Q2 2023 DICK'S Sporting Goods Inc Earnings Call

August 22, 2023

In quarter 2023 earnings conference call all lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session.

You would like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again press. The star followed by the number one. Thank you Nate guilt senior director of Investor Relations you May begin your conference.

Good morning, everyone and thank you for joining us to discuss our second quarter 2023 results on today's call will be Lauren Hobart, our president and Chief Executive Officer <unk> <unk>.

Our Chief Financial Officer.

A playback of todays call will be archived on our Investor Relations website located at investors <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 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.

Including our last annual report on Form 10-K, and cautionary statements made during this call.

Assume no obligation to update any of these forward looking statements or information.

Please refer to our Investor relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call.

And finally for your future scheduling purposes, we are tentatively planning to publish our third quarter 2023 earnings results on November 21 2023.

I will now turn the call over to Lauren.

Thank you Nathan good morning, everyone.

We are pleased with our strong sales performance for the second quarter.

Total sales increased three 6% to $3 billion to $2 billion and our comp sales increased one 8% driven by robust transaction growth.

<unk> continued to gain market share demonstrating that athletes throughout the country are increasingly relying on <unk> to meet their needs.

Within the quarter sales accelerated significantly in July when the back to school season kicked off and when we opened our newest houses support location.

For the full year, we remain confident in delivering comparable store sales in the range of flat to positive 2% unchanged from our prior outlook.

With this context I want to take a moment to address our second quarter profitability in our revised 2023 EPS outlook.

While we delivered double digit EBIT margin of 10, 1%, our second quarter profitability was short of our expectations.

This was primarily due to lower gross margin, which while still significantly above pre COVID-19 levels was lower than originally anticipated.

<unk> newest houses support location.

Speaker 1: and when we opened our newest House of Sport location.

Two key factors impacted our second quarter gross margin relative to our original expectation.

Speaker 1: For the full year, we remain confident in delivering comparable store sales in the range of flat to positive 2%, unchanged from our prior outlook.

Speaker 2: with our recent Mochis acquisition.

The first was the impact of higher inventory shrink.

Speaker 2: Reopening expenses were $22.1 million, an increase of $18.3 million compared to the same period last year. For more information, visit www.fema.gov

Organized retail crime in fact in general and increasingly serious issue impacting many retailers.

Speaker 1: With this context, I want to take a moment to address our second quarter profitability and our revised 2023 EPS outlook.

Speaker 2: This increase was in support of our 7 houses for conversions, including advertising expense to support the opening.

Based on the results from our most recent recent physical inventory cycle the impact of theft on our shrink was meaningful to both our Q2 results and our go forward expectations for the balance of the year.

Speaker 1: While we delivered double-digit EBT margin of 10.1%, our second quarter profitability was short of our expectations.

Speaker 2: Interest expense was $14.4 million and decrease of $11.1 million compared to the same period last year.

We are doing everything we can to address the problem and keep our stores teammates and athletes safe.

Speaker 1: This was primarily due to lower gross margin which, while still significantly above pre-COVID levels, was lower than originally anticipated.

Speaker 2: This decrease was primarily due to the inducement charges incurred in the prior year related to the exchange of our convertible senior notes and interest expense savings this year from the retirement of these notes.

And second beyond shrink. We also took decisive action on excess product, particularly in the outdoor category to allow us to bring in new receipts and ensure our inventory remained vibrant and well positioned.

Speaker 1: Two key factors impacted our second quarter gross margin relative to our original expectations.

Speaker 2: Other income totaled $28.5 million compared to the expense of $7.4 million in the same period last year. For more information, visit our website www. Cesarec Understandmentcenter.org

Speaker 1: The first was the impact of higher inventory shrink.

Speaker 1: Organized retail crime and theft in general.

Keeping our inventory fresh is one of our key operating philosophies and we're pleased that our inventory was down 5% at the end of the quarter.

Speaker 1: an increasingly serious issue impacting many retailers.

Speaker 2: This $35.9 million increase in income was driven by a $14.9 million increase in our interest income as a result of higher average interest rates on our cash and cash equivalent.

Speaker 1: Based on the results from our most recent physical inventory cycle, the impact of theft on our strength was meaningful to both our Q2 results and our go-forward expectations for the balance of the year.

Our revised 2023, non-GAAP EPS guidance of $11 50.

To $12 37 takes.

Speaker 2: Other income also included the $20.9 million expense reduction from changes in our deferred compensation plan which fully offset the SG&A expense increase I mentioned earlier.

<unk> takes into account, our Q2 results as well as our latest views on gross margin for the back half of the year, including higher levels of shrink.

Speaker 1: We are doing everything we can to address the problem and keep our stores, teammates, and athletes safe.

Speaker 1: And second, beyond shrink, we also took decisive action on excess product, particularly in the outdoor category, to allow us to bring in new receipts and ensure our inventory remains vibrant and well positioned.

It's important to note we remain very confident that we still expect gross margin to increase for the full year compared to 2022, which includes a significant increase in the back half.

Speaker 2: EBT was $325.9 million, or 10.1% of net sales.

Speaker 2: This compares to an EVT of $427.3 million or 13.73% of net sales in 2022.

To say our future is bright would be an understatement.

Speaker 1: Keeping our inventory fresh is one of our key operating philosophies.

The enthusiasm we have for our business and the confidence we have in our long term growth opportunities have never been stronger.

Speaker 2: In total, we delivered earnings per diluted share of $2.82.

Speaker 1: And we're pleased that our inventory was down 5% at the end of the quarter.

Speaker 1: Our revised 2023 non-GAAP EPS guidance of $11.50

Speaker 2: This compares to non-GAAP earnings for diluted shares of $3.68 last year.

We're making transformative investments so that we're well positioned to continue gaining share and extending our leadership in a fragmented $140 billion industry.

Speaker 1: to $12.30.

Speaker 2: Now looking to our balance sheet, we ended Q2 with approximately $1.9 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility.

Speaker 1: takes into account our Q2 results as well as our latest views on gross margin for the back half of the year, including higher levels of shrink.

Following our tremendous success over the last several years, we are laser focused on capitalizing on our most significant growth opportunities.

Speaker 1: It is important to note we remain very confident that we still expect growth margins to increase for the full year compared to 2022, which includes a significant increase in the back half.

Speaker 2: Our quarter and inventory levels decreased 5 percent compared to Q2 of last year.

We're doing extensive work to determine how best to optimize our business going forward to capture that growth.

Speaker 2: Our inventory is well positioned for the important back to school season.

This includes better aligning our talent organizational design and spending in support of our most critical strategies, while also streamlining our overall structure and costs.

Speaker 1: To say our future is bright would be an understatement.

Speaker 2: Turning to our second quarter capital allocation.

Speaker 1: The enthusiasm we have for our business and the confidence we have in our long-term growth opportunities have never been stronger. We're making transformative investments so that we're well positioned to continue gaining share and extending our leadership in a fragmented $140 billion industry.

Speaker 2: Net capital expenditures were $157 million and we paid $84 million in quarterly dividends.

Now deep will share more details about our plans and the associated charges, we anticipate related to this business optimization in his remarks.

Speaker 2: We also repurchased 1.6 million shares of our common stock for $202.7 million at an average price of $129.14.

Innovating within the Omnichannel athlete experience is at the heart of our growth strategies and our newest Dick's concepts have proven to be tremendously successful and are a key part of our future.

Speaker 1: Following our tremendous success over the last several years, we are laser focused on capitalizing on our most significant growth opportunities.

Speaker 2: Thus far this year we have repurchased a total of $260.4 million worth of our stock.

First Dick's houses sport is yielding powerful results.

Speaker 1: We're doing extensive work to determine how best to optimize our business going forward to capture that growth.

Speaker 2: Now turning to our outlook for 2023.

During Q2, we're excited to have opened seven new locations and.

Speaker 1: This includes better aligning our talent, organizational design, and spending in support of our most critical strategies while also streamlining our overall structure and cost.

And earlier this month, we opened two additional locations.

I've had the opportunity to visit many of these stores in recent months and I left each visit proud of our team and inspired by the athlete experience that we're providing.

Speaker 1: Navdeep will share more details about our plans and the associated charges we anticipate related to this business optimization in his remarks.

These stores are doing incredibly well and during July delivered strong double digit comp growth compared to their prior.

Speaker 1: Innovating within the omni-channel athlete experience is at the heart of our growth strategies.

Prior combo store locations with the same square footage.

Speaker 1: And our newest DICKS concepts have proven to be tremendously successful and are a key part of our future. This next slide focuses on our implementation work that anything that is considered a consulting

With 12 total houses sports stores now open and plans to open another 10 locations throughout 2024, we continue to expect that by 2027, we will have between 75 to 100 across the country.

Speaker 1: First, Dix House of Sport is yielding powerful results.

Speaker 1: During Q2, we're excited to have opened seven new locations.

Speaker 1: Earlier this month, we opened two additional locations.

In addition to house the sport, we're excited to continue rolling out our next generation <expletive> store, which completely revolutionizing our most typical 50000 square foot format.

Speaker 1: I've had the opportunity to visit many of these stores in recent months, and I left each visit proud of our team.

Speaker 1: and inspired by the athlete experience that I'm providing.

This store is inspired by our houses for a concept with a similar elevated assortment and service model.

Speaker 1: These stores are doing incredibly well and during July delivered strong double-digit comp growth compared to their prior combo store locations with the same square footage.

Premium experiences and enhanced visual expression.

Building on the success of our first opening we've now opened two additional locations and overall sales have been exceptionally strong.

Speaker 1: With 12 total housesport stores now open and plans to open another 10 locations throughout 2024, we continue to expect that by 2027 we will have between 75 to 100 across the country.

This concept is driving great results and we're excited to open another eight locations by the end of 2023.

Speaker 1: In addition to House of Sports, we're excited to continue rolling out our next generation <expletive> store, which completely revolutionizes our most typical 50,000 square foot format.

The one two punch of houses sport and our new 50000 square foot prototype is the future of our <expletive> stores.

We're also extremely enthusiastic about our long term opportunity in golf, both a dicks golf Galaxy work.

Speaker 1: This story is inspired by our House of Four concepts.

Speaker 1: with a similar elevated assortment and service model.

Excited to open seven new golf Galaxy performance centers this year.

Speaker 1: premium experiences, and enhanced visual expressions.

Beyond this year, we will continue growing our golf galaxy footprint with approximately two new locations planned for 2024.

Speaker 1: Building on the success of our first opening, we've now opened two additional locations.

Speaker 1: and overall sales have been exceptionally strong.

In combination with our stores our digital experience remains an integral part of our success.

Speaker 1: This concept is driving great results and we're excited to open another eight locations by the end of 2023.

And we continue to invest in technology to strengthen our athletes omnichannel experience.

Speaker 1: The one-two punch of House of Sport and our new 50,000 square foot prototype is the future of our jigsaw.

This past quarter, we were excited to extend our omnichannel fulfillment model and now offer our integrated White label same day delivery service on the Dicks App and on <unk> Dot com.

Speaker 1: We're also extremely enthusiastic about our long-term opportunity in golf, both at Dix and Golf Galaxy.

We also continue to innovate and invest in a rapidly growing and profitable game changer business and we're very proud to have recently announced a multiyear partnership between game changer in major League baseball.

Speaker 1: We're excited to open seven new Golf Galaxy Performance Centers this year.

Speaker 1: Beyond this year, we will continue growing our Gulf Galaxy footprint with approximately 10 new locations planned for 2024.

In conjunction with the reinvention of our Omnichannel experience, we continue to drive deep brand engagement.

Speaker 1: In combination with our stores, our digital experience remains an integral part of our success.

This past quarter, we launched the second iteration of our sports change lives campaign.

Speaker 1: And we continue to invest in technology to strengthen our athletes' omnichannel experience.

In partnership with Nike and Jordan, We're spotlighting 10 iconic athletes.

Speaker 1: This past quarter, we were excited to extend our omni-channel fulfillment model and now offer our integrated white-labeled same-day delivery service on the Dix app and on Dix.com.

<unk>, Mike trout, Alex Morgan and Carmelo, Anthony who share their personal stories of how sports changed their lives.

In addition to the athlete stories recaptured exclusive behind the scenes content that is available to our Dixon Nike connected members on the Dicks App.

Speaker 1: We also continue to innovate and invest in our rapidly growing and profitable game changer business.

We've seen extremely positive athletes sentiment and to date. This work has achieved nearly $1 5 billion impressions in our media.

Speaker 1: And we're very proud to have recently announced a multi-year partnership between Game Changer and Major League Baseball.

Speaker 1: In conjunction with the reinvention of our omni-channel experience, we continue to drive deep brand engagement. Thank you for your attention. Enjoy the rest of your day. Thank you.

The marketing campaign is running the summer's most relevant sports moments, including the NBA finals NHL Stanley Cup playoffs in the women's World Cup.

Speaker 1: This past quarter, we launched the second iteration of our Sports Change Lives campaign.

I want to thank all of our teammates across the company for their outstanding efforts and continued commitment to Dick's sporting goods.

Speaker 1: In partnership with Nike and Jordan, we're spotlighting 10 iconic athletes.

Speaker 1: including Mike Trout, Alice Morgan, and Carmelo Anthony.

We have an incredible team here across every area of our business and they are the most important drivers of our success.

Speaker 1: who share their personal stories of how sports changed their lives.

Speaker 1: In addition to the athlete stories, we captured exclusive behind-the-scenes content that is available to our DICKS and Nike Connected members on the DICKS app.

Before concluding I want to share some final thoughts on fixed growth potential.

And third we have for our business and the confidence we have in our long term growth opportunities has never been stronger.

Speaker 1: We've seen extremely positive athlete sentiment.

Speaker 1: And to date, this work has achieved nearly 1.5 billion impressions in our media.

We're driving positive comp sales and gaining significant share.

Speaker 1: The marketing campaign has run in the summer's most relevant sports moments, including the NBA Finals, NHL Stanley Cup playoffs, and the Women's World Cup.

Despite moderating our 'twenty to 'twenty three EBT expectations, we will still deliver double digit EBT margin. This year, which is approximately double our 2019 rate.

Speaker 1: I want to thank all of our teammates across the company for their outstanding efforts and continued commitment to Dick's Sporting Goods.

And based on the powerful results of our new Dicks concept.

Speaker 1: We have an incredible team here across every area of our business.

To support in our next generation 50000 square foot prototype the long term growth opportunity. We have ahead of US is nothing short of extraordinary.

Speaker 1: and they are the most important drivers of our success.

Speaker 1: Before concluding, I want to share some final thoughts on Dick's growth potential.

As Ed said and I quote we haven't seen growth opportunities like these since we went public in the early two thousands.

Speaker 1: The enthusiasm we have for our business and the confidence we have in our long-term growth opportunities has never been stronger.

With that I will turn the call over to <unk> to share our financial results in more detail.

Speaker 1: or driving positive comp sales and gaining significant share.

Thank you Lauren and good morning, everyone.

Speaker 1: Despite moderating our 2023 EBT expectations, we will still deliver double-digit EBT margin this year, which is approximately double our 2019 rate.

Let's begin with a brief review of our second quarter results.

We are pleased to report a consolidated sales increase of three 6% to $3 2 billion.

Speaker 1: And based on the powerful results of our new DICKS concept, House's Sport, and our next generation 50,000 square foot prototypes, the long-term growth opportunity we have ahead of us is nothing short of extraordinary.

As we continue to gain market share.

Comp sales increased one 8% driven by a two 8% increase in transactions.

Partially offset by a 1% decline in average ticket.

Speaker 1: As Ed said, and I quote, we haven't seen growth opportunities like these since we went public in the early 2000s. We're not seeing growth opportunities like these since we went public in the early 2000s.

The roughly 180 basis points of non comp sales growth. This quarter was driven by sales at our warehouse locations and Montreal.

Speaker 1: With that, I will turn the call over to Nadeep to share our financial results in more detail.

As Lauren said.

Sales momentum both considerably in July as we saw a strong start to the back to school season, and reopen seven new houses port locations by converting previously closed combo stores.

Speaker 2: detail. Thank you, Lauren, and good morning, everyone.

Speaker 2: Let's begin with a brief review of our second quarter results.

Speaker 2: We are pleased to report a consolidated sales increase of 3.6% to $3.22 billion as we continue to gain market share.

Cited to report that these are reopened stores are yielding tremendous results.

In terms of category performance footwear and team sports did extremely well in apparel, we continued to gain significant share and saw strength across key brands, including Nike and our flagship vertical brands.

Speaker 2: Comm sales increase 1.8% driven by a 2.8% increase in transactions.

Speaker 2: Partially offset by a 1% decline in average ticket.

Speaker 2: The roughly 180 basis points of non-comp sales growth this quarter was driven by sales at our warehouse locations and moose jaw.

Gross profit in the second quarter was $1 1 billion or 34, 42% of net sales and declined 261 basis points compared to last year.

Speaker 2: As Lauren said, our sales momentum built considerably in July as we saw a strong start to the back to school season and reopened seven new House of Sport locations by converting previously closed combo stores.

This decline was driven by lower merchandise margin of 254 basis points.

As Loren discussed we took decisive actions on excess product, particularly in the outdoor category to keep our inventory position.

Speaker 2: We are excited to report that these re-open stores are yielding tremendous results.

Speaker 2: In terms of category performance, footwear and team sports did extremely well. In apparel, we continued to gain significant share and saw strength across key brands including Nike and our flagship vertical brand.

In addition, we experienced a meaningful headwind from higher than expected shrink, which represent a third of our merchandise margin decline.

This was partially offset by lower supply chain cost, which leveraged 115 basis points.

Speaker 2: Gross profit in the second quarter was $1.11 billion, or 34.42% of net sales, and declined 161 basis points compared to last year.

SG&A expenses were $775 6 million or 24.06% of net sales.

SG&A dollars increased $118 2 million and Deleveraged 294 basis points compared to last year.

Speaker 2: This decline was driven by a lower merchandise margin of 254 basis points.

Speaker 2: As Lauren discussed, we took decisive actions on excess product, particularly in the outdoor category to keep our inventory well positioned.

This deleverage was planned and was driven by three key factors first.

We continue to invest in our hourly base rate talent and technology to <unk>.

Speaker 2: In addition, we experienced a meaningful headwind from higher than expected shrinks, which represent a third of our merchandise margin decline.

A better athlete experience, including elevating our service levels in store.

These investments drove approximately 100 basis points of deleverage.

Speaker 2: This was partially offset by lower supply chain costs which leveraged 115 basis points.

Second we made investments in marketing to support a highly successful opening of seven new houses Ford stores in this quarter.

As well as the second major phase of our sports change lives Brian campaign.

Impactful campaign in the history.

Our marketing investments drove approximately 70 basis points of deleverage.

And third we saw approximately 70 basis points of deleverage due to the net expense increase from the changes in the investment values of our deferred compensation plan.

Which is fully offset in other income.

Lastly, it's worth noting that our Q2 SG&A included a full quarter of expenses associated with our recent moisture acquisition.

Preopening expenses were $22 1 million, an increase of $18 3 million compared to the same period last year.

This increase was in support of our seven houses for conversions, including advertising expense to support the opening.

Interest expense was $14 4 million and decrease of $11 1 million compared to the same period last year.

This decrease was primarily due to the newsman charges incurred in the prior year related to the exchange of our convertible senior notes and interest expense savings. This year from the retirement of these notes.

Other income totaled $28 5 million compared to the expense of $7 $4 million in the same period last year.

This $35 9 million dollar increase in income was driven by $14 9 million dollar increase in our interest income as a result of higher average interest rates on our cash and cash equivalents.

Other income also included the $20 9 million dollar expense reduction from changes in our deferred compensation plans, which fully offset the SG&A expense increase I mentioned earlier.

<unk> was $325 9 million or 10, 1% of net sales.

This compares to <unk>, $427 3 million or $13, 73% of net sales in 2022.

In total we delivered earnings per diluted share of $2 82.

This compares to a non-GAAP earnings per diluted share of $3, 68% last year.

Now looking to our balance sheet at the end of Q2 with approximately $1 $9 billion of cash on cash equivalents and no borrowings on our $1 6 billion unsecured credit facility.

Our quarter end inventory levels decreased 5% compared to Q2 of last year.

Our inventory is well positioned for the important back to school season.

Turning to our second quarter capital allocation net capital expenditures were $157 million and we paid $84 million in quarterly dividends.

We also repurchased one 6 million shares of our common stock for $202 7 million at an average price of $129 14.

Thus far this year, we have purchased a repurchase a total of $264 million worth of our stock.

Now turning to our outlook for 2023.

We are reaffirming our expectations for comparable store sales to be in the range of flat to plus 2%.

We continue to be measured in our expectation considering the continued macroeconomic uncertainties, including upcoming resumption of student loan repayments.

At the midpoint of this range.

Employers are back half comp will be approximately flat, which was on top of a comp increase of approximately 6% in the same period last year.

Including the 53rd week, we expect roughly 202 hundred 50 basis points of non comp sales growth for the <unk>.

We are reaffirming our expectations for comparable store sales to be in the range of flat to plus 2%.

For me.

As a result of our Q2 performance and our latest views on gross margin for the back half. We now expect non-GAAP earnings per diluted share to be in the range of $11 50 to $12 30.

We continue to be measured in our expectations, considering the continued macroeconomic uncertainties, including upcoming resumption of student loan repayments.

At the midpoint of this range.

To our prior expectation of $1 90 to $13 80.

Players are back half comp would be approximately flat, which is on top of a comp increase of approximately 6% in the same period last year.

This continues to include approximately 20 coming from the 50 <unk> week.

Including the 50 <unk> week, we expect roughly 202 hundred 50 basis points of non comp sales growth for the full year.

At the midpoint non-GAAP EBT margin is expected to be approximately 10, 2% compared to our prior expectation of 11, 6%.

As a result of our Q2 performance and our latest views on gross margin for the back half. We now expect non-GAAP earnings per diluted share to be in the range of $11 50 to $12 30.

Despite moderating our expectations, we continue to expect improvements in gross margin for full year, which will meaningfully improve in the back half of the year as we anniversary clearance activity from the same period in 2022 and benefit from improving freight expenses.

Compared to our prior expectation of $1 90 to $13 80.

This now includes an expectation of higher shrink, which will reduce our full year gross margins by approximately 50 basis points compared to 2022 as well as our continued emphasis to keep our inventory vibrant and fresh.

This continues to include approximately 20 coming from the 50 <unk> week.

At the midpoint non-GAAP EBIT margin is expected to be approximately 10, 2% compared to our prior expectation of 11, 6%.

We also continue to expect SG&A expenses to deleverage for the full year, primarily due to the proactive investments in our growth strategy, which we expect will drive long term sales and profitability growth.

Specific to the back half at the midpoint of our guidance, we expect SG&A to deleverage slightly over 200 basis points versus the prior year.

This now includes an expectation of higher strength, which will reduce our full year gross margins by approximately 50 basis points compared to 2022 as well as our continued emphasis to keep our inventory vibrant and fresh.

We expect Preopening expenses will increase for full year with a year over year growth moderating in the back half.

Our earnings guidance is based on an effective tax rate of approximately 21% and approximately 87 million average diluted shares outstanding compared to our prior expectation of approximately 88 million average diluted shares outstanding.

Specific to the back half at the midpoint of our guidance, we expect SG&A to deleverage slightly over 200 basis points versus the prior year.

As part of the business optimization, we made the difficult decision to eliminate certain positions primarily at our customer support center for which we expect to incur approximately $20 million of severance expense in the third quarter.

We expect Preopening expenses will increase for full year with the year over year growth moderating in the back half.

These charges were excluded from today's non-GAAP outlook.

Related cost savings.

I expect it to be largely offset by strategic talent investment over the next 12 months.

While we have not committed to specific additional actions at this time, we currently expect to complete our business optimization plans during fiscal 2023, which may result in additional charges of $25 million to $50 million.

These potential actions were not contemplated as part of today's outlook and any related charges will be excluded from our results on a non-GAAP basis.

These charges were excluded from today's non-GAAP outlook.

In addition, based on our continued confidence in our core strategies, we are maintaining our expectation for net capital expenditure of between $550 million to $600 million for the year.

Related cost savings.

<unk> to be largely offset by strategic talent investment over the next 12 months.

This concludes our prepared comments. Thank you for your interest in Dick's Sporting goods.

Operator, you May now open the line for questions.

If you would like to ask a question. Please press star one on your telephone keypad and we ask that you limit yourself to one question and one follow up.

These potential actions were not contemplated as part of today's outlook and any related charges will be excluded from our results on a non-GAAP basis.

Your first question comes from the line of Simon Guseman from Morgan Stanley . Please go ahead. Your line is open.

In addition, based on our continued confidence in our core strategies, we are maintaining our expectation for net capital expenditure of between $550 million to $600 million for the year.

Good morning, It's Simeon Gutman. My first question is just to clarify the gross margin and merch margin decline in the quarter was a third shrink and then I think then the remainder would be decisive actions.

Sure.

This concludes our prepared comments. Thank you for your interest in Dick's Sporting goods.

Operator, you May now open the line for questions.

If that's correct can you quantify within the actions what percentage of it or what pressure was due to the outdoor category and how are the remaining categories looking.

If you would like to ask a question. Please press star one on your telephone keypad and we ask that you limit yourself to one question and one follow up.

Yes.

Your first question comes from the line of Simon Guseman from Morgan Stanley . Please go ahead. Your line is open.

Good morning, Tim and this is I'm sorry.

Yes, you characterized it right the largest driver of the decline as I called out in my prepared commentary was around the fact that we continue to be decisive.

And keeping our inventory clean outdoor was a perfect example of that so.

I'm not willing to discuss any further details about how big the outdoor was but the way to think about that is there is an outdoor peak that happens right around the mid part of Q2 and that was the purpose purposeful decision that we made to keep our.

If that's correct can you quantify within the actions what percentage of it or what pressure was due to the outdoor category and how are the remaining categories looking.

Yes.

Our inventory clean and be decisive about the outdoor category the biggest impact in terms of the surprise bar for Q2, primarily came from shrink.

Good morning, Tim and this is I'm.

Yes, you characterized it right the largest driver of the decline as I called out in my prepared commentary was around the fact that we continue to be decisive.

We thought we had adequately reserved for it however, the number of incidents and the organized retail com impact came in significantly higher than we anticipated and that impacted our Q2 results as well.

And keeping our inventory clean outdoor was a perfect example of that so I'm not willing to discuss any further details about how big the outdoor was but the way to think about that is there is an outdoor peak that happens right around the mid part of Q2 and that was the purpose focused bold decision that we made to keep our <unk>.

I wanted to add just a couple of things about the outdoor category. We had there was excess inventory in the marketplace.

And as Andrea said, there's a very short window in which to sell through that and so we were aggressive but it doesn't change our expectations on how on the outdoor category in general we are.

Inventory clean and be decisive about the outdoor category.

Biggest impact in terms of the surprise bar for Q2, primarily came from shrink.

We're very excited about reinventing the outdoor category and delivering a great consumer experience. This was a short term issue this past quarter.

We had thought we had adequately reserved for it however, the number of incidents and the organized retail com impact came in significantly higher than we anticipated and that impacted our Q2 results as well.

Okay and then maybe the follow up is you know last year. There was some markdown activity. This year theres, some I guess as well as what you'd call. It. So what actions excuse me do you take so that you prevent this from continually happening how do you. How do you think about that because I think it's a key part of keeping the gross margin sustainably higher.

I mean I want to add just a couple of things about the outdoor category. We had there was excess inventory in the marketplace.

And as Andrea said, there's a very short window in which to sell through that and so we were aggressive but it doesn't change our expectations on how on the outdoor category in general we are.

Than pre Covid levels.

Yes.

So last year. It is a very different situation from this year I just wanted to take you back to the spring receipts came in quite late last year and there was a ton of inventory in the marketplace and we acknowledged at the time and then did get a very heavy into our clearance activity. We dropped 600 basis points in margin at the end of last year.

We're very excited about reinventing the outdoor category and delivering a great consumer experience. This was a short term issue this past quarter.

Okay and then maybe the follow up is you know last year. There was some markdown activity. This year theres, some I guess as well as what you'd call. It. So what actions excuse me do you take so that you prevent this from continually happening how do you. How do you think about that because I think it is a key part of keeping the gross margin sustainably.

Importantly, this year, we are acting the way, we would to keep our inventory fresh and clean we're being surgical and aggressive and we do expect gross margin on a full year basis to increase over last year and to sequentially improve as we go through the back half of the year. So it's really important to understand.

Higher than pre Covid levels.

Yes, so last year. It is a very different situation from this year I just wanted to take you back to <unk>.

Spring receipts came in quite late last year, and there was a ton of inventory in the marketplace and we acknowledged at the time and then did get a very heavy into our clearance activity. We dropped 600 basis points in margin at the end of last year.

This is not a return to a promotional environment in any way shape or form this is us being surgical and keeping our inventory fresh and and we expect to grow gross margin in the back half and for the full year.

Thank you.

Yep.

Your next question comes from the line of Adrienne, Yes from Barclays. Please go ahead. Your line is open.

Good morning. Thank you very much for taking my question Lauren wanting to stay on the house and sports concept.

And the new prototype.

At this point I think it's helpful for us to get any kind of color on door economics, the maturations any for Walnut Creek payback, but any anything that you can share with us.

Not a return to a promotional environment in any way shape or form this is us being surgical and keeping our inventory fresh and and we expect to grow gross margin in the back half and for the full year.

More quantitatively in addition to any qualitative comments you want to share as well and then the update kind of sticking on the gross margin composition.

Thank you.

Yep.

Your next question comes from the line of Adrienne, Yes from Barclays. Please go ahead. Your line is open.

Understandably not more promotional but the sort of implies an inventory write down to get inventory very clean and fresh how should we think about shrink do you do it once a year twice a year and then are we going to accrue that in the next three quarters and then get a nice positive.

Good morning. Thank you very much for taking my question Lauren wanting to stay on the house and sports concept.

And the new prototype.

At this point I think it's helpful for us to get any kind of color on door economic the maturation.

Reversal of that in the fourth quarter of next year. Thank you so much.

For Walnut Creek payback, but any anything that you can share with us.

Thanks, Adrian starting with your first question on houses sport as we mentioned in our prepared remarks July picked up significantly in the quarter and that was because of back to school starting off really strong but also importantly, we had seven houses a sport that we opened and they are doing in <unk>.

More quantitatively in addition to any qualitative comments you want to share as well and then the update kind of sticking on the gross margin composition understandably not more promotional but the sort of implies an inventory write down to get inventory very clean and fresh how should.

Credibly well, it's it's easy now to compare them on the same square footage basis versus our combo stores. Because these were largely relocations of our remodels of combo stores and we are seeing significant growth. We are very very bullish on this concept.

We think about shrink do you do it once a year twice a year and then are we going to accrue that in the next three quarters and then get a nice positive.

Reversal of that in the fourth quarter next year. Thank you so much.

With the 50 K the dicks.

Classic 50, K redesign, it's inspired by houses sport and it's doing very very well. So I will turn it over to NAV deeps talk about margin, but I do want to emphasize that we have an incredible growth opportunity ahead of us with these two concepts, we feel so optimistic about about them and now with <unk>.

Well, it's it's easy now to compare them on the same square footage basis versus our combo stores. Because these were largely relocations of copper remodels of combo stores and we are seeing significant growth. We are very very bullish on this concept. Similarly.

We've got two more that we opened this quarter. So there's 12 opening total we can confidently say that they are doing incredibly well.

Yeah, maybe I'll.

Slide one more sentence to what Ron said, because she summed it up really well.

Similarly, with the 50 K the dicks.

Classic 50, K redesign, it's inspired by houses sport and it's doing very very well. So I I will turn it over to NAV jeeps talk about margin, but I do want to emphasize that we have an incredible growth opportunity ahead of us with these two concepts, we feel so optimistic about about them and now with.

Say that the the response that we're seeing to the houses for the opening not just from the athlete, but our brand partners as well as mall owners.

Is exceptionally positive. So we are really excited about the changes that we are bringing into the mall as well as the assortment that we are bringing directly in terms of on answering your question around the physical inventory counts will be.

We've got 10 with two more that we opened this quarter. So there's 12 open in total we can confidently say that they are doing incredibly well.

We conduct our physical inventory once a year, we do that right ahead of the back to school season and that's when.

The elevated levels of shrink.

Yeah, maybe I'll add one more sentence to what Ron said, because she summed it up really well I would say that the the response that we're seeing to the houses port opening not just from the athlete, but our brand partners as well as mall owners.

We actually quantified the impact of that in your book that.

Q2 results.

And like I said in my prepared remarks, we are assuming that this is this is a trend that is going to remain with us for a longer time. So.

<unk> is exceptionally positive. So we are really excited about the changes that we are bringing into the mall as well as the assortment that we are bringing to our athletes.

We haven't baked in and elevated levels of shrink expectations for the back half of this year that further pressured our outlook that we gave for 2023.

Turning to advanced answering your question around the physical inventory counts will be.

This debate and see vendors does reverse but right now we wanted to be conservative and we wanted to be prudent about the potential risk that may still be out there.

We conduct our physical inventory once a year, we do that right ahead of the back to school season and that's been.

The elevated levels of shrink.

Great. Thank you very much best of luck.

Actually quantified the impact of that and we booked that in our Q2 results.

Thank you.

Our next question comes from the line of Ravi <unk> from Bank of America. Please go ahead. Your line is open.

And like I said in my prepared remarks, we are assuming that this is this is a trend that is going to remain with us for a longer time. So yeah.

Oh, Hey, I'll save money deeper question is on the EBIT margin decline outlook for maybe the follow up call, we're going to have but maybe get a little more color on.

Do you have baked in and elevated levels of shrink expectations for the back half of this year that further pressured our outlook that we gave for 2023, we'll have this debate and see vendors does reverse but right now we wanted to be conservative and we wanted to be prudent about the potential risk that may still be out there.

What happened during the quarter has back to school gone as well as you expected.

Maybe more commentary on what categories worked and Didnt work there was a ticket decline in the second quarter was that trade down was that.

Great. Thank you very much best of luck.

Thank you.

Your next question comes from the line of Ravi Ohms from Bank of America. Please go ahead. Your line is open.

Mix, maybe maybe just sort of walk us through the different things that happened.

Yeah. Thanks, Robbie so starting with our total comp we had a 1.8% comp and a three 6% total sales.

Oh, Hey, I'll save money deeper questions on the EBIT margin decline outlook for maybe the follow up call, we're going to have but maybe get a little more color on what happened during the quarter as back to school gone as well as you expected.

It's really important to note that our consumer is doing very very well and I would point to a number of different proof points on that first of all we saw growth across every single income demographic, which I know is different from what youre hearing from other from other companies from our lowest income consumer to our higher income demographics, we saw growth across <unk>.

Maybe more commentary on what categories worked and Didnt work there was a ticket decline in the second quarter was that trade down was that.

Mix, maybe maybe just sort of walk us through the different things that happened.

Each one we did not see a trade down from best to better or better to good product, we saw transactions grow to 8%. So while there was some decline in average ticket overall, we had more athletes join our database come into our into our fold and they came more often and they spent.

Yeah. Thanks, Robbie so starting with our total comp we had a 1.8% comp and a three 6% total sales.

It's really important to note that our consumer is doing very very well and I would point to a number of different proof points on that first of all we saw growth across every single income demographic, which I know is different from what you're hearing from other from other companies from our lowest income consumer to our higher income demographics, we saw growth across.

More in total so it is really clear and important to note that our consumer is doing very well and I think what we used to consider us as a discretionary category has become something that's very important to them and something they're voting with their wallet that they want to maintain a healthy active lifestyle team sports running walking all of these things.

Each one we did not see a trade down from best to better.

Or better to good product, we saw transactions grow to 8%. So while there was some decline in average ticket overall, we had more athletes join our database come into our into our fold and they came more often and they spent more in total so it is really clear and important to <unk>.

So overall really really terrific consumer consumer for this for the quarter and for many quarters now yes Robyn.

In terms of what we are seeing in the month of July we couldn't be more excited about the results and the momentum that we're seeing at the tail end of a quarter, especially in the month of July two big reasons for that you called out very early back to school season that that started out in the tail off Q2. These we are very excited about the start of the season, so plenty of.

Note that our consumer is doing very well and I think what we used to consider us as a discretionary category has become something that's very important to them and something they're voting with their wallet that they want to maintain a healthy active lifestyle team sports running walking all of these things.

Season to go ahead of us.

Second aspect is we opened our seven also support locations in Q2 and actually in the month of July and the results and the momentum that we are seeing coming out of those locations as well as the two next generation <unk> stores that we opened we now have three of them.

So overall really really terrific consumer consumer for this for the quarter and for many quarters now yes Robyn.

On that in terms of what we are seeing in the month of July we couldnt be more excited about the results and the momentum that we have seen at the tail end of a quarter, especially in the month of July two big reasons for that you called out very early back to school season that that started out in the tail of Q2, we are very excited about the start of the season so plenty.

Collective momentum that we're seeing from the investments that we've made how well the assortment is resonating and how well the servicer is resonating we couldnt be more excited about and that's what you saw us reiterating our guidance for full year on a comp sales basis.

Of season to go ahead of US. The second aspect is we opened our seven also support locations in Q2 and actually in the month of July and the results and the momentum that we are seeing coming out of those locations as well as the two next generation <unk> stores that we opened we now have three of them are collective momentum that we have.

And just to clarify the inventory actions taken in the second quarter did they support.

Traffic today.

We have an impact on the ticket.

I would say no. It was a small targeted portion of the actions that we took we are happy with the fact that actually our inventory finished down 5% compared to last year, but those actions were highly targeted and like Lauren indicated was primarily focused around our outdoor category.

Seeing from the investments that we've made how well the assortment is resonating and how well the servicer is resonating we couldnt be more excited about and that's what you saw us reiterating our guidance for full year on a comp sales basis.

Got it thank you.

Thank you.

Your next question comes from the line of Kate Mcshane from Goldman Sachs. Please go ahead. Your line is open.

And just to clarify the inventory actions taken in the second quarter did they support.

The traffic today.

Hi, good morning, Thanks for taking our question I know, you flagged strength and footwear and team sports and in the quarter, but it sounds like apparel, maybe underperformed a little bit is that the case and did it have to do more without door was there something else there.

Have an impact on the ticket.

Thanks, Kate we saw tremendous growth in team sports and then footwear and Youre correct apparel did soften the one thing I want to point out about apparel is that the softening was at an industry level. We did continue to gain market share and importantly, our Nike apparel business was.

Got it thank you.

Thank you.

Your next question comes from the line of Kate Mcshane from Goldman Sachs. Please go ahead. Your line is open.

Hi, good morning, Thanks for taking our question I know you flagged strength and footwear and team sports in the quarter, but it sounds like apparel, maybe underperformed a little bit is that the case and did it have to do more without door was there something else there.

With extremely positive very strong and our flagship vertical brands were also very strong so.

We were very optimistic and bullish about apparel going forward.

And I wanted to ask a question about what.

What you guys flagged in the press release I think Ed.

And it is quite about growth opportunities being the best since you've gone public in the early two thousands.

Wondered if you could drill down a little bit more on what that statement beans, and what the opportunities are.

Yeah. So retail has increasingly become about innovation and about technology and the technological enablement of of that innovation and what we have ahead of us is completely revolutionizing retail so our houses sport concept, our new 50 K lean.

With extremely positive very strong and our flagship vertical brands were also very strong so.

We were very optimistic and bullish about apparel going forward.

And I wanted to ask a question about.

What you guys flagged in the press release I think Ed.

Into experiences Romanian service, we've got fantastic assortment, and we're investing to technologically enable all of our teammates and that's in every aspect of our business from from supply chain to E com to how we how we arm our teammates and run our stores there has not been an opportunity. This notable.

And it is quite about growth opportunities being the best since you've gone public in the early two thousands.

Wondered if you could drill down a little bit more on what that statement means and what the opportunities are.

I have to quote Ed because I wasn't here back in the early two thousands but since since we went public and we had so much growth ahead of us.

Thank you.

Your next question comes from the line of Chris Harvard from J P. Morgan. Please go ahead. Your line is open.

Thanks, Good morning, I just wanted to follow up on the on the cadence question. So you mentioned how sports. In addition to momentum. So can you maybe parse out a little bit more the comp cadence is how's the sports in the comp and maybe talk about what you saw over the season.

I have to quote Ed because I wasn't here back in the early two thousands but since since we went public and we had so much growth ahead of us.

Yeah, Chris.

We saw positive comps across all the months of our quarter and yes to answer your question <unk> is in the comp base. Because this is a relocation of an existing store or it's just a remodel of an existing location in the seven of the ones that were opened here in Q2, what remodel of our earlier field <unk> stream combo location.

Thank you.

Your next question comes from the line of Chris Harvard from J P. Morgan. Please go ahead. Your line is open.

Thanks, Good morning, I just wanted to follow up on the on the cadence question. So you mentioned how sports. In addition to momentum. So can you maybe parse out a little bit more the comp cadence is how sports in the comp and maybe talk about what you saw over the season.

Yeah.

Understood and then as it relates to the shrink I'm not sure. If this was touched on earlier, but it was a third of the impact to the gross margin for the merchandize margin in the second quarter was there an accrual in the first quarter just as we try to parse out what the what the back half actually looks like.

Yeah, Chris.

Given that you're expecting shrink to be a 50 basis point impact for the year.

Yes, Chris it's a good question, yes, there was an incremental accrual that we had at the end of Q1 as well however than physical inventory that store ahead of the back to school season, that's where the elevated level offering became clear to us and we could actually quantify that we had been seeing the number of incidents go up but quantification.

<unk>.

<unk> of that gets done as part of the physical inventory process. So yes, there was a headwind in Q1 and there was a catch up that you saw in Q2 and the full year expectations of 50 basis points. So you should be able to quantify based on the tail of Q1 Q2, as well as the back half expectations, which are elevated compared to where it would be.

Given that you are expecting shrink to be a 50 basis point impact for the year.

Finished in Q2.

Meaning that the impact in the second half is bigger than what you accrued for in the second quarter.

Yes, we are expecting some level of elevation level elevated levels of trying to continue just being conservative and being prudent about this potential risk that we continue to see.

<unk> of that gets done as part of the physical inventory process. So yes, there was a headwind in Q1 and there was a catch up that you saw in Q2 and the full year expectations of 50 basis points, you should be able to quantify based on the tail of Q1 Q2 as well as the back half expectations, which are elevated compared to where we.

Elevate.

Got it thank you so much.

Your next question comes from the line of John Kernan from TD Cowen. Please go ahead. Your line is open.

Yes. Good morning, Thanks for taking my question I have a couple here.

We finished in Q2.

Meaning that the impact in the second half is bigger than what you accrued for in the second quarter.

Loren just on the topic of shrink what do you think the long term solution to this is across the sector and <unk>.

Yes, we are expecting some level of elevation level of elevated levels of trying to continue just being conservative and being prudent about this potential risk that we continue to see.

Do you think you're at an appropriate level of reserves as we go into next year, given what you're currently seeing.

Yeah, John as you know shrink has an industry level problem, it's actually.

Elevate.

Got it thank you so much.

The problem for our entire country and it's something that we all need to work together on with with our partners with our trade organizations and with our government honestly.

Your next question comes from the line of John Kernan from TD Cowen. Please go ahead. Your line is open.

Yes. Good morning, Thanks for taking my question I have a couple here.

Continue to address the shrink issue if we've all seen the stories and it's it's it's quite alarming what's going on.

Good morning, just on the topic of shrink what do you think the long term solution to this is across the sector and.

So yes, we believe we have appropriately reserved at this point to <unk> point, we've been conservative as we go into the back half, but we are going to fight to the extent, we can to keep our teammates are our athletes and our stores safe and that's with increased security with a lot cop cameras and working with local law enforcement and with our industry partners.

Do you think you are at an appropriate level of reserves as we go into next year, given what Youre currently seeing.

Yeah, John as you know shrink has an industry level problem, it's actually.

The problem for our entire country and it's something that we all need to work together on with with our partners with our trade organizations and with our government honestly.

<unk>.

Understood. Thank you and then not be.

I think you said SG&A at the midpoint of the new guidance is 200 basis points of deleverage what's changed in your thinking around SG&A as you as we get into the back half of the year.

Continue to address the shrink issue, we've all seen the stories and it's it's it's quite alarming what's going on.

Got through Q2 with the comp guidance, obviously didn't change much so.

But there is it does feel like Theres more deleverage going on at this point. So maybe can you talk to that.

Yes, John I would say, there's no change in our thinking from an SG&A perspective. This is what we contemplated and actually quite frankly guided at the beginning of the year that we expected SG&A to deleverage and if you look at the back half deleverage of slightly over 200 basis points. It's.

<unk>.

Understood. Thank you and then I think you said SG&A at the mid point of the new guidance is 200 basis points of deleverage what's changed in your thinking around SG&A as you as we get into the back half of the year.

It's actually in line with the deleverage that you saw in the first half of this year. This goes back to what Loren talked about and what Ed has said about you have such a significant opportunity ahead of us in terms of these growth opportunities and the investment that is required and no different than what we guided in capex the investments there.

Got through Q2 with the comp guidance, obviously didn't change much so.

But there is it does feel like Theres more deleverage going on at this point. So maybe can you talk to that.

We are making in our business are driving the long term sales and profitability growth whether it is the technology talent whether it is the.

The talent within our stores and the service that we can provide as well as making prudent investments in game changer platform. Those are all of the examples and so coming back to your question our expectations continue to be in line with our previous guidance that this is going to be an area that we continue to invest.

<unk> I'll foreshadow and I know this will be a question. We expect 2020 forward growth in SG&A to moderate from this point.

We are making in our business are driving the long term sales and profitability growth whether it is the technology talent whether it is the.

By 2023 is right in line with our expectations.

Very helpful. Thank you.

Your next question comes from the line of Warren Cheng from Evercore ISI. Please go ahead. Your line is open.

The talent within our stores and the service that we can provide as well as making prudent investments in game changing platform. Those are all the examples and so coming back to your question our expectations continue to be in line with our previous guidance that this is going to be an area that we continue to invest.

Hey, good morning, I, just wanted to clarify the delta between how much you missed your two Q margin expectations and what you are baking in for second half headwinds incremental two three months ago can you just clarify the buckets that were unique to Q2 at first the ones that you are carrying forward.

I'll foreshadow I know this would be a question. We expect 2020 forward growth in SG&A to moderate from this point.

They have.

By 2023 is right in line with our expectations.

Yeah, why don't I would say that the buckets are pretty much the same versus our original expectations like Lauren called out the biggest surprise against our expectation was the elevated levels of shrink that became apparent to us when we physically in the inventory in the store and we have assumed I like like I said, we have assumed that this trend is not going to abate a bit.

Very helpful. Thank you.

Your next question comes from the line of Warren Cheng from Evercore ISI. Please go ahead. Your line is open.

Hey, good morning, I, just wanted to clarify the delta between how much you missed your two Q margin expectations and what you're baking in for second half headwinds incremental two three months ago can you just clarify the buckets that were unique to Q2 at first the ones that you are carrying forward.

Inventory results. So we have baked in some elevated level of shrink in our back half expectation and the second driver was the decisive action that we took to keep our inventory clean the examples I'll give up the outdoor and we have assumed some of this moderation in some of this activity in the back half expectation is.

As I have.

Yeah, why don't I would say that the buckets are pretty much the same versus our original expectations like Lauren called out the biggest surprise against our expectation was the elevated levels of shrink that became apparent to us when we physical in the inventory in the store and we have assumed I like like I said, we have assumed that this trend is not going to abate a bit.

Well to continue to keep our inventory fresh and well positioned because of the assortment that we have in our in our houses port location and Nextgen 50 K.

It's different and is elevated and we want to make sure. We are continuously keeping our inventory clean to be able to bring in the innovation and the right assortment to be able to fuel the growth in these locations.

The gold inventory results will be up we have baked in some elevated level of shrink in our back half expectation and the second driver was the decisive action that we took to keep our inventory clean. The example, you gave up the outdoor and we have assumed some of this moderation is some of this activity in the back half expectation is.

Thanks for my follow up I, just wanted to ask how you. If you step back from the stated margin beyond this year. We're obviously in a very uncharacteristically high promotional environment. The zero to two comp is clearly below what your typical leverage point would be for fixed cost.

Well to continue to keep our inventory fresh and well positioned because of the assortment that we have in our in our houses port location and our Nextgen 50, K is is different and is elevated and we want to make sure. We are continuously keeping our inventory clean to be able to bring in the innovation and the right assortment to be able to fuel the growth.

I mean with a shrink is here to stay but if you just kind of look at all these factors together how much pressure are you facing.

On margins this year on sort of these.

Temporary.

Three specific crushers and how should we think about normalized profitability of this business beyond this year.

In these locations.

Thanks, Doug.

Yes, maybe I'll begin with our confidence in the long term.

I just wanted to ask how you if you step back from the stated margin beyond this year. We're obviously in a very uncharacteristically high promotional environment. The zero to two comp is closed below what your typical leverage point would be for fixed cost.

We will break that we have he could not be more excited about the long term growth opportunities that we see from a top line sales perspective or from the bottom line profitability ingredients of our sales and profitability business absolutely remain intact, whether it is our ability to continue to gain share in 140, <unk> hundred 40 <unk>.

They shrink is here to stay but if you just kind of look at all these factors together.

Crusher are you facing.

On margins this year on sort of these.

Dollar fragmented industry. The work that we're doing with how's the sport and the next Gen 50 K R.

Temporary 2023 specific crushers and how should we think about normalized profitability of this business beyond this year.

Odd recipe order are the ingredients that we have called out around the margins continue to remain our product is extremely differentiated and very narrowly distributed and that is what gives us the confidence that we can continue to grow our margins quite frankly. This is the 50 basis points of headwind in shrink this yet.

Yes, maybe I'll begin with our confidence in the long term.

Guiding that on a full year basis, our total gross margin will be higher than 2022.

And from a product that's what I.

Coming back to your question, that's what is giving us the confidence that you can continue to grow the top line and the bottom line in the years to come.

<unk> a fragmented industry the work that we're doing with houses sport and the Nextgen 50 K R.

Thanks, a lot thanks, Lauren and good luck.

Our recipe order are the ingredients that we have called out around the margin continuing to remain our product is extremely differentiated and very narrowly distributed and that is what gives us the confidence that we can continue to grow our margins quite frankly. This is the 50 basis points of headwind in shrink this yet.

Thank you.

Your next question comes from the line of Michael Lasser from UBS. Please go ahead. Your line is open.

Good morning, Thanks, a lot for taking my question. So given that the shrink impact is going to be greater in the second half.

Guiding that on a full year basis, our total gross margin will be higher than 2022 and from a product. That's what you know.

It was in the first half and you don't take physical inventories.

Until what it sounds like around the middle of the year, we still anticipate that this issue of shrink is going to impact you into at least the first half.

Coming back to your question, that's what is giving us the confidence that you can continue to grow the topline and the bottom line in the years to come.

Thanks, a lot.

Of next year until you fully anniversary is that is that right.

Good luck.

Thank you.

Your next question comes from the line of Michael Lasser from UBS. Please go ahead. Your line is open.

Yes, Michael we are revisiting, our our physical inventory process based on the learnings that we have hard this year. So we will share more but I don't anticipate us doing one large inventory sounded like we did this year considering that the level of risk that we may be actually be counting our stores, a little bit more frequently or at least sampling.

Good morning, Thanks, a lot for taking my question. So given that the shrink impact is going to be greater in the second half than it was in the first half and you don't take physical inventories.

Until what it sounds like around the middle of the year, we should anticipate.

Stores to keep a close tab on this situation.

Okay.

This issue of shrink is going to impact you into at least the first half of next year until you are <unk>.

And then on the house of sport to two related questions here number one how much of the SG&A growth.

Fully anniversary is that is that right.

In the last couple of quarters and really for the full year that youre expecting is related to a greater fixed cost structure both in the store.

Yeah, Michael we are revisiting our our our physical inventory process based on the learnings that we have hired this year. So we will share more but I don't anticipate us doing one large inventory sounded like we did this year considering that the level of risk we may be actually be counting our stores, a little bit more frequently or at least sampling.

Well as whats necessary in the customer support and store support center too.

Continue to build out these bigger locations and if you look at the <unk>.

Our stores to keep a close tab on the situation.

<unk> and then Knoxville locations, which are I believe the first.

Okay.

And then on the.

The house of sport two related questions here number one how much of the SG&A growth.

Two have been opened in the longest in existence, how did the comp in the last couple of periods.

Last couple of quarters and really for the full year that youre expecting is related to <unk>.

These location compare to the comps overall for the for the chain.

Greater fixed cost structure.

Yeah, Michael Great question.

In the stores as well as whats necessary in the customer support and store support center to.

First of all let's put this in context, we only have 12 houses port locations. So when you think about the overall magnitude of impact on SG&A I would say its pretty insignificant, but the capabilities that we are building in at the corporate at the support center here in terms of technology.

Continue to build out these bigger locations and if you look at the Rochester, and then Knoxville locations, which are I believe the first.

And bringing in the right talent to be able to find the opportunities to grow into into 2024 and 2025, that's what the business optimization exercise was well it's about for US is finding the right talent resourcing appropriately and then finding the capabilities that need to be built so in terms of the absolute impact of on S. G.

Two have been opened in the longest in existence, how did the comp in the last couple of periods at those locations compared to the comps overall for the for the chain.

Yeah, Michael Great question.

First of all let's put this in context, we only have 12 houses port location. So when you think about the overall magnitude of impact on SG&A I would say its pretty insignificant, but the capabilities that we are building at the corporate at the support center here in terms of technology.

<unk> from the opening of houses port locations I would say, it's pretty small.

Announced to answer your question, we could not be more excited about the results that we continue to see out of our stores that have been open for some time now and we couldnt be more excited about the overall sales and profitability results from those locations as well.

And bringing in the right talent to be able to find the opportunities to grow into into 2024 and 2025, that's what the business optimization exercise was well is about for US is finding the right talent resourcing appropriately and then finding the capabilities that need to be built so in terms of the absolute impact of on <unk>.

Thank you and good luck.

Thank you.

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead. Your line is open.

Hi, good morning.

From the opening of houses port locations I would say, it's pretty small.

So my first question with regard to the <unk>.

Inventory adjustment mutual keurig in Q2, the outdoor products.

Just to understand this clue so.

Is that product the product that you basically worked out is that product now sold or we still anticipate selling that product over the balance of the year.

Thank you and good luck.

And then I guess the second question there was what.

Thank you.

We were talking about some weakness in outdoor for a while but what necessitated the write down now.

Your next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead. Your line is open.

Why do you do it now.

Hi, good morning.

Yeah. Thanks, Brian So the product we got aggressive with in Q2 is sold very well and we've moved through it such that we don't have to pack a majority of it away and we were we were heading towards a place where we were gonna have to do that so we're very very pleased with how it's sold through and moving on why go through the <unk>.

So my first question with regard to the.

Inventory adjustment neutral keurig in Q2, the outdoor products.

Just trying to understand this clue so.

Is that product the product that you basically wrote down is that product now sold or we still anticipate selling that product over the balance of the year.

Now, they're seven peak selling weeks in the outdoor category, obviously, the whole business as a full year business, but for the cabinet subcategories that we're talking about.

And then I guess the second question there was what.

We were talking about some weakness in outdoor for a while but what necessitated the write down now.

There are seven peak weeks and so you have to strike.

Why do you do it now.

Strike, while the iron is hot and that's exactly what we decided to do and again I am very happy with that decision because it does make our inventory cleaner were down 5% at the end of the year and we don't want to pack it away.

Okay.

My second question.

Moving on why go through the product now, they're seven peak selling weeks in the outdoor category, obviously, the whole business as a full year business, but for the cabinets the subcategories that we're talking about.

Maybe bigger picture, but you know so we're looking at the release today you have.

You have the inventory issue. We just discussed you have obviously the shrink issue because we've been discussing here, which was rather significant then you are also right sizing to some extent your labor force. So theres a lot here happening in Q2. So the question I have is I guess.

There are seven peak weeks and so you have to strike while the iron is hot and that's exactly what we decided to do.

In your comments you are still very upbeat about the longer term potential projects in fixed model, but you'll give it everything we're learning today.

And again I am very happy with that decision because it does make our inventory cleaner were down 5% at the end of the year and we don't have to pack it away.

<unk> taken a different or do you have a different perspective on the nearer term outlook predicts.

Okay.

The underlying health of this business.

My second question.

Maybe bigger picture, but you know as we're looking at the release today.

Absolutely not absolutely not no I would point to we are doubling our EBT margin or sales are 40% higher than they were pre pandemic. Our EPS is three times, what it was weak.

You have the inventory issue. We just discussed you have obviously the shrink issue because we've been discussing here, which was rather significant and then you've also bright sizing to some extent your labor force. So theres a lot here happening in Q2.

We have a shrink issue and we cleaned up some outdoor inventory we are completely confident in the future short term and long term of our business.

I have is I get that.

And your comments Youre still very upbeat about the longer term potential projects in fixed model, but you'll give it everything we're learning today.

Got it I appreciate the color. Thanks.

Yes.

Your next question comes from the line of Paul <unk> from Citi. Please go ahead. Your line is open.

We've taken a different or do you have a different perspective on the nearer term outlook predicts.

The underlying health of this business.

Hey, Thanks, guys, how much of the additional D or the opening of the house of sports stores move Com.

Absolutely not absolutely not no I would point to we are doubling our EBT margin or sales are 40% higher than they were pre pandemic. Our EPS is three times what it was.

In.

Into Q and related to that you also said there was a July pick up I think you said it picked up significantly so how much does it specifically acts as a driver of July and also you were just talking about the outdoor promotions really moving through quickly.

We have a shrink issue and we cleaned up some outdoor inventory we are completely confident in the future short term and long term of our business.

Got it I appreciate the color. Thanks.

Yep.

Your next question comes from the line of Paul <unk> from Citi. Please go ahead. Your line is open.

Much to that.

That drive July comps I think you said you were positive every month.

July picked up very significantly in comp is only up one and change. So just wanted to understand that a little bit better.

Hey, Thanks, guys, how much of the additional D or the opening of the house of sports stores move Com.

Then you do not adjust any of your second half sales assumptions from having less inventory than you thought as a result of that.

<unk>.

Into Q.

And related to that you also said there was a July pick up I think you said it picked up significantly.

So how much does it specifically because of the driver of July and also you were just talking about the outdoor promotions really moving through quickly how.

That inventory count.

Thanks, Paul I, just want to point out on houses for it while we're not going to get into exactly the the impact in July overall, it's really important to note that we had closed several stores and so net net despite how great. These stores did in July it was a drain on comps in the quarter.

How much did that.

That drive July comps I think you said you were positive every month, but youre such a lie picked up very significantly in comparable only up one and change. So just wanted to understand that a little bit better.

And that's important to note so really a tale of two cities, we close them. So that we could open them with great fanfare at which is exactly what we did with great Grand openings I'll turn it to an update for for the other questions. Yeah in terms of the impact in July like Laurent said had we not close these stores our comp in Q2.

And then you do not adjust any of your second half sales assumptions from having less inventory than you thought as a result of that.

That inventory count.

Thanks, Paul I, just want to point out on houses sport, while we're not going to get into exactly the the impact in July overall, it's really important to note that we had closed several stores and so net net despite how great. These stores did in July it was a drain on comps in the quarter.

<unk> been higher and we saw the acceleration in these stores Grand opened literally in the last few weeks of July so the overall impact in July and actually quite frankly in Q2 is very small and what what we are excited about the opportunity that we see now that these stores have grand opened and the acceleration that we're seeing and.

And that's important to note so really a tale of two cities, we closed them. So that we could open them with great fanfare at which is exactly what we did with great Grand openings I'll turn it to an update for the other questions. Yes in terms of the impact in July like Laurent said had we not close these stores our comp in Q2.

That's what gives us the excitement about the outlook that we have for the back half of this year.

In terms of did we adjust any sales assumptions, but the less inventory I would say now the inventory is pretty clean the 5% was actually in line with why we wanted to be at the end of the quarter. So the decisive actions that we took in Q2 actually positions us well to be able to bring in the innovation and bring in the right product for the back to school season.

Have been higher and we saw the acceleration in these stores Grand opened literally in the last few weeks of July so the overall impact in July and actually quite frankly in Q2 is very small and what what we are excited about the opportunity that we see now that these stores have grand opened and the acceleration that we're seeing and.

And as well as the holiday season that is up on us.

Right because you have a bigger shrink issue than you thought so you have less inventory to sell than you had previously anticipated.

That's what gives us the excitement about the outlook that we have for the back half of this year.

Well I shrink as it's unfortunate, but then you you make sure that youre not impacting the customer experience and you Brian the product will be able to have the right assortment and the availability, but then our stores.

In terms of did we adjust any sales assumptions, but the less inventory I would say no. The inventory is pretty clean the 5% was actually in line with why we wanted to be at the end of the quarter. So the decisive actions that we took in Q2 actually positions us well to be able to bring in their innovation and bring in the right product for the back to school season.

Alright, Thanks, good luck.

Thank you.

Your next question comes from the line of Mike Baker from D. A Davidson. Please go ahead. Your line is open.

As well as the holiday season that is up on us.

Hi, Thanks can I try to clarify.

Right because you have a bigger shrank issue than you thought you have less inventory to sell than you had previously anticipated.

Aurify.

The margin change in the guidance I think the EBT guidance is down about I think it's 140 basis points 50 of that is because of the higher shrink.

Well I shrink as it's unfortunate, but then you make sure that youre not impacting the customer experience and you Brian the product to be able to have the right assortment and the availability, but then our stores.

What's the rest of it is it the combination of the markdowns that you took in the second.

Second quarter as well as expected markdowns for the back half of the year because not deep just said that's going to linger a little bit are those factors that are leading to the lower margin. You said sales in the same in SG&A is the same.

Alright, Thanks, good luck.

Thank you.

Your next question comes from the line of Mike Baker from D. A Davidson. Please go ahead. Your line is open.

Yes.

All right the change besides shrink is coming from just be.

Hi, Thanks can I tried to clarify the.

Margin change in the guidance I think the EBT guidance is down about I think it's 140 basis points 50 of that is because of the higher shrink.

Flowing through the Q2 results as well as keeping.

We moderated our merchandize margin expectations in the back half in line with the actions that we discussed here in Q2, but I just wanted to make sure that we are keeping our inventory fresh and vibrant and want to make sure that we are positioning our growth opportunities and bringing the ability to bring in the innovation that we see in the marketplace are coming down in <unk>.

What's the rest of it is it the combination of the markdowns that you took in the second.

Second quarter as well as expected markdowns for the back half of the year because not deep just said that's going to linger a little bit or are those are the factors that are leading to the lower margin. You said sales in the same in SG&A is the same.

Loading some of the exciting brands that are available to us now.

Yes.

Okay that helps.

Youre right that the changed besides shrink is coming from just flowing through the Q2 results as well as keeping we moderated our merchandise margin expectations in the back half in line with the actions that we discussed here in Q2, but I just wanted to make sure that we are keeping our inventory fresh and <unk>.

Bigger picture question, you know the whole idea here is that the margins are structurally higher than they were pre pandemic and based on your guidance. They still will be just less so than you know.

Maybe some people thought.

Question is if the shrink issue does that mean that your margins longer term are just going to be less than you would have otherwise thought prior to doing these physical inventories.

Brand and want to make sure that we are positioning our growth opportunities and bringing the ability to bring the innovation that we see in the marketplace are coming down including some of the exciting brands that are available to us now.

In the second quarter, how much of that impact the longer term margin.

Yeah, I would say the answer is yes based on what we are able to see now and we can't foreshadow what the shrink would look like in future like Laurent said. This is not just a Dick's sporting goods challenge. This is a collective retail chairman. So I don't know if we can foreshadow what the collective resolve of the of the retail community.

Okay.

Yes.

Bigger picture question. The whole idea here is that the margins are structurally higher than they were pre pandemic and based on your guidance.

There will be just less so than you know.

Maybe some people had thought.

And quite.

Quite frankly and community at large would be but for now for the near term we do anticipate this.

As if this shrink issue does that mean that your margins longer term are just going to be less than you would have otherwise thought prior to doing these physical inventories.

Rest of World remained with US Yeah that said you point out and you're absolutely right that our margins are structurally higher than pre pandemic and so we are operating in a place where they are structurally improved significantly higher than they were pre pandemic and you're right. It's shrink does take that down slightly as the overall story does not change.

In the second quarter, how much of that impact the longer term margin.

<unk>.

So you'd always talked about the margin baseline and what you are supposed to be the baseline now clearly last year was not the baseline because of the shrink issue and other things I guess can I ask this is the 10, 1% EBT margin. This year, what do you think that's the new baseline.

And quite frankly and community at large would be but for now for the near term we do anticipate this will.

Yeah. So go ahead Duffy, yes, no absolutely we absolutely believe even if you look at the total margin for the full year, our total margins will actually be higher than 2022, so even with this headwind of shrink our total margins will be higher you called out that the SG&A as a as a plant.

<unk>.

So you'd always talked about.

Investment and we are expecting our SG&A growth to moderate into next year. So yeah, absolutely confident in the long term expectations on both sales and profitability basis.

The margins base filing in March it was supposed to be the baseline now clearly last year, it's not the base hard because of the strike issue and all the things I guess can I ask this is the 10, 1% EBT margin. This year do you think that's the new baseline.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Justin Kleber from Baird. Please go ahead. Your line is open.

Yeah. So go ahead, nothing yes, no absolutely we absolutely believe.

And if you look at the total margin for the full year, our total margins will actually be higher than 2022, so even with this headwind of shrink our total margins will be higher you called out that the SG&A as a as a planned investment and we're expecting our SG&A growth to moderate into next year. So yeah, absolutely confident in the long term.

Yes. Thank you everyone for taking the questions just two clarifications on shrink you mentioned, the 50 basis point headwind versus 'twenty, two I'm curious where that sits versus.

Versus your pre pandemic.

Most margin and shrink rate.

And then secondly, just on the SG&A deleverage of 200 basis points across the second half does that exclude excuse me, Doug, but does that exclude last year's onetime charge and <unk> <unk> related to field <unk> stream.

<unk> on both sales and profitability basis.

Okay. Thank you very much.

Thank you.

Yeah.

Your next question comes from the line of Justin Kleber from Baird. Please go ahead. Your line is open.

So Justin I'll start with the shrink of the.

It is significantly elevated buses.

Yes. Thank you everyone for taking the questions just two clarifications on shrink you mentioned, the 50 basis point headwind versus 'twenty, two I'm curious where that sits versus.

Versus the pre pandemic level the shrink.

I would say, we had kind of baseline closer to the pre pandemic level late last year. When we did the physical inventory of our stores, but this 50 basis points is a pretty significant acceleration from the pound.

Versus your pre pandemic.

Gross margin in shrink rate.

And then secondly, just on the SG&A deleverage of 200 basis points across the second half does that exclude excuse me Doug does that exclude last year's onetime charge and <unk> <unk> related to field <unk> stream.

The original levels, we used to be in.

In terms of the SG&A deleverage he does not have a onetime charge associated with field <unk> stream. So maybe you went up we can take this offline and clarify this madhu.

Yeah.

The SG&A deleverage as on an apples to apples basis like we have guided to be slightly over 200 basis points for the back half of this year.

So Justin I'll start with the shrink of the.

It is significantly elevated losses.

Both of the pre pandemic level the shrink.

I would say, we had kind of a baseline closer to the pre pandemic level late last year. When we did the physical inventory of our stores. So this 50 basis points is a pretty significant acceleration from the pound.

Got it thank you.

Your next question comes from the line of Joe Feldman from Telsey Advisory Group. Please go ahead. Your line is open.

The original levels, we used to be.

In terms of the SG&A deleverage he does not have a onetime charge associated with field <unk> stream. So maybe you went up we can take this offline and clarify this with you.

Yeah, Hey, guys. Thanks for taking my questions.

I wanted to ask on footwear.

Much of the strength that you're seeing in footwear is related to the category overall versus your.

The SG&A deleverage as on an apples to apples basis like we have guided to be slightly over 200 basis points for the back half of this year.

Assortment changes in the distribution changes you've made in your stores and possible I guess market share gains I'm assuming on your side.

Got it thank you.

Yeah, well the shrink in footwear is not related to the change in or what.

Your next question comes from the line of Joe Feldman from Telsey Advisor Group. Please go ahead. Your line is open.

We didn't get into guiding them by category level, but.

The strength the strength of the category the strength I'm, sorry, I misunderstood how much was related to.

Hey, guys. Thanks for taking my questions.

I wanted to ask on footwear.

Your changes versus the industry just yeah. Thanks.

How much of the strength that you're seeing in footwear is related to the category overall versus your.

Got it okay. Thank you, yes, so our growth in footwear is definitely related to the fact that the consumer is very interested in footwear, but more importantly, the fact that with our premium full service footwear decks.

Assortment changes in the distribution changes you've made in your stores and possible I guess market share gains I'm assuming on your side.

In our assortment changes and the access that we have to brands.

Yeah, well the shrink in footwear is not related to the change in or should.

We are meeting those consumer needs.

We didn't get into guiding them by category level, but.

Ever had before so its a combination for us of assortment changes overall experienced distribution changes all of that.

It doesn't mean the strength the strength of the category the strength I'm, sorry, I misunderstood how much was related to.

Your changes versus the industry just yeah. Thanks.

Got it. Thank you and then just.

Back to the inventory question again.

Yes, I know, it's you're in a very clean position as you described a few times, but you know.

Does that also mean youre in stock levels are where they should be broadly speaking and how should we think about inventory in the second half like will it end the year down a little bit year over year or do you think it comes back to kind of level with last year, how should we think about that the growth rate I guess of inventory for the back half. Thanks.

And our assortment changes and the access that we have two brands.

We are meeting those consumer needs better than we ever had before so its a combination for us of assortment changes overall experienced distribution changes all of that.

Okay.

Yeah, I don't know if I want a guide necessarily in terms of the inventory expectations for full year I would say that'd be a continued though it will all depend on the top line results as well, but I would say we are very happy that the results are.

Got it. Thank you and then just.

Back to the inventory question again.

Yes, I know you're in a very clean position as you described a few times, but you know.

Our inventory position currently is positioned for both the back to school season, and the holiday season, and happy with the fact that we finished down 5% on a year over year basis actually slightly higher on a per square footage basis. If you look at it in stock levels are quite good and that's partly what's made us start the <unk>.

Does that also mean youre in stock levels are where they should be broadly speaking and how should we think about inventory in the second half like will it end the year down a little bit year over year or do you think it comes back to kind of level with last year, how should we think about the growth rate I guess with inventory for the back half. Thanks.

The school season with such strength in July .

Okay.

Yeah, I don't know if I want to guide on necessarily in terms of the inventory expectations for full year I would say that'd be a continued though it'll all depend on the topline results as well, but I would say we are very happy that the results of their inventory position. Currently is positioned for both the back to school season, and the holiday season, and happy with the fact that.

Perfect. Thanks, guys. Good luck with the third quarter.

Thank you. Thank you.

Your final question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

Hey, Thanks, very much just one quick one for me on the guide how should we think about the phasing of comps in the back half of the year on a one year basis. The comparisons are relatively similar but on a multiyear.

We finished down 5% on a year over year basis actually slightly higher on a per square footage basis. If you look at it in stock levels are quite good and that's partly what's made us start the back to school season with such such strength in July .

Much harder in the third quarter and I'm trying to tie that in with your commentary about about back to school in July have been strong, which I presume would mean that August is also pretty healthy.

Perfect. Thanks, guys. Good luck with the third quarter.

Yes, Chuck I don't know if I would give any further detail than that but.

Thank you. Thank you.

Your final question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

Have collective basis, you can look at.

Our comps both in Q3 and Q4, they were pretty ratable and we are equally as optimistic about the back to school season, as we are about our holiday season, So really excited about the overall back half sales expectations.

Hey, Thanks, very much just one quick one from me on the guide how should we think about the phasing of comps in the back half of the year on a one year basis. The comparisons are relatively similar but on a multiyear they're much much harder in the third quarter and I'm trying to tie that in with your commentary about about back to school in July have been strong, which I presume would mean.

Okay.

Lauren Hobart, President and CEO . Please go ahead with final remarks.

August is also a pretty healthy.

Yes, Chuck I don't know if I would give any further detail than that but.

Well. Thank you everybody for your interest in Dick's Sporting goods, we will look forward to seeing you all at the next quarter call. Thank you.

Have collective basis, if you look at.

Our comps both in Q3 and Q4.

And this concludes today's conference call. Thank you for your participation and you may now disconnect.

Pretty ratable and we are equally as optimistic about the back to school season, as we are about our holiday season, So really excited about the overall back half sales expectations.

Okay.

Lauren Hobart, President and CEO . Please go ahead with final remarks.

Well. Thank you everybody for your interest in Dick's Sporting goods, we will look forward to seeing you all at the next quarter call. Thank you.

And this concludes today's conference call. Thank you for your participation and you may now disconnect.

And you all at the next quarter call. Thank you.

And this concludes today's call.

Q2 2023 DICK'S Sporting Goods Inc Earnings Call

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