Earnings Call Transcript - DKS Q4 2020

Nate Gilch, Senior Director of Investor Relations

Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2020 results. On today's call will be Ed Stack, our Executive Chairman and Chief Merchandising Officer; Lauren Hobart, our President and Chief Executive Officer; and Lee Belitsky, our Chief Financial Officer. A playback of today's call will be archived in our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties, that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and the risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find a reconciliation of any non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a note on our same-store sales reporting practices. Our consolidated same-store sales calculation includes stores that were temporarily closed as a result of COVID-19. The method of calculating comp sales varies across the retail industry, including the treatment of temporary store closures as a result of COVID-19. Accordingly, our method of calculation may not be the same as other retailers. And second, for your future scheduling purposes, we are tentatively planning to publish our first quarter 2021 earnings release before the market opens on May 26, 2021, with our subsequent earnings call at 10 a.m. Eastern Time. And with that, I'll now turn the call over to Ed.

Ed Stack, Executive Chairman and Chief Merchandising Officer

Thanks, Nate. Good morning, everyone. We've never had a year like 2020. We were challenged in numerous ways, as were so many others. But as an organization, we not only survived, we thrived. The strength of our diverse category portfolio, technology capabilities, and advanced omnichannel execution helped us capitalize on the favorable shifts in consumer demand across golf, outdoor activities, home fitness, and active lifestyle. For the full year, we delivered record sales and earnings. Our consolidated same-store sales increased a record-setting 9.9%, which was on top of our 3.7% comp increase from the prior year. And our non-GAAP earnings per diluted share of $6.12 represented a 66% increase over last year. We developed innovative technology, including curbside pickup that set the pace for the retail industry and helped drive full year eCommerce sales of over $2.8 billion, an increase of 100%. Most importantly, we care for each other and our communities every step of the way. As we reopened our stores, the health and safety of our teammates and athletes was our highest priority, and we established protocols and procedures to provide a safe shopping experience. Our frontline hourly associates and distribution center teammates went above and beyond in 2020, and we showed our appreciation through our premium pay program. In total, in 2020, we invested approximately $175 million across incremental teammate compensation and safety costs. Additionally, last Friday, we partnered with Allegheny Health Network to host a COVID-19 vaccination clinic at our corporate headquarters. As a result of this partnership, approximately 6,000 community members were vaccinated, the largest single vaccination clinic in the state of Pennsylvania to date. We plan to host a number of these vaccination clinics in the future also. We also recognize that youth sports programs have been severely hampered by the pandemic, and low-income communities of color have been most impacted. To help get these kids back on the field, we donated $30 million this year to our Sports Matter Foundation to help serve these impacted communities. While the pandemic informed much of our ESG activity in 2020, we also increased our focus on caring for the planet. Among other actions, this past year, we committed to become the sports retail sector lead of the Beyond the Bag challenge, which aims to identify innovative solutions to replace today's single-use plastic retail bags in a way that is both sustainable and convenient for our customers. We also joined the Outdoor Association's Climate Action Corps and committed to publishing climate-related goals in 2021. Today, as Lauren and Lee talk about another strong quarter, I remain as committed and as excited about our business as I've ever been. Before concluding, I want to thank all of our teammates for their hard work and unwavering dedication to our business during this very difficult year. I'll now turn the call over to Lauren.

Lauren Hobart, President and Chief Executive Officer

Thank you, Ed, and good morning, everyone. I want to start by also thanking our team. I am extremely proud of how our teammates managed through this challenging year. They came together to care for their communities, their families, and each other. At DICK'S, it is our people who make us great, and I am so excited for our future and for what I know we will all accomplish together. Now on to our results. As announced earlier this morning, we delivered a record fourth quarter from both a sales and profitability perspective. Our Q4 consolidated same-store sales increased 19.3%, which was on top of our 5.3% comp increase in the same period of last year. Our strong comps were supported by significant growth across each of our three primary categories of hardlines, apparel, and footwear, as we continue to benefit from favorable shifts in consumer demand as well as strong execution from our team. From a channel standpoint, our brick-and-mortar stores comped positively for a second straight quarter, increasing mid-single digits, and our eCommerce sales increased 57%, representing nearly one-third of our total business. Within eCommerce, we continue to see the strongest growth across in-store pickup and curbside, which increased nearly 250% compared to BOPIS sales in the prior year. These same-day services are fully enabled by our stores, which are the hub of our industry-leading omnichannel experience, both serving our in-store athletes and providing over 800 forward points of distribution for digital fulfillment. In fact, during Q4, our stores enabled 90% of our total sales and fulfilled over 70% of our online sales, either through ship from store, in-store pickup, or curbside. During Q4, we again remained very disciplined in our promotional strategy and cadence, and certain categories in the marketplace continue to be supply constrained. As a result, we expanded our merchandise margin rate by 372 basis points. This merchandise margin expansion drove a significant improvement in gross margin, which on a non-GAAP basis increased 507 basis points. In total, our fourth quarter non-GAAP earnings per diluted share of $2.43 represented an 84% increase over last year. It's clear that our strategies over the past several years are working and have helped us not only withstand the pandemic but thrive, setting us up for long-term success. As we enter 2021, our business has so much momentum, and we are pleased with the start to our year. Our focuses here will center around enhancing our existing strategies to accelerate our core and enable long-term growth. First, within merchandising. Our strategic partnerships with key brands have never been stronger, and we will continue to make big bets with important brand partners. At the same time, we will continue to elevate our vertical brands. As we've discussed on previous calls, our vertical brands have become a significant source of strength and growth. During 2020, our vertical brands eclipsed $1.3 billion in sales with comps outperforming the company average by over 400 basis points. Our DSG brand finished the year as our largest vertical brand, and CALIA was again our second-largest women's athletic apparel brand, only behind Nike. Furthermore, our vertical brands together represented the company's largest brand in golf, fitness, outdoor equipment, and team sports. During 2021, we will invest in making our vertical brands even stronger through improved space in store and increased marketing while expanding into additional product categories. Later this month, we'll augment our men's apparel selection by launching VRST, our new premium apparel brand that serves the modern athletic male. VRST, which will only be available at DICK'S, will put us in a much stronger position to compete with similar offerings from premium apparel brands and specialty athletic apparel stores. Also in 2021, we will build on our momentum from 2020 and drive growth in important categories, including golf, athletic apparel, footwear, and team sports, as well as in fitness, which saw significant gains throughout the pandemic. In 2020, our golf business across both DICK'S and Golf Galaxy was tremendous. As the country's largest golf retailer, we are very well positioned to capitalize on increased participation and other favorable trends. And in 2021, we will invest in TrackMan technology to enhance the fitting and lesson experience in our Golf Galaxy stores. We'll also enable online booking of lessons and club fittings and will invest in talent to elevate our in-store service model. Additionally, in 2021, we plan to build on the strong results and momentum in our athletic apparel and footwear businesses. Our athletic apparel assortment for 2021 is on trend, and we're excited to continue the energy in this category beyond the pandemic. We will complete head-to-toe looks with a strong footwear assortment and presentation. As part of this, we'll convert over 100 additional stores to premium full-service footwear, taking this experience to over 60% of the DICK'S chain. We believe that these enhancements, along with strong consumer trends and improving allocations of the most in-demand styles, will drive continued positive results in our athletic apparel and footwear business. Lastly, we expect our team sports business to provide a nice tailwind during 2021, as kids get back out on the field following a year in which many seasons were canceled. Furthermore, we plan to reconceptualize our soccer business, an initiative we delayed last year because of COVID. We will follow the same playbook we used to attack the baseball category in 2019, centered around more premium product, enhanced store experiences, and exceptional service. Beyond merchandising, in 2021, we'll focus on several key areas to enable the profitable growth of our business, including our omnichannel experience, data science, and customer relationships. Within our omnichannel experience, we'll continue to lean on our stores as well as our eCommerce business to serve our customers, whom we call athletes, whenever, wherever, and however they want. As Ed mentioned earlier, in 2020, our eCommerce sales increased 100%, partially driven by our curbside service that we launched in March and continuously improved throughout the year. Curbside pickup, along with fewer promotions and leverage of fixed costs, drove significant improvements in the profitability of our online channel in 2020. In 2021, we expect curbside to remain a meaningful piece of our omnichannel offering as our athletes turn to the service for speed and convenience. In addition to curbside, we will continue to improve our online shopping experience. This includes leading with mobile, which for 2020 represented over 50% of our online sales. This also includes shortening the path to purchase and reducing delivery times, as well as becoming a more consistent destination for our athletes' needs by offering a more integrated loyalty experience. Beyond online shopping, through our game-changer technology, we will enhance our scorekeeping and live streaming offering for used sports with video-on-demand, all delivered through a premium subscription service. We will also continue building relationships with both new and existing athletes in our stores and online. In fact, a key to our omnichannel offering is our ScoreCard program, which in 2020 drove over 70% of total sales. In 2021, we will continue to use data science to leverage our extensive athlete database to drive more personalized one-to-one marketing to increase loyalty among the 8.5 million new athletes that we acquired in 2020, including more than 2.5 million new athletes added during Q4. Lastly, we are very excited to be opening our first experiential prototype store next week in Rochester, New York. This new DICK'S store called DICK'S House of Sport will focus on service and community and allow us to innovate and deliver elevated experiences to our athletes, including an outdoor field to host sports events and promote product trial, a rock climbing wall, and health and wellness spaces for in-store programming. It will serve as a test and learn center and will roll the most successful elements into our core DICK'S stores. As I look at our business, we are really in a great position. Our brick-and-mortar stores and our technology platforms are working seamlessly together to deliver an industry-leading omnichannel experience. We have world-class vertical brands, and our vendor relationships with key partners have never been stronger. We've become more athlete-centric, focusing on friendly, knowledgeable, and available service. Importantly, we have a respected and loved brand, and are aligned behind our common purpose to create confidence and excitement by personally equipping all athletes to achieve their dreams. In closing, we're extremely pleased with our Q4 and 2020 results and look forward to building on this success in 2021. I'll now turn the call over to Lee to review our financial results and outlook in more detail.

Lee Belitsky, Chief Financial Officer

Thank you, Lauren, and good morning, everyone. Let’s begin with a brief overview of our full year 2020 results. Consolidated sales rose by 9.5% to $9.58 billion, despite having stores closed to foot traffic during the spring, which accounted for an average of 16% of our store days closed throughout the year. Our consolidated same-store sales achieved a record increase of 9.9%. Within this, we saw a 100% rise in eCommerce sales. Online sales made up 30% of total sales, up from 16% last year. Gross profit for the full year was $3.05 billion, which is 31.83% of net sales, and on a non-GAAP basis, it improved by 249 basis points from the previous year. This improvement was driven by a merchandise margin rate increase of 204 basis points and leverage on fixed occupancy costs of 114 basis points, partially offset by higher shipping expenses due to significant eCommerce growth. Additionally, gross profit included around $23 million in extra COVID-related compensation and safety costs. SG&A expenses totaled $2.3 billion, or 23.98% of net sales on a non-GAAP basis, and leveraged by 25 basis points compared to last year, mainly due to the notable sales increase. SG&A dollars rose by $178 million compared to last year's non-GAAP results, driven by $152 million in COVID-related compensation and safety costs, along with a $30 million donation to the DICK'S Foundation to support youth sports programs impacted by the pandemic. Other increases in store payroll and operating expenses to support sales growth were offset by expense reductions, including advertising during store closures. Strong sales and merchandise margin rate expansion led to non-GAAP EBT of $733.3 million, or 7.65% of net sales, with a non-GAAP increase of $292.8 million or 262 basis points compared to the same period last year. Consequently, non-GAAP earnings per diluted share were $6.12, a significant 66% increase from last year’s $3.69. Now, looking at our Q4 results, consolidated net sales grew by 19.8% to roughly $3.13 billion. Consolidated same-store sales increased by 19.3%, primarily due to a 20.3% rise in average ticket, although this was partially offset by a 1% drop in transactions. Our brick-and-mortar stores showed mid-single digit growth even with closures on Thanksgiving Day. eCommerce sales surged by 57%. As a percentage of total net sales, our online business increased to 32% from 25% last year. We also saw substantial growth across our three main categories: hardlines, apparel, and footwear. In the fourth quarter, gross profit was $1.05 billion, or 33.67% of net sales, and on a non-GAAP basis, it improved by 507 basis points from the previous year. This improvement stemmed from a merchandise margin rate growth of 372 basis points and leverage on fixed occupancy costs of 148 basis points. The merchandise margin rate improvement was primarily due to fewer promotions and less clearance activity. In terms of shipping costs, there were higher expenses from shipped packages resulting from increased volume and industry-wide holiday surcharges. However, the higher average ticket, along with a larger share of in-store and curbside pickup, offset this impact on a basis point basis. Specifically, our curbside and in-store pickup sales rose nearly 250% in the fourth quarter. SG&A expenses reached $761.2 million, or 24.35% of net sales, on a non-GAAP basis, which is an increase of $163 million or 142 basis points compared to last year. 27 basis points of this increase were due to adjustments related to our deferred compensation plans, which were influenced by rising equity markets during the fourth quarter. This expense is fully mitigated in other income, leading to no net effect on earnings. The remaining deleverage was largely attributed to $47 million in extra COVID-related compensation and safety costs, along with the $30 million donation to the DICK'S Foundation, most of which occurred in Q4. These factors were somewhat balanced by leverage on other expenses from the significant sales growth. Non-GAAP EBT stood at $298.5 million, or 9.55% of net sales, increasing by $149.9 million or 385 basis points compared to the same period last year. Overall, we achieved non-GAAP earnings per diluted share of $2.43, up from $1.32 last year, marking an 84% increase year-over-year. On a GAAP basis, our earnings per diluted share were $2.21, which included $7.2 million in noncash interest expense and an additional 6.7 million shares for GAAP diluted calculations due to convertible notes issued in the first quarter. For further details, you can check the non-GAAP reconciliation tables included in our press release issued this morning. Moving on to our balance sheet, we remain in a strong financial position, closing Q4 with nearly $1.7 billion in cash and cash equivalents, and no borrowings on our $1.85 billion revolving credit facility. Our inventory levels decreased by 11% compared to the same period last year. Looking forward, our inventory is in good shape, and we will continue to pursue products to enhance our stock in the most in-demand categories. Regarding our fourth quarter capital allocation, we had net capital expenditures of $53 million and paid out $27 million in quarterly dividends. Now, let’s discuss our fiscal 2021 outlook for sales and earnings. Given the irregular nature of 2020, we are basing our 2021 plans on a 2019 baseline and believe it is essential to compare our performance against both 2019 and 2020. Moreover, considering the ongoing uncertainty regarding when athlete activities will return to normal in 2021 and what that new normal will look like, we will provide a wider range of possible outcomes than usual. Starting with sales guidance, then moving to EBT dollars and rates, and finally to EPS. For 2021, we expect consolidated same-store sales to range from a decline of 2% to an increase of 2%, which at the midpoint indicates a low-double-digit sales increase compared to 2019. Our square footage compared to 2019 remains about the same. We are pleased with our sales trends thus far this year, and for the first quarter, we anticipate significant consolidated same-store sales and earnings growth as we move past the majority of our temporary store closures from last year. Beginning in Q2, we expect comps to decline by high single digits to low double digits as we compare against more than a 20% comp gain during those quarters in 2020. Non-GAAP EBT is forecasted to be between $550 million and $650 million, which at the midpoint on a non-GAAP basis represents a 36% increase versus 2019 and an 18% decline from 2020. At the midpoint, we expect the non-GAAP EBT margin to rise by over 100 basis points compared to 2019 but decrease by approximately 150 basis points compared to 2020. Within this, gross margin is expected to increase against 2019 due to leveraging fixed expenses and higher merchandise margins. When compared to 2020, gross margin is anticipated to decline mainly due to a return to normal promotions and slight deleveraging on fixed expenses starting in Q2. We expect SG&A expenses to deleverage compared to both 2019 and 2020, primarily due to hourly wage rate investments compared to 2019 and normalizing advertising expenses as a percentage of net sales compared to 2020. Our guidance also includes around $30 million in COVID-related safety costs for the first half of the year, mostly reflected in SG&A. In terms of our premium pay program for hourly store and DC teammates, at the start of fiscal 2021, we moved to more sustainable compensation programs, such as increased and accelerated annual merit raises and higher minimum wages. The effects of these changes are part of our guidance but are separate from the previously mentioned COVID costs since they are now permanent. Finally, we expect non-GAAP earnings per diluted share to be between $4.40 and $5.20, indicating a 30% increase compared to 2019 and a 22% decrease compared to 2020 at the midpoint. Our earnings guidance is based on an average of 96 million diluted shares outstanding and an effective tax rate around 23%. This is lower than our normal tax rate due to the favorable tax impacts from share-based payments expected to vest in 2021. Our capital allocation plan includes net capital expenditures of $275 million to $300 million, focusing on upgrades to existing stores, continued technology investments, the opening of six new DICK'S stores and six new specialty concept stores, and converting two Field & Stream stores into Public Lands stores while relocating 11 DICK'S stores. Regarding shareholder returns, we announced a 16% increase in our quarterly dividend to $0.3625 per share, or $1.45 annually. Additionally, we plan a minimum of $200 million in share repurchases, which is factored into our EPS guidance, but we may continue to repurchase shares opportunistically beyond this total. In conclusion, we are very pleased with our 2020 results, and we look forward to sustaining this success in 2021, maintaining our enthusiasm for our business. Before we wrap up, I want to direct your attention to a new investor presentation that will be available on our Investor Relations website later today. This presentation aims to serve as a resource for current and potential investors by providing an overview of our company, strategy, and competitive advantages. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods. Operator, please open the line for questions.

Simeon Gutman, Analyst

My first question is about the outlook for 2021. I understand that gross margin is expected to be higher compared to 2019 levels. There are many possible outcomes to consider. Can you provide any guidance? Specifically, on a midpoint of a zero comparison, you may return some of the rent leverage and occupancy gains, so we can address that aspect. However, I am curious about the remainder of the product margins and the various factors influencing them.

Lee Belitsky, Chief Financial Officer

The merchandise margin rates we achieved during the second through fourth quarters this year were mainly due to significantly fewer promotions than we experienced in the past. So far, we haven't felt the need to reintroduce promotions. However, as the year progresses and we expect a more abundant supply of merchandise, there is a chance the industry will return to more typical promotional levels. It's difficult to predict exactly when or to what extent this will occur, but we are planning for merchandise margins to gradually incorporate promotions, particularly from Q2 through Q4. We do not plan to lead in promotions; that is not our strategy, but we will need to respond if the market shifts that way. Currently, inventories are in good shape, but they are low across the industry and various categories. Therefore, we do not anticipate any immediate changes, but we remain cautious about the second half of this year regarding promotions.

Simeon Gutman, Analyst

Sure. My second question is a bit broader. Are you considering the long-term margin potential of the business? I’m curious if you plan to address this with investors in the coming year. Historically, the business peaked at around a 9% EBIT margin, which seems to be before the eCommerce era. This appears to rely heavily on gross margin. Is there a timeframe in which you could update the market on the company’s earnings potential, particularly whether the margin rate from 2020 could serve as a reasonable target to reach again over time? How should we view this?

Lauren Hobart, President and Chief Executive Officer

We are not going to share our long-term guidance on what our operating margin will be going forward. However, we definitely view there is upside in the operating margin, and we plan to continue to deliver that over the next few years. We're just not laying down a commitment right now.

Lee Belitsky, Chief Financial Officer

I would just add to that, that I think we want to see how the business settles out once we get past kind of the pandemic-driven demand and how much of that demand we hold on to. We believe a lot of it’s just new normal, and we'll come out of this at a meaningfully higher level of sales, but we'd like to see where that settles in. So we'll have more information on this probably later in the year this year.

Simeon Gutman, Analyst

Okay. If I could revisit the gross margin for a moment, I realize there's not much detail, but if we gain some leverage on occupancy compared to 2019 and with a decline in hunting, that should be a positive. Improved eCommerce margins might lead to an increase of 25 to 50 basis points. It seems feasible that we could estimate something around 32 and change, but I'm not sure if you can provide any feedback on my calculations there, Lee.

Lee Belitsky, Chief Financial Officer

Yes. I'm not really prepared to discuss the numbers at this time, but we do believe there are still opportunities for improvement in gross margin.

Adrienne Yih-Tennant, Analyst

Congratulations on a strong year all year long and ending on a high note. This is for Ed and/or Lauren. Can you talk about long-term store targets? And maybe on a 3 to 5-year basis, what your annual gross new store and net store growth should be, how we should think about that? Also for Ed and Lauren, can you talk about the team sports opportunity? If you can give us some characterization of how large that is as a percent of sales historically and what the relative merch margin of that business is. And finally, for Lee, the quarter-to-date comp and just any comments on delays, port congestion and how that's impacting the flow of product.

Lauren Hobart, President and Chief Executive Officer

Thank you, Adrienne. To begin with our long-term store targets, it has become very clear this year that our stores are a significant asset within our entire omnichannel ecosystem. We see the growth of our stores and eCommerce as closely linked, and we will continue to experiment with different store prototypes. We have introduced our new House of Sport, which is a larger model, and we will keep exploring where to expand. However, I do not anticipate any drastic changes in our store growth over the next few years. We have outlined our plans for this year and will continue to capitalize on opportunities as they arise. Regarding team sports, we believe there is considerable momentum in this area. Many kids missed opportunities to play last year, and while the season got off to a slow start due to cold weather and ongoing COVID concerns, we believe football is now being played in many regions, with baseball following next. We see team sports as a significant growth area, in addition to the continued interest in golf, fitness, and other outdoor activities that have become part of people's new lifestyles. Lee, would you like to address the port delays?

Lee Belitsky, Chief Financial Officer

So with regard to supply chain, we have seen some delays across some product categories that we have. Our inventories are a little bit lower than we would like them to be. We were a little bit constrained in the fourth quarter, not so much due to port delays, but due to some categories of merchandise not being manufactured as highly as we would have liked. But we don't anticipate that being a significant impediment to our business at this point. Now that could change. It looks like the supply chain issues, I'd say, over the last couple of weeks, have got a little bit better. They have been trending worse for a while, but it seems like what we see Asia is catching up a little bit right now. The ports are getting a little bit better in the U.S., and we're in a pretty good inventory position at this point. So we don't really see that as an impediment to doing the business we need to do over the next couple of quarters.

Adrienne Yih-Tennant, Analyst

Great. Any comment on quarter-to-date?

Lee Belitsky, Chief Financial Officer

We're really pleased with our quarter-to-date sales, so we'll leave this at…

Katharine McShane, Analyst

I wondered if you could comment at all about what you're seeing of the golf business in warmer weather regions and how it might be providing a read-through to the spring and summer season for golf nationally. And then my second question was just around the store relocations. I think you mentioned that you're doing 11 this year. I think this is a little bit higher than what you traditionally do. I wondered if there were more real estate opportunities or new real estate opportunities in which you're relocating into, and is it at more favorable rates?

Lauren Hobart, President and Chief Executive Officer

Kate, I'll start with the golf business. We are incredibly bullish on the golf business. It has remained strong through the pandemic in the warm weather markets and still strong nationally across the board. So participation rates are up. There's new athletes in the golf sector, and we see a lot of growth ahead of us there. In terms of relocations, we definitely have multiple opportunities, and a big part of our strategy with real estate right now has been to either renegotiate or relocate. And we do see a nice pop when we do relocate into a new store from a sales and profit standpoint.

Lee Belitsky, Chief Financial Officer

Yes. The big driver on the relocations is more the lift in sales we get from it than the savings in rent. Sometimes, the rent is reduced. But typically, we get a fresh new store, and we see a significant sales and profitability lift as well. Our new stores continue to perform very well as well, so we've been selective in picking our targets for new stores, and the economics have been very good. So we're not discouraged from opening new stores in any way, but we do want to continue to be selective.

Michael Baker, Analyst

One bigger picture question. Why do you think you're better positioned today than you were pre-pandemic? Is it vendor relationships? Is it eCommerce? Is it technology? Is it all of the above? I think one thing important to note that, even before the pandemic, in 2019, I think that was your best comp in 4 or 5 years. So clearly, things are moving in the right direction pre-pandemic. What do you think is leading to that better positioning?

Lauren Hobart, President and Chief Executive Officer

Thank you for your question, Mike. I completely agree with you. This isn't just a temporary boost from the pandemic year. For several years now, we have been working on a new strategy to enhance our entire omnichannel ecosystem, maximizing both our physical stores and online sales. Additionally, our strong vendor relationships have only strengthened during the pandemic. The ecosystem we’ve built, including curbside services, has made our stores a crucial part of the digital experience. Our investments in technology over the past few years not only allowed us to rapidly implement curbside services within two days of the pandemic's onset, but also helped us leverage our fixed costs more effectively than we could have without those prior investments. I believe we've experienced our best quarters just before the pandemic and continued that success during the pandemic. We are eager to get back to some normalcy and refine our operating model.

Lee Belitsky, Chief Financial Officer

Additionally, from the perspective of consumer trends and activity patterns, we are enthusiastic about the new habits our athletes have developed over the year, whether it involves golf, running, or other outdoor activities that necessitate footwear and athletic apparel. We also anticipate some continued remote work, which may provide people with more time in their daily lives. We are optimistic about the product trends moving forward and expect that demand will stabilize at a higher level than it was prior to the pandemic, driven by these new activities our athletes have embraced.

Lauren Hobart, President and Chief Executive Officer

Sorry, Mike, I just wanted to add one more thing, which is one of the most pleasing things to see over the past few quarters is that as we launched curbside and improved our digital and our eCommerce experience and then we opened up our stores, that our stores are comping positively, while we're still getting incredibly strong growth out of the eComm. So that feels like a long-lasting trend.

Michael Baker, Analyst

Yes. I was just going to add that I imagine you're selling a lot of layer-type Under Armour or the DSG similar product for winter football in New England. It's been cold out there for some of these practices.

Lauren Hobart, President and Chief Executive Officer

It’s cold outside. There’s a mini football season happening, which is unexpected for February or March. We definitely need some Under Armour or cold gear from the DSG brand.

Christopher Horvers, Analyst

Can you discuss the strong performance in hardline, apparel, and footwear? How does their relative performance compare now to what you observed in the third quarter? Also, do you have any insights on how stimulus has affected these trends?

Lauren Hobart, President and Chief Executive Officer

Yes, Chris, hardlines showed remarkable strength in the fourth quarter, similar to the categories that performed well in Q3. Areas like fitness, golf, and outdoor equipment, which include our bikes and paddle sports, really excelled despite the supply constraints and challenges we faced in obtaining many products. They stood out this year, along with footwear and apparel, which also performed strongly this quarter and throughout the year.

Lee Belitsky, Chief Financial Officer

As for stimulus, we do not have a way to quantify how much stimulus checks have helped us and may help us in the future. It's not something we are planning for. There is just too much noise in the business when trying to measure the exact impact of that.

Christopher Horvers, Analyst

Understood. Can you discuss the outlook for working capital and the balance sheet? What should we consider as the appropriate level for days of inventory? Should we use 2019 as a benchmark? You concluded the year with $1.7 billion in cash and are planning a minimum $200 million for share repurchases. The difference between your EPS outlook and the Street's estimate seems largely tied to the share count. Are you reserving that cash for a specific reason? Are you anticipating a significant working capital drain? Why aren’t you planning to buy back more than $200 million?

Lee Belitsky, Chief Financial Officer

We have a few points to discuss. To start with working capital, we plan to finish 2021 with inventory levels roughly matching those of 2019, while anticipating sales growth in the low double-digit range, around 11%. Therefore, we expect our inventory to remain stable compared to the end of 2019. Although inventory turnover might be slightly lower than in 2020, we anticipate it will be significantly higher than in 2019. Our accounts payable leverage is expected to be greater than in 2019 but less than in 2020, and we don’t foresee any unusual working capital drains at this time. Regarding share buybacks, we have established a minimum of $200 million for this year, which is included in our current forecast. However, we will continue to assess the pace of our business and any changes in demand due to the pandemic, leaving open the possibility of increasing our share repurchases if it aligns with the business needs.

Christopher Horvers, Analyst

Understood. And then one last question. Do you expect eCommerce growth to be up in '21? And to the extent that you expect it down, how might that impact your gross margin.

Lee Belitsky, Chief Financial Officer

Yes. We are anticipating a decline in our eCommerce business compared to 2020. Last year, we experienced an unusual surge, especially in the latter half of the first quarter and into the second quarter when our stores were closed. As a result, we will face some challenging eCommerce numbers. However, our eCommerce performance as we exit Q4 is significantly better than it was last year, leading us to feel positive about this segment. Additionally, our average unit retails have been strong. We are also utilizing curbside and in-store pickup, which eliminates delivery costs. Therefore, we do not expect any significant impact on our overall gross margins as the eCommerce portion of our sales modestly decreases.

Seth Sigman, Analyst

Congrats on the quarter. I was hoping you could frame a little bit more the incremental costs in FY '20. I think Ed had talked about $175 million for the year. I don't think that included the $30 million donation. And also, I assume there was higher incentive comp and maybe some other factors. So Lee, maybe can you confirm that and help us think about how much was in the base for '20? And then for the outlook, I want to make sure we have this right. It sounds like you're saying don't necessarily assume that these costs come back because you're going to reallocate that to more permanent wages and things like that. Can you just confirm that as well?

Lee Belitsky, Chief Financial Officer

Yes. So, regarding the $175 million, it does not include the $30 million in additional foundation contributions, which were incremental in 2020. Moving forward, a significant portion of the COVID costs has been reallocated to more permanent wage increases. We are experiencing wage pressures as we strive to attract the right talent for our stores. Consequently, we need to invest more in hourly wages to maintain the right personnel in both our stores and distribution centers. Therefore, much of that investment is being reinvested moving forward.

Lauren Hobart, President and Chief Executive Officer

The other piece I want to mention is that advertising expense this past year was pretty much nonexistent between March and May, while we were trying to figure out how we were going to manage liquidity through the pandemic. And so that is another cost that will be normalizing next year.

Seth Sigman, Analyst

Okay. That's helpful. And then just another follow-up and clarification. Lauren, you talked about earlier upside to the long-term operating margins of this business. Just to confirm, is that versus the 5.1% in 2019 or versus what you just saw in 2020?

Lee Belitsky, Chief Financial Officer

I would say it's versus our guidance for this year. If you take the midpoint of our guidance, we think we can establish that as a new base and then keep building off of that. So it's over 6% operating margin we can build from there.

Michael Schwartz, Analyst

Looking back at the sales growth you saw over the past year, would you be able to parse out how much of that was driven by new customers versus increased spend from existing customers? And how do new customers compare to existing customers in terms of ticket and frequency?

Lauren Hobart, President and Chief Executive Officer

Yes. We have seen a significant increase in new customers over the past year, totaling 8.5 million for the full year and 2.5 million in the fourth quarter. We are very pleased with the demographics of these new customers, who are generally younger, slightly more female, and predominantly urban compared to our previous customers. Many of these new customers appear to be people who are engaging with the brand for the first time, particularly those who have moved from cities. We are making a concerted effort to retain these customers in our database and encourage them to make repeat purchases. This growth is a crucial part of our overall strategy.

Michael Schwartz, Analyst

And as a follow-up, is it within DICK’s ability to drive a more limited promotional stance when we think about from 2019 levels? Or will it depend on pricing and promotional intensity in the marketplace?

Lauren Hobart, President and Chief Executive Officer

We do not plan to be very promotional moving into. Of course, we will respond to any market pressure that we have or any environmental or economic pressure, but we do not plan to lead a hyperly promotional cycle here. And we believe we have the levers to manage appropriately through.

Charles Grom, Analyst

Long time, Ed. Hope you're well. Just on the lease front, I know you have a number of leases coming up for renewal over the next several years. Just wondering how we should think about the impact from that to the occupancy cost line over the next couple of years.

Lee Belitsky, Chief Financial Officer

Well, we've got about 2/3 of the leases coming due over the next 5 years, and we have an option on those leases. As we go forward in the majority of those stores, as we negotiate new leases, we've been able to negotiate reductions along the way. It also gives us leverage to drive better deals when we relocate stores. So I would expect modest declines year-over-year in the rent line, going forward, as we have all along.

Charles Grom, Analyst

Got you. Great. And then just one quick question, and I apologize for being near-term-oriented, but I'm wondering if you're seeing any difference in regional performance where there's been fewer COVID restrictions, particularly in states like Florida, Georgia, Texas, versus maybe, say, up here in the Northeast.

Lauren Hobart, President and Chief Executive Officer

I think the best way to answer that is just that, obviously, COVID restrictions have allowed different levels of activity. And team sports coming back and we are looking at the business that way and where they are coming back, we're seeing strength in those businesses.

Paul Lejuez, Analyst

Curious if you could talk about the mix performance and the impact it had on gross margin this year in FY '20. And just how you think the mix could have an impact on that merch margin line in FY '21? You maybe talk from a category perspective, also private-label perspective in terms of how you're managing that business. And then second, just also curious if you can comment on what's going on in the competitive landscape. Just how much of your FY '21 guidance is driven by what you think will be market share opportunities from competitor store closings, either medium-sized chains, small-sized competitors? Any numbers you can share around that.

Lee Belitsky, Chief Financial Officer

The mix in 2021 is expected to be better than in 2020, as the strongest segments last year were in hardlines, such as outdoor equipment and fitness. We anticipate a recovery in team sports and continued growth in athletic apparel and footwear, which tend to have higher margins. Our private and vertical brands are also expected to expand, positively affecting the mix. Additionally, a decrease in hunt business may benefit margins. Overall, I foresee some positive changes in the mix for 2021. Regarding competition, I don't expect significant changes in the brick-and-mortar sector. The sporting goods industry is generally in a good position, and the pandemic has increased sales across our area, so I don't anticipate meaningful store closures this year. While some department stores are shutting down locations, which is beneficial, others are intensifying competition in athletic apparel, which could offset that. In summary, I do not expect any substantial shifts in the competitive landscape for brick-and-mortar stores this year.

John Kernan, Analyst

Congrats on a phenomenal year.

Lauren Hobart, President and Chief Executive Officer

Thank you.

John Kernan, Analyst

Can you discuss the inventory levels from the middle of 2020, which were substantially reduced? Were there any key categories where you faced supply constraints and may have missed out on potential sales? The sales were impressive, so I'm interested if there was demand that you couldn't meet.

Lauren Hobart, President and Chief Executive Officer

Yes. John, there definitely was some demand we've been chasing all year in categories that were surging due to the pandemic and managing through it. So it's on a hand-to-mouth basis for some of these categories. We left some sales on the table, but let me turn it over to Lee.

Lee Belitsky, Chief Financial Officer

Yes. I mean the categories that we were chasing all year were fitness, kayaks and golf equipment and athletic apparel. So certainly, if we had more inventory over the course of the year in certain key categories, our sales would have been higher. We are in much better shape in inventory right now. So we're down 10%. We feel pretty good about our inventory levels right now. There's still a few pockets where we're short, but we don't have the kind of widespread inventory outages that we did through mid and the latter part of the year last year.

John Kernan, Analyst

Got it. And maybe my follow-up question goes back to the mix question. How will mix affect comps this year? I know ticket was a big driver of overall comps in fiscal '20. Just curious how you expect mix to affect, not only the gross margin but also the comps this year.

Lee Belitsky, Chief Financial Officer

Well, that remains to play out, I think, for us to take a look at it and see how well the big-ticket items hold up. Part of the reason the average retail is up so much is because we were less promotional, so that drove a lot of the average ticket. But we did have strength in big-ticket items like in the fitness area, in kayaks, golf clubs and so on. And I think we feel really good about the golf business. We feel good about all of those categories right now. And time will tell as we get later in the year when the new activities kind of normalize, what will happen to the sales there.

Scot Ciccarelli, Analyst

It's Scot Ciccarelli. So it seems like your new men's athletic apparel brand, VRST, is aimed right in the middle of the core merchandise offering for some of your most important vendor partners. I'm just curious how you guys are planning to introduce that brand. And any potential conflicts that could create with those partners, especially given your comment on the improving vendor relationships?

Lauren Hobart, President and Chief Executive Officer

Yes, Scot, the VRST brand that we discussed, which is our new men's premium athletic apparel brand, represents an opportunity in our stores that we believe is currently untapped. It competes with other specialty brands, but we are confident that its product selection will stand out from what we currently offer with our main vendor partners. You can think of it as a men's counterpart to CALIA, aiming to fill a gap that isn't being addressed by our present partners.

Scot Ciccarelli, Analyst

So can you provide any more detail on why that's going to be different than, say, a Nike, Under Armour type offering, Lauren?

Lee Belitsky, Chief Financial Officer

I would say it's closer to lululemon, and the assortments that they've got, it's more a lifestyle apparel that you can wear to work, you can travel in. You can work out in it if you choose to. So it covers a broader range of activities than kind of the Nike, which is a little bit more athlete focused than our new brand that’s coming out.

Steven Forbes, Analyst

So given the comments, right, on the importance of the stores, I think Lee spoke to that 6-plus percent operating margin. Curious if you can remind us what the 4-wall margin profile is across the mature store base and/or what sort of 4-wall margin target you guys are looking at when you're identifying relocations, right, or new store opportunities.

Lee Belitsky, Chief Financial Officer

We base our operations on return on investment, aiming for at least an 18% internal rate of return on new stores, including relocations, which must also have a higher IRR compared to our existing stores to encourage new investments. Typically, we can achieve this because moving stores often results in a significant increase in sales. We're not going to share the IRR of the deck, other than to say that the decks have unlocked a lot of assortment and a much better athlete experience. And so it's really been a game changer, a very positive game changer for our entire footwear business.

Joe Feldman, Analyst

I wanted to ask if you could elaborate on the enhancements to the mobile experience that you mentioned previously and how you plan to better integrate that experience for consumers.

Lauren Hobart, President and Chief Executive Officer

Yes. We're currently working on relaunching our mobile app. Mobile already accounts for 50% of our eCommerce sales. Our plans involve fully integrating both the store experience and the ScoreCard experience to enhance the online shopping experience, especially by making the mobile app the central hub for ScoreCard users and members' overall DICK'S experience. More updates will follow.

Joe Feldman, Analyst

I wanted to ask about the last mile. You've made great progress this past year. What are your plans for 2021? Will you be focusing on making curbside pickup and buy online, pick up in store more efficient? If possible, could you share some of those plans?

Lauren Hobart, President and Chief Executive Officer

Yes, we are concentrating on the last mile and looking to enhance BOPIS profitability. While profitability in that channel is strong, we are also prioritizing the customer experience. We are working on ensuring a quick service for our athletes, with notifications that their BOPIS curbside orders are ready. We aim for under an hour, but typically it's within 30 minutes or even sooner. The curbside wait time is just a couple of minutes, making it very swift. Our goal is to create such a convenient experience that customers will really appreciate it. Additionally, this past year we conducted a small test with Instacart for same-day delivery to gauge interest among our athletes, and we will continue to explore this as the year progresses.

Warren Cheng, Analyst

Great quarter. I just had a follow-up question on Simeon's question and some of the other questions on gross margin. So if I just try to sort out what's happening to your gross margin structurally and filter out some of the noise of 2020 and even 2021, in a scenario where we're back to a post-COVID sales mix, post-COVID more normalized promotional environment, whenever that may be, can you maybe just rank order the biggest changes to your structural underlying gross margins relative to 2019 levels?

Lee Belitsky, Chief Financial Officer

I would say the largest one, we believe, will be the merchandise margin being higher due to mix shift and due to better promotions management, particularly online. I'd say that's the largest. I'd say the second largest is going to be around leverage of occupancy expense. To the extent we've got the same square footage in 2021 as we did in '19 and we're able to continue to drive some rent reductions along the way, we should be able to continue to leverage our occupancy expense. Going the other way, as eCommerce is a larger part of the business, there is some pressure from additional delivery expenses to get products to customers. We did a really good job in the fourth quarter, mitigating that through more BOPIS and curbside pickup and higher AURs. We think we'll be able to hold on to some of that, but it will be a constant, very detailed management effort on our expenses there to try to keep that down. But I would expect versus '19, the delivery expenses to run a little bit higher as a percent of sales from the eCommerce business.

Seth Basham, Analyst

My question's around SG&A. If you could contextualize the underlying growth in SG&A that we're seeing in the business. Maybe if you think about it on a 2-year basis from 2019, should we be looking at 3% to 4% growth on an annual basis underlying?

Lee Belitsky, Chief Financial Officer

So versus '19, the main drivers of growth are really our store payroll expenses, and that's really driven by higher wage rates that are across the board. I'm not going to comment on the exact amount that it's going up, but the deleverage that we are experiencing is really attributable to that factor, the hourly wage rates. Advertising is in good shape. Admin expenses are in good shape as well, so it's really driven by store payroll.

Seth Basham, Analyst

Okay. But no comment on what the underlying growth rate's been?

Lee Belitsky, Chief Financial Officer

Not really. As we know, we got investments coming in throughout the year this year, a partial year of depreciation expense. It's not really a headwind for this year.

Tom Nikic, Analyst

Lauren, I just want to ask quickly on the ScoreCard loyalty program. I think it launched something like 18 months ago, and it seems like you've gotten a pretty good uptake there, like I think 70% of sales. I just wanted to ask you, are there like meaningful differences in the metrics you're seeing of your ScoreCard members, non-ScoreCard members in terms of buying frequency or average basket or anything like that? And then just also, do you think that, that 70% penetration can move even higher from here? Is this the kind of situation where you could see it becoming 80%, 90% of sales?

Lauren Hobart, President and Chief Executive Officer

Our ScoreCard program has been in place for many years, and the 70% penetration has remained consistent over the past few years. While we hope to see it increase, it's already a very high figure as is. What you might be referring to is our ScoreCard Gold Program, which we launched around 18 months ago for our best customers. These customers generate our highest sales, with a minimum criteria of over $500 a year, and they significantly contribute to our overall sales, consistently achieving higher average unit retail in every transaction.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Lauren Hobart for any closing remarks.

Lauren Hobart, President and Chief Executive Officer

Okay. Thank you, everybody, for your interest in DICK'S, and a final thank you to our teammates for their amazing performance this year. Thanks, everybody.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.