DICK'S Sporting Goods Inc (DKS) 2016 Q2 法說會逐字稿

Hello, and welcome to the DICK'S Sporting Goods second-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us to discuss our second-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 Interim Chief Financial Officer; and Joe Oliver, our Chief Accounting 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 risks and uncertainties. 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 factors section 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 statement. We have 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, Nate. Good morning. The second quarter of 2016, we were pleased to deliver results well above our previous expectations.

Our diluted EPS of $0.82 per share and consolidated comp store sales growth of 2.8%, both are well above the high end of our guidance range. Our e-commerce sales increased 26%, and grew to 8.5% of net (technical difficulties) [sales compared to] 7.3% in the same quarter last year. Our stronger than expected performance was driven by two factors.

First, our guidance assumed substantial headwinds from the TSA and Sport Chalet liquidations, which we expected to continue into the third quarter. As many of you know, these were completed sooner than anticipated. We actually saw some benefit from the end of the quarter.

Second, our license business benefited from the Pittsburgh Penguins and Cleveland Cavalier championships. We saw growth across most of our categories, most notably the outdoor business. Golf comps were negative, however, we are pleased to see margin expansion for the fifth consecutive quarter.

Now let me provide a few updates on how we remain focused on driving store productivity and overall growth through impactful merchandising and marketing strategies. On the merchandising front, footwear is a key area of investment. As of the end of the second quarter we had 117 premium full-service footwear decks in place, and we continue to be pleased with the early sales results.

We are supporting these new decks with heightened marketing efforts and an enhanced level of service, and are very excited about the new brands and styles we have in place for the important back-to-school season. In addition to what we're doing in store, we are elevating our footwear business online through improved content and a broader assortment. To further differentiate ourselves, we continue to focus on our private brands.

We remained particularly enthusiastic about CALIA, which is now our number three women's athletic apparel brand. With great brands like CALIA, Field & Stream, Quest, adidas Baseball, Umbro Soccer, Top Flite and Maxfli, we see a lot of opportunity ahead. And are targeting $1 billion in annual sales over the next few years.

Turning to our marketing. I couldn't be happier with the work our team has been doing with the United States Olympic Committee and Team USA. The Olympics have provided us a platform to deliver our highly inspirational brand message to a much broader audience than we ever have before.

We've had over 200 Olympic contenders working in our stores leading up to Rio with the mission of providing these athletes fully flexible jobs so they can train and travel and compete. 31 of these remarkable men and women qualified for Team USA and they all have made us tremendously proud of their accomplishments.

Also during the quarter we purchased TSA's intellectual property and the right to acquire 31 store leases. We were very pleased with the results of the auction, acquiring the assets that will be most impactful to our business. The customer information will be integral to our efforts to capture this displaced market share, while the rights to these stores allow us to access key markets that represent significant white space for DICK'S Sporting Goods.

Our store growth will continue to be focused on new and underpenetrated markets where we will minimize cannibalization to our existing stores. A good example is Houston, the fourth largest city in the country, where we will be opening our first stores later this quarter.

Looking ahead, while we did start to see some benefit toward the end of the second quarter, there is still some uncertainty about how much business may have been pulled forward during this liquidations, particularly in some of the important back-to-school categories such as footwear and apparel. We believe we are poised to pick up long-term market share, but remain a bit conservative until we get more distance from the liquidation event, which removed approximately $400 million of inventory from the market in a very short period of time.

As you learn from our announcement on August 12, Teri List-Stoll is no longer our Chief Financial Officer. This timing made sense, given where we were with the quarter end and the upcoming budget season. We wish Teri all the best going forward.

Andre Hawaux, our present Chief Operating Officer and former Chief Financial Officer, will assume the role of Interim CFO until we announce a replacement. In summary, we're very pleased with our second quarter results, particularly in light of the liquidation activity within the marketplace. We are focused on capturing this displaced market share, and remain confident in our ability to realize meaningful share gains over the long term.

I'd now like to turn the call over to Andre.

Thank you, Ed. During the second quarter we continued to execute on our growth drivers and expand our powerful omnichannel platform, beginning with e-commerce, where we remain on track to relaunch Dicks.com on our own web platform in January of 2017.

Turning to our new stores. In the second quarter we opened five new DICK'S Sporting Goods stores, with three of them in new markets. We relocated two DICK'S Sporting Goods stores to more attractive retail nodes. We also closed three DICK'S Sporting Goods stores and one Golf Galaxy store.

During the third quarter we expect to complete the bulk of our 2016 store development program, opening approximately 25 new DICK'S stores and relocating four DICK'S stores. We will also open approximately seven new Field & Stream stores and two new Golf Galaxy stores. 15 of our third-quarter DICK'S openings will be in new markets, including six DICK'S stores in Houston.

In total for 2016, we expect to open approximately 36 new DICK'S stores and relocate approximately nine DICK'S stores. We also expect to open approximately two new Golf Galaxy stores and nine new Field & Stream stores, with all but one in the combo store format.

During the quarter we purchased TSA's intellectual property and the right to acquire 31 store leases. The intellectual property includes the name The Sports Authority as well as TSA's domain names, private brands, and importantly their customer information.

The leases are primarily located in new and underpenetrated markets, including California and South Florida. The lease deal was structured with maximum flexibility where we have the right to retain or reject any or all of these leases. Our plan is to convert any TSA location we retain into a DICK'S store and expect to reopen these stores over the next 12 months.

Additionally during the quarter we announced our plans to open a new 650,000 square foot distribution center in Binghamton, New York. This new facility will allow us to better leverage our distribution infrastructure and support our future growth.

Lastly one of the ways we are driving store productivity is through our new premium full-service footwear deck, and the early sales results continue to be encouraging. At the end of the second quarter we had 117 new premium full-service footwear decks. And we remain on track to open approximately 70 additional decks in time for holiday. I'll now turn the call over to Joe Oliver to review our financial performance in greater detail.

Thank you, Andre. Good morning, everyone.

Beginning with our second-quarter financial results, consolidated sales increased 7.9% to approximately $2 billion. Consolidated same-store sales, which includes all banners both online and in-store, increased 2.8%, which was above the high end of our guidance. Within this, DICK'S Sporting Goods omnichannel same-store sales increased 3%, driven by a 1.3% increase in ticket and a 1.7% increase in traffic.

Golf Galaxy omnichannel same-store sales decreased 4.3%. We continued to see strong growth in our e-commerce business, which increased 26%. Gross profit for the second quarter was $597 million, or 30.36% of sales, within 1 basis point of last year.

Within the gross profit section, our merchandise margins expanded and we leveraged our occupancy expenses but this was offset by shipping costs associated with our e-commerce business. SG&A expenses were $442 million for the quarter, or 22.45% of sales, an increase of 73 basis points from the same period last year. The deleverage was primarily driven by two items.

First, we invested in store payroll as we continued to enhance the shopping experience within our stores and to support key initiatives such as our new full-service footwear decks. Second, we also increased our administrative headcount to support our growth initiatives, such as the continuing development of our e-commerce platform. In total, led by our strong comp sales performance, we delivered earnings per diluted share of $0.82, which exceeded the high end of our guidance of $0.62 to $0.72.

Now looking to our balance sheet, we ended the second quarter with approximately $112 million of cash and cash equivalents and $152 million in borrowings outstanding on our $1 billion revolving credit facility. The borrowings are a result of returning capital to our shareholders and continued investments in our growth.

Total inventory increased 6.2%, which is below our 7.9% sales growth for the quarter. We're very comfortable with our inventory levels and the quality of our merchandise as we transition into the Fall selling season. As a reminder, our inventory still includes the winter pack-aways that we discussed with you as we exited 2015.

Turning to our second-quarter capital allocation, net capital expenditures were $68 million, or $120 million on a gross basis. Additionally during the quarter we paid $16.9 million in dividends and repurchased $57 million of stock at an average price of $42.60 a share. Our year-to-date share repurchases total $107 million and we have approximately $1.1 billion remaining in our authorizations.

Now let me wrap up with the outlook for the remainder of the year. Starting with the third quarter, as Ed had indicated, there's still some near term uncertainty associated with the recent liquidation events, particularly in certain key back-to-school categories. Our investments and the partnership with the United States Olympic Committee and Team USA are most heavily weighted in the third quarter and we're continuing our investments in e-commerce platform during the quarter.

Taking all this into consideration, for the third quarter we anticipate earnings per diluted share of between $0.39 and $0.42, with an increase in consolidated same store sales of between 2% and 3%. Third-quarter operating margin is expected to decline compared to the same period last year due to higher SG&A expenses for the initiatives that we just discussed, partially offset by an increase in gross margin.

Looking at the full year, we're raising our guidance and now expect earnings per diluted share of between $2.90 and $3.05. This compares to our prior guidance of between $2.60 to $2.90. We now expect consolidated same-store sales to increase between 2% and 3%.

To remind everyone, our earnings this year are impacted by approximately $50 million to $55 million, as we're investing in three key initiatives. First is the transition and growth of our e-commerce business. Second is our brand building through our sponsorship with the United States Olympic Committee, and third is the rollout of our full-service footwear decks.

As a result, the higher SG&A expenses with some partial relief from gross profit improvement will cause operating margins to decline year over year. Net capital expenditures for the full year of 2016 are now expected to be approximately $275 million, or about $450 million on a gross basis. The increase versus our prior expectation is primarily driven by our new distribution center.

Please note that our earnings per diluted share estimates do not include certain costs to integrate The Sports Authority stores into our operations. These costs include occupancy expenses incurred while converting TSA stores to the DICK'S brand, costs incurred to ready these stores for the grand openings, and other professional fees related to the transition. We will separately report these costs to you beginning with our third-quarter results.

I'll now turn the call back over to Ed for some final comments.

Thanks, Joe. It's clear that DICK'S Sporting Goods has significant growth opportunities ahead.

With the acquisition of TSA's intellectual property and the meaningful growth in our digital business, through the investment in our key partners such as Nike, Under Armour and The North Face continue to make with us to enhance the consumer experience both in-store and online. DICK'S is poised to capture significant amount of the displaced market share out there today. I believe this is evident in our second-quarter results.

Last but not least, I'd like to thank our over 30,000 associates for their hard work and thoughtful strategies. They are the team that has made DICK'S Sporting Goods successful.

Operator, this concludes our prepared remarks. We'd like to open it up for questions. Thank you.

(Operator Instructions)

Our first question comes from Robby Ohmes of Bank of America. Please go ahead.

Good morning, Ed. How are you?

Hi, Robby, how are you?

I'm good. Listen, I was hoping you could maybe give us a little more color on the cadence through this quarter in terms of trends in stores that were overlapping with The Sports Authority? Maybe a little more color on how much full-service footwear shops, were they meaningful in helping this quarter? And maybe you remind us you how -- do you usually see -- are you seeing a lift from the Olympics? Did you see any of that in July or is that something that's really helping you in August? Thanks.

Sure.

Well, Robbie, as the stores closed -- we're not going to get into a lot of detail, but the stores that were competing with The Sports Authority are outperforming the balance of the chain. We are definitely seeing market share coming to us from the closings.

The full-serve footwear, these things have kind of rolled on on a weekly basis. So we didn't see much of an impact yet, although the sales results that we've seen of the stores that have been open for a while are very positive. We expect to see more of an impact in the third quarter with these full-service footwear decks than we saw in the second quarter, although we do remain a bit cautious on footwear as the Sport -- we're not sure how much The Sports Authority and the Sport Chalet liquidations are going to have on that. Sports Authority, from what we understand, liquidated a little less than 1 million pairs of cleats and over 2 million pairs of athletic footwear. And so we don't know what that's going to do to the third quarter.

As far as the Olympics go, we haven't seen a big impact on Olympic merchandise, although, as we talked about in the call, we've been very aggressive with our marketing with the Olympics. Our team has done a great job on how we've partnered with the US Olympic Committee and Team USA. And we think we got our message out and have had very positive comments back on our marketing message around the Olympics.

The other aspect that helped our business were the playoffs in hockey and the NBA. So to have the Penns win the Stanley Cup was certainly helpful to our business. And to have the Cavs win the NBA championship was helpful to our business. And Cleveland responded great to the championship merchandise.

Got it. That's really helpful. Thanks, Ed.

Thanks, Robby.

Our next question comes from Seth Sigman of Credit Suisse. Please go ahead.

Thanks. Good morning and nice quarter.

Thanks.

Ed, you discussed the benefits late in the quarter from some of those competitor closings. But then a couple comments about the uncertainty regarding the pull-forward here in the third quarter, which makes sense. I'm just wondering, is that based on what you're seeing right now or are you just taking a conservative view of the different scenarios?

It's not necessarily what we're seeing right now, but the merchandise in the second quarter is a little bit different than the third quarter. So that outdoor category, and I'm not talking about the hunt, fish piece, but the outdoor camp piece, canopies, chairs, outdoor camping merchandise, is very important to us in the second quarter. As Sports Authority was liquidating, we think people came to us for those type of products. As we said, our outdoor category was very good in the second quarter.

We're concerned that there may be this liquidation of $400 million worth of merchandise, a big part which is athletic footwear and apparel, could impact us on the third quarter. People may have done some early back-to-school shopping with the liquidations that they had. We just don't know. And we won't know for a couple of weeks.

Okay. That makes sense. And then just a follow-up question on store growth, maybe two parts here. First, just regarding the store rights that you've acquired. As you look to next year, is there a view here where maybe you could accelerate your store openings? Or is the plan to basically just cherry-pick and use any of those acquired stores as -- or in lieu of any of the previously planned stores? And then the second piece of it is, as you think about a market without one of your large competitors, does it change your you view on the ultimate store target or how to think about the pace of store growth and if you need to continue at this current pace? Thanks.

So as far as accelerating the store growth, we've got designation rights on 31 stores. We don't expect that we're going to open up all 31. We've already -- there's a few that we know that we're not going to open up because we couldn't make the right deal. And we've walked away from them. I'm not going to give you a lot of detail on that right now because we're still kind of working through this. But it won't be 31 stores that we open up.

Our store growth next year will probably be a little bit higher than it was this year because of the TSA stores. But we expect our growth to remain kind of in the same zone that it has been.

With these liquidations, we think that there's not a need to accelerate the store growth. Our total store count probably hasn't changed an awful lot, although we'll probably go at, as we said, this same pace. And our big focus is to drive our digital business, which you can see that we're doing this, that we've made these big investments. This business continues to accelerate. And we think we're poised to really drive this business going forward.

Seth, this is Andre. I'd add two things.

One is, many of the stores that we're looking at are in markets that we currently do not serve and they're underpenetrated. So we believe this will be a nice complement to the fleet we already have. And the other thing investors need to know is, we're going through the same rigor with these leases as we do with our real estate strategy. So we're going through the same analysis we would do on a brand-new DICK'S store to make sure that it pencils and that it makes economic sense for us to open. Otherwise, we have flexibility not to take the lease.

And of these 31 stores that we have the designation rights to, the vast -- 20 of the 31 are in California and Florida where we are very underpenetrated.

Thanks. Very helpful.

Our next question comes from Michael Lasser of UBS. Please go ahead.

Good morning. Thanks a lot for taking my question.

Ed, how long do you think that this benefit from the market consolidation is going to last? Is it the type of thing where you're going to see some share gains for the next four quarters and then that will normalize? Or should we expect that the tailwind is going to last longer than that?

Well, again, we're not 100% sure. But I think -- I would think the tailwind is going to last longer than that. Because not only the fact that these competitors are gone, the fact that they will no longer be opening stores and intruding on some of our markets, we think will be positive also. So there's kind of a double-edged benefit, if you will, that they left some markets and then they're not going to be opening up in markets that intrude on our market share. So we think this is going to last for a while.

And then philosophically, how do you think about the margin windfall that you should experience from abnormally high comps for the next several quarters, at least? Do you allow that to fall to your bottom line and reward some of the shareholders, or do you reinvest that back into the business and put it off for a rainy day?

Well, I think it will depend on a couple of things. And I suspect some of it will go to -- go back into the business, which we think no matter what we do, we think it will reward the shareholders longer term, whether it's having something drop to the bottom line right now or continuing to invest in the future of our business, which will certainly benefit us going forward. So we'll take a look at this. And there will be some that will come to the (technical difficulty) [bottom line] and some that will go to continuing to make investments in our business.

And my last question is, just on your relationship with your vendor community and how that's unfolding now that the market is consolidating. Do you feel like the tenor of your conversations and the nature of your relationship, especially with your key vendor partners, is changing where you're becoming that much more important?

Well, it's always been good with our key partners such as Nike, Under Armour, The North Face, those brands. It's always been very good. It continues to get better, as you continue to see them investing in our stores. We'll have a new roll-out of Nike shops in the Houston stores when we open them. We continue to have investments from The North Face, Under Armour, so it's -- they've always been good.

They continue to be good. And we really work as partnership. We're not trying to get one up on them. I don't think they're trying to get one up on us. We really go to the market as true partners.

Okay. Thanks so much.

Our next question comes from Camilo Lyon of Canaccord Genuity. Please go ahead.

Thanks. Good morning, Ed and everyone else. How are you?

Ed, I was hoping to get a little bit more detail on how you view your promotional stance. I think in years past you've talked about competitors in the marketplace becoming more promotional and you meeting that promotional cadence so that you would not suffer some traffic losses to that. With TSA now gone, how do you view now that promotional stance, and particularly as we head into the back-to-school and holiday season?

Well, we think it will probably -- we expect it, although you never know what somebody else is going to do, we expect the promotional environment to be no worse than it's been in the past, and we think a little bit better.

Okay, great. And then with respect to the IP that you won at auction, have you begun to use that data? Have you seen any benefits from that data, any of the customers coming over to the DICK'S platform? And if you haven't begun using it, when will you and how will that inform your targeted kind of rollout of stores, and really the messaging that you want to convey to those customers?

We're seeing some benefit right now based on the stores being closed. We just closed on this not long ago. We're just getting this information, starting to sort through it. We hope that it will be helpful for us in the fourth quarter, a little bit in the third quarter but more so in the fourth quarter.

And then just a last one. You touched upon it a little bit with respect to the Q3 guidance with regards to how much inventory has been taken out of the market already, given the liquidations. Is there anything else that would help explain why you would anticipate a deceleration on the tier basis in the Q3 comps, now that the stores have completely shuttered, the TSA stores?

No, the only thing it is, is how much was taken out of the marketplace, especially for the back-to-school season, because footwear as a percent to our business, and apparel, athletic apparel as a percent to our business, is a very big part of our business in the third quarter. And they took out, like I said, they took out almost 1 million -- liquidated 1 million pair of cleats, so soccer cleats, football cleats, baseball cleats.

Even more so than that, athletic footwear in the marketplace, that some people probably did some -- we think did some early back-to-school shopping during these liquidations. So we just don't know how this is going to play out. But long term, it's great for us. I don't think it will have any impact -- it will have no impact on us in the fourth quarter, we don't think.

Was there any category that TSA was particularly stronger at than you that you think would be an opportunity for you to rapidly accelerate your share in that particular category, whether it's outerwear or some other category that you might not have had as big a mix representation in your own business?

From what we've seen -- well, one we always knew, the other one we kind of seen at the store, we didn't think it was doing as well as it probably was. They were always a better tennis store than we are. So I think there's some opportunity in tennis. But that's a very small business and not going to move the needle. What we've learned is that they did a better -- a bigger fitness business than we had anticipated. And we think around fitness, whether it's cardio, other fitness products, we think we've got an opportunity in fitness to grab significant market share.

Got it. All the best to you in the upcoming back-to-school and holiday season.

Thanks.

Our next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.

Thanks. Good morning. Nice quarter, Ed.

Thanks.

Different topic for a minute on Eagle Investments as we head into next year. Can you just talk about any -- just give us a sense of how it's going. Any changes to the investment cadence? Anything that had popped up one way or the other, good or bad, as we roll into next year, and you take on independents with regard to the online platform?

We're very pleased with where we are. Some of the things that we needed to get done have been done. We've actually, in a test stage, taken orders and shipped product. So we're moving in the right direction. We don't see any red lights right now. The capital that we had anticipated is coming in on budget. We're, as of right now, systems are green.

You called out free shipping as a headwind. Was it any more of a headwind than you anticipated, or it's about what you've expected?

It's about what we expected. It's just different than last year. It's going to continue -- as this business continues to increase, it's going to become a larger part of our expense structure, or margin rate structure.

Got it. Okay. And then my follow-up. This is sort of implicit, given that there seems to be some conservatism in the third quarter. But I was going to ask you, if you back into the fourth quarter, I think it looks like it's somewhere between a 3 to a 4, if the math is right there. And yet your Q4 compare is very easy, much easier than what you just did this quarter.

And so it looks like there's conservatism as the rest of the year goes on. But I just want to confirm that, and if there's any reason why by the fourth, if you're doing 2 to 3 now, why you can't do even better than what's implied by the time we get to the end of the year?

It's still an uncertain environment out there with what some other retailers might do. It's an uncertain environment out there with the Presidential election. It's uncertain out there from a weather standpoint. So I agree with everything you said, but there's still some uncertainty out there.

Okay. Thanks. Good luck.

Thanks.

Our next question comes from Matthew McClintock of Barclays. Please go ahead.

Hi. This is Marjorie Lopez on for Matthew McClintock. Thank you for taking our question.

My first question is, can you elaborate on your golf business? How do you believe you're positioned in this business, particularly given that one of your partners decided (technical difficulties) [to exit the golf equipment?] Thank you.

As far as the golf business goes, I think we're very well positioned. But it's been a difficult -- it's been a bit more of a difficult business from a sales standpoint. But don't lose the fact, and we've talked about this, that the margins have increased. So a lot of the products that had been in the marketplace that needed to be liquidated, those are out of the market today. And although sales are down a bit, the margin rates are up. And this is the fifth consecutive quarter that margin rates are up.

There is some consolidation going on in the wholesale side of the business. I think there will be some consolidation on the retail side of the business. But as far as in the golf business, I think we are very well positioned. And our golf business, we remain committed to our golf business. And understand, our golf business is profitable. It's not a drag on earnings. Our golf business is profitable.

Great. Thank you.

And just a quick follow-up. I know that another area for growth is product development. How has CALIA performed? And are you making other improvements across our other private brands? And also if there are any other categories where you see an opportunity for private label? Thank you.

Our product development business, we're very enthusiastic with. And CALIA has done great. For CALIA to move to be the number three women's athletic brand in a 1.5 years since we launched it, 1 year and 16 months since we launched it, is great. We continue to invest in that brand. You'll see us investing heavier next year in that brand.

And as we take a look at what we're going to do from a PD standpoint, we continue to be enthusiastic about Field & Stream. We continue to be enthusiastic about Quest and some other outdoor categories. And we're pretty confident we can move this private brand business to exceed $1 billion over the next couple years.

Great. Thank you.

Thank you.

Our next question comes from Steven Tanal of Goldman Sachs. Please go ahead.

Good morning. Thanks, for taking the question.

Sure.

Just wanted to, I guess, figure out sort of the inflection from TSA and understand how that might have moved. And, really just asking Simeon's question in a different way, can you maybe size the Penguins and the Cavs championships in the quarter as we think about what the 2Q kind of trend rate to 3Q implied guide might look like as we think about TSA kind of rolling in?

So could we? Yes. Are we? Probably not. From a competitive reason we're not going to tell you how much business we did with those two. But I will tell you that the Penns and the Cavs were meaningful to the quarter and certainly very helpful to the quarter. The Cavs more so than the Penns.

The TSA, the stores TSA closed or were closing did better than the balance of the chain. So kind of how that laid out, we're not going to get that granular from a competitive standpoint. But TSA, Cavs, Penns, were all very helpful to the quarter.

All right, fair enough. You mentioned strength in the outdoor category, but not firearms and ammo. Can you talk about sort the sub-categories and whether you saw any movement on the gun side?

That business has been up and down and depends on what's happening in the news, unfortunately, and on the political climate. But the majority of our outdoor business is driven by that outdoor category, which is camp, water sports, paddle sports. And that business has really been very good. Our team has done a wonderful job focusing on those businesses. Just take a look at -- the gun business was positive, but we have no idea -- the gun business is somewhat volatile. But in the second quarter, it was positive.

Understood. And just last one from me. There was a recent announcement in the department store front, I guess another one of these companies getting more athletic apparel. How do you think about that? And any comments you might make on that front would be appreciated. Thanks.

The way we're looking at this is that Sports Authority's out. Somebody else is going to carry an important brand. We think it's probably net neutral. It might be slightly net negative, based on the number of stores they have. But we don't think it's really meaningful. And we have a differentiated assortment there. So I think it's -- we wish it wasn't happening, but we don't think it's really a big impact.

Got it. Thanks so much.

Our next question comes from Sam Poser of Susquehanna. Please go ahead.

Good morning. Thank you for taking my question. First of all, on the merchandise, can you give us the specifics on the merch margin and the fixed cost, just the improvement and the leverage or deleverage?

Yes, Sam, this is Joe. So we're not going to talk about the specific number. But I would say between merch margin and the occupancy leverage, the basis point improvement was about the same. And then offset what the increased shipping cost.

Okay. Thank you.

And then when you think about -- between TSA and Sport Chalet, they did probably $3.2-ish billion annually. When you think about that over time, how much of that business do you think you can get? On where we are today, forget about the store openings, all that other stuff, just from a share basis.

We're not going to go -- I think you probably wouldn't either if you were sitting on this side of the table, Sam. We're not going to go out and throw a number out there. But I can tell you, we're going to aggressively go after as much of this share as possible. We've gone down to the very granular level of where we think -- categories that we think we have a big opportunity to grab market share. We think we have a meaningful opportunity to grab share in the footwear business and the apparel business. We think that we've got an even bigger opportunity to grab a bigger part of the market share on the team sports area, baseball, football, soccer and those.

We think we've got an opportunity to take a bigger market share in the fitness business. And we think in Sports Authority's outdoor category, which was really more backyard type camping, we think we've got a big opportunity to do that. We think we saw pretty good results in the second quarter in that outdoor category coming from TSA. So we've got this pretty granular. Our teams are monitoring these stores very closely, making sure that we funnel merchandise into these stores as fast as we can. I will tell you, we've gotten surprised in some areas of the country, that it's growing at a faster pace than we had anticipated, such as South Florida.

Got you. Lastly, speaking of South Florida, you've got the rights to the 31 stores. It sounds like you're going to give a few back. But are there other stores where you wanted them, but it just didn't work and you're going to go back to the landlords and have further discussions so that number could go up in total, just working a different kind of deal? I don't imagine there's a ton of them, but are there more there or is that 31 in total sort of what you wanted?

Those 31, Sam, are the 31 that we wanted. I will tell you, there was one other one -- there was actually two other ones we did want that we didn't get. And somebody else got them. So that's off the table, no problem. But there is nothing else sitting out there that we're trying to negotiate with the landlord to get. We got everything that we wanted, except two.

Lastly, in the one in Florida, Sunrise, that's Sawgrass Mills, I assume?

That's correct.

Okay. Thank you very much. Good luck.

Thanks.

Our next question comes from Kate McShane of Citi Research. Please go ahead.

Hi. Thanks. Good morning.

Hi, Kate.

My first question was just with regard, again, on the new stores, especially in California and South Florida. Are you taking the time to just gather some learnings in that market before you convert to the TSA stores -- before you convert the TSA stores there? And any insights into what you may have to do differently in those markets versus the rest of your fleet?

I'll start with, and Ed can add to this, but I think we are, as I mentioned, first on the economics and the way we think about the real estate transaction. We're being very consistent with how we look at the financials for whether the lease makes sense for us to get there. As Ed also mentioned, the merchants are doing a very deep dive, understanding market by market where they excelled or where that customer was really going. In some markets that will see us accentuate categories such as fitness. And some markets there may be some tennis accentuation that we see. But also clearly footwear and athletic apparel where we were strong and they were pretty good as well.

In Southern California and South Florida you'll see swim play a different role in our stores there. Very much the merchants and the allocators are taking a very granular view of those markets to determine how we assort those stores to meet the customers' expectations. I don't know if you want to add anything else.

One of the other things we've done, Kate, is we've talked to the brands to say okay, based on this market share that's being displaced, what was -- in order for you to continue your business and market share, what advice do you have for us in some of these stores in California and Florida and a couple of other places? And the brands have been very helpful working with us on these learnings also.

Understand also, the majority of these stores, we've got stores in the general vicinity. We may not be in that particular trade area and we need to go into that trade area, but we've got a number of stores in Florida. We've got a number of stores in California. And we've got a sense of what needs to be done there.

Okay. Great. And I think, Ed, you had mentioned maybe last quarter that there were opportunities to buy some inventory at a discount. Did that contribute much during the quarter, and do you continue to benefit that for the next couple of quarters going forward?

I don't think it's the next couple of quarters. We've got -- we did have the opportunity to buy some product off-price. Some of the product that we bought off-price, we actually have bought and packed away for promotions going into next year, beginning of the year, new store openings.

So it's helpful. We did buy some product off-price. I don't think with the size of our business and what we bought, I don't think you'll -- if we didn't tell you that we did that, you probably wouldn't -- you wouldn't even know. It won't drive the needle a whole lot.

Okay. Thank you.

Our next question comes from Mike Baker of Deutsche Bank. Please go ahead.

Thanks. A couple of follow-up questions.

One, I just want to understand this. So the stores that were against Sports Authority, they did better than the chain. But I assume -- does that include some negative impact early in the quarter when The Sports Authority stores were in liquidation and then as liquidations ended, the DICK'S stores saw a bump and the net result through the quarter was a positive? Is that the right way to think about it? Or even when the Sports Authority stores were liquidating, the DICK'S stores were out-comping?

It's a little of both, but more the former than the latter. There was some pressure to begin with. And as the liquidation -- as there were less good products there, we started to see some market share. As you can imagine over the first several weeks all the good stuff got cherry-picked pretty good and they got left with the dregs. It was helpful as we got closer to the end of the liquidation.

In that sense, can we infer that the comp trends got better throughout the quarter?

Well, it's kind of -- it's a little bit difficult because we did have -- the Cavs and the Penns were an important part of that comp trend also, which was earlier in the quarter.

Okay, understood. Two other unrelated -- well, somewhat related follow-ups. One, how do you think about your fixed cost or variable cost when you see a sales windfall from these types of things? Do you need to add a lot of store labor, or marketing around it, or --just so we can gauge the flow-through of the incremental sales.

Nothing really significant. So will we add some store payroll? Sure. As the store gets busier, we'll add some store payroll in the form of associates on the floor or cashiers to try to check people out quickly. Marketing, not an awful lot from a marketing standpoint that we need to add to these trade areas where TSA went out. So there's a relatively good flow-through.

Okay. That's encouraging. Lastly, the comment about shipping cost impacting the gross margins, which is understandable. But I'm wondering, is that a function of just the big increase in e-commerce? Said differently, are you seeing an improvement in your shipping costs but it's still a bigger drag because e-commerce is bigger than it was a year ago because it's up 26%? Are you making any progress in lowering your costs, though?

We've worked on you to lower the cost, or mitigate those increases. Our team's done a really nice job. The vast majority of this is because of the increase in penetration, just we're doing so much more business digitally.

And is that going to be less of a drag once you flip the switch on taking the e-commerce in-house in 2017?

Not necessarily from a shipping standpoint, but there will be other cost drags that will not be there any longer. As we said, we'll get a roughly 25-basis point improvement in operating margin when we flip the switch.

Primarily on the SG&A line, I think is what you said.

Yes.

Right. Okay. Understood. Thanks for all the color.

Thank you.

Our next question comes from Scot Ciccarelli of RBC Capital Markets. Please go ahead.

Hello. Scot Ciccarelli. Would you have expected more gross margin pressure in the quarter, given the TSA liquidation process?

We really didn't. We indicated that we weren't -- in the last call, I think we indicated that we weren't going to go chase the liquidation prices, that we're going to let them just liquidate their product and we'll get the benefit after they're done. But we weren't going to go try to chase the liquidation and take our margin rates down.

Got you. And then a little bit of a different subject. I suspect it's a little taboo. But is there any different messaging from the Company, whether it's on the expense side or any other front, frankly, relative to what Teri has been telling us now that she's no longer in the CFO seat?

No.

Okay. That's all I needed. Thank you.

Thanks.

Our next question comes from Mitch Kummetz of B. Riley. Please go ahead.

Yes, thanks for taking my questions. Ed, you talked about a little bit uncertainty, given potential pull-forward on some categories like footwear, cleats, things like that. Are there any categories where there really should be no pull-forward? I'm thinking about maybe some fall team sports, things like that, where maybe TSA didn't have that inventory at the time that they were going through liquidation. And if so, is that potentially meaningful to the third quarter?

Well, I mean, so are there some things like -- I'm not sure how they were in stock on mouth guards for football, soccer, receiver gloves, all that. So did they pull some of that forward? Probably. I don't know how significant it was.

But the main think that we are concerned about, and it's so important to our third-quarter business, is footwear and athletic apparel. And I just think some people went and stocked up a little earlier. I mean, I know some people did. What the impact is, we don't know yet. But we think that there's a very big opportunity for us going forward as we get further away from these liquidations.

Got it. And in terms of some of those liquidations in the quarter, again you mentioned athletic footwear, 2 million pairs. To what extent did that have a negative impact on your footwear business in the quarter? Is there any way to kind of quantify that? Was your footwear business potentially down in the quarter because of it, or --

No, it's tough to put that -- to give that -- what that number would be, because we had a lot of noise in our footwear business also, that we were renovating a number of these decks. These decks, as you could imagine, and would expect us to, we made the investments in our best stores.

So as we're going through this transition, building out these decks, it put some pressure on our footwear business because it was a relatively difficult shopping experience as we were going through the modification of these footwear decks. After we did it, our footwear business in those areas have been really good and have outperformed the chain. So there's just a little too much noise right now to come to a conclusion in the second quarter.

Got it.

And then last question. In terms of the 31 stores that you have rights to and how many you might be going forward with, I think you made the comment that you'd reopen those doors within the next 12 months. I guess that's further out than I would have anticipated. I would have guessed that you would make a decision retrofit, and most of the stores would kind of come online at the same time.

First of all, is it still kind of 4 to 5 months on a retrofit? And at some point are you going to come to a decision on those stores? How does that work? Is it all sort of individually negotiated with the landlords or --

A couple things there, Mitch. This is Andre.

One is, there are individual discussions that are going on. We do have a time frame, and that's going to be the first week of September where we have to make some of these decisions because we want to be able to, in the event that we do reject, we do want to walk away and not have any cost as a result of the rejection. The other piece will be, in the markets that we're going, where the bulk of these stores are, California and South Florida, the permitting process for us to do the stores the way we want to do them is going to take some time. So it varies by jurisdiction.

Some will be opened earlier than others. But I think there will be some long lead time items relative to permitting that is required for us to build. As you know, California has a lengthy permitting process, and parts of Florida do as well.

Our goal is to get these opened as soon as possible and to make sure that we're providing that customer the experience and the shopping experience that they're used to at DICK'S Sporting Goods. So we're going to do the right things for that and get them opened as soon as we can.

Appreciate the color. Thanks and good luck.

Our next question comes from Dan Wewer of Raymond James. Please go ahead.

Thanks.

Ed, I wanted to ask you about the Field & Stream combo stores. I recall originally a few years ago when you were still using the free-standing model you were looking at potentially 50 stores by 2017. And then I guess the following year we dialed that target back.

But given the success of the combo stores, what are you now thinking is the art of the possible for the large Field & Stream format? And then also if you could talk about in those stores that are located near a Bass Pro or a Cabela's, how they perform against those stores without those competitors?

The stores that don't have Bass Pro or a Cabela's do a little better than the ones that do have Bass Pro and Cabela's. They're both very good competitors. As we take a look at these combo stores, we're very enthusiastic about the combo stores. We just opened up one in Albany, New York, relocated a DICK'S store, just opened one up in Albany, New York, and has done great.

We've got a couple of them that are going to be opening in Houston in this next quarter. We've got several of them for next year. We think that there's -- we haven't come out to say exactly where -- how many we can put out there, but we still expect this to be an important part of our store development program. Where we've done these combo stores, we have been very pleased with them.

So in Houston where you picked up some TSA leases, you're able to get some adjacent space that's large enough to support the combo format?

No, no, no, there's no TSA store that will be converted to a combo store. The stores in Houston are coming right up out of the ground as part of our development program in Houston. And remember, we don't have a DICK'S store in Houston today. We don't have a DICK'S store, we don't have a Field & Stream store in Houston today.

Second question. What is your thoughts on the status of athletic footwear and apparel? And the reason I'm asking is some of your competitors are telling me that they've been disappointed with the lack of innovation in apparel relative to footwear from the key vendors in the industry.

We're still very pleased. We're happy with our business. We are very happy with the footwear business. We continue to be very enthusiastic about what we're doing with the CALIA brand on the women's side. And we're talking about what else we can do on the athletic side to bring in another athletic brand that would go across men's, women's and kids that would be more of an opening price point brand. So we continue to be very enthusiastic about what's going on with apparel and footwear.

When we get to Houston you'll see a new Nike concept on the floor from an apparel standpoint that we've been working on with them that we expect will be rolled out to a number of stores going into next spring. So we continue to be very excited about it.

And then the last question. I think Joe, you had mentioned in your prepared comments that you would exclude the occupancy cost for the TSA stores until they opened, which makes sense. But I think you also indicated you would exclude some of the preopening expenses as well from the figures that you release going forward. I was curious as to why those would be carved out, just the preopening expense component.

So it would just be some of the preparation costs associated with getting the store ready. So it's kind of no different that we've done in the past when we picked up some of the stores from Galyan's and kind of went through that conversion process.

Is it a lot more expensive than if you were to -- than the expenses with the Greenfield location?

They're going to be different, yes. So as Andre said, we've got a long permitting process that we have to go through. It will be a bit different. And then like I said, a lot of the dead rent, those types of costs that we're going to incur. So those will all be the items that we're going to (technical difficulties) [call out going forward].

Okay. Thank you.

Our next question comes from John Kernan of Cowen. Please go ahead.

Good morning. Thanks for squeezing me in. And congratulations on a really strong quarter.

Thank you.

Ed, I think on an earlier call you had blessed mid-teens earnings growth off of this year's base. Obviously with the $55 million in costs related to footwear, the Olympics and the transition of e-com rolling off, it seems like that could potentially be conservative given the new run rate of the business coming out of Q2. Are you thinking any differently about the margin recovery next year and the expenses that are going to be rolling off the business?

We think about them every day. Are we going to come out with anything different than that right now? No. We're going to take a wait-and-see attitude and see how it plays out. With that being said, understand we are aggressively going after this market share. We're aggressively going after this market share to make it as efficient and as much of a flow-through as we possibly can. But we think about this every day, and are pretty excited about the prospects going forward.

Okay. Then Andre, the implied guidance for Q4, how are you thinking about merchandise margin recovery? Obviously very difficult environment in the fourth quarter of last year, promotional all across retail. You lost about 130 basis points of merch margin. How do you think about the recovery opportunity there, and what is embedded in your guidance for this year?

We don't have -- at this point to guide to Q4, we're not quite there. What I talked about in the comments were more about how we're viewing the full year. So for the full year, so we talked about we expect to see some improvement in gross margin in Q3 as well as the full year. But we haven't guided specifically to Q4 yet.

Okay. Thank you.

Our next question comes from Rick Nelson of Stephens. Please go ahead.

Thanks. I'd like to follow up on the footwear deck. You have 117 in place now, 70 more for holiday. Do you accelerate that rollout now with the big footwear opportunity following TSA's demise?

We're looking at what we're going to do next year. We're probably for a while, we're going to read this. We did this in roughly 180 stores, which we think will be our best stores, which include some new stores. We're going to then sit and read this for most of next year and decide where we want to go after that and see if there's any modifications we want to make to this.

And with what's going on with Sports Authority, we think we've got the time and the patience to be able to do that before we rush and do any more of these. But we're excited about them. We just don't feel that we need to go and add that capital and that expense to the footwear component right now.

Do you envision, Ed, the whole chain producing these decks, or just a small --

No, Rick, I don't think it ever gets to be the entire chain. There are some stores that there's not enough term left on the lease. There's some stores that from a volume just don't make sense to put that kind of capital into them. So I don't expect them to be all of them. But I would expect in the next -- I'll go out on a little bit of a limb here. Over the next three years I would expect that close to half of our stores would have these in them.

(Inaudible) And have you disclosed the lift that you're seeing from these decks?

We haven't yet. It's actually too early to do that. They haven't been in place long enough. We haven't gone through the all important back-to-school season, get through holiday. So we haven't yet. We think it's too early to do that.

Okay. Thanks a lot, and good luck.

Thanks, Rick. Okay, thanks. See you.

Our next question comes from Patrick McKeever of MKM Partners. Please go ahead.

Okay. Thank you. Good morning. Just on the e-commerce, 26% year-over-year growth versus sort of a mid-teens rate for the prior couple quarters. I know you gave some quick drivers in the prepared remarks, but could you elaborate on what drove that sharp sequential acceleration, maybe the month-to-month trend or stronger categories? And I'm also just wondering if you saw any impact from the liquidation sales there, the TSA liquidation sales, or from the second annual Amazon Prime Day in July, and some other retailers chasing that event?

I don't think it was that. We've done a better job. Our team continues to get better. I'm sure we picked up some business from Sports Authority's online business.

Our footwear and apparel business, we continue to be very aggressive in footwear and apparel around the online business. And the Penns and the Cavs winning was also helpful to that business, too. It's a little bit of everything. Mostly I think it's that we've done a better job marketing our online business and we've been much more aggressive with our online business, and expect to continue to do so.

So no change in the longer-term thinking about the growth rate of that business, like you had previously maybe said mid-teens or so?

We'll stay right where we're at for right now. We're not going to provide anything.

Okay. Thanks.

Thank you.

Our next question comes from Jim Duffy of Stifel. Please go ahead.

Good morning. Thanks for taking my question. So I was interested to see your bid for the TSA trademarks and web domain. Was that a preemptive maneuver or do you see some potential to use The Sports Authority name and web domain in some strategic capacity?

We clearly see it as a strategic asset for us and that's why we acquired it. And we're working through plans right now as to how we would deploy that, the intellectual property. As Ed mentioned earlier, the key element of that also was the customer names and the list and how we market to them and how we bring them over to become DICK'S customers. But we see that as very strategic for us.

Okay. And the sports.com, do you foresee that as an ongoing entity, perhaps a clearance channel for you?

We're looking at a number of alternatives to how we might use that. We haven't landed on any particular strategy or tactic yet. But those are some of the things we're talking about.

Great. I'll leave it at that. Thanks for taking my call.

Thank you.

Our next question comes from David Magee of SunTrust Robinson Humphrey. Please go ahead.

Hi. Good morning everybody. Good quarter.

I just have one question at this point. With regard to the Olympics, the commercials have been impressive, in my mind, for DICK'S. I'm curious, post the event, can you leverage that into the fall? Have you planned to sort of extend the legs of that promotion?

Well, we've got marketing plans going into the fall that will be inspirational, the same kind of thought, but they won't be exactly those Olympic spots. We'll be doing something different.

But we'll be leveraging what we have always done, and that's focusing on that core true athlete. And whether that's the true athlete that is participating in the Olympics or that really true athlete who is out there running, playing baseball, basketball, doing yoga, we really focus on the authentic side of the business, and we'll continue to do so. I agree with you, our marketing team did a great job with those, the marketing plan around the Olympics and we've gotten great accolades for it.

Thanks, Ed. Good luck in the second half.

Thank you.

Our next question comes from Joe Feldman of Telsey Advisory Group. Please go ahead.

Hey, guys. Thanks for taking the question.

A lot of mine have been answered. But I did want to go back to, on e-commerce can you just refresh us on what you're seeing within e-commerce? Are you seeing -- like maybe the type of products that are sold or the mix of products, and the customer type. Is it still the loyalty reward member or is it just a new customer to the Company? Just any kind of flavor you can give us about what is selling and how it's being sold would be great.

As we do more and more business online, the business gets to look more and more like what we're doing in the Company as a whole. As far as who's shopping there, we're getting new customers all the time. There's a combination of new customers and existing customers, customers who shop online, who shop in the store. It's kind of what you would expect of what's going on with our business online. And I think we continue to take market share online from a sports and fitness standpoint.

Got it. And then also online, can you help us think about the profitability of it? I understand where the business is today, and that when you take ownership in January next year it will be more profitable than it is today. But I recall a couple of years ago you suggesting that it could get to store level type profitability. And I'm wondering if that's still the case, given the changes in the industry and dynamics now with e-commerce?

We still definitely think that, and we're getting closer and closer to that every year. We continue to make improvements in that direction.

That's great. That's great. And then just one quick one on the CFO spot.

I was just wondering, how are you guys are thinking about that, is it external search? Internal search? Both? And any sense of time frame when you would like to have somebody -- I know Andre, you've done it before and can certainly handle it, but you have a lot on your plate, so just curious.

We're being very thoughtful about that, whether it's external or internal. And we're talking with the Board. We're going through how best to position this. And it won't be long before we have a final decision.

Got it. That's great.

Thanks, guys. And good luck with this quarter.

Thank you.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Ed Stack for any closing remarks.

I'd like to thank everyone for joining us on the call. And we look forward to talking with everyone about our third quarter in a few months. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.