Dick's Sporting Goods, Inc. Q4 FY2023 Earnings Call

Good morning. My name is Dennis, and I will be your conference operator today. I would like to welcome everyone to the DICK'S Sporting Goods, Inc. Fourth quarter 2023 Earnings Conference Call. I will now turn the conference over to Nate Gilch, Senior Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2023 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 our most recent Form 10-Q, as well as cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find a reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a few admin items. First, a reminder about our comparable store sales reporting for fiscal 2023. It's important to note that fiscal 2023 was a 53-week year. Our comp sales calculations exclude the extra week from both our full year 2023 and fourth quarter 2023 results. Thus, these metrics have been calculated on a 52-week and 13-week comparable basis. Second, beginning in fiscal 2024, we are revising our comparable store sales calculations to include revenue from our GameChanger business. Next, we'll be playing a short year-end video in advance of our prepared remarks. And starting toward the end of Navdeep's prepared remarks, we'll also be sharing slides to visually support key discussion points. And finally, for your future scheduling purposes, we are tentatively planning to publish our first quarter 2024 earnings results on May 29, 2024. With that, let's play the video.

Good morning, everyone. I hope you enjoyed the video. DICK'S is a really special company with 75 years of history reinventing sport. It's been a terrific year, and I'm really proud of the team for their extraordinary efforts. Since our founding in 1948, DICK'S has believed in the power of sports to change lives. We bring this to life every day through the experience we provide for our athletes; the differentiated products we offer; the marketing we create to connect our athletes deeply with our brand; and most importantly, our teammates. Through these strategic pillars, we are actively creating and defining our future. And during this past year, it's evident just how far we've extended our leadership position. For the full year, we delivered record sales of $13 billion. On a 52-week comparable basis, our comps increased 2.4%, driven by growth in transactions as we continue to gain market share. We added nearly 7 million new athletes during the year and reached record highs in our active athlete database. It's clear that sport and leading healthy, active lifestyles are priorities for our athletes, and they are increasingly looking to DICK'S Sporting Goods to meet these needs. With our industry-leading assortment and strong execution, we capped off the year with incredibly strong fourth quarter and holiday season. Including week 53, our quarterly sales grew 7.8% to $3.9 billion. On a 13-week comparable basis, our comps increased 2.8%, which was on top of a 5.3% comp increase last year. On a non-GAAP basis, our gross margin expanded more than 200 basis points, driven by higher merchandise margin. Our non-GAAP EBT margin was 11%. And we delivered non-GAAP EPS of $3.85, which included $0.19 for the extra week. On a 13-week comparable basis, our non-GAAP EPS was $3.66, an increase of 25% versus the prior year. For 2024, we're guiding to another strong year and expect to grow both our sales and earnings through positive comps, higher merchandise margin, and productivity gains. Our inventory is well positioned, and we're excited about the assortment we have curated for our athletes. We expect our comp sales to be in the range of 1% to 2% and expect our EPS to be in the range of $12.85 to $13.25. We're excited to continue redefining the future of retail. With the continued success of our growth initiatives, we will increase our capital investment to drive our business forward, both digitally and in-store, and continue gaining market share in this fragmented $140 billion industry. A key driver of this growth is the repositioning of our portfolio, including House of Sport, our next-generation 50,000 square foot stores, which completely revolutionizes our most typical 50,000 square foot DICK'S store; and Golf Galaxy Performance Center. Navdeep will share greater detail on House of Sport's compelling unit economics. I'd like to thank all our teammates for delivering another strong year and for their passion, hard work, and dedication to our business. At DICK'S, it's our people who make us great, and none of what we accomplished is possible without our exceptional team. Before I go deeper into our growth strategies, I'll first turn the call over to Navdeep to share more detail on our financial results, 2024 outlook, and capital allocation.

Thank you, Lauren, and good morning, everyone. Let's begin with some highlights of our full year 2023 results, which was a 53-week year. Consolidated sales increased 5% to $12.98 billion, which included $170 million from the 53rd week. On a 52-week comparable basis, our comps increased 2.4%, and we continue to gain market share. Our comps were driven by a 1.6% increase in transaction and a 0.8% increase in average ticket. On a non-GAAP basis, gross profit for the full year was $4.55 billion or 35.01% of net sales, an increase of 36 basis points from last year. This increase was driven by lower supply chain costs, which leveraged 80 basis points. This was partially offset by lower merchandise margin of 53 basis points, which was entirely due to higher shrink. To be clear, absent the headwind from shrink, our merchandise margin would have been flat. Non-GAAP EBT was $1.4 billion or 10.8% of net sales, and we delivered non-GAAP earnings per diluted share of $12.91, which included $0.19 from the 53rd week. On a 52-week comparable basis, our non-GAAP earnings per diluted share were $12.72. This compares to a non-GAAP earnings per diluted share of $12.04 in 2022, an increase of 5.6% on a 52- to 52-week basis. I will remind you that our 2023 tax rate was lower than our typical tax rate driven by the favorable impact of vesting of employee equity awards and exercises during the year. This positively impacted earnings per diluted share by $0.44 compared to the prior year. As we have discussed on our prior calls, to continue fueling our long-term growth, during the second half of 2023, we took actions to better align our talent, organizational design, and spending in support of our most critical strategies while also streamlining our overall cost structure. This included actions to change our resourcing and organizational structure, primarily at our customer support center, as well as the optimization of our outdoor specialty business. As part of this, we integrated operations of Moosejaw into Public Lands and made decisions about the go-forward outdoor inventory assortment consistent with our prior expectations. Additionally, we conducted a comprehensive review of our store portfolio with respect to our outdoor specialty business. We completed our business optimization review during the fourth quarter. In total, we incurred pretax charges of $84.8 million for the full year 2023. These charges were included in our GAAP earnings per diluted share of $12.18. For additional details, you can refer to the non-GAAP reconciliation in the tables of the press release issued this morning. Now moving to our results for Q4, which also included the extra week. We are very pleased to report a consolidated sales increase of 7.8% to $3.88 billion, which included $170 million from the 53rd week. On a 13-week comparable basis, this was the largest sales quarter in the history of the company. Also on a 13-week comparable basis, our comps increased 2.8% on top of a 5.3% increase in the same period last year. Our strong comps were driven by a 2.8% increase in average ticket on flat transactions. Within our portfolio, we were very pleased with the performance of our key holiday categories, modestly offset by the performance of our outerwear business due to warm weather. On a non-GAAP basis, gross profit in the fourth quarter was $1.34 billion or 34.57% of net sales, and expanded 213 basis points compared to last year. This year-over-year expansion was a sequential improvement from Q3 and in line with our expectations. Gross margin expansion for Q4 was driven by higher merchandise margin of 124 basis points as well as lower supply chain costs and leverage on occupancy costs. This increase in merchandise margin was primarily driven by the quality of our assortment and favorable sales mix. This was partially offset by higher shrink of approximately 50 basis points, in line with the prior quarter. On a non-GAAP basis, SG&A expenses increased 12.6% to $915.8 million or 23.63% of net sales and deleveraged 102 basis points compared to last year. As we have highlighted on prior calls, the year-over-year deleverage in the fourth quarter and throughout 2023 was driven by investments in our hourly wage rate, talent, and technology to create better athlete experience as well as investments in marketing. Savings from our business optimization actions helped to offset these investments. Driven by our strong sales and higher gross margin, non-GAAP EBT in the fourth quarter was $427.7 million, 11.03% of net sales. This is up from non-GAAP EBT of $350.5 million or 9.74% of net sales in Q4 of 2022. In total, we delivered non-GAAP earnings per diluted share for the quarter of $3.85, which included $0.19 from the 53rd week. On a 13-week comparable basis, our non-GAAP earnings per diluted share were $3.66. This compares to a non-GAAP earnings per diluted share of $2.93 in 2022, an increase of 24.9% on a 13- to 13-week basis. During the quarter, we incurred pretax charges of $32.3 million related to our business optimization. These charges were included in our GAAP earnings per diluted share of $3.57. For additional details, you can refer to the non-GAAP reconciliation in the tables of the press release issued this morning. Now looking to our balance sheet. We ended Q4 with approximately $1.8 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our year-end inventory levels increased 1% compared to last year. We believe our inventory is clean and well positioned. In fact, our clearance penetration ended the year amongst the lowest it's ever been. Turning to our fourth quarter capital allocation. Net capital expenditures were $151 million, and we paid $81 million in quarterly dividends. Now moving to outlook. In 2024, we expect to grow both sales and profitability. Consolidated sales are expected to be in the range of $13 billion to $13.13 billion. We anticipate comparable store sales growth in the range of 1% to 2%. EBT margin is planned to be at 10.9% at the midpoint. We anticipate gross margins to be approximately 35% and in line with 2023 non-GAAP results. Within this, we expect merchandise margin to expand modestly, offset by occupancy deleverage as we invest to reposition the portfolio. SG&A expenses are expected to leverage modestly compared to 2023 non-GAAP results, driven by our ongoing focus on improving productivity and reducing discretionary costs as well as the expected benefits from our business optimization actions. We anticipate full year earnings per diluted share to be in the range of $12.85 to $13.25. Our earnings guidance is based on approximately 83 million average diluted shares outstanding and an effective tax rate of approximately 24%. As we model 2024, I want to point out a few things that we expect to impact comparability of our financial results. First, keep in mind that the extra week in 2023 will create a shifted calendar. As a result, when we report our comp sales results, we will compare week 1 through 52 in 2024 with week 2 through 53 in 2023. We do not expect this shift to have a material impact on comp sales for the full year. However, we do expect our reported sales to be positively impacted by the shifted calendar in the first half with an offset in the second half. During the first quarter, we will be investing in several exciting brand campaigns as well as supporting our Q1 House of Sport grand openings. Next, as a reminder, in Q1, we will see an unfavorable impact to our gross margin from higher shrink rates which we will anniversary starting in Q2. And finally, recall that our Q1 2023 tax rate was meaningfully lower than normal, driven by favorable impact of the vesting of employee equity awards and exercises. We do not anticipate this again in 2024. I'll now discuss our capital allocation priorities. Investing in our business to drive profitable organic growth remains our top priority. And as Lauren said, in 2024, we will increase our capital investment to drive our business forward. For 2024, our capital allocation plan includes net capital expenditure of approximately $800 million. As we continue to reposition our portfolio, these investments will be concentrated in store growth, relocations and improvements in our existing stores, along with ongoing investments in technology and supply chain expansion. Our 2024 CapEx plan also includes purchase of certain real estate assets related to House of Sport, for which we are evaluating potential sale-leaseback opportunities. House of Sport is one of the most exciting concepts in retail today. And in 2024, we expect to open eight new locations. As we elevate our store portfolio, seven of these are planned relocations or conversions of existing DICK'S stores, along with one new store at Prudential Center in Boston. We expect to begin construction on approximately 15 House of Sport locations that are scheduled to open throughout 2025. We will also open 16 next-generation 50,000 DICK'S stores in 2024. As part of this, we will relocate or remodel 12 existing DICK'S stores into this innovative new format and open 4 new locations. Across our footprint, we will add approximately 50 premium full-service footwear decks, taking this elevated athlete appearance to nearly 90% of our DICK'S locations. In 2024, we are also excited to grow the footprint of our Golf Galaxy business and plan to open 10 Golf Galaxy Performance Center locations. As part of this, we will relocate or remodel five existing Golf Galaxy stores into this immersive new format and open five new Golf Galaxy Performance Center locations. Through these investments, we expect to increase our square footage by approximately 2% in 2024, marking our most significant expansion since 2017. Lastly, we plan to begin construction on a new regional distribution center opening in 2026. This new DC will play an important role in supporting the long-term growth of our business. Before continuing, I want to share why we are so excited about these investments, especially the House of Sport and our next-generation 50,000 DICK'S locations. As you will see on the slide, for a new House of Sport, in year 1, we expect approximately $35 million in omnichannel sales and a very strong profitability with a target of approximately 20% EBITDA margins. In terms of capital, it will take about $11.5 million of net CapEx to open a House of Sport location, resulting in an expected year 1 cash-on-cash return of approximately 35%. We also expect attractive returns from our next-generation 50,000 DICK'S store investments, where we are targeting approximately $14 million in year 1 omnichannel sales and a comparable EBITDA margin of approximately 20%. We also remain committed to returning significant capital to our shareholders through our quarterly dividend and opportunistic share repurchases. During 2023, we returned $1 billion to shareholders while continuing to invest in the profitable long-term growth of our business. All of this is underpinned by our commitment to a healthy balance sheet and maintaining our investment-grade credit ratings. Today, we announced an increase in our quarterly dividends of 10% on an annualized payout of $4.40 per share or $1.10 on a quarterly basis. This is on top of a 105% increase last year and marks the 10th consecutive year that our shareholders have benefited from a dividend increase. In addition, our 2024 plan includes our expectation for share repurchases of $300 million, which is included in our EPS guidance. As always, we will optically look at additional share repurchases throughout the year. With that, I'll turn it back over to Lauren to review some of the key initiatives that will drive our profitable growth in 2024 and over the long term.

Thanks, Navdeep. As we turn to 2024, our focus is on driving sustained profitable growth by innovating within the omnichannel athlete experience, curating a compelling and differentiated product assortment, providing a best-in-class teammate experience, and driving deep engagement with the DICK'S brand. Industry leaders consistently innovate from a foundation of strength, positioning themselves ahead of the curve. With this mindset, a key part of our growth strategy for this year and future years is continuing to drive omnichannel athlete engagement by repositioning our portfolio and experiences through House of Sport and our next-generation 50,000 DICK'S store. With House of Sport, we are truly redefining sports retail. Since we launched our first location in 2021, this highly experiential destination has brought very strong engagement with our athletes, brand partners, and communities and has delivered powerful financial results. Compared to a typical DICK'S store, athletes are traveling farther to visit House of Sport, increasing the time they spend in the store and visiting more frequently. Because of the engagement and experience at House of Sport, our national brand partners are providing access to unique and expanded assortments, while new and emerging brands see it as a platform for growth. With a total of 12 House of Sport locations now open, we look forward to opening another 8 locations in 2024. Next month, we are so excited to open a House of Sport in our hometown of Pittsburgh and at the Prudential Center in Downtown Boston. We will support these grand openings with high-impact marketing. With the compelling economics Navdeep outlined, House of Sport is a significant part of our future growth story. As we said, by 2027, we expect to have between 75 to 100 House of Sport locations across the country. The vast majority of these will be relocations or conversions of existing DICK'S stores into House of Sport. At the same time, we're continuing to innovate with our next-generation 50,000, which completely revolutionizes our most typical 50,000 square foot DICK'S store. Inspired by House of Sport, this store has a similar elevated assortment and service model, premium experiences, and enhanced visual expressions, and the format is delivering great results. We opened 11 next-generation 50,000 locations in 2023 and are excited to open another 16 locations in 2024. This one-two punch of House of Sport and our next-generation 50,000 is the future of our DICK'S stores and will serve as the hub for our athletes' omnichannel experience. Golf Galaxy is another important part of our growth story. This past year, we grew our Golf Galaxy footprint to over 100 locations. As Navdeep said, we plan to further grow our footprint through Golf Galaxy Performance Centers, which offer an immersive experience for golf enthusiasts of all levels. With 14 performance centers now open, we're excited to open another 10 locations throughout 2024. This spring, we're investing in marketing to drive market share and elevate the Golf Galaxy brand perception in a memorable and relatable way for golfers. During 2023, golf rounds played in the U.S. hit an all-time high, and we believe golf is a compelling long-term growth opportunity. When we talk about drivers of success, it's critical to mention our strong brand relationships. With these strategic partnerships, we've built our industry-leading assortment, making DICK'S the go-to destination for differentiated and on-trend products. We'll continue to make big bets with our partners while also actively seeking to work with new and emerging brands. At the same time, we will continue to invest in our highly profitable portfolio of powerhouse vertical brands, including VRST, DSG, and CALIA, that are gaining meaningful traction with our athletes. For DSG, which is our largest vertical brand, we expect to build on the success of our Q4 campaign with an always-on approach focused on family, value, and sport. With CALIA, our second-largest women's apparel brand behind only Nike, we recently launched the Inspire collection. This is our most versatile collection yet and features an innovative new fabric. We're supporting this important launch through a campaign that uniquely positions CALIA as a performance brand that embodies strength as beautiful. Our digital capabilities are also core to our omnichannel success, and we continue to see growth in our omnichannel athletes who spend more with us and shop more frequently than single-channel athletes. As part of this, we continue to rapidly advance our capabilities in getting products into the hands of our athletes very quickly. Throughout 2024, we'll look to drive consideration for dicks.com through a marketing campaign where we're teaming up with A-list celebrities and adding some humor to really make it memorable. As we expand our leadership position in youth sports, GameChanger, another incredibly strong digital capability we have, plays a pivotal role. GameChanger has become a leader in the multibillion-dollar youth sports technology market. It is a go-to destination for millions of parents, grandparents, and fans to watch games, track stats, and share video highlights for athletes of all ages. Last year, over 1 million teams used GameChanger to capture moments from 7 million games and create 110 million highlight clips. In fact, more games are covered on GameChanger in a single spring month than have been played in the entire history of Major League Baseball. As a recurring revenue, Software as a Service platform, GameChanger is very profitable and has grown sales at over a 35% CAGR since 2017. We expect GameChanger to reach approximately $100 million in sales this year. Importantly, GameChanger families are some of DICK'S Sporting Goods' most valuable customers. A GameChanger customer who also has a DICK'S scorecard spends over 2x more per year at DICK'S than a typical scorecard member. With customers visiting the app over 13 times a month, we believe there are numerous opportunities for DICK'S to reach these customers in unique and authentic ways to drive brand loyalty and sales. Lastly, we will continue to invest in DICK'S brand-building through our Sports Change Lives campaign. At DICK'S, we believe sports have the power to change lives, and our objective with this work is to unequivocally communicate who we are and what we stand for. We're pleased with the first year's results and the way the campaign is resonating with our athletes and increasing brand connection. In the second year of this campaign, you'll see new creative expressions during high-profile sports moments like the NCAA tournament, the Summer Olympics, and NFL games. In conclusion, we are extremely optimistic about our future and the opportunities ahead of us. We're very pleased with our results and accomplishments in 2023, especially our progress in advancing House of Sport, our next-generation 50,000 stores, and upgrades to our existing footprint to enhance the athlete experience. We're continuing to innovate our omnichannel approach, which is further improving convenience and satisfaction and driving higher sales and market share gains. Our decision to step up our investments in 2024 to fuel our future growth clearly demonstrates the confidence we have in our business and our team. I'm incredibly proud to be working alongside such a talented and motivated group across every part of our company, from stores, to our corporate teams, to our distribution centers, to our GameChanger team, and I'm so excited about the future. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.

Your first question is from Simeon Gutman with Morgan Stanley.

My first question is on margins and growth going forward. The business looks like it's rebased, and you now have the House of Sport coming in, which sound very positive to both growth and to margin. Curious how we should think about the business from this point going forward. Are you thinking about it in terms of earnings growth? Or should we think about the margin growing and making this a margin story as well?

Thanks, Simeon. We are incredibly excited about the momentum that we have in our business, just coming off of this Q4 with a 2.8% comp on top of a 5.3% comp. And then looking forward to the year, we are driving growth in top line, margin, and profitability overall. And I think the key driver of the margin story is really the differentiated product that we continue to have access to and expand access to. That product is resonating with athletes, it's creating newness and innovation, and just a feel in the store of energy. And it's also enabling us to navigate, this past Q4, a fairly promotional environment, where we were able to navigate without having to be extremely promotional. And actually, we drove over 200 basis points of gross margin. So House of Sport is a great lever in that it enables us to provide a completely immersive experience for athletes. We've got rock-climbing walls and tracks and field and a whole bunch of elevated service and visual presentation. But importantly, from a margin standpoint, House of Sport does encourage our brand partners, both our strategic partners and our new and emerging brand partners, to experiment. We can bring a brand to life in our Co Lab space in a really exciting way, and it's therefore enabling us to drive even deeper partnerships and more access to new and different products. So overall, very confident about the long-term margin story.

Okay, I’ll paraphrase, but I don’t want it to be my follow-up. It seems that in the future, we should consider a combination of margins and earnings growth. It’s not only about dollar growth; margins can also increase. For my follow-up, looking at the industry and market share for 2024 in the categories you sell, it’s challenging because we don’t have a clear benchmark for potential industry growth. Do you anticipate that the industry will grow? Are we moving towards a typical industry growth rate and market share growth rate? How should we consider this for the next several years?

Our strategy focuses on increasing market share within this industry through various initiatives. We're leveraging our strategic pillars, which include differentiated products, enhancing the athlete experience, and investing in our brand and teammate experience. Our team, which comprises the best individuals in the industry, is a significant asset and has strong momentum. The growth we are witnessing is primarily due to these market share gains. Additionally, we are reimagining our portfolio to include 20 House of Sports and 27 new prototypes as part of our 50,000 new experiences, which offers a fresh take on House of Sport and is very exciting. To directly address your question, we do not anticipate a considerable increase in overall category growth because we believe we have enough momentum to drive share.

I mean, I'll just build on what Lauren said. If you look at it, right, it's a $140 billion overall industry, which is highly fragmented. And what we reiterated today is our core strategies are working really well, and we actually gained almost 50 basis points of our market share over 2023. So really exciting about the results we are posting as well as the core strategy and how those core strategies are resonating with our athletes.

I'm going to add one last thing to Navdeep's comments, which is the consumer has held up incredibly well. We saw that in Q4, we saw it all last year, where we didn't see a trade-down from best to better, better to good. We saw growth across all income demographics. So we do have a healthy consumer, and they are increasingly choosing DICK'S to meet their needs.

Your next question is from the line of Adrienne Yih with Barclays.

Congratulations on an excellent quarter and year, with remarkable execution. Lauren, I'd like to focus on the House of Sports and the idea that its four-wall EBITDA is higher than the core. Could you explain the revenue model? How much of it comes from goods versus services? I assume the goods fall into better and best categories. Additionally, how much of the House of Sports is exclusive and differentiated from core DICK'S? Navdeep, for my follow-up, inventory levels seem to be clean across the landscape. Can you first share your insights on the level of innovation and trends you're anticipating in 2024? Secondly, could you discuss the need and potential for replenishment considering that inventory levels are quite low?

Thanks, Adrienne. When you examine a House of Sport store, it's clear that all of our key strategies are being implemented effectively. Our unique products, access, service model, and overall experience are all coming together exceptionally well. Most of our revenue still comes from product sales, though we also generate some service revenue, which fits our typical business model. What’s really driving this success is the positive response from athletes. They are traveling farther, visiting more often, and spending more time at our House of Sport locations. As a result, our sales per square foot are higher, showcasing an elevated version of our core business model. In response to your question about innovation for 2024, we are very enthusiastic. If you visit our stores now, you will see our spring collection, which includes exciting innovations in both softlines and hardlines as well as team sports. We have a heightened access to popular products that athletes are responding to very positively. Navdeep, I’ll pass it over to you for the inventory question.

Adrienne, thanks for the question. So really pleased with the overall inventory and the quality of the inventory that we finished 2023 with. Our inventory grew just about 1% on top of a 5% growth in sales. As we reiterated this morning, the focus that we have of keeping our inventory clean and well positioned is a core tenet and core strategy of the company, and that is what is allowing us to continue to differentiate our results versus our competition. In terms of our expectations for 2024, like Lauren said, there is so much of innovative and newness available to us in the market, not only from the national brands, but also from the emerging brands. So looking deeper into it and really excited about the spring assortment as well as the more assortment that we see coming into our stores, both in House of Sport and in the next-gen 50,000 locations.

Your next question comes from the line of Chris Horvers with JPMorgan.

My first question brings together some of the different comments and inquiries we've already discussed. Can you explain the merchandise margin, as you mentioned the EBITDA and 4-wall EBITDA margin for both concepts? Does it seem to be higher? How do you view the other lines in the profit and loss statement? Is the occupancy cost greater? Additionally, what is the cost of operating the store? I'm trying to understand the breakdown to reach that 20% 4-wall EBITDA margin and how it compares to the current box.

Yes, Chris, I’m really excited to share the financial details of our House of Sport location and the 50,000 square foot next-gen store. This has been something we’ve been asked about for some time, but we wanted to ensure we had enough experience and data to discuss these economics thoroughly. Let’s begin with the top line. It’s great to see our stores operating at full maturity, benefiting from strong brand awareness and positioning in these markets. The House of Sport locations are generating nearly $35 million in top line sales, while the next-gen store is close to $14 million. As you noted, the EBITDA margins are comparable for both stores. There is some interaction between margin and SG&A, as the House of Sport locations offer a more elevated experience, which leads to a higher service level and consequently a higher margin. Additionally, I want to highlight the occupancy costs; we are investing more capital into these locations, which affects depreciation. Overall, we are very pleased with the EBITDA margin rates we are achieving and the strong profitability from both types of stores.

Got it. So succinctly, it allows you, and I think Lauren mentioned this earlier, that this is the next lever to continue gaining market share. The components may vary, but ultimately the margin returns are similar, and there is an opportunity for continued growth.

Yes. Chris, I will build on what we've been saying, that the financial returns are great, but what is even better is how well this overall concept is resonating not only with our brand partners, with our athletes, and also with the community. And that's what we see as a long-term driver of the differentiation of getting better access, getting more allocated product available to us, having the emerging brands come to us and want to partner with us in these really, really experiential destinations. And that is what we consider as a true differentiator DICK'S Sporting Goods.

Understood. That's very helpful. My follow-up is regarding the specific challenges you mentioned in the first quarter. Could you summarize those? Additionally, how should we approach the investments and their impact on SG&A? You also mentioned shrink in relation to gross margin. Should we still anticipate an increase in merchandise margin? Perhaps you could provide more detail about the first quarter.

Yes. So a few comments that we gave out in our prepared comments today. First of all, I'll start with the sales, right? We're going to have a shifted calendar, so there will be a little bit of an impact to our total top line sales total revenue, but not a significant impact when you think around a shifted basis on comp. What we did call out was just a reminder, we saw the elevated levels of shrink in Q2 of 2023. So in Q1, we haven't lapped that as yet. So as you all are modeling, it will be helpful to keep that in mind. The other is the tax rate. If you remember, our tax rate in Q1 was significantly low compared to our normalized tax rate, and you will see that piece play out as well. And finally, hopefully, you all have watched some of the exciting brand campaigns that we have going on right now between brand campaigns associated with the launch of our CALIA Inspire collection, our dicks.com campaign. And so we are investing into that. In addition, we're going to be opening two really exciting House of Sport locations here in Q1 between Ross Park Mall here in Pittsburgh and at Prudential Center. So you will see some of the investments associated with those two stores in Q1 as well. So a slightly elevated levels of preopening expense, maybe I'll just put a finer point on that one.

Your next question is from the line of Kate McShane with Goldman Sachs.

I wanted to ask about just if there was any more detail on the performance of footwear versus apparel versus hardlines in the fourth quarter. And our second question was, if there was any impact to the 2024 comp guide as a result of the relocations that you're doing for House of Sport.

Thanks, Kate. So in terms of category performance, with the 2.8% comp this past quarter, we saw growth across all of our key categories. So growth in footwear, growth in apparel, and growth in some of the key hardlines categories. So it really was across the board. The only area of softness was the cold weather didn't come as we had hoped it would, and so there was some softness in outerwear. But across the board, really strong growth in our core categories. I'll turn it to Navdeep for the next question.

Yes. Kate, in terms of the comp guidance, overall, like we said, because of the shifted calendar, no material impact to the comp cadence itself when you look at it. However, keep in mind last year, we were converting eight combo locations into House of Sport which were closed during the first half of last year. So we expect our comp in the first half to be slightly stronger than the comps in the back half of the year.

But there won't be any impact from store closures as you relocate this year?

No. We're not doing the closed remodels as we did last year.

Your next question is from the line of Robby Ohmes with Bank of America.

Great quarter, and thanks for all the commentary on the store economics. Really appreciate that. A couple of follow-ups on just the fourth quarter. Can you give us a sense of sort of digital transactions versus in-store transactions in the fourth quarter? Were in-store transactions positive?

Robby, thanks for the question. We're not guiding to digital versus in-store overall. In the fourth quarter, transactions were flat and most of the growth came from ticket. However, it's really important to note that, in Q4 of last year, we were up over 7.6% in transactions. So from a 2-year basis on an omnichannel standpoint, really, really strong growth in transactions. Digital business remains really strong, but we're not going to get into more detail than that.

For the 2024 comp guidance, how should we consider the ticket versus transaction components?

Yes, Robby, we won't break that down any further. I'm really excited to provide positive guidance on top of a 2.4% comparable from last year. Our focus continues to be on driving sales and profitability growth for the business.

Overall, this year, the majority of growth came from transaction growth, reflected in the 2.4%. We are very confident in our comp guidance.

And then one quick clarification. For the store economic models, when you refer to omnichannel sales, is that a web sale fulfilled by the store? What is included in omnichannel sales at a House of Sport or the new 50,000 store?

Yes. No, Robby, that's exactly that. It's not only the stores that are fulfilled from a store with an athlete walking in. Even an omnichannel sale or a digital sale that gets fulfilled by the store is also included in that because that's what we look at as the 4-wall performance of the store, including the work that our team members are doing in fulfilling an omnichannel order.

Yes. And the stores are fulfilling over 80% of e-com orders, 90% of orders across the board, if you include the brick-and-mortar. So it's appropriate to think of it as omnichannel sales.

Your next question is from the line of Brian Nagel with Oppenheimer.

Congrats on another nice quarter.

Thank you.

Thank you.

My first question is regarding shrink. It hasn’t been long since we were discussing it extensively. From your comments and the results shared today, it seems you have effectively addressed shrink. As we look forward to 2024, how should we think about the trend in shrink and the current efforts at DICK'S to manage it?

Thanks, Brian. Yes, we do feel that we are appropriately reserved for shrink. We've been doing significantly more inventory pulses and I do believe that we have an appropriate reserve going forward. In Q1, it's important to note that we are still up against the headwind of the fact that we didn't put the extra shrink reserve in until the end of Q2 last year. But overall, we're doing a lot of things in-store to mitigate. We're working with loss prevention and local law enforcement, as well as moving products to the back of the store that are high shrink. So we have a lot going on. But overall, we are appropriately reserved.

Got it. And then my follow-up question, this is a bit of, I think, a follow-up to the prior question. But just with regard to transaction growth. So DICK'S has done a phenomenal job here driving transaction growth, and you clearly stand out amongst most retailers doing so. You're recognizing all the changes that have happened in the business and the merchandising and all. But is there anything you can kind of help us understand better, underlying drivers of that transaction growth? Are you seeing any type of variability across the chain, maybe within departments, so we get a better understanding of kind of the sustainability of that?

I believe that the growth in transactions is largely attributed to our unique product offerings and the access we provide. Additionally, when athletes visit our stores or shop online, our team is working hard to ensure a satisfying omnichannel experience, and they are making significant strides in that area. Moreover, our brand's strong values and our ongoing emphasis on the importance of sports contribute to this positive momentum. All of these elements are collectively driving robust transaction growth.

Yes, Brian, I'll add to the fact that, if you look at it in 2023 and in fourth quarter, we gained 7 million new athletes in 2023. Just in the fourth quarter alone, we gained 2 million new athletes. So back to Lauren's point, the athlete database that we have, the work that we have been doing around personalization, and the loyalty and our scorecard program, in addition to having the right product, our ability to go and address and discuss those type of features and product availability in our store is resonating very well as well with our athletes.

Your next question is from the line of John Kernan with TD Cowen.

Congrats on another great year. I think you said the House of Sports, they open at maturity. How do we think about the comp contribution for both House of Sport and the next-gen 50,000 square foot stores if they're opening at maturity? How do we think about them, the comp contribution in year 2 and beyond, going forward?

Yes, John, that's a two-part question, so I'll begin with the second part regarding the comp contribution as we consider growth in the second year. We are very optimistic and confident in the results we are observing. First, we don't have a large sample size; there are two stores that opened in 2021 and 2022, which are both now in their second full year. In 2023, they again showed comp sales growth in year two, which we are very pleased with. Regarding the comp contribution, we see opportunities when we relocate a 50,000 or 80,000 square foot store that transitions from generating $19 million to $20 million in sales to closer to $35 million in omnichannel sales, which is an exciting prospect for us. Additionally, I must mention the unique products we are acquiring through these next-gen 50,000 square foot and House of Sport locations. This allows us to spread innovation and freshness into our regular DICK'S stores, helping us enhance the overall portfolio and the performance we are experiencing.

That's helpful. I guess my follow-up, just shift to more of a category level. Softlines, apparel, footwear, I think it's going to be around 60% of the business this year. It's not terribly different from where it was historically, but I think we can all see that the allocations from vendors have gotten significantly better. The private label offering has clearly increased as well. I think this has contributed to 255 basis points in merch margin expansion since pre-COVID levels. How should we think about future merch margin? Particularly as all of the softline categories seem to be elevated at this point.

The product composition remains the key factor driving our merchandise margin expansion compared to 2019, and we are confident this will continue. We are particularly excited about our work with vertical brands, including the recent launch of the CALIA Inspire product in 2024. The DSG brand is also connecting well with our athletes, and we now have a consistent message around it. The softline vertical brand products are performing strongly with athletes as well. As we aim for our long-term goal of $2 billion, this focus on vertical brands will be a significant contributor to margin growth in the coming years. Additionally, we are consistently enhancing our promotional and pricing optimization strategies, and we are optimistic about the unique products we offer.

John, the situation is widespread. It's not limited to just softlines. We are concentrating on improving margins across our entire portfolio.

Your next question is from the line of Joe Feldman with Telsey Advisory Group.

Great quarter. Could you provide more insights on the share gain you are experiencing and where it might be originating from? I'm curious because you continue to execute so well, and I would appreciate your thoughts on this.

Thanks, Joe. I mean, we are gaining market share due to our differentiated experience, the reimagining of our portfolio, the experience we're providing. I think it's coming from a lot of places. And as we continue to get differentiated access to product, I believe it will continue to come.

Got it. Just a quick unrelated follow-up regarding freight, which has been a positive factor for you. When will we start to see some effects of that? Also, have you experienced any pressure on future costs due to the global supply chain issues, such as those related to the Red Sea and the Panama Canal?

Yes, Joe, like you called out in 2023, we saw the tailwind from the freight. As we look to 2024, we are not expecting any kind of tailwind or headwind right now. But to your point, we are definitely evaluating the evolving situation that we have across the world right now. Overall, we feel great about the inventory position, and we'll continue to monitor how the overall situations evolve.

Your next question is from the line of Warren Cheng with Evercore ISI.

I was wondering how the shift to the newer concepts and also the rollout of the floor decks will impact the assortment on a couple of dimensions. So first, if you think about sort of the big global brands versus smaller brands or your own private label, how will that mix skew as you build out some of the newer concepts? It sounds like, from an answer to an earlier question, that vertical brand penetration is going to go up from here. Curious on the global brand aspect.

Yes, we are very enthusiastic about our partnerships across the board. Our collaboration with the national brands has reached an unprecedented level. We are not only enhancing our service levels but also the experience we offer in our stores. The national brands are eager to connect with the sports community, and when they seek a partner capable of showcasing their entire range of products nationwide, we position ourselves as the go-to choice. We are experiencing strong interest and cooperation, along with innovation, entering our stores. Additionally, we are thrilled about the growth of emerging brands such as On, HOKA, and Free People Movement. We see a significant opportunity to deepen our partnerships with these brands and further integrate them into our operations. Lastly, the efforts of our vertical brand team have been outstanding, and we are very excited about the successful product launches we have achieved this year and what lies ahead in 2024.

I also wanted to ask about your latest view on where you see long-term normalized gross margins and EBIT margins as you shift to these newer concepts. There's a lot of moving parts here. Curious if you can give us your view on the level and also the ongoing drivers that will shape margins past this year.

Yes. Warren, today, we are not going to be providing a long-term algorithm. But what we have consistently said is what we are consistently delivering is the fact that we are confident in driving the long-term sales and profitability of the company leaning into the core strategies that Lauren has laid it out today. So we'll continue to execute and confident in the guidance that we have provided to be able to drive positive comps in 2024 on top of a strong 2.4% comp that we posted in '23.

Today's final question will come from the line of Mike Baker with D.A. Davidson.

Okay. I wanted to ask a follow-up on the outdoor concepts. You talked about bigger-picture restructuring or changing some things there. But more specifics, what is the plan in terms of store count there? Are you closing those stores down? And just longer term, a couple of iterations you've had on the outdoor business in your history. What's sort of the long-term thought process there?

Yes, Mike, we are very enthusiastic about the outdoor category. At a macro level, it represents a $40 billion highly fragmented total addressable market. We see a chance to differentiate ourselves through service, product experience, and our overall selection. In 2023, we acquired Moosejaw, and last year we worked on integrating the back office operations of Moosejaw and Public Lands to enhance long-term profitability. Our business optimization efforts involve streamlining some of our previous investments. While we are closing some Moosejaw locations, we are optimistic about the future of the business and will keep assessing that market. Overall, we remain very confident about the long-term opportunities in the outdoor segment.

Okay. One quick follow-up. I may have missed it. Just looking for a number. Did you tell us how much it costs, the cost to build the 50,000 stores? So I think you gave us the sales volume and the EBITDA margin. I may have missed it, I didn't hear the cost to build and therefore the cash-on-cash returns.

Yes. Actually, Mike, on both these metrics are in the slide that will be there on our Investor Relations webpage, both the net capital investment, inventory, as well as the preopening, and then the cash-on-cash return.

Got it. Sorry, doing the call on the phone, so I missed that.

We appreciate the flexibility on joining us early here.

This concludes the question-and-answer session. I will now turn the call over to Lauren Hobart, President and Chief Executive Officer, for closing remarks.

Thanks, everybody, and thanks for your interest in DICK'S Sporting Goods. I want to give a shout out to our 50,000 teammates who really are the reason that we are driving these incredible results. Thank you all very much. See you next quarter.