DICK’S Sporting Goods, Inc. (NYSE:DKS) Q2 2023 Earnings Call Transcript

DICK’S Sporting Goods, Inc. (NYSE:DKS) Q2 2023 Earnings Call Transcript August 22, 2023

DICK’S Sporting Goods, Inc. misses on earnings expectations. Reported EPS is $2.82 EPS, expectations were $3.75.

Operator: Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the DICK’S Sporting Goods Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. Thank you. Nate Gilch, Senior Director of Investor Relations, you may begin your conference.

Nate Gilch: 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, and Navdeep Gupta, our Chief Financial Officer. A playback of today’s call will be archived in our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and cautionary statements made during this call.

We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find a 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. With that, I’ll now turn the call over to Lauren.

Lauren Hobart: Thank you, Nate, and good morning, everyone. We are pleased with our strong sales performance for the second quarter. Total sales increased 3.6% to $3.22 billion, and our comp sales increased 1.8%, driven by robust transaction growth. We continue to gain market share, demonstrating that athletes throughout the country are increasingly relying on DICK’S 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 House of Sport 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 and our revised 2023 EPS outlook.

While we delivered double-digit EBT 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 levels, was lower than originally anticipated. Two key factors impacted our second quarter gross margin relative to our original expectations. The first was the impact of higher inventory shrink, organized retail crime and theft in general, an increasingly serious issue impacting many retailers. Based on the results from our most 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 year. We are doing everything we can to address the problem and keep our stores, teammates, and athletes safe.

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. 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. Our revised 2023 non-GAAP EPS guidance of $11.50 to $12.30, 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. 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. To say our future is bright would be an understatement.

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. Following our tremendous success over the last several years, we are laser focused on capitalizing on our most significant growth opportunities. We’re doing extensive work to determine how best to optimize our business going forward to capture that growth. 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. Navdeep will share more details about our plans and the associated charges we anticipate related to this business optimization in his remarks.

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. First, DICK’S House of Sport is yielding powerful results. During Q2, we’re excited to have opened seven new locations. 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 they’re providing. 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. With 12 total House of Sport 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.

In addition to House of Sport, we’re excited to continue rolling out our next-generation DICK’S store, which completely revolutionizes our most typical 50,000 square foot format. This store is inspired by our House of Sport concept, with a similar elevated assortment and service model, premium experiences, and enhanced visual expressions. Building on the success of our first opening, we’ve now opened two additional locations, and overall sales have been exceptionally strong. This concept is driving great results, and we’re excited to open another eight locations by the end of 2023. The one-two punch of House of Sport and our new 50,000 square foot prototype is the future of our DICK’S stores. We’re also extremely enthusiastic about our long-term opportunity in golf, both at DICK’S and Golf Galaxy.

We’re excited to open seven new Golf Galaxy Performance Centers this year. Beyond this year, we’ll continue growing our golf Galaxy footprint with approximately 10 new locations planned for 2024. In combination with our stores, our digital experience remains an integral part of our success, and we continue to invest in technology to strengthen our athletes’ omnichannel experience. 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 DICK’S app and on dicks.com. 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 multi-year partnership between Game Changer and Major League Baseball.

In conjunction with the reinvention of our omnichannel experience, we continue to drive deep brand engagement. This past quarter, we launched the second iteration of our Sports Change Lives campaign. In partnership with Nike and Jordan, we’re spotlighting 10 iconic athletes, including Mike Trout, Alice Morgan, and Carmelo Anthony, who share their personal stories of how sports changed their lives. In addition to the athlete stories, we captured exclusive behind the scenes content that is available to our DICK’S and Nike connected members on the DICK’S app. We’ve seen extremely positive athlete sentiment, and to date, this work has achieved nearly 1.5 billion impressions in our media. 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.

I want to thank all of our teammates across the company for their outstanding efforts and continued commitment to DICK’S Sporting Goods. We have an incredible team here across every area of our business, and they are the most important drivers of our success. Before concluding, I want to share some final thoughts on DICK’S growth potential. The enthusiasm we have for our business, and the confidence we have in our long-term growth opportunities, has never been stronger. We’re driving positive comp sales and gaining significant share. Despite moderating our 2023 EBT expectations, we will still deliver double-digit EBT margin this year, which is approximately double our 2019 rate. And based on the powerful results of our new DICK’S concept, House of Sport, and our next-generation 50,000 square foot prototype, the long-term growth opportunity we have ahead of us is nothing short of extraordinary.

As Ed said, and I quote, we haven’t seen growth opportunities like these since we went public in the early 2000s. With that, I will turn the call over to Navdeep to share our financial results in more detail.

Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Let’s begin with a brief review of our second quarter results. We are pleased to report a consolidated sales increase of 3.6% to $3.22 billion as we continue to gain market share. Comp sales increased 1.8%, driven by a 2.8% increase in transactions, partially offset by a 1% decline in average ticket. The roughly 180 basis points of non-comp sales growth this quarter was driven by sales at our warehouse locations and Moosejaw. As Lauren said, our sales momentum built considerably in July as we saw strong start to the back-to-school season and reopened seven new House of Sport locations by converting previously closed combo stores. We are excited to report that these reopened stores are yielding tremendous results.

In terms of category performance, footwear and team sports did extremely well. In apparel, we continue to gain significant share and saw strength across key brands, including Nike and our flagship vertical brands. 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. This decline was driven by lower merchandise margin of 254 basis points. As Lauren discussed, we took decisive actions on excess product, particularly in the outdoor category, to keep our inventory well positioned. In addition, we experienced a meaningful headwind from higher-than-expected shrink, which represents a third of our merchandise margin decline. This was partially offset by lower supply chain cost, which leveraged 115 basis points.

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. This deleverage was planned and was driven by three key factors. First, we continue to invest in our hourly wage rate, talent, and technology, to create a better athlete experience, including elevating our service levels in store. These investments drove approximately 100 basis points of deleverage. Second, we made investments in marketing to support a highly successful opening of seven new House of Sport stores in this quarter, as well as the second major phase of our sports change live brand campaign, our most impactful campaign in the history. Our marketing investments that 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 Moosejaw acquisition. Reopening 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 House of Sport conversions, including advertising expense to support the opening. Interest expense was $14.4 million, a decrease of $11.1 million compared to the same period last year. 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.

Other income totaled $28.5 million compared to the expense of $7.4 million in the same period last year. This $35.9 million increase in income was driven by $14.9 million 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 expense reduction from changes in our deferred compensation plans, which fully offsets the SG&A expense increase I mentioned earlier. EBT was $325.9 million or 10.1% of net sales. This compares to an EBT of $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, we ended Q2 with approximately $1.9 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility.

Our quarter end inventory levels 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 repurchase 1.6 million shares of our common stock for $202.7 million at an average price of $129 .14. Thus far this year, we have repurchased a total of $260.4 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 that continued macro-economic uncertainties, including upcoming resumption of student loan repayments.

At the midpoint of this range implies our back half comp will be approximately flat, which is on top of a comp increase of approximately 6% in the same period last year. Including the 53rd week, we expect roughly 250 basis points of non-comp sales growth for the full year. 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 compared to our prior expectation of $12.90 to $13.80. This continues to include approximately $0.20 coming from the 53rd week. At the midpoint, non-GAAP EBT margin is expected to be approximately 10.2%, compared to our prior expectation of 11.6%. 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.

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 a continued emphasis to keep our inventory vibrant and fresh. 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. We expect pre-opening 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 a prior expectation of approximately 88 million average diluted shares outstanding.

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. These charges were excluded from today’s non-GAAP outlook. Related cost savings are expected 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.

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. This concludes our prepared comments. Thank you for your interest in DICK’S Sporting Goods. Operator, you may now open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead. Your line is open.

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

Navdeep Gupta: Good morning, Simeon. This is Navdeep. So, 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 in 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 purposeful decision that we made to keep our inventory clean and be decisive about the outdoor category. The biggest impact in terms of the surprise for Q2 primarily came from shrink. We thought we had adequately reserved for it. However, the number of incidents and the organized retail crime impact came in significantly higher than we anticipated, and that impacted our Q2 results as well.

Lauren Hobart: Simeon, I want to add just a couple of things about the outdoor category. We had – there was excess inventory in the marketplace. And as Navdeep 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 the outdoor category in general. We are very excited about reinventing the outdoor category and delivering a great consumer experience. This was a short-term issue this past quarter.

Simeon Gutman: Okay. And then maybe the follow-up is, last year there was some markdown activity. This year there’s some I guess as well, is what you’d call it. So, what actions do you take so that you prevent this from continually happening? How do you think about that? Because I think it’s a key part of keeping the gross margin sustainably higher than pre-COVID levels.

Lauren Hobart: Yes. So, last year is a very different situation from this year. I just want to take you back to, 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 very heavy into our clearance activity. We dropped 600 basis points in margin at the end of last year. 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 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 we expect to grow gross margin in the back half and for the full year.

Simeon Gutman: Thank you.

Operator: Your next question comes from the line of Adrienne Yih from Barclays. Please go ahead. Your line is open.

Adrienne Yih: Good morning. Thank you very much for taking my question. Lauren, wanting to stay on the House of Sports concept and the new prototype. At this point, I think it’s helpful for us to get any kind of color on store economics, the maturation, any four-wall metric payback, but anything that you can share with us more quantitatively in addition to any qualitative comments you want to share as well. And then Navdeep, kind of sticking on the gross margin composition, understandably not more promotional, but this 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? Do you do it twice a year? And then are we going to accrue that for the next three quarters and then get a nice positive reversal of that in the fourth quarter of next year? Thank you so much.

Lauren Hobart: Thanks, Adrienne. Starting with your first question on House of 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 of Sport that we opened and they are doing incredibly well. It’s easy now to compare them on the same square footage basis versus our combo stores because these were largely relocations – remodels of combo stores, and we are seeing significant growth. We are very, very bullish on this concept. Similarly, with the 50k, the DICK’S classic 50k redesign, it’s inspired by House of Sport, and it’s doing very, very well. So, I will turn it over to Navdeep to 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 them. And now we’ve got two more that we opened this quarter, so there’s 12 open in total, we can confidently say that they are doing incredibly well.

Navdeep Gupta: Yes, Adrienne, maybe I’ll add one more sentence to what Lauren said because she summed it up really well. I would say that the response that we are seeing to the House of Sport opening, not just from the athlete, but our brand partners as well as small owners is exceptionally positive. So, we are really excited about the changes that we are bringing to the mall as well as the assortment that we are bringing to our athlete. In terms of answering your question around the physical inventory counts, 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, we actually quantify the impact of that and we booked that in our Q2 results.