Hibbett Sports, Inc. (HIBB) Q3 2022 Earnings Call Transcript

Hibbett Sports, Inc. (NASDAQ: HIBB) Q3 2022 earnings call dated Dec. 03, 2021

Corporate Participants:

Jason Freuchtel — Director, Investor Relations

Michael E. Longo — Chief Executive Officer and President

Jared S. Briskin — Senior Vice President and Chief Merchant

Robert J. Volke — Chief Financial Officer

Benjamin A. Knighten — Senior Vice President of Operations

William G. Quinn — Senior Vice President of Digital Commerce

Analysts:

Sam Poser — Williams Trading — Analyst

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

John Lawrence — The Benchmark Company — Analyst

Alex Perry — Bank of America Merrill Lynch — Analyst

Presentation:

Operator

Greetings, and welcome to Hibbett’s Third Quarter Earnings Results Conference Call. [Operator Instructions]

I would now like to turn this conference over to your host, Mr. Jason Freuchtel, Director of Finance and Investor Relations. Thank you. Sir, you may begin.

Jason Freuchtel — Director, Investor Relations

Good morning, everyone. 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 under the News and Events section. These materials may help you follow along with our discussion this morning.

Before we begin, I would like to remind everyone that some of management’s comments during this conference call are forward-looking statements. These statements, which reflect the company’s current view with respect to future events and the financial performance are made in reliance with 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 the company’s annual report on Form 10-K, the most recent quarterly report on Form 10-Q and in other filings with the Securities and Exchange Commission. We refer you to those sources for more information. Also to the extent, non-GAAP financial measures are discussed on this call, you may find a reconciliation to the most directly comparable GAAP measures on our website.

Lastly, I would like to point out that management’s remarks during this conference call are based on information and understandings believed accurate as of today’s date, December 3, 2021. Because of the time-sensitive nature of this information, it is the policy of Hibbett to limit the archived replay of this conference call and webcast to a period of 30 days.

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

I will now turn the call over to Mike Longo.

Michael E. Longo — Chief Executive Officer and President

Thanks, Jason. Good morning, and welcome to the Hibbett Q3 earnings call. If you’re following along using the slide deck, I’m on the third slide entitled, Introduction. I’ll be relatively brief this morning so that the team can go into greater detail on some topics of interest. This quarter’s financial performance was a strong outcome for the company. The third quarter is always the hardest of the year, so we’re very proud of the results we’re able to deliver. Specifically, the Q3 comp sales increased 13%. This came from a combination of a double-digit increase in both brick and mortar and omnichannel. The two year Q3 comp increased 37%. We also delivered operating income of $33 million and a diluted earnings per share of $1.68.

In spite of the much publicized global supply chain problems, we still managed to grow inventory nearly 23% versus the prior year and 19% just since the end of Q2. We put capital to work through a combination of capital expenditures invested in our business model and the consumer experience, a substantial share buyback of 1.4 million shares, and of course, our dividend. Most importantly, we continue to attract high quality talent and continue to develop our people. And that is after all the most critical component of the business, the people. And I couldn’t be prouder of the team, whether they’re in the stores or the distribution centers or the store support center, they all delivered on their commitment to the consumer, and we’re proud to represent them here today.

On Slide 4, as we showed you in Q2 and previous to that, we have a number of factors that we believe will have a lasting impact into the future, including continued improvements to our business model. Those are represented by our highly coveted selection of merchandise, our enhanced customer service and further developments in our best-in-class omnichannel experience.

Second, additional investments in the consumer experience such as store remodels and new store designs, website innovations, etc. And new customer retention, which has been driven by improvements of the loyalty program and our marketing programs to include significant investment in our social media program. Capitalizing on competitive closures and the reduction in distribution of key brands. And by that we mean our stores are in underserved communities, which effectively limits the amount of competition in our trade areas. But I’m going to come back to this in a minute and give you some further detail.

And then finally, an improved inventory position, which has benefited from the work we’ve done on our supply chain to increase capacity and the close coordination with our valued brand partners. This list hasn’t changed since the last few times we discussed it, and we are delivering on these factors now and in the future. Again, we are excited to report these strong results and are bullish on our future.

But I do also want to put a finer point on that underserved community comment. And so we’re going to give you some data that we haven’t previously disclosed that I think would be interesting. As of January 22, a couple of months in the future, we are forecasting that better than half of our stores will have no competition within three miles that carry products from our key brands. If you expand that and look at the stores with one or less competitors within three miles, that figure increases to almost 70%.

I’ll repeat that, because this is new news and we haven’t actually disclosed this previously. Come January, better than half of our stores will have no competition within three miles that carry products from our key brands. And when you look at one or less, that number jumps to 70%. So remember, these effects really don’t begin in a meaningful way until January of 2022. So we believe that this will be a significant factor for our success going forward.

I’ll now turn the call over to Jared to go into greater detail on our merchandising performance. Thank you.

Jared S. Briskin — Senior Vice President and Chief Merchant

Thank you, Mike. Good morning. If you turn to the merchandising slide, for the third quarter, our merchandise categories — excuse me, of apparel, footwear and team sports were all up double-digits. Our focus on toe-to-head merchandising continues to drive results as we saw strong cross-category connectivity drive improvement in items per sale and average ticket with a very strong back-to-school season across all categories and genders when compared to last year’s third quarter.

When compared to the third quarter of fiscal 2020, the results are even more impressive. All genders and categories were up double-digits to fiscal 2020 with the kids business just below 50% growth and the women’s business more than doubling. We’re very proud of these results and believe this achievement is coming as a direct result of the strategic shift in our merchandise organization that we deployed last year. As a reminder, we evolved from a traditional category structure of footwear, apparel and team sports to focus teams and leadership over our men’s, women’s, kid’s and City Gear businesses.

Our apparel business increased in the mid-teens. Drivers in the apparel business remain color and material connected tops and bottoms, sneaker connectivity and tall-to-small connectivity from adults to kids’ sizing. From the athletic brands, we continue to see strong demand for lifestyle product, especially fleece tops, fleece bottoms and T-shirts. Our fashion brand performance continued to be very strong. Fleece tops and bottoms were drivers in the category, but our performance in denim was the standout. We made a significant investment in denim in support of the investment through a strong cross-functional effort with our visual, operations and marketing teams leading to a fantastic result.

License business continued to perform extremely well. Our merchants did an exceptional job connecting the license products back to sneakers and to our seasonal stories. Fan business also improved in the quarter as some of our local teams such as the Atlanta Braves and Georgia Bulldogs performed well. Socks, sneaker accessories, bags and sunglasses had strong results during the quarter, offset by pandemic-related items such as masks in the year ago period.

Footwear business increased in the low-teens. Demand for classics and basketball footwear remains incredibly strong and in short supply across the market. Running continues to perform well as more consumers continue to explore the category. Sandals and slides showed significant growth in the quarter as we broadened our assortment and investment. Casual fall footwear was also exceptionally strong during the quarter. Specific to footwear and apparel, all genders were positive led by growth in the 20s for women’s and kid’s.

Inventory ended the quarter up 22% to last year and is very fresh. We are very confident with our inventory position to deliver the results outlined in our guidance and are incredibly proud of our efforts to improve our inventory position in the current environment. We accomplished this by working closely with our vendor partners to secure a substantial increase in our order book, securing incremental product from our vendor partners in season, improving our priority with our vendor partners regarding shipping and increasing our capacity by more than 50% within our own supply chain. We expect to end the fiscal year with year-over-year inventory growth in the mid-to-high single-digit range, and we’ll continue to prioritize inventory growth and consumer experience over cost.

As we look forward into the first quarter of fiscal ’23, we expect the supply chain to remain challenged and very fluid. We are working tirelessly to mitigate these challenges. While we continue to believe the challenges will persist and achieving our optimum level of inventory might be a challenge, we are expecting to deliver a significant increase in new receipts compared to the first quarter of fiscal 2022.

I’ll now turn the call over to Bob Volke.

Robert J. Volke — Chief Financial Officer

Thanks, Jared, and good morning. If you will please refer to the sixth slide titled, Third Quarter Fiscal 2022 Results. As a reminder, our results include both Hibbett and City Gear, and all results are reported on a combined basis.

For the third quarter, total net sales increased 15.2% to $381.7 million and consolidated comp sales increased 13%. This compares to third quarter fiscal 2021 sales of $331.4 million and a comp sales increase of 21.2%. Over a two year period, our comp sales have increased 37.4%. Brick and mortar comp sales were solid during the third quarter, coming in at 11.6% increase versus fiscal 2021 and a 31.6% increase relative to the third quarter of fiscal 2020.

E-commerce comp sales rose 22.3% compared to last year’s third quarter and reflected an 84.2% comp versus the third quarter of fiscal ’20. E-commerce sales accounted for 14% of net sales in the most recent quarter compared to 13.2% in the prior year third quarter. In comparing the third quarter of this year to the third quarter of fiscal ’20, the mix of e-commerce sales was approximately 350 basis points higher.

Our GAAP gross margin declined to 36.3% of net sales compared to 38.3% in the prior year third quarter. This approximate 200 basis point decline was primarily due to increased freight and transportation costs, which more than offset leverage from store occupancy expenses. Excluding adjustments to our non-cash inventory valuation reserves last year, the current year gross margin of 36.3% is comparable to the non-GAAP gross margin of 38.1% in the prior year.

Store operating, selling and administrative expenses, excluding depreciation and amortization, were 25.2% of net sales in the third quarter, which was a approximately 90 basis points below the 26.1% reported in the third quarter of last year. This decrease was primarily the result of leverage gained from the strong sales increase and improved labor management. Excluding certain City Gear acquisition integration expenses that occurred last year, SG&A expenses of 25.2% of net sales for the most recent quarter decreased by approximately 80 basis points from adjusted SG&A expenses of 26% of net sales in the prior year quarter.

Depreciation and amortization increased approximately $1.4 million from last year, reflecting increased capital investments on organic growth opportunities and infrastructure project. On a GAAP basis, we generated $33.4 million of operating profit or 8.8% of net sales, which compares to last year’s operating profit of $33.2 million or 10% of net sales. Excluding all non-GAAP adjustments during last year’s third quarter, our $33.4 million of operating income this year compared to operating income of $32.7 million in the third quarter of fiscal ’21.

GAAP diluted earnings per share were $1.68 for this year’s third quarter and did not include any non-recurring items. In last year’s third quarter, GAAP diluted earnings per share were $1.47 and adjusted diluted earnings per share were $1.45.

I will now have you move forward to the year-to-date results page on Slide 7. On a year-to-date basis, sales increased 25.4% to $1.31 billion, which is up from $1.04 billion over the first nine months of the prior year and compares to $871.2 million reported over the first nine months of fiscal ’20. Compared to fiscal 2021, comparable sales increased 24.1%. Brick and mortar comparable sales were up 29.6%. And e-commerce sales reflected a slight decrease of 2.9%. E-commerce represented 12.8% of total sales during the first nine months of the current year compared to 16.6% of total sales in the comparable period last year. Relative to two years ago, total comparable sales increased 51.9%. Brick and mortar comparable sales increased 45.4%. And e-commerce sales grew 111.8% over that same two year time period.

Our year-to-date GAAP gross margin was 39.1% of net sales compared to 35% for the first nine months of fiscal 2021, reflecting product margin strength, a lower mix of e-commerce sales and leverage of store occupancy costs. Excluding adjustments to our non-cash inventory valuation reserves last year, the current year gross margin of 39.1% is comparable to the non-GAAP gross margin of 35.3% in the prior year.

For the first nine months of fiscal 2022, SG&A expenses were 21.5% of net sales compared with 26.4% of net sales in the first nine months of last year. Excluding certain City Gear acquisition and integration expenses and pandemic-related impairment and valuation costs that occurred last year, current year SG&A expense of 21.5% of net sales reflected an improvement of approximately 110 basis points from adjusted SG&A expense of 22.6% over the first nine months of last year.

On a GAAP basis, we produced $205.1 million of year-to-date operating profit compared to last year’s operating profit of $67.4 million. Excluding all non-GAAP adjustments in the prior fiscal year, our year-to-date operating profit of $205.1 million, representing 15.7% of net sales is comparable to adjusted operating profit of $110.2 million or 10% — 10.6% of net sales over the first nine months of last year.

GAAP year-to-date diluted earnings per share were $9.74 for the current year compared to $2.98 in the first nine months of fiscal ’21. Excluding all non-GAAP adjustments in the prior year, the $9.74 diluted earnings per share this year compares to $4.74 for the same period of fiscal ’21. Driven by strong sales, robust margins and leverage of SG&A expenses, we generated operating cash flow of approximately $112 million on a year-to-date basis and we spent $43.9 million in capital, which was largely related to new relocated, remodeled and expanded stores plus various infrastructure projects.

During the first nine months of fiscal 2022, we’ve returned over $245 million in cash to our shareholders. We have spent $238.3 million, repurchasing nearly 3 million shares and paid out $7.5 million via a regular recurring quarterly dividend that was initiated in June of the current year. Specific to the third quarter, the company repurchased just over 1.4 million shares at a cost of $117.8 million.

Turning to the balance sheet. We ended the quarter with $29.8 million in cash and cash equivalents, which is down from $176.8 million at the beginning of the quarter and $177.7 million a year ago. Our entire $100 million of borrowing capacity remains available to us as of the end of the third quarter. Net inventory ended the quarter at $258.8 million, a 19.4% increase from the beginning of the quarter and a 22.8% increase from last year’s third quarter ending balance. Consistent with comments we have made previously, we continue to strengthen our relationships with our vendor partners and have collaborated fully with the entire vendor community to build and strengthen our inventory position.

Next I will review our updated fourth quarter and fiscal ’22 guidance on the eighth slide, entitled Updated Guidance. Given the strong performance experienced year-to-date, we are updating our financial guidance for the fourth quarter of fiscal ’22, which ends on January 29, 2022. This update is influenced by several factors. As we have previously mentioned, we attracted and retained new customers throughout fiscal ’21 due to pent-up demand, market disruption and government stimulus.

We have continued to attract and retain new customers through the first nine months of fiscal ’22 and feel that our business model will provide us the opportunity to continue building on this trend in the future. We expect that accelerating consumer adoption of e-commerce will continue to drive growth across our best-in-class omnichannel platform. Those factors, in addition to our strong vendor relationships and targeted purchases by our merchandising team, have us well positioned to take advantage of expected increases in our business.

Net double-digit unit store growth, improving the in-store consumer experience in addition to supply chain and selling initiatives should also help drive sales growth. We are now forecasting comp sales for the fourth quarter to be in the positive high-single-digit range, which is an upward revision from previous guidance and applied full year comp sales percentage growth in the positive high-teens.

We expect gross margin performance will be lower in the fourth quarter of fiscal ’22 in relation to the fourth quarter of fiscal ’21, which is consistent with previous guidance due to headwinds on freight and shipping costs and a potential increase in promotional activity. We continue to expect gross margin will be favorable to both the GAAP and adjusted fiscal ’21 gross margin percentages on a full year basis.

SG&A is expected to decline as a percentage of sales in the fourth quarter of fiscal ’22 in comparison to the fourth quarter of fiscal ’21 and is also anticipated to decline as a percent of sales in comparison to both GAAP and adjusted SG&A in fiscal ’21 on a full year basis, which is also consistent with prior guidance.

Lastly, diluted EPS for the fourth quarter is forecasted to be in the range of $1.85 to $2.05, which implies full year diluted EPS of $11.70 to $11.90. This is an upward revision versus our previous outlook for projected diluted EPS of $11 to $11.50. Our full year diluted EPS forecast assumes an effective tax rate of approximately 24% and a weighted average diluted share count of approximately 15.7 million. We do not anticipate the difference between our GAAP and non-GAAP results will be material for the current fiscal year.

From a capital expenditure perspective, we remain committed to investing in our business and have built a pipeline of attractive investment opportunities for the remainder of the year. For the full year of fiscal ’22, we reiterate our plan to invest approximately $70 million focused on organic growth opportunities that we believe will lead to incremental sales and profitability in future periods and also on strategic infrastructure projects that will enhance our store operations, distribution and back office efficiency. We believe that these investments will assist in attracting new customers, retaining both new and existing customers, enhance the customer experience in stores and online and modernize our technology and processes.

In addition to our capital expenditure plans, we intend to opportunistically allocate capital to share repurchases and currently have approximately $398 million available under our share repurchase program. We also remain dedicated to returning capital to our shareholders in the form of our regular recurring quarterly dividend of $0.25 per share.

That concludes our prepared remarks. Operator, please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Sam Poser with Williams Trading. You may proceed with your question.

Sam Poser — Williams Trading — Analyst

Good morning, everybody. Thank you for taking my questions. Happy holidays. Can we talk a little bit about the gross margin? And can you give us some details or some more details on sort of the merchandise margin versus the fixed cost versus the freight so we can understand sort of the overall health, please?

Robert J. Volke — Chief Financial Officer

Hey, Sam, it’s Bob. So we don’t get into specific percentages on those buckets. But again, I guess, as we’ve said before, just to remind everyone, we kind of break things down in the kind of the product margin, the transportation piece as well as the store occupancy. So I would say it on the product margin piece, it’s pretty solid. We’ve been pretty consistent from quarter-to-quarter on the product margin side. This is a little bit of a lower sales quarter. So we do get a little less leverage from the store occupancy side. And where we really saw kind of the headwinds as we expected and we’ve been talking about over the last several quarters is starting to see some of that transportation and freight cost increased a little bit as we get deeper into the year. So that’s kind of how margin breakdown for the current quarter.

Sam Poser — Williams Trading — Analyst

So if we compare Q3 to Q2, your merch margin was — your product margins remained high or did they improve from Q2?

Robert J. Volke — Chief Financial Officer

I’d say they were pretty flat.

Sam Poser — Williams Trading — Analyst

And then — so that’s up significantly year-over-year. You’ve got a little less leverage on your occupancy. And then, to what degree was transportation as an impact to gross margin worse in Q3 than it was in Q2?

Robert J. Volke — Chief Financial Officer

Again, I think that when you look at kind of the decline from Q3 to Q2 — from Q2 to Q3, that would — we would say most of that is driven by the freight and transportation component.

Sam Poser — Williams Trading — Analyst

Okay, thanks. And then when we’re looking ahead into fiscal ’23, I know you’re not guiding, but you did mention, I think Jared mentioned that the closure that you’re going to get some benefit from some vendor decisions and so on, and your stores — you have less stores with competition around you. Would you anticipate looking into ’23 that you could get close to a positive comp for the year given sort of the extraordinary comps that you’ve run this year?

Michael E. Longo — Chief Executive Officer and President

Absolutely. Good morning, Sam. This is Mike. Happy holidays to you as well. The answer to your question is, yes. So we are not going to go into a great deal of detail on next year, but I am very comfortable talking about this part of next year on the sales line. So if you were to look at the headwinds and tailwinds that puts in the calls, the pluses a minuses, so on the headwinds, the negatives. We’re going to comp, as everyone knows, against stimulus, which was significant and it impacted Q1 and to some degree Q2. So those are headwinds. We have a little bit of concern over share of wallet, the rotation out of buying goods and it moving into services and experiences. We’re not that worried about that, but it certainly will be a factor over the mid and long-term. So those are the headwinds.

The tailwinds are what we spoke to on the competitive set and the changes in distribution which you yourself have written extensively about. So if you take those and you extrapolate them out, we think that that is a significant tailwind for us. And as I went to some pains to detail in my earlier remarks, that really won’t in a substantial amount show up until January of 2022, which of course is next — will be at the beginning of next fiscal year.

I would add to that the tailwinds of our customer and our ability to retain that customer, our loyalty programs and the marketing that we’re doing around it to include the social media. I’d add to that a third point, which is all of the improvements in the business model. The capital expenditures that we’ve basically tripled over our run rate this year are being reinvested in the business. Some of that’s for sure catch-up, but most of it has to do with an improved consumer experience both at brick and mortar as well as the omnichannel and digital experience.

Additionally, that will drive some digital strength. Part of the digital strength will come from we’ve got a better mousetrap. We just have a better experience. We’ve got a better website. We rank very highly if not at the top of all the websites in our universe and in the country. And I’d say that with no degree of modestly. I will also point out that our inventory position is not only going to help our brick and mortar sales, but our commerce sales as well, because we were significantly impacted last year. So we want the inventory to recover and we’re working very hard to do that as are our major brand partners, but that’s going to have a great effect on e-commerce sales and brick and mortar sales next year. So when you sum all that up and you do the puts in the calls, we’ve got a positive comp next year and we feel very confident about that.

Sam Poser — Williams Trading — Analyst

Thank you. If I could just follow-up on the priority with your vendors, there’s legal [Phonetic] supply chain delays and everything else and with some of the vendors, increasing their focus on direct-to-consumer. How are you — is your — to what degree is your priority changing with the major vendors? And if you could just expand on that, and I think Jared probably had something to say about this.

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. Hey, Sam, good morning. Happy Holidays to you. Certainly, we’re very confident in our positioning with the vendors and how our priority has been elevated. In Mike’s opening remarks he talked a lot about our focus on underserved markets and an underserved consumer, and that’s very valuable for our brand partners. In conjunction with all of the distribution changes that the brands are deploying, that leaves us in a very, very strong position to recapture sales and to essentially in the majority of our market to be the only distribution point for all of our primary brands. And that has significantly elevated our positioning with the brands and the focus on our business, especially with regard to inventory and some of the impacts in supply chain.

Sam Poser — Williams Trading — Analyst

Thanks. And if I can just one last one, changing the subject. With your payroll costs at store level and the ability to appropriately staff the stores to optimize the sales in the stores, from my checks on some markets, there may have been some issues in regard to that?

Benjamin A. Knighten — Senior Vice President of Operations

Yeah, Sam, this is Ben Knighten, and I think I can speak to that a little bit. To your point, you have individualized markets are going to react differently and we face those challenges. There’s been a general tightening of the labor market, but that’s not really new. As retail began reopening, everybody’s going after that labor component. And so we’ve seen some incremental cost in wage because of that, but we’ve also put in place some tactics to mitigate that. And specifically with our Sole School, which we partner with our vendors own, that really opens us up to a little bit younger aged employee. And so we lowered our minimum hiring age to 17, which allows us not only to go into our Sole Schools and talk about Hibbett and retail in general, but to give them the opportunity to come and actually experience that and work with us, and that’s been a huge success for us there. They’re also our customer force and our target consumer. And so that’s been received very well.

You also I think I’m going to take a look at the overall compensation. There’s not only the wage itself, but the other components, the benefits associated with that, including the discount quite honestly and the consumer or the employee that we go after what they value. Wage being a big piece of that, no doubt, but also the other — the environmental factor of where you work. And so we’re actively managing that. Our wage and our payroll is in line with kind of our expectations. And we think we can manage that on a go-forward basis.

Sam Poser — Williams Trading — Analyst

Thank you very much, and all the best. Happy holidays again.

Robert J. Volke — Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Jim Chartier with Moness, Crespi & Hardt. You may proceed with your question.

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Good morning. Thanks for taking my questions. First, Bob, I was wondering if the freight and the transportation cost headwinds, how do you see those trending over the next two or three quarters?

Robert J. Volke — Chief Financial Officer

Again, I think, my expectation is that we are going to still continue to see a little bit of pressure on that, I don’t think it’s going to be significantly more than where we are today. We are doing a lot of things internally to try to mitigate some of that. We’ve got some ways to move products through the system internally to our own business. Again, we’ve been saying this for a couple of quarters, kind of waiting for some of these trends to kind of kick in. As far as ways or rates and things like that, I think we might see some additional price increases in the fiscal ’23. But again, don’t think it’s going to be a substantial headwind beyond that.

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Great. And then the share repurchase, clearly very significant this quarter. Are you guys willing to take on debt to buy back more stock?

Robert J. Volke — Chief Financial Officer

I think that’s to be determined. We obviously have — we look at capital allocation around here on a regular basis first and foremost as we want to invest in our business. We want to continue to put money into projects that are going to generate additional opportunities for revenue and profitable in the future. Obviously, if we feel that there is an attractive opportunity out there to buy back shares, we will certainly do that when it’s prudent. We do have that backstop if we need it, but at this point in time, it’s again still to be determined.

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Okay. And then, Mike, you said third quarter is the toughest quarter of the year. Just wondering if you could give a little more detail around why that is and why things might get better in fourth quarter?

Michael E. Longo — Chief Executive Officer and President

My general comments about Q3 are just having been in this industry for over a decade. It’s just a relatively low sales period with relatively lower gross margins. Back-to-school is the only single event in the whole thing. You will have a homecoming game here there, but events drive business and back-to-school is skews towards commoditized business away from a fashion business. And so it’s just a little less exciting. Don’t make too much of the comment. It’s just that Q2, Q3 are typically, you look every year, as a combination, are the low sales period. So Q1 dominated by tax season, Q3 dominated by the holidays.

Jared, do you want to jump in there?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah, I think it’s pretty accurate. I just would highlight one additional comment from Bob’s remarks with regard to the freight. So the other thing to keep in mind is we are processing a significant increase of receipts coming through our facilities. Obviously, the work we’ve done with our vendor partners in securing inventory is helping us to build the inventory at a significantly higher revenue level that we’ve been at historically. So that is necessitating us to process a significant level of receipts, which is also having an impact on our freight and transportation costs.

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Great. There is very helpful. Thanks, and best of luck.

Michael E. Longo — Chief Executive Officer and President

And add to that the fact that outbound was significantly higher than both inbound as well as sales. So you’ve got a rate increase, which we’ve done a good job talking about in this conversation, but Jared brings up a great point. The volume part of freight was significantly higher in Q3 than any time in recent history. So you had a rate problem as well as the volume problem. The rate problem will continue into the near future. At some point that will normalize. Everything comes back to the mean at some point, but the volume problem won’t persist at this level. So that’s a great call out by Jared. Thank you.

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Great. Thank you.

Operator

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

Cristina Fernandez — Telsey Advisory Group — Analyst

Hi, good morning. Thank you for taking my question. I wanted to see if you could talk about the competition of the inventory in sort of the flow of receipts over the next two quarters. I thought, Jared, it was interesting you mentioned that you expect to have more fresh inventory receipts in the first quarter of next year versus last. But perhaps you can expand on that and how that will fit the high heat product launches over the next two quarters?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah, certainly. Good morning. Thank you for the question. Yeah, I think first and foremost, our teams collectively in working with our partners have done just an incredible job of reacting to our higher sales volume to continue to get access to inventory. We’re certainly very proud of what we were able to achieve with regard to our increase in inventory in the third quarter year-over-year, but as well as our increase in inventory from the third quarter relative to the second quarter.

There is certainly some challenges, as everyone is aware of, with regard to the supply chain, but we continue to have a substantial flow of inventory coming in. And based off of our expectations of when product will deliver in conjunction with our heightened order book and priorities that we’ve gotten from the vendors, we expect to have a significant level of increased fresh receipts in the first half of next year compared to where we were last year.

As a reminder, we had stimulus occur early in the year last year that drove inventory levels significantly down. We’ve had to use the second quarter and the third quarter of this year to catch those inventory levels up. But we expect to enter into the period of low inventory levels next year in a much better level this year on top of the fact that it being very clean, very fresh and what we believe will be on trend.

Cristina Fernandez — Telsey Advisory Group — Analyst

And then one for Mike. I saw the data you gave on the competitors, which was really interesting. I mean, are there any callouts between what the — where the product is being taken out from a competitors’ standpoint this year that will benefit 2023 versus last year, which was more department stores? I know last year was skewed more to apparel and perhaps more mid-price point. Where do you think the benefit will be in 2023 for Hibbett? Is it more footwear or also more on the apparel side?

Michael E. Longo — Chief Executive Officer and President

Right. This is Mike. So, as you know, last year, the thing that we spent a lot of time detailing for you were the very specific instances of Stage stores liquidation as well as some known closures of JCPenney stores. So what that did for us was in those smaller markets and in some of those medium-sized markets, the competition went away in whole or part. We saw an uptick in those markets. We didn’t see it immediately, but it took a number of weeks where the consumer because of the consumer doesn’t show up every week, they don’t know about the closure and they walk next door when they do finally come back. And so the frequency of shopping drives some of that. So if you have a customer that’s basically coming in four to five times a year as your average consumer, it’s going to take a little while for them to make that discovery.

So when Stage stores closed, back to your point, that was much more of an apparel sort of driven phenomenon. And I would say, JCPenney is similar. And while we focus on our key brand partners in these conversations, I will also point out that Levi’s and denim and other apparel that we sell was a significant portion of the inventory and sales of Stage and JCPenney. So we’ve tracked that, we understand that phenomenon and we have pretty good idea of what that meant to us. And so we have seen a handful of moderate price department stores begin to lose distribution over the course of this year. The most meaningful set of that will come January of ’22 when some of that distribution dries up in December of ’21. So we believe that the lion’s share of this will show up in the next fiscal year. So I’m not sure if I’m getting to the heart of your question. Happy to have you redirected the direction you want to go, but Jared has got a couple of things to add.

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. Thanks, Mike. I just want to add. Mike certainly referenced the apparel opportunity that we saw early from Stage and JCPenney, and we feel great about our reaction to that and what’s that — how that’s impacting our business. But I’d also like to say, I think more specific to your point, a lot of the competitive set in distribution certainly is more at the good and better level when you talk about product. Our focus from a product standpoint remains best level product. And our expectations are, we’ll continue to grow our offering with regard to best level product, but we also have taken this as an opportunity to reinforce our positioning at the better level. And that’s where we do expect consumers that we will pick up some consumers at the better level that in most cases will not have another opportunity or destination to shop in the markets that we serve.

Cristina Fernandez — Telsey Advisory Group — Analyst

That’s very helpful. Thank you.

Jared S. Briskin — Senior Vice President and Chief Merchant

Thank you.

Operator

Our next question comes from the line of John Lawrence with Benchmark. You may proceed with your question.

John Lawrence — The Benchmark Company — Analyst

Yeah. Thank you. Good morning, guys.

Michael E. Longo — Chief Executive Officer and President

Good morning, John.

John Lawrence — The Benchmark Company — Analyst

Mike, would you just — were those call-outs about the smaller markets in your competition? Would you just take a minute and talk about the differences of that customer maybe that you see in that demographic in that small market versus that same customer in more of a metro market, more of an urban market and how that plays to your advantage with that product set?

Michael E. Longo — Chief Executive Officer and President

Sure, John. Thank you. So we were — recently, we had a trip in the Houston metro area, and we ended up in a store because most of our stores are in these underserved markets. We were in, I believe it was El Campo, Texas was one of the ones I can remember, but there were dozens of these examples. So we’re standing in a store in El Campo, Texas. And you begin to ask the obvious questions to the store manager and say, okay, who is your consumer? What’s your staff? Where do they come from? It’s neighborhood, neighborhood, neighborhood, and we talk about that. And then you inevitably ask, well, who’s your competition? And they start laughing. They said, well, 45 minutes away, there is a mall over in that city. And then they start to scratch their head because they can’t come up with any other answer.

So our nearest competitor who sells product that looks like us, anywhere close to us, is 45 minutes away. So we basically are the only point of distribution for Nike, Jordan, Puma, Adidas, Under Armour, Hilfiger, AKOO, Pink Dolphin, etc., etc. in this county, 45 minute radius around the store. So we’re pulling that entire trade area plus the trade areas around it and that’s part of our competitive differentiation. It’s that underserved market consumer.

And so then your next question ought to be and will be, well, how do you compare and contrast that when you drive into Houston and you’re in the actual city? Well, inside Houston, if you’re familiar with Houston, you go to Alief, for example. Well, inside Alief or Mesa and Tidwell or all these other places, you go look at the trade areas. Those trade areas may be five miles across in terms of radius, 10 mile diameter. And within that, you start talking about drive distances and you talk about the consumers that are addressable within that trade area, which is well defined by — and if you’ve done any trade area work, you know what defines trade areas. And so within that trade area, we’re the only thing going. There is no competition within that trade area in Alief. We are the point of distribution.

And so we do talk about this a lot. In that, the economics of the trade area in an underserved market are identical whether they’re in a metro market or a rural market because the only difference is the geography that you cover, the customers that you’re pulling are relatively the same. Certainly, your big gun stores have more consumers than your smaller stores, but on average, those economics are the same. And so we like that business model a lot. We prosper in that environment. And we’re incremental and complementary to the major brands business as a result, and we think that that’s a big part of what we do. So I’ll pause for a minute, let you redirect where you want to go with that question.

Operator

Our next question comes from the line of Alex Perry with Bank of America. You may proceed with your question.

Alex Perry — Bank of America Merrill Lynch — Analyst

Hi. Thanks for taking my question, and congrats on a strong quarter, and happy holidays.

Michael E. Longo — Chief Executive Officer and President

Thank you. Same to you.

Alex Perry — Bank of America Merrill Lynch — Analyst

Thanks. I just wanted to circle back to the inventory a little bit here. So it sounds like inventory position for holiday remained strong, but could you maybe talk a little bit about if you are to any extent seen an impact from the Vietnam closures from a lot of your brand partners when that would — when that inventory would hit? And then I think Jared may have made a comment on sort of Classics Bball being in short supply, maybe talk a little bit about sort of the composition of the inventory and differences around that? And I think it sounds like receipts versus last year and in the first half of next year are going to be up nicely, but I think inventory was down pretty significantly. So maybe could you just characterize it in sort of versus a normalized level that would be super helpful? Thank you.

Michael E. Longo — Chief Executive Officer and President

Yeah. So I’ll start. This is Mike, and then Jared will come in. To highlight, we’re not overly concerned about our inventory position. As a matter of fact, we think it’s one of our strengths going forward, both this quarter, next quarter and next year. So while it is breathlessly reported in the media that the supply chain is a problem, this is not news to the retailers. It’s been like this for some time. And if you go back into our recent history when the tariffs were put in place, that was the first big slug of inventory and that bubble of inventory came through the supply chain that caused disruption.

Now this disruption is bigger, for sure, and has lasted longer, but none of this is news. We’ve been dealing with this. And for two years, we’ve been working on our own supply chain. And I’ll point out one of the things that may be obvious, but sometimes we don’t talk about it is, when you have volatility and if you look at that graph of receipts, you look at the amplitude of the changes and the severity of the tops and the bottoms, the troughs and the peaks, that amplitudes increase. Well, the only reason — the only way to deal with variance is to increase your capacity. And the best way to increase your capacity is to do it in a flexible way. No one wants to pour tens of millions of dollars in a capacity that you’re only going to use a few weeks of the year.

So, Jared and Mike McAbee who works with him along with their partners in the business have done a masterful job in adding flexible capacity. And Ron Blahnik and the folks in IT have done a great job in giving them pieces of systems and different ways of executing processes that allow them to do things that they were unable to do previously. So we’re really excited about those things, but this is not a today sort of thing. And so I just wanted to point out that none of this is a surprise to us.

So I’m going to hand this over to Jared. Thanks.

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. Thanks, Mike. So I’ll try and get a little bit deeper here maybe in the question over demand and what’s happening within Classics and Lifestyle and Basketball. So obviously, we have a very consistent and strong business in launch product and we continue to see extremely strong liquidations there. Bill and team have done a fantastic job of continuing to update our Raffle program and Ben and his team doing an excellent job in the stores of getting the products sold through.

Where we’ve seen the biggest difference from a rate of sales standpoint is in our, what we would call, high heat product. Not necessarily the launch date, but very, very high demand. And without getting too technical, essentially product that historically may have lasted 60 days, now lasting 30. Products that may be would have lasted a 30 days is now lasting a seven to 10. And product that historically might have lasted a week is now selling out in the day that the stores receive it.

So that’s not the best customer experience and that’s why we’re working to really improve the level of inventory to take advantage of that. But what it has done is that product selling through as fast as it has elevated other parts of our business typically associated with the Monday through Friday business. So as we’ve broadened our investments, made investments in categories that haven’t been large categories for us historically, these demand patterns have helped us, and again, we’re very confident. Our footwear business was up double-digit for the back-to-school period. So we feel great about what we have to offer for our consumers, they obviously reacted positively and we were able to build inventory.

Mike mentioned the supply chain challenges and not a new story, as he mentioned. So our focus has been on the things that we can control. From an expectation standpoint, we’ve been dealing with late deliveries for upwards of 18 months now. So that’s not new. And we do expect that there will be some convergence of delivery based off the Vietnam shut down during the first quarter. So we’re excited about that. That’s why we believe that our receipt levels will be significantly higher during the first quarter and our inventory levels will be significantly higher, as you referenced. Our inventory last year was quite compressed due to the big ramp-up of stimulus.

So with all that, we’re confident. There is certainly lots of products that we would like to have a lot more. And we would like to have more product available on our store on a day in day basis and some of our apparel categories as well. But very confident that now the consumer is reacting and our ability to serve them.

Alex Perry — Bank of America Merrill Lynch — Analyst

That was really, really helpful. I appreciate it. Could you maybe talk about the promotional commentary in the guidance in terms of — it sounds like embedded in the 4Q guide is a potential increase in promos. But just maybe talk through if you’ve seen that, kind of seen like the way it was phrased, maybe you haven’t seen that, but you are — there could be some of that embedded in the guidance? Thank you.

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah, we’re always focused on it. Certainly, we want to be very cognizant of what competition is doing. Again, our inventory is extremely healthy. Certainly, it is the holiday period, so there are some promotions that we’re going to run, but it is a significantly lower level than what we’ve done historically. But at the same time, we want to make sure that should competition react from a promotional standpoint that we are prepared and then we could do that accordingly.

I think certainly, we follow that closely, as Mike mentioned. We have a significant reduction in the competition and we’ll have a further reduction as we get into January. So some of that from a reactionary standpoint can become less important over time, but we want to ensure that we are putting our best foot forward with the consumer every day and understanding what’s occurring in the market.

Alex Perry — Bank of America Merrill Lynch — Analyst

Perfect. And just one last one, if I could. Could you maybe help us parse out the differences you’re seeing in sort of traffic versus ticket? It sounds like both were up nicely this quarter. Maybe just if you could give us a little more detail on sort of what you’re seeing there? And is — the very quick sell through rate, is that — do you find that in a way like increasing traffic within the stores as people are revisiting the CF products back in stock? Just any help there would be really helpful. Thanks.

William G. Quinn — Senior Vice President of Digital Commerce

Hey, Alex, good morning. This is Bill Quinn. So I’ll start with just traffic in general. We have a record amount of active customers and that has really been driven by just continuing to add new members into our loyalty program. On top of that, our existing member base has grown significantly, and that’s from the new members as well as just the lower attrition rate. So with more customers, of course, you’re going to get more purchases. So we’re very happy to see those trends.

As far as the average purchase, we’re definitely seeing the average purchase amount go up. That’s a result of two components; the AUR going up, and Jared spoke a little bit to that as well as our IPS, which is just how many items we have per sale. And Ben and team has done a wonderful job driving that through a variety of initiatives.

A couple of other things to mention is that our fastest growing customer segment is our omnichannel customer who shops in both channels, and they purchase twice as much. And we’ve seen that segment grew considerably. And then on top of that, we relaunched our loyalty program this quarter and we’ve seen a dramatic increase in new customers from that as well as the shift in customer behavior. So we’ve made it actually easier to get points and award, and that’s driving a higher purchase rate.

In particular, we’ve got two levels to our program; MVP, which is a base level and VIP, which is the top level. And we’re seeing a lot more VIP customers who purchase three times the amount of an MVP customer. So just to summarize, we’re seeing good trends at the ticket level, and some of that is being driven by just an increased number of members, but also just VIPs, more VIPs and also more omnichannel customers.

I’ll turn it over to Ben to talk a little bit more about that.

Benjamin A. Knighten — Senior Vice President of Operations

Yeah, just to tag on that a little bit. To Bill’s point, we’ve seen nice increases in AURs, nice increases in customer traffic both online and in store, and a lot of that can be attributed to the assortment that we have in store, and some of — Jared talked about earlier, we’re able to offer that underserved consumer in El Campo, Texas an assortment. It’s not only can you not find those specific items if you can’t find them together in one spot except in Hibbett without having to go 45 minutes. And so that’s a big piece of what drives that for us in our investment in denim and other things.

We also have to reach out and let our customers know how that — we’ve made some increases or some investments in supply chain, frequency of delivery, things like that to get stuff to stores faster, but then we have to let our consumers know that it’s there. Bill and his team have done a great job of that and we’ve done some things with local social media that have really kind of accelerated how we were able to reach out and engage with our consumers, let them know that their product, the project that they want is in our store or online. And so we’ve done a really good job of doing that, and you see that in those metrics.

Alex Perry — Bank of America Merrill Lynch — Analyst

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

Michael E. Longo — Chief Executive Officer and President

Thank you.

Operator

Ladies and gentlemen, we have reached the end of today’s question and answer session. I would like to turn this call back over to Mr. Mike Longo for closing remarks.

Michael E. Longo — Chief Executive Officer and President

Well, thank you. As you can tell, we’re very excited to report these strong results. We had a great Q3. We’re forecasting a great Q4. We like our business model. We like our inventory position. We like it now, we like it next quarter and we like it next year. We love our team. We love the people that we go to work with and we play this game with, and we can imagine having anyone else on our team. So we always like to talk about that. We always like to highlight the fact that we have great teammates and they’re doing a fantastic job. We look forward to sharing our results next quarter and speaking to next year. So again, thank you. We appreciate it. And we look forward to speaking with all of you very, very soon.

Operator

[Operator Closing Remarks]