Q1 2022 DICK'S Sporting Goods Inc Earnings Call
In our business across economic cycles.
With this perspective, we believe it's appropriate to be cautious and are therefore, lowering our outlook for the year.
To be clear, we expect our performance will continue to meaningfully exceed 2019 levels, reflecting the strength of our core strategies and the changes we've made in our business over the past five years.
This is the clear market leader and we are well positioned to extend our lead and build on our competitive advantages in the years ahead.
We continue to closely watch the macro landscape and have the flexibility in our business to remain nimble.
Now getting back to our results.
As we announced earlier this morning, we delivered sales of $2 7 billion in the first quarter.
This included a comparable store sales decline of eight 4%, which followed a 117% increase in comp sales in the same period of the prior year.
It's also reflected the anniversary of significant stimulus payments as well as anticipated sales normalization in certain categories.
Importantly, sales continued to run substantially above pre COVID-19 levels.
Up 41% versus Q1 2019.
And sequentially accelerated from last quarter.
These top line results reinforced our strong conviction that the shift in consumer behavior over the past two years is indeed structural.
Consumers have made lasting lifestyle changes with an increased focus on health and fitness and greater participation in sports and outdoor activities.
Our business is squarely at the center of these secular trends and the actions we have taken over the past five years to transform our company have given us significant competitive advantages across all aspects of our business.
Our increasingly differentiated product assortment combined with our disciplined and more sophisticated promotional strategies continues to drive strong merchandize margin growth.
During the quarter, we expanded our merchandise margin rate by 143 basis points versus 2021.
Before continuing let me underscore this critical point that is not always appreciated about our transformation.
The content of the product that we carry today is very different from the products, we carried five years ago.
It's higher heat and more narrowly distributed than what you'll find in the market as a whole.
And therefore, it is not as susceptible to promotions.
In addition, the tools we have today to surgically adjust pricing are significantly more sophisticated than they were several years ago.
With these fundamental changes we are very confident that the majority of our merchandize margin rate expansion that we've driven over the past two years is sustainable.
Led by our structurally higher sales and merchandise margin compared to pre COVID-19 levels, we achieved double digit EBT margin of over 12% and non-GAAP earnings per diluted share of $2 85.
Both significantly ahead of any pre COVID-19 first quarter in our history.
We entered 2022 and a position of tremendous strength and we're focused on enhancing our existing strategy to further strengthen our core business and drive long term profitable growth.
Our approach is centered on our best in class Omnichannel platform, which features our stores as the hub.
During the first quarter, our stores enabled over 90% of total sales serving both our in store athletes and providing over 800 forward points of distribution for Omnichannel fulfillment through ship from store in store pickup or curbside.
We also continue to invest in an enhanced service model and lean into highly engaging experiences to better serve our athletes and reinforce their loyalty.
Our digital capabilities remain core to our Omnichannel success, and we are continuing to prioritize investments in technology and data science.
Furthermore, we remain focused on maintaining our strong culture, putting our teammates athletes and communities at the center of everything we do.
This work continues to have a positive impact as we were recently awarded back to back annual certification by great place to work.
I spend a lot of time, visiting our stores and distribution centers and the positive energy and sense of community from the teams I need is fantastic.
Our strong dedicated team and our ability to attract and retain talent are key competitive advantages for us.
Next within merchandising our relationships with key brands remains stronger than ever.
Our assortment is on trend and we are providing our athletes with enhanced access to the hottest styles across a wide range of categories from the top brands in sports.
Importantly, we also are ensuring that we have products at prices that address the needs of all athletes.
For example through DSG, our largest vertical brand, we offer high quality fashion forward product at a tremendous value across men's women's and youth.
Our key lifestyle vertical brands, including Calia and burst are also resonating strongly with our athletes and we continue to invest in and grow these brands.
Lastly, our new concept, including Dick's houses sport Golf Galaxy performance Center public lands and going going gone are delivering promising early results.
Today, we are really excited to open our third houses sports store in Minnetonka, Minnesota.
How's the sport has exceeded our expectations and has been a great example of the power of elevated service community engagement and merchandise presentation.
We look forward to continuing to refine and grow these concepts, while pulling key learnings into our core <unk> and golf Galaxy chain.
In closing, we remain confident in our strategies and our ability to deliver long term sales and earnings growth.
<unk> has a unique and powerful position in the marketplace.
Sports and an active lifestyle are important in all time and now more than ever as we help families get outside together and lead active and healthy lives.
Our teammates are United behind our common purpose.
Which is to create confidence and excitement I personally equipping all athletes to achieve their dreams.
Especially during these times of uncertainty.
Before concluding I want to thank all of our teammates for their hard work and unwavering dedication to our business.
I'll now turn the call over to Nab deep to review, our financial results and outlook in more detail.
Thank you Lorne and good morning, everyone.
Let's begin with a brief review of our first quarter results.
Consolidated sales decreased seven 5% to approximately $2 7 billion.
Comparable store sales decreased eight 4% following a 117% increase in comp sales in the same period last year.
As Lawrence indicated comps were impacted as we anniversary significant stimulus payments from the prior year quarter.
And in addition, we saw the anticipated sales normalization in certain categories.
Throughout the pandemic.
And as part of this year over year.
<unk> transactions declined by six 4% and average ticket decline by 2%.
Importantly, our sales continue to run significantly above pre COVID-19 levels.
Compared to 2019 consolidated sales increased 41% and sequentially accelerated from the most recent quarter.
Gross profit in the first quarter was $984 7 million or <unk> 36, 47% of net sales and declined 83 basis points versus last year.
This decline was driven by 103 basis points increase in supply chain related costs and a de leverage on fixed occupancy cost of 94 basis points from the sales decrease.
These items were partially offset by continued merchandise margin rate expansion.
For the quarter merchandise margin increased 143 basis points and we continue to see the benefits from our increasingly differentiated product assortment combined with our discipline and more sophisticated promotional strategies and cleared in pricing.
We also saw favorable sales mix.
SG&A expenses were $615 3 million or $22, 79% of net sales and Deleveraged 195 basis points compared to last year, primarily due to the decrease in sales.
The increase in SG&A expense dollar is driven by our investment in advertising and hourly wage rate.
These items were partially offset by lower incentive compensation expense and $17 million.
Income associated with the changes in the investment values of our deferred compensation plan.
Is fully offset by the investment loss recognized in other expense line.
In addition, SG&A also included approximately $13 million of Covid related safety costs in the prior year quarter.
Driven by a structurally higher sales and merchandise margin compared to pre COVID-19 levels.
<unk> was $331 9 million or 12, two 9% of net sales.
In total we delivered non-GAAP earnings per diluted share of $2 85.
This compares to a non-GAAP earnings per diluted share of $3 79 last year and 62 in 2019.
Now looking to our balance sheet. We ended Q1 with approximately $2 two 5 billion of cash and cash equivalents and no borrowings on our $1 6 billion unsecured credit facility.
Our quarter end inventory levels increased 40% compared to Q1 of last year with product flow improving as the quarter progressed.
Looking ahead, we feel good about our overall inventory levels for Q2 and are prepared to continue navigating a dynamic global supply chain environment through the rest of the year.
Turning to our first quarter capital allocation net capital expenditures were $53 $9 million and we paid $46 1 million in quarterly dividends.
During the quarter, we exchanged 100 million or approximately 17% of the outstanding principal of our convertible senior notes for cash and undergone the corresponding portion of convertible note hedge and warrant for one 8 million shares of our common stock.
Following this exchange, we have approximately $475 million in aggregate principal amount outstanding.
We also repurchased 417000 shares of our stock for $42 million at an average price of $101 39.
Now, let me wrap up with our outlook for 2022.
We are pleased with the start of our year and continued to see meaningful growth above 2019 levels.
However, as Lorne mentioned, we have been carefully monitoring the economic environment and there are many puts and takes at play.
With an increasingly uncertain macroeconomic backdrop geopolitical environment in a dynamic global supply chain do you believe it is prudent to adopt an appropriately cautious outlook for the year. Thus we are adjusting our 2022 guidance range.
For the year, we now expect non-GAAP earnings per diluted share in the range of $9 15 to.
The $11 70.
And our comparable store sales in the range of negative 8% to negative 2%.
EBT is expected to be in the range of 1.05 billion to $1 35 billion.
With EBT margins expected to be approximately 10% at the midpoint.
This includes.
Additional risks and supply chain related cost and higher wage rates as well as greater than originally anticipated normalization of promotional landscape over the balance of the year.
As a reminder, this also includes approximately $55 million of pre tax interest expense associated with our $1 5 billion long term debt.
Our earnings guidance assumes an effective tax rate of between 23, and 24% and is based on an approximately 88 million average diluted shares outstanding.
In addition, our plan now includes a minimum of $300 million of share repurchases. The effect of which is included in our EPS guidance.
Importantly, we are continuing to invest in our business for long term and for the year expect the net capital expenditure of 340 million to $365 million.
In closing we are pleased with.
That is also of our first quarter and while we recognize we are in an uncertain economic environment. This is a clear market leader and we remain structurally stronger and more profitable company today compared to pre COVID-19.
And at the midpoint of our updated outlook, we expect sales to increase approximately 35% versus 2019, and EBT margin of approximately 10% doubling our 2019 and BT rate.
Our financial position is strong and in Q1 with approximately $2 5 billion of cash and cash equivalents and we remain confident in our strategies and our ability to drive sales and profitability growth over the long term.
This concludes our prepared comments. Thank you for your interest in Dick's Sporting goods. Operator, you may now open the line for questions.
Thank you we will now start our Q&A session.
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And our first question comes from Simeon Gutman with Morgan Stanley . Please go ahead. Your line is open.
Hey, good morning, everyone I would like to follow up on the revision I think the midpoint, it's about a 16% cut in deep you mentioned a few factors can talk to us about the current environment, what's changing as we speak.
Sales gross margin can you talk about the inventory balance it looks like youre carrying a good amount going into the year are you already seeing that elevated promotion or are you seeing in line with what's in your guidance. So that's my first question.
Thanks Simeon.
Lauren I think those are all very important questions and I'll try and parse them all out and answer all of them.
We have had as you know a fantastic a very good Q1, we're pleased with our Q1 and we had anticipated increases in our freight cost and our labor costs and in our product costs as we went into the quarter and we were accurate in our forecasting of those expenses.
There's two things that have changed that are driving our approach to the guidance for the rest of the for the rest of the quarter.
First is that the consumer is going through an awful lot right. Now. So obviously macroeconomic change trends are challenging inflation is putting pressure on the consumer at the gas pump and grocery store. We all know and then there's this geopolitical environment that is very very challenging.
At the same time, we see that the expenses of those three line items, so freight labor and perhaps the product input costs are accelerating more quickly than we had anticipated and so we want to be appropriately cautious as we look forward to the year, However, I want to be very clear.
<unk> that we are not seeing any meaningful trends that are different from what we saw in Q1, and we believe our inventory of plus 40% actually is very healthy and we are very pleased with it in fact, there are areas, where if we could have more we would have more theres been some disruption in terms of when.
When inventory is flowing in but we had anticipated that certain categories like fitness and outdoor equipment would normalize this year and they have normalized as we expected we are still chasing product in certain categories and our inventory is healthy we are not anticipating any significant markdown risk.
To answer your other question.
The promotional environment, we are not seeing a change in the promotional environment. We will obviously continue to monitor that.
And we will be surgically addressing price changes as we absorbed some of the cost increases, but the marketplace has not shifted dramatically.
In any in any meaningful way, we are just being appropriately cautious as we look toward a lot of things that are outside of our control. When we look at the rest of the year.
Okay. Thanks for that follow up is the.
And the confidence that the industry or your business won't revert further and we've been talking about this question for two years, but is there any categories that you can point to.
That in which consumption is holding or growing at the structurally higher level. Because we are at a much higher water level as you mentioned, 30%, 40% even at the mid point of getting a beep said, so which categories are showing us that we won't see that level of reversion.
Yeah across the board Youre, absolutely right. If you look at the last two years and look at the consumer every single category in our business has virtually everyone except for Hunter has re baseline meaningfully higher than our pre pandemic.
Volume and that reflects the fact that the consumer is outdoors more there they're running they're walking there playing golf the pandemic surging categories that we've all been talking about and we expected to normalize our fitness outdoor equipment, which will include things like bikes and paddle and golf.
And those three normalized as we expected them to normalize, but we believe they all have long term growth potential. So we are not changing our outlook on any aspect of our of our business, we actually think.
And these types of times people need to get outside they need to be active they want to be with their families and we are well positioned to serve the needs of these athletes.
Okay, Thanks, Laura and good luck.
Thank you so much for your question.
Next question comes from IGN here at Barclays.
Please go ahead.
Great. Thank you very much.
Lauren I wanted to stay on the promo topic, because we as well did not see promos this quarter.
Yes, well I guess my question really is the notion that say a partnership with Nike what are your sort of their premier partner, let's just call. It for lack of a better term.
That causing other competing brands.
Actually offer you the best and highest product as well, so, thereby elevating the entire brand and product platform. That's my first question. Thanks.
Yeah, Hi, Adrian.
Our partnership with Nike is at an all time high as is our partnership with all of our strategic partners and I think Thats. The result, not just of a situational moment in time with certain partners, but the fact that we have invested so much in our stores and in our experience such that brands, who are rooted in or want to actually showcase their products.
And our brand in our stores so yes.
Yes across the board, we're getting access to higher heat and more pristine premier product is high in consumer demand and that's a big part of our strategy and that has been driving our results.
Great and then for now a couple of quick ones on inventory at the end of the quarter was up 40% you're comfortable with that what portion of that is cost.
<unk> AUC increase and what portion of that is in transit so effectively I'm trying to get the unit.
So yes.
Yes, and maybe before I go into the details I think the one other ways to think about the inventory is to also look at what what was happening to our inventory position as we were going through 2021. So if you look at it as we called out last year on inventory position continue to build as we went into the year. So what you have.
In Q1 versus Q1 last year, especially they are inventory stocks and in stock levels in Lafayette and Houston.
Okay.
Sorry, It appears that we have lost Kate <unk> line.
Hello.
Sorry, everybody if you could just bear with US one second one will reconnect the speakers.
Okay.
Okay.
Okay.