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Hibbett Sports, Inc. (NASDAQ:HIBB)

F1Q09 Earnings Call

May 23, 2008 10:00 am ET

Executives

Mickey Newsome – Chairman, Chief Executive Officer

Gary Smith – Chief Financial Officer

Nissan Joseph – President, Chief Operating Officer

Jeff Rosenthal – Vice President Merchandise

Analysts

Ralph Jean – Wachovia Securities

John Shanley – Susquehanna International Group

Rick Nelson – Stephens Inc.

Dan Wewer – Raymond James

Sean McGowan – Needham & Company

Sam Poser – Sterne, Agee

Anthony Lebiedzinski – Sidoti & Co.

Jeff Feinberg – JLF Asset Management

David Magee – Suntrust Robinson

[Joe Rivle] – Pacific Capital

Mitch Kaiser – Piper Jaffray

Reed Anderson – D.A. Davidson

Jeff Mintz – Wedbush Morgan

[Rob Willison – Tiberian Research]

Vivian Ma – Oppenheimer

Operator

Good day everyone and welcome to the Hibbett Sports’ first quarter conference call. (Operator instructions) 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. Please go ahead sir.

Mickey Newsome

Thank you May and good afternoon everyone. This is Mickey Newsome, I have with me Nissan Joseph, our President and Chief Operating Officer, Gary Smith, our Chief Financial Officer and Jeff Rosenthal our Vice President of Merchandise. We appreciate each of you being on the call today and your interest in Hibbett Sporting Goods. Before we start, Gary Smith 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 in 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.

Mickey Newsome

Thank you Gary. As you know from our press release, late yesterday our first quarter earnings per share were $0.32. Overall sales increased 9% and same store sales increased 0.1%. 0.1% comp is not a big number but we feel good about the number considering the minus 7.3% comp decrease we had in the fourth quarter on a calendar basis.

February was positive 2.3%. March was a tough month for Hibbett. We were minus 8%. We did lose one day because of the Easter shift but taken that into consideration we were still down over 6% in March. But April we had a nice big comeback, we were up 10%. Without the extra day that we gained, we were up over 6%.

For the quarter, non-urban stores outperformed urban stores which has been our trend in recent quarters. Non-urban were up approximately 1% and urban was negative approximately 1%, but the urbans did improve over recent quarters. Strip centers outperformed enclosed mall stores, approximately minus 2% for enclosed malls, approximately plus 1.5% for strip centers.

The price of a unit sold in Hibbett decreased 3% but we sold a lot more comp store units which could indicate we’re gaining some market share but that does indicate that the big ticket items are probably a little softer than we would like. But it does indicate also that traffic did increase especially in April.

Now we did sell a lot of high priced footwear, it did very well. The big ticket stuff, $500 and up is where we did suffer some. Now the first 19 days of May we have positive comps in the mid single digit range. Now why have sales increased and improved in the last seven weeks? To tell you more about the “why,” our Chief Operating Officer and President Nissan Joseph will speak to you.

Nissan Joseph

Thank you Mickey and good morning. Given the economic challenges facing the industry, we have spent a lot of time and energy in Q1 focusing on our internal processes. There have been improvements made in each of the functional areas but it remains a process of continuous improvement.

We are optimizing our utilization of technology in many areas to make more meaningful decisions. In the area of market intelligence, we are able to deliver and disseminate information from our field executives faster and more efficiently thereby improving our reaction time to market needs.

We’ve improved our ability to systemically segment our stores and customers to ensure that product assortments and promotions are more rational, compelling and relevant to that demographic. We also realized early in Q1 that ASPs were at risk and consequently tailored our promotions and field incentive programs to raise the average transaction price.

We continue to leverage our growth opportunities in our footwear segment which Jeff will speak to you shortly. While we remain influenced by the consumer’s spending capability, our Q1 performance is a validation of our real estate strategy of going to small markets and offering leading brands at convenient locations.

This has become more of a competitive advantage at a time when the cost of commuting to a bigger market to shop can dwarf the cost of purchases. We compete not on price but on convenience, selection, service and product knowledge. Our premium high end footwear continues to perform well and we are less dependent on big ticket items to maintain and grow our business.

Looking ahead, we expect to see ASPs in check as increased prices from our suppliers flow through at retail. On the real estate side we’re increasingly challenged by the ability of retail developers to access credit but are on pace to open between 80 to 90 stores and close approximately 8-12 stores.

Although a little early to come to definite conclusions, our new stores opened this years are currently performing above pro forma. While expecting the challenging business conditions to continue through the remainder of the year, we remain focused on capitalizing on the opportunities available to us. Back to you Mickey.

Mickey Newsome

Thanks Nissan. Now to speak with you more specifically about merchandise, Jeff Rosenthal will speak.

Jeff Rosenthal

We have three major areas of business: apparel, footwear and equipment. We break out apparel into two areas: branded active wear and licensed. Branded active wear up mid single digits with men’s, women’s and youth all up. Urban lifestyle apparel still remained tough.

The youth apparel, both boy’s and girl’s were up double digits. Leading brands are Under Armor and Nike. Our licensed business is broken into two areas: college and pro. College up single digits and pro down single digits. Going against tough comparisons from Colt and [Vera] Super Bowl from a year ago.

Our footwear business was up single digits. Men’s, women’s and youth all up. Youth was up high single digits despite going against Heelys from a year. Cleats business was tough in February but has been up in April and May. Key drivers: Nike Shocks, Airforce Ones, Jordans, Adidas Bounce, Asics Technical Running, DC Shoes and Under Armor cross training shoes.

Classic footwear remains tough. We’re in very good shape in footwear going into the second quarter and feel very strong about it. Equipment was down double digits, however it has improved in April and early May. Football and the soccer business are off to good starts in May which is a big part of the [Hargins] business in the second quarter. Inventory from an age standpoint is in excellent shape and we are in great position to take advantage of the opportunities to drive sales in the second quarter.

Mickey Newsome

Thank you Jeff, Gary Smith will speak with you more specifically about our financials.

Gary Smith

First quarter total sales were $145.8 million an 8.95% increase from the previous year while comps were slightly positive. We opened 14 stores and closed 3 and have 699 stores at quarter end, a 12.7% increase versus last year.

Gross profit decreased 87 basis points due to increased markdowns and the deleveraging of store occupancy. Store operating, selling and administrative costs increased 50 basis points due to the deleveraging of store payroll. However, costs were down on a per store basis.

Operating income was $15.4 million and 10.6% versus last year’s $16.1 million and 12%. EPS came in at $0.32 versus last year’s $0.32. From a balance sheet perspective, the company ended the quarter with $6.8 million in cash versus $19 million last year. We spent approximately $17 million to buy back 1 million shares in the quarter and program to date we’ve repurchased 7.8 million shares for approximately $167 million.

Inventories increased 13.4% over the previous year but marginally on a store by store basis. Aged inventory as a percent of total and as a dollar amount is less than last year. We also spent $2.9 million in cap ex for the quarter.

Mickey Newsome

Thank you Gary. Operator we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Ralph Jean – Wachovia Securities.

Ralph Jean – Wachovia Securities

Mickey regarding the mid single digit same store sales increase thus far this quarter, could you give me an idea of what the breadth of that is, is it across all categories or is it isolated to just a few areas?

Jeff Rosenthal

It has really been across a lot of areas, we’re up in footwear and apparel and equipment and is just slightly down.

Ralph Jean – Wachovia Securities

You came into the quarter with inventories kind of high from the last quarter, your gross margin was down about 90 basis points on top of a decline last year, so do you feel like you have a tougher comparison on the gross margin line in Q2 or should it be down year over year?

Jeff Rosenthal

We’re planning it to be up. Our inventory is in the best shape it’s been in in over a year, from an age standpoint, so we feel like we’re going to increase our gross margin in the second quarter.

Ralph Jean – Wachovia Securities

Can you comment on the initial sell through of the Under Armor cross trainers please?

Jeff Rosenthal

Yes, it hit our expectations. And our sell through we’re pretty satisfied with.

Ralph Jean – Wachovia Securities

Is that something you can re-order, do you feel confident you’re going to be able to reorder it as inventories diminish?

Jeff Rosenthal

There isn’t a lot of inventory to chase but really our biggest buy in that really comes at the back to school period in June and July, because that’s really when we think we’re going to sell the most of it.

Mickey Newsome

Ralph, we get some new colors in in July also which should help.

Operator

Your next question comes from John Shanley – Susquehanna International Group.

John Shanley – Susquehanna International Group

I wonder if you could comment in terms of when the company will eventually need that second DC center. I know you postponed it initially in terms of a DC center in Texas, when would the store base expanding as rapidly as it is, when do you feel it will be necessary for you to bring a second facility online?

Mickey Newsome

We feel like our existing DC can support 1,100 stores. And it’s going to take us six years to get to 1,200. We should be okay in the next three to four years and then we’ll have to start looking at something. But there’s a lot of other things we can do.

Nissan Joseph

We’ve been looking primarily at 3PLs, third-party logistics providers that are offering capabilities that minimize the need for us to own distribution centers in the United States. We would probably contract a 3PL out on the west coast to handle deconsolidation for us so we don’t have to grow our investment in the distribution side of the business and we feel comfortable that in the foreseeable future we really don’t have the need for a second DC.

John Shanley – Susquehanna International Group

What percent of the store base is now considered urban stores and what is the game plan in terms of improving the performance of the urban stores specifically as it relates to merchandise needs?

Jeff Rosenthal

It’s a little over 300. It’s really not growing significantly. You know this really has been proved from a footwear standpoint, the apparel piece has been a little bit tougher. But from a footwear standpoint we’re just a little bit more focused on what we’re putting in there and it seems like it’s been working.

John Shanley – Susquehanna International Group

Is it different from the merchandise mix that you have in your non-urban stores?

Jeff Rosenthal

Yes, we definitely are more focused on some key brands and it’s a lot less SKUs than it was a year ago.

Mickey Newsome

Our merchandise presentation in the urban store is really different than a suburban store and we think the new JDA software conversion we went through last year is going to really help us fine tune this and get it better and better based on the demographic needs. It’s a big deal and it’s difficult to do but we think we’re well on our way to getting it done.

John Shanley – Susquehanna International Group

Do you think the current weakness in the hard lines category might be macroeconomic related, in other words, a lot of those products may be a little bit more postponeable by consumers rather than footwear, apparel, is that something that you think could be affecting that side of your business?

Jeff Rosenthal

I think there could be some of that, absolutely. You know you may use the same baseball glove again or you may use a bat again where footwear and apparel, it changes and it wears out, where a baseball glove you may be able to get two seasons instead of one season out of it. So I think there’s a little bit of that definitely.

Nissan Joseph

Having said that though, we do have some internal efficiencies that we can look to to improve sales in that category.

John Shanley – Susquehanna International Group

Could you elaborate a little bit in terms of what they may be?

Nissan Joseph

Right, space efficiencies and replenishment predominantly.

John Shanley – Susquehanna International Group

What were the inventory levels on a per store basis? You gave us total inventories, were up 13% but maybe you can give us the details in terms of a per store basis?

Gary Smith

On a per store basis the inventories were up a little over 13%, the store growth was 12.7%, but we’re seeing some inflation coming through from China, so I would say on a unit basis we’re probably equal or a little bit down on a per store basis.

Nissan Joseph

And the other thing is our age of the inventory is significantly better.

John Shanley – Susquehanna International Group

Do you have much inventory that’s over a year in age?

Gary Smith

Not really John.

Operator

Your next question comes from Rick Nelson – Stephens Inc.

Rick Nelson – Stephens Inc.

I wanted to follow up on the May trends, how do you think rebates are playing into the sales and is there anything unusual from a comparison standpoint and how does the remainder of the quarter shake out from a comparison standpoint?

Mickey Newsome

We didn’t have those rebates in April and things got a lot better. So things are pretty good in May, not as good as they were in April but we’re up mid single digits and it’s hard to measure, I’m sure there have been some but it’s really hard to measure. We’re in a lot of areas where it’s not real high income so we’re probably getting some help from it, it’s just hard to measure.

Nissan Joseph

It’s all anecdotal evidence that we have. One can’t imagine that a stimulus package like that does not flow through at retail at some point but equally, on the other side you hear about a lot of people have not received it yet and when you look at the performance that we’ve been in having in comps through early May, late April, there’s actually drivers to that that we feel are beyond the stimulus package.

Rick Nelson – Stephens Inc.

On the comparison front, I know a year ago we had all kinds of calendar shifts going on so it’s more difficult to read but are the comparisons [inaudible] early going.

Mickey Newsome

The comparisons are exact this year. Last year they were real tricky, but it’s pretty much on target this year as far as comparisons.

Rick Nelson – Stephens Inc.

One of your peers yesterday was talking about irrational pricing in Texas and Georgia, just curious if any of that is spilling into your markets?

Mickey Newsome

I don’t think it’s been any worse than it has been. We’re full price full service good presentation go where you need it, we’re not involved in that.

Jeff Rosenthal

I really don’t, haven’t seen that big a difference.

Rick Nelson – Stephens Inc.

Are you seeing any resistance at all to the tight price points in the technical apparel area?

Jeff Rosenthal

Not at all.

Mickey Newsome

And we haven’t seen any resistance in footwear for sure. If there is any resistance it’s in the $300-$400 baseball bats. But if we have a big ticket item, that’s probably it.

Rick Nelson – Stephens Inc.

In terms of systems updates, maybe you can address that.

Gary Smith

We’ve gone full cycle on JDA and I think the allocation piece has really started to pay dividends and our merchants are much more familiar and have a better grasp of the system. Early at the fiscal part of the year we moved into the enterprise planning piece and there’s two pieces more of that to go.

But more important about four weeks ago we turned on the more dynamic replenishment E3 and we certainly think that’ll be a driver of the business moving forward. So we’re excited to see that because it manages SKUs by store and that’s what we need to help us with our allocations and become unique in stocking those markets.

Rick Nelson – Stephens Inc.

When does price optimization, when does that?

Gary Smith

Well we’re still taking a look at that and that would probably be if we could go ahead and do it, it’d be the back end of the year.

Operator

Your next question comes from Dan Wewer – Raymond James.

Dan Wewer – Raymond James

Mickey a few months ago you noted that Hibbett has become a preferred customer of Nike. Now that you have a few months under this arrangement can you give us some sense to what the benefits have been and how that’s comparing to your initial expectations.

Nissan Joseph

Nike has been working with us as a strategic partner ongoing for over a year now and we’re starting to see some of the benefits of that come from the attention and focus they’re paying to our business and the help they’re providing in assorting our stores and allocating product to us and we’re definitely seeing advantages from that flow through and we hope to see it continue through the year but also growth through the year.

Dan Wewer – Raymond James

Nissan while I’ve got you on the line, the hard goods component of Hibbett, when you look at some of the bulky items, whether it’s some of the fitness training products or things like soccer goals, when you start looking at the amount of space those products consume in your store, have you given any thoughts to maybe reallocating that into more productive categories?

Nissan Joseph

I think we are going through a process of space rationalization. It is important in the markets we serve, we want to be a store of the community and the community looks to us to be a sporting goods store, so it’s important to be relevant and also complete to that place.

Equally, we have a responsibility to be profitable and effective with our space. We’re looking at ways to minimize our investment in it without in any way deteriorating the selection of products for our consumers.

Mickey Newsome

We’re not real big in that Dan to begin with.

Dan Wewer – Raymond James

I just thought with the small stores and space at a premium, I was suspecting that categories like footwear or more athletic apparel could better use that space.

Mickey Newsome

One thing that we do, 5,000 square feet is very typical but when we’ve got an over-performing store, we love to expand it to 6,500 or 7,000 and we usually see a huge jump and I think it’s part of what you’re talking about, we can present that stuff much better, we don’t really have to add inventory we just present it better.

Dan Wewer – Raymond James

Relating to inflation and how that might be impacting the value of your inventory and then also if you are seeing inflation in your costs of goods sold, how easy or difficult is that to pass it through to your customer?

Gary Smith

We’re seeing on average a 3-5% increase coming from China especially in footwear. And since there’s new models and styles of footwear that are coming out on a regular basis, it’s not like it’s a like kind product where the consumer can say it’s up $5.00 this year versus what it was last year. So from that standpoint it’s fairly reasonable for us to pass that on and maintain our markups. So we should be able to maintain rate and get more dollars from that.

Operator

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

Sean McGowan – Needham & Company

Gary can you talk about how important May is to the quarter, I seem to remember from prior years that it isn’t particularly important, maybe I got that backwards.

Gary Smith

You’re right, May is the smallest quarter or smallest month in the quarter and it just gets increasingly important as you move through the quarter on a per week basis.

Sean McGowan – Needham & Company

Can you talk about what weather factors may have been present a year ago during this period of rather sudden improvement in sales, did you suddenly go up against lousy weather a year ago and might that explain part of it?

Gary Smith

As the end buyers are spread from almost sea to shining sea now, the weather in one area is pretty much offset by the weather in other areas. Last year we had a drought in the southeast, we got a little bit more rain this year but then the weather in the Midwest has been terrible. So we don’t think that’s either a hindrance or a plus to the business.

Sean McGowan – Needham & Company

Regarding the shift in the sales mix and how that might be affecting margins. If we see equipment now for a bit and a big pickup in footwear and apparel that would seem to suggest a positive impact and positive implications for gross margin and yet you’re still calling out some pressures, so is there some additional pressure on initial markups going on?

Jeff Rosenthal

Sometimes there’s with a shift in footwear there is a little bit from an initial standpoint but our footwear is performing well at the high end so we really don’t see that being a factor and apparel of course we have a little bit better margins so we feel that that will continue to be pretty good.

Sean McGowan – Needham & Company

So then your comments regarding gross margin performance in this quarter is really all about leverage, nothing else going on in the first quarter I meant?

Jeff Rosenthal

Yes.

Sean McGowan – Needham & Company

So you’re expecting improvement in the second.

Gary Smith

Sean just to reiterate on that weather thing, in May we’re seeing particular strength in the Midwest and the southwest. And the other parts of the country are a little bit lagging behind that but are at least flat.

Sean McGowan – Needham & Company

And last year if I remember it was more that, was it more the early part of the third quarter where it was unusually warm like everywhere and you were having a little bit of trouble selling the cold weather stuff?

Mickey Newsome

Last year the first quarter we had a big drought in the south, I don’t think we got any rain at all and we had a tough first quarter. This year we’re getting a lot of rain and its better. So with Hibbett the weather don’t really mean that much we don’t think, it evens out.

Operator

Your next question comes from Sam Poser – Sterne, Agee.

Sam Poser – Sterne, Agee

On the gross margin expansion and the guidance. First of all on this guidance, what is your share count assumption for the guidance that you’ve given?

Gary Smith

About 28.8 for each quarter in the remainder of the year.

Sam Poser – Sterne, Agee

And then when we look at this, you’ve maintained, the comps are easier as you get into the back half, we should be looking at some margin expansion and then some deleveraging on the SG&A, is that how we should be looking at this?

Gary Smith

The guidance is conservative.

Mickey Newsome

There’s so much uncertainty out there for the balance of the year. We’ve had a good run, about seven weeks but it just don’t make a year, we got to be conservative. We may be fine and you’re right, the numbers do get weaker in the third and fourth quarter. Surely we can beat last year’s fourth quarter but you never know.

Sam Poser – Sterne, Agee

We’ve got JDA on, you’ve left the JDA, you’re rolling out enterprise planning NE3 right now. How much and I don’t know, Nissan or Jeff, how much did JDA working contribute to the better than expected quarter on a year over year basis?

Nissan Joseph

Sam, to say that JDA has lapped, really I think JDA is an ongoing process, it’s a continuous improvement and a continuous incremental leveraging of the system. So we’re not finished with the leveraging yet but by no means are we capitalizing on it wholly. So on that, we still have a ways to go. How much of that helped, I think that was a part of it.

I think there were a lot of moving parts to our performance in Q1 and to say that one was distinctly more than anything else would be a little premature at this time. But to say JDA is not going to be an important part of our growth as we continue to grow in the next few years, I think the best company is going to be the one with good systems and great people.

Sam Poser – Sterne, Agee

With JDA being a part of the success in Q1, what were the other pieces that, from sort of the back of the house that contributed to that?

Nissan Joseph

I think there’s a lot of pieces. You know when you look at it from a store environment it was our focus on the consumer experience, increasing the basket, increasing the frequency, tailoring the promotions by segment. When you look at it from a merchandise standpoint it was our focus of making sure that we were maybe a little more focused on our assortment that we were offering by store, by segment.

It was about speed to market on a lot of reactionary issues, it was about how we positioned our exit of aged inventory and consequently came out of the quarter cleaner with age. So there’s a lot of moving parts to this. We can even talk about the fact that gas prices may have helped consumers shop locally which is what Hibbett strategically is known for and it is our competitive advantage.

And I could rattle off a lot of other things but I think they would be encompassed by those factors and as you’ve heard, there were a lot of factors there for me to say JDA was the significant one, it’s a little hard to read that totally.

Sam Poser – Sterne, Agee

But it sounds like the promotions by segment, assortments, speed to market and planning exits for aged inventory, all of those sort of in their core, you have the foundation of a much better system than you did a year ago.

Nissan Joseph

Correct, the driver would be the fact that there’s better visibility and as we pull levers we’re able to better assess the effectiveness of those actions.

Sam Poser – Sterne, Agee

And that should only improve as we go forward and add on enterprise planning and all the other various things you’re working with.

Jeff Rosenthal

Absolutely Sam.

Mickey Newsome

And Sam, let’s talk about the human side just a minute. We have really put an emphasis which we always do but we reemphasized customer service and our items per transaction are up but we’re not going to give that exact number on that. But they’re up and we’re proud of that and we think they can be up even more. We’ve got to sell more to the customers coming in.

Sam Poser – Sterne, Agee

What are you doing to do that?

Nissan Joseph

We have incentive programs at the store base, we’re offering training, data, feedback, measuring, you know the old adage, that which gets measured gets done. I know it sounds very cliché but it works. A lot of those kinds of things are in place Sam.

Operator

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

Anthony Lebiedzinski – Sidoti & Co.

Were there any first quarter benefit from any calendar shifts or no?

Gary Smith

There was none Anthony.

Anthony Lebiedzinski – Sidoti & Co.

Are there any calendar shifts in the second quarter that might help or hurt your performance?

Gary Smith

We’re 13 to 13 and 52 to 52. So it’s like throughout the year.

Anthony Lebiedzinski – Sidoti & Co.

So we’re already past it, okay, so just wanted to clarify that.

Mickey Newsome

You’ve got a shift in the fourth quarter that’s not good for retail in general, it’s not big but that Thanksgiving coming later. It’s still in the quarter but it condenses the buying period between Thanksgiving and Christmas, so to me that’s a little bit of a negative but it’s not big.

Anthony Lebiedzinski – Sidoti & Co.

Regarding Heelys, are you still facing tough comps in the second quarter and maybe you could just talk to us about the progression of your comparisons that you’ll be facing regarding Heelys as the year progresses.

Jeff Rosenthal

It pretty much evens out throughout the year and I feel very confident we’re really comping it right now and the numbers don’t get, they get even a little bit smaller but we’re comping it very well in our kid’s footwear and we feel like we can comp kid’s footwear the rest of the year.

Anthony Lebiedzinski – Sidoti & Co.

Also in the first quarter you did have a little bit of short term debt when you closed out the quarter, would you be willing to actually borrow some more to buy back stock or what’s your thoughts on that?

Gary Smith

Just my feeling right now, I’m not quite sure we’ll be as aggressive going forward as we have been.

Mickey Newsome

It’s a subject at every Board meeting, I will assure you and it will be in a couple of weeks.

Operator

Your next question comes from Jeff Feinberg – JLF Asset Management.

Jeff Feinberg – JLF Asset Management

Our research at your stores speaking to customers seem to indicate that high gas prices has actually improved your traffic because folks that might have been traveling to other locations have been coming to yours. I’m curious if that’s something that is your perception or your own store research might have indicated also?

Nissan Joseph

That is one of the moving factors we’ve talked about, the moving parts that we think is driving our comps, our retail strategy of convenience and availability makes it much more attractive given the high cost of commuting these days and the fact that we predominantly draw from a much smaller radius around our stores.

Our stores are designed to draw from a small radius, not a large radius because we don’t build big stores. That gives the consumers the convenience to shop more locally and I think it’s very critical to consumers today to do so.

Jeff Feinberg – JLF Asset Management

I understand that you’re not giving quarterly guidance but just to make sure that we can understand the drivers of the business and the balance between top line and margins, is it fair to say that you would expect earnings and EPS to improve versus last year in the second quarter just as we saw here in the first given the strong start?

Gary Smith

I would think so. If things continue the way they have been we would expect that certainly.

Jeff Feinberg – JLF Asset Management

Finally I just wanted to understand a little bit, I know there was a little bit of dialogue but I just wanted to make sure that I understood, the guidance for the year is for zero to negative 3% comps, you’re running positive year to date, probably 1-2% and your comparisons go from flat in the first half to down 5% in the second half. Why would you expect comps to get worse?

Nissan Joseph

I think we’re taking a conservative approach, we’re not expecting comps to get worse as a focus but we maintain our conservative approach given the macroeconomic headwinds that all of us retailers are facing right now.

Mickey Newsome

We’re just afraid to try to read that crystal ball, there’s just a lot of uncertainty out there.

Jeff Feinberg – JLF Asset Management

Would you say that this is more macro concern or conservatism?

Gary Smith

Conservatism.

Operator

Your next question comes from David Magee – Suntrust Robinson.

David Magee – Suntrust Robinson

You mentioned the ASP decline in the first quarter, could you remind us what that was in the second half of last year, what the trend might be there?

Nissan Joseph

I wasn’t here, but we had declining ASPs last year, to give you an exact rate, I don’t have it available. But we did see the ASPs probably continue their decline but not as significantly as in the fourth quarter.

Mickey Newsome

We could get that number but it was down some.

David Magee – Suntrust Robinson

So you think that the trend line has improved a bit from the fourth quarter?

Nissan Joseph

Correct, in the first quarter it did improve on the trend line.

David Magee – Suntrust Robinson

And just so I understand the gross margin, to belabor the point a little bit, distribution costs were higher year to year as a percent of sales.

Gary Smith

Distribution costs were actually down as a percent of sales year over year David. We saw some decrease or increase in rate in store occupancy and then the product margin rate we had a little more promotion than we had the year before.

David Magee – Suntrust Robinson

So pricing, was, I think it was a small factor year to year?

Gary Smith

At this point, yes.

David Magee – Suntrust Robinson

Which category would that be in?

Gary Smith

Basically footwear.

David Magee – Suntrust Robinson

Another clarification question on the weather, did the Midwestern stores improve during the month of April or was that more recent in May?

Gary Smith

They improved in April.

David Magee – Suntrust Robinson

So despite the poor weather they still had a better month.

Gary Smith

Yes.

David Magee – Suntrust Robinson

And then lastly do you know of any differences this year with regard to state tax holidays?

Jeff Rosenthal

David they’re pretty much in line with last year.

Nissan Joseph

The only one that hasn’t announced is Florida. But they always are late to announce.

David Magee – Suntrust Robinson

Okay but, so but, it sounds like it’s going to be about apples-to-apples then with regard to that factor.

Nissan Joseph

Correct.

Operator

Your next question comes from [Joe Rivle] – Pacific Capital.

[Joe Rivle] – Pacific Capital

Could you repeat again what the comp store sales progression was, I know you said it earlier, by month.

Gary Smith

February was just over 2%, March was about minus about 8%, and April up 10%.

[Joe Rivle] – Pacific Capital

Okay and how did you deal with the leap year, was that accounted for on that plus 2% or?

Gary Smith

That’s last year and that’s old news.

Mickey Newsome

It doesn’t affect this year.

[Joe Rivle] – Pacific Capital

Did you quantify the Easter shift?

Mickey Newsome

Yes, we were down about 8% in March but if you took out the one lost day, we were still down about 6.6%. In April we were up 10%, but if you took out that extra day that we gained in April, we were still up 6.4%.

[Joe Rivle] – Pacific Capital

I’m a little confused about the earlier comment about leap year being last year.

Gary Smith

Well last year was a 52 week year and the comparison was thrown off because the year before that was 53 weeks. So this year’s 52 to 52 and a comparable quarter ending calendar.

[Joe Rivle] – Pacific Capital

I was asking about the extra day of February.

Nissan Joseph

It was a four week month, it didn’t change the number of days or weeks in this quarter.

Gary Smith

Every five to six years we go to a 53 week year, that’s how we make up for the extra day in February.

[Joe Rivle] – Pacific Capital

Also could you remind me what the comps were last year in Q2, the progression through the months?

Nissan Joseph

It was low single digits.

Gary Smith

Yes I think May was a little stronger than June and July were down negative. So we have easier comparisons going through the quarter.

[Joe Rivle] – Pacific Capital

So May was the strongest month?

Gary Smith

That’s our understanding.

[Joe Rivle] – Pacific Capital

Second last year, yes.

Mickey Newsome

We’ll get it to you.

[Joe Rivle] – Pacific Capital

And then my final question was on the, you mentioned earlier that your inventory per store or inventory per square foot were up a couple of points, is that right on a year over year basis?

Gary Smith

A little less than one.

[Joe Rivle] – Pacific Capital

And on the same basis, what were revenues per square foot, or revenues per store?

Gary Smith

Well the comp was up 0.1% and the total was about 9%. The store growth was 12.7%.

Operator

Your next question comes from Mitch Kaiser – Piper Jaffray.

Mitch Kaiser – Piper Jaffray

I’m trying to reconcile just the pickup in the business relative to easier comps. And if I look at you said last year you were up against a negative 4 plus 8, negative 4 and this year you did plus 2.3, I think negative 6.6 and then plus 6 if you adjust for the Easter shift. So it looks like it’s a negative 2 plus 2 plus 2 on a two year basis.

And then I go through and I look at the transcript for the second quarter and I know you just said that May was your best month of the quarter. But and I know the calendar shift skews it a little bit, but if you look at the transcript it shows that it was negative 26, negative 3 and then plus 14. So I’m trying to reconcile the pickup in the business relative to easier compares if you could.

Gary Smith

I think last year in that second quarter we erred on that negative 26, we weren’t down 26 in a quarter. It was 2.6 I believe.

Mickey Newsome

I said that wrong last year, they got on me about it.

Mitch Kaiser – Piper Jaffray

The point is, not being negative 26, so negative 2.6, negative 3 plus 14 is kind of how that plays out. So that would be, so May and June are roughly consistent and then July was a big pickup. But that is calendar shift.

Gary Smith

Yes.

Operator

Your next question comes from Reed Anderson – D.A. Davidson.

Reed Anderson – D.A. Davidson

Jeff you had said that, I think you talked about margins will be up probably in the second quarter, gross margins. And then if I look at the last two quarters the mark downs have been higher in both those quarters, I don’t know about the third quarter, but the last two have been higher. So was that just an issue of clearing out some inventory and that goes away now as a margin pressure starting in Q2 or how should we think about that?

Jeff Rosenthal

Business, of course we had a tough fourth quarter, so we had to clean out and then March was tough so we cleaned up a little bit. But our inventory from an age standpoint now is in the best shape it’s been in in over a year. So that should go away.

Reed Anderson – D.A. Davidson

So that’s why then when we look at 2Q, you basically remove that mark down pressure you were seeing the last couple quarters and we should see margins hopefully up from year ago levels?

Jeff Rosenthal

Yes.

Reed Anderson – D.A. Davidson

And then the comment on the high end footwear doing well, I was just curious, are you doing something different specifically with your higher end product featuring it differently, advertising it differently that would account for that? I’m just trying to get a little more color why you’re doing well there where maybe everyone else isn’t.

Jeff Rosenthal

I think of course our inventory assortment is a lot more focused. We’re not as broad in assortment. And also we’re making a bigger emphasis to sell it in stores. So I think between the two it’s definitely getting better.

Nissan Joseph

And part of the JDA help is we’re able to initially allocate it more correctly to the right and appropriate stores, that helps you sell through the on the back end.

Reed Anderson – D.A. Davidson

Jeff, when you said doing better to sell it in the stores, do you mean from a person standpoint or just from a featuring or putting the product on the shelves?

Nissan Joseph

From a product knowledge training service standpoint.

Reed Anderson – D.A. Davidson

Curious, what would be kind of the inflection point where you would get or be at least break even in terms of store occupancy or payroll in terms of comps, would it be 1-2%, somewhere in there?

Gary Smith

That level since we sort of delayed and postponed hiring has come down a little bit. So probably in the 2% range.

Operator

Your next question comes from Jeff Mintz – Wedbush Morgan.

Jeff Mintz – Wedbush Morgan

On the Under Armor performance trainers, how many doors was that in for you?

Jeff Rosenthal

It was around 300, just a little bit above 300, right around that number.

Jeff Mintz – Wedbush Morgan

And do you expect to add more doors as we go into the back to school part of that business?

Jeff Rosenthal

Yes.

Jeff Mintz – Wedbush Morgan

Any sense of where you might be for back to school?

Jeff Rosenthal

It’s closer to 400.

Jeff Mintz – Wedbush Morgan

And then going back to the comps in the quarter and the comp progression, can you give us some sense of kind of how the comps went from negative 8% to plus 10%, was it greater traffic, more units per transaction, kind of what drove that swing?

Mickey Newsome

More units per transaction for sure and March was tough but it just turned around in April and we don’t have the entire answer. I think the merchandise assortment got cleaner and better and we probably did a better job of customer service. We certainly put an emphasis on it and there were more items per transaction.

Jeff Mintz – Wedbush Morgan

Was it more transactions as well?

Mickey Newsome

Yes.

Operator

Your next question comes from [Rob Willison – Tiberian Research].

[Rob Willison – Tiberian Research]

I want to get some color on your mix shift, apparel versus equipment versus footwear and what impact that may have had in Q1 on your gross profit margin and what you expect that impact might be going forward?

Gary Smith

Our footwear has researched, it’s become the predominant leader as far as comps are concerned. Equipment has moved up and apparel still continues to be strong. So as far as our gross product margin is concerned, footwear is in the low 40’s which is below the apparel and the equipment.

So as we increase, as footwear increases its share, out product margins may decrease as rate but we should get more dollars. And from a footwear standpoint, we think footwear drives other traffic in the stores, so when footwear is good, we would expect to be low to mid single digit comps.

Mickey Newsome

But our footwear inventory is much cleaner this year so we are certainly hopeful that we’ll sell more at regular price rather than mark down price. So that could come back and add to gross margin percent.

[Rob Willison – Tiberian Research]

Also, you mentioned comps by month, when you refer to a particular month, how do you calculate that, is that on a calendar month, like let’s say April 1 through April 30 or is that on a retail calendar?

Gary Smith

It’s on a retail fiscal calendar.

[Rob Willison – Tiberian Research]

Okay, finally you mentioned success here in April and May, of course a lot of retailers have mentioned that they’ve had some top line success in April and May, so how do you discern how much of this success if a function of the company’s initiatives versus some macro level benefit that a lot of retailers have reported in April and May?

Mickey Newsome

It’s really hard to tell. I mean I know we’re an improved company internally because of the improved systems and improved customer service emphasis but you never know. It’s hard to tell. I think our product is certainly much better than it was a year ago, more precise to the demographics but I don’t have a good answer for you on that, it’s just hard to tell.

Nissan Joseph

It’s hard to disaggregate the success drivers or the drivers of any business and quantify it on a numerical basis. But we continue to know that there’s a lot of systemic improvement, people improvements, process improvements that are sustainable with what’s going on today in retail.

[Rob Willison – Tiberian Research]

You’ve mentioned positive mid single digits here, the first 19 days, can you give us some sense what the comps were of those first 19 days last year?

Nissan Joseph

We don’t have that available at the moment, for the month though we know we were negative 2%.

Gary Smith

I think we were coming off a slightly down first 19 days comparable to comparable.

Operator

Your next question comes from Sam Poser – Sterne, Agee.

Sam Poser – Sterne, Agee

Last year you had a big launch with the Crocs business and I wanted to get some idea of what you were seeing there and what kind of growth was going on.

Jeff Rosenthal

Crocs has slowed down for us but form a comp standpoint it’s nothing that we don’t think we can overcome.

Sam Poser – Sterne, Agee

Any kind of quantification on how much slowing you’re seeing?

Jeff Rosenthal

The rate of sales has just slowed down.

Sam Poser – Sterne, Agee

Are you down on a year over year basis?

Jeff Rosenthal

Slightly, yes. It’s not a big category for us.

Operator

Your next question comes from Dan Wewer – Raymond James.

Dan Wewer – Raymond James

Jeff you had noted that gross margin rate should be up during the second quarter because of the clean inventory levels. Will that be enough to offset the higher distribution and occupancy expenses? I’m assuming you were alluding the merchandise margin would be up, not total gross margin.

Gary Smith

That’s correct Dan, we would expect the rate on product margin to improve throughout the year, we just need to get to a 2-3% comp to leverage occupancy in warehouse.

Dan Wewer – Raymond James

On incentive compensation, can you remind me how that was adjusted last year and how that will track in 2008 compared to 2007?

Gary Smith

I recollect that we were at full accrual through the first quarter last year and started paring it back second third and fourth.

Dan Wewer – Raymond James

In the first quarter, how would the incentive comp accrual compare to a year ago?

Gary Smith

About the same on the dollars.

Dan Wewer – Raymond James

If the company were to make the high end of your range, let’s say a dollar a share in the current fiscal year, would that imply a higher incentive comp?

Gary Smith

Absolutely.

Dan Wewer – Raymond James

On the new store volumes, you alluded to that the new stores this year were running above pro forma, is that due to better site selection or a better job in selecting managers and marketing the new stores?

Mickey Newsome

This is my opinion, we all probably got a different opinion here, I think we got better merchandise this year than we had a year ago. I think the site selection is pretty consistent with what we’ve been doing over the years. I think our managers are reasonably consistent, maybe they’re a little better trained but I think the merchandise is better and it gets back to that improvement in systems.

Dan Wewer – Raymond James

In terms of looking at the demographics of the store and you’re getting the correct mix in the store from day one?

Mickey Newsome

Yes and less outages, more in stock.

Operator

Your last question comes from Vivian Ma – Oppenheimer.

Vivian Ma – Oppenheimer

Just wanted to follow up on Dan’s question on the gross margin by the fourth quarter though in the overall you should see gross margin up year over year, right, because it was, the comparison last year was unusually low.

Gary Smith

Yes, we would expect that however we haven’t really shown that in our guidance.

Vivian Ma – Oppenheimer

How should I think about the modeling for the debt levels in the rest of your, you commented maybe you’re not going to be as aggressive with the share buyback. Should I assume debt levels of more or less of where we are?

Gary Smith

Of course it’s going to swing month by month but I would expect to be anywhere from $10-$20 million in debt by the end of the year.

Operator

Mr. Newsome at this time I’ll turn the call back over to you for closing comments.

Mickey Newsome

Thank you. As we said in our conference call on March 14, we believe we’re conservative with our annual guidance of $0.88 to $1.00. Comps have improved in the last seven weeks but seven weeks does not make a year. But we are encouraged. We strongly believe we’re an improved company verse this time last year but we realize there’s a lot of uncertainty in the marketplace.

So we’re keeping our conservative guidance. We continue to open stores in small markets in the Sun Belt primarily and we’re going to be full priced, full service and go where we’re needed. We’re confident we can have 1,200 in the next six years in small markets. Thanks for being on the call today. We look forward to talking with you on August 22 at 9:00 am CST. Thanks for being on the call.

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