Hibbett Sports, Inc. F2Q09 (Qtr End 08/02/08) Earnings Call Transcript

Aug.22.08 | About: Hibbett Sports, (HIBB)

Hibbett Sports, Inc. (NASDAQ:HIBB)

F2Q09 Earnings Call

August 22, 2008 10:00 am ET

Executives

Michael J. Newsome - Chairman, Chief Executive Officer

Nissan Joseph - President, Chief Operating Officer

Gary A. Smith - Chief Financial Officer, Vice President

Jeffry O. Rosenthal - Vice President - Merchandising

Analysts

John Shanley - Susquehanna Financial Group

Rick Nelson - Stephens, Inc.

Dan Wewer - Raymond James

Sean McGowan - Needham & Company

David Magee - SunTrust Robinson Humphrey

Sam Poser - Sterne, Agee & Leach

Anthony [Inaudible] - Sidoti & Company

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

Rob Wilson - Tiburon Research

Jeff Mintz - Wedbush Morgan Securities, Inc.

John Lawrence - Morgan, Keegan & Company, Inc.

Jeff Feinberg - JLF Funds

Mitchell Kaiser - Piper Jaffray

Operator

Welcome to the Hibbett Sports, Inc. conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to Chairman and Chief Executive Officer, Mickey Newsome.

Michael J. Newsome

Also with us today is Nissan Joseph, our President and Chief Operating Officer, Gary Smith, our Chief Financial Officer, and Jeff Rosenthal, our VP of Merchandising. They will also be speaking to you. We appreciate your interest in Hibbett Sporting Goods and being on the call today.

Before we get started, Gary Smith will cover the Safe Harbor language.

Gary A. Smith

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

Michael J. Newsome

As you know from our press release late yesterday, our second quarter earnings per share was $0.17 versus $0.15 one year ago and as you know we increased our annual guidance but we remain very conservative with guidance. Overall sales increased 13.9%. Same store sales increased 5%. Same store sales by month were as follows: May was up mid single digits; June was up high single digits; but keep in mind the last week of June which ended July 5 this year was up 20% comp because July 4 fell on a Friday this year versus a Wednesday last year. This had the effect of pulling comp store sales out of July into June in the first week of July. July comps were positive low single digits partly because of the shifting of the holiday but also because the stimulus checks slowed or stopped; people are waiting longer and buying closer to back-to-school needs especially in the last two weeks of the month; tax-free holidays are getting more and more important and people are waiting for those and they come in August; many school systems, in fact in eight of our 23 states many of the school systems pushed back-to-school start dates one to two weeks and this drove some sales from July into August. August month-to-date sales on a comp store basis are positive mid single digits and August is the most important month in the third quarter. It’s approximately 40% of the business for the quarter. This supports our belief that people are waiting longer and buying closer to need.

Second quarter comps in our urban stores underperformed our non-urban. Our non-urban were up mid single digits; urban stores were up low single digits.

Now for some additional comments, Nissan Joseph our President and Chief Operating Officer will talk with you.

Nissan Joseph

Our performance in Q2 was driven by various internal and external factors. Internally we continue to maximize and leverage the investments in our merchandise systems. We launched E3 a replenishment program late in the quarter and plan on seeing momentum from this program build into the third and fourth quarters of this year. Improved visibility of data this year has enabled us to meaningfully segment our stores and customers to better suit our product assortments and offerings.

Externally our real estate strategy of being located in small markets benefited with the consolidating of trips by shoppers that plays a greater value on proximity and convenience. Our stores in the agriculture and Snow Belt continue to perform well. We are on pace to open 80 to 90 new stores this year and close approximately 10 to 12 stores.

We did see our unit sales increase in the 2% to 3% range which is a key indicator of traffic and as anticipated we saw steady increases in average selling prices especially in footwear as rising costs from overseas manufacturing flow through to retail. We expect ASP to increase for the remainder of the year.

We continue to grow the strategic partnerships we have with our key vendors which helps us drive sales in the footwear, apparel and accessory categories. Our ability to provide brand experiences to consumers in small markets remains a critical part of our strategy. The merchandise initiatives launched this year are performing well.

We are pleased with our sales at the start of the third quarter which is a reflection of our focus on execution of our tactical plan. The increase in our guidance is a reflection of our performance combined with our attitude of responsible conservatism. We remain internally optimistic but externally cautious about the rest of the year given the pressures on our consumer.

Michael J. Newsome

Jeff Rosenthal, our VP of Merchandising, will speak with you.

Jeffry O. Rosenthal

We have three major areas of business: Apparel, footwear and equipment. The two areas of the apparel business are branded and licensed. Our branded apparel was up mid single digits with men’s, women’s and kids all up. Men’s Lifestyle which is mostly Urban remains challenging; however performance apparel from Nike and Under Armour remain very strong. The license business was up low single digits. Key areas of the license business have been MLB headwear and MMA apparel. Our accessory business has been very good, up double digits. Key brands driving the business has been Nike, Under Armour and Oakley.

Footwear was up mid single digits. Men’s and kids are driving the business. Women’s and cleats have been a little bit more challenging. Key drivers: Shocks, Air Force 1s, Jordans, ASICs and Under Armour Cross-Training shoes.

Equipment was down mid single digits. We went live with E3 during the quarter and we’re very encouraged with the opportunity to grow our replenishment business. Our aged inventory is much cleaner than last year and our inventory is down to last year and we are well positioned to take advantage for the second half of the year.

Michael J. Newsome

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

Gary A. Smith

Second quarter sales were $130.3 million a 13.9% increase from the previous year. Fiscal comps were up a robust 5%. Gross profit rate decreased slightly due to fuel costs related to both in-bound and out-bound freight, and in the prior year the company had a favorable gross margin adjustment in the second quarter as we took all store inventories due to the installation of JDA and the actual run rates were better than the accrued rates. However, product margin rates on a comparable basis improved year-over-year from second quarter to second quarter.

Selling and admin costs increased over the prior year due to sales in bonus sensitive related expenses that were somewhat accelerated in the quarter and medical insurance claims that were running higher than anticipated. The quarter tax rate of 36.6% benefited from federal employment tax credits that were certified by the states.

From a balance sheet perspective the company ended the quarter with $14.3 million in cash versus $9.2 million last year. Debt was at $29.5 million versus last year’s $5.8 million. Inventories increased 10.8% over the previous year but decreased over 1% on a store-by-store basis. Aged inventory as a percent of total is approximately 5% less than last year. Working capital needs decreased as AP growth outpaced inventory build and we spent $5.4 million in cap ex for the year versus the $24 million budget. We did not buy any stock back in the quarter but year to date we’ve repurchased approximately $17 million worth in a million shares.

However, just a word on guidance. While the company’s official position in this environment is to be both cautious and conservative, we expect to be at the upper end of the range.

Michael J. Newsome

We’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Shanley - Susquehanna Financial Group.

John Shanley - Susquehanna Financial Group

Mickey, with the strong comp performance the company turned in in the second quarter and with comp sales running ahead mid single digits so far in August, I’m curious as to why the guidance for the back half of the year is so conservative in terms of comp? I think you’re guiding us to flat to up only 2%. Is that just being overly conservative or is there something else that you anticipate happening in the second half of the year that causes you to be more conservative at this point?

Michael J. Newsome

I think we’re being very conservative. We don’t like running around here doing emergency press releases and we just want to be very conservative and there’s a lot of uncertainty out there. You never know what’s going on with wars and all that’s going on and we just want to be conservative. We were standing here this time last year thinking that third and fourth quarter was really going to be robust and it was not. But we feel a lot better this year about it and we’ve got a lot of good things going on, but the bottom line is we just want to be very conservative and beat guidance.

John Shanley - Susquehanna Financial Group

That’s fair. But there’s nothing that you foresee in terms of either merchandising or operational issues that are causing you concern at this point in time?

Michael J. Newsome

Absolutely not. We feel pretty good about what’s going on out there. We think we’re well positioned; we think we’re going to have gross margin improvement in the merchandise; and we’ve got more face this year we didn’t have last year; and it’s just a lot of good things going on but we need to be conservative in this environment.

John Shanley - Susquehanna Financial Group

I’m also curious about the operating and gross margin levels which were both down and the company did not seem to be able to leverage the 5% comp gain that it achieved in the second quarter. Were merchandise margins the culprit that caused the pullback in the gross and operating margins for the period?

Gary A. Smith

Not really John. The company was battling an unfavorable comparison with last year. We took a number of our inventories in the second quarter and as the second quarter is the lowest volume we had a favorable inventory adjustment and it affected the second quarter more significantly than it would other quarters because of the low sales volume. In fact the merchants ran a gross margin rate higher than they did last year and we expect that to continue through the back half of the year.

John Shanley - Susquehanna Financial Group

What’s driving that, Gary? Is it apparel and footwear or is it some other component of the company’s operation that’s turning in favorable merchandise margins?

Jeffry O. Rosenthal

John, it’s really both. It’s apparel and footwear.

Gary A. Smith

Yes, and part of it is that we’re so much cleaner than we were last year and the systems have really aided us by being able to segment the business and drill down into it from a detail level. And we’re just excited about what we’re seeing from the replenishment side of E3.

Michael J. Newsome

John we’re a much improved company over last year because of this systems issue. I mean, our merchants have just got a lot more to work with; they’re much more on target; and we’re just an improved company in that area.

John Shanley - Susquehanna Financial Group

Super. The last question I have is for you Jeff. Of the product margins that you’re getting from the Marquis business comparable or better than what you’re achieving with the rest of the footwear merchandise mix? And is Marquis becoming a bigger component of your overall footwear merchandise assortment?

Jeffry O. Rosenthal

Yes. Really we have seen a lot of improvement on the high end Marquis product. We’re seeing a lot of the business go that way. ASPs especially in footwear are a lot higher than they were a year ago.

John Shanley - Susquehanna Financial Group

What about the margins?

Jeffry O. Rosenthal

Pretty good because we’re getting through it and not having to mark it down really.

John Shanley - Susquehanna Financial Group

So it is higher than the rest of the footwear assortment?

Jeffry O. Rosenthal

I would say in general probably yes.

Operator

Our next question comes from Rick Nelson - Stephens, Inc.

Rick Nelson - Stephens, Inc.

You mentioned the shift in the tax-free holidays from July to August as being one of the drivers. Is there a way to look at the August comp in states maybe that were not affected by this tax-free holiday shift?

Michael J. Newsome

Rick, the tax-frees didn’t shift. They’re in the same timeframe as they were last year. What shifted were the back-to-school starting dates and eight of our 23 states they backed them up one to two weeks. The tax-frees were the same. I think the consumer is just more dialed in to the importance of waiting and buying when tax-frees happen so they can save that money.

Gary A. Smith

Rick, the run rate in those states that are not experiencing back-to-school is still positive and good.

Rick Nelson - Stephens, Inc.

You’ve got 40% approximately of the quarter now under your belt. How do the compares shake out going forward September and October? I know you reported a negative comp last year in the third quarter.

Gary A. Smith

We lost steam. In September and October the comps got increasingly worse as the quarter moved on. So the comparables through the rest of the quarter become more favorable because I think we were up almost 6% at the call this time last year.

Rick Nelson - Stephens, Inc.

How do you see the Olympics impacting your business?

Jeffry O. Rosenthal

So far we’ve seen just a little bit. Our swimming like goggles and stuff we’ve seen a little bit of pickup there. Boxing’s been a little bit better. So far that’s what we’ve seen.

Michael J. Newsome

And a lot of times you get the real effect in the weeks and months afterwards.

Rick Nelson - Stephens, Inc.

I wanted to follow up on the equipment category which has lagged here for a little bit. Anything you can do to combat that comp pressure?

Jeffry O. Rosenthal

We’ve made some changes. E3 replenishment should help us get a little bit better about staying in stock. We’ve made a few changes from a buying standpoint. We’re really looking where we are successful and trying to increase our presence in some of those areas. Sometimes these things take a little bit of time but hopefully we’ll get there.

Rick Nelson - Stephens, Inc.

Are you seeing any resistance to the higher price points in the footwear category?

Jeffry O. Rosenthal

Not at all.

Operator

Our next question comes from Dan Wewer - Raymond James.

Dan Wewer - Raymond James

Jeff, Urban sportswear, I guess it’d be fair to say that’s been an inconsistent performer the last few years. Have you guys considered any strategies in reducing your dependence on that category which I think is about half of your stores and replacing it with more core sporting goods inventory?

Jeffry O. Rosenthal

Yes. We’ve already made a lot of adjustments. I mean, we’re going against some of the numbers from just a comp basis but we are seeing a little bit of opportunity especially in footwear. So even though the apparel part is a little bit tough, the footwear part is good. So we have made some adjustments there and that’s something that’s just a fashion shift and you really can’t fight it so you just have to put your dollars where they’re at.

Nissan Joseph

And Dan equally while we are lowering our dependence on them today, we do plan on fully capitalizing on it if and when that Urban apparel does make its comeback again. It’s just the cyclical nature of the Urban business.

Dan Wewer - Raymond James

That’s the reason I thought it’d be a benefit in just reducing the overall dependence on that category. And then Nissan I have one question for you. I guess you’ve been with the company what eight months now. Can you discuss what parts of the operation you think that you’ve had the biggest impact and when those items may become visible to investors?

Nissan Joseph

Hibbett’s is a great solid company to begin with and the strategies and the competitive advantages that they’ve had over the last 20 years continue to be its strengths. So it’s not a question of in any way changing anything that Hibbett’s is doing but it’s definitely adding on to it. Over the next 12 months I think we will see improvements in our inventory turns as we improve our supply chain processes, execution in stores from a selling perspective, assortment in stores, the leveraging of technology both as a system to help us analyze our business but also where the technology starts to speaking to each other right from the consumer back to the associate in the store back to our back office here where we integrate those three things. For the full effect of that it’s probably enough 12 to 18 months out but in the meantime we’re seeing definite process improvements that the team already had in place prior to my joining and I’ve just continued to build on it.

Dan Wewer - Raymond James

I understand that Nike is showing stronger momentum for you than the other leading brands. It looks like purchases of Nike are now over 50%. For Hibbett I think it’s the first time ever. But when you think about Michael Porter’s competitive framework, that kind of dependence on one supplier also presents a number of risks. If you could just elaborate on that how you manage that kind of concentration with one supplier?

Nissan Joseph

Obviously when you have the five forces working as Michael Porter has talked about that is definitely a dependence that we watch. However, we’re very comfortable with the way Nike manages their brand than if it were to be anybody other than Nike. Equally we do value the relationships we have with our other vendors. To name a few it would definitely be on an Under Armour, Adidas, New Balance. We value those relationships. We continue to look for ways to leverage that but we feel very comfortable given the way Nike manages their business as they grow their business internally that we’re not too much at risk if you use the [inaudible] from suppliers.

Michael J. Newsome

Let me add to that comment Dan. We’re very comfortable with Nike. Our philosophies really match. They love dealers at a full price, full service, go-to-markets where they don’t have distribution. We fit perfect and we’re just not concerned about that.

Dan Wewer - Raymond James

I was actually thinking more of just the other part of the equation Mickey if for some reason Nike’s performance were to be less impressive.

Nissan Joseph

There’s always somebody selling in that void at some point and if and when that ever should happen, we would be poised to move and move with the market too.

Operator

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

Sean McGowan - Needham & Company

A few questions I think also for Nissan in the systems area. One, are you contemplating any additional significant investments in systems beyond the upkeep and basic maintenance that we ought to be aware of? And second, in terms of measurable improvement at least something that we could see on the outside, how far can you go with improvements from E3?

Nissan Joseph

Let me answer your second question first. E3 could impact 20% to 30% of our business by the time we’re up and running with all the vendors and programs that we want on it. We are seeing extremely good results come through, markedly different results from what we were running pre-E3 to post-E3 so we hope for that to continue and we think that could be pretty significant in our growth towards our five-year goal.

To answer your first question we are looking at investments in numerous other technologies keeping in mind we want to be paid back very quickly on it. To name a few, it would be absence management, labor management, markdown management, inventory visibility in stores. There’s a lot of other software that we’re considering and it’s about integrating all of it towards the same goal that’s the challenge; it’s not about the availability of software which is plentiful but picking the right ones in the right steps is the challenge for us.

Operator

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

David Magee - SunTrust Robinson Humphrey

On the men’s Lifestyle apparel, it would seem to be there would be opportunities for you all to benefit from consolidation that’s taking place out there; smaller independents or other retailers retrenching in that space. Are you seeing any of that for that category or for other categories?

Jeffry O. Rosenthal

In that category there definitely are a lot of independents going out of business. We definitely do see that. I think that consumer though is really just not spending the money on some of those brands. A lot of those brands the distribution’s gotten a little bit wider so there really hasn’t been a new trend out of there David but we definitely see the consolidation. Even a lot of brands are hurting also.

David Magee - SunTrust Robinson Humphrey

But not other categories. Are you seeing any consolidation that would benefit you at all across the stores?

Jeffry O. Rosenthal

Not particularly.

Nissan Joseph

Since the independent is fragmented, it’s hard for us to really realize any significant shift in our business because of the fragmentation of them.

David Magee - SunTrust Robinson Humphrey

With regard to the Nike relationship being enhanced year-over-year, you mentioned New Balance and Under Armour. Are you seeing a definite change in terms of their allocation and/or pricing or are you seeing other vendors stepping up to try to prevent their share from being taken by Nike?

Jeffry O. Rosenthal

As our relationship and as we became strategic with Nike, we have also seen the other brands step up also. We’re a desirable place especially with the amount of stores that we have so we see the Under Armours of the world and the New Balances and ASICs all trying to do that same type of thing.

David Magee - SunTrust Robinson Humphrey

Is this a process that could continue to benefit you throughout say 2009?

Jeffry O. Rosenthal

Oh absolutely.

David Magee - SunTrust Robinson Humphrey

With regard to the equipment category Jeff, if you had to pick one or two areas where you might see some strength in the second half of the year going into the holidays, could you do so?

Jeffry O. Rosenthal

Probably boxing. We really have seen a tremendous amount with the Vick’s martial arts and boxing and that type of thing. We’ve seen a little bit of growth there.

Operator

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

Sam Poser - Sterne, Agee & Leach

How much would you attribute the improvement in the sales to the change of systems right now on a rate basis?

Jeffry O. Rosenthal

Sam you and I have talked a little bit about that. That’s just a hard one to say. I think it’s pretty significant but how you put a number to that would be pretty difficult. So it’s definitely that we are getting a lot better at seeing visibility a lot quicker.

Nissan Joseph

And the key thing there Sam is that we continue to feel good that we could leverage it through next year also.

Sam Poser - Sterne, Agee & Leach

You had spoken in the past about price optimization or markdown optimization being the next stage and you were talking about that later this year. What is your current timetable there?

Nissan Joseph

It’s really a stage timetable as opposed to a calendar timetable. There is planning and allocation software that now we’re trying to install at a different level which looks at clusters, by store, by SKU level. We need to launch that and leverage that. So it’s a matter of launching and digesting before we put something else on. The learning curve on these things depends from company to company and their readiness to absorb it. So to come up with an actual calendar timetable is a little hard to do Sam but equally I can tell you that it is on the radar but I can only tell you it is a stage of the process, not necessary a calendar against it.

Sam Poser - Sterne, Agee & Leach

When you mention the planning and allocation software, you’re talking about enterprise planning, is that correct or is there something else there?

Nissan Joseph

No, enterprise planning is already being done. We’re now taking enterprise planning down to the next step which is by store, by SKU, by cluster.

Jeffry O. Rosenthal

And there’s a lot of assortment planning Sam by door.

Sam Poser - Sterne, Agee & Leach

To change the subject a little bit, you talked about your unit growth in conjunction with the ASPs going up. Are you expecting to continue to see unit growth and how much of a better job are you doing getting the right item to the right store at the right time now as it compares to last year or a couple years ago?

Nissan Joseph

Quantifying a number against it systemically versus traffic consumer pattern wise is a little bit of an ambiguous way to do it. What I can tell you is that as we get visibility of our stores better than last year, we hope to see unit sales go up. Equally we also believe the consumer is now consolidating their shopping trips and value proximity much more than they used to given the gas price situation, and we think we’re benefiting from that being in locally driven market places and small towns. So both those factors Sam would tell me that going forward we should expect to see some unit growth.

Sam Poser - Sterne, Agee & Leach

In the stores that have closer adjacencies to Wal-Mart which is a large group of your non-mall stores, did those outperform the ones that were not in as close proximity to Wal-Mart?

Michael J. Newsome

We don’t specifically look at that. Most of them are Wal-Mart influenced either with Wal-Mart or across the street and strip centers in general certainly outperformed enclosed malls but that’s been the case for a while now.

Sam Poser - Sterne, Agee & Leach

And you did say that your Urban stores did comp up for the first time. What was the thing that attributed most to that?

Jeffry O. Rosenthal

It would be footwear.

Operator

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

Anthony [Inaudible] - Sidoti & Company

I just wanted to follow up on your comments regarding the June and July comps. If you were to adjust for the 4th of July holiday, would you say that both June and July were up mid single digits?

Michael J. Newsome

Closer. June would probably still be stronger than July but July would have been up a little bit more. The main thing that affected July probably was people waiting longer. There’s a history of that in the last two weeks. The last three years we’ve been negative the last two weeks of July but it flips into August real positive.

Anthony [Inaudible] - Sidoti & Company

The trends that you’re seeing so far in the third quarter, are you still seeing the same type of increased traffic versus ticket that you’ve seen from the second quarter or is that comp sales the number of about 5%?

Nissan Joseph

We’re seeing a combination of both, increased traffic and increased AFCs.

Anthony [Inaudible] - Sidoti & Company

Also, I was wondering if you guys could talk a little bit more about your strategic relationship with Nike. How do you see that evolving over time and some of the benefits that you’ve seen so far?

Jeffry O. Rosenthal

I think it really helps from a lot of different fronts. One thing is allocated footwear on being able to get the proper allocations. It’s going to what we do in-store with them all the way to doing grassroots marketing with them.

Michael J. Newsome

And further, they have a dedicated team just to Hibbett. We’re the only account they work and that’s very helpful.

Operator

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

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

Jeff, are you seeing more opportunistic purchase offers due to the difficult backdrop?

Jeffry O. Rosenthal

It’s funny. We’re really not seeing that much more. I think a lot of the vendors have paid pretty close attention to their inventories. There’s not an overabundance of it out there.

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

Maybe also related to the difficult environment, if someone could comment on what you’re seeing lately in the real estate environment?

Nissan Joseph

We are seeing it getting tougher on the sites that are Greenfield sites David where credit facilities are hard to find and also co-tenants are hard to find on a Greenfield site. Equally we think that’s going to be offset by other retailers that exit existing leases either through bankruptcies or through planned closures. So we are seeing the upside there. But needless to say that’s changing the landscape a little bit. We still feel confident that we should be hitting our goal of 80 to 90 new stores this year.

Michael J. Newsome

And in existing properties we’re seeing a softening of rent. If you negotiate pretty hard, you can do a little better in existing properties.

Operator

Our next question comes from Rob Wilson - Tiburon Research.

Rob Wilson - Tiburon Research

I don’t know if I heard earlier in the call, did you give the sales metrics like average unit retail, UPT and traffic?

Nissan Joseph

We gave some of it. Our UPTs are up in the 2% to 3% range. I said our units were up 2% to 3% also on top of that. We were up 5% in comps, 2 to 3% of that was driven by greater units; the rest was driven by an increase in price of average units.

Rob Wilson - Tiburon Research

So traffic was flat?

Nissan Joseph

No, traffic was up a little because we drove more units as the core sales.

Rob Wilson - Tiburon Research

Did you mention also strip centers versus mall stores, the same store sales in those two respective venues?

Michael J. Newsome

Yes. Strip centers outperformed enclosed malls and they have in recent quarters; in the last couple years really.

Rob Wilson - Tiburon Research

I’m a little confused. You guys seem to be doing really well in the top line; doing a great job there. You’re systems are improved. Your inventory’s cleaner. Yet your operating margin this year looks like it might be quite a bit lower than last year. So I’m just curious, what am I missing here? Are your new stores underperforming from a profitability perspective?

Gary A. Smith

No. Our new stores are performing above our model at this point in time. I would expect in the back half of the year our operating margins to do better than they did last year.

Rob Wilson - Tiburon Research

When you say new stores are outperforming, is that from a top line or a bottom line perspective or both?

Gary A. Smith

Both.

Operator

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

Jeff Mintz - Wedbush Morgan Securities, Inc.

Jeff, I guess a question for you. As we head into college football on the licensed product, is there anything unusual that happened in Q3 last year that we should look for as a comparison either easier or more difficult?

Jeffry O. Rosenthal

I really don’t think there’s a tough comparison for the second half of the year. Georgia’s rated number one; we have a lot of stores in Georgia, so hopefully that’ll drive a little bit of business. But from a comparison standpoint we didn’t have anything really favorable the whole second half of the year. So hopefully the ball bounces our way sometime in the second half.

Jeff Mintz - Wedbush Morgan Securities, Inc.

And Gary, just a couple of technical questions. On the tax rate, what are you looking for in modeling for the rest of the year or for the full year?

Gary A. Smith

38.5% for the back half.

Jeff Mintz - Wedbush Morgan Securities, Inc.

On use of debt, it looks like the debt level obviously is up a little here and you didn’t buy back stock in the quarter. Can you just talk a little bit about where you see those debt levels going for the rest of the year ex any stock buy-backs that you do?

Gary A. Smith

I would expect the debt levels to progressively decrease from this level and that at the end of the year we should be probably $10 million or less.

Operator

Our next question is from John Lawrence - Morgan, Keegan & Company, Inc.

John Lawrence - Morgan, Keegan & Company, Inc.

Just real quick on the systems thing to go over it one more time. Some of the different types of stores with the merchandise, is it very simplistic that if you just don’t have to take some of that merchandise into the store the markdown cadence will be less and you save money there by what doesn’t go into the store?

Jeffry O. Rosenthal

Yes, absolutely. The more we get better at segmentation and that we understand what each store stands for, the better off we’ll be. Some of these systems are allowing us to find them quicker so that we don’t put merchandise where it doesn’t belong.

John Lawrence - Morgan, Keegan & Company, Inc.

Going forward, just give us some kind of a sense if you would Jeff of labor scheduling as far as in baseball terms are we still in the second or third inning of this?

Jeffry O. Rosenthal

We haven’t even stepped on the field as far as that goes.

Operator

Our next question comes from Jeff Feinberg - JLF Funds.

Jeff Feinberg - JLF Funds

Can you provide a little bit of detail in terms of the SG&A? Why on the goods sales that was up a little bit?

Gary A. Smith

More than the increase was the fact that we had our sales and bonus goals the first quarter we were not achieving those so the accruals related to that were down. When you look at the second quarter, the cadence picked up and so we had to increase those accruals in the second quarter. And then our medical claims were up more than anticipated. So if you take those, we would have leveraged that SG&A line nicely.

Jeff Feinberg - JLF Funds

If I heard correctly, more importantly in the back half of the year you do expect your operating margin to begin to expand?

Gary A. Smith

Correct. Now we’re going to have some challenges on the SG&A line because of the differential in the bonus accrual but I would expect with the sales volume that we should be able to make that up and also with the gross margin dollars.

Jeff Feinberg - JLF Funds

You had made some comments that perhaps the approach with the guidance was conservative here?

Gary A. Smith

Cautious and conservative.

Jeff Feinberg - JLF Funds

Because the implication of the guidance, it would be hard to have margins expand.

Gary A. Smith

Right. We understand the math.

Operator

Our next question comes from Mitchell Kaiser - Piper Jaffray.

Mitchell Kaiser - Piper Jaffray

On the gross margin side, could you go through the drivers of the erosion? I think you talked about fuel costs in-bound and out-bound hurting a little bit.

Gary A. Smith

In-bound and out-bound freight was probably half of the adjustment but we certainly with fuel costs coming down we’d expect that to turn around. And then the unfavorable comparison to last year could be worth up to 60 to 70 bips. The merchants did a good job in managing their inventory and their gross margin rates so we’re past that unfavorable comparison now and it should be favorable moving forward.

Mitchell Kaiser - Piper Jaffray

I think if I go back to the first quarter transcript Jeff was suggesting that it was probably going to be up on a year-over-year basis. Were you just talking about product margins or forgetting about the unfavorable adjustment?

Gary A. Smith

That’s for Jeff to comment on. We’re talking on a year-over-year basis and by the end of January he’ll be there.

Mitchell Kaiser - Piper Jaffray

On the SG&A you mentioned some bonus accruals for the third and fourth quarters then as well is kind of the thinking?

Gary A. Smith

Last year we paid out very little in bonus and this year certainly with the full bonus accrual we could expect to pick up $2 million in year-over-year expenses, and most of that will be reflected in the third and fourth quarters and some of it’s been reflected in the second quarter.

Operator

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

Sam Poser - Sterne, Agee & Leach

In Q2 ex the freight and the unfavorable compare, can you break out the improvement in the merchandise margin Jeff? Can you quantify what that was?

Gary A. Smith

It was north of 70 basis points.

Sam Poser - Sterne, Agee & Leach

Now that we have more apples to apples, is that the kind of rate we should be looking at?

Gary A. Smith

That would be a pretty big hurdle to overcome so I would expect that we would on a minimum get 20 to 30 basis points.

Operator

This concludes our question and answer session for today’s conference.

Michael J. Newsome

As we said on our conference call on March 14 of this year and on May 23, we believe we’re very conservative with our annual guidance. Our goal is to beat guidance. Comps have been strong in recent months; we’re a much improved company versus one year ago because of our systems investments which has allowed our merchandise department to perform at a much higher level. This year’s new stores are performing above the model; we’re confident that there are at least 400 additional markets that we can put stores in in our current states in the future. Hibbett has a strong solid future. Thanks for being on the call today and we look forward to speaking with you on November 21 at 9:00 Central Standard Time about our third quarter results. Thank you.

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