Q2 2022 DICK'S Sporting Goods Inc Earnings Call
With our second quarter results, which demonstrate the strength of our core strategies and the foundational improvements that we've made across our business over the past five years.
It's approximately the same EBT in Q2 as we did in all of fiscal 2019.
While the macroeconomic environment remains uncertain, the Dick's sporting goods consumer has held up quite well.
Over the past two years, they've made lasting lifestyle changes focused on health and fitness sports and outdoor activities and we remain uniquely positioned to capitalize on these secular trends.
Our inventory is healthy and well positioned with improved in stock levels in key categories.
Importantly, we are raising our full year outlook, which continues to incorporate an appropriate level of caution given today's macroeconomic environment and contemplates an approximate 10, 7% EBT margin at the midpoint.
Now to our results.
As we announced earlier this morning, we delivered second quarter sales of $3 1 billion.
This included a comparable store sales decline of five 1% and as expected represented a sequential improvement from the first quarter.
It's important to highlight that our sales continued to run substantially above pre COVID-19 levels up 38% versus Q2 2019.
Reinforcing that the favorable shift in consumer behavior that I, just mentioned is durable and our actions to capitalize on this shift are yielding strong results.
Notably for the year, our key athlete success metrics inclusive of acquisition new athlete retention.
<unk> purchasing and Omnichannel behavior are elevated across the board compared to pre COVID-19 levels.
Our increasingly differentiated product assortment combined with our sophisticated and disciplined pricing strategies and favorable product mix continues to drive strong merchandise margin.
Our merchandise margin rate was up 439 basis points versus Q2 2019, as we maintain the majority of the merchandise margin expansion that we drove over the past two years.
Before continuing let me emphasize a critical point.
The content of the product that we carry today is very different from the products that we carried five years ago.
It's higher heat and more narrowly distributed than what you'll find in the marketplace and therefore, it is not as susceptible to promotions.
In addition, the tools, we have today to surgically adjust pricing and promotions are significantly more sophisticated than they were several years ago.
Lastly, our product mix is structurally shifted toward higher margin categories.
We've materially reduced hunter exposure, which had margins approximately 700 basis points below the company average in 2019, and we've continued to grow our vertical brands, which currently have margins between 600 to 800 basis points above the national brands.
Looking ahead, we remain very confident that our merchandise margin will be meaningfully higher compared to pre COVID-19 levels on an annual basis and that this improved profitability is sustainable due to these foundational changes in our business.
With our structurally higher sales expanded merchandise margin and operating efficiencies compared to pre COVID-19 levels, we achieved double digit EBIT margin of nearly 14%.
Approximately two times, our Q2 2019 EBT margin.
In total we delivered non-GAAP earnings per diluted share of $3 68 in Q2 compared to.
69, <unk> for the entire fiscal year of 2019.
As we continue our transformational journey, we are focused on enhancing our existing strategy to further strengthen our core business and to drive long term profitable growth.
At the heart of these strategies is our athlete experience.
We continue to develop a highly engaging in store service model to better serve our athletes.
Our teammates are highly trained and are focused on creating confidence for our athletes by finding the best product for them.
Our stores also now have highly experiential elements such as our premium full service footwear deck elevated soccer shops golf simulators, <unk> technology and batting cages.
Our new Dick's houses support and golf Galaxy performance Center stores are tremendous examples of the power of elevated service model and experiential retail.
These new concepts are redefining sports retail and providing us with valuable learning, while also driving strong sales and profitability.
In addition, our digital experiences remain an integral part of our success and we continue to prioritize investments in technology and data science to elevate the athlete experience.
We're focused on advancing our personalization capabilities and enhancing our one to one relationships with our athletes through our digital marketing, ensuring we serve them the most relevant products at the right time.
Sure.
Our personalization strategies are fueled by our robust and growing scorecard loyalty program in total athlete database.
We now have over 25 million active scorecard loyalty members valuable cohort that has grown in recent years.
And during the second quarter, our scorecard members generated well over 70% of our total sales up approximately 200 basis points from the same period last year.
Furthermore, our Omnichannel platform, which features our stores as a hub is an important competitive advantage for us.
During the second quarter, our stores enabled over 90% of our total sales serving both our in store athletes and providing over 800 forward points of distribution for Omnichannel fulfillment.
Next within merchandising our brand portfolio is a tremendous asset and.
And in fact, our data tells us that approximately 80% of our active athletes will predict for a multi branded shopping experience.
Importantly, our relationships with key brands remains stronger than ever and we are continuing to develop relationships with new and emerging brands.
At the same time, we are creating and growing disruptive vertical brands like Korea first in DSG.
Our assortment is on trend across categories and our wide range of price points ensures we are able to meet the needs of all athletes.
Our teammates are our greatest asset and we see our ability to attract and retain talent is a key differentiator for us.
We're proud of our high teammate engagement levels, which reflect our efforts to be a great place to work.
We'll continue to invest in our teammates and our enhanced service model to maintain our strong culture and drive a top tier athlete experience.
In closing our strategies are working and we remain confident in our ability to deliver long term sales and earnings growth. We're the clear market leader in a large fragmented industry and we believe we are well positioned to continue taking market share and extending our lead.
Through the macro doesn't macroeconomic environment remains uncertain, we will continue to focus on meeting the current needs of our athletes.
Before concluding I want to thank all of our teammates for their hard work and unwavering dedication to our business.
Ill now turn the call over to now deep to review, our financial results and outlook in more detail.
Thank you Lauren and good morning, everyone.
Let's begin with a brief review of our second quarter results.
Consolidated sales decreased 5% to approximately $3 1 billion.
When compared to 2019.
<unk> increased 38% demonstrating the sustainability of our structurally higher sales base compared to pre COVID-19 levels.
Comparable store sales decreased five 1% and as expected accelerated sequentially from the first quarter.
As a reminder, we were lapping a two year stock comp increase of approximately 40% in Q2.
Transactions declined eight 4%, while the average ticket increased three 3%.
Within our portfolio each of our three primary categories of Heartlands apparel and footwear performed generally in line with our expectations.
Gross profit in the second quarter was 112 billion or 36.0% to 3% of net sales and declined 388 basis points versus last year.
As expected. This decline was driven by a merchandise margin rate decline of 197 basis points higher supply chain costs and deleverage on fixed occupancy costs from lower sales.
Compared to 2019, our merchandise margin rate expanded 439 basis points, driven by our increasingly differentiated product assortment combined with our sophisticated and disciplined pricing strategies and favorable product mix.
As Lauren mentioned because of the structural drivers we continue to expect automotive in those margin rates to be meaningfully higher than pre COVID-19 levels on an annual basis.
SG&A expenses were 657 4 million or 20, 112% of net sales and Deleveraged 157 basis points compared to last year, primarily due to the decrease in sales.
The increase in SG&A dollars was driven by our continued investment in hourly wage rates and talent to support our growth strategies.
Interest expense was $25 5 million, an increase of $19 3 million on a non-GAAP basis compared to the same period last year.
This increase was primarily due to the $13 8 million of interest expense related to our $1 5 billion senior notes issued during Q4 of 2021.
The current quarter also included a $6 $6 million of inducement charge related to our exchange of 100 million outstanding principal of our convertible senior notes.
Driven by a structurally higher sales expanded merchandise margin and operating efficiency compared to pre COVID-19 levels, EBT was $427 3 million or $13, 73% of net sales.
This compares to EBIT of $151 million or $6, 69% of sales in the second quarter of 2019.
In total we do.
The lower non-GAAP earnings per diluted share of $3.68.
This compares to non-GAAP earnings per diluted share of $5 eight last year and GAAP earnings per diluted share of $1 26 in 2019.
Now looking to our balance sheet. We ended Q2 with approximately $1 9 billion of cash and cash equivalents and no borrowings on our $1 6 billion unsecured credit facility.
Our quarter end inventory levels increased 49% compared to Q2 of last year. However, we were chasing inventory last year amid significant supply chain disruptions.
A better comparison is against Q2 of 2019.
Our 40% increase in inventory was relatively in line with our 38% increase in sales.
As Lauren said, our inventory is healthy and well positioned.
We are excited about the assortment we have in place for the important back to school season, and we are prepared to continue navigating a dynamic global supply chain environment through the rest of the year.
Turning to our second quarter capital allocation net capital expenditure was $84 5 million and repaid $36 9 million in quarterly dividends.
During the quarter, we exchanged 100 million or approximately 21% of then outstanding principal of our convertible senior notes for cash and unwound. The corresponding portion of the convertible note hedge and warrant for $1 7 million shares of our common stock.
Following this exchange, we have $375 million in aggregate principal amount outstanding.
During the quarter, we also repurchased three 9 million shares of our stock for $319 million at an average price of $80 and 84.
Now, let me wrap up with our outlook for 2022.
Pleased with our performance in the first half of the year and continue to deliver meaningful sales and profitability growth over 2019.
As a result of our Q2 performance and improved inventory position for the important back to school season, we are raising our 2022 guidance.
Potently as lawn and indicated our updated outlook continues to incorporate an appropriate level of caution given the uncertainty around the macroeconomic backdrop and geopolitical environment and the dynamic global supply chain.
For the year, we now expect comparable store sales in the range of negative 6% to negative 2% compared to our prior expectation between negative eight to negative too.
In addition, we now expect non-GAAP earnings per diluted share in the range of $10 to $12 compared to our prior expectation of $9 15 to $11 70.
While our outlook is not dependent upon share repurchases beyond the $361 million executed through the end of Q2, we will continue to be opportunistic as the year progresses.
EBIT margin is expected to be approximately 10, 7% at the midpoint more than double our 2019 rate.
Our earnings guidance assumes an effective tax rate of approximately 24% and is based on approximately 88 million average diluted shares outstanding.
In closing we are very pleased with our Q2 results and we remain very enthusiastic about the future upticks.
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.
If you'd like to ask a question. Please press star followed by the number one on your telephone keypad now.
Have you changed your mind staff on a bike.
And so let's keep your questions to one question and one follow up.
Our first question today comes from Simeon Gutman of Morgan Stanley .
Your line is open. Please go ahead.
Hi, good morning, everyone.
Short term and then maybe a longer term question.
The short term is on the guidance.
The better performance this quarter.
Remember that the year could have gone up for it in theory could have stayed the same or gone down so.
Given the uncertainty why the confidence to even slightly nudge up the back half when you could have just kept it more conservative.
I'll take that one that Youre short term question.
Guidance, we felt given the momentum that we had in Q2, the strong Q2, and the fact that within Q2, our sequential our comp sequentially accelerated as we moved into July and back to school season, and our inventory started to be in.
In stock more than it had been before we feel like we're going into the back half with a lot of momentum and thus we wanted to appropriately adjust our guidance and take the low end of the range up.
And so.
On an EPS basis points.
I would say that.
Also raised our EPS expectations and that was driven by if you recall at the end of Q1, we had we had kind of foreshadowed that the freight and fuel expenses, while continuing to remain elevated versus last year, but we're continuing to rise and what we have seen in the last call. It three months that they are not remaining then ongoing us faster.
As they were going to <unk> and some of that favorability was contemplated in our adjustment of the EPS expectation or.
For full year.
Got it Okay and then the longer term question is.
The stacks the comp stacks are holding up remarkably strong levels, even though the top line this quarter declines a little.
I guess, the skeptic would say that some of the demand post COVID-19, it's holding up a little bit longer than we think and it's going to eventually subside.
The Nonsked pick the Bull would say the new normal and we continue to move higher do you have any thoughts on that I guess as you get more information post Covid I guess as demand rebates in some categories.
How to think about digestion reversion going forward. Thank you.
Yes, Simeon we agree our comps are significantly higher than they were pre COVID-19 and we believe very strongly that that is structural in nature, both because consumers have adopted more oven.
LTE and <unk>.
Active outdoor lifestyle, and we're getting a bigger market share of that but also there are many structural changes and theres almost nothing structurally the same and our business as there was several years ago I would point to the fact that our assortment is completely different now than it was we've got access to higher heat product more narrowly disk.
Attributed product that doesn't isn't nearly as susceptible to pricing pressures and promotion.
Our product mix has meaningfully changed toward higher margin products, we've reduced our exposure meaningfully over the past years.
And that Hunt business was 1700 basis points below our average we're having success with our vertical brands, which have 600 to 800 basis points higher than our average margin and then I think one of the most important thing is that we have moved our entire marketing effort from what used to be.
Long term print based effort, where we had to make decisions multiple weeks and even months in advance on how we wanted to price and promote we've moved at all to a digital.
Marketing capability, where we can be much more surgical much more real time much more personalized. So we don't have to put the whole store or the whole website on sale. We can be very very specific with our pricing and leverage data science to do that so.
Totally agree with you the business is structurally different than it was several years ago and we are no longer looking at this are.
Are we ever as a COVID-19 bump that was going to return.
Okay. Thank you good luck in the second half.
Thank you.
Our next question today comes from Kate Mcshane of Goldman Sachs. Your line is open.
Hi, good morning, Thanks for taking our question.
Had a question around the inventory and gross margin I wondered if there was any way to break it down the inventory between cost and units and maybe any earlier receipts that you might be taking and then just a second question is around the gross margin cadence in the second half if you expect much difference between Q3 and.
Q4, and how we should think about the promotional environment around back to school and holiday.
Good morning, Kate in terms of the cost and the units I would say, it's a pretty balanced.
Breakdown between the two are definitely a little bit more elevated on the cost side.
So.
But like we said in our commentary it is important to look at the inventory versus 2019 does because of the makeup of the inventory last year was and how the makeup right. This year is looking very different EBIT chasing a lot of categories last year, and we feel much much better about the in stock today.
And the last thing I would say is if you look at the growth versus 2019 again on a unit and on a cost basis, it's call. It a comparable view long as we as we look to the promotional environment for back to school and holiday, we are anticipating a slightly more normalized pricing and promotion environment, you look versus last year.
It was an incredibly benign pricing promotional environment, but all of that is reflected in our in our go forward guidance, we're not expecting any surprises there.
Thank you.
Our next question today comes from Adrienne <unk> of Barclays.
Dan Your line is open.
Yes, good morning, and congratulations on another really solid quarter.
Lauren let me start with you.
We've always talked about how the the notion that you're at about 85% branded as a pretty significant competitive advantage can you talk about that with regard to push hard at some vendor levers markdown money or our TV. How is that evolving and are you seeing any more of that.
We are expecting more of it in your forward guidance.
And then from a deep cause obviously peak inventory period.
So wondering what the inventory might look like at the end of third quarter and probably more importantly at the end of the year. Thank you very much.
Thanks, Adrian our brand our brand assortment is absolutely a competitive advantage for us we've got fantastic relationships with our strategic partners. We also are doing.
Really really strong job with our vertical brands, we always work with our with our core partners on managing our inventory levels. So yes. We are we have certain return return on levers our Cds, but we also work really real time to determine how best to move through product and we have in our case.
Really the elevated clearance process, including our new going going gone concept, which allows us to work to move product really quickly through if there's if there are any overages.
Keith about inventory, yes, good morning, Adrian we won't provide the guidance on a on an inventory on our outlook for Q3, our portfolio. However, having said that the point that I want to make is like Lauren called out in her comments right and we feel really really good about where our inventory right now is especially as we head into the important.
Back to school season, we feel good about the inventory levels and our overall composition of the inventory itself it seems to be well positioned and very healthy.
We feel very optimistic as we go into the back half of this year.
Great Great job again, the best of luck.
Thank you. Thank you.
The next question today comes from Robby <unk> of Bank of America. Please.
Please go ahead.
Hi, Good morning, guys, great great quarter, and the outlook a couple of quick questions. Just could you give a little more color on the categories that outperformed in the second quarter, excluding back to school.
And the ticket growth I think you guys said, if I got it right ticket was up around 8% in transactions down around 8%.
Maybe some color around.
I think that would mean decelerating transactions.
The first quarter and some color around what's maybe going on there and is there any kind of trade down.
Things happening with your customers as well.
Yeah.
Thanks Robby.
<unk> with the categories that outperformed in Q2, we actually had tremendous success across all of our key categories. They were in line with our expectations footwear. In particular is really strong given our assortment is is absolutely best in class and that's driving incredible.
Incredible success with our customers team sports have been back and that business is very strong we were really pleased with the golf business, which sequentially accelerated in Q2 versus Q1 and still remains significantly above 2019.
So I think apparel was the only business that was slightly challenged in Q2 of our core businesses and that was really because there were some late shipments in apparel, where some of the spring product came in on top of back to school products, but even within apparel once the products started flowing and our teams have done an absolutely incredible job flowing product and getting it into the stores.
<unk>, we started to see comps significantly improve in athletic apparel as well. So overall really really strong across the categories I'll turn it to <unk> to answer the ticket question.
Good morning, Robby, So let me give a little bit of a breakdown again.
In Q2, our comps declined five 1% the transactions actually declined eight 4% and the average ticket was up three three.
However, as you can imagine those meaningful noise in the transactions data, especially as we're going up against the stimulus payments that were given out last year as well as the kind of the the timing of the different markets reopening because of Covid and therefore, if you look at the compares the transactions comparison versus 2019.
The transactions actually grew in both quarters in Q1, and Q2 and they were much more in line versus kind of the change that you might see if you look at on a transaction on our Q1 versus Q2 basis. So hopefully that gives you the answer in terms of the transaction trends.
So that really helps and just any.
Any sort of color around just the consumers shifting behavior and the high inflation environment, and if youre seeing that kind of trade down stuff in your stores.
Yeah, Ravi we actually are not seeing a significant trade down or consumer is holding up very well, we're not seeing people trade from best to better and better.
Better <unk>, better and better it's a good product.
Across all income demographics, the trends are pretty similar I think that just speaks to the fact that our portfolio has something for everybody. If youre if youre looking for the most premium technical piece of equipment or cleats. We've got that for you, but we also have opening price point brands like our DSG brand, which is doing really really well.
And has tremendous value and fashion to it so across the board no, meaning our consumer is holding up very well.
That's great. Thank you so much.
Thanks.
Our next question today comes from Warren Cheng of Evercore ISI.
Your line is open.
Hey, good morning, great job guys.
I had a follow up on <unk> question on the Comstock and how it's been remarkably stable can you dig in and give us some color on how the pandemic winter categories. In particular have performed last few quarters are they still normalizing and dragging on that overall comp for us.
It started to normalize and stabilize just trying to think through kind of how those categories are going to drag or not drag on comps from here.
Hi, Juan yes.
What unquote pandemic, winning categories and by the way there were a lot of pandemic, winning categories, including footwear and apparel, which remained incredibly strong some of the more specific pandemic winters like fitness, our outdoor equipment bike those are acting in line with our expectations and in fact are still significantly above 2019 levels.
So while there is some adjustment going on year to year due to the surge in those businesses. They are significantly higher than they were pre pandemic.
Got it. Thank you and my follow up I thought you guys made an interesting comment in your prepared remarks, you called out that more higher heat more narrowly distributed products has been a driver of the merch margin. If we step back and look at that 400 basis points of merch margin expansion, you've achieved since 2019 as the mix shift.
Component to mix shift to high heat product higher margin product.
That then the more material driver or as the lower markdowns and lower promos and the more material driver.
Yeah.
Yes, Ron this is.
I would say is actually is all balance right. If you look at it what we're seeing is that the mix shift that we have gotten from the <unk> product, which used to have 70 to 100 basis points lower margin rate going down as well as acceleration of the vertical brands with 500 800 basis points is one driver of mix and as you recall of the <unk>.
<unk> of <unk>.
Products that we carry especially in the key categories like footwear.
And in apparel as well we are seeing benefits in two for one the benefit is coming because of the margin rates from those categories do the bigger benefit like you called out is coming because of the lack of promotion that because these are highly allocated product. So it's a combination of both of those things that is also driving our merch margins higher.
Got it. Thank you good luck.
Thank you.
Our next question today comes from Christopher <unk> of Jpmorgan. Please go ahead.
Thanks, and good morning.
You talked about momentum in the business and called out July and back to school I know you don't guide the quarters, but any thoughts on the cadence and as you revisited the guidance to your internal expectations changed for the back half and <unk> versus <unk>.
Okay.
Yes.
You called out right, we were pleased with the way the quarter to finish in that.
If you look at the tail end of July kind of the early season of the back to school season.
Look at that as a testament to where we are expecting for for back to school season. We are very happy with the early start of the back to school season, and yet you also called out kind of gave you one guide to the intra quarter trends, but.
The inventory levels that we have the in stock position that we are going into the important back to school season, we are very pleased with that.
In terms of the internal expectation definitely if you look at what we did at the lower end of the guidance of raising the low end of the guidance for minus six to.
So minus six for the full year that kind of flowed does not only the benefit that we saw from Q2, but also our optimism around the consumer trend holding up well better than we had kind of at the end of Q1 and that has been factored into the bringing the low end of the guidance up to minus 6%.
Understood and then you also mentioned on the expectation that <unk> youll have some promotional normalization. So how are you thinking about that.
Margin stack that you referenced for the second quarter do we see any degradation in that in the third quarter, obviously still very strong versus <unk>.
<unk> 19, but does.
Does that lessen in the third quarter.
Yes, Chris I don't think it will be called out that we anticipate from our promotions will be going up what we called out in our guidance is the fact that what we don't know is what the overall promotional landscape in the back half will look like and that is what has it been factored into our guidance. So if we continue to see a benign environment.
That will be factored into the actual results for Q3.
There are like lawn and indicated there are certain categories, there would be a bit heavier like say in apparel and we will be appropriately activating around those products as we go into the back half. However, even that impact has been contemplated into our guidance and so we feel really strongly about the guidance that we've given.
For the full year, Chris I would just add that long term, we still feel very confident that structurally we will maintain more than half of our the margin gains that we've gotten over the past couple of years.
Thanks, very much best of luck.
Yes.
Thanks, Chris.
The next question and the key comes from Michael Lasser of UBS. Your line is open.
Good morning.
<unk> on for Michael Lasser, Thanks, a lot for taking our questions.
First a quick question on the comp guidance at the midpoint it implies.
Tigers.
Jamaica geometric stacks in the back half deceleration partnerships for the second quarter and the first half.
Does this reflect the caution that Loren you cited in the prepared remarks with respect to your guidance.
And does the comp guidance assume that demand for your categories in the back half decelerate further from what you saw in the second quarter.
Yes, I would say like we called out in our prepared comments right.
No.
We are appropriately being cautious about our expectations for fall.
The macroeconomic.
Situation as well as the geopolitical situation continued to remain a challenge so we need to be cognizant of those trends and that is what has been contemplated in our guidance.
If you look at the high end of the guidance and the low end of the guidance. Yes. The midpoint is that it is but at the high end of the guidance. We are expecting the comp to be minus two portfolio. I would also point out the comparison that you are making versus triple year of 2019.
The fact that we were we were very very promotional in 2019. So while we are contemplating that there will be some normalized pricing and promotion in the back half.
That could be impacting the comp the comps as well on a three year stack.
Got it that's very helpful and then.
And my follow up question is.
And granted that there are a lot of reasons to believe that.
The current comp levels from the current levels are sustainable.
The event that comps to remain pressured in 2023, how much room is there to cut back on operating expenses to manage profitability.
At your P&L. Your SG&A margin has not traded leverage March versus 2019, despite sales being 35% higher. So one would think that there is going to cut back on cost next year strip sales come under pressure.
Love to get your thoughts on additional.
Yes, so we have tremendous amount of flexibility in our P&L. If you look at it right. The first thing is.
<unk>.
You were talking about a hypothetical here in case. The 2023 sales are down because we are not adding anything like that we feel really optimistic about our business.
Keeping the macroeconomic situations aside, but just looking into the P&L flexibility. The first thing would be we will look into the variable expenses and.
And to the extent you called out.
There is flexibility even in our discretionary in our fixed expenses and then the lastly, as you called out.
Like we said you know, we only have 8% share today in a very strong industry that is doing really well. So we are being aggressive in terms of our investments in the key categories and key capabilities to be able to ensure the long term sustainability of the trends that we have been driving.
We potentially could look into those investments as well if need be but we feel very optimistic about the long term sales and the profit trajectory of the business.
Got it that's very helpful. Thank you for that and good luck with the back half of the year.
Thank you.
The next question comes from Nishu City.
Citigroup.
Please go ahead your line is open.
Hey, Thanks, guys curious if you could talk a little bit more about the footwear category curious about your performance in Nike product versus non Nike product, if that's something that might be willing to give more color on and also would love to hear an update on the linkage of the of your App, the Nike App and what that might be.
Be doing in terms of new customer acquisition.
In fact, it is bringing new customers into your network.
Thanks, Paul footwear is doing incredibly well across the board Nike doing well other brands are doing very well. So just in general the quality of our assortment and the type of products. We have it's so meaningfully different than it was before that that business is really being responded to very well by consumers are.
<unk> membership with Nike continues to be really fruitful. We are working together, we're starting at the supply chain continued to improve starting to get some higher heat product going to through that connection and we are growing new customers that are jointly connect.
Connected to Nikkei index, each quarter meaningfully this past quarter as well.
Got it and then just.
Follow up just thinking out to next year I don't know if you.
Sorry, if I missed any update you gave on some of the younger growing concepts, but just performance in the quarter. How are you thinking about growth for next year. Thanks.
Yes, so we public lands.
Three stores now or do it we're very very pleased with how thats doing very small obviously compared to the logistics business. Our houses sport concept continues to do very very well and we're learning significantly from that experience, we're going to be growing morehouse. The sport experiences go forward, but we're also taking lessons and rethinking.
The entire chain, how we can improve the service and the experience and similarly with golf Galaxy performance Center, we are Redeveloped reinventing our experience we will continue to invest in more golf Galaxy performance centers, but also bringing the learnings through the rest of that chain the last new comps.
That is really doing very well right now is our going going gone and warehouse channel that business is obviously.
And then an inflationary environment, it's great to have that kind of channel we've built significantly more even in the past months.
And we're finding the consumer responding very well to that channel as well.
Thanks, Good luck.
Thank you.
Yeah.
The next question comes from Michael Baker of D. A Davidson. Please go ahead.
Okay, Hi, thanks.
Thanks.
So you.
I want to go back to the comment about maintaining at least 50% of the margin gain during.
During the pandemic and so if I look at it on the EBT line that apply something a little bit north of about $10 eight to 10, 9%.
Your guidance this year is 10, 7%.
Does that imply or can we infer that you think margins will be down this year, obviously versus last year, but the sort of bottom here.
Sorry to go back up in 2013 is that a.
Reasonable assumption based on that comment.
Yes, Mike.
If you look at the midpoint of the guidance, yes, Youre right that we are maintaining a majority of the module margins that we have driven over 2019 and again, we're not going to guide to 2023 that like we said we are very confident about the sales and the earnings trajectory of the business over the long term. The biggest unknown. If you think about 'twenty three that are in the macro.
So economic condition, so those keeping the macro side.
Your thesis is spot on we feel really optimistic about the sales and the <unk>.
Profit trajectory of the business over the long term.
Okay, Great fair enough.
A follow up.
Give some color some good color on the components of the P&L.
We can obviously make our own estimates, but one missing piece. If you would how should we think about interest expense non-GAAP interest expense after the adjustments for the convert how should we think about that in the back half of the year or full year.
Yes.
The biggest variable factor if you look at it again, if youre doing the year over year comparison is the fact that we didn't have the.
The long term senior notes that we have outstanding on the balance sheet today.
So if you keep and we believe that is the right capital structure for us as a company. So that is a structural piece the piece that is.
You look at it both in Q1 and in Q2, we had the onetime costs associated with settlement of the convertible notes to the tune of just over $6 million.
If you do make another transaction like that in the second half there will be a corresponding cost but that is onetime in nature.
Associated with just unwinding of the convert earlier than it is due.
So I'll put it out putting that all together would you care to just give us the non-GAAP interest expense number or we can we can certainly figure it out but.
I might just be easier for every one of you told us how to expect non-GAAP interest in the third and fourth quarter.
Yes, non-GAAP interest expense would be pretty much in line with Q2 with the exception of the $6 1 million that we called out for the one time transaction cost.
Understood I appreciate the help thank you.
Thank you.
Next today is cowens John Cannon. Your line is open John .
Excellent. Thanks for taking my question.
I wanted to go back to maybe the merchandise margin expectation.
Assumptions for apparel in particular, it looks like some of the vendors moved away from maps.
Promotions Hawkeye in store they look.
Inventory unit costs on all the vendors balance sheets look fairly high so what's the assumption for athletic apparel as we move through the back half of the year. When do you think will be.
On a normalized promotional environment in that.
Apparel category as we go into next year. Thank you.
Thanks, John we are working really closely with our vendors.
Apparel is a category, where we're all working due to flow through to make sure that we clear through the product.
We are moving through that channel through that through our growing going non channel through through also our experience activity. It's hard to know when exactly we'll see a normalized promotional activity, but we are we do have everything that we anticipate reflected into our guidance and we are marking some apparel down right now thats included in our guidance.
And its moving well through the system. So so we're hoping.
For improvement in the near term.
Got it maybe just a follow up to the earlier question on inventory balance into year end.
And maybe just the costs associated with some of the inventory on balance sheet now how do we how should we expect.
Some of the costs associated with the current inventory unit.
On the balance sheet, obviously freight that's elevated product cost seem to be moving higher because some of this carryover into next year, how do we how should we think about the cost piece of the inventory thats on the balance sheet right now for both you and a lot of your vendors.
Yes, I would say that some of that cost will continue into next year as well as you can imagine the cost increases that have been taken this year. It will take some time for us to be able to sell through that inventory. So that cost pressure as you look from the freight cost increases, especially will remain with us I would say.
Until early part of next year the piece that is unknown as you know.
How the overall supply chain landscape continues to remain for the balance of this year, we feel better about that as we're going into into the second half versus how we felt I'll call. It three months ago at the end of Q1. So we'll get will have to continue to navigate that cost pressures as we go through the balance of this year.
Okay. That's helpful. Thank you and best of luck and congrats on the success through this year.
Thank you.
And next question today comes from Tom <unk> of Williams trading.
Your line is open.
Thank you. Thank you for taking my question I have.
Follow up on the last question.
In regard to the can you give us some more color on what happened in July and if the map holiday that started towards the end of the month.
Help that.
<unk>.
And are you being.
Are you having to absorb any of the markdowns.
<unk>.
Associated with that and I apologize.
Okay.
Hi, Paul.
Yes, so we did have some months throughout July .
In in the business overall and in apparel.
The map at the end of the month, we participated in them we absorb.
A portion of that as do our brand partners.
Nothing meaningful to talk about there.
And then thank.
Thank you and then secondly, a lot of the conversations about what May happen next and about what the consumer is going to do can you talk about the improvement in all of these investments Youre doing.
In digital and consumer engagement both in the store.
And online.
To help.
It appears to have help you overcome some of the concerns you had about the macro and can you talk about how that's evolving and how.
Is that good or flexibility may or may not help you.
Both in good and bad times.
Yes. Thank you Sam it's a great question.
We have been working on improving our entire omnichannel experience over the past several years and so youre seeing us first of all I'll bring experiences into our <expletive> stores, and our golf Galaxy stores that the consumers responding really well to.
Elevated service levels, which the consumer also is valuing so that they can find the right product for them, we have completely transformed our marketing. So that we are much more digital digitally savvy and we can be much more personalized and I think you see all of that when you look at our athlete database.
One thing that we haven't mentioned on the call. Yeah, I don't think is that our scorecard.
Old customers, who are now 5 million strong are contributing 40% of our sales. So they are growing in terms of their contribution and their mix, which again speaks to the fact that we are creating engagement with our customers. So that entire experience from a customer standpoint, both online and in store has meaningfully improved from what it was several years ago.
<unk>.
Thanks, I just had a quick follow up.
How much of sort of this Matt how much when you look at what the consumer is doing and what Youre doing and so on do you feel is in your control.
Versus sort of what's happening on the macro because.
Yeah.
Everybody asked about what the consumer is going to do but my question is what.
How much of this do you really believe you have control of to keep that consumer coming again, both in good times and bad.
Yes.
To me the way to think about this would be the look at the structural drivers of what is in our control and we have done a really really good job around so the things that I look to is quite frankly that we have 16 million new athletes.
We acquired over the last couple of years alone.
And like Lauren mentioned, the ability to be able to really engage with them is definitely differentiated approach that we have done and then a lot of players in the industry and then we would look at in terms of the the.
The access that we have gotten off of the high end high heat and kind of the narrowly distributed product also drives the differentiation that is much more in our control and then looking very similarly on a P&L basis. If you look the drivers that we called out the margin.
Improvements are much more structural.
<unk> that we have made in our business very very consciously over the last few years and those are the reasons why we feel really optimistic about the long term notes and the profitability trajectory of the company.
I would add to that that our product mix in our assortment while.
Some of it you may consider discretionary there are things in our business that are essential and thats everything from making sure that your kids at the right place on their feet too.
Equipment that you need to perform at your best II with your outside running in your shoes are worn down. So we do have products that have held up well in prior recessions and the fact that we offer different price points and different levels for everybody.
Something in our control.
Thank you very much and continued success.
Thank you.
The next question comes from Chuck Grom.
Gordon Haskett your line is open.
Hey, Thanks, good morning, and great quarter on the on the change in guide can you remind us your expectation for promotions given.
Elevated inventory levels are across.
A lot of retail today, and then on <unk> can you unpack the gross margin decline between merch occupancy E com and if theres any other items that played into the quarter.
So Chuck I'll take the second question first and then I'll come back to your first question. So if you look at the comp.
Of the gross profit decline, but then that the Roes the merch margin decline of 197 basis points and Thats, probably the biggest driver.
And like we called out Brian that was pressured as youre going to expect from the supply chain costs because of the freight.
Cost and the occupancy deleverage because of the negative comps.
That's the way to think about the gross margin decline to meet this was expected and we had contemplated and guided to that at the beginning of the year. What is what we have we are continuing to look deeper into is to make sure that we're maintaining vast majority of the margin and the structural changes we have made buses versus 2019.
Coming back to your first question in terms of the promotional expectation so.
We are expecting in our guidance, we have contemplated a more normalized promotional landscape in the second half not that it would go back to 2019.
Timeframe as it was then but it does definitely may not be it may not be as benign as what we saw in 2021. So that is what has been contemplated in our guidance.
Great and then as a follow up you talked about better tools to control pricing and I think that's one of the one of the key building blocks on the merchandise margin improvement can you elaborate on that a little bit of that.
So on pricing just just a little bit more color. Thank you.
Yes, we have developed a really strong data science capability, where we can optimize pricing and we're looking to do that real time item by item.
Market and consumer by consumer so that is a key a key advantage that we built over time.
Thanks.
Thank you.
Our next question Nicky comes from Justin Kleber of bet Justin Your line is open.
Hey, good morning, everyone. Thanks for taking the question.
If I look at the midpoint of your guidance on sales it assumes that youre going to be up about 36% from 19, just curious how you bridge that gap between growth in the sector versus your market share gains I know not deep you mentioned, 8% share.
Earlier, which I think is the same number you have in the investor deck for 2020. It just seems like your growth is outpacing the industry. So any updated thoughts on where share stands today.
Yes, Justin we are pleased with the performance that we have driven through the first half of this yet and if you look at it.
We have definitely gained share in the first half of this year and that is kind of our expectation as well as the differentiating capabilities that we have we will be able to continue to gain share and especially in the key categories. There.
Our core categories for us as we think about footwear or apparel team sports and golf.
Okay.
A quick follow up on the promotional environment have you guys changed your internal expectations from a merch margin perspective, we'll go to the back half of this year relative to what you were thinking.
Back in May.
I would say, it's a combination of both of those things yesterday internal capabilities are the biggest unknown in terms of the midpoint of the guidance continues to be more to do with the external environment versus our internal expectations.
Got it okay. Thanks best of luck.
Thank you.
Next we'll take a question from Jason Feldman of Telsey Advisory Group. Please go ahead.
Yeah.
Hey, guys. Thanks for taking my question and congrats on the quarter.
Thanks, Joe.
The inventory.
How is the flow of good.
These days and apparel versus footwear versus hardware like our thing I mean hard lines.
Are you seeing differences among the categories and the flow of goods and are you getting things on time or are you still finding you need to kind of accelerate orders or order more than you.
We anticipate getting because you won't you won't get the full order fulfilled.
Yeah.
Thanks, Joe our inventory overall I think it's important just to restate that our inventory is very healthy and we do not we're not concerned that there's toxicity in our in our inventory our flow of goods has improved significantly category by category throughout the last two and a half years it's been.
A series of different challenges. The most recent challenge was apparel as I mentioned, but we are that is moving now and we are working through the backlog that was that was there in clearing that through and it is affecting our sales well when it comes to some of our hardline categories say fitness and outdoor equipment we have.
That is.
We have a lot of inventory there that we've just buying we're buying around for next year, So no issues with flow there.
And footwear has been pretty good so far.
<unk> is good.
Over the last two and a half years something is a new challenge every every few months so.
That's how we're managing it.
Got it that's helpful. Thanks for sharing that aren't and then.
Kind of.
What are you guys seeing these days from a labor perspective I know.
Wage pressures there and we keep hearing about how hard it is to get talent, especially at distribution centers and I'm just wondering.
Where do you guys are seeing from your.
Whereas in distribution centers do you have.
The staffing you need and gearing up for this holiday season.
Yes.
Labor that has been labor shortage in the market for a couple of years now it has improved we have not been having issues that maybe some other people are having in terms of not being able to staff appropriately.
Stores have remained fully staffed our distribution centers are staffed and operating well and I think that that speaks to the fact, we obviously, where we have a competitive wage in our wage costs have gone up as everybody has but more importantly, our teammate engagement. Our employee engagement is is that a.
All time high and I do think that being a fun and great place to work is meaningfully.
Our competitive advantage for us that's made a meaningful improvement in this area for us.
Got it.
That's good to hear thanks, and good luck with this quarter.
Thank you.
The next question comes from Seth Basham of Wedbush Securities Your.
Your line is open Saks.
Thanks, a lot and good morning, and great quarter. My question is on the hiking narrowly distributed products that you mentioned being key to driving margin expansion for the last three years could you give us a sense of what your sales mix is of those products relative to 2019.
And what the margin differential is on those products relative to average realized margin differential.
Yes Seth.
Definitely the mix of those products as they look definitely.
The key categories like footwear, the mix is significantly higher compared to where it was in 2019 and in terms of the margin. The margin also the net margin that we realized margin is also higher it's a combination like like we said the promotional intensity on those products and how narrowly distributed they are helps us drive our incremental margin in.
That as well.
Got it but can you provide any more.
Quantification, how are we talking 1000 basis point difference in mix and heighten their distribute products out to 2019.
As we are.
Called out I know, it's a very proportional view between the mix benefit that we have driven between.
The lower penetration of the vertical brands on the pricing capabilities that Loren talked about as well as the narrowly distributed mix on.
And the higher feed product that we have so it's balanced between all three of those levels.
Got it Okay and my follow up question is just I know you don't normally talk too much about the cadence in the quarter, but can you give us a sense of whether or not your traffic or transactions growth comparable store sales basis improved through the quarter.
It's very very noisy to look on a year over year basis, because of the stimulus impact and the timing of stimulus from last year.
I would look at it is if you look at it versus 2019 years of steady violence and then we were pleased with the overall trajectory of the traffic.
As you've been looking back into Q1 of this year.
Understood. Thank you.
Next we have a question from Jim Duffy of Stifel. Your line is open. Please go ahead.
Thank you and thank you for squeezing my question in.
Few around the apparel business on the spring product I'm curious when you carry inventory over to spring 'twenty three or have you pushed that back to the vendors given the dynamic of late deliveries.
And then given the environment.
<unk> favorable buying opportunities for spring 'twenty three in the apparel business. Thanks.
Thanks, Jim.
We are looking at some of the seasonal business is.
While some of the business in apparel and seasonal and won't be appropriate to carry over to fiscal 'twenty three some of it is appropriate.
We work with our vendors to cancel where <unk> and our RTD, but mostly we are working together now to clear through any overages any late product that isn't seasonal right now or that needs to move before we get into holiday. So and yes, I do think we see favorable buying opportunities in spring 'twenty three.
We could be buying now for them.
Thanks Laurent.
Thank you.
And finally, our last question comes from Brian Nagel of Oppenheimer. Your line is open.
Hi, good morning.
Thanks for squeezing me in here.
I actually would like to add my congratulations on another solid quarter. So congrats.
Thanks, Brian .
I guess the longer I guess they are longer term in nature.
So when we look at the business just to understand what's really what kind of which we'll be happy.
There is clearly as you've mentioned.
Your prepared comments and responses to questions, we clearly restricting stronger northern past couple of years in a few years. So as you look at it if you think that's more muted more functional.
Youll behavioral changes on the part of your consumers that took hold during the pandemic or there'll be some total initiatives, particularly on the merchandise side.
But then the call up question on half of that to the extent that you've now shifted the business to better products higher end product.
Clearly, we're seeing no indication of this right now, but does that make <unk> potentially more susceptible weaker spending environment.
Thanks, Brian So our business certainly has strengthened as you said and I would say this is more a function of the strategies that we have put in place over the past five years to make our business completely transformed you cannot look at our at our merchandising assortment.
<unk> not noticed just how completely different it is at the same time, we've been fortunate that our consumer has chosen a more outdoor lifestyle healthier lifestyle more active and so the pie is growing but I would say that the bigger change. If you look over the past several years is the strategies that we've put in place in the business.
With the high end product people spend money on what's important to them and these products are highly desirable. So we're seeing that now even though it's a tougher yes, it's inflationary timeframe. So.
We're happy to have that product and to be delighting consumers in that way.
I appreciate it thank you.
Thank you.
We have no further questions in the queue today, So I'll turn the call back to you on how you got president and CEO for closing remarks.
Thank you and thanks, everybody for your interest in Dick's Sporting goods I will look forward to seeing you and talking next quarter. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your line.
Okay.