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.

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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.

And like I said in my prepared remarks, we are assuming that this is a trend that is going to remain with us for a longer time. So, we have baked in an elevated level of shrink expectations for the back half of this year that further pressured our outlook that we gave for 2023. We’ll have to wait and see when does this reverse, but right now we wanted to be conservative and we wanted to be prudent about the potential risk that may still be out there.

Adrienne Yih: Great. Thank you very much. Best of luck.

Operator: Your next question comes from the line of Robby Ohmes from Bank of America. Please go ahead. Your line is open.

Robby Ohmes: Oh, hey, I’ll save my deeper questions on the EBIT margin decline outlook for maybe the follow-up call we’re going to have, but maybe get a little more color on what happened during the core. Has back-to-school gone as well as you expected? Maybe more commentary on what categories worked and didn’t work. There was a ticket decline in the second quarter. Was that trade-down? Was that mix? Maybe just sort of walk us through the different things that happened.

Lauren Hobart: Yep. Thanks, Robby. So, starting with our total comp, we had a 1.8% comp and a 3.6% total sales. It’s really important to note that our consumer is doing very, very well. And I would point to a number of different proof points on that. First of all, we saw growth across every single income demographic, which I know is different from what you’re hearing from other companies. From our lowest income consumer to our higher income demographics, we saw growth across each one. We did not see a trade-down from best to better or better to good product. We saw transactions grow 2.8%. So, while there was some decline in average ticket, overall we had more athletes join our database, come into our fold, and they came more often and they spent more in total.

So, it is really clear and important to note that our consumer is doing very well. And I think what we used to consider is as the discretionary category has become something that’s very important to them and something they’re voting with their wallet that they want to maintain a healthy, active lifestyle, team sports, running, walking, all of these things. So, overall, really, really terrific consumer for the quarter and for many quarters now.

Navdeep Gupta: Yes, Robby, maybe I’ll build on that. In terms of what we are seeing in the month of July, we couldn’t be more excited about the results and the momentum that we are seeing at the tail end of our quarter, especially in the month of July. Two big reasons for that. You called out very early back-to-school season that started out in the tail of Q2. We are very excited about the start of the season. Still plenty of season to go ahead of us. The second aspect is we opened our seven House of Sport locations in Q2, and actually in the month of July. And the results and the momentum that we are seeing coming out of those locations, as well as the two next-generation 50k stores that we opened, we now have three of them, the collective momentum that we are seeing from the investment that we have made, how well the assortment is resonating, and how well the servicer is resonating, we couldn’t be more excited about.

And that’s what you saw us reiterating our guidance for full-year on a comp sales basis.

Robby Ohmes: And just to clarify, the inventory actions taken in the second quarter, did they support the traffic? Did they have an impact on the ticket?

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

Robby Ohmes: Got it. Thank you.

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

Kate McShane: Hi, good morning. Thanks for taking our question. I know you flagged strength in footwear and team sports in the quarter, but sounds like apparel maybe underperformed a little bit. Is that the case and did it have to do more with outdoor? Was there something else there?

Lauren Hobart: Thanks, Kate. We saw tremendous growth in team sports and in footwear, and you’re correct, apparel did soften. The one thing I want to point out about apparel is that the softening was at an industry level. We did continue to gain market share, and importantly, our Nike apparel business was extremely positive, very strong, and our flagship vertical brands were also very strong. So, we are very optimistic and bullish about apparel going forward.

Kate McShane: And I wanted to ask a question about what you guys flagged in the press release. I think Ed said in his quote about growth opportunities being the best since you’ve gone public in the early 2000s. But just wondered if you could drill down a little bit more on what that statement means and what the opportunities are.

Lauren Hobart: Yes, so retail has increasingly become about innovation and about technology and the technological enablement of that innovation. And what we have ahead of us is completely revolutionizing retail. So, our House of Sport concept, our new 50k, we’re leaning into experiences. We’re leaning into service. We’ve got fantastic assortment, and we’re investing to technologically enable all of our teammates, and that’s in every aspect of our business, from supply chain to e-comm to how we arm our teammates and run our stores. There has not been an opportunity this notable. I have to quote Ed because I wasn’t here back in the early 2000s, but since we went public and we had so much growth ahead of us.

Kate McShane: Thank you.

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

Chris Horvers: Thanks. Good morning. Just wanted to follow up on the cadence question. So, you mentioned House of Sports in addition to momentum. So, can you maybe parse down a little bit more the comp cadence. Is House of Sports in the comp and maybe talk about what you saw over the season.

Navdeep Gupta: Yes, Chris, we saw positive comps across all the months of our quarter. And yes, to answer your question, House of Sport is in the comp base because this is a relocation of an existing store, or it’s just a remodel of an existing location. And the seven of the ones that were opened here in Q2 were a remodel of our earlier Field & Stream combo locations.

Chris Horvers: Understood. And then as it relates to the shrink, I’m not sure if this was touched on earlier, but it was a third of the impact to the gross margin or the merchandise margin in the second quarter. Was there an accrual in the first quarter? Just as we try to parse out what the back half actually looks like, given that you’re expecting strength to be a 50-basis point impact for the year?

Navdeep Gupta: Yes, no, Chris, it’s a good question. Yes, there was an incremental accrual that we had at the end of Q1 as well. However, when the physical inventoried our store ahead of the back-to-school season, that’s where the elevated level off shrink became clear to us, and we could actually quantify that. We had been seeing the number of incidents go up, but quantification of that gets done as part of the physical inventory process. So, yes, there was a headwind in Q1 and there was a catch up that you saw in Q2 and the full-year expectations of 50 basis points, you should be able to quantify based on the tail of Q1, Q2, as well as the back half expectations, which are elevated compared to where we finished in Q2.

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

Navdeep Gupta: Yes, we are expecting some level of elevated levels of shrink to continue, just being conservative and being prudent about this potential risk that we continue to see elevate.

Chris Horvers: Got it. Thank you so much.

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

John Kernan: Yes, good morning. Thanks for taking my question. I have a couple here. Lauren, just on the topic of shrink, what do you think the long-term solution to this is across the sector, and do you think you’re at an appropriate level of reserves as we go into next year, given what you’re currently seeing?

Lauren Hobart: Yes, John, as you know, shrink is an industry level problem. It’s actually – it’s a problem for our entire country, and it’s something that we all need to work together on with our partners, with our trade organizations, and with our government honestly to continue to address the shrink issue. We’ve all seen the stories and it’s quite alarming what’s going on. So, yes, we believe we have appropriately reserved at this point. To Navdeep’s point, we’ve been conservative as we go into the back half, but we are going to fight to the extent we can to keep our teammates, our athletes, and our stores safe, and that’s with increased security, with lockup cameras and working with local law enforcement and with our industry partners.

John Kernan: Understood. Thank you. And then, Navdeep, I think you said SG&A at the midpoint of the new guidance is 200 basis points of deleverage. What’s changed in your thinking around SG&A as we get into the back half of the year and as you got through Q2? The comp guidance obviously didn’t change much so, but there is – it does feel like there’s more deleverage going on at this point. So, maybe can you talk to that?

Navdeep Gupta: Yes, John, I would say there’s no change in our thinking from an SG&A perspective. This is what we contemplated and actually quite frankly, guided at the beginning of the year, that we expected SG&A to deleverage. And if you look at the back half deleverage of slightly over 200 basis points, it’s actually in line with the deleverage that you saw in the first half of this year. This goes back to what Lauren talked about and what Ed has said about. We have such a significant opportunity ahead of us in terms of these growth opportunities and the investment that is required. And no different than what we guided in CapEx. The investments that we are making in our business are for driving the long-term sales and profitability growth, whether it is the technology talent, whether it is the talent within our stores and the service that we can provide, as well as making prudent investments in Game Changer platform.

Those are all the examples. And so, coming back to your question, our expectations continue to be in line with our previous guidance, that this is going to be an area where we’ll continue to invest. I’ll foreshadow and I know this would be a question, we expect our 2024 growth in SG&A to moderate from this point, but 2023 is right in line with our expectations.

John Kernan: Very helpful. Thank you.

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

Warren Cheng: Hey, good morning. I just wanted to clarify the delta between how much you missed your 2Q margin expectations and what you’re baking in for second half headwinds incremental to three months ago. Can you just clarify the buckets that were unique to 2Q versus the ones that you’re carrying forward into the second half?

Navdeep Gupta: Yes, Warren, I would say that the buckets are pretty much the same versus our original expectations. Like Lauren called out, the biggest surprise against our expectation was the elevated levels of shrink that became apparent to us when we physically inventoried the store. And we have assumed – like I said, we have assumed that this trend is not going to update here with the physical inventory results. So, we have baked in some elevated level of shrink in our back half expectation. And the second driver was the decisive action that we took to keep our inventory clean. The examples we gave of the outdoor, and we have assumed some of this moderation, some of this activity in the back half expectation as well to continue to keep our inventory fresh and well positioned because the assortment that we have in our House of Sport location and our next-gen 50k is different and is elevated, and we want to make sure we are continuously keeping our inventory clean to be able to bring in the innovation and the right assortment to be able to fuel the growth in these locations.

Warren Cheng: Thanks, Navdeep. And for my follow-up, I just wanted to ask how you would – if you would step back in your stated margins beyond this year, we’re obviously in a very uncharacteristically high promotional environment. The zero to two comp is clearly below what your typical leverage point would be for fixed costs. Maybe we say shrink is here to stay, but if you just kind of look at all these factors together, how much pressure are you facing on margins this year on sort of these temporary 2023 specific pressures and how should we think about normalized profitability of the business beyond this year?

Navdeep Gupta: Yes, maybe I’ll begin with our confidence in the long-term rubric that we have. We could not be more excited about the long-term growth opportunities that we see from a topline sales perspective or from the bottom-line profitability. The ingredients of our sales and profitability business absolutely remain intact, whether it is our ability to continue to gain share in a $140 billion fragmented industry, the work that we are doing with House of Sport and the next-gen 50k, our recipe or the ingredients that we have called out around the margin continue to remain. Our product is extremely differentiated and very narrowly distributed, and that is what gives us the confidence that we can continue to grow our margins.

Quite frankly, with the 50 basis points of headwind and shrink this year, we are guiding that on a full-year basis, our total gross margin will be higher than 2022. And coming back to your question, that’s what is giving us the confidence that we can continue to grow the topline and the bottom-line in the years to come.

Warren Cheng: Thanks, Navdeep. Thanks, Lauren. Good luck.

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

Michael Lasser: Good morning. Thanks a lot for taking my question. So, given that the shrink impact is going to be greater in the second half than it was in the first half, and you don’t take physical inventories until what it sounds like around the middle of the year, we should anticipate that this issue of shrink is going to impact you into at least the first half of next year until you fully anniversary. Is that right?

Navdeep Gupta: Yes, Michael, we are revisiting our physical inventory process based on the learnings that we have had this year. So, we’ll share more, but I don’t anticipate us doing one large inventory count like we did this year. Considering the level of risk, we may actually be counting our stores a little bit more frequently or at least sampling our stores to keep a close tab on the situation.

Michael Lasser: Okay. And then on the House of Sport, two related questions here. Number one, how much of the SG&A growth in the last couple of quarters and really for the full year that you’re expecting is related to a greater fixed cost structure both in the stores as well as what’s necessary in the customer support and store support center to continue to build out these bigger locations. And if you look at the Rochester and the Knoxville locations, which are I believe the first to have been opened and the longest in existence, how do the comps in the last couple of periods at those locations compare to the comps overall for the chain?

Navdeep Gupta: Yes. Michael, great question. First of all, let’s put this in context. We only have 12 House of Sport locations. So, when you think about the overall magnitude of impact on SG&A, I would say it’s pretty insignificant. But the capabilities that we are building in at the corporate – at the support center here in terms of technology and bringing in the right talent to be able to find the opportunities to grow into 2024 and 2025, that’s what the business optimization exercise is about for us, is finding the right talent, resourcing appropriately, and then finding the capabilities that need to be built. So, in terms of the absolute impact on SG&A from the opening of House of Sport location, I would say it’s pretty small.

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

Michael Lasser: Thank you and good luck.

Michael Lasser: Thank you.

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

Brian Nagel: Hi, good morning. So, my first question, with regard to the inventory adjustment you took here in Q2, the outdoor product, so just to understand this clearly, so is that product – the product that you basically wrote down, is that product now sold or were you still anticipating selling that product over the balance of the year? And then I guess the second question there is, we’ve been talking about some weakness in outdoor for a while, but what necessitated the write-down now, or why did you do it now?

Lauren Hobart: Yes, thanks, Brian. So, the product we got aggressive with in Q2 sold very well, and we’ve moved through it such that we don’t have to pack a majority of it away. And we were heading toward a place where we were going to have to do that. So, we’re very, very pleased with how it sold through and moving on. Why go through the product now? There’s seven peak selling weeks in the outdoor category. Obviously, the whole business is a full-year business, but for the subcategories that we’re talking about, there’s seven peak weeks. And so, you have to strike while the iron is hot, and that’s exactly what we decided to do. And again, I am very happy with that decision because it does make our inventory cleaner. We’re down 5% at the end of the year and we don’t have to pack it away.

Brian Nagel: Okay. And then my second question, and it is going to be maybe a little bit bigger picture, but so we’re looking at the release today and you have the inventory issue we just discussed. You have obviously this shrink issue that we’ve been discussing here, which was rather significant. And then you’ve also right-sizing to some extent your labor force. So, there’s a lot here happening in Q2. So, the question I have is, and I get that in your comments, you’re still very upbeat about the longer-term potential for DICK’S and the DICK’S model. But given everything we’re learning today, are you taking a different – or do you have a different perspective on the newer term outlook for DICK’S, the underlying health of this business?

Lauren Hobart: Absolutely not. Absolutely not. No. I would point to, we are doubling our EBT margin. Our sales are 40% higher than they were pre-pandemic. Our EPS is three times what it was. We have a shrink issue and we cleaned up some outdoor inventory. We are completely confident in the future, short-term and long-term of our business.

Brian Nagel: Got it. I appreciate the color. Thanks.

Operator: Your next question comes from the line of Paul Lejuez from Citi. Please go ahead. Your line is open.

Paul Lejuez: Hey, thanks, guys. How much should the addition of the – or the opening of the House of Sport stores moved the comp in 2Q? And related to that, you also said there was a July pickup. I think you said it picked up significantly. So, how much did it specifically act as a driver of July? And also, you were just talking about the outdoor promotions really moving through quickly. How much did that drive July comp? I think you said you were positive every month, but you also said July picked up very significantly and comp was only up one and change. So, just want to understand that a little bit better. And then, did you not adjust any of your second half sales assumptions from having less inventory than you thought as a result of that inventory count? Thanks.

Lauren Hobart: Thanks, Paul. I just want to point out on House of Sport, while we’re not going to get into exactly the impact in July overall, it’s really important to note that we had closed several stores. And so, net-net, despite how great these stores did in July, it was a drain on comps in the quarter. That’s important to note. So, really a tale of two cities. We closed them so that we could open them with great fanfare, which is exactly what we did with great grand openings. I’ll turn it to Navdeep for the other questions.

Navdeep Gupta: Yes. In terms of the impact in July, like Lauren said, had we not closed these stores, our comp in Q2 would’ve been higher, and we saw the acceleration, and these stores grand opened literally in the last few weeks of July. So, the overall impact in July, and actually quite frankly in Q2, is very small. And what we are excited about is the opportunity that we see now that these stores have grand opened and the acceleration that we are seeing. And that’s what gives us the excitement about the outlook that we have for the back half of this year. In terms of did we adjust any sales assumptions with the less inventory? I would say no, the inventory is pretty clean. The 5% was actually in line with where we wanted to be at the end of the quarter.

So, the decisive actions that we took in Q2 actually positions us well to be able to bring in the innovation and bring in the right product for the back-to-school season and as well as the holiday season that is up upon us.

Paul Lejuez: Right, because you have a bigger shrink issue than you thought, you have less inventory to sell than you had previously anticipated?

Navdeep Gupta: Well, shrink is unfortunate, but then you make sure that you’re not impacting the customer experience and you’re providing the product to be able to have the right assortment and the availability within our stores.

Paul Lejuez: Okay. Thanks. Good luck.

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

Mike Baker: Hey, thanks. Can I try to clarify the margin change in the guidance? I think the EBT guidance is down about, I think it’s 140 basis points. 50 of that is because of the higher shrink. What’s the rest of it? Is it the combination of the markdowns that you took in the second quarter as well as expected markdowns for the back half of the year? Because Navdeep just said that’s going to linger a little bit. Are those the factors that are leading to the lower margin? Because you said sales are the same and SG&A is the same.

Navdeep Gupta: Yes. Mike, you are right. The change besides shrink is coming from just – we are flowing through the Q2 results, as well as keeping our – we moderated our merchandise margin expectations in the back half in line with the actions that we discussed here in Q2. We are just wanting to make sure that we are keeping our inventory fresh and vibrant and want to make sure that we are positioning our growth opportunities and bringing the ability to bring in the innovation that we see in the marketplace coming down, including some of the exciting brands that are available to us now.

Mike Baker: Okay. that helps. Bigger picture question, the whole idea here is that margins are structurally higher than they were pre-pandemic, and based on your guidance, they still will be, just less so than maybe some people have thought. The question is this, this shrink issue, does that mean that your margins longer term are just going to be less than you would’ve otherwise thought prior to doing these physical inventories in the second quarter? How much does that impact the longer-term margin?

Navdeep Gupta: Yes, I would say the answer is yes, based on what we are able to see now, and we can’t foreshadow what the shrink would look like in future. Like Lauren said, this is not just a DICK’S Sporting Goods challenge. This is a collective retail challenge. So, I don’t know like if we can foreshadow what the collective resolve of the retail community and quite frankly, community at large would be. But for now, for the near term, we do anticipate this risk will remain with us.

Lauren Hobart: Yes. That said, you point out, and you’re absolutely right, that our margins are structurally higher than pre-pandemic. And so, we are operating in a place where they are structurally improved, significantly higher than they were pre-pandemic. And you’re right, shrink does take that down slightly if this overall story does not change.

Mike Baker: So, you’d always talked about the margins baselining, and last year was supposed to be the baseline. Now, clearly last year’s not the baseline because of the shrink issue and other things. I guess, can I ask this, is the 10.1% EBT margin this year, do you think that’s the new baseline?

Lauren Hobart: So, go ahead, Navdeep.

Navdeep Gupta: Yes, no, absolutely. We absolutely believe, even if you look at the total margin for a full-year, our total margins will actually be higher than 2022. So, even with this headwind of shrink, our total margins will be higher. We called out that the SG&A is a planned investment and we are expecting our SG&A growth to moderate into next year. So, we are absolutely confident in the long-term expectations on both sales and the profitability basis.

Mike Baker: Okay, thank you very much.

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

Justin Kleber: Yes, thanks, everyone, for taking the questions. Just two clarifications. On shrink, you mentioned the 50-basis point headwind versus 2022. Curious where that sits versus your pre-pandemic gross margin and shrink rate. And then secondly, Navdeep, just on the SG&A deleverage of 200 basis points across the second half, does that exclude – I assume it does, but does that exclude last year’s one-time charge in 4Q related to Field & Stream?

Navdeep Gupta: So, Justin, I’ll start with the shrink. It is significantly elevated versus the pre-pandemic level, the shrink. I would say we had kind of baselined closer to the pre-pandemic level late last year when we did the physical inventory of our stores. But this 50-basis point is a pretty significant acceleration from kind of the original levels we used to be at. In terms of the SG&A deleverage, we did not have a one-time charge associated with Field & Stream. So, maybe we can take this offline and clarify this with you. The SG&A deleverage is on an apples-to-apples basis, like we have guided to be slightly over 200 basis points for the back half of this year.

Justin Kleber: Got it. Thank you.

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

Joe Feldman: Yes. Hey, guys. Thanks for taking my question. I wanted to ask on footwear, how much of the strength that you’re seeing in footwear is related to the category overall versus your assortment changes and the distribution changes you’ve made in your stores and possible, I guess, market share gains, I’m assuming on your side?

Lauren Hobart: Yes. Well, the shrink in footwear is not related to the change in our – which we didn’t get into the guiding by category level, but (crosstalk))

Joe Feldman: No, I’m talking about the strength, the strength of the category.

Lauren Hobart: Oh, the strength. I’m sorry, I misunderstood you.

Joe Feldman: How much was related to your changes versus the industry just – yes, thanks.

Lauren Hobart: I misunderstood you. Got it. Okay, thank you. Yes, so our growth in footwear is definitely related to the fact that the consumer is very interested in footwear, but more importantly, the fact that with our premium full-service footwear decks and our assortment changes and the access that we have to brands, we are meeting those consumer needs better than we ever have before. So, it’s a combination for us of assortment changes, overall experience, distribution changes, all of that.

Joe Feldman: Got it. Thank you. And then just back to the inventory question again, I know you’re in very clean position as you’ve described a few times, but does that also mean your in-stock levels are where they should be broadly speaking? And how should we think about inventory in the second half? Like will it end the year down a little bit year-over-year, or do you think it comes back to kind of level with last year, or how should we think about the growth rate, I guess of inventory for the back half? Thanks.

Navdeep Gupta: Yes, I don’t know if I want to guide necessarily in terms of the inventory expectations for full year. I would say that we continue to – it will all depend on the topline results as well. But I would say we are very happy with the results of where our inventory position currently is, position for both the back-to-school season and the holiday season, and happy with the fact that we finished down 5% on a year-over-year basis, actually slightly higher on a per square footage basis if you look at it.

Lauren Hobart: Yes, in-stock levels are quite good. And that’s partly what’s made us start the back-to-school season with such strength in July.

Joe Feldman: Got it. Perfect. Thanks, guys. Good luck with the third quarter.

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

Chuck Grom: Hey, thanks very much. Just one quick one for me. On the guide, how should we think about the phasing of comps in the back half of the year? On a one-year basis, the comparisons are relatively similar, but on a multi-year, they’re much, much harder in the third quarter. And I’m trying to tie that in with your commentary about back-to-school in July being strong, which I presume would mean that August is also pretty healthy. Thanks.

Navdeep Gupta: Yes, Chuck, I don’t know if I would give any further detail than that, but (indiscernible) collective basis. If you look at our comps both in Q3 and Q4, they were pretty valuable, and we are equally as optimistic about the back-to-school season as we are about our holiday season. So, really excited about the overall back half sales expectation.

Chuck Grom: Okay, thanks.

Operator: Lauren Hobart, President and CEO, please go ahead with final remarks.

Lauren Hobart: Well, thank you, everybody for your interest in DICK’S Sporting Goods. We will look forward to seeing you all at the next quarter call. Thank you.

Operator: And this concludes today’s conference call. Thank you for your participation, and you may now disconnect.