Hibbett - Q4 2022

Transcript

Operator (participant)

Greetings, and welcome to Hibbett, Inc.'s Q4 earnings results. At this time, all participants are on a listen-only mode. A 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 of Investor Relations. Thank you. You may begin.

Gavin Bell (VP of Investor Relations)

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 & Events section. These materials may help you follow along with our discussion this morning. Before we begin, I'd 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, the most recent quarterly report on Form 10-Q, 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 to be accurate as of today's date, March 4, 2022. Because of the time-sensitive nature of this information, it is the policy of Hibbett, Inc.

To limit the archived replay of this conference call webcast to a period of 30 days. 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'll now turn the call over to Mike Longo.

Mike Longo (President and CEO)

Good morning, and welcome to the Hibbett Q4 earnings call. For those of you following along on the slides, I'm on the slide entitled Overview, slide number 3. As you know, we pre-released sales and earnings two weeks ago in order to get information to you ahead of today's call. While that data reflected results below our expectations and the guidance we gave you previously, we believed it was important to provide an update to you as soon as we were reasonably certain of the results. Today's press release provides our updated results for the Q4 and for the full fiscal year. In review, the Q4 FY 2022 results, sales increased 1.7% with a negative 1 comp. The two-year comp was +20.7% and a diluted earnings per share of $1.25.

For the full year, FY 2022, we had a 17.4% comp, a two-year comp of +43.7%, and diluted earnings per share of $11.19. We believe the results of Q4 were negatively impacted by a handful of factors. In addition to a surge in COVID-19 cases, we feel the other primary factors fall into three general categories: inventory, inflation, and income. In the inventory category, the biggest factor that affected sales in Q4 was the supply chain disruption that resulted in a shortfall of inventory versus what we forecast. The late delivery of specific products, most notably footwear, drove an approximate -10% comp for the last month of the quarter, and that resulted in an overall negative comp of -5% for the quarter. The second bucket is inflation.

The top three goods and services affected by inflation are fuel, food, and housing. These three things effectively lowered the consumer's discretionary income available to purchase goods and services. This trend is also expected to continue into Q1, but will begin to abate as we anniversary the changes throughout the year. The third bucket, income, reflects the lack of stimulus this year versus last year, and that caused a change in consumer behavior. When blessed with excess income last year, the consumer had less disposable income in the current quarter than last year, and so that materially affected sales. Moving on to the fourth slide, historical performance. We wanna remind everybody that the sales growth and related financial performance improvement of our business over the most recent several fiscal years has been material.

While it's easy to get caught up in evaluating results on a quarter-by-quarter basis, we manage our business with a longer-term outlook in mind. While the last two fiscal years have been positively impacted by stimulus and changes to the competitive landscape among other factors, we've also seen steadily improving underlying business factors, and that model has improved and has allowed us to take advantage of the opportunities afforded to us in the current circumstances. We believe those improvements were driven by investments in the business model, investments in the consumer experience, new customer retention, and an improving inventory position.

As a reminder, at the beginning of our fiscal year, the one that we're in now, we believe that approximately 54% of our stores will have no competition within 3 miles that carry product from our key brands. If you look at the stores with 1 or less competitors within 3 miles, that figure increases to almost 70%. We believe this is a significant factor in our success going forward. As you can see from the tables on the slide, the rapid sales growth has driven significant diluted earnings per share expansion, in addition to generating a huge lift in operating income as a percent of net sales.

As stated in this morning's press release, I believe that our improved omni-channel business model and compelling merchandise assortment creates differentiation in the marketplace and 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 results in the coming years. I'll now turn the call over to Jared. Thank you.

Jared Briskin (EVP, Merchandising)

Thanks, Mike. Good morning. Please turn to slide 5, Merchandising. For the Q4, we had a mixed performance across our merchandise categories. As expected, apparel and team sports were very strong, with apparel up mid-teens and team sports up in the low twenties. Momentum in our footwear category slowed as deliveries were further impacted by the challenges in the supply chain. We estimate that comps were affected negatively by approximately 10% in the footwear category and 5% overall due to the headwinds from delays associated with launch products. When compared to fiscal 2020 Q4, our results remain impressive. All genders and categories were up double digit when compared to fiscal 2020, with apparel the most significant growth category, up more than 50%.

While the Q4 was below our expectations, the results that we achieved for the year give us confidence that the strategic shifts in our merchandising organization and our toe-to-head merchandising strategy are working and elevating how we serve consumers. In the Q4, apparel business increased in the mid-teens. Further development of our apparel business across all genders has been and remains a priority for us. Key incremental investments in denim, premium fleece, jerseys, and littles performed above plan during the quarter. Our athletic brand performance was excellent during the quarter. Key trends included footwear connectivity, matching monocolor tops and bottoms, and premium fleece. Denim in both tops and bottoms was the driver of our fashion brand business. Our essential denim programs, as well as denim in our streetwear collections, performed exceptionally well. Jerseys and hats remain a hot trend and added significant upside during the quarter.

Footwear business decreased mid-single digits in the Q4 and continues to be impacted more significantly by supply chain challenges than other categories. Order delays as a result of the supply chain affected basketball, lifestyle, and running negatively, although demand remains extremely high. Incremental investments in casual footwear has been and remains a priority, and this category more than doubled during the quarter. Specific to footwear and apparel, women's improved mid-single digits and kids improved in the low teens. Men's was down mid-single digits and is our most pressured area regarding inventory. As expected, inventory ended the Q4 up approximately 9% to last year. During the latter part of December and January, we saw a slowdown of deliveries impacting our inventory estimates by an additional 30-45 days. This was unexpected and had a meaningful impact to sales in January.

I'm incredibly proud of the team's efforts to secure inventory to support our increased business. During fiscal 2022, in the midst of all the reported supply chain challenges, our team was able to secure, deliver, and process an additional $185 million in receipts at cost over and above historical norms. We were able to accomplish this by improving our priority with our vendor partners, securing incremental product from our vendor partners in season as well as through booking periods, and increasing our processing capacity by more than 50% within our own supply chain. The additional slowdown of deliveries continues to pressure our ability to get to an optimal level of inventory. We're confident in our order book, but timing of deliveries remains incredibly fluid.

Based on current estimations, we do expect inventory levels to continue to improve throughout the first half of the year, reaching levels closer to optimum levels in the back half of the year. I'll now turn the call over to Bob to discuss our financial results.

Bob Volke (SVP and CFO)

Thanks, Jared, and good morning. Please refer to slide 6 for some highlights of the fiscal Q4 of 2022. As a reminder, we report our results on a consolidated basis that includes both the Hibbett and City Gear brands. For the Q4, total net sales increased 1.7% to $383.3 million in comparison to the Q4 of fiscal 2021, and reflected a two-year sales increase of 22.5% compared to the Q4 of 2020. Comparable sales for the quarter fell 1% compared to the prior year Q4, but increased 20.7% over a two-year period. Brick-and-mortar comp sales decreased 1.6% versus the same period in fiscal 2021, but were up 15.9% on a two-year stack.

E-commerce sales increased 1.8% in the current quarter and have risen by 48.1% over two years. E-commerce sales accounted for 17.1% of net sales during the current quarter, a percentage that was unchanged from the Q4 of fiscal 2021. In the Q4 of fiscal 2020, e-commerce sales accounted for 14.2% of net sales. Sales trends were strong during the first half of the quarter, but the flow of inventory receipts subsequently slowed, and a number of scheduled deliveries were delayed, as Jared noted previously. This has had a material impact on footwear inventory and select product launches. In addition, inflation concerns and an uptick in COVID-19 case counts also contributed to traffic and transaction volume declining in late December and throughout the month of January.

GAAP gross margin was 35.1% of net sales, compared with 37.1% in the prior year period. This approximate 200 basis point decline was primarily due to shifting launch schedules, additional promotional activity, higher freight costs, and deleverage in store occupancy costs resulting from the negative comp sales performance. GAAP store selling, general and administrative expenses were 26.4% of net sales, compared with 26.8% for the Q4 of last year. This approximate 40 basis point improvement is the result of more efficient management of wage and related employee benefit expenses and lower impairment charges, partially offset by increased costs of advertising, professional services, transaction fees, and back-office infrastructure expenses.

Excluding certain City Gear acquisition integration expenses that occurred during the Q4 of fiscal 2021, current quarter SG&A expense of 26.4% compares to the prior year adjusted figure of 26.7%, an improvement of around 30 basis points. Depreciation and amortization in the Q4 of fiscal 2022 increased approximately $2.7 million in comparison to the same period last year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. In the current year Q4, we generated $23.1 million of GAAP operating income, or 6% of net sales, compared to $31 million or 8.2% of net sales in the prior year Q4.

Excluding all non-GAAP adjustments during last year's Q4 are $23.1 million of operating income this year, compared to adjusted operating income of $31.2 million in the Q4 of fiscal 2021. GAAP diluted earnings per share were and did not include any non-recurring items. In last year's Q4, GAAP diluted earnings per share were $0.39, and adjusted diluted earnings per share were $0.40. Capital expenditures during the Q4 were $27.3 million, consisting primarily of ongoing infrastructure investments and store development projects. During the Q4, we opened 12 new stores, including one rebrand, and closed two stores, which also reflects one rebrand. In the Q4, we purchased nearly 417,000 shares under our authorized share repurchase program for a total cost of approximately $29.5 million.

Let's move to the full year results on Slide 7. For the full year, sales increased 19.1% to $1.69 billion, up from $1.42 billion in fiscal 2021, and increased 42.8% versus the $1.18 billion reported in fiscal 2020. In relation to fiscal 2021, comparable sales increased 17.4%. Brick-and-mortar comparable sales were up 21.4%, and e-commerce sales reflected a slight decrease of 1.6%. Relative to two years ago, total comparable sales increased 43.7%. Brick-and-mortar comparable sales increased 37.9%, and e-commerce sales grew 89% over the two-year time period.

E-commerce represented 13.8% of total net sales during fiscal 2022, compared to 16.7% of total net sales in fiscal 2021 and 10.4% of net sales in fiscal 2020. For the year, GAAP gross margin was 38.2% of net sales, compared to 35.5% for fiscal 2021. This is the result of historically high margin performance in the first half of this year, which was driven by higher sell-through, a low promotional environment, and a greater mix of in-store sales, which carry a higher margin than e-commerce sales. Excluding adjustments to our non-cash inventory reserves in fiscal 2021, the current year gross margin of 38.2% is comparable to the adjusted gross margin of 35.8% in the prior year.

GAAP SG&A expenses, including goodwill impairment in the prior year, were 22.6% of net sales for the current year, compared with 26.5% of net sales in the prior year. This improvement is the result of wage and related employee benefit expense leverage and lower impairment charges, partially offset by increased costs of advertising and professional services. Excluding certain City Gear acquisition and integration expenses and pandemic-related impairment and valuation costs that occurred in the prior fiscal year, current year SG&A expense of 22.6% of net sales compares favorably with adjusted SG&A expense of 23.7% of net sales in fiscal 2021. On a GAAP basis, we produced $228.2 million of operating income in fiscal 2022 compared to last year's operating income of $98.4 million.

Excluding all non-GAAP adjustments in the prior fiscal year, our current year operating income of $228.2 million, representing 13.5% of net sales, is comparable to adjusted operating income of $141.4 million, or 10% of net sales in fiscal 2021. GAAP year-to-date diluted earnings per share were $11.19 for the current year compared to $4.36 in fiscal 2021. Excluding all non-GAAP adjustments in the prior year, the $11.19 of diluted earnings per share this year compares to adjusted diluted earnings per share of $6.12 in fiscal 2021.

Driven by strong sales, robust margins, and leverage of SG&A expense, we generated operating cash flow of $159.5 million in fiscal 2022 and invested $71.2 million in capital, which was largely related to new, relocated, remodeled, and expanded stores, plus various infrastructure projects. During fiscal 2022, we returned $278.8 million in cash to our shareholders. We repurchased nearly 3.4 million shares under our authorized share buyback program at a total cost of $267.8 million and have paid out almost $11 million via our regular recurring quarterly dividend that was initiated in June of fiscal 2022. Turning to the balance sheet. We ended the year with $17.1 million in cash and cash equivalents, which is down from the previous year's ending balance of $209.3 million.

As noted previously, capital expenditures, share repurchases, and dividends were significant uses of cash during the year. Our entire $100 million of borrowing capacity remained available to us at the end of the fiscal year. Net inventory ended the year at $221.2 million, a 9.5% increase from the beginning of the year. Consistent with comments we have made previously, we continue to strengthen our relationships with our vendor partners and have worked collaboratively with the entire vendor community to build and strengthen our inventory position. Before we discuss our fiscal 2023 guidance, we want to dig a little deeper into some of the elements that we feel set us apart from our competition and represent the way we have upgraded and transformed the organization in the last couple of years.

Bill Quinn will provide insights into our customer and digital strategy, and then Ben Knighten will provide a real-life example of how we are elevating and executing our in-store experience. I'll now hand it off to Bill.

Bill Quinn (SVP of Marketing and Digital)

Good morning, and thank you, Bob. Looking back over the last couple of years, many of our customer metrics have rebased above pre-pandemic levels. This was accomplished by improving programs that engage and retain customers. Some specific examples include revamping our loyalty program, investments in mobile, our launch process, as well as general in-store experiences. Our new loyalty program, launched in fall of last year, is even easier to use and provides more value to customers. As a result, our loyalty penetration grew to 56% this quarter versus 54% prior year. Also, the number of VIP members, our highest value customers, grew 16% year-over-year for the quarter. Looking at member data for the entire year, we are also seeing healthy signs.

Our one and done rate, where customers only make one purchase, has declined 9% for the year, and the amount of lapsed members that have reactivated increased 38% versus the prior year. The number of customers earning loyalty benefits and redeeming their benefits has significantly increased. This has caused the total value of loyalty benefits redeemed to increase by 23% year over year. A final view and understanding of our customer behavior can be achieved by looking at pandemic versus pre-pandemic behavior. In Q4, we had a 9% increase in the number of active customers shopping and a 13% increase in sales per customer versus two years ago. Omnichannel shoppers have grown by over 40%. Customers acquired during the pandemic in 2020 and 2021 are continuing to have lower monthly attrition rates than historical averages.

Over the course of the last two years, we have improved our customer experience, but we are not done. This year, there will be even greater focus. Customer experience can be a broad term. Our approach is very specific, and we'll focus on the removal of customer friction points. In Q3 and Q4 of last year, we performed various large research studies where customer friction points were identified and prioritized. Using this research, we are making investments in the customer experience, which include adding organizational resources, increasing our capabilities by adding new technology partners, and making capital investments that will add new omnichannel capability. We will continue to deliver significant value to our underserved customers with a best-in-class omnichannel experience. Turning to our e-commerce business, comparable sales increased 1.18% in Q4 and 48% versus two years ago.

E-commerce represented 17% of total net sales for the quarter. Traffic to our website and apps increased approximately 30% during the quarter. Unfortunately, due to inventory constraints, we were unable to convert this traffic at historical rates. During FY 2022, inventory availability has had a significant impact on our e-commerce comp. In this fiscal year, upcoming increases in inventory as well as past, present, and future investments in driving e-commerce conversion will produce between high single-digit to low double-digit growth rates. Entering into this new fiscal year, we are continuing to keep a pulse on how our customers are feeling in general. Through recent customer research, very few of our customers have described their financial health as worse than last year, but they are concerned about inflation.

They believe the rise in inflation will have a general impact on their discretionary spending, which includes restaurants, entertainment, and retail. This will be something we will keep a close eye on as we navigate the first part of this year. I will now turn the call over to Ben Knighten to discuss our in-store experience.

Ben Knighten (SVP of Operations)

Thanks, Bill. I'd like to move to slide 9. Both Jared and Bill provided information related to our merchandising and digital strategies. I wanna talk a little bit about how that translates to the in-store experience. One way to do this is by taking a look at an individual market. Natchez, Mississippi fits into our strategy of servicing underserved consumers in underserved communities. Natchez is located equal distance between Vicksburg and Baton Rouge on the Mississippi River. It's the definition of an underserved market, situated in a rural area whose main economy revolves around agriculture. The population of Natchez is approximately 14,000 people. You can see the trade area on the map depicted in blue. You can see that consumers from many of the surrounding communities do their shopping in Natchez, so the trade area actually has 25,000 potential consumers.

The trade area is approximately 22 miles wide, and the demographics are listed on the slide. Additionally, there are no competitors within 50 miles except for our own store 4 miles away across the river. That store in the trade area depicted in red is doing approximately $800,000. In February of this year, we opened two locations, one Hibbett and one City Gear in Natchez. The projections on both stores are a combined $2.2 million annually, yielding a forecasted ROIC well in excess of 20%. In this underserved area, we have three stores that will do approximately $3 million annually in sales. Another point worth covering is that because these stores are new, we open with a full merchandise assortment.

This, combined with our sales culture, reinforced through associate training, as well as the omni-channel experience we offer consumers, including our loyalty program, BOPUS, Buy Online Pick Up In Store, ROPUS, Reserve Online Pick Up In Store, our launch shoe raffle system, and access to merchandise through our vendor drop shipment. This allows us to provide a unique in-store experience that our consumers appreciate. Since opening, sales in the Hibbett store have been twice the sales volume of the average store during the same period, and the City Gear store is more than double the average volume. We believe this demonstrates that our consumers will shop with us and reward us with their business when we have the selection and depth of inventory they desire.

With both Hibbett and City Gear stores in the market, we differentiate ourselves with a culture built on salesmanship, a superior product assortment, and best-in-class omni-channel capabilities to reach specific underserved consumers. In markets like Natchez, we can reach consumers who are hard to capture. These stores produce sales that are both incremental and complementary to our vendor partners. I'll now turn it back over to Bob Volke to discuss our guidance.

Bob Volke (SVP and CFO)

Thanks, Ben. Slide 10 summarizes the fiscal 2023 guidance. Consistent with the directional guidance we provided 2 weeks ago, we expect the following from a sales perspective. Total net sales are expected to be relatively flat compared to fiscal 2022, implying comp sales are projected to be in the negative low single digit. Comp sales are projected to be in the negative low teen range in the first half of the year, followed by a high single digit comp sales in the back half of the year. Our sales forecasts are based upon assumptions that as the year progresses, supply chain constraints will ease, timing of inventory receipts becomes more consistent and predictable, and our overall inventory position strengthens. Net new store growth is estimated in the range of 30-40 stores, with new units spread fairly evenly throughout the year.

From an overall financial results standpoint, and again, consistent with our earlier guidance, we expect the following. Fiscal 2023 gross margins are forecasted to be in the range of 36.6%-36.9%, down from the results of fiscal 2022, but above pre-pandemic levels. Ongoing supply chain challenges, a higher mix of e-commerce sales that carry a lower margin than brick-and-mortar sales, an increased promotional environment, inflationary pressure, and deleverage of store occupancy will all contribute to this anticipated decline. We believe gross margin results in comparison to fiscal 2022 will become more favorable as the year progresses. SG&A, as a percent of net sales, is projected to be in the range of 23.3%-23.6%, higher than fiscal 2022 levels, but also favorable to pre-pandemic results.

Wage inflation, deleverage of fixed costs driven by relatively flat sales expectations, and annualization of back office infrastructure investments in fiscal 2022 are drivers of this anticipated SG&A increase. Similar to gross margin, we feel SG&A comparisons on a year-over-year basis will become less challenging in the back half due to an expectation of an improved inventory position and a more favorable sales environment. Operating income is anticipated to be in the low double-digit range as a percent of sales. Diluted EPS is forecast to be in the range of $9.75-$10.50, using an estimated full-year tax rate of approximately 24.5% and an estimated weighted average share count of 13.5 million.

Capital expenditures are 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 the shares throughout the year and pay recurring quarterly dividends. That concludes our prepared remarks. Operator, please open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may 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 key. Our first question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser (Senior Equity Analyst)

Thanks for taking my question, guys. I have a handful. Let's see, where should we start? Number one, the aged inventory that you said in the press release was slightly elevated versus last year. How does that aged inventory compare to two years prior? It's what.

Jared Briskin (EVP, Merchandising)

Yeah. Hey, good morning, Sam. It's Jared. Yeah, slightly elevated year-over-year, but still significantly below kind of historical averages.

Sam Poser (Senior Equity Analyst)

Thanks. Can you also, Jared, talk about the sales trends? Like, can you give us some more color on the total sales trends by month in the Q4, especially January, how much it fell off?

Jared Briskin (EVP, Merchandising)

Yeah, I think as we said, I mean, you know, we were really confident in the Q4. I mean, we had some pretty robust numbers in the November period, which gave us a lot of confidence. Unfortunately, as we stated, kind of the volatility in some of the delivery expectations towards the end of the quarter had a pretty significant impact.

In particular, in January. Again, we were very, very pleased with November, very happy with December, and then January was more difficult, for sure. I think in our prepared remarks, we noted effect of January by, you know, low teens, around 10%.

Sam Poser (Senior Equity Analyst)

January was down 10% or down worse than that because of the impact of the footwear on the entire quarter?

Jared Briskin (EVP, Merchandising)

Down about 10%, Sam.

Sam Poser (Senior Equity Analyst)

Thanks. I mean, given sort of all the noise right now with late delivery, stimulus, and so on, can you give us some, Bob or Jared, can you give us some help with what Q1 and Q2, especially the first, I mean, are gonna look like, from a comp or at least from a comp perspective on how to think about that, and, you know, relative to the rest of the year because, you know, you're up against some big compares and, you know, there's all these extraneous factors happening.

Jared Briskin (EVP, Merchandising)

Yeah. Sure, Sam. Certainly the most difficult compare is in the Q1. We certainly know there was a significant impact with regard to stimulus in the year ago period. That'll have slightly less effect as we get into the Q2. Still, we do believe there was a fairly significant amount of extra funds out in the marketplace. You know, the real opportunity as we see it is in the back half. We've been continuing to fight pressures with regard to the supply chain and inventory balances. We have two, you know, really big, excuse me, mitigating factors around our business and offsetting the stimulus. The first being inventory, and as we stated, it unfortunately a little bit later than we had expected with that additional 30-45 days.

The second is our ability to take advantage of all of the distribution changes that have occurred in the marketplace. Our ability to take advantage of that is also dependent on inventory. As we go through the year, we do expect our inventory balances to continue to improve. We are up year over year, as we said, but we're not at a level where we can optimize the level of revenue to our expectations. As we go through the first and Q2, that will continue to build. We do believe that when we get to the back half of the year, we'll be at more of an optimal level to support our business.

Sam Poser (Senior Equity Analyst)

Great. Lastly, can you talk about your relationship with your largest vendors, specifically the one from Beaverton, and how confident you are in, you know, what's happening there, how they're supporting your new store opening plans and so on and so forth?

Jared Briskin (EVP, Merchandising)

Yeah, sure, Sam. As we've said on previous calls, we're very confident in our positioning with our strategic vendor partners. Obviously, COVID's had a pretty dramatic impact on the supply chain that's led to, you know, a lot of short-term things with regard to order management issues, order changes and cancellation delays, so on and so forth. At the same time, we've been able to deliver a significant amount of receipts over and above historical norms, which I think reflects the level of support and priority that we're getting from our strategic partners. You know, our strategy continues to be to focus on the underserved consumer in underserved markets, as I mentioned earlier, all reinforced with a premium consumer experience, and that's highly differentiated in the marketplace and remains largely complementary to our partners.

Sam Poser (Senior Equity Analyst)

All right. Thanks very much. Continue the success.

Jared Briskin (EVP, Merchandising)

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 (Senior Research Analyst and Director, Equity Research)

Hi. Yes, thanks for taking my question. Just to follow up on that last point. You know, the competitive environment, it seems like a lot of other competitors are sort of losing access as some of your vendors go increasingly DTC. I mean, it seems like sort of implied in the guidance and the commentary that you are not seeing a similar trend there. Then I guess, like, another way of asking it would be like, you know, I think historically, maybe your top vendor was around 68% of sales in the last time you disclosed it. Would you expect that to sort of increase or decrease as we sort of move throughout the year? Thanks.

Jared Briskin (EVP, Merchandising)

Hey, good morning, Alex. I appreciate the question. I'm gonna answer this the same way I just did. Again, we're very confident in our positioning with the strategic vendor partners. How this projects going forward, I think we need to get some understanding and help with regard to the supply chain and be able to get to a more normalized position with regard to that. But again, as far as our positioning with the key vendors, they very clearly understand our strategy. They very clearly understand what we bring in a very highly differentiated environment. The focus on the underserved consumer, our increased investment in consumer experience are continuing to put us in a strong position with all of our strategic vendor partners.

Alex Perry (Senior Research Analyst and Director, Equity Research)

Perfect. That's really helpful. Just on the quarter, was the major headwind in the supply chain, high heat launch footwear product on the men's side? Is that, like, a fair way of characterizing it? Was there any, you know, apparel headwinds in there? What about, you know, some more sort of like everyday shoes from your top vendors?

Jared Briskin (EVP, Merchandising)

Yeah, it's pretty unpredictable, to be transparent. There obviously were impacts across, you know, all of our categories, but certainly more focused on the footwear category as a whole. I think the disruption and the delay when we talk 30-45 days, as you are aware, the high heat product is selling out in many cases the day we get it. Certainly, if not the day of the week we get it, and absolutely in the period that we get it. When we miss deliveries by 30-45 days, it can have a pretty significant impact in today's environment versus maybe what it would have impacted historically, when there were lower liquidation rates.

Alex Perry (Senior Research Analyst and Director, Equity Research)

Gotcha. Then just my last one. Just on the promotional sort of commentary, it seems like promotionals, you know, promos came back for you, this past quarter for the first time in a while. Was that specifically just to drive traffic given the, you know, lack of some of the launch product? Have you seen industry promos come back at all? What would be sort of the expectation for the overall, you know, promotional environment throughout the industry as you move through this year?

Jared Briskin (EVP, Merchandising)

Yeah. Some of the increased promotional activity was absolutely to drive traffic at the end of the quarter. We certainly were, you know, quite disappointed as we started to see January unfold. I think overall there's a you know, slightly increased level of promotions. I think with the current challenges around inventory and the supply chain, I wouldn't expect a dramatic increase in promotions throughout this year. I think we'll see more promotions than maybe we have seen in the last 12-18 months, but I do not expect it to get anywhere back close to the promotional environment that we saw pre-pandemic.

Alex Perry (Senior Research Analyst and Director, Equity Research)

That's really helpful and best of luck going forward.

Jared Briskin (EVP, Merchandising)

Thank you. I appreciate it.

Operator (participant)

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

Justin Kleber (Senior Research Analyst)

Hey, good morning, guys. Thanks for taking the questions. I just first wanted to follow up on the comp outlook and trying to better understand the inputs behind the second half inflection. You know, you obviously talked about the improvement in inventory, but curious what you're factoring in, you know, from a macro standpoint, because, you know, we are still gonna be lapping stimulus and the inflationary pressures facing your consumers probably are gonna get worse, not better. Just trying to understand kind of the macro inputs within your comp outlook and, you know, your confidence level in forecasting high single digits across the back half of the year.

Jared Briskin (EVP, Merchandising)

Yeah. It's Jared. I think I'll start on that one. First and foremost, you know, as we got to the back half of last year, as we talked about, we were not happy with the consumer experience in stores with regard to available inventory, and that certainly impacted our digital business as well. First and foremost, our reasoning for our heightened guidance around the back half is where we expect our inventory to be relative to last year. Number one, we expect to be able to take advantage of that. That in conjunction with our investments and improvements in consumer experience, we do believe will be a healthy driver for us. Secondly, the distribution changes that are occurring in the marketplace, we think will be largely complete at that point.

That's the time where we expect that we'll really see a significant acceleration, again, in the markets where we are the only distribution point for our strategic partners.

Justin Kleber (Senior Research Analyst)

Okay. Maybe a question for Bob. You know, as we think about the, you know, the maintaining the double-digit EBITDA or EBIT margin here for this fiscal year. I guess if sales don't improve as you expect over the second half, how much flexibility from an expense perspective, you know, do you have to maintain the op margin north of 10%?

Bob Volke (SVP and CFO)

Yeah, I mean, you know, we've obviously talked about this a lot, and we've got some contingency plans in place should, you know, the expectation at the top line, you know, not live up to what we want. You know, at some point, again, it just depends on magnitude. This is a very volatile, you know, situation as far as being able to manage expenses to track revenue. We've got a, you know, an infrastructure that we feel is stronger, more resilient than it's been in previous years. We've also committed to certain investments, and we're not gonna give up on driving consumer experience, and we are not gonna give up on putting ourselves into the best position to be able to take advantage of opportunities going forward. You know, we obviously have some flex.

Like I said, we can deal with some up and down, but, again, I think it's just more a matter of magnitude as the year plays out.

Justin Kleber (Senior Research Analyst)

Okay. Just last question. Maybe this one's for Mike, but clearly, you know, the market is skeptical about your guidance for this fiscal year just based on where the stock's trading at. Curious either your view or the board's view on the willingness to tap into that borrowing capacity you have to more aggressively buy shares here with it trading at, you know, 4-5 times earnings.

Mike Longo (President and CEO)

We do believe that our share buyback program is instrumental in how we return capital to our shareholders. As you are well aware, and we talk often, the three uses of free cash flow are CapEx, which is the most important way we deliver capital back to the shareholders, and that's by reinvesting in the business model, and that means the consumer experience primarily. As you know, we are paying a dividend. Then to your point, the share repurchase program is an important part of what we do, and we're committed to it. As you know, we still have outstanding capacity on our board approved share buyback program. Bob has given you some specific guidance around our plan on how many shares we're gonna buy back. We're committed to it.

We believe in it, and it's a big part of what we do.

Justin Kleber (Senior Research Analyst)

All right. Thanks, guys, and best of luck.

Mike Longo (President and CEO)

Thank you so much. We appreciate it.

Operator (participant)

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

Cristina Fernandez (Analyst)

Thank you, good morning. I wanted to ask about how do you feel about achieving the targets you gave out, you know, at the analyst day last year for 2024 or fiscal year 2025 in light of the guidance this year? You still think you can get to $2 billion in sales and perhaps see operating margin expansion over the next couple years? I don't know if getting back to 13.5% is realistic, but how do you see that progression and what could be, you know, long-term operating margin targets?

Bob Volke (SVP and CFO)

Hey, Cristina, it's Bob. You know, again, obviously a lot has changed since we released those, you know, or I guess forecasts back in June. You know, we are still confident that we are moving in the direction. I've said multiple times, these are not necessarily linear charts that go, you know, in a perfect straight line. You know, again, I think we still feel confident that $2 billion number is out there for us. We have taken, you know, obviously a little bit of a pause here in the Q4, mostly due to, again, the supply chain issues and the related inventory. That does have an impact also on how quickly we can grow, you know, the chain in overall terms.

Also, I would say, to be very honest, that, you know, the margin and the SG&A rates were obviously at pretty stellar levels here throughout fiscal 2022. Again, the goal is that we will not, you know, significantly backslide. Again, I don't think it's gonna be, again, directly linear throughout the next couple of years. We feel with the infrastructure we've built over the last 18-24 months, when we get, you know, the inventory situation, you know, straightened out, continue to grow stores. I believe all the numbers we've put on paper are still very achievable in the future.

Cristina Fernandez (Analyst)

Thank you. I have a question perhaps for Jared. Can you talk about, I mean, I know a lot of the high heat product launches were delayed, you know, from the Q4 to perhaps the you know the spring or later this year. How do those flow over the course of the year, and how do you feel about your specific product allocations for those high heat footwear styles?

Jared Briskin (EVP, Merchandising)

Yeah. Hello, good morning. I think it largely is where we feel with regard to the high heat styles again relates back to our positioning. I mean, we're confident in our order book and what's in our pipeline. I would continue to expect launch dates and delays of product continue to be very fluid. So I think that's what's causing some, you know, an inability to predict on our side based off of when we're gonna receive those deliveries and then should launch dates actually move or not, or are we just going to receive the product after the launch date. So that's pr oviding some volatility. But as far as what we have in the pipeline in our order book, we are very confident.

Cristina Fernandez (Analyst)

Last one. On the cash balance, it was $17 billion this quarter. It's a little bit, it's below where it was pre-pandemic. What balance do you feel comfortable or you feel like it's a good sort of minimum amount to have on the balance sheet going forward?

Bob Volke (SVP and CFO)

Again, at this point in time, you know, we feel that the cash is more valuable to us as we're deploying it into the business and back to the shareholder. As I mentioned earlier, you know, we have our entire $100 million line of credit available to us. You know, I think again, we're trying to use the cash as efficiently and effectively as we can. I don't think there's any magic number. Historically, people tend to think, you know, you need $30 million, $40 million, $50 million on the balance sheet. Again, we are gonna use the cash, like I said, as quickly as we can get a solid return on that investment. I don't see us having any set minimums.

Again, we'll use the line of credit judiciously as we need to and feel that we are in pretty good shape, you know, from a liquidity standpoint going forward.

Operator (participant)

Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Co. Please proceed with your question.

Jim Chartier (Analyst)

Good morning. Thanks for taking my question. I was wondering what you think, you know, assuming you have sufficient inventory, you know, what do you think the sales opportunity from, you know, the reduction in Nike's distribution is for you? You know, and is that, you know, kind of captured over time? And if so, what kind of time period would it take to kind of realize all of that opportunity?

Mike Longo (President and CEO)

Yeah, Jim, this is Mike. Thanks for the question. We have previously talked about the knowns last year of JCPenney and Stage Stores. Stage Stores going out of business, JCPenney being cut off, and we hung a number on there. We feel really good about that estimate, and our measurements lead us to believe that we hit those numbers.

What we were forecasting going forward, as you're pointing out, were a number of other undifferentiated retailers who lost the ability to buy and distribute product from our major brand partners. That effect is gonna be most pronounced in the fiscal year that we started four weeks ago. We're looking forward to seeing those results. We have not historically and have not yet pinned a number to that specifically that we've talked about publicly. We will. We have that in our guidance, let's say it that way. We have a lot of confidence that it is a tailwind to the business, and it will help us offset the headwind that we are gonna see primarily in Q1 from last year's stimulus. We feel really good about that aspect of the business.

When you combine that with all of the other things that we're talking about today, which goes into, you know, we have the underserved customer, we have our three pillars of our competitive advantage. We have the ability to continue to land inventory. We're gonna be in an advantageous position going forward. We love our consumer experience going forward and the investments we're about to put into it, both in brick-and-mortar as well as omni-channel. I like what we're doing. Now, would I like it better if the results year-over-year were positive? Well, of course. As everyone knew, we hit a peak last year in Q1, and that was always going to be the thing that, as was said earlier, causes skepticism. We are very realistic and sober about that, as are you. Therefore, our guidance going forward took all of that into account.

We've got a range of diluted earnings per share with a plan that we feel very confident about.

Jim Chartier (Analyst)

What are you seeing from, you know, the undifferentiated retailers losing Nike? Do they still have Nike product in the stores? You know, do you expect it to be complete by the end of Q1? You know, I guess, is it a similar opportunity to Stage and JCPenney or maybe a bigger opportunity?

Jared Briskin (EVP, Merchandising)

Hey, good morning, Jim. It's Jared. I think that, you know, expectations was it would be a pretty clean environment at the early part of this year based off of all the distribution changes. You know, we believe due to some of the delivery delays and impacts of the supply chain, that some of that likely will push out a little later than we potentially have originally estimated. Again, we largely would expect that during the Q2 at the latest all those distribution changes would be in effect. We did see from the Stage and JCPenney example that Mike referenced earlier, you know, it does take about a 60-90-day cleanup for them once they're through all their inventory, and then we start to see the real impact.

As we go throughout this year, we'll continue to see the impact broaden. I would expect that some of the undifferentiated retailers will still have some product, at least at the beginning of this year.

Jim Chartier (Analyst)

Great. Just Mike, you know, would you size it, you know, kind of the opportunity in relation to kinda JCPenney? Is it a similar type opportunity or is it potentially bigger?

Jared Briskin (EVP, Merchandising)

Yeah. We believe based off the counts that we've done with regard to number of stores in our markets that will be closing, we do believe it's a broader opportunity.

Jim Chartier (Analyst)

Great. Thank you.

Operator (participant)

Our last question comes from the line of Sam Poser, which is a follow-up question from Williams Trading. Please proceed with your question.

Sam Poser (Senior Equity Analyst)

All right. Bob, thank you for taking my second question here. Bob, can you give us for the quarter, I know you guys don't normally do it, but can you break out merch, you know, the different components of the gross margin, you know, with some specificity in the Q4 relative to the gross margin versus the prior year, merch margin, freight, and so on?

Bob Volke (SVP and CFO)

Again, you know, we won't speak to specific numbers, but I can tell you that kinda all components certainly were down compared to the prior year. We did see, you know, compression in the product margin side of things, again, mostly based on the mix of the product as well as, you know, the kinda overall basket of the consumer. We do have headwinds in freight, so that was definitely contributing, as well, and we expect those headwinds to obviously continue into fiscal 2023. We also lost a little bit of ground on store occupancy. You know, all of those components were all in kinda negative compared to the same period of the prior year. We expect that we're gonna see some of that again early in fiscal 2023 as we move forward.

Sam Poser (Senior Equity Analyst)

Thanks. I mean, so, what's the biggest? Was the biggest piece of it the occupancy just because of the difference? Can you give us some view of the, you know, each one hurt? Can you say which one was the biggest, which one's one, two, three? Can you rank them for us at least?

Bob Volke (SVP and CFO)

Yeah, I would say, you know, probably it's gonna be freight is probably the biggest headwind we've got in terms of just pure basis point change year-over-year. It's pretty similar, I would say, between occupancy and the product side of things. Yeah, freight's definitely escalated here in recent months.

Sam Poser (Senior Equity Analyst)

When we think about the first half of the year, especially the Q1, occupancy is probably gonna move way up because, just because of the compare on the comp.

Bob Volke (SVP and CFO)

Yeah.

Is that fair assessment?

Mike Longo (President and CEO)

Yeah, I think, like I said, you know, in the comments, we feel like the comparisons will get easier as the year progresses. Yes, when you've got a coming off an 87+, it's gonna be pretty tough to leverage store occupancy into the first part of the year.

Sam Poser (Senior Equity Analyst)

Thanks. Lastly, do you expect in Q1, the negative comp to start with a 1, start with a 2, start with a 3?

Bob Volke (SVP and CFO)

We're sticking with our kinda overall guidance, which is, you know, negative teens% in the first half of the year. We're not gonna get into quarter by quarter.

Sam Poser (Senior Equity Analyst)

Okay. All right. Thanks very much, and good luck.

Operator (participant)

That concludes our question and answer session. I'd like to hand the call back to management for closing comments.

Mike Longo (President and CEO)

Well, thank you so much for your participation today. We're proud of the business, but we're more proud of our 11,000 teammates out there in the store support center, the distribution centers, and our stores. We couldn't be prouder of them, and all of these results come as a result of their very hard work and their dedication. Thank you to them. That concludes today's call. Thank you.

Operator (participant)

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