Dick's Sporting Goods Inc

Good morning, everyone, and welcome to the Q1 2023 Dick's Sporting Goods Earnings Conference call. My name is Ellen, and I will be coordinating your call today. During the presentation, if you would like to register a question, please press star, followed by one on your telephone keypad, and you will join the question queue. I will now hand you over to your host, Nate Galt, Senior Director of Investor Relations. Nate, please go ahead.

Good morning, everyone. Thank you for joining us to discuss our first 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 on our Investor Relations website, located at investors.dix.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 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 second quarter 2023 earnings results on August 22nd, 2023. With that, I will now turn the call over to Lauren.

Thank you, Nate, and good morning, everyone. We are very pleased with our first quarter results, which demonstrate the continued strength of our business, resulting from our focused strategies and the strong execution of our long-term transformation. While consumers face macroeconomic uncertainties, our athletes have continued to prioritize sport and rely on Dick's to meet their needs. In fact, compared to the same period last year, more athletes purchased from us, they purchased more frequently, and they spent more each trip. Our strategies are working and resonating with our athletes. We remain enthusiastic about our business and our long-term growth plan. As the largest U.S. sporting goods retailer, we have robust runway for growth, and are well positioned to continue gaining share in a fragmented $140 billion industry. We will build on our 2022 results, which set a new bar for us in both sales and profitability, and provide an excellent foundation for growth this year and in the years ahead. Today, we are reaffirming our guidance for 2023. We continue to expect our comparable store sales to be in the range of flat to positive 2%. We also continue to expect our earnings per diluted share to be in the range of $12.90 to $13.80, up 11% at the midpoint versus 2022. Now to our results. We achieved Q1 sales of $2.84 billion with total sales growth of 5.3% and comp growth of 3.4% as our compelling spring assortment allowed us to meet robust demand and deliver a fantastic athlete experience. We continued to gain market share and saw increases in both transactions and average tickets, with strong transaction growth driving most of our comp gain. Our gross margin represented a meaningful improvement from Q4 of 2022, and we delivered strong double-digit EBT margin of 11.6%. Our earnings per diluted share were $3.40. an increase of 19% over the prior year's quarter on a non-GAAP basis. As we continue our transformational journey, our focus is centered around four key priorities. Innovating within the athlete experience, curating a compelling and differentiated product assortment, providing a best-in-class teammate experience, and driving deep engagement with the Dix brand. Innovating within our omni-channel athlete experience is at the heart of our growth strategies, and we continue to enhance and refine our highly engaging in-store service model to consistently support and inspire our athletes. The very best expression of this is Dick's House of Sports. House of Sports is redefining sports retail and over the long term will be a significant part of our growth story and the primary driver of our square footage growth. House of Sport is fostering very strong engagement with both our athletes and our brand partners, all while delivering much higher sales and profit. This year, we're on track to open nine House of Sport locations ahead of the back to school season and are beginning construction on more than 10 additional locations that will open throughout 2024. By the end of 2027, we continue to estimate that we will have between 75 to 100 House of Sport locations nationwide. Furthermore, we're excited to provide a completely redesigned and reimagined experience for our athletes through our next generation Dick store translated into our more traditional 50,000 square foot format. This prototype is a great representation of key athlete insights that we've gained from House of Sport, including premium experiences, an elevated service model, and enhanced visual expressions. Our first location opened last week in South Bend, Indiana. We are really excited about this opportunity and look forward to continuing to develop and learn from this new store format. 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. Recent enhancements are being well received by our athletes, including easier access to scorecard rewards, access to upcoming launches through a native sneaker release calendar and in-app reservation capabilities, as well as in-store mode in the Dix app, which offers product scanning, access to scorecard offers, and free shipping. Furthermore, our expansive database of our 150 million athletes is a tremendous asset that enables stronger, more personalized relationships with our athletes. We're also expanding our leadership position in the sports technology market through Game Changer, the premier video streaming, scoring, and statistics mobile platform for youth sports. During Q1, Game Changer saw continued robust revenue growth and massive engagement increases. Nearly 2 million games were covered by the platform, up 25% over the same period last year, with over a quarter of these games streamed live a year-over-year increase of over 100%. We'll continue innovating and investing in our game-changer business as we strengthen our relationships with our athletes on and off the field. We're also advancing new strategic concepts to connect with our athletes. Our value chain stores are enabling a great experience for our value-conscious athletes, while also serving as a critical component of our inventory optimization strategy. They allow us to move clearance product out of the DIC stores, opening up space for more full price selling. At the same time, they allow us to provide full size and color runs clearance product for our athletes. We've been really pleased with the athlete feedback as well as the margin recapture rates from these stores. Next, within merchandising, we're curating a compelling and differentiated product assortment. As discussed on prior calls, Footwear is a key pillar of our merchandising strategy. During the quarter, we converted nearly 20 additional stores to include premium full-service footwear, and by the end of the year, we'll take this experience to more than 75% of the Dick's chain. Our premium footwear decks have enabled us to expand our access to a wider assortment of differentiated product from key brand partners, as well as new and emerging brands. We're confident that our ability to provide an elevated footwear experience will continue to foster strong engagement with our athletes as well as drive sales growth and robust margins. We remain committed to developing and investing in our vertical brands, which strongly resonate with our athletes. Our brands offer something for every athlete, including our DSG brand, which continues to play a pivotal role in our opening price point assortment. We've also recently expanded our vertical brands into new product categories, including Versed and Calia golf apparel, as well as Calia fitness accessories. The athlete response has been fantastic, and we're confident in our ability to continue growing our vertical brand portfolio. Our third key priority is providing a best-in-class teammate experience. We strongly believe that highly engaged teammates are critical to a great athlete experience. Our culture is a key advantage, and we continue to be recognized by national media organizations and industry experts as a great place to work. At the same time, we're making investments in foundational elements of our in-store experience to enable greater efficiency and productivity, including a new point of sale system with a more seamless checkout process. We also recently implemented a new HR management system across our organization, which will unlock further efficiencies in our workforce management. We're confident these investments will amplify our team's ability to provide an enhanced level of service to our athletes while supporting our strong culture. Lastly, we're driving deep brand engagement. As we celebrate our company's 75th anniversary this year, we recently launched our Sports Change Lives campaign. Our objective with this work is to unequivocally communicate who we are and what we stand for. Dix believes in the positive impact that sports participation has on physical and mental health, academic achievement, and more broadly, the ability of sport to bring together and inspire communities and the next generation of athletes. The feedback has been very positive, and it's clear our message is resonating. We're excited to build on this energy as we launch the second iteration of this campaign early next month, focused on telling stories of how sports changed the lives of several well-known athletes. In addition, as part of our 75 for 75 Sports Matter grant program, our foundation will fund 75 under-resourced youth sports organizations, each with a $75,000 grant to keep kids playing. In closing, our strong Q1 performance is the direct result of our transformational journey, and we will continue to focus on athlete experience, differentiated product, teammate experience, and brand engagement as the pillars of growth for our business. While the macroeconomic environment remains uncertain, we remain confident in our business and the strategies that will deliver sales and earnings growth this year and into the future. Before concluding, I'd like to thank all of our teammates across our company for their outstanding efforts and continued commitment to our business. I'll now turn the call over to Navdeep to review our financial results and outlook in more detail.

Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our first quarter results. We are very pleased to report a consolidated sales increase of 5.3% to $2.84 billion. Comp store sales increased 3.4% driven by a 2.7% increase in transactions and a 0.7% increase in average ticket. Within our portfolio, our priority categories continue to perform very well. driven by our differentiated assortment across footwear, athletic apparel, and team sports. The roughly 200 basis points of non-comp sales growth this quarter was driven by sales at our temporary warehouse locations and from our newly acquired Moose Jaw business. Gross profit in the first quarter remained strong at $1.03 billion, or 36.19% of net sales. This represented a modest 28 basis point year over year decline and represented a meaningful improvement versus fourth quarter results of 2022. As planned, this decline was driven by lower merchandise margin of 136 basis points due to the normalization of the pricing activity relative to Q1 of 2022 when our inventory was quite lean. This was nearly all offset by lower supply chain costs, which leveraged 108 basis points. SG&A expenses were $693.9 million and deleveraged 162 basis points compared to last year. As expected, this deleverage was primarily driven by investments in our hourly wage rates, talent, and technology to support our growth strategy. In addition, nearly a quarter of this deleverage as a percentage of net sales was due to a net expense increase from the changes in the investment value of our deferred compensation plan, which is fully offset in other income. Interest expense was $15 million, a decrease of $10.6 million compared to the same period last year. This decrease was primarily due to the inducement charges related to the exchange of our convertible senior notes we incurred in the prior year, as well as interest expense savings this year from the retirement of these notes. Other income totals $17.7 million compared to the expense of $9 million in the same period last year. This $26.7 million increase in income was primarily driven by a $16.6 million increase in the interest income as a result of higher average interest rates on our cash and cash equivalents. Other income also included an expense reduction from changes in our deferred compensation plans, which fully offset the SG&A expense increase mentioned earlier. Driven by our strong sales and gross margin, along with lower interest expense and higher other income, EBT was $328.3 million, 11.55% of net sales. This compares to an EBT of $331.9 million, or 12.29% of net sales in 2022. Our Q1 tax rate was 7.2%, which was meaningfully lower than a typical quarterly tax rate driven by the favorable rate impact of the vesting of employee equity awards and exercises during the quarter. This favorably impacted our first quarter earnings by approximately 50 cents compared to the same period last year. In total, we delivered earnings per diluted share of $3.40. This compares to a non-GAAP earnings per diluted share of $2.85 last year, an increase of 19%. Now looking to our balance sheet, we ended Q1 with approximately $1.6 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter and inventory levels increased 7% compared to Q1 of last year. Our inventory is clean and well-positioned. Turning to our first quarter capital allocation, net capital expenditures were $61 million, and we paid $105 million in quarterly dividends. We also repurchased 418,000 shares of our stock for 57% at an average price of approximately $138. Furthermore, we retired the remaining $59 million of outstanding convertible senior notes and related bond hedges and warrants for 1.7 million shares of our common stock. As of April 18th, these notes have been fully retired. Now turning to our outlook for 2023. Assuming no material change in consumer spending behavior or in the macroeconomic environment, we are reaffirming our expectation for EPS and comp sales. We continue to expect earnings for diluted shares to be in the range of $12.90 to $13.80, which includes approximately 20 cents coming from the 53rd week. At the midpoint, this represents 11% increase versus 2022 or up 9% on a 52-week comparable basis. We are also maintaining our comparable store sales expectation between flat and plus 2% and continue to expect comps to be stronger in the first half due to the improved inventory availability compared to last year. At the midpoint, EBT margin is expected to be approximately 11.6%. We continue to expect improvement in gross margin, which will sequentially improve throughout the year. We also continue to expect SG&A expenses to deleverage, primarily due to the investment in our long-term growth strategies. Our earnings guidance is based on approximately 88 million average diluted shares outstanding and an effective tax rate of approximately 21% compared to a prior expectation of approximately 22%. In addition, we are maintaining our expectations for net capital expenditure to be between $500 million to $600 million for the year. Lastly, in March, we completed our acquisition of Moose Jaw and are thrilled to welcome their passionate and dedicated team into the exporting goods family. Together, we are excited to serve the outdoor community through the collective strength of Public Lands and Moose Jaw Brands. For just over 10 months in 2023, we expect Moose Jaw will add approximately $100 million in net sales. However, it will not impact our comp expectations. We have incorporated the impact of Moose Jaw into our full-year EPS outlook. In closing, we are very pleased with our Q1 results as we continue to implement our strategic initiatives to drive sales and profitable growth. This concludes our prepared comments. Thank you for your interest in exporting goods. Operator, you may now open the line for questions.

Operator, we're ready for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Please note we'll take one question and one follow-up. We'll pause for just a moment. Our first question today goes to Simeon Goodman of Morgan Stanley. Simeon, please go ahead. Your line is open.

My first question is, I think, Navdeep, in your prepared remarks, you said if the macro or the consumer stays the same, are you basing that on how the year started or how the current, I guess, how the most recent trends look, meaning has the consumer weakened at all? And that's what you're basing. And then as part of this question, if sales are weaker, I wanted to talk about GM, a gross margin, and what's different in how you're managing it, how you're looking at markdowns, and basically how GM behaves if sales are weaker.

Hi, Simeon. I'll start off the question and turn this on deep. But in terms of the macro environment, we are coming off of a Q1 that we're very, very excited about. We had a 3.4% comp, 5.3% total sales. And I think it's important to look at the breakdown of where those sales came from. We had really strong transaction growth, 2.7 points of transaction growth in there. We had ticket growth. We had more athletes purchasing from us, purchasing more frequently and spending more per trip. And I think very importantly, you have to look at each of our income demographics and we saw growth across every single income demographic from a lower income consumer to an upper income consumer. We did not see trade down from best to better or better to good. Overall, we really feel very good about how our consumer is holding up. So Navdeep's remarks just indicated, you know, barring some major macroeconomic change or major change in consumer, we're reaffirming our guidance, feeling really good about it. And I will turn to Navdeep now on the gross margin question.

Good morning, Simeon. On coming to the gross margin, I think we will first pivot to when you look at the diverse categories of the product that we carry in our stores and how well our assortment that we have in our stores is resonating with the athletes, we have reiterated our confidence that we believe that the much margin will continue to improve as we go through the year. And, you know, we don't intend to lead with promotions and we'll continue to watch the overall macro landscape very carefully. But we are confident in the outlook that we have provided for full year.

Okay. My quick follow-up is on the sporting goods category broadly. Thinking of reversion, we've talked a lot about some of the big ticket items, ones even that were COVID winners. Curious if there's any change in underlying unit consumption there or any other, some of the COVID winning categories and how they're behaving.

Yes, I mean, I think the story for us is really about our core categories. So we saw strong growth in footwear, in team sports, in apparel throughout the quarter. Some of those COVID categories you've talked about, maybe bikes or fitness, they are all, while they have retrenched, they're well above where they were in 2019, golf included. and we think they have long-term growth. So we've been dealing with the pandemic, quote-unquote, pandemic-surging categories for some time. Our core businesses are doing very well and driving our growth.

I'll just add to what Lauren said. It is exactly in these categories that we are continuing to gain share, and so that's what gives us the confidence as we look at the long-term expectation of our business.

Okay, thanks. Have a great spring and summer. Take care.

Thank you.

Our next question comes from Adrian Yee. Adrian, your line is now open. Please go ahead.

Great. Thank you very much. Congratulations on a great start to the year. Lauren, my question is on the restocking cycle within wholesale and sort of new innovation, new brands coming to the forefront. Just wondering, obviously inventory better in the first half. Is that suggestive that... You know, you've restocked kind of in categories that were under-inventoried and that perhaps the kind of outlook for the back half is a little bit more tempered. And then my second question is just, Nadeep, can you help us with the shaping of the comp and gross margin over the quarters? I'm assuming still, you know, nicely positive comp Q2, maybe flattish to negative in the back half, but with significant gross margin expansion. Thank you very much.

Yes. Thanks, Adrienne. You're right. If you go back a year in time, we were really out of stock. The whole industry was out of stock. Supply chain disruptions had created an issue for the whole category. And so what's wonderful now is the supply chain is mostly flowing. We're feeling like product is coming in. Our spring assortment looked terrific. Our summer assortment, which is set now, looks absolutely terrific. And so that is helping, obviously, drive some of our growth, our sales growth. I'll turn this to Navdeep, but you will see as we start to comp what was then the counteracting of the delayed inventory, the apparel that came in so late last year, you will see gross margin start to increase over the course of the year, and you'll see comps slightly declining. All of that just dealing with the base of the cycles that happened last year. Navdeep, what would you add?

Good morning, Adrian. I'll build on what Lauren said. You know, we expect the comps to be stronger in the first half of 2023. Like Lauren said, much better inventory availability and inventory position this year compared to last year. And just to remind you all that the second half comp in last year for us was plus 6%. So we are up against really strong comps from the back half as we look to the 2023. In terms of the merchandise margin, as we have reiterated, we expect much margin to continue to improve and build as we go into the year, also driven by the freight expenses leverage that we are expecting that we capitalize from a balance sheet perspective.

Okay. Thank you very much. And the stores do look great.

Thank you, Adrian. Thanks, Adrian.

Our next question comes from Robbie Ames from Bank of America. Robbie, your line is now open. Please go ahead.

Thanks. Good morning, guys. A couple of things. I was hoping you could maybe talk about the comp trend through the quarter and if you guys feel like you saw some weather impact and if you'd be kind enough to give us any sort of thoughts on quarter-to-date trends.

Hi, I'll answer the first part of your question. Overall, the entire quarter was strong. We had growth in every single month. February was a very strong month. The weather was more in our favor. But across the board, we didn't see a major weather impact when you look at the whole quarter in total. We're not going to comment on quarter-to-date trends just too soon than most of the quarters ahead of us.

Got it. I had to try, Lauren. And then my follow-up question is, The transactions strength, I think, stands out. Was that led by digital versus stores?

Actually, it's both, Robbie. We are seeing strong transaction growth in brick-and-mortar stores as well as online, something that we're very, very excited about.

That's great. And then the last one is a lot of people are talking about seeing, you know, this emerging resistance to, you know, big ticket stuff. Is that something you didn't see? And I'm kind of asking in the context of you guys continue to elevate the assortment. Is there any, is there not resistance to, you know, elevating the assortment or are you also, you know, augmenting with a lot of new introductions of lower price points?

Robbie, it's a great question. Consumers are opting to spend their money on whatever is important to them. For example, we have brought in the upper echelon of soccer cleats and other equipment in our stores, and people are absolutely voting with their pocketbooks for those items. At the same time, we've got opening price point. We always have entry-level product. We do not see a major resistance to big-ticket items. We just see that people are opting to invest in the things that are important to them. And health and wellness and team sports and being outside are part of those categories that are important to them.

That's great. Thanks so much.

Thank you.

Our next question comes from Warren Cheng from Evercore ISI. Warren, your line is now open. Please go ahead.

Thanks. Good morning. Just to follow up on Simeon's question, I know your base case outlook that you just outlined is for merch margins to continue to improve throughout the year. But as we think about just the possible scenarios for how this year may play out in a downside scenario where things get a lot more competitive, the environment gets a lot more competitive, more promotional over the summer or over the fall, how would you balance maintaining these merch margin gains you've achieved through COVID versus just keeping your foot on the gas and making sure that doesn't come at a cost of market share?

Yeah, Warren, I would again reiterate what we have consistently said. First of all, it all goes back to having a very differentiated assortment. The differentiated assortment that is not only narrowly distributed, but also is in really, really high demand when we look from the athlete. So it goes first and foremost to that. The second thing I would again reiterate is that we will continue to have a balanced approach to what is right for the athlete as well as what is right for the company. We have always made the decisions that way. And we continue to believe that we will be able to act like that as we have guided today.

I'll just add one thing to your comments, Navdeep. Our value chain and warehouse stores are a really great tool for us to clear out the product, be able to bring in fresh product to the Dick's store, but also make more product size runs, color runs available to the value conscious consumer. So we have a tool now that helps us manage through this significantly.

Thanks, that's really helpful. And then as my follow up, I just wanted to ask about the new store component to the algorithm over the next few years. So you've given us some parameters around House of Sport, but how should we think about public lands and some of the outdoor or clearance concepts that you've been working on?

Yeah, so as Lauren indicated in our prepared comments, our long term growth will continue to come out of the House of Sport model that we are building. We are really, really optimistic about The three stores that we have operating and our expectation to open about 20 stores in the next couple of years and 75 to 100 doors over the next five years. Public lands, I would say it's still something that we are continuing to refine our learnings. And especially with the Moose Jaw acquisition, we are looking back and saying, how best do we serve that athlete? It's a $40 billion industry, which is highly fragmented. So we see a long-term great growth opportunity there. We'll just continue to learn and test with the public land concept.

I would add one other thing, which is you didn't ask about Gulf Galaxy Performance Center, but we'll also be growing those concepts.

Great. Thanks, Lauren. Thanks, Nadeep. Nadeep, good luck.

Thank you. Thank you.

Our next question comes from Brian Nagel from Oppenheimer. Brian, your line is now open. Please go ahead.

Hi, good morning. Nice quarter. Congratulations. Thank you. Thank you. So my questions, and I guess I'm going to ask a couple questions basically just kind of level set here with what you're seeing versus maybe some of the noise that's been taking place within your broader space. So as you look at the sector now, how do you view inventories? And I know this is a follow-up to some of the prior questions, but there's inventories. It seems like Dix has managed them well. I mean, is there an inventory issue there? know beyond dicks that it's something you have to do you worry about or you think about and then secondly you know just with regard to sales you know obviously your sales perform quite well here but are you seeing any signals whatsoever you know of a kind of a moderation more that more discretionary type area um great questions brian so starting with inventories we are managing our inventory well our inventory is clean it's well positioned

And I think what's very important to realize is that our inventory and our products now are very narrowly distributed. So we have more of a moat against any industry level promotion that might have affected us in a time ago when there was just wide distribution of similar products. So we are not expecting to go into a major promotional cycle here. We're very proud and happy with the inventory levels that we have, and the assortment is a real asset here. In terms of discretionary spending, we talk a lot about this, and I just want to clarify how we're looking at it. Discretionary spending means different things to different people. And if you are a runner or you want to be outside or you want to play golf, or you have a kid and they play team sports, it's not really discretionary to need to replace that equipment. I mean, those are choices that feel more like a necessity, and they're choices that people invest in. And so we are optimistic going forward, and we're not seeing any moderation of what we would say discretionary spending that's impacting our business in a meaningful way.

Perfect. Well, I appreciate it, McCullough. Thank you.

Thank you.

Our next question comes from Kate McShane from Goldman Sachs. Kate, your line is now open. Please go ahead.

Hi, good morning. Thanks for taking our question. We wanted to ask about the going, going, gone strategy for the fiscal year. Could you remind us how many you plan to have open this year maybe versus last year? What component is pop up versus maybe more permanent And is there a way to quantify how this concept impacts your merch margins versus maybe being more promotional in the store?

Okay, let me take the second part of the question first. So, as we have said, we are really happy with the going, going, gone and the warehouse store strategy that we have had. We have perfected this work over the last three years now. What it has allowed us to do is to move more clearance inventory out of the Dick store into our going, going, going channel. What it allows us to do is one, get much better recovery rate on the clearance margin in these value chain store itself. In addition, you are able to replace that inventory that was in the Dick store with more regular price merchandise, which is bringing up the overall sales within the Dick store as well. In terms of the store count itself, going, going, gone, we anticipate having end of quarter, we had 15 stores and warehouse plus or the warehouse stores were 40. And we are converting 10 of them, 10 of the warehouse locations into going, going, gone as part of the confidence that we have in those locations as part of the plan that we have laid out for CapEx guidance for this year.

Yeah, Kate, I think the pop-up versus permanent is an ongoing part of the strategy because We are doing what we're calling try before we buy in terms of putting permanent locations. But we find we're able to flex these pop-up stores quickly and then shut them down if it's either the wrong location or we don't have a need for it. So the pop-up is a long-term part of the strategy.

Thank you. Thanks.

Our next question comes from Michael Lasser from UBS. Michael, your line is now open. Please go ahead.

Hi, this is Isabel Thompson. I'm from Michael Lasser. Thanks for taking our question. Maybe just to start, how much did the expansion of premium footwear, along with the attachments to those transactions, contribute to the comp in the first quarter? And then when does this become less of a driver to the top line?

Isabel, I think I heard your last part of your question, but the premium footwear decks are a key part of our strategy. We will continue, and by the end of the year, we'll have 75% open. We don't get into specifically by category or transactions attributed to the category, but I will say footwear was a very solid, very strong contributor to us over the course of the quarter. We think footwear is the engine that drives the train. Footwear is a really important part of of our entire assortment. And so we're not looking and looking at a time when footwear becomes less of a driver to top line sales. We just continue to try to elevate our assortment and our products for our athletes to come in.

OK, thank you. And then maybe as a follow up, we've heard from many other retailers about the weakness and discretionary categories. How have you seen this in the business, especially into May? And what levers can Dix pull in order to address a more value conscious consumer?

Yeah, we won't be commenting on May quarter to date results. And as I mentioned, we haven't seen significant change and we don't really consider many of our categories as discretionary as one might think because they are investments in living and health and wellness and active lifestyle. But we do have a lot of levers. We have a very broad portfolio. We have opening price point products. We have everything up to the enthusiast product. And we also have opening rec level products. So a value conscious consumer between our DIC stores and our value chain stores has a lot of options.

Thank you very much. Thank you.

Our next question comes from Mike Baker from DA Davidson. Mike, your line is now open. Please go ahead.

Okay. Thanks, guys. So a couple of margin-related questions real quick. One, the 10 basis points reduction in your EBT guidance, is that a function of Moose Jaw, which I presume is a lower margin than your core business, so sort of mixing that down? And then a related question, if EBT is 11.6. Can you help us with your expectation for interest expense and as importantly, maybe more importantly, interest income and other such that we can understand what a reasonable EBIT expectation is? Thank you.

Mike, let me try and take all three of them. So, yes, you are correct that the 10 basis points reduction in the EBT guidance for full is because of the Moose Jaw. It is slightly EBT diluted on a full year basis, and it'll add about $100 million of top line sales in 2023. In terms of the interest expense, we guided that the interest expense that the convert now out of our mix is going to be about $55 million on a full year basis. And interest income, I think so to me, that's a function of the cash on the balance sheet that we have and the interest rate that we are getting. I don't expect that to vary a lot by quarter by quarter. The only thing that I would call out is, in the prepared comments we shared, there was an offset that we had in this quarter from the deferred comp, and that would be the one-time thing that if you were modeling, you may want to take that off.

Right. So you implied that was about 40 basis points or about $11 million. So don't assume that going forward, but I guess we can do our own math on an interest interest income rate versus your cash and so that should get you your EBIT is what you're saying.

Yes.

Got it. Understood. Thank you.

Our next question comes from John Kernan from TD Cohen. John, your line is now open. Please go ahead.

Excellent. Thanks for taking my question. I wanted to go back to Nike and the relationship with Nike. The business scaled to $2.8 billion last year. I think it was up over 36% year over year. Can you talk to just the general level of allocations from Nike, inventory levels in the marketplace? I think there was some concerns. One of the footwear-focused peers is a bit over-inventoried at this point. So any comments on Nike and the relationship there and the integration of memberships? how that's trending. Thank you.

Thanks, John. Our Nike partnership, our Nike relationship is at an all-time high. We are having significant discussions sharing consumer insights, sharing insights on products, sharing co-branded marketing. We are working on all aspects of the business together. And as we continue to build premium full-service footwear decks, that does enhance our allocation and our ability to provide premium product across Nike and all the brands actually. So we do not feel we have an over inventory situation with that product at all. The Nike membership, we have over a million members. Again, when you think about sharing strategic insights and partners, it's been a fantastic way for us to get insights into the consumer and we continue to grow and also elevate the benefits of membership between the Zicks and the Nike consumers.

Understood. Thank you. Maybe one quick follow-up on SG&A and how to think about SG&A rates and dollars going forward, given the pivot back to square footage growth and some of the emerging concepts like House of Sport, public lands, and the warehouse. How do we think about the leverage point on SG&A and the investment in dollars year over year? It looked like SG&A was up in the teens on a dollar basis in Q1. Curious how we should think about that for the remainder of the year.

Yeah, John, as we have given in our prepared comments, we expect SG&A investments to deleverage for the full year because of the investments we are making in the hourly wage rates. As Lauren called out, the talent and technology improvements we are making, whether it is in the Game Changer platform or the investments we are making in our new POS system, those are all the investments that are within the SG&A component. In addition, we also have the SG&A increase on a year-over-year basis because of the Moose Jaw business. And in Q1, we had the deferred compensation unfavorable impact within Q1 as well. But we are, I think the general question that you are asking is we are going to be very disciplined and very targeted with the investments that we are making on these SG&A because we believe these are the right investments we need to make to drive the long-term growth opportunity that we have ahead of us.

Great. Thank you.

Our next question comes from Paul from City. Paul, your line is now open. Please go ahead.

Hey, thanks, guys. I'm curious if you could talk a little bit more about the footwear business and how footwear performed across your different price spectrums and if you saw anything change on that front as you move throughout the quarter. And then second, just curious about your transaction versus ticket assumptions for the rest of the year. build up to your comp. Thanks.

Thanks, Paul. We don't get into details about price points within a category, but across the board, footwear was a very strong performer for us, and we're very pleased with how that category is doing. Transactions and ticket were very strong, as you know, leading into our 3.4% comp. And we think we'll continue, according to our guidance plans, to meet that zero to 2% for the full year. But we don't break down specifically our guidance for transaction and ticket.

Got it. Can you just maybe talk about categories that underperformed during the quarter?

So we had strength in our three of our core categories. So footwear, team sports, and apparel. Those are three of our biggest categories. I wouldn't say anything, quote, unquote, underperformed, because we've really met our expectations. Golf is resetting somewhat, but still significantly over, excuse me, 2019 levels. But that was exactly what we expected, and we have a lot of confidence long-term in the golf business. So there wasn't anything that underperformed. All right.

Thanks. Good luck.

Our next question comes from Stephen Forbes from Guggenheim. Stephen, your line is now open. Please go ahead.

Good morning. This is Anders Meyer on for Stephen Forbes. Can you expand on the key offerings within the next generation store format and provide some high-level commentary on how you envision the RIC of this format compared to the House of Sports concept?

Yeah, the Next Generation 50K is a DICS format that's really inspired by our House of Sport experience. So it's got elevated visual presentation, elevated product assortment, elevated service experiences, things like an all-sport batting cage, different fitting room experience. And we're very, very excited about it. I'll turn it to Navdeep. So it's way too soon to start talking about the ROI of this, but we're very optimistic. Navdeep?

Yeah, I couldn't add. I agree with you, Lauren. We are just a few weeks into the grand opening of the store, so it's very early to talk about the ROIC. But I will just build upon what Lauren said. We couldn't be more excited to be able to take the key learnings from our housesports format and bring that into a 50K format. So we are very excited about the opportunity that is ahead of us, and we are continuing to monitor this investment closely.

Understood. Look forward to seeing the new store format next week. And as a follow-up, now that the convertible notes have retired, how are you thinking about the optimal levels of gross debt and cash on hand moving forward?

So we feel the debt level that we have, which is both long-term debt that we have on the balance sheet as the optimal level of the debt and the cash, we will continue to be conservative and have the right amount of cash and maintain also our investment grade rating. And then beyond that, we'll continue to look to invest aggressively into the business between the growth opportunities we have with House of Sport, the new 50K format, as well as other growth drivers that we have talked about.

Thank you.

Our next question comes from Chris Horvitz from JP Morgan. Chris, your line is now open. Please go ahead.

Thanks and good morning. One question on the merchandise margin side. Do you expect it to improve sequentially over the year? Do you start to lapse through some pretty big declines in the back half? Is it your expectation that merchandise margin will still be up on a year-over-year basis in 23?

Yes, Chris, this is Navdeep. Yes, our expectation is that our merchandise margin will be up both by the factor that you talked about, about the pricing action that we took in the second half of last year. We don't anticipate lapping those actions this year. we continue to believe that the freight expenses will be favorable compared to last year, which are capitalized and get released through the merge margin as well.

So then as a follow-up, this, you know, sort of the 36.2%, you know, gross margin in the first quarter here, there's always some seasonal variation based on the quarter. But as you think about the structural gross margin, you know, Does that, so two parts, does that reflect a normalization of promotion back to 2019 in your view? And then I guess how much doesn't it reflect the potential freight savings normalization?

So first of all, I think that we have moved past 2019. So we are looking much more on a year-over-year basis. And like you said, you know, We did see, and as expected, normalization of the pricing relative to last year when the inventory was really lean. And that's the reason we saw this 136 basis points of much margin decline. And the freight expenses and the supply chain expenses did leverage compared to last year. And that is driven by both the domestic freight, the fuel expenses, as well as the international freight being more favorable compared to last year. And we expect these trends to continue. as we go through the balance of the year.

I would just add one point. We're not talking about 2019, but I don't want it to be lost that our gross margin has structurally improved from a pre-pandemic world. And so this is not about a normalization of promotion, not at all. We have a different gross margin structure than we did before.

Right, so just to clarify on the freight side, I mean, you know, freight turns with the inventory generally, and so you have not experienced the full benefit of freight normalization inside 1Q. There should be more.

No. It will continue to build as we go through the balance of the year.

Got it. Thank you very much.

Thank you.

Our next question comes from Justin Kleber from Baird. Justin, your line is now open. Please go ahead.

Hey, good morning, everyone. Thank you for taking the question. Just on the second half of Revenue Outlook, I know that the temp locations are not included in comp, but how have you factored in the lack of the apparel clearance from last year into your guide? And just remind us if you experienced any traffic or sales benefit in the core Dix banner last year as you were addressing some of the apparel inventory overage. Thanks so much.

So, in terms of the guidance that we have provided, we are confident about the comp expectation that we have given here from zero to two percent. That includes the kind of the anticipated benefit that you are calling about the clearance action that we undertook last year. In terms of the Couldn't have been more pleased with the results that we have delivered here in Q1 with a plus 2.7 transaction growth and a 3.4% comp growth. You know, clearance was not a major factor in Q1. Our inventory was pretty clean at the end of 2022, and we continue to feel really optimistic about our inventory on hand at the end of Q1. Got it.

Let me just follow up quickly. Now, Deep, on the delta between revenue growth and comp, Do we expect that to remain somewhat similar throughout the balance of this year? Does it build as you start to add, obviously, new stores? How do we think about that, what looks like about a 1.9% gap in the first quarter, excluding the extra week, obviously, in 4Q?

Yeah, that's a good point. Yeah, so the 53rd week, so if you exclude the 53rd week, you would see that the moose drop benefit was only a partial quarter of the benefit we saw in Q1, so that will be, if you put it on a CAGR, sorry, total sales growth of $100 million, so that will sequentially build. And then the other piece, which is the warehouse locations, those will depend on the number of stores that we have in our base. Right now, we feel that the inventory is clean and well-positioned, so we'll continue to monitor that expectation as we go through the balance of the year.

Yeah, I would just add, Justin, that there is a spread. You called it out, almost 200 basis point spread. And given the fact that we have Moose Draw now, that we have value chain concepts that are going to be pop-up and not in the comp base, the fact that we're returning to square footage growth, the fact that we have Game Changer in there, like that spread is a meaningful amount and something to note going forward.

Got it. Thank you both, and best of luck.

Thank you.

Our next question comes from Chuck Grom from Gordon Haskett. Chuck, your line is now open. Please go ahead.

Hi, good morning. Nice results. I was wondering if there's any comment on regional performance throughout the quarter and if there was an impact from weather, particularly on businesses such as golf.

So we do not, we cannot attribute a weather impact on, we've tried, onto our Q1 business. So overall, there was no impact meaningful impact on the business. That said, week by week, category by category, certainly there was some weather, extreme weather in the quarter, but on the course of the quarter, over the course of the quarter, it balanced out. So nothing to report there.

Okay. And regional? Was there any difference across the country?

Only as the weather moved across the country. I mean, no. Everybody was impacted by weather in Q1 at different times.

Nothing significant, Chuck. If it had been, we would have called it out.

Okay. Okay. Fair enough. And then just like, you know, bigger picture, you call it the 25 million scorecard members, which is a great number, but you also call it 150 million total athletes in the database. I guess, how do you guys go about proactively trying to reach back to those, to those, you know, former customers and get them back into the loop?

That's a great question, Chuck. That is a major priority of our marketing group is, to get athletes who may have lapsed to come back into the fold. And we use personalization. We're very much focused on that particular area where we want to have people re-up. We also have kept our retention levels of the database high, even as we've brought on so many new athletes. I think we have 16 million new athletes in the last two years and a million this quarter. And our retention rates have stayed high. But we have an amazing database and an ability to go back and retarget and increasing personalization to be able to do that in a way that drives them to act.

Our next question comes from from West Bush Securities. Seth, your line is now open. Please go ahead.

Thanks a lot, and good morning. I have a gross margin follow-up question. Just in terms of occupancy cost and the impact on gross margin this quarter, and how are you thinking about occupancy cost dollars growth through the balance of the year?

Seth, this is Navdeep. The occupancy cost leveraged modestly, but, you know, nothing major to call out. And we, you know, occupancy cost is relatively fixed, so we will see that as a function of the top line sales expectation.

Thank you. And then to follow up on the supply chain costs, Hunter, you basically want to leverage this quarter. Did I hear you right that you expect that to improve, meaning more leverage for the balance of the year?

Yeah, we expect the overall freight and supply chain costs to continue to improve as we go through the year. And some of this cost gets capitalized into cost of goods sold. So it'll be between the two lines on a total gross profit basis, we expect our merge margin and our gross profit to continue to improve as we go through the year.

Okay, thank you.

Our next question comes from Daniel Inbre from Stevens. Daniel, your line is now open. Please go ahead.

Hey, good morning, everybody. Thanks for squeezing us in here. A lot of what I've been asked, but a couple of follow-ups on the top line. One within the core of DICS, stores. Lauren, you mentioned success with the footwear decks. I'm curious, we exit this year with 75% of those done. I guess, what is the next initiative or kind of what's the next growth driver you see within the store or place for investment to drive that next leg of comps in the core deck store?

Yeah, I think the thing to point out here is just our focus on new concepts and real estate growth. So between our house of sport, the 75 to 100, and the remodeling of our 50K and where we'll go with that. We constantly are prioritizing categories that are hot, and there's many across the entire chain. It's not just a footwear story at all. So, yeah, we're very excited about our growth going forward.

Okay, and then we dovetailed into the second one about unit growth. Now, deep in the slides, you talked about an opportunity to grow into outdoors. I think it's a $40 billion market. It sounds like a lot of the growth is going to be house of sport on the unit side, but should we think about as you've grown to outdoor, that's going to be more of a new unit driven growth algorithm, or is it going to be more adding outdoor categories to your existing boxes that you have? Thanks.

I think so. It'll be a combination of both. We see opportunities both within the Dick's Sporting Goods store itself to be able to continue to be relevant to the outdoor enthusiasts. But we feel between the Moose Jaw, which is an omni-channel business, as well as our public lands, which is also an omni-channel business, we see opportunity there to resonate even better with the outdoor athletes. So both those opportunities are great as we think about the long-term prospects in that outdoor category.

I appreciate all the color and best of luck.

Thank you. Thank you.

Thank you. That was our last question. I'll now hand back to Lauren Hobart, CEO and President, for any closing comments.

Thank you all for your interest in exporting goods, and we will see you at the end of next quarter. Thanks.

This now concludes today's call. Thank you for joining. You may now disconnect your lines.