DICK'S Sporting Goods Inc (DKS) 2016 Q1 法說會逐字稿

Good morning and welcome to the DICK'S Sporting Good first-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Anne-Marie Megela, Vice President, Treasury and Investor Relations.

Please go ahead.

Thank you.

Good morning and thank you for joining us to discuss our first-quarter 2016 financial results.

On today's call will be Ed Stack, our Chairman and Chief Executive Officer; Andre Hawaux, our Chief Operating Officer; and Teri List-Stoll, our Chief Financial Officer.

Please note that a rebroadcast of today's call will be archived on the investor relations portion of our website located at Dicks.com for approximately 30 days.

In addition, as outlined in our press release, the dial-in replay will also be available for approximately 30 days.

During this call, we will be making forward-looking statements which are predictions, projections, or other statements about future events.

These statements are based on current expectations and assumptions that are subject to risk and uncertainty.

Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and in the risk factor sector of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statements.

We've also included some non-GAAP financial measures in our discussion today.

Our presentation of the most directly comparable financial measures calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the investor relations portion of our website at Dicks.com.

I will now turn the call over to Ed Stack.

Thank you, Anne-Marie.

Good morning.

For the first quarter of 2016, we are pleased to deliver EPS of $0.50 per share, which is the high end of our guidance.

Comp store sales were plus 0.5%, the midpoint of our range, and total sales increased 6.1%.

Our e-commerce business grew to 9.2% of sales in Q1 from 8.5% in the same quarter of last year, and sales increased 15%.

We continue to be on schedule to relaunch Dicks.com on our own Web platform in January 2017.

We launched Golf Galaxy on this platform in March of last year and Field & Stream this past October.

We are quite pleased with these sites and their performance from both a technology and sales standpoint.

To remind everyone, once we move Dicks.com to this platform in 2017, we expect our consolidated operating margins to increase approximately 30 basis points.

We continue to support initiatives to increase productivity in our stores.

Two key areas of investment are footwear and our own product development.

At the end of Q1, we had 52 new full-service footwear decks in place.

To date, early sales are encouraging, and Andre will provide an update on the build-out in a moment.

We are also very focused on our product development.

We have seen an increase in this business in Q1 of this year versus Q1 of last year.

Our CALIA line of women's athletic apparel remains on track to be the number three women's athletic brand in our Company by the end of the year, and it was number three in Q1 of this year.

We continued to expand our proprietary products, such as Adidas Baseball, Field & Stream, Umbro Soccer, Top Flite and Maxfli in our golf area, along with Quest in the outdoor area.

We expect this to be $1-billion business for us over the next few years, with margin rates of 600 to 800 basis points higher than the brands they replace.

During the quarter, our golf business was positive, with Golf Galaxy generating comps of 1.7% and the DICK'S business performing slightly better.

The outdoor category was positive, despite a decline in hunting.

Our apparel business was below expectations and below last year.

Lastly, I would like to talk about the marketplace.

There is a lot of activity in the sporting goods landscape right now.

The long-awaited consolidation is taking place.

Over the past several months, City Sports in Boston had liquidated, Sport Chalet has announced the closing of all of their stores, The Sports Authority is in the midst of liquidating and closing their 400-plus stores, and others evaluating strategic alternatives.

Although it's a mess, it's a great opportunity for DICK'S Sporting Goods.

This environment will likely put short-term pressure on our business.

There are over 200 stores within five miles of a DICK'S store that are closing and liquidating, and over 350 stores within 10 miles of a DICK'S location.

Once this consolidation works its way through the system, we are poised to pick up significant market share.

We are in the process of executing plans to ensure a meaningful portion of this market share comes to DICK'S Sporting Goods.

Although there will be some short-term pain during this process, we are pretty excited about the long-term future of our stores and our business online.

We also have a very strong balance sheet, with no long-term debt, to help us through the consolidation process.

Last year we generated over $640 million in cash from operations, produced approximately $730 million in EBITDA, and returned over $420 million to our shareholders through share repurchases and dividends.

We also continued to invest both online and in our store experience with increasing investments from our key vendor partners such as Nike, Under Armour, Adidas, and The North Face.

I would like to thank our over 30,000 associates who work so hard to help ensure that DICK'S is not only a survivor of this consolidation but continues to lead this industry.

Thank you to all of them.

I would now like to turn the call over to Andre.

Thank you, Ed.

As we've previously discussed, one of our growth strategies is opening stores in new and underpenetrated markets.

When opening in these new markets, we see our e-commerce sales typically double.

Our new stores also deliver very attractive unit economics, on average, generating an approximate 50% cash-on-cash return in year three.

In the first quarter, we opened three new DICK'S stores, with two of them in brand-new markets.

We also relocated three DICK'S Sporting Goods stores to more attractive retail nodes, and opened two new Field & Stream stores.

During the second quarter, we expect to open approximately five new DICK'S stores and relocate two DICK'S stores.

In total for 2016, we expect to open up approximately 36 new DICK'S stores and relocate approximately 9 DICK'S stores.

We also expect to open approximately 2 new Golf Galaxy stores and 9 new Field & Stream stores, with all but 1 in the combo store format.

As Ed mentioned, one of the ways we are driving productivity is through our new premium full-service footwear decks, and the early sales results are encouraging.

The enhanced customer experience is being supported by investments in store payroll, associate training, and technology, and importantly, will include a broader assortment of brands and styles.

At the end of the first quarter, we had 52 new full-service -- new premium full-service footwear decks online.

We expect back to have approximately 124 in place by the end of Q2, in time for the critical back-to-school season.

The remaining 54 will be in place in time for holiday, bringing our total to approximately 180 premium full-service footwear decks.

Beginning in July, these stores will have a meaningfully broader assortment not readily available at DICK'S Sporting Goods.

I will now turn the call over to Teri to review our financial performance in greater detail.

Thanks, Andre.

Good morning, everyone.

Beginning with our first-quarter financial results, consolidated sales increased 6.1% to approximately $1.7 billion.

Consolidated same-store sales, which includes all banners, both online and in-store, increased 0.5%, within our guidance of flat to up 1%.

Within this, DICK'S Sporting Goods omni-channel same-store sales increased 0.4%, driven by a 1% increase in sales per transaction and a decline in traffic of 0.6%.

Golf Galaxy omni-channel same-store sales increased 1.7% and our e-commerce business grew 15%.

Gross profit for the first quarter was $496 million, or 29.86% of sales, down 10 basis points year over year.

Within this, merchandise margins expanded; however, this improvement in merch margin was more than offset by occupancy and an increase in shipping expenses as a percentage of sales due to the growth of our e-commerce business.

SG&A expenses were $399 million for the quarter, this is 24% of sales, deleveraging 96 basis points from the first quarter of last year.

This deleverage was primarily driven by higher store payroll costs, as we continued to invest to enhance the shopping experience within our stores, as well as higher administrative, payroll, and related benefit costs to support our planned future growth initiatives.

We delivered earnings per diluted share of $0.50, which is at the high end of our guidance of between $0.48 and $0.50.

Now, looking to our balance sheet, we ended the first quarter with approximately $92 million of cash and cash equivalents and $158 million in borrowings outstanding on our $1 billion revolving credit facility.

This compares to $51 million outstanding at the end of the first quarter last year.

The increase is a function of returning capital to our shareholders and our continued investments in our growth.

Total inventory increased 7.3% at the end of the first quarter of 2016, compared to the first quarter of 2015, slightly higher than the 6.1% sales growth in the quarter.

This delta between inventory and sales growth is primarily made up of the cold weather merchandise that was packed away for the 2016 winter season.

Now turning to our first-quarter capital allocation, net capital expenditures were $73 million, or $89 million on a gross basis.

Additionally, during the quarter, we paid dividends of $17.6 million.

We also completed share repurchases of $50 million at an average price of $46.81.

Since the beginning of 2013, we have repurchased approximately $863 million of common stock, and we have approximately $1.1 billion remaining on our authorizations.

Now turning to our outlook for the remainder of 2016, as we have indicated 2016, is an important investment year for us.

First we are continuing to invest in e-commerce as we transition to full operational control in January 2017.

Second, we are partnering with the United States Olympic Committee and Team USA in a way that will have a far-reaching impact on our brand.

And lastly, as Andrei described, we are elevating the footwear business in our stores.

We estimate these strategic investments will have an approximate $50 million to $55 million impact on earnings before taxes in 2016.

Additionally, based on the expectation that TSA Sports Authority will liquidate all 400-plus stores and Sport Chalet will be closing and liquidating all of their 48 stores, together removing over 20 million of square feet from the market, our short-term results could vary widely.

We believe TSA will be running a liquidation event through all of the second quarter and through the back-to-school portion of the third quarter.

Importantly, as Ed described, we remain confident in our ability to capture the displaced market share and to strengthen our leadership position.

This current market consolidation and the strategic investments we're making will then benefit our business for many years to come.

Due to liquidation pressure of Sports Authority and Sport Chalet in the near term, for 2016 we are lowering our full-year guidance and now expect earnings per diluted share of between $2.60 and $2.90.

We expect consolidated same-store sales to be in the range of negative 1% to positive 1%.

Operating margin is expected to decrease year over year, driven by SG&A deleverage as we make a strategic investments in our business.

This will be partially offset by an expected increase in gross margin.

Although painful in the short term, we see this industry consolidation as an opportunity over the long term.

Net capital expenditures for the full year of 2016 are expected to be approximately $230 million, or about $420 million on a gross basis.

2015 net capital expenditures were $204 million, or $370 million on a gross basis.

For the second quarter, we anticipate earnings per diluted share of between $0.62 and $0.72.

Consolidated same-store sales are expected to be in the range of negative 4% to negative 1%.

Operating margin is expected to decrease, driven by SG&A deleverage and a slight decline in gross margin.

Again this guidance is heavily influenced by the liquidation activities taking place over the next quarter-and-a-half or so.

This will conclude our prepared comments.

We appreciate your interest in DICK'S Sporting Goods.

Operator, please open the line for questions.

(Operator Instructions)

Robbie Ohmes, BofA Merrill Lynch.

Thank you for taking my question.

Ed, I actually had a broader question for you.

I was hoping, given the outlook for this Sports Authority banner to go away and signs of pressure from other of your competitors, could you talk maybe more generally about how the -- your key vendors are thinking about DICK'S Sporting Goods and where DICK'S Sporting Goods fits in for them over, say, the next 5 to 10 years?

And could you link into that your dot-com business versus your store growth potential over the long term?

I know it is open-ended, but there is a lot going on and I think it would be helpful to all of us.

Thanks.

Sure, Thanks Robbie.

Well, how the vendors are thinking about us is I don't think significantly different than they have been thinking about us, which they continue to make meaningful investments in our business.

You can see the investment that we're making in the footwear platforms and what we're doing with Nike there., what we're doing with Nike, Under Armour, Adidas, and The North Face in our stores.

We continue to work with these brands very closely.

I think that they really look at us as the future on the wholesale side of their business, which will continue to be very important.

Although a number of brands -- they talk about what they're doing from a DTC standpoint, they also talk about a meaningful part of the growth is going to come from the wholesale side of their business and we're an important part of that wholesale side of their business.

From a dot-com standpoint, we continue to think that there is great opportunities for us to continue to grow our dot-com business.

As we move to the platform, our own platform will give us a lot more flexibility than we have right now.

And based on what's going on in the marketplace that Teri indicated and I've indicated, there will be some short-term pain, but there is an awful lot of opportunity out there for us with this consolidation that everybody knew was going to come, just wasn't sure when.

And it all seems to be coming at relatively the same time.

So it creates a big opportunity for us and we continue to work with these brands, and they continue to be very helpful and invest with us.

Ed, should we -- you aren't acquiring anything from Sports Authority that we know of so far.

But should we assume that -- we shouldn't expect you to make regional acquisitions potentially in the future?

Or how -- or does this environment make it easier for you to do some regional acquisitions?

Robbie, I don't think -- it's been well chronicled that we've talked -- we were at the auction for TSA and we talked about a very small group of TSA's assets.

And whether we end up doing this or not, it's hard to say.

It's really inconsequential with what we're looking at from TSA.

There's a small group of stores that we would love to get.

But with all that's going on in retail today, with other retailers, Penneys, Kohl's, Sears, Macy's, a few of them have announced store closings, there's going to be real estate out there.

And some of these trade areas we'll get into eventually.

This is pretty inconsequential, what we're doing with TSA right now.

Regional chains, I don't see us acquiring regional chains.

We'll look at a couple of the Sport Chalet sites also, but the other regional chains, Robbie, I don't see us being an acquirer of those.

We will grow organically with a big part of our growth coming from the dot-com business.

That is great.

That's really helpful.

Thanks, Ed.

Sure, thanks, Robbie.

Seth Sigman, Credit Suisse.

Good morning.

Just on the short term, I think last time you reported there was some uncertainty about TSA and the state of them at that point.

Can you give us a sense of how the first quarter played out, what the impact from those first 140 liquidations were?

And then what are you assuming in the second-quarter guidance in terms of the impact from those liquidations?

Thank you.

Well Seth, we knew what was going to happen in the first quarter.

But they were closing and liquidating about 140 stores, and these were really their -- most of them, many of those were their worst performing stores, as these were the ones that they were going to jettison when there was talk about reorganizing the business.

We've had access to all of their store info -- from a sales standpoint, what the -- we got a lot of information about their stores through this process.

We have a sense of what impact will be in the short term and then what some of the opportunities we could have to gain market share there.

So we're pretty confident in what we've laid out here.

And as far as -- the second part of your question again.

Just what would you be assuming in the second quarter for the impact?

I don't know if there's a way to quantify for what is in the comp guidance.

Well, we talked about this and if we didn't have these issues, we'd probably be looking at somewhere between minus 1 and a flat, based on what is going on in the marketplace right now.

So there's a big part of this has got to do with the short-term liquidation.

And remember, there's over 200 Sports Authority stores that were within 5 miles of a DICK'S store, and a total of 350 stores that are within 10 miles.

This is going to have a short-term impact, but it does provide us a great opportunity going forward.

Just a follow-up there.

Is there a thought that the impact is mostly isolated to the second and third quarter?

Or do you think that there is going to be some pull- forward from these liquidations and also impact the fourth quarter?

Yes, it's going to be primarily second quarter into third quarter, really primarily around the important back-to-school season.

But we do believe that there will be some pull-forward out of the fourth quarter into right now through this liquidation process.

We really expect to see a bigger benefit to this beginning in 2017.

Thank you.

If I could just ask a follow-up question.

I think Teri talked about the store payroll cost increasing in the quarter.

Can you guys elaborate on the changes that you're making?

What's one-time, what's recurring, and what's part of that $50 million to $55 million you've talked about?

Because I know one of the opportunities here you've talk about pretty clearly is to improve the store experience over time, so just curious what may be changing.

Thank you.

So of the $50 million to $55 million, if you remember, a big portion is Project Eagle, and then the remainder is split between full-service footwear and the marketing investments we're making in brand equity.

And so, if you split those apart, obviously the Project Eagle, we have been very public about how this plays out this year and next.

And then of that remainder, particularly as speaks to store payroll, some portion of the full-service footwear investment, let's call -- I think we've landed on $15 million to $16 million for that.

Some portion of that is the current year impact of installing the footwear decks, et cetera, and then the portion of it is store labor.

Now, I will let Andre talk a little bit about the store labor portion.

Yes, so I think Teri articulated the pieces that are supporting the investments we are making in premium full-service footwear.

The other things that we have out there, Seth, as well as we are enhancing our customer experience.

And also what we have in some marketplaces, as, there is a little bit of upward rate pressure that we are also feeling as a result of various state initiatives around minimum wage.

So I would capture them all in that.

We're not going to carve out what each of those dollars are, but that's roughly what we're seeing in the investment and payroll.

Okay, understood.

Thank you very much.

Kate McShane, Citi Research.

Hi.

Thanks, good morning and thank you for taking my question.

I just had a couple of questions, one on the impact from TSA.

And I think you had mentioned before that there is some opportunity for you to buy maybe some cheaper inventory from the vendors that as a result of what is happening in the marketplace.

Has that come to fruition and how much has that been able to offset some of the margin pressure or the expected margin pressure from the liquidations?

That process is really just starting to take place once TSA indicated that they were going to close their stores.

So we've gotten calls from some vendors, and provided us some opportunities to buy some product off-price.

I won't go into specifically what that is.

But we do think that will help alleviate some of the margin rate pressure.

But it's not significant.

Okay, thank you.

And then I think you had mentioned in your prepared comments that apparel was below your expectations.

Can you give us any detail on the breakdown between men's versus women's versus your expectations?

And then how footwear trended versus your expectations during the quarter?

We're not going to get quite that granular for you, Kate.

But the business was a bit more difficult.

Some of the apparel miss came from cold weather merchandise.

You still have a fair amount of that, and you still have some of that in Q1 in February and March.

We also have -- and in the athletic piece of that, you have got some of the issues around that with fleece and all that.

But men's was better than women's.

I will get to that point.

So the men's business was better than the women's business.

Great.

Just to sneak in one last question about inventory growth, I think in the press release, it had mentioned that it included some winter pack-away.

Are you able to tell us what the inventory growth would have been X the pack-away?

Substantially all of the difference between the sales growth and the inventory growth is related to that pack-away.

That is so helpful.

Thank you.

Simeon Gutman, Morgan Stanley.

Thanks, good morning.

Just a follow-on to the TSA questions, and it's probably early and may not have enough examples.

But so, some of the 140 that have closed, they've liquidated and they have shut down.

Are you seeing any lift or retention that's coming back into the DICK'S store?

I know there is a lot of estimates out there of what transfer rates could eventually be, but curious if there is an early read on that.

There is not quite yet, and I will tell you the reason why.

Those were really -- they're smaller stores, so they would have less of an impact.

Also, we think that some of -- those liquidations just recently concluded.

We think there was some pull forward of some purchases, so there hasn't been enough time yet for us to be able to give you an indication there.

Okay, that's helpful.

And I may have missed it in prepared remarks.

Did you or can you speak to any regionality in the business?

We've heard a story that the Northeast has been tough.

Does weather explain variability?

I guess weather and maybe TSA would explain variability among regions.

But anything else to call out there?

TSA we think is going to have an issue, and we're not talking about the weather anymore.

The weather can have an impact, but we're not going to hide behind the weather.

We're actually really pretty pleased with the environment of what we did in the first quarter, posting positive comps and hitting the high end of our expectations.

We were relatively -- we were really quite pleased with what we accomplished in the first quarter in a difficult retail environment.

And to that, the improvement in ticket, did that play out any differently than how it did -- in terms of the drivers of that ticket growth, was that similar or different than how it played out in previous quarters?

Not a lot different.

We've had some nice growth in the AUR around the golf business, which we've talked about, that all of the inventory that had been tied up in the system, along with the suppliers and retailers, is pretty much gone.

Our margin rates again in the first quarter were up in the golf business.

Our footwear business was really pretty good, so nothing really meaningfully different than what you would have seen in previous quarters.

Thank you.

Christopher Horvers, JPMorgan.

Thanks, Chris Horvers.

Following up on the TSA locations, only looking at narrow subset of stores, are the locations that bad?

Or are the lease rates just too high, or do you think there is just too much money that needs to be put into the stores and wait for the landlords to take it back and you can get a better deal on the back end of it?

Because if you look at where their stores are, at least from a state perspective versus where you would like to grow, that seems to be a pretty good crossover there.

There are a couple of stores that we have looked at, but what you've got to do, you have to take the TSA lease as it is.

You've got to pay the cure cost, which is really the rent that TSA may not have paid.

And we have taken a look at some of this and we've got a very small number of stores that we are interested in.

Some of the reports are relatively accurate for the number of stores we're looking at.

But it's really inconsequential to our growth plan.

And as I said, with all the retail consolidation going on and store closing across retail, we don't feel compelled that we have to take any particular deal.

That there will be other opportunities in those trade areas.

So if we can make the deal that we're comfortable with, we will make the deal.

But we're not stretching by any stretch of the imagination to do a deal.

Understood, so it's not that -- the locations might be fine.

So how does that make you think about the potential share capture, given the close proximity and the growth of the overall online business in this category?

Should we think about your overall market share as the right guide in terms of how much share you capture from TSA?

Well we're taking a look at this, so from a market-share standpoint in markets where we are, like we said, they have got 200 stores that are within five miles of a DICK'S store.

We will pick up an awful lot of that market share.

There is 350 stores between TSA and Sport Chalet that are within 10 miles of a DICK'S store; we will pick up a fair amount of market share there.

Some of the stores that they're closing in markets where we don't have a store, in some of the five boroughs in New York City or Alaska, Hawaii, which we're really not interested in, obviously we're not going to pick up any share.

I would look at we're going to pick up share in markets that we do business with and we compete with them, and I think a significant amount.

And our online business we think will grow also because of the share that we can pick up from TSA.

Understood, and then last question is as you think about the second-quarter guidance in particular, how much gross margin headwind are you baking in for TSA?

And is it potential mark-down risk or is it more your need to step up voice as they announced all the liquidation sales loudly?

It's going to be -- there is going to be some customers who are going to go shop who might shop with us normally, that based on the liquidation, they're going to go take a look and see what Sports Authority has.

So I think it's going to impact our sales, which you saw in our sales guidance.

When that impacts our sales, it's going to make it -- some of the expenses deleverage, as we talked about.

But we are not going to go chase the markdown dollars with Sports Authority.

When they are running X amount of product at 25%, 30%, 40% off, it's going to -- we're not going to go chase that.

We don't think that's the right thing for our brand to do long term, and we're really looking at this as some short-term pain, which we're willing to endure for the long-term benefit of our Company and our shareholders.

Thank you.

Steven Tanal, Goldman Sachs

Thanks, good morning, guys.

Ed, could you maybe -- it sounds like you guys have very good sense for the TSA impacts, but I didn't think you sized the impact you thought you saw in 1Q on the comp.

Are you able to share that level of color?

I'm sorry, I'm not really sure I understand the question.

So like if you said, okay, TSA did X basis points to the comp in 1Q, like we would have comped X otherwise, something like that, to help us think about the magnitude or the impact there.

It is pretty tough to say.

Again, these were pretty -- relatively small stores, so we don't think it had a real big impact on our business in Q1, probably a little bit.

But again, from what we've seen, these are their smaller volume stores.

These are stores that if they had reorganized, they wanted to jettison out of the fleet.

So they weren't stores that were performing very well for them, and therefore, they didn't have a meaningful impact on us.

Understood, and as we think about stores you may acquire, how long does it typically take you to retrofit a store?

And more specifically, of course, a Sports Authority store to a DICK'S?

It depends on the level of retrofit that we would want to do, but we could have it done in a matter of four or five months.

Got it.

Okay.

Just lastly, obviously, the auction is done.

There is some information out there.

Now you didn't comment on the outcome.

Do you have a sense for when you may, or is there something specific you are waiting, perhaps the sale hearings next week?

Yes, we will see how it goes.

We have yet to reach agreement.

We've made -- there were some things in the press that were relatively accurate of what we've been talking about.

But we haven't reached an agreement, and quite frankly, we may not.

As I said, these sites are interesting sites that we would take if we can get them at the right economics.

But they are really inconsequential; they're not -- it's not very significant to our growth plan.

And as we have looked at this with all the other real estate that is coming online from some other retailers closing stores, we are confident we will get sites in those trade areas eventually.

And we think this is a time to be very patient out in the marketplace.

So we're not in any rush.

Understood, okay, thanks.

Michael Lasser, UBS.

Good morning.

Thanks a lot for taking my question.

Ed, so it seems like you've baked in a significant impact from the TSA liquidations in the second quarter, but it seems like you also are not baking in virtually any impact of market-share gains in the second half of the year.

To get to the midpoint of the guidance, you have to assume that your comps are flattish, maybe slightly positive, slightly negative in the second half.

So what was the thought process behind only baking in the downside and none of the upside?

Well, there's a couple of things.

So we think that TSA, from what we understand, they will liquidate through June, July, and August.

It make go longer, we don't know.

But even if it goes into August, that goes into an important part of the back-to-school selling season in the third quarter.

And we feel that there will be business that will be moved from the third quarter, fourth quarter into these other quarters.

Some people will do some buying upfront.

And we just think that there's a possibility that the market could just be tired by the time we get into the -- toward the end of the year.

And we really feel that there will be an upside to the beginning in 2017.

There may be some upside at the back half of the year, which we talked about on the previous quarter call.

But we do think that the market could be a little weary of sporting goods promotions, as TSA and Sport Chalet liquidate 20 million square feet of sporting goods, that's a lot.

But it is fair to say that you really haven't baked any share gains from those liquidations, from that 20 million square feet, into the second half of the year outlook.

Is that right?

That would be accurate, yes.

And then secondly, Ed, obviously, the margin of business has been volatile over the last few years, and it seems like you are on the precipice of a lot of margin-enhancing opportunities whether it's the e-comm business coming back in-house, the share gains.

How much are you going to let fall to the bottom line as we look towards next year and how much are you just going to just flow back into the business, because that's the way you think is the right thing to do?

As we get further into taking a look at what we're going to do for next year, we will make those decisions.

But we do think, as we said, from an e-commerce standpoint, we think that will increase our margin rates 30 basis points as we move to our own platform.

So we will take a look at that.

The big -- the meaningful amount of investments that we need to make in our business are being made through 2016.

And we expect that Project Eagle or the e-commerce business that will slow going into 2017.

We're making a very big bet on the footwear side of the business with the construction costs and build-out costs here in 2016.

We don't expect that to accelerate.

We're going to have approximately 175, 180 of these stores done by the end of this year.

We will read that and see where that goes.

And if there is another group of stores we want to do in 2017, I suspect it will probably be toward the back half of 2017 or the beginning of 2018, if we do that.

But a lot of the investments are being made.

And we said upfront earlier this year and in 2015, we telegraphed that, that 2016 would be an investment year and we expect those to slow in 2017.

Let me ask it this way: as recently as 2014, you had an 8% to 9% operating margin.

Is it realistic to expect as you move through this transition period where you are front-loading some investments that once you get past it, you will be able to get back to the 8% to 9% operating margin that you had as recently as two years ago?

Let us get through the balance of these next couple of quarters and let's see what happens with the TSA and what market share we can pick up.

And give us toward the end of the year to give us you more guidance on that question.

It is a fair question, we're just not ready to provide guidance for that right now.

Okay.

Thank you so much.

Sam Poser, CRT Capital.

Thank you for taking my question.

There was some information out the other day regarding Sports Authority, and I'm not sure about Sport Chalet, but that since they have a lot of stores but there wasn't that much inventory.

It sounded like there was only about $400 million worth of inventory.

So yes, there's a lot of stores, but it sounds like a lot of that retailers stopped -- or a lot of brands stopped shipping these retailers fairly recently.

So this liquidation may not be -- what is your thought there?

Are my numbers wrong based on what you know, because it's impact may not be quite as big as you are leading on to if those numbers are right?

Well Sam, if you think about this, that's $400 million at cost, not a retail.

So it's a much bigger number retail.

And I'm sure you know, as they go through the liquidations, the liquidators have the opportunity to augment that inventory with buys or things that they have from previous liquidations.

I think it's pretty significant.

And it's -- and it is $400 million at cost, whatever that number translates to at retail, in a very short period of time.

Right.

Right, and thank you.

And then as far as both the geographies of where you might be interested, there's some locations in South Florida that, from what I've heard, were very good Sports Authority stores and then in Southern California, which is basically going to be vacated of sporting goods.

Are those the general vicinities of where you are -- the 20 to 30 stores you might be interested in are located?

We think it's -- we're not going to give you that level of granularity right now, but the stores that we've looked at, we would be pleased to take those if the economics were right.

As we have done a survey of the areas; we know that with some of the other closings that have been announced or other closings that may come, we're not concerned.

One thing we all know is there is plenty of real estate around for retailers, and we don't feel compelled, or we don't feel any pressure to go and make these deals at the present time.

If we can get them under the right economics, we will do it, and if we don't we are good walking away.

Thank you.

One last thing.

Sports Authority is said to do about $2.5 billion worth of sales annually.

Without really thinking about any store pickups, with the 350 stores within 10 miles, how much of that business do you think will naturally, with some marketing from you, but over time, go your way when you think about it, let's say, over the next few years?

I am not going to go out on a limb and put that number out there.

I appreciate the question and nice try, but as we go through this, we will give you guys some sense.

You will see what our sales are.

We think we have an opportunity to pick up meaningful market share, but we're not going to go out in public and say what we think that is right now.

We don't think that would be appropriate.

Do you think we would know that by, let's say, the end of the third quarter, once the dust has settled with the liquidations and you have seen a little bit?

Or do you think this is more of an end-of-the-year situation?

I think it is more end of the year, and as I indicated, I think we will start to see that -- more impact beginning in 2017.

Sports Authority's liquidation is going to go through this Father's Day period, it's going to go through a very big -- virtually all of the back-to-school selling period.

And I think at that point, the market's going to be a little tired and some business is going to have been pulled forward.

And I think we will start to see the positive impact of this in 2017.

Could there be some positive impact in the fourth quarter?

Yes, and if there is, we will let you know.

But the way we're looking at this right now is it's going to be beginning in 2017.

Thank you.

Thank you very much.

Michael Baker, Deutsche Bank.

Thanks.

A couple, one, you -- how does the Sports Authority going away change your long-term store count plan?

Have you gone back and reassessed what you may have thought in terms of a real estate plan?

As you said, there were markets where you don't exist and where they did.

Do you now plan on putting more stores in those types of areas?

I don't think that has really changed.

I think we can do -- if we were looking at putting a store in trade areas, because we always felt very comfortable competing with Sports Authority.

So, and as many of you know, we've got a store within a couple of miles or right across the street from a Sports Authority, and those stores have always performed quite well.

Our view would be that the stores that we would put in those trade areas will have a higher sales volume; we don't necessarily need more stores.

Helpful.

A couple more, if I could.

You had said earlier in the call you do have plans in place to drive your share during this time.

Are those plans above and beyond the footwear deck and the Olympic branding and other things like that?

Yes, we will take a look at some marketing, increasing some marketing in some local areas where we feel that we have got the opportunity to take some significant market share, and we're working through this.

But it's all baked into the guidance that you have seen.

Okay, that was the important point.

Lastly, unrelated to Sports Authority, the apparel weakness I know we're not talking about weather, so -- but is it more indicative of the overall consumer environment?

Or do you think there were any share issues?

We know that Amazon is getting more aggressive in the apparel space.

I was just wondering if you could help us with why apparel was weak, if not the weather.

I think we're coming off some pretty good apparel numbers over the last several years.

We have been pretty aggressive there.

I don't think that it is a share issue.

I think that business has been really, has been very good for us.

We're not going to hide behind the weather, but we continue to invest in our apparel business and think it will continue to be an important part of our business and a very profitable part of our business.

Okay.

Understood.

Thank you very much.

Camilo Lyon, Canaccord Genuity.

Thanks.

Ed, last quarter you talked about investing in attracting TSA customers in those initial 140 store areas.

Can you just talk about the success you've had in attracting them to your stores?

And have you begun marketing to them already in the remaining trade areas?

Well, we are starting to, and we looked at not only some of the -- those markets, we were waiting to get through the liquidation process and then we would start that.

They've liquidated -- they're pretty much done with those 140 stores.

Again they were the smaller volume stores that didn't have as big of an impact on us.

But yes, we are starting to market to those and we think that there will be a positive impact.

Have you seen the uptick in the rewards member sign-ups?

I think that's what you've been using to try and attract them to your stores.

Well we don't have their customer list; we just continue to try to market and try to bring people to shop in our store and try to sign them up when we get them here.

Okay.

Since you are one of the very few retailers left that will continue to open large stores.

Have you already begun to see the benefits of lower rent costs in your current discussions with landlords, irrespective of any stores you may take over the next few months from the TSA?

So are current rent discussions becoming more favorable?

I don't think it's gotten any better or any worse than it has been.

And I think that as some other retailers closed stores that they have announced that they're going to close, there is a number of those that we would have an interest in.

And again, we don't feel this -- we're not compelled to open stores or accelerate our store program.

We are very comfortable with what we're doing, and our view is if we can get the right economic -- we are very disciplined from a real-estate standpoint.

And if we can get the right economics, we will do the deal; if we can't get the right economics, we walk away from the deal.

And believe me, we've walked away from plenty of deals where we didn't feel the economics were right.

And many times, you let it sit for a few months, sometimes six months, sometimes a year, you come back and you make you right deal.

So we are very disciplined and we are very patient.

Would you say that the economics have become more favorable in the last three-month period, given that TSA is completely going away, and before, there was an option that they may have stuck around in a smaller form?

I don't think landlords are really thinking of Sports Authority.

We're starting to build some stores from the ground up again, some centers are being added onto or built, and I don't think anybody was looking at Sports Authority as a viable tenant.

So they really weren't playing in the game, so they didn't have much to do with real estate rental prices.

Okay, and then just shifting gears, you mentioned on the full-service footwear decks that you would be getting new product that you hadn't gotten before in the big stores.

Can you just talk about what that product consists of and then any comments you might have on your brand Jordan stores, how those are performing.

I will tell you we will be investing in some additional brand Jordan shops; we love those shops.

And as far as what we're doing, footwear, we are relatively happy with what's going on there.

It keeps on going to the categories that you are getting more allocations from that you weren't before?

Well, we're getting some of the better selling shoes that you would've seen in the marketplace that we didn't have access to.

So if you walk into our store today, to the premium full-service footwear areas you see, you'll see some -- you'll see Nike Roshe shoes, you will see some of the key Adidas shoes, you will see Steph Curry, you will see some shoes that you didn't find -- that weren't as readily available in our store as in the past, you will see those in the full-service footwear decks.

Got it.

All the best, thanks.

Chris Svezia, Susquehanna Financial.

Good morning, everyone.

Thanks for taking my questions.

Ed, for you, just to go back on the footwear for a moment.

Is it fair to say that footwear out-comped the corporate average of 0.5 in the quarter?

We're not going to give you that level -- get too granular with that, but the answer would be yes.

Okay.

All right, thank you.

And then I'm curious, when you step back and think about the market-share opportunities, and within 200 stores, five-mile radius, what are some of the inhibitors from you obtaining significant market share where the consumer goes to another broad, hard-lines retailer or mass merchandiser goes online, how do you think about the ability to retain as much as possible of that market share that becomes available?

I think there are some things that we have to do from an execution standpoint.

So we have to plan for that market share so that we have the products, so that we're in stock in that product, which is going to require some -- to make sure that we've got the right inventory there.

We're going to need to make sure that -- and Andre is doing this with the store operations group, he and George Hill, we need to make sure that we provide the customer with terrific service and we've got people on the floor to help them.

We need to make sure that they have a great experience, which comes from having what they want, having it in the size that they want, and helping provide them to make an informed decision of the right product for them.

So there's a number of things that we need to do that we are in the process of doing.

We also need to take a look and try to market to those people to come and shop with us, because I believe where they shop next, if they were a Sports Authority shopper and they did $2.5 billion in sales roughly, so they had some shoppers, our firm belief is that where those shoppers shop next is going to be where they primarily shop for their products that we sell.

So we're going to work very hard to market to them to have them come and shop with us.

And that's enough, because as you said I think earlier, that is factored into your thought process for 2016, correct?

Yes.

But nice to see it comping.

Any thoughts about sustainability, what is going on in the industry from a pricing and inventory management perspective, just any additional color?

It's nice to see at least a positive comp out of that.

Yes, so it has been a positive comp.

Some brands came out with some really great product that captured the imagination of the golfer.

TaylorMade with the M1 and the M2, Callaway with the Great Big Bertha.

There has been some new shoe designs out from FootJoy; they have done a really great job over the last several years.

So there has been some good product out there.

The golf apparel business, there's some great golf apparel out there that's been helpful.

The pipeline of inventory is in pretty good shape, and we've indicated that over the next couple of quarters as our margin rates are up.

And we've started to see somewhat influenced by the weather in a positive way that rounds are actually up.

That is helpful to the golf business.

Okay, thanks very much.

Good to hear.

All the best.

Patrick McKeever, MKM Partners.

Thanks very much.

Just also on the footwear, the new footwear decks, and I saw one of them recently, they look fantastic.

I was just wondering if you could share any numbers on the impact to same-store sales and footwear, maybe the economics.

I know it's early, but the economics.

And then what might the hurdle rate be from a return standpoint for you to go forward and move beyond the 175 to 180 stores that are planned for this year?

Well, so as you can imagine, we're not going to get too granular on this for competitive reasons and for some other reasons.

But I will tell you that they are -- once we get through the construction process, they are performing better than the balance of the chain from a comp standpoint.

So they're having the desired effective of being positive to our footwear business.

From an IRR standpoint, we're not going to let you know what that is, but you can imagine if we continued to go forward with these, that they are meeting the hurdle rate that we put in place.

Okay, sounds good.

And then on the hunting business, maybe a little -- you mentioned that it was soft in the quarter.

I'm just wondering if you could give us a little additional color, better or worse than fourth quarter?

Just thoughts on the current environment?

That hunt business has been difficult.

And some of the things that are driving that business we're not as -- we're not as invested in.

The handgun business, some of that, we just don't -- we sell those in some stores; we don't sell them in all stores.

But we suspect the hunt business is going to continue to be challenged for a little bit here.

We're don't -- we're not looking at that to get a whole lot better.

Although, I will tell you that our hunt business in Q1 was a bit better than it was in Q4.

Good stuff.

Thank you, Ed.

Peter Benedict, Robert Baird.

Hello.

Thanks for taking the question.

The $0.10 to $0.15 cut on the earnings plan, can you give us -- it sounds like it's spread across the balance of the year, 2Q, 3Q, 4Q.

Obviously more in Q2.

Can you give us a sense of maybe how that buckets out across the quarters?

We've never really provided guidance outside of the quarter of the year that we've been in, so we're not going to get that granular with you on it.

We do feel that, as we've said, this liquidation is going to have an impact on Q2.

It will have an impact on Q3, because it will go through the all-important back-to-school time frame of the third quarter.

And we think there will be some pull-forward out of the fourth quarter into the second quarter or third quarter, and the market is just going to be tired from a sporting-goods standpoint going in the fourth quarter.

Now we might have some upside from that.

We haven't baked that in, and we think the benefit of this consolidation that the industry is going through, we'll see the benefit of that in 2017.

Thanks, it sounds like a reasonable approach.

Just the other would be just on this overtime rule change that is coming into effect.

Any early thoughts, considerations on that and how that might impact the way you manage payroll, et cetera?

Thank you.

As you know, those regs just came down the other day, and I think what we're doing right now is we are assessing the impact.

We don't see it as a material impact in either -- excuse me in either 2016 or 2017 as we go forward.

So it is something we are going through, as I said.

The regs just got published the other day, and we're going through that.

But we don't see that as a meaningful cost increase year over year.

Great.

Thanks.

Wayne Hood, BMO Capital.

I just had two questions actually.

Separately from looking at a small subset of TSA stores you might buy, why wouldn't you put forth a proposal to buy TSA's customer loyalty list they developed since 2012?

And then I had a follow-up.

We haven't given any granularity into what the offer is on the table.

So haven't said we've done that, haven't said we haven't done that.

Do you think, putting aside whether you did or didn't, is that a list that you would view as something that you would want to get, because of, stating the obvious, right, it's a list that you can deep dive into.

So could we?

Sure.

There's other ways to get lists like that also.

Lists of names is not -- we're not that concerned about the list of names.

If the real estate sites are good sites and we can get the economics, we would be happy to do that.

The list of names is interesting, but we can get names very easily and we're starting to target some of those customers through other lists that we buy.

And we think we might be able to buy them cheaper than we can buy from TSA.

Okay, my final question is, just when you look at the market share data by line of business at TSA, recognizing they don't index anywhere, but would you say that like footwear would be the greatest opportunity for you?

As you look at categories where they might be over-indexing, where you would say that's our biggest opportunity, where would that be?

Thank you.

It would only be our sense, because the data that we got from them was not at that level of detail by category of business.

But we do think that they had a relatively good footwear business.

And we think footwear is an opportunity for us to gain some market share, as is their apparel business and their team sports business.

They had exited some of the other businesses or really scaled them back, such as the hunt, fish, camp business.

And some of the -- some other hard lines, ancillary hard-line businesses.

But I would say footwear and apparel is the key area that we're looking at that will be the biggest market share opportunity for us.

Thank you, Ed.

Scott Ciccarelli, RBC Capital Markets.

Good morning, guys.

Ed, I have a bigger question for you, or bigger picture question, rather.

What do you think the biggest challenges are for your industry?

You have TSA and Sport Chalet essentially going away, DICK'S Sporting Goods as the leader of the industry, essentially flat comps, even without TSA if we look at the first half.

Do you think it's an over-stored market?

Is it a combination of just various pockets of softness in different categories, slower levels of innovation on the part of vendors, channel cannibalization from e-commerce?

Just love your view and color on that.

I think there's a number of things.

I think the industry has definitely been over stored.

We are making some big strides with this right now with over 20 million square feet coming out of the marketplace.

I think that some of these other companies didn't have the relationships with the vendors that we do; when you walk into the stores you can see that with the investment that we have made in conjunction with Nike and Under Armour and TNF, so that was a big part of this.

And then I think one of the smartest things that we did versus some others is that we have no debt.

And a number of these retailers had a significant amount of debt, and when business gets soft it gets difficult.

So we know the debt that TSA had; we know that whatever Vertis had they had, but we're debt-free.

We can ride through these difficult times much easier than some of these other retailers did.

That's very helpful, and then how do you think about the increasing penetration rates we are seeing in your category from e-commerce?

We really look at that as an opportunity; that's why were making the investments that we're making in Project Eagle.

You can see that our e-commerce business continues to grow at a pretty rapid rate.

We're going to continue to make these investments, and we look at that as an opportunity.

And you'll start to see more from us on the e-commerce side as we try to build out not only the DICK'S e-commerce business, but also what we're going to be doing with Golf Galaxy and with Field & Stream.

A number of retailers and analysts look at this as a problem for retailers like us; we look at it as a real opportunity.

And you'll see as we continue to make these investments, our business will continue to grow in this area.

Very helpful, thank you.

Mitch Kummetz, B. Riley.

Two questions.

One, could you talk a little bit about your pricing strategy relative to the TSA liquidations?

To what extent are you guys going to do some price matching so that you don't lose more volume?

And how does that flow through the gross margin line?

And then I have a follow-up.

Sure, we're not going to go chase the liquidation pricing.

So they are going to take pricing at 20% to 30% off, and then they're going to go 40% to 50%, off and we are not going to go chase that.

As those liquidations get to be pretty aggressive, we're not going to go chase that.

We will bide our time, we'll be patient, and we don't think it's the right thing to do for our brand.

And we will be patient and let them get through this liquidation over the next quarter-and-a-half.

And then beginning in 2017, I think we have got an opportunity to take significant market share when these guys -- when this 20 million square feet of sporting goods retail is gone.

And then secondly, how do you holistically think about a market, a trade region like California, where you are obviously underpenetrated?

You've talked about wanting to expand there.

A lot of stores are going away between TSA and Sport Chalet, and I get it that you are very measured and deliberate in terms of how you open stores.

But is there any increased urgency to do something there to maybe preempt some of your vendors from exploring other distribution opportunities, like maybe an Under Armour exploring selling to Kohl's or something like that, just as they think about how they make up for lost volume?

There is not.

The one thing that we have always talked about here is you can't fix bad real estate.

We are very disciplined, and we think a lot of this market share is going to come to us.

Our business with Under Armour we expect to go up; our business with Nike we expect to go up.

The same with North Face, Adidas, Taylor Made.

We expect to increase our business with these guys.

And we will not take bad real estate.

We will not take real estate at economics that don't fit our model, because you live with that for 10 years; you can't fix bad real estate.

You can make a bad buy from a merchandising standpoint, and you can mark it down and you can do whatever you need to do with it to get it out of the system.

Bad real estate, you've got it for 10 years.

Got it.

Thanks, good luck.

Paul Swinand, Morningstar.

Good morning and thanks for taking all the questions, as always.

I wanted to ask a question on the -- you mentioned the other stores, TSA, some of the people in trouble, don't have the relationships with the national brands with the big vendors.

Could you say how much more of a lead you had with the top 5 or 10 national brands?

In other words, was it 20% of it were dwindling from 10% to 5% of the business?

I don't know what that is.

All I know is that we really made a strategic initiative years ago to partner with these brands.

You walk into our store and you see the significant Nike presence, the significant Under Armour presence, what we're doing with North face.

And I think that really resonated with the consumer and helped move market share to us.

And it is clear that we're the winners in this race between us and Sports Authority and Sport Chalet, and we're very happy the position we are in right now.

Let me maybe come at it a different way.

There are many regional players out there.

I know you don't put your national market share that high, low double digit, I think.

Of the regional players or some of the other players in the outdoor space that are maybe national, are there significant weaknesses in those national brand representations?

And where I'm going is how much further consolidation do you see in the next 5, 10 years?

I think there will be more consolidation.

Do we see weaknesses in some of these other competitors?

Sure.

I don't think it would be appropriate for me to call it out here.

But, yes, I think there is and I think there will be more consolidation going forward.

Great, thanks and best of luck.

Thank you.

Joe Feldman, Telsey Advisory Group.

Hello.

Thanks for taking the question.

Most of mine had been answered, but I did want to follow up on something, just the blending between stores and e-commerce.

And I understand your comments earlier, makes a lot of sense to me.

You open a store in a new market, it helps drive e-commerce sales.

That being said, have you thought about what the right balance is over a longer-term basis?

I know that you have the long-term store potential, but that has been done in the prior years.

Have you given any new thoughts to what the right number of stores might be relative to e-commerce?

Obviously, e-commerce is growing at a nice clip for you and increasing penetration quickly.

I will leave it there.

Well, we think about that all the time, and that is why we are so disciplined from a real estate standpoint.

We really do believe that a balance between stores and e-commerce is the right balance.

Where that balance is, we're like everybody else in this industry, trying to figure out where that is.

But that's why we're going slowly, that's why we're very disciplined from a real estate standpoint, and that's why the reports that you saw, we didn't buy a lot -- we didn't make an offer on a lot of TSA stores.

And that's why you hear me talking throughout this call, when we've talked about TSA, that the stores we're interested in are really inconsequential to our plan.

There's some good real estate that we would like to -- that we would be happy to take if the economics are right.

We don't feel any pressure or any hurry to get those deals done.

We don't feel any pressure or any hurry to take this real estate from Sports Authority, because what's going on in the marketplace, there will be other real estate available.

So we're exercising our patience, we're being very diligent in our real estate process, and as we go on we will understand where that balance is.

And we feel right now we are in a pretty good spot.

And remember, our leases are, for the most part, only 10 years in duration.

And I forget, I don't have it right off the top of my head, but we've got a number of stores that are coming up for renewal next year, the year after that, the year after that.

So over a period of three to five years, we have the ability to not renew or renew at lower rates stores that we have right now.

So we've got a lot of flexibility in our Business, and this is one of the things that I don't think the street understands is how much flexibility we've got in our real estate and our real estate strategy.

So just for the audience, it's about a quarter of our DICK'S fleet comes up over the next couple years, and about 50% plus of our Golf Galaxy fleet comes up in the next couple of years.

To Ed's point, we have a lot of flexibility as these leases come up for renewal whether to stay in a market or to exit the market.

That is really helpful.

Thank you and good luck with this quarter.

Thank you.

That will conclude our question-and-answer session.

I would like to hand the conference back over to Ed Stack for his closing comments.

I would like to thank everyone for joining us on our quarterly call, and we will look forward to talking to everybody at the end of the next quarter.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.