Good morning, and welcome to the Pecks Sporting Goods 4th Quarter Earnings Conference Call. All participants will be in listen only mode. 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 Yotes, Director of Investor Relations.
Please go ahead, sir.
Thank you. Good morning, and thank you
for joining us to discuss our Q4 2016 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer Andre Howell, our Chief Operating 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 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 and are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and in the Risk Factors section of our Form 10 ks, 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 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 dis.com.
I'll now turn the call over to Ed Stack.
Thanks, Nate. I'd like to
thank all of you for joining us today. As we announced this morning, we had a strong Q4 and delivered non GAAP earnings per diluted share of $1.32 This exceeded the high end of our guidance and represents a 17% increase over last year. Our total sales increased 10.9% and we improved non GAAP operating margins year over year. We delivered comp sales growth of 5%, supported by increases in both ticket and traffic. Our e commerce sales increased 27 percent to approximately $444,000,000 and grew to 17.9% of our net sales compared to 15.7% in the same quarter last year.
During the quarter, we continued to realize meaningful market share gains and saw growth across each of our 3 primary categories, hardlines, apparel and footwear. Our footwear business was strong and we remain encouraged with the results of our premium full service footwear decks. We're pleased with our apparel business, which benefited from the Chicago Cubs World Series Championship and favorable weather patterns that helped our cold weather business. Golf was also positive, while the outdoor category was slightly negative, driven in part by a decline in hunting. 2016 was certainly a unique time in our industry.
We've taken advantage of the market disruption by capturing significant market share left behind by TSA, Sports Chalet and Golf Smith. As we've studied the consolidation in our industry, we felt it prudent to conduct a thorough review of our business, including our stores, merchandising strategy and vendor structure. Based on this review, we are implementing a new merchandising and vendor matrix to better serve our customers now and wherever they choose to interact with us. Our vendors will be divided into 3 segments. Segment A will be strategic vendors.
These partners will invest significantly in our business, both online and in store, and we will invest significantly in their business. These strategic vendors will also provide exclusive and differentiated products in the marketplace. We will overtly move market share to these partners in an effort to drive growth in our respective businesses. Segment B will be vendors that we simply have a transactional relationship with, and segment C will be vendors who we will eliminate from our stores. We've already started this process and expect to eliminate up to 20% of our vendors this year.
We've identified the merchandise that doesn't fit within vendor and assortment strategy and have taken a $46,000,000 charge to write it down. We also conducted a comprehensive review of our store portfolio and other assets. As a result of this review, we closed only 3 of our 676 DICK'S stores. Separately, in conjunction with acquiring the best Goldsmith location, we closed 10 of the original Golf Galaxy stores we bought that were located in close proximity to an acquired Golf Smith store that is better positioned to serve our customers. We also incurred the leasehold improvement to 12 additional stores and other assets as well as incurring TSA and Golf Smith integration costs.
In total, these charges were approximately $47,000,000 During 2016, we fulfilled the needs of displaced TSA, Sport Chalet and Golfsmith customers. We acquired their best store locations, customer information and transaction details at the SKU level. Leveraging this data, we reached out to displaced customers and plan for their needs with the right product offerings in the right locations. As a result, we realized meaningful market share gains, both in store and online. In 2017, we'll remain focused on aggressively capturing displaced market share.
Our new growth new store growth will center on new and under penetrated markets, which were historically served by TSA and Sport Chelet. We will also continue to leverage the transaction details along with the TSA and Goldsmith customer list to target millions of new customers. Turning to digital. I'm proud to report that at the start of this fiscal year, we successfully relaunched dicks.com on our proprietary web platform. The relaunch was a critical moment for us and we're optimistic as we continue to iterate on platform functionality.
We believe there is meaningful opportunity for future profitable growth, which we will drive by remaining focused on consistently and deliberately meeting our customers' needs across all channels. Looking ahead, one way we'll continue to meet our customers' needs is through our team sports headquarters business, which is a roll up of Blue Sombrero, Affinity Sports and Game Changer. Our goal is to create a holistic digital ecosystem to support and equip youth sports. Importantly, through agreements and principles for exclusive partnerships with Little League Baseball and Softball, Pop Warner Football and U. S.
Youth Soccer, we have established relationships with millions of players. Team sports headquarters will also keep us top of mind for athletes and their families and will create a powerful data set that we will use to develop offers that are tailored and time to meet the needs of these athletes. We see this as a multiyear initiative that will be a growth driver for us. Lastly, our private brands and premium full service footwear decks are key pillars of our new merchandising strategy. For an example, we remain extremely enthusiastic about CALIA, which has risen to become our 3rd largest women's brand in less than 2 years.
Looking ahead, we will expand offerings in CALIA, Field and Stream, Reebok and other key brands. We'll also be launching 2 exciting new brands this spring. As a result, we expect our private brand business to reach approximately $1,000,000,000 in sales this year. Our premium full service footwear decks also provide us a compelling product offering. With this presentation, we're able to offer products that our customers cannot find at many other sporting goods stores and department stores.
In summary, during this time of significant disruption in our industry, we are very optimistic about our future and the strategies we've outlined. I'd like to take a moment to thank our associates across the company for the hard work and commitment they showed to deliver our Q4 results and for the upcoming efforts in this fiscal year. I'd now like to turn the call over to Andre.
Thank you, Ed. In 2016, we possibly grew our omnichannel platform, ending the year with 6 76 Pick Stores, 91 Golf Specialty Stores and 27 Field and Stream Stores. We maintained strong new store productivity and our stores continue to support our e commerce business, which for the full year increased approximately 26% to $939,000,000 During the Q4, we reopened the first three former TSA stores and Zix stores and acquired 30 Golfsmith stores, which are being converted to the 12 Galaxy brand. In 2017, we expect to open approximately 43 new Zix stores, primarily located in California, Florida, Texas and the Pacific Northwest and relocate approximately 7 Dick's stores. 19 of these are former TSA stores that will reopen as a DICK's store largely during the first half of the year.
Additionally, we expect to open approximately 9 Golf Galaxy stores, relocate 1 Golf Galaxy store and open 8 Field and Stream stores. 8 of the Golf Galaxy openings will be golf Smith conversions, while the remaining location will be in the combo store format. All of the Field and Stream stores will be in the combo store format. During the Q1, we expect to open 16 new Dick's stores, including 10 former TSA stores and relocate 2 Dick's stores. We also expect to open 2 Field and Stream and 9 Golf Galaxy stores, including 8 former Goldsmith stores.
Lastly, we continue to drive store productivity through our premium full service footwear decks. At the end of 2016, we had 184 in place and expect to add approximately 50 additional decks in 2017, primarily within our new Zix stores. I'll now turn the call over to Lee to review our financial performance in greater resale.
Thank you, Andre, and good morning, everyone. Beginning with our Q4 financial results, consolidated sales increased 10.9 percent to approximately $2,500,000,000 Consolidated same store sales, which includes all banners, both online and in store, increased 5%. Within this, Dick's Sporting Goods' omni channel same store sales increased 5.3%, driven by a 2.4% increase in ticket and a 2.9% increase in traffic. Golf Galaxy omni channel same store sales increased 13.2%. We continue to see strong growth in our e commerce business, which increased 27%.
On a non GAAP basis, gross profit for the Q4 was $766,000,000 or 30.85 percent of sales, up 85 basis points over last year as merchandise margins expanded and we leveraged occupancy expenses, partially offset by higher shipping costs associated with our rapidly growing e commerce business. Non GAAP SG and A expenses were $533,000,000 for the quarter or 21.46 percent of sales, an increase of 86 basis points from the same period last year and deleverage was primarily driven by higher incentive compensation expense. In total, led by our strong comp sales performance, we delivered non GAAP earnings per diluted share of $1.32 which represented a 17% increase over the same period last year. On a GAAP basis, our earnings per diluted share were $0.81 which as Ed discussed, included approximately $93,000,000 in charges. For additional details on this, you can refer to the non GAAP reconciliation in the tables of our press release that we issued this morning.
Now looking to our balance sheet, we ended the 4th quarter with approximately $165,000,000 of cash and cash equivalents and no borrowings outstanding on our $1,000,000,000 revolving credit facility. Total inventory increased 7.3%, which is below our 10.9% sales growth in the quarter. This increase includes inventory purchased for the 30 Goldsmith conversions as well as our 27 new store openings planned for the Q1. As we transition into the spring season, we are comfortable with our inventory levels for our go forward merchandise and confident that our new merchandising strategy will drive better inventory productivity. Turning to the Q4 capital allocation, net capital expenditures were $49,000,000 or $115,000,000 on a gross basis.
Additionally, during the quarter, we paid $16,700,000 in dividends. And as you know, we recently increased our quarterly dividend by 12% to $0.17 per share. We also repurchased $29,700,000 of stock at an average price of $54.06 In total for 2016, we repurchased 3,130,000 shares of stock for $145,700,000 and we have approximately $1,000,000,000 remaining in our authorizations. Now let me wrap up with our outlook for 2017, which will be a 53 week year. For 2017, we anticipate non GAAP earnings per diluted share in the range of $3.65 to $3.75 This includes approximately $0.05 coming from the 53rd week.
We expect consolidated same store sales to increase between 2% and 3%. As we discussed, digital is a top priority. Within our guidance, we have contemplated continued investments to enhance our digital capabilities, including our team sports headquarters business. This also includes support for our new e commerce platform, primarily within the Q1, which we previously planned for as part of the launch. Additionally, we will maintain our investment in premium full service footwear.
All this considered, we expect operating margin to increase year over year, driven by SG and A leverage and expected expansion in gross margin. Net capital expenditures for the full year of 2017 are expected to be approximately $350,000,000 or about $465,000,000 on a gross basis. 2016 net capital expenditures were $242,000,000 or $422,000,000 on a gross basis. Our earnings guidance assumes an effective income tax rate of approximately 37.5 percent and is based on an estimated 111,000,000 to 112,000,000 diluted shares outstanding. This includes the expectation of share repurchases to fully offset dilution in 2017.
Turning to the Q1, we anticipate non GAAP earnings per diluted share of between $0.50 $0.55 with an increase in consolidated same store sales of between 3% 4%. We expect earnings growth in Q1 to be a little lower than our annual rate of growth as we will have higher pre opening expenses, since opening 22 more stores compared to the same period last year and previously planned one time expenses to support the launch of our new e commerce platform. These items account for about $10,000,000 of incremental expenses in the Q1. Looking ahead, we expect to deliver accelerating earnings growth in the Q2. Please note that our Q1 and full year non GAAP earnings per diluted share guidance does not include approximately $3,000,000 of occupancy and professional fees to convert former Sports Authority stores.
We will continue to report these costs to you in future periods. Before concluding, I'll take just a moment for a quick housekeeping item. As previously indicated, since Golf Galaxy was only approximately 3% of our total sales in 2016, we are not planning to specifically call out Golf Galaxy comps, rather we will speak to our Golf business on a consolidated basis. This will conclude our prepared comments. We appreciate your interest in Dick's Sporting Goods.
And operator, please open the line for questions.
Thank you, sir. We will now begin the question and answer session.
And
And our first question will be from Caitlin Shane of Citi Research. Please go ahead. Hi, good morning. Thanks for taking my question. My question is around the settlement consolidation.
Just why is it the right time now? And with the change in vendor strategy and the competitive landscape changing, how are you viewing your balance of opening price points in your mix of goods or best?
Kate, this is the right time. Based on the disruption that's been that's happened in this industry over the last year, we felt that it was really the right time to review really an in-depth review of everything that we do in the business. As we look at this, we felt that it was the right time to consolidate our vendors and we will continue to have a good better best strategy that is really going to change. We'll still have opening price point product, we'll have good product and we'll still have the product to be able to serve that enthusiast. But some of those tertiary vendors, like I said, we'll be we'll probably be eliminating up to 20% of our vendor base.
And we think it's the right thing to do long term for the business.
Is there
a particular category that the vendor base is concentrated or is it across the board?
It's really across the board. And we're not going to get into vendors that we are eliminating. We're not going to get into talking about what vendors are in what particular segments, but it will be across the board.
Okay. Thank you. The next question will be from Michael Lasser of UBS. Please go ahead.
Good morning. My first question is on the vendor consolidation as well. What do you expect to be sales and margin implications on the strategy to be? And is it really a play on trying to get more exclusive products? Or is it really about getting better margins and terms from your partners?
It's really across all of those. So what we don't expect to with the comp sales gains and the earnings that we've anticipated, we don't expect to give up any sales or any margin rate. It's going to be across a broad range of products and it will also give us an opportunity to showcase our private brands more and drive that business, which we've indicated we expect to be approximately $1,000,000,000 this year.
Okay. And recognizing that you don't want to call out specific vendors, but should we expect any major vendors to be no longer featured in your stores?
Yes. I would tell you that the top 10 vendors we do business with today, they will not be there's none of our top 10 vendors being eliminated.
Okay. And then my question is on core growth, Ed. You said you did a comprehensive review on the business. You're going to be opening and converting a bunch of stores this year. What's the outlook beyond that?
When do you start to get to the point where do you say, look, we're comfortable with our store base. You don't need to open any more locations to reach that incremental consumer and we probably have to use some of our capital as a result?
Well, I think there's still so we're kind of at that point in a number of markets, but there's some markets that are still wide open. We still have we don't have many stores in California. Take San Francisco, for example, the Bay Area, we only have a handful of stores down in South Florida. Miami, we have a handful of stores. We've got nothing in the 5 boroughs.
We've only got 6 Dick's stores in Houston, which I think is the 4th largest market in the country. So we're going to be just as we said, we're going to be opening in new or very underpenetrated markets is our plan going forward. And Michael, this is Andre. Again, we use very rigorous criteria, that new store productivity number for us as well as
very strong return criteria. Otherwise, we don't open stores. And to Ed's point, it's really right now in markets where we are largely either white or
a very severely underpenetrated where we'll open stores. Otherwise, we won't. We look at this going forward that now is absolutely the right time to be patient from a real estate standpoint with all the real estate that's going to come up on the market, Penny's announcing stores that they're closing, Macy's announcing stores, some other people that are rumored to be closing stores or consolidation in this industry is not over. And this is a time that we're going to be very patient going forward.
Okay. Thank you very much.
The next question will be from Seth Sigman of Credit Suisse. Please go ahead.
Thanks. Good morning. I wanted to follow-up on the guidance. So you relaunched the e commerce site, previously discussed 30 basis points margin benefit from that transition. Has that math changed at all?
And maybe you could give us a sense of how to think about the timing of that benefit? And related, you had talked about $6,000,000 to $7,000,000 of investments falling into 'seventeen, obviously less than last year. But are you assuming the need to reinvest in perhaps other areas specific to online and how that could impact your P and L?
So the 30 basis points is still a good number and we expect that number. It will be toward the Q2, Q3 and beyond. We've got some investments around the launches as Lee indicated in his remarks that we had previously announced in that $6,000,000 $7,000,000 range that we would be investing to launch the brand. Other investments, we're extremely excited about the team sports headquarters. And the acquisitions that we've done over the last couple of years and couple of them last year around Blue Sombrero, Affinity and Game changer, we think this truly is a big unlock for how we're going to approach these young athletes going forward.
And there will be some investments that we will be making there to drive that business.
Okay, thanks. That's helpful. And then one follow-up on the merchandising strategy. The change seems to imply a higher concentration of certain vendors. Correct me if I'm wrong, but can you give us a sense of what's embedded, if anything, for the financial benefits in 2017 related to the strategy to perhaps balance some of the long term risks associated with that concentration?
We haven't played we think that there will be some there can be some margin rate expansion here going forward. We haven't played a lot of that into this guidance. We think that the brands that we've worked with are providing us, as we said, exclusive and differentiated product. They're making meaningful investments in our business. And we think it will be very good for our business going forward.
And we don't have a whole lot baked into this year for consolidation.
The next question will be from Simeon Gutman of Morgan Stanley.
Thanks. Good morning. I want to follow-up first on the vendor question. And I guess it's hard to say where the concentration is going to go, but I guess the first assumption is that there could be a greater concentration with some of the bigger vendors. I don't know if you agree with that or if within the top 10, you go bigger such that the numbers 1 and 2 don't get too big.
And then related to that, I guess, is there a risk here? I mean, you're going to eliminate certain vendors. I'm guessing they'll look for other outlets, maybe look for DTC channels. But is there a risk that some of the existing vendors look for that exposure as well? I don't know if different than normal, but just curious how your thoughts are there?
Yes, I don't think that so there's going to be a concentration of more with these vendors, but the investments that they're going to be making in our business and the investments that we're going to be making in their business are going to be great investments. As far as some of these other vendors looking for other avenues, they probably will. But you have to remember, they are not that important to us as we are eliminating them from the mix. And then being able to look at terms and conditions of sales and how we come to market with other brands that really make a difference. And we think it's absolutely the right thing to do.
And the brands that we have talked with so far, our plan is playing out very nicely.
Okay. And then, just different topic, just on the outlook for earnings. It looks like the second half, there's a pretty good step up in both earnings growth despite some tougher compares. Just curious what's behind the forecast and if you could shed any light on color between GM and SG and A in the back half.
Part of this and I'll let Lee jump in if he needs to, but part of this is that some of the investments that we're making in the Q1. As we said, there's about $10,000,000 in investments in the Q1 that's depressing the Q1. We expect accelerated growth in the going forward after that.
I wouldn't bank on it all in the second half. I think we'll really get this going in the second quarter as well.
The next question will be from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good morning, guys. Maybe asking just another question on the vendor change program. So is it right to assume that with the 20% reduction in vendors in the inventory that there will be 20% reduction in square footage that was allocated to them that will be reallocated to the top brands, the top 10 brands or is that going to go to private label? And does that impact how you think about future store size as you go forward in the opening?
You have to remember that 20% of our vendors isn't 20% of our business or 20% of our square footage. These are vendors that we think don't really have significant growth going forward. But there'll be a combination of some of this will go to existing vendors that we're going to partner with and part of this will go to our own private brands. And as we said, our private brand business, we expect to be $1,000,000,000 this year. That's a pretty good chunk of change.
We're pretty excited about what we're doing from a private brand standpoint. And if you take a look at what we've done with CALIA, it's gotten to be the 3rd largest women's athletic brand in the company and it's growing pretty rapidly.
Great. And then just switching topics to, I believe it was in the December period that you began to mine the customer data that you purchased from the bankruptcy proceedings. Were you able to see any monetization of that data or is that still yet to unfold?
Well, we've seen some, but it's yet to the biggest benefit we
think is ahead of us, not behind us.
And did you see a materialization of any of that benefit in the 4th quarter or?
We did, yes. Yes. More from TSA than from Gulf Smith.
Got it. And then just along with your question, as you see your the share gains continue to accrue to you as the industry continues to consolidate, how do you think about your EBIT margin potential and where the right EBIT margin should rest for this business on a go forward basis once things have settled out and there's obviously more of a share opportunity that you have in front of you to capture?
Yes. So we're not going to get to the point where we're going to provide guidance, but we do think that there is meaningful upside and we will start to see some of that growth this year.
Got it. All the best guys.
Thank you.
The next question will be from Steven Tonnell of Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for taking my question. Just wanted to understand, I think it seems like same store sales are maybe slowing a little bit in the core. And I guess weather was said as being fine. Is there anything else to call out potentially impacts from department stores pushing in or any change in the TSA share capture that you think you got in the quarter versus 3Q?
Any color there maybe by category, it would be a better way to approach it, just as we think through that?
You're talking about in the Q4?
Yes, the Q4 same store sales rate.
Yes. I mean, we thought a 5% comp sales gain is pretty good. Part of it was driven by the Cubs were helpful. The weather kind of was helpful. Our team just did a really good job of going out there and grabbing business.
We were pretty pleased with 5% in the environment that was out there.
Got it.
And I guess there
was nothing to qualify category. Apparel was fine versus the others?
Well, we did say that the hunting business was difficult. That hunting business continued to be continues to struggle and struggled in the Q4, both firearms and from an ammunition standpoint.
Got it. And are you I think you've
seen which I think has been prevalent in the marketplace right now. Yes. Well, so in looking
at the consolidated comp, obviously, versus core decks that we sort
of sussed out, that field industry must have been pretty tough. But I don't know if you can provide any other color there?
No, I mean Field and Stream was a bit more difficult down kind of mid single digits. And the hunt business inside DICK'S was difficult. It's just that structurally is a difficult business right now. We think we did a very nice job offsetting that with what's going on with the golf business and with the TSA market share gains.
Got it. And just last one
for me then. Can you help
us think about what percent
of sales would be represented by sort of the segments of vendors just to get a sense for how things will shift, specifically segment C? I'm just curious around that.
Yes. So we're not going to get to that level of detail, especially in segments 12. But segment C is 20% of our vendor base and it's meaningfully less of our business than the 20%.
Got it. That helps.
And we've got to solve for anything that we're eliminating, we've got to solve for how we make up that business.
Understood. Thank you. Sure.
Your next question will be from Scot Ciccarelli of RBC Capital Markets. Please go ahead.
Good morning, guys.
Two questions. First, how large was the compensation swing 4Q 'fifteen to 4Q 'sixteen?
It made up most of the change in SG and A expense. SG and A expense as
a percent of sales.
So we had a really solid year this year off a relatively weak year last year. So comp
Most of the change
on a percentage basis? Yes.
Not on a
dollar basis, but the basis points, yes. Okay. And then second question, you guys have been talking about private label.
You think you've kind of hit $1,000,000,000 Can you give us
an update on kind of where private label ended the year on a percent mix? And then kind of how
much it was up this year, just so we can kind
of gauge the trend line that's following?
Well, I mean, it was up a bit. It was up. We're not going to get into real specifics right now for competitive reasons, but it was up, and we expect it to that growth to accelerate going forward. We've got some terrific plans for our PD business. We saw some of that materialize last year, and we're pretty confident we can get this to roughly $1,000,000,000 this year.
And is the margin still much better on that? I think we've talked about several 100 basis points historically.
Probably 600 to 800 basis points different than the brands that it's eliminating.
Got it. All right. Thanks a lot guys.
Sure.
The next question will be from Brian Nagel of Oppenheimer. Please go ahead.
Hi. Good morning. Thanks for taking my question.
Sure, Brian.
And first question, just
with respect to market share gains,
I know you as you mentioned, that market share gains
would be the
driver of the business here in the Q4. Could you help us understand whether it's more or less a driver in the Q3, could we break out and look at your 1 or so comp comments or that came from market share gains?
I'd say a good part of that was market share gains then also. I mean, if you remember, we talked about at the end of the second quarter, we were a little bit conservative in our guidance. We weren't sure what those market share gains were going to be. We thought the liquidation of Sports Authority would have a bigger impact than it did. It didn't.
Those gains continued into the Q4. And we were very pleased with the way that the marketing team, the operations team and the merchandising team went after that market share.
And then looking at 'seventeen, we have your initial guidance now. How should we think then about given what you've seen so far with the market share gains, the cadence of those gains continuing through 2017?
Well, Q1, Q2 should be pretty good. We'll start to come up against them in Q3. But based on the fact of how we're mining the data, and we think that we don't think the market share gains necessarily end beginning with the Q3 because we'll be we continue to mine this data, understand this data, test this data, and we think there's still more upside for us. And it doesn't stop in the beginning of Q3.
Got it. And then just a follow-up on a separate topic with respect to the merchandising changes you're making. How should we think the product you've written down, we're taking the charge for here in the Q4. How should we think about the flow of that product through
your stores? Has a lot
of it been cleared already? Or will it be cleared here as we work into 2017? Is there some strategic use for it as a traffic driver as you clear that product?
And we've cleared it, Brian. We've taken it off the floor, made room for the student receipts, and we've cleared that off and we're jobbing some of that out, but it's gone.
Great. Thank you.
The next question will be from Sam Poser of Susquehanna. Please go ahead.
Good morning. Thank you for taking my question. What impact was in your guidance, can you give any impact you would have had from the later tax refund for the Q1?
Yes. We're not aware of any particular impact delayed tax refunds have had. We haven't really tracked that historically. So if there is anything from that that we pick up later, then that's fine. But we're not counting on it in the 1st or second quarter.
Okay. You may have said this. Can you give us what your annual preopening expenses are looking like this year?
We can. Just give us a second, Sam. We'll get to those. But in the Q1, they're significantly higher. We're opening 22 more stores in the Q1 than we did last year, which roughly 8 of them or so are converted TSA stores.
But that increase in preopening is a big number in the Q1. It should be It
could almost double in Q1 and then it would sort of settle down. Right.
And it's roughly expected to be roughly flat year over year reopening. So it's really a shift into the Q1 and out of
future quarters.
So year over year, assume it's flat and then just more weighted to
the Q1 than it's been in the past.
And then lastly, can you you mentioned these new brand the new private label or private brands that you're working on.
Can you give us a little bit
of what categories they may be looking at there?
Not yet, Sam. But we will at the if not the next call, then on or call at the end of the second quarter. Okay.
And then one more then. In the 20% of the vendors that are going to go away, you talked about it much less in sales. I would assume also that their profitability is also under the their EBIT is under the company average as well. Is that a fair assessment to
Actually, Sam, it might not be. It's just that we've decided that some of these vendors that are smaller vendors, we can replace them someplace else where we can get a bigger bang for our buck. Or we can take some of this and we can put our own private brand on it, which would increase our profitability. So all the brands that we're getting rid of are not necessarily less than acceptable returns. We just think as we go forward, we can get a better return.
Part of that would come in co op advertising and things like that from the more important brands as you would grow that?
Yes. In different terms and conditions of sales and a number of different as we kind of look at the whole thing, it's better to move it to move some of these brands out.
Thank you very much. Good luck.
Thank you.
The next question will be from Adrienne Yih of Wolfe Research. Please go ahead. Good morning. Congrats on the Q4 on the comp there. Very nice.
My question is also on the inventory write off. Can you talk about whether the composition of that was mostly the non go forward branded category? Was it seasonal? If you can give us any more color on that, that would be very helpful.
It was a combination of all. It was a combination of some non go forward merchandise with brands that we're doing business with. Some brands that we're doing business with also that are going to the transactional segment are we are eliminating or scaling back categories of merchandise that we do with those brands. So it was some non go forward product with brands that we're going to continue to go forward with. And then it's also in there are the brands that we're not going forward with.
Okay, fair enough. And then secondarily, the Gulf comp is so strong. Just wondering if we should expect sort of to model in double digit comp as we go into Q1 or whether we should look for some moderation there as well?
Yes. I wouldn't be quite as enthusiastic. There were a couple of the Goldsmith stores that closed were really helpful around the holiday season at both Golf Galaxy stores and Dick's stores. And we've got to just see how this plays out a little bit. But a double digit comp in golf would be fantastic, but I wouldn't necessarily get too enthusiastic and model that right now.
The next question will be from Steve Forbes of Wertheim. Please go ahead.
Good morning.
Good morning.
You mentioned an incremental 50 premium for the year, right, this year, mostly in the new stores. I know the plan was always to digest last year's rollout. Given that we're farther along here, can you comment on the pace of the rollout? Why not go faster? I mean, where are we relative to expectations?
And maybe also how has it impacted your relationships or your go forward relationships with your footwear vendors?
It's been very positive. We're making some additional modifications to the footwear deck. You'll see a much bigger Adidas presence in the footwear decks now with how we're positioning that brand. You'll see some new things that we're doing from Nike on the wall. So it's been very good.
We're going to open up about 50 more. A lot of those will be in not all of them, but a lot of them will be in new stores. And we're taking some other relocated stores and doing this. So we're comfortable with the pace that we're going at right now. And you'll continue to see these things expand.
And maybe just a quick follow-up, right, as we kind of try to digest what's going on in the marketplace, and I'm sure you guys are as well. As you think about your ability to maybe put out an updated long term target? I mean, are we is it something you envision doing? You probably I mean, you probably don't want to give a specific time line on it, but do you have to get through this year first before we can revisit those?
I would say probably right now, we'd like to see how the whole thing shakes out. There's probably more like I said, there seems to be more consolidation probable in the marketplace that we see. So I think the consolidation is not over yet, and we've got to kind of get through
it all
before we're going to make any long term targets. But I'd say we are extremely enthusiastic of the position we sit in right now in the marketplace with the profitability of our stores, what we're doing from an e commerce standpoint, what our balance sheet looks like, we like a lot the position we're in.
The next question will be from Peter Benedict of Robert Baird. Please go ahead.
Hey, guys. Thanks for taking the question. First, just rough math on the guidance, maybe implies somewhere
in the neighborhood of 50 basis points of EBIT improvement this year. You mentioned gross margin and SG and A would both be favorable. Do you expect it to be more favorable for 1 versus the other? Or is it a pretty even split?
I don't think we're at the point right now where we're ready to get more detailed guidance on that. But we'll be going in a positive direction.
Okay. And then still around CapEx, in
a couple of years ago,
the plan that was laid
out had 16 as kind
of the peak CapEx year. I know a lot of things have changed, of course. And so how should
we think about CapEx beyond 'seventeen? I mean, is 'seventeen kind of
a peak? It sounds like maybe a little bit more rational for slowing down on the store growth as we look longer term. Should we assume that 'seventeen level persists or does CapEx kind of start to step down after 'seventeen?
In 'seventeen, we have just one unusual item in that we're adding a distribution center in 'seventeen. So I'd say that's kind of an unusual blip for this year.
This will be primarily the peak year.
Yes. Okay, good. That helps. And then
just lastly around e commerce and the team sports stuff, As you guys look out to 2017, do you think a 20% plus e commerce growth rate is sustainable? I mean, there's obviously great momentum in the business. Just trying to get your feeling around that.
Yes. I think right now, I would say it's probably not. As you launch a new platform like this, you've got natural search that needs to reset. You've got some things we need to continue to do from improvement from a functionality of the site. So in 'seventeen, I would say probably no.
Going forward, after that, I think we're in the back half of this. I think it's good to see we're pretty confident of what we can do from an e commerce standpoint.
Okay, great. I appreciate the perspective. Thank you.
Your next question will come from Mitch Kummetz of B. Riley. Please go ahead.
Yes, thanks for taking my questions. I've had a few. Let me start on the vendor matrix. You talked about one of the benefits of focusing more on strategic vendors is more exclusive differentiated product. Is there any way you could speak to kind of what that's like, what level of that or percentage has been historically, like how much that bumps up and maybe how much margin benefit you could see from that?
Is there any way to kind of break out margins, differentiated versus non differentiated products like you talked about in private label and brands?
Yes. We're looking through that. We're not ready to kind of provide all of that as we're still going through some of these conversations with some brands. We've had a number of brands that we've had these conversations with that come to an agreement on where they're going to be from a strategic standpoint, a transactional standpoint or some of them that are going to be eliminated. But how that all flows through yet, we're still working through that.
But we've got a model that we're confident that we can meet or exceed. Is it fair to assume
the more differentiated product you have, the better it is for your margins?
Yes. Yes. You've got less competition out there, yes, definitely. And then on the full year guide,
I know a year ago when you guys provided the out year guidance, you kind of talked about some discrete items that were pressure points on the earnings. Is there anything that you'd like to call out in terms of the 2017 guidance? It sounds like you're going to the e commerce helps you in terms of the 30 basis points of EBITDA. But anything else in terms of like, Mark, I know last year there was some Olympic spend and the Funderdak investments. Is there anything that's worth calling out?
Just what we're going to do from a how enthusiastic we are about the team sports headquarters and these technologies of Blue Sombrero, Affinity and Game changer that we acquired. And we think this is a there's a big unlock here that we're working through.
Okay. And then last question on the margins. Shipping was a drag on the quarter. Is there any reason to believe that that won't change going forward? And is there any way to kind of speak to the overall e commerce margin versus the store margin?
How are they how do they compare?
Well, still the so we expect as we continue to grow the business that the shipping costs are still going to are going to become a bigger piece of the expense structure as the business becomes a bigger piece of the entire business. We're looking at ways that how we might be able to slow that those shipping costs and we're working through those. But to kind of call out the profitability of e com versus profitability of the store, we're not ready to do that. But I will tell you that the e commerce business is probably more profitable than you think.
Okay.
All right.
Thanks a lot. Sure.
The next question will be from David Magee of SunTrust. Please go ahead.
Yes. Hi. Good morning. You mentioned the success of the footwear decks, which makes a lot of sense to us. Are there other things that you're doing in the stores that would have also have an impact, whether it be additional vendor shops or what have you?
I think a big piece of what we're doing is this there are 2 things, is the vendor consolidation that we've implemented and relooking at our vendor structure and what segment of vendor is in and then what rights or privileges those vendors have inside our business, the investments we're going to make, the investments they're going to make. And then also what we're going to be doing from a private brand standpoint. We have gotten much more aggressive with private brand. You can see what we've done with CALIA. Field and Stream has been great from a private brand standpoint.
One of the biggest issues that we have going forward, biggest opportunities is private brand, and we're investing very heavily in them from an infrastructure standpoint. You're going to see more marketing of these. And over the next few years, you'll see our private brand business grow pretty dramatically.
Thanks, Ed. And then secondly, with regard to Build and Stream, how do you feel about how that's positioned right now, just given the sector backdrop, the probable consolidation that's going to take place in the sector? Are you still happy with the combo store format and also the price points with the downstream?
Yes, we are happy with that. We think if some of this additional consolidation happens, we are in a great position to pick up a significant amount of that market share, whether it be at DICK'S OR Fields and Stream, the same way as we were able to pick up. And we think we can pick up market share in the golf business when the Gulf Smith has gone out in both Golf Galaxy and in DICK'S. So we like the position we're in. This industry is a bit more difficult right now.
We think it's going to continue to be that way on a macro basis, but we do expect some consolidation. And if that happens, we'll be we're in a great position to pick up that market share. So I actually think toward the back half of the year, that could be a good business for us. But we're not planning on that right now.
All right. Thank you. Sure.
The next question will be from Jim Duffy of Stifel. Please go ahead.
Thank you. Good morning. Believe it or not, I have more questions
on the merchandising direction. Ed,
can you talk about the development timeline for this strategy? How long has this been in the works? How long have you been in conversations with the vendors? Will we see a lot of these exclusives in the spring assortments? You won't see as many of them in the spring assortments as you will toward the back half of this year.
We've been talking about this for quite a while. And as we've kind of talked about this, done this analysis of the business and we decided we've got to pull the trigger and we've got to do this. And it's difficult to do. It's difficult to tell people that you've done business with for a long time that we're not going to do business going forward. So this is something we've been talking about for a while.
And based on what's going on in the industry today, we felt this was the right time we had to do this. Ed, following the change in strategy and inclusive of the 1,000,000,000 private brand business, how much of the volume do you expect will be exclusive to Dick's versus in line product that may be available at other retailers? Yes. So we're not going to guide to that right now. We're still working through this.
We're still working through some vendor agreements and how we're going to do this and how we're going to either our private brand business, how we may co create with some brands product. But this has definitely been the right thing for us to do.
And then final question on this.
Beyond the exclusive, what are some of the other investments these vendors
are making in the business? Does the
vendor concentration bring you better pricing, better terms?
If you could help with that, that would be great.
Well, every vendor is a little bit different and every category is a little bit different, but you should look at that we will get some combination of, and this is a two way street. So we're also investing also. We're providing them additional square footage. We're investing with them to be a bigger part of our marketing campaign. So you should look at this as it's around pricing, it's around discount, it's around marketing, it's around in store presentation.
So this is not a one size fits all. In every category and every vendor would be different. We'd be looking for something different from somebody in the golf business might be different than what we'd be looking for from someone in the baseball business. So this has been pretty successful out of the gate. And as you can imagine, the vendors that are going into that strategic bucket are very excited about it.
Thanks for that perspective. I'll leave it at that.
Great. Thank
you. The next question will be from Joe Feldman of Telsey Advisory Group. Please go ahead.
Hi, guys. Thanks for taking my question. Why don't we go back to the digital ecosystem for a minute and because I think it's pretty innovative way to get at customers. And can you share any thoughts dimensionalize it for us like how much you think it could become one day or even in this year, how much it might contribute to sales or profit or how you might work these partnerships with like
Little League and Pop Warner?
Well, we're not going to get into the economics around this right now. But the way this works is leagues will sign up on our platform, whether it be Cabluce and Borrero. The governing bodies sign up on our platform, which is Affinity. And then Game changer is an interactive application that primarily around baseball right now is going to be broadened out to other sports. And they interact with this.
We're able to understand who's doing what, who's playing what sport and be able to market to them. I thought there was a great comment when we're looking to play game changer with their CEO, who said, well, I don't remember exactly the number of teams, but there's they've got an awful lot of teams and said, I know everybody in Little League that adds cleanup. I know in high school baseball, almost everyone who plays the position of catcher. So we can market to them that particular way. And it's a great database that we have only begun to mine.
So there's still a lot to do. We can get to that level of detail with people and these young athletes that I think we'll be able to serve them better and we'll be able to provide them what
they really need. Another great thing about us is that it's a database that continuously refreshes. So, as you have new kids coming into each of the sports, we know who those new kids are as they enter the sport and we have the ability to get the right kind of offers to them and their parents so they know what to buy at the right time. So the constant refreshing aspect of this is really important to us as well.
That's great. Thanks. As a user, I know how effective it can be. It's great. Thanks.
Who are you using? The game changer app quite a bit. And actually Blue Sombrero, our softball uses that. Yes. They're both terrific companies.
Yes. Yes. One other question, one I want to ask, when you guys look at the way the comps maybe by region or by area, presumably those closest to outgoing TSAs performed better. Like was there any variance you can share, those closest or furthest away from TSA or the non effective? Well, as you can imagine, the closer our store was to a TSA store, the better it did.
And the further away, then not as good as the one that was as close. But we've got the transaction data for all of their business down to the SKU level. So we can target by store from a marketing standpoint, and we can target by store from assortment standpoint to better serve those athletes. Got it. Thanks.
And then, if I just one other kind of bigger picture question. We get asked a lot on our side of the table like, well, if there's so much consolidation going on in the industry and it seems like there's others out there with a lot of pressure and we're definitely seeing it as you are, but yet Dick's continues to outperform and do well, does it ultimately get to where Dick's gets caught up in that as well? Is it more a sign of a lousy industry versus or industry in decline? How would
you respond to that, I guess?
As we've taken a look at that, we've done a deep dive into not only our business, but some of the businesses that have consolidated. And we took a hard look at this and said we've got to make sure that we don't have symptoms of the disease that these other companies atrophied from and died. And some of the things that we looked at that they had issues with is they had extremely high debt, private equity owned, high debt. They didn't invest in their e commerce business the way that we've invested from an e commerce point. They did not invest from a product development standpoint the way that we have across not only good, better and best categories of products.
They also did not invest in their stores. And they also had a they had a constant revolving door from a leadership standpoint. As we look at these, we don't have any symptoms of those disease. We have no debt. We've continued to invest in our e commerce business pretty aggressively, and you've seen the growth there.
This past year, our e commerce business was almost $1,000,000,000 As we take a look at what we're doing from a PD standpoint, our PD business is going to be roughly $1,000,000,000 We expect margin rates to expand. We've developed great partnerships and relationships with the vendors that the others didn't. So is this a great industry right now? I think it really is a very good industry that there were some weak links in some companies that couldn't survive. And I think you're seeing this in some other retail industries too.
So I don't think this is something that we get caught up in as long as we continue to run and manage our business, which is why when this whole thing happened, we didn't take a lot of time to we didn't take time to celebrate. We said, hey, let's do a thorough review of our business and make sure we don't have symptoms of this disease, which is why we've gone back and we did the we've redone the vendor structure and took some of these charges to kind of clean out a little bit of the issues to make sure that we don't have these issues going forward. That's really helpful. Thanks so much, guys, and good luck this quarter.
Thank you. The next question will be from John Kernan of Cowen and Company. Please go ahead. This is Krista Zuber on behalf
of John. Thanks for taking questions and fitting us in. Just a few here to add. Are there any anticipated inventory write downs embedded or future write downs embedded in the 2017 guidance?
No. No, it's all behind us.
Okay, great. And then secondly, did you anticipate any additional investments in fulfillment or technology or even digital that could sort of increase CapEx kind of going back to, I think, your colleague's question earlier in the call, going forward beyond fiscal 'seventeen?
At some point, it would just depend from a fulfillment standpoint if we developed our own fulfillment center. But other than that, I don't think so. And we've got a terrific fulfillment partner right now in radio, and we're very happy with them.
Okay, great. And then final question. In the 2017 CapEx side, you asked that there's a new DC included in that. Could you just sort of give us a sense of the cost of the DC to strip it out?
This year, we anticipate putting an additional $50,000,000 into that building.
The next question will be from Chris Svezia of Wedbush. Please go ahead.
Good morning, everyone. Thanks for taking my questions. I guess first, Andre, for you, if you could talk maybe the store productivity rate of the 2 stores all meet, give any color where that ends up in the
full quarter?
Certainly. We it was north of 90%. And you'll recall when we talked to you, we said 90% is really that waterline for us in year 1. So we plan our stores to be 90%, 95% and 100% in the
full year ramp, and we
were north of 90% in
the 4th quarter. Okay. And if you just on the gross margin for the year, could you maybe just decipher between product margin opportunity versus occupancy or leverage or deleverage? And I know there's a shipping cost element in e commerce, but Any color you can give on some of those buckets one way or the other would be helpful.
I don't think we're going to guide specifically on kind of those basis points right now, but we do think it will be up somewhat in total for the year.
We do expect merchandise margins to expand.
Okay. Okay. Got it. Ed, for you, just on the e commerce versus physical store,
at what point do
you become agnostic in terms of where the consumer transact from an operating margin perspective? Is that potentially as you
get to the second half
of the year as you maybe lap some investments in the Q1? Just sort of where is that inflection where
it doesn't make any difference, The
operating margins are pretty similar one way or the other.
Well, actually, I don't think we get there this year. But we are very agnostic as to where they shop. We just want to make sure they shop with us, whether it be in the store or online. But the store right now is still a bit more profitable than the e commerce business, and we expect that to continue throughout the year as we continue to heavily market this because of the new site. With a new site, you've got to treat it with some tender loving care.
And we've got some investments that we're going to make there from a marketing standpoint, infrastructure to make sure that we do that.
Okay. Two final things real quick here. Is Lucy I know you sell Lucy in stores. Is Lucy's I think Via is winding down the Lucy brand. Is that one of the brands that exits your business and is replaced by something else, whether it's another brand or Coppelia, for example?
This is the agent. It would be safe to make that assumption.
Okay. And finally, just on
the market share opportunity. Once you get into the 3rd and 4th quarter, I know you answered this a little bit earlier,
but just your confidence level,
are you able to get same store sales growth out of the DICK'S concept as you go into the back half of the year, you're anniversarying the comparisons. Just your level of confidence you're able to see that, maybe if you could talk a little bit more about that specific. Is there
still this notion that once you
get to the Q2, it's just sort of it's all gone, which is I don't think it's true, but I'm just curious your response to that.
We don't think it's gone either. We think there's still opportunities. We've got I said, the data that we were mining in the 3rd Q4, we're much better at it going forward. We think that there's still more market share to get. And as we said, we think there's still more consolidation to happen in this industry, but the consolidation is not done.
Okay. All right. Thank you very much. And all
Thank you. You too.
The next question will be from Patrick McKeever of MKM Partners. Please go ahead. Okay.
Thanks. Thank you.
Question on just performance of your mall based stores versus the off mall stores. Wondering if there's any meaningful difference there in terms especially as it relates to store traffic, which I think you said was up 2.9% for the Dick's stores.
Yes, not a lot of difference. We're a destination retailer. We're not really we don't need the mall traffic to drive our business. We're a destination. We actually help the mall traffic.
So there's no real difference.
And what I mean, as you look forward, I know a number of the stores that you're opening in 2017 will be conversions of former TSA stores or golf stores. But what would how would the as it relates to new stores, how would the mix be mall versus non mall or off mall stores?
This is Andre. The bulk of the TSA conversions really, they were
not very mall based. So many of them are in power centers or standalone locations. So the bulk
of this will largely be in
the 1st 2 quarters, the bulk of them will be conversions and many
of them are freestanding or as I said power center. There are a
few mall based stores that we're opening in
some other markets in the first and second quarter, but it tilts mostly the power center.
And then just a last question for me. Just on the earnings guidance, I mean, it seems like a lot of the difference, I guess, between street expectations and guidances in plans investment spending, including more spending on e commerce. Is there I think you said gross margin up for the year and looking for stronger merchandise margins. But I'm also looking right now, I'm looking at the MC Sports website and they're doing a going out of business sale. I mean, that's obviously not a huge company, but it's $110,000,000 in inventory that they're talking about has to be sold.
So my question is, in gross margin, are you anticipating any negative impact from competitor liquidation sales?
Not MC. Okay.
It's too small?
Yes, too small. Yes, no, nothing there.
Okay. Thank you.
And ladies and gentlemen, this will conclude our question and answer session. I'd like to hand the conference back over to Ed Stack for his closing remarks.
I'd like to thank everyone for joining us on our Q4 earnings call, and we'll look forward to seeing everyone towards the Q1. Thank you very much.
Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.