Good day, and welcome to the DICK'S Sporting Goods second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal the conference operator by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nate Gilch, Director of Investor Relations. Sir, please go ahead.
Thank you. Good morning, and thank you for joining us to discuss our second quarter 2017 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer, 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'll 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 today's earnings press release, in the comments made during this conference call, and in our 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 statement. We have 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 Stack.
Thank you, Nate. I'd like to thank all of you for joining us today. As we announced this morning, our second quarter non-GAAP earnings per diluted share were $0.96 below our guidance of $1.02 to $1.07. Our total sales increased 9.6% to approximately $2.2 billion. Within this, consolidated same-store sales increased 0.1%. The retail market is currently in flux. The environment is highly competitive and dynamic. We continue to believe this disruption translates into opportunity for our business long term. We like the position we occupy in the sporting goods marketplace. As this industry continues to consolidate, we believe we will become stronger. Although sales and earnings did not meet our original expectations, we still reported a significant increase in our bottom line from last year of approximately a 17% increase over the same period last year.
I want to address our outlook for the remainder of this year. As I said, this is a very dynamic marketplace. Vendor distribution strategies have changed. Pricing in the marketplace has become unpredictable and at times irrational. We will engage to protect and strengthen our leadership position. We are intentionally joining this battle. We will aggressively be promoting our business to drive market share to our stores and online. We are also targeting our marketing and pricing efforts in important regions of the country where the fight for market share is more fierce. We have conducted extensive consumer research. The customers have told us they feel our prices are not competitive in today's environment. Consequently, we've become more promotional and competitive and have launched our Best Price Guarantee where we promise the customer if they find a lower price than ours, we'll match it.
Our outlook on sales includes reduced expectations for the hunt and athletic apparel business. We expect the hunting business to remain extremely tough through at least the balance of this year. With continued consolidation in this business taking place, we are going to surgically invest in this category to capture as much market share as possible that was left behind by Gander Mountain. This category is very difficult. Even with us capturing displaced market share, we expect range of $2.80-$3 a share. We are a leader in this industry. We will use our financial strength to aggressively compete in this competitive and disrupted market. We continue to build our business on an omni-channel basis. Our project to relaunch dicks.com on a proprietary web platform has been a great success.
Our digital channel is now more profitable for us on our new web platform. We need to provide our e-commerce customers with a better experience that is competitive in today's marketplace. Looking ahead, we are planfully investing in the online experience through faster delivery, better pricing, more targeted marketing, and continued improvements in our digital channels. This is going to be a bit more expensive in the short term. It is what we need to do for the long-term benefit of the company and our shareholders. Our stores are the foundation of our omni-channel business. They provide the best physical experience of sporting goods by a wide margin. Our stores are where our key partners invest to showcase their brands. These investments work for both of us.
Our stores provide us an opportunity to deeply engage in the communities we serve and build relationships with local teams, coaches, players, and parents. Furthermore, with our stores, we have over 700 distribution centers in the communities we serve. I also note that our stores generate meaningful cash flow that allows us to continue to invest in these areas that will drive our business in the future without raising additional capital. We see our stores as having the ability to generate increased cash flow and profits as we renew and renegotiate many of our leases at reduced rents. We have approximately 25% of our DICK'S stores up for renewal over the next three years. We think this reduced rent trend will accelerate in all but the true A malls, where we actually think rents may increase. Our private brand portfolio continues to be a strong opportunity.
Top-Flite, Field & Stream, and Walter Hagen are all doing quite well and are developing a following. We are building a competitive advantage in the marketplace with these brands, and CALIA, a brand we built in-house, is now our third-largest athletic women's brand. We continue to expect our private brand business to reach approximately $1 billion in sales this year, representing double-digit growth. Over time, we believe this business can double as we explore opportunities to broaden our assortments and distribution channels. We continue to make significant investments in our Team Sports HQ technology, which is a multi-year initiative. We expect this business to be a growth driver for in-store and digital sales. It also allows us to better connect with athletes of all ages, along with their parents. As I said earlier, we love the position we occupy in the sporting goods marketplace.
Sports are deeply ingrained in the culture of our country, and we lead the retail sports industry. Yes, the environment is highly dynamic and difficult at the present time. We at DICK'S are excited about the opportunities that lay ahead of us. Our leadership position is the direct result of the talented and dedicated men and women who make up our company. I would like to thank all of them for their hard work and effort. I'd now like to turn the call over to Lee to review our financial performance in greater detail.
Thank you, Ed. Good morning, everyone. Beginning with our second quarter financial results, consolidated sales increased 9.6% to approximately $2.2 billion. Consolidated same-store sales, which includes all banners, both online and in-store, increased 0.1%. The comp increase was driven by a 2.1% increase in ticket and a 2% decrease in transactions. Our e-commerce business grew 19%. In the second quarter, we continued to capture displaced market share from our competitive closures and delivered strong sales results in e-commerce, as well as our golf and footwear businesses. Our e-commerce results demonstrate our ability to profitably scale our new platforms. Our golf business was favorably affected by a strong new product cycle and retail consolidation. Footwear was driven by our premium full-service footwear departments and the improved allocations of key styles that resulted from the investment. Four areas that were under sales pressure were hunting, licensed, athletic apparel, and electronics.
First, the hunting business was very soft as comp sales declined double digits, much worse than our expectations, and gross margin rates also declined as promotions increased. Second, the licensed business declined significantly due to the anniversary of the Cleveland Cavaliers' win of the NBA Championship last year. This produced record NBA sales for us. While we had not counted on repeating this win in our guidance, it did negatively affect our comp sales for the quarter. Third, the athletic apparel business was softer and more promotional than we'd expected. Increased distribution and increased promotions by the brands themselves, as well as our traditional competitors, negatively affected this business. Lastly, our electronics business, which is primarily fitness tracking, continues to be very soft and comp sales were well into the negative double digits.
Gross profit for the second quarter was $637 million, or 29.54% of sales, and was down 82 basis points versus last year, driven by lower merchandise margins as the marketplace became more promotional than expected, as well as occupancy deleverage and higher shipping and fulfillment costs as a percentage of sales as our e-commerce business continued to grow. Non-GAAP SG&A expenses were $463 million for the quarter, or 21.47% of sales, leveraging 98 basis points from the same period last year. This leverage was primarily driven by our new e-commerce operating model and expense reduction initiatives. In total, we delivered non-GAAP earnings per diluted share of $0.96, which represented a 17% increase over the same period last year. On a GAAP basis, earnings per diluted share were $1.03. For additional details, you can refer to the non-GAAP reconciliation in the tables in our press release issued this morning.
Looking to our balance sheet, we ended the second quarter with approximately $132 million in cash and cash equivalents and $187 million in borrowings outstanding on our revolving credit facility. Also, as disclosed this morning, we've amended and extended our revolving credit facility, thereby benefiting from the attractive interest rate environment. We've increased our limit by $250 million to $1.25 billion, and we've extended the maturity to August 2022 to support the continued growth of the business and provide additional financial flexibility. Turning to our second quarter capital allocation, net capital expenditures were $83 million, or $122 million on a gross basis. Additionally, during the quarter, we paid $18.2 million in dividends and repurchased approximately 3.4 million shares for $143 million at an average price of $41.56. We have approximately $875 million remaining in our authorizations. Let me wrap up with our outlook for 2017.
As Ed discussed, the retail marketplace is competitive and dynamic, and to protect and grow our market share, we will aggressively price offerings to improve our price perception with customers and drive traffic to our stores and online. We have reduced our sales and gross margin expectations accordingly. As a result, we are lowering our full-year guidance and now expect non-GAAP earnings per diluted share to be in the range of $2.80 to $3, which includes approximately $0.05 coming from the 53rd week. This compares to our previous guidance range of $3.65 to $3.75. We now expect consolidated same-store sales to be flat to low single digit negative for the year, compared to our previous guidance of positive 1%-3%.
All of this considered, we now expect operating margins to decline year-over-year, driven by an anticipated decline in gross margin rates and increased marketing expense, partially offset by other SG&A expense savings. As noted in our press release this morning, our full earnings guidance is not dependent upon share repurchases beyond the $166 million executed through the second quarter, although we will consider using our authorization to continue to opportunistically repurchase shares. For the third quarter, based on low single-digit negative consolidated comp store sales, we anticipate earnings per diluted share between $0.22 and $0.30. Operating margin is expected to decline year-over-year, driven by an anticipated decline in gross margin, partially offset by SG&A expense leverage. In the balance of the year, we will continue to make previously planned investments in our e-commerce, DICK'S Team Sports HQ, and private brand businesses to build on our strengths in these important transformational areas.
This will conclude our prepared comments. We appreciate your interest in DICK'S Sporting Goods. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Robert Ohmes with Bank of America Merrill Lynch. Please go ahead.
Hello. Good morning, guys. Thanks for taking my question. I actually had just a couple of questions. The first, Ed, on the footwear strengths in the quarter, can you maybe talk about the outlook for footwear in allocations, the things that supported that strength in the second quarter. Do you see that continuing in the back half in this tougher environment? That's my first question. Then maybe connected to that, you mentioned irrational and unpredictable promos. Is that just in apparel, or is that a hunt, fish, camp thing, or is some of that actually going on in footwear? Maybe tie together for us so we have a better understanding of what we should be looking for in the back half.
Sure. We hope that footwear continues to be a strength. I think there's some great footwear product out there, and we hope that is going to continue going forward. As opposed to what's going on from a pricing standpoint, it has gotten really competitive. It's gotten irrational. We've not only seen that in a number of categories on the athletic apparel side, but also on the hunt, fish side. There's a lot of people right now, I think, in retail and in this industry, in panic mode. It's been a difficult environment. I'm not going to speculate what they're thinking, but they seem to be in panic mode with how they're pricing product, and we think it's going to continue to be promotional and at times irrational going forward. I think that's going to be across a number of different sectors.
I don't think it's going to be particularly prevalent in the footwear business, but I do see it in the athletic apparel business. I see it in the hunt, fish, camp business. The electronics business is going to continue to be promotional, too.
Just in terms of timing, Ed, was it as you entered back to school period you saw more of this, or was this sort of playing out a month or two ago?
I would say it probably started around Father's Day. We started to see this happening a little bit before Father's Day, it continued to be very promotional. Not only from retailers but also from some of the brands on a direct-to-consumer basis.
Got it. Thanks very much. I'll yield for other people.
Thanks, Robbie.
Our next question comes from Kate McShane with Citi Research. Please go ahead.
Thank you. Good morning. Put a few questions with regards to pricing and the discounting. I wondered if you could talk through how much of the price match impact to margins could be offset by the vendor changes you announced a couple of quarters ago. When you do talk about promotions and discounts, does that include your exclusive product from the promotions as well?
No. The products that are exclusive to us can't be price matched in the marketplace. Some of those may get caught up in just promotional opportunities around the entire category of brands. Most of our exclusive and our own private brands, we don't see that price pressure on. As it relates to the vendors, we see that our vendor strategy is working really quite well. The strategic vendors have been very helpful and supportive of the business. We've eliminated a number of vendors going forward. What's going on in the marketplace right now is that it's just very promotional.
Panicked in some cases. I think especially in the hunt fish categories, there's a lot of inventory in the pipeline, and people need to move it out, and it's going to be promotional until this inventory gets moved out of the pipeline.
Okay, thank you. On the same note with regards to pricing, you had mentioned, Ed, during your prepared comments that you had taken consumer surveys, that there was a perception that your prices were too high. Were these surveys taken once the tide kind of turned with regards to the discounting, or was this just an in general perception? Just further to that, do you think that you were too high, or is it more of a function of you being a premium sporting goods retailer?
I think it's a good question. I think there's some aspects of this perception that is really perceived versus reality, part of it was reality. We tried to not be promotional. We didn't want to be the price leaders in the industry. As things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren't priced competitively in the marketplace. Part of it has come from the fact that if we have an expensive athletic shoe or a high-priced jacket, we weren't high-priced on that jacket or on that shoe, but it was a high-priced shoe or a high-priced jacket. We think with the right price guarantee, they'll feel comfortable that we are at the right price and that we are competitively priced.
As we go forward with this, we need to make sure that we convince the customer that they should be comfortable shopping with us, and that's the whole idea around the right price promise. It's gotten some traction, and we've gotten very positive response from it.
Thank you.
Our next question comes from Seth Sigman with Credit Suisse. Please go ahead.
Thanks for taking the question. The industry was obviously weaker this quarter. I'm trying to understand if DICK'S comps were weaker because you're taking less share than prior quarters or if the base business just got a lot weaker. Do you feel like you're capturing similar market share to prior quarters, or did something change?
I think we're actually picking up market share. If you take a look at what else is going on in the marketplace, a competitor in the outdoor category announced comps negative 9.7%. Take a retailer in the Southeast, comped -10%. When you take a look at it, we comp positively 0.1%. I think we're actually taking share in the marketplace. We've got visibility to some other companies that we think have had negative comps. We think the sector has gotten weaker, as you said. You take a look at our sales versus what else is in the marketplace, we think we've actually picked up market share.
Do you think you're gaining less share than maybe prior quarters where you've seen all the disruption, all the benefits from competitors closing, just as you think about the magnitude of the market share benefit?
I don't. If you take a look, as I said, the outdoor competitor, the comps were down -9.7%, and the other retailers that we compete with in the Southeast had -10%. There's never been that kind of a difference between our comps and the competitor's comps before. Our comps have usually been, in the sporting goods industry, the same or higher than our competitors. There's never been a 10% difference. With that 10% difference, we clearly believe that we're picking up market share, probably at a greater rate than we had in the past.
Okay. As you think about the investments that you're making in aggregate, it seems like a step up from what we've seen, at least in the last couple of quarters, and you discussed price, e-commerce, team sports. These don't really seem like short-term investments. As we think about next year, would you expect margins to remain under pressure?
I'm not sure they would become under increasing pressure. They may, depending on what's going on in the marketplace. I think at least for the next some period of time, this is a new normal from a margin rate standpoint.
Okay. Thank you.
Sure.
Our next question comes from Steven Turnbull with Goldman Sachs. Please go ahead.
Hey, good morning, guys. Thanks for taking the question. I guess if I could just follow up a little bit on sort of sales and trying to understand. Clearly, you guys are doing quite well relative to some of your competitors, but in absolutes, things have slowed, and some of that's the market. If you could sort of parse out, what do you think is the bigger driver here, the step change? Is it the incremental capacity that's come online, whether it's Kohl's and Under Armour or others, or is it the Gander liquidations in the quarter, or the vendor selling direct? Do you have a good sense of how you could sort of parse through those and think about what may be the biggest issue or what's changed the most anyway?
I think it's a combination of all of those. Certainly, the distribution changes in the marketplace, the broadened distribution primarily around the athletic area, is parsing out market share. Kohl's indicated that they've had great success, and I suspect when you come from zero on something to rolling it out, you're going to be determined to have success. I think the increased distribution in this category has impacted the business. We're going to go and aggressively fight to move that market share back to us. That's a high margin area also. As we reduce margin and that area gets hit a bit from a sales standpoint, that has an impact. The vendor direct piece is certainly a concern, especially when the vendors start to become promotional on their own sites.
Yep. That's helpful. I appreciate that. Now, just thinking through the guidances, it looks to us anyway, as though the back half EBIT margin is implied down about 120 or 180 basis points, and you just levered SG&A close to 100 basis points. I guess part of the question is, does the SG&A leverage continue at a similar pace such that gross margins are actually implied down, call it 220 or 280 basis points, something in that neighborhood, or is there reason to believe that SG&A gets less good, or yeah. You say yeah.
No. About the same. You've got it, Craig, and the difference is going to be in the margin rates from a sales and promotional standpoint.
Got it. Okay, just lastly for me then, on the SG&A side, could you give us a little help, maybe, Lee, on sort of the different drivers in the quarter as we try to model it forward here, the trend rate?
Well, we continue to benefit from our new e-commerce platform and the leverage that's giving us on the e-commerce, which is helpful. As we get into the back half of the year and that becomes a bigger part of the business, we expect that to continue. We also had our reduction in force that we had here at the corporate office back in May, and we picked up a pretty good chunk of that in the second quarter. Those will continue in the third and fourth quarter as well. Those are the main drivers, and we'll be pursuing some additional expense opportunities and really sharpen our pencil on our expenses for the back half of the year beyond that.
Got it. Okay. Thank you, guys.
Our next question comes from Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Ed, you've been talking about irrational and unpredictable pricing. What's the end game? What do you see as the catalyst to make pricing become more predictable and more rational?
That's a really good question, I don't really know. I think that this whole mindset on what's going on with the business, everybody resetting their business, can get more rational. I think there's going to be continued consolidation in this industry. As we know, when consolidation starts to happen, price is the first line of defense, if you will, or the last line of defense. I think it's going to continue on. As I said, I think that how the market is being priced right now and the promotional opportunity, I think is going to be, at least for the foreseeable future, is going to be the new normal until the industry consolidates further.
Is your strategy from here to meet the market, or do you intend to try and accelerate some of the consolidation and some of the damage that might be experienced for the long run by being more aggressive to the market, so beating to your competitor's pricing?
There are going to be some areas that we are going to go and we are going to be aggressive, and we will be beating their prices. We're not going to sit back and just watch this happen. We've got the financial strength and muscle to withstand this storm, and we're going to be very aggressive and continue to take that leadership position in the marketplace. We took it in the past as how we led the business from a premium standpoint, how we led it from a merchandise presentation standpoint. We're not going to change that, but if we're going to get into a price war, we're going to get into a price war. That's what's happening, and that's why we've taken the guidance down. We're not going to sit back and just wait for things to transpire in front of us.
We're going to completely engage, and we're going to be very aggressive to protect our position.
Just to frame all this, margins for DICK'S have peaked out around 9% in the past. We shouldn't think about that as a realistic margin expectation anytime soon.
Not in the foreseeable future right now with the marketplace the way that it is today.
Thank you very much.
Sure.
Our next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Just to follow up on margin to a couple of questions that were asked. Back half margins are forecast to be down pretty significantly. If we think about an investment period that's beginning the next couple of quarters, or now, that should linger at least for the next couple of quarters into 2018. Is that fair? I know you're saying it's hard to know if it stabilizes, but do you have a sense if these investments linger basically until we lap them in the middle of next year?
I would probably look at this. This is going to continue on into 2018. I'm not going to predict when it's going to lapse, but you should look at this, as I said, this is the new normal for a while.
Okay. I guess, a couple of parts on the price matching. You intimated that you've seen a little bit of a, I don't know, rebound or response in engagement or maybe even business on the back of price matching. I'm less concerned about the top-line trends, more about if it's starting to change behavior. If that's the case, as a component of that, are there any categories where the perception on price was more prevalent than others? I have one more follow-up on the price match.
On the track of what I said was that we've gotten a positive response from our consumers. It's been too early to say it's really having an impact on our business, but we've gotten positive response from the consumer on this. I'm sorry, the second part of your question?
Are there any categories that stand out that are more prevalent as a perception as far as price driving or price perception driving?
Yeah. The hunt business, the gun and ammunition business, as difficult as that is right now, that is continuing to be promotional, and I think it is going to become more promotional as we get into the meat of the season, which is toward the end of the third quarter and into the beginning of the fourth quarter.
Okay. I guess then my last piece is then, does it make sense to think about EDLP in some categories? I don't know, I dare to say, are competitors selling below what should be EDLP currently vis-à-vis promotions?
Yeah. The pricing in the outdoor category, especially the hunt category, has become what I would characterize as almost irrational. Part of that is because there is a big, and you know this from looking at some others, through the entire supply chain, there is a significant amount of inventory that needs to be cleaned out.
Got it. Okay.
Not dissimilar to the golf business probably four or five years ago, now the golf business has rebounded and the golf business is terrific. We would expect this it'll happen in the hunt category. As with the golf business, there's going to be some pain that's going to be experienced for the foreseeable future.
Thanks.
Sure.
Our next question comes from Sam Poser with Susquehanna. Please go ahead.
Good morning. Thanks for taking my questions. First of all, I guess, can you talk about the makeup? You might have said this, but can you give us more details on the makeup of the excess inventory? Where are you clean, where you don't expect it to be as promotional? You've already talked about your hunting inventory. Can you give us some more details on that? Then I have a couple more.
Our inventory is really in pretty good shape. The supply chain is backed up, our inventory is in pretty good shape. We haven't opened a buy on products across the board. If we have an opportunity to buy product at what we perceive to be the right price, we'll do that. We're not backed up in inventory. We're in a very good position.
Thank you. You're starting the price matching strategy as well. As you mentioned, how promotional you anticipate it is for the first little bit of the year. Does this make you nervous that to drive the traffic, you need to be promotional, hence, your consumer may consider they continue to think it's promotional as you're going to become a more promotional retailer going forward? Or is this an opportunity maybe to really think about your messaging for the DICK'S brand to help drive more traffic to the stores vis-à-vis in-store events, so on and so forth. Lastly, what kind of variance, let's say, in those A malls versus the C malls and B malls or locations are you seeing on the brick and mortar from a comp basis?
I'll answer the last question first. We're not going to get to that level of granularity to lay out what our comps are by category A mall, B mall, C mall. From your first part of your question, Sam, we really think there's so much price transparency in the market today that those who sit back and hope that it goes away or that it's going to change, I think, are going to have a problem. You've got to find a way to compete and not only survive but thrive in this industry in the way that the price transparency is today. We think that we're doing that, and we think eventually we'll continue to make up more market share. We think there'll be more consolidation in this industry, and we like where we are long term.
We don't like where the whole industry is today, it won't stay here forever. We like the position we're in going forward. Price transparency is here to stay, and our margins, I think, are going to be under pressure from what they were a few years ago for a very long time, possibly in perpetuity. If anybody tells you anything different, I don't think they're understanding the new reality.
I will. Thank you, good luck.
Thanks.
Our next question comes from Steven Forbes with Guggenheim. Please go ahead.
Adrian Bachman for Steve. Two questions. When you think about the stepped-up promotional activity, is that likely to be more brick and mortar direct than e-commerce? How do you get your arms around an ROIC calculation in an environment where pricing is irrational or you really can't, that sort of has to go out the window until rationality returns?
Yeah. The pricing is transparent and is going to be the same in stores and online. You're going to have that promotional activity along both of them. You see people at the grocery stores today walking up and down the aisles with their phones, shooting barcodes and getting prices. The price transparency is here to stay. An ROIC calculation, we take a look at that. We've got to do a better job of looking at the components of that. We've got to do a better job of turning our inventory. We've got to do a better job of how we can manage margins. We think it can be helpful what we're doing with our private label. As I said, that was up mid to high single digits in comps in the second quarter. These are all at margin rates that are higher than the company average.
We've got to continue to build those brands. The CALIA brand has been a huge success for us. We think that that gives us the opportunity to move into other areas and other categories. This is a longer-term play, but we like where we're at long term.
As a follow-up, somebody in another industry had said to me once that if you go out and smack people around price-wise, it can take that irrationality out of the market, but it sounds like this is different because it's an inventory overhang more than anything else.
Well, I think that the inventory overhang is in the hunt category.
Yes.
The promotional aspects are across a number of categories. The hunt category, the athletic apparel category, and with the increased distribution in the athletic apparel category, it's become more promotional. We didn't start the promotion, but we can't sit around and pretend it doesn't happen. We need to engage in that. Our customers have told us, "You need to engage. In today's marketplace, you're higher priced than I can find the product someplace else." I'm a firm believer that the definition of loyalty in the retail business for the consumer is the absence of a better alternative. We need to make sure that we provide the consumer the best alternative, and that's what we're going to do.
It's going to be a little expensive, and it's going to be a little painful for a short period of time, but it's what we need to do long term.
Lastly, given your under-penetration in footwear, right, and the success of the decks, is there a good likelihood that the pace of installation accelerates in 2018? It's probably too late for this year, but that 2018 it steps up?
Yeah, we're looking at the vast majority of the new stores that we open will have the new footwear deck. Any of the stores that we remodel will have the new footwear deck. We're taking a look at what stores we would want to put that new footwear deck into next year.
Okay, thank you.
Sure.
Our next question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Hi, this is Mike on for Scot. I was wondering if you could help quantify the impact of the price matching program versus overall, just lowering prices towards the market. Also, if you could remind us what the penetration of the hunt category is in overall sales.
Well, we've never disclosed what the hunt category penetration is, for competitive reasons, we're not going to get that granular. As far as the price match guarantee, we've just started that. If you want to take a look at a level of impact, the price match guarantee is going to have a much lower impact on the margin rates than being competitive out there in the marketplace. Because if we're competitive in the marketplace, we're not going to have to match many prices. The primary driver of the reduced margin rates going forward is the marketplace today and how we need to be competitive for our consumers.
Thanks. Just to follow up, I was wondering if you could talk about the juxtaposition of your ongoing vendor negotiations with strategic partners and some of the broader distribution, how maybe that's impacted some of those discussions and how it might impact them going forward.
Our strategic vendors, we've got a very good relationship with. We understand why the broadened distribution has happened and what's going on. We understand that. We don't really like it, but we understand that. That's the way of the world, and we need to compete in the real world and not sit around wishing that things were different. We have these conversations, and they've been very helpful in trying to find ways to differentiate us in the marketplace, and we expect that will continue. We try to find ways to overtly move market share to those strategic vendors. We've continued to have a great relationship with the vendors, even though they're making some decisions that we don't like. We understand the world we operate in, and they're going to do that.
If they don't do that, you guys are going to bust them for not doing it. It's kind of a catch-22.
Thank you.
Sure.
Our next question comes from Adrienne Yih with Wolfe Research. Please go ahead.
Good morning. I have two quick questions. The first is on e-com. What's the penetration this quarter? How much did it grow? If you can give us some color on the digital initiatives and when they'll start to impact digital and personalization. Secondly, what do you perceive the impact of Nike partnering testing on Amazon, and how can you ensure that your positioning is still differentiated from that of the Amazon offering? Thank you very much.
The e-com penetration was 9.2% for the quarter, it grew 19% year-over-year.
Excuse me.
All right.
From an Amazon standpoint and Nike, this is a test. We'll see how this goes. They've been transparent talking to us about this test. I suspect it will probably go well, and then Nike will decide what they want to do about it and how they want to handle the balance of the market. Our relationship with Nike has always been very good. It continues to be very good. We continue to work with them on shops, on our footwear decks, on exclusive products. They're a strategic vendor of ours, and we've got a great relationship, and what they're going to test and what they'll do ultimately, we'll deal with that when it happens.
Okay, great. Thanks a lot. Best of luck.
Thank you.
Our next question comes from Christopher Horvers with J.P. Morgan. Please go ahead.
Thanks. Good morning. You mentioned that the inventory overhang is not in the athletic apparel category. That's typically a MAP pricing structure in that category, as far as I understand it. Are brands basically looking or not disciplining on MAP and looking past it? With it not being an inventory overhang, what's the issue and what brings that MAP enforcement back in line? Do you think they just need to get that the growth rate in the market isn't what it was, and once they get that, they'll start being more disciplined? How do you think about that?
Well, some brands have actually modified their MAP program, number one. Number two, I don't think there's discipline at enforcing it. Number two, MAP is only for advertised price. It has nothing to do with what product is sold in the store at. MAP is an interesting and a nice idea that's not as effective as some people think that it might be.
When you say that some brands have modified MAP, is that basically loosening the structure?
Yeah. Loosening the structure or having more MAP weeks where everybody promotes a MAP week or some categories or some products taking off MAP. I think MAP right now is an interesting concept that's not terribly effective, and as I said, MAP is only a minimum advertised price. It has nothing to do with what the price of the product is sold in the store.
Then, do you think that if you look at some of your big vendors over the past five years, they've expanded sequentially into more and more department store brands, now you have Nike with the test on Amazon, obviously from their perspective, they like to grow doors and they like to grow. They've expanded the distribution points chasing growth. Is there any hints that they will become more disciplined on channel management, given the fact that pricing sounds like just falling apart in the market?
Well, I don't think it's falling apart. It's just gotten more promotional, and you'll have to talk to them. I'm not going to comment on what I think some other brands are thinking about doing with their brands and how they come to market.
Understood. Thanks very much, Ed.
Our next question comes from Daniel Muller with Raymond James. Please go ahead.
Thanks. During your prepared comments, you did open up the possibility of additional share buybacks. During the Q&A session, Ed, you talked about the company being willing to enter, I think your words were, a price war to protect market share. Do you really think this is a good time to be buying back shares if the industry is going into a prolonged price war? Do you see it as an area where maybe it makes sense to improve liquidity instead of buying shares?
Dan, we didn't say we were going to. We said we're going to leave open the opportunity.
No, that was like.
You said we can.
This is a follow-up question then. Last year, we were expecting 2017 to become a year that you began to achieve a payback on the e-commerce investments. I believe we were looking at savings of 25 basis points. Would I understand your comments correctly that you're seeing a need for increased investment in your e-commerce shopping site and that.
We feel that
Okay.
I'm going to finish your thought. I thought you were done.
Well, I was going to say that original forecast of 25 basis points in savings kicking off this year no longer looks achievable. Is that the takeaway?
Well, actually, we did that. We got the increased profitability that we had talked about in a normal world. What's happened now from a pricing standpoint, it's gotten more promotional. The issues that we had or what we're looking at is investments we need to make are pricing online also. The increased profitability we had of between 25 and 30 basis points as we moved into our own e-commerce business, we actually achieved. We did exactly what we said we were going to do, no one predicted what was going to happen in the marketplace from a pricing standpoint.
Just one real quick question, if I could add. Talking about the golf category, I was talking with the other leading off-course specialty retailer, if they could see a scenario where 2018 could be lower than 2017 with the thought that you won't reach the anniversary of the Golfsmith liquidation. Perhaps Callaway doesn't have another product as successful as Epic. They talked about it's something that they're kicking around inside their corporate office, but no one ever likes to tone the business down, but that could happen next year in the golf category. Do you see that as a possibility?
We have never commented, nor am I going to comment about [2,000 and a year out]. We're having a very good year from a golf standpoint right now. Our hope is that the brands continue to bring out great product. We're in a great product cycle right now, I'm not going to comment or speculate on what the golf business might be next year.
Okay. Thank you.
Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Hi. Good morning.
Hey, Brian.
Sorry to be repetitive or beat a dead horse here.
That's okay.
I guess, you talk a lot about price promotions, I guess now my big question is, are the promotions coming primarily from retailers struggling with excess of inventories, in categories like hunting? Or are you seeing new, likely online-only type companies push into the space with lower prices as a means, or as an effort to disrupt the margin structure? Is it one of those two buckets and is one significantly more than the other?
New retailers online with lower prices, not a big deal. We don't see that as a big deal. New online retailers. Existing online retailers and what happens with Nike and Amazon, we'll have to wait and see. Inventory is backed up in the hunt channel. I don't think it's backed up that much in the athletic channel. Maybe a little bit, but I don't think in a short time that can be done. I think the pricing is from additional significantly increased distribution and everybody fighting for their share of what now is the same size market, but with more competitors in there. We're going to be very aggressive trying to retain that market share. I think that's the pricing on the athletic side. On the hunting side, it is very slow growth.
There is no concern about any gun reform right now based on the political situation that is in Washington today. The inventory is backed up. People need to get rid of the inventory. Some people are panicked as to what's going to happen with their business from a growth standpoint. I think it's just a perfect storm right now in retail, and I think sporting goods is in the center of it right now. There'll be further consolidation. We're seeing Gander Mountain closing right now. We'll see what happens with some other retailers. It's a perfect storm right now. We're not particularly happy that we're in it, but we think we are one of the few that are very well positioned to come out the other side very strong and continue to be the leaders in this industry.
We think it'll be great on the backside, but it's going to be painful for a while. We're fortunate that we've got the financial strength and the balance sheet to get through it all without having to raise additional capital.
Got it. The next question, and maybe this is early, but clearly, you're talking on this call and in your release today about adjusting your pricing for this environment. Should we start to think about changes in your stores? As you think about how the environment's, or how the sector's transitioning and what's likely to come out the other end, are there changes you could make in your stores, either to the format or the layout in the stores? You mentioned before as a golf example, but through that period of upheaval, you did reformat that area of your store. Is that something else we can see happening there?
Yeah. We're taking a look at that. We're enthusiastic about what we've done from a footwear standpoint. You'll also start to see that we've starting to reformat the center of the store. You'll find CALIA on the front of the power aisle going forward, in a lot of stores now and then going forward. In some stores, we've tested having CALIA have a much bigger footprint and having both sides of what we characterize as the pad on the power aisle, both the front and the back of that. We will probably move different brands into those areas, moving some brands in and out. We've also talked about what we're going to do with the store. We've got some thoughts about some meaningful changes that we're going to make in the store that we're not ready to talk about yet.
Got it. Just one more. You mentioned CALIA. With this whole discussion of pricing and more aggressive pricing in the category, where does CALIA fit into that?
There will be maybe some promotion with CALIA, but very little. This is a brand that's pretty hot right now. Our design team has done a great job from a pattern standpoint, performance standpoint, fabrication standpoint. This is a brand that's pretty hot in the marketplace for us right now, and we do not see a need to promote that brand aggressively.
Okay. Thanks.
Sure.
Our next question comes from Omar Saad with Evercore ISI. Please go ahead.
Thanks. Good morning. Thanks for taking my question.
Sure.
You guys talked last quarter about slowing the store growth down, taking advantage of what you expect to be lower rental rates. With the changes accelerating in the industry and the pricing pressure, which you've obviously talked a lot about today, are you rethinking the long-term goal and the footprint of the DICK'S franchise? As a result and what seems to be now a prescient decision to slow down the store growth?
Remember, we've talked about slowing down our store growth, not because we're not happy with our new store performance. Our new store performance has been very good. We slowed the store growth down because we think real estate prices a couple years from now are going to be less expensive than they are today. We're seeing that as we renegotiate leases or relocate stores, the rents are coming down in all but the true A malls. If you take a look at the true A malls, we actually think rents in those malls might actually go up. We're not in a ton of those, and we've got long-term options, so it won't affect us. We actually think those rents may go up because they're going to be in such high demand.
Some of the secondary locations, and we're a destination shop, so we can take that kind of a B mall location, and the rents have continued to come down in those, and we think they're going to continue to come down. We've got 25% of our stores over the next three years that are up for renewal, and the renewals are our option. We have an option to extend for another five years and another five years after that, and probably another five years after that. We control these buildings for a long time. If there's another alternative, we have an opportunity to go to a different alternative. The rents have come down pretty significantly, and we expect that to continue.
Got you. You're sticking with the longer term 1,100 store target?
We still think that we're kind of in that zone, yes. It's going to be a longer ramp to get there. We've also taken a look at what we're going to do with the Field & Stream stores and the combo stores and the triple plays. When we've lined up the three banners all together, the Field & Stream, DICK'S, and Golf Galaxy all lined up together, it's a powerful shopping experience, and we're very happy with that. When you take a look at that, is that one store or is that three stores? Overall boxes, we think that that 1,100 is probably pretty close.
Got you. Then one quick follow-up on the pricing. When you look at the irrational behavior you alluded to, would you lay the blame there more at the retailer's feet or the brand's feet, or are both sides kind of guilty of going down that path?
I'm not going to lay that at anybody's feet. I think you'd add someone else there, too. I'm not going to lay that at anybody's feet. That's just the way the marketplace is. That's the environment we have to operate in, and that's how we're going to operate. We're going to engage in this and protect our market share.
Thanks for the color.
Sure.
Our next question comes from Rick Nelson with Stephens. Please go ahead.
Hey, guys. Nick Zangla on for Rick here. Thanks for squeezing me in. The e-commerce performance improved in the quarter up 19% versus 10% last quarter. I'm assuming associated marketing was stepped up in the quarter and drove some traffic. Can you just detail the drivers of the sequential improvement, and then should we continue to expect 20% growth on the e-commerce side like we've seen historically, even despite some of this broader vendor distribution?
We're not going to comment on what we think that the e-commerce business is going to be going forward and guide to that. The sequential improvement was due to marketing. If you remember, we said that as we got the site up and running, we had scaled back some of the marketing, not to stress the site, to make sure that everything was fine. As we felt that the site was up and running and stable, we increased the marketing, which drove those sales numbers. Also, the pricing. We were very competitive from a pricing standpoint and promotion standpoint online.
Was there normalized marketing throughout the entirety of this quarter, or did that take some time to adjust?
It was pretty much normalized for the quarter.
Great. All right. Thank you, guys.
Our next question comes from Camilo Lyon with Canaccord Genuity. Please go ahead.
Hi. Good afternoon. Good morning. Thanks for all the candor this morning. Most of my questions have been asked, but I did want to get your thoughts on what the feedback has been with respect to going after TSA clients via the intellectual property that you secured from the TSA bankruptcy. Has that been successful? Have you been able to track that consumer's migration to DICK'S and Golf Galaxy? Are you seeing any sort of changes in their shopping behavior relative to your core consumer?
Well, we don't see them shopping much differently than our core consumer. Yeah, we've been aggressive in targeting that and continue to pick up market share where those TSA stores have closed. I think our marketing team and the operations team has done a really good job with that.
Okay. Just in trying to attack a question that's been asked many times on the call from slightly different perspective on the brand impact on the promotional environment on the apparel front. What do you think from their perspective is the leading cause for being incredibly promotional in today's market? What do you think is driving their decision to carry that level of promotion in their own products?
You're talking about the brands?
Yes.
The category slowed down a little bit. Not every brand is doing this, but I just think there's the thirst for growth or the requirement for growth, and that has broadened the distribution channels. As you broaden distribution channels, you've got relatively the same pie and more people going after it. The marketplace is going to be disrupted, and people are going to be more promotional, trying to drive consumers to their store and their shop. That's what we're seeing. The market was disrupted from a distribution standpoint. Everybody in the market is going to try to grab their share of the market. Usually, you do that with either If it's not truly differentiated content, it's going to be service and price. In all of our research, service is important. Price trumps service.
Do you think it's a lull of innovation on the product front or association on the consumer's behalf in terms of how much athletic apparel they have in their closet?
I think it's a combination of the two. I think most of it is just broadened distribution.
Okay. Thanks very much. Good luck.
Thanks.
Our next question comes from Matthew McClintock with Barclays. Please go ahead.
Hi. Yes. Good morning, and thanks for taking my question. Ed, I'd like to take a different angle at this and maybe start with an area of somewhat strength, which was premium footwear for the quarter. Can you talk what specifically is different about the premium footwear business relative to the rest of your business and maybe why it's outperforming the other categories right now? Thank you.
Well, the footwear business has been good. We hope that it's going to continue. There's been really differentiated product out there and product that has been hot, the consumer really wants to buy. We've worked with the brands. We had that product in our store. Our teams have done a great job merchandising it. The stores have done a great job servicing it. Content is king. In footwear, the content is more exciting right now than the athletic apparel business. It's more exciting than other areas of this business that we occupy in the outdoor category, in the hunt category. Footwear is still pretty exciting out there, and the brands are doing a very good job of bringing out innovative and new product that is resonating with the consumer.
Thank you for that color.
Sure.
Our last question for today comes from David Magee with SunTrust. Please go ahead.
Yes. Hey. Good morning. Just a quick one on the loyalty program, I'm just thinking about ways you could differentiate yourself in this environment. Is that shopper proving to be more sticky at this point in time, or is there more you can do in that area to stand out?
It's interesting you bring that up. Yes, that customer is pretty good with us. We have talked about it. We're looking at ways that we can make that more exciting and get a bigger share of that customer's wallet. What we're doing right now is relatively basic in our loyalty program, and we're looking at ways that we can ramp that up to give the consumer a better reason to shop in our store than other stores. We don't have any color on that yet. We're working through that, but we do expect to come out with something that will enhance our loyalty program pretty significantly.
Okay. Thanks, Ed. Good luck.
Sure. Thank you.
This concludes our question and answer session for today. I'd like to turn the conference back over to Ed Stack for any closing remarks.
I'd like to thank everyone for joining us on the call. We look forward to talking to everyone on our third quarter results. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.