Hello, everyone, and welcome to the First Quarter 2022 DICK'S Sporting Goods, Inc. Earnings Conference Call. My name is Victoria, and I will be coordinating your call today. I'll now pass you over to your host, Nate Gilch, Senior Director of Investor Relations, to begin. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our first quarter 2022 results. On today's call will be Lauren Hobart, our President and Chief Executive Officer; and Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. As required by new accounting rules adopted in the current period, our first quarter GAAP earnings per diluted share assumes shares of settlement of our convertible senior notes issued in Q1 2020, which excludes the after-tax interest expense and includes the total shares underlying these notes. Given our intent to settle the principal portion of these notes in cash and the shares that will be delivered by our bond-hedged settlements, we do not expect the notes to have a dilutive effect at settlement. Accordingly, we believe that reflecting the notes as debt more closely aligns with the underlying economics of the transaction, which is reflected in our non-GAAP earnings per diluted share. For additional details on this or to find a reconciliation of any non-GAAP financial measure referenced on today's call, please refer to our Investor Relations website. And finally, for your future scheduling purposes, we are tentatively planning to publish our second quarter 2022 earnings results on August 23, 2022. With that, I will now turn the call over to Lauren.

Thank you, Nate, and good morning, everyone. We are pleased with our first quarter results as our team continued to move with agility and execute well in a highly dynamic environment. Before diving into the results of the quarter, I think it's important to recognize that over the past two years, we have demonstrated our ability to adeptly manage through the pandemic and other challenges and we are confident in our continued ability to adapt quickly and execute through uncertain macroeconomic conditions, while keeping our athletes at the heart of every decision we make. With that context, I do want to take a moment to address the adjustments we made to our 2022 outlook this morning. Like everyone else, we have been carefully monitoring the rapidly evolving macroeconomic environment and assessing our expectations based on our experience running our business across economic cycles. With this perspective, we believe it's appropriate to be cautious and are, therefore, lowering our outlook for the year. To be clear, we expect our performance will continue to meaningfully exceed 2019 levels, reflecting the strength of our core strategies and the changes we've made in our business over the past five years. DICK'S is the clear market leader, and we are well positioned to extend our lead and build on our competitive advantages in the years ahead. We continue to closely watch the macro landscape and have the flexibility in our business to remain nimble. Now getting back to our results. As we announced earlier this morning, we delivered sales of $2.7 billion in the first quarter. This included a comparable store sales decline of 8.4%, which followed a 117% increase in comp sales in the same period of the prior year. This also reflected the anniversary of significant stimulus payments as well as anticipated sales normalization in certain categories. Importantly, sales continued to run substantially above pre-COVID levels, up 41% versus Q1 2019 and sequentially accelerated from last quarter. These top-line results reinforce our strong conviction that the shift in consumer behavior over the past two years is indeed structural. Consumers have made lasting lifestyle changes, with an increased focus on health and fitness and greater participation in sports and outdoor activities. Our business is squarely at the center of these secular trends and the actions we have taken over the past five years to transform our company have given us significant competitive advantages across all aspects of our business. Our increasingly differentiated product assortment, combined with our disciplined and more sophisticated promotional strategies, continues to drive strong merchandise margin growth. During the quarter, we expanded our merchandise margin rate by 143 basis points versus 2021. Before continuing, let me underscore this critical point that is not always appreciated about our transformation. The content of the product that we carry today is very different from the products we carried five years ago. It's higher heat and more narrowly distributed than what you'll find in the market as a whole, and therefore, it is not as susceptible to promotion. In addition, the tools we have today to surgically adjust pricing are significantly more sophisticated than they were several years ago. With these fundamental changes, we are very confident that the majority of our merchandise margin rate expansion that we've driven over the past two years is sustainable. Led by our structurally higher sales and merchandise margin compared to pre-COVID levels, we achieved double-digit EBT margin of over 12% and non-GAAP earnings per diluted share of $2.85, both significantly ahead of any pre-COVID first quarter in our history. We entered 2022 in a position of tremendous strength and we're focused on enhancing our existing strategy to further strengthen our core business and drive long-term profitable growth. Our approach is centered on our best-in-class omnichannel platform, which features our stores as a hub. During the first quarter, our stores enabled over 90% of total sales, serving both our in-store athletes and providing over 800 forward points of distribution for omnichannel fulfillment through ship from store, in-store pickup, or curbside. We also continue to invest in an enhanced service model and lean into highly engaging experiences to better serve our athletes and reinforce their loyalty. Our digital capabilities remain core to our omnichannel success and we are continuing to prioritize investments in technology and data science. Furthermore, we remain focused on maintaining our strong culture, putting our teammates, athletes, and communities at the center of everything we do. This work continues to have a positive impact, as we were recently awarded back-to-back annual certification by Great Place to Work. I spend a lot of time visiting our stores and distribution centers and the positive energy and sense of community from the teams I meet is fantastic. Our strong dedicated team and our ability to attract and retain talent are key competitive advantages for us. Next, within merchandising, our relationships with key brands remain stronger than ever. Our assortment is on trend and we are providing our athletes with enhanced access to the hottest styles across a wide range of categories from the top brands in sports. Importantly, we also are ensuring that we have products at prices that address the needs of all athletes. For example, through DSG, our largest vertical brand, we offer high-quality, fashion-forward products at a tremendous value across men's, women's, and youth. Our key lifestyle vertical brands, including CALIA and VRST, are also resonating strongly with our athletes and we continue to invest in and grow these brands. Lastly, our new concepts, including DICK'S House of Sport, Golf Galaxy Performance Center, Public Lands, and Going, Going, Gone!, are delivering promising early results. Today, we are really excited to open our third House of Sport store in Minnetonka, Minnesota. House of Sport has exceeded our expectations and has been a great example of the power of elevated service, community engagement, and merchandise presentations. We look forward to continuing to refine and grow these concepts, while pulling key learnings into our core DICK'S and Golf Galaxy chains. In closing, we remain confident in our strategies and our ability to deliver long-term sales and earnings growth. DICK'S has a unique and powerful position in the marketplace. Sports and an active lifestyle are important in all times and now more than ever as we help families get outside together and lead active and healthy lives. Our teammates are united behind our common purpose, which is to create confidence and excitement by personally equipping all athletes to achieve their dreams, especially during these times of uncertainty. Before concluding, I want to thank all of our teammates for their hard work and unwavering dedication to our business. I'll now turn the call over to Navdeep to review our financial results and outlook in more detail.

Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our first quarter results. Consolidated sales decreased 7.5% to approximately $2.7 billion. Comparable store sales decreased 8.4% following a 117% increase in comp sales in the same period last year. As Lauren indicated, comps were impacted as we anniversaried significant stimulus payments from the prior year quarter. And in addition, we saw the anticipated sales normalization in certain categories that surged throughout the pandemic. And as part of this year-over-year anniversary, transactions declined by 6.4% and average ticket declined by 2%. Importantly, our sales continue to run significantly above pre-COVID levels. Compared to 2019, consolidated sales increased 41% and sequentially accelerated from the most recent quarter. Gross profit in the first quarter was $984.7 million or 36.7% of net sales and declined 83 basis points versus last year. This decline was driven by a 103 basis points increase in supply chain-related costs and a deleverage on fixed occupancy costs of 94 basis points from the sales decrease. These items were partially offset by continued merchandise margin rate expansion. For the quarter, merchandise margin increased 143 basis points as we continue to see the benefits from our increasingly differentiated product assortment, combined with our disciplined and more sophisticated promotional strategies and clearance pricing. We also saw favorable sales mix. SG&A expenses were $615.3 million or 22.79% of net sales and deleveraged 195 basis points compared to last year, primarily due to the decrease in sales. The increase in SG&A expense dollars is driven by our investment in advertising and hourly wage rates. These items were partially offset by lower incentive compensation expense and $17 million of income associated with changes in the investment values of our deferred compensation plans, which is fully offset by the investment loss recognized in the other expense line. In addition, SG&A also included approximately $13 million of COVID-related safety costs in the prior year quarter. Driven by our structurally higher sales and merchandise margin compared to pre-COVID levels, EBT was $331.9 million or 12.29% of net sales. In total, we delivered non-GAAP earnings per diluted share of $2.85. This compares to a non-GAAP earnings per diluted share of $3.79 last year and $0.62 in 2019. Now looking to our balance sheet. We ended Q1 with approximately $2.25 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter-end inventory levels increased 40% compared to Q1 of last year, with product flow improving as the quarter progressed. Looking ahead, we feel good about our overall inventory levels for Q2 and are prepared to continue navigating a dynamic global supply chain environment through the rest of the year. Turning to our first quarter capital allocations, net capital expenditures were $53.9 million and we paid $46.1 million in quarterly dividends. During the quarter, we exchanged $100 million at approximately 17% of the outstanding principal of our convertible senior notes for cash and unwound the corresponding portion of convertible note hedge and warrants for 1.8 million shares of our common stock. Following this exchange, we have approximately $475 million in aggregate principal amount outstanding. We also repurchased 417,000 shares of our stock for $42 million at an average price of $101.39. Now let me wrap up with our outlook for 2022. We are pleased with the start of our year and continue to see meaningful growth above 2019 levels. However, as Lauren mentioned, we have been carefully monitoring the economic environment and there are many puts and takes at play. With an increasingly uncertain macroeconomic backdrop, geopolitical environment, and a dynamic global supply chain, we believe it is prudent to adopt an appropriately cautious outlook for the year. Thus, we are adjusting our 2022 guidance range. For the year, we now expect non-GAAP earnings per diluted share in the range of $9.15 to $11.70 and comparable store sales in the range of negative 8% to negative 2%. EBT is expected to be in the range of $1.05 billion to $1.35 billion, with EBT margins expected to be approximately 10% at the midpoint. This includes additional risk in supply chain-related costs and higher wage rates, as well as greater than originally anticipated normalization of the promotional landscape over the balance of the year. As a reminder, this also includes approximately $55 million of pretax interest expense associated with our $1.5 billion long-term debt. Our earnings guidance assumes an effective tax rate between 23% and 24%, and is based on approximately 88 million average diluted shares outstanding. In addition, our plan now includes a minimum of $300 million of share repurchases, the effect of which is included in our EPS guidance. Importantly, we are continuing to invest in our business for the long term, and for the year, expect net capital expenditure of $340 million to $365 million. In closing, we are pleased with the results of our first quarter. And while we recognize we are in an uncertain economic environment, DICK'S is a clear market leader, and we remain structurally stronger and a more profitable company today compared to pre-COVID. And at the midpoint of our updated outlook, we expect sales to increase approximately 35% versus 2019 and an EBT margin of approximately 10%, doubling our 2019 EBT rate. Our financial position is strong, ending Q1 with approximately $2.25 billion of cash and cash equivalents, and we remain confident in our strategy and our ability to drive sales and profitability growth over the long term. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.

And our first question comes from Simeon Gutman at Morgan Stanley.

I would like to follow up on the revision. I think the midpoint, it's about a 16% cut, and Navdeep, you mentioned a few factors. Can you talk to us about the current environment? What's changing as we speak? Sales, gross margin, can you talk about the inventory balance? It looks like you're carrying a good amount going into the year. Are you already seeing that elevated promotion? Are you seeing in line with what's in your guidance? So that's my first question.

Thanks, Simeon. It's Lauren. I think those are all very important questions, and I'll try to parse them all out and answer all of them. We have had, as you know, a fantastic Q1. We're pleased with our Q1. And we had anticipated increases in our freight costs, in our labor costs, and in our product costs as we went into the quarter, and we were accurate in our forecasting of those expenses. There's two things that have changed that are driving our approach to the guidance for the rest of the quarter. First is that the consumer is going through an awful lot right now. So obviously, macroeconomic trends are challenging, inflation is putting pressure on the consumer at the gas pump and in grocery stores, we all know. And then there's this geopolitical environment that is very, very challenging. At the same time, we see that the expenses of those three line items, so freight, labor, and perhaps product input costs, are accelerating more quickly than we had anticipated. And so we want to be appropriately cautious as we look forward to the year. However, I want to be very clear that we are not seeing any meaningful trends that are different from what we saw in Q1 and we believe our inventory at plus 40% actually is very healthy and we are very pleased with it. In fact, there are areas where if we could have more, we would have more. There's been some disruption in terms of when inventory is flowing in. But we had anticipated that certain categories, like fitness and outdoor equipment, would normalize this year. And they have normalized as we expected. We are still chasing products in certain categories and our inventory is healthy. We are not anticipating any significant markdown risk. To answer your other question, the promotional environment, we are not seeing a change in the promotional environment. We will obviously continue to monitor that and we will be surgically addressing price changes as we absorb some of the cost increases. But the marketplace has not shifted dramatically in any meaningful way. We are just being appropriately cautious as we look toward a lot of things that are outside of our control when we look at the rest of the year.

The follow-up question is about the confidence that the industry or your business won’t regress further. We have been discussing this for two years now. Are there any specific categories you can identify where consumption is either holding steady or increasing at a structurally higher level? We are at a significantly elevated point, as you mentioned, 30% to 40%, even at the midpoint that Navdeep indicated. Which categories demonstrate that we are unlikely to see that level of reversion?

Yes. Across the board, you're absolutely right. If you look at the last two years and look at the consumer, virtually every category in our business has re-baselined meaningfully higher than our pre-pandemic volume. And that reflects the fact that the consumer is outdoors more. They are running, they are walking, they are playing golf. The pandemic-surging categories that we've all been talking about and we expected to normalize are fitness and outdoor equipment, which will include things like bikes and paddles and golf. And those three have normalized as we expected them to normalize, but we believe they all have long-term growth potential. So we are not changing our outlook on any aspect of our business. We actually think in these types of times, people need to get outside. They need to be active. They want to be with their families, and we are well positioned to serve the needs of these athletes.

Our next question comes from Adrienne Yih at Barclays.

Great. Lauren, I want to stay on the promo topic because we as well did not see promos this quarter. I guess my question really is the notion that, say, a partnership with Nike, where you're sort of their premier partner, let's just call it, for lack of a better term. Is that causing other competing brands to actually offer you their best and highest heat product as well, so thereby elevating the entire brand and product platform? That's my first question.

Yes. So our partnership with Nike is at an all-time high, as is our partnership with all of our strategic partners. And I think that's a result, not just of a situational moment in time with certain partners, but the fact that we have invested so much in our stores and in our experience, such that brands who are rooted in sport want to actually showcase their product and their brand in our stores. So yes, across the board, we are getting access to higher heat and more pristine premier products that are high in consumer demand. And that's a big part of our strategy, and that has been driving our results.

Great. And then for Navdeep, a couple of quick ones. Inventory at the end of the quarter was up 40%. You're comfortable with that. What portion of that is cost inflation, like AUC increase? And what portion of that is in transit? So effectively, I'm trying to get to units, so yes.

Yes. Adrienne, maybe before I go into the details, I think one of the ways to think about the inventory is to also look at what was happening to our inventory position as we were going through 2021. If you look at it, as we called out last year, our inventory position continued to build as we went into the year. So what you're comparing Q1 versus Q1 last year, especially our inventory starts and in-stock levels last year in...

Hello, everybody, and thank you for your patience. We have reconnected with the speakers. Adrienne, please go ahead.

I think that you were in the middle of your discussion on last year's inventory?

Yes, I apologize for the interruption. There was an issue with the connection on our end. Regarding your question about inventory, we are comparing our inventory trends to 2019. As mentioned previously, in 2021, our inventory levels increased throughout the year, making 2019 a more accurate benchmark. Currently, our sales have risen by 41%, while our inventory has grown by 32%. We do have slightly elevated levels of in-transit inventory, which is mainly due to delays in receiving products expected in Q1, rather than purchasing items in advance for the remainder of the year. This situation reflects a balance between the increase in units and the increases in average unit retail prices.

Our next question comes from Kate McShane at Goldman Sachs.

I wanted to ask about average ticket, which I think you mentioned was down about 2%. Is there any way to parse that out in terms of how much was price inflation versus how much was the change in mix away from maybe some bigger ticket items during the quarter?

Yes, Kate, we haven't provided the specifics on that. The simplest way to understand it is that it's a combination. As you noted, the normalization of the COVID surge in categories like fitness and outdoor equipment does apply some pressure on the ticket size, which is counterbalanced by the overall increases in average unit retail that we've observed due to inflation.

Okay. And then my follow-up question is, we've heard a lot about adverse weather, whether it be in apparel or auto part retail and just how it affected sales in the first quarter. I know you have some weather-sensitive categories like apparel and team sports in the quarter. Were there any markdowns related to that? And if so, could merch margins have been higher in the quarter?

Yes, it's Lauren. We did not see a significant weather impact in any of the key categories and it certainly didn't lead to any markdown behavior. The main category affected by the colder and wetter spring was golf, but that aligned with our expectations for normalization.

Our next question comes from Robert Ohmes at Bank of America.

My follow-up question is for Navdeep. I'm interested in understanding what the midpoint of guidance suggests. Lauren, you mentioned that the consumer is still doing well into Q2. Does the midpoint of guidance indicate that the consumer is expected to perform less satisfactorily as we progress through the year? Additionally, merchandise margins were strong in the first quarter. Should we anticipate a decline in merchandise margins as the year goes on? You've also noted that certain expenses are coming in higher than expected. Should we expect these expenses to accelerate year-over-year? Lastly, just to clarify regarding Q2 to date being similar to Q1, does that refer to same-store sales? Should we be prepared for approximately minus 8% to 9% in comparable sales for Q2?

Robert, that was a very detailed question. I'll start with the last one. We are not providing inter-quarter guidance at this time. The sentiment that Lauren mentioned is that we haven't observed a significant change in business trends, which is more about our customers than implying any expectations for Q2. Addressing your three main questions, first regarding our implied midpoint expectations on sales: we were pleased with our Q1 performance. The business gained momentum compared to 2019, especially when looking at our results from Q4. We feel positive about the business trends and core categories in Q1. As Lauren noted, we aren't seeing a notable shift in the business trajectory in May. The downward adjustment in our top-line guidance comes from being prudently cautious about the overall economic landscape. We recognize the pressure on our consumers and wanted to address this in our sales guidance. Regarding the other two areas mentioned, we expected elevated freight expenses. There will be inflation and wage pressures, but these costs have become more pronounced in the last three months since our original guidance. Fuel prices are still high and rising. We wanted to highlight these cost structure risks and have incorporated them into our guidance. Finally, about promotions, we had anticipated some normalization in the second half of the year, but we now believe there may be more promotions than expected. We are merely being cautious about the economic environment and what might happen next. Additionally, we are noticing some increases in input costs and may choose not to pass all of those costs onto our athletes, balancing our responsibilities to them and the long-term success of our business. This has also been factored into our guidance.

Yes. Robby, I just want to build on one thing, which is that our merch margin forecast going forward still assumes, even in the new guidance, that we are going to maintain the majority of our merch margin gains over the past few years.

Our next question comes from Paul Lejuez at Citi.

Can you discuss the performance and market share of private label products during the quarter? Are there any areas where private label is not increasing its share within your business? Additionally, could you elaborate on the performance and inventory levels in apparel and footwear, including where you experienced strengths and weaknesses, and your current outlook on inventories in those categories?

Yes. Paul, our vertical brand did extremely well in Q1. And I would point specifically to how pleased we are with the DSG line, and the fact that, that does provide an opening price point with really wonderful fashion is doing incredibly well, as is our new VRST line and our CALIA line. So really, really pleased. And there's not an area I can point to where I think vertical brands are not gaining share across the business. From an apparel and footwear performance standpoint in the quarter, footwear did really, really well for all the reasons that we've been talking about, and inventory in that category is good. And again, if we could chase more, we would chase more. On the apparel side, we did have some inventory challenges during the quarter, just making sure that we have the right product, the right season product in stock. But we are planning to buy around anything that came in late, so it's not a markdown risk for us, and we believe that by back-to-school apparel should be getting better.

Our next question comes from Christopher Horvers at JPMorgan.

So I just want to follow up on the merchandise margin point. If I could characterize what you said, you basically, at this point, you have passed through input cost pressures and have essentially at least maintained your gross margin rate. Going forward, you're saying there could be some input cost absorption where it causes degradation in your merchandise margin. So my follow-up is that if you look on a sort of stack basis versus 2019, merchandise margins did decelerate relative to what you experienced in the fourth quarter. Can you talk about what drove that?

I'll start off and pass it over to Navdeep to answer your last question. I want to clarify one thing. We have passed some input cost pressures on to consumers, specifically in hardlines and a little bit in softlines, but we have not been passing through all our input cost pressures. We have benefited from some of our improved assortment, our mix, and the fact that we're not promotional. So our merchandise margins, while strong, do not reflect that we've passed 100% of the costs forward. As we look to the future, if costs continue to increase at an accelerated rate, we may need to start passing on higher cost increases. At that point, we'll rely on data-driven pricing that considers what the consumer will bear versus what our margin will absorb. I just wanted to clarify that. Navdeep, can you answer the latter part of the question?

Yes, Chris, I think there are two ways to consider this. If you compare it to the fourth quarter of last year, we noted that we were not promotional. Given how promotional the fourth quarter usually is, that benefit was factored into our Q4 expectations. We are very pleased with the merchandise margin expansion we have achieved, especially in comparison to 2019. As Lauren mentioned, we anticipate being able to maintain the majority of the merchandise margin gains from the past two years into this year, and that has been included in our guidance. We expect that the promotional environment will not remain as favorable as it has been in recent years. However, we also do not expect it to return to pre-COVID levels. It is likely to settle somewhere between the two, and we will continue to monitor this situation.

Okay, just to clarify, in the fourth quarter, it seems that the lack of typical holiday promotions led to an additional benefit, whereas in the first quarter, there wasn't that year-to-year effect.

Exactly. The first quarter is typically less promotional compared to the fourth quarter. Despite this, we were still able to improve our merchandise margin when compared to the first quarter of 2021. Additionally, we are very pleased with the merchandise margin growth in comparison to 2019.

Got it. And then my quick follow-up is regarding the 100 basis points. Was that all freight? Obviously, diesel increased significantly mid-quarter, up 70% year-over-year. So is that the main impact? And how are you planning to model that going forward?

Yes. I would say the biggest factor is freight, without question. There are two aspects to consider: fuel, which we highlighted, and the fixed expenses along with the deleveraging caused by a negative 8.5% comparable. However, I would say that the majority of the issues we encountered were driven by freight pressures. Just to clarify, this decline was not unexpected for us. When you examine that decrease, it reflects more of a year-over-year comparison. As Lauren mentioned, both wage rate pressure and freight pressure in the first quarter aligned with our internal expectations, and we anticipated some normalization, which we are not currently expecting in the latter half of the year.

Our next question comes from Warren Cheng at Evercore ISI.

I just wanted to ask about your confidence that the majority of the merchandise margin rate expansion is sustainable. So you've talked about some of these tools you've developed to surgically adjust pricing. You've developed some new clearance concepts. Have these tools and concepts been tested in an inventory clearance environment? So as in Q1, as some of the pandemic winter categories normalize, were there pockets of inventory or situations where you actually had to clear inventories because it hasn't really happened much in the last couple of years? And if so, can you just talk about how some of these tools are changing the realizations that you're getting on these excess inventories?

Yes, thank you, Warren. We haven't had a significant amount of clearance in some of the normalized categories you mentioned because, as I mentioned earlier, we intend to maintain healthy, quality inventory. We aren't marking down items extensively. That said, our clearance levels are strong and have improved significantly. This is partially due to our digital marketing tools, allowing us to be very precise in our approach. We've shifted away from broad site-wide and store-wide offers to more targeted personalized or category-specific promotions. Additionally, our Going, Going, Gone! concept has been quite successful, allowing us to clear products from DICK'S stores to make room for fresh inventory. It also helps us manage clearance more efficiently online by reducing safety stock issues at higher prices without needing to hold onto items for extended periods. Overall, our tools are performing exceptionally well.

Yes. Warren, I'll add one more color to what Lauren said. Back to your initial part of the question, which is the confidence that we can hold on to the vast majority. Again, if you think back to 2019, hunt's penetration has significantly gone down. The vertical brand penetration has significantly gone up and vertical brands, just to remind, 600 to 800 basis points higher margin rate as well as our approach to marketing has significantly changed. So we no longer are doing big promotions that we used to do back in 2019. And those are all structural capabilities that we have developed over the last three years that give us tremendous confidence in addition to the price optimization capabilities we have built.

That's very helpful. And my follow-up is, are you seeing any evidence of trade down, either the private brands are doing really well? Are you seeing those private brands take share from national brands or new customers coming in? Just any thoughts on trade-down behavior that you might have observed in the first quarter.

I don't believe it's accurate to say that we're observing a trade down. In fact, it's noteworthy that our Gold customer penetration has increased, and sales from that group have been positive. This suggests that people are still spending on essential categories, and our premium assortment has become more appealing. At the same time, we have seen success with entry-level products like the DSG brand, but I wouldn't characterize this as a trade down. Rather, I see it as providing the right products for what people need at this time in their lives. So it's a somewhat divided response.

Our next question comes from Sam Poser at Williams Trading.

I have two. One is on the prior guidance you gave, I mean, you sort of gave real direction on the overall gross margin and SG&A. You said that SG&A would likely lever versus '19 by 150 bps. And I think around 640 bps, the gross margin would end up above '19. So could you update those numbers for us?

Yes, Sam. I believe we have provided an adequate level of guidance today, so I won't go into the specifics. If there are modeling inquiries, we can address those later. To summarize, there are three main factors to consider in our updated guidance, particularly regarding profitability. The first is the revised expectations for our top line range, which has been factored in. Next, we are experiencing freight and supply chain pressures that primarily affect our gross profit margin. Lastly, wage pressures are mainly impacting our store labor expenses, which will also reflect on our SG&A line. We've acknowledged these issues, and while there may be other inflationary pressures, we've implemented certain measures in our revised guidance to mitigate the impacts we are observing elsewhere.

During the crisis, you managed to adapt effectively to better connect with your consumers and successfully navigated much of the macro challenges. Now, as the situation shifts, I'm curious about your approach. While I recognize you are being cautious about potential outcomes, what steps are you taking to elevate your performance in response to these macro pressures that led to a revision in your guidance?

Yes. Sam, I agree that our team did an incredible job navigating the crisis, and we learned a few things about our business. One observation is that we have a natural hedge within our operations; when people stopped playing team sports, they still wanted to spend time outdoors with their families, leading to an increase in other businesses. Conversely, as people returned to sports, those businesses returned to normal. Overall, I believe we are in a strong position with the products we offer. We are being cautious as we look ahead, as consumers are facing a lot of challenges right now, which seem to be increasing daily. We will work diligently to drive sales and manage expenses, and you can expect us to do that. However, we want to be appropriately cautious given the rapid rise in some costs and the difficult state of the consumer.

Our next question comes from Michael Baker at D.A. Davidson.

I have two questions. First, regarding the comp, I understand that the new guidance range has been adjusted down, specifically from down 2% to down 8%. This indicates that you are anticipating some shifts in the consumer environment, even if you haven't observed them yet. You seem to be suggesting that your guidance reflects some assumptions about this. Secondly, I assume you are still operating within your prior guidance of 5% to down 4%, since you have not noticed any actual changes and are just being cautious based on potential developments. Is that an accurate understanding of the change in the top line?

Michael, you articulated it perfectly. Our new guidance reflects that there are many factors we can't control moving forward. However, we are still operating and expect to remain within our guidance range on the comparable side, which aligns with our previous guidance. We feel very confident about everything we can control.

Okay. Yes. That makes sense. One other question, if I could ask specifically about the golf business. I think you said quickly in there at one point that, that business wasn't as strong. And maybe that was weather related, but you had anticipated that. I guess what's your outlook for the golf business for the year? If there was a weather impact, now that the weather seems to have gotten a little bit better, do we expect that business to get better? Just curious how you're thinking about that category.

Yes. Golf is a category that we think has tremendous growth in the long term. Rounds played are still really strong. The new consumers who have come into the game have not dropped it and are buying new products. So I think there's going to be some normalization, which we expected. The weather shifts don't bother me at all because that happens every year, one either snowing in December or maybe snowing in April, I don't know. But long term, we have a lot of confidence in the golf business.

Makes sense. And I'll just say your Golf Galaxy offering, the club fitting, I took advantage of that, tremendous offer. Appreciate it.

Our next question comes from John Kernan at Cowen.

So from what we're hearing from a lot of the softline vendors, apparel footwear vendors, the athletic brands, there's plans for an acceleration and in some cases, a meaningful acceleration in their North American businesses as we get into the back half of the year. Can you talk to that opportunity and what you're seeing in that market? How you're buying to that trend as we get into the back half?

John, we believe that the year will start slowly but will pick up momentum as it progresses. I noted that the apparel sector, particularly in softlines, has faced some supply chain issues, yet we are optimistic as we approach the back-to-school season and the remainder of the year. The consumer demand is strong, the product offering is solid, and we are fully committed to these positive trends.

Got it. If we examine the high end and the low end of guidance, which ranges from down 8% to down 2% and the EPS forecast of $9.15 to $11.70, what do you believe is the main factor influencing this guidance from both sales and margin perspectives? What conditions would lead us to the high end, and what scenarios would push us closer to the low end from a macro perspective? Go ahead.

John, the main factor to consider is comparable sales. If consumers continue to show resilience and are not significantly affected by cumulative inflation, rising gas prices, and increasing commodity costs, that would signal positive performance for our business. This is the key element we are focusing on. We are aware that costs will likely remain high, and those have already been factored in. Therefore, the primary consideration is our expectations for top-line growth.

Got it. And then maybe just one quick follow-up there. When you simply look at inventory growth on the balance sheet in dollar terms compared to our top line growth perspective, which is consistent across the industry, what gives you such confidence that we won't end up over-inventoried in the second half of the year? This also applies to the vendors and retailers, as inventory is clearly trending above sales trends at this point.

Go ahead, Navdeep.

I believe that our confidence stems from our merchandising and supply chain teams. They have a strong understanding of the business, and we have honed our abilities over the past two years in anticipating market trends. We are very cautious in assessing various scenarios and identifying categories that could be affected. As expected, we conduct frequent internal evaluations and discussions on these scenarios. For me, the confidence in our team is the key indicator of our overall confidence in our inventory situation.

I believe that at this moment, our inventory is in good condition. We have no intention of creating any risk with it, and we are capable of managing and acquiring any necessary inventory. Therefore, this situation does not worry us.

Our next question comes from Joe Feldman at Telsey Advisory Group LLC.

I want to go back to the gross margin line. I know we've talked about merchandise margin a lot, but you mentioned that occupancy costs decreased significantly. I am curious about what caused that. Was it just the sales, or are you actually seeing an increase in rents, or is there additional pressure related to real estate?

No, Joe, it's all driven by sales. With a minus 8.5% comp and a 7.5% sales decline, it’s all due to the sales decline. To answer your question, the flexibility we have in our real estate portfolio, combined with our strong financial performance and solid balance sheet, makes us feel optimistic about our ability to increase efficiencies in our occupancy costs.

Got it. That's great to hear. I had a broader question regarding the appropriate level of operating profit or operating margin, specifically EBIT margin, moving forward. How should we approach this? It seems we can all agree it's unlikely to return to pre-COVID levels, and it probably won't reach the peak of last year at 16.5%. Just three months ago, the expectation was closer to 13%, but now it appears to be around 10%. I'm curious if you could provide any guidance on how to view this going forward.

Thank you, everyone. Unfortunately, we have lost connection with the speakers. Hello, everybody. We have reestablished the connection with the speakers. Please continue with the Q&A.

Joe, this is Navdeep. I'm not sure where we lost the connection. Let me try to rephrase my previous point. Essentially, we believe there is nothing structurally that will prevent us from reaching the profitability levels we achieved in 2021. The main factor at play is the macroeconomic conditions, which we will keep monitoring. Structurally, our merchandising margin remains strong, our e-commerce business is thriving, and it is very profitable. Therefore, we are quite optimistic about the long-term sales and profitability of our business.

This concludes our Q&A session. I would now like to pass back over to Lauren Hobart, President and CEO, for any final remarks.

Thank you, and thank you all for your interest in DICK'S Sporting Goods. We apologize for some of the technical glitches on this call, but hopefully, you were able to hear the confidence that we have in our business. We look forward to seeing you next quarter. Thank you.

Thank you, everybody, for joining today's call. You may now disconnect.