Q4 2022 DICK'S Sporting Goods Inc Earnings Call
Our Chief Financial Officer.
Our strong performance and financial strength position us to increase the rate of investment in our business to fuel long term growth opportunities and also return significant capital to shareholders.
The step change increase in our dividend that we announced today more than doubling our annualized payout to $4 per share or one dollar on a quarterly basis.
Clearly reflects our strong conviction in the structurally higher sales and earnings profile of our business and our ongoing focus on delivering shareholder value.
With 2023, marking our company's 75th anniversary. This is an incredibly exciting time for Dick's sporting goods.
Our company was founded in 1940, <unk> stack with a dream and $300 from his grandmother's cookie jar.
Under his leadership, it's grown from a small bait and tackle shop to become the preeminent sporting goods retailer in the country.
I've had the honor of working alongside Ed for over a decade, and we will continue partnering to drive the business forward.
While we will take the time to celebrate our heritage. We believe it's just as important to use this milestone as an opportunity to look forward.
Our future is extremely bright and we have great momentum as we write the next chapter in our growth story.
Our 2022 results provide a strong foundation upon which we will build in 2023 and in the years ahead.
In 2023, we will grow both our sales and earnings through positive comps are returned to square footage growth and higher merchandise margin.
We expect our comparable store sales to be in the range of flat to positive 2%.
We expect our earnings per diluted share to be in the range of $12 90.
To $13 80.
Which at the midpoint is up 11% versus 2022.
We will continue to create and define our future and as the largest U S. Sporting goods retailer, we are well positioned to extend our lead and continue gaining share in a fragmented $140 billion industry.
I'd like to thank all of our teammates for delivering another strong year and for their passion hard work and dedication to our business.
At <unk>. It is our people who make us great and none of what we will what we would have accomplished none of what we have accomplished excuse me would have been possible without our exceptional team.
I'll now turn the call over to dive deep to review, our financial results outlook and capital allocation in more detail.
Thank you Lorne and good morning, everyone.
Let's begin with a brief review of our full year 2022 results.
Consolidated sales increased 0.6% to a record setting $12 $37 billion in the comparable store sales decreased <unk>, 5%.
When compared to 2019 sales increased 41, 3% or $3 61 billion demonstrating the sustainability of a structurally higher sales compared to pre COVID-19 levels.
Importantly, if you look at some of the slides that we have inserted in our investor deck, you will see that approximately 80% of our growth was driven by sales in our priority categories of footwear athletic apparel team sports and golf there'll be gained considerable market share.
These gains are the direct result of our differentiated product enhanced service and elevated experience we provide to our athletes.
On a non-GAAP basis gross profit for the full year was 429 billion or 30, 465% of net sales and declined 368 basis points from last year.
However, our gross profit increased 531 basis points over 2019 on a non-GAAP basis.
As expected the year over year decline was driven by merchandise margin rate decline of 303 basis points.
When compared to 2019, our merchandise margin rate was up 308 basis points.
It is important to highlight that we maintain the majority of the merchandise margin expansion that we drove over the prior two years.
We also saw a significant leverage of 306 basis points in occupancy costs due to our structurally higher sales.
On a non-GAAP basis, SG&A expenses were $2 78 billion or 22, 45% of net sales and Deleveraged 78 basis points from last year.
SG&A dollars increased $112 million, primarily due to investments in hourly wage rates talent and technology to support our growth strategy.
This was partially offset by lower incentive compensation expense.
When compared to 2019 on a non-GAAP basis, SG&A leveraged 178 basis points due to the significant sales increase.
Interest expense was $95 2 million, an increase of $68 2 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to $52 8 million of interest expense related to the $1 5 billion senior notes issued during Q4 of 2021.
The current year also included $23 3 million of inducement charges that were partially offset by cash interest savings both related to our exchange of approximately $516 million of principal of our convertible senior notes.
Driven by a structurally higher sales expanded merchandise margin and operating efficiencies compared to pre COVID-19 levels non-GAAP EBT was $1 41 billion, a 11, 43% of net sales.
This compares to a non-GAAP EBIT of $440 5 million or five 3% of net sales in 2019, an increase of close to a $1 billion of 640 basis points as a percentage of net sales.
The additional slides that we have included in our investor deck, highlighting the key drivers of our structurally higher profitability today versus pre COVID-19.
These include significant leverage of fixed costs due to a structurally higher sales base.
A structurally higher merchandise margin due to our differentiated product assortments more granular pricing management and the merchandising mix benefits.
The improved e-commerce profitability, which is now in line with the total company EBIT margin.
In total we delivered non-GAAP earnings per diluted share of $12 and <unk>.
This compares to a non-GAAP earnings per diluted share of $15 70 last year and has more than three times, our 2019 non-GAAP earnings per diluted share of $5 I'm, sorry, $3 69.
Now moving to our Q4 results.
We are very pleased to report a consolidated sales increase of seven 3% to $3 6 billion.
This was the largest sales quarter in the history of Dick's Sporting goods comparable store sales increased five 3% on top of a six 6% increase in the same period last year, a 19, 3% increase in Q4 of 2020 and a five 3% increase in Q4 of 2019.
Our strong comps were driven by a seven 6% increase in transactions, partially offset by a two 3% decline in average ticket.
Within our portfolio, our priority categories did very well driven by our differentiated assortment across footwear athletic apparel and team sports.
When compared to 2019 sales increased 37, 9% or $988 1 million.
On a non-GAAP basis gross Robert in the fourth quarter was $1 7 billion or 30% to 44% of net sales and declined 514 basis points versus last year. However, our gross profit increased 384 basis points over Q4 of 2019 on a non-GAAP basis.
The year over year decline was driven by merchandize margin rate decline of 640 basis points, and partially offset by lower supply chain costs.
As planned during the holiday season, we provide our athletes with a series of compelling item level deals. Additionally, we continued to address targeted inventory overages due to the late arriving spring product.
As a result of these actions our inventory is in great shape as we start 2023 <unk>.
We are taking a new receipts and could not be more excited about our spring assortment importantly, when compared to 2019 Q4 'twenty to margin rate is 209 basis points higher driven by our differentiated assortment combined with our sophisticated and disciplined pricing strategy and a favorable product mix.
These are the same key contributors to a structurally higher margins that we have been emphasizing.
On a non-GAAP basis, SG&A expenses were $823 7 million or 22, 9% of net sales and leveraged 48 basis points compared to last year.
Interest expense was $18 million, an increase of $9 2 million on a non-GAAP basis compared to the same period last year.
This increase was primarily due to $11 4 million of interest expense related to the $1 5 billion senior notes issued in January of fiscal 'twenty one.
Driven by a structurally higher sales expanded merchandise margin and operating efficiencies compared to pre COVID-19 levels non-GAAP EBT was $350 5 million a 974% of net sales. This.
This compares to non-GAAP EBT of $148 6 million or five 7% of net sales in 2019, an increase of $201 9 million or 404 basis points as a percentage of net sales.
In total we delivered non-GAAP earnings per diluted share of $2 93. This compares to a non-GAAP earnings per diluted share of $3 64 last year and represents a 122% increase over 2019 non-GAAP earnings per diluted share of $1 32.
As Lauren said.
We're very excited about the opportunities ahead of us, particularly in our core business the deck houses for.
As a result, we plan to convert our 17 existing field <unk> stream stores. The majority of which are part of Dick's field <unk> stream combo store to Dicks also support a larger format Dick's stores and exited the field <unk> stream Brian .
We closed 12 of these stores during Q4, and we plan to convert the remaining stores by 2024.
As a result in Q4, we incurred pre tax charges totaling $30 $1 million, primarily noncash impairments of field <unk> stream store assets. These charges along with certain items related to our convertible senior notes were included in our GAAP earnings per diluted share of $2 60.
For additional details on this you can refer to our non-GAAP reconciliation table of our press release that we issued this morning.
Now looking to our balance sheet. We ended Q4 with approximately $1 9 billion of cash and cash equivalents with no borrowings on our $1 6 billion unsecured credit facility.
Quarter end inventory levels increased 23% compared to Q4 of last year.
As a reminder, we were chasing inventory last year and that's industry wide supply chain disruptions. Therefore, the more useful comparison is against 2019.
Third to Q4 of 2019 or 38% increase in sales was well ahead of our 29% increase in inventory.
Our inventory is healthy and well positioned.
Turning to our fourth quarter capital allocation net capital expenditures were $89 8 million and we paid $39 3 million in quarterly dividends.
We also repurchased approximately 610000 shares of our stock for $66 million at an average price of $107 53.
Furthermore, following the exchange of approximately $95 million of the outstanding principal of our convertible senior notes. We gave notice in February to the convertible noteholders that the remaining $59 million will be redeemed in shares.
The total principal plus the accrued interest.
I expect these notes to be fully paid off by April 18th.
Now, let me move to our 2023 outlook, which will be 453 bps.
Coming off of two consecutive record years in 2020 and 2021, our 2022 results provide a strong foundation upon which we will build in 2023 and in the years ahead.
Let's review the details.
Comparable store sales are expected to be in the range of flat to positive, 2% with comps expected to be stronger than the first half due to improved inventory availability.
At the midpoint EBT margin is expected to be approximately 11, 7% driven by an increase in gross margins.
This includes an expected improvement in merchandise margin.
Lower supply chain costs.
Q1, gross margin is expected to meaningfully improve versus Q4, but be modestly down year over year, primarily due to lower merchandise margins.
Partially offset by improving freight expenses.
We expect both gross margins and merchandise margins to sequentially improve through the year.
SG&A expenses are expected to deleverage primarily due to investments to fund our growth strategy intra.
Interest expense is expected to be approximately $55 million, which is down approximately $40 million year over year due to the newsman charges that we incurred throughout 2022, as we repurchased a convertible debt and related interest savings.
In total we anticipate earnings per diluted share to be in the range of $12 92.
To $13 80.
Which includes approximately 20 coming from the 50 <unk> week.
At the midpoint of this range EPS is up 11% versus 2022.
5% on a 52 week comparable basis.
Our earnings guidance is based on approximately 88 million average diluted shares outstanding and an effective tax rate of approximately 22%, which was driven by a favorable rate impact on the vesting of employee equity awards in the first quarter.
I'll conclude with a brief discussion around capital allocation priorities.
Investing in our business to drive profitable organic growth remains our top priority.
We also remain committed to returning significant capital to our shareholders through our quarterly dividend and through opportunistic share repurchases.
In fact over the past two years, we have returned nearly $2 4 billion to shareholders, which included approximately $1 6 billion of share repurchases and $766 million of dividend all while continuing to invest in the profitable growth of our business.
Where appropriate we will pursue acquisitions to amplify our growth and add new capabilities for the future.
All of this is underpinned by our commitment to a healthy balance sheet and maintaining our investment grade credit ratings.
For 2023, our capital allocation plan includes capital expenditures of $550 million to $600 million.
We will make significant investments to grow our business and drive athlete engagement and as Loren said, we're excited to return to growing our square footage.
This helps us support will be the primary driver of the square footage growth in 2023, we will open nine new Dicks also support locations eight of which are existing Dick's and field <unk> stream combo store conversions, along with one relocation.
We will also begin construction on more than 10, new decks houses port locations that will open throughout 2024.
In 2023, we will grow the footprint of our golf Galaxy business, two golf Galaxy performance center and convert temporary value chain stores to permanent location.
In addition, we will convert over additional hundreds stores premium full service footwear, taking this elevated athlete experience to over 75% of our Texas locations.
In terms of returning capital to shareholders today, we announced a considerable increase in our dividends of 105% to an annualized payout of $4 per share or $1 on a quarterly basis.
This dividend increase is based on our confidence in a structurally higher sales and earnings profile and reflects our conviction and our strategies and future growth trajectory.
In addition, our 2023 plan includes our expectation of $300 million of share repurchases to offset dilution the effect of which is included in our EPS guidance.
However, we will consider using our excess cash flow to opportunistically repurchase shares.
Beyond the $300 million.
With that I'll turn it back over to Loren to review some of the key initiatives that will propel our profitable long term growth.
Thanks Sandeep.
It takes we've been reinventing sports for 75 years.
Over this time, we've grown significantly to become the largest omnichannel sports retailer in the U S of 140 billion dollar industry and the number one premium golf and team sports destination in the world.
We provide an unrivaled athletic apparel and footwear experience to our athletes and we are the most important U S retail partner to many of the world's leading sports brands.
Since 2017, we have transform virtually every aspect of our business and have added $3 $6 billion in sales over the last three years.
We are well positioned to extend our leadership in a large fragmented industry and I've never been more excited about the future of <unk>.
Within merchandising, we built an industry, leading assortment known for differentiated and on trend product.
Our ability to showcase an entire brand portfolio is highly valued by our strategic partners and our relationships with key brands remains stronger than ever.
We're also developing relationships with new and emerging brands and at the same time have created powerhouse vertical brands that collectively represent the second largest brand in our company.
Yeah.
In our stores, we've invested in our teammate experience and training to heighten our team's ability to provide an enhanced level of service to our athletes all while continuing to make <unk>, a fun and rewarding place to work.
We believe strongly that highly engage teammates are critical to providing a great experience for our athletes and our culture is one of our key competitive advantages.
In 2022, we were named one of Fortune's best workplaces in retail and just last month, we were named one of America's best large employers by Forbes.
Along with enhanced service, we've leveraged distinct in store elements powered by technology to provide an unparalleled athlete experience.
Experiential in store elements, such as hip tracks batting cages, Trochmann golf simulators and premium full service footwear decks inspire confidence in our athletes and reinforce the power of our expertise.
These strategies in combination with our personalized marketing engine and brand building efforts are working.
We added 7 million new athletes during the year and reached record highs in our active athlete database in Q4.
Our new athletes continue to skew younger and more female representing a great opportunity for future growth.
Importantly, our gold athletes are most valuable cohort at a record high of over 7 million people equating to nearly 30% of our active score card members.
We're seeing very strong retention with our goal to athletes and they continue to drive meaningful sales growth representing well over 40% of total sales.
We've also launched new concepts, such as public lands and golf Galaxy performance center to better serve enthusiast outdoor athletes and golfers and recently announced that we will be acquiring leading outdoor retailer moose jaw are.
We our affirmation of our commitment to growth in the multibillion dollar outdoor category.
However, there is no greater example of our commitment to innovation within the athlete experience index houses sports.
Dykhouse export is redefining sports retail.
It's an experiential destination that was inspired by Ed as he challenged us to create the concept that if built across the street from a Dick's sporting goods store would put that store out of business.
It's this way of thinking that drives us to continue to innovate and create market leading disruption.
How is the sport is an experience that fosters deep community involvement goes well beyond traditional retail and has become a destination where athletes can fuel their passion.
Since launching houses for in 2021, our initial three locations have exceeded our expectations driving strong engagement with our brand partners, while delivering much higher total sales and profit.
As well as much higher sales and profit on a per square foot basis.
Our support will be a significant part of our future growth story.
Over the next two years, we plan to open around 20 additional locations.
<unk> downtown Boston, and our two hometown of Pittsburgh, and Binghamton New York.
And over the next five years, we could have as many as 75 to 100 houses a support across the country.
We are also continuing to pull key learnings into our core Dicks fleet. In fact later this year. We're excited to open. The next generation 50000 square foot Dicks store in South Bend, Indiana, which will reflect the houses.
Sport learnings for our athletes.
For those who haven't yet had the chance to visit our houses for it in person, which we highly recommend we've added a short video to our Investor Relations website to help bring the experience to life.
Across our ecosystem, we will continue to improve our omnichannel experience.
For decades, we focused on making meaningful investments in technology with the long game in mind.
Our athletes desire touch points have evolved significantly over the years and we think about how to best meet their needs through a personalized experience enabled by technology.
And arguably the best dataset in sports.
We continue to see growth in our omnichannel athletes to spend more with us and shop more frequently than single channel athletes.
We're excited by the results of these investments are generating and believe our capabilities are distinctive in our industry and provide a long term competitive advantage.
As we expand our leadership position in new sports game changer plays a pivotal role.
Game changer is the premier, scoring and statistics mobile App for youth sports and as a leader in the multibillion dollar sports technology market.
As our recurring revenue software as a service company game changer has delivered five year CAGR revenue CAGR of 35%, while also being profitable a function of its business model, which deliver some of the best unit economics in consumer technology.
With game changer, we are connecting youth athletes to their teammates coaches and families through scorekeeping and live streaming all on one easy to use mobile app.
Over the past few years, our game changer team transformed its user experience to incorporate video streaming highlights and eight new sports.
All delivered to athletes and their families on their phones and tablets anywhere they are.
Every year nearly 6 million games are covered on game changer and athletes and their families engage with the platform for over 280 million hours.
To put this in perspective more games are covered in a single spring months on game changer and have been played in the entire history of major League baseball.
We were honored to see game changer named SaaS companies list of the world's most innovative companies for 2023 and also be named as a finalist for the sports business Journal Tech Awards that will be held later today.
Looking ahead, we will continue innovating within youth sports technology and strengthening this important connection with athletes.
Lastly, we have big plans for our brand in 2023.
Over the years, our brand marketing has inspired athletes to participate in sports and our sports matter program has made it possible for more youth athletes to experience the unique and life altering benefits that youth sports provide.
We believe it's time to blend the inspiration and aspiration, that's always been a part of our brand marketing efforts with the raw power and emotion of our sports matter initiatives.
To make that happen, we're really pleased to share that we will be re launching our brand during the upcoming Ncw tournament with a camp with a campaign focused on the power of sports to change lives.
We are so proud of the great work, our team has done and if youre watching departments mens or womens I promise you will not miss it.
In addition, we're combining this with a commitment from our foundation of more than $5 million to fund 75 youth sports organizations, each with a $75000 grant to keep kids playing.
In closing, we want to reiterate that our strong Q4 in 2022 performance is the direct result of our strategies our agility in meeting the evolving needs of our athletes and our relentless drive to innovate all supported by outstanding execution from our team.
Since 1948, Dick's has believed in the power of sports change lives and we are committed to bringing this belief to life through our athlete experience brand engagement differentiated product and most importantly, our people.
These are the pillars of the new foundation of growth for our business and we believe that no one is better positioned to lead in the marketplace.
Before concluding I'd like to thank all of our teammates across our stores distribution centers and customer support center for their outstanding efforts and continued commitment to our business.
This concludes our prepared remarks. Thank you for your interest in Dick's Sporting goods. Operator, you may now open the line for questions.
Okay.
Thank you we will now begin the question and answer session.
Please state your question quickly I think start up for that by one on your telephone keypad, we'd like to remind our participants to please limit yourself to one question and one follow up we will pause momentarily to compile all Q&A roster.
Our first question today comes from the line of Simeon Gutman with Morgan Stanley Simeon. Please go ahead.
Sure.
Hi, Good morning. My first question is on the 23 merch margin guidance.
Can you tell us what source mix underlying initial markup less promo and then into 'twenty two level of merch margin is that a baseline that you're underwriting Andre we want.
Hi, Simeon, yes, our fiscal 'twenty two level of merch margin is indeed, a new baseline we are planning to grow our merch margin.
Going forward I'll turn to south deep to answer the breakdown of where we think that will come from next year.
So again as we articulated in our guidance, we expect the profitability of the business to improve next year driven by both growth in our merchandise margin and gross margin.
And as we talked about and we are very optimistic about continuing to grow our topline and profitability on the long term basis as well.
Okay.
A follow up.
Sales.
One of the factors, where a lot of factors have driven the better sales performance I think some of the narrow distribution, but should also.
Reflection of how well you've done to fix its getting key product.
As health, what's your line of sight that this structure Hall.
Continues to be a place where the.
Product and Thats the marketplace doesn't evolve to.
To be more widespread.
Thanks, Simeon Yeah, Youre, absolutely right that our product mix and our assortment is a key driver of our growth and it's been a driver of our growth in our transformation and it will be going forward. We believe there has been there has been a structural change in our business over the last five years.
First of all we've seen a shift in consumer behavior, where they are prioritizing athletic.
Sports Health and active life health and healthy excuse me an active lifestyle.
And they are prioritizing <unk> in order to meet those needs, but as you mentioned, we've also completely revamped our athlete experience. So we've got our omnichannel capabilities that people are leaning into we've got a great service model that we continue to focus on and we brought in experiences such as hip tracks and track man.
Into our into our overall experience so that people can really feel confident in the goods that they're buying.
And then lastly, our ability to showcase our brand from head to toe and to really put our brand forward in the best light possible has become a big advantage. So are our distribution or access to product. The fact that we now have products all the way from opening price point up to what the enthusiast will would desire to meet.
Their needs on the field is absolutely part of our ongoing strategy, we're very confident in that growth.
Our next question comes from Adrienne <unk> with Barclays.
Please go ahead.
Great. Thank you, Brian . Thank you very much and Nathan to off to a great year, Lauren I wanted to focus sort of on the maybe longer term horizon on the new concepts in the store growth.
It sounds like Youre now back into the acceleration of square footage in the stores that are being opened are much larger in size. I think can you talk about kind of the sales productivity of the boxes and the EBIT contribution and how we should think about that.
It is impacting the consolidated four wall and then my follow up is also on that.
In that kind of top line environment.
What do you longer term kind of EBIT margins look like maybe on a three year or five year horizon. If you will thank you very much.
Thanks, Adrian you're absolutely correct that we are leaning into new store growth and specifically due to the experience we've had with houses or the fact that these three experiences that we built as really concept stores have become scalable highly profitable more sales more profit both.
On a total basis as well as a square footage basis. We are we are leaning into that growth and so we will have nine that are being built this year up from Remodels and one relocation as well as 10 in the pipeline for our 2024 that were already going to start construction. This year were very very bullish on houses sport and what this can.
Due for our athlete experience in our business.
Adrian and great question.
I think that maybe there is two ways to answer this first of all like we have said 2022 is the new baseline foundation upon which we will grow on sales and earnings over the long term.
As also Lauren noted.
As we look to the future. We still believe there is tremendous amount of share gain opportunity for us we are the largest sporting goods come.
Company and right now our share in $140 billion industry is just 8%. So as we look to the future there will be a very optimistic about the opportunity that we have to continue to provide differentiated assortment and service to our outlet and continuing to gain share.
I'm not willing to give today are a long term rubric, but here's the way to think about it that we believe we can continue to drive positive comps continue to grow our square footage and continuing to expand our profitability into the future and we are very optimistic as you can see based on the guidance that we have provided that for 2023.
Yeah.
Our next question comes from Robbie <unk> with Bank of America. Let me. Please go ahead.
Hey, good morning, guys.
I think two questions just I just want to.
Think this is kind of obvious but the cadence of comps in 2023 could you give a little more color.
Or are they sort of strongest in the first quarter and then.
Fade through the year and zero to two I think youre, implying that we should we should be doing negative same store sales for the back half of the year I just want to.
Confirm that and then.
The other question somewhat related just the average transaction size was I think you guys said down in the fourth quarter, I think 2% to 3% that doesn't you guys don't have negative average transaction size often is it can you give us color on it is it.
Weak large ticket or.
Lack of price increases and then also related to that the traffic was obviously offset that was that store more store traffic or more online transactions any any color on these things around same store sales would be great.
Thanks, Robbie I'll start off.
The cadence of comps in fiscal 'twenty, three you're correct that we will expect we do expect comps to be stronger than the first half and the second half.
Do you think back to last year at this time Q1, and Q2, we had significant inventory challenges. That's the whole reason why the inventory came in late as the year went on and it was difficult to put together a really fantastic athlete experience at this point our spring product is in I would actually encourage you to go to that store.
Take a look we have a fantastic assortment and so due to the due to the comps from last year and the confidence we have in our business. We do expect comps to be very strong in the first half.
As you look toward the back half of the year, we're just being cautious we're up against a 6% comp and we wanted to reflect that the comps will moderate.
I'll turn it I'll turn it over to deep to break down some of your further questions, but I do want to start by saying your question about transaction size. I think you have to start with the fact that transactions were up seven 6%. So while there was a slight decline in average ticket and we don't break out whether that's you AUR U P T. We.
Did find that there were more athletes. So we had more athletes and our database they shopped more frequently and in total they spent more so delivering a five 3% comp with that level of of transaction size were really really pleased with that.
Good morning, Ravi I think the law incurred that answer really well maybe another way to think about this is if you look at on the same transaction and ticket versus two point versus 2019, we saw much balanced performance. So that maybe is another way to think about that and then as you look to the guidance overall, we are remaining very optimistic.
And about the guidance that we have provided here for 2023.
Yeah.
Our next question comes from Kate Mcshane with Goldman Sachs.
Go ahead.
Hi, good morning, Thanks for taking a question we wonder if we could go back to the merchandise margins on the gross margin.
The in terms of what is driving the improvement that you expect for gross margins in 'twenty three is it because we're lapping.
With your inventory.
It seems in promotions in 'twenty, two that you expect things to be a little bit better is there something changing with the bundled relationship or the merch margins to be up a little bit better.
I'll drill down loyalty really helpful.
Good morning, Kate this is nothing.
So they gave to our color commentary around the gross margin expectation for us that we expect.
The merch margin and gross margins will improve into 2023 to drive as much margin as well as the lower freight expenses that we will start to see the benefit into 2023 as well in terms of a little bit of more cadence around gross.
Margin itself.
You can imagine the England and the.
The inventory positions in Q1, both for us as well as the inventory in the industrial growth pretty lean and was pretty constrained. So as we are analyzing that we expect some level of normalization of the pricing in the first half and Thats. What we gave in our kind of our cadence for the merch margin expansion and as you think about the back half. We also expect the freight expense.
To start we should have the benefit and the inventory starts to turn because we capitalize those expenses. So that's the other factor that we have contemplated in our guidance Keith I just wanted to pick up one other part of your question you asked whether we're lapping severe inventory issues are promotions I want to be very clear that we while we manage through.
A lot of inventory disruptions last year, there was no return to an overall promotional environment, we cleared through inventory through our value chain stores are going going gone.
Jane and we were able to keep the <expletive> store really looking great for holiday with an assortment of full price merchandise and that really was true throughout the entire year. So promotions I just wanted to pick up Alex that story that comes up all the time promotions were not a key factor in our year last year, there was price item discounts, especially on lumps, but it wasn't a highly.
Promotional environment for us.
Yeah.
Okay.
Our next question comes from Chris <unk> with J P. Morgan Chris. Please go ahead.
Okay.
Okay.
Thanks, and good morning, I have a couple of topline related questions as well. So first as you think about.
How you're planning the business.
You referenced 2019 up until this point, we're getting to a period as 2019, even a good reference point. So are you looking at things in a four year basis, and then more broadly is the expectation that your business sort of reverts to like a normal seasonal seasonal cadence.
Over the year.
And then related to that just as you think about that back half in that hard compare to what extent do you think that the promotions elevated the comp trend in the back half of the year is.
In terms of like.
Some sales that youre, just going to have to naturally get back.
Yes, Thanks, Chris.
We have been talking 2019, just due to all of the ups and downs of the past few years, but we will not be doing that going forward towards 22 is the new base from which we're going to grow we're going to grow the topline and Bottomline and yes. It is our hope that this year. Finally, there is some normalized seasonal cadence just because with the inventory challenges for last year.
The impact that had on consumer shopping behaviors as well as some of the.
Issues people are having with inflation all of that will we're hoping will normalize. This year. So that we can continue to plan from this going forward.
Important point unrelated to what I was just Saint Kate our promotions did not elevate our comp trends in in the second half in fact, most of the the inventory liquidation that we had happened in our value chain and in our warehouse stores, which don't affect our comp our comp was driven by transactions.
Transactions seven 6% increase in transactions.
Got it.
Yeah.
Yeah.
Our next question comes from Mike Baker with D. A Davidson Mike. Please go ahead.
Okay.
I hate to ask two mundane boring modeling questions, but I did want to ask you about your 2020 sales growth or sales outlook versus comps. We can we can probably estimate the extra week, but it's most jaw, which I think is a couple of hundred million dollars supposed to close in March is that in the guidance or would that be.
Or would that be above and beyond.
Mike go ahead, nothing like most of that is not included in our guidance.
Transaction is not yet closed.
We will include that commentary in our next quarter's outlook.
It's not likely to be material.
Okay.
Okay.
Yes.
Okay, and then second modeling question.
<unk> talked about interest income was a big driver.
<unk> earnings in the fourth quarter.
What is your total interest expense should be in 2023 can you tell us what interest income is expected within your EBT guidance.
That's a great question, Mike I think that it'll all depend on what do we do with the excess cash as we have also included in our guidance that we will continue to remain opportunistic with our share buyback. So.
Depending on what we do with the share buyback that will have an impact on the interest income, but as you rightfully said with the current interest in.
Environment that we have the aren't able to get a good yield on excess cash on the balance sheet.
Our next question comes from Michael Lasser with UBS, Michael. Please go ahead.
Good morning, Thanks, a lot for taking my question. So you mentioned that the 30.
The 2022% 34, 6%.
Gross margin, let me start that again, you mentioned that the 2022 gross margin of 34, 6% is the new level from which you start to move.
Move higher from over from here, yet the 34, 6% gross margin last year had a significant amount.
<unk> inventory liquidation within that.
Plus you have the benefit of lower transportation costs.
Why wouldn't you get more of that back and to what degree are you just assuming that transportation costs are going to drive.
Gross margin in 2023.
Why isn't your gross margin going to be even better moving forward are you expecting that promotions are going to increase metal provide a little bit of an offset.
Michael look let's make sure we understand your question correctly, because maybe I'll begin with the middle part of your question you indicated that the transportation cost was a benefit in 2022 actually that is not the case, because we recognize the freight expenses over the terms of the inventory. So by the time, we started to see the early benefits of.
The freight expenses by the time it rolls through we actually will start to see the benefit in the second half of 2023.
And in terms of the guidance that's kind of the first part of your question. What we said about both the sales and the profitability and we're not indicating to the gross margins you are talking about the overall profitability of the company as the new baseline. So we are very confident in the guidance that we gave that we will improve both the merch margin and gross profit into 2000.
23 over where we finished 2022.
He is a better way to.
Maybe I'll ask the question because it wasn't clear and I apologize for that why wouldn't you get back to the 38% gross margin you had in 2021, when there was less inventory clearance and you should have with favorable transportation costs on top of that.
The thing we can say Oh I want to add my second question how did the hu.
That had the full complement of over <unk> category.
Continued.
Towards that did not have.
Elevating the assortment within priority important category in the fourth quarter.
Our material.
We moved two cohorts of stores.
Oh.
Yes.
Take the first part and I'll turn to Lauren for the second one in terms of over time like we have said there is nothing structurally that is holding us back from achieving that level of profitability that we delivered in 2021, so overtime Michael your comment is appropriate.
And maybe you can take the second one sure yes, I mean, if you think about our priority categories of footwear athletic apparel team sports.
Footwear and our premium full service footwear decks, we are making a larger investment in those as you heard in our prepared remarks, because it does allow us to have a full assortment, which does really delight the athlete and enable us to drive strong comps.
And that we're not going to break down how it was.
In Q4 for various categories, but generally speaking our assortment was really strong and drove the comp.
Okay.
The next question comes from Brian Nagel with Oppenheimer, Brian . Please go ahead.
Yes.
Yeah.
Hi, good morning.
Great great quarter and year congratulations.
So my first question was just a bit of a follow up and.
There's obviously a lot of talk in your broader space about inventory clearance and normalizing promotions through quite hear what you're saying is that promotions did not drive the business in the second half of the year.
Very optimistic as we look into the first half of 'twenty three that better inventory availability will help to drive improved sales and further improved sales of <unk>.
So the question I have is <unk> been just not affected by promotions outside of your company, what youre seeing with other brands or other retailers.
Managing through that.
Yeah. Thanks, Bryan So <expletive> is I can't say, it's not affected by any promotions outside of our company, but our assortment is so narrowly distribute distributors now and and just differentiated that we don't spend a lot of time looking at and outside promotional environment, we have an.
Pensive database of 150 million people, we can manage on a personalized basis, what what pricing we want to offer and we are very much more focused on strategic investments and price item where necessary to move our business.
That's very helpful and congrats on that and then the second question I have also just looking at <unk> relative to what else is happening out there. So what you're looking at a number of retailers to talk lately about pressure within their consumer whether it be an equation or some other type of economic factors.
Sales improved here. So I guess the question I have is are you seeing any signs of a more pressured consumer behind your strong results and as we look into 'twenty three what's the basic macro assumptions underpinning the guidance you outlined today.
Yes.
Yeah. Thanks, So we are seeing our consumer doing very very well and I would point to a few data points on that so so over each one of our income demographics, we have seen growth and we saw growth in this past quarter, we saw growth in our goal to athletes but.
Every single income demographic and what we're finding is that people are prioritizing health and wellness and active lifestyle team sports and.
Those are there even more popular than they were before the pandemic I think people really have decided with whatever.
They have in their wallet, they're prioritizing these categories. There they are coming to life more as necessities rather than discretionary.
Now I'll turn it to you to answer the question on our macros.
Yeah in terms of the macro assumptions that we will continue to be.
Mindful about what is happening in the in the macroeconomic landscape, but to your point as you look at the guidance that we have provided flat com two plus two we are very optimistic and confident about the guidance that we provided just based on the differentiated assortment and the capabilities that we have as well as the number of athletes that we have acquired over the law.
Several years, yet we are confident in the guidance that we have provided.
Yeah.
The next question comes from Warren Cheng with Evercore ISI. Please go ahead.
Hey, good morning, Thanks for taking my question I just wanted to ask about the partnership with Nike So you're you're over a year now into the loyalty program, a plug in and they're presumably getting a much deeper level of customer data insight than they were before and they've talked a lot about investing in the best best strategic partners.
Are there examples you can give on just how they've been using that data or any updates on how they're engaging with you with the partner.
Yeah, that's why I think you.
Our relationship with Nike is at an all time high and that's everything from insights that we're sharing product information that we're sharing we're looking very long term at the state of the consumer and each category and working at a very strategic level. We've been very pleased with how the connected membership has gone we have over 1 million.
When members now who have opted to link both their Nike analytics loyalty accounts and because of that we're able to get much better insights into our athletes, how they're shopping where they're shopping and how we can continue to innovate in that partnership. We're very excited about some of the things coming down the pike with that connected membership in terms of omnichannel experiences that were going on.
Offer that we haven't gotten into yet, but overall the Nike partnership is a tremendous.
Just a wonderful partnership for us.
Great and my follow up just a clarification on some of the comments you made earlier about the house's support rollout rollout.
Is that actually going to be a.
Margin accretive or merger neutral or is that does that take time to scale before that happens.
Yes. So one just couple of commentary before we get into the specifics. So we are very confident about the house of smart strategy. The three stores that we have opened a handful of stores, but the results both on the topline on the bottom line that we are seeing a really really great and that's what gives us the confidence that we have in terms of the.
Impact of these things that will be recognized over time as you can imagine over the next two years, we intend to open about 20 and Mike Lauren said in her prepared comments over the next five years. It could be 75 to 100. So the benefit will be seen over time, but we are very optimistic about the strategy and the differentiation as well as the ability it provides us to engage with the athlete.
And a very differentiated way.
Our next question comes from Paul <unk> with Citi.
Please go ahead.
Yes.
Hey, Thanks, guys I'm curious.
Can you give an update on going going gone how many did you end the year with.
How many of pop ups versus permanent and any any.
Anything you could share in terms of what that added to sales and F 22, and what's the plan for F. 'twenty.
Yeah.
So Paul in terms of the going going gone on stores like as we call them permanent there were 15 of them that we had at the end of the year, we had more their house plus build out kind of the.
The 43 temporary locations as we call them.
Really really enthusiastic about the strategy not only is it allowing us to engage with an athlete and a different profile of monopoly than a Dick's sporting goods outlet. So that's one benefit in addition, as we have talked about the.
The benefit that this provides in terms of being able to liquidate that inventory and actually get a better recovery rate on that inventory is also a strong asset for us I would just add one thing I think the way we look at the going on non chain is that it's a flexible asset. So we can expand and we've done that with our temporary pop up locations. We can.
Take those down.
Don't read them or if theyre not working so by the time something becomes that going going gone up concept, it's been proven and tested but the warehouse strategy is very flexible.
Got it and then Keith.
Just a little bit of a further breakdown of Capex investments for 23, just how much of that is at the store level, both new and existing stores.
Versus corporate.
Yes.
Although the vast majority of the expense or the capital investment will be going into stores as we call it out right.
Our clients to open nine new houses port locations as well as do the earlier copy capital investment into the 2020 for fossil sport openings. In addition, as we indicated will be will be upgrading 100 of our stores to premium full service footwear deck. There is definitely an investment on the box side in terms of the game changer technology there.
Investments that were making in personalization as well as the the other capability from data and analytics. All of that is also included in the guidance, but the vast majority of that investment will continue to be store facing.
The next question comes from John Kernan with Cowen John . Please go ahead. Your line is open.
Yeah.
Excellent. Thanks for taking my question and congrats on a great year.
So how should we think about the new store productivity contribution from <unk>.
Square footage growth it looks like that the gap between comps and overall reported sales was closer to 200 basis points this quarter, which would suggest.
<unk>.
Any new store productivity to come on online has been quite productive so just.
I'm curious how should we model one new store productivity and overall square footage growth.
Based on the number of stores, you're talking to and also the bigger size of some of them.
Okay.
Yes, John are two different answers to that first of all if you look at Q4, the difference that you're seeing between the comp sales and.
And the total sales growth one like you said is driven by some of the new store openings. In addition, the temporary warehouse locations that we have the warehouse plus stores as we call them. They are not included in the comp numbers. So the sales that happened during the fourth quarter in those temporary locations are included in that.
Coming back to your macro question, we do see a significant improvement in our sales productivity when we convert a store.
From the basic 50, Kay store to a household port location or even.
Our comparable store to our houses port location, considering that a majority of the stores that we have remodeled right now are relocations. So those will be in our comp expectation there won't be as part of the new stores.
And when we open <unk> sport as a brand new location yesterday will definitely start to benefit our new store productivity metrics.
Okay.
Our final question today comes from Joe Feldman of Telsey Advisory Group. Please go ahead.
Right.
Yeah.
Yes, thanks, guys for taking the question.
Wanted to ask about.
Any merchandising changes you might.
Considering for 2023 like are there any.
Categories or certain trends or products that you might be leaning into are emphasizing a little bit more based on what youre seeing from the consumer.
Hi, Joe Yes, we are still very focused on our four priority categories footwear team sports Athletic apparel and golf were always looking for new trends new categories, but generally speaking that's the 80% plus of our business and that's why we're focused on on driving growth.
Okay, so not much newness coming I guess some of those what about.
Well I did not.
Please describe things.
Oh, sorry, yes.
Yeah.
Alright, I just wanted to I didn't say there wasn't note any newness theres a ton of newness coming I just wanted to share with you that our our priority categories of footwear team sports apparel and golf are where we're focused but theres certainly a ton of newness across the business.
Okay got it okay, sorry for misunderstanding that.
Then.
With regards to private label.
Maybe could you share just kind of the latest penetration and what you saw in the fourth quarter I feel like you guys usually have shared a little more color there around.
The consumers opting for some of your your brands.
Yeah, Thanks, Joe our vertical brands did tremendously well last year and in the quarter.
Really pleased with how the DSG brand is doing opening price point brand high function high fashion as well as clear inverse which are filling white space in our portfolio and even the Hagen brand doing incredibly well so as we look to the end of the year are our overall vertical brand penetration for this past year was 14th.
<unk>, we had originally laid out a goal of about $2 billion a few years ago for vertical brands and we finished about $1 seven very excited about both the sales and margin opportunity go forward as you know vertical brands up six to 800 basis points of higher margin than our average.
Unfortunately that is all the time, we have today for questions I will now turn the call back to learn Hobart, President and CEO for any concluding remarks.
Okay.
Thank you all for your time today and for your interest in Dick's Sporting goods and look forward to seeing you on the next call. Thank you.
Okay.
Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Yeah.
Yeah.
Okay.