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spk06: Greetings, and welcome to the Hibbett, Inc.' 's fourth quarter fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode. The 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. I would now like to turn the call over to Gavin Bell, Vice President of Investor Relations and Treasury. Thank you. You may begin.
spk14: Thank you and good morning. Please note that we have prepared a slide deck that we'll refer to during our prepared remarks. The slide deck is available on Hibbett.com via the investor relations link found at the bottom of the homepage or at investors.hibbett.com and under the news and events section. These materials may help you follow along with our discussion this morning. Before we begin, I'd like to remind everyone that some of the management 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 two of the earnings presentation and the company's annual report on Form 10-K. and in other filings with the Securities and Exchange Commission. We refer you to those sources for more information. Also, to the extent non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website. Lastly, I'd like to point out that management's remarks during the conference call were based on information and understandings believed accurate as of today's date. Because of the time-sensitive nature of this information, it's the policy of Hibbett, Inc. to limit the archive replay of this conference call to a period of 30 days. The participants on this call are Mike Longo, President and Chief Executive Officer, Jared Briskin, Executive Vice President of Merchandising, Bob Voelke, Senior Vice President and Chief Financial Officer, Bill Quinn, Senior Vice President of Marketing and Digital, and Ben Knighton, Senior Vice President of Operations. I'll now turn the call over to Mike Longo.
spk02: Good morning and welcome to the Hibbett CityGear Q4 Earnings Call. For those of you following along on the slides, I'm on the slide three entitled Results. Before we get started, I would note that we've used FY20 calendar 2019 as a basis of comparison for some time now because of the effects of the pandemic stimulus and all the other effects that you already know. Now that we've experienced a relatively normal seasonality last year, this quarter will be the last time we need to make these types of comparisons. Q4 was a strong performance with a comp sales increase of 15.5% versus last year and an almost 40% increase versus FY20. Operating margin for the quarter was 11.1% and diluted earnings per share was $2.91, an increase of 133% last year and up eightfold versus FY20. These results came from strong demand for popular footwear brands and a recovery in inventory levels. Despite that, these results did not meet our high expectations for ourselves and fell short of our guidance. We are going to address that particular issue through the course of this call. But first, some history around the results. So I'm moving on to slide four entitled history. The last four years, as you well know, have been eventful for all of us, and Hibbett in particular. And while nobody needs a history lesson, it is instructive to review it through the Hibbett point of view. By the end of FY20, Hibbett was substantially complete with the transformation from a sporting goods retailer to a fashion retailer, a retailer that was squarely focused on a narrower, well-defined customer base in underserved markets selling athletically-inspired footwear and apparel. In FY21, of course, the pandemic struck and changed everything. Tibbett made some good decisions on how to navigate through the crisis, and those decisions drove the business higher, much higher. In FY22, the reopening of the economy, coupled with stimulus and market disruptions, drove us another leg higher. And last year, we dealt with the aftermath of the supply chain crisis and its uneven effects. including inventory shortages. Since FY20, we have rebased the business at a higher level with sales 50% and higher, gross margin percentage 300 basis points higher, non-GAAP EBIT dollars three times higher, and non-GAAP earnings per share four times higher. Last year, we were able to consolidate those gains and produce sales of $1.7 billion and earnings per share of $9.62. We achieved that by focusing on our three competitive advantages. And you're by now very familiar with them, but I'll say them again. Superior customer service, a compelling assortment of hard-to-access product, and a best-in-class omnichannel experience. It was our investment in these advantages and our strategy that drove our results. But none of this is inexpensive. With these investments came incremental cost. especially regarding managing in a chaotic environment. Now that we're operating in a somewhat more normal environment, it's time to address our SG&A and some areas where costs have increased. As a result, we are conducting a systematic review of our operating expense structure with a particular focus on SG&A. In other words, we're committed to improving operating cost leverage while still investing in the business model. These investments are outlined in somewhat greater detail in slide five entitled Strategic Imperatives. Our focus within that is to drive effectiveness and efficiency of the existing franchise and to drive growth in the future. And of course, the four pillars, category offense, increasing traffic, improving conversion, and leveraging our investments are our strategic imperatives. So in summary, Before we move on, I would like to thank all of our teammates in the stores, the distribution centers, and the store support center. They're the ones who make all of these results possible. I'll now turn the call over to Jared.
spk11: Thank you, Mike. Good morning. Please turn to slide six, titled Merchandising. Our category offense continued to yield strong results in the fourth quarter. Intense focus on toe-to-head merchandising while leading with sneakers through the lens of men's, women's, kids', and city gear is proven successful and we see additional opportunities to optimize our business as we move into the future. We continue to believe that for the fourth quarter, due to the impacts of COVID and stimulus, the comparative fiscal 2020 calendar 2019 is still irrelevant. Beginning in fiscal 24, as Mike mentioned, we will no longer provide detailed commentary regarding the comparison to fiscal 2020. From either of your category standpoint, when compared to fiscal 22 calendar 2021, we saw strong results in footwear and team sports. This was offset by a weak performance across apparel. Footwear was our strongest category during the quarter, growing in the mid-40s. Footwear sales were driven by strong launches as well as strength across our lifestyle, basketball, and casual categories. Team sports was driven by strong results in cleats and cold weather accessories. Apparel was negative mid-teens in the quarter, up against significant increases in the prior year, and a more challenging and promotional apparel environment. When compared to fiscal 20, calendar 2019, we saw positive comp results across all merchandise categories. Footwear drew the largest increase, comping in the mid-50s. Apparel was up in the mid-20s, and team sports was up mid-single digits. Specific to footwear and apparel, men's, women's, and kids all showed significant growth when compared to fiscal 22, calendar 2021. Kids was our standout area, growing in the high 20s. Men's and women's both grew in the mid-teens. When compared to fiscal 20, calendar 19, women's grew in the mid-70s, kids in the low 50s, and men's in the mid-30s. Investments in leadership, process improvement, and technology in our supply chain have helped to mitigate challenges in product delivery and flow of inventory. These investments have increased our capacity and speed to market enabling our strong inventory position and sales results. As a reminder, the prior year was significantly impacted by supply chain delays, primarily in footwear. Our in stock position of key footwear franchises and launch products drove our strong footwear results. Due to the supply chain disruption in fiscal 2022, we believe the most meaningful comparison regarding inventory is comparing to fiscal 20 calendar 19. When compared to fiscal 20 calendar 19, inventory levels were up 46% at the end of the quarter, roughly in balance with our 40.9% sales gain. This increase is largely due to price inflation as well as positive impacts on our mix of inventory and footwear. When compared to fiscal 2020 calendar 2019, unit inventory levels were plus 4%. Our focus over the last three years was to secure enough of the most relevant inventory to provide strong consumer experience both in-store and online. The chaos of the last three years certainly was challenging, but our team delivered, and our results have been outstanding. As we look forward to fiscal 24, we believe that the supply chain will be more predictable, allowing more precision regarding delivery timing and inventory levels. Year-over-year inventory compares will be volatile due to the challenges in the supply chain during fiscal 2023. Our expectations are for year-over-year inventory growth in the first half of the year and year-over-year declines in the second half of the year. I will now hand the call over to Bob to cover our financial results.
spk07: Thank you, Jared. Please refer to slide 7 entitled Q4 Fiscal 23 Results. Our results are reported on a consolidated basis that includes both the Hibbett and City Gear brands. Total net sales for the fourth quarter of fiscal 23 increased 19.6% to $458.3 million from $383.3 million in the fourth quarter of fiscal 22. Overall comp sales increased 15.5% versus the prior year fourth quarter. In comparison to the fourth quarter of fiscal 2020, the most relevant period prior to the pandemic, comp sales have increased by 39.6%. Brick and mortar comp sales were up 14.3% compared to the prior year's fourth quarter and have increased by 32.6% versus the fourth quarter of fiscal 20. E-commerce sales have increased 21.4% compared to the last year's fourth quarter and have increased by 79.8% on a three-year stack. E-commerce sales accounted for 17.4% of net sales during the current quarter compared to 17.1% in the fourth quarter of last year and 14.2% in the fourth quarter of fiscal 20. Gross margin was 35.2% of net sales for the fourth quarter of fiscal 23, compared with 35.1% in the fourth quarter of last year. This slight increase was driven by approximately 30 basis points of store occupancy leverage, approximately 25 basis points resulting from lower freight costs, and approximately 15 basis points of deficiency gains in our logistics operations. These favorable factors were primarily offset by a decline in average product margin of approximately 60 basis points due to increased promotional activity. We're operating selling administrative expenses for 21.6% of net sales for the fourth quarter of fiscal 23 compared to 26.4% of net sales for the fourth quarter of last year. This approximate 470 basis point decrease is primarily a result of leverage from the higher current quarter revenue. Although wage inflation continues to be a headwind, other spend categories that were favorable to the prior year as a percent of sales included incentive compensation, professional fees, advertising, and repairs and maintenance. Appreciation and amortization in the fourth quarter of fiscal 23 increased approximately $1 million in comparison to the same period last year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. We generated $50.7 million of operating income, or 11.1% of net sales in the fourth quarter, compared to 23.1 million, or 6% of net sales in the prior year's fourth quarter. The alluded earnings per share were $2.91 for this year's fourth quarter, compared to $1.25 per share in the fourth quarter of fiscal 22. We did not have any non-GAAP items in either period. Next, I will discuss the fiscal full year 23 results. I'm now referencing slide eight, so please move forward to that page. Thank you. Little net sales for fiscal 2023 were $1.71 billion, compared to $1.69 billion in fiscal 2022, an increase of 1%. overall comp sales decreased 2.2% versus last year. In comparison to fiscal 2020, comp sales have increased by nearly 41%. Brick and mortar comp sales decreased 4.9% for the year, but are up 31.5% compared to fiscal 20. E-commerce sales increased 14% compared to fiscal 22 and have increased by 115.5% over a three-year period. E-commerce sales accounted for 15.6% of net sales in fiscal 23, compared to 13.8% in the prior year and 10.4% versus fiscal 20. Gross margin was 35.2% of net sales for the full year fiscal 23, compared to 38.2% in fiscal 22. The approximate 300 basis point decline was primarily due to the following factors. Lower average product margin were approximately 195 basis points due to promotional activity, primarily in apparel, and a higher mix of e-commerce sales, which carry a lower margin than brick and mortar sales. Increased cost This is driven by higher fuel costs and increase in our e-commerce mix. The leverage of store occupancy costs approximately 65 basis points, mainly due to higher utility and store security costs. These unfavorable impacts to gross margin were partially offset by expense leverage of approximately 25 basis points in our logistics operations. SGN expenses were 22.8% in fiscal 2023, This approximate 20 basis point increase is primarily the result of de-leveraging wages and employee benefits. Appreciation and amortization in fiscal 23 increased approximately 8.1 million in comparison to last year, reflecting our ongoing commitment to invest in organic growth opportunities and infrastructure improvement projects. We generated $168.4 million of operating income, or 9.9% of net sales in fiscal 23, compared to $228.2 million or 13.5% of net sales in fiscal 22. Included earnings per share were $9.62 for fiscal 23 compared to $11.19 per share in fiscal 22. We did not have any non-GAAP items in either fiscal year. Now a few comments on the balance sheet and cash flow. We ended the fourth quarter of fiscal 23 with $16 million available cash and cash equivalents on our unaudited condensed consolidated balance sheet and $36.3 million of debt outstanding. Effective under 28-2023, we replaced our former $125 million unsecured credit facility with a new $160 million unsecured credit facility. This new credit facility increases our financial strength and provides us with greater operational flexibility. Net inventory at the end of fiscal 23 was $420.8 million, a 90.2% increase from the end of fiscal 22. Much of this dollar increase have grown at a much slower pace. We also had a higher accounts payable balance at year end compared to previous periods due to the timing of inventory receipts throughout the fourth quarter. Capital expenditures during the fourth quarter were $15.4 million, bringing the full year total to $62.8 million. Capital spend consists primarily of store development, technology, and infrastructure projects. For the year, our store count increased by a net of 37 units, comprised of 43 new locations and six closures. Our total store count stands at 1,133 as of the end of fiscal 23. During the fourth quarter, we did not repurchase shares as we focused our cash flow on investments in inventory and capital expenditures. On a full year basis, we bought back approximately 797,000 shares under our share repurchase plan at a total cost of 38.5 million. We paid a recurring quarterly dividend during the fourth quarter in the amount of 25 cents for eligible common share for a total outflow of 3.2 million. For fiscal 23, dividend payments amounted to 12.9 million. I'll now turn the call over to Bill Quinn to discuss our customer.
spk05: Thank you, Bob. Despite pervasive inflationary impacts, our customers continue to increase their shopping with us during the fourth quarter. Loyalty sales increased double digits, driven by double-digit increases in shoppers and average unit retail. We see both increased customers and higher AUR as structural in nature, keeping our business rebaseline well above FY20. In Q4, we continue to see increased sales from new shoppers, and most notably, large growth from our existing customers. We had more existing customers shop, they spent more per visit, and they increased their visits. We believe these results were driven by our continued investments in the customer experience. Regarding this upcoming year, our consumer research indicates that our customers, like most U.S. consumers, are concerned about various financial aspects of life, most notably food and utility costs. When it comes to discretionary spend, we anticipate that customers will make reductions in entertainment, travel, and eating out before reducing retail expenditures. Also, our research indicates that customers likely plan to spend the same or more as last year on footwear and specific key brands. Turning to our e-commerce business, In Q4, sales increased 21.4% versus last year and 79.8% versus FY20. These results were driven by increases in traffic, average order value, and investments in our digital customer experience. Last year and this year, our focus has been and will continue to be improving the digital customer experience by reducing friction points on two dimensions. One, improving the pre-purchased experience, and two, improving the post-purchase experience improvements to the pre-purchase experience include making it easier to find and discover products and making it easy to purchase our post-purchase efforts remain focused on improving fulfillment speed and enhancing customer service capability to resolve issues quickly as well as intercepting and preventing issues from occurring i will now turn the call to ben to discuss our store experience
spk12: focused on developing and implementing tools to drive that culture. This includes investing heavily in creating a true mobile experience for both our consumers and our associates. Our store-level infrastructure and systems required an overhaul to go mobile. This included ensuring every store had high-speed internet, Wi-Fi, multiple mobile devices, and the apps required to deliver on that experience. The investments were significant, but were also required to achieve increased sales while lowering operating costs over time. The mobile environment enables process improvements to both customer-facing and non-facing tasks. We've re-engineered the way we operate. This includes not only what tasks are done, but also how they're completed. Most importantly, we've redefined how we interact with the consumer on the sales floor. The things Bill mentioned about driving the e-commerce business also hold true for the in-store consumer. The investments we made allow associates to leverage the inventory process supply chain. They also improve the conversion rate, which lead to an improved consumer experience. This year is a payoff year. Much of the costs were front-loaded. Now we can begin to leverage these investments. The productivity gains will allow us to take costs out of our model while improving our best-in-class omni-channel experience. I will now turn the call back to Bob to discuss our guidance.
spk07: Thanks, Ben. The business outlook for fiscal are a number of challenges to consider, but also a handful of tailwinds that will help to mitigate these headwinds, as noted on slide 11. Inflation has a broad impact not only on consumer sentiment and spending patterns, but also contributes to operating cost increases in the form of wage pressure and higher prices paid for goods and services. We expect the promotional environment to be more significant than in fiscal 23, and we'll be dealing with higher costs of borrowing and some intermittent lingering supply chain disruptions throughout the year. On the flip side, low unemployment and higher wages provides consumers with more purchasing power. We feel our inventory assortment has become much healthier in the past several months, and the unique and hard-to-find products we offer is expected to attract more customers to our stores and website. In addition to investments in store development, the customer experience and to back office infrastructure will begin to yield operating cost leverage as we move forward. Slide 12 summarizes fiscal 2024 guidance. Total net sales for the full year, including the impact of the 53rd week, are anticipated to increase mid-single digits compared to our fiscal 2023 results. The 53rd week is expected to be approximately 1% of full year sales. We anticipate full year sales will break down as follows. Approximately 26% in the first quarter, approximately 22% in the second quarter, approximately 24% in the third quarter, and approximately 28% in the fourth quarter. Comparable sales are expected to grow in the low single-digit range for the full year. Full-year brick and mortar comparable sales are expected to grow in the low single-digit range, while full-year e-commerce revenue growth is anticipated in the high single-digit range. It is anticipated that total comparable sales in the first half of the year will increase in the low to mid single-digit range and will be flat to up low single digits in the second half of the year. Net new store growth is expected to be in the range of 40 to 50 stores. We anticipate that fiscal 2024 will be more promotional than the prior year. In addition, a higher mix of e-commerce sales, intermittent supply chain challenges, and inflationary pressures on some elements of store occupancy costs will result in anticipated gross margin decline for approximately 20 to 30 basis points compared to fiscal 23 results. The projected full year gross margin rate of 34.9 to 35.0% as a percentage of net sales exceeds pre-pandemic levels. SG&A's percent of net sales is expected to increase by approximately 40 to 50 basis points in comparison to fiscal 23 results due to new store growth, wage inflation, an increase in incentive compensation costs, and higher data and transaction processing fees. The expected full-year SG&A expense range of 23.2% to 23.3% of net sales is favorable to pre-pandemic levels as well. SG&A as a percent of sales will vary depending on the quarter as higher sales volumes allow us to more effectively leverage the fixed cost components of SG&A. Operating margin for the year is expected to be in the range of 9% to 9.3% of net sales, also remaining above pre-pandemic levels. We do not expect operating margin as a percent of sales to vary significantly between the first half and second half of the year. And looking more specifically at the first half of the year, We anticipate first quarter operating profit percentage will be similar to the first quarter of fiscal 23, while the second quarter will be a more challenging comparison to the prior year. Additional operating margin guidance for the third and fourth quarter will be provided at a later date. It is anticipated that there will be debt outstanding on our line of credit for a majority of the year. We believe borrowings will be more significant in the first half of the year as current inventory levels are not expected to decline significantly until after the back to school season. Interest expense for the full year is projected to be approximately 25 to 30 basis points of net sales. Diluted earnings per share anticipated to be in the range of $9.50 to $10 using an estimated full year tax rate of 24% and an estimated weighted average diluted share count of 12.7 million shares. capital expenditures in the range of $60 to $70 million, with the largest allocation focused on new store growth, remodels, relocations, new store signage, and improving our customer experience. Our capital allocation strategy continues to include share repurchases and recurring dividends in addition to the capital expenditures noted above. That concludes our prepared remarks. Operator, please open the line for questions.
spk06: Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The 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 your question. Our first questions come from the line of Sam Hoser with William Strader. Please proceed with your question.
spk09: Thanks for taking my questions. Just a little, I have a couple, just a little color on the inventory. It sounds to me, just based on what you said, Jared, it sounds like the apparel inventory is, are you heavier in apparel right now than in footwear, you know, relative to need? Is that accurate?
spk11: Yes, Sam. I think there's obviously a little more of a Struggle in apparel right now, consumer demand for apparel in the fourth quarter. You know, we certainly don't see that necessarily changing anytime soon based off the level of inventory in the market and the promotional environment. So, you know, we certainly have some things that, you know, to work through, but the biggest impact of our inventory is certainly the price inflation. And we want to ensure that we have an appropriate level of units to provide the best consumer experience that we can. So that's where we sit today. The team is certainly focused on inventory productivity as the supply chain becomes hopefully more normalized and more predictable. But apparel is our toughest area at the moment with regard to liquidations of inventory.
spk09: And just to follow up on that, you mentioned the supply chain. The supply chain in 2020, I mean, I understand there's going to be ongoing issues with the supply chain potentially in fiscal 24, but isn't it, I mean, given all the craziness that happened last year, isn't it probably still going to end up being a tailwind rather than a headwind?
spk11: Well, I think that this year, as I mentioned, I think the predictability and the normalizing is something that, you know, our team is really looking forward to. The last couple of years with the chaos, you know, planning inventory levels, tracking inventory, ensuring we had enough units for a positive customer experience was really, really difficult. As we go forward, we can be way more precise based on that predictability that will give the team a little bit more of a luxury to make decisions in a more timely manner than we have in the past. So, yeah, I would agree with you. We would expect that to be a tailwind as we move forward.
spk09: And there's 2 more things number 1, you mentioned, you know, gave sort of specific year over year numbers on. On the various merchandise categories, but you didn't, you sort of get more vague 1 on team sports year over year. I wonder if you could just give us a more specific. what the change year over year was in the fourth quarter?
spk11: Yeah, it was up in the mid-single-digit area, largely driven by cleats, and then a positive impact around accessories for cold weather. Some of that, frankly, is due to some chaos in some of the cold weather accessory inventory in the year prior from a compare standpoint, but it was in the mid-single-digit area.
spk09: Okay, and then lastly, in the gross margin, and I'm not sure who this one's for, in the gross margin, are you seeing um some of your larger accounts um basically cutting your margins like charging you more or cutting a discount or anything like that and is that also impact is that impacting the margins that you're seeing um or the the gross margin guidance i guess yeah there's some impact that we started experiencing last year but i would say the bigger impact to
spk11: The gross at this point is certainly the promotional environment and some of our liquidation efforts to ensure that our inventory remains healthy. As well as with the marketplace, as you know, that the marketplace has been extremely promotional. So, you know, certainly in categories that have pressure on them, we want to ensure that we're competitive.
spk09: Okay, and then last, I'm sorry. Bob, in the first quarter, you sort of gave a little direction. I'm assuming you're expecting an earnings, an EPS increase in Q1 and then a decrease in Q2. Is that sort of the way you think about it? As specific as you want to get would be greatly helpful.
spk07: Yeah, I guess I'm not quite ready to be that specific, Sam, but again, thanks for the question. I mean, I think what we're looking at here is, again, as we kind of, feel like seasonality is starting to more normalized. Again, I think you go back and you look at previous years, excluding kind of a couple pandemic years. And we did see that, you know, first quarter is a fairly profitable quarter for us. So we expect that we'll see, you know, a little bit of returning to that normalized. That's why I said our guidance is from an EBIT percentage, you definitely will see something fairly similar to what we saw in Q1 of last year. But we do have a little bit, you know, obviously additional interest that throughout the year.
spk09: Thanks very much. Good luck.
spk06: Thank you. Thank you. Our next question has come from the line of Alex Perry with Bank of America. Please proceed with your question.
spk00: Hi.
spk08: Thanks for taking my questions. Just first, Jared, I think you just said marketplace extremely promotional. Is that all apparel? Is there any buildup of footwear inventory? You know, are there pockets where footwear is requiring discounts? And then, you know, maybe, Bob, on the gross margin guidance for the year, is the expectation that 1H declines will be more significant than 2H as you work through that sort of elevated apparel inventory?
spk11: Yes, the first part of the question, Alex. Yeah, I mean, the marketplace obviously has been very promotional around apparel, but really it's been promotional around everything. There's certainly been pressure on, you know, secondary and tertiary brands and franchises and footwear, and we would expect that to continue throughout the year and the marketplace gets to a little bit more balanced inventory levels.
spk07: As far as the margin is concerned, I don't think we're seeing a huge difference between the first half and the second half of the year. throughout the year.
spk08: Great. So it's fair to say that the sort of launch, you know, the high-heat footwear franchises from like a Nike or some of your largest vendors aren't requiring a lot of markdowns. It's more sort of the secondary, tertiary brands. Is that fair?
spk11: That's fair, yeah. I mean, the primary focus of our assortment is seeing Excellent throughput, phenomenal liquidations, and we would expect that to continue. But there is some pressure on some secondary and some of the tertiary investments that, you know, we'll need to work through.
spk08: Yeah. And then my last question is, can you just maybe talk about how the launch calendar for the first quarter stacks up versus last year? Or I guess another way of putting it, I think you were still dealing with some inventory issues on the footwear side through the later part of March last year. Is that sort of correct? So how should we think about, you know, will 1Q be driven by the same sort of unevenness of the inventory compares that 4Q is driven by? That's correct.
spk11: I mean, last year's inventory levels, you know, where we began a year from a first quarter standpoint was not acceptable to deliver the experience that we look to deliver to our consumers. That inventory really did not build when we started getting into the latter part of the quarter, so that's certainly a part of this year's comparison, and the comparison in inventory will be significantly heavier to the prior year. As we get throughout the balance of the year, that will level off as we get back to normal with our expectation of declines in inventory in the back half of the year. Perfect. That's really helpful. Best of luck going forward. Thank you.
spk06: Thank you. Our next questions come from the line of Justin Cleven with Baird. Please proceed with your questions.
spk04: Good morning, everyone. Thanks for taking the questions. Just to follow up on the gross margin there, Bob, you're expecting more promotions, higher digital mix, talk about occupancy plus inflation, but you're only forecasting gross margin down 20 to 30 basis points. Two questions there. What's embedded from a product margin perspective in that guide? And then what are some of the offsetting levers you see in gross margin this year to only allow the margins to dip 20 to 30 basis points?
spk07: Yeah. So, you know, obviously, as Jared touched on, I think, you know, the promotional environment is clearly the biggest, you know, headwind against us this year as we've worked through some of the product categories. The flip side is, you know, we are still looking at, you know, pretty significant sales growth year over year. And so we're probably going to get, we expect, we anticipate that we'll get some leverage out of store occupancy. And also we peaked in freight rates, you know, the middle of last year. And we've continued to see, you know, some additional lowering of those costs, more efficiency within our own operations. So we think there's some, you know, some good news in the freight component as well. And so I think... Frank Cox.
spk04: Got it. Okay. That's very helpful color. And then just a bigger picture question on EBIT margins. Mike, you talked about this focus on delivering operating leverage. I guess I'm just curious, you know, if I go back a couple of years ago, you had an investor meeting and you talked about 15 to 25 basis points of annual EBIT expansion. So, I mean, do you think the business has reached an EBIT margin level that is sustainable and and perhaps you can grow off this base after this fiscal year, or do you think operating margins are going to continue to drift lower here?
spk02: Thank you. Yeah, we did address that in the investor day. We do expect to continue to grow EBIT, but as you know, it's not linear. And so we believe that we have reached a new rebase in that 9% range and we grow from here. We'll continue to grow it towards 10%. So, Bob, any additional color on that?
spk07: Yeah, again, I think there's a lot of factors that have played into this over the last two to three years that obviously we would not have been able to foresee as we did our, you know, as an investor kind of conversation a couple years back. I agree with Mike. You know, we are making a lot of investments in the business over the last year, and with that came some additional costs of operations. Inflation has clearly been impactful across a number of different expense categories. Also, just kind of returning to more normalized, you know, business operations where people are traveling a little bit more and getting out into events and meeting with the vendors. So, a lot of that stuff has kind of come to roost now over the last 12 months. We think we're going to start, again, building back toward a higher even percentage as we move blip. But again, the commitment we're making is to continue to evaluate our cost structure and move that number up slowly toward, as Mike said, into that 10% range again.
spk04: Got it. Okay. That's great to hear. And then just last question, Bob, do you have any estimation on just what you're thinking about free cash flow this year?
spk07: Again, I think, you know, we still have plenty of cash necessary to as we see the opportunity in the marketplace, continuing, as I said, to invest $60 to $70 million in CapEx. With our sales growth, with a declining inventory in the back half of the year, I mean, I feel pretty comfortable with our cash flow position as the year progresses.
spk04: Great. All right, guys. Thanks so much, and best of luck. Thank you.
spk06: Thanks. Thank you. Our next questions come from the line of Mitch Cummings with Seaport Research. Please proceed with your question.
spk10: Yes, thanks for taking my questions. Mike, I guess my first question is for you. Using your prepared remarks, you talked about falling short of plan in the quarter. I just want to make sure I am totally clear as to kind of where and why you had that shortfall. It looks like it's more on the sales side than the margin side. And then kind of the split between footwear and apparel. I know there's been a lot of talk on this call about how footwear had a good quarter, at least the year increase with strong apparel was down. But I imagine that was sort of expected as well. So I'm not sure that was, you know, apparel was worse than expected and then footwear was sort of in line, but maybe just a little bit more color on kind of where and why you misplanned the quarter.
spk02: Thank you. Footwear, we were very pleased with the performance. We continue to see good sell-throughs. High heat is high heat. Nothing's really changed with that. They may be fractionally lower sell-throughs, but still, the compelling product assortment works. Apparel was a bit of a disappointment, not only in terms of units, but in terms of the price and the gross of it. I think Jared did a good job of going through that a couple of times, but he's going to follow me up in just a moment. In the terms of the total revenue, what we have modeled, as everyone knows, and we talked about the higher AUR, in a somewhat higher transaction number. So the shortfall really was in the transactions number.
spk11: So, Jared, do you want to? Yeah, that's exactly right. I mean, the shortfall came in the transaction number, and we believe primarily attributed to the apparel business, which was worse than our expectations. Certainly, we're not expecting a robust apparel business, but it had a lot more pressure on it. Certainly, as we talked earlier, the market was incredibly promotional. you know, consumers were spending their money in other categories with us. So I think that added some pressure to the apparel business, especially when we compare it to the prior year where there wasn't much inventory available in footwear.
spk10: Okay, that's helpful. And then second question, I know you mentioned that going forward you're going to stop anchoring against 2020, but I hope you might indulge my question anyways because when i look at the comp guide on on 24 low singles that implies a four year of like low 40s and then when i kind of run your quarterly splits in terms of kind of percentage of sales by quarter i kind of back into at least uh kind of pencil into like a key one cop on a four year of like, you know, in the low thirties and then the balance of the year, kind of in the mid forties, that's a, that's a pretty big difference. Um, and I was hoping you might be able to address that a little bit.
spk07: Yeah. So I think, you know, again, every year has got a little bit of a different, you know, unique cadence than we, over the last three to four years. So last year, again, as we've touched on a couple of times, the inventory was not in a great position as we entered the first quarter. So as you think about tax season being one of our big kind of seasonal peaks, we didn't have a great assortment for the customer. We didn't do a great job of meeting the needs. So we feel this first quarter is going to be stronger. And I do think that that's why we're kind of looking at the mix of sales being a little bit heavier here as far as the first quarter is concerned. So I think that does give you a little bit more ammunition as far as leverage in the first quarter. And you will see a little bit of lowering as the year goes on. Again, fourth quarter is a big year, or I mean a big quarter for us as well. But I also want to remind everyone the 53rd week is in that fourth quarter this year. So that's going to give a little bit of lift to the fourth quarter, but we do not see that 53rd week as being a very accretive week for us. It's a relatively low sales week. We're considering closer to a roughly break-even type of scenario. So again, I think this year than last year, clearly.
spk10: Okay. And then lastly, you know, a lot of vendors have already reported their Q4 given their December year end, or not all of them on a December year end, but a lot. Some of them have talked about having too much inventory and kind of working through that through the first half of the year, a lot of that going kind of through their direct channels. I'm wondering if you're seeing any impact from vendor discounting. And a lot of them have talked about how that should improve in the back half of the year as they get their inventory kind of right-sized by the back half. So I guess maybe just a two-part question. One, are you seeing much competition from the vans being on sale direct? And I guess if so, does that actually kind of ease up in your plans as you kind of go through the year?
spk11: Yeah, so the vendor direct pricing cadence, certainly during the holidays, was aggressive, but so were the partner pricing promotions. So it really was a marketplace overall that was heavily dependent on promotions and very active, again, especially in apparel. So overall, there's a significant impact with regard to the promotional environment, certainly the The direct businesses are having an impact on that, and my expectation would be as inventory does start to get a little bit more cleaned up and level out across the marketplace, reduced promotions, not just from the direct channels, but also from our competitors, can hopefully put a little less pressure on the apparel business in particular.
spk10: All right. That's helpful. Thanks, and good luck.
spk11: Thank you.
spk06: Thank you. Thank you. Our next question has come from the line of Christine Fernandez with Telsey Advisory Group. Please proceed with your question.
spk01: Hey, good morning and thank you for taking my question. I have a few. The first one is I wanted to see if you could talk about how you approach the guidance for this fiscal year different than last year in light of not being able to meet your targets. Do you feel like you have enough fruition or conservatism in the outlook, you know, in this case
spk07: consumer environment remains as it is today through the through the rest of the year yeah i mean you know i think we go into each period with guidance thinking that we've got a good answer you know we're obviously not purposely targeting targeting being overly aggressive or overly conservative i think as we saw how the fourth quarter played out as we started to look at what we were seeing in the marketplace from some of the other companies that were putting out results and some of the commentary we made. Clearly, we felt that there were some things that we needed to be a little bit more careful of pushing too far beyond the envelope, so to speak. So, again, we still think that the guidance we're giving is fair and reasonable. I don't want to you know, say it's going to be overly aggressive on one end or like sandbagging on the other end. Again, we feel this is a reasonable approach for our business based on what we're seeing for fiscal 24. So obviously a lot of assumptions into those numbers, still some level of volatility, especially when it comes to consumer behavior and pricing and inflation, et cetera. So again, this is what we think is a reasonable approach for now. Obviously, if circumstances change, we will continue to update and modify that guidance as necessary.
spk01: Thank you. And pushing a little bit more on the low single-digit comp outlook, how are you thinking about that level of growth in relation to industry growth? I also want to touch on market share gains. Are you seeing those market share gains from competitors who've left the market? Maybe you can parse out that outlook for the year in more detail.
spk11: I think what we've seen so far in estimates is a lower growth rate overall for the next three years than certainly what we're guiding to for this year. And obviously what we've seen over the last four years since pre-pandemic has been a very significant increase in our business that is outsized compared to the market. So we certainly believe we picked up some share. Lots of investments in the business model to continue to pick up share. But again, based off the consumer environment and all the pressure points that are out there and inflation, we want to ensure that we don't get too far over our skis with regard to expectations.
spk01: Okay, thanks. And then the last question I had was, I mean, you mentioned that the higher e-commerce sales are headwind to the gross margin. Can you update us on what's the difference in profitability between those two channels, between the store sales and the online sales?
spk05: Yeah, I can take that. So this is Phil. We're very pleased with the level of profitability of our e-commerce business. Profit grew in Q4 for our e-commerce business. A few things to mention, actually quite a few things to mention. So our product margin expanded in Q4. We managed our advertising very well. We leveraged our fixed costs. And as Bob mentioned earlier, fulfillment costs were reduced, and that was largely a function of AUR going up. So our freight expense was lower as a percent of sales. But overall, e-commerce will not be a drag on the company's EBIT.
spk07: So, Christian, just the margin level that e-commerce is going to have a lower overall gross margin level, yes, overall gross margin result than the brick and mortar because of the fulfillment component. So even though we're getting better and more efficient at fulfilling the e-commerce orders, we do believe that there's a little bit of headwind, at least in terms of the mix change on the gross margin level. Again, as Bill touched on,
spk01: Thank you. That's very helpful.
spk06: Thank you. Thank you. Our next questions come from the line of John Lawrence with Benchmark Company. Please proceed with your questions.
spk03: All right. Thanks, guys. When you've been in the stores the last few weeks, and Jared, you can help me here, looking at the promos, and one manufacturer, I guess for a period of time, was 50% off across the board anything you buy. Some other guys, I guess your largest guys were just picking select shoes and putting them off at $39.99 or with very limited skus. Is there anything changing in promo strategy and is that across the board or just select stores?
spk11: Well, there's definitely some changes with regards to the promo strategy. I mean, first and foremost, we will have promos now where if you go back a few years, there weren't any based off what was going on during the pandemic and post-pandemic. But our strategies changed some. We're looking at shorter periods, deeper marks to try and reflect the way the consumers are behaving now. And all these things are things that we're testing to assure that the model we use for promotions gives us the right level of margin and the right level of liquidation as we move forward. But there are absolutely changes with regard to our promotional strategy that we're currently executing.
spk03: Great, thanks. And lastly, just how much has the customer been able to split up the payments for payments for a period of time? Has that helped sales at all to reach some of those customers?
spk05: Yeah, this is Bill. I'll take that question. We haven't seen a you know, a major increase in that. Certainly, though, that's a service we offer both in stores and online. You know, I spoke earlier about customers being concerned about various financial assets, grocery, utility, but a few things to re-mention, or actually something I did, which is the concern over unemployment is lower, so that is good. Also, our customers are going to cut back in other areas before they cut back in retail, travel, entertainment, eating out. And we, our customers continue to plan to buy more footwear than last year. And also, we're confident in customer demand for our primary brands.
spk03: Great. Thanks. Congrats, guys. Good luck.
spk06: Thank you. Thank you. Our next question has come from the line of Jim Chartier with Monis, Crespi, and Hart. Please proceed with your questions.
spk13: Good morning. Thanks for taking my questions. I wanted to follow up on that in first quarter. You know, just given kind of a three-year trend in fourth quarter would kind of imply that first quarter comp should be up more like mid-teens. And, again, given the seasonality that you've talked about in the guidance, it looks like, you know, guidance applies something more like high single digits in first quarter. So just curious, you know, anything in terms of, you know, timing of launches or shifts that we should be thinking about where, you know, again, that three or four-year comp trend should be softer in first quarter.
spk11: Yeah, good morning. Yeah, we feel like we haven't modeled appropriately. I mean, you know, certainly, you know, launch calendar changes are always things, you know, that we have to deal with and look at. So, we feel, you know, reasonably confident with where we sit today and the guidance that we've given that, We understand that calendar well, and we've anticipated any potential changes.
spk07: Okay, Jim, 1 other thing I guess, Jim, 1 other thing to add to that is, you know, we've probably all seen the steps coming out from the IRS. There was. Obviously, some concern that the average refund might be a little bit lower this year. So I think again, that's also part of the factoring we looked at in the 1st quarter.
spk13: Okay, makes sense. And then on. You mentioned you're conducting a systematic review of the cost structure. I guess first, you know, when do you expect to complete that review? And then does your guidance assume any benefit from cost savings related to that this year?
spk02: It does. This is Mike. We began the process mid-Q4. We were able to achieve some of the results in late Q4. And, of course, those began the year, you know, in week one. So certainly helpful. All of the other things that we have on the table are in the plan and part of the guidance. So if we're able to find additional cost savings, we'll consider that upside from here.
spk13: Okay. And then finally, you know, any thoughts or observation on the kind of new store performance that you've kind of gotten to more of a, you know, 3% to 4% store growth? Great. How are the new stores performing?
spk11: This is Jared. Our store development team, working with our merchants and ops groups, have really done an incredible job with our new stores. Our site selection has been fantastic. We continue to focus on the underserved areas that are very, very complementary to the market. They're incremental to our vendor partners, and we've been very successful. We do plan to take up the new store openings during fiscal 24. Great. Thanks and best of luck.
spk06: Thank you. Thank you. Thank you. Our final questions will come from the line of Sam Poser with William Tritt. Please proceed with your questions.
spk09: Mike, I apologize ahead of time for ending on this note. Last year, you know, you missed guidance sort of consistently throughout the year. And so the question really is, is when we look, has there been a change in the way you're approaching full-year guidance now, you know, sort of all things being equal compared to the way you looked at it last year? I guess that's the best way to ask the question.
spk02: Well, thanks for the question. I think we've weaved that answer into our script as well as hopefully the tenor of the answers to the questions that you've asked today. Certainly, no one puts a guidance out there and expects to miss it. So our modeling and our forecasting and all the things that we believed going into the year, we continue to believe. And we're trying to hit it right down the middle of the fairway. We're not trying to be conservative. We're not trying to exaggerate. We're not trying to pump the stock price. We're trying to give you a range that we think is within reasonable estimates. When we entered Q4, we had a lot of confidence. By the end of Q4, we were going through a systematic SG&A review for a reason. It's because we wanted to make sure that we could deliver on our commitments to this year. We believe that our estimates and our guidance are reasonable. They're within a reasonable range. No one's happy about the performance. You know, we put in writing and we said, again, that we had high goals. I think you would prefer us to be someone who's attempting to attain those high goals. We'll continue that. The guidance we put forth for the future for FY24 is believable, reasonable, and something we're going to deliver on because that's our commitment.
spk09: Thank you. My question really is, the way you approach it this year versus the way you approached it last year. Are you taking sort of a more, I would say, are you taking a less optimistic, yeah, are you taking a less optimistic outlook than you did, you know, again, of all things being equal than you did a year ago? That's really the question. It's, you know, or have you approached it differently, you know, if you felt the same way you did last year or this year that you did at this time last year, I gather you probably would have guided a little more aggressively a year ago. And so I'm just trying to understand how things have changed in the way you're looking at things internally now versus this time last year.
spk02: Sure. I think we are delivering messages in a similar fashion. You would note that the range of the guidance would be lower than you would have expected, right? And so why? Because the situation has changed and the lack of clarity around the consumer has changed somewhat. So we're operating a macroeconomic environment that's a little different this year. So we are being more conservative this year.
spk09: All right. Okay. Thanks very much. Appreciate it.
spk06: Thank you. Thank you. There are no further questions at this time. I would now like to hand the call back over to Mike Longo for any closing remarks.
spk02: Thank you for everyone attending today. Thank you to the management team. Again, thank you to our teammates who make all of this possible. We look forward to sharing with you in the near future our Q1 results as we continue to invest in our business, we continue to invest and financial capital, human capital, and most importantly, the consumer experience, both online and in stores. And that's the thing that we'll continue to focus on going forward. It's the thing that delivers the results and the thing that's uppermost in our mind. So thank you again, and we look forward to speaking again soon.
spk06: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy.
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