Hello, everyone, and welcome to the Q3 2022 DICK'S Sporting Goods, Inc. Earnings Conference Call. My name is Emily, and I'll be your operator for today's call. I will now turn the call over to our host, Nate Gilch, Senior Director of Investor Relations. Please go ahead, Nate.

Good morning, everyone, and thank you for joining us to discuss our third quarter 2022 results. On today's call will be Lauren Hobart, our President and Chief Executive Officer; Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived in our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC including our last annual report on Form 10-K and cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. During this morning's call, we will discuss 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 your future scheduling purposes, we are tentatively planning to publish our fourth quarter 2022 earnings results on March 7, 2023. So with that, I'll now turn the call over to Lauren.

Thank you, Nate, and good morning, everyone. As we announced earlier this morning, we delivered an exceptionally strong quarter. Our Q3 results demonstrate the continued success and strength of our business based on our transformational journey and the foundational improvements we've made over the past 5 years. Our strategies are working and are clearly resonating with our athletes. While consumers continue to face macroeconomic uncertainties, our athletes have held up very well as we continue to offer them a compelling and differentiated assortment as well as a best-in-class omnichannel experience. In fact, during the quarter, we saw three important consumer trends. More athletes purchased from us, they purchased more frequently and they spent more each trip compared to the same period last year. Our industry has strong momentum given a lasting shift in consumer behavior and our differentiated assortment, elevated service standards and best-in-class omnichannel athlete experience are setting us apart in the marketplace. This Q3, we achieved record sales of $2.96 billion and our comps increased 6.5%, driven by increases in both transactions and average ticket. This strong comp was on top of a 13% comp last year, a 23% comp in 2020 and a 6% comp in 2019. As you've heard us say many times, DICK'S is a growth company, and our Q3 results are powerful evidence of our sustainable growth story. As we indicated on our last call, at the end of Q2, our inventory position was strong, and we were back in stock in key items. This enabled us to deliver a very strong back-to-school season and meet robust consumer demand. Additionally, we also mentioned that we have pockets of apparel inventory to address and we have addressed much of that overage this quarter. As a result, and as expected, we saw a merchandise margin decline of 438 basis points versus last year. Importantly, our merchandise margin remained elevated compared to 2019. And looking ahead, we continue to be very confident that our merchandise margin will remain meaningfully higher than pre-COVID levels on an annual basis. We achieved a double-digit EBT margin of 10.3% in the quarter, over 3x our 2019 rate on a non-GAAP basis. This was driven by our structurally higher sales, expanded merchandise margins and greater operating efficiency. In total, we delivered non-GAAP earnings per diluted share of $2.60, significantly ahead of any pre-COVID third quarter in our history. Looking ahead, our inventory is healthy and well-positioned, and we're excited about the assortment that we have in place for the holiday season. Because of our continued strong performance, quality of inventory and the confidence we have in our business, we're raising our full year outlook. We now expect comparable store sales for the year to be in the range of negative 3% to negative 1.5% and non-GAAP earnings per diluted share to be in the range of $11.50 to $12.10. In closing, I'm very pleased with our strong third quarter results and remain enthusiastic about the future of our business. I'd like to thank all of our teammates for their hard work and commitment to DICK'S Sporting Goods, which helped make this performance possible and for their upcoming efforts during the holiday season. I'll now turn the call over to Navdeep to review our financial outlook and results in more detail.

Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our third quarter results. We are excited to report a consolidated sales increase of 7.7% to $2.96 billion. As Lauren noted, comparable store sales increased 6.5% on top of a 12.8% increase in the same period last year, a 23.2% increase in Q3 of 2020 and a 6% increase in Q3 of 2019. Our strong comps were driven by a 3.7% increase in transactions and a 2.8% increase in average ticket. Within our portfolio, the back-to-school categories did very well, driven by our differentiated assortment across footwear, apparel and team sports. When compared to 2019, sales increased 51%. This reflects a significant sequential acceleration in our sales trends versus 2019 from recent quarters. Gross profit in the third quarter was $1.01 billion or 34.22% of net sales and declined 423 basis points versus last year. However, it increased 463 basis points over Q3 of 2019. As expected, the year-over-year decline was driven by merchandise margin rate decline of 438 basis points. During the quarter, we focused on cleaning up some targeted inventory overages due to late arriving spring products. We moved excess apparel inventory to our value chain concept and have been very successful in liquidating much of this product. We intend to continue addressing this overage in Q4 in order to start 2023 clean. Our Q4 merchandise margin expectations are appropriately reflected within our annual outlook. Compared to 2019, our merchandise margin rate is 141 basis points higher driven by a differentiated assortment, combined with our sophisticated and disciplined pricing strategies and a favorable product mix. Because of these structural drivers, we continue to expect our merchandise margin rate to remain meaningfully higher than pre-COVID levels on an annual basis. SG&A expenses were $679.7 million or 22.97% of net sales and leveraged 3 basis points compared to last year on the increase in net sales. The $48 million increase in SG&A dollars was driven by investments in hourly wage rates, talent and technology to support our growth strategies. Interest expense was $26.1 million, an increase of $20.1 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to $13.8 million of interest expense related to our $1.5 billion senior notes issued during Q4 of 2021. The current quarter also included $8.8 million of inducement charges related to our exchange of approximately $221 million of outstanding principal of our convertible senior notes. Driven by a structurally higher sales, expanded margins and operating efficiency compared to pre-COVID levels, EBT was $304.1 million or 10.28% of net sales. This compares to a non-GAAP EBT of $59.9 million or 3.05% of net sales in 2019 and an increase of $244.2 million or 723 basis points as a percentage of net sales. In total, we delivered non-GAAP earnings per diluted share of $2.60. This compares to a non-GAAP earnings per diluted share of $3.19 last year and represents a 400% increase over 2019's non-GAAP earnings per diluted share of $0.52. Now looking to our balance sheet. We ended Q3 with approximately $1.4 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter end inventory levels increased 35% compared to Q3 of last year. As a reminder, we were chasing inventory last year amidst industry-wide supply chain disruptions. Therefore, the better comparison is against Q3 of 2019. And compared to Q3 2019, our 51% increase in sales was well ahead of our 31% increase in inventory. Our inventory is healthy and well positioned. Now turning to our third quarter capital allocation. Net capital expenditures were approximately $100 million and we paid $41 million in quarterly dividends. During the quarter, we exchanged approximately $221 million of outstanding principal of our convertible senior notes for cash and unwound the corresponding portion of the convertible note hedge and warrants or 4.3 million shares of our common stock. After completing this exchange, we have taken out approximately $421 million with approximately $154 million in aggregate principal of the convertible notes still outstanding. Beyond retiring nearly 3/4 of our convertible notes, year-to-date, we have returned $485 million to shareholders through dividends and share repurchases while continuing to invest in the profitable growth of our business. So let me wrap up with our outlook for 2022. As a result of our strong Q3 performance and the quality of our assortment for the holiday season, we are raising our 2022 guidance. Importantly, our updated outlook continues to incorporate an appropriate level of caution given the uncertain macroeconomic backdrop. For the year, we now expect comparable store sales in the range of negative 3% to negative 1.5% compared to our prior expectation of negative 6% to negative 2%. In addition, we now expect non-GAAP earnings per diluted share in the range of $11.50 to $12.10 compared to our prior expectation of $10 and $12. EBT margin is now expected to be approximately 11.4% at the midpoint, more than double our 2019 rate. Our earnings guidance assumes an effective tax rate of about 25% and is based on approximately 88 million average diluted shares outstanding. In closing, we are very pleased with our Q3 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.

My first question is on merch margin or gross margin. I think you've been saying that we expect to retain a majority of the COVID gains. I wanted to ask if that's still the case. And I guess the fact that you're getting through this period relatively well where your vendors have excess inventory, does that build your confidence around that forecast of being able to retain a majority of this gross margin?

Thank you, Simeon. Yes, we still believe we can keep a significant portion of our merchandise margin gains. If we look back at the second quarter, we mentioned that we received many late spring shipments on top of our back-to-school inventory, which resulted in an excess of apparel. This quarter, we took proactive steps to address that inventory and ensure a clean start for holiday merchandise and 2023. We are confident in the structural improvements to our overall margin. Notably, our EBT margin, despite the investment in cleaning up apparel, reached 10.3%, which is over three times what it was before 2019. We have strong confidence in the long-term sustainability of our profitability.

And then my follow-up is on sales. Some of the categories or the overall business, either normalizing at a higher level or just performing better than maybe the market would have thought, if you look back a couple of years. You're prepared to talk about '23, but can you just talk about some of the categories where there's been some reversion? Has that stabilized and rebounded? Does the business digest or can the business keep growing next year?

Yes. The categories in Q3 that our core categories are the ones that we are the most focused on. So team sports, apparel, footwear, all key back-to-school categories and our top categories, and they performed extremely well. If you look across every single one of our key categories, everything except hunt, which is not a key category anymore, we have meaningfully rebaselined versus pre-COVID levels. We see no reason why long term, we should not be able to continue to grow from this level.

Congratulations to the team on this outstanding execution as always. So Lauren, my first question is about the promotional environment. Is it limited to apparel? It sounds like you've navigated through that. Are you noticing any spillover into safe footwear? How much vendor support are you receiving for those promotions? How long do you anticipate that will last? And then for Navdeep, as you're preparing for spring of next year, with the buildup of safety stock in transit, how are you approaching unit buys outside of that in-transit inventory?

Thanks, Adrienne. So we work very closely with our vendor partners, as always, to make sure that the inventory in the marketplace is at the levels that we all want it to be. We continue to move product when it needs to be moved, and that's in every category. Apparel was an issue this past quarter, and we will be aggressive to clean up whatever needs to be cleaned up in Q4 in partnership with our vendor partners. Our main priority right now is to start 2023 clean, and we're really thrilled that we have in stock for Q4 inventory for the first time in a few years that's going to be robust and that people will be able to find exactly what they're looking for with great holiday gifts. Navdeep?

Yes, Adrienne, thanks. For 2023, I cannot provide early guidance. However, as Lauren mentioned, we are very confident about the core aspects of the business, including apparel, footwear, team sports, and the outdoor category. We are being cautious regarding the macroeconomic outlook. Overall, we remain confident about our long-term sales expectations. We will share our 2023 outlook as part of our fourth-quarter earnings release.

My question is about the basket uplift you experienced in the third quarter. Should we expect that to continue into the fourth quarter? I would appreciate more details on what is contributing to the increase in average transaction size. Is it due to better in-stock levels and higher-ticket items, or is it related to being out of stock last year? Understanding the dynamics driving that would be very helpful.

Our performance this quarter was very strong, with over 50% of the growth coming from transactions and the remainder from basket size. Within the basket, inflation had some impact, and we passed along certain costs to consumers, though we absorbed some ourselves. Additionally, there was a notable shift in the product mix we offer and an increase in premium items purchased. Consumers are clearly expressing that maintaining a healthy outdoor lifestyle is important to them, leading them to invest in what they view as discretionary purchases to support that lifestyle. Overall, improvements were seen across the entire product range.

Yes, Robby, maybe I'll add one more comment. Each of our the consumer income demographic that we have within our store did really, really well in third quarter. And what we saw was that highly engaged and loyal athletes that we have in our gold customer. Those customers actually did even better. And so we continue to be really optimistic when we look at the core aspects of the business about the fourth quarter. We are balancing that against the macroeconomic constraints that we see right now. But overall, we were very pleased with the results that we saw in Q3.

And maybe just a quick follow-up. Can you remind us how holiday played out last year in terms of pull-forward of spending and how you're planning against that this year for the fourth quarter?

Yes, we likely experienced a similar early start to the season as most retailers did last year and in 2020 due to the constrained inventory levels. However, as we assess the business, we take into account the entire holiday season rather than focusing solely on the initial weeks or late October.

I'm just trying to reconcile what one of your vendors said with regards to the amount of inventory that they had in transit. And I wondered if there was any risk of further late deliveries over the next quarter or two that you might have to manage as a result?

Kate, thank you. Yes, we are working very closely with our vendor partners. We've got a great flow of product right now, and everything has been factored into our guidance, which we're feeling really, really good about.

Maybe you could frame for us the amount of excess inventory that you had to clear through in 3Q, how that compares to what you think you have to clear through in 4Q. Any help you can provide on the merchandise margin side. And I guess just related to the clearance, I'm curious if as you picked up the promotional cadence, if you saw a lift in sales? Was it a traffic and sales driver during the quarter?

Paul, I think there are two questions there. In terms of the quantification of the clearance inventory, I would say it was not a material portion of our driver of the sales in the third quarter. What we saw and like Lauren alluded to, we saw the gain in our comp sales come more from the transaction growth and the AUR increase. And AUR increase also came from kind of the high heat and the highly allocated assortment that we have. In terms of the potential markdown risk for fourth quarter, much of the inventory that had been moved into clearance was activated and quickly moved through in third quarter. There is some pockets of inventory here in fourth quarter, which we will continue to address. However, all of that has been contemplated in our fourth quarter guidance. And with this guidance that we have given, we are very confident that we'll be able to maintain a meaningful gain in our merch margins compared to 2019.

Can you dig in a little bit on the gross margin side? The 438 basis points, does that include the mix benefit if footwear and apparel did really well relative to other categories? And then as you think about the freight line, how are you thinking about freight costs? Were they still a pressure year-over-year? Is there any sort of capitalized inventory costs that will flow through on a delayed basis as we look over the coming quarters?

Yes, Chris, there was a slight benefit in the mix, but it wasn't significant enough to highlight. That's why it wasn't mentioned. Regarding freight costs, they have been decreasing since the start of this year, but they are still higher compared to 2019. In terms of product flow, it will take some time for the benefits of these reduced costs to be realized in 2023.

As a follow-up, you mentioned being prudent and conservative with the fourth-quarter guidance. You've adjusted your three-year compound annual growth rate relative to 2019. Can you elaborate on what influences that perspective? I understand there are normalized factors and seasonality happening now, especially between late October and November. Are you extending the current business trend to estimate the fourth-quarter comparison, or is there a certain level of conservatism factored in?

Chris, we feel incredibly good about the momentum in our business coming out of a very strong Q3. I would point out, we had three really strong months in Q3. And coming into Q4, we see absolutely no signs of any degradation. We're very enthusiastic about Q4. We are being appropriately cautious just because of the uncertain macroeconomic environment and the fact that the consumer is going through a lot right now, but our confidence is as high as it's been.

I would like to follow up on an earlier question regarding the remaining inventory to be cleared. I believe your fourth quarter EBT margin guidance is down 260 basis points, which represents the smallest decline over the year and is an improvement compared to what was seen in the third quarter. Is this due to the fact that you are mostly through the markdowns? If not, what explains the expectation of a smaller decline in EBT margins in the fourth quarter compared to the earlier quarters?

Yes, Mike, I won't guide specifically to fourth quarter, I'm sure you can back into it. I would say there are structurally things are expected to improve as we go into the fourth quarter. Like we said, much of the clearance activity that we were activating in third quarter is behind us. So that's one reason. The other reason is just because we feel confident about our ability to manage our expenses as well as drive higher productivity. Yes. You are spot on in terms of the onetime costs associated with the convert, it's over $20 million when you look at it on a year-to-date basis. So if you do decide to execute another tranche of the convertible note transaction in fourth quarter, that headwind was not contemplated in our guidance. But we will continue to look on the convert and take that out in fourth quarter on an opportunistic basis.

Great execution this quarter. Sorry to keep hammering on this merchandise margin question, but I think it's just really important to understand the dynamics here. So if I just look relative to 2019 levels, it looks like the merchandise margins degraded about 300 basis points from second quarter to third. Can you just give us a little bit better sense of how much of that came from that apparel clearance maybe so we can understand what merchandise margin would look like excluding this issue with the late spring receipts.

Warren, the vast majority of the decline that we saw here in third quarter came from the activation that we had around the apparel overages that Lauren indicated at the end of Q2.

Got it. Okay. And my follow-up is just any color on the process of clearing these inventories. I know a lot more is running through your own clearance concepts, your own value chain concepts. Can you just give us a sense of the margin uplift when it runs through your own content versus the old way through your own mainline stores?

We've achieved significant success with our value chain concepts, both in our ongoing efforts and in our warehouse stores. We believe there is potential to improve our margins on clearance items. We've also had great results with online product clearing, which allows us to introduce fresh products into our stores and contributes positively to our margins. However, I'm afraid we won't provide a specific answer to that.

Yes. Warren, I would say that we are very pleased with the strategy that we have of leveraging the Going, Going, Gone! concept as well as the warehouse locations. Like Lauren indicated, the recovery on this product from a clearance perspective is significantly better than what we used to have in 2019. And we have called out that as one of the key structural drivers of our confidence of us being able to maintain a meaningful portion of the margin gains compared to 2019.

So the message that you're offering this morning is that the margin degradation that you experienced in the third quarter is transitory in nature because it's associated with having excess inventory that presumably will be cleared out by the end of the fourth quarter, and you will now have this moving into next year. Now next year, you might experience a softer overall demand environment such that you will have to increase your promotional activity to work harder to driving customers and this will offset some of the benefit next year that you'll have from cleaner inventory. Is that the right way to think about it?

Partly, Michael, but not all, no. The margin degradation, we expect to be clean going into next year. So correct that these were investments that we made to get our inventory clean and we'll continue to do that. We're not guiding to next year, but I would just point to the fact that we've had significant athlete growth. We've had growth in the number of athletes, over 16.5 million new athletes in the last 2 years and this year-to-date, 4.5 million new athletes joining, and they are driving transactions and our gold customers are growing. So I would not say that we're expecting at this point in time, any sort of an overall demand change that would require a heavy promotional environment.

Yes, Michael, and I'll add one more point you mentioned. One of the structural factors contributing to our consistently elevated merchandise margin is the assortment we currently have in our stores. This assortment is strategically allocated and in high demand, and it is generally unaffected by any promotional activities that may be occurring. This is another reason we have a great deal of confidence as we look toward 2023.

Congrats on nice quarter. Just on inventory. $3.3 billion on the balance sheet in Q3. Some of that's obviously just from higher cost, but how should we think about the growth of inventory year-over-year in Q4 where you think you might finish? And what you think inventory levels look like in the spring of '23?

John, let's delve deeper into the Q3 results concerning inventory. As noted, it's more informative to compare inventory growth to 2019 since we were managing our inventory throughout last year, including the fourth quarter, with a significant amount of product still in transit as we prepared for the holiday season. In the third quarter, our sales increased by 51% compared to 2019, while our inventory grew by 31%. We will maintain the same inventory management approach to ensure there is adequate availability and stock for athletes during the crucial holiday season. As mentioned, there are specific areas of inventory that we will focus on in the fourth quarter. Overall, we believe our inventory is in a strong position and well-prepared for the holiday season.

Got it. And then maybe one quick follow-up as it relates to supply chain costs. Obviously everybody can see that some of the inbound freight costs have come down pretty significantly. How do we think about some of the domestic freight and shipping costs as we go into Q4 and next year?

You meant Q4 of this year?

Yes.

Okay. No, that's helpful. No, we agree with you on the international freight side that definitely there is a continued lowering of the costs that we have seen, probably I would call it from third quarter onwards. And However, the domestic side still continues to be volatile, and we are working very closely with our vendor partners as well as our supply chain team works very closely with the domestic partners as well. That still continues to be volatile. We are playing close attention to it. But right now, our focus is to make sure that the inventory is available in stores and available for athlete to buy as they are looking for good opportunities here for the holiday season.

This is William Dossett on for Brian Nagel. Congrats on a nice quarter. So our question is actually just on product mix over time, how you're balancing between your national accounts and your vertical brands? And can you provide an update on the performance in the quarter for your private label brands and how this customer is behaving?

Yes. Our vertical brands continue to do very well and outperformed for this year in Q3. The DSG brand, in particular, has done incredibly well. It's a high fashion, high-function product at a very attractive price point. It's perfect for the consumer right now. And at the same time, CALIA and VRST are filling white space in our assortment and really leaning toward that athletic male, athletic female and more of a performance and lifestyle brands. So we're very, very pleased with the vertical brands. The last time we gave an update that we do it annually, and it was 14% was our vertical brand penetration. So we'll update that again at the end of this year, yes.

I wanted to ask about the layout in the store, at least a couple of local stores around me, it feels like you've done some things to adjust the layout. Maybe emphasizing private brands a bit more, the vertical brands, I should say, more front and center and in fact, even replacing where you used to keep the big brands, the national brands. And I'm just curious if that's something you're testing and what you're learning from that test? And is that something we should expect to see in more stores in the future?

Joe, what you're noticing is that we have taken a very flexible approach to product layout based on inventory levels and current consumer trends. The days of consistent layouts across all DICK'S stores are over. We are continuously optimizing our space, frequently adjusting and rearranging items as necessary.

I have a few questions about the warehouse store strategy. We have about 50 locations. So it looks like temporary locations. Is that how you think about this? Or is that a permanent part of the strategy? And I'm curious how that fits with the Going, Going, Gone! concepts?

Yes. Great question, Jim. The way we're thinking about the value change in general, is that we have a try before you buy strategy where we do a pop up, and that's what you're seeing at the DICK's warehouse stores. See how the consumer reacts, see how we like the real estate and then a portion of those are converted into a Going, Going, Gone! permanent location. So that will be our ongoing strategy. We find a great deal of success trying before we actually sign a long-term lease. House of Sport has been exceptional, both in how the locations are performing and in what we can learn from House of Sport to enhance our other stores in terms of service levels and products. We have also launched some new products there that have been very successful throughout the rest of the chain. We are really excited about House of Sport. Public Lands also equally really excited about. We have just launched, I think, five new Public Lands stores about in the past month. They are meant to tap into a very broad outdoor consumer, and they are doing an incredible job serving those explorers very well. So we're very excited. Public Lands, still in test phase. House of Sport support definitely a key part of our roll forward strategies.

I'm sorry to parse words, and maybe this is just a nuance, but regarding the merchandise margin improvement that you've seen since 2019, you're indicating now that you expect to retain a significant amount or a meaningful amount of it versus previously expecting to retain a majority of it. Is that accurate?

Seth, I would say we are still guiding that we will maintain a meaningful portion of that margin gain. So again, maybe I'll recap some of the structural reasons that we are seeing, and we have that confidence. If you look at Q3, the performance that we saw in Q3 from the highly-allocated product is what drove a significant amount of our success in third quarter. And to me, that's kind of a go-forward strategy, and that will be a continued benefit that we will keep. The tools that we have, whether it is Going, Going, Gone! or the promotional and the pricing capabilities that we have delivered is something that is really, really strong compared to where it was in 2019. And that, again, gives us a tremendous amount of confidence. And then the product mix, I know there was a question on vertical brands. The vertical brands have 600 to 800 basis points of higher margin. And these brands, again, resonated really well in third quarter. And the hunt penetration, that used to have almost about 1,700 basis points lower margin, and that has become a meaningfully small piece of our business. When you look back at all of these structural drivers, and you look at the performance that we delivered in Q3, that's what gives us the tremendous amount of confidence that we can maintain a meaningful portion of these gains versus 2019.

That's helpful. But just to clarify, you don't expect to necessarily maintain majority anymore, just a meaningful amount?

Yes. Yes, you can parse the words, but we are very confident that we'll maintain a meaningful portion of those gains versus 2019.

I think it's important to look at our full year results. We've been discussing the full year, and we absolutely expect to maintain a significant amount of our margin improvements. Yes. Our approach to the holiday season is very different from how it was prepandemic. We are being much more surgical. We're making sure we have great gifts for people at great value but no longer are we doing whole household sites on sale, that sort of a sledgehammer approach to promotion. We're being much more targeted, much more item focused and much more surgical. We're really excited about the in-stock levels that we have and that our approach to holiday is going to be very well-received by athletes.

Just wanted to ask a follow-up on merch margins. Given your comments on largely working through the apparel inventory here in 3Q, do you expect your merchandise margin declines to moderate in 4Q based on the guidance?

Yes. Justin, I would say it's been implied in our annual outlook. When you look at the merch margin, there are a couple of factors you have to keep in mind. Comparing to 2019, we definitely feel very confident that we'll maintain a meaningful portion of those gains as we go into the fourth quarter. And then you have to look into the commentary that we gave in fourth quarter around the promotional landscape last year compared to where our expectation that Lauren just laid out. Overall, on an annual basis, like we have said, we'll maintain a meaningful portion of the gains versus 2019.

Okay. Maybe a follow-up, Navdeep, on just SG&A flexibility. Your sales based on the guidance are going to be up to 38.5% at the midpoint. Looks like SG&A will have leveraged maybe around 150 basis points versus '19. So clearly, you've been reinvesting some of the top line upside into SG&A in the past few years, whether that's marketing or wages. I guess my question is in the event demand does soften, how much flexibility do you have within your SG&A structure to maintain EBT margins at this level without of course sacrificing service levels in the store?

Yes. Justin, I think that you've read the SG&A profile really well. We agree that we are investing in the long-term growth strategies of the company. In addition, the wage pressures continue to remain elevated compared to 2019. So those are the big areas of investment in SG&A as you look to this year. In terms of the forward-looking view, first of all, the variable expense is always flexible sales. So if the sales are volatile for whatever reason, we believe that our variable expenses will definitely reflect. In addition, we have flexibility in our fixed as well as the discretionary expenses as well. And as you called out, we will balance these actions with what is the right thing to do for the long-term aspect of the business versus keeping the company in really healthy conditions. And we could look also at our growth strategies and the investments required. So internally, we feel really confident that we will be able to navigate macroeconomic conditions really well and drive the long-term sales growth and the profitability growth of the company.

I have a few questions about the warehouse store strategy. We have about 50 locations. So it looks like temporary locations. Is that how you think about this? Or is that a permanent part of the strategy? And I'm curious how that fits with the Going, Going, Gone! concepts?

Yes. Great question, Jim. The way we're thinking about the value change in general, is that we have a try before you buy strategy where we do a pop up, and that's what you're seeing at the DICK's warehouse stores. See how the consumer reacts, see how we like the real estate and then a portion of those are converted into a Going, Going, Gone! permanent location. So that will be our ongoing strategy. We find a great deal of success trying before we actually sign a long-term lease.

I wanted to ask one, Lauren, on the consumer. It doesn't sound like you're seeing any trade down yet. But just as the consumer weakens, are there levers you can pull other than price to kind of increase the value offering DICK'S has to retain that customer? And then just as you think about the box, what categories would you expect to slow first? Or where would be the times of weakness you're looking for to get a sense of the health of the consumer?

Daniel, we aim to offer a variety of products to cater to everyone. We haven't noticed customers downgrading their choices, and we provide a wide range of price points, from great apparel and gear to premium options. There are various strategies we can implement. Our engagement scorecard is very effective, allowing us to send personalized messages to our athletes. Generally speaking, we haven't observed any signs of decline in any of our major categories, and all of them remain strong.

Yes. Overall, our inventory is very healthy and well-positioned for the holiday season. The only issue we noted was in the athletic apparel category, but we have already addressed much of that in the third quarter, and we will continue to manage it. Overall, we feel very confident about our in-stock levels as we approach this important holiday season.

Thanks, everybody, for your interest in DICK'S Sporting Goods. I hope you have a happy, healthy and safe holiday. Bye-bye.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.