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spk04: 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, 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. are noted on slide two of the earnings presentation and the company's annual report on form 10k and in other filings with the securities and exchange commission we refer you to those sources for more information also to the extent non-gap financial members are measures are discussed on this call you may find a reconciliation to the most directly comparable gap 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 25th, 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 Knighton, Senior Vice President of Operations. I will now turn the call over to Mike Longo.
spk14: Good morning. Our team delivered a solid second quarter. 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 omnichannel 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 four, 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 two 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 at 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 were 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 two to three 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 omnichannel 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. And 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 Jerry. Thanks, Mike.
spk03: Good morning. If you turn to slide five, the merchandising slide. For the second quarter, our overall performance was in line with our expectations across the merchandising categories. We continue to believe that due to the impacts of COVID and stimulus during the last two fiscal years, the comparative fiscal 20, 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 22, 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 20, 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-digit range. Specific to footwear and apparel, men's, women's, and kids' all showed significant growth when compared to fiscal 20, 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 positions. The increased inventory levels are largely attributed to a better in-stock position of key franchises and 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 compared to fiscal 2020, calendar 2019. When compared to fiscal 2020, calendar 2019, inventory levels were up 35% at the end of the quarter, imbalanced with our 54% sales. 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 19, our unit inventory levels were up 10%. Our results in the second quarter, combined with our strong quarter end inventory position, continue to give us confidence that our tone-ahead merchandising strategy is working and elevating how we serve our consumers. I'll now hand it over to Bob to cover our financial results.
spk11: Thank you, Jared, and good morning. Please refer to slide six entitled Q2 FY23 Results as a reminder to report our results on a consolidated basis that includes both the HBIT and City Gear brands. Total net sales for the second quarter of fiscal 23 decreased 6.3% to 392.8 million from 419.3 million in the second quarter of fiscal 22. However, if looking back three years to fiscal 2020, the last relevant comparable period prior 2020. Overall comp sales decreased 9.2% versus the 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%. 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 from the second quarter of fiscal 2023, compared to 39% in the second quarter of the prior year. The approximate $160 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 will have approximately 125 basis points, and deleverage of store occupancy costs will be approximately 110 basis points, mainly due to the year-over-year decline in total sales, Store operating, selling, and administrative expenses were 23.3% of net sales for the second quarter of fiscal 23 compared to 22.3% of net sales for the second quarter of last year. This approximately 100 basis point 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 and net surges 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 23 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 second quarter. Included earnings per share were $1.86 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 the period. Next, I will discuss the fiscal 2023 year-to-date results. I am now referencing slide seven. Total net sales for the first six months of fiscal 2023 decreased 11.8% to $816.9 million from $926.1 million in the first six months of fiscal 22. In comparison to fiscal 20, increased 14.5% versus the same period in the prior year. In comparison to the first six months of fiscal 20, comp sales increased by 36.2%. Brick and mortar comp sales decreased 17.4% versus the first half of fiscal 22, but have increased by 25.6% versus the six months of fiscal 20. E-commerce sales increased 6.2% compared to the same period of fiscal 22, and have increased by 141.7% E-commerce sales accounted for 14.9% of net sales during the current fiscal year, compared to 12.4% in the first six months of fiscal 22, and 8.4% in the first half of fiscal 20. Year-to-date gross margin was 35.7% of net sales in fiscal 23, compared with 40.3% increases, higher max e-commerce sales, lower margin, sorry, general shifts in product max, and delays in launch events. De-leverage and store occupancy costs approximately 140 basis points, mainly due to the year-over-year decline in total sales, again, against higher rents and utility costs. And then increased costs of freight and transportation for approximately 130 basis points. FG name expenses were 22.9% of net sales for the first half of fiscal 23, compared with 20% of net sales from the same period of last year. This approximately 290 basis point increase is primarily the result of fee leverage and the lower current year revenue. Expense categories such as wages, professional fees, advertising, and general supply necessary to support the larger store base and increase e-commerce activity were negatively impacted. Appreciation and amortization in the first six months of fiscal year 23 We generated $83.5 million of operating income, worth 10.2% of net sales in the first six months of this year, compared to $171.6 million, or 18.5% of net sales in the prior years, the first six months. Year-to-date diluted earnings per share were $4.77 for fiscal 23, compared to $7.90 per share at the same period in fiscal 22. 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. At inventory at the end of the second quarter, fiscal 23 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 by a net of 12 units comprised of 13 new locations and one closure. On a year-to-date basis, we have increased store count by a net of 21 with 22 new locations, one rebrand, and two 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 paid a recurring quarterly dividend during the order in the amount of $0.25 per eligible common share for a total outflow of $3.2 million. For the first six 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.
spk05: 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 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 two fundamental differences versus FY20. One, the number of shoppers in our customer base has grown. Q2, the average ticket has increased substantially due to gains in average unit retail. We see these two factors as structural in nature, keeping our business rebate line 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 for 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.
spk11: 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 six months of the year behind us, we feel certain elements of our full-year guidance need to be updated. Sales, gross margin, and SG&A updates are as follows. well that they are not going to agree with the whole thing with the range dollars compared with the point but we're going to be able to be in the range of black i'm going to be able to do it for the whole year or you're going to work for a little bit being flat on the whole thing with the great wall here all your cover of the growth of the state in the pocket i think it's great i'm going to be able to go double-digit range year progresses, supply chain constraints continue to ease, timing of inventory receipts becomes more consistent and predictable, and our overall inventory decision remains strong. Fiscal 2023 gross margins and percent of sales are anticipated to be in the range of 35.1% to 35.3%, down approximately 290 to 310 basis points to fiscal 22. 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 deleveraged 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's percent of net sales is projected to be in the range of 22.7% to 22.8%, higher than fiscal 2022. 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 22 contribute to this year-over-year increase. The following components are consistent with guidance provided previously. That new store growth is estimated in the range of 30 to 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 percent of sales. Deluded EPS and anticipated remain in the range of $9.75 to $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 to 70 million with a focus on new store growth, remodels, and additional technology 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.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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.
spk12: Good morning, everybody. Thanks for taking my questions. On back to school, how far, you know, what percentage of back to school is in right now? And can you give us, please give us more specific as to sort of the run rate that you're seeing right now?
spk14: Hey, good morning, Sam, Mike. I'll handle the first part of that. So we believe about two-thirds 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 that we're seeing in the stores and through surveys of how consumer behavior has changed, but net-net, it's going very well. So 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. And so 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. So remember, 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. And if it shifts, you still got the cost, but you don't get the sales. And those incremental sales, as you know, are incredibly profitable for us. So not only the sales, but some of the operating profit moved into Q2, or into Q3 from Q2, rather. So Bill, you want to 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.
spk05: Yeah, hi, good morning, Sam. So some of the customers have been impacted by inflation, but they've found ways to manage through it. So 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. We're seeing that shift and back to school. And then also, they're cutting back in other discretionary spend outside of retail. But the net-net is that customers plan to spend more for back-to-school. They have new current plans to cut back for holiday spending at all. And we have very few customers trading down. I'll turn it over to Ben for more commentary.
spk13: Yeah, just to tag on what Bill said, I had the opportunity to visit some stores in Arkansas last And so, you know, what we saw there is exactly what Bill's reporting. You know, some calendar shifts in the actual back-to-school days, but also just shifts in behavior. And so starting to see some consumers where they normally might have 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. But felt pretty good about what I saw in those towns and talking to the consumers and to our associates.
spk14: Yeah, and 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 want to follow up on that?
spk03: Yeah, thanks, Mike. Good morning, Sam. So as we start learning, you know, all the impacts of the supply chain, you know, dates are moving on. So, 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, we had an expectation of that large amount ending volume coming at the end of Q2, along with some launches that unfortunately wound up pushing into Q3. So all those things had somewhat of an impact on Q2 negatively, but now we're having a pretty positive impact on Q3. The other thing I would mention is Bill said In fact, we've seen significant increases in products that, like for like, had some price increases on some franchises. So we're very confident and comfortable where we stand right now.
spk12: Thanks. I just have two follow-ups there. One, how were you impacted by one of your larger vendors doing their map holiday, and did that do anything for the business? And two, are you seeing a benefit from that same large vendor? Are you seeing allocation benefits further in the year because of that? And lastly, based on the way the comp falls, Bob, do you anticipate that the
spk03: uh comps in q3 just 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 all right sam so i'll start with the promotional activities so you know certainly uh the last two years um we've had essentially zero promotional activity so it's certainly been somewhat of a shift we have some promotional activity in the second quarter With regard to inventory, we've been fighting the inventory battle for a couple of years of really just not having enough inventory, in particular footwear. And frankly, our consumer experience within the stores and conversion from an online perspective of footwear has not been a good experience for our consumers. Our team working really closely with our vendors has really done an excellent job of getting the things that are driving traffic the things that are high heat um and then sell through quickly so 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 probably not giving cost guidance to the individual board but i think we think about some enough things we just heard over the last couple minutes uh with some of the shifting into q3 with some of the consumer sentiment as far than we would have liked to see because, again, we had a real struggle with the inventory balance.
spk08: I think when you have all, you know, the consumer sentiment, the shifting of sales in the Q3 and the inventory position, again, feels pretty confident that both Q3 and Q4 feel fairly strong. Got you. Thank you very much. Appreciate it. Christina.
spk00: Our next question comes from the line of Christina Fernandez with Telsey Advisory. Please proceed with your question.
spk01: 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 are we also thinking about better inventory availability or the high heat launch calendar shifting? It would be helpful if you can give us a little bit better explanation of why raise the outlook. you know, this early in the year.
spk14: Thank you, Christina. This is Mike. I'll lead it off, and then everyone else has a piece of this. So 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 going to start. That has led to a very good start to the quarter. But it's also more than that. So 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, the competitive differentiation that we've established, we really like our business model. So 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 two together, that turns into increased transactions. And so those increased transactions manifest themselves in a couple of ways. And Bill has talked a little bit about that. Do you want to amplify any of those comments, Bill?
spk05: Yeah, absolutely. First of all, we've got some pretty incredible omnichannel 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. We're 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 and what those two programs can deliver. From an e-commerce perspective, 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.
spk14: Yeah, so that's the transaction side. Jared, do you want to comment on the AUR and how that impacts tickets?
spk03: Yes, we've got a couple of additional things that are happening. You know, Mike referenced the distribution changes that have gone on in the marketplace. And, you know, our expectation for this year was that we would be a significant beneficiary of those distribution changes. And that's kind of happened a little later than we would have expected just with all the supply chain challenges that are out there in the amount of inventory. But you absolutely saw during the second quarter our store locations that had been impacted by a distribution change from one of our vendors. did come much better than the stores without a distribution change. So 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 two 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. But 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 strong and excellent launch calendar, all on the back draft 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.
spk01: Thank you. That's a very helpful caller. And 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 underperform. I guess that perhaps carries a higher product margin or cost inflation. Any color there would be helpful.
spk03: understanding that trend sure thank you i'm going to share i'll take that one you know so a couple things um you know absolutely there's more promotional activity going on in the marketplace right now certainly we have some more uh than we had over the last two years where we essentially had done um but as as we discussed a little earlier at mike reference you know the shift in back to school um along with some of the launch shifts that occurred in the end of the quarter um into q3 those losses, and then that did materialize into the third quarter. That put a little pressure. As we look ahead into the second half, we started to see more of a promotional environment than last year. Again, nothing anywhere close to what we saw in fiscal 20. And the health of our inventory from an age perspective is really exceptional. So not something that has us terribly concerned. Don't expect to maintain product margin levels that we saw in the last year or
spk02: or two years, but we certainly expect a significantly rebase above fiscal 2020.
spk01: And can you expand on the apparel performance during the quarter relative to school work? Is it mostly related to the inventory receipts or anything else to note?
spk03: Yeah, I would say, you know, if you think about our apparel business compared to last early in the 40s so we absolutely had an outside apparel business last year frankly because consumers had money for stimulus and we really had no footwear inventory or certainly not enough footwear inventory so we're seeing that balance back with again footwear becoming more meaningful categories we got into the second quarter and certainly expect that to be the same in the back half of the year so apparel is an area that we have some concerns about not as susceptible to promotions, and we feel like we have it under pretty good control.
spk00: Thank you. Our next question comes from the line of Justin Cleaver with Robert W. Baird. Please proceed with your question.
spk15: 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, that puts the full year down a couple percent. You're guiding flat to up low single digits for the full year. So, 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. So what am I missing there? Okay. Maybe we can follow up offline there, Bob. And then 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?
spk14: Well, certainly we know that there's macro pressures. I mean, 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. But the product that we have, again, hard to get, compelling assortment. People enjoy the experience of coming in our stores. And 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?
spk03: Yeah, thanks for the question. Certainly the right question. Yeah, I think one of the things that really gives us a lot of confidence is historically. When you think about second quarters, if we don't get off to an early back to school, Q2s are typically really, really difficult. In this case, we posted a 54% comp on top of fiscal 20. And that comp was driven by a lot of the similar products that we have right now and based off of our inventory position. So we have a lot of confidence coming into Q3. From the results in Q1, obviously Q1 and Q2, but then also what we're seeing for back-to-school gives us a lot of confidence.
spk15: Okay. No, thank you both. That makes sense. Sorry, I didn't mean to cut you off there.
spk05: Hey, Justin. This is Bill. So just to add to that, we've obviously re-baselined above FY20, 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. So we're able to communicate with more customers than ever before. On top of that, just the elevated purchases that we have through an increased AUR, which is structural, gives us confidence as well. And also, just doing some more surveying with customers, some do intend to shop early for holidays, and that's to spread out their expenses to avoid future inflation. And also, there's still some product availability concerns out there.
spk15: Okay. And 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 lack over the back half of this year and when the pressure might subside on that line item? Thank you. Bill?
spk14: Go ahead, Bill.
spk05: Yeah, sure, this is Bill. So just kind of talking about freight, 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 at the percent of sales. So if you think about the unit economics of shipping out of box with a higher AUR item in it, that works very favorably for us.
spk15: All right. Thanks, everyone. Best of luck over the back half of the year.
spk08: Thank you.
spk00: Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.
spk09: 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 receipts, like more launch product versus your initial expectations? Or is it that what you're seeing from back to school is very encouraging and so you sort of are thinking that that sort of flows through the year? Just trying to get more clarity on the guidance raised for sales.
spk14: Thanks. Yeah, thank you. So versus last time we spoke, what has changed is the essence of your question. So 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, 18, et cetera. Well, I don't think it was just us. So 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 going to help us drive some sales. And so then 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.
spk03: Yeah, I think the only thing that I would also add to that is just our confidence in the visibility around inventory. 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.
spk14: And 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.
spk13: Yeah, you know, we've spent a lot of time over the last early couple of years, you know, with the labor market being as tight as it is. A lot of focus there. And seeing that mitigate a little bit. And so that's been helpful as we've gone along here. You know, wages are kind of in line with our expectations. We knew that they would be higher, you know, this year than the kind of run rate historically. kind of in line with the expectations. Really doing a lot of work too on our scheduling and things of that nature at store level and meeting demand. And I've gotten a little bit better there and controlling overtime and some of the things that we're doing in store. And so I'll put pretty good on the goal board basis, maybe relative to the first half of the year.
spk09: Perfect. That's really helpful. And just as a follow-up, I think you talked a bit about product margins in the quarter. It looks like the implied QH 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.
spk11: 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 to the back half as well as far as the uh the deleverage on the store occupancy piece but i would say those are probably two of the components again i think jared and phil have touched on some of the other positives when it comes to the mix of product and things so there's a little bit of mitigating there going on with the back half
spk14: And this is Mike. I'd like to lay 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. So the inventory that we have now and that we have been working very hard to get and put in the stores and put in front of the consumers is making that consumer experience what we want and what they want and, frankly, what our brands want. And so as a result, when that sell-through comes back to more normal levels, not going back to fiscal 20, but rather going back to a good consumer experience, you would expect for gross margin to come down some. And 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. So 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, who've gotten very, their inventories have gotten long, they're going to get promotional. I don't think that's what you're going to see with us. Our inventory is on target. It's fresh, it's new, and it's selling through. And we don't expect, we do expect clearance to be more than last year. We do not expect for it to be significant.
spk09: Thank you. That's extremely helpful. And then 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're seeing sort of less expenses versus your original expectations?
spk14: 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.
spk11: Yeah, absolutely. leverage a little bit more in the second half.
spk13: Yeah, just tagging on to that, as we said earlier, it is the planning for sales. Not sure exactly where things are going to show up, but you're planning and you do that with labor and stores too and you're hiring. And so you get ready and set for that and you see that shift a little bit. And so you're going to eat a little bit of cost there. And then, of course, then as it shifts over, you're able to gain leverage on a go-forward basis. And that's what we're kind of seeing and expect for the remainder of the back half of the year.
spk09: Perfect. That's all incredibly helpful. That's a lot going forward. Thank you. Mitch?
spk00: Our next question comes from the line of Mitch Comets with Seaport Research. Please proceed with your question.
spk10: 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 that shift from Q2 to Q3? Is there anything you can help us out there?
spk14: I'm going to be a little reticent to go past what I've said, but as you would imagine, the peak weeks and back to school are significantly higher in the range of an average week in the quarter. They'll be anywhere from 50% to 60% higher. And so when you move two or three of those weeks, it can be meaningful. And 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, and when it doesn't come in, it falls through the opposite way on the EBIT line. So, yeah, it's meaningful, and we look forward to seeing it in Q3 and talking about it when we speak again in November.
spk10: Got it. And then on the comp, on a three-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 three-year comp is embedded in the back half?
spk14: Yeah, so if we go back to full year results on the three-year comp, we're at 36, and for Q2, we were 54, right? So you're right. The trend is there, and you're putting your finger on the right trend. I haven't actually done the math on what that three-year comp in Q3 and Q4 would be, but suffice it to say that trend continues.
spk10: Okay. And then 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? So Q3 more so than Q2, does that build into the fourth quarter, and then obviously I would think it would continue into the first half of next year as well. How do you sort of think about that?
spk14: So I'll take you back in time. When state stores went out and JCPenney closed several stores, we went to some paintings to quantify what we thought that sales effect would be, and I think we were in that average of a $30 million impact, 20 to 40, I think. And so when we witnessed that, we were in the stores at the end of August, the day that state stores close their doors. And what we saw was the consumers bouncing off the doors, but if you take the consumer experience in them and extend it into what's happening today, those consumers typically shop anywhere from three to four times a year with those retailers. And so now you have to go through one 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. So then if they shop with us multiple times a year, you have to go through that cycle. So 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. And 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. So when you combine those two things together and compare and contrast that to what we saw with Stage and JCPenney's pullback, it extended it anywhere from three to six 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. And Jared?
spk03: Yeah, that's correct, Mike. Certainly as the inventory got depleted and a lot of these competitors that had lost distribution, we saw the run rate improve in the markets where a competitor lost distribution. As a reminder, as we've said this before, as all of the distribution changes have occurred, more than half of our and the types of products and brands that we carry. And almost three-quarters of our stores may have one or zero. So 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 that we can really take advantage of in the back half.
spk10: Okay, great. Appreciate that, caller. Thanks, and good luck. Thank you.
spk00: Our next question comes from the line of John Lawrence with The Benchmark Company. Please proceed with your question.
spk06: 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 come in there, please?
spk03: 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-focused category-based, but wear apparel team sports, as an example, and get more focused on each gender within our business. So as a result of that work, that change of the entire organization, again, and all of our support teams, the women's and the kids' business. So, you know, the year-over-year compares obviously have lots of noise in them, but I'm very, very excited based off the results compared back to fiscal 20 that women's was our fastest-growing area, again, in those upper 70s, followed by kids into those 60s. So really, really incredible. You know, we're obviously growing the men's business as well at this time. super, super excited about what we're seeing in the women's and kids' business space about the change of focus.
spk06: Great. Thanks for that. And the last question for me. Did you see any correlation across the regions with differentiating with different gas prices? And when you saw that little spike down in gas prices, did it have any impact on the business?
spk14: Thanks. 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 of 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 or, Bill, I know you've got some actual data there.
spk05: Yeah, so 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. And then also just cutting back other discretionary spending outside of retail. But as a reminder, customers tend to spend more back-to-school They don't have any plans to cut back spending for holidays, and we have very few customers trading now. Thank you, Bill.
spk02: Great. Thanks, guys. Congrats. Thank you.
spk00: Our final question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.
spk12: Well, all my questions were answered, so thank you very much. Thank you, Sam. We appreciate it.
spk00: I would now like to turn the floor back over to management for closing comments.
spk14: Thank you. We appreciate everyone's time and attention today. We're very proud of our results. We look forward to reporting Q3. And, again, thank you to all our teammates who make all this possible. Thank you.
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