Hibbett, Inc. (NASDAQ:HIBB) Q2 2023 Earnings Conference Call August 25, 2022 10:00 AM ET
Company Participants
Gavin Bell – Vice President of Investor Relations
Mike Longo – President and Chief Executive Officer
Bob Volke – Senior Vice President and Chief Financial Officer
Jared Briskin – Executive Vice President of Merchandising
Bill Quinn – Senior Vice President of Marketing and Digital
Ben Knighten – Senior Vice President of Operations
Conference Call Participants
Sam poser – Williams Trading
Cristina Fernandez – Telsey Advisory
Justin Kleber – Robert W. Baird
Alex Perry – Bank of America
Mitch Kummetz – Seaport Research
John Lawrence – The Benchmark Company
Operator
Greetings, and welcome to the Hibbett’s Second Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Gavin Bell, Vice President of Investor Relations. Thank you, sir. You may begin.
Gavin Bell
Good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on hibbett.com via the Investor Relations link found at the bottom of the homepage or at investors.hibbett.com and under the News & Events section. These materials may help you follow along with our discussion this morning.
Before we begin, I would like to remind everyone that some of management’s comments during this conference call are forward-looking statements. These statements, which reflect the company’s current views with respect to future events and financial performance, are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to uncertainties and risks. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and are noted on slide 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 Web site.
Lastly, I would like to point out that management’s remarks during the conference call are based on information and understandings believed accurate as of today’s date, August 25, 2022. Because of the time-sensitive nature of this information, it is the policy of Hibbett to limit the archived replay of this conference call webcast to a 30-day period.
The participants on this call are Mike Longo, President and Chief Executive Officer; Bob Volke, Senior Vice President and Chief Financial Officer; Jared Briskin, Executive Vice President, Merchandising; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations.
I will now turn the call over to Mike Longo.
Mike Longo
Good morning. Our team delivered a solid second quarter and 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 sale-through of this inventory was strong. We had a compelling selection of in-demand product that was supported by excellent execution in the stores and on our omni-channel platform. Overall, our team did an outstanding job executing this quarter. We successfully managed the aspects of the business that are you 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 we’re well-positioned to meet our full-year goals. We ended the quarter with inventory of $366 million, which we believe is able to meet back-to-school demand.
In addition to the amount of inventory, we are very positive about the quality of our inventory. We’re ready with fresh, in-demand products that will excite our customers. As mentioned in today’s press release, we’re seeing favorable sales trends for the back-to-school shopping season, and we’re pretty excited about that. This includes a timing shift that favors Q3. We saw customers late 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 an improvement from a supply chain perspective, and look forward to easier comps in the second-half. We expect higher year-over-year sales which will result in a return to leveraging our fixed costs. As we move through the year, we remain committed to executing our proven business model to optimize our performance over the long run.
Our best-in-class omni-channel business model, our superior customer service in 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 Jared.
Jared Briskin
Thanks, Mike. 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 our merchandise 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-impacted 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 of 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 of 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 with our inventory position. The increased inventory levels are largely attributed to a better in-stock position of key franchises in footwear and are appropriate for the results we were seeing during back-to-school.
As I referenced in my sales commentary, we also believe the most meaningful comparison regarding inventory is comparing to fiscal 2020, calendar of 2019. When compared to fiscal 2020, calendar 2019, inventory levels were up 35% at the end of the quarter in balance of our 54% sales gain. This increase is largely due to the 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 about 10%. Our results in the second quarter combined with our strong quarter-end inventory position continue to give us confidence that our toe-to-head merchandising strategy is working and elevated in how we serve our consumers.
I’ll now hand it over to Bob to cover our financial results.
Bob Volke
Thank you, Jared, and good morning. Please refer to slide six titled Q2 FY23 Results. As a reminder, we report our results on a consolidated basis that includes both the Hibbett and the City Gear brands. Total net sales for the second quarter of fiscal ’23 decreased 6.3% to $392.8 million, from $419.3 million the second quarter of fiscal ’22. However, and looking back three years to fiscal 2020, the last relevant comparable period prior to the pandemic, current quarter sales of $392.8 million were 55.6% higher than the $252.4 million recorded in the second quarter of fiscal 2020. Overall comp sales decreased 9.2% versus prior year second quarter. In comparison to the second quarter of fiscal 2020, comp sales increased by 54.4%.
Brick-and-mortar comp sales decreased 11.9% versus the same period in the prior year, although they have increased by 22% versus the second quarter of fiscal 2020. E-commerce sales increased 8.3% compared to the second quarter of the prior year, and then, increased by 174.4% on a three-year stack. E-commerce sales accounted for 15.2% of net sales during the current quarter, compared to 13.1% in the second quarter of fiscal 2022, and 8.6% in the second quarter of fiscal 2020. Gross margin was 34.4% of net sales for the second quarter of fiscal 2023, compared to 39% in the second quarter of the prior year. The approximately 460 basis point decline was primarily due to the following factors.
A decline in product margin of approximately 225 basis points due to cost increases, a higher mix of e-commerce sales which [contributed] [Ph] lower margin than brick-and-mortar sales, general shifts in product mix and delays in launch events. Increased cost of freight and transportation was approximately 125 basis points, and deleverage of store occupancy costs, of approximately 110 basis points, mainly due to the year-over-year decline in total sales coupled with higher rent expense and utility costs. Store operating, selling, and administrative expenses were 23.3% of net sales for the second quarter of fiscal ’23, compared to 22.3% net sales for the second quarter of last year.
This approximate 100 basis point increase is primarily the result of deleverage and the lower currency revenue expense categories such as wages, employee benefits, repairs and maintenance, and general supplies necessary to support a larger store base and increased e-commerce activity were negatively impacted by the sales decline. Depreciation and amortization in the second quarter of fiscal ’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’s second quarter. Diluted 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 that particular period.
Next, I will discuss the fiscal 2023 year-to-date results, and I’m 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, current year-to-date sales of $816.9 million was 37.1% higher than the $595.7 million reported in the first-half of fiscal ’20. Overall comp sales decreased 14.5% versus the same period in the prior year. In comparison to 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 same period of fiscal ’22, and increased 141.7% on the three year’s deck. E-commerce sales accounted for 14.9% of net sales for current fiscal year compared to 12.4% of first six months in fiscal ’22 and 8.4% in the first-half of fiscal ’20.
Year-to-date gross margin was 35.7% in net sales in fiscal ’23 compared with 40.3% in same period last year. This approximate 460 basis points decline was primarily due to the same fact that I mentioned in the second quarter, a decline of product mix of approximately 190 basis points due to cost increases, e-commerce sales, lower margin — Sorry, general shifts in product mix and delays in long term. Deleverage of store occupancy cost was approximately 140 basis points mainly due to the year-over-year decline in total sales again against the prior rent and utility cost.
And then, increased cost of freight and transportation was approximately 130 basis points. SG&A expense were 22.9% of net sales for the first-half of fiscal ’23 compared with 20% of net sales for the same period of last year. This approximately 290 basis point increase is primarily result of deleverage in the lower current revenue, expense category such as wages, professional fees, advertising, and general supply necessary to support large store base and increased e-commerce activity were negatively impacted.
Depreciation and amortization first six months of fiscal ’23 decreased approximately $5 million in comparison to same period last year, reflecting increased capital investments in our organic growth opportunities and infrastructure projects. We generated $83.5 million of operating income or 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 first six months. Year-to-date diluted earnings per share was $4.77 for fiscal ’23 compared to $7.90 per share for 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 a $28.4 million in cash and cash equivalent, higher than $17.1 million balance at the beginning of fiscal year. And inventory at the end of the second quarter of fiscal ’23 was approximately $366 million or 65.6% higher in the beginning of fiscal year and about 68.9% higher than the same period last year. We have short-term debt of $88.5 million outstanding and $145 million line of credit at quarter end maybe this will result in inventory build over the first-half of the year.
Capital expenditure during the second quarter was $14.5 million bringing the year-to-date total of $30.5 million. Capital expenditures is primarily store development, technology, and infrastructure projects. During the second quarter, our store count increased by net of 12 units comprised of 13 new locations and one closure. On a year-to-date basis, we have increased store count by net of 21 with 20 in 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 shares under authorized repurchase program with a total cost of approximately $7 million. On a year-to-date basis, we have purchased approximately 636,000 shares at a total cost of $29.4 million. We paid a recurring quarterly dividend of about $0.25 per common share with a total outflow of $3.2 million. For the first six months of fiscal ’23, dividend payments have amounted to [$22.5] [Ph] million.
I will now the call over to Bill Quinn to discuss some consumer insights.
Bill Quinn
Thanks, Bob. Entering Q3, we are continuing to keep a pulse on how our customers feel. Through recent research, we know that majority of customers plan to spend more this year on back-to-school, in particular on footwear. Also a significant portion of customer shifted to the timing of back-to-school purchases versus last year. Longer-term customer trends have not changed keeping us re-baseline above pre-pandemic levels.
Comparable sales increased 54.4% versus Q2 of FY’20. From a customer perspective we have seen two fundamental differences versus the FY’20. One, number of shoppers in our customer base has grown; and two, the average ticket has increased substantially due to gain averaging and retail. We see these two factors as structural in nature, keeping our business rebase line well above FY’20.
Turning to our e-commerce business, in Q2, sales increased 8.3% versus last year at 174% versus FY’20. E-commerce represented approximately 15.2% of total sales for the quarter versus last year’s 13.1%, continued improvements to our customer experience with gains in total customers increased traffic for our website ads by over 20% year-over-year. For back-to-school digital sales has accelerated versus our Q1 and Q2 run rate. Key drivers include strong tracking, robust footwear sales, and gains in average unit retail. These factors continued investments in digital will produce low double-digit growth for the remainder of this year.
I will now turn the call back to Bob to discuss our guidance.
Bob Volke
Thanks, Bill. Slide nine summarizes updated fiscal 2023 guidance. Although there continued to be some potentially significant business and economic challenges that may impact 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, SG&A updates our response. Total net sales are now expected to increase in the low single-digit range in dollars compared to fiscal ’22. This implies comparable sales are expected to be in the range of flat, positive low single-digits for the full-year. Full-year Brick-and-mortar comparable sales are expected to be in the flat to positive low single-digit range, while full-year e-commerce revenue growth is anticipated to be in the positive by single-digit range.
Comp sales are projected to be in the positive low double-digit range in the back-half of the year. Our sales forecasts are based on assumptions that as the year progresses, supply chain constraints continue to ease, time of inventory receipts becomes more consistent and predictable, and our overall inventory decision remains strong.
Fiscal 2023 gross margins percent of sales are anticipated to be in the range of 35.1% to 35.3%, down approximately 290 to 310 basis points in fiscal ’22. The global gross margin is still above pre-pandemic levels, potential supply chain challenges, rate headwinds, higher e-commerce sales attributable to lower margin and Brick-and-mortar sales, inflationary pressures and de-leveraging store occupancy will all contribute to this anticipated decline, we continue to believe gross margin results compared to the fiscal ’22 will become more favorable as the years pass.
SG&A as a percent of net sales is projected to be in the range of 22.7% to 22.8% higher than fiscal 2022 levels by approximately 10 to 20 basis points, although again still favorable to pre-pandemic levels. Wage inflation costs associated with growth in e-commerce, larger store count and annualization of back office infrastructure investments made in fiscal ’22 contribute to the year-over-year increase.
The following declines are consistent with guidance provided previously. Net new store growth was estimated in the range of 30 to 40 stores with new units spread relatively consistently throughout the year. Operating income is still expected to be in the low double-digit range as a percent of sales. Diluted EPS has been anticipated to 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 million to $70 million with a focus on new store growth, remodel and additional technologies and infrastructure investments. Our capital allocation strategy continues to include the expectation that we will repurchase shares throughout the remainder of the year and pay recurring quarterly dividends.
That concludes our prepared remarks. Operator, please open the line for questions.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Sam poser with Williams Trading. Please proceed with your question.
Sam Poser
Good morning, everybody. Thanks for taking my questions. On back-to-school, how far — what percentage of back-to-school is in right now, and can you give us — or please give us more specific at to the run rate that you’re seeing right now?
Mike Longo
Hey, good morning, Sam. Mike. I’ll handle the first part of that. So, we believe that about two-thirds of the back-to-school sales have occurred, that 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, is going to be — 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 were — and then we’ll — 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’d 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, and you move the inventory, and you set up for it. And if it shifts, you still got the costs, 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.
Bill Quinn
Yes, hi, good morning, Sam. So, some of the customers have been impacted by inflation, but they found ways to manage through it. So, a few of the behaviors that we’re seeing right now, and customers are shopping for deals a little bit more. They’re delaying their purchases until they absolutely need it. We’re seeing that shift in 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 no 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.
Ben Knighten
Yes, just to tag on to what Bill said, I had the opportunity to visit some stores in Arkansas last week, and it happened in the middle of kind of their back-to-school season. And so, what we saw there is exactly what Bill is reporting, 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 [won’t no matter] [Ph] shop a few days prior to back-to-school, maybe even late until after school goes back so they can understand a little bit about what’s going on in the school system, and then able to understand a little bit about how the spend [needs to go there] [Ph], but felt pretty good about what I saw in those towns and in talking to those — talking to the consumers and to our associates there.
Mike Longo
Yes. And one of the things that we didn’t talk a lot about yet was there has also been some calendar shift [indiscernible] product. Jared, do you want to follow up on that?
Jared Briskin
Yes, thanks, Mike. Good morning, Sam. So, as we starting [leaning into] [Ph] and looking at all the impacts of the supply chain, you know, [indiscernible] so, as Mike mentioned, as we were putting our plans together for Q2, both our promotional calendar as well as all of our sales forecasts, and again the expectation of that [indiscernible] ending volume coming at the end of Q2, along with some launches that unfortunately wound up pushing into Q3. So, all those things has somewhat of an impact on Q2 negatively, but now we’re a pretty impact on Q3. The other thing I would mention, as Bill said, that it does not appear that our consumers are trading down, although they do have certainly some inflational pressure going on.
The number of launches that we’ve been able to [purchase] [Ph] during the second quarter and early part of the third quarter, from a liquidation perspective, has been incredible, and we’ve also seen no slowdown, in fact we’ve seen significant increases in products that, like-for-like, add some price increases on key franchises. So, we’re very confident and comfortable where we stand right now.
Sam Poser
Thanks. If I can — I just have two follow-ups there. One, how are you impacted by the — by one of your larger vendors doing their map holiday, and did that do anything for the business? And two, that are you seeing a benefit from the — 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 comps in Q3, just because you’re up against a harder compare, inventory levels should be better, that you’ll comp stronger in the fourth quarter than you will in the third quarter or am I thinking about that wrong?
Jared Briskin
All right, Sam, so I’ll start with the promotional activity. So, certainly, the last two years we’ve had essentially zero promotional activity. So, there’s certainly been — some of them was shift, we had some promotional activity in the second quarter primarily revolving around apparel, we don’t expect that to slow down at least in the near-term. So, all that said, the promotional activity is still and I still expect it to be significantly less than what we saw from a pre-pandemic standpoint. And with regard to inventory, we’ve been fighting the inventory battle for a couple of years of really just not having enough inventory, and particularly in footwear.
And, frankly, our consumer experience within the stores and [indiscernible] my perspective in footwear has not been a good experience for our consumers. So, our team is working really closely with our vendors, has really done an excellent job of getting our pipeline full. And not just getting it full, but getting it full in the right things, the things that are driving traffic, the things that are high heat and that sell through quickly. So, we’re confident with where we stand now, as well as our plans for the back-half.
Bob Volke
I guess just to follow up, we’re currently not giving comp guidance [indiscernible] individual quarter, but I think if you think about summing [this thing] [Ph], in just sort of the last couple minutes, well, some of the shifting into Q3 with some of the consumer sentiment as far as holiday, we’d expect both Q3 and Q4 to be very strong. And if you do remember last year too, Q4 was a little bit less than we would have liked to see because, again, we had a real struggle with the inventory belt. So, I think when you couple together consumer sentiment, that the shifting of sales to the Q3, and the inventory position, again, feel pretty confident that both Q3 and Q4 should be fairly strong.
Sam Poser
Got you. Thank you very much, appreciate it.
Operator
Your next question comes from the line of Cristina Fernandez with Telsey Advisory. Please proceed with your question.
Cristina Fernandez
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. And is it mostly the back-to-schools 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 with the outlook this early in the year?
Mike Longo
Thank you, Cristina, and this is Mike. I’ll lead it off, and then everyone else is — 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 is a — has led to a good — 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 on our business model and the significant improvements we’ve made to the business model and the competitive differentiation that we’ve established, we really like our business model. So in with that, in the context of the competitive changes that has 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 significantly improved our inventory, it’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 in sales in a couple of ways
And Bill has talked about that, do you want to amplify any of those comments, Bill?
Bill Quinn
Yes, absolutely. First of all, I think we’ve got some pretty incredible omni-channel program. A couple in particular, our loyalty program, which we revamped last year, has 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, as well continues to grow for us. Also, our launch process continues to be extremely fair and focused on customers, and that continues to do very well, and also draw new customers to us. So, we’re very confident into the back-half and what those two programs can deliver.
From an e-commerce perspective, well, we have very good inventory, we had very good traffic. As Mike said, we’re focused on the customer experience, and we feel very confident there as well.
Mike Longo
Yes, so that’s the transaction side. Jared, do you want to comment on the AUR and how that impacts ticket?
Jared Briskin
Yes, so we’ve got a couple of additional things that are happening. Mike referenced the distribution changes that are going on in the marketplace. And 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 and the amount of inventory. But absolutely saw, during the second quarter, our store rotations, it had been impacted by a distribution change from one our vendors did comp much better than the stores without a distribution change, so that 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, then you 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 significant portion of the back-half of the year, along with what we believe to be a very, very strong and excellent launch calendar, all on the 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.
Cristina Fernandez
Thank you, that’s very helpful color. 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 noted apparel underperformed, I guess that perhaps carries a higher product margin or cost inflation, any color there would be helpful in understanding that trend?
Jared Briskin
Sure, thank you. It’s Jared, I’ll take that one. So, a couple things, absolutely there’s more promotional activity going on in the marketplace right now, and certainly we have some more than we had over the last two years, where we essentially had none. But as we discussed somewhat earlier and Mike referenced, that the shift in back-to-school along with some of the launch shifts that occurred in the end of the quarter into Q3 put some pressure on the margin line. We had made some decisions to run some promotions earlier in the quarter to take advantage of some of the earlier holidays and traffic, particularly focused around apparel and we expected some offset to the margin at the end of the quarter based on some of those peak back-to-school sales along with some of those launches, and then that did materialize into the third quarter.
So, that put a little pressure. As we look ahead into the second-half, we’re starting to see more of a promotional environment than last year, and again, nothing anywhere close to what we saw in fiscal ’20. And the health of our inventory, from the 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 two years, but we certainly expect to significantly [remain] [Ph] above fiscal ’20.
Cristina Fernandez
And can you expand on the apparel performance during the quarter relative to footwear, is it mostly related to the inventory receipts or anything else to note?
Jared Briskin
Yes, I would say, if you think about our apparel business compared to last year, it had declined in high 10s. So, at first look, you would go, well, that’s really, really disappointing. But when you really look at apparel compared to fiscal ’20, it grew in the 40s. So, we absolutely had an outsized apparel business last year, frankly, because consumers have money from stimulus, and you really had — footwear inventory, there was certainly not enough footwear inventory. So, we’re seeing that balance back, with again footwear becoming a more meaningful category as we got into the second quarter, and certainly to expect that to be the same in the back-half of the year. So, apparel is an area that we have some concerns about just based off the year-over-year comps. But again, overall, our inventory is incredibly clean, very, very focused at premium levels so it’s not unsusceptible to promotions. And we feel like we have it under pretty good control.
Cristina Fernandez
Thank you.
Operator
Our next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed with your question.
Justin Kleber
Yes, 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 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?
Bob Volke
Hi, Justin, this is Bob. First of all, two half the year not equal. So, it’s not just the simple average of the two, we do have a little bit heavier sales mix in the back-half of the year. So, you do have to account for that. So, again, we felt that you kind of do the back of the envelope math, when we’re thinking about how we do this, the weighting between Q1, first-half, second-half, that low double-digits, the math still comes about. So, as your numbers might be just a little bit higher than what we would have anticipated but again, I think we still feel comfortable that the guidance is accurate.
Justin Kleber
Okay, maybe we can follow-up offline there, Bob. And then, a question on how you guys think about the risk of a shopping low after back-to-school is completed. We’re hearing from several retailers back-to-school is strong. Obviously that is a distinct shopping event. So, once that past, how do you handicap the risk that the consumer hunkers down a bit here? Just given all these, these well documented macro pressures?
Bob Volke
Well, certainly we know that there’s macro pressures, and we all live in the same world, we see what’s happening 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 of 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 often is pretty compelling, Jared?
Jared Briskin
Yes, thanks for the question. Great question and the right question, I think one of the things that really gives us a lot of confidence is, frankly, our results compared to fiscal ’20 in Q2, historically, we think about second quarters. If we don’t get off to an early back-to-school, Q2 is typically really, really difficult. In this case, we posted a 54% comp on top of fiscal 20 and that comp was driven by 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 excuse me Q1 and Q2, but then also what we’re seeing for back-to-school gives us a lot of confidence.
Justin Kleber
Okay, thank you both. That makes make sense. All right, I didn’t mean to cut you off there.
Bill Quinn
Hey, Justin this is Bill. So, just to add to that, we’ve obviously rebase line above FY ’20, 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 from increased AQR, 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 the spread out their expenses, to avoid future inflation. And also there’s still some product availability concerns out there.
Justin Kleber
Okay. And this last one for me on freight and transportation costs increases. Can you just remind us when you started to see the step-up in those costs last year, just as we think about the lap over the back-half of this year, and when the pressure might subside on that line item? Thank you.
Bill Quinn
Yes, sure. So, just to kind of talking about freight, and we see that pressure decline in here, going into the back-half of the year for a couple different reasons. The first one is we’ve worked with multiple carriers, and that gives us an opportunity to reduce expenses. The second big reason is the AUR increase. It really decreased that freight as a percentage of sales. So, if you think about the unit economics of shipping out a box with a higher AUR in them, that works very favorably for us.
Justin Kleber
All right, thanks everyone, best of luck over the back-half of the year.
Bob Volke
Thank you.
Operator
Our next question comes from the line of Alex Perry with Bank of America. Please proceed with your question.
Alex Perry
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 what do you think about the comp guide and 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 sees like more launch products versus your initial expectations? Or is that, you know 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 raise on for sales. Thanks.
Bob Volke
Bill?
Bill Quinn
Yes, thank you. So, versus last time we spoke, what has changed is the essence of your question. So, first and foremost, we’ll do it 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 that. 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.
Jared Briskin
Yes, I think the only thing that I would also add to that is just our confidence in the visibility around inventory. We obviously there’s still volatility in the supply chain. But what we’ve been able to accomplish, and the improvements in visibility and improvement in delivery timelines also gives us a lot of confidence as we get to the back-half of the year. And there’s a couple of changes that I’ve highlighted as been to speak to in terms of our ability to hire people in the stores and wages and staffing in general.
Bill Quinn
Yes, we spent a lot of time over the last couple of years, the labor market being as tight as it is, a lot of focus there, it mitigate a little bit. And so, that’s been helpful as we go along here. Wages are kind of in line with our expectations, we knew that they will be higher this year than the kind of run rate historically, and planning for that. And we’re seeing that kind of in line with expectations, really doing a lot of work to on our scheduling and things of that nature is in store level and in meeting demand, and gotten a little bit better there and controlling over time, and in some of the things that we’re doing in store and so on, we’re pretty good on a go forward basis, maybe rental relative to the first-half of the year.
Alex Perry
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.
Bob Volke
Hi Alex, this is Bob. I would say probably, one of the things and even though Bill just touched on and kind of break out when he talked about the freight to the customer, obviously, I think we’re going to see some benefit there. But when he talked about the break between distribution stores, and not to get too much in the Chronicles, but we have to capture that on the balance sheet recognize that as the inventory gets sold. So, some of those costs from when the periods, where price is higher still need to flow through the back-half of the year. So, that’s one of the things that kind of gave us a little bit of maybe a headwind going forward. The other thing is, again, we have seen it was a fairly hot, warm summer, across the South and Southeast, and we have seen a higher run rate when it comes to utility costs, which is again something that we just kind of baked a little bit extra assumptions in the back-half as well as far as the deleverage on the store occupancy piece. But I would say those are probably two of the components. Again, I think Jared and Bill touched on some of the other positives when it comes to mixed product and things, so there’s a little bit of mitigating there going on in the backend.
Mike Longo
And this is Mike, I’d like to lay and 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 hit, and put in the stores to put in front of the consumers is making that consumer experience what we want and what they want, and frankly, what our brands want. 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 be right, we don’t want a 50 gross, because that means we’re selling through the 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 products, 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 in with us. Our inventories on target, it’s fresh, it’s new, and it’s so improved. And we don’t expect, we do expect clearance to be more than last year, we do not expect for it to be significant. Thank you.
Alex Perry
That’s extremely helpful. And then, maybe just one last one for 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?
Mike Longo
Bob, why don’t you start and then, Ben come in and talk about store labor which is a significant portion of what we do.
Bob Volke
Yes, I would just say it is kind of perfect lead in. So, there’s some categories that, kind of category static year-over-year. And of course with the higher sales in the back-half, you start to take back some of that leverage, we had some of the sales slip out of Q2 into Q3, retailers in the last two or three weeks of quarters, start making meaningful changes. The other big piece of that is we are much, much better at managing, especially store labor. And I think again, we’re going to see some benefits in that in the back-half of the year. So, ultimately, as we looked at the second six months, we felt that our run rate was a little bit more favorable than our previous guidance. And again for mostly due to the fact that we can keep leveraging a little bit more in the second-half. Ben?
Ben Knighten
Yes, just taking all of that, as we said earlier, there’s no planning for sales, not sure exactly where things are going to show up. But you’re planning and you do that with labor in 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, you are 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 expected the kind of a remainder of back-half near.
Alex Perry
Perfect, that’s all incredibly helpful. That’s about going forward.
Gavin Bell
Thank you. Mitch?
Operator
Our next question comes from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.
Mitch Kummetz
Yes, thanks for taking my questions. On the back-to-school in the loan 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 that shift from Q2 to Q3, anything you can help us out there?
Mike Longo
I’m going to be a little reticent to go past what I’ve said, but as you would imagine, the peak weeks in back-to-school are significantly higher in the range of an average week in the quarter, they’ll be anywhere from 50% 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 an incremental revenue dollar that falls through at a great rate. And when it doesn’t come in and falls through the opposite way on the EBIT line. So, yes, it’s meaningful and we look forward to seeing in Q3 and talking about it when we speak again in November.
Mitch Kummetz
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?
Mike Longo
Yes. So, if we go back to full-year results on the three-year comp, we are at 36%. And for Q2, we were at 54%, right? So, you are right. The trend is there and you are 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 to say that trend continues.
Mitch Kummetz
Okay. And then, you mentioned in some remarks that the distribution changes. But, 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?
Mike Longo
So, I will take you back in time when Stage Stores went out and JCPenney’s closed several stores. We went through some [Penney’s] [Ph] to quantify what we thought that sales effect would be. I think we were in the average of $30 million impact — $20 million to $40 million I think. And so when we witnessed that, we were in the stores of the end of August the day that Stage Stores closed 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 years with those retailers. And so, now they 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 is always a lag effect between the absence of the inventory and the consumer showing up in our stores and realizing we are 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 straddled in over time. And it took even longer for it to disappear from the shelf. So, when you combine those two things together and compare and contrast that what we saw was Stage and JCPenney pull back, it extended 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?
Jared Briskin
Yes, that’s correct, Mike. Certainly as the inventory got subsided at a lot of these competitors that loss distribution, we saw that run rate improved in the markets where a competitor lost distribution. As a reminder, as we said this before, as all of the distribution changes that occurred, more than half of our stores do not have a relevant competitor inside three miles selling the types of products and brands that we carried. And almost three quarters of our stores may have one or zero. So that gives us a lot of confidence as we go further and you combine that with the increased customers that Bill referenced, our ability to get inventories, [indiscernible] we have with the vendor community and our partners. And we feel like that is absolutely something we can really take advantage of in the back-half.
Mitch Kummetz
Okay, great. Appreciate that color. Thanks and good luck.
Mike Longo
Thank you.
Operator
Our next question comes from the line of John Lawrence with The Benchmark Company. Please proceed with your question.
John Lawrence
Yes, thanks. Good morning, guys. Jared, would you take a couple of minutes and talk a little bit about the women’s business? Couple of years ago, you made a real I guess a focal point on that part of the business. And it just seems like it’s been really strong ever since. Can you comment there please?
Jared Briskin
Yes, thanks, John. I appreciate that callout. Obviously we made a very significant change to our merchandizing organization and all the supports. We have been merchandizing a few years ago to move away from a department focus category based footwear, apparel, teen sports, as an example, and get more focus on each gender within our business. So, as a result, that work that changed the entire organization, and again all of our support teams, we put a significant emphasis on both the women’s and the kids’ business. So, the year-over-year comparison, I would say have lots of noise in them. But very, very excited based off the results prepared back to fiscal ’20. Women’s was our fastest growing area, with again you know, upper 70s, followed by kids, it was 60. So, really, really incredible, we are obviously growing the men’s business as well [indiscernible] growth, we are super, super excited about what we are seeing in the women’s and kids business, very [indiscernible] change of focus.
John Lawrence
Great. Thanks for that. And the last question from me, did you see any correlation across the regions with different gas prices? And when you saw that little spike down in gas price, did it have any impact on the business? Thanks.
Mike Longo
This is Mike. Hard to tell, we didn’t see a significant regional variation. Again, we think that our consumer has done a pretty good job with comp margin 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.
Bill Quinn
Yes. So, customers are managing through the inflation several different ways. First of all, [indiscernible] historically also delaying purchases until when a products is absolutely needed. Some of that we see in back-to-school and delay there. And office is becoming back other discretionary spending outside of retail. But as a reminder, customers who spent more on back-to-school, they don’t have any plans to cut that spending for holidays, and we have very few customers trading down.
Mike Longo
Thank you, Bill.
John Lawrence
Great. Thanks, guys. Congrats.
Mike Longo
Thank you.
Operator
Our final question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.
Sam Poser
Well, all my questions were answered. So, thank you very much.
Mike Longo
Thank you, Sam. We appreciate it.
Operator
I would now like to turn the floor back to over to management for closing comments.
Mike Longo
Thank you. We appreciate everyone’s time and attention today. We are very proud of our results. We look forward to reporting Q3. And again, thank you to our teammates who make all this possible. Thank you.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.
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