Dick's Sporting Goods Inc

inventory and having that excitement, assortment and the newness that is resonating so well at the exporting goods with the gross margin expansion and the much margin expansion that you're seeing is going to be the first and foremost order of priority as we look to the building blocks for how can this business be accretive. And keep in mind, you know, we talked about as part of the cleaning out of the garage that there are other unproductive assets that We are looking into the store portfolio where there are some unprofitable stores. But the opportunity we are looking that that is not only deciding if the store should be closed, but actually the opportunity is the reverse to say if those stores had access to the right product and the right innovation and the newness, can those stores be turned around and made profitable? So we are looking into that. We are absolutely looking into some of the unproductive assets that won't be part of the core business going forward. But to your point, it starts with sales and margin. And in addition to that, we'll look into cleaning up the garage to position the business for a profitable growth into 2026, especially from the back-to-school season of next year. Got you.

And my follow-up question is one of the key debates on the combined enterprise story right now is how do you ring-sense the Cordix business in order to ensure that that the integration of Foot Locker does not become a distraction to slow the momentum of the core business. It does look like in the fourth quarter you are anticipating a significant slowdown, guiding to a flat to slightly positive comp for the core business. So, A, what is fostering that expectation? And, B, given you have owned this business for a matter of months now, give us a sense of, how you anticipate that they won't become a distraction such that the core business can accelerate into next year and drive some growth on top of the accretion that you're anticipating for Foot Locker. Sorry, there was a lot of words in that question.

I got it. Thank you, Michael. One of the absolute prerequisites for us to do this acquisition was exactly what you're saying. We needed to ring-fence the the Dix team, and Dix needs to stay completely focused on driving our growth and our strategic priorities. And that is exactly what we are doing. I mean, eight, 10 weeks in now, I'm even more confident that that is how we're doing it. We've set up the team at Foot Locker. Ed is very much spending time over there. The Dix team is fully focused on the Dix priorities, and we're going to continue to just keep the team's sharing learnings, but not remotely working, not distracting each other from what their core priorities are. When we look at Q4, you mentioned the deceleration. I want to be really clear about this. We just came off of a 5.7% comp, and we're up against a 6.4% comp last year. So the fact that you see our comp slightly moderating in Q4, we actually just raised the comp, and the high end of our previous guidance now is the low end of our guidance. So We are really bullish on the holiday. We are just balancing that with an appropriate level of caution, as we always do. We don't ever guide to the best possible outcome. But we are pumped and ready to go on the Dix side for Q4.

Thank you very much, and good luck. Thank you. Thanks.

Your next question comes from the line of Mike Baker with DA Davidson. Please go ahead.

Great. A couple to start on. First, a little bit more detail on that 11-store test. Maybe any initial results or pop-ins sales. I mean, is it just as simple as relaying a back wall, or there's got to be more to what you're doing? So if you could address that, please.

Sure. So we're not going to lay out kind of the results. As I said, they're early, but we're really very encouraged on them. And it's not just as simple as laying out the wall as we've kind of taken some of the older product out of those stores, put in some newer, fresher product that we were able to get our hands on. And one of the things we've also done is we're bringing the apparel business back to Foot Locker. They had really kind of walked away from the apparel business. And if you walk into these stores, you can see the apparel in there and the apparel is selling really quite well, too. So we think that there's an increase from a footwear standpoint, from an apparel standpoint going forward. And, you know, we'll we'll. We'll more than likely give you a little bit more color on this test at the end of the fourth quarter as we give guidance going into 2026. But there's a lot of just basic retail 101 that if Foot Locker gets back to that or when, as Foot Locker gets back to it, will have a meaningful impact on their business.

Great. Fair enough. One more follow-up, if I could. You're talking about a fresh start and getting everything cleared by the end of the fourth quarter. But back to school is the inflection point, not to put too much pressure on you or try to accelerate it, but why not spring as an example as the inflection point? Why should presumably the first half not be as strong?

I think that's a really good question. And the main reason for that is, is our merchandising philosophy and how we're buying the product. We didn't buy that. It was bought by the previous management team. And we think that there's some and we're going to talk to the brands about trying to plug some holes. But the third quarter of the back to school time frame is the first time we will have had complete control over the assortment going forward.

Makes perfect sense. Thank you for that answer.

Sure. Your next question comes from the line of Christopher Horvers with JP Morgan. Please go ahead.

Hi, this is Jolie Wasserman on for Chris. Just following up with Dick's ability to affect inventory orders for Foot Locker. So just confirming that you're saying that you won't be able to fully affect it until the start of the third quarter. But are you able to have any sort of impact, even if it's lighter in the first half? And just specifically on the percent of spring ordered since the acquisition, how much of that have you been able to order thus far? And how do you see that flowing into the fall?

We can have some impact on Q1 and Q2, probably hopefully a little bit more on Q2 than Q1, but we're working through that and working with the brands, and they are being as helpful as they can to try to get product to us that we need. But it's really going to be in that third quarter that you'll see the big difference that our team will have fully bought that product and merchandised that product.

That makes sense. And our follow-up question was just on gross margin with the third quarter. Just more broadly, if you could speak to what's going on there in terms of promotional environment. This is all for Cordix. Promotional environment, tariff costs, and the other inputs we discussed last quarter, like the game-changer business.

Yeah, so we reported today at 27 basis points in expansion and our gross margin. Keep in mind that that 27 basis points of gross margin expansion is on top of 70 basis points of expansion that we saw. In terms of the promotionality within the quarter, the promotionality, as you can imagine, the overall marketplace continues to remain dynamic. We participated in select promotions, which we always do during the important back-to-school season. The tariff impact was within that quarter, our results as well within the merchandising margin. But keep in mind, we still delivered a merchandising margin expansion of five basis points on top of almost about 60 basis points of impact, a positive impact last year. And there was a slight unfavorable impact from the mix. Like Lauren talked about, the licensed business performed really well, which is a fantastic growth opportunity, but has a slightly lower margin margin. So that we had a little bit of an unfavorable impact from the mix as well. And just to kind of run out that answer, I would say that if you look at it, we have guided that we expect our gross margin to expand on a full year basis. We expect gross margin to expand on the back half as well as within the fourth quarter. So overall, we feel great about the merchandising capability. the work that the Game Changer team is doing, and the Dex Media Network, those ingredients continue to remain in place that drive our confidence in the gross margin expansion for this year and into the future.

Thank you. Your next question comes from the line of Paul Lejeuze with Citi. Please go ahead.

Hey, guys. Can you talk about the $500 to $750 million in charges It might be coming. How much of that is cash versus just write off? And how many stores are actually being reviewed when you think about that range of 500 to 750 and any split that you can share the U.S. international or a banner?

Yeah, Paul, we'll share much more of the detailed assumptions. As you can imagine, we are 10 weeks into this acquisition. And like I said before, we are balancing the evaluation that we are doing with the opportunity that we see in terms of driving growth and profitability expansion on a store basis. So on stores, we'll share much more of the detailed plans during our Q4 call. In terms of the makeup of the 500 to 750, I would say there are three main buckets. The first and foremost, as Ed talked about, is the unproductive inventory, which makes up quite a decent chunk of that, that we will be addressing. The vast majority of that will be addressed here in Q4. That does include some of the stored portfolio evaluation. And then we are looking deeper into the assets that we have in place, some of the technology assets, some of the legacy contracts. that we will evaluate as part of the fourth quarter and clean that also up to position the business and the profitability of the business for 2026. In terms of the cash versus non-cash, I would say it would be a combination of both things. Inventory definitely would be cash, but if there are some existing assets on the balance sheet that we'll be cleaning up, those will obviously be non-cash. So we'll share more detailed assumptions behind all of this during our fourth quarter call.

TAB, Mark McIntyre, they say, and then just on the synergy number the one to 125 how much of that are you assuming. TAB, Mark McIntyre, You can capture in F 26 to get to those accretion numbers in it and curious if you're thinking you might be actually playing for a bigger number than that 100 to 125 longer term.

Yeah, well, the 100 to 125 million, I would say we have a there's a lot of work that has already been done. What we are working through, as you can imagine, is just conversations with with the brands, conversations with the non merchandising vendors. And those conversations are happening right now. So to have a better line of sight, call it 12 weeks from now as part of the fourth quarter. And in terms of looking for additional opportunity. you know us, we'll continue to focus on driving the top line and the bottom line results for the collective business now. So absolutely, that's a focus within the organization.

Thank you.

Your next question comes from the line of Christina Fernandez with Telsey Advisory Group. Please go ahead.

Good morning, I wanted to ask a question on the vision for the merchandising and full locker that business historically was heavy on basketball, sneaker culture and kits. So as you look at where there can be improvement, do you see that makes materially changing on the apparel side? Are you looking to lean more into private label or do you also see national brands playing a big role in their apparel expansion?

Yeah, Full Locker has always been steeped in basketball culture, and basketball will still be a very important part of that. The basketball construct that we see in the product coming forward from a basketball standpoint, we are really enthusiastic about across a couple of brands. And the apparel business, we do see the apparel business. The national brands is where they had kind of stepped away from, and leaned into their private brands, which we think the private brands certainly have a place there, but we feel that the national brands will have a meaningful increase in the apparel business in Foot Locker, which will help drive the AURs, and we think it'll be very profitable.

And then my second question is on Foot Locker also have been on a pretty significant remodel and refresh program. Have you continued with those full locker reimagined stores or have you paused that program and looking to make changes in that real estate strategy that they have been on?

I think the Foot Locker reimagined stores has been an interesting test. As we've kind of gone through there, there's parts of the reimagined store that are very good and other parts that need to be rethought. And we're in the process of rethinking those right now. So as an example, what they characterize as the Kick It Club and the The drop zone, when you first walk into a Foot Locker store in the middle of the store, we're going to take that out, reimagine that, give better sight lines to the balance of the store, and repurpose some of that area of the store, which was not very productive at all. It was more of a social place, and turn that into giving the apparel presentation more space and really focusing from an apparel standpoint, which we think will drive the sales even better than they are.

We have time for one more question, and that question comes from the line of Steve Forbes with Guggenheim. Please go ahead.

Good morning, Ed, Lauren, Nadib. Ed, I was curious maybe to just explore like any demographic differences we should be aware of as we think about the performance spread between the two businesses. Yeah, I think one of the thoughts out there is maybe more exposure to lower income, but I'd be curious to maybe just hear you summarize how we should think about the demographic exposure and how that sort of impacts your merchandising plans on a go forward basis here.

Well, we'll merchandise Foot Locker for Foot Locker, which is going to be a bit more basketball inspired, a bit more trend inspired, definitely more urban than the Dick's business. The Dick's business will be more sport led along with the lifestyle product. We think Dick's is really kind of at the center of sport and culture, and it's a more suburban concept. With that being said, All categories of consumer, if you will, are looking for product that is new, innovative, and different than what's out there in the marketplace right now. And Foot Locker didn't have that new and innovative product. As we get into the, you know, 2026, we'll start to have more of that product. And by the third quarter, we think we'll be fully invested in that newer product. the newer innovative product that the consumer across all income levels is looking for.

And then just a quick follow-up, Nadeep, maybe just so we're all on the same page here. There's a slightly negative adjusted EBIT for Foot Locker on a performance basis. That compares to the $118 million last year. I guess confirm that. And then is there any way to sort of think through how you sort of view, you know, like a normalized 4Q or a or how you would speak to just where that LTM adjusted EBITDA profile is for the business relative to the 395 that's in the presentation.

Yeah, so the comparison you're right, it's comparing to a normalized on a non-GAAP basis, the results that the Foot Locker posted in fourth quarter of last year. And keep in mind the connection point between the 1,000 or the 1,500 basis points of the margin decline versus the slightly negative operating income expectation for Foot Locker. is the part of the cleanup of the garage inventory. And that's the piece that we have threaded between the two, the numbers and the estimates that we gave out for the footlocker business.

Thank you.

And that concludes the question and answer session. I will now turn the conference back over to Lauren Hobart, President and Chief Executive Officer, for closing comments.

Okay, well, thank you all for your interest in the Dick story. We will see you next quarter. Have a wonderful Thanksgiving and a huge thank you to our entire teams of over 100,000 people around the globe. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.