Good morning, and welcome to the DICK'S Sporting Goods fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead.
Thank you. Good morning, and thank you for joining us to discuss our fourth quarter 2017 financial 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. Please note that a rebroadcast of today's call will be archived on the investor relations portion of our website, located at dicks.com, for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will also be available for approximately 30 days. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Actual results could materially differ because of factors discussed in the earnings press release, in the comments made during this conference call, and in our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. We've also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the investor relations portion of our website at dicks.com. I will now turn the call over to Ed.
Thanks, Nate. I'd like to thank all of you for joining us today. As we announced this morning, we're very pleased to deliver results within our guided range. We earned a $1.22 per diluted share on a non-GAAP basis, and our total sales increased 7.3% to approximately $2.66 billion. Within this, consolidated same-store sales decreased 2% on a 13 to 13 week basis. Our e-commerce business increased approximately 9%, and as a percent of total net sales increased from 17.9% to 19%. As previously guided, gross margins declined year-over-year, though less than we had anticipated on our November call. During the quarter, our team sports, footwear, and outdoor equipment business comped positively. We also drove strong comp growth in our private brands, which significantly outpaced the company average, posting strong double-digit comp sales gains and improved margin rates.
As expected, these areas of strength were offset by the hunt and electronic categories, while our apparel business comped approximately flat. Within apparel, strong sales growth came from Adidas, CALIA, and Patagonia, which is offset by significant weakness in the Under Armour brand, as expanded distribution in a highly promotional environment impacted its sales. In 2018, we will continue to aggressively adapt our apparel business by allocating more premium space in our stores to our own brands, which, as I indicated, comped double digits in the quarter, as well as the brands that are performing well and have differentiated assortments. With a stronger innovation pipeline from Nike, Adidas, Callaway, and TaylorMade, and our own private brands, we now expect margin rates will be impacted less than previously anticipated.
We have a strong position in the marketplace, and we are focused on leveraging our financial strength to make critical investments in our business in order to improve efficiency and earnings over the long term. As we previously outlined, our goal is to build the best omni-channel experience in the sporting goods category, and we will continue to increase our investments in the consumer experience, supply chain, technology, private brands, DICK'S Team Sports HQ, and our associates. We will invest in our supply chain in an effort to increase our in-stock levels down to the size color level, improve the speed of delivery to our customers. We expect these investments will improve customer satisfaction, inventory turnover, and merchandise margin rates. Next, investments in technology are critical as we seek to improve the consumer experience online.
We will also make investments in our fulfillment system and networks to shorten the delivery window for our online orders. Additionally, we remain focused on driving differentiation and exclusivity within our assortment, particularly in our private brands. This year, our private brands significantly outpaced the company average as we grew this business to more than $1 billion and expanded gross margins. We expect our own brand growth again to outpace the company average in 2018. During 2018, we will accelerate in our private brand area investments in talent as well as marketing, design, and technology capabilities to drive growth in our key brands such as CALIA, Field & Stream, Top Flite, Walter Hagen, and Fitness Gear. We'll also launch a couple of new brands this year. Looking ahead, we continue to believe our private brand business can reach $2 billion over a relatively short period of time.
As the industry leader, we are making these investments from a position of strength and continue to believe we will be the clear winner in our sector. We will achieve this by striving to flawlessly execute the basics while focusing on elevating the consumer experience.
I'd like to thank our associates across the company for the hard work and commitment they showed to deliver the fourth quarter results and for their upcoming efforts in 2018. I'd now like to turn the call over to our President, Lauren Hobart.
Thank you, Ed. Good morning, everyone. During this past quarter, we made significant progress on our efforts to better serve our customers. We invested in payroll to ensure our stores were staffed to deliver improved customer service, particularly during peak holiday hours. We also made enhancements to our scoreCard loyalty program to make it more rewarding for our customers. This included no longer expiring reward points at year-end to ensure the customers have ample time to reap the benefits of shopping with us during the holiday season. Additionally, we continue to test new ways to better reward our most loyal customers. In e-commerce, our teams did a great job as we completed our first full year and our first holiday season on our new web platform.
We had a record-setting Cyber Monday. We also had some intermittent performance issues with our site during the quarter, resulting in a fourth quarter growth rate of 9%, which was below our expectations. We have mitigated many of these issues. We've seen our e-commerce growth accelerate in the first quarter. In 2018, we will elevate the online customer experience by improving the design and functionality of product pages, streamlining the checkout process, and implementing more personalization. From a delivery perspective, we will focus on increasing our speed to customer. We will explore new shipping and fulfillment methods. In marketing, we are leveraging the strength of our brand to deepen the emotional connection that we have with our customers through our shared passion for sports.
Last month, in connection with the Winter Olympics, we launched our new Unity Campaign, which is an expression of our company's belief in the power of sport and its ability to unite communities. The Unity Campaign aims to remind people of the tremendous value of sport and, in the process, drive brand equity and increase sport participation. We also remain focused on driving traffic to our brick-and-mortar stores and our online site. We are prioritizing personalization and leveraging our scoreCard database, which is a tremendous asset to deliver more targeted marketing and offers to our customers. As media consumption continues to shift, we have moved significant marketing support to digital channels to engage more personally and directly with consumers. In closing, we see tremendous opportunity as we continue to transform our business to meet our customers' ever-changing needs, both in stores and online.
Our focus for 2018 is on executional excellence and continued innovation to drive differentiated competitive advantage. I will now turn the call over to Lee to review our financial performance in detail.
Thank you, Lauren, good morning, everyone. Beginning with our fourth quarter financial results, which was a 14-week quarter, consolidated sales increased 7.3% to approximately $2.66 billion. On a 13 to 13-week comparative basis, consolidated same-store sales, which includes all banners, both online and in-store, decreased 2%. The comp decrease was driven by a 2% decline in ticket due to the promotional environment. Transactions were flat, which was an improvement compared to the prior quarter. E-commerce sales increased approximately 9%. During the quarter, our private brand business remained strong, comping positive double digits with increasing margins from the same period last year. Footwear continued to comp positive low single digits after fully anniversarying our premium full-service footwear department expansion. Excluding the impact from Under Armour's problem distribution, we were pleased with our apparel business, which benefited from a strong merchandising strategy and favorable weather.
Team sports and outdoor equipment also posted healthy comp sales gains. As expected, the hunting and electronics businesses remained under pressure during the quarter. Our hunting business comped negative high single digits, indicative of a weak overall industry demand, which has affected competitors and suppliers alike. Gander Mountain filed for bankruptcy last year. Remington Outdoor Company announced plans to reorganize under bankruptcy protection, major gun manufacturers have posted steep sales and earnings declines. While we saw comps sequentially improve from the third quarter as we captured displaced market share from the Gander Mountain closings and anniversaried the 2016 presidential election, the improvement was not as much as we had expected. We expect the hunting headwind to continue throughout 2018, and it will likely be more impactful as a result of our recently announced changes in our firearms policies.
Our electronics business, which is primarily performance tracking, continued to boast significant double-digit negative comps as the industry sector is in significant decline. This headwind is expected to continue into 2018 as we are meaningfully reducing our exposure to this business. Additionally, the anniversary of the Chicago Cubs' 2016 World Series championship was a significant headwind to our comp sales during the quarter, particularly because the vast majority of Houston Astros sales, who won this year, were not included in our comp base. However, the bounce of our license business was quite strong. On a non-GAAP basis, gross profits for the fourth quarter were $787.3 million or 29.55% of sales, which was down 130 basis points versus last year. This decline was driven by lower merchandise margins in a promotional market space.
In addition, we saw higher shipping and fulfillment costs as a percentage of sales as our e-commerce business grew. Non-GAAP SG&A expenses were $590.3 million for the quarter or 22.16% of sales and deleveraged 69 basis points from the same period last year. This deleverage was primarily driven by higher store payroll expenses as we invested to deliver improved customer service during the peak holiday hours. Approximately $18 million of asset impairment charges. These were partially offset by our new e-commerce operating model and lower incentive compensation. The effective tax rate for the quarter was approximately 36%, which reflects a one-month benefit from tax reform. In total, we delivered non-GAAP earnings per diluted share of $1.22, which includes $0.09 from the 14th week.
During the quarter, we incurred transition costs of approximately $11.5 million or $0.07 per diluted share related to improvements to our scorecard program, as well as a $6.6 million charge, or $0.04 per diluted share, related to a litigation contingency. We have excluded these two items from non-GAAP earnings to enhance comparability. For additional details, you can refer to the non-GAAP reconciliation in the tables of the press release issued this morning. For the full year, we delivered non-GAAP earnings per share of $3.01, which included $0.09 from the 53rd week. This compares to $3.12 per diluted share in 2016. On a 52-week to 52-week comparative basis, consolidated same-store sales decreased 0.3%. E-commerce sales increased approximately 13% to over $1 billion following the successful relaunch of dicks.com last January. Looking to our balance sheet.
We ended the fourth quarter with approximately $101 million cash and cash equivalents and no borrowings outstanding on our revolving credit facility. Turning to our fourth quarter capital allocation, net capital expenditures were $65 million, or $88 million on a gross basis. We also repurchased approximately 1.3 million shares for $42.5 million at an average price of $31.70. In total for 2017, we repurchased 8.1 million shares for $284.6 million and have $757 million remaining in our authorization. Additionally, during the quarter, we paid $17.7 million in dividends, and a few weeks ago, we announced an increase to our quarterly dividend of 32% to $0.225 per share. Before moving to our guidance, I'd like to provide a few comments on tax reform. The passage of the Tax Cuts and Jobs Act in December will result in improvement in cash flow from a lower tax rate.
The retail environment is very dynamic, this will provide the flexibility to enhance our investments in our business and our associates. Among other things, these savings will fund important investments in our omnichannel strategy, including the addition of nearly 200 new positions, primarily within technology and e-commerce, that support key growth areas for the company, as well as the expansion of our Conklin, New York distribution center to include e-commerce fulfillment capabilities. The expansion will allow us to fulfill online orders more quickly and efficiently, including giving us the ability to offer cost-effective one-day delivery to customers in the Northeast and will create new jobs within the local community. We'll also return capital to our shareholders, starting with the recent increase in our quarterly dividend. Turning to our outlook for 2018.
As a reminder, to more closely align with industry practices, we will no longer provide quarterly comp sales and EPS guidance but will continue to provide annual guidance, which we'll update on a quarterly basis as appropriate. Additionally, keep in mind that because 2017 includes 53 weeks, any comp sales comparison to the 2017 calendar will reflect a one-week shift. This shift will not have a material effect on comp sales for the year but will impact quarterly results. As a result of the shifted calendar, we expect our sales and earnings to be positively impacted in quarters one and two, but this will be offset in quarters three and four. As Ed discussed, within our guidance, we have contemplated significant investments that will have a near-term impact on our earnings. We are also reviewing our expenses to reduce costs and provide some offset to the cost of our investment.
Taken together, we believe these actions will strengthen our business for the long term. All this considered, for 2018, we expect earnings per diluted share to be in the range of $2.80 to $3.00 and consolidated same-store sales to be flat to a low single-digit decline. Our EPS and comp sales guidance includes the estimated impact of the changes to our firearm sales policies. Operating margin is expected to decline year-over-year, driven by SG&A deleverage as we make strategic investments in our business and restore incentive compensation plans to average historical levels. Gross margin is expected to decline slightly as we've seen improving product innovation cycle and better balance of inventory in the supply chain, reducing pressure on gross margins versus our viewpoint a few months ago.
Also, as outlined in our press release, due to significant reduction in new store openings from 2017, we expect a meaningful reduction in pre-opening expenses. Our earnings guidance assumes an effective tax rate of 26%, although we expect the first quarter rate to be approximately 30% due to the accounting rules around tax treatment of equity compensation. Our earnings guidance is based on an estimated 103 million diluted shares outstanding, which includes the expectation of share repurchases to fully offset dilution in 2018. However, we will consider using our cash flow to continue to opportunistically repurchase shares. We will continue to make significant capital investments in the business, which will be more concentrated in technology and e-commerce fulfillment. In 2018, net capital expenditures are expected to be approximately $250 million or about $280 million on a growth basis.
2017 net capital expenditures were $373 million or $474 million on a gross basis and include a significantly higher number of new store openings as well as a new regional distribution center. We are confident that the investments we are making will set a great foundation and will benefit DICK'S over the long term. This will prepare our prepared remarks. We appreciate your interest in DICK'S Sporting Goods and operator, please open the line for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Kate McShane with Citi Research. Please go ahead.
Hi. Good morning. Thanks for taking my question. My question centered around the e-commerce growth rate. I know you had mentioned in the prepared comments you had some operational issues in the fourth quarter. I wondered if you could highlight what that was and what the growth rate would've been, X that, and can you tell us how much you fulfilled from the store during the fourth quarter, for your e-commerce sales?
Yes. We had several issues during Q4. We did have a number of wins during the quarter. We had a very strong Cyber Monday. We had peak volumes, that had never been reached before on our new platform, but we did have several glitches throughout the quarter where consumers had challenges either shopping or more commonly checking out of the site, and cumulatively, that did impact us in the quarter. We are not prepared to share what the comp would've been, had those issues not happened. It was meaningful. In terms of your next question about how much we're shipping from stores, we don't share exact numbers, but we are shipping the majority of our e-commerce volume from our stores.
Kate, this is Ed. What I think is really important to note is that some of these glitches we've had, the vast majority of them we have mitigated, as Lauren said in her script, that we've seen an acceleration of our e-commerce sales so far this quarter.
Okay. Thank you.
Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Ed, I wanted to ask you first regarding the business' investments and this transition that's happening, can you assess where you are with it? I know there's in-store technology, e-commerce investments, Team Sports HQ. Can you talk about where you are? I heard it's the gross margin being a little better is sort of, getting you off the investment, or at least the margin degradation's gonna be a little less than it was supposed to be. Is that fair, or are there more investments that are on the way?
I think that from an e-commerce standpoint, there's gonna constantly be investments. That's never really gonna end. Technology changes and upgraded, that's gonna continue. As we take a look at where we're making some of these investments from a supply chain standpoint, we think that we get this done this year, that will be a big piece of it. Team Sports HQ, we're gonna continue to make investments in. That's part of the technology group. These investments will continue, but we believe that we'll start to leverage these investments, they will help us with the consumer experience, which you think will help sales, also these will help us from a gross margin standpoint.
Lee mentioned there's an additional, a continued focus on expenses. Can you give us a sense what the right level of expense dollar growth is, granted you're not opening stores at the same rate. Pre-opening will come down and there'd probably be other expenses, but the business historically has been in this mid to high single-digit range. Next year it kind of looks a little bit reduced from that level, but where should it go to over time?
Well, we haven't guided to that long term. The one item that's a bit of an anomaly for this year as we're into it is, as I mentioned, the restoration of the incentive compensation, which those payments are very minimal this year. That is going to affect the growth rate for this coming year. We expect once that normalizes, that we'll have SG&A growth that's more in line with sales growth going forward.
Okay, thanks.
Our next question comes from Robert Ohmes with Bank of America, Merrill Lynch. Please go ahead.
Hi. Good morning. This is Alex Perry on behalf of Robbie. Thanks for taking our question. I just wanted to ask, how should we think about same store sales trends through the year? Would you expect a stronger second half versus first half due to the timing and flow of the new product that you mentioned?
We're not gonna guide to give quarterly or what the sliding scale is on a quarterly basis from a sales standpoint. We expect our sales to be flat to low single digit comp for the year. We're not gonna comment on quarter by quarter or how they're gonna go through the year.
Perfect. Just a follow-up. Can you comment on your perception of industry-wide inventory levels and how close we are to seeing that clean up?
I think we're pretty close. I think it's pretty cleaned up. I would say the hunt category has probably got some inventory in the pipeline. The balance of our business, we feel that not only our inventory is in good shape, but we think the industry's inventory is in pretty good shape.
Thank you. Best of luck.
Thank you.
Our next question comes from Camilo Lyon with Canaccord Genuity. Please go ahead.
Thanks. Good morning. Ed, in your prepared remarks, you talked about the excitement around some of the new product innovation from your key brands. I think you mentioned Nike and Adidas. You talked about the weakness that you experienced with Under Armour. You also talked about shifting more premium space to your private brands. Can you just help us understand, are you actually shifting more square footage to these brands that are coming to the market with greater innovation, so you're reducing those ones that are underperforming? Will the balance of that shift be made up with your private brands? I think you launched last year, Second Skin, as your private apparel compression brand. So any sort of color you could provide on that would be helpful.
Our private brands will have more space this year than they did last year, primarily driven by, like we said, Field & Stream, CALIA. We have a licensing agreement with Reebok. Probably 90% of the apparel product you see on our floor is Reebok. The golf brands we have from an apparel standpoint, Walter Hagen, Slazenger, have done extremely well combined. You're going to see more space there and less space with some of the brands that are not performing as well. The innovation pipeline that Nike has, we're really very enthusiastic about that. We're enthusiastic about what's going on with Adidas also.
Got it. I guess, you did mention that you're launching into new categories in the private brands. Were these brands mentioned in what you just said, or are they incremental to what you already have, what you called out?
There's two that are incremental, and they'll be phased in. The Tommy Armour brand from a golf standpoint, from an equipment standpoint, we're launching shortly. Later this fall, we'll be launching an outdoor brand that we'll talk about as we get ready to launch that.
Is that an outdoor apparel brand?
It's outdoor apparel, it'll have some hard lines components to it eventually.
Got it. Okay. Thanks very much. Good luck.
Our next question comes from Bill Schulz with Goldman Sachs. Please go ahead.
Thanks, guys. Ed, can you maybe just talk about how your comp metrics were impacted by the firearms announcement you made a few weeks ago? Have you seen any sort of drop-off in store traffic at all quarter to date, can you just give us a little bit of a flavor around that? Thank you.
Well, we were actually surprised the outpouring of support that we received from this. It's only been two weeks and we've seen a bit of a difference in the hunt business, not an awful lot, but it's too early to tell how this is going to be impacted. We've got what we think the impact will be baked into our guidance.
Just one more follow-up, maybe this is a little short-term focused, but our checks from the Eagles Super Bowl win looked pretty solid. You've got a pretty good concentration of stores in that market. Can you talk to how that win may have impacted your first quarter comps and margins?
Yeah. We're not going to get to that level of detail, but the Eagles were good for us. It was a good win. We're very happy with our licensed business, and we'll see what happens in the playoffs going forward.
Understood. Thanks, Ed.
Sure.
Our next question comes from Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Ed, can you unpack your comp guidance for this year? Flat to down low single digits at the midpoint would be worse than what you did in 2017, suggesting you are expecting some degradation. Is that because you think the industry demand is going to degrade this year, or your share won't be as good as it was last year?
Well, I think there's going to still be some pressure with Under Armour. The announcement we made two weeks ago regarding our firearms policy is not going to be positive from a traffic standpoint and a sales standpoint.
With that being said, there are some other positives. You'll lap some of the degradation that the hunting category has had. Presumably, you won't have the intermittent issues with the website. You're launching some new private brand products. There's going to be more innovation. Is there a level of conservatism in your guidance that as you thought through how you're going to guide for this year, that you baked in?
Well, I'm not going to say that it's conservative or aggressive. I'm going to say we're very comfortable with that, and we'll update it quarter by quarter. There are some areas of strength in the business. The areas of strength in the business, the innovation pipeline, as I said, Nike, Adidas, Callaway, TaylorMade, a few other brands. We're also taking a look at the announcement that we made last week and trying to have that baked into our guidance. Like I say, after only two weeks, it's too early to tell. We'll give you a lot better picture at the end of our first quarter call.
My follow-up question is, Ed, from a longer run perspective, what do you expect the category and collectively the categories that DICK'S participates in to grow at? I think the market would be helped by having a better understanding of what the long-term growth rate potential is for the business.
Well, I'm not going to guide to what we think the long-term growth is, but we think there's a fair amount of growth that's available here, not only from the innovation pipeline that's coming out from some of our key vendors, but also what we're doing to differentiate our business from competition. We think there'll be some more consolidation of other retailers and market share that'll be up for grabs, and we're in a very strong position to take that market share, and we'll aggressively go after it the same way as we did Sports Authority and what we did with Gander Mountain and Golfsmith.
Thank you so much, and best of luck.
Thank you.
Our next question comes from Chris Horvers with JPMorgan. Please go ahead.
Hi, this is Tori Burchian for Chris. Thank you for taking our question. Can you talk about the cadence of gross margin in 2018?
When you say the cadence, what do you mean?
Is it supposed to be somewhat similar to the past two quarters and then getting better in the second half? I think on 3Q, you said it was going to be less of a headwind in the second half.
Yeah. Again, we've said that we're not going to provide quarterly guidance. We've given our guidance as to what it'll be for the year. We think that the gross margin impact is not going to be as great as we had anticipated because of the pipeline of product that we see coming out, some things that we've done with our private brands, and what we think we can do from a supply chain standpoint to mitigate some markdowns on the back end. How that's going to play out through the year, we're not ready to comment on. We will update you, obviously, at the end of each quarter where we're at.
As my follow-up, can you quantify how much the merchandise margin was down in 4Q?
We haven't commented on exactly what that is. A big part of it was the merchandise margin rate because of the promotional environment and some of the issues with some of our brands and broadened distribution strategies.
Thank you.
Our next question comes from Seth Sigman with Credit Suisse. Please go ahead.
Thanks. Good morning. I wanted to follow up on the pricing strategy. You made some more aggressive changes in 2017, including promoting that price match guarantee. You're guiding to gross margins down, I guess, just slightly in 2018. Do you see the price environment improving and less price investments from DICK'S, or do you just have greater offsets on the other side of that?
Well, I think that the market is bringing some innovative product that won't be as widely distributed, that you'll be able to make a full margin on. A case in point is Callaway with their new golf ball, the new Chrome Soft golf ball, and all the Truvis colors that went up from $40 to $45. We think that's not going to discount it. It's going to help our margin rates. The new Nike React shoe that we launched with a couple of pretty narrow band of retailers has been very successful at $150. We just think there's a better innovation pipeline coming out from our key vendors than there has been in the past.
Basically, it's mix that should help offset whatever other headwinds you have in the business.
Yes.
Okay. Just following up on the comp guidance for the year, flat to down low single-digit. As of the third quarter, you had talked about roughly flat, and I'm just curious, are you seeing anything that would cause you to be a little bit more cautious now as you have better visibility on 2018? Because clearly you should see some benefits also from some of the strategic initiatives that you talked about earlier.
We will. There's a couple of things. The accessory business, which is really the performance tracking business, industry-wide has been very difficult. That had been a relatively good business for. It continues to decelerate, if you will, or comps are down pretty significantly over the last couple of years. It's a business, let's say we're getting out of it completely, but we are significantly reducing our presence in that business. Margin rates are getting compressed. The sales are continuing to go down. We can find a better use for that square footage in our store. We're significantly reducing our investment there. Also, since the call in November around our third quarter call, the change in our firearm policy is not insignificant.
Okay. Thank you.
Sure.
Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Hey, guys. Good morning. It's David Belanger on. A couple questions. First, can you give us a sense on what's happening in stores in terms of traffic and conversion, and what you guys are doing to address any issues there? It seems as though in-store comps have been tracking down, say, low to mid single digits of late. Is there any improvement baked into your guidance from here?
Well, we think that it'll get a little bit better, and it'll be driven by, as I said, the innovation that's coming out there in the marketplace. I think we've got the opportunity to be in a relatively good product cycle right now, which I think will help. That'll be offset, and I don't mean to be a broken record, but that'll be offset by some of the accessory pieces of the performance tracking we talked about and our firearm policy. There's
Okay
pluses and.
Got you. Just switching to online, just thinking about the current e-commerce infrastructure you've built out in the 850 or so stores you have, how should we think about the level of online sales the business can support today, and where that number should go with the new digital investments you got planned for 2018?
I believe in our prepared remarks, we had said that we were about 19% in Q4 of an e-commerce mix. We are planning for aggressive growth in that channel. It will continue to balance in favor of e-commerce. We have a very large store base, obviously, that continues to be a profitable contributor for us as well. It's a mix.
Cool. Thank you very much.
Our next question comes from Mike Baker with Deutsche Bank. Please go ahead.
Hi. Couple of questions from me. One, you said the 9% growth in e-commerce was below your plan. Can you tell us what your plan would've been without the glitch that you guys talked about?
We're not going to get to that level of specifics. We anticipated it to be double digits, close to mid-double digits. Some of the issues that we had, we're disappointed about. Our technology group did a great job getting this site built from scratch over the last year. We're really proud of all that they did, and they've done a great job mitigating these issues right now. I can't stress enough how pleased we are with our e-commerce business so far this quarter.
Just on the mid-double digits, I think Ed's referring to mid-teens.
Yeah.
Yeah.
Yeah. Not mid-double digits like mid-50.
50s, yeah.
15.
That would've been something.
Yeah.
Can you talk about, was this around the holidays, I guess related to that, just the general pace of business throughout the quarter?
Are you speaking specifically to the e-commerce business?
Really both. Just e-commerce.
Yeah
Total comps.
Generally speaking, we had a very strong, and I'll speak from the e-commerce perspective, a very strong Cyber Monday, Cyber Week. We had tremendous demand in November. In December, the market was a little bit more promotional, and that affected the brick-and-mortar and the e-commerce business.
It came late. I think most retailers would say that on the brick-and-mortar side, the sales came late.
Okay. Understood. If I could slide one more. When you had the extra week and the calendar shift, last time you had it, we based the comps, the comparables from a year ago. I'm just wondering how you're going to speak to it, going forward. Should we think about a different comp base than what you guys actually reported?
I'm not sure how it works in your models, but we are shifting our calendar, and we're going to report against the same weeks last year. Everything we report from a comp basis will be comparable to the same week last year.
Same calendar week.
Same calendar.
Correct me if I'm wrong. That's different than how you did it last time. You had an extra week, if you recall. Lee, maybe this was before your time, but I think you shifted it such that the comparable comp, when we do a two-year comparison, would've been different than what you guys had reported at the time.
Right. We're going to report it shifted. We're going to report shifted comps. I think we reported both last time, unshifted and shifted.
That's right.
This time, we're going to report the shifted comps because it's a more meaningful indicator.
Okay. That might require some follow-up, but okay. I appreciate the color. Thanks.
Our next question comes from Omar Saad with Evercore ISI. Please go ahead.
Thanks for taking my question. I was hoping you could give an update on both the price matching that you announced early last year, how that worked over the holiday. Maybe thought we'd see a little bit more on the comp, but the gross margins, I think, might've been a little bit better than we expected. Then also on real estate, an update on new store opportunities. I know you put the brakes on or slowing that down for a pause period. Where you are on that as well? Thanks.
I'll take the first part of the question about the best price guarantee. We have seen tremendous success with that in many different ways. It is giving our customers and our associates the confidence to make a purchase without worrying about the price. It's actually taken price somewhat off of the table in these discussions and made for a much more hassle-free experience. That said, it has not been extremely dilutive to our margin rate. It is something we were just doing sporadically before without sort of making it a policy and taking credit for the position. Best price guarantee, I think, has been very successful.
We'll continue to roll forward with the best price guarantee.
On the real estate piece, we have slowed down our store growth. Again, not because our new stores are not working. We're very pleased with the performance of our new stores. We think that the real estate prices are going to continue to fall. We've seen a pretty meaningful reduction, which I'm not going to comment on how much, but we've seen a pretty meaningful reduction in renewals for stores or relocation. We relocate a store from one location to another in the same trade area. We're getting a brand new store in, and many times less rent than what the renewal rent would've been. We're going to make deals where we feel we get a great deal, and we're going to wait and see what happens with real estate prices with additional store closings.
Got you. That's helpful. If I could just sneak one follow-up on Under Armour. Is the issue there, you think, the product pipeline or the broadened distribution? Because some of the other brands that you mentioned are doing well have a lot of the same kind of distribution channels that Under Armour has moved into. Thanks.
Yeah. I think Under Armour is going to come back. I think Kevin and his team are really focused on fixing the business. I think they'd probably talk to you about that they have to work on their segmentation policy, which I think they've talked about. The broadened distribution, I think definitely had an impact, and I think it's going to continue to have an impact until segmentation is done. Those are things you should talk to Kevin and the Under Armour team about.
Thanks, Ed. Thanks for the insight, guys.
Sure.
Our next question comes from Peter Benedict with Baird. Please go ahead.
Hey, guys. Thanks for taking the question. Lee, just a clarification. You said 30% tax rate in the first quarter, 26% for the year. Do we read that as 25% for the remaining three quarters, and that's the longer-term tax rate? That's my first question.
We will have a lower rate in the second, third, and fourth quarter to balance it out for the 26%. The longer term, it depends on the equity, the extra taxes related to the stock compensation. That's going to vary from year to year. It could reduce our tax rate, it could increase it. Just depends on how the stock prices move over time.
Okay. That's helpful. Thank you. Turning to inventory and payables, how should we be thinking about that as we look at 2018? Do you think inventory kind of grows with sales? I know you guys made a lot of progress on payables last year. Is there more room to push that? Should we expect the payables ratio to expand in 2018?
I would say that inventory would increase by no more than the rate of sales, but we have internal targets to be better than that. I would expect accounts payable to continue at roughly the same level of leverage where we are now.
Okay, thanks. My last question, more to Ed. The 2018 plan seems to envision an operating margin profile that's maybe mid to upper 4% range. How do you think about the risks and the opportunities in that metric longer term? Given what's going on in the sector and across retail more broadly, do you see more opportunity than risk longer term? Is it a balanced view? Just kind of curious how you're thinking about it right now.
I think long term, it's between a balanced view and it can get better longer term. We think there'll be more consolidation. I think as we continue to refine our private brands and get better from an innovation standpoint in our private brands, that's going to help. We've got two brands in women's. CALIA, kind of on the higher end, and Reebok on the slightly lower end. Combine those two brands that we develop ourself, it's the number 2 brand in our women's athletic apparel business. Our golf apparel brands are number 1 or number 2 in what we're selling today. We're starting to get some real traction in our private brands. As that continues, that's going to help the margin rates and should help the overall profitability of the company.
Okay, great. That's really helpful. Thanks so much.
Our next question comes from Steve Forbes with Guggenheim Securities. Please go ahead.
Good morning. Just a question on payroll. You mentioned higher payroll expenses during the fourth quarter. Can you touch on whether that's hours versus rate? Then maybe expand on how you're planning labor hours, in particular for 2018, given the outlook for comps. Just trying to gauge if you view that there's an opportunity to drive conversion in the box and understand what you're hearing from customers as it relates to your in-store services in general.
Yep. This is Lauren. Jeff, our payroll investments in Q4 were in additional hours more than anything. As we go into this coming year, we're working on rate as well as productivity in terms of what the associates are spending their time doing. We think we have a lot of opportunities to be much more efficient in terms of the various jobs that we give the stores in addition to just taking care of the customer. They will have everything that they need in order to service the customer first and foremost appropriately well. We're comfortable with the investments that we're making in the store.
Just a quick follow-up here for Lee. I think it was a year ago where D&A included the impairment charge from last year. I don't know if you can help clarify what the year-over-year increase was in D&A this year on a core basis, because I believe you mentioned $18 million asset impairment this year as well. Was that removed from the adjusted numbers or wasn't it? Maybe just touch on what D&A should be next year.
Why don't we get back to you on that one to make sure that we have that all straightened out. I'm sure we've picked it up appropriately in supplemental information that's in the back of the earnings release.
Okay. Very good. I'll follow up. Thank you.
Okay.
Our next question comes from Sam Poser with Susquehanna. Please go ahead.
Thanks for taking my question. I have three. One, just to follow up on the staffing levels, what is the appropriate sort of number of equivalent 40-hour people in an average store and what was it, and where is it going to? Of course, the expenses that go with that.
Yeah, Sam, that's really difficult to say because there's such a wide variety of store volumes from a 30,000 square foot store that we have in some smaller markets, all the way up to an 80 to 100,000 two-level store. We're taking a look at the payroll number. We're taking a look at the services that the stores need to perform, and we've made some investments to increase the payroll in the stores. To be able to answer your question specifically, we're not going to be able to do that.
Okay. Secondly, regarding the change in your firearms rules, the guidance for the year. Doesn't the merchandise mix related to that does help your gross margin profile? Given that you want to expand a lot of your private label and some of these other brands in the soft goods, that also theoretically gives you the real estate in the stores to do such. Am I thinking about that properly?
Well, theoretically, yes. Our policy, although the sport's been overwhelmingly positive, there has been some negative pushback on this. Some of those customers that buy firearms buy other things also. We've had some pushback, and we knew that that was going to happen, and we try to have that in our guidance, that there's going to be people who just don't shop us anymore for anything.
On a gross margin basis, from a mix perspective, it's additive, even if theoretically, from a merch margin perspective, it's additive, even if they don't buy anything.
Overall that area is less from a margin rate standpoint, but there's a lot of accessory items there, hunting apparel, hunting boots, the accessories that go along with the firearms that the margin rates are pretty good on. Theoretically, yes, but I don't think it has as much as you might think it does.
Thank you. Lastly, the shift from Q2 to Q3 of that one week because of the 53rd week this past year. In other words, if you comped flat in Q2 and flat in Q3, Q2 would be up in revenue significantly, and Q3 would be down. Can you give us what those weeks are? The week you gained in the front half and the weeks you lost in the back half, so we can then comp it, we can do the comp estimate properly. If that makes sense.
I know what you're trying to say.
You pick up a really big week at the end of Q2 because that was week one of Q3, which is back to school, and then you pick up.
Right.
You balance off a very small week at the beginning of November. You could lever on a very low comp in Q2 and de-lever on a decent comp in Q3 because of the way the weeks compare.
We were saying that first and second quarter will be favorably impacted by the shift in the calendar, and that the sales will be somewhat more positive and the related EBT will be somewhat more positive in the first and second quarter, and the third and fourth quarter will be somewhat less. It balances out over the course of a year. One week is not.
One week, you're talking about a week that is one of the bigger weeks of the year because it's a big back-to-school week shifting from Q3 into Q2. It's meaningful in the way people get their numbers right. I'm not asking you to give guidance for the quarter. I'm just saying, could you give us sort of the value of those four weeks or three weeks over the year then everybody can adjust their numbers appropriately without giving us comp guidance because it really doesn't impact the comp. It just impacts the year-over-year. It impacts sort of the leverage of the comp.
Well, it also impacts the comp. You pick up a big week and give a small week. That impacts the comp also.
Well, yeah, but you have your big weeks over a big week, and your small weeks over a small week and the comp, so it's really the value of the weeks.
Yeah. Sam.
You know what I'm trying to get to.
I get it
it just makes it very difficult to be accurate, especially in second quarter.
Right. Yeah. We're just not going to be getting into breaking down the sales by week. I think you'll going to have to take your best shot at it in the modeling, what a week's impact could be.
All right. Thank you. Good luck.
Thank you.
Our next question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Hey, guys. Follow-up on gross margin. How much work still needs to be done on your pricing efforts? In other words, do you expect a lot more incremental pressure on merch margins going forward, or do you expect kind of steady merch margins as a run rate outside of mix changes?
Repeat the question, please. I'm not sure if I understood exactly what you're trying to get at.
Well, I guess it relates to, you guys had announced a couple of quarters back that you were trying to invest more in price. You're doing the Amazon price matching. There was a specific question on that earlier. I guess what I'm trying to figure out is, as you guys have tried to become more competitive on the pricing front, where are you in that journey? Do you think you're fully price competitive today? Do you think there's more work that needs to be done, whether it's on a category basis, whether it's on some other adjustment that needs to be made to be more competitive in the marketplace?
No, I think we're where we need to be, where we want to be. Now, if something changes in the marketplace, it's a dynamic marketplace. If something changes, we may have to reevaluate. Right now, we think we're really in very good shape. We think our margin rates are going to be a little better than we anticipated because, as I've said a couple of times on this call, the innovation pipeline of some of our key vendors, we're very pleased with that and what our private brands are doing and the traction we have with our private brands, which are higher gross margin. As far as getting deeper discounts or deeper into a price battle, we don't see that right now.
Got it.
That's as of today. That can always change tomorrow.
Yep, understood. Then just looking for some clarification, I guess this is probably for Lee. You guys, is the extra week you picked up from the 53rd week extremely small? It looks like the adjustment you made for that 53rd week looks like it's about half the volume of a typical week in 4Q.
Yeah, it's a small sales week as well. I believe we've got that in the reconciliation in the back of the earnings release as well.
All right. There's no other adjustment that needs to be made. It's just an incredibly small week. It still added about $0.09 to the bottom line because presumably a lot of the costs are already covered for that quarter.
Correct.
Okay, got it. Thank you.
Our next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead.
Hi, guys. Good morning, and thanks for taking the question. I wanted to get an update on how the reshaping of the brand portfolio has been going. I know you guys had talked about, if I recall correctly, reducing the bottom sort of 20%. Has that been completed at this point? I just want to get a sense where we are in the journey of reshaping the brands.
We're about done. Now, we're always looking at it year-over-year, times quarter-over-quarter, because new brands come out of the market, other brands slow down. We're right about where we thought we would be, and we've pretty much concluded that process.
Okay, great. Thanks. Then sort of another question on e-commerce related to delivery. I know you guys talked about, in the prepared remarks, maybe wanting to do things to speed up delivery and facilitating getting the product to the customer faster. How far away are you from, say, two-day or even one-day, same-day delivery in many markets? What do you need to do, I guess, to get to that level?
We are testing various things. We have a big supply chain initiative that should get all of our deliveries faster than they are today by getting the product just sent closer to the customer. At the same time, we have a lot of experimentation going on with potential same-day delivery from our stores and using our stores as a distribution center. That is very in its infant phases, but we're trying to learn. We do think we have an asset with the 800 stores that we have in terms of getting faster to deliver.
Yeah. Joe, to do it on a more scalable basis and more economically, I think we do have to make some changes in our supply chain, the first of which is expansion of our Conklin, N.Y. facility, which will allow us to service all of the Northeast within a day pretty cost effectively. That'll come live in 2019. We've got a facility that can handle the Midwest, we still have some holes in covering the West and the South and Texas and that area that we'll have to work on over time. As a stopgap measure, we can do that from the stores. We don't do it as efficiently from the stores as we can do it from centralized fulfillment, we do have the ability to get the product to the customers quickly. It just costs us a little bit more.
Got it. That's great. Thanks, guys, for the update and good luck with this quarter.
Thank you.
Our next question comes from Jim Duffy with Stifel. Please go ahead.
Thank you. Good morning. Lauren or Ed, you guys touched on this with some previous questions, but I'm hoping you can elaborate on key learnings to highlight from consumer and competitor response to your more price-led marketing strategy. Then related to that, does that inform any changes to marketing strategy planning for 2018?
As I mentioned before, the best price guarantee has helped with our value perception, so that it's taken price largely off the table. When we look at how to drive traffic and marketing, we really have a two-pronged approach, and one is investing in our brand, which you've seen us do both at the Olympics and continue to do so throughout the year. Then from a traffic standpoint, it is more about personalization and getting the right product into specific marketing for individual people. So we have a two-pronged approach. We're extensively leveraging digital channels at this point and our scorecard database to make us smarter with what we send out, both in digital and direct mail.
Okay. Another quick one on the dividend. Payout ratio now in the low 30s, is there a place where you see a cap for that?
We're going to continue to assess the dividend as we go forward based upon how the business operations are. We're pretty comfortable with where the dividend rate is right now and the payout ratio. We will continue to assess that going forward.
Thanks, Lee. Thanks, everyone.
Thank you.
Our final question comes from Christopher Svezia with Wedbush. Please go ahead.
Good morning, everyone, and thanks for squeezing me in here. I just want to touch on, I guess, two things. One, the scorecard and the changes that you've made to the scorecard policy, just in terms of the rolling 12 months, and I think there's also a new tier. Any thoughts about how you're thinking about that in terms of your comp outlook or any color you can add in terms of what you've seen in terms of customer response?
It's too soon to answer both of those questions. We do expect to have positive ROIs from both of these initiatives. The investment in extending rewards should drive traffic into the first quarter. We can't measure that just yet because it's ongoing. Different tiering of our scorecard customers on very initial results looks encouraging from an ROI standpoint, but it's too soon to communicate any impact to traffic.
Okay. Thank you. Just on Second Skin, I know that was a sort of preliminary launch in 2017. We saw it in the marketplace, and they got heavily promoted as we went through the fourth quarter, at least in some of the stores that we went to. You didn't call it out, I'm just kind of curious where that stands right now in the marketplace and what your expectation is.
Well, we launched that. There were a few issues with that. We are coming back and reevaluating and plan to launch that in the not-too-distant future. We don't have any specific plans that we can call out with you right now. We continue to be very excited about Second Skin. You'll see that back in the marketplace in a pretty substantial way shortly.
Okay. Just out of curiosity, is there anything on pricing or any color you can add as to what maybe the issue was?
A couple of things. Pricing might have been an issue, but I actually think that we looked at it in too narrow of a target customer as opposed to being broader based. In that one, we made a mistake. We've had some really great successes with our other private brands, CALIA, Field & Stream, things that we've talked about. We didn't do a very good job on that one, and we're reevaluating, going to go back and relaunch it, and I suspect we will do a much better job with it this next time.
Okay. Sounds good. All the best to you guys. Thank you very much.
Thanks.
Thank you.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Ed Stack for any closing remarks.
I'd like to thank everyone for joining us on our fourth quarter conference call, and we'll look forward to talking to you again in a couple of months. All right. Thank you very much.
Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.