Hibbett Sports, inc (HIBB) Q4 2022 Earnings Call Transcript

Hibbett Sports, inc  (NASDAQ: HIBB) Q4 2022 earnings call dated Mar. 04, 2022

Corporate Participants:

Gavin Bell — Vice President of 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

William G. Quinn — Senior Vice President of Digital Commerce

Benjamin A. Knighten — Senior Vice President of Operations

Analysts:

Sam Poser — Williams Trading — Analyst

Alex Perry — Bank of America — Analyst

Justin Kleber — Robert W. Baird — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

Jim Chartier — Monness, Crespi, Hardt — Analyst

Presentation:

Operator

Greetings and welcome to Hibbett, Inc.’s Fourth Quarter Earnings Results. [Operator Instructions]

It is now my pleasure to introduce your host, Gavin Bell, Vice President of Investor Relations. Thank you. You may begin.

Gavin Bell — Vice President of Investor Relations

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 at investors.hibbett.com and under the News & Events section. These materials may help you follow along with our discussion this morning.

Before we begin, I’d like to remind everyone that some of management’s comments during this conference call are forward-looking statements. These statements, which reflect the Company’s current views with respect to future events and financial performance are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the Company’s future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued this morning and are noted on slide 2 of the earnings presentation in the Company’s Annual Report on Form 10-K, the most recent quarterly report on Form 10-K and 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 the conference call are based on information and understandings believed to accurate as of today’s date, March 4, 2022, because of the time-sensitive nature of this information, it is the policy of Hibbett, Inc. 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; 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’ll now turn the call over to Mike Longo.

Michael E. Longo — Chief Executive Officer and President

Good morning and welcome to the Hibbett Q4 earnings call. For those of you following along the slides, I’m on the slide entitled overview, slide number 3. As you know we pre-released sales and earnings two weeks ago in order to get information to you ahead of today’s call. While that data reflected results below our expectations and the guidance we gave you previously, we believe it was important to provide an update to you as soon as we are reasonably certain of the results.

Today’s press release provides our updated results in the — for the fourth quarter and for the full fiscal year. So in review, the Q4 FY ’22 results sales increased 1.7% with a negative one comp, the two-year comp was a plus 20.7% and a diluted earnings per share of $1.25. For the full year FY ’22, we had a 17.4% comp, a two-year comp of a positive 43.7% and diluted earnings per share of $11.19. We believe the results of Q4 negatively impacted by a handful of factors.

In addition to a surge in COVID-19 cases, we feel the other primary factors fall into three general categories, inventory, inflation and income. In the inventory category, the biggest factor that affected sales in Q4 was the supply chain disruption that resulted in a shortfall of inventory versus what we forecast. The late delivery of specific products, most notably footwear drove an approximate negative 10 comp for the last month of the quarter and that resulted in an overall negative comp of negative 5% for the quarter.

The second bucket is inflation. The top 3 goods and services affected by inflation or fuel, food and housing. These three things, effectively lower the consumers’ discretionary income available to purchase goods and services. This trend is also expected to continue into Q1. But we’ll begin to abate as we anniversary the changes throughout the year. The third bucket income reflect around the lack of stimulus this year versus last year and that cause a change in consumer behavior. When blessed with excess income last year the consumer have few disposable had less disposable income in the current quarter than last year, and so that materially affected sales.

And so moving onto the fourth slide, historical performance. I want to remind everybody that the sales growth and related financial performance improvement of our business over the most recent several fiscal years has been material. While it’s easy to get caught up in evaluating results on a quarter-by-quarter basis. We manage our business for the longer term outlook in mind. While the last two fiscal years have been positively impacted by stimulus and changes in the competitive landscape among other factors, we’ve also seen steadily improving underlying business factors and that model has improved and as allowed us to take advantage of the opportunities afforded to us in the current circumstances. We believe those improvements were driven by investments in the business model, investments in the consumer experience, new customer retention and an improving inventory position.

As a reminder, at the beginning of our fiscal year, the one that we’re in now, we believe that approximately 54% of our stores will have no competition within three miles that carry product from our key brands. If you look at the stores with one or less competitors within three miles, that figure increases to almost 70%. We believe this is a significant factor in our success going forward. As you can see from the tables on the slide, the rapid sales growth has driven significant diluted earnings per share expansion in addition to generating a huge lift in operating income as a percent of net sales. As stated in this morning’s press release, I believe that our improved omnichannel business model and compelling merchandise assortment creates differentiation in the marketplace and provides us with a competitive advantage in the eyes of the consumer and our vendor partners and puts us in a position to deliver strong sales and profitability results in the coming years.

I’ll now turn the call over to Jared. Thank you.

Jared S. Briskin — Senior Vice President and Chief Merchant

Thanks, Mike. Good morning. Please turn to slide 5, merchandising. For the fourth quarter, we had a mixed performance across our merchandise categories. As expected, apparel and team sports were very strong with apparel up mid-teens and team sports up in the low-20s. Momentum in our footwear category slowed as deliveries were further impacted by the challenges in the supply chain. We estimate that comps were affected negatively by approximately 10% in the footwear category and 5% overall due to the headwinds from delays associated with launch products.

When compared to fiscal 2020 fourth quarter, our results remain impressive. All genders and categories were up double-digit when compared to fiscal 2020, with apparel, the most significant growth category up more than 50%. While the fourth quarter was below our expectations, the results that we achieved for the year give us confidence that the strategic shift in our merchandising organization and our toe-to-head merchandising strategy are working and elevating how we serve consumers.

In the fourth quarter, apparel business increased in the mid-teens. Further development of our apparel business across all genders has been and remains a priority for us. Key incremental investments in denim, premium fleece, jerseys and littles performed above plan during the quarter. Our athletic brand performance was excellent during the quarter. Key trends included footwear connectivity matching mono-color tops and bottoms and premium fleece. Denim in both tops and bottoms was the driver of our fashion brand business. Our essential denim programs as well as denim in our streetwear collections performed exceptionally well.

Jerseys and hats remain a hot trend and added significant upside during the quarter. Footwear business decreased mid-single-digits in the fourth quarter and continues to be impacted more significantly by supply chain challenges than other categories. Order delays as a result of the supply chain affected basketball, lifestyle and running negatively although demand remains extremely high. Incremental investments in casual footwear has been and remains a priority and this category more than doubled during the quarter.

Specific to footwear and apparel, women’s improved mid-single digits and kids improved in the low teens. Men’s was down mid-single digits and is our most pressured area regarding inventory. As expected inventory ended the fourth quarter, up approximately 9% the last year. During the latter part of December and January, we saw a slowdown of deliveries impacting our inventory estimates by an additional 30 to 45 days. This was unexpected and had a meaningful impact to sales in January.

I’m incredibly proud of the team’s efforts to secure inventory to support our increased business. During fiscal ’22 in the midst of all the reported supply chain challenges, our team was able to secure, deliver and process an additional $185 million in receipts at cost over and above historical norms. We were able to accomplish this by improving our priority with our vendor partners, securing incremental product from our vendor partners in season as well as through booking periods and increasing our processing capacity by more than 50% within our own supply chain.

The additional slowdown of deliveries continues to pressure our ability to get to an optimal level of inventory. We’re confident in our order book, that timing of deliveries remains incredibly fluid. Based on current estimations, we do expect inventory levels to continue to improve throughout the first half of the year, reaching levels closer to optimum levels in the back half of the year.

I’ll now turn the call over to Bob to discuss our financial results.

Robert J. Volke — Chief Financial Officer

Thanks, Jared, and good morning. Please refer to slide 6 for some highlights of the fiscal fourth quarter of ’22. As a reminder, we report our results on a consolidated basis that includes both the Hibbett and City Gear brands. For the fourth quarter, total net sales increased 1.7% to $383.3 million in comparison to the fourth quarter of fiscal 2021 and reflected a two-year sales increase of 22.5% compared to the fourth quarter of 2020. Comparable sales for the quarter fell 1% compared to the prior year fourth quarter, but increased 20.7% over a two-year period.

Brick-and-mortar comp sales decreased 1.6% versus the same period in fiscal ’21, but were up 15.9% on a two-year stack. E-commerce sales increased 1.8% in the current quarter and have risen by 48.1% over two years. E-commerce sales accounted for 17.1% of net sales during the current quarter, a percentage that was unchanged from the fourth quarter of fiscal 2021. In the fourth quarter of fiscal 2020, e-commerce sales accounted for 14.2% of net sales.

Sales trends were strong during the first half of the quarter, but the flow of inventory received subsequently slowed and a number of scheduled deliveries were delayed as Jared noted previously. This has had a material impact on footwear inventory and select product launches. In addition, inflation concerns and an uptick in COVID-19 case counts also contributed to traffic and transaction volume declining in late December and throughout the month of January.

GAAP gross margin was 35.1% of net sales compared with 37.1% in the prior year period. This approximate 200 basis point decline was primarily due to shifting launch schedules, additional promotional activity, higher freight costs and deleverage in store occupancy costs resulting from the negative comp sales performance.

GAAP store selling, general and administrative expenses were 26.4% of net sales compared with 26.8% for the fourth quarter of last year. This approximate 40 basis point improvement is a result of more efficient management of wage and related employee benefit expenses and lower impairment charges, partially offset by increased cost of advertising, professional services, transaction fees and back-office infrastructure expenses. Excluding certain City Gear acquisition and integration expenses that occurred during the fourth quarter of fiscal 2021, current quarter SG&A expense of 26.4% compared to the prior year adjusted figure of 26.7%, an improvement of around 30 basis points.

Depreciation and amortization in the fourth quarter of fiscal 2022 increased approximately $2.7 million in comparison to the same period last year, reflecting increased capital investment on organic growth opportunities and infrastructure projects. In the current year fourth quarter, we generated $23.1 million of GAAP operating income or 6% of net sales compared to $31 million or 8.2% of net sales in the prior year fourth quarter. Excluding all non-GAAP adjustments during last year’s fourth quarter, our $23.1 million of operating income this year compared to adjusted operating income of $31.2 million in the fourth quarter of fiscal ’21.

GAAP diluted earnings per share were $1.25 for this year’s fourth quarter and did not include any non-recurring items. In last year’s fourth quarter, GAAP diluted earnings per share were $1.39 and adjusted diluted earnings per share were $1.40. Capital expenditures during the fourth quarter were $27.3 million, consisting primarily of ongoing infrastructure investments and store development projects. During the fourth quarter, we opened 12 new stores, including one rebrand and closed two stores, which also reflects one rebrand. In the fourth quarter, we purchased nearly 417,000 shares under our authorized share repurchase program for a total cost of approximately $29.5 million.

Let’s move to the full year results on slide 7. For the full year, sales increased 19.1% to $1.69 billion, up from $1.42 billion in fiscal 2021 and increased 42.8% versus the $1.18 billion reported in fiscal ’20. In relation to fiscal ’21, comparable sales increased 17.4%. Brick-and-mortar comparable sales were up 21.4% and e-commerce sales reflected a slight decrease of 1.6%. Relative to two years ago, total comparable sales increased 43.7%. Brick-and-mortar comparable sales increased 37.9% and e-commerce sales grew 89% over the two-year time period. E-commerce represented 13.8% of total net sales during fiscal ’22 compared to 16.7% of total net sales in fiscal ’21 and 10.4% of net sales in fiscal ’20.

For the year, GAAP gross margin was 38.2% of net sales compared to 35.5% for fiscal ’21. This is the result of historically high margin performance in the first half of this year, which was driven by higher sell-through, a low promotional environment and a greater mix of in-store sales, which carry a higher margin than e-commerce sales.

Excluding adjustments to our non-cash inventory reserves in fiscal ’21, the current year gross margin of 38.2% is comparable to the adjusted gross margin of 35.8% in the prior year. GAAP SG&A expenses, including goodwill impairment in the prior year were 22.6% of net sales for the current year compared with 26.5% of net sales in the prior year. This improvement is the result of wage and related employee benefit expense leverage and lower impairment charges, partially offset by increased cost of advertising and professional services.

Excluding certain City Gear acquisition and integration expenses, and pandemic-related impairment and valuation costs that occurred in the prior fiscal year, current year SG&A expense of 22.6% of net sales compares favorably with adjusted SG&A expense of 23.7% of net sales in fiscal ’21.

On a GAAP basis, we produced $228.2 million of operating income in fiscal ’22 compared to last year’s operating income of $98.4 million. Excluding all non-GAAP adjustments in the prior fiscal year, our current year operating income of $228.2 million, representing 13.5% of net sales is comparable to adjusted operating income of $141.4 million or 10% of net sales in fiscal ’21.

GAAP year-to-date diluted earnings per share were $11.19 for the current year compared to $4.36 in fiscal ’21. Excluding all non-GAAP adjustments in the prior year, the $11.19 of diluted earnings per share this year compares to adjusted diluted earnings per share of $6.12 in fiscal 2021. Driven by strong sales, robust margins and leverage of SG&A expense, we generated operating cash flow of $159.5 million in fiscal ’22 and invested $71.2 million in capital which was largely related to new, relocated, remodeled and expanded stores plus various infrastructure projects.

During fiscal ’22, we returned $278.8 million in cash to our shareholders. We repurchased nearly 3.4 million shares under our authorized share buyback program at a total cost of $267.8 million and have paid out almost $11 million via regular recurring quarterly dividend that was initiated in June of fiscal ’22.

Turning to the balance sheet. We ended the year with $17.1 million in cash and cash equivalents, which is down from the previous year’s ending balance of $209.3 million. As noted previously, capital expenditures, share repurchases and dividends were significant uses of cash during the year. Our entire $100 million of borrowing capacity remained available to us at the end of the fiscal year.

Net inventory ended the year at $221.2 million, a 9.5% increase from the beginning of the year. Consistent with comments we have made previously, we continue to strengthen our relationships with our vendor partners and have worked collaboratively with the entire vendor community to build and strengthen our inventory position.

Before we discuss our fiscal 2023 guidance, we want to dig a little deeper into some of the elements that we feel set us apart from our competition and represent the way we have upgraded and transformed the organization in the last couple of years. Bill Quinn will provide insights into our customer and digital strategy, and then Ben Knighten will provide a real-life example of how we are elevating and executing our in-store experience.

I’ll now hand it off to Bill.

William G. Quinn — Senior Vice President of Digital Commerce

Good morning. Thank you, Bob. Looking back over the last couple of years, many of our customer metrics have rebased above pre-pandemic levels. This was accomplished by improving programs that engage and retain customers. Some specific examples include revamping our loyalty program, investments in mobile, our launch process, as well as general in-store experiences.

Our new loyalty program launched in fall of last year is even easier to use and provides more value to customers. As a result, our loyalty penetration grew to 56% this quarter versus 54% prior year. Also, the number of VIP members, our highest-value customers, grew 16% year-over-year for the quarter.

Looking at member data for the entire year, we are also seeing healthy signs. Our one and done rate where customers only make one purchase has declined 9% for the year and the amount of lapsed members that have reactivated increased 38% versus the prior year. The number of customers earning loyalty benefits and redeeming their benefits has significantly increased. This has caused the total value of loyalty benefits redeemed to increase by 23% year-over-year.

A final view and understanding of our customer behavior can be achieved by looking at pandemic versus pre-pandemic behavior. In Q4, we had a 9% increase in the number of active customers shopping and a 13% increase in sales per customer versus two years ago. Omnichannel shoppers have grown by over 40%. Customers acquired during the pandemic in 2020 and 2021 are continuing to have lower monthly attrition rates than historical averages. Over the course of the last two years, we have improved our customer experience, but we are not done. This year, there will be an even greater focus. Customer experience can be a broad term. Our approach is very specific, and we’ll focus on the removal of customer friction points.

In Q3 and Q4 of last year, we performed various large research studies where customer friction points were identified and prioritized. Using this research, we are making investments in the customer experience, which includes adding organizational resources, increasing our capabilities by adding new technology partners and making capital investments that will add new omnichannel capability. We will continue to deliver significant value to our underserved customers with a best-in-class omnichannel experience.

Turning to our e-commerce business. Comparable sales increased 1.8% in Q4 and 48% versus two years ago. E-commerce represented 17% of total net sales for the quarter. Traffic to our website and apps increased approximately 30% during the quarter. Unfortunately, due to inventory constraints, we were unable to convert this traffic at historical rates.

During FY ’22, inventory availability has had a significant impact on our e-commerce comp. In this fiscal year, upcoming increases in inventory as well as past, present and future investments in driving e-commerce conversion will produce between high single-digit to low double-digit growth rate.

Entering into this new fiscal year, we are continuing to keep a pulse on how our customers are feeling in general. Through recent customer research, very few of our customers have described their financial health as worse than last year, but they are concerned about inflation. They believe that rising inflation will have a general impact on their discretionary spending, which includes restaurants, entertainment and retail. This will be something we will keep a close eye on as we navigate the first part of this year.

I will now turn the call over to Ben Knighten to discuss our in-store experience.

Benjamin A. Knighten — Senior Vice President of Operations

Thanks, Bill. I’d like to move to slide 9. Both Jared and Bill provided information related to our merchandising and digital strategies. I want to talk a little bit about how that translates to the in-store experience. And one way to do this is by taking a look at an individual market.

Natchez, Mississippi fits into our strategy of servicing underserved consumers in underserved communities. Natchez is located in equal distance between Vicksburg and Baton Rouge in the Mississippi River. It’s the definition of an underserved market situated in a rural area whose main economy revolves around agriculture.

The population of Natchez is approximately 14,000 people. You can see the trade area on the map depicted in blue. You can see that consumers from many of the surrounding communities do their shopping in Natchez. So the trade area actually has 25,000 potential consumers. The trade area is approximately 22 miles wide and the demographics are listed on the slide. Additionally, there are no competitors within 50 miles, except for our own store 4 miles away across the river. That store in the trade area depicted in red is doing approximately $800,000.

In February of this year, we opened two locations, one Hibbett and one City Gear in Natchez. The projections on both stores are a combined $2.2 million annually yielding a forecasted ROIC well in excess of 20%. So in this underserved area, we have three stores that will do approximately $3 million annually in sales.

Another point worth covering is that because these stores are new, we open with a full merchandise assortment. This combined with our sales culture, reinforced through associate training, as well as the omnichannel experience we offer consumers, including our loyalty program; BOPIS, buy online pickup in store; ROPIS, reserve online pickup in store, our launch shoe raffle system and access to merchandise through our vendor drop shipment.

This allows us to provide a unique in-store experience that our consumers appreciate. Since opening, sales in the Hibbett store have been twice the sales volume of the average store during the same period, in the City Gear store is more than double the average volume. We believe this demonstrates that our consumers will shop with us and reward us with their business when we have the selection and depth of inventory they desire.

With both Hibbett and City Gear stores in the market, we differentiate ourselves with a culture built on salesmanship, a superior product assortment and best-in-class omnichannel capabilities to reach specific underserved consumers. In markets like Natchez, we can reach consumers who are hard to capture. These stores produce sales that are both incremental and complementary to our vendor partners.

I’ll now turn it back over to Bob Volke to discuss our guidance.

Robert J. Volke — Chief Financial Officer

Thanks, Ben. Slide 10 summarizes the fiscal 2023 guidance. Consistent with the directional guidance we provided two weeks ago, we expect the following from a sales perspective. Total net sales are expected to be relatively flat compared to fiscal 2022, implying comp sales are projected to be in the negative low single digits. Comp sales are projected to be in the negative low-teen range in the first half of the year followed by a high single-digit comp sales in the back half of the year.

Our sales forecasts are based upon assumptions that as the year progresses, supply chain constraints will ease, timing of inventory receipts becomes more consistent and predictable, and our overall inventory position strengthens. Net new store growth is estimated in the range of 30 to 40 stores with new units spread fairly evenly throughout the year.

From an overall financial results standpoint, and again, consistent with our earlier guidance, we expect the following, fiscal 2023 gross margins are forecast to be in the range of 36.6% to 36.9%, down from the results of fiscal 2022 but above pre-pandemic levels. Ongoing supply chain challenges, a higher mix of e-commerce sales that carry a lower margin than brick-and-mortar sales and increased promotional environment, inflationary pressure and deleverage of store occupancy will all contribute to this anticipated decline. We believe gross margin results in comparison to fiscal ’22 will become more favorable as the year progresses.

SG&A as a percent of net sales is projected to be in the range of 23.3% to 23.6%, higher than fiscal 2022 levels but also favorable to pre-pandemic results. Wage inflation, deleverage of fixed costs driven by relatively flat sales expectations and annualization of back-office infrastructure investments in fiscal ’22 are drivers of this anticipated SG&A increase. Similar to gross margin, we feel SG&A comparisons on a year-over-year basis will become less challenging in the back half due to an expectation of an improved inventory position and a more favorable sales environment.

Operating income is anticipated to be in the low double-digit range as a percent of sales. Diluted EPS is forecast to be in the range of $9.75 to $10.50 using an estimated full year tax rate of approximately 24.5% and an estimated weighted average share count of 13.5 million. Capital expenditures are projected in the range of $60 million to $70 million with a focus on new store growth, remodels and additional technology and infrastructure investments. Our capital allocation strategy continues to include the expectation that we will repurchase the shares throughout the year and pay recurring quarterly dividend.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser — Williams Trading — Analyst

Thanks for taking my question guys. I have a handful. Let’s see what [Indecipherable]. Number 1, the aged inventory that you said in the press release was slightly elevated versus last year. How does that aged inventory compared to two years prior?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. Hey, good morning, Sam, it’s Jared. Yeah, slightly elevated year-over-year, but still significantly below kind of historical averages.

Sam Poser — Williams Trading — Analyst

Thanks. Can you also, Jared, talk about the sales trends? Like what — like can you give us some more color on the total sales trends by month in the fourth quarter, especially January? How much it fell off?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. I think as we said, I mean, we were really confident in the fourth quarter. I mean, we had some pretty robust numbers in the November period, which gave us a lot of confidence. Unfortunately, as we stated, kind of the volatility in some of the delivery expectations towards the end of the quarter had a pretty significant impact, in particular in January. We were very, very pleased with November, very happy with December and then January was more difficult for sure. I think in our prepared remarks, we noted effective January by low teens, around 10%.

Sam Poser — Williams Trading — Analyst

So January was down 10% or down worse than that because of the impact of the footwear on the entire quarter?

Jared S. Briskin — Senior Vice President and Chief Merchant

Down about 10%, Sam.

Sam Poser — Williams Trading — Analyst

Thanks. And then can you give us some — I mean, given sort of all the noise right now with late delivery, stimulus and so on, can you give us some — Bob or Jared, can you give us some help with what Q1 and Q2, especially in the first quarter, I mean, are going to look like from a comp — or at least from a comp perspective on how to think about that? And relative to the rest of the year because you’re up against some big compares and — you’re up against some big compares and there’s all these extraneous factors happening.

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah, sure, Sam. So certainly, the most difficult compares in the first quarter. We certainly know there was a significant impact with regard to stimulus in the year ago period. That will have slightly less effect as we get into the second quarter. But still, we do believe there was a fairly significant amount of extra funds out in the marketplace.

The real opportunity as we see it is in the back half. We’ve been continuing to fight pressures with regard to the supply chain and inventory balances. And we have two really big mitigating factors around our business and offsetting the stimulus. The first being inventory. And as we stated, unfortunately, a little bit later than we had expected with that additional 30 to 45 days.

And then the second is our ability to take advantage of all of the distribution changes that have occurred in the marketplace. Our ability to take advantage of that is also dependent on inventory. So as we go through the year, we do expect our inventory balances to continue to improve. We are up year-over-year as we said, but we’re not at a level where we can optimize the level of revenue to our expectations. So as we go through the first and second quarter, that will continue to build. And we do believe that when we get to the back half of the year, will be more of an optimal level to support our business.

Sam Poser — Williams Trading — Analyst

Great. And then lastly, the — can you talk about your relationship with your largest vendors, specifically the one from Beaverton, and how confident you are in what’s happening there, how they’re supporting your new store opening plans and so on and so forth?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah, sure, Sam. As we’ve said on previous calls, we’re very confident in our positioning with our strategic vendor partners. Obviously, COVID’s had a pretty dramatic impact on the supply chain. That’s led to a lot of short-term things with regard to order management issues, order changes and cancellation play, so on and so forth.

But at the same time, we’ve been able to deliver a significant amount of receipts over and above historical norms, which I think reflects the level of support and priority that we’re getting from our strategic partners. Our strategy continues to be to focus on the underserved consumer in underserved markets, as Ben mentioned earlier, all reinforced with the premium consumer experience, and that’s highly differentiated in the marketplace and remains largely complementary to our partners.

Sam Poser — Williams Trading — Analyst

All right. Thanks very much. Best of luck.

Jared S. Briskin — Senior Vice President and Chief Merchant

Thank you.

Operator

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

Alex Perry — Bank of America — Analyst

Hi. Thanks for taking my question. So just to follow-up on that last point. So the competitive environment, it seems like a lot of other competitors are pursue of losing access as some of your vendors go increasingly DTC. I mean, it seems like sort of implied in the guidance and the commentary that you are not seeing a similar trend there. And then I guess like another way of asking it would be like, I think historically, maybe your top vendor was around 68% of sales in the last time you disclosed that. Would you expect that to sort of increase or decrease as we sort of move throughout the year? Thanks.

Jared S. Briskin — Senior Vice President and Chief Merchant

Hey, good morning, Alex, I appreciate the question. I’m going to answer this the same way I just did again. We’re very confident in our positioning with the strategic vendor partners. How this projects going forward? I think we need to get some understanding and help with regard to the supply chain and be able to get to a more normalized position with regard to that. But again, as far as our positioning with the key vendors, they very clearly understand our strategy. They very clearly understand what we bring in a very, very highly differentiated environment. The focus on the underserved consumer. Our increased investment in consumer experience are continuing to put us in a strong position with all of our strategic vendor partners.

Alex Perry — Bank of America — Analyst

Perfect. That’s really helpful. And then just on the quarter, was the major headwind in the supply chain, high heat launch footwear product on the men’s side, is that like a fair way of characterizing it? Was there any apparel headwinds in there? What about some more sort of like everyday shoes from your top vendors?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. It’s pretty unpredictable to be transparent. There obviously were impacts across all of our categories, but certainly more focused on the footwear category as a whole. I think the disruption and the delay when we talk 30 to 45 days, as you’re aware, the high heat product is selling out in many cases, the day we get it, certainly, if not the day, the week we get it and absolutely in the period that we get it. So when we miss deliveries by 30 to 45 days, it can have a pretty significant impact in today’s environment versus maybe what would have impacted historically when there were lower liquidation rates.

Alex Perry — Bank of America — Analyst

Got you. And then just my last one. Just on the promotional sort of commentary, it seems like promotional promos came back for you this past quarter for the first time in a while. Was that specifically just to drive traffic given the lack of some of the launch product? And then have you seen industry promos come back at all? And what would be sort of the expectation for the overall promotional environment throughout the industry as you move through this year?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. So some of the increased promotional activity was absolutely to drive traffic at the end of the quarter. We certainly were quite disappointed as we started to see January on the whole. I think overall, there’s a slightly increased level of promotions. I think with the current challenges around inventory in the supply chain, I wouldn’t expect a dramatic increase in promotion throughout this year. I think we’ll see more promotions than maybe we’ve seen in the last 12 to 18 months, but I do not expect it to get anywhere back close to the promotional environment that we saw pre-pandemic.

Alex Perry — Bank of America — Analyst

That’s really helpful. And best of luck going forward.

Jared S. Briskin — Senior Vice President and Chief Merchant

Thank you. Appreciate it.

Operator

Our next question comes from the line of Justin Kleber with Robert W. Baird. Please proceed with your question.

Justin Kleber — Robert W. Baird — Analyst

Hey, good morning, guys. Thanks for taking the questions. Just first, I wanted to follow-up on the comp outlook and trying to better understand the inputs behind the second half inflection. You obviously talked about the improvement in inventory, but curious what you’re factoring in from a macro standpoint because we’re still going to be lapping stimulus and the inflationary pressures facing your consumers probably are going to get worse, not better. So just trying to understand kind of the macro inputs within your comp outlook and your confidence level in forecasting high single digits across the back half of the year?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. So it’s Jared. I think I’ll start on that one. So first and foremost, as we got to the back half of last year, as we talked about, we were not happy with the consumer experience in stores with regard to available inventory, and that certainly impacted our digital business as well. So first and foremost, our reasoning for our heightened guidance around the back half is where we expect our inventory to be relative to last year. So number one, we expect to be able to take advantage of that. That in conjunction with our investments and improvements in consumer experience, we do believe will be a healthy driver for us. Secondly, the distribution changes that are occurring in the marketplace, we think will be largely complete at that point. And that’s the time where we expect that we’ll really see a significant acceleration again, in the markets where we are the only distribution point for our strategic partners.

Justin Kleber — Robert W. Baird — Analyst

Okay. And then maybe a question for Bob. As we think about maintaining the double-digit EBITDA — or EBIT margin here for this fiscal year. I guess, if sales don’t improve as you expect over the second half. How much flexibility from an expense perspective, do you have to maintain the op margin north of 10%?

Robert J. Volke — Chief Financial Officer

Yeah. I mean, we’ve obviously talked about this a lot, and we’ve got some contingency plans in place should — the expectation at the topline not live up to what we want. But at some point, again, it just depends on magnitude. This is a very volatile situation as far as being able to manage expenses to track revenue. We’ve got an infrastructure that we feel is stronger, more resilient than it’s been in previous years, but we’ve also committed to certain investments, and we’re not going to give up on driving consumer experience, and we’re not going to give up on putting ourselves into the best position to be able to take advantage of opportunities going forward. So we obviously have some flex. Like I said, we can deal with some up and down. But again, just think — I think it’s just more a matter of magnitude as the year plays out.

Justin Kleber — Robert W. Baird — Analyst

Okay. And then just last question, maybe this one is for Mike. But I think clearly, the market is skeptical about your guidance for this fiscal year just based on where the stock is trading at. So curious either your view or the Board’s view on the willingness to tap into that borrowing capacity you have to more aggressively buy shares here with it trading at 4 to 5 times earnings?

Michael E. Longo — Chief Executive Officer and President

We do believe that our share buyback program is instrumental in how we return capital to our shareholders. As you are well aware, and we talk often the three uses of free cash flow, our capex, which is the most important way we deliver capital back to the shareholders. And that’s by reinvesting in the business model and that means the consumer experience primarily. And as you know, we’re paying a dividend. And then to your point, the share repurchase program is an important part of what we do, and we’re committed to it. As you know, we still have outstanding capacity on our Board-approved share buyback program. And Bob has given you some specific guidance around our plan on how many shares we’re going to buy back. We’re committed to it. We believe in it, and it’s a big part of what we do.

Justin Kleber — Robert W. Baird — Analyst

All right. Thanks, guys. Best of luck.

Michael E. Longo — Chief Executive Officer and President

Thank you so much. We appreciate it.

Operator

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

Cristina Fernandez — Telsey Advisory Group — Analyst

Good morning. I wanted to ask about how do you feel about achieving the targets you gave out at the Analyst Day last year for 2024 — or fiscal year ’25 in light of the guidance. For this year, you still think you can get to $2 billion in sales in — and perhaps see operating margin expansion over the next couple of years. I don’t know if getting back to 13.5% is realistic, but how do you see that progression and what could be long-term operating margin target?

Robert J. Volke — Chief Financial Officer

Hey, Cristina, it’s Bob. Again, obviously, a lot has changed since we’ve released those, I guess, forecast back in June. We’re still confident that we are moving in the direction. I’ve said multiple times, these are not necessarily linear charts that go in a perfect straight line. But again, I think we still feel confident that, that $2 billion number is out there for us. We’ve taken, obviously, a little bit of a pause here in the fourth quarter, mostly due to, again, the supply chain issues and the related inventory. That does have an impact also on how quickly we can grow the chain in overall terms.

Also, I would say, to be very honest, that the margin and the SG&A rates were obviously at pretty stellar levels here throughout fiscal ’22. So again, the goal is that we will not significantly backslide. But again, I don’t think it’s going to be, again, directly linear throughout the next couple of years, but we feel with the infrastructure we’ve built over the last 18 to 24 months, when we get the inventory situation straightened out, continue to grow stores, I believe all the numbers we’ve put on paper are still very achievable in the future.

Cristina Fernandez — Telsey Advisory Group — Analyst

Thank you. And then I have a question, perhaps for Jared. Can you talk about — I mean, I know a lot of the high heat product launches were delayed from the fourth quarter to perhaps the spring or later this year? How do those flow over the course of the year? And how do you feel about your specific product allocations for those high heat footwear styles?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. Hello, good morning. I think it largely or where we feel with regards to the high heat styles, again relates back to our positioning. I mean, we’re confident in our order book and what’s in our pipeline. I would continue to expect launch dates and delays of product continue to be very fluid. So I think that’s what’s causing some — an inability to predict on our side based off of when we’re going to receive those deliveries and then should launch dates actually move or not? Or are we just going to receive the product after the launch date. So that’s providing some volatility. But as far as what we have in the pipeline and our order book, we’re very confident.

Cristina Fernandez — Telsey Advisory Group — Analyst

And then last one. On the cash balance, it was $17 million this quarter. It’s a little bit — it’s below where what’s pre-pandemic. What balance do you feel comfortable? Or you feel like it’s a good sort of minimum amount to have on the balance sheet going forward?

Robert J. Volke — Chief Financial Officer

Again, at this point in time, we feel that the cash is more valuable to us as we’re deploying it into the business and back to the shareholder. As I mentioned earlier, we have our entire $100 million line of credit available to us. I think, again, we’re trying to use the cash as efficiently and effectively as we can. I don’t think there’s any magic number. We probably — historically, people kind to think you need $30 million, $40 million, $50 million on the balance sheet. Again, we’re going to use the cash, like I said, as quickly as we can get a solid return on that investment. So I don’t see us having any set minimums. And again, we’ll use the line of credit judiciously as we need to and feel that we’re in pretty good shape from a liquidity standpoint going forward.

Operator

Our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt. Please proceed with your question.

Jim Chartier — Monness, Crespi, Hardt — Analyst

Good morning. Thanks for taking my question. I was wondering what you think — assuming you have sufficient inventory, what do you think the sales opportunity from the reduction in Nike’s distribution is for you? And is that kind of captured over time? And if so, what kind of time period would it take to kind of realize all of that opportunity?

Michael E. Longo — Chief Executive Officer and President

Yeah, Jim, this is Mike. Thanks for the question. We have previously talked about the knowns last year of JCPenney and Stage Stores. Stage Stores going out of business, JCPenney being cut off, and we hung a number on there. We feel really good about that estimate and our measurements lead us to believe that we hit those numbers. So what we were forecasting going forward, as you’re pointing out, were a number of other undifferentiated retailers who lost the ability to buy and distribute product from our major brand partners. That effect is going to be most pronounced in the fiscal year that we started four weeks ago.

So we’re looking forward to seeing those results. We don’t — we have not historically and have not yet pinned a number to that specifically that we talked about publicly. So we will — we have that in our guidance, let’s say it that way. We have a lot of confidence that it is a tailwind to the business. And it will help us offset the headwind that we’re going to see primarily in Q1 from last year’s stimulus. So we feel really good about that aspect of the business.

When you combine that with all of the other things that we’re talking about today, which goes into we have the underserved customer, we have our three pillars of our competitive advantage. We have the ability to continue to land inventory. We’re going to be in an advantageous position going forward. We love our consumer experience going forward and the investments we’re about to put into it, both in brick-and-mortar as well as omnichannel. I like what we’re doing. Now would I like it better if the results year-over-year were positive? Well, of course. But as everyone knew we hit a peak last year in Q1, and that was always going to be the thing that, as was said earlier, causes skepticism. We’re very realistic and sober about that as are you. And so therefore, our guidance going forward, took all of that into account. We’ve got a range of diluted earnings per share with a plan that we feel very confident about.

Jim Chartier — Monness, Crespi, Hardt — Analyst

What are you seeing from the undifferentiated retailers losing Nike? Do they still have Nike product in the stores? Do you expect it to be complete by the end of first quarter? And then, I guess, is it a similar opportunity to Sage and JCPenney’s or maybe a bigger opportunity?

Jared S. Briskin — Senior Vice President and Chief Merchant

Hey, good morning, Jim, it’s Jared. Yeah, so I think that expectations was it would be a pretty clean environment at the early part of this year, based off of all the distribution changes, and we believe due to some of the delivery delays and impacts of the supply chain, but some of that likely will push out a little later than we potentially have originally estimated.

Again, we largely would expect that during the second quarter at the latest, all those distribution changes would be in effect. We did see from the Sage and JCPenney example that Mike referenced earlier. It does take about a 60 to 90-day cleanup for them once they’re through all their inventory and then we start to see the real impact. So as we go throughout this year, we’ll continue to see the impact broaden, but I would expect that some of the undifferentiated retailers will still have some product at least at the beginning of this year.

Jim Chartier — Monness, Crespi, Hardt — Analyst

Great. And then just like — would you size it kind of the opportunity in relation to kind of JCPenney, is it a similar type opportunity? Or is it potentially bigger?

Jared S. Briskin — Senior Vice President and Chief Merchant

Yeah. We believe based of the accounts that we’ve done with regard to a number of stores in our markets that we’ll be closing, we do believe it’s a broader opportunity.

Jim Chartier — Monness, Crespi, Hardt — Analyst

Great. Thank you.

Operator

Our last question comes from the line of Sam Poser, which is a follow-up question from Williams Trading. Please proceed with your question.

Sam Poser — Williams Trading — Analyst

Hi. Bob — thank you for taking my second question. Bob, could you give us for the quarter, I know you guys don’t normally do it, but can you breakout the different components of the gross margin with some specificity in the fourth quarter relative to the drop of the gross — relative to the gross margin versus the prior year merchant margin, freight and so on?

Robert J. Volke — Chief Financial Officer

Again, we won’t speak to specific numbers, but I can tell you that kind of all components, certainly were down compared to the prior year. We did see compression in the product margin side of things, again, mostly based on the mix of the product as well as the kind of overall basket of the consumer. We do have headwinds in freight. So that was definitely contributing as well, and we expect those headwinds obviously continue into fiscal ’23. And we also lost a little bit of ground on store occupancy. So all of those components were all kind of negative compared to the same period of the prior year. So we expect that we’re going to see some of that again early in fiscal ’23 as we move forward.

Sam Poser — Williams Trading — Analyst

Thanks. So I mean, what’s the biggest — was the biggest piece of it is the occupancy just because of the difference? Or can you give us some view of the each one or could you say which one was the biggest, which one is second, one, two, three, can you rank them for us at least?

Robert J. Volke — Chief Financial Officer

Yeah. I would say probably it’s going to be — freight it’s probably the biggest headwind we’ve got in terms of just pure basis point change year-over-year. And it’s pretty similar, I would say, between occupancy and the product side of things. So — but yes, freight is definitely escalated here in recent.

Sam Poser — Williams Trading — Analyst

And when we think about the first half of the year, especially the first quarter, occupancy is probably going to move way up because — just because of the compare on the comp. Is that fair assessment?

Robert J. Volke — Chief Financial Officer

I guess in the comments, we feel like the comparisons will get easier as the year progresses. But yes, when you’ve got coming off an 87-plus, it’s going to be pretty tough to leverage store occupancy into the first part of the year.

Sam Poser — Williams Trading — Analyst

Thanks. And then lastly, do you expect in Q1 you’re — the negative comp to start with a one, start with a two, start with a three?

Robert J. Volke — Chief Financial Officer

We’re sticking with our kind of overall guidance, which is negative teens in the first half of the year. We’re not going to get into quarter-by-quarter.

Sam Poser — Williams Trading — Analyst

Okay. All right. Thanks very much and good luck.

Operator

That concludes our question-and-answer session. I’d like to hand the call back to management for closing comments.

Michael E. Longo — Chief Executive Officer and President

Well, thank you so much for your participation today. We’re proud of the business, but we’re more proud of our 11,000 teammates out there in the store support center, the distribution centers and our stores. We couldn’t be prouder of them, and all of these results come as a result of their very hard work and their dedication. So thank you to them. And that concludes today’s call. Thank you.

Operator

[Operator Closing Remarks]