Earnings Call: Q4 2017

Mar 7, 2017

Good morning. Welcome to DICK’S Sporting Goods fourth quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead, sir. Thank you. Good morning. Thank you for joining us to discuss our fourth quarter 2016 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer, André Hawaux, 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, in the comments made during this conference call, and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. We've also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures, calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the investor relations portion of our website at dicks.com. I will now turn the call over to Ed Stack. Thanks, Nate. I'd like to thank all of you for joining us today. As we announced this morning, we had a strong fourth quarter 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%. 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% to approximately $444 million 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. 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, Sport Chalet, and Golfsmith. 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 how and wherever they choose to interact with us. Our vendors will be divided into three 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. 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 have identified the merchandise that doesn't fit within this vendor and assortment strategy and have taken a $46 million 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 three of our 676 DICK'S stores. Separately, in conjunction with acquiring the best Golfsmith locations, we closed 10 of the original Golf Galaxy stores we bought that were located in close proximity to an acquired Golfsmith store that is better positioned to serve our customers. We also impaired the leasehold improvements of 12 additional stores and other assets, as well as incurring TSA and Golfsmith integration costs. In total, these charges were approximately $47 million. 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 planned 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 store growth will center on new and underpenetrated markets, which were historically served by TSA and Sport Chalet. We will also continue to leverage the transaction details along with the TSA and Golfsmith customer lists 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. 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 GameChanger. Our goal is to create a holistic digital ecosystem to support and equip youth sports. Importantly, through agreements in principle for exclusive partnerships with Little League Baseball and Softball, Pop Warner Football, and US 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 timed to meet the needs of these athletes. We see this as a multi-year 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 third-largest women's brand in less than two years. Looking ahead, we will expand offerings in CALIA, Field & Stream, Reebok, and other key brands. We'll also be launching two exciting new brands this spring. As a result, we expect our private brand business to reach approximately $1 billion 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 fourth quarter results and for the upcoming efforts in this fiscal year. I'd now like to turn the call over to André. Thank you, Ed. In 2016, we profitably grew our omnichannel platform, ending the year with 676 DICK'S stores, 91 Golf specialty stores, and 27 Field & 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 million. During the fourth quarter, we reopened the first three former TSA stores as DICK'S stores and acquired 30 Golfsmith stores, which are being converted to the Golf Galaxy brand. In 2017, we expect to open approximately 43 new DICK'S stores, primarily located in California, Florida, Texas, and the Pacific Northwest, and relocate approximately seven 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 nine Golf Galaxy stores, relocate one Golf Galaxy store, and open eight Field & Stream stores. Eight of the Golf Galaxy openings will be Golfsmith conversions, while the remaining location will be in the combo store format. All the Field & Stream stores will be in the combo store format. During the first quarter, we expect to open 16 new DICK'S stores, including 10 former TSA stores, and relocate two DICK'S stores. We also expect to open two Field & Stream and nine Golf Galaxy stores, including eight former Golfsmith 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 DICK'S stores. I'll now turn the call over to Lee to review our financial performance in greater detail. Thank you, André, and good morning, everyone. Beginning with our fourth quarter financial results, consolidated sales increased 10.9% to approximately $2.5 billion. Consolidated same-store sales, which includes all banners, both online and in-store, increased 5%. Within this, DICK'S Sporting Goods omnichannel same-store sales increased 5.3%, driven by a 2.4% increase in ticket and a 2.9% increase in traffic. Golf Galaxy omnichannel 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 fourth quarter was $766 million or 30.85% 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&A expenses were $533 million for the quarter, or 21.46% of sales. 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 million 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. Looking to our balance sheet, we ended the fourth quarter with approximately $165 million of cash and cash equivalents and no borrowings outstanding on our $1 billion 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 Golfsmith conversions, as well as our 27 new store openings planned for the first quarter. As we transition into the spring season, we are comfortable with our inventory levels for our Go Forward merchandise, and we're confident that our new merchandising strategy will drive better inventory productivity. Turning to the fourth quarter capital allocation, net capital expenditures were $49 million, or $115 million on a gross basis. Additionally, during the quarter, we paid $16.7 million in dividends, and as you know, we recently increased our quarterly dividend by 12% to $0.17 per share. We also repurchased $29.7 million of stock at an average price of $54.06. In total for 2016, we repurchased 3,130,000 shares of stock for $145.7 million, and we have approximately one billion remaining in our authorizations. 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, which 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 first quarter, 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&A leverage and expected expansion in gross margin. Net capital expenditures for the full year of 2017 are expected to be approximately $350 million, or about $465 million on a gross basis. 2016 net capital expenditures were $242 million, or $422 million on a gross basis. Our earnings guidance assumes an effective income tax rate of approximately 37.5% and is based on an estimated 111 to 112 million diluted shares outstanding. This includes the expectation of share repurchases to fully offset dilution in 2017. Turning to the first quarter, we anticipate non-GAAP earnings per diluted share of between $0.50 and $0.55, with an increase in consolidated same-store sales of between 3% and 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 due to 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 million of incremental expenses in the first quarter. Looking ahead, we expect to deliver accelerating earnings growth in the second quarter. Please note that our first quarter and full-year non-GAAP earnings per diluted share guidance does not include approximately $3 million 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. Operator, please open the line for questions. Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing star and two. Our first question will be from Kate McShane of Citi Research. Please go ahead. Hi, good morning. Thanks for taking my question. My question is around the vendor consolidation. Just why is it the right time now? With the change in vendor strategy and the competitive landscape changing, how are you viewing your balance of opening price points and mix of good, better, best? Kate, this is the right time. Based on the disruption 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 looked at this, we felt that it was the right time to consolidate our vendors. 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. We'll still have the product to be able to serve that enthusiast. Some of those tertiary vendors, like I said, will probably be. Eliminating up to 20% of our vendor base, we think it's the right thing to do long term for the business. Are there particular categories where the base is concentrated, or is it across the board? It's really across the board, we're not going to get into the vendors that we are eliminating. We're not going to get into talking about what vendors are in what particular segments. It'll be across the board. Okay, thank you. Sure. 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 the sales and margin implications of the strategy to be, 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. 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, 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 billion this year. Okay. Recognizing that you don't want to call out specific vendors, should we expect any major vendors to be no longer featured in your stores? Yeah, I would tell you that the top 10 vendors we do business with today, there's none of our top 10 vendors being eliminated. Okay. My question's on store 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 that look beyond that? When do you start to get to the point where you say, "Look, we're comfortable with our store base. We don't need to open any more locations to reach that incremental consumer, and we probably have more productive uses for our capital as a result"? Well, we're kind of at that point in a number of markets, but there's some markets that are still wide open. 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 five boroughs. We've got six DICK'S stores in Houston, which I think is the fourth largest market in the country. As we said, we're going to be opening in new or very under-penetrated markets, is our plan going forward. Michael, this is André. 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. To Ed's point, it's really right now in markets where we are largely either white or are very severely under-penetrated 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. Penney's announcing stores that they're closing, Macy's announcing stores, some other people that are rumored to be closing stores. 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. Sure. 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. You relaunched the e-commerce site, previously discussed 30 basis points margin benefit from that transition. Has that math changed at all? Maybe you could give us a sense of how to think about the timing of that benefit. Related, you had talked about $6 million-$7 million of investments falling into 2017, 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&L? The 30 basis points is still a good number. We expect that number. It will be towards the second quarter, third quarter, and beyond. We've got some investments around the launches, as Lee indicated in his remarks, that we had previously announced in that $6 million-$7 million 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 a couple of them last year around Blue Sombrero, Affinity, and GameChanger. We think this truly is a big unlock for how we're going to approach these young athletes going forward. There will be some investments that we will be making there to drive that business. Okay, thanks. That's helpful. One follow-up on the merchandising strategy. The change seems to imply a higher concentration of certain vendors. Correct me if I'm wrong, 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 think that 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, we think it will be very good for our business going forward. We don't have a whole lot baked into this year for this consolidation. Understood. Thank you. The next question will be from Simeon Gutman of Morgan Stanley. Please go ahead. Thanks. Good morning. I want to follow up first on the vendor question. I guess it's hard to say where the concentration's 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. Related to that, I guess, is there a risk here? You're going to eliminate certain vendors, I'm guessing they'll look for other outlets, maybe look for DTC channels. Is there a risk that some of the existing vendors look for that exposure as well? I don't know, different than normal, but just curious how your thoughts are there. Yeah. 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're not that important to us as we are eliminating them from the mix. Being able to look at terms and conditions of sales and how we come to market with other brands that really make a difference. We think it's absolutely the right thing to do. The brands that we have talked with so far, our plan is playing out very nicely. Okay. Then, different topic, just on the outlook for earnings. It looks like the second half, there's a pretty steep 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&A in the back half. Part of this, 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 first quarter. As we said, there's about $10 million in investments in the first quarter that are depressing the first quarter. We expect accelerated growth 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. Okay, thanks. You're welcome. Thanks. The next question will be from Camilo Lyon of Canaccord Genuity. Please go ahead. Thanks. Good morning, guys. Is it right to assume that with a 20% reduction in vendors and the inventory, that there will be a 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? Does that impact how you think about future store size as you go forward with new openings? 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. 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. As we said, our private brand business, we expect to be $1 billion this year. That's a pretty good chunk of change. We're pretty excited about what we're doing from a private brand standpoint. You take a look at what we've done with CALIA, it's gotten to be the third largest women's athletic brand in the company, and it's growing pretty rapidly. Great. 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? We've seen some, the biggest benefit we think is ahead of us, not behind us. Did you see a materialization of any of that benefit in the fourth quarter? We did, yes. Not yet? Yes. Okay. It was more from TSA than from Golfsmith. Got it. Just along with that question, as you see 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? We're not going to get to the point where we're going to provide that guidance, but we do think that there's meaningful upside, and we'll start to see some of that growth this year. Got it. All the best, guys. Thank you. The next question will be from Stephen Tainter of Goldman Sachs. Please go ahead. Good morning, guys. Thanks for taking my question. Sure. 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, or maybe by category would be a better way to approach it, just as we think through that. Are you talking about in the fourth quarter? Yeah, the fourth quarter same store sales rate. Yeah. We thought a 5% comp sales gain is pretty good. Part of it was driven by the Cubs were helpful. The weather pattern 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. I guess there was nothing to call out by category. Apparel was fine versus the others? Well, we did say that the hunting business was difficult. That hunting business continues to struggle and struggled in the fourth quarter, both firearms and a bit from an ammunition standpoint. Got it. Are you. Which I think has been prevalent in the marketplace right now. Yeah. Well, in looking at the consolidated comp, obviously, versus core DICK'S, we sort of sussed out that Field & Stream must've been pretty tough. I don't know if you can provide any other color there? No. Field & Stream was a bit more difficult, down kind of mid-single digits. The hunt business inside DICK'S was difficult. 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. Just last one from me, then. Can you help us think about what % 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. Yeah. We're not going to get to that level of detail, especially in segments 1 and 2. Segment C is 20% of our vendor base, and it's meaningfully less of our business than the 20%. Got it. That helps. Thank you. 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. The 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 for Q1 2015 to 4Q 2016? It made up most of the change in SG&A expense, and SG&A expense is a % of sales. We had a really solid year this year off a relatively weak year last year. Most of the change on a % basis? Yes. Got it. Not dollar basis, but the basis points, yes. Okay. Second question. You guys have been talking about private label. You think it's going to hit $1 billion. Can you give us an update on where private label ended the year on a % mix, and then how much it was up this year, just so we can kind of gauge the trend line that it's following? Well, it was up a bit. It was up. I'm not going to get into real specifics right now for competitive reasons, but it was up, and we expect 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 billion this year. Is the margin still much better on that? I think we've talked about several hundred basis points historically. Probably 600-800 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. Good morning. Thanks for taking my question. Sure, Brian. First question, just with respect to market share gains. I know Ed, you had mentioned that market share gains remained a driver of the business here in the fourth quarter. Can you help us understand was it more or less a driver in the third quarter? Can we break out, looking at your comparable store comp, how much of that came from market share gains? I'd say a big part of that was market share gains also. 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 fourth quarter, and we were very pleased with the way that the marketing team, the operations team, and the merchandising team went after that market share. Well, looking into 2017, 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. Based on the fact of how we're mining the data, we don't think the market share gains necessarily end beginning with the third quarter because we continue to mine this data, understand this data, price this data, we think there's still more upside for us, it doesn't stop in the beginning of the third quarter. Got it. Maybe just to follow up on a separate topic with respect to the merchandising changes you're making. The product you've written down or taken the charge for here in the fourth quarter, 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 as we work into 2017? Is there some strategic use for it as a traffic driver as you clear that product? We've cleared it, Brian. We've taken it off the floor, made room for the spring receipts, and we've cleared that off, and we're jobbing some of that out. It's gone. Great. Thank you. Sure. The next question will be from Sam Poser of Susquehanna. Please go ahead. Good morning. Thank you for taking my question. Sure. In your guidance, can you give any impact you would have had from the later tax refund for the first quarter? Yeah. We're not aware of any particular impact delayed tax refunds have had. We haven't really tracked that historically. If there is anything from that that we pick up later, then that's fine. We're not counting on it in the first or second quarter. Okay. Thank you. You may have said this. Can you give us what your annual pre-opening expenses are looking like this year? We can. Just give us a second, Sam, we'll get to those. In the first quarter, they're significantly higher. We're opening 22 more stores in the first quarter than we did last year, of which roughly eight of them or so are converted TSA stores. That increase in pre-opening is a big number in the first quarter. Right. It could almost double in Q1, and then it would sort of settle down. Right. It's expected to be roughly flat year-over-year pre-opening. It's really a shift into the first quarter and out of future quarters. Yeah. All right. Year-over-year, assume it's flat and then just more weighted to the first quarter than it's been in the past. Lastly, you mentioned the new private label or private brands that you're working on. Can you give us some idea what categories you may be looking at there? Not yet, Sam. We will at, if not the next call, then on our call at the end of the second quarter. Okay. One more then. Only 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, their EBIT, is under the company average as well. Was that a fair assessment, too? 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. We can take some of this, and we can put our own private brand on it, which would increase our profitability. 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. Yeah. In different terms and conditions of sales and as we look at the whole thing, it's better 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 fourth quarter, 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 would be very helpful. Thank you. Adrienne, it was a combination of all. It was a combination of some non-go-forward merchandise with brands that we do business with. Some brands that we're doing business with also that are going to the transactional segment, we are eliminating or scaling back categories of merchandise that we do with those brands. It was some non-go-forward product with brands that we're going to continue to go forward with. Also in there are the brands that we're not going forward with. Okay. Fair enough. Secondarily, the golf comp is so strong. Just wondering if we should expect to model in that type of double-digit comp as we go into Q1, or whether we should look for some moderation there as well. Yeah, I wouldn't be quite as enthusiastic. The Golfsmith stores that closed were really helpful around the holiday season at both Golf Galaxy stores and DICK'S stores. We've got to just see how this plays out a little bit. A double-digit comp in golf would be fantastic, but I wouldn't necessarily get too enthusiastic and model that right now. Okay. Fair enough. Thank you very much for that, Mark. Thank you. The next question will be from Steven Forbes of Oppenheimer. Please go ahead. Good morning. Good morning, Steve. You mentioned an incremental 50 premium footwear decks 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? 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 has 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. It's been very good. We're going to open up about 50 more. 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. We're comfortable with the pace that we're going at right now, and you'll continue to see these things expand. Just a quick follow-up, right? As we try to digest what's going on in the marketplace, and I'm sure you guys are as well. How did you think about your ability to maybe put out an updated long-term target? Is this something you envision doing? You probably don't want to give a specific timeline on it, but do we 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. As I said, there seems to be more consolidation probable in the marketplace that we see. I think the consolidation's not over yet, and we've got to get through it all before we're going to make any long-term targets. 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. Thank you. Sure. The next question will be from Peter Benedict of Robert W. Baird. Please go ahead. Hey, guys. Thanks for taking the question. First, just rough math on the guidance. Maybe implies something in the neighborhood of 50 basis points of EBIT improvement this year. You mentioned both margin and SG&A would both be favorable. Do you expect it to be more favorable for one 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 give some more detailed guidance on that, but they'll both be going in a positive direction. Just over on CapEx. I know a couple of years ago, the plan that was laid out had 2016 as kind of the peak CapEx year. I know a lot of things have changed, of course. How should we think about CapEx beyond 2017? Is 2017 kind of a peak? It sounds like maybe a little bit more rational slowing down on the store growth as we look longer term. Should we assume that 2017 level persists, or does CapEx kind of start to step down after 2017? In 2017, we have just one unusual item in that we are adding a distribution center in 2017. I would say that is kind of an unusual blip for this year. Okay. This would be primarily the peak year. Yeah. Okay, good. That helps. Just lastly, around e-commerce and the team sports stuff. As you guys look out to 2017, do you think a 20%+ e-commerce growth rate is sustainable? There is obviously great momentum in the business. Just trying to get your feeling around that. Thank you. Yeah. 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 that we need to continue to do from improvement from a functionality of the site. In 2017, I would say probably no. Going forward after that, I think we're in the back half of this. I think you'll start to see. We're pretty confident of what we can do from an e-commerce standpoint. Okay, great. Thanks. I appreciate the perspective. Thank you. The next question will come from Mitch Cubitt of B. Riley. Please go ahead. Yeah, thanks for taking my questions. I've got 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 what level of that or percentage has been historically, and 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 between private label and brands? We're looking through that. We're not ready to 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's 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. How that all flows through yet, we're still working through that. We've had 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. You've got less competition out there. Yeah, definitely. 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 guide? It sounds like the e-commerce helps you in terms of the 30 basis points of EBIT there. Anything else in terms of like I know last year there was some Olympic spend and the Sports Deck investments. Is there anything that's worth calling out? Just what we're going to do from a how enthusiastic we are about Team Sports Headquarters and these technologies of Blue Sombrero, Affinity, and GameChanger that we acquired. We think there's a big unlock here that we're working through. Okay. Then last question on the margins. I know shipping was a drag on the quarter. Is there any reason to believe that that won't change going forward? Is there any way to kind of speak to the overall e-commerce margin versus the store margin? How do they compare? Well, what we expect as we continue to grow the business that the shipping costs are still 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 at how we might be able to slow those shipping costs, and we're working through those. To call out the profitability of e-com versus the profitability of the store, we're not ready to do that. 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 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 two things, is the vendor consolidation that we've implemented and re-looking at our vendor structure and what segment a vendor is in, what rights or privileges those vendors have inside our business, the investments we're going to make, the investments they're going to make. 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 & 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, over the next few years, you'll see our private brand business grow pretty dramatically. Thanks, Ed. Secondly, with regard to Field & 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 within Field & Stream? Yeah, we are happy with that. We think if some of this additional consolidation happens, we're in a great position to pick up a significant amount of that market share, whether it be at DICK'S or Field & 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 Golfsmith has gone out in both Golf Galaxy and in DICK'S. 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. We do expect some consolidation, and if that happens, we're in a great position to pick up that market share. I actually think toward the back half of the year, that could be a good business for us. We're not planning on that right now. Great. 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 Shocking. 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. As we've 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. 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. 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 billion-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 to other retailers? Yeah. 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. This has definitely been the right thing for us to do. 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'd be great. Well, every vendor's a little bit different and every category's a little bit different. You should look at that we will get some combination of. This is a two-way street. 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. You should look at this as it's around pricing, it's around discount, it's around marketing. It's around in-store presentation. 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. This has been Pretty successful out of the gate. 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. Sure. 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. I wanted to go back to the digital ecosystem for a minute. Yep I think it's pretty innovative way to get at customers. Can you share any thoughts to 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. The way this works is leagues will sign up on our platform, whether it be Blue Sombrero. The governing bodies sign up on our platform, which is Affinity. GameChanger is an interactive application that primarily around baseball right now, but is going to be broadened out to other sports. They interact with this. We're able to understand who's doing what, who's playing what sport, and can be able to market to them. I thought there was a great comment, when we were looking to buy GameChanger with their CEO, who said Well, I don't remember exactly the number of teams, but they've got an awful lot of teams and said, "I know everybody in Little League that bats cleanup. I know in high school baseball, almost everyone who plays the position of catcher." We can market to them that particular way. It's a great database that we have only begun to mine. 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 it is that it's a database that continuously refreshes. If 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 that they know what to buy at the right time. 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 GameChanger app quite a bit. Actually, Blue Sombrero, our softball uses that. Yeah. They're both terrific companies. Yep. One other question. Wanted to ask, when you guys looked at the way the comps maybe by region or by area, presumably those closest to outgoing TSAs perform better. Was there any variance you can share, those closest or furthest away from TSA or the non-effective ones? As you could imagine, the closer our store was to a TSA store, the better it did. The further away, then not as good as the one that was as close. We've got the transaction data for all of their business down to the SKU level. We can target by store from a marketing standpoint, and we can target by store from an an assortment standpoint to better serve those athletes. Got it. Thanks. Then, just one other kind of bigger picture question. We get asked a lot on our side of the table, like, 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 the point 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. 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." 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 standpoint. 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. They also 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 billion. As we take a look at what we're doing from a PD standpoint, our PD business is going to be roughly $1 billion. We expect margin rates to expand. We've developed great partnerships and relationships with the vendors that the others didn't. Is this a great industry right now? I think it really is a very good industry, that there were some weak links and some companies that couldn't survive. I think you're seeing this in some other retail industries too. 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 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've redone the vendor structure and took some of these charges to 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 our 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. Okay. It's all behind us. Okay, great. 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 another colleague's question earlier in the call, going forward beyond fiscal 2017? At some point, it would just depend from a fulfillment standpoint if we developed our own fulfillment center. Other than that, I don't think so. We've got a terrific fulfillment partner right now in Radial, and we're very happy with them. Okay, great. Final question. In the 2017 CapEx guide, you mentioned that there's a new DC included in that. Could you just sort of give us a sense of the cost of the DC, strip it out, if you- This year, we anticipate putting an additional $50 million into that building. Okay. Terrific. Thank you very much. The next question will be from Christopher Svezia of Wedbush. Please go ahead. Good morning, everyone. Thanks for taking my questions. I guess first, André, for you, if you can talk to maybe the store productivity rate of the DICK'S stores only. Can you give any color where that ends up in the fourth quarter? Certainly. 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 one. We plan our stores to be 90, 95, and 100, and this could be a ramp, we were north of 90% in the fourth quarter. Okay. If you just talk about gross margin for the year, can you maybe just decipher between product margin opportunity versus occupancy, either leverage or de-leverage? I know there's a shipping cost element in e-commerce. 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'll be up somewhat more in total for the year. Yeah, we do expect merchandise margins to expand. 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 transacts from an operating margin perspective? Is that potentially as you get to the second half of the year, as you maybe lock some investments in the first quarter? 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. 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. 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 got to treat it with some tender loving care. 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, because I know you sell Lucy in your stores. Because I think VF 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 CALIA, for example? It would be safe to make that assumption. Okay. Finally, just on the market share opportunity. Once you get into the third and fourth quarter, I know you answered this a little bit earlier, but just your confidence level that you'll be able to get same-store sales growth out of the DICK'S concept as you go into the back half of the year. You know your anniversary and the comparisons. Just your level of confidence you're able to do that. Maybe if you could talk a little bit more about that specific. Is there still this notion that once you get through the second quarter, it's just sort of, it's all gone. Which is, I don't believe 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, as I said, the data that we were mining in the third and fourth quarter, much better at it going forward. We think that there's still more market share to get. As we said, we think there's still more consolidation to happen in this industry, that the consolidation is not done. Okay. All right. Thank you very much, and all the best to you. 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, especially as it relates to store traffic, which I think you said was up 2.9% for the DICK'S stores. Yeah. Not a lot of difference. We're a destination retailer. We don't need the mall traffic to drive our business. We're a destination. We actually help the mall traffic. There's no real difference. As you look forward, I know a good number of the stores that you're opening in 2017 will be conversions of former TSA stores or Golfsmith stores. As it relates to new stores, how would the mix be mall versus non-mall or off-mall stores? This is André. The bulk of the TSA conversions, really, they were not very mall-based. Many of them are in power centers or standalone locations. The bulk of this will largely be in the first two 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. It tilts mostly to power center. Just a last question from me. Just on the earnings guidance, it seems like a lot of the difference, I guess, between street expectations and guidances in planned investment spending, including more spending on e-commerce. I think you said gross margin up for the year and looking for stronger merchandise margins. Right now I'm looking at the MC Sports website, and they're doing a going-out-of-business sale. It's obviously not a huge company, but it's $110 million in inventory that they're talking about has to be sold. My question is, in gross margin, are you anticipating any negative impact from competitor liquidation sales? Not MC. Okay. Just too small? Yeah. Too small. Yeah. No, nothing there. Okay. Thank you. 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 fourth quarter earnings call. We'll look forward to seeing everyone over the course of the first quarter. 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.