Hibbett Sports Inc (HIBB) Q1 2024 Earnings Call Transcript

Hibbett Sports Inc (NASDAQ: HIBB) Q1 2024 earnings call dated May. 29, 2023

Corporate Participants:

Gavin Bell — Vice President, Investor Relations

Mike Longo — President and Chief Executive Officer

Jared Briskin — Executive Vice President, Merchandising

Bob Volke — Senior Vice President and Chief Financial Officer

Bill Quinn — Senior Vice President of Marketing and Digital

Ben Knighten — Senior Vice President of Operations

Analysts:

Mitch Kummetz — Seaport Research — Analyst

Alex Perry — Bank of America Merrill Lynch — Analyst

Sam Poser — Williams Trading — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

Justin Kebler — Baird — Analyst

John Lawrence — The Benchmark Company — Analyst

Presentation:

Operator

Greetings. Welcome to Hibbett Incorporated’s First Quarter’s Earnings Call. [Operator Instructions]. Please note this conference is being recorded.

I will now turn the conference over to Gavin Bell, Vice President of Investor Relations. Thank you, you may begin.

Gavin Bell — Vice President, Investor Relations

Thank you, and good morning. Please note that we have prepared a slide deck that we will refer to during our prepared remarks. The slide deck is available on Hibbett.com via the Investor Relations link found at the bottom of the homepage or at investors.hibbett.com and under the News and Events section. These materials may help you follow along with our discussion this morning.

Before we begin, I’d like to remind everyone that some of the 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 website.

Lastly, I’d 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, May 26, 2023. Because of the times-sensitive nature of this information, it is the policy of Hibbett to limit the archived replay of this conference call webcast to a period of 30 days.

The participants on this call are Mike Longo, President and Chief Executive Officer; Jared Briskin, Executive Vice President, Merchandising; Bob Volke, Senior Vice President and Chief Financial Officer; Bill Quinn, Senior Vice President of Marketing and Digital; and Ben Knighten, Senior Vice President of Operations.

I’ll now turn the call over to Mike Longo.

Mike Longo — President and Chief Executive Officer

Thank you, Gavin. Good morning and welcome to the Hibbett Q1 earnings call. For those of you following along, I’m on slide 3.

Our financial and operating results for the first quarter reflect the challenging retail environment. Our consumer space difficulties ranging from inflation to fears of jobloss. This and other factors have combined a lower consumer sentiment, and we think this adversely affect sales. Also the important tax season in the first quarter was negatively affected by lower tax returns versus last year and caused sales come in lower than our expectations. Having said that, we still achieved a 7.4% year-over-year sales growth and a 4.1% comp sales inquiries.

We believe these sales result in increased share for Hibbett and our reason for confidence in our business model. Also, our strong relationships with our brand partners give us the ability and confidence to continue to execute our store opening plan. We continue to invest in our already best-in class consumer experience and business model, while still taking costs out-of-the business. In the first-quarter, we managed to produce leverage on SG&A of 140 basis points versus last year and all the while we believe we increase our market share. We believe we have a proven operating model that will support our business regardless of market conditions and we remain committed to executing our strategy of focusing on our distinct competitive advantages, namely, our customer service, the compelling product selection best-in class omnichannel experience and our positioning in underserved markets.

In summary, we believe, Hibbett is well-positioned for the short and long-term to continue to grow and increase market-share. Before turning the call over to Jerry. I’d like to thank our approximately 11,000 team members across the organization, whether they’re working in our stores or on our Omni-Channel platform, our logistics facilities or store support center in the face of Hibbett provided consistent superior service that’s synonymous with our brands.

I’ll now turn it over to Jared.

Jared Briskin — Executive Vice President, Merchandising

Thank you, Mike, good morning. The first quarter started strong with double-digit gains in the first half of the quarter. As March progressed, we began to see some deceleration in our comp performance and that deceleration continues to pressure the business into April moving into our total comp, just over 4%. Footwear was our strongest category, during the quarter, growing high-teens, versus the prior year. A strong footwear results continue to be driven by several solid launches as well as strength across basketball, lifestyle and casual categories. In addition, we saw an improving trend in our running business.

Apparel and Team Sports were both negative for the quarter, with apparel down in the low 20s, approximately half of the decline in apparel came from winter carryover in the prior year that we did not anniversary. This was planned in order to ensure that inventory was seasonally appropriate now that the supply-chain is more predictable. Sales of spring and summer apparel started the season slowly and remain under pressure due to the consumer environment. Specific to footwear and apparel men’s, women’s and kids all comp positively driven by our footwear results. Men’s and women’s, both were up in the low-single digits, Kids was up in the high-teens. Slowdown in sales in the back-half of the quarter, the continued promotional environment and a much more selective [Technical Issues] prompted additional markdowns and promotional activity during the back-half of the quarter. We expect this to continue at least through the third quarter as we work to reduce our inventory.

These promotional efforts as well as support from our key brand partners will help us to achieve our goals for inventory reduction. While year-over-year inventory compares will still be volatile due to the challenges in the supply-chain during fiscal ’23, our expectations remain the same for our inventory levels, we will have growth in the first-half of the year and year-over-year declines in the second-half of the year.

I will now hand over to Bob to cover our financial results.

Bob Volke — Senior Vice President and Chief Financial Officer

Thank you, Jared, and good morning. Please refer to Slide 5. As a reminder, our first quarter results are reported on a consolidated basis that includes both the Hibbett and City Gear brands. Total net sales for the first quarter of fiscal 2024 increased 7.4% to $455.5 million from $424.1 million in the first quarter of fiscal ’23. Overall comp sales increased 4.1% versus the prior year first quarter. Brick-and-mortar comp sales were up 4.7% compared to the prior year’s first quarter. While E-commerce sales increased 0.6% compared to the prior year.

E-commerce sales accounted for 13.7% of net sales during the current quarter compared to 14.6% in the first quarter last year. Gross margin was 33.7% of net sales for the first quarter of fiscal ’24 compared to 37% in the first quarter of the prior year. This approximate 330 basis-point decline was driven primarily by lower average product margin. Average product margin in the first quarter of fiscal ’24 was approximately 375 basis-points lower than the prior year first quarter, due to higher promotional activity across both footwear and apparel. Total occupancy was relatively flat as a percent of sales year-over-year, while both freight and logistics operations were favorable, as a percent of net sales. So our operating, selling and administrative expenses were 21.1% of net sales for the first quarter compared with 22.5% of net sales for the first quarter last year.

This approximately 140 basis-point improvement is primarily the result of expense reduction initiatives, lower discretionary advertising spend and reduced incentive compensation expense, partially offset by wage inflation. Depreciation and amortization in the first quarter of fiscal ’24 increased approximately $1.2 million in comparison to the same period last year, reflecting increased capital investment on store development and infrastructure projects. We generated $45.9 million of operating income, or 10.1% of net sales in the first quarter compared to $50.7 million or 12% of net sales in the prior year’s first quarter.

Diluted earnings per share were $2.74 for this year compared to two $2.89 per share in the prior year first quarter. We ended the first quarter of fiscal ’24 with $26.9 million of available cash-and-cash equivalents on our unaudited condensed consolidated balance sheet and $103.6 million of debt outstanding on our $160 million line-of-credit.

Net inventory at the end-of-the first-quarter was $438 million, a 39.1% increase in the first quarter of fiscal ’23 and at 4.1% from the beginning of the year. Please note that the majority of this increase year-over-year is due to inflation and product mix, inventory units are up approximately 8% and we have a heavier mix of footwear, which carries a higher average unit cost. Capital expenditures during the first quarter were $14.2 million, with over 60% of that focused on-store development projects, including new stores, remodels and relocations. We opened 10 net new stores in the first quarter, bringing the store base to 1,143 in 36 states.

We also completed 16 store remodels and three relocations. The remainder of our capital expenditures for the quarter were related to technology and infrastructure projects. We bought back nearly 160,000 shares under our share repurchase plan in the first quarter at a total cost of $10.2 million. We also paid a recurring quarterly dividend in the amount of $0.25 per eligible share for a total outflow of $3.2 million.

I’ll now turn the call over to Bill to discuss the latest consumer insights.

Bill Quinn — Senior Vice President of Marketing and Digital

Thank you, Bob. Despite a challenging retail environment and pervasive inflationary impacts. Our customers continue to increase their shopping with us during the first quarter. In Q1, our loyalty, sales were up low double-digits. This growth was driven by increased sales from our existing customers.

Our total customer-base grew, increased their average purchase and made more visits. However, we have started to see a slowdown in new customer shopping and our consumer research indicates that there will be ongoing challenges to discretionary spend this year, in particular customers have grown more cautious as [Technical Issues] over inflation continue and also fierce over job loss are arising.

Turning to our E-commerce business. In Q1, E-commerce sales were essentially flat. The primary headwinds included the macroeconomic environment, our highly promotional online environment, and greater inventory availability in-stores, which drove more in-store shopping. These factors led to decreases in traffic and conversion, which were offset by higher average purchases. As always, we remain focused on the long-term and providing the best possible customer experience for online and Omni-Channel shopping. To that end, we have many planned investments in improving our loyalty program, our core customer e-commerce experience and further evolving our omnichannel offerings. We believe these efforts will continue to attract and retain customers.

I will now turn the call-back to Bob to discuss our guidance.

Bob Volke — Senior Vice President and Chief Financial Officer

The business outlook for the remainder of fiscal ’24 continues to be complex and difficult to forecast. There are several significant headwinds to consider as we proceed through the year, inflation has a broad impact not only our consumer sentiment and spending patterns, but also contributes to operating cost increases in the form of wages and prices paid for goods and services, higher interest rates have driven up the cost of borrowing for us that may also be affecting discretionary purchase decisions for those consumers of variable-rate loans and credit card debt. We also expect the heavier promotional environment we’ve seen over the last two quarters to continue for the near-term.

In summary, economic uncertainty coupled with a more cautious and increasingly stress consumer has resulted in lower expectations for the remainder of this fiscal year. As noted previously, we still have confidence in our business model and our ability to track new customers while providing exceptional customer service and practice assortment to our existing customers. We continue to make investments in the most critical elements of our business, new-store development, the consumer experience and operational efficiencies.

Our inventory mix and assortments have become healthier over the last several months and we’ve made progress on reducing the ongoing operational costs of the organization. I’ll now turn to slide seven that summarizes our guidance. Net sales for the full-year, including the impact of the 53rd week are anticipated to be flat to up approximately 2% as compared to fiscal 2023 results, the 53rd week is still expected to be approximately 1% of full-year sales. The breakdown of sales by quarter remains unchanged from the previous guidance provided, we believe that the first quarter represented approximately 26% of full-year sales, with approximately 22% in the second quarter, approximately 24% in the third quarter and approximately 28% in the fourth quarter, including the 53rd week. Comparable sales are now expected to decline in the low-single digit range for the full year, brick-and-mortar comparable sales and full year E-commerce revenue are also anticipated to both be in the negative low-single digit range. Net-new store growth remains unchanged with an expectation to open between 40 units and 50 units. We anticipate the aggressive promotional environment to continue in the near-term with a heavier impact on the second quarter, lower forecasted annual sales volume will also create additional deleverage of store occupancy costs, as a result we’ve revised — revised projected full year gross margin rate is approximately 33.9%. to 34.0% of net sales. We expect the second quarter will yield the lowest gross margin results of the year with improvement anticipated in the back half of the year. Although, we were able to generate SG&A leverage in the first quarter this year compared to last year and are making good progress on cost savings initiatives, we anticipate the quarterly comparisons to the prior year to be more difficult due to fixed cost deleverage resulting from lower sales expectations as well as ongoing inflationary pressure in wages and other goods and services. SG&A as a percent of net sales is now expected to be in the range of approximately 23.3% to 23.5% of net sales. Once again, the second quarter will be heavily impacted as is expected to be the lowest sales quarter of the year. Due the factors due to — the factors mentioned previously. Operating margin for the year is now expected to be in the range of 7.4% to 7.8% of net sales. Operating profit as a percent of net sales in the first quarter and fourth quarter benefit from higher sales volume. Although the 53rd week is considered near breakeven due to the low sales volume in that extra week. We expect that operating profit as a percent of sales will be modestly higher in the second half of the year compared to the first half of the year. We still expect to carry debt for a majority of the year. We project borrowings will be higher in the first half of the year as current inventory levels are not expected to decline significantly until after the back-to-school season. The lower full-year sales guidance is anticipated result in a higher interest expense. that communicated in our previous guidance. Interest expense for the full year is now projected to be approximately 40 basis-point to 45 basis-points of net sales peaking in the second quarter and declining as the year progresses. Diluted earnings per share are anticipated to be in the range of $7 to $7.75, using an estimated full-year tax-rate of approximately 23.5% to 23.7% and an estimated year end weighted-average diluted share count of approximately 12.8 million. We still project capital expenditures in the range of $60 million to $70 million with the largest allocation focused on new-store growth, remodels, relocations new-store signage and improving the consumer experience. Our capital allocation strategy continues to include share repurchases and recurring quarterly dividends, in addition to the capital expenditures noted above. That concludes our prepared remarks. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question is from Mitch Kummetz with Seaport Research. Please proceed.

Mitch Kummetz — Seaport Research — Analyst

Yeah, thanks for taking my questions. I guess, Mike, just to start on the quarter, can you kind of walk us through metrics like traffic ticket conversion. I’m curious, it sounds like the back-half of the quarter was tougher than the first-half. I’m curious about some of those metrics might have evolved as the quarter transpired.

Mike Longo — President and Chief Executive Officer

Sure, thanks for the question. Thanks for being on today. In the beginning of the quarter, we were seeing really good results that we were seeing an increase in both transactions, as well as AUR and therefore average ticket. As the quarter continued, however, it did get significantly negative, with regards to transactions. We tie that back directly to the overhang of course and consumer sentiment, but more directly the tax returns being down and as you know, tax returns are disproportionately going to affect our customer and our business in Q1, which we, as you know, typically referred to as tax season.

Mitch Kummetz — Seaport Research — Analyst

And then, Bob, on the on the guide for 2Q, it sounds like you expect a pretty heavy margin pressure there on the product margin side. I know that in the first quarter, it was down 370 bps, are you looking for something similar there in 2Q.

Bob Volke — Senior Vice President and Chief Financial Officer

I’ll start and Jared will add some color. The expectation is that the trend we’ve seen here in the second half of the first quarter continue into Q2. Q2 is notoriously kind of quiet quarter for us. There’s not a lot of big events or holidays. That kind of drive the business. So the expectation is that we’ll still be working through some of our higher inventory levels and that will require us to continue to be in somewhat promotional mode at this point, Jared.

Jared Briskin — Executive Vice President, Merchandising

Yeah, that’s good morning, it’s jared. I think Bob’s got it exactly right. I mean, we still expect some pressure, very similar to what we saw in the first quarter, but we have recently seen some pretty significant incremental promotions over and above what we saw the first quarter from the marketplace as a whole. So likely continue to put some pressure, we’ve been pretty clear around our inventory aspirations. But the first half and second half perspective. So obviously, we want to ensure that we can maintain that projection with regard to inventory. So what’s happening externally from a marketplace perspective, could put some additional pressure onQ2.

Mitch Kummetz — Seaport Research — Analyst

Okay and then lastly just. I just wanted to get your thoughts on back-to-school. I mean it seems like you expect the consumer to remain fairly pressure, but how are you feeling about kind of your inventory and your access to products for back-to-school and I also heard somewhere that maybe the tax-free day outlook could be better this year, then a year-ago, and. I don’t know if the least but optimistic that could maybe drive some — drive some traffic and conversion?

Mike Longo — President and Chief Executive Officer

Yeah, Mitch. I think we’re confident in our first of all, the inventory that we have heading into back-to-school, while the inventory is elevated over where we’d like it to be, the team has been extremely careful with regard to receipts that are coming in for back-to-school. Ensuring that we’re only looking at what we’d like to call a players, so we feel very good about those investments and that will have what the consumers looking for. Typically, from a back-to-school season. Q2 and Q3 kind of have a blend between our back-to-school historically, it starts at the end of July and runs through the middle of August.

We believe historically what we’ve seen, a pressured consumer that tends to drive the business more-and-more last-minute, so our expectations are value some of that back to school low but likely fall more into Q3 than Q2. But we do feel, from a product perspective, we will have enough products in energy to drive the business that as outlined in our guidance.

Mitch Kummetz — Seaport Research — Analyst

Alright. Thanks so much.

Mike Longo — President and Chief Executive Officer

Thank you.

Mitch Kummetz — Seaport Research — Analyst

Our next question is from Alex Perry with Bank of America. Please proceed.

Alex Perry — Bank of America Merrill Lynch — Analyst

Hi. Thanks for taking my question. I guess just first, can you maybe talk about the more recent run-rate of the business as you move further away from some of the tax refund headwinds?

Jared Briskin — Executive Vice President, Merchandising

Yeah, Alex, this is Jared, good morning. As we said, we got off to a really Hotstar in the first quarter, strong, strong double-digit increases and that really started to falter as we got towards the end of the quarter. We really haven’t seen anything change at this point, a level product launches still performing extremely well, but nothing from a step-change perspective based off what we saw towards the back-end of the quarter.

Alex Perry — Bank of America Merrill Lynch — Analyst

Great, that’s really helpful. And then just on the top-line, can you just talk about how you’re thinking about the second quarter versus the rest of the year. I think the guide implies like a sort of negative mid single-digit to high single-digit top in the second half. I guess, first part of question, is that right? And then in the press release you said that these headwinds will be more impactful on our second fiscal quarter than in the back half of the year. Is that implying that you’re sort of expecting the consumer to contact to come back in the back half of the year?

Jared Briskin — Executive Vice President, Merchandising

Alex. I think that’s hard to say and. I think specifically the second quarter obviously the the run rate at the end of the first quarter was not where you’d like it to be. so that presents concern. The conversation with regard to back to school and potentially some more back to school business moving into third quarter. Based on the pressure that the consumer is under and more last minute along with the elevated promotional activity that’s [Technical Issues] on in the marketplace. I mean all of those things cause us to be really conservative with regard to second quarter. Specifically, as far as the outlook for the rest of the year — we’re really trying to work towards what our new normal is, what these new quarterly and monthly splits look like. Obviously, we have information from our pre pandemic perspective, but then new information from a POS standpoint. So, really understanding how that works quarter-over-quarter period-over-period has become quite the forecasting challenge, then you add-in the volatility of the consumer and the volatility of our back to school business which always crosses between second and third-quarter. So all of those things are causing us to be very conservative.

Alex Perry — Bank of America Merrill Lynch — Analyst

Great. And then my last one was just. I just want to clarify, sort of the monthly cadence in the quarter. So it sounds like maybe comps are worst — April was the worst month of comps. I think there is a better launch calendar. That’s what the launch calendar improved the most in April. So is that like your casual footwear business and apparel business, really, and you said the liquidation tightens in the launches are good, so is it like the casual apparel and footwear business, you just saw a more precipitous decline in those businesses in April, is that sort of a fair assessment?

Mike Longo — President and Chief Executive Officer

Yeah, Alex. I would define it. I’m not sure if, I would use casual but we saw no deceleration at all and the launch product from liquidation perspective, what we call the day players, again. But the secondary franchises, secondary brands as we called out in previous quarters. I’ve gotten a really challenging and sort of down the consumer as being extremely selective. What they’re interested in and what they’re willing to purchase and that continues to put some pressure on some of our liquidation efforts in those products, where we increasing promotions and markdowns to try to accelerate it.

Alex Perry — Bank of America Merrill Lynch — Analyst

Perfect. That’s really helpful. Best of luck going forward.

Mike Longo — President and Chief Executive Officer

Thank you.

Jared Briskin — Executive Vice President, Merchandising

Thank you.

Operator

Our next question is from Sam Poser with Williams Trading. Please proceed.

Sam Poser — Williams Trading — Analyst

Good morning, thanks for taking my questions. Can you talk a little bit about how you plan — the planning the business any evolution in the process of planning, because while same store sales are going to decelerate to the rest of the year, which you talked about before, you’re expecting some margin improvement in the back — margins going to get less worse in the back half. So I’m wondering sort of from a planning process is taking the macro out of it, what can you guys do better to get there in, in the face of the environment?

Jared Briskin — Executive Vice President, Merchandising

Yes, and this is Jared. I’ll start. So, obviously, first and foremost, we’re obviously not happy. Where we are, we’re not we’re not happy with the composition of the inventory right now, but we are happy with our continued access to higher liquidation, highly scarce product that we call a player. So we still see that providing a lot of momentum, and we’re making a lot of consumers very happy when we provide that inventory. As we go through into the back half of the year really starting in second quarter, we were significantly more conservative with regard to our buys, not only with how much we were buying, but also what we we’re buying, that’s just an intense focus only those eight players, as we described.

So we believe that could help us significantly our inventory liquidation efforts that we’ve had underway with regard to secondary brands and secondary franchises are going a little slower than we’d like, again, based about the consumer environment, based of the consumer being very selective. But that’s all we have coming in, through the balance of the years what we believe to be that high-grade product, and we do expect, as we get our inventory levels back below last year’s levels in the back half of the year, we’ll see some improvement in our aged inventory and that we believe, a little less pressure from a markdown and promotional cadence that we’re planning.

Sam Poser — Williams Trading — Analyst

And when you say your inventory is going to be below last year, to what degree. I mean, because I though you ended Q4, probably about $50 million heavy. I think it may have gone up to about $90 million now, and. I think you still got it — get it to about at least 10% below last year from a pure dollar perspective to sort of the optimum is, am I thinking about that right?

Jared Briskin — Executive Vice President, Merchandising

I think you’re on the right track. I don’t know if we will land in the exact same place from an optimum perspective, but we are tracking to get below last year level. Likely more in the single-digit range by the end-of-the third quarter and then a significant reduction by the end of the fourth quarter. At a similar level to what you just described. Again. I think we want to be very careful with getting real specific here, we have our aspirations and wherever you want to be from an inventory perspective, we’re confident in our plan but there’s a lot of unknowns at this point that we want to make sure that we take into account, but your thought process around optimal level of inventory, it’s not that far off from ours is.

Sam Poser — Williams Trading — Analyst

Mike, can I ask one thing?

Mike Longo — President and Chief Executive Officer

Of course.

Sam Poser — Williams Trading — Analyst

Over the last. I think four or five quarters you’ve missed. The numbers have moved around, you’ve missed the street estimates and so on. So have you taken sort of, I mean, what makes you feel comfortable, you sort of taken the draconian and up view of this year in what you’ve now put out there?

Mike Longo — President and Chief Executive Officer

Thank you. I think you have to track back to the cause, right. What’s the cause change, approximate cause of change in Q1, the biggest contributor was the fact that tax returns came in significantly unfavorable and. I haven’t found anybody who had that in their guidance. I haven’t found anybody who said, well, yeah, you should have known that. So, we didn’t know that. We were surprised, we didn’t stand around and wait for it to happen to us, we began to take actions very rapidly. In anticipation of risk in the year, we also, as we communicated took on a systematic review of our costs, which are in the early innings, but we’re certainly doing that. So okay, so get back to the question. So what happened? In the backdrop of pretty serious macroeconomic challenges, we had a specific and pinpoint Q1 problem and that being a significant part of our year was part of the downdraft.

In addition to that, then going-forward, we still have the overhang of the consumer, the consumer sentiment and macro pressures, etc., along with a somewhat higher inventory level entering into Q2 than we anticipated, which is directly related to the lower sales than our expectations. So that allows us — doesn’t allow us, forces us to change some of our thinking around gross margin. More inventory, lower gross margin.

Now these are not huge changes, but they are material in the plan. So now you’ve got fewer sales, a little bit less gross margin and as a result, we have to be prudent — we believe will be included on the SG&A lines in the intro slides, so interest being one of those things that we’ve talked a little bit about. Interest is going to be slightly higher, somewhat higher than we anticipated, because again sales then leads to inventory, which then leads to debt, which then leads and. interest. Debt and money has a cost now. So we’re managing all those things, we put them together. I think this is a prudent way to approach the guidance.

Sam Poser — Williams Trading — Analyst

Thanks very much.

Mike Longo — President and Chief Executive Officer

Thank you.

Operator

Our next question is from Cristina Fernandez with Telsey Advisory Group. Please proceed.

Cristina Fernandez — Telsey Advisory Group — Analyst

Good morning, and hi, everyone. I wanted to ask about your view of the industry with a lot of the brands and retailers already having reported, what is your view as far as the inventory in the marketplace? How long, will but all take inventory to normalize in the level of promotions, where do you see them now versus pre-pandemic.

Jared Briskin — Executive Vice President, Merchandising

Yeah. Hey, Christine, it’s Jared, good morning. I think that from an expectation perspective, I I think we felt fairly confident that by the second — by the midway point that this year, a lot of the promotional environment from an industry perspective, would be a lot better. I think since that point, the Consumer Health has certainly changed. And specifically for our industry, their focus has narrowed significantly around what they’re engaging with what they’re going to purchase.

So I think, as I called out in my commentary, I think that moves — moves the line at least through the end of the third quarter, where. I would expect that we’ll see significant promotions, but it could be longer than that depending on what happens with the consumer through the rest of the year. But recently we’ve seen significantly more promotions in the marketplace, which certainly indicates to us that the cleanup of the industry as a whole, could take a little bit longer then we were expecting.

Cristina Fernandez — Telsey Advisory Group — Analyst

And then my second question is around the cost-cutting initiatives across the organization, last call you talked about SG&A reigning that in. Can you give more color and an update of where you are in your cost-cutting initiatives and anything incremental you’re doing now based on the lower sales outlook?

Mike Longo — President and Chief Executive Officer

Yeah, thank you. We did we did talk about that last-time we brought it up this time. It is a systematic review, we’re relatively early in it, but it has yielded some results, some of that contributed to the SG&A, but there are other reasons for the SG&A leverage in Q1 that are called out in the press release, but. I think it is also worth noting that those investments that we’ve made over the past few years, are bearing fruit and some of it in SG&A. So Ben, you want to speak to some of the things that you’re doing.

Ben Knighten — Senior Vice President of Operations

Yeah. As Mike mentioned, we have invested in the business over last few years and particularly in respect to the mobile environment, a mobile platform at store-level. That’s helped us in a couple of things obviously, enhanced experience inside the store, very similar drive experience. On the web and bringing the omnichannel experience in the store, but it’s also allowed us to become more productive and more engaged with our — more engagement between our associates and our consumers. That’s allowed us to take some of the cost-out of the business, quite honestly, from a labor perspective at store-level and we become more productive and we’d accelerate some of those efforts. I’ve got more on the table, but really after those investments over the last few years, allows to kind of pushed that a little bit.

Bob Volke — Senior Vice President and Chief Financial Officer

Yeah, Christina, this is Bob, just to kind of finish that kind of thought off. One other things we are still dealing with as much as we are working actively to reduce some kind of ongoing structural cost within the organization, also taking advantage of periodically of some discretionary opportunities to reduce spend, but the one thing we can’t forget about is as we have obviously lowered our revenue guidance. There is still real inflation affecting wages and the goods and services that we need to support the organization. So as much as we are doing right at the moment. I think this is going to pay bigger dividends in the future years, but this year still a little bit under pressure from a leverage standpoint again just because we’ve got the tougher sales environment as well.

Cristina Fernandez — Telsey Advisory Group — Analyst

Thank you.

Operator

Our next question is from Justin Kebler[Phonetic] with Baird. Please proceed.

Justin Kebler — Baird — Analyst

Hey, good morning guys. It’s Justin Kleber. Jared, wanted to follow-up on the promotional environment last year, you were talking about apparel and now it’s footwear, so if. Can you talk about where the footwear promotions are concentrated. Is it just broad-based outside of the launch product. And then is it really you guys driving promotions, are you simply responding to what some of your competitors are doing in the marketplace?

Jared Briskin — Executive Vice President, Merchandising

Yeah, thanks Justin. It’s actually both. As we’ve talked a lot in the back half of last year we were very focused on getting our apparel seasonally appropriate, getting apparel cleaned up, getting to the right inventory level. And we accomplished all that. We felt good about where our apparel inventory is today although apparel continues to be under significant pressure from a sales standpoint. Just due to the consumer environment in general trends. So our focus now has shifted on the footwear side. It’s not as simple as just launch and not launch. There are many products that are not launched that we would consider to be highly scarce and high — that are store performing extraordinarily well. But some of the secondary franchises, tertiary franchise, secondary brands has really been a significant slowdown. So some of our promotional engagement has been the response from a marketplace perspective, but some of that’s also been a deterioration in what we saw, at the back-end first quarter and our ability to really obviate some of that inventory. So it’s a combination of both.

Justin Kebler — Baird — Analyst

Okay, thanks for that and Bob, can you help me a bit on the gross margin. If I look at your first quarter gross margin rate, it’s always been above the full year rate by at least 100 basis points, if not more, outside of the calendar ’20 with the pandemic and stores being closed. But your full year gross margin guide this year, it’s above what you just delivered in the first quarter despite more promotions and you have occupancy that’s going to flip to a headwind given the comp outlook. So why would that be the case?

Bob Volke — Senior Vice President and Chief Financial Officer

Yeah. I think, again, we kind of feel like with the heavy promotional environment in the first half of the year, we think that’s going to drag down margins for that first two quarters, but then there’s some lift coming in the back half of the year. Again, harder to predict exactly how quickly or how significant that lift will be, but the goal is that as inventory gets cleaned up, again, Jared touched on this earlier, less need to promote and reduce price in the back half of the year.

The other thing is we are starting to get some other leverage in terms of our freight and logistics operations costs, so that’s helping to offset some of the pure product margin headwinds that we’re dealing with. So again, it’s kind of like — we feel like — we’re kind of dealing with a little bit heavier kind of challenge in the first part of the year and hopefully get some lift, like I said, as the year goes on. So that’s the thinking as we look at the full year outlook.

Justin Kebler — Baird — Analyst

Okay, that’s helpful. That’s helpful. Last question, just on new stores. Can you guys just comment given the environment, I mean, how new stores are performing? Or are they hitting your internal hurdle rates? I mean does it make sense to slow the pace of store growth until the environment, I guess, returns to some form of normal, whatever that’s going to look like into next year?

Jared Briskin — Executive Vice President, Merchandising

Hey, Justin, it’s Jared. Obviously, we continue to look at this in great detail. And our stores are performing exceptionally well. So, we still see it as a real strong use of capital. New store performance along with remodels along with new storefront signs, having a really significant payout on our investments. So, we do not plan at this point to slow the growth down that we’ve already committed to.

Justin Kebler — Baird — Analyst

All right, Thanks everyone. [Technical Issues]

Operator

Our last question is from John Lawrence with The Benchmark Company. Please proceed.

John Lawrence — The Benchmark Company — Analyst

Good morning, guys. Jared, would you talk a little bit about that basket, I mean, in normal times without this pressure, somebody picks up a pair of shoes and maybe the attach rate for apparel. Can you just talk about how that’s changed from a basket perspective? Or is somebody just waiting for a promotion on the apparel side? Or just dive into that a little bit, please.

Jared Briskin — Executive Vice President, Merchandising

Yeah, John. We’re seeing it go down some. I mean, obviously, our teams continue to focus on products that connects and continue to deploy our toe-to-head strategy which we still believe is the right strategy. Some of those opportunities around those connected outfits are now happening over multiple transactions.

But at the same time, the primary driver of the business is footwear, the average retail price of footwear has skyrocketed over the last few years, and that’s putting a lot of pressure on apparel. So, we are absolutely seeing less apparel being sold in conjunction with footwear in the current environment.

John Lawrence — The Benchmark Company — Analyst

Great, thanks. Good look.

Jared Briskin — Executive Vice President, Merchandising

Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Mike Longo — President and Chief Executive Officer

Well, again, thank you for being here today. We appreciate it. None of these results were according to our expectations. You’ve heard everything we had to say about our business model, and we believe in it. So, again, we appreciate it, and we hope everyone has a safe, long weekend and celebrates Memorial Day.

Operator

[Operator Closing Remarks]