Dick's Sporting Goods, Inc. Q2 FY2022 Earnings Call

Hello, everyone, and welcome to the Q2 2022 DICK'S Sporting Goods Earnings Call. My name is Lydia, and I will be your operator for today's call. It is my pleasure to now introduce Nate Gilch, Senior Director of Investor Relations. Please proceed when you are ready.

Good morning, everyone, and thank you for joining us to discuss our second 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. During this morning's call, we will be discussing earnings per diluted share on a non-GAAP basis, which eliminates the impact of certain items related to our convertible senior notes issued in Q1 2020. For additional details on this or to find a reconciliation of any non-GAAP financial measures referenced on today's call, please refer to our Investor Relations website. And finally, for the future scheduling purposes, we are tentatively planning to publish our third quarter 2022 earnings results on November 22, 2022. And with that, I will now turn the call over to Lauren.

Thank you, Nate, and good morning, everyone. We are very pleased with our second quarter results, which demonstrate the strength of our core strategies and the foundational improvements we've made across our business over the past 5 years. In fact, we delivered approximately the same EBT in Q2 as we did in all of fiscal 2019. While the macroeconomic environment remains uncertain, the DICK's Sporting Goods consumer has held up quite well. Over the past 2 years, they've made lasting lifestyle changes focused on health and fitness, sports and outdoor activities, and we remain uniquely positioned to capitalize on these secular trends. Our inventory is healthy and well positioned with improved in-stock levels in key categories. Importantly, we are raising our full-year outlook, which continues to incorporate an appropriate level of caution, given today's macroeconomic environment and contemplates an approximate 10.7% EBT margin at the midpoint. Now to our results. As we announced earlier this morning, we delivered second quarter sales of $3.1 billion. This included a comparable store sales decline of 5.1% and, as expected, represented a sequential improvement from the first quarter. It's important to highlight that our sales continued to run substantially above pre-COVID levels, up 38% versus Q2 2019, reinforcing that the favorable shift in consumer behavior that I just mentioned is durable, and our actions to capitalize on this shift are yielding strong results. Notably, for the year, our key athlete success metrics, inclusive of acquisitions, new athlete retention, repeat purchasing and omnichannel behavior are elevated across the board compared to pre-COVID levels. Our increasingly differentiated product assortment, combined with our sophisticated and disciplined pricing strategies and favorable product mix, continue to drive strong merchandise margin. Our merchandise margin rate was up 439 basis points versus Q2 2019 as we maintained the majority of the merchandise margin expansion that we drove over the past 2 years. Before continuing, let me emphasize a critical point. The content of the product that we carry today is very different from the product that we carried 5 years ago. It's higher heat and more narrowly distributed than what you'll find in the marketplace and therefore, it is not as susceptible to promotions. In addition, the tools we have today to surgically adjust pricing and promotions are significantly more sophisticated than they were several years ago. Lastly, our product mix has structurally shifted towards higher-margin categories. We've materially reduced hunt exposure, which had margins approximately 1,700 basis points below the company average in 2019, and we continue to grow our vertical brands, which currently have margins between 600 to 800 basis points above the national brands. Looking ahead, we remain very confident that our merchandise margin will be meaningfully higher compared to pre-COVID levels on an annual basis, and that this improved profitability is sustainable due to these foundational changes in our business. With our structurally higher sales, expanded merchandise margins and operating efficiencies compared to pre-COVID levels, we achieved a double-digit EBT margin of nearly 14%, approximately double our Q2 2019 EBT margin. In total, we delivered non-GAAP earnings per diluted share of $3.68 in Q2 compared to $3.69 for the entire fiscal year of 2019. As we continue our transformational journey, we are focused on enhancing our existing strategies to further strengthen our core business and to drive long-term profitable growth. At the heart of these strategies is our athlete experience, and we continue to develop a highly engaging in-store service model to better serve our athletes. Our teammates are highly trained and are focused on creating confidence for our athletes by finding the best product for them. Our stores also now have highly experiential elements such as our premium full-service footwear decks, elevated soccer shops, golf simulators, HitTrax technology and batting cages. Our new DICK'S House of Sport and Golf Galaxy Performance Center stores are tremendous examples of the power of elevated service models and experiential retail. These new concepts are redefining sports retail and providing us with valuable learnings while also driving strong sales and profitability. In addition, our digital experiences remain an integral part of our success, and we continue to prioritize investments in technology and in data science to elevate the athlete experience. We're focused on advancing our personalization capabilities and enhancing our one-to-one relationships with our athletes through our digital marketing, ensuring we serve them the most relevant products at the right time. Our personalization strategies are fueled by our robust and growing ScoreCard loyalty program and total athlete database. We now have over 25 million active ScoreCard loyalty members, a valuable cohort that has grown in recent years. And during the second quarter, our ScoreCard members generated well over 70% of our total sales, up approximately 200 basis points from the same period last year. Furthermore, our omnichannel platform, which features our stores as a hub, is an important competitive advantage for us. During the second quarter, our stores enabled over 90% of our total sales, serving both our in-store athletes and providing over 800 forward points of distribution for omnichannel fulfillment. Next, within merchandising, our brand portfolio is a tremendous asset. Our data tells us that approximately 80% of our active athletes look to DICK'S for a multi-branded shopping experience. Importantly, our relationships with key brands remain stronger than ever, and we are continuing to develop relationships with new and emerging brands. At the same time, we are creating and growing disruptive vertical brands like CALIA, VRST and DSG. Our assortment is on-trend across categories, and our wide range of price points ensures we are able to meet the needs of all athletes. Our teammates are our greatest assets, and we see our ability to attract and retain talent as a key differentiator and a competitive advantage for us. We're proud of our high teammate engagement levels, which reflect our efforts to be a great place to work. We'll continue to invest in our teammates and our enhanced service model to maintain our strong culture and drive a top-tier athlete experience. In closing, our strategies are working, and we remain confident in our ability to deliver long-term sales and earnings growth. We're the clear market leader in a large fragmented industry, and we believe we are well positioned to continue taking market share and extending our lead. Though the macroeconomic environment remains uncertain, we will continue to focus on meeting the current needs of our athletes. 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 second quarter results. Consolidated sales decreased 5% to approximately $3.1 billion. When compared to 2019, sales increased 38%, demonstrating the sustainability of our structurally higher sales base compared to pre-COVID levels. Comparable store sales decreased 5.1% and, as expected, accelerated sequentially from the first quarter. As a reminder, we were lapping a 2-year stack comp increase of approximately 40% in Q2. Transactions declined 8.4% while the average ticket increased 3.3%. Within our portfolio, each of our 3 primary categories of hardlines, apparel and footwear performed generally in line with our expectations. Gross profit in the second quarter was $1.12 billion or 36.03% of net sales and declined 388 basis points versus last year. As expected, this decline was driven by merchandise margin rate decline of 197 basis points, higher supply chain costs and deleverage on fixed occupancy costs from lower sales. Compared to 2019, our merchandise margin rate expanded 439 basis points, driven by our increasingly differentiated product assortment, combined with our sophisticated and disciplined pricing strategies and favorable product mix. As Lauren mentioned, because of these structural drivers, we continue to expect our merchandise margin rate to be meaningfully higher than pre-COVID levels on an annual basis. SG&A expenses were $657.4 million or 21.12% of net sales and deleveraged 157 basis points compared to last year, primarily due to the decrease in sales. The increase in SG&A dollars was driven by our continued investment in hourly wage rates and talent to support our growth strategies. Interest expense was $25.5 million, an increase of $19.3 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to the $13.8 million of interest expense related to our $1.5 billion senior notes issued during Q4 of 2021. The current quarter also included $6.6 million of inducement charge related to our exchange of $100 million outstanding principal of our convertible senior notes. Driven by our structurally higher sales, expanded merchandise margin and operating efficiency compared to pre-COVID levels, EBT was $427.3 million or 13.73% of net sales. This compares to EBT of $151 million or 6.69% of sales in the second quarter of 2019. In total, we delivered non-GAAP earnings per diluted share of $3.68. This compares to non-GAAP earnings per diluted share of $5.08 last year and GAAP earnings per diluted share of $1.26 in 2019. Now looking to our balance sheet. We ended Q2 with approximately $1.9 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter-end inventory levels increased 49% compared to Q2 of last year. However, we were chasing inventory last year amid significant supply chain disruptions. A better comparison is against Q2 of 2019, where our 40% increase in inventory was relatively in line with our 38% increase in sales. As Lauren said, our inventory is healthy and well positioned. We are excited about the assortment we have in place for the important back-to-school season, and we are prepared to continue navigating a dynamic global supply chain environment through the rest of the year. Turning to our second quarter capital allocation. Net capital expenditures were $84.5 million, and we paid $36.9 million in quarterly dividends. During the quarter, we exchanged $100 million or approximately 21% of then-outstanding principal of our convertible senior notes for cash and unwound the corresponding portion of the convertible note hedge and warrants for 1.7 million shares of our common stock. Following this exchange, we have $375 million in aggregate principal amount outstanding. During the quarter, we also repurchased 3.9 million shares of our stock for $319 million at an average price of $80.84. Now let me wrap up with our outlook for 2022. We are pleased with our performance in the first half of the year and continue to deliver meaningful sales and profitability growth over 2019. As a result of our Q2 performance and improved inventory position for the important back-to-school season, we are raising our 2022 guidance. Importantly, as Lauren indicated, our updated outlook continues to incorporate an appropriate level of caution, given the uncertainty around the macroeconomic backdrop, geopolitical environment, and the dynamic global supply chain. For the year, we now expect comparable store sales in the range of negative 6% to negative 2% compared to our prior expectation between negative 8% to negative 2%. In addition, we now expect non-GAAP earnings per diluted share in the range of $10 to $12 compared to our prior expectation of $9.15 to $11.70. While our outlook is not dependent upon share repurchases beyond the $361 million executed through the end of Q2, we will continue to be opportunistic as the year progresses. EBT margin is expected to be approximately 10.7% at the midpoint, more than double our 2019 rate. Our earnings guidance assumes an effective tax rate of approximately 24% and is based on approximately 88 million average diluted shares outstanding. In closing, we are very pleased with our Q2 results, and we remain very enthusiastic about the future of DICK'S. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.

Our first question today comes from Simeon Gutman of Morgan Stanley.

I have a short-term and then maybe a longer-term question. The short term is on the guidance. The better performance this quarter meant that the year could have gone up or, in theory, could have stayed the same or gone down. So given the uncertainty, why the confidence to even slightly nudge up the back half when you could have just kept it more conservative?

Simeon, I'll take that one. That was your short-term question. Guidance, we felt, given the momentum that we had in Q2, the strong Q2 and the fact that within Q2, our comp sequentially accelerated as we moved into July and the back-to-school season and our inventory started to be in stock more than it had been before, we feel like we're going into the back half with a lot of momentum. And thus, we wanted to appropriately adjust our guidance and take the low end of the range up.

We have also raised our EPS expectations, which was influenced by our previous indication at the end of Q1 regarding elevated freight and fuel expenses compared to last year. Over the past three months, these expenses have not increased as rapidly as they did earlier, and this improvement was factored into our revised EPS expectations for the full year.

Got it, okay. The longer-term question is regarding the comp stacks, which are holding up at notably strong levels despite a slight decline in the top line this quarter. Skeptics might argue that some of the post-COVID demand is persisting longer than anticipated and will eventually taper off. Conversely, the optimists would assert that this is the new normal and that we will continue to see growth. Do you have any insights on this? As you gather more information post-COVID and as demand stabilizes in certain categories, how should we approach the idea of digestion reversion moving forward?

Yes, Simeon, we agree. Our comparables are significantly higher than they were before COVID, and we strongly believe that this change is structural. Consumers have adopted a healthier and more active outdoor lifestyle, and we are capturing a larger market share as a result. Additionally, there are numerous structural changes within our business. Almost everything about our business model has transformed compared to several years ago. Our product assortment is entirely different now, featuring higher-demand products that are more selectively distributed, making them less vulnerable to pricing pressures and promotions. Our product mix has shifted significantly toward higher-margin items. We have meaningfully reduced our exposure to the hunting segment, which was 1,700 basis points below our average. Our vertical brands are performing well, with margins that are 600 to 800 basis points higher than our average. One of the most crucial changes is that we have transitioned our entire marketing strategy from a long-term print-based approach, which required advanced planning for pricing and promotions, to a digital marketing capability. This allows us to be more precise, timely, and personalized in our pricing strategies, enabling us to avoid blanket sales across our store or website. We can be very specific with our pricing and utilize data science to optimize it. So, we absolutely agree that our business is structurally different than it was several years ago, and we will no longer view this as a temporary boost from COVID that will fade away.

Our next question today comes from Kate McShane of Goldman Sachs.

We had a question around inventory and gross margin. I wondered if there was any way to break it down, the inventory between cost and units and maybe any earlier receipts that you might be taking. And then just our second question is around the gross margin cadence in the second half, if you expect much difference between Q3 and Q4 and how we should think about the promotional environment around back-to-school and holiday?

In terms of cost and units, it's a fairly balanced breakdown, with costs being slightly higher. It's essential to compare this year's inventory to 2019 because the composition of inventory last year was quite different. Last year, we were focused on many categories, and we feel much better about our in-stock situation today. Additionally, when looking at growth compared to 2019, both on a unit and cost basis, it's a comparable perspective. Lauren?

Yes. As we look to the promotional environment for back-to-school and holiday, we are anticipating a slightly more normalized pricing and promotion environment. If you look versus last year, it was an incredibly benign pricing promotion environment. But all of that is reflected in our go-forward guidance. We're not expecting any surprises there.

Our next question today comes from Adrienne Yih of Barclays.

Congratulations on another really solid quarter. Lauren, I'm going to start with you. We've always talked about how the notion that you're about 85% branded is a pretty significant competitive advantage. Can you talk about that with regard to return of some vendor levers, say, markdown money or RTV? How is that evolving? And are you seeing any more of it current day or expecting more of it in your forward guidance? And then for Navdeep, it's obviously peak inventory period. So wondering what the inventory might look like at the end of the third quarter and probably more importantly, at the end of the year?

Thanks, Adrienne. Our brand assortment is absolutely a competitive advantage for us. We've got fantastic relationships with our strategic partners. We also are doing a really, really strong job with our vertical brands. We always work with our core partners on managing our inventory levels. So yes, we have certain return levers, RTVs, but we also work really real-time to determine how best to move through product. And we have, in our case, a really elevated clearance process, including our new Going, Going, Gone! concept, which allows us to work to move product really quickly through if there are any overages. Navdeep, about inventory?

Yes. Adrienne, we won't provide the guidance for an inventory on an outlook for Q3 or for full year. However, having said that, the point that I want to make is, like Lauren called out in her comments, right? We feel really, really good about where our inventory right now is, especially as we head into the important back-to-school season. We feel good about the inventory levels and our overall composition of the inventory itself. It's very well positioned and very healthy. So we feel very optimistic as we go into the back half of this year.

The next question today comes from Robby Ohmes of Bank of America.

Great quarter and outlook. I have a couple of quick questions. Could you elaborate on the categories that performed well in the second quarter, excluding back-to-school? You mentioned that ticket growth was up around 8% while transactions were down around 8%. Is this an indication of decelerating transactions compared to the first quarter? Additionally, is there any evidence of customers trading down?

Thanks, Robby. So starting with the categories that outperformed in Q2, we actually had tremendous success across all of our key categories. They were in line with our expectations. Footwear, in particular, is really strong, given our assortment is absolutely best-in-class, and that's driving incredible success with our customers. Team Sports have been back and that business is very strong. We were really pleased with the golf business, which sequentially accelerated in Q2 versus Q1 and still remains significantly above 2019. Athletic apparel was the only business that was slightly challenged in Q2 of our core businesses, and that was really because there were some lead shipments in apparel, where some of the spring products came in on top of back-to-school products. But even within apparel, once the products started flowing, our teams have done an absolutely incredible job flowing product and getting it into the stores. In July, we started to see comp significantly improve in athletic apparel as well. So overall, really, really strong across the categories. I'll turn it to Navdeep to answer the ticket question.

Let me provide a brief breakdown. In Q2, our comparable sales decreased by 5.1%. The number of transactions fell by 8.4%, while the average transaction value rose by 3.3%. However, there is considerable variability in the transaction data, particularly when considering the stimulus payments distributed last year and the timing of market reopenings due to COVID. If we compare transactions to 2019, we actually saw growth in both Q1 and Q2. These results align more closely with the variations you might notice between Q1 and Q2. I hope this clarifies the trends in transactions.

That does. That really helps. And just any sort of color around just the consumers' shifting behavior in a high inflation environment, and if you're seeing that kind of trade-down stuff in your stores?

Yes, we are not seeing a significant shift in consumer spending. Our customers are performing well. We are not observing a movement from higher-end products to mid-range or lower-end items. In fact, the trends are quite consistent across all income groups. This indicates that our product range caters to everyone. Whether customers are looking for the highest-quality technical gear or affordable options, like our DSG brand, which is performing excellently and offers great value and style, we are well-equipped to meet their needs. Overall, our consumers are doing very well.

Our next question today comes from Warren Cheng of Evercore ISI.

I had a follow-up on Simeon's question on the comp stack and how it's been remarkably stable. Can you dig in and give us some color on how the pandemic winter categories, in particular, have performed over the last few quarters? Are they still normalizing and dragging on that overall comp? Or has that started to normalize and stabilize? Just trying to think through kind of how those categories are going to drag or not drag on comps from here.

Warren, so the pandemic-winning categories, and by the way, there were a lot of pandemic-winning categories, including footwear and apparel, which remained incredibly strong, some of the more specific pandemic winners like fitness or outdoor equipment bikes, those are acting in line with our expectations and, in fact, are still significantly above 2019 levels. So while there is some adjustment going on year-to-year due to the surge in those businesses, they are significantly higher than they were pre-pandemic.

Got it. And my follow-up. I thought you guys made an interesting comment in your prepared remarks. You called out that more higher heat, more narrowly distributed product has been a driver of the merch margin. If we step back and look at that 400 basis points of merch margin expansion you've achieved since 2019, has the mix shift component, some mix shift to high heat product, higher-margin product, has that been the more material driver? Or has the lower markdowns and lower promos been the more material driver?

Yes. I would say it is all balanced. We are observing a mix shift from the hunt product, which had a margin rate that was 1,700 basis points lower, decreasing, along with an acceleration of the vertical brands, which have margins that are 600 to 800 basis points higher. This is one factor contributing to the mix. Additionally, in key categories such as footwear and apparel, we are experiencing benefits in two ways: first, from the margin rates in this category, and second, the larger benefit comes from reduced promotions since these products are highly allocated. Both of these factors are driving our merchandise margins higher.

Our next question today comes from Christopher Horvers of JPMorgan.

You talked about momentum in the business and called out July and back-to-school. I know you don't guide to the quarters, but any thoughts on the cadence? And as you revisited the guidance, did your internal expectations change for the back half in 3Q versus 4Q?

We were pleased with how the second quarter finished. At the end of July, which marks the early part of the back-to-school season, we are happy with the start we have observed. Regarding the inter-quarter trend, we have a good inventory level and in-stock position as we enter the important back-to-school season. We are very satisfied with that. Looking at our internal expectations, we raised the low end of our guidance to minus 6% for the full year, reflecting not only the benefits we saw from Q2 but also our optimism about consumer trends remaining strong, which is better than we expected at the end of Q1. This optimism is reflected in our guidance adjustment to minus 6%.

Understood. And then you also mentioned on the expectation at 3Q, you'll have some promotional normalization. So how are you thinking about that margin stack that you referenced for the second quarter? Do we see any degradation in that in the third quarter? Obviously, still very strong versus 3Q '19, but does it lessen in the third quarter?

Yes, Chris, I don't think we called out that we anticipate our promotions will be going up. What we called out in our guidance is the fact that what we don't know is what the overall promotional landscape in the back half will look like. And that is what has been factored into our guidance. So if we continue to see a benign environment, that will be a factor into the actual results for Q3. There are, like Lauren indicated, there are certain categories where we are a bit heavier like, say, in apparel, and we will be appropriately activating around those products as we go into the back half. However, even that impact has been contemplated into our guidance, and so we feel really strongly about the guidance that we have given for the full year.

Yes, Chris, I would just add that long term, we still feel very confident that structurally, we will maintain more than half of the margin gains that we've achieved over the past couple of years.

The next question in the queue comes from Michael Lasser of UBS.

This is Atul Maheswari on for Michael Lasser. First, a quick question on the comp guidance. At the midpoint, it implies that the 3-year CAGR, so the 3-year geometric stacks in the back half, decelerate relative to the second quarter and the first half. So does this reflect the caution that, Lauren, you cited in the prepared remarks with respect to your guidance? And does the comp guidance assume that demand for your categories in the back half decelerate further from what you saw in the second quarter?

Yes. I would say like we called out in our prepared comments, right, we are appropriately being cautious about our expectations for fall. And the macroeconomic situation as well as the geopolitical situation continue to remain challenging. So we need to be cognizant of those trends, and that is what has been contemplated in our guidance. And if you look at the high end of the guidance and the low end of the guidance, yes, the midpoint is there, it is. But at the high end of the guidance, we are expecting the comp to be minus 2% for full year.

Yes, I would also point out the comparison that you're making versus triple year of 2019 includes the fact that we were very, very promotional in 2019. So while we are contemplating that there will be some normalized pricing and promotion in the back half, that could be impacting the comps as well on a 3-year stack.

Got it. That's very helpful. And then my follow-up question is, I mean, granted that there are a lot of reasons to believe that the current comp levels and the current sales levels are sustainable, but in the event that comps do remain pressured in 2023, how much room is there to cut back on operating expenses to manage profitability? If I look at your P&L, your SG&A margin has not really leveraged much versus 2019 despite sales being 35% higher. So one would think that there is room to cut back on costs next year, should sales come under pressure, but would love to get your thoughts on it as well.

We have a lot of flexibility in our profit and loss statement. While we are discussing a hypothetical scenario where 2023 sales may decline, we are quite optimistic about our business, regardless of the macroeconomic situations. When considering our P&L flexibility, we will first examine our variable expenses. There is also room to adjust discretionary and fixed expenses. Furthermore, with only an 8% market share in a robust industry, we are committed to investing strongly in key categories and capabilities to ensure the long-term sustainability of our growth trends. We could consider adjusting those investments if necessary, but we remain confident about our long-term sales and profit outlook.

The next question comes from Paul Lejuez of Citigroup.

Curious if you could talk a little bit more about the footwear category. Curious about your performance in Nike product versus non-Nike product, if that's something that you might be willing to give more color on. And also, I would love to hear an update on the linkage of your app with the Nike app and what that might be doing in terms of new customer acquisition if, in fact, it is bringing in new customers into your network?

Thanks, Paul. Footwear is doing incredibly well across the board. Nike is doing well. Other brands are doing very well. So just in general, the quality of our assortment and the type of products we have is so meaningfully different than it was before that, that business is really being responded to very well by consumers. Our connected membership with Nike continues to be really fruitful. We are working together. We're starting as the supply chain continues to improve, starting to get some higher-heat product going through that connection, and we are growing new customers that are jointly connected to Nike and DICK'S each quarter meaningfully, this past quarter as well.

Got it. I have a follow-up regarding next year. I’m not sure if I missed any updates on some of the younger growing concepts, but how are you thinking about growth for next year based on the performance in the quarter?

Yes. Public Lands has three stores now, and we are very pleased with their performance. Although they are small compared to the larger DICK'S business, our House of Sport concept is also doing exceptionally well, and we are learning a lot from that experience. We plan to expand the House of Sport experiences in the future while also improving service and experience throughout the entire chain. Similarly, with the Golf Galaxy Performance Center, we are rethinking and enhancing the consumer experience. We will continue to invest in more Golf Galaxy Performance Centers and apply the insights gained across the entire chain. Another new concept that is performing well is our Going, Going, Gone! and warehouse channel. This business is thriving even in an inflationary environment, and we've significantly expanded it in recent months, with strong consumer response to this channel as well.

The next question comes from Michael Baker of D.A. Davidson.

Okay. I want to revisit the comment about maintaining at least 50% of the margin gained during the pandemic. If I analyze it based on the EBT line, that suggests a figure slightly above 10.8% or 10.9%. Your guidance for this year is 10.7%. Does that imply, or can we deduce, that you expect margins to decrease this year compared to last year, but maybe reach a bottom here and start to improve in 2023? Is that a reasonable inference from that comment?

Yes, Mike, at the midpoint of our guidance, we are indeed maintaining a significant portion of the margins we achieved in 2019. We are not providing guidance for 2023, but we remain very confident about the long-term sales and earnings trajectory of the business. The biggest uncertainty for 2023 is the macroeconomic conditions. Aside from that, your insight is accurate. We are very optimistic about the long-term sales and profit trajectory of the business.

Okay. As a follow-up, you provided some detailed insights on components of the P&L. While we can make our own estimates, one aspect that’s unclear is how we should consider interest expense after the adjustments for the convert. What are your thoughts on that for the second half of the year or the full year?

Yes. The main variable factor in the year-over-year comparison is that we did not have the long-term senior notes currently on our balance sheet. We believe that this is the appropriate capital structure for our company. Additionally, in both Q1 and Q2, we incurred a one-time cost of just over $6 million associated with the settlement of the convertible notes. If we undertake a similar transaction in the second half of the year, there will be a corresponding cost. However, this is a one-time occurrence tied to unwinding the convert before its due date.

Next today is Cowen's John Kernan.

I wanted to revisit the expectations for merchandise margins, specifically for apparel. It appears that some vendors have shifted away from expected norms. In-store promotions seem to be high, and inventory levels and costs on the vendors' balance sheets are significantly elevated. What are the expectations for athletic apparel as we head into the latter half of the year? When do you anticipate we will see a return to a typical promotional environment in that category as we approach next year?

Thanks, John. We are working really closely with our vendors. And you're right that apparel is a category where we're all working due to fleet through to make sure that we clear through the product. We are moving through that through our Going, Going, Gone! channel, through also our DICK'S clearance activity. It's hard to know when exactly we'll see a normalized promotional activity, but we do have everything that we anticipate reflected into our guidance, and we are marking some apparel down right now. That's included in our guidance and it's moving well through the system. So we're hoping for improvement in the near term.

And finally, our last question comes from Brian Nagel of Oppenheimer.

I would also like to congratulate you on another outstanding quarter. I have some longer-term questions. When we look at the business, I want to understand what is truly happening. Your business has shown clear strength over the past few years, as you mentioned in your prepared comments. Do you believe this growth is primarily due to changes in consumer behavior that occurred during the pandemic, or is it a result of your internal initiatives, especially in merchandising? Additionally, given that you've shifted towards better, higher-end products, do you think DICK'S might be more vulnerable in a weaker spending environment, although we aren't seeing any signs of that at the moment?

Thanks, Brian. Our business has certainly strengthened, as you mentioned. This improvement is largely a result of the strategies we've implemented over the past five years to completely transform our business. You can see a significant difference in our merchandising assortment. Additionally, we've been fortunate that consumers have gravitated towards a more outdoor and healthier lifestyle, which is expanding the market. However, the more significant change over the past several years has been the strategies we've put in place. With our high-end products, people are willing to spend on what matters to them, and these items are highly sought after. We are witnessing this trend even during a challenging inflationary period. We are pleased to offer these products and to satisfy consumers in that way.

We have no further questions in the queue today, so I'll turn the call back to Lauren Hobart, President and CEO, for closing remarks.

Thank you, and thanks, everybody, for your interest in DICK'S Sporting Goods. I will look forward to seeing you and talking next quarter. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your line.