Earnings Call Transcript - DKS Q1 2021

Nate Gilch, Senior Director of Investor Relations

Good morning, everyone, and thank you for joining us to discuss our first quarter 2021 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 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 few admin items. First, a note on our same-store sales reporting practices. Our consolidated same-store sales calculation includes stores that we chose to temporarily close last year 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. Next, as a reminder, due to the uneven nature of 2020, we planned 2021 off a 2019 baseline. Accordingly, we will compare 2021 sales and earnings results against both 2019 and 2020. And lastly, for your future scheduling purposes, we are tentatively planning to publish our second quarter 2021 earnings results before the market opens on August 25, 2021, with our subsequent earnings call at 10 a.m. Eastern Time. And with that, I'll now turn the call over to Ed.

Edward Stack, Executive Chairman and Chief Merchandising Officer

Thanks, Nate. Good morning, everyone. We are extremely pleased to announce yet another quarter of record results as we continue to execute at a very high level and capitalize on incredibly strong consumer demand. We're in a great lane right now, and 2021 will be our boldest and most transformational year in the company's history. We believe the future of retail is experiential, powered by technology and a world-class omnichannel operating model. Importantly, we are reimagining the athlete experience both across our core business and through new concepts that we have been working on for the past several years, which will collectively propel our growth in the future. We recently debuted DICK'S House of Sport in Rochester, New York. It's off to a great start and is on track to become among our highest-volume stores in the chain. We have reimagined virtually everything in the store and believe it sets the standard for sport retailing and athlete engagement. Our partners who have visited the store all agree there's nothing like it, and we hope everyone has the opportunity to see it in person. Next, we are completely reengineering our Golf Galaxy business. The game of golf is in great shape and our golf business has been tremendous. With Golf Galaxy comps significantly outperforming the company average in recent quarters, we're leaning into this streak by investing in our Golf Galaxy business and adding TrackMan technology to enhance the fitting and lesson experience. We are also investing in talent to elevate the in-store service model and are remodeling 18 stores this year. The new stores we've remodeled are showing promising results. Looking ahead, we expect golf to have a long runway, and we are committed to leveraging this momentum for future growth within our business. Additionally, we are launching Public Lands, a complete outdoor omnichannel retail concept that will focus on making the outdoors a place where everyone feels welcome and inspired. We've been working on Public Lands for several years and look forward to opening our first two stores later this year. Based on our research, we think there is an opportunity in the marketplace and believe this new concept will be a great growth vehicle for us. Importantly, conservation will play a prominent role in our new Public Lands concept, and we will champion environmental issues as we speak up to protect the planet and our public lands. As a member of the outdoor industry, we have also joined forces with other retailers to advocate for conserving 30% of the U.S. lands and waters by 2030. We expect to have the same voice and as much impact on these issues as we've had inside the DICK'S business, highlighting the youth sports crisis and sensible gun legislation. We'll be sharing more details about our plans for Public Lands in the weeks and months ahead. In closing, you can see DICK'S is a growth company, and we will continue to invest in our business to grow our lead as the nation's largest sport retailer. We see significant growth opportunities within DICK'S and Golf Galaxy as well as with House of Sport and Public Lands. We will continue to invest in our vertical brands and with our key partners, including Nike, North Face, Callaway, TaylorMade and others to elevate the athlete experience across the stores and online. This morning, as Lauren and Lee discuss the results of our strategic growth drivers in greater detail, I couldn't be more excited about our business and more proud of our team and their unwavering dedication to our business. I'll now turn the call over to Lauren.

Lauren Hobart, President and Chief Executive Officer

Thank you, Ed, and good morning, everyone. As announced earlier this morning, we delivered another exceptionally strong quarter, achieving record first quarter sales and our highest-ever quarterly earnings, both significantly exceeding our expectations. Our Q1 consolidated same-store sales increased 115% as we anniversaried the majority of our temporary store closures from last year. The strength of our diverse category portfolio, supply chain, technology capabilities and omnichannel execution helped us continue to capitalize on strong consumer demand across golf, outdoor activities, home fitness and active lifestyle. We also saw a resurgence in our team sports business as kids began to get back out on the field after a year in which many youth sports activities were delayed or canceled. Our strong comps were supported by sales growth of over 100% within each of our three primary categories: the hardlines, apparel and footwear, as well as increases in both average ticket and transactions. Like others, we also benefited from the recent stimulus checks. These results combined translate to a 52% sales increase when compared to the first quarter of 2019. From a channel standpoint, our brick-and-mortar stores generated significant triple-digit comps and importantly delivered an approximate 40% sales increase when compared to 2019 with roughly the same square footage. Our eCommerce sales increased 14%, which was on top of our 110% online sales increase in the same period last year when the vast majority of our stores were closed for over six weeks. This represented nearly a 140% increase when compared to 2019. Within eCommerce, in-store pickup and curbside continued to be a meaningful piece of our omnichannel offering, increasing approximately 500% when compared to BOPIS sales during the first quarter of 2019. And as a percent of online sales, we saw sequential growth compared to the second half of last year. These same-day services, along with ship-from-store, 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. During Q1, our stores enabled approximately 90% of our total sales and fulfilled approximately 70% of our online sales through either ship-from-store, in-store pickup or curbside. Throughout the quarter, we remained disciplined in our promotional strategy and cadence as certain categories in the marketplace continued to be supply constrained. As a result, we expanded our merchandise margin rate by 787 basis points versus 2020 and 312 basis points versus 2019. This merchandise margin expansion, along with substantial leverage on fixed costs, drove a significant improvement in gross margin. In total, our first quarter non-GAAP earnings per diluted share of $3.79 not only represented a 511% increase over Q1 2019 but eclipsed our full year 2019 non-GAAP earnings per diluted share of $3.59. During the first quarter last year, we recorded a net loss per share of $1.71 as we temporarily closed our stores to promote the safety of our teammates, athletes and communities. Looking ahead, we remain very enthusiastic about our business, and we're raising our full year sales and earnings guidance. Our financial outlook balances this enthusiasm with the uncertainties that still exist, particularly as it relates to the second half of the year. Lee will address our outlook in greater detail within his remarks. Now let me provide a few updates on our strategic growth drivers. First, within merchandising, our well-defined brand strategy drives differentiation and exclusivity within our assortment as we leverage both our key national brand partnerships and our highly profitable and growing vertical brand portfolio. During the quarter, our vertical brands continued to be a significant source of strength, posting triple-digit comps, with merchandise margin rate expansion that outperformed the company average. We saw sustained success in DSG, our largest vertical brand, as well as in CALIA, our second-largest women's athletic apparel brand. This year, we are investing to make our vertical brands even stronger through improved space in store and increased marketing. In March, we augmented our men's athletic apparel selection by launching VRST, our new premium apparel brand that serves the modern athletic male. The team has done a great job with VRST and is off to a really strong start. Next, to increase engagement with our athletes, we're taking steps to dial up service in our stores and to make our stores more experiential. As Ed mentioned, we've been very pleased with the early results from our first DICK'S House of Sport and are excited for the grand opening of our second location in Knoxville next week. Virtually everything in House of Sport is new, from our engagement and service models to our merchandising standards, brands and concept shops, as well as an adjacent outdoor field to host sports events and promote product trial. These highly experiential stores are exploring the future of retail, and they provide us a great opportunity to test and learn. We'll continue to refine and grow the House of Sport concept while also rolling the most successful elements into our core DICK'S stores. Beyond House of Sport, we continue to evolve the DICK'S athlete experience. During the quarter, we added more than 30 soccer shops that provide a high level of service from in-store soccer experts who are especially trained to help athletes find the equipment and cleats they need to excel at the game. The soccer shops also feature a variety of updated in-store elements, including an elevated cleat shop, an expanded selection of licensed jerseys and soccer trial cages in select locations. We've been pleased with the initial results and plan to add additional shops throughout the year. As discussed on prior calls, footwear is a key pillar of our merchandising strategy. And during the quarter, we converted more than 40 additional stores to premium full-service footwear. Over 50 more stores will be converted by the end of the year, taking this experience to approximately 60% of the DICK'S chain. Lastly, as the number one premium golf retailer in the world, we are benefiting from renewed interest in the game. Participation rates are healthy and energy for the game of golf continues to increase, with women, juniors and young adults contributing to the game's growth. As a result of this robust demand, our golf business has been great at both DICK'S and Golf Galaxy, with Golf Galaxy comps significantly outperforming the company average in recent quarters. In 2021, we're investing over $20 million to transform our Golf Galaxy stores via a combination of elevated experience, industry-leading technology and unmatched expertise through our certified PGA and LPGA professionals. As part of this, we rolled out TrackMan technology to over 80% of the chain to enhance the fitting and lesson experience. We've also completely redesigned nearly 20 stores. In addition, we enabled online booking of lessons and club fittings and invested in talent and training to elevate our in-store service model. We supported these efforts through our first Golf Galaxy-specific brand campaign, Better Your Best, across TV, social and in-store. Now moving to our omnichannel capabilities. We continue to drive significant improvement in the profitability of our eCommerce channel through fewer promotions, leverage of fixed costs and strong athlete adoption of in-store pickup and curbside. We're continuing to enhance the curbside experience with new features like proxy pickup as well as through improved inventory availability and reduced pickup wait time for athletes. During Q1, over 90% of curbside orders were ready within 15 minutes and upon check-in at the store, 50% were delivered to the athlete's car in under 2.5 minutes. Looking ahead, we continue to expect curbside pickup will remain a meaningful piece of our omnichannel offering as our athletes turn to this service for speed and convenience. Along with curbside, our ScoreCard Program continues to be key to our omnichannel offering with more than 20 million active members who drive over 70% of our sales. We're using data science to drive more personalized marketing and engagement with our athletes, which is resulting in strong retention of the 8.5 million new athletes we acquired last year. Speaking of new athletes, we acquired nearly 2 million new athletes this past quarter, and relative to our existing athletes, they continue to skew younger and more female, representing a great opportunity for future growth. In closing, we are a growth company steeped in technology and omnichannel experience with a bold path forward. As we continue to execute against our strategic priorities, we are enthusiastic about our business and confident that our investments will strengthen our leadership position within the marketplace. I had the pleasure of visiting many of our stores during this first quarter, and I would like to thank our teammates across the company for their continued hard work, collaborative spirit and passion for serving our athletes and supporting our business. I will 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 review of our first quarter results. Consolidated sales increased 119% to approximately $2.92 billion. Including the impact of last year's temporary store closures, consolidated same-store sales increased 115%. This increase was broad-based with each of our three primary categories of hardlines, apparel and footwear comping up over 100%. Transactions increased 90% and average ticket increased 25%. Compared to 2019, consolidated sales increased 52%. Our brick-and-mortar stores comped up nearly 190% as we anniversaried last year's temporary store closures, and compared to 2019, increased approximately 40% with roughly the same square footage. Our eCommerce sales increased 14% over last year and increased 139% versus 2019. As a percent of total net sales, our online business was 20%. As expected, this decreased from the 39% of net sales in 2020, given last year's temporary store closures, but increased compared to the 13% we had in 2019. Lastly, in terms of stimulus, while this can be difficult to quantify, we recognize that our athletes had more cash to spend during the quarter and believe we benefited from this during the first quarter. Gross profit in the first quarter was $1.09 billion or 37.3% of net sales and improved approximately 2,100 basis points compared to last year. This improvement was driven by leverage on fixed occupancy costs of approximately 1,000 basis points from the significant sales increase and merchandise margin rate expansion of 787 basis points, primarily driven by fewer promotions and a favorable sales mix. Additionally, last year included $28 million of inventory write-downs resulting from our temporary store closures, which were subsequently recovered in the second quarter of 2020 due to better-than-anticipated sales and margin on merchandise nearing the end of life upon the reopening of our stores. The balance of the improvement was driven by lower shipping expense as a percent of net sales due to higher brick-and-mortar store sales penetration following last year's temporary store closures. Compared to 2019, gross profit as a percent of sales improved by 795 basis points, driven by leverage on fixed occupancy costs of 475 basis points due to the significant sales increase and merchandise margin rate expansion of 312 basis points, primarily driven by fewer promotions. SG&A expenses were $608.3 million or 20.84% of net sales and leveraged 940 basis points compared to last year due to significant sales increase. SG&A dollars increased $205.1 million, of which $21 million is attributable to the expense recognition associated with changes in our deferred compensation plan investment values. This expense is fully offset in other income and has no impact on net earnings. The remaining $183 million is primarily due to normalization of expenses following our temporary store closures last year to support the increase in sales as well as higher incentive compensation expenses due to our strong first quarter results. SG&A expenses include $13 million of COVID-related safety costs, which in light of the latest CDC guidance, we expect these costs to decline significantly beginning in the second quarter. Compared to 2019's non-GAAP results, SG&A expenses as a percent of net sales leveraged 446 basis points due to the significant sales increase. SG&A dollars increased $122.3 million due to increases in store payroll and operating expenses to support the increase in sales and hourly wage rate investments and COVID-related safety costs as well as higher incentive compensation expenses. Driven by our strong sales and gross margin rate expansion, we delivered record quarterly non-GAAP EBT and EBT margin results. Non-GAAP EBT was $477.1 million or 16.35% of net sales, and it increased $684.8 million or approximately 3,200 basis points from the same period last year. More relevantly, compared to 2019, non-GAAP EBT increased $396 million or approximately 1,200 basis points as a percent of net sales. In total, we delivered non-GAAP earnings per diluted share of $3.79. This is compared to a net loss per share of $1.71 last year and non-GAAP earnings per diluted share of $0.62 in 2019, a 511% increase. On a GAAP basis, our earnings per diluted share were $3.41. This includes $7.3 million in noncash interest expense as well as 9.2 million additional shares that will be offset by our bond hedged at settlement but are required in the GAAP diluted share calculation. Both are related to the convertible notes we issued in the first quarter of 2020. For additional details on this, you can refer to the non-GAAP reconciliation tables of our press release that we issued this morning. Now looking to our balance sheet. We're in a strong financial position, ending Q1 with approximately $1.86 billion of cash and cash equivalents and no borrowings on our $1.85 billion revolving credit facility. While our quarter-end inventory levels decreased 4% compared to the same period last year, our strong flow of products supported Q1 sales growth in excess of our expectations. Looking ahead, our inventory is very clean, and we continue to expect a robust product flow. In terms of supply chain expense, we are seeing elevated costs, which we expect to continue, but thus far have mitigated this pressure through higher ticket as a result of being less promotional and increasing prices in select categories. Turning to our first quarter capital allocation. Net capital expenditures were $57.2 million, and we paid $33 million in quarterly dividends. During the quarter, we also repurchased just over 1 million shares of our stock for $76.8 million at an average price of $74.59. And we have approximately $954 million remaining under our share repurchase program, and our plan for 2021 continues to include a minimum of $200 million of share repurchases. Now let me move on to our fiscal 2021 outlook for sales and earnings. As a result of our significant Q1 results, we are raising our consolidated same-store sales guidance and now expect full year comp sales to increase by 8% to 11% compared to our prior expectation of down 2% to up 2%. At the midpoint, our updated comp sales guidance represents a 22% sales increase versus 2019 compared to our prior expectation above 11%. While we have been very pleased with the start of our second quarter and are highly encouraged about the rest of the year, beginning in June, we will start to anniversary significant comp sales gains from last year. There's also continued uncertainty around when consumer behavior will normalize and what the new normal will be. And we are limited in our ability to forecast demand, particularly as it relates to the second half. Given this, within our updated outlook, we have maintained our Q3 and Q4 performance expectations in line with our original guidance, which assumes comps will decline in the range of high single to low double digits. Non-GAAP EBT is now expected to be in the range of $1 billion to $1.1 billion compared to our prior outlook of $550 million to $650 million, which at the midpoint and on a non-GAAP basis is up 142% versus 2019 and up 45% versus 2020. At the midpoint, non-GAAP EBT margin is expected to be approximately 10%. Within this, gross margin is expected to increase versus 2019, driven by leverage on fixed expenses and higher merchandise margins. When compared to 2020, gross margin is also expected to increase, driven by leverage on fixed expenses, while merchandise margins are expected to be approximately flat. This assumes a gradual normalization of promotions beginning in the second quarter and modest de-leverage on fixed expenses in the second half. SG&A expense is expected to leverage versus both 2019 and 2020 due to the significant projected increase in full year sales. As a reminder, at the beginning of 2021, we transitioned last year's premium pay program to a more lasting compensation program, including increasing and accelerating annual merit increases and higher wage minimums. The impact of these programs has been included within our guidance. In total, we are raising our full year non-GAAP earnings per diluted share outlook to a range of $8 to $8.70 compared to our prior outlook of $4.40 to $5.20. At the midpoint and on a non-GAAP basis, our updated EPS guidance is up 126% versus 2019 and up 36% versus 2020. Our updated earnings guidance is based on 97 million average diluted shares outstanding and an effective tax rate of approximately 24%. In closing, we are extremely pleased with our Q1 results and remain very enthusiastic about the future of DICK'S Sporting Goods. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods, and operator, you may now open the line for questions.

Operator, Operator

Our first question comes from Robby Ohmes with Bank of America.

Robert Ohmes, Analyst

I'm still too speechless to say congratulations. I wanted to ask about the curbside customers. Can you remind us what their spending levels are? Are they spending two to three times compared to regular customers, and is that spending happening inside or outside of the stores? Additionally, with the 10.5 million new customers you mentioned, who are younger and more female, can you provide insights into their spending habits? Do they spend more than past customers? Are you losing some existing customers while gaining these new ones? I would appreciate more details on who's coming into the store and how they're spending.

Lauren Hobart, President and Chief Executive Officer

Yes. Thanks, Robby. So in terms of curbside customers, I mean, our best customer is our omnichannel customer, someone who shops in all channels. And this curbside is so new, we don't have specific data on those specific customers versus the general eCommerce customers. But overall, when somebody comes into our system and if they shop in a store and they shop online, they are a more valuable customer. In terms of new customers, so you're right, we had 8.5 million last year and 2 million new customers this year. Our database continues to grow. We have over 30 million emails that we can reach out to people with and communicate to and personalize our offers to them and our communication to them. And those athletes are spending more than last year and doing well versus existing customers. We're not going to share specifically how they're doing, but we are very pleased with their retention rate. They're shopping again. They're shopping again within a short window, a few week window, and we're very pleased with that.

Robert Ohmes, Analyst

Got you. And then just a quick follow-up. Lee, on the guidance, I just want to clarify. What kind of promotional environment are you guys expecting, kind of a return to full normal in the back half of this year? Or how should we think about the promotional environment?

Lee Belitsky, Chief Financial Officer

We're not anticipating a return to full normal that we might have seen in 2018 and 2019, but we are anticipating a gradual return of promotions kind of beginning here later in Q2 and then building throughout the back half of the year.

Operator, Operator

Our next question comes from Adrienne Yih with Barclays.

Adrienne Yih-Tennant, Analyst

Just when we thought it couldn't get better, it does. Congratulations, Lauren. My first question for you is about those who thrived during the pandemic. You hold a unique position to accelerate investment, test new formats, and take on more risk compared to others. We see this happening with House of Sport, along with various other initiatives like exclusive high-touch in-store soccer shops and lower-priced concepts such as OVERTIME, Warehouse, and off-price offerings. I understand these are still in the small, testing phase, but what insights are you gaining from each, particularly regarding OVERTIME, Warehouse, and the Going, Going, Gone! formats? Are you simply testing these to determine which will succeed, and what thoughts or strategies do you have regarding this?

Lauren Hobart, President and Chief Executive Officer

Thank you, Adrienne. We are indeed investing in our business in various ways. It's important to note that many of these initiatives were already in development prior to the pandemic and are now continuing. This includes our investments in Golf Galaxy, House of Sport, and soccer shops, which were in progress but paused during the pandemic. As we emerge from the pandemic, we are seeing increased consumer demand and support for strategies that we believed in before the pandemic, and we are even more eager to pursue them now. We are certainly investing in our business, enhancing our omnichannel experience, and adding experiential features in our stores, such as House of Sport with elements like rock climbing walls, soccer shops, footwear decks, and HitTrax. Regarding Warehouse and Going, Going Gone!, that is currently just a test. We are using it as a clearance solution in the DICK'S channel, with only a few stores involved at the moment. It serves as a way to keep our clearance products moving, and we will provide more updates on that as we progress. I hope I addressed all your questions.

Adrienne Yih-Tennant, Analyst

Okay. Super helpful. Lee, a quick question for you. Can you share what percentage of Team Sports and associated accessories represents on an annualized basis? I assume this increases during the back-to-school season, so could you provide the penetration for the third quarter? Lastly, with close to $2 billion in cash, what are your thoughts on how to utilize that amount?

Lee Belitsky, Chief Financial Officer

We have a few points to discuss. Team Sports typically sees its highest penetration in the first quarter, followed by the third quarter, with the second and fourth quarters showing lower performance. We performed strongly in Team Sports during the first quarter, which is expected as it's our peak season. We entered the quarter with a solid inventory strategy anticipating a recovery in demand, and we successfully met that demand. Regarding our current cash balance, we plan to maintain a conservative approach to cash management while still supporting investments in new concepts going forward. We're investing in working capital and are proactively increasing our inventory purchases for the latter half of the year. Although we anticipate a decline in sales of around 10% year-over-year, we expect a 10% increase compared to 2019. We’re committed to supporting continuous comp sales growth since we don’t want to influence consumer behavior. Thus, we will have sufficient inventory and working capital to make necessary investments. Ed and Lauren mentioned our ongoing commitment to invest in stores and new concepts. We plan to stick to our guidance of repurchasing at least $200 million in stock this year and will continue making dividend payments, which we have been increasing over the past several years. We see multiple uses for our cash while remaining conservatively capitalized and maintaining a healthy cash balance.

Operator, Operator

Our next question comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman, Analyst

Nice results. My first question is on gross margin and I wanted to focus on two elements of it. First, if you can look at product margins and look at it within category, are there any changes that are improving that you could sort of attribute structurally getting better, whether the hardline margin is getting better within itself because of mix or apparel and footwear? And then the other part of it is, if you look at the eCommerce business, and I realize you look at it all combined multichannel, but any way to quantify how much better EBIT margins can be structurally from higher BOPIS or from ship-from-store than pre-COVID?

Lauren Hobart, President and Chief Executive Officer

So I'll start with the last question. So with eCommerce, it's certainly advantageous for us to have a higher penetration of BOPIS and curbside. We're up 500% versus 2019 on those areas. The channel is benefiting from that but also benefiting by the fact that we invested in technology many years ago, and we've created a platform now where we do get leverage as the sales come in and then our gross margin, again to your second question, which has been extremely strong for the last few quarters and including this past quarter. Within categories for gross margin, we are finding, across the board, we are not in a promotional environment nor are we certainly leading in any promotional way. And so across the board, the categories have been improving in gross margin. It's true of hardlines, it's true of footwear, it's true of apparel. So overall, it's a really, really good story, and we're very, very pleased with eCommerce profitability. The more BOPIS and curbside, the better, but even the ship-from-home business, everything is more profitable now as we scale.

Lee Belitsky, Chief Financial Officer

And I would just add to that, due to the strength of demand kind of across our product assortment, we're not really creating much in the way of clearance merchandise. So we don't have a little bit of an anchor on our merchandise margin rates coming from dealing with clearance that we would typically have. And the clearance stores that we've opened have also helped us to more efficiently deal with our clearance inventory. So structurally, that's helped us with our merchandise margin rates, but the strong demand has helped us as well.

Simeon Gutman, Analyst

Okay. For my follow-up, I wanted to ask Ed and Lauren about how you view the future, especially considering the current strength of demand. Can we discuss which trends you believe will continue, such as sustained category strength? Also, have there been any changes in your product assortment or platform? I'm curious about the idea of comping again, given that your business achieved double-digit growth last year and seems set to do so again. Is that something you've been considering, even at this early stage? I'm interested in your thoughts on what might be sustainable moving forward.

Lauren Hobart, President and Chief Executive Officer

Yes, we are learning every day about the new consumer and their behaviors. Many factors are influencing this, including stimulus and other variables. However, we have definitively observed that Team Sports has returned strongly, which is justified since it had been over a year since many participated. Additionally, certain categories that surged during the pandemic, like golf, fitness, and outdoor activities, are still performing exceptionally well. While we can't predict the future, we are optimistic about the business and the consumer demand as we move forward.

Edward Stack, Executive Chairman and Chief Merchandising Officer

I think there are a couple of things that have changed due to our team's efforts in distinguishing our in-store products from those of our direct competitors and even some indirect ones. We've achieved this not only through our key brands but also by enhancing our footwear selection, particularly in our premium full-service footwear areas, and through our concept shops featuring Nike and other brands, alongside our vertical brands. The team has successfully differentiated our offerings, making us a unique retailer compared to our competitors. I believe that consumers are recognizing this, shopping with us more frequently, and this gives us an advantage in terms of margins, allowing us to avoid a promotional environment. If a promotional climate returns, I anticipate that we will engage in less promotional activity due to our distinct product lineup. I cannot emphasize enough how instrumental our merchandising, store, and marketing teams have been in achieving this, and they are a significant reason for our current success.

Operator, Operator

Our next question comes from Paul Lejuez with Citi Research.

Paul Lejuez, Analyst

Curious if you could give some of the comp metrics, traffic ticket versus 2019, particularly at the store level. But also would be curious to hear about categories versus 1Q '19, just which ones have really taken a large amount of share within the box and online versus those that are down. Obviously, hunt would be, I think, the obvious one there, but curious if any others are lower. And then just second, on the Team Sports strength that you saw in the spring, how much of that was driven by spring team sports versus fall sports that just got pushed out of the spring?

Lauren Hobart, President and Chief Executive Officer

Yes, our traffic and ticket sales compared to 2019 are both positive, and we are optimistic about that. When looking at 2020, the traffic figures are somewhat skewed since our stores were closed, but we still see strong double-digit growth compared to 2019. Regarding team sports, there is definitely significant pent-up demand, along with some unexpected occurrences like a mini-football season earlier this year that few anticipated. We have seen high demand for team sports in the first quarter, but I don't believe this indicates a pull forward of fall sports. There are still many athletes who need equipment, and football participation is returning strongly with kids continuing to grow. Therefore, we are confident about the future of team sports.

Paul Lejuez, Analyst

Got it. And just on the supply chain side, any categories that you're still finding it hard to chase?

Lauren Hobart, President and Chief Executive Officer

I believe this is a significant point. Our supply chain team has done an exceptional job managing through 15 months of real challenges related to supply chains. Initially, we saw this impact in hard goods and fitness, but it has affected nearly every part of our business. We are continuously working to address these challenges. We have become quite adept at this, with dedicated teams working on it daily. Our collaboration with vendors has improved, allowing us to source products more quickly and integrate them into our supply chain. This has developed into a core capability that enables us to drive growth despite the ongoing supply chain difficulties.

Operator, Operator

Our next question comes from Michael Lasser with UBS.

Michael Lasser, Analyst

So you're pointing to a 10% operating margin this year. Your prior peak has been a 9% operating margin. Is it 10% margin the right way that we should be modeling the business moving forward?

Lee Belitsky, Chief Financial Officer

We need to observe how the latter half of the year unfolds. There are still many uncertainties regarding the new demand levels in our product categories. We are confident that it will be significantly higher than in 2019, and our optimism grows as we progress in this current period. We feel more positive about achieving higher operating margins compared to three or six months ago. However, we are not ready to provide guidance on the long-term margin outlook until we see a stabilization in spending on travel and dining and how that impacts our categories. The consumer shows a desire to engage in outdoor activities, pursue fitness, and purchase athletic clothing and footwear. These trends are likely to continue, but we need time to assess the situation before providing a long-term perspective.

Michael Lasser, Analyst

And Lee, as part of that, can you frame when you had a 9% operating margin back in 2012, you had a 31.5% gross margin. eCommerce penetration was much lower than. How does your merch margin today compare to where it was back then? And as an unrelated point to that, you had mentioned that you were very pleased with the start of the quarter. What does that put the bias to the upside too for your full year guidance, if the strength you're seeing now continues?

Lee Belitsky, Chief Financial Officer

The merchandise margin rates are currently higher than they were at their peak because we do not have any promotions at the moment and very little clearance merchandise to manage. We have not been in a situation where we haven't had to run promotions before. Moving forward, it will be a question of when promotions return and at what levels. We are encouraged by some activities from our brands and have been narrowing the distribution of our product, moving away from some players that typically led promotions previously. This excites us about the potential outlook for promotions. We also appreciate the restraint on putting products into various channels. Product levels remain thin, indicating that favorable margins should continue. So, as we look ahead, the merchandise margin should remain favorable, and currently, it's significantly higher than it was at peak. Regarding the start of the quarter and its impact on fiscal year guidance, we incorporated some of the positive results from Q2 into our guidance. The guidance includes our first quarter performance compared to expectations, with a small contribution from Q2 at the lower end and a larger contribution at the higher end, along with some increases from the second quarter as well.

Operator, Operator

Our next question comes from Mike Baker with D.A. Davidson.

Michael Baker, Analyst

Okay. I have a couple of follow-up questions. Regarding the first quarter, you mentioned that the third and fourth quarters are down about 10%. For the second quarter, you indicated a wide range, from down high single digits to up low single digits. Can you clarify why you don’t just provide guidance for the second quarter since you've already shared information on the latter half of the year? This would help ensure everyone is aligned.

Lee Belitsky, Chief Financial Officer

We're not going to give the specific numbers around the second quarter. However, we're very pleased with the start. And really in June, we start to come up against these significant double-digit comp sales gains and coming to Father's Day and beginning of back-to-school. So we're going to have to let it play out here as we start to come up against the big gains that we saw in the kind of the back half here of the second quarter.

Michael Baker, Analyst

I wanted to follow up on Mike Lasser's question regarding your current position compared to your previous peak. It appears that your vendor relationships have improved significantly. From my calculations, Nike now constitutes a smaller percentage of your overall business than it did before, while your share of Nike's North American business has increased. It seems like Under Armour is reducing some of their vendor partnerships. Can you provide a broader overview, possibly from Ed, on how and why your vendor relationships have evolved over the past eight to nine years since the last peak?

Edward Stack, Executive Chairman and Chief Merchandising Officer

I believe our vendor relationships have improved compared to the past, but they were still strong back then. Key individuals we partner with have recognized our commitment to service, the environment, and the overall experience when athletes visit our stores, and they appreciate that. As a result, we've received additional product allocations, and our teams have excelled in merchandising, marketing, and selling. We genuinely view our key partners as true partners, and while "partnership" can sometimes be an overused term, we really collaborate with them. We align on each other's goals and engage in constructive conversations to create mutually beneficial market conditions. I expect this trend to continue, which will enhance our relationships with brands, ultimately benefiting both us and our partners.

Michael Baker, Analyst

Okay. Yes, makes sense. I'll just end by saying I'm not looking forward to buying my second pair of football cleats for my son in 5 months. But I guess bad for me, good for you.

Edward Stack, Executive Chairman and Chief Merchandising Officer

Well, I hope that everybody feels the same way you do.

Operator, Operator

Our next question comes from John Kernan with Cowen.

John Kernan, Analyst

Yes. Let me extend my congratulations on just phenomenal performance and just such a differentiated offering versus all your competitors out there. Lee, could you give us any detail on how you're thinking about transactions and tickets for the remainder of the year? I feel like there's still tailwinds behind ticket. Obviously, transactions was going to be huge in Q1, but I'm curious in terms of how we should think about transactions ticket in the overall comp guidance for the remainder of the year.

Lee Belitsky, Chief Financial Officer

Well, I think generally, there are more tailwinds behind the ticket side in the transaction to what will remain to be played out here. But as we continue to be not very promotional and not getting back to normal kind of levels of promotion really this year, that bodes well for ticket. Also, we've seen trading up in some areas as well, particularly like in golf where there's a better inventory supply of new products than there is in cascaded prior year products. The consumers showed a willingness to trade up and we expect that trend to continue. So I think that there's pretty good tailwinds around ticket around promotions, lack of clearance, trading up a bit to some better products. So we feel good about that. Transactions, we're going to have to let that play out and see when as folks get back to kind of normalized activities and travel and so on. But we continue to get the trips, the high level of trips that we're getting now into our stores. Our comp sales in stores have been fantastic and we'll continue to get the traffic online as well. But I'd tell you, the outlook for ticket is good. The outlook for traffic may be good, but we're not that certain around it.

John Kernan, Analyst

Understood. Maybe just a quick follow-up on private label. The performance in Q1, I think it was annualizing around $1.3 billion last year, just the margin profile of that business, the top line performance in Q1. And then any initial reads on VRST?

Lauren Hobart, President and Chief Executive Officer

Yes. The vertical brands performed fantastically in Q1, in line with the entire chain, and margin did expand somewhat, so really great trends on vertical brands. And did you say about VRST, was that your last question?

John Kernan, Analyst

Yes.

Lauren Hobart, President and Chief Executive Officer

Yes, we are very pleased with VRST and how we launched it. It represents a genuine opportunity in our stores to engage athletic males in a lifestyle context that we hadn't addressed previously. I encourage everyone on the call to give it a try. It is an outstanding, high-quality, fashion-forward product, and we are excited about it.

Operator, Operator

Our next question comes from Warren Cheng with Evercore ISI.

Warren Cheng, Analyst

Great quarter. I just want to follow up on Adrienne's question about some of the new banners that you're piloting. Can we see square footage, the square footage component of the algorithm start to pick up in the near term? And also, can you just talk a little bit about how the OVERTIME and Going, Going, Gone! concepts are tying into the inventory clearance? What products go through these channels? Are they moving the needle on gross margin?

Lauren Hobart, President and Chief Executive Officer

So first question on the square footage. We do have some net growth in stores coming in the next few years. In the long term, our strategy is not to significantly expand our square footage, but possibly that we will show up differently within the square footage we have. But we are building new concepts, there will be some net square footage growth. Lee, I'll turn it to you for the Going, Going, Gone! and clearance question.

Lee Belitsky, Chief Financial Officer

I mean, Going, Going, Gone! and clearance, we have a couple of different concepts within here. But at this point, they're handling clearance product coming from DICK'S stores. The DICK'S stores have been generating less clearance, but we certainly have enough to give us a good test in these stores. It is moving the gross margin needle, the gross margins. The merchandise margins that we're getting out of these stores are considerably higher than when we handle clearance merchandise within the DICK'S stores. So we're really pleased with that. And it's still a test for us. We're going to read it for a while and make a determination. But so far, the signs are good that at a minimum, it's helping us with clearance in the DICK'S stores and maybe there's an opportunity to make some money at it over the long term. But we're going to test it and see how it works for us.

Operator, Operator

Our next question comes from Christopher Horvers with JPMorgan.

Christopher Horvers, Analyst

As you consider your cash opportunities and continue to enhance your experiences and eCommerce, are there specific capabilities that you believe would be beneficial for deploying some of that cash and acquiring those capabilities for in-house development?

Lauren Hobart, President and Chief Executive Officer

So we always are looking to improve our core capabilities, and a lot of our investments in capital this year is exactly that, improving our capabilities. We look opportunistically at M&A as well, if that's what you're getting at. But right now, we're very focused on building capabilities internally.

Lee Belitsky, Chief Financial Officer

Right. And I'll just say that we've got a really, really good relationship, at this point, with Federal Express and meet with them regularly as they talk about different ways to get product to our athletes more quickly. So while we do look at opportunities to bring capabilities in-house, we're really pleased with the partnership we've got with the team at FedEx. And they've been extremely helpful in coming up with new ideas as well.

Christopher Horvers, Analyst

Got it. That's very helpful. Looking at the merchandise margin improvement in the first quarter compared to the fourth quarter, it did decrease slightly in relation to 2019. The numbers are still very strong on a two-year basis. Was this due to having more winter clearance and increased clearance activity in the fourth quarter, which affects the two-year comparison since the first quarter is not as significant for clearance?

Lauren Hobart, President and Chief Executive Officer

Lee, you want to take that?

Lee Belitsky, Chief Financial Officer

Yes, it really comes down to the product mix, and there was more clearance in the fourth quarter of 2019 compared to the first quarter, which isn't typically a big clearance period for us. You're correct, Chris.

Operator, Operator

Our next question comes from Joe Feldman with Telsey Advisory Group.

Joseph Feldman, Analyst

And again, congratulations on the quarter. So one of my questions, with regard to back-to-school and that period, are you guys changing your approach this year? I mean, presumably, it's coming at a time when the child tax credit's coming through and that should help families. And I would think you guys should be able to capitalize on that. So I was wondering if you're thinking about it differently than you have in years past.

Lauren Hobart, President and Chief Executive Officer

Yes. Back-to-school, we think, is going to be big. A lot of opportunity to meet both the field and in the classroom for athletic apparel and footwear, so we're leaning into it. We have a great marketing campaign plan. We've got great products coming in and we're expecting it to be a strong season.

Lee Belitsky, Chief Financial Officer

And call it, last year, back-to-school, I'd say was smaller than typical because a lot of kids didn't go back to school and it came later because many of the schools were delayed for several weeks before they got going. So there's a big opportunity between the child tax credit that's coming and the smaller and delayed back-to-school to get the third quarter off to a good start.

Joseph Feldman, Analyst

That's great. I wanted to follow up on the topic of labor. We've been hearing a lot about how challenging it is to find workers, along with the pressure on wages. I know you've mentioned this before, but could you share your insights on whether you're able to recruit labor as easily as you have in the past, and what wage pressures you anticipate for this year?

Lauren Hobart, President and Chief Executive Officer

That's a valid question, and it's something we, along with others, are paying close attention to. We have taken proactive steps by planning for peak volumes and hiring in advance. It's important to highlight that our team has always been our priority. We have shared some of the benefits from our earnings over the past year, treated our employees well during the pandemic, and ensured their health insurance remained covered, which fostered a family-like atmosphere within the company. This approach has positively impacted our employee retention. Generally, we are considered an employer of choice right now. While we face challenges in a few markets, it's not our primary concern.

Joseph Feldman, Analyst

That's helpful. And good luck with this quarter.

Operator, Operator

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli, Analyst

So you guys are obviously making a lot of changes to the business. You talked about the golf, the soccer shops and new store formats. And you've also talked about how you're happy with the early results. But honestly, it seems like everything is really strong right now. So do you think you're in a position where you can really evaluate these initiatives properly and whether they're going to generate the kind of returns you guys are looking for in a more normal environment?

Lauren Hobart, President and Chief Executive Officer

Yes, it's a great question. I mean, obviously, you're right. Every category is trending right now or most of them are. So obviously, things are doing much better than we might have expected. But when we built these initiatives out, we didn't expect comps quite like this or sales quite like this. We have a productive business model and we're learning from these concepts every day in terms of what can be translated back into the DICK'S store, both in golf and with the House of Sports and all these experiential concepts. So I think we can tell and we look versus balance of chain, how things are doing, we can tell what's working and what's not.

Edward Stack, Executive Chairman and Chief Merchandising Officer

And these are not concepts or programs that we've put in place recently or thought about recently. As I said, these have been a couple of years in the gestation period, and we're pretty confident that these are going to work. Whether it's the soccer shop, we had done a couple of soccer shops last year and have, right in the middle of the pandemic, and knew that soccer was an area that we weren't great in. If you take a look at how we are in baseball and football, soccer was an area that we trailed in. So we're just making some of these investments in these areas to bring us up to parity with some other categories that we are more top of mind with. So these have all been very thoughtful, and I suspect there might be a surprise or two here but we're pretty confident with these. And the House of Sport that we opened up in Rochester is off to a great start. The other House of Sport that we've done in Knoxville is a very differentiated experience. And I think they were going to continue to be very viable as we go forward.

Operator, Operator

Our next question comes from Chuck Grom with Gordon Haskett.

Charles Grom, Analyst

Just this one quick one for me. When you look at sales performance in the quarter and maybe into the month of May by region, particularly in states that are farther along in the reopening process, I'm curious what you're seeing from a trip frequency and overall buying perspective.

Lee Belitsky, Chief Financial Officer

I mean, we're seeing strength across the country right now. Probably seeing a little bit more strength in the states that were closed for longer like in the Northeast and California. But nationwide, we're seeing strength.

Operator, Operator

Our next question comes from Steven Forbes with Guggenheim.

Steven Forbes, Analyst

Congratulations as well. To follow up on loyalty and customer trends, you mentioned that 70% of the 8.5 million new athletes were acquired through the digital channel in 2020. I'm curious if you could discuss how that group is engaging with the brand so far in 2021 in terms of channel, and whether the repeat or retention behavior has historically differed between those acquired through digital compared to those from brick-and-mortar.

Lauren Hobart, President and Chief Executive Officer

Yes, it's a great question. What we're finding is that generally speaking, people's first transaction once acquired is in the same channel that they came in through. And we have so many new users in the digital channel that I don't think looking backwards to say how that's going to change is going to be very helpful. So retention is good. It's good across all of whichever way they're coming in, and they're repeating more often than not in the channel where they came in.

Steven Forbes, Analyst

I have a quick follow-up. I'm not sure if the number was shared earlier, but you mentioned in the presentation that there are 5 million ScoreCard Gold loyalty members who have spent $500 or more. I have two questions regarding that. First, how does that compare to 2019, or can you provide any insights on the growth in the Gold member base? Secondly, can you comment on the variety of categories that this group participates in? How diverse is their purchasing behavior across the categories you offer?

Lauren Hobart, President and Chief Executive Officer

Yes. The ScoreCard Gold program is relatively new, only a year or two old, so we don’t have a comparison to 2019. We initiated the program approximately 18 months ago, targeting our best customers. To qualify, customers need to spend $500 or be a credit card member, and they tend to purchase a wide variety of products. Therefore, they represent our top-tier customers.

Operator, Operator

Our next question comes from Seth Basham with Wedbush Securities.

Seth Basham, Analyst

Congratulations. My question is around fiscal stimulus. I know it's tough to quantify, but do you have a sense how much this stimulus might have driven your sales growth versus 2019 in the first quarter?

Lee Belitsky, Chief Financial Officer

Yes. We certainly believe that it helped the business but I wouldn't want to put a number on it. The business was in good shape going into the stimulus. We did get a nice lift when those checks started hitting. But the business has continued to be strong throughout the first quarter and going into the second quarter as well.

Seth Basham, Analyst

If we looked at the slowdown implied in your guidance for the second quarter from the first quarter in terms of growth versus 2019, would you say that the biggest driver of that slowdown is fading fiscal stimulus benefits?

Lee Belitsky, Chief Financial Officer

I wouldn't say that.

Seth Basham, Analyst

What would it be then, if you could give us some recap?

Lee Belitsky, Chief Financial Officer

So I would say that versus '19, I think our biggest concern is when people start traveling over the summer and they're booking vacations and spending in restaurants and going to concerts and things like that, where is the share going to be? And I think that's more of our concern than stimulus because there is actually some new stimulus coming beginning in July with the child tax credit that is going to start to be distributed on a monthly basis.

Edward Stack, Executive Chairman and Chief Merchandising Officer

Seth, did you have another question or do we want to go on to the next question? Next question, Sarah.

Operator, Operator

Our next question comes from Brian Nagel with Oppenheimer.

Brian Nagel, Analyst

I would like to extend my congratulations on a strong start to the year. As we approach the end, I have one question that follows up on our previous discussions. You've mentioned that we should expect tougher comparisons ahead, which is reflected in your guidance. It seems you are taking a more conservative approach by anticipating a slowdown in sales trends for the latter half of the year. My question is whether you are ready to let the business operate against these comparisons, or do you have options available that you might use to mitigate the impact of these comparisons?

Lauren Hobart, President and Chief Executive Officer

Go ahead. Yes. Sorry, I've got it. So yes, there are multiple levers we could pull if we wanted to and we'll have to assess it. I mean, as we've mentioned, we're not promotional right now. Could we pull that lever? Yes. Do we want to? No. So we're going to watch it. We're really monitoring the business versus 2019 trends and trying not to get caught up in the ups and downs of each of these quarters or do anything irrational as a result of what might be uncomfortable for short term. So yes, we have levers but we are planning to continue with the business as it is.

Brian Nagel, Analyst

Great. Then maybe just one quick follow-up from a bigger picture standpoint. Clearly, the business performed extraordinarily well here as the economy is reopening. Are you seeing indications that through the COVID crisis, there was some competitive fallout within the sporting goods category? You know potentially making it an easier competitive backdrop for DICK'S now?

Lauren Hobart, President and Chief Executive Officer

Yes. I mean, there's been obviously some other channels, nonsporting goods. Some competitors have gone out of business and some of the department stores have stopped selling some products. But generally speaking, no. We are the leader in the sporting goods category and remain that way.

Brian Nagel, Analyst

I appreciate it. Congrats again.

Operator, Operator

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

Lauren Hobart, President and Chief Executive Officer

Okay. Thanks, everybody, for joining our Q1 call, and we will see you next quarter. Have a great spring.

Operator, Operator

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