Q2 2020 Dick's Sporting Goods Inc Earnings Call
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Turning and welcome to the Dick's Sporting goods.
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Please note. This event is being recorded I would now like to turn the conference over to Nate guilt Senior director of Investor Relations. Please go ahead.
Good morning, everyone. Thank you for joining us to discuss our second quarter 2020 results on today's call will be Ed stack, our chairman and Chief Executive Officer, Lorne Hobart, our president and LIBOR, Let's hear Chief Financial Officer.
Playback of today's call will be archived in our Investor Relations website located at investors start Dick's dotcom for approximately 12 months.
As a reminder, we will be making forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on form 10-K, and cautionary statements made during the call.
We assume no obligation to update any of these forward looking statements or information.
Please refer to our Investor relations website to find a reconciliation of any non-GAAP financial measures referenced in today's call.
Finally, a couple of admin items first I know on our same store sales reporting practices. Our consolidated same store sales calculation includes stores that were temporarily closed as a result of coded 19.
The method of calculating comp sales varies across the retail industry, including a treatment of temporary store closures as a result of cobot 19.
Accordingly, our method of calculation may not be the same at other retailers.
Furthermore, recall during our Q4 call, we announced our intent to move away from providing E commerce sales growth in ecommerce penetration metrics beginning in Q1.
Given the circumstances surrounding our store closures you provided these metrics last quarter and are continuing to provide these metrics for Q2.
We'll revisit this decision for the third quarter.
And lastly, if your future scheduling purposes, we're tentatively planning to publish our third quarter 2020 earnings release before the market opens on November 24th 2020 with their subsequent earnings call at 10 am Eastern time, and with that I'll now turn the call today.
Thanks, Nick good morning, everyone.
As announced earlier this morning, we had an exceptionally strong second quarter.
In which we delivered our highest ever quarterly sales and earnings.
We achieved record consolidated sales of 2.71 billion.
Consolidated same store sales increased 20.7%.
Even with approximately 15% of our stores closed on average during the period.
This followed our 3.2% comp increase last year.
Our second quarter non-GAAP earnings per diluted share of $3.21 represented a 155% increase over last year.
And was also an all time record.
Before we get into the details I want to take a moment to thank our teammates who is hard work in dedication to our company and to the athletes. We serve made these significant results possible.
Concurrent with our strong business performance I'm pleased to report that during the quarter. We returned our teammates from furlough restored previously reduced salaries and repaid teammates for the loss last wages.
Now back to our Q2 results.
Our 20.7% comp sales increase was driven by the continued success of our industry, leading omnichannel experience.
Our ecommerce sales were tremendous increasing nearly 200%.
More than 75% of our online sales were fulfilled by our stores, which service localized distribution points and are the help of our omni channel experience.
By the end of June we reopened 100% of our stores to the public.
While continuing to prioritize the health and safety of the teammates and the athletes we serve.
We saw increases in both average ticket and transactions as well as growth across each of our three primary categories of Hardlines apparel and footwear.
Lastly, our private brands continued to be a significant source of strength and growth.
Outperforming the company average by approximately 500 basis points.
This broad based performance is a testament to the flexibility and dedication of our teammates.
Well reacted quickly to meet favorable shifts in consumer demand throughout the quarter.
During this pandemic the importance of health and fitness has accelerated.
Participation in socially distant outdoor activities has increased.
And there has been a greater shift toward athletic apparel and active lifestyle product with people spending more time, working and exercising at home.
The majority of our assortment sits squarely at the center of these trends.
Over the past few months.
The partnership's demonstrated by our strategic vendors has been unparalleled.
During Q2, we leverage these strong re vendor relationships and our private brand supply chain to aggressively chased product and the most in demand categories.
Certain categories in the marketplace for supply constrained.
Therefore, less promotional and our margin rates increased by 325 basis points during the quarter.
This merchandise margin expansion drove significant improvement in gross margin, which increased 456 basis points.
Now, let me touch on our third quarter performance.
Favorable shifts in consumer demand that drove our strong comps. During Q2 have continued into Q3, partially offset by softness in the best key back to school categories.
With a significant part of back to school already behind Us.
Through the first three weeks of Q3.
Our consolidated comp sales have increased 11% with continued margin rate expansion.
As I look at our business, we're in a great Lane right now.
We have reopened our stores and remain committed to the procedures to protect our teammates and athletes health and safety.
We have enhanced our ecommerce offering with curbside pickup in faster shipping.
Our product assortment is wolf tailored to the recent consumer trends supported by strong relationships with our key brands.
And importantly, we're in a strong financial position, having paid our line of credit to zero and have approximately $1 billion in cash.
We're really in a great position.
In summary, we're extremely pleased with our Q2 results and look forward to the remainder of the year.
I'd now like to turn the call over to Lauren. Thanks.
Thank you add and good morning, everyone.
I want to start by also thanking our teammates you are the foundation of our company in your efforts helped US continued to execute a seamless omni channel experience and deliver a record setting comp sales increase for Q2.
This morning, I will review, our strong brick and mortar an online results and I'll also provide updates on our marketing efforts on our private brands.
First we experienced a very strong athlete response to our story openings.
We saw momentum build throughout the quarter and delivered positive double digit brick and mortar store comps during both June and July.
Our teammates have worked tirelessly to adapt to a constantly changing landscape and have demonstrated an unrelenting commitment to serve our athletes and community safely.
In recognition of our hourly store NGC teammates efforts, we recently announced the 15% pay program will be extended through the end of the year.
In total during the second quarter, we invested $42 million across incremental coded related compensation and safety measures going forward, we expect approximately $50 million at similar cost per quarter through the end of this year.
Turning to E commerce during the second quarter, our online sales increased 194% with over 50% mobile penetration.
This included curbside pickup, where we focused on improving speed and convenience and the athlete response remained very strong.
E Commerce merchandise margin expanded meaningfully, which along with higher penetration of curbside and profit sales drove a significant improvement in E Commerce gross margin.
We also continue to reduce delivery times to our athletes even as ecommerce demand remained at unprecedented levels.
This excess online is a direct result of the technology and fulfillment investments we have made over the years as well as better integration of our digital and store channels.
As we work to relentlessly improves the athlete experience enhance our profitability and build the best in class Omnichannel platform.
Moving to marketing, where one of our largest asset is our score card loyalty program. We have over 20 million active users in the program accounting for more than 70% of our sales the data from this program sized our digital and direct marketing efforts, which we continue to enhance during Q2, enabling more personalized communications with our athletes.
Throughout Q2, we also maintained a strong voice theres several compelling marketing initiatives, our CEO out their campaign inspired athletes everywhere filling them with hope and motivation to get outside.
Our golf specific marketing was also successful as we focused on our fitting experience and product offerings.
Most recently at the ended Q2, we launched our back to school campaign, which addresses the ever changing landscape and acknowledges that no matter, how you're going back to school, whether it's in person or on camera you still need to have the best styles.
We've had these larger brand campaigns as more tactical marketing around stormy openings and curbside pickup to ensure our athletes knew we were there to get product them wherever and whenever they want today.
Lastly across our stores and online our private brands remain a key sources strengthen differentiation within our assortment.
As Ed mentioned, they outperformed the company average by approximately 500 basis points in Q2.
We've been particularly pleased with calia, and DSG, which represented our second and third largest women's athletic apparel brands during the quarter.
And in total across all categories. After only one year. Following its launch DSG has surpassed fields stream to become our largest private brands.
In closing we remain very excited about the future Dick's sporting goods as we continue to leverage our best in class Omnichannel platform to serve our athletes.
I'll now turn the call over to lead our view our financial results in more detail.
Thank you Lauren and good morning, everyone, let's begin with a brief review of our second quarter results.
Consolidated sales increased 20.1% to approximately 2.71 billion.
Consolidated same store sales increased 20.7% driven by a 17.9% increase in average ticket and a 2.8% increase in transactions.
Our ecommerce sales increased 194% and as a percent of total net sales our online business increased to 30% compared to 12% last year and as Ed mentioned during the quarter, we delivered growth across each of our three primary categories, probably lines apparel and footwear merchandise.
Gross profit in the second quarter was 936.9 million or 34.53% of net sales.
456 basis point improvement compared to last year. This improvement was driven by merchandise margin rate expansion of 325 basis points and leveraged on leverage on fixed occupancy costs of 204 basis points.
The merchandise margin rate expansion was primarily driven by fewer promotions as well as better than anticipated sales and margin on merchandise nearing the end of life.
This was partially offset by shipping expenses and E commerce fulfillment costs as a result of our meaningfully higher ecommerce sales growth as well as the fixed costs associated with our two ecommerce fulfillment centers that opened in the third quarter last year.
Gross profit also included $10 million of incremental cobot related compensation and safety cost.
As DNA expenses were $543 million or 20.1% of net sales down 305 basis points for the same period last year due to the significant sales increase.
SDMA dollars increase on the 22 million from the same period last year. This includes 32 million of incremental kobin related compensation safety costs.
And 12 million associated with the change in value of our deferred comp plans, resulting from the significant increase in overall equity markets in the quarter.
Which fully which is fully offset in other income and has no impact to earnings.
These expenses were partially offset by expense reductions following our temporary store closures.
Driven by our stock our strong sales of gross gross profit margin non-GAAP EPS was 397.8 million or 14.66% of net sales of 246.7 million or 797 basis points.
Operating margin expansion versus same period last year.
In total we delivered non-GAAP earnings per diluted share $3.21 compared to earnings per diluted share of dollar 26 last year.
155% year over year increase.
On a GAAP basis earnings per diluted share were $3 at 12 cents.
This included $6.6 million in noncash interest expense as well as 1.1 million additional shares required under GAAP diluted share calculation both related to the convertible notes we issued in Q1.
For additional details as you can refer to the non-GAAP reconciliation tables of our press release that we issued this morning.
Now I will briefly review our 2021st half results.
Despite temporary store closures during March April and May consolidated sales decreased only 3.2% to approximately $4.05 billion consolidated same store sales decreased only 2.3% within this our ecommerce sales increased 154% and as a percent.
Total net sales our online business increased to 33% versus 12% last year.
Non-GAAP earnings per diluted share $1.60 and this included $76 million or 65 cents per diluted share of incremental cobot related compensation and safety costs and compares to non-GAAP earnings per diluted share of $1.86 for the first 26 weeks last year.
Now moving to our balance sheet as it stays where it is strong financial position during the quarter, we leverage our cash flow from operations as well as cash on hand to repay $1.4 billion of outstanding borrowings on our 1.855 billion dollar.
Billion dollars revolving credit facility, we ended Q2 with $1.1 billion of cash and cash equivalents and no outstanding borrowings on our line.
Our quarter end inventory levels decreased 12% compared to the end of the same period last year and looking ahead, our inventories clean and we will continue to optimize our assortment to approve our in stock positions in the most in demand categories.
As previously announced in light of our strong business results, we reinstated our dividend program and during the quarter, we pay $26 million some quarterly dividends.
Net capital expenditures were just 12.5 million and we did not repurchase shares.
With respect to our full year outlook. There is still a high degree of uncertainty surrounding the scale and duration of several key external factors. This includes the Coca 19 pandemic, an economic stimulus as well as employment and consumer confidence and their potential impact on our business.
Given this uncertainty will not provide a 2020 outlook for sales and earnings at this time.
We will continue to reassess the practicality of resuming guidance in future quarters.
While mindful of the uncertainty in the current environment. We're extremely pleased significant Q2 results as well as our Q3 sales trends, we remain very enthusiastic future Dick's sporting goods.
This concludes our prepared comments.
Thank you for your interest in Dick's Sporting goods and operator, you May now open up the line for questions.
We'll now begin a question and answer session.
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At this time, we will pause momentarily to assemble our ROE our roster.
And our first question will come from Robby Ohmes with Bank of America Merrill Lynch. Please go ahead.
Good morning, guys, Hey, I'll say, great quarter, but I really don't have a word per quarter like this it's pretty hard believable hum the.
My My question I think I think for you is.
These these categories that are doing so great you I think you're not the only ones that are seeing this unbelievable sell through rate.
How are you thinking about in stock levels in a lot of these solitary leisure categories for the balance of the year.
Given that others are running short end.
How do we need to be concerned about.
Your inventory positioning when we think about how we think about your sales run rate going forward and.
And maybe Ed can you tie into that.
Has anything changed in how you guys are thinking about the hunt category.
You've exited in a lot of stores is not expected to continue and then lastly, some common comments on the Gulf category, maybe some insights on how golf Galaxy comps are doing.
Sure.
Robbie Thanks.
Let me start with the 100 category. One. So this has not changed our view towards one category, we're still planning to significantly reduce that.
Exit to what we're doing with field and stream and so really nothing has changed although that business from what I understand has really been quite good.
We're not changing our position on that.
As we take a look at stock levels, Robbie we're going to be.
Somewhat.
Inventory constrained on some of these categories, but we've got a flow of product that has it comes in it goes right back out and we actually think we're going to be in a bit better position from an inventory standpoint going forward in the fitness category in the bike category.
And a little bit in the Gulf category, beginning towards the end of September into October so.
Weve our team has done a great job working to supply chain a number of these products that we talked about from a fitness standpoint bikes.
Our own private brand so we control the supply chain and the team has done a great job of being able to.
Service, the the athlete or the customers if you're going to walk in our store is still going to look like our fitness business is really depleted, but the flow of product we have coming in it's kind of going out as fast as its coming in and we expect the trends from a sales standpoint in those categories to continue.
As far as.
The golf business.
Golf is one of those categories that are your outdoors, social distancing others. It's the golf business has been great. It both dictated galaxy Theres a number of young people who've come into the game, because they're not playing football or soccer some other sports.
So they're all planned guys around playing golf because theyre not at their kids games.
Men women and kids of all really have jumped into this game and we expect that to continue.
Through the balance of the year to the golf season is being extended with what's going on right now with the playoffs on the PJ tour followed by the the US open in September and then the Masters in.
November So we think golf is is one of those categories, it's going to be really really very good. It's there's some concerns about people, saying well, what's going to happen when it gets cold and people go inside well up north Thats a concern if it gets really cold in November and December but we have so many stores that are in the south season.
In the west that the weather's going to be.
You're going to be able to get outside 12 months a year. So we're pretty we continue to be pretty excited about our business.
Thats, great. Thanks, and just could you give the golf Galaxy comps.
We don't Robby.
Alright, thanks, so much and.
Good.
Yes.
That's great. Thanks, so much thanks rose.
Our next question comes from Kate Mcshane of Goldman Sachs. Please go ahead.
Hi, Thank you good morning.
Good question, Hi, I had a was around team sports I wondered if you could maybe go through a little bit more what you're seeing now within maybe certain team sport categories and how much maybe that could affect Q3 and then my second question was just about the fulfilling from store I think you mentioned 75% of E.
Commerce sell by store, what was that in previous quarters, and why is it higher because the curbside pickup option and we'll do you expect it to be elevated going forward.
So the Kate I'll take the one a team sports and then I'll, let Lauren talked about E. Com. So from a team sports standpoint, the team sports businesses not very good right now with the exception of baseball.
The baseball businesses continued to be pretty good but other sports have been difficult. We expect them to continue to be difficult through all of Q3, but we've got the majority of this business behind us and I think people should understand that.
The back to school business and the team sports business is going to be difficult through this back to school timeframe, but we are more than offsetting that.
With comps at 11% so far this quarter in the back to school business in the team sports business will become less important as we go forward.
So.
But team sports is going to be be difficult in the with the way. We're looking at this is that we're just bank in comps for next year with the team sports business.
We hope it will be better next year.
Great and then I'll take your second question Hey.
So in terms of that percentage of E. Commerce business that was to build out of the stores I do think it's meaningful to point out the 75% as a large increase in the past Weve indicated it with the majority to over half, but this is a meaningful increase that's being fulfilled from the stores and yes, you're right that a lot of that business is going out the front door as well as what you speak.
The backed or in terms of curbside and ship from store curbside remains really strong even as we opened the stores.
Is that business that we believe strongly adhere to today and we believe it will be at important player throughout the back half the year entered into holiday and into the future.
Thank you.
Our next question comes from Chris Horvers of JP Morgan. Please go ahead.
Thanks, Good morning, everybody so.
First a follow up question as as you talk about team sports is getting behind this and back to school is picked as well and you have in number of school districts and opening later and then taxes and.
Delayed sports programs in New York State High School sports or delayed till September 20, Onest. So I guess, how do you think about the potential acceleration that business can you maybe peel away, what's going on in the these non like what's going on in them and the in the and the comp base acts back to school.
And.
Team sports.
Well, we won't get into quite that level of detail, but.
As I said the team sports and back to school business has been has been soft so far and even with that being soft than we have a big part of it behind us the comps are still plus 11% as we take a look at some of these school district in states that have indicated that the theyre going to delay sports.
We've got some inventory to be able to service them.
But we're not sure that that's actually going to happen when it gets right down to what are they going to play or they're not going to play. So we're we're being cautious as we go forward from the from a team sports standpoint in these fall sports.
Understood I guess, maybe the other way to try to cut. The question is you talked about strong trends accelerating obviously over the quarter because of how you report comps, including close stores, and then double digit brick and mortar.
In June and July so.
Our rough math, you said that you were down 4% quarter to date. When you reported last time it looks like you comp 30 in those months.
Is that is accurate.
That's that's pretty close yes.
Understood and in my follow up is really on the M&A, obviously, a lot of puts and takes in there you did have for LOE savings.
Presumably some maybe some right not rent, but maybe some other reduced hours affecting affecting that as Shane line as well so what's the right based SGN eight to sort of look at.
Our back half estimates are on a go forward basis.
Last year, you were 515 million in the Shannay in five or 600 million in third and fourth quarters are we now building off that or what's the right base that we're building from I think I think last year is the right basically have you got to take a look at them in Q3, we had a big.
A big piece of incentive comp in there that.
In less we have really extraordinary results here, we won't anniversary that kind of levels incentive comp, but I think last year basically going to build off of that we talked about the incremental.
Cobot expenses, a $50 million quarter, probably split around 40 million will be.
Yes, you in a line of 10 million in the gross margin will hit gross margin.
And just maybe a cut a different way what how much was the furlough savings that was an offset in the M&A line.
Yes, there were a lot of there were a lot of pieces in there for LOE savings.
We had some small reductions in force that are involved we we can travel we control consulting costs, we really bad that matches.
In Q1 and cut Capex and.
Other as Genie expenses, along the way.
So we did have some pretty significant savings, particularly in the first half of the second quarter.
Understood Thanks very much.
Our next question comes from Michael Lasser have you been please go ahead.
Good morning, Thanks for taking my question was the entirety of this slowdown from 30% comp in June July to 11% comp.
For the leading August due to weakness in back to school and team sports or the other categories as well as well.
It was pretty it's pretty much by the back to school the back to school categories and then those back to school categories is is footwear is all the team sports, which is a pretty violent peak in in the month of the.
The first part of August.
Much more a much higher percent of our total sales in August then it will be in September and October so those back to school categories.
The team sports the clique business backpacks, all of those have been soft, but even with that comps are still run an 11% with margin rate expansion.
And to borrow the term that you use.
Very eloquently.
Yeah.
Yeah.
Not only grew to think about banking some call for next year from the team sports business getting better or next year or whenever we get back to normal but also back to school getting back to normal so.
With that it's at the right way to think about it.
Yes, I think so Michael I think the back to school business next year, we hope it will be what will be better because we hope kids are actually going back to school.
In the classroom and playing sports, which we think is really important for the kids, but let's face. It there will be some offset to that two of some other categories that might not be quite as strong but.
We think we're in a great lane for what's going on right now.
In the country from an outdoor standpoint, the golf business.
Camping business kayaking fitness running.
We think we're in a great lane and a lot of these these activities are going to continue into next year, even when hopefully make sometime next year cobot is behind us with a a vaccine and therapeutics et cetera. So we're moving in.
Yes.
Yes.
Humans have adopted all these behaviors and habits, whether it's working out at home or kayaking are pushing or golfing and they won't necessarily be give back next year, the habits or you're here to stay in the under what conditions would would your tools would you think will change and then I'll turn it over thank you.
I don't so I think these things are pretty sticky I think people are going to continue to do these activities theres. Some great family activities that have taken place here and I think people are going to continue those four for some time into the future.
What would make us think differently about that if the trends change, but right now we don't see them changing significantly.
Okay. Thank you very much equal.
Thanks, Michael.
Our next question comes from Paul is way of Citi Research. Please go ahead.
Hey, Thanks, guys.
Just follow up on the last couple comments about comp opportunity next year and also maybe some offsets to that can you maybe talk about some of the stronger specific categories that base.
We lost Jeff stopper categories that we see maybe.
Paul you still there.
Operator, if we go to the next call and then when Paul resumes, we can jump in front of the line.
Okay next question will come from Simeon Gutman of Morgan Stanley. Please go ahead.
Thanks, everyone. Good morning, I wanted to ask first on gross margin. If you look back to 2019. It ended at around 29.
Change and at once peaked at about 31 and a half.
So it's about 200 basis points below the peak.
It does the channel mix explain most of this gap and I think if we got the math right. It was in about a 40 or 50 basis point channel mix headwind this quarter.
What would be the reason it can't and closer to that prior peak I know ecommerce was probably extra good because of a pickup in store but.
Should or shouldn't narrow back overtime, assuming the March margin continues to stay healthy.
It should it should edge back towards that level.
There has been a channel shift and the gross margin is lower because we have the delivery expense. We have the shipping expense in E. Com niches structural difference, but we are leveraging some of the fixed expenses and E. Com in fulfillment along the way and a lot of it comes down to have promotional we're gonna have to be so we havent had to be terribly promotional.
Over the last three or four months or so and E com.
I don't expect we're going to be able to maintain the same levels of gross margin coming in our ecommerce business indefinitely, but.
For for some time going forward, we should be able to maintain elevated levels of gross margin.
I think it can move predict it can move closer to that also to Simeon based based on what's happening with our private brands are private brands are doing extremely well whether it be equally is the DSG brand what we're doing.
In a number of other categories the fitness brands.
So is.
Our private brands continued to improve our margin rates will continue to improve.
Yes, and any sense on the sticky minutes of using this curbside model, which I'm sure a lot of customers had been introduced to which that's wasn't an option before but obviously it should be pretty powerful going forward, but how do you you sent that will continue and that these pickup rates will will stay high going forward.
Hey, Finance Lauren we do think that card guidance here to stay in a fundamental shift in consumer behavior, and we anticipated originally that we wouldn't see large drop off when the stores. We opened at that that is not the case apps curbside remains very strongly penetrated and very high percentage that make so it's.
We are we think we're excited that behavior is here to stay and just an added element to a store so thats far becomes the omni hub of the whole ecosystem.
And we're expecting curbside continue to be strong for the balance of the year, we're thinking that with cobot around.
There might be that much interest in getting into crowded stores and the Christmas season.
So we're planning on a big curbside fall season, we're forward deploying our inventory out where stores to satisfy that demand and setting up all the parking lots to to operate that way and it will be ready for big curbside event, the rest of year.
Okay, and just this weakness in and just in terms of the fluidity of the environment that's transition to other seasons.
Even though the weather will change in categories like bicycles and fitness is it still literally this stuff comes in the door and it out that same day is it that type of demand environment still.
Well I'm not sure it's that day CEMEA, but it's.
A few days.
At this did sells out pretty quickly as soon as we have the have product in there.
Level of supply coming in for fitness product over the next several months for bikes over the next several months the boat business is going to be a bit more constrained. Although we do have some more product coming in.
But we're we're pretty comfortable.
On the the flow we've got coming in that's just going to come and go right back out.
Yes, thanks, good luck.
Thanks.
Our next question will come from Polish way of Citi Research. Please go ahead.
Hey, Thanks, sorry for Tom cutting out there I would just asking about maybe if you could talk about some about the stronger performing categories that you saw specifically in the second quarter and just how do you plan after 21.
You got the comp opportunity, perhaps in the back to school and team sports category, but then maybe difficult comparisons and some others. So just curious how you're thinking about it from an inventory perspective, and then also in some of these categories that you're chasing are you seeing higher average unit costs.
In some of those hot trending category, that's not to want to what extent.
Prices, maybe moving higher if at all thanks.
We really haven't seen higher costs.
In any meaningful way coming out of these products and.
Some of these categories, we're talking about whether it'd be the camping business the the fitness business the boat business.
A lot of these are our our owned brands. So we control the supply chain and we've done we've done a pretty good job with that.
As we look into next year, what we really ours, we're looking at 19 as the year to plan off of and we've talked a number of other people who are in our industry. That's what they're doing also other people brand. So we do business with a lot of we're looking at kind of planning off of 19, and that's what we're planning to do and we think next.
Sure the.
If a lot of the this pandemic is behind US and kids are back in school and playing sports and everyone feels safe, we think theres a big upside in the team sports in the back to school business next year.
Got it. Thank you good luck.
Our next question will come from Michael Baker of D.A. Davidson. Please go ahead.
Hi, Thanks, written I know you guys aren't aren't going to give guidance per se, but it sounds like Carter, if im wrong, the application with back to school and team sports, becoming smaller over the coming weeks and months is.
That would tell me that cost would accelerate is there is or is there an offset to that such that cost wouldn't accelerate and excuse the working from home my dog parking exactly what my question comes off.
[laughter], Michael we can all relate to barking dogs in working at home.
No barking at all today until until you called on me Okay.
Oh My kids.
I understand nowhere is.
Yes, so you would be.
That's not inappropriate assumption, but last year too.
We were exiting the hunt business last year, and there's a couple of offsets to that but we're really comfortable and excited about where we're at and we couldn't be happier that with the back to school is kind of shaping up the way that it is which is going to be back to school is going to be a disappointment.
For I think for a lot of people, but we're fortunate that we've got this broader based portfolio that we can offset that and the comps that.
Plus 11, right now we're pretty happy within these back to school items will become a smaller percent of the balance for the quarter.
Yes, it makes sense I understood to two questions for Lee real quick if I could one Lee you said that you cycling incentive comp in the third quarter unless you have you know a really strong third quarter. This year, while you're copying 11 and things could get better so I.
I guess, how should we think about potential.
At the comp in the third quarter of this year and that Hey passes type of boring question, but the the distressed you put in place with the convertible and the offsetting hedge I think at 50 246 to 42 is our call that starts to become dilutive you're above that now so can you give us any color.
How we should think about the share count going forward. Thanks.
So I'll take on the expense question first I mean.
We do have some significant additional expenses that were incurring here that could yeah with the kobin expenses that we have that they could impact.
The payout of incentive comp for this year so.
We have to have some some really strong.
Comps.
In order to get to the level of incentive compensation paid and we had last year.
So you have probably greater than the 11 that we've got.
Quarter to date.
With regard to the convertible convertible notes.
We did put the bond hedge structure in place and you're right. The the notes economically excuse me the convert becomes economically dilutive at around 50 to 50 240 or so.
Order of magnitude you know at $55.
It on $55 on average for the quarter.
Creates about 900000 shares of dilution so it's about 1% dilutive at $55 to share on on a non-GAAP basis.
On a GAAP basis, it's about 5.9 million shares.
On average for the quarter, if we had $55 price for the quarter of 5.9 5.9 million.
Yes, Okay. That's good color and presumably the division goes up as the stock price goes higher.
Correct.
Understood. Thank you.
Our next question comes from Adrian yet of Barclays. Please go ahead.
Good morning, congratulations on the progress in the quarter to date.
My first question is on the digital you're welcome well deserved a my first questions on the digital business you know as that grows obviously you can you see the data on new customers you've acquired since the pandemic began can you share any of those metrics are statistics there.
For Lauren on can you talk about CLIA, Adidas key penetration and probably more importantly, going forward eagle physical brick and mortar channel. It's such a competitive advantage given your end of Basel and big boxes are there opportunities for you to be the distribution channel for digitally native brand.
In athleisure footwear or maybe other category and then Lee My last question. It last quarter inventory had been shipping out of the stores to keep inventory clean what happened in the third quarter and what should normalize ship from store be thank you very much for taking my question.
Okay and his line out outside to tackle the first few so as digital growth.
We do have new customers, joining the Dixie home system meaningfully.
A meaningful not revenue customers tenant meaningful number coming into the digital channels and those customers are repeating so we're very pleased with with.
Customers generally speaking I don't think I'm just go deeper than that at this point, but generally speaking we felt we were very focused on retaining those new customers this quarter, yes.
CLIA DSG are doing amazingly well as I mentioned earlier has been absolutely is number two and three.
They are the number two and three women's athletic MDC brand is number one across the board. We're very focused on private brand grows I don't want to share a penetration goal with you at this point.
We are we are very very very enthusiastic about those brands as well as some other brands.
In the future.
And then opportunity, especially distribution channel for digitally native plans is a very interesting they had done on longer term horizon, nothing I would say short term.
But certainly we do believe that the omni channel strength that we have in the fact that we have.
800 plan to pick up in distribution getting noted that Tom could really be an advantage for us first and foremost and possibly in the future, but not know media plans on that.
Great. Thank you.
Okay, and with regard to the fulfillment channels in in Q2, obviously when you have nearly 200% comp increase all about fulfillment chen's lifted in terms of volume. So we are market fulfillment centers had significant increases year over year.
Curbside with huge ship from store picked up as well our vendor direct programs picked up so yes, and we talked about in total mix, 75% was fulfilled by the stores between ship from store and and curbside. So all channels looked in volume the good news as we had the infrastructure in place to handle kind of holiday.
Level ecommerce sales for months on end.
With all the different fulfillment channels, we have turned on so you know as Lawrence said earlier on the investments we made over time, both in technology and and in fulfillment really really paid off for us during the quarter.
Great. Thank you very much best of luck.
As you.
Our next question comes from Seth Sigman of Credit Suisse. Please go ahead.
Hey, guys. Good morning, Congrats on the quarter I wanted to pull them out last point around E. Commerce economics, obviously in this environment consumer adoption of online has accelerated probably by many years. You wondering can you elaborate on the efficiencies in the operating leverage that you're seeing that perhaps more encouraging as you think about the scalability of E commerce.
Turning to change at all how you think about the profitability of online over time I realize that has been improving in recent years spike.
Give you any more confidence in what the profitability could look like overtime.
Yes, it definitely does give us confidence that we have this quarter been able to elaborate it's all the fixed expenses all investment that you mentioned in order to drive more flow through on the bottom line. We also had increased merge margin and then reduced shipping costs on a per package basis, because as they increased profits and.
Our type penetration so overall, a very very meaningful improvement in our.
In our ecommerce PML and something that we think we can continue to leverage all the investments that we've made over time to be able to scale. The platform our are coming to fruition at this point.
Okay. That's helpful and just to clarify with the profitability have improved even without the merchandise margin improvement.
Yes meaningfully.
Okay, and then just around merchandise margin you had been breezy for more promotional activity later in the quarter in Q2 doesn't really seem like that happen you just update us on what you're seeing now how are you planning for promotional activity for the balance of the year and then I'm just wondering how much of the constraint promotional activity is tight inventory versus perhaps.
A more structural change in how vendors are controlling distribution now.
We don't really see.
The majority of what's driving our business today, we don't see that becoming more promotional.
There are inventory constraints across a number of categories and with those constraints. We don't think it's going to get very promotional I think vendors are being a very cautious and.
To make sure that the market doesn't get flooded with products that needs to be cleaned up going into next year. So I think everybody's taking a pretty conservative approach from an inventory standpoint.
In inventory will be in very good shape I think by the end of the year I don't think there'll be a glut I don't think will be meaningful margin rate erosion.
Okay, great. Thanks, a lot.
Our next question will come from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good morning.
Great quarter congratulations.
Thanks, Brian.
And I apologize ahead of just forget to near term focus but.
Historically, we look at that.
The the performance here, so far in the third quarter.
And I understand there you know it's extraordinary fluid in there may be really no normal markets, but in markets that have opened up more would you maybe see more teams regular team sports activity or is there where you've seen a different performance in the category there than the rest of the chain.
Meaningfully.
Okay.
Then the second question I have my guess is we look into back half of the year what.
Dick is not terribly fashion focus, but but it but there are new product launches from your key vendor partners to help to drive sales through as you're talking to be that you're partners.
Given the fluidity the disruptions in the body, but how are they thinking about product the product introductions of backup the or how do you think about as a sales driver.
It depends on the category and it depends on the brands.
There will be some kelway is launching a new driver in a few weeks the.
Which we think is going to be great. Some other people have delayed launches too.
Cleanup some inventory and.
So that there is not.
Theres, a glut of inventory or they're not doing product launches until you know, possibly some people are talking about not doing any new product launches until.
Actually 22, with some categories, which I'm not going to get into what those are would those particular brands I'll, let them talk about them, but we.
We.
Where there is going to be newness I think it's going to be very good I think some people that have.
Had some newness now but for reasons that business slowed down whether thats in some of the team sports area.
Or.
Backpack some of that kind of stuff, where there is actually we as much newness going into next year, we think thats perfectly fine. So we have we think the brands are being very thoughtful and appropriate handheld they're looking at this going forward.
Thank you.
Our next question comes from Tom Nikic of Wells Fargo. Please go ahead.
Hey, good morning, everyone.
Thanks for taking my question congrats on a great quarter.
Yeah, Yeah, let's ask there's been some news out there about stripping cost increases.
But carriers lobbying.
Surcharge.
The key holiday season.
On the yes, you have any.
Thoughts around that or or mitigation strategies or how we should think about.
The gross margin impact from potential shipping from should Q4.
The the.
The freight markets are tightening up out there both truckload intermodal and package delivery.
So the we're signing see some increases in rates.
On the package side, you know you PSS announced across the board rate increases. We are we only do a very small part of our business with EPS. Most of it is has done with Fedex at this point.
But you know with a higher level of E commerce business that is likely to occur in the back half of the year, both with us and what everybody else I would expect there'd be some level of surcharges.
From both Fedex and U.P.S. going forward for the fall, we don't know the extended that at this point, but it is a you know it is a potential headwind for later in the year, that's partially offset by the tremendous amount of curbside pickup that we're doing which should mitigate some of that expense on ecommerce side. So you know works.
I did about being a lot for that to our to our athletes as well.
Got it and when we think about the.
Moving to another topic well, let me think about the strong performance in Q2, and the pretty solid quarter to date trends by the back to school headwinds.
Yes, I really don't think about it in terms of shield, new customer acquisition versus just something like a wallet share among.
Interesting customers.
This is line I think it's actually a little bit about we know we've got new customer acquisition, but we also.
Drove higher you ours and more more sales within our existing customer base. So that it was both.
Alright, great. Thanks, very much and best of luck Leslie.
Thank you.
Our next question comes from Sam Poser of Susquehanna. Please go ahead.
Hi, everyone. Good morning.
This will on for Sam.
I just wanted to follow up on this you know that you guys you, taking your obviously taking market share, adding new customers.
What do you guys doing to keep these new customers and make them.
Quote unquote sticky.
We are we are really really focused on trying to get customers.
Into that into the family I mentioned retain them. So we are we've got a massive database of over 20 million athletes every time, we get a new athlete, it's an opportunity to try to personalize and customize and I would say that mean change in what we're doing versus what we might have done in the past is that it's not just.
Yes promotional basket offer its targeted incentive for people to come into the store.
So we it that yes, we also have a tenant brand marketing out there to too.
The strike brand health, but the traffic driving elements are very personalized and data driven.
Okay. That's helpful. Thank you and then.
You guys you said that the.
Private pirate brands private label outperformed.
It's about 500, that's how does how does the private label business, specifically for DSG and CLIA compare how the performance compare online.
It is branded.
So they're not us, but right now we're not going to give it a lot of detail, but they're not as penetrated online yet is.
As a.
Some other brands, but we're moving in that direction clean as making some real progress and DSG is really only launched last year, but the DSG will be this this year will be or light largest private brand across men's women's kids and then into some of the hardlines categories that we have it and so we're really pleased with what's going on with it it hasn't.
It's not as strong online yet, but we're working through that and that's.
No different than what we expected really.
Okay, and just one more for me hey, so so we as far as you know savings how how much of that savings do you expect to continue.
Over.
Into two age and then into next year, how much of that is.
Sticky.
Hi in the short term me over the next quarter to we're going to continue to have some some savings xenon ground travel expenses and consulting and things like that is where as we are not obviously not traveling as much as we had due to the pandemic, but from a staffing.
Perspective, we are out aggressively hiring right now so I I would expect some of the savings that we had from Q2.
To mitigate as we work our way through the year.
Yes going into next year.
Fair enough. Thank you.
Our next question will come from John Kernan of Cowen. Please go ahead.
Yes, thanks, good morning AD.
Brian Lee Congrats on a phenomenal quarter.
Thank you.
I wanted to talk on scorecard and bar and I think you drop the number 20 million members, 70% of sales obviously driving.
Great.
Ray ban personalization marketing et cetera can you talk about the future this business what it means.
The type of growth, you're seeing in members and what you're able to accomplish.
From a sales per member versus non member.
Thank you.
We have a big push behind our smart card program. We've recently in the past year launched a gold program to reward our best customers as keep driving.
Back to them that that's better than the then the standard scorecard or the scanner customer benefit.
So we're driving membership we have as we have that enhanced online now so that's easier to apply online which used to be a barrier and then just working on the value proposition. So that our best customers know how much we value down and just putting everything through that lens, we make any decision to make sure that it's right for our customers and right.
Our specifically our best customers.
Got it maybe one follow up question.
Like despite your private label so a lot of the relationship with your key vendors.
Across a lot of different categories, what softlines hard lines have been strengthened recently and you're getting top level product, whether you know callaway drivers are Nike on the footwear side of things it isn't footwear decks. They really help you.
Grow and build just wondering can you talk about the strengthening of relationship you have with a lot of your key vendors.
Yeah, as we head into next year certainly.
Feels like on their own conference calls there mentioned anymore.
We can see when we walk the stores, but just talk about the strengthening.
Yeah with the key vendors at this point as we go into a holiday.
Yeah, I think we've we've always said great relationships with our with our vendors. So this isn't something new we worked on this and.
For a number of years and we've got great partnerships with the people that we do business with I think one of the reasons that their strengthening going forward is that we have a footprint that allows us to showcase kind of.
Brands entire brand, whereas some other retailers that they do business with.
They can showcase a portion of a brand we can showcase an entire Brad you know so if you take a look at some of the athletic companies. We can showcase the apparel footwear in the hardline side of their business, where some others can't when you take a look at the from a.
A golf standpoint, what we can showcase across to.
Ill Callaway brand for road clubs bags balls gloves. So the accessory piece of the business that I think they're looking at us as somebody who can showcase their entire brand gives us a great presentation to the to the consumer walking in that they can't get a couple of people have said to US you guys.
The way you guys present in the space, the dedicate to and the way that you services and the way the merchandise. It is how we would want to do it if we were doing our own store and I think they just see us as a great.
As a great gateway to.
To the consumer and.
At the relationships of just continue to strengthen in.
Our vendors.
Q, what they say, they're going to do and they know that if we say we're going to do something we're going to we're going to do it. So I think the one thing that's really helping to strengthen the relationships with the vendors is the trust and communication on both sides and there's been more communication more strategic planning and more trust between us and our key vendors and I think there ever has been in the.
Passed.
We see that continuing.
That's great to hear thank you.
Thanks.
Our next question comes from Warren Chang of Evercore ISI. Please go ahead.
Hi, Good morning, I had a question on the new overtime and warehouse outlet stores that have been halfway through the quarter how much of the store base is able to utilize a this centers for clearance and is it changing the realizations that you're getting on some of the and the like merchandise.
So it's definitely the this is a very this concept is very much at its infancy stage right now we don't have many of them out there, but we've got a well.
They can take a lot of a clearance merchandise, we can get out of the stores the traditional stores and make room for the new product, which is really help is another thing that's helping our margins and were able to realize a higher margin rate in these stores and if we kept it in our store and tried to.
Clean it out so it's been it's.
Early on we're really pleased with what's going on here with the would be stores.
Okay, and then just going forward beyond this year, a you know how how do you see that fitting in to your overall current strategy how many more.
How much larger than that footprint be going forward.
But right now we really don't know we're just in the test phase, we'll see how it goes there is.
We're working through this right now early on we're very pleased with it but we're we're not really ready to guide what this can be or how we're going to go with the for going forward. It's still really much very much in the test phase.
Got it thank you.
Our next question comes from Peter Benedict of Baird. Please go ahead.
Hi, guys. Thanks for taking the question.
Two questions first just maybe maybe an update on on the occupancy cost reductions or your products your progress on that front.
But some of your landlords and I'm curious how did those curbside figure into those discussions all you know the enhanced you said this curbside fulfillment does that influence those discussions and then secondly.
The BOPUS attachment rates when folks are coming into the store to pick up in order what one of those attachment rates than historically and are you seeing any change in that in the current environment.
Thank you for doing BOPUS. Thanks.
So with regard to the occupancy costs. So we made some pretty good progress and.
In the second quarter on negotiations of occupancy costs in cases, where the stores were closed a number of the leases we had an opportunity to to abate our rents during a period of time in the stores were closed.
From an accounting perspective, we've elected to defer those gains in spread the gains over the remaining rights of the lease. So we did we didnt pick up those earnings.
In in during the quarter.
Most of those discussions have wrapped up by now.
You know we're back to paying rent.
Pretty pretty much everywhere at this point.
So.
Relationships are are pretty good right now I'd say when our landlord community.
I'm not Bob a question in terms of attachment rate. We are we haven't thought than we've disclosed in the past, but we are actively trying to drive reasonable attachments and you can see with every transaction be it in store curbside or buy online pick up in store and if you. If you go see some of our curbside expression you'll see.
Rather than attachment items, sometimes out on the curve that people can buy and or.
Offered on the website when you when you placed the orders that you know you also need business. So.
Definitely focused on that.
All right Yeah, no. Thank you I've used the term side that they're trying to golf Galaxy, it's been fantastic experience, so well done on that thank you very much.
Thanks.
Our next question will come from Scott since the release of RBC capital markets. Please go ahead.
Good morning, guys Scot ciccarelli, thanks for squeezing in.
You mentioned that you have seen some meaningful performance differences in various geography can you guys, providing more color on that I guess I'm really curious young do you actually start to see a counter cyclical effect, where are the sales of personal fitness and outdoor products actually accelerate enough where more than offset the team sports really pad or additional club.
19 outbreaks.
So we're not going to get into kind of the geographic piece of this what we did say is where theyre playing team sports we've seen the team sports business meaningfully outperformed where they're not which is minimal not surprising.
I think the fitness business is going to be very good all over it is people are just know that in order to fight the pandemic or whatever comes next.
People need to be healthy and that doesn't mean that we're going to have lot of marathon runners, but people are going to get out and they're going to walk they're going to buy a treadmill, they're going to do the lift some weights, even if they're lightweights kettlebells. This whole fitness trend is just people are going to try to be healthier and we don't see that changing even.
When the covert 19 is in a rearview mirror for quite awhile.
Okay. Thanks for that and then I guess you know a follow up here I'm just curious if your field teams are starting to see any competitive closure or is it just seems like a lot of the biggest economic pressures, we're seeing a within the retail landscape growing smaller private companies went up businesses and the like I Wonder if you started to see any of that and you are absolutely ocular.
Sector.
Well, we've seen some closures you know I mean models is even before coal that they were going to close on models as close and I think we'll see a number of competitors.
Close their store closed stores, and we think will be a beneficiary of some of this as it happens.
Got it alright, thanks, guys.
Sure.
Our next question will come from Chris The V gel of Wedbush. Please go ahead.
Good morning, everyone. Congratulations thanks for squeezing me I'm not got a bit too I guess first just on the I'm just curious the 75% that E commerce fulfilled in stores.
As you call out by any chance how much of that it's actually what percentage of that is actually curbside curious about that number one and number two I guess it for you overall when you made a comment earlier about your planning the business off of 29 team.
Yes, I'm curious as we look at the business model from a financial perspective is that a way we should be looking at it as well just given a lot of the sort of abnormality and fluctuations were going to see and 2020 somethings stick around something down south fairway to calm look at it or do you feel like they're structurally going to be revenue.
You benefits margin benefit.
That will carry into 2021.
Over and above how we should think about looking at 20 Nike.
Hi, Thanks, So in terms of your first question, we haven't specifically broken out how much curbside is as the protect the percent of that 75%, but we did say that used to be majority right around happened is now 75% coming to the stores. So you can do some rough interpretation there in terms of car type.
Sorry, meaningful and economic cycle in as far as we go into 19.
I think you've got to look at your model. However, it works for you were going off 19, because we suspect next year in the first quarter. If you just look at it versus 20, our comps will be positive right I'm not sure that our comps will be positive in the second quarter next year, just because then the second quarter. There we are team did a.
Great job there was some pent up demand from Q1. So this is a really odd year of how this is all going to play out and hopefully 21 will be a more you know predictable year, let's put it that way and the best way. We think to do this has to go off of 19 from not only a sales standpoint into.
Sorry standpoint, it's that our job to make a decision of what we think is going to happen category by category Department by Department in region of the country by region of the country and so we've already started talking about this we've started planning for 21 already as you would expect and we're really using 19 as the base of.
Where to go.
And just a quick not just from a and that's helpful. Thank you, but just from a margin perspective E commerce.
Things like curbside pickup just for the sustainability that sustainability of those to structurally impact the margin for the better as we move forward how do I had a maybe do we think that and against the off that.
To a degree as we start thinking about that as well.
I think the ecommerce business is going to continue to accelerate I think the curbside piece is going to accelerate so I think the curbside piece is.
But I think some people Miss about this is it started off as a safety piece you know people wanted it because they didnt want to come in contact with anyone else. It's now becoming a convenience piece you know there was a number of people said to me Hey, Curbside was great I called I got there I set the texstar I made the phone call.
So a couple of minutes they brought the product up and I was on my way. So this is really getting to be a convenience piece.
I think it will be more convenience piece and 21 that it is a health and safety concern as it is today. So we think thats going to continue and I think that will accelerate the one thing everybody well, let me maybe not right now, but the one thing everybody felt time can constrained was their time.
And I think curbside gives people sometime back and I think it's going to continue.
Alright, Thank you very much in all about Europe. Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to add stack for any closing remarks.
I'd like to thank everyone for joining us on our road Q2 call and we'll look forward to talking to everybody. When we release earnings for Q3. Thank you very much and everybody stay well stay safe.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Mm Hmm.