don’t do any retail business. I think their occupancy expense is like 1%. It’s a whole different model. But their business is good. It’s real interesting. I think high school sports is still going to be there. And their business has been very good this year.

Sean McGowan - Needham & Company

And that’s about a $10 million a year business?

Michael J. Newsome

Yes. It’s a small piece of our business but it’s where we started and we still have it. We wish it was $200 million now.

Operator

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

Sam Poser - Sterne, Agee & Leach

Jeff, when you mentioned with the potentially bringing in more price point products in footwear, and given that you’re continuing to plan the footwear business down aggressively going forward and orders for spring are beginning to be due, I mean how does this work with your more premium brands as you plan the business from a mix basis? I mean are you going to them to get the deals or where are you going and is this something where you can, can you be planning any of these businesses up at this time?

Jeffry O. Rosenthal

You know Sam I think you know we still expect to sell premium products. We’ll shift some of our dollars towards that. And from an open to buy situation it’s really you know we work with all the vendors on making sure our inventory levels are correct. And we’ll make sure that you know we make the proper adjustments on where we see that business going. It’s just going to be a piece of. We’re not changing what we’re doing. You know we really want to stick to what we are but you know we do need to make some changes obviously to get the business better.

Sam Poser - Sterne, Agee & Leach

Given the current trend and your current outlook, the lower price points notwithstanding it would probably necessarily mean that everybody’s going to take a hit of some sort due to [inaudible] constraints and turn constraints and so on and so forth.

Jeffry O. Rosenthal

Well you know there are some categories that we’re playing up. And for instance if we’re looking at technical running we’re planning it up. So they’ll get more open to buy. There may be some areas that will get less open to buy but it’s just that you know we’re making some adjustment, we’re analyzing what vendors we do business with and if we should do as much or not at all. So we’re just taking a bigger scope on the way we look at the business.

Sam Poser - Sterne, Agee & Leach

And then Gary one last question, on a flat to negative four could you lever occupancy in the balance of the year?

Gary Smith

At the higher end probably, at the lower end no.

Operator

Your next question comes from [Seth Cohen – Valennor].

[Seth Cohen – Valennor]

My question’s sort of around the follow up to last quarter just with Wal-Mart coming in with Starter and Danskin and how that impacts sort of your view, how you’re adapting your strategy if at all and if you think it’s even a competitive threat.

Jeffry O. Rosenthal

I remember the question last [audio impairment] and I really don’t think it’s a threat [audio impairment]. You know really with Danskin and Starter it’s mostly apparel and our apparel business is very good. And I really don’t think it affects us at all. I know they have a little bit of footwear but I mean I think you’re talking apples and oranges and really don’t feel like that’s a threat at all.

Michael J. Newsome

Yes, we see Wal-Mart as our ally. They’re not the enemy.

[Seth Cohen – Valennor]

So are you looking at any strategy changes or how to monitor it or is it going to be sort of reactive here?

Jeffry O. Rosenthal

Well you know we’re always making adjustments. You know we do have some private label in apparel and it’s doing very well so we look at that, but I really don’t think that’s a factor at all.

Operator

Your next question comes from John Lawrence - Morgan Keegan & Company.

John Lawrence - Morgan Keegan & Company

Just real quick, Jeff would you comment a little bit on replenishment? The last time you had this cycle and these types of trends, remind us of how that replenishment system helps you today on that markdown cadence and all those types of things.

Jeffry O. Rosenthal

Well the more stuff you have on replenishment it’s more stable items. It’s not really susceptible to markdowns as much. You know we stay in inventory positions more, the vendors hold most or almost all of the inventory. So it builds just a better base for us and a more consistent business going forward.

John Lawrence - Morgan Keegan & Company

And that’s what gives you the confidence of getting margins better as you continue to go forward?

Michael J. Newsome

That’s one of the things.

Jeffry O. Rosenthal

Correct. You know we need some top line too to help, but that’s one of the factors that’s key to us in making sure that it’s X percent of our business.

Michael J. Newsome

Another factor in build and margins is our inventory is cleaner and less aged and lower per store.

John Lawrence - Morgan Keegan & Company

And then secondly, Mickey, obviously with some of these fall outs and you mentioned catch up over the next couple of years, I mean as things come back to normal, etc., how high would you take that unit growth rate?

Michael J. Newsome

I think we can take it to 75 to 85 pretty quick.

John Lawrence - Morgan Keegan & Company

And some of those would be catch up and some would be new markets.

Michael J. Newsome

Right.

Operator

Your last question comes from Mitchell Kaiser - Piper Jaffray.

Mitchell Kaiser - Piper Jaffray

On the gross margin, Gary, you talked about it down 250 basis points. Could you give us a sense for what the merchandise margins, how they performed and then maybe just a breakout of if it was performance or mix related to footwear, please?

Gary Smith

Half the decrease was in the gross profit line was due to deterioration in product margin was mostly in footwear. And the warehouse and occupancy was due to de-leveraging.

Mitchell Kaiser - Piper Jaffray

So kind of half and half between the two?

Gary Smith

Yes.

Operator

Mr. Newsome?

Michael J. Newsome

Yes?

Operator

There are no further questions at this time. I will turn the call back to you. Please continue with [inaudible] or closing remarks.

Michael J. Newsome

Okay, thank you. In some regions we feel much better about the third quarter and we have many positive things going on at Hibbett Sporting Goods. Number one, we ended the quarter with $15.5 million in cash and no debt. Vendors and landlords love that. Number two, we ended second quarter with less aged inventory and less inventory per store, which could result in increased product margins in the future. Number three, we’ve greatly improved in systems. The Automatic Replenishment is really helping us and it shows up the fact in apparel, in equipment and accessories we were much better in the second quarter than footwear. Number four, we will continue to grow our store count, opening 50 new stores this year and at least another 50 next year. We’ll continue to cut costs whenever possible. We have a solid store model going into smaller markets where we are needed by customers, landlords and vendors. We are in a great position to take full advantage of growth opportunities in the future.

Thanks for being on the call today and we look forward to speaking with you on November the 20th at 9:00 Central Standard Time with our third quarter results. Thanks for being on the call.

Operator

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

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