Earnings Call Transcript - DKS Q1 2020

Operator, Operator

Good day, and welcome to the DICK'S Sporting Goods First Quarter 2020 Earnings Conference Call and Webcast. Please note this event is being recorded. I would now like to turn the conference over to Nate Gilch, Senior Director of Investor Relations. Please go ahead, sir.

Nathaniel Gilch, Senior Director of Investor Relations

Good morning, everyone. Thank you for joining us to discuss our first quarter 2020 results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer; Lauren Hobart, our President; and Lee Belitsky, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in the 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 couple of admin items: First, a note on our same-store sales reporting practices. Recall last quarter, we announced our intent to move away from providing eCommerce sales growth and eCommerce penetration metrics beginning in Q1. Given the circumstances surrounding our temporary store closures, we are continuing to provide these metrics this quarter and we'll revisit this decision for Q2. And second, for your future scheduling purposes, we are tentatively planning to publish our second quarter 2020 earnings release before the market opens on August 26, 2020, with our subsequent earnings call at 10 a.m. Eastern Time. And with that, I will now turn the call over to Ed.

Edward Stack, Chairman and CEO

Thanks, Nate. Good morning, everyone. Let me start by saying, on behalf of all of us here at DICK'S Sporting Goods, we hope each of you and your families are safe and healthy. We would all agree that this has been a difficult year so far for our country. Our hearts go out to all those impacted by COVID-19 and the civil unrest going on across America. These events have shined a spotlight on the deep-rooted and long-standing issues around racial injustice and inequality in the country. All of this is happening while our world is still grappling with the dramatic and continuous change as a result of the coronavirus pandemic. Virtually every business segment, including the retail industry and DICK'S Sporting Goods, has been affected. Organized sports at all levels have come to a standstill. Gyms and fitness centers were closed across the country, forcing everyone to build new fitness habits and routines. Throughout this evolving landscape, we anchor to our corporate values on the premise that doing the right thing is the ultimate path to success. Our company has a long tradition of promoting the safety and welfare of our teammates, athletes, and communities, and our response to the current health crisis was no exception. This is why on March 18, we supported the nationwide efforts to minimize the spread of the virus and temporarily closed our stores to the public. To take care of our teammates, we invested $34 million in the first quarter across a number of compensation and safety measures. Beginning in mid-March, through the balance of the first quarter, from a business standpoint, we've focused nearly exclusively on managing for liquidity to ensure we came through this crisis in a strong financial position. We acted quickly and decisively to reduce, defer, and eliminate cash outflows, and we maximized cash inflows through our eCommerce business. To fortify our balance sheet and provide maximum financial flexibility, we exercised the accordion feature on our revolving credit facility to increase our borrowing capacity to $1.855 billion, and we issued convertible senior notes that added over $500 million of net proceeds to our cash position. As a result of these actions, I'm pleased to report at the end of the first quarter with cash and cash equivalents of approximately $1.5 billion, and we feel very good about our liquidity. Throughout the store closures, we continued to serve our athletes online and through our mobile apps. Our eCommerce sales were tremendous, increasing more than 200% since we closed our stores through the end of the first quarter and notably contributing to our strong liquidity position. Importantly, these strong online results have continued into the second quarter, even in those markets where our stores have reopened. A key part of this success online is our new Curbside Pickup service. Under Lauren's leadership, our stores, eCommerce, and technology teams came together and launched this new initiative across most of the country within a matter of days. Lauren will cover this in greater detail during her remarks. As for our stores, beginning in mid-April, we started to reopen where permitted in accordance with federal, state, and local guidelines. As of the end of May, approximately 80% of our stores have reopened to the public, and we've been pleased with the early results. Although the business environment of 2020 remains uncertain, DICK'S Sporting Goods is in a position of strength. We believe coming out of this crisis, health and fitness will become even more important to the customer. As the leader in the sporting goods retail sector, our relationships with our key brands have never been stronger, and we are in a great place to support this demand. Our experienced management team has a history of successfully navigating difficult market cycles and remains fully committed to managing our business with a long-term view. Perhaps most importantly, our balance sheet is strong, and due to the actions we've taken when the pandemic first hit, we have enhanced liquidity to emerge from this crisis in even stronger competitive position. Now, with confidence in our liquidity and our stores reopening, we can turn our attention to gaining market share for the remainder of 2020 and positioning our business for profitable growth in 2021. Finally, I would like to thank our teammates. Through these difficult times, I'm especially proud of how they came through and came together to support one another and the company as a whole. I would now like to turn the call over to Lauren.

Lauren Hobart, President

Thank you, Ed, and good morning, everyone. I want to start by also thanking our teammates for their hard work and dedication over the past several months. We've been incredibly impressed with how you've committed to serve our athletes and continued to serve communities. You've done a tremendous job responding to the constantly changing landscape. Through March 10, our consolidated same-store sales increased 7.9%, which was a clear indication that our strategies were working. Shortly thereafter, our strong sales trends abruptly changed as the spread of the virus accelerated, and on March 18, we closed our stores to the public. For the quarter, our online sales increased 110%, including Curbside Contactless Pickup. This strength in eCommerce increased significantly after we closed our stores as online sales grew 210% since then through the end of the quarter. We continued to leverage our store network for ship-from-store and Curbside Pickup, while also fulfilling orders via our eCommerce fulfillment centers and distribution centers as well as directly from our vendors. Importantly, our vast fulfillment network seamlessly supported the significant increase in eCommerce volume, and our ability to leverage these many fulfillment methods helped us to continue to reduce shipping times to our athletes. We executed our new Curbside initiative within days as our stores, eCommerce, and technology teams quickly helped us pivot our business and ensure that we were able to provide our athletes with a safe and convenient way to pick up their orders while reducing shipping and packaging expenses. This is a great reflection of our culture and our nimble operating model and a huge credit goes out to those teams. The athlete response has been overwhelmingly positive. Curbside sales were up 1,000% since its launch through the end of the quarter compared to BOPIS sales in the prior year, and Curbside accounted for over 40% of our total eCommerce sales during this time period. We believe this experience will continue to be a big opportunity for us as we move forward. Now let me turn to the stores. By the end of the first quarter, we had reopened approximately 20% of our stores. As of the end of May, approximately 80% of our stores have reopened. We expect to continue opening our remaining stores throughout the rest of Q2 and into Q3. As we reopen, the health and safety of our teammates and athletes is our highest priority, and we're following the guidelines from the Centers for Disease Control and Prevention as well as federal, state, and local authorities. As part of these efforts, we've enhanced our sanitizing protocols and are requiring face coverings to be worn by all teammates. We're also requiring our teammates to sanitize their hands regularly or wear gloves. Next, we're communicating, supporting, and enabling social distancing. This includes using floor details throughout the store and plexiglass screens at checkout as well as limiting the number of people in the store where applicable by local ordinance. Lastly, we're taking steps to minimize contact, including continuing to offer Curbside Pickup. These actions are being supported by teammate and athlete communication tools aimed at reinforcing healthy habits in addition to wellness protocols to ensure teammates are working only when healthy. As Ed mentioned, to date, we've been very pleased with the early results in our stores that have reopened, where we've seen a progressive recovery in sales and traffic. In fact, since reopening, many stores have comped positively on a brick-and-mortar basis. Furthermore, our online sales, including Curbside Pickup, have remained very strong, even in those markets where we've reopened our stores. We're regaining momentum, and through the first 4 weeks of Q2, with 44% of our stores remaining closed on average, our consolidated same-store sales have decreased only 4%. As part of this, eCommerce sales have increased momentum and are over 250%. In closing, we believe our teammates and athletes will have new expectations related to their working and shopping experiences, and we're certain that the actions we're taking to build trust and to create confidence in these new experiences will pay off for the long term. Along with Ed, I remain very enthusiastic about the future of DICK'S Sporting Goods. I will now turn the call over to Lee to review our financial results in more detail.

Lee Belitsky, CFO

Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our first quarter results. Consolidated sales decreased 30.6% to approximately $1.33 billion. Consolidated same-store sales decreased 29.5%, driven by a 38.7% decrease in transactions and was partially offset by a 9.2% increase in average ticket. We saw declines in each of our three primary categories: hardlines, apparel, and footwear. As Lauren mentioned, prior to the impact of COVID-19, we were very pleased with our comp sales performance. Through March 10, our consolidated same-store sales increased 7.9%, a continuation of the strong comp trends we delivered in the second half of 2019. Shortly thereafter, we saw a significant reduction in customer traffic and demand due to the continued spread of the virus, and we closed all of our stores. We were able to partially offset the negative sales impact from our store closures through a significant acceleration in our eCommerce business, including Curbside Contactless Pickup. For the quarter, our eCommerce sales grew 110% and as a percent of total net sales, our online business increased to 39% compared to 13% last year. Gross profit in the first quarter was $219.3 million or 16.45% of net sales, a 1,290 basis point decline compared to the same period last year. Within gross profit, we saw a deleverage on fixed occupancy costs of 526 basis points due to the sales decline. It's important to note that while we have successfully negotiated payment term deferrals and rent abatements, this didn't materially affect the P&L in Q1 as deferrals don't change the total cash payments, and abatements are spread over the remaining life of the lease. We also saw lower merchandise margins, which decreased by 475 basis points and were primarily driven by sales mix; higher promotions, particularly early in the quarter; and a $28 million write-down of inventory resulting from our temporary store closures. Finally, we saw higher shipping expenses and eCommerce fulfillment costs as a result of our meaningfully higher eCommerce sales growth as well as the fixed costs associated with our two new dedicated eCommerce fulfillment centers that opened in the third quarter last year. SG&A expenses were $403.2 million or 30.24% of net sales, up 494 basis points from last year's non-GAAP results. Again, that was due to the sales decline. However, SG&A dollars decreased $83 million compared to last year. This includes approximately $90 million reduction in expenses following our temporary store closures and was partially offset by $31 million of incremental teammate compensation and safety costs. Within the $90 million reduction in expenses included $21 million of income associated with changes in the company's deferred comp plan for investment values for which the corresponding investment loss was recognized in other expense. In total, we recorded a loss per diluted share of $1.71 compared to a non-GAAP earnings per diluted share of $0.62 last year. Since the rapid rise of COVID-19 cases in mid-March, we acted quickly and decisively to preserve cash and fortify our balance sheet. Collectively, these actions have bolstered our cash and cash equivalents to approximately $1.5 billion at the end of the first quarter, and we had $214 million of additional borrowing capacity on our line of credit. Let's walk through the details. First, we meaningfully reduced cash expenses across the business, including marketing, travel, contractors, and within payroll through salary reductions and furloughs of a significant number of our teammates across our stores, distribution centers, and customer support center. Concurrent with the reopening of the majority of our stores last week, we restored previously reduced salaries for our teammates, except for certain executives, and have started bringing teammates back from furlough. We have also had very productive discussions with our vendors to reduce inventory receipts and extend payment terms. Likewise, we've had similarly productive discussions with our landlords about deferring and abating rent payments. Additionally, we completed the issuance of $575 million of 3.25% convertible senior notes due in 2025, which includes a full exercise of the $75 million overallotment option. These notes provide for an initial conversion option once our stock price reaches $35.38 per share, and thus dilution would typically occur when our stock price exceeds this threshold. However, in conjunction with the notes issuance, we entered into stock hedge transactions to reduce the dilution from shares issuable upon conversion of the notes. The hedge transactions will provide economic dilution protection upon maturity of the notes if our stock trades at or between $35.38 and $52.42; the aggregate net proceeds from the issuance and the sale of notes were approximately $558 million or approximately $502 million net of the note hedge. Due to current accounting rules, we have discounted the value of the notes on the balance sheet to $398 million as of the end of the first quarter. This discount will be amortized as noncash interest expense resulting in a total annualized interest rate of 11.6% on the discounted value of the notes. We also exercised the accordion feature on our revolving credit facility to increase our borrowing capacity from $1.6 billion to $1.855 billion and ended the first quarter with approximately $1.4 billion outstanding. Finally, we made meaningful modifications to our 2020 capital allocation plan. This includes significant reductions to our planned capital expenditures. We also temporarily suspended our quarterly dividend as well as our share repurchase program. As our business continues to stabilize, we may resume opportunistic share repurchases under our current authorizations. For the first quarter, net capital expenditures were $51 million, and we paid $28 million in quarterly dividends, which was declared prior to the suspension. We did not repurchase any shares. Our quarter-end inventory levels decreased 2% compared to the end of the same period last year. Working alongside our brands, we acted decisively to reduce, defer, and cancel planned receipts to align with our new sales forecast. For the rest of 2020, we are conservatively planning our inventory receipts. However, we have plenty of liquidity as well as strong relationships with our vendors if we need to opportunistically chase products. With respect to our outlook, there's a high degree of uncertainty surrounding the scale and duration of several key external factors, including the COVID-19 pandemic, stay-at-home orders, economic stimulus, employment, and consumer confidence, and their potential impact on our business. Given this uncertainty, we do not believe it is appropriate to provide a 2020 outlook for sales and earnings at this time. Notwithstanding this uncertainty, we move forward with confidence; we have ample liquidity and are pleased with our market position as well as our Q2 sales trends. 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

Today's first question comes from Robby Ohmes with BofA Securities.

Robert Ohmes, Analyst

Could you provide more details about the performance in the first four weeks? We appreciate the information about the 4% decline in comparable sales. How should we interpret that, especially regarding the performance of the reopened stores? Additionally, how do eCommerce and Curbside Contactless Pickup change after stores reopen? Any further insights on those four weeks would be helpful. I also have a follow-up question.

Edward Stack, Chairman and CEO

So Robby, I think a couple of things. The stores that have opened are doing very well. As Lauren mentioned, many of them are showing positive comparable sales. We're really pleased with that. And the Curbside Pickup is still performing very well.

Lauren Hobart, President

Yes. No, the penetration of Curbside Pickup continues on. And Robby, I think the way to think about it is, we were down 4%, we had 44% of our stores on average closed during that period. And so if you do the math, you can say that we're very pleased with how the stores are performing when they reopen.

Robert Ohmes, Analyst

Should we assume the closed stores are comping similarly to what you reported for the first quarter? Or...

Lee Belitsky, CFO

Well, if they're closed, we're not recording any brick-and-mortar sales in it, but we are continuing to do Curbside Pickup. Curbside Pickup, we're including within our eCommerce sales.

Edward Stack, Chairman and CEO

The stores are performing well, and most of those we have opened are showing positive comparisons. Our eCommerce business also remains strong. It's important not to assume that the positive performance from the stores that are open compensates for those that are closed because that's not the case. The open stores are doing exceptionally well. We're very pleased with their performance, and the Curbside Pickup and eCommerce sales remain robust even in markets where we've reopened.

Robert Ohmes, Analyst

Got it. That's very helpful. I have a follow-up question about how we should consider potential further write-downs going forward. Ed, could you share your thoughts on how we should view different seasons? As we move into the second quarter, how might it differ from the first quarter in terms of categories that could impact us, like team sports?

Edward Stack, Chairman and CEO

Yes. Team sports is the area we are most concerned about regarding future sales. It remains uncertain whether children will participate in football or soccer this fall, as many of these activities are school-based, particularly football. Baseball is beginning to regain traction in some markets, primarily in municipal and travel leagues. In those areas where baseball is becoming more active, it is performing very well. However, our primary concern lies with team sports, where we have the least visibility on what to expect moving forward.

Robert Ohmes, Analyst

Congrats on getting that Curbside Pickup going. That's a really amazing execution.

Edward Stack, Chairman and CEO

Thanks, Robby.

Lee Belitsky, CFO

Thank you.

Operator, Operator

Our next question today comes from Kate McShane with Goldman Sachs.

Katharine McShane, Analyst

The first question I had was just in terms of the change in product demand, how that's changed over time. I assume there was a lot of fitness-type equipment being sold during the shelter-in-place. But in the last 4 weeks, just wondering if you're seeing any strength in other categories. You mentioned baseball. I wondered if there were any other trends that were emerging. And then my second question is just about how you're thinking when it comes to the back half of the year? And what level of promotions you could possibly expect because of what we're entering into?

Edward Stack, Chairman and CEO

So Kate, the trends have shifted somewhat. However, the fitness segment was a significant part of our business when the stores closed during the pandemic, and it remains solid. We are currently facing challenges in maintaining stock for that product, but we have some inventory on the way and believe we'll be fine. The bike segment performed very well, and we've also seen strong growth in the footwear, apparel, and golf segments since the golf courses reopened. Overall, things are looking good. The baseball segment is doing well now that games are resuming, although there are still many areas where baseball has yet to return. Our GameChanger app gives us insight into the baseball market, and we're noticing an increase in games being played and scored each week, indicating rapid growth. Despite the challenges, we feel confident moving forward. The footwear, apparel, golf, and outdoor segments continue to perform exceptionally well.

Lauren Hobart, President

And the second question about the level of promotions in the back half.

Edward Stack, Chairman and CEO

Oh, yes. I don't know yet. None of us do. We think it will probably be a tad more promotional because people have inventory to get rid of. But our inventory is in very good position. I mean, I think a lot of people were surprised to see our inventory actually down 2% at the end of the quarter. So we're in a pretty good position. I think it will be a little bit more promotional, but I don't think it's going to be too bad.

Operator, Operator

Our next question today comes from Michael Lasser with UBS.

Michael Lasser, Analyst

So Ed, has this situation permanently changed DICK'S Sporting Goods' margin structure? And as part of that, can you comment on what the puts and takes are going to be into the second half that we should factor as we're modeling the business?

Lee Belitsky, CFO

So Michael, it's Lee. I think with respect to the margin structure, and I gather you're talking about operating margins, if we continue these trends where we're getting the brick-and-mortar sales back up and running and they're getting back up and running well, the profitability of that channel is strong. Our eCommerce business has continued to grow. It hasn't been terribly promotional, frankly, on the eCommerce channel. And we've increased the Curbside Contactless Pickup, which eliminates the shipping and packaging expense. If we're able to maintain a high penetration of that, the profitability of our eCommerce business should improve as well. So it all depends how it's going to mix out. I think in aggregate it's a good picture for profitability going forward, for total profits. What it does to the profit margin line, it's really going to depend on how it mixes out between eCom and brick-and-mortar stores. But if we can keep those brick-and-mortar stores rolling along with respectable comps, our profit picture should be pretty solid going forward.

Edward Stack, Chairman and CEO

And the merchandising margin rates from an eCom standpoint are actually running ahead right now.

Michael Lasser, Analyst

To clarify a few points, are the merchandise margin rates improving partly due to the lack of promotions? Do you anticipate that promotions will return at some point, given that this is a unique period? Also, if the resurgence in brick-and-mortar business is short-lived, can you explain the expected impact from the shift to eCommerce? It seems that increased shipping costs dragged around 300 basis points this quarter. How much of that is likely to be temporary? Additionally, can you explain your perspective on occupancy? You should benefit from a significantly different real estate landscape, so shouldn't that allow you to manage occupancy costs at a much lower rate compared to the past?

Lee Belitsky, CFO

Regarding eCommerce, we are experiencing some pressure on our gross margin due to increased shipping costs. I don’t anticipate that eCommerce will continue to constitute 39% of our business as it did in Q1. If our brick-and-mortar sales recover and eCommerce remains at 39%, we would be pleased. However, I don’t foresee that level being sustainable. Despite significant savings from Curbside Pickup, they have not fully mitigated the impact of having eCommerce at 39% on our gross margin. Concerning occupancy expenses, I believe there will still be opportunities to decrease these costs and lower our rent. We have over 100 leases up for renewal each year, and we are actively renegotiating them as we move forward. We expect to keep finding opportunities in this area.

Lauren Hobart, President

Michael, it's Lauren. I would like to add that in this omnichannel environment we've experienced over the last 10 weeks, where consumers could only place orders online and stores played a significant role in fulfillment, we need to reconsider what constitutes a sale and how profitability flows through to the P&L because stores have been crucial to the eCommerce performance during this time. The integration of these elements is now more pronounced than ever.

Lee Belitsky, CFO

Yes, without the stores, we don't have the Curbside Pickup. So that's becoming a growing consideration in how much real estate we need.

Operator, Operator

And our next question today comes from Chris Horvers with JPMorgan.

Christopher Horvers, Analyst

So first a question, follow-up on the gross margin. You mentioned some, I think, promotions earlier in the quarter. I think that was when you had strong comps. So if you can just give a little color there of what drove that pressure? And then I have a follow-up.

Lee Belitsky, CFO

I think shortly after we closed the stores, we were in a scenario where nobody knew what was going to happen, how long the stores were going to be closed, if it was going to be weeks, months, nobody knew. So we were pretty aggressive with promotions online in those first couple of weeks after we closed. We were also still clearing out a little bit of the winter merchandise early in the quarter because we didn't have much cold weather, so we were clearing through some of that remaining winter merchandise in stores even before we closed.

Christopher Horvers, Analyst

Makes sense. As you look ahead to the SG&A line, could you provide insight into how we view savings moving forward? To what extent will you rehire all the furloughed employees when a store opens, or will you gradually bring them back as the business recovers? Additionally, how are you planning for marketing expenses in the second and third quarters? Any further details would be appreciated.

Lee Belitsky, CFO

The sales have been robust in the stores as we open them, so we are reinstating a significant portion of the furloughed associates as the stores resume operations. We are assessing this on a store-by-store basis since their performance varies. In the first quarter and into the second quarter, we incurred some additional expenses in the stores. We have maintained our Hero Pay program, which temporarily boosts hourly wages in stores and distribution centers by 15%. This will continue for a while, though we have not decided when it will end. There is also extra payroll allocated to cleaning and sanitizing the stores, including disinfecting shopping carts and other surfaces. Therefore, we anticipate incurring additional payroll expenses in the stores for a period as they reopen, compared to our past expenses. We saw this increase at the end of the first quarter as stores started to reopen, and we expect it to continue into the second quarter.

Christopher Horvers, Analyst

Are you planning any marketing efforts in the second quarter? From a promotional perspective, your inventory is clean. Are you waiting to see how the environment develops, considering the strong sales and the clean inventory? It seems that promotional activities may be a positive at this point.

Lauren Hobart, President

Yes, it's Lauren. Starting with the marketing, we definitely cut back significantly when the stores were closed due to COVID, but we have increased our efforts again. We are feeling very optimistic about the second half of the year regarding spending and generating consumer demand. Therefore, we are gradually ramping up our marketing. Ed, would you like to discuss the inventory?

Edward Stack, Chairman and CEO

Yes. We feel great about our inventory position. We're actively pursuing inventory and purchasing some off-price inventory from brands that have it available for various reasons. Overall, we're really happy with our inventory situation and have a positive outlook on our margin rates moving forward, based on the visibility we have. We remain cautiously optimistic.

Operator, Operator

Our next question comes from Adrienne Yih with Barclays.

Adrienne Yih-Tennant, Analyst

Congrats on the performance. Ed, I guess one of my first question is, pre-COVID, DICK'S was one of the few retailers that were still sort of looking to open stores, albeit at a slower pace. I'm wondering how this current crisis sort of impacts that. And as a follow-on to that, you're very prescient with your kind of digital investments since 2017. What are the next evolutionary sort of IT investments, whether that's contactless checkout or things you're thinking about kind of the future store?

Edward Stack, Chairman and CEO

Sure. So new stores, we've slowed the growth down a little bit. We pushed some of the stores that we're going to open this year into next year. And we'll assess the marketplace, and we'll assess what's going on from a real estate standpoint on a go-forward basis. As far as IT investments, we continue to invest in technology. We continue to invest in what we're going to do from a Curbside Pickup, footwear app that we're talking about. We continue to invest from a technology standpoint. And Lauren, you've got a couple of other things?

Lauren Hobart, President

Yes, Adrienne, you are absolutely correct. The investments we've made over the past few years to enable productive scaling have yielded very positive results recently. The new consumer environment has certainly sped up our innovation initiatives. We are examining the complete customer experience and journey to offer more contactless experiences in-store during shopping, including our ShoeRunner app, which allows customers to assist themselves and creates numerous opportunities. Mobile will be a significant focus for us going forward. This situation has greatly motivated our innovation efforts and energized our technology teams to adapt to the changing landscape.

Lee Belitsky, CFO

One thing is we also improved our delivery performance during the quarter versus last year. So notwithstanding the big increase in sales that we had, we took about half a day off of our average delivery time from the same period last year. So we continue to make improvements there.

Adrienne Yih-Tennant, Analyst

Lee, I have a quick question for you. How should we consider the sales for the second quarter? I'm asking because we want to understand the sustainability of the trends from May. With people discussing summer vacations, it seems more like they're planning staycations and outdoor activities. It appears that the factors contributing to May's strong performance are different from some previous one-time demand trends, and they might actually strengthen as we enter summer. I'm curious about how we should view the drivers for early May.

Lee Belitsky, CFO

Yes. It's hard to say how it's going to play out. It could get stronger, but it could be some that was pulled forward as well because the kids are out of school and people are working from home. So they may have got into some of the summer purchases early. So it's a little hard to say on those summer trends how it's going to play out.

Operator, Operator

Our next question today comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman, Analyst

My first question, I want to ask you, Ed. There was a comment about market share in the press release. And I think it was a couple years back, when Sports Authority were closing, you made a clear message about going after share. I guess, first, is it clear that you didn't gain in Q1? And then in the comment that you made in the release, are you approaching this next few quarters in a similar way to how you looked at 2016, 2017? And any read across to how the business should be managed from a financial perspective?

Edward Stack, Chairman and CEO

We believe we have strong relationships with our vendors and that our inventory is in excellent condition. The positive trend we observed from the second quarter of last year through the first quarter of this year, prior to closing stores, along with the momentum we are seeing as we reopen stores, gives us confidence. The adjustments we've made in merchandising and how our brand is perceived by consumers support our belief that we will continue to gain market share. We have positioned ourselves financially to aggressively purchase off-price products, allowing us to maintain our marketing efforts without any cuts. We can effectively drive customers to our stores, whether through brick-and-mortar locations, curbside pickup, or traditional online shopping. Significant changes have been made in the merchandise we offer, in-store service approaches, and marketing strategies. When comparing last year's comparable sales to others, we gained market share and we are optimistic about maintaining this trend, especially as we reopen our stores.

Lauren Hobart, President

Yes. I just want to add that comparing it to 2016 and 2017 feels different from our current perspective. It's not about seeing our brick-and-mortar competitors fail; rather, it's about us gaining market share and attracting new customers to our online business who have never tried it before. It's a different comparison, and I wanted to highlight that it's exciting.

Simeon Gutman, Analyst

Okay. My follow-up is related to something that Lee and Lauren mentioned regarding the merging of the two channels. I understand that it's more challenging to assess profitability separately. My question is, looking at the business a year from now, are we much closer to achieving an equilibrium in profitability between the two channels? I appreciate that it's harder to evaluate them individually, but I'm curious if reaching sustainable profitable growth depends on this equilibrium.

Edward Stack, Chairman and CEO

I think it does get to being closer, especially as we're seeing the Curbside Pickup not slow down and our stores continue to comp positively. As eCommerce picks up from a Curbside standpoint, as Lee and Lauren have both said, it gets to be more profitable because of the shipping and packaging changes.

Operator, Operator

And our next question comes from Sam Poser with Susquehanna.

Frederick Gaertner, Analyst

This is Will on for Sam. So my first question is on eCommerce. And I realize you guys are not guiding here. But I mean, how big do you think the eCommerce business could be this year? I mean, do you think it could be a $2 billion-plus business this year?

Lee Belitsky, CFO

Well, Will, as you said, we're not guiding to that. But we're really pleased with the momentum we've got and hope we can keep it up.

Edward Stack, Chairman and CEO

And we suspect we can. But we're not going to go out on a limb and tell you what we think the numbers are right now. We'll let you know at the end of the fourth quarter, okay?

Frederick Gaertner, Analyst

Fair enough. How much do you think the eCommerce business is affecting store sales, considering that the stores that have opened are performing positively?

Edward Stack, Chairman and CEO

Right now, very little. A lot of the eCommerce pickup we've got are from new customers.

Frederick Gaertner, Analyst

And that's a good segue. I guess how many customers in 1Q do you think that you guys acquired and were put into the loyalty program?

Edward Stack, Chairman and CEO

Yes. We're not going to provide that level of detail right now, but a significant number of the customers we serve through eCommerce, whether it's curbside pickup or traditional online shopping, are new customers that we've gained.

Operator, Operator

Our next question comes from Seth Sigman with Crédit Suisse.

Seth Sigman, Analyst

I wanted to follow up on the quarter-to-date performance, the stores that have reopened, the positive results that you're seeing. Is it sort of like an initial surge, and then the trend steps back down? Or have you seen some level of consistency or even an acceleration through this period in those stores that have reopened? And then sort of unrelated, but the point on team sports, that is obviously a risk ahead. There's some uncertainty. Any way for you guys to size up the exposure? And what could be the impact from some limitations in the back half of the year?

Edward Stack, Chairman and CEO

From a store perspective, it has remained steady. We believe that as we start introducing more products like fitness, bikes, and boats, there is potential for acceleration. However, it has been quite stable so far. Regarding the fourth quarter and the latter half of the year, we won't delve into those details or provide any guidance at this time. We need to see how things unfold. There are questions about a potential second wave and the ongoing issues facing the country, making it challenging to predict that far ahead.

Seth Sigman, Analyst

Okay. Fair enough. Just a follow-up on the online business. Can you guys give us the percent of online sales that actually touch the store today, whether that's ship-from-store or pickup and how that compares to maybe a year ago? Clearly, the model is evolving here. And then just regarding pickup, any more color on the types of categories that are being picked up and if it's different than the typical mix?

Lee Belitsky, CFO

So again, a meaningful kind of majority of the sales come out of our stores, whether it be Curbside or ship-from-store. Mix, fortunately, is a little bit more skewed towards some of the bigger, bulkier items that are more expensive to ship, and that's kind of favorable from an earnings perspective to do that from the stores.

Lauren Hobart, President

It continues to increase. It's been more than half for some time that touch the stores in some way, our eCommerce business. And obviously, with the surge in Curbside, that increased.

Operator, Operator

Our next question today comes from Mike Baker with Nomura.

Michael Baker, Analyst

Can you talk about, if you think the stimulus helped? And I guess part of that question would be, any more color on sort of the pace of business through April? We can sort of back into what the last 7.5 weeks comped out, but I'm sure they weren't consistent across that period. My guess is, like a lot of other retailers, you saw things progress through the end of March and into April, helped by the stimulus or weather or whatever the case may be. But if you could provide some color on that, that would be helpful.

Lee Belitsky, CFO

The eCommerce business has been building. And as we have opened stores, obviously, our store sales have been building. Some of that is timed in connection with when the stimulus checks arrived. But the stimulus checks arrived going out a month ago and the business continues to be good now. But stimulus checks probably helped. It's hard to measure it. But we're still encouraged with where the business is now.

Michael Baker, Analyst

Okay. That's helpful. I have a couple of follow-up questions. You mentioned that you are currently purchasing off-price products. Will those products be available in the stores this season, or will some of them be set aside?

Edward Stack, Chairman and CEO

The majority of it will be in the stores this season. We may have some buys that we might pack away to use for next year, but the vast majority of it will be in stores this year.

Michael Baker, Analyst

Okay. Interesting. And then one more sort of follow-up as it relates to inventory. And I don't know if you're prepared to answer this, but as you're putting in inventory now, and as you said, there is still a lot of uncertainty out there. I mean, how do you think about the risk of building inventory right now? And particularly as we get into back-to-school and some schools might not be going back in a normal fashion in September. And I could also ask about licensed apparel, is there risk there if we don't have college football or World Series or those types of things?

Edward Stack, Chairman and CEO

We are making the best decisions possible with the information available to us. Currently, we are likely being more cautious than aggressive. There are specific categories where we believe we will see strong performance, and we are being proactive in those areas. For example, we are continuing to invest heavily in the fitness category, the bike category, and particularly in athletic footwear, especially for running. As people emerge from the pandemic, they are coming to understand the importance of being healthy and fit, and we believe we are well-positioned to serve those consumers. While we are being aggressive in certain areas, we are not as proactive around licensing for college football and some professional sports, depending on how the situation unfolds. Our aim is to make informed decisions based on our current knowledge, balancing aggression in some areas while pulling back in others.

Operator, Operator

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

Scot Ciccarelli, Analyst

Another store footprint question. And I think we all understand, you can't have Curbside Pickup without your stores, but does the growth in eCom and Curbside potentially push you to reevaluate the specific role of each of your stores? In other words, do they all have to be the same size, same configuration, etc., that they are today?

Edward Stack, Chairman and CEO

We haven't made any changes to our store strategy. Recently, we discussed our efforts to reduce space allocation while continuing to focus on team sports athletes. Although these athletes, like baseball, football, and soccer players, may currently be facing challenges, we believe they will return, whether it's this fall or next spring. This is crucial for our business. As we make adjustments to our footwear department and expand our product offerings in footwear, athletic apparel, and our women's segment, CALIA and the new DSG brand are currently our second and third largest brands in women's athletic apparel. We don't anticipate any significant changes. Regarding Curbside Pickup, we need to ensure that inventory is available for customers who want to pick up their orders on the same day. This requirement makes our stores essential. While some may not fully understand our business model, we are confident in our current store configuration.

Scot Ciccarelli, Analyst

Got it. And then just a follow-up, I just wanted to clarify something, I think Lee said. Have sales actually continued to accelerate as we've moved further away from the distribution of the stimulus funds? Is that what the inference was like?

Lee Belitsky, CFO

Well, the eCommerce, we talked about the eCommerce business in May being up north of 250%. It was 210% in the back half of Q1.

Operator, Operator

Our next question comes from Peter Benedict with Baird.

Peter Benedict, Analyst

Two questions. First, can you provide an update on the status of the hunt clearance and exit? Did that have any significant impact on the product margin number in the first quarter? Additionally, regarding the outdoor theme in the marketplace, are there any other areas of the store where you're noticing that trend?

Edward Stack, Chairman and CEO

Yes. So on the space allocation, we slowed that down right now based on the capital. We cut back on our CapEx budget pretty significantly. So that's been slowed down a little bit. As far as the outdoor categories, those outdoor categories have continued to be pretty good. We continue to comp positively in those areas.

Peter Benedict, Analyst

Okay. And just pivoting over to SG&A, just to follow up on those. Two questions. One, I mean, as we think about SG&A was down 17% in the first quarter year-over-year. Sounds like you're adding back store employees, you're bringing back some marketing. How should we think about SG&A in the second quarter as you sit here today? Would you still expect it to be down year-over-year? And then that $34 million of COVID expense that kind of hit SG&A in the first quarter, call it, a $20 million to $23 million monthly run rate, does that just continue through 2Q and in the back half of the year or are there parts of that that start to come off?

Lee Belitsky, CFO

There are aspects of our expenses that will decrease as we are no longer paying employees who aren't working. We spent three weeks paying individuals who were not active, which will be reflected in our store operations as we bring people back from furlough. However, we anticipate increased expenses related to operating the stores as we have largely had to rehire most, if not all, of our store associates due to consistent sales trends. We also have additional costs for hourly workers totaling 15% and extra hours needed for regular cleaning in the stores. While we will continue to see some savings from employees still on furlough and lower expenses in May, we are not actively filling open positions at this time, which will also contribute to some savings. Nonetheless, we will incur additional costs as well.

Operator, Operator

Our next question comes from Tom Nikic of Wells Fargo.

Tom Nikic, Analyst

I wanted to ask, over the last couple of years, you've made a lot of investments in the in-store experience, batting cages, the elevated in-store service levels. With new requirements around sort of safety, social distancing, etc., does that create any sort of impediments to some of those experiences that you've worked to add to the store?

Lauren Hobart, President

Tom, yes. So when we first closed the stores and right prior to that, we pretty much shut down all of those experiential elements in the store, be it the batting cages or the golf simulators. But we have now been working very hard over the last several weeks to figure out ways to continue those experiences in a safe manner. We've turned back on golf fittings. We are able to do it in a way that we believe is very safe for both our teammates and our athletes. Same with the baseball simulator. So we actually have adapted fairly well, and there seems to be consumer demand to keep those experiences going.

Lee Belitsky, CFO

Yes, a question for you. Obviously, to shore up some of the liquidity, you did a convertible debt raise, and you also borrowed quite a bit on the revolver. Is there a way we should think about the pace of sort of maybe paying down that revolving debt? And I don't know if there's like a certain milestone you want to reach before you start paying down that debt or anything like that, but just from a balance sheet leverage perspective, any help would be appreciated. Yes. We're in the process of paying down that revolver debt as we go through. I think the worst of our concerns and many concerns around the liquidity crisis that could have possibly occurred from mid-March through mid-April seemed to be behind us. Our business is coming back. Our relationships with our banks are really good. So we're in the process of bringing that down.

Operator, Operator

Our next question comes from Jim Duffy of Stifel.

Jim Duffy, Analyst

On Curbside Pickup, what do trends show you with respect to consumers' patience for inventory to be delivered to the store? Is conversion much higher if the inventory is lit up as immediately available in-store versus available in a few days or a week?

Lauren Hobart, President

Yes. Right now, the availability that we're presenting is availability that is available in-store. Immediately.

Edward Stack, Chairman and CEO

Immediately.

Lauren Hobart, President

Yes, that is available to pick up immediately. So the patience has not been a factor. We actually think that's upside. We can actually have what we would call a delayed buy-online-pickup-in-store experience. That is something we're working on right now. And just as the patience for the entire order or the process, the whole thing has been taking on average less than 30 minutes and usually closer to 15 minutes to fulfill. So patience is important, but I think we're overdelivering.

Jim Duffy, Analyst

That's great. And then a question as it relates to the second half of the year. A lot of enthusiasm around reopening right now. Speaking with the vendors, most have been conservative with respect to planned inventory receipts for seasonal categories in the second half. We don't know what back-to-school is going to mean, but it will get cold and there will be a Christmas. Are you concerned that you may not have enough inventory for holidays? Is that part of the thought process at this juncture?

Edward Stack, Chairman and CEO

I think we're concerned if we'll have enough of the right inventory. We'll then have to kind of go to some second choices and move some market share. But right now we feel pretty confident; we're in pretty good shape. There are some categories and some vendors we'd like to have some additional inventory from that we're moving market share to, and we'll see how that goes. But right now, we feel pretty good.

Operator, Operator

And today's final question comes from Joe Feldman with Telsey Advisory Group.

Joseph Feldman, Analyst

I wanted to ask a bit more about the consumer. I know there was a previous question about the stimulus checks. What insights do you have regarding consumer behavior? It appears there is a demand for certain segments of sporting goods. Are you noticing any variations, such as a shift to lower or higher-end products? Is there any information that could help us understand consumer sentiment? Or do you believe that once we move past COVID-19, conditions will improve?

Edward Stack, Chairman and CEO

We don't see any significant changes in trading patterns. In some categories, the average retail price is actually increasing, like footwear, but that's largely due to our product mix. There are variations in that mix. As we mentioned, our fitness, boating, biking, and outdoor sectors are performing exceptionally well, and we believe this trend will continue.

Joseph Feldman, Analyst

Got it. That was a good segue, Ed. Regarding the footwear category, you mentioned running a couple of times. Is that currently the main driver, or how does it compare to basketball or style? I know there have been some additional investments in that area. Any insights would be helpful.

Edward Stack, Chairman and CEO

The lifestyle business is performing exceptionally well, and we remain very optimistic about it. We also have strong enthusiasm for the running category. As restrictions started to ease, people began to engage in outdoor activities like running and walking. We believe this trend will persist as individuals strive to improve their fitness through walking and running. We are well-positioned to capitalize on this opportunity.

Operator, Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Ed Stack for any final remarks.

Edward Stack, Chairman and CEO

I'd like to thank everyone for their interest in DICK'S Sporting Goods, and we'll look forward to seeing everybody on our next conference call. Thank you. Be safe.

Operator, Operator

Thank you, sir. Today's conference has now concluded. You may now disconnect your lines, and have a wonderful day.