Q3 2022 DICK'S Sporting Goods Inc Earnings Call
Ill now turn the call over to Iced Nate guilt senior director of Investor Relations. Please go ahead Nate.
Good morning, everyone and thank you for joining us to discuss our third quarter 2022 results on today's call will be Lauren Hobart, Our president and Chief Executive Officer, <unk>, <unk>, our Chief Financial Officer.
The back of today's call will be archived on our Investor Relations website located at investors Dot <unk> dot com 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 this call.
We have no obligation to update any of these forward looking statements or information.
During this mornings call, we will discuss earnings per diluted share on a non-GAAP basis, which eliminates the impact of certain items related to our convertible senior notes issued in Q1 2020 for.
For additional details on this or to find a reconciliation of any non-GAAP financial measures referenced on today's call. Please refer to our Investor Relations website.
And finally for your future scheduling purposes.
Tentatively planning to publish our fourth quarter 2022 earnings results on March seven 2023.
With that I will now turn the call over to Lauren.
Thank you Nate and good morning, everyone.
We announced earlier this morning, we delivered an exceptionally strong quarter.
Our Q3 results demonstrate the continued success and strength of our business based on our transformational journey and the foundational improvements we've made over the past five years.
Our strategies are working and are clearly resonating with our athletes.
While consumers continue to face macroeconomic uncertainties, our athletes have held up very well as we continue to offer them, a compelling and differentiated assortment as well as the best in class Omnichannel experience.
In fact during the quarter, we talked three important consumer trends.
More athletes purchased from us they purchased more frequently and they spend more each trip compared to the same period last year.
Our industry has strong momentum given our lasting shift in consumer behavior, and our differentiated assortment elevated service standards and best in class Omnichannel athlete experience are setting us apart in the marketplace.
This Q3, we achieved record sales of $2 96 billion.
And our comps increased six 5% driven by increases in both transactions and average ticket.
This strong comp was on top of a 13% comp last year of 23% comp in 2020, and a 6% comp in 2019.
As you've heard US say many times Dick's is a growth company and our Q3 results are powerful evidence of our sustainable growth story.
As we indicated on our last call at the end of Q2, our inventory position was strong and we were back in stock in key items.
This enabled us to deliver a very strong back to school season, and meet robust consumer demand.
Additionally, we also mentioned that we had pockets of apparel inventory to address and we have addressed much of that overage this quarter.
As a result, and as expected we saw merchandise margin decline of 438 basis points versus last year.
Importantly, our merchandize margin remained elevated compared to 2019 and looking ahead, we continue to be very confident that our merchandise margin will remain meaningfully higher than pre COVID-19 levels on an annual basis.
We achieved double digit EBT margin of 10, 3% in the quarter over three times, our 2019 rate on a non-GAAP basis.
This was driven by our structurally higher sales expanded merchandise margin and greater operating efficiency.
In total we delivered non-GAAP earnings per diluted share of $2 60.
Significantly ahead of any pre COVID-19 third quarter in our history.
Looking ahead, our inventory is healthy and well positioned and we're excited about the assortment that we have in place for the holiday season.
Because of our continued strong performance quality of inventory and the confidence we have in our business, we're raising our full year outlook.
We now expect comparable store sales for the year to be in the range of negative 3% to negative one 5%.
And non-GAAP earnings per diluted share to be in the range of $11 50 to $12 10.
In closing I'm very pleased with our strong third quarter results and remain enthusiastic about the future of our business.
I'd like to thank all of our teammates for their hard work and commitment to Dick's Sporting goods, which helped make this performance possible and for their upcoming efforts during the holiday season.
I'll now turn the call over to <unk> to review, our financial outlook and results in more detail.
Thank you Laura and good morning, everyone.
Let's begin with a brief review of our third quarter results.
We are excited to report a consolidated sales increase of seven 7% to $2 96 billion.
As Lauren noted comparable store sales increased six 5% on top of a 12, 8% increase in the same period last year, a 23, 2% increase in Q3 of 2026% increase in Q3 of 2019.
Our strong comps were driven by a three 7% increase in transactions and a two 8% increase in average ticket.
But then our portfolio the back to school categories did very well.
Driven by our differentiated assortment across footwear apparel and team sports.
When compared to 2019 sales increased 51%.
This reflects a significant sequential acceleration in our sales trends versus 2019 from recent quarters.
Gross profit in the third quarter was one point at a $1 billion or $34 two 2% of net sales and declined 423 basis points versus last year. However, it's increased.
<unk> hundred 63 basis points over Q3 of 2019.
As expected the year over year decline was driven by merchandise margin rate decline of 438 basis points.
During the quarter, we focused on cleaning up some targeted inventory overages due to late arriving spring product.
Removed excess apparel inventory to our value chain concept and have been very successful in liquidating much of this product.
We intend to continue addressing this overage in Q4 in order to start 2023 clean.
Our Q4 merchandise margin expectations are appropriately reflected within our annual outlook.
Compared to 2019, our merchandise margin rate is 141 basis points higher driven by our differentiated assortment combined with our sophisticated and disciplined pricing strategies and a favorable product mix.
Because of the structural drivers we continue to expect our merchandise margin rate to remain meaningfully higher than pre COVID-19 levels on an annual basis.
SG&A expenses were $679 7 million or 20, 297% of net sales and leverage 30 basis points compared to last year on the increase in net sales the.
The $48 million increase in SG&A dollar was driven by investments in hourly wage rates talent and technology to support our growth strategies.
Interest expense was $26 1 million, an increase of $20 1 million on a non-GAAP basis compared to the same period last year.
This increase was primarily due to $13 8 million of interest expense related to a $1 5 billion in senior notes issued during Q4 of 2021.
The current quarter also included $8 $8 million of inducement charges related to our exchange of approximately $221 million of outstanding principal of our convertible senior notes.
Driven by a structurally higher sales expanded margins and operating efficiency compared to pre COVID-19 levels EBT was $304.
$304 1 million or 10, 8% of net sales.
This compares to a non-GAAP EBT of $59 9 million or 310, 5% of net sales in 2019, an increase of $244 2 million or 723 basis points as a percentage of net sales.
In total.
We delivered non-GAAP earnings per diluted share of $2 60.
This compares to a non-GAAP earnings per diluted share of $3 19 last year and represents a 400% increase over 2019 non-GAAP earnings per diluted share of 52.
Now looking to our balance sheet.
Ended Q3, with approximately $1 4 billion of cash and cash equivalents and no borrowings on our $1 6 billion unsecured credit facility.
Our quarter end inventory levels increased 35% compared to Q3 of last year.
As a reminder, we were chasing inventory last year industry wide supply chain disruptions. Therefore, the better comparison is against Q3 of 2019 and.
And compared to Q3 2019, our 51% an increase in sales was well ahead of our 31% increase in inventory.
Our inventory is healthy and well positioned.
Now turning to our third quarter capital allocation net capital expenditures were approximately $100 million and we paid $41 million in quarterly dividends.
During the quarter, we exchanged approximately $221 million of outstanding principal of our convertible senior notes for cash and unbound. The corresponding portion of the convertible note hedge and warrant for $4 3 million shares of our common stock.
After completing this exchange we have taken out approximately $421 million.
Approximately $154 million in aggregate principal of the convertible notes still outstanding.
Beyond returning retiring nearly three quarters of our convertible notes year to date, we have returned $485 million to shareholders through dividends and share repurchases, while continuing to invest in the profitable growth of our business.
Now, let me wrap up with our outlook for 2022.
As a result of our strong Q3 performance and the quality of our assortment for the holiday season, we are raising our 2022 guidance.
Accordingly.
Our updated outlook continues to incorporate an appropriate level of caution given the uncertain macroeconomic backdrop.
For the year, we now expect comparable store sales in the range of negative 3% to negative one 5% compared to our prior expectation of negative 6% to negative 2%.
In addition, we now expect non-GAAP earnings per diluted share in the range of $11 50.
$12 10 <unk>.
Compared to our prior expectation of $10 and $12.
EBITDA margin is now expected to be approximately 11, 4% at the midpoint more than double our 2019 rate.
Our earnings guidance assumes an effective tax rate of about 25% and is based on approximately 88 million average diluted shares outstanding.
In closing we are very pleased with our Q3 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 we will now begin the question and answer session. If you'd like to ask a question you may decide now by pressing star followed by the number one on your telephone keypad.
Do you mind I would like to be remains from Nicky. Please press star and then T. Please limit yourself to one question and one follow up.
Our first question today comes from Simeon Gutman with Morgan Stanley . Please go ahead Simeon your line is open.
Hey, Good morning, everyone. My first question is on merch margin or gross margin I think you've.
<unk> been saying that we expect to retain I think a majority of the Covid gains I wanted to ask if that's still the case and I guess, the fact that you are getting through this period relatively well where your vendors have excess inventory.
Does that builds your confidence around the forecast of being able to retain a majority of this gross margin. Thank you.
Hi, Simeon Thank you yes.
We still believe that we will be able to retain a significant amount of our merch margin gains. This particular quarter. If you look back at Q2, we had indicated that we had gotten a lot of late receipts and from spring that came in on top of our back to school inventory and we were heavy in apparel and we aggressively took care of that.
This quarter to clean up our inventory so that we could maintain so we take in holiday merchandise and start 2023 clean. So we absolutely believe in the structural changes in our overall margin I would point to the fact that our EBT margin.
Even with that investment that we made to clean up apparel was 10, 3% over three X. What it was pre 2019, we have tremendous confidence in the long term sustainability of our profitability.
And then my follow up is on sales some of the categories or the overall business either normalizing at a higher level or just performing better than them.
Maybe the market would have thought if you look back a couple of years.
Okay.
Prepared to talk about 'twenty three but can you just talk about some of the categories, where there's been some reversion has that stabilized and rebounded does the business digest or kind of business keep growing next year.
Yes.
So the categories in Q3 that are our core categories are the ones that we are at the most focus on so teams for apparel footwear, all key back to school categories, and our top categories and they performed extremely well. If you look across every single one of our key categories everything except <unk>, which is not a key category.
Any more we have meaningfully we baseline versus pre COVID-19 levels and we see no reason why long term, we should not be able to continue to grow from this level.
Okay. Thanks, happy Thanksgiving take care.
Thank you.
Our next question comes from Adrienne <unk> with Barclays. Please go ahead adrianne.
Good morning, congratulations to the team.
<unk> execution.
Alright, thank you.
Youre welcome Lauren I guess my first question is going to be on the promo environment is it only apparel it sounds like you've actually made your way through that are you seeing any kind of spill.
Over into say footwear, and how much vendor support are you getting those promos how long do you think that lot.
And then for <unk>.
And you clearly are buying for spring next year.
So you had that build up safety stock in transit or whatever you want to call. It but how are you thinking about unit by excluding right outside of that.
In transit inventory. Thank you so much.
Thanks Adrian.
We work very closely with our vendor partners as always to make sure that the inventory in the marketplace is at the levels that we all want it to be.
We continue to.
Move product when it needs to be moved and that's in every category apparel was an issue this past quarter, and we will be aggressive to clean up whatever needs to be cleaned up in Q4 in partnership with our vendor partners. Our main priority right now is to start 2023 clean and we're really thrilled that we have in stock for Q4.
Our inventory for the first time in a few years, that's going to be robust and that people will be able to find exactly what they are looking forward with great holiday gifts.
Okay.
Hey, good morning, Thanks for 2023, I'm not going to be able to provide any early guidance, but as as Lawrence indicated we are very confident about the core aspects of the business as you think about apparel footwear team sports and even in the outdoor category. So we are appropriately being cautious about the macroeconomic outlook back over.
We are very confident about the sales expectations on a long term basis and will provide our 2023 outlook as part of our fourth quarter earnings release.
Okay, great. Thank you very much happy Thanksgiving.
Thank you you too.
Our next question comes from Robbie <unk> with Bank of America. Your line is open.
Hey, good morning, Thanks for taking my question.
My question is on the.
The basket uplift that you guys saw in the third quarter.
Should we look for that to continue into the fourth quarter, maybe maybe more color on.
What is driving the increase in the average transaction size is it better in stock levels in the high ticket items or is it because you were out of stock last year like more of the dynamic on on what's driving that would be helpful.
Yeah. So our comps this year this quarter was really strong driven by more than 50% was driven by transactions and the rest buyback.
By basket and within the basket there was some impact of inflation and passing some costs along to consumers some of which we absorbed ourselves.
There was also a shift in terms of the mix that we provide to consumers and some premium innovation of of what people are buying consumers are absolutely.
Signaling that healthy active outdoor lifestyle is important to them and they are buying what theyre considering discretionary items.
To keep that lifestyle going so it really across the entire basket things, where things were improved Robin maybe I'll add one more comment.
Each of the consumer income demographic that we have but then our store did really really well in third quarter.
And what we saw was that highly engaged and loyal athletes that we have in our gold customer.
Those customers actually did even better and so we continue to be really optimistic when we look at the core aspects of the business.
The fourth quarter, we are balancing that against the macro economic constraints that we see right now, but we overall we were very pleased with the results that we saw in Q3.
And maybe just a quick follow up can you remind us how holiday played out last year in terms of <unk>.
Forward spending and how you are planning against that this year for the fourth quarter.
Yes.
Probably Ravi you saw a little bit pretty much like I believe every retailer that there was a little bit of early start to the season, both last year and if you look in 2020 as well because of the overall constrained inventory levels that were existing.
But however, as we looked at the business, we look at it as the overall holiday season, so not too focused on the first few weeks at late October .
Got it thank you very much.
Thanks Robby.
Okay.
The next question comes from the line of Kate Mcshane with Goldman Sachs. Please go ahead.
Yeah.
Hi, Thanks, good morning, and thanks for taking our question.
I'm just trying to reconcile what one of your vendors said with regards to the amount of inventory that they had in transalta.
I'm wondering if there was any risk.
With further.
Over the next quarter or two that you might have tomorrow that juncture result.
Hi, Kate. Thank you Yeah, we are working very closely with our vendor partners. We've got great flow of product right now and everything has been factored into our guidance.
Which we're feeling really really good about.
Thank you.
Yeah.
Our next question comes from Paul <unk> with Citi. Please go ahead Paul.
Hey, Thanks, guys I Wonder if you could.
Frame for us.
I don't have excess inventory that you had to clear through and <unk>. How that compares to what you think you have to clear through and for Q.
Any help you can provide on the on the merchandise margin side and I guess just related to the clearance I'm curious as you.
You picked up the promotional cadence if you saw a lift in sales because of the traffic and sales driver.
During the quarter.
No Paul I think that there are two questions. There in terms of the quantification of the clearance inventory I would say it was not a material portion of our of our driver of the sales in third quarter, what we saw in like lawn and alluded to we saw the gain in our comp sales come more from the transaction growth and the AUR increase in AUR increase.
He's also came from kind of the high heat and the highly allocated assortment that we have in terms of.
The potential markdown risk for fourth quarter much of the inventory that had been moved into clearance was activated and quickly move through in third quarter. There is some pockets of inventory here in fourth quarter, which we will continue to address however, all of that hasn't been contemplated in our fourth quarter guidance and and with this guidance that we have.
Given.
We are very confident that we'll be able to maintain the meaningful gain and how much margins compared to 2019.
Thank you good luck.
Thanks, Paul.
Our next question comes from Christopher <unk> with Jpmorgan. Please go ahead Christopher.
Thanks, and good morning can you dig in a little bit on the gross margin side. The 438 basis points does that include a mix benefit if footwear and apparel did really well relative to other categories and then.
As you think about the freight line how are you thinking about freight costs, where they still have pressure year over year is there any is there any sort of capitalized inventory cost that will flow through on a delay on a delayed basis as we look over the coming quarters.
Yes, Chris and in terms of the mix there was a probably a small benefit but it wasn't material to call that out and that's the reason. It was not included in terms of the freight costs. Yes, we are seeing that the freight costs have continued to come down.
And I have come down since the beginning of this year, but still not down versus.
When you compare it to 2019 in terms of the flow of the product.
Yes, it will take some time that possible or the benefit of those reduced costs will be realized into 2023.
And then as a follow up.
You mentioned trying to be prudent and conservative around the guidance in the fourth quarter you are degrading.
You're sort of three year CAGR of growth relative to 2019, I guess can you talk about what informs that point of view I know theres. Some normalizing seasonality that's occurring as we speak sort of end of October through November are you extrapolate in the sort of the current trend of the business to arrive at the implied <unk> comp or.
Are you is there and what degree of conservatism is baked in.
Chris we feel incredibly good about the momentum in our business coming out of a very strong Q3, I would point out we had three really strong months in Q3 and coming into Q4, we see absolutely no signs of any degradation. We're very enthusiastic about Q4, we are being appropriately cautious.
Because.
But the uncertain macroeconomic environment and the fact that the consumer is going through a lot right now, but our confidence is as high as it's been.
Understood have a great holiday. Thank you.
You.
Yeah.
Our next question comes from Mike Baker with D. A Davidson Mike Your line is open.
Thanks also just follow up on a previous question.
How much inventory is left to clear.
I think the fourth quarter EBIT margin guidance is down 260 basis points that that would be the smallest decline of the year and better than what you saw in the third quarter is that because you are now mostly through the the markdowns or if not what why is the EBT margin decline expect III.
Better in the fourth quarter than the previous quarters.
Yeah, Mike.
Our guidance specifically the fourth quarter I'm sure you can back into it I would say there are structurally things are are expected to improve as we go into the fourth quarter like we said much of the clearance activity that we were activating in third quarter is behind us. So that's one reason the other reason is just because we feel confident.
About our ability to manage our expenses as well as drive higher productivity.
Makes sense, if I could ask one more follow up of a mundane question, but the interest expense and everything thats going in that line with all the convert stuff is it's been about 2500 $26 million each of the three quarters. This year on a non-GAAP basis.
Can you just help us any reason why that should be different I know theres a lot of moving pieces with the convert there. So just wondering if you can help us with that line.
Yeah, you are spot on in terms of the onetime costs associated with the convert it's over $20 million. When you look at it on a year to date basis. So if we do decide to execute another.
Tranche of the convertible note transaction in fourth quarter that had been was not contemplated in our guidance.
But we.
We will continue to look at on the convert and take that out in fourth quarter on an opportunistic basis.
Okay awesome. Thank you understood.
Our next question is from Warren Cheng with Evercore ISI. Your line is open.
Yeah.
Hey, good morning.
Great execution this quarter Im sorry.
Sorry to keep hammering on this merchandize margin question, but I think it's just really important to understand the dynamics here.
If I just look relative to 2019 levels. It looks like commercialize margins degraded about 300 basis points from second quarter to third can you just give us a little bit better sense of how much of that came from the apparel clearance maybe so we can understand.
Merchandise margin would've looked like excluding this issue with the late spring receipts.
Yes, the vast majority of the decline that we saw here in third quarter came from the the activation that we that we had around the apparel overages that lawn and indicated at the end of Q2.
Got it Okay and my follow up is just any color on the process.
These inventories I know a lot more is running through your own clearance concepts of your own value chain concepts.
Can you just give us a sense of the margin uplift when it runs through your own content versus the old way through on mainline stores.
Yeah, we've had great success with our value chain concepts, both going going gone in our warehouse stores, we do see that we can optimize our margin on our clearance better. We also have great success, when we clear product online, but it also enables us to bring product fresh product into the dicks stores, which also help.
US drive margin.
Not really I don't think we're going to answer specifically.
Yes.
Walter and I would say that we are very pleased with the strategy that we have of leveraging the going going gone concept as well as the warehouse locations like lawn and indicated the recovery on this on this product from a clearance perspective is significantly better than what we used to have in 2019, and we have called out that is one of the key structural drivers of our confidence.
Of us being able to maintain a meaningful portion of the margin gains compared to 2019.
Thanks, Sandeep, Thanks, Laura and good luck.
Thank you. Thank you.
The next question today comes from Michael Lasser with UBS. Please go ahead Michael.
Yes.
Good morning, Thanks, a lot for taking my question. So the message that you're offering. This morning is that the margin degradation that you experienced in the third quarter is transitory in nature, because it's associated with having excess inventory that presumably will be cleared out by the end of the fourth quarter.
And you will not have this moving into next year.
Next year you might experience.
Softer overall demand environment, such that you will have to increase your promotional activity to work harder to driving customers and this will offset some of the benefit next year that you'll have from cleaner inventory is that the right way to think about it.
Partly Michael but not all of the margin degradation, we expect to be clean going into next year. So correct.
And that these were investments that we made to get our inventory clean and will continue to do that and we're not guiding to next year, but I would just point to the fact that we've had significant athlete growth. We've had growth in the number of athletes over $16 5 million new athletes in the last two years and this year to date $4 5 million new athletes training and they are dry.
Living transactions and our gold customers are growing so I would not say that we're expecting at this point in time any sort of an overall demand changed that would require a heavy promotional environment.
Yeah, Michael analog one modeling as you called out one of those.
Yeah, one other structural driver glad we have talked about in RMR and merch margin continuing to remain significantly elevated is the is the need is.
Is the assortment that we now have in our stores and that assortment is highly allocated.
And typically not.
They are impacted by the promotional activity that might be happening. So that's another factor that gives us a tremendous amount of confidence as we look to 2023.
My follow up question is objectively thinks is going to put up one of the strongest results across retail.
And within sporting goods retailer in the quarter, presumably some of that is related to the unique content that that big pads, where it's got a great assortment of footwear theres, a footwear cycle going on.
That's growing and a lot of the traffic. This is happening at a time where back to school with good in part because kids hadn't been in school or known to be we're going to know to be and who are ahead of time for the last few years. So is there anything unique given those set of circumstances that is you would.
Hold responsible for driving demand that may not persist into next year, especially at a time, where the overall consumer environment is likely going to soften.
Yes, Michael you have essentially just laid out what I would say is our transformational journey over the past few years, where we have.
Really.
Change the allocation of products that we have what we're offering to consumers, we've got higher heat and more differentiated product and at the same time, we've been working on our Omnichannel athlete experience of elevating service in the stores elevating our digital experience elevating having our products available close to the consumer when and where they want it. So there is.
Nothing unique about how we drove demand that will persist into next year.
The back to school season happens to be a showcase of our very strongest categories in footwear apparel and team sports, but nothing unique about this quarter that shouldn't shouldn't persist.
Thanks, a lot and haven't been holding.
Thank you. Thank you.
Our next question comes from John Kernan with Cowen. Please go ahead John .
Excellent good morning, everybody and congrats on a nice quarter.
Just on <unk>.
$3 3 billion on.
On the balance sheet in Q3, some of that is obviously just from higher cost, but how should we think about.
The growth of inventory year over year in Q4, where you think you might finish.
What you think inventory levels look like in the spring of 'twenty three.
Okay.
Hey, John I, just let's let's deep go a little bit deeper into the Q3 results in terms of the inventory and as we called out it's much better to look on inventory growth versus 2019, as we were chasing our inventory all of last year, including fourth quarter with plenty of product remaining in transit as we were getting ready for the holiday season.
So when you look at the growth in our inventory in third quarter, our sales grew versus 2019, 51% and our inventory grew 31% and we will continue to manage the inventory the same way we want to make sure that there is right availability and in stock available for the athletes for the important holiday season and beyond and.
There are pockets of inventory like we said we will actively work on that in the fourth quarter. Overall, we feel our inventory is healthy and is very well positioned for the holiday season.
Got it and then maybe one quick follow up as it relates to supply chain cost, we see everybody can see that some of the inbound freight costs have.
Have come down pretty significantly how do we think about some of the domestic freight and shipping costs as we go into Q4 and next year.
You mean Q4 of this year.
Yes.
Okay. Thank you guys.
Yeah.
No.
No. That's helpful. No. We agree with you on the international side that definitely there is a continued lowering of the cost that we have seen probably I would call it from third quarter onwards and.
However, the domestic side still continues to be volatile and we are working very closely with our vendor partners as well as our supply chain team works very closely with the domestic partners as well that still continues to be volatile. We are playing close attention to it right now our focus is to make sure that the inventories available in stores.
And available for athletes to buy as they are looking for good opportunities here for the holiday season.
Excellent. Thanks.
Our next question comes from Brian Nagel with Oppenheimer, Brian Your line is open.
Hi, Good morning. This is William Dossett on for Brian Nagel, Congrats on a nice quarter.
Thank you.
So.
Our question is actually just on <unk>.
Got it.
Time.
How you are balancing between your national accounts in your vertical brands.
Can you provide an update on the performance in the quarter for your private label brands and how this customer is behaving.
Yeah, our vertical brands continue to do very well.
And outperformed our RF this year and Q3, the DSG brand in particular has done incredibly well at the high fashion high function product at a very attractive price point, it's perfect for the consumer right now and at the same time, kellyanne burst or filling white space in our in our assortment and really leaning.
Toward that athletic mail athletic female at more of a performance and lifestyle brands. So we're very very pleased with the vertical brands and the last time, we gave an update that we do it annually and it was 14% with our vertical brand penetration.
And so we'll update that again at the end of this year.
Yeah.
Okay, I appreciate that and just to follow up.
Do you see any variability across geographies.
And across the other product structures.
Yeah.
Nothing meaningful in the quarter.
No.
Okay. Thank you and best of luck. Thank you. Thank you.
The next question today comes from Sam Poser with Williams trading Sam. Please go ahead. Thank you.
Thank you very much for taking my questions a bunch of them have been answered, but I have a few more what was your.
DTC e-commerce penetration or e-commerce sales for the quarter.
At Sam.
We no longer break that out as we think about the athlete. We look at the outlet on an omnichannel basis, because the athlete is making the channel agnostic assertion and that's the way we want to operate our business. So we no longer are giving that breakout.
Actually that's been going on since the beginning of this year.
Okay I missed that.
I'll add that we were very very happy with the overall performance that we saw across both channels.
So let me just follow up okay. So that's the inventory what is your.
Forward weeks of supply optimum forward weeks of supply with what Youre seeing right now are optimum annual turn target that that would be because its up from it.
It's up from pre Covid.
Turning a little slower than pre COVID-19.
So how should we think about sort of what it should be on an optimal basis should you be having like 14 or 15 forward weeks of supply or are you should you be running at 17 or 18.
Yes, we haven't given that level of guidance, but the way to think about this is as we are comparing our inventory growth and sales growth compared to 2019, because that is probably the last time, we had some normalized level of inventory.
So probably that's the easiest and the best comparison right now you can do.
Okay and then.
The loyalty members make up how much of your business. These days.
It's over 70% of our business, but importantly, we've got.
20 over 25 million active loyalty members over 32 million active.
Members of both outside of our loyalty and within and then over 150 million athletes who are in our database overall.
They comprise less than less than that.
Okay. Thank you and then lastly, there's a lot of questions asked about the macro but my question for you is about what you guys have done.
And about.
The long term.
Growth of the business, where are you in the continuum of the improving the levels of engagement the personalization process and so on.
To overcome the macro because.
So I wouldn't call it a direct competitor, but another athletic retailer reported you put up significantly better numbers, we're going to hear from somebody else next week.
Could you talk about your.
We use of your CRM.
And how everything is evolving.
Sort of the reason why from the perspective of what you're doing.
The cut the biz.
This is re basing over and can grow from here.
Okay great.
Great question, Yeah, It's a great question, because our database and our knowledge of our athletes is at an all time high and we continue to have what I would say is the best dataset in sports and I'm not the only person, saying that we have an amazing dataset, we are more personalized.
Than ever before we are driving engagement, both online and also I would say in our in our stores in terms of how we serve athletes are very focused on the athlete experience.
But at the same time I would say we're in early innings. So I think we've got a long way to go with personalization, we continue to gain new athletes and we're very focused on provide using our CRM database to provide people with the best experience for them and that.
So I think early innings still for a lot of this despite how far along with com.
Thank you very much happy Thanksgiving and happy holidays.
Thank you. Thank you you too.
Our next question is from Steven Forbes with Guggenheim Steven Your line is open.
Good morning.
I wanted to revisit the acceleration in transaction trends really if we look at it on a three year basis.
Meaningful sequential improvement so I'm curious if you could just expand on what drove that if it had anything to do with new athletes that were acquired you mentioned $4 million, but is that $4 million were heavily weighted to the third quarter really just trying to get any insight on the.
The sustainability of this step up in transactions on a multi year trend.
Yeah, Steven Thank you for the question. So we are growth in transaction came from several important trends first of all we did have new athletes come in so I mentioned $4 5 million year to date a million and half of those were in the past quarter. So it's been fairly.
Consistent throughout the year, but they are also driving increased transactions and increased dollars per transaction and I think it's important to dive into our how our consumers are doing and how they're responding to our industry and our stores, but every single one of our <unk>.
Demographic levels has grown meaningfully in the past quarter. So it's clear that we are providing something for everybody in terms. So they can meet their needs and still deliver that outdoor lifestyle. We are not seeing people trade down so between two and our athlete database growing our increased personalization.
Efforts, which will continue into next year.
We expect.
That that will be a key driver for us going forward.
Thank you maybe just a quick follow up on <unk>.
Obviously, right Youre sort of a net net share issuer with the settlement and unwind of the convertible note hedges and so forth.
So love to just maybe if you can expand on the decision to pause the repurchase activity last quarter.
Yes.
Current updates on capital allocation as we look forward here over the MTM.
Yes, No let me let me start with the second question first so as we think about capital allocation we.
We continue to have a really strong balance sheet with more than.
$1 $4 billion of cash and cash equivalents.
In addition to that.
Maintaining the investment grade is an important part of the criteria as we think about the capital structure and then we are continuing to invest aggressively in our business and the growth opportunities that we have.
To your question on a year to date basis, we have returned $485 million of excess cash on the balance sheet between the share repurchases, which we guided at the beginning of the year a minimum of 300.
Already at clubs back and in this quarter, we focused on taking out the convert so we took out $221 million up and what how deep the converters in the money it trades pretty much like an equity and like you said.
We are taking that that potential future dilution as the stock price continues to rise by taking the convert out right. Now. So overall, we will continue to be flexible in our capital allocation in terms of of buying more shares back and we'll be opportunistic as we look to the to the share buyback for the balance of this year.
Thank you bye thought happy Thanksgiving.
Thank you.
Yes.
Our next question comes from Joseph Feldman with Telsey Advisory Great. Joe Your line is open.
Hey, guys. Good morning, Thanks for taking the question.
I wanted to ask about.
The layout in the store.
A couple of local stores around me it feels like you've done some things to adjust the layout, maybe emphasizing private brands a bit more the vertical brands I should say.
More front and center and in fact, even replacing where you used to keep the.
The big brands.
The national brands and I'm, just curious if that's something you're testing and what you're learning from that test and is that something we should expect to see more stores in the future.
Hi, Joe I think what you are picking up on is that we have adopted a very flexible approach to how we lay out product based on based on in stocks based on what's hot with the consumer at the moment and so.
No longer are the days, where youre going to walk into a dicks store and see everything laid out the same way we are constantly optimizing we do space optimization frequently and move things around as needed.
Got it okay. Thanks, and then.
Just wanted to get an update on maybe how sports and public lands just.
Latest learnings and expansion plans for those two concepts.
Yes.
Sure.
Been absolutely tremendous both in terms of how the locations themselves are doing there. They are exceeded our expectation, but also in terms of what we're able to take from houses sport and bring down to the rest of our chain in terms of service levels and products and even.
We have some new products that have launched there that have done really well the rest of the chain. So really really excited about houses sport public lands also equally really excited about we have.
Just launched I think five new Avenue publicly owned stores about them in the past month.
They are meant to tap into a very broad outdoor.
Consumer and they are doing an incredible job serving those those explorers very well. So we're very excited public lands still in test phase houses for definitely a key part of our.
Roll forward strategies.
Thanks, and happy Thanksgiving to book this quarter.
Thank you.
The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good morning.
Sorry to parse words and maybe this is just a nuance, but regarding the merchandize margin improvement that you've seen since 2019.
You're indicating now that you expect to retain a significant amount of meaningful amount of it versus previously expecting to retain a majority of it is that accurate.
Okay.
So I would say we are still guiding that we will maintain a meaningful portion of that margin gains. So again, maybe I'll recap some of the structural reasons that we are seeing and we have that confidence.
If you look at Q3 the performance that we saw in Q3 from the highly allocated product is what drove a significant amount of our success in third quarter and to me that's kind of our go forward strategy and that will be a continued benefit that we will keep the.
The tools that we have whether it is going going gone are the promotional and the pricing capabilities that we have delivered is something that is really really strong compared to where it was in 2019 and that again gives us a tremendous amount of confidence and then the product mix I know there was a question on vertical brands vertical brands have six to 800 basis points.
A higher margin and these brands again resonated really well in third quarter and the penetration of that.
We used to have almost about 17 100 basis points lower margin and that has become a meaningful a small piece of our business. When you look back at all of these structural drivers and.
And you look at the performance that we delivered in Q3.
What gives us a tremendous amount of confidence that we can maintain.
A meaningful portion of those gains versus 2019.
That's helpful. But just to clarify you don't expect necessarily maintain majority anymore, just a meaningful amount.
Yes.
Yes, you can parse the words, but we are very confident that we'll maintain a meaningful portion of those gains versus 2019.
To add on this it's important to look at our full year results that we've been talking about full year, and we absolutely expect to maintain a significantly meaningful amount of our margin improvements.
Wonderful and just as a follow up question regarding the promotional environment outside of apparel, how would you characterize that relative to pre pandemic levels in your expectations into the holiday season.
Yeah, our approach to the holiday season, it's very different from how it was pre pandemic, we are being much more surgical or making sure. We have great gifts for people at great value, but no longer are we doing.
Whole household sights on sale avnet sort of a sledgehammer approach to promotion, we're being much more targeted a bunch more item focused and much more surgical and we're really excited about the in stock levels that we have and that our approach to holiday is going to be very well received by athletes.
Wonderful Thanks, a lot and best of luck.
Thank you.
Yeah.
The next question comes from Justin <unk> with Baird. Please go ahead.
Yeah.
Good morning, everyone. Thanks for taking our questions just wanted to ask a follow up on merch margins given your comments.
On largely working through the apparel inventory here in <unk> do you expect your merchandise margin declines to moderate in <unk> based on the guidance.
Yes, Justin I would say it's been it's been implied in our annual outlook. You know when you look at the March margin that there are a couple of factors you have to keep in mind.
Pattern to 2019, we definitely feel very confident that we'll maintain a meaningful portion of those gains as we go into the fourth quarter and then you have to look into the commentary that we gave in fourth quarter around the promotional landscape last year compared to where our expectations deadlines as laid out overall on an annual basis.
Just like we have said, we will maintain a meaningful portion of the gains versus 2019.
Okay.
Okay.
Maybe a follow up not.
Just SG&A flexibility.
Your sales based on the guidance are going to be up to 38, 5% at the midpoint.
It looks like SG&A, we'll have leverage may.
Maybe around 150 basis points versus 19, so clearly you've been reinvesting.
Some of the top line upside into into SG&A in the past few years, whether that's marketing or wages. I guess my question is in the event demand does soften how much flexibility.
Do you have within your SG&A structure to maintain.
PBT margins at this level without of course sacrificing.
Service levels in the store.
Yes, Justin.
I think that you've read the SG&A profile really while we agree that we are investing in the long term growth strategies of the company. In addition, the wage pressures continue to remain elevated compared to 2019. So those are the big areas of investment in SG&A as you looked at this year.
In terms of the forward looking view first of all the variable expenses always flexible itself. So if the sales are.
Volatile for whatever reason.
We believe that the our variable expenses will definitely reflects in addition, we have flexibility in our fixed as well as the discretionary expenses as well and and as you called out you know we will balance these actions with what is the right thing to do for the long term aspect of the business versus keeping the company and really healthy conditions and we could.
Look also at our growth strategies and the investments required.
Internally, we feel really confident that we will be able to navigate microeconomic conditions really well and drive the long term sales growth and the profitability growth of the company.
Alright, Thank you best of luck over the holidays.
Thanks.
The next question comes from Jim Duffy with Stifel. Please go ahead Jim.
Thank you good morning, Thanks for taking my question.
I have a few questions about the warehouse store strategy of about 50 locations, who could temporary locations is that how you think about this or is that a permanent part of the strategy.
And I'm curious how that fits with the going going gone concepts.
Yes, great.
Question, Jim the way, we're thinking about the value chains in general is that we have a try before you buy strategy, where we do a pop up and Thats, what youre seeing is the Dick's warehouse stores.
See how the consumer reacts see how we like the real estate and then a portion of those are converted into accounting going on permanent location. So that will be our ongoing strategy. We find a great deal of success trying trying try before we actually sign a long term lease.
Got it and then a question around the inventory in those stores with footprints for the ones I've seen are large or you opportunistically buying the popular these stores or is there inventory in these stores simply excess from regular way business and I'm also curious as that inventory in the outlook.
So our strategy is that visible and shop online.
Online or those kind of brick and mortar silos.
Yes, they are shopping both online in fact, they they really help us by consolidating all of the clearance inventory into one location, we can easily find it and light it up online not worrying about safety stocks and things like that so that's a key part of it.
We do buy a little bit opportunistically for the culling going on at warehouse stores, but by and large they are primarily clearance channels for Dick's Sporting goods. Our main goal is to clear that products that we can bring fresh new receipts into decks.
Thank you.
Thank you.
Our last question today comes from Daniel <unk> with Stephens, Inc. Please go ahead Daniel.
Hey, Thanks, guys. Thanks, taking my question.
Wanted to ask one Lawrence on the consumer you know it doesn't sound like you are seeing any trade down yet, but just as the consumer weekends are there levers you can pull other than price to kind of increase the value offering Dick's has to retain that customer and then just as you think about the box what categories would you expect to slow first or where would be the signs of weakness youre looking for to get a sense of the health.
And the consumer.
And the way we approach the assortment is that we want to have something for everyone. We are not seeing people trade down, but we do offer a range of opening price point.
Fantastic apparel and gear all the way up to the most premium so I mean, certainly there's levers we can pull our scorecard engagement is really high that's a great tool for us it enables us to get dedicated personalized message out to our athletes, but across the board, we're not seeing I can't predict because I don't see any.
Slowdown in any of our key categories, they're all healthy.
That's helpful. And then I think just to dig in on the inventory a little more detail or asked a different way.
Is your inventory equally strong or healthy across maybe vertical brands and national brands or are you more exposed just thinking about if there was a trade down could you get stuck with more national brand inventory that maybe the consumers opting out of ore or how is your inventory health across the different kind of sub section of inventory.
Yeah overall, I would say our inventory is very healthy and very well positioned for the holiday season the only.
Lump that we called out was on the athletic apparel side and we are a much of that has been already activated here in third quarter and will continue to work through that but overall like I said, we feel really strong about our in stock levels going into this important holiday season.
Okay. Thanks for the color and good luck.
Thank you.
Thanks for all the questions. We have for today's call I'll now turn the call back to learn Hobart, President and CEO for concluding remarks.
Thanks to everybody for your interest in Dick's Sporting goods I Hope you have a happy healthy and safe holiday.
Hi.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
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