Dick's Sporting Goods, Inc. Q1 FY2024 Earnings Call

Thank you for standing by and welcome to the DICK's Sporting Goods First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Nate Gilch, Senior Director of Investor Relations. You may begin.

Good morning, everyone, and thank you for joining us to discuss our first quarter 2024 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 on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements that 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 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 the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a few admin items. First, as we previewed on our last earnings call, beginning this quarter, we have revised our comparable sales calculations to include revenue from our GameChanger business. Second, beginning this quarter, we've included grand opening advertising costs within preopening expenses. These one-time costs incurred in connection with opening new stores were historically presented within SG&A, part of advertising costs. We have reclassified prior period amounts informed to our current year presentation. And finally, for your future scheduling purposes, we are tentatively planning to publish our second quarter 2024 earnings results on September 4th, 2024. With that, I will now turn the call over to Lauren.

Thank you, Nate, and good morning, everyone. We're incredibly proud of our strong Q1 results which demonstrate how well our strategies are working. Powered by our compelling omnichannel athlete experience, differentiated product assortment, deep engagement with the DICK'S brand and our focus on providing a best-in-class teammate experience, we continued our momentum from the fourth quarter. Our execution on these strategic pillars is driving continued market share gains. For the first quarter, our sales increased 6.2% to just over $3 billion. Adjusting for the calendar shift, our comps increased 5.3%, which was on top of a 3.6% comp last year. This strong comp was driven by growth in transactions and in average ticket. During the quarter, we saw more athletes purchase from us and they spent more each trip compared to the prior year. Our first quarter gross margin expanded 10 basis points and we achieved double-digit EBT margin of over 11%. In total, we delivered Q1 EPS of $3.30. Today, we're raising our full year outlook to reflect our strong Q1 results. We now expect comp sales growth for the year to be in the range of 2% to 3% and EPS to be in the range of $13.35 to $13.75. Our emphasis on the omnichannel athlete experience is driving robust athlete engagement. We are continuing to enhance service levels across all our digital and store experiences to meet our athletes wherever they are, provide the support and service they need, and get product into their hands faster. During Q1, we continue to see growth in our omnichannel athletes, our strongest athletes, who spend more with us and shop more frequently than single-channel athletes. As we've talked about previously, our significant investments to reposition our portfolio are key to delivering an elevated omnichannel athlete experience. We expect House of Sport and our next generation 50,000 square foot DICK's store to drive robust omnichannel athlete engagement and generate strong sales and profitability. During Q1, we opened two House of Sport locations and are excited to open six additional locations this year. We also opened two next-generation 50K locations during the first quarter and look forward to opening an additional 14 locations throughout 2024. We continue to be very pleased with the results of these exciting DICK's concepts. This one-two punch of House of Sport and our next-generation 50K format combined with the elevated omnichannel experience our teammates are bringing to life throughout our entire portfolio is the future of DICK's. We're also growing our Golf Galaxy Performance Centers, an immersive experience for golf enthusiasts of all levels, and opened three new locations during the first quarter. We remain confident in the long-term growth opportunity in golf and are excited to bring this experience to more golfers. Investing in our digital capabilities is central to our omnichannel success. I want to briefly talk about GameChanger, the premier live streaming, scheduling, communications and scorekeeping mobile app where we're building the first and best place to experience youth sports. During Q1, GameChanger drove continued strong sales growth. Over 5 million unique users engaged with GameChanger, averaging approximately 30 minutes per day on the app. We saw a robust increase in usage of the app across all sports, including those that are newer to the GameChanger platform such as basketball, football, soccer and volleyball. We're excited to continue innovating within the fast-growing, multi-billion dollar youth sports technology market and strengthening our relationships with athletes and their families through GameChanger. Our access to differentiated on-trend products, which is our second strategic pillar, helps make DICK's the go-to destination for sport in the US. We're excited about the product pipeline from our key brand partners. For example, Nike's recent Paris Innovation Summit highlighted several breakthrough products across apparel and footwear that we look forward to bringing to our athletes. Our relationships with our brand partners are stronger than ever and the innovation of performance and style, in our opinion, has never been better. In addition, our flagship vertical brands DSG, CALIA and VRST, are resonating very well with our athletes. They continue to outpace the total company comp growth and contribute greater margin expansion. We see a long runway for sales and profitability growth for our vertical brands. Our teammates are a critical driver of our success and our third strategic priority is providing a best-in-class teammate experience. This past quarter, we were named a great place to work for the fourth year in a row. We remain focused on providing our teammates with the tools and technology to help them do their jobs better and driving a culture where they can develop and thrive. Lastly, we're creating deeper brand engagement. During the first quarter, we invested in several exciting marketing campaigns and also continued to invest in DICK's brand building during March Madness. We're excited to celebrate the 10-year anniversary of our foundation Sports Matter Program and recently announced that the program is giving $2 million in grants to mark its anniversary and empower even more young athletes to pursue their passions. In closing, we are very pleased with the strength of our first quarter performance and are highly confident in our strategy to drive sustained, profitable growth. Before concluding, I'd like to thank all of our teammates across the company for their tremendous efforts and continued commitment to DICK'S Sporting Goods. It's their passion and hard work that make these results possible. They are truly an outstanding team. With that, I'll turn the call over to Navdeep to share our financial results in more detail.

Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our first quarter results. We are very pleased to report a consolidated sales increase of 6.2% to $3.02 billion. This included a benefit from the calendar shift due to the 53rd week last year of approximately $45 million. Adjusting for the calendar shift which we believe provides the clearest view of the business. Our comps increased 5.3% as we continued to gain market share. Our strong comps were on top of a 3.6% comp last year. Our Q1 comps were driven by a 2.7% increase in transactions and a 2.6% increase in average ticket, and we saw strength across footwear, athletic apparel and hardlines. Gross profit for the first quarter was $1.1 billion, or 36.29% of net sales, and increased 10 basis points from last year. This included leverage on occupancy costs due to higher sales and a decline in merchandise margin of 45 basis points which included higher year-over-year shrink of 22 basis points. It's worth noting that while we anticipated our shrink to be higher than the previous year, the increase in shrink moderated compared to our expectations. On a non-GAAP basis, as expected, SG&A expenses increased 6.6% to $739.7 million and deleveraged 10 basis points compared to last year. This increase in SG&A dollars included investments in the exciting brand campaigns we introduced earlier this year supporting CALIA, DSG as well as Golf Galaxy and DICKS.com. This also included higher estimated incentive compensation expense and cost in support of our sales growth. Pre-opening expenses were $21.1 million, an increase of $11.9 million compared to the prior year. This expected increase was primarily driven by our Q1 House of Sport openings. As Nate noted earlier, SG&A and pre-opening expenses have been adjusted in the current and prior years to reflect the reclassification of grand opening advertising from SG&A to pre-opening expenses. EBT was $342.4 million, or 11.34% of net sales. This compares to EBT of $328.3 million, or 11.55% of net sales in Q1 of 2023. As expected, our Q1 tax rate grew from 7.2% in last year's quarter to 19.6% this year. I'll remind you that this approximate 1,200 basis points increase reflects the higher tax deduction from the vesting of employee equity awards and exercises in the prior year, which favorably impacted Q1 2023 earnings by approximately $0.45 compared to the current year quarter. In total, we delivered earnings per diluted share of $3.30. This compares to earnings per diluted share of $3.40 last year. Now, looking to our balance sheet, we ended Q1 with approximately $1.6 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter-end inventory levels increased 5.5% compared to Q1 of last year, slightly below our 6.2% increase in sales. We believe our inventory is clean and well-positioned. Turning to our first quarter capital allocation, net capital expenditures were $126 million and we paid $94 million in quarterly dividends. We also repurchased 548,000 shares of our stock for $113.6 million at an average price of $207.32. In 2024, we continue to expect share repurchases of $300 million. Now, turning to our outlook for 2024. As a result of our strong Q1 performance, our expectations for continued robust demand from athletes and the confidence we have in our business, we are raising our full-year outlook. We now expect consolidated sales in the range of $13.1 billion to $13.2 billion. In addition, we now expect comp sales growth in the range of 2% to 3% compared to our prior expectation of 1% to 2% growth. EBT margin is now planned to be at 11.1% at the midpoint compared to 10.9% previously. Gross margin is now expected to expand modestly compared to 2023 non-GAAP results. We previously expected gross margins to be in-line with 2023 non-GAAP results at approximately 35%. We continue to expect SG&A expenses to leverage modestly compared to 2023 non-GAAP results. In total, we now anticipate full-year earnings per diluted share to be in the range of $13.35 to $13.75 compared to our prior expectations 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 23% compared to our prior expectation of approximately 24%. We continue to expect net capital expenditures of approximately $800 million for the year. Lastly, as you model 2024, I want to point out a couple of things that we expect to impact comparability of our financial results for the second quarter. First, recall that due to the shifted calendar, we expect our reported total sales to be positively impacted in the first half with an offset in the second half. Specifically, given the impact of the shift on a key back-to-school week, we expect our reported total sales in Q2 to be positively impacted by approximately $100 million versus the prior year with an offset in Q3. Second, we will begin to anniversary the higher shrink rates from 2023 in the upcoming second quarter. As a reminder, our shrink in Q2 of last year also included a cumulative unfavorable true-up of actual results from our physical inventories, which reflected an 84 basis points increase over 2022. Consequently, we expect to see year-over-year favorability in shrink during this year's second quarter. In closing, we are very pleased with our Q1 results and remain enthusiastic about the future of our business. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.

Thank you. We will now begin the question-and-answer session. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Adrienne Yih from Barclays. Your line is open.

Great. Thank you very much and congratulations on a great start to the year. Lauren, we were lucky enough to see House of Sport in Boston during the quarter. And I guess my question for you is kind of more longer term. The notion or the philosophy was that you wanted to create a store such that people wouldn't need to go to another store other than House of Sport or the DICK's next-gen. So to the extent that you see kind of going forward, how do you see the Sporting Goods landscape kind of panning out? And then my kind of main question is the investment in training, education, service, and then advertising, it's a level-up of anything that we're seeing currently in the retail landscape. So can you talk about kind of the investments that you're making there and how that's going to differentiate your concepts versus the rest of retail? Thank you.

We were thrilled to host you and a group in Boston. The House of Sport has seen a great influx of visitors, and the enthusiasm in the community has been remarkable. What sets House of Sport apart in the sports retail industry is our unique experience that can't be found elsewhere. Athletes are truly engaging with it, and as a result, local communities are responding positively. Many of you noticed the blimp overhead, which reflects the excitement surrounding the opening of a House of Sport. Once open, athletes are not only coming in, but they are traveling from further away, spending more time, and showing a strong interest in the products and experiences we offer. Our brand partners are also very enthusiastic, as we can prominently showcase a brand across our entire company in a sophisticated manner. At House of Sport, the collaboration spaces and opportunities we provide allow us to highlight a brand effectively, which not only fosters new partnerships but also enhances our relationships with existing partners. Additionally, when a House of Sport opens in a mall, real estate developers, landlords, and mall operators report significant increases in foot traffic, adding to the excitement in the market. Overall, we are very optimistic about House of Sport and equally excited about launching our new 50K square foot format, which captures many of the elements of House of Sport. Regarding investments, I'll pass it to Navdeep to discuss SG&A, but I want to highlight that our SG&A expenses in Q1 were in line with our plans. We are focusing on marketing to build our brand for the long term, as well as investing in training, service, and technology to enhance the athlete experience that our team members are equipped to provide. Navdeep, would you like to add anything?

Good morning, Adrienne. Building on what Lauren mentioned, our focus remains on the four core pillars, particularly the athlete experience and the teammate experience. Our store and merchandising teams are dedicated to bringing innovative and unique products to our stores, enhancing the experience for athletes as they shop, whether it's for a baseball bat or a golf club. We believe this focus gives us a competitive edge not just within our industry but also against specialty players in the market. This will be a key area for our investments. As Lauren noted, we’re showcasing these efforts with advertising investments, including our vertical brands, which stand out as part of Q1. We anticipate these investments will continue to align with our sales growth.

Thank you very much. It's definitely showing up in the stores. Thanks.

Thank you.

Your next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open.

Good morning, everyone. I wanted to ask about sell-through of seasonal merchandise spring and summer as the seasons are transitioning, and in the context of merch margin being down a little this quarter. Can you also share with us, was merch margin or is merch margin planned to be flat within the overall gross margin guidance, or is the gross margin being elevated by occupancy? Thanks.

Thanks, Simeon. Yeah, for the quarter, we were really pleased with our gross margin expanded 10 basis points, 36.29%. There were a ton of puts and takes to the quarter as we expected there would be, well, and an unexpected good surprise with the sales numbers that enabled us to drive more leverage on occupancy costs, more leverage on supply chain and e-commerce costs. All of that was slightly offset by a 45 basis point decline in merch margin, but that we had anticipated driven primarily because of the shrink, the fact that we're not anniversarying yet, the shrink reserves that we put into place, and we'll start anniversarying those in Q2. I think it's important to note that one of our core merchandising strategies and one of our core sales-driving strategies is to keep our inventory clean and fresh. We are constantly moving product through the lifecycle so that when people come into our stores or shop online, they're getting a completely differentiated assortment and they are finding the products that are appealing to them. And so, as expected, merch margin was slightly declined in Q1. But for the full year, we are now expecting gross margin to expand modestly, whereas before we had said it was going to be flat.

That's helpful.

And Simeon, we are expecting

I want to ask.

Simeon, I'll just add one more thing to what Lauren said. The merch margin, I would say in Q1 was in line with our expectations and we expect merch margin to also expand modestly on a year-over-year basis in '24 compared to non-GAAP 2023 results.

Okay. And then follow-up, Navdeep, the full year EBIT or the implied EBIT or EBT, whatever way you look at it, looks like it's being raised above and beyond what was achieved or beat versus the street number in Q1. The comp, I think, looks like it's more of a flow-through from what happened in Q1. So is that fair and what is changing in terms of profit to raise the back half while sales is kind of moving up by what happened in Q1?

Yeah, Simeon, that's a great question. First of all, let me start by saying we were really excited by the results that we delivered here in Q1 and we continue to remain really excited about the future and the opportunities that we see ahead of us. As you can imagine, this is just Q1. We are very early in the year as well as everybody knows what else is happening on a macro-factor basis. So what we have done today in terms of the full-year guidance reflects the results that we posted here in Q1 and we maintained largely our expectations for Q2 through Q4. There's a little bit of a disconnect with the external consensus expectation, but I would say, we are appropriately cautious as we think about Q2 through Q4. But we continue to remain really excited about the opportunities that we see for the balance of the year.

Thanks. Good results. Take care.

Thank you.

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

Hi. Good morning. Thanks for taking our question. I believe when you last guided same-store sales of 1% to 2%, that was mainly based on your assumption of market share gains. With the new comp guide of 2% to 3% today, is there any better view on the health of the industry within that or is it still primarily driven by market share?

We are excited to raise the comp guidance from 1% to 2% to 2% to 3% for the remainder of the year. As Navdeep mentioned, much of this is reflected in our Q1 results, and we will maintain an appropriate level of caution moving forward. We plan to continue gaining market share, which is one of our key strategies, and we believe we have the experience and the product to achieve that.

Okay. Thank you. And then our second question, with the change in accounting for GameChanger and some of your earlier comments in the prepared comments about GameChanger, is there a meaningful strategy change there in terms of how much that can drive the business and what is kind of the long-term goal and strategy with GameChanger?

Yes, thank you for the question. We are thrilled about GameChanger and its potential as an engaging platform for families to connect with youth sports. It enables kids to monitor their stats and performance, which is exciting for us. We have made significant investments in this digital platform, which is a leading youth sports app with remarkable features that continue to yield substantial success. In the first quarter, we had 5 million active users spending an average of 30 minutes each day on GameChanger, making it an excellent engagement tool. We see it as a crucial element of our long-term strategy to become synonymous with sports and part of our overall ecosystem. While we're trying to factor it into our comparisons, it currently represents a small portion of that overall equation, but we envision it playing a significant role in our future.

Kate, I want to add two more points to what Lauren mentioned. First, the platform itself is experiencing significant growth in sales and is also highly profitable. The business is performing exceptionally well on its own. Additionally, we've noted that athletes who use both GameChanger and ScoreCard generate twice the revenue compared to those who only use ScoreCard. This highlights the level of engagement we have with these multi-channel athletes, which is very promising as we consider the long-term potential of this platform.

Thank you.

Thank you.

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

Thanks. Good morning. So my first question is just a follow-up on the merchandise margin. Can you talk about what after the first quarter being down, can you talk about what the drivers of what makes it go up over the year? And within that answer maybe address is it channel inventory is clearing up? We've heard about maybe some of the vendors being promotional. Is the newness coming? Is it the House of Sports? Maybe help us think about what the big drivers are there? Thank you.

Sure, Chris. I will begin with our full-year outlook. We expect both the gross margin and merchandise margin to see a modest increase compared to the 2023 non-GAAP results we reported last year. In relation to our Q1 outcomes, we have already shared some points about Q2 expectations to consider as you build your model. First, we experienced an 84 basis points accumulation in shrink last year when we conducted physical inventories in our stores, and we do not expect that same effect this year. Therefore, we anticipate improved shrink results in Q2. We remain cautiously optimistic about the rest of the year regarding shrink. Additionally, as you may recall, we were addressing excess inventory in the outdoor category last year during Q2. We do not expect to repeat those actions, as we feel very positive about our current inventory, its quality, and the assortment we have ready for the main selling season in Q2. We are eager about the quality of our assortment, and we believe that those prior actions will not recur as we approach Q2.

Got it. And then in my, as a follow-up question, just can you touch a little bit on how you think about the cadence of comps over the year? I know you don't drive speak specifically to by quarter, but how should we think about that? I know there was some lift in the first quarter here with regards to lapping the closed stores, the House of Sports stores. And I think the general consensus maybe was around two points. So any comments on that and how you think about the cadence of comps over the year? Thanks so much.

Yeah, Chris, you're absolutely right. We said originally, and we still hold that the first half of the year, where we had eight of our largest stores being converted to House of Sports and closed for a good part of the first half of last year is driving stronger comps in Q1. Now, we just obviously delivered a stronger comp than we had even expected. But in the first half we do, we will feel that impact, and then in the second half, we'll go up against that those openings. And so that is why we've said the deceleration. We expect some deceleration in the back half and nothing has changed in that opinion. We continue to believe that.

Great. Thanks so much.

Thank you.

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

Hey, good morning. Great quarter. My first question is just, Lauren, you guys have been leading with apparel and footwear for a little while now. Any signs or expectations that hardlines could start to catch up and grow again for you guys?

Thank you, Robby. The 5.3% comparable sales growth this quarter is exciting because we experienced growth across all areas of our business. We saw increases in footwear, athletic apparel, and total hardlines. There are some fluctuations to consider, particularly regarding consumer trends adjusting post-pandemic, but that represents a minor part of our overall business. The core hardline categories are performing very well. Although this quarter brought a slightly wetter season that had some impact on golf and team sports, it was minimal. Overall, we are very enthusiastic about the hardlines business.

Got it. And then you guys called out Nike and the Paris Summit in the press release, can you give a little more color on what you think the pipeline looks like from Nike and your other key vendors versus what you were getting last year heading into the year?

Thanks, Robby. Yes, I would say we're excited about the product pipeline that we see across our strategic partners and we look long-term. Obviously, we have long-term strategy planning meetings where we're looking at a couple of years with our strategic partners. I'm also very excited, as we all are, about our flagship vertical brands, the CALIA, DSG, VRST, doing incredibly well and some of our emerging brands. Within our strategic partners, we are very excited about the long-term work that we saw in Nike. We were there at the innovation summit and then more recently we were in their offices and looking at future innovation. I would call out things like the technology that they are bringing to the air platform. It's going to be very exciting from a consumer standpoint. We're really excited about the elevation of both performance apparel and footwear and bringing some newness into those categories. And then they've started to talk about what their Olympic messaging is going to be, and we are really, really excited to see that come to market and just drive consumer noise around the Nike brand. So across the board, very excited about that partnership.

Sounds great. Thank you.

Thank you.

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

Hey, good morning. Congrats on a really solid quarter and a tough environment here. I wanted to ask about how you're thinking about SG&A investment here and whether that's evolving given the really strong response you're getting to the elevated service levels at House of Sport and the next-gen stores. Could the core benefit from kind of a higher level of SG&A and selling personnel? And maybe just if you could take a minute and talk about how you're thinking about SG&A in the medium term here.

So Warren, first of all, let's start with where the SG&A came in. So SG&A deleveraged 10 basis points here in Q1 and that was driven by the core investments that we are making including in advertising. So because we see clearly an opportunity to continue to position, especially at flagship vertical brands in a much more appropriate fashion with our athletes because those brands, like Lauren said, are resonating so well. So you saw us come out with advertising messages around CALIA around DSG as well as drove the brand awareness for our dotcom platform with DICKS.com. So that will be an area that we said we were going to invest in Q1 and the early part of the year and we did that. And then on a full-year basis what we have guided is we expect our SG&A to modestly leverage on a year-over-year basis. So we are being prudent in how we are making investment. You called out we are making investments in talent, in technology, as well as in the store service level, especially as you look to the House of Sport as well as the 50K. And those are kind of the planned investments that we are making in addition to investments that we are making in store training. So we will continue to look to make these core investments that are driving the differentiation in the marketplace and are resonating really well with the athletes. However, balancing that also against the overall ability to drive the leverage on the SG&A line for the full year.

Thanks, Navdeep. And my follow-up question, can you help us put the $35 million per box number that you gave last quarter in a little bit more context? Once you're fully rolled out to the 75 to 100 target over the next three years, would that represent sort of one of the larger and more productive stores in the chain? Because I know the new House of Sports have a lot of different shapes and sizes or is that pretty representative of the average that you would expect across the fully scaled-out chain?

The $35 million we mentioned last quarter is our expected average for a House of Sport across both the physical store and e-commerce. This figure is based on insights gained from the 12 stores we opened at the end of 2023, and we are really enthusiastic about the two new store openings we have achieved in Q1.

I would point out also that the 50K's continue to deliver incredibly strong results. And the House of Sport, the ones that have been opened the longest, also keep driving growth. So we're really excited, not just about how they open, but how they grow past that.

Thanks. Nice quarter. Good luck.

Thank you.

Thank you.

Your next question comes from the line of Mike Baker from D.A. Davidson. Your line is open.

Thank you. This question has been raised before, but I’ll rephrase it. The implied EBT margin for the remainder of the year appears to have increased after a decline this quarter. A significant part of this seems to stem from the comparison to the second quarter downturn from last year. How should we view the potential to boost your margins in the latter half of the year? According to your guidance, margins are expected to rise by about 30 basis points on the EBT line this year. What are the long-term factors that drive margins? Once we move past the easier comparison in the second quarter, do we expect margins to continue to grow?

Yeah, Mike, great question. I won't provide quarterly guidance today, but what we have given to you are some of the key ingredients. On a full-year basis, we expect our EBT margin to expand driven by the fact that we expect gross margin to expand modestly as well as our SG&A to leverage modestly compared to non-GAAP results for 2023. You called out really well that the drivers of that will be definitely here in Q2. Keep in mind, Q2 will also have the higher amount of leverage being driven by the $100 million of sales shift that we're going to see from Q3 into Q2. In terms of the long-term expectation, we continue to be really excited about both the ability to grow our top-line sales as well as the bottom-line profitability over the long term.

Okay, that makes sense. Follow-up question. How much of the $11 million increase in pre-opening costs went to pay Larry Bird, Kevin McHale and Robert Parish to show up at your opening, which was amazing.

Those are, I'll call them, they're right investments. They're like Lauren said, they are driving such an excitement in the community and the overall results that we are driving here in these stores. But great question.

Great question.

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

Yeah. Hi, guys. Good morning. And wanted to ask a bit about the promotional environment and what you're seeing out there. And, because, it feels like inventory levels are still a bit high from a lot of the competition and some of the brands. And I'm just curious about how you're approaching it and what you're seeing. Thanks.

Thanks, Joe. We didn't see an unusually promotional environment in Q1. Certainly the industry overall is in a better place than it was at the end of last year. And our inventory, in particular, 5.5% growth on a 6.2% total comp. We feel really good about our inventory and the healthiness of it. And so I think we continue to manage through whatever promotional environment will come our way, but we have no concerns there and we know that we have the ability to manage with the tools that we have to drive profits.

Thank you for that. And then another kind of related question is some of the categories that were asked about, but how is outdoor broadly performing? Because I know, again, we hear it's kind of still soft out there and just wondering if you guys saw a step up in your outdoor performance.

Yeah. Joe, I want to point out, in the long-term, we have a tremendous confidence in the outdoor business. It's a $40 billion total addressable market. We are building public lands. We're working to moose draw, athletes to bring, explorers rather to bring them in, so that we can really deliver a unique and differentiated experience in the outdoor category. Across the board, the industry does continue to have a post-pandemic reset and we're no different in that than everybody else. But it doesn't take away. It's a small piece of our business, first of all, at this time, and doesn't take away from our confidence, our long-term confidence, that there is a consumer here that we can serve even better than they're being served today. And participation in the outdoor category continues to be high. So when this category rebounds, it's going to, we believe it's going to be really strong.

That's great. Now, thank you guys for that, and good luck with the quarter.

Thank you.

Thank you.

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

Good morning. Thanks for taking my question and congrats on a great quarter.

Thank you.

Thank you.

Can you talk to footwear? Footwear has been a big driver of comps going back to last year. I know the premium footwear decks have obviously attracted top allocations from Nike, HOKA, ON. How many more doors can HOKA and ON get into? How many more premium footwear decks can there be? And maybe just talk the allocations you're getting at footwear, given it's such a big portion of the comp?

Yeah, great question. Footwear certainly has been a big driver of comps and footwear is a key part of how people shop. It's the engine that drives the train. We're very pleased with our footwear business. Our premium full-service footwear decks, which we started putting into place many years ago, absolutely are driving that elevated experience and then opening us up for more allocations, more specialty brand partners with HOKA and ON and with the premium footwear decks, we'll be at 90% by the end of the year. And obviously, all of our new store development, as we reimagine the portfolio, will have premium full-service footwear decks. HOKA and ON are still in a good portion of the chain. There's still significant upside in both brands. HOKA is a little further ahead, been on at this point just in terms of the number of door count, and we're excited to continue to expand those brands as well.

Got it. And then maybe we saw some more sluggish trends within the broader sporting goods industry in the first quarter that you obviously significantly outperformed. I'm just curious are there any regions that are outperforming? What were the biggest category outperformers in Q1? And how are you thinking about long-term market share in the industry?

Yeah. We had 5.3% comp. We saw growth. We didn't see sluggish trends across our categories. We saw growth across all of the different areas of our business, footwear, apparel, total hardlines, all grew. And I think what we can speak to our story, the consumer is absolutely putting a priority on a healthy and active lifestyle. You see people running and walking, being outdoors. But I think the most important thing is that we are providing them with an experience that they're clearly choosing. And that's both due to the products that we have in our stores as well as the experience that we provide in-store and online. And so it's the core strategies that are coming to life that are driving our performance and we're not seeing any pockets of softness across the country.

Excellent. Thank you.

Thank you.

Your next question comes from the line of Justin Kleber from Baird. Your line is open.

Hey, good morning, everyone. Thanks for taking the questions. First just a clarification on the full-year merch margin outlook. Is the modest expansion just recapturing the shrink pressure from last year or you're expecting your, I guess what I would call your core merch margins to improve year-over-year, particularly, Navdeep, you mentioned lapping the outdoor clearance. So just wanted to clarify that first.

We expect a positive impact on shrink in Q2, but we remain cautiously optimistic. We've completed counting half of the chain, and there's still another half to go, so we want to temper our expectations regarding shrink. On the merchandise margin front, we're excited about the efforts of our merchant team in curating a distinct product assortment and the strong performance of our flagship brands like CALIA, DSG, and VRST. While I won’t go into detailed expectations for merchandise margins, we anticipate a modest year-over-year growth in both gross margins and merchandise margins as we plan for the full year.

Got it. Okay, thank you. Just one other question around the calendar shift. Curious if you could share the EPS benefit in 1Q. I assume those sales flow through at a much higher incremental margin. But, again, just any color on how that $45 million in 1Q impacted earnings. And then just so we can think about the list in 2Q related to the $100 million in the calendar shift benefit. Thank you.

I would say it's $45 million, so you can do a calculation based on that. The shift is occurring in the early part of the year, so you can adjust your margin expectation in SG&A accordingly. Net between Q2 and Q3, the impact will be neutral. However, Q2 will benefit from $100 million in sales, which will have an offsetting impact in Q3.

All right. Thank you and congrats on the quarter.

Thank you.

Thank you.

Your next question comes from the line of Joseph Civello from Truist Securities. Your line is open.

Hey, good morning, guys. Thanks for taking my questions and congrats on the quarter. I just wanted to ask another question about the cost cadence this year. In 2Q, obviously, you're going to be lapping a ton of clearance in the outdoor from last year. Should we think about recovering all of that or most of that or do you give any guidance there?

No, I don't know if I'll provide more specific quarterly guidance, but in addition to the clearance activity you mentioned, we will benefit from the shrink true-up, which had an unfavorable impact of about 84 basis points in Q2. I would consider it on a full year basis. As we indicated, we expect our merchandise margin to expand year-over-year, as will our gross margins.

Okay, great. And then just one more question. I think said shrink came in a little bit better than you were expecting. How should we think about that in the second half as you are lapping normalized shrink from last year?

Yes, that's a great question. In Q1, shrink decreased by 22 basis points, but it is still increasing compared to the same period last year. I want to emphasize this point. As we evaluate the potential impact on the profit and loss statement for Q3 and Q4, we remain cautious. Nonetheless, it did improve compared to our internal projections, which is encouraging. However, we have only accounted for half of our chain, so we will maintain a cautious approach regarding the shrink line for the remainder of the year. I would attribute a lot of this to...

All right. Thank you so much.

I want to acknowledge our store team and the distribution center team for their efforts in moving merchandise and making the right operational decisions to ensure the safety of our stores and athletes. This has resulted in a slight year-over-year growth that is somewhat below our initial expectations.

Got it. Thanks so much.

Thank you.

Your final question today comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Hey, good morning. Really great quarter. My question's on traffic. The past three quarters have been really, really strong, particularly on a two-year basis. Curious if there's a way to unpack new customers versus existing customers.

So we've continued to grow our athlete base over the past several years. I think we had 7 million new athletes joined last year and 1.5 million this past quarter. And traffic has continued to be strong. So it's about new athletes. It's also just about the differentiated product that we keep bringing in and the fact that the elevation of the brand and the experience has been strong. So really, really good traffic numbers and our consumers holding up very, very well.

Okay, great. And then my follow-up is just on GameChanger. I'm curious how you're thinking about growing that business for kids and youth sports. There's just a big appetite right to watch your kids, there's a ton of different platforms out there, but it seems like you guys are taking the pole position here. Just so curious how you're thinking about growing it over time.

Great question. We share your vision of it being the best platform. We initially started with GameChanger as a business focused on Diamond Sports. While we continue to enhance it, we are leveraging artificial intelligence to make the video content even more engaging and precise. We have a lot happening behind the scenes to generate increased excitement. In the short term, our main objective is to expand the Diamond Sports business into other sports that may not be mainstream yet, like volleyball, as well as prioritizing basketball. This is our near-term growth strategy. However, we have a broader vision and are focused on long-term development to strengthen our connection with athletes, not just during their time in stores, but also at practices, games, and throughout their training.

Great. Thank you.

Thank you.

Your next question comes from the line of Paul Lejuez from Citi. Your line is open.

Hey, thanks, guys. I'm wondering if you could talk a little bit more about stores versus e-comm in terms of what you're seeing transactions versus ticket within both channels. And I'm curious if you could share anything further about what you see in the e-comm business in the trade area of a House of Sports store when it opens and as they mature. Thanks.

Thank you for the question, Paul. We no longer separate stores in e-commerce because the customer is so omnichannel and focused, making it a challenging task. However, we are very pleased with our digital business and how the e-commerce segment responds when we open new stores or when a House of Sport is established in the area. It all contributes to a very positive ecosystem.

Okay. Then just a follow-up. Did anything change in terms of how you're thinking about category performance as you move throughout the year just based on what you saw in Q1, maybe relative to your prior expectations, just how each category is contributing to this year's growth.

Now, overall, the categories are delivering on our expectations above them in Q1 and nothing material changed. Thank you.

Your next question comes from the line of Will Gaertner from Wells Fargo. Your line is open.

Hey, guys, thanks for taking my question. Just firstly, where are you guys and who are you guys taking share from in your opinion?

Yeah, so it's a quick question. Yes, we're taking share, really across the board. There's been some consolidation in the industry. We are taking share from, I don't want to call out anybody specifically, but we have our premium footwear assortment, for example, is driving strong interest. Our apparel is driving strong interest. Our vertical brands are meeting consumer needs, even everything from opening price point to true lifestyle. So I would say it's across the board and across the industry that we're seeing share gains.

Got it. Thank you. As far as GameChanger, it looks like it added 20 basis points to the comp, excuse me, last year.

Correct.

Yes.

How should we view GameChanger in terms of revenue moving forward? I believe you mentioned $100 million in revenue for the fourth quarter. Are there any seasonal factors to consider? How should we assess GameChanger's contribution to the comparisons in the future?

You expressed both points very well. The favorable impact on comparable sales was approximately 20 basis points, and we anticipate that for the full year, it will range from 20 to 30 basis points. We expect the GameChanger platform to generate about $100 million in sales in 2024.

Got it. Thank you.

Thank you.

Your next question comes from the line of Seth Basham from Wedbush Securities. Your line is open.

Thanks a lot and good morning. My question is just on SG&A. Following the business optimization actions you took last year, where are you with reinvesting there? Are you still on track to reinvest in the focus areas that you planned and any other color you have on the SG&A outlook?

Yeah, no, we are definitely focused on investing in appropriate capabilities and quite frankly, we have been doing this all along 2023 itself. The big area of investments continue to be in talent, right, bringing the right talent that is helping us do these store openings have the successful openings not just of the House of Sport, but the 50K. There is a lot of investment, as you can imagine, that is going in technology area, which as you can imagine, that is allowing us to get the top-line returns from those investments. And it's also helping us drive productivity improvements, which we are then able to reinvest that into the business. And then the third area continues to be investment appropriately within the advertising line, driving the brand awareness as well as the growth in our vertical brands.

Got it. And so, going forward beyond 2024, SG&A leverage is going to be predominantly dependent on top-line growth. That's a fair statement?

That's generally a fair statement, but I would say again that on a long-term basis, we expect both to drive top-line growth and improve bottom-line profitability. It will be balanced between margin investment opportunities and SG&A investment opportunities.

Thank you.

And your final question today comes from the line of Jonathan Matuszewski from Jefferies. Your line is open.

Great. Nice results and thanks for taking my questions. The first one was on ticket. If you could give us just more color on what fueled the ticket growth this quarter looks better than the industry and prepared remarks indicate more spend per trip. So any more color there would be helpful and kind of understanding what's embedded in that revised comp guide for 2024 regarding ticket whether the 50-50 split from 1Q is reasonable. Thanks.

Yes, Jonathan, I would say the answer to your first question is the same, right? The increase in basket size when athletes visit our store, along with the overall ticket growth, is primarily driven by the unique products we have access to. These products are currently in high demand, which allows us to not only meet the demand from customers both in-store and online, but also achieve better full-price sales recovery. The premium assortment and the highly sought-after products continue to boost both our ticket size and basket size when athletes shop with us. As for guidance, we don’t offer it at that specific level, but I’ll maintain the comp guidance of 2% to 3% for the full year at the highest level. We're really excited about the balance we're achieving between traffic growth and ticket growth.

Great. And just a quick follow-up on the transactions this quarter. Did you see any discernible shift in trends across income cohorts?

We didn't. We saw growth across all of our income demographics and we didn't see trade down from best to better, better to good. So pretty consistent across all the income demographics or cohorts.

Thanks so much.

Thank you.

And that concludes our question-and-answer session. I will now turn the call back over to President and CEO, Lauren Hobart, for some closing remarks.

Well, thank you all for your interest in DICK'S Sporting Goods. And I just want to take a moment to thank our incredible team in our CSC, our DCs, our stores, our GameChanger offices. It is they who delivered this really strong quarter. I'm very, very thankful and proud of them. Thank you all. We'll see you next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.