Hibbett - Q2 2023

Transcript

Operator (participant)

Greetings, and welcome to the Hibbett second quarter fiscal 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Gavin Bell, Vice President, Investor Relations. Thank you, sir. You may begin.

Gavin Bell (VP of Investor Relations and Treasury)

Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the homepage or at investors.hibbett.com and under the News and Events section. These materials may help you follow along with our discussion this morning. Before we begin, I would like to remind everyone that some of management's comments during this conference call are forward-looking statements. These statements, which reflect the company's current views with respect to future events and financial performance, are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements.

Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and are noted on slide 2 of the earnings presentation and the company's annual report on Form 10-K and in other filings with the Securities and Exchange Commission. We refer you to those sources for more information. Also, to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website. Lastly, I would like to point out that management's remarks during the conference call are based on information and understandings believed accurate as of today's date, August 25, 2022. Because of the time-sensitive nature of this information, it is the policy of Hibbett to limit the archive replay of this conference call webcast to a 30-day period.

The participants on this call are Mike Longo, President and Chief Executive Officer, Bob Volke, Senior Vice President and Chief Financial Officer, Jared Briskin, Executive Vice President, Merchandising, Bill Quinn, Senior Vice President of Marketing and Digital, and Ben Knighten, Senior Vice President of Operations. I will now turn the call over to Mike Longo.

Mike Longo (President and CEO)

Good morning. Our team delivered a solid second quarter, so we are well positioned as we enter the second half of the year. We are increasing our full year total and comparable sales guidance and reaffirming our previously stated full-year diluted earnings per share guidance. As discussed on the first quarter call, we improved our inventory position, and I'm pleased to report sell-through of this inventory was strong. We had a compelling selection of in-demand product that was supported by excellent execution in the stores and on our omni-channel platform. Overall, our team did an outstanding job executing this quarter. We successfully managed the aspects of the business that are under our control and adjusted as necessary to respond to external macroeconomic pressures. Moving on to slide 4, I'd like to reiterate a handful of things.

Our success in rebasing our sales and profits at higher levels versus pre-pandemic levels is to be noted. While the last 2 fiscal years were positively impacted by stimulus and changes in the competitive landscape, we've also improved the underlying business model, which positions us for growth over the long term. Looking to the back half of the year, we believe that we're well positioned to meet our full year goals. We ended the quarter with inventory of $366 million, which we believe is ample to meet back to school demand. In addition to the amount of inventory, we are very positive about the quality of our inventory. We're ready with fresh, in-demand products that will excite our customers. As mentioned in today's press release, we're seeing favorable sales trends for the back to school shopping season, and we're pretty excited about that.

This includes a timing shift that favors Q3. We saw customers wait until closer to the start of school to begin their back to school shopping. Historically, customers have started their back to school shopping 2-3 weeks prior to the start of school. This year, we saw these purchases shift somewhat, and as a result, some sales shifted from Q2 into Q3, and we're seeing those trends take place now. As a result, we are increasing our second half comparable sales guidance to the positive low double digits from the positive high single digits, and the full year comparable sales guidance to the positive low single digits from the negative low single digits. In addition to these positives for the top line, we expect some improvement from a supply chain perspective and look forward to easier comps in the second half.

We expect higher year-over-year sales, which will result in a return to leveraging our fixed costs. As we move through the year, we remain committed to executing our proven business model to optimize our performance over the long run. Our best-in-class omni-channel business model, our superior customer service in the stores, and our compelling merchandise assortment creates differentiation in the marketplace, provides us with a competitive advantage in the eyes of the consumer and our vendor partners, and puts us in a position to deliver strong sales and profitability in the coming years.

Finally, I'd like to thank our approximately 11,000 team members across the organization, whether they're in the stores, the logistics facilities, or the store support center. It's their efforts that represent our brand and our values to our customers, vendors, and our communities. It's their daily commitment to excellence that will propel us forward, and I appreciate their efforts. I'll now turn the call over to Jared.

Jared Briskin (EVP of Merchandising)

Thanks, Mike. Good morning. If you turn to slide 5, the merchandising slide. For the second quarter, our overall performance was in line with our expectations across the merchandise categories. We continue to believe that due to the impacts of COVID and stimulus during the last 2 fiscal years, that compared to fiscal 2020, calendar 2019 is the most meaningful comparison. When compared to the second quarter of fiscal 2020, comp sales were up 54%. From a category standpoint, when compared to fiscal 2022, calendar 2021, all categories declined as expected, going up against the stimulus impact of last year period. Footwear and team sports declined in the low single digits, while apparel declined in the high teens.

When compared to fiscal 2020, calendar 2019, footwear was our standout category with growth in the high 60s%, followed by apparel growing in the low 40s% and team sports growing in the low single digits%. Specific to footwear and apparel, men's, women's, and kids all showed significant growth when compared to fiscal 2020, calendar 2019. Women's growth was in the upper 70s%, kids grew in the low 60s%, and men's grew in the high 50s%. As Mike referenced earlier, we're confident in our inventory position. The increased inventory levels are largely attributed to a better in-stock position of key franchises in footwear and are appropriate for the results we are seeing during back to school. As I referenced in my sales commentary, we also believe the most meaningful comparison regarding inventory is comparing to fiscal 2020, calendar 2019.

When compared to fiscal 2020, calendar 2019, inventory levels were up 35% at the end of the quarter in balance with our 54% sales gain. This increase is largely due to positive impacts to our mix of footwear inventory as well as price inflation. When compared to fiscal 2020, calendar 2019, our unit inventory levels were up 10%. Our results in the second quarter, combined with our strong quarter and inventory position, continue to give us confidence that our toe-to-head merchandising strategy is working in elevating how we serve our consumers. I'll now hand it over to Bob to cover our financial results.

Bob Volke (SVP and CFO)

Thanks, Jared, and good morning. Please refer to slide 6 entitled Q2 FY 2023 results. As a reminder, we report our results on a consolidated basis that includes both the Hibbett and City Gear brands. Total net sales for the second quarter of fiscal 2023 decreased 6.3% to $392.8 million from $419.3 million in the second quarter of fiscal 2022. However, in looking back 3 years to fiscal 2020, the last relevant comparable period prior to the pandemic, current quarter sales of $392.8 million were 55.6% higher than the $252.4 million reported in the second quarter of fiscal 2020. Overall comp sales decreased 9.2% versus prior year second quarter.

In comparison to the second quarter of fiscal 2020, comp sales increased by 54.4%. Brick-and-mortar comp sales decreased 11.9% versus the same period in the prior year, although they have increased by 42% versus the second quarter of fiscal 2020. E-commerce sales increased 8.3% compared to the second quarter of the prior year and have increased by 174.4% on a 3 year stack. E-commerce sales accounted for 15.2% of net sales during the current quarter, compared to 13.1% in the second quarter of fiscal 2022 and 8.6% in the second quarter of fiscal 2020.

Gross margin was 34.4% of net sales for the second quarter of fiscal 2023, compared with 39% in the second quarter of the prior year. The approximate 160 basis point decline was primarily due to the following factors, a decline in product margin of approximately 225 basis points due to cost increases, a higher mix of e-commerce sales which carry a lower margin than brick-and-mortar sales, general shifts in product mix and delays in launch events. Increased cost of freight and transportation of approximately 125 basis points, and deleverage of store occupancy costs of approximately 110 basis points, mainly due to the year-over-year decline in total sales coupled with higher rent expense and utility costs.

Store operating, selling, and administrative expenses were 23.3% of net sales for the second quarter of fiscal 2023, compared to 22.3% of net sales for the second quarter of last year. This approximate 100 basis points increase is primarily the result of deleverage in the lower current year revenue. Expense categories such as wages, employee benefits, repairs and maintenance, and general supplies necessary to support a larger store base and increased e-commerce activity were negatively impacted by the sales decline. Depreciation and amortization in the second quarter of fiscal 2023 increased approximately $2.5 million in comparison to the same period prior year, reflecting increased capital investment on organic growth opportunities and infrastructure projects.

We generated $32.8 million of operating income or 8.4% of net sales in the second quarter, compared to $61.5 million or 14.7% of net sales in the prior year's second quarter. Diluted earnings per share were $0.86 for this year's second quarter, compared to $2.86 per share in the second quarter of fiscal 2022. We did not have any non-GAAP items in either period. Next, I will discuss the fiscal 2023 year-to-date results. I am now referencing slide 7.

Total net sales for the first 6 months of fiscal 2023 decreased 11.8% to $816.9 million from $926.1 million in the first 6 months of fiscal 2022. In comparison to fiscal 2020, current year-to-date sales of $816.9 million were 37.1% higher than the $595.7 million reported in the first half of fiscal 2020. Overall comp sales decreased 14.5% versus the same period in the prior year. In comparison to the first 6 months of fiscal 2020, comp sales increased by 36.2%. Brick-and-mortar comp sales decreased 17.4% versus the first half of fiscal 2022, but have increased by 25.6% versus the 6 months of fiscal 2020.

E-commerce sales increased 6.2% compared to the same period of fiscal 2022, and have increased by 141.7% on the 3 year stack. E-commerce sales accounted for 14.9% of net sales during the current fiscal year, compared to 12.4% in the first 6 months of fiscal 2022 and 8.4% in the first half of fiscal 2020. Year-to-date gross margin was 35.7% of net sales in fiscal 2023, compared with 40.3% in the same period last year. This approximate 460 basis point decline was primarily due to the same factors I mentioned in the second quarter.

A decline in product mix of approximately 190 basis points due to cost increases, a higher mix of e-commerce sales, general shifts in product mix and delays in launch events. Deleveraged of store occupancy costs of approximately 140 basis points, mainly due to the year-over-year decline in total sales, again, against the higher rents and utility costs. Increased costs of freight and transportation of approximately 130 basis points. SG&A expenses were 22.9% of net sales for the first half of fiscal 2023, compared with 20% of net sales for the same period of last year. This approximate 290 basis point increase is primarily the result of deleverage from the lower current year revenue.

Expense categories such as wages and professional fees and advertising and general supplies necessary to support the larger store base and increased e-commerce activity were negatively impacted. Depreciation and amortization in the first 6 months of fiscal 2023 increased approximately $5 million in comparison to the same period last year, reflecting increased capital investment on our organic growth opportunities and infrastructure projects. We generated $83.5 million of operating income, or 10.2% of net sales in the first 6 months of this year, compared to $171.6 million or 18.5% of net sales in the prior year's first 6 months. Year-to-date diluted earnings per share were $4.77 for fiscal 2023, compared to $7.90 per share in the same period of fiscal 2022.

We did not have any non-GAAP items in either fiscal year. Turning to the balance sheet. We ended the quarter with $28.4 million in cash and cash equivalents, higher than the $17.1 million balance at the beginning of the fiscal year. Net inventory at the end of the second quarter of fiscal 2023 was approximately $366 million, or 65.6% higher than the beginning of the fiscal year and about 68.9% higher than the same period last year. We have short-term debt of $88.5 million outstanding on our $125 million line of credit at quarter end, mainly as a result of our inventory build over the first half of the year. Capital expenditures during the second quarter were $14.5 million, bringing the year-to-date total to $30.5 million.

Capital spend consists primarily of store development, technology, and infrastructure projects. During the second quarter, our store count increased by a net of 12 units, comprised of 13 new locations and 1 closure. On a year-to-date basis, we have increased store count by a net of 21, with 22 new locations, 1 rebrand, and 2 closures. Our total store count stands at 1,117 as of the end of the second quarter. In the second quarter, we repurchased just over 145,000 shares under our authorized share repurchase program for a total cost of approximately $7 million. On a year-to-date basis, we have purchased approximately 636,000 shares at a total cost of $29.4 million.

We paid a recurring quarterly dividend during the quarter in the amount of $0.25 per eligible common share for a total outflow of $3.2 million. For the first 6 months of fiscal 2023, dividend payments have amounted to $6.5 million. I'll now turn the call over to Bill Quinn to discuss some consumer insights.

Bill Quinn (SVP of Marketing and Digital)

Thanks, Bob. Entering Q3, we are continuing to keep a pulse on how our customers are feeling. Through recent research, we know that a majority of customers plan to spend more this year on back-to-school, in particular on footwear. Also, a significant portion of customers shifted the timing of their back-to-school purchases versus last year. Longer-term customer trends have not changed, keeping us re-baselined above pre-pandemic sales. Comparable sales increased 54.4% versus Q2 of FY20. From a customer perspective, we are seeing 2 fundamental differences versus FY20. 1, the number of shoppers in our customer base has grown. And 2, the average ticket has increased substantially due to gains in average unit retail. We see these 2 factors as structural in nature, keeping our business re-baselined well above FY20. Turning to our e-commerce business.

In Q2, sales increased 8.3% versus last year and 174% versus FY20. E-commerce represented approximately 15.2% of total sales for the quarter versus last year's 13.1%. Continued improvements to our customer experience and gains in total customers increased traffic to our website and apps by over 20% year-over-year. For back to school, digital sales have accelerated versus our Q1 and Q2 run rates. Key drivers include strong traffic, robust footwear sales, and gains in average unit retail. We expect that our continued investments in digital will produce low double-digit growth for the remainder of this year. I will now turn the call back to Bob to discuss our guidance.

Bob Volke (SVP and CFO)

Thanks, Bill. Slide 9 summarizes updated fiscal 2023 guidance. Although there continue to be some potentially significant business and economic challenges that may impact the remainder of fiscal 2023, with 6 months of the year behind us, we feel certain elements of our full year guidance need to be updated. Sales, gross margin, SG&A updates are as follows. Total net sales are now expected to increase in the low single digit range in dollars compared to fiscal 2022. This implies comparable sales are expected to be in the range of flat to positive low single digits for the full year. Full year brick-and-mortar comparable sales are expected to be in the flat to positive low single digit range, while full-year e-commerce revenue growth is anticipated to be in the positive high single digit range.

Comp sales are projected to be in the positive low double-digit range in the back half of the year. Our sales forecasts are based on this on assumptions that as the year progresses, supply chain constraints continue to ease, timing of inventory receipts becomes more consistent and predictable, and our overall inventory position remains strong. Fiscal 2023 gross margins percent of sales are anticipated to be in the range of 35.1%-35.3%, down approximately 290-310 basis points from fiscal 2022. This level of gross margin is still above pre-pandemic levels. Potential supply chain challenges, freight headwinds, a higher mix of e-commerce sales that carry a lower margin than brick-and-mortar sales, inflationary pressures, and de-leveraged store occupancy will all contribute to this anticipated decline.

We continue to believe gross margin results in comparison to fiscal 2022 will become more favorable as the year progresses. SG&A as a % of net sales is projected to be in the range of 22.7% to 22.8%, higher than fiscal 2022 levels by approximately 10-20 basis points, although again, still favorable to pre-pandemic levels. Wage inflation, costs associated with growth in e-commerce, a larger store count, and annualization of back office infrastructure investments made in fiscal 2022 contribute to this year-over-year increase. The following components are consistent with guidance provided previously. Net new store growth is estimated in the range of 30-40 stores, with new units spread relatively evenly throughout the year. Operating income is still expected to be in the low double-digit range as a % of sales.

Diluted EPS is anticipated to remain in the range of $9.75-$10.50, using an estimated full year tax rate of 24.5% and a slightly adjusted estimated weighted average share count of 13.3 million. Capital expenditures are still projected in the range of $60 million-$70 million, with a focus on new store growth, remodels and additional technology and infrastructure investments. Our capital allocation strategy continues to include the expectation that we will repurchase shares throughout the remainder of the year and pay recurring quarterly dividends. That concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser (Equity Analyst)

Good morning, everybody. Thanks for taking my questions. On back-to-school, you know, what percentage of back-to-school is in right now? Please give us more specific as to sort of the run rate that you're seeing right now.

Bob Volke (SVP and CFO)

Hey, good morning, Sam. Mike, I'll handle the first part of that. We believe about 2/3 of the back-to-school sales have occurred. The shape of the curve has changed a little bit. Not only did it shift to the right in terms of timing, the amplitude of the curve has changed somewhat. Overall, we think that back to school, when you sum it all up, we know it's going to be a net positive for us. There's some behaviors that Bill will talk about in a few minutes, and Ben will, that we're seeing in the stores and through surveys of how consumer behavior has changed. But net-net, it's going very well. You know, and everyone on the call knows that we very rarely talk about intra-quarter results.

The exception being historically this Q2 to Q3 shift because of the volatility of back to school in terms of how the calendar moves it. Typically, and historically, we've mentioned in our comments that the timing of back to school could be meaningful, and in this case, it was. Remember, you know, we're setting up for back to school at the end of Q2. You put in your sales plan, you put in your payroll, you move the inventory, and you set up for it. If it shifts, you still got the cost, but you don't get the sales. Those incremental sales, as you know, are incredibly profitable for us. Not only the sales, but some of the operating profit moved into Q2 or into Q3 from Q2, rather.

Bill, you wanna talk for a couple of minutes about what we've seen on the consumer behavior, and then Ben, if you will, follow that up with what you saw in the stores.

Bill Quinn (SVP of Marketing and Digital)

Yeah. Hi, good morning, Sam. Some of the customers have been impacted by inflation, but they found ways to manage through it. A few of the behaviors that we're seeing right now, the customers are shopping for deals a little bit more. They're delaying their purchases until they absolutely need it. You know, we're seeing that shift in back to school. They're cutting back on other discretionary spend outside of retail. The net-net is that customers plan to spend more for back to school. They have no current plans to cut back for holiday spending at all. We have very few customers trading down. I'll turn it over to Ben for more comment there.

Ben Knighten (SVP of Store Operations)

Yeah, just to tag on to what Bill said, I had the opportunity to visit some stores in Arkansas last week, and it happened to be in the middle of kinda their back to school season. You know, what we saw there is exactly what Bill is reporting. You know, some calendar shifts in the actual back to school dates, but also just shifts in behavior. Starting to see some consumers where they normally might have, you know, shopped a few days prior to back to school, maybe even waiting until after school goes back so they can understand a little bit about what's going on in the school system and then, you know, able to understand a little bit about, you know, how the spend needs to go there.

Jared Briskin (EVP of Merchandising)

Felt pretty good about what I saw in those towns and talking to the consumers and to our associates there.

Bill Quinn (SVP of Marketing and Digital)

Yeah. One of the things that we didn't talk a lot about yet was there has also been some calendar shift with regards to some meaningful heat product. Jared, do you wanna follow up on that?

Jared Briskin (EVP of Merchandising)

Yeah. Thanks, Mike. Good morning, Sam. As we certainly continue to look at all the impacts of the supply chain and, you know, dates are moving on us. You know, as Mike mentioned, as we're putting our plans together for Q2, both our promotional calendar as well as all of our sales forecasts, you know, you had an expectation of that large, ending volume coming at the end of Q2, along with some launches that unfortunately wound up pushing into Q3. All those things had somewhat of an impact on Q2 negatively, but now are having a pretty positive impact on Q3. The other thing I would mention, as Bill said, does not appear that our consumers are trading down, although they do have certainly some inflationary pressure going on.

The number of launches that we've been able to digest during the second quarter and the early part of the third quarter from a liquidation perspective has been incredible. We've also seen no slowdown. In fact, we've seen significant increases in products that like for like had some price increases on some franchises. We're very confident and comfortable with where we stand right now.

Sam Poser (Equity Analyst)

Thanks. I just have 2 follow-ups there. 1, how are you impacted by one of your larger vendors doing their MAP holiday? Did that do anything for the business? 2, are you seeing a benefit from that same large vendor chain? Are you seeing allocation benefits further in the year because of that? Lastly, based on the way the comp falls, Bob, do you anticipate that the comps in Q3 just because you're up against a harder compare inventory levels should be better, that you'll comp stronger in the fourth quarter than you will in the third quarter? Or am I thinking about that wrong?

Jared Briskin (EVP of Merchandising)

All right, Sam. I'll start with the promotional activity. You know, certainly, the last 2 years, we've had essentially 0 promotional activity. There's certainly been somewhat of a shift. We have some promotional activity in the second quarter, primarily revolving around apparel. I don't expect that to slow down, at least in the near term. All that said, the promotional activity is still, and I still expect it to be significantly less than what we saw from a pre-pandemic standpoint. You know, with regard to inventory, we've been fighting the inventory battle for a couple years for really just not having enough inventory, in particular in footwear. Frankly, our consumer experience within the stores, and conversion from an online perspective in footwear has not been a good experience for our consumers.

Our team working really closely, you know, with our vendors has really done an excellent job of getting our pipeline full. Not just getting it full, but getting it full in the right things. The things that are driving traffic, the things that are high heat, and that sell through quickly. We're very confident with where we stand now, as well as our plans for the back end. I guess just to follow up, you know, we're obviously not giving comp guidance individual quarter, but I think if you think about summing up the things we've just heard over the last couple minutes, with some of the shifting into Q3, with some of the consumer sentiment as far as holiday, we'd expect both Q3 and Q4 to be very strong.

If you do remember last year, you know, Q4 was a little bit, you know, less than we would have liked to see because again, we had a real struggle with the inventory balance. I think when you couple, you know, the consumer sentiment, the shifting of sales into Q3 and the inventory position, again, feel pretty confident that both Q3 and Q4 will be fairly strong.

Sam Poser (Equity Analyst)

Gotcha. Thank you very much. Appreciate it.

Jared Briskin (EVP of Merchandising)

Christine.

Operator (participant)

Our next question comes from the line of Cristina Fernandez with Telsey Advisory. Please proceed with your question.

Cristina Fernandez (Managing Director and Senior Equity Research Analyst)

Hi. Good morning, and thank you for taking my question. I wanted to understand better the increased outlook for the comp in the back half. Is it mostly the back to school sales being better? Or, you know, are we also thinking about better inventory availability or the high heat launch calendar shifting? It'd be helpful if you can, you know, give us a little bit better explanation of why raise the outlook, you know, this early in the year.

Mike Longo (President and CEO)

Thank you, Cristina. This is Mike. I'll lead it off and then everyone else has a piece of this. Part of the increase in the comp in the second half of the year for sure is the back to school shift. That is how it's gonna start. That has led to a good, very good start to the quarter. But it's also more than that.

If you think about the things that we've been talking about in our business model and the significant improvements we've made to the business model and the competitive differentiation that we've established, we really like our business model. With that, in the context of the competitive changes that have occurred with regards to distribution of the valued products that are out there, the major brands have made decisions on who carries the product and who doesn't. That favors us. When you combine that with the fact that we've significantly improved our inventory, that's high quality, fresh inventory that the consumer covets and wants. When you combine those 2 together, that turns into increased transactions. Those increased transactions manifest themselves in a couple of ways, and Bill has talked a little bit about that. Do you wanna amplify any of those comments, Bill?

Bill Quinn (SVP of Marketing and Digital)

Yeah, absolutely. First of all, I think we've got some pretty incredible omni-channel programs. A couple in particular, our loyalty program, which we revamped last year. We've actually seen year-over-year growth in loyalty sales, and that's a result of having more members and also greater purchases per member. So that's a very positive sign that loyalty continues to grow for us. Also, our launch process continues to be extremely fair and focused on customers. That continues to do very well and also draw new customers to us. So we're very confident in the back half in what those 2 programs can deliver. From an e-commerce perspective, where we have very good inventory, we have very good traffic. As Mike said, we're focused on the customer experience, and we feel very confident there as well.

Mike Longo (President and CEO)

Yeah. That's the transaction side. Jared, do you wanna comment on the AUR and how that impacts Ticket?

Jared Briskin (EVP of Merchandising)

Yes. We've got a couple of additional things that are happening. You know, Mike referenced the distribution changes that have shown on the marketplace. You know, our expectation for this year was that we would be a significant beneficiary of those distribution changes. That's kind of happened a little later than we would've expected, just with all the supply chain challenges that are out there and the amount of inventory. Absolutely saw during the second quarter, our store locations that had been impacted by a distribution change from one of our vendors did comp much better than the stores without a distribution change. We do feel that that is starting to have an impact. On top of that, with the increase in inventory, we're certainly seeing an increase in AUR. It's really due to 2 things.

There is some price inflation that is driving some AUR increases. We are not seeing our consumers trade down or not respond to some of those price increases. More importantly, a very, very significant shift toward best-in-class premium high heat footwear. So that's a large component of the current inventory, and will be a very significant portion of the back half of the year, along with what we believe to be a very, very strong and excellent launch calendar, all on the backdrop of really not having near the footwear inventory necessary to satisfy our consumers during the back half of last year, especially in the fourth quarter.

Cristina Fernandez (Managing Director and Senior Equity Research Analyst)

Thank you. That's very helpful color. Then I wanted to also see if you can provide more color on the incremental gross margin pressure, particularly on the product average product margin. How much of it is it? I guess, for the quarter, is it promotions or mix? You know, you noted apparel underperformed. I guess that perhaps carries a higher product margin or cost inflation. Any color there would be helpful in understanding that trend.

Jared Briskin (EVP of Merchandising)

Yeah, sure. Sure. Thank you. It's Jared. I'll take that one. You know, a couple things. You know, absolutely there's more promotional activity going on in the marketplace right now. Certainly, we have some more than we had over the last 2 years where we essentially had none. As we discussed a little earlier, and Mike referenced, you know, the shift in back to school, along with some of the launch shifts that occurred in the end of the quarter, into Q3, you know, put some pressure on the margin line. You know, we had made some decisions to run some promotions earlier in the quarter to take advantage of some of the earlier holidays and traffic, particularly focused around apparel.

We expected some offset to the margin at the end of the quarter based on some of those peak back-to-school sales, along with some of those launches. Then that did materialize into the third quarter. That put a little pressure. You know, as we look ahead into the second half, we're starting to see more of a promotional environment than last year. Again, nothing anywhere close to what we saw in fiscal 2020. The health of our inventory from an age perspective is really exceptional. Not something that has us terribly concerned. Don't expect to maintain product margin levels that we saw last year or 2 years, but we certainly expect to significantly rebase above fiscal 2020.

Cristina Fernandez (Managing Director and Senior Equity Research Analyst)

Can you expand the apparel performance during the quarter relative to footwear? Is it mostly related to the inventory receipts or anything else to note?

Jared Briskin (EVP of Merchandising)

Yeah. I would say, you know, if you think about our apparel business compared to last year, you know, it declined, you know, in the high teens%. You know, at first look, you would go, "Well, that's really disappointing." But when you really look at apparel compared to fiscal 2020, you know, it grew in the 40s%. We absolutely had an outsized apparel business last year, frankly, because consumers had money from stimulus, and we really had no footwear inventory, or certainly not enough footwear inventory. We're seeing that balance back, with, again, footwear becoming a more meaningful category as we got into the second quarter and certainly expect that to be the same in the back half of the year.

Apparel is an area that, you know, we have some concerns about, just based off the year-over-year, you know, comps. Again, overall, our inventory is incredibly clean, very, very focused at premium levels, so it's not as susceptible to promotions. We feel like we have it under pretty good control.

Bill Quinn (SVP of Marketing and Digital)

Thank you.

Jared Briskin (EVP of Merchandising)

Justin.

Operator (participant)

Our next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed with your question.

Justin Kleber (Senior Equity Research Analyst)

Yeah, good morning, everyone. Thanks for taking the questions. First one is just I'm struggling here a bit with the math on the full year comp guide. If you guys do a 12 over the back half of the year, which I guess to me is low double digits, but correct me if I'm wrong there, you know, that puts the full year down a couple%. You're guiding flat to up low single digits% for the full year. I mean, the simple math assumes you need to run about a 17 or 18% comp over the back half of the year just to be flat. What am I missing there?

Bob Volke (SVP and CFO)

Hey, Justin, it's Bob. First of all, 2 halves of the year are not equal, so it's not just a simple average of the 2. We do have a little bit heavier sales mix in the back half of the year, so you do have to account for that. Again, we felt that if you kind of do the back of the envelope math when we're thinking about how we do this, the weighting between Q1 or first half, second half, that low double digits, the math still pencils out. I think your numbers might be just a little bit higher than what we would have anticipated, but again, I think you know, we still feel comfortable that the guidance is accurate.

Justin Kleber (Senior Equity Research Analyst)

Okay. Maybe we can follow up offline there, Bob. A question on how you guys think about the risk of a shopping lull after back to school is completed. You know, we're hearing from several retailers back to school is strong. Obviously, that is a distinct shopping event. So once that passes, how do you handicap the risk that the consumer hunkers down a bit here, just given all these well-documented macro pressures?

Mike Longo (President and CEO)

Well, certainly we know that there's macro pressures and we all live in the same world. We see what's happening, you know, and our consumer is paying inflated prices with inflated wages. We get all that. The product that we have, again, hard to get, compelling assortment. People enjoy the experience of coming in our stores. What we're witnessing is not all back to school. What we're seeing is the high heat product, which we have in good supply, and there are lots of launches coming in this quarter and the next, along with, again, a business model that we're very proud of. I think that that all is pretty compelling. Jared?

Jared Briskin (EVP of Merchandising)

Yeah, thanks for the question. Certainly a good question and the right question. Yeah, I think one of the things that really gives us a lot of confidence is, you know, frankly, our results compared to fiscal 2020, in Q2. You know, historically, when you think about second quarters, if we don't get off to an early back-to-school, Q2s are typically really difficult. In this case, you know, we posted a 54% comp on top of fiscal 2020. That comp was driven by, you know, a lot of the similar products that we have right now and based off of our inventory position.

We have a lot of confidence coming into Q3 from the results in Q1, excuse me, Q1 and Q2, but then also what we're seeing for back to school gives us a lot of confidence.

Justin Kleber (Senior Equity Research Analyst)

Okay. No, thank you both. That makes sense. Sorry, I didn't mean to cut you off there.

Bill Quinn (SVP of Marketing and Digital)

Sure. Hey, Justin, this is Bill. Just to add to that, we've obviously rebased our line above FY 2020, so we have more customers than ever through our acquisition and retention efforts. On top of that, we have more customer information than ever through text, social media, push email, et cetera. We're able to communicate with more customers than ever before. On top of that, just the elevated purchases that we have through increased AUR, which is structural, gives us confidence as well. Also, you know, just doing some more surveying with customers, some do tend to shop early for holidays, and that's to spread out their expenses to avoid future inflation. Also, there's still some product availability concerns out there.

Justin Kleber (Senior Equity Research Analyst)

Okay. This last one for me on freight and transportation cost increases. Can you just remind us when you started to see the step up in those costs last year, just as we think about the lap over the back half of this year and when the pressure might subside on that line item? Thank you.

Jared Briskin (EVP of Merchandising)

Bill. Go ahead, Bill.

Bill Quinn (SVP of Marketing and Digital)

Yeah, sure. This is Bill. Just kind of talking about freight, and we see that pressure declining here going into the back half of the year, for a couple different reasons. The first one is we work with multiple carriers, and that gives us an opportunity to reduce expenses. The second big reason is the AUR increase will really decrease that freight as a percent of sales. When you think about the unit economics of shipping out a box with a higher AUR item in it, that works very favorably for us.

Justin Kleber (Senior Equity Research Analyst)

All right. Thanks, everyone. Best of luck over the back half of the year.

Bill Quinn (SVP of Marketing and Digital)

Thank you.

Operator (participant)

Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.

Alex Perry (VP of Equity Research)

Hi. Thanks for taking my questions. I just wanted to follow up on a few questions that were asked earlier, but maybe asked in a slightly different way. I guess when you think about the comp guide and the sales guide for the year, what changed versus your expectations 90 days ago that led you to take up the guide? Is it better visibility? In terms of inventory, see it's like more launch product versus your initial expectations? Or is it, you know, that what you're seeing from back to school is very encouraging and so you sort of are, you know, thinking that that sort of flows through the year. Just trying to get, you know, more clarity on the guidance raise for sales. Thanks.

Mike Longo (President and CEO)

Yeah, thank you. Versus last time we spoke, what has changed is the essence of your question. First and foremost, we'll do them chronologically. The first thing that happened was a bit of an unexpected shift in back to school. You could say, "Well, you should have been able to figure that out from the past history from 2017, 2018, et cetera." Well, I don't think it was just us. Sales shifted. That is a meaningful number. That moved some sales. Second thing was there were some launch products that were due to arrive and sell in Q2 that pushed into Q3. On top of that, we have been able to opportunistically buy some really good inventory that's gonna help us drive some sales.

That allows us to do an even better job capitalizing on our competitive differentiation. The other thing that I would say is, in spite of the fact that we didn't see a lot of the pickup that we anticipated from changes in the competitive landscape did not show up in Q3, that actually was a drag on Q2, rather. It didn't show up in Q2, but it will begin to help us in Q3. I think those are the big changes. Jared, you've got a couple of others.

Bob Volke (SVP and CFO)

Yeah. I think the only thing that I would also add to that is just our confidence in the visibility around inventory. You know, obviously there's still volatility in the supply chain, but what we've been able to accomplish and the improvement in visibility and improvement in delivery timelines also gives us a lot of confidence as we get to the back half of the year.

Mike Longo (President and CEO)

There's a couple of changes that I'd highlight and ask Ben to speak to in terms of our ability to hire people in the stores and wages and staffing in general, Ben.

Ben Knighten (SVP of Store Operations)

Yeah. You know, we spent a lot of time over the last really couple of years, you know, with the labor market being as tight as it is and put a lot of focus there and seeing that mitigate a little bit. That's been helpful, as we've gone along here. You know, wages are kind of in line with our expectations. We knew that those would be higher, you know, this year than the kind of run rates historically and planned for that. We're seeing that, you know, kind of in line with expectations. Really doing a lot of work too on our scheduling and things of that nature at store level and meeting demand.

Bob Volke (SVP and CFO)

have gotten a little bit better there and controlling overtime and some of the things that we're doing in store and so on feel pretty good on a go forward basis, maybe relative to the, call it, first half of the year.

Alex Perry (VP of Equity Research)

Perfect. That's really helpful. Just as a follow-up, I think you talked a bit about, you know, product margins in the quarter. It looks like the implied Q2 gross margin came down versus your prior expectations. What's the key driver there? What does that sort of contemplate in terms of promotions in the back half? Thanks.

Bob Volke (SVP and CFO)

Yeah. It's Bob. I would say probably, you know, one of the things, and even though Bill just touched on kind of freight. When you talk about freight to the customer, obviously I think we're gonna see some benefit there. When you talk about the freight between, you know, distribution and stores, again, not to get too much into the accounting rules, but, you know, we have to capture that on the balance sheet, recognize that as the inventory gets sold. Some of those costs from when the period where freight was higher still need to flow through the back half of the year. That's one of the things that kind of gave us a little bit of, you know, maybe a headwind going forward.

The other thing is, again, we have seen, it was a fairly hot, warm summer, you know, across the South and Southeast, and we have seen a higher run rate when it comes to utility costs, which again, something that, we just kind of baked a little bit extra assumption into the back half as well as far as the deleverage on the store occupancy piece. I would say those are probably 2 of the components. Again, I think Jared and Bill touched on some of the other positives when it comes to mix of product and things. There's a little bit of mitigating there going on within the back half.

Mike Longo (President and CEO)

This is Mike. I'd like to weigh in, put a finer point on a couple of things so that they don't get lost. Remember, comparing to first half and comparing to Q3 last year, Q4 last year, we didn't have product at a level that was sufficient for a good customer experience. We were selling through at rates that I haven't seen before, and those rates drove an extraordinarily high gross margin. Now, we don't expect and don't want that to happen again because we don't think that's a good consumer experience. The inventory that we have now and that we have been working very hard to get and put in the stores, to put in front of the consumers, is making that consumer experience what we want and what they want and frankly, what our brands want.

As a result, when that sell-through comes back to more normal levels, not going back to fiscal 2020, but rather going back to a good consumer experience, you would expect for gross margin to come down some. We want it to, right? We don't want a 50 gross because that means we're selling through at a rate that the consumer is just not being serviced properly. We feel very good about where we're at on that inventory. If you were to listen to other general merchants out there who sell other types of product whose inventories have gotten very long, they're gonna get promotional. I don't think that's what you're gonna see with us. Our inventory is on target. It's fresh, it's new, and it's selling through. We do expect clearance to be more than last year.

We do not expect for it to be significant. Thank you.

Alex Perry (VP of Equity Research)

That's extremely helpful. Maybe just one last one from me. It looks like the SG&A expense ratio sort of came down a bit. What were the key drivers there? Are there any areas where, you know, you're seeing sort of less expenses versus your, you know, original expectations?

Mike Longo (President and CEO)

You know, Bob, why don't you start and then Ben, come in and talk about store labor, which is a significant portion of what we do.

Bob Volke (SVP and CFO)

Yeah, I was gonna say, that's kind of perfect lead-in. You know, there's some categories that we've kind of kept pretty static year-over-year. Of course, with the higher sales in the back half of the year, you start to gain back some of that leverage. You know, when you have some of the sales slip out of the Q2 into Q3, pretty tough in the last 2 or 3 weeks of the quarter to start making meaningful changes. The other big piece is we are much better at managing, especially the store labor. I think, again, we're gonna see some benefit from that in the back half of the year.

Ultimately, as we look at the second 6 months, we felt that our run rate was a little bit more favorable than our previous guidance. Again, for mostly due to the fact that we can deleverage a little bit more in the second half. Ben.

Mike Longo (President and CEO)

Yeah, just tagging on to that, and as we said earlier, you know, it is what you're planning for sales, not sure exactly where things are gonna show up, but, you know, you're planning and you do that with labor in stores, too, and you're hiring. You get ready and set for that and you see that shift a little bit. You're gonna eat a little bit of cost there and then, of course, then as it shifts over, you're able to gain leverage, you know, on a go-forward basis. That's what we're kind of seeing and expect for kind of the remainder of the back half of the year.

Alex Perry (VP of Equity Research)

Perfect. That's all incredibly helpful. Best of luck going forward.

Mike Longo (President and CEO)

Thank you. Mitch.

Operator (participant)

Our next question comes from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.

Mitch Kummetz (Senior Analyst)

Yeah, thanks for taking my questions. On the back to school and the launch shift, and Mike, you mentioned earlier that the back to school piece was pretty meaningful. I know you don't like to give the intra-quarter data, but is it possible to quantify, you know, that shift from Q2 to Q3? Is there anything you can help us out there?

Mike Longo (President and CEO)

I'm gonna be a little reticent to go past what I've said, but as you would imagine, the peak weeks in back to school are significantly higher in the range of an average week in the quarter, they'll be anywhere from 50%-60% higher.

Mitch Kummetz (Senior Analyst)

Okay.

Mike Longo (President and CEO)

When you move 2 or 3 of those weeks, it can be meaningful. One more time, I know I've said this a couple of times, it's that incremental revenue dollar that falls through at a great rate. When it doesn't come in, it falls through the opposite way on the EBIT line.

Mitch Kummetz (Senior Analyst)

Mm-hmm.

Mike Longo (President and CEO)

Yeah, it's meaningful and we look forward to seeing it in Q3 and talking about it when we speak again in November.

Mitch Kummetz (Senior Analyst)

Got it. On the comp, on a 3 year, you saw a substantial step up from Q1 to Q2, and you said you're at a 54 in Q2. As we think about the full year guide now and is there any way you can say what kind of 3 year comp is embedded in your in the back half?

Mike Longo (President and CEO)

Yeah. If we go back to full year results on the 3 year comp, we're at 36%, and for Q2, we were 54%, right? You're right.

Mitch Kummetz (Senior Analyst)

Yep.

Mike Longo (President and CEO)

The trend is there and you're putting your finger on the right trend. I haven't actually done the math on what that 3 year comp in Q3 and Q4 would be, but suffice it to say that trend continues.

Mitch Kummetz (Senior Analyst)

Okay. You mentioned in some remarks about the distribution changes that it didn't have much of an impact on Q2, but you expect more so in Q3. Can you kind of just walk us through how you expect that to kind of flow? Q3 more so than Q2, does that build into the fourth quarter? Obviously I would think it would continue into the first half of next year as well. How do you sort of think about that?

Mike Longo (President and CEO)

I'll take you back in time, when Stage Stores went out and JCPenney's closed several stores. We went to some pains to quantify what we thought that sales effect would be, and I think we were in that average of a $30 million impact, $20 million-$40 million, I think. When we witnessed that, we were in the stores at the end of August, the day that Stage Stores closed their doors. What we saw was the consumers bouncing off the doors. If you take the consumer experience in them and extend it into what's happening today, those consumers typically shop anywhere from 3-4 times a year with those retailers.

Now you have to go through 1 cycle where they bounced off the door and figured out, hey, the Nike, Jordan, Under Armour, Adidas, Puma, et cetera, are not available in those stores, so then that's a failed attempt. If they shop with us multiple times a year, you have to go through that cycle. There's always a lag effect between the absence of the inventory and the consumer showing up in our stores and realizing we're the place to get it. On top of that, the supply chain difficulties that we all witnessed in the first half of the year and the end of last year meant that some of that inventory straggled in over time, and it took even longer for it to disappear from the shelves.

When you combine those 2 things together and compare and contrast that to what we saw with Stage Stores and JCPenney's pullback, it extended it anywhere from 3 to 6 months later than we expected and anticipated. I think Jared pointed out that in the latter stages of Q2, we began to see that effect. Jared?

Jared Briskin (EVP of Merchandising)

Yeah, that's correct, Mike. Certainly as the inventory got depleted at a lot of these competitors that have lost distribution, we saw the run rate improve in the markets where a competitor lost distribution. You know, as a reminder, as we've said this before, as all of the distribution changes have occurred, more than half of our stores do not have a relevant competitor inside of 3 miles selling the types of products and brands that we carry. And almost 3Q of our stores may have 1 or 0. That gives us a lot of confidence as we go forward.

When you combine that with the increased customers that Bill referenced, our ability to get inventory, the positioning we have with the vendor community and our partners, and we feel like that is absolutely something we can really take advantage of in the back half of the year.

Mitch Kummetz (Senior Analyst)

Okay, great. Appreciate that color. Thanks, and good luck.

Mike Longo (President and CEO)

Thank you.

Operator (participant)

Our next question comes from the line of John Lawrence with The Benchmark Company. Please proceed with your question.

John Lawrence (Senior Equity Research Analyst)

Yeah, thanks. Good morning, guys. Jared, would you take a couple of minutes and talk a little bit about the women's business? I know a couple of years ago, you made a real, I guess a focal point on that part of the business, and it just seems like it's been really strong ever since. Can you comment there, please?

Jared Briskin (EVP of Merchandising)

Yeah. Thanks, John. I appreciate that call-out. Obviously, we made a very significant change to our merchandising organization and all the support teams within merchandising a few years ago to move away from a department focus, category-based, footwear, apparel, team sports, as an example, and get more focused on each gender within our business. You know, as a result of that work, that change of the entire organization, again, and all of our support teams, we put a significant emphasis on both the women's and the kids' business. You know, the year-over-year compares obviously have lots of noise in them, but very, very excited based off the results compared back to fiscal 2020, that women's was our fastest growing area, again, in those upper 70s%, followed by kids in the low 60s%. Really, really incredible.

You know, we're obviously growing the men's business as well, but super excited about what we're seeing in the women's and kids' business based off the change in focus.

John Lawrence (Senior Equity Research Analyst)

Great. Thanks for that. The last question from me. Did you see any correlation across the regions with differentiating with different gas prices? When you saw that little spike down in gas price, did it have any impact on the business? Thanks.

Mike Longo (President and CEO)

This is Mike. Hard to tell. We didn't see significant regional variation. Again, we think that our consumer has done a pretty good job economizing and making different choices like all of us do, right? Depending upon how much you make and whether it impacts you or not, whether that's decreasing the trips and increasing the amount per purchase. Bill, I know you've got some actual data there.

Bill Quinn (SVP of Marketing and Digital)

Yeah. Customers are managing through the inflation several different ways. First of all, a little bit more deal seeking than what we've seen historically. Also delaying purchases until when the product is absolutely needed. Some of that we see in the back to school and the delay there. Then also just cutting back, other discretionary spending outside of retail. As a reminder, customers intend to spend more for back to school. They don't have any plans to cut back spending for holidays, and we have very few customers trading down.

Mike Longo (President and CEO)

Thank you, Bill.

John Lawrence (Senior Equity Research Analyst)

Great. Thanks, guys. Congrats.

Mike Longo (President and CEO)

Thank you.

Operator (participant)

Our final question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser (Equity Analyst)

Well, all my questions were answered, so thank you very much.

Mike Longo (President and CEO)

Thank you, Sam. We appreciate it.

Operator (participant)

I would now like to turn the floor back over to management for closing comments.

Mike Longo (President and CEO)

Thank you. We appreciate everyone's time and attention today. We're very proud of our results. We look forward to reporting Q3. Again, thank you to all our teammates who make all this possible. Thank you.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.