Good morning, welcome to the DICK'S Sporting Goods third quarter 2015 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela, Vice President of Treasury Services and Investor Relations. Please go ahead.
Thank you. Good morning, thank you for joining us to discuss our third quarter 2015 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer, André Hawaux, our Chief Operating Officer, and Teri List-Stoll, 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 30 days. During this call, we will be making forward-looking statements, which are predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risk 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 factor 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 statement. We have also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures, calculated in accordance with generally accepted accounting principles and related reconciliations, can be found on the investor relations portion of our website at dicks.com. I will now turn the call over to Ed Stack.
Thank you, Anne-Marie. As announced this morning, our third quarter non-GAAP earnings per diluted share were $0.45, within our guidance of between $0.45 and $0.48. Net sales for the quarter increased 7.6% to approximately $1.6 billion. Within this, consolidated same-store sales increased 0.4%, below our guidance range, largely due to performance in a couple of key categories. As we mentioned on our last call, our inventory was well-positioned coming into the third quarter for back-to-school selling season. Our merchants did a great job selecting key items, refining our product assortments. Overall, we were very pleased with our performance across the important categories such as athletic apparel, athletic footwear, and accessories. At the conclusion of back-to-school, our comps were running at the higher end of our guidance. However, as the quarter progressed, record warm weather across the majority of our markets negatively impacted sales and traffic.
This impact was notable in the critical cold weather categories. The outdoor category comped relatively flat in the quarter. We saw strength in lifestyle camping, paddle sports, and sport games offset by a decline in hunting. We expect the hunt business to remain under pressure in the fourth quarter based on recent trends and an anticipated promotional environment. Our golf business continued to show meaningful improvement. During the quarter, our golf margins expanded over 200 basis points compared to last year as both golf apparel and equipment comped positive on a consolidated basis. We continue to leverage our strong vendor relationships, where we're working together to create and deliver best-in-class merchandise presentations and a new unique shopping experience for our customers.
Key vendors such as Nike, Under Armour, The North Face, and Adidas continue to make investments in our business at an increasing rate to support growth in important categories such as athletic apparel and footwear, where we delivered solid comp gains for the quarter. With Nike, we opened up six brand Jordan shops during the third quarter and have opened an additional four this quarter. We've also partnered with Nike to develop a new full-service footwear deck. We are also working with new partners such as Polo and are opening 75 Polo shops this year. Additionally, our investments in private brand continues to pay off. For example, CALIA remains well positioned to become our number 3 women's athletic apparel brand by the end of 2016.
As a key element of our omni-channel focus, our e-commerce business remains strong. E-commerce penetration grew to 8% of net sales in the third quarter, compared to 7.3% in the third quarter of 2014, reflecting a growth rate of 18%. We continue to move forward with our e-commerce independence to capitalize on the significantly improved economics and other strategic benefits, including the control to create a differentiated online experience, easier access to data and the ability to leverage cross-channel data, control over development cycles, including faster testing times and implementation, and the ability to quickly stand up new sites. Turning to the fourth quarter, we're off to a slow start as the continuation of unseasonably warm weather across the majority of our markets is putting pressure on sales and traffic. This is obviously affecting our inventory levels, which are higher than we planned.
To address this situation, we're working with key vendors to return slow-moving product as well as canceling some orders. We are also developing markdown strategies and securing markdown allowances. We expect a more promotional holiday season that will create additional margin rate pressure. Given these dynamics, we have reduced our expectations for the rest of the year, Teri will provide more detail around our guidance. I'd like to thank our associates for their hard work during the quarter and for delivering earnings in spite of a challenging retail environment. I'd now like to turn the call over to André.
Thank you, Ed. During the third quarter, we continued to execute against our growth drivers. In addition to striving to offer the best assortment and customer experience in store, we continued to invest in strengthening the reach, frequency, and effectiveness of our marketing. These are critical to the success of our omni-channel platform, which we further expanded during the quarter, growing both our store base and our e-commerce business. This was our biggest quarter for new store openings in 2015. We opened 27 new DICK'S stores, relocated five DICK'S stores, and remodeled two DICK'S stores. We are very pleased with our new store productivity of 97.4%. Our DICK'S stores deliver very attractive unit economics, on average, generating an approximate 50% cash-on-cash return in year three, while our relocations and remodels generally provide a respective 15% and 5% sales lift in their first full year.
We also opened seven new Field & Stream stores in the quarter. We grew our e-commerce business to 8% of net sales, compared to 7.3% of net sales in the third quarter of 2014, while continuing to make progress on growing and controlling our e-commerce business. Outdoor enthusiasts nationwide now have more ways to shop, as we launched Field & Stream's first-ever e-commerce website. Along with Golf Galaxy, Field & Stream is now the second e-commerce site we operate in-house. This not only creates an additional sales channel, but allows us to begin to operate and gain experience from having two sites on a single platform. The launch of Field & Stream was the key step in successfully completing phase 2 of our e-commerce roadmap. We remain on track to transition dicks.com to our proprietary site by January of 2017.
We also recently enhanced our mobile application to reward customers for an active lifestyle. Through the addition of the new Move feature, we now allow users to connect fitness tracking applications such as Under Armour's MapMyRun and Fitbit to earn ScoreCard points for achieving activity goals. This aligns with our brand belief that sports matter, and we hope this encourages our customers to be active and continue playing sports. Additionally, we also enriched our highly penetrated ScoreCard loyalty program, which is a strategic asset and key differentiator from our competitors. We consolidated and streamlined the loyalty programs across DICK'S, Golf Galaxy, and Field & Stream, allowing members to now seamlessly enjoy benefits across these banners. During the beginning of the fourth quarter, we completed our 2015 store development program.
This brings our store count to 646 DICK'S stores and 19 Field & Stream stores, including four combo store locations. I'll now turn the call over to Teri to review our financial performance in greater detail. Teri?
Thanks, André. I'll start with our third quarter financial results. Total consolidated sales increased 7.6% to approximately $1.6 billion. Consolidated same-store sales increased 0.4% compared to our guidance of 1%-3% increase and compared to comps of +1.1% in the third quarter of last year. Within this, DICK'S Sporting Goods omni-channel same-store sales increased 0.7%, driven by a 1.2% increase in sales per transaction and a 0.5% decrease in traffic. Our non-GAAP earnings per diluted share grew 10% to $0.45 per share within our guidance range of between $0.45 to $0.48. Gross profit for the third quarter was $488 million, or 29.73% of sales, and was up 13 basis points year-over-year.
This improvement in gross profit margin was primarily driven by merchandise margin expansion, partially offset by occupancy and increased shipping expense as a percentage of sales due to the growth of our e-commerce business. Excluding litigation settlement costs, our SG&A expenses were $387 million, or 23.57% of sales, and deleveraged 14 basis points from the third quarter of last year. This was primarily due to store payroll, where we continued to invest hours to enhance the shopping experience in our stores. Expected litigation settlement charges of $7.9 million pre-tax, or $0.04 per share, relate to reaching an agreement in principle to settle an employment-related class action lawsuit. For additional details, you can refer to the non-GAAP reconciliation in the tables of the press release issued this morning. Looking at our balance sheet.
We ended the third quarter of 2015 with approximately $74 million of cash and cash equivalents and $342 million of borrowings outstanding on our revolving credit facility. Total inventory increased 13.1% for the end of the third quarter compared to the end of the third quarter in 2014. As Ed previously mentioned, we're working alongside our vendor partners to mitigate the risk, but still anticipate margin pressure in the fourth quarter. We remain focused on keeping tight control of our inventory so that we're properly set for the spring business. Turning to our third quarter capital allocation. Net capital expenditures were $76 million, or $119 million on a gross basis. Additionally, during the quarter, we paid dividends of $16 million and also completed share repurchases of $150 million.
Since we started our $1 billion authorization at the beginning of 2013, we've repurchased over $755 million of common stock and have approximately $245 million remaining under the authorization. Turning to our guidance. As we previously discussed, our current trends reflect record-setting warm temperatures. Because of the elevated inventory levels across the industry, we anticipate a more promotional holiday season. Given this, for the fourth quarter of 2015, we anticipate earnings per diluted share in the range of $1.10-$1.25. We expect same-store sales to be in the range of -2% to +1%. Operating margin is expected to decrease, driven by gross margin contraction, primarily due to lower expected merchandise margin in anticipation of a more promotional holiday season, as well as SG&A deleverage.
For the full year 2015, we're lowering our earnings guidance and now expect non-GAAP earnings per diluted share in the range of $2.85 to $3. We expect same-store sales to be approximately flat to an increase of 1%. Gross margin is expected to decrease, primarily driven by occupancy deleverage, increased shipping expense as a percentage of sales due to the growth of our e-commerce business, and lower merchandise margin. SG&A is expected to deleverage as we invest in key marketing strategies, as well as expenses related to bringing e-commerce onto our own platform. Year-over-year, pre-opening expenses are expected to remain relatively flat as a percentage of sales. As a result of these dynamics, we expect operating margins on a non-GAAP basis to decrease year-over-year. Net capital expenditures for the full year are expected to be approximately $245 million, or about $365 million on a gross basis.
With that, I'll turn the call back over to Ed for some final remarks.
Thanks, Teri. There's no denying this is a difficult environment for many retailers, including us. What I can say with certainty is that we both have the mettle and the balance sheet to weather the storm. I'd like to remind our shareholders of the following. We're the largest and most profitable full-line sporting goods retailer in the country. We have a very robust private brand engine with exclusive brands such as CALIA, Top-Flite, Field & Stream, and others. Our e-commerce growth has outpaced the market. We have meaningful white space to broaden our footprint. Not only are we the largest retailer for most of our vendors, our key vendors have invested in us and are increasing those investments. With these attributes, we are well positioned to capture market share.
We'll continue to take a long-term view, return capital to our shareholders, and make the right strategic investments to profitably grow our business. This concludes our prepared comments. We appreciate your interest in DICK'S Sporting Goods. Operator, if you could please open the line for questions.
Yes, sir. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using the speakerphone, we ask that you please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Kate McShane of Citi Research. Please go ahead.
Hi. Thank you. Good morning.
Morning.
My question centered around outerwear and just some of the trends that you saw during October. Can you break down at all how the performance was between some more of the cold weather-related layering pieces like fleece versus jackets and heavier outerwear? What inventories looked like going into October. Then the final piece of the outerwear question is, if it does get cold starting in the next week or so, which I know it's not predicted to do so, but if it does get colder, how much better can comp and margin be?
Okay, Kate. The outerwear and fleece categories, they performed relatively similar. We had issues with both of those. Anything related to cold weather product was an issue. I'd like to remind everybody that we said through back to school, our business was great. If you take a look at this through Labor Day, we haven't really commented about what normally went on in a quarter, this time, based on the guidance, we want to try to give you guys a very clear view of where we are and where we were. Through Labor Day, our comps were up in the high range of our guidance. We were really very pleased. The warm weather continued, it was right after Labor Day that it's like somebody turned off the switch, it was primarily the cold weather-related products.
That would be outerwear, that would be fleece, that would be compression product that football players and soccer players would wear. It was the boot category that hunters would use, and all of those had a really difficult time and have continued to do so. If it gets cold, and you're right, according to Planalytics that we look at every day, it doesn't look like it's going to get meaningfully colder through the month of November, although there is some optimism about what will happen in December. If it does get cold, we've got the inventory, we've got the right product. In some markets where it has gotten a little bit colder, and we've actually had some snow, the consumer has responded that our content is right, the assortment is right, and we're optimistic. It could get much better if we do get that colder weather.
Okay, thank you. Just another unrelated question, you had mentioned in your prepared comments about a new Nike footwear deck, I believe is what you said. Can you provide any more details at this time what that is?
Yeah. A new store that we opened in Las Vegas and another one that we opened in an L.A. suburb, we built a footwear deck in conjunction with Nike. We designed it together. That is a full-service deck and does for the footwear business what the Pinnacle shops did for the apparel business. It's only been open for a few weeks, but it looks very good. We like the way the Nike product is displayed and is selling. We think that the other brands and the way that we focused on the other brands, away from Nike, looks very good also. We're pretty pleased with this, and I suspect we'll do several more of these.
Thank you.
Sure.
Our next question comes from Seth Sigman of Credit Suisse. Please go ahead.
Okay, thanks. A couple follow-up questions here. First, on the hunting category, Ed, I think you talked about it remaining under pressure in the fourth quarter. Can you elaborate on some of the challenges that you're seeing in the category on a short-term basis? What's driving that increase in promotional activity that you alluded to? Then as you think about longer term, given the learnings from Field & Stream to date, how do you think about the prospects for the concept over time?
We still think that the prospects for Field & Stream are very good. We feel that the prospect in the majority of the Field & Stream stores going forward will probably be in this combo format, where we have a DICK'S and a Field & Stream right next to each other. We've got a few of those open, and the response from the consumer has been very positive. The hunting business has continued to be difficult. A lot of that, we feel, is caused by the warm weather. The guys haven't had to buy any jackets, boots, socks, layering pieces. It's all been pretty difficult, and we expect it will continue. You kind of saw some other competitors in this space talk about the same thing, and we're kind of all experiencing the same sales.
Okay. Understood. As you look at SG&A, did deleverage in the quarter but seem pretty well managed considering the sales shortfall and some of the ongoing investments. Teri, I think one of the things you talked about were some opportunities to be a little bit more efficient over time. If we assume that we remain in this low single-digit comp environment, and I realize weather is probably skewing that a little bit right now, but let's assume that continues. What are some of the steps that the company can take to manage the cost structure, including more efficient labor management, things like that?
I think you've hit the nail on the head. What we're looking at is how we can drive efficiency literally in everything that we do. When I first came in, we talked about some things within the store that we think we can go after to reduce some of the tasking but still allow us to invest as necessary to provide the customer experience that's so important. André can probably talk a little bit more about that. As we look at the trends we're seeing, we're being very diligent in turning over every rock and understanding where can we be more efficient, where can we cut back on our spending so that we have the right level of support on the things that really matter to our customers, and cut out the things that are not value added.
Just to follow up on that, as you look to next year, you do have a pretty big investment plan in place. As you get ready to take on the rest of the e-commerce business, are there specific levers you can pull to try to offset that?
That's what we're looking at now. Now a lot of those costs are fixed costs relative to the project. We're not going to do anything that's going to jeopardize our ability to execute that project with excellence. There are certainly some other overhead investments that will be challenging to try to offset some of that.
Okay. Thanks very much.
Our next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.
Hi, good morning. It's actually Tim on for Simeon. Had a question on your exposure to the apparel category. I mean, it makes sense given that it's a faster-growing category and it's higher margin as well. Obviously, there are things you can't control with it, like the weather. Does that cause you to rethink your category mix at all?
No. We think that that's really where the growth comes. There's big opportunity for growth there. We've talked about that we're going to continue to invest in these higher margin, higher turning areas. Right now it is really weather dependent. If you were able to take a look at our reports, you could see the categories that are weather dependent have had serious sales misses, and the categories that are not weather dependent have continued to perform really quite well.
Okay, thanks. Then a quick follow-up, if I can. I guess historically DICK'S has done a good job avoiding markdowns through packaways. Is that something that you've considered and that you're prepared to do at all?
We're going to try to mitigate these markdowns by returning some merchandise to vendors. The partners have been very helpful with this. We will take a look and cancel some slow-moving product that we had partner orders on. We've talked a lot over the years that we have these partner orders in winter merchandise where they're coming in at different dates. Some of these partner orders, we're slowing down, and if we don't need them, they won't come in. We are also working with the vendors to get some markdown $ to help clear this merchandise. We will take a look at some SKUs that if we're going to turn around and buy those SKUs again in a few months, we won't mark those down. In the hunt category, a very good example is guns and ammunition.
If the weather kind of impacts this and the people aren't buying as much hunting product as opposed to marking down some of the firearms or the ammo or some of the other hard lines aspects that we're just going to turn around and buy again next April or May, we won't mark those down. We'll just right-size the inventory with our order for next year because the product is exactly the same product from one year to the next.
Great. That's helpful. Thank you.
Sure.
Our next question comes from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good morning, guys. I was hoping to switch gears a little bit and discuss the parts of the business that have been working well, particularly in the footwear side. If you could give some insights, Ed, on how basketball and running have performed. I would imagine that those categories probably are somewhat better aligned to a warmer weather pattern. If you could comment on that'd be great.
Sure. We indicated our footwear business was good, and it comped positively in the quarter. I'm not going to get into category by category, but our overall footwear business was really very good for back to school and has continued to be positive to date.
Okay. Just a clarification question on the new Nike footwear deck. I think you said that that was expected to be a full-service format. Is that going to be staffed by a DICK'S employee or by a Nike employee?
DICK'S employees. Nike helped design this with us. It's a big focus on their brand. We've also focused on the other brands, giving them highlighted positions in this footwear deck. It'd be staffed by DICK'S associates, not Nike associates.
Okay. Is that to say that there's a shift a little bit in how you're viewing the overall footwear service kind of construction in that part of the store?
There is. We're planning to move to the full-service model. We think that as we've tested it, the customers responded very well to it. We like the assortment. We'll be able to offer a broader assortment of product with this presentation, and we're moving in that direction at a pretty rapid pace.
Okay. Good luck with the holiday season. Thank you.
Thank you.
Our next question comes from Robert Ohmes of Bank of America. Please go ahead.
Hey, good morning. Thanks. Ed, actually, a couple of questions. First question is, I don't know if you can do this, but if you look at what you're seeing recently and you look into the fourth quarter, if you separate out the sort of the cold weather related merchandise, is there any impact you're feeling from some of the brands like Nike proliferating a little bit more into competitors like Kohl's? Is that a pressure for the fourth quarter as well? I have a few follow-ups.
Yeah, Robbie, I don't think so. Kohl's, and I know they called out that their business was pretty good in that category. Ours was very good in that category also. We're not seeing the pressure from an athletic apparel standpoint around the true athletic apparel. The athleisure wear, as people have kind of coined it. If you take a look at what Kohl's has versus us with the shops that we have, the environment, the broader selection of product, the key color ups, the exclusive colors, the hookups with footwear, it's a very different shopping environment at our store than it is at Kohl's or even the department stores. We're not seeing that as an issue right now.
That's great. That's really helpful. The other question, Ed, as you look at your guidance for the fourth quarter and you think about this environment, any color you can give us on how you think this will play out in brick and mortar versus online, or things that we should think about for that?
We're seeing right now brick and mortar and online behaving relatively similarly. The cold weather merchandise is affecting our online business a little bit also. We don't see a big difference between the two.
That's really helpful. Last question. Anything you can tell us about your feeling on the golf business as you look into the spring season? Any thoughts you can give us would be great.
Yeah. We're cautiously optimistic about golf. As we said, golf actually comped positively on a consolidated basis in the third quarter. Our margin rates, which we had indicated before, expanded approximately 200 basis points. This is a much more profitable category based on the way that we right-sized costs. The fact that we are comping positively and the fact that our margin rates are up 200 basis points, this is a much more profitable business for us than it was in the last year or so. The third quarter is not a big golf quarter, but it's still, I think. As we indicated in the second quarter, our golf business got better. We're cautiously optimistic. Some of the brands have brought out some great product. The new M1 driver from TaylorMade is doing extremely well. The Great Big Bertha from Callaway is doing very well.
We're cautiously optimistic. FootJoy's got some new terrific-looking shoes out, some new technology out. We're cautiously optimistic about the golf business.
That's great.
It's still not going to be a big growth area for us, Robbie. It's just we think we've stopped the bleeding, so to speak. It'll be much more profitable.
Got it. Hey, thanks very much, Ed.
Sure. Thanks, Robbie.
Our next question comes from Aram Rubinson of Wolfe Research. Please go ahead.
Hey, good morning, and thanks for taking the question. We've seen kind of situations before where things look like they're weather induced, maybe there's something else going on as well. I'm just curious if you can tell us about your capital allocation plans because you're still growing pretty strong. You said your fastest growth in the last quarter. I'm just trying to figure out at what point in time do we start to think that maybe that growth spigot should be tapered.
Well, right now we don't. We think this is weather related, we've got the data that backs that up. I've tried to articulate this, if you take a look at the categories that are not weather related, our business has been really quite good. The golf business comped positively, both on the equipment side and on the apparel side, up 200 basis points. The athletic footwear business, the apparel business was good. We indicated that our comps through Labor Day, through the back-to-school season, was up at the high end of our range. It's weather related, if you take a look at this and take a look at what our outerwear business had been, our fleece business had been this year versus last year, it's all that business. If it wasn't, we'd let you know.
We've got the data that we can bear out that this is primarily weather related.
And I'll-
Except the hunting business. There's still pressure in the hunt business, but the vast majority of this is weather related product.
Scot,
I'm sorry. I'd like to add also that on the new store productivity at 97.4%, we also feel very good about the unit economics of our stores. What we also see is when we put new stores in new markets, we also see a corresponding significant increase in our e-commerce business as customers can now use and access the store for buy online, pick up in store, and also return products. We believe that our fleet also encourages our e-commerce business as well.
Well, I ask in part because the market with the way they're treating your stock is in no way paying you for the growth. I just didn't know if it made sense to kind of take it off the table to fortify and ultimately prove the market wrong. Anyway, the follow-up I had is around inventory and if there's a growth projection that you would like your inventory growth to be at and at what time you might like to see that inventory at an ideal growth rate.
Yeah, we're not going to lay that out right now. We just want people to know that we think the inventory is higher than we would like right now based on some of what's happening with this product that's related to cold weather, so the outerwear, the fleece, the cold weather compression product, winter boots. We've tried to lay out what we are doing about it. We continue to work with the vendors to send product back. They've provided us some markdown $ to help mitigate that margin rate pressure. We've taken a look and we're canceling merchandise that is slow moving. We're working hard to make sure that inventory is not a problem. We don't expect it to be a major problem based on how the team has reacted to this.
Thanks for the opportunity.
Sure.
Our next question comes from Michael Lasser of UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. I guess if we back up a step and look back over the last 3 years, you've grown your store base by about a third. Yet during that 3-year period, if we take the midpoint of your guidance for this year, you'll have only grown your operating income by about 7.5%. Recognizing that the weather is a bit extreme during this period, do you think the more sluggish trends over the last 3-year period is just due to consistently funky weather? Are some of the concerns out there, like a shift to online, a shift to the direct channel for your primary vendors, increased competition, are those factors starting to come to roost as well?
Yeah. All of those things I know you guys get concerned about, and some of them we can talk about in greater detail. The big reason for the growth rate that you've talked about is we've made significant investments in this business. We've talked about that we're going to continue to make investments in the business for the long haul. We've made very meaningful investments from an e-commerce standpoint as we were exiting the GSI contract to have full control over our e-commerce business. That's an expensive proposition but it's the right thing to do for the business. We've made meaningful investments there. We'll have to make meaningful investments, as we've guided to you, into next year also. In 2017 and 2018, we get the payoff because now we'll be fully e-commerce independent as we talk here, and we will have complete control over this.
The profitability goes up, the GSI fees go away, we've made those investments. We've also made investments in the long term in the Field & Stream concept. As we've taken a look at other retailers and their growth pattern and what's happened to them, many retailers don't have a growth vehicle by which they continue to grow their business or expand their business when their primary vehicle starts to run out of runway. We've wanted to make sure that doesn't happen to us. That's why we've invested in Field & Stream. We've made an investment in Field & Stream over the last several years that has been pretty significant, that we think we found the right vehicle in these combo stores that will pay great dividends. It's really been more of an investment. The last 3 years have nothing to do with funky weather.
The weather we're talking about has to do with where we're at right now, in our guidance in the fourth quarter. It's been the investments that we've made in the business for the long term. The investor community, if we hadn't made those investments, it'd be a different problem further down the road. We've done what's right for the business long term.
Do you think you've effectively balanced the pace of investment with execution in the core business, or has the tension between those two factors increased during this period?
No, I don't think so. The group works very well together. I don't think that we're out of balance. I don't think we have an issue there. The businesses are complementary. The e-commerce business is obviously complementary. It's the main business we're in. Field & Stream is a complementary business. We've got that expertise. No, I don't think that we've done that. If we got way outside our knitting, I would say you might have a point, but we can leverage a lot of the resources, a lot of the vendor relationships that we have in DICK'S for the Field & Stream concept.
My last question is, you've bought a lot of stock over the last three years at an average price of about $51. Right now, the stock's trading at $34.75. Why wouldn't you use your balance sheet capacity to lever up and aggressively buy the shares at this point?
We have an authorization for a billion-dollar stock repurchase program. We've got about $245 million left on that repurchase program, we will continue to take a look and opportunistically purchase stock. We're not going to guide exactly what we're going to do, but we will continue to take a look at it.
Okay. Thank you so much. Have a good holiday.
Thanks. You, too.
Our next question comes from Paul Swinand of Morningstar, Inc. Please go ahead. Hello, Paul from Morningstar, you're on the line, sir.
Good morning. Thank you for taking the questions.
Sure.
Wanted to follow up on the store openings. I noticed just looking down the list that it looked like about 21 of the stores opened in the quarter were actually what I would call established or East Coast or existing markets, even Illinois or Pennsylvania. It seemed like actually that the Field & Stream were almost all in existing markets. Would you say that as you still see the same net total store count in the long run, is it going to shift more towards West Coast and southern markets where you're less stored, or are there still significant opportunities in the existing markets?
Well, there's still some opportunities in the existing markets, we continue to look into South Florida, Texas, California. You'll probably start to see a little bit more heading in that direction. As far as Field & Stream goes, we're looking at Field & Stream in some of our better hunt markets, our better outdoor markets. As we take a look at what the hunting participation is, the fishing participation is, those are the markets that we've opened them up in. I would expect that most of the Field & Stream and the combo stores will be primarily east of the Mississippi and north of the Carolinas right now, until we get a little more mass here.
Just wanted to follow up also on one of the comments. I think somebody said when you open a new store, the e-commerce goes up significantly. Is that true even when you're filling into some pretty well-established markets? Again, I see several stores open in Pennsylvania or Illinois. Are you still seeing the e-commerce lift, for example, in Joliet, Illinois, where you're probably well known already?
Well, we talked about that in opening in markets that we're not in. Be careful. You take a look at Pennsylvania, take a look at Illinois. Pennsylvania is a big state. Uniontown is 50 miles outside Pittsburgh. We didn't have a store in there. It's a non-competitive town. There's not many people from Uniontown shopping in a DICK'S Sporting Goods store because it's a very long drive. The Illinois store in Lincoln Park, that's downtown Chicago. The people who are living in the urban setting in Chicago, they're not shopping at DICK'S Sporting Goods store. These are not markets where we're dropping a store six miles from another DICK'S Sporting Goods store. Don't be too alarmed on because we're opening up in a state that we're already in, that that means we're cannibalizing existing stores.
Excellent. Thanks for that. Real quick, when you said there wasn't so much competitive pressure from big box, are you seeing the markdown pressure or the competitive pressure from regionals? Are you seeing any difference by region, meaning regional sporting goods?
No. When we talk about the markdown pressure, we're probably going to have to do some markdowns to clear through the inventory. We think some of the other retailers that have had some difficult times or may be having a more difficult time than us are going to have to take markdowns. You can take a look what happened in Boston where I think City Sports had 15 stores, something like that. They've now gone out of business. Some other competitors have talked about significantly slowing their growth rate, their new store program. Others are closing stores, we don't have to do that. We're in really a very good shape. Our new stores are performing extremely well, we're very well positioned to take advantage of this displaced market share when some of these people are closing stores.
Okay, great. That's very important. Thanks again and best of luck for the holidays.
Thank you.
Our next question comes from Steven Tanouye of Goldman Sachs. Please go ahead.
Thanks, guys, for taking the question. A lot of color on the category trends. I think it would be somewhat helpful for us if you could just sort of summarize it. I know in the past, you've sort of said golf, hunting and all others. Obviously, you have three main categories, apparel, footwear, and equipment. Footwear seems like it's positive. Anything else you can kind of give us on the high level to understand how big the differences were here?
Well, we're not going to get to what the differences were, but if you take a look, we're pleased with the team sports hardlines category. We're pleased with athletic footwear. Not the boot category, but the athletic footwear category. We're pleased with athletic apparel. We're pleased with the golf business, and it's primarily the hunt business and those cold weather businesses are the issue. We've made a push into the team license business along the professional sports lanes and the NCAA, and that's performed very well also.
Got it. Finally, on the fourth quarter outlook, the profitability, the EPS guide seems to imply gross margins down something like 200 basis points, which seems pretty big. Can you talk about sort of the puts and takes here and whether there's an element of conservatism or if you're effectively planning to sort of clear the decks so that the issues would be contained to the quarter?
As we said, there's certainly an element of the merchandise margin being depressed as we do clean through that inventory. We are very focused on ensuring that we are strong going into the spring season and that we are clean from an inventory standpoint. There's also some de-leveraging effects that come in with the lower sales growth. It's really as simple as that.
Okay. Thank you.
Our next question comes from Matthew McClintock of Barclays. Please go ahead.
Hi, good morning, everyone.
Good morning.
I was wondering if we could talk about Chelsea Collective. Just recent learnings from the new openings that you had, anything that you can provide there. The second piece that I'd like to talk about is hunting overall. Sounds like the hunt category would've been down even excluding the weather. What really needs to happen in that category to drive an acceleration in the business? Thanks.
Well, sure. The Chelsea Collective, we opened two stores. They are really labs. The leases that we signed are only roughly 24- to 30-month leases, and we've got little exposure there. What we've learned is that we've learned some things that we can bring back into the DICK'S business around the accessory category, around some of the key brands that we have in the Chelsea Collective that we could bring into the DICK'S store. We've learned some things around the service element of how important that personalized service is to the woman coming in to shop in the store. We've learned that the footwear component of this is very important, these hookups, and then broadening out to the lifestyle apparel and Chelsea Collective has been very good. We've learned some terrific things that we can bring into the main DICK'S store.
As far as the hunt business goes, it does continue to be difficult. Even if the weather was normalized, the hunt business would be under pressure. I think there's still an overhang from the buildup of purchasing that was done over the last couple of years, especially in the gun category. We think it still hasn't normalized, and it's going to continue to be under pressure.
Thank you very much.
Our next question comes from Sam Poser of Sterne Agee CRT. Please go ahead.
Thank you for taking my question. A couple things. Number one, can we assume that the athletic footwear and those other brands that you called out, not the other categories that you called out that were doing well, given the weather, have continued to do well? Number two, regarding the markdowns and returns and cancellations, I assume that you would prefer to do returns and cancellations ahead of taking markdowns because when it gets cold, you don't want to have your goods at a low price. I have one other question.
That would be correct. Most of these returns, we've got commitments that will come post-holiday. If it does get cold, we'll have the product to be able to sell. Repeat the footwear question if you would, please.
You called out footwear, athletic apparel, athletic footwear, team sports, hardlines, and so on that did well in the third quarter.
Yeah.
Given the weather and everything, I assume those have continued to do well to date without any specific anything.
Yes. The footwear category continues to do well. The athletic apparel areas that are not cold weather based have continued to do well.
One last thing. To follow up on Chelsea Collective, I know it's a lab, are you planning to open any more stores? Do you have stores slated for next year there other than.
We have no stores slated for next year.
Okay. Thank you and have a good holiday.
Yeah. Thanks.
Our next question comes from Dan Wewer of Raymond James. Please go ahead.
Thanks. Ed, I think it was about seven months ago when the company hosted an investor day, at that time, it adjusted the 2007 operating margin goal. It was about 10%, 10.5%, and we lowered it to 9% or 9.5%. Based on where the updated guidance is for the current year, to reach the low end of that 2017 forecast, you'll need about 150 basis point increase, which seems aggressive. Do you think we're at the point where we need to be maybe rethinking that 2017 operating margin goal?
No, Dan, I don't think so yet. We've got to play this quarter out. We've indicated this is primarily weather related, I think as we get through this quarter and into the next quarter, we'll be in a better position to discuss that. Right now, we're not looking to make any changes.
During the last three years, margin, I think as Michael discussed earlier, margins have been under pressure. That lower operating margin cycle took place during a period of rapid e-commerce growth for the company. Can you remind us the operating margin? I don't expect you to quantify it, but if you can just give us some sense of the magnitude of the difference in margin rate between the direct sales channel and your bricks and mortar channel.
Yeah, we've never provided that, we're not going to get to that level of granularity. Not only is it the fact of the margin rate that we're driving the e-commerce business, but it's the investments that we've made from an e-commerce standpoint and the investments that we've made in Field & Stream, which we really do think are the right long-term investments. We put some pressure on the profitability and the operating margins right now, we're not in this for the next quarter or two quarters or three quarters. We're really in this for the long-term benefit of the company, they were the right decisions to make.
Hey, just a housekeeping item. A few instances during the call, you noted that the golf category achieved positive comps. In the news release, it actually states that golf decreased 2.9%, at least at Golf Galaxy.
Dan, if you read that a little more closely, it will say that Golf Galaxy decreased 2.9%. What we said is that our total golf business on a consolidated basis ramped up was positive and that we increased margin rates 200 basis points.
The Golf Galaxy is not performing as well as the DICK'S branded.
That's correct. Golf Galaxy ran a little bit behind what we did in the DICK'S business. Golf Galaxy is really a small portion of our entire business. Golf Galaxy is only roughly about 3% of our total business. In the golf business as a whole, at DICK'S, Golf Galaxy combined comped positively. We had a 200 basis point improvement in margin rate. We had a significantly reduced cost structure associated with that. It's a much more profitable business.
Is that just the availability of Ping product in a lot of your DICK'S stores compared to a year ago? Is that?
No
What's driving a lot of that improvement or?
No, it was across the board. The new releases from Callaway did very well, from TaylorMade did very well. Ping certainly does very well. Some of the other categories in apparel have done well. We've kept the inventory under control. The margin rates have been better. The cost structure is down. It's been a much better business for us, and we're cautiously optimistic that that will continue.
Okay. Thank you.
Our next question comes from Christopher Horvers of J.P. Morgan. Please go ahead.
Thanks. Good morning. I made it in. Can you share how much merch margins were up in the third quarter and how you're thinking about the merch margin decline in the fourth quarter?
To get to that level of granularity, we haven't provided that, but the margins in the fourth quarter, we think, are going to be under pressure based on the promotional environment. If you've heard from many other retailers that they expect it to be a promotional environment, and we will not be immune from that. We think we'll have our inventories under control with what we're doing with our brands. To be competitive in the marketplace, especially at the holiday season, we expect we'll put pressure on our margin rates.
Okay. Then another margin question. On the payroll deleverage in the quarter, how much of that was an acceleration in the payroll dollar growth due to some of the wage pressures in the environment versus the impact of deleverage? As you think about going forward, is that sort of your leverage point on payroll going up as a result of wage pressures?
Yeah. I think a lot of it was due to deleverage, just simply sales deleverage in the stores. We are seeing in some jurisdictions, some rate pressure as a result of minimum wage increases, but that's about it. Most of the deleverage was due to simply the sales deleverage that we saw and experienced in the third quarter.
Okay.
If you think about the pattern, as Ed mentioned, that we were very strong in the back to school then the fall off after, and we made the conscious choice that we wanted to protect some of those store hours during that period.
I got you. Then a more bigger picture question, understanding that DICK'S offering is better than the department store channel, more better best, you get better allocations, you get the best products from Nike and Under Armour. How do you think your assortment compares to the vendor direct channel, which I think is really the boogeyman for a lot of investors. Do you still have exclusive colors and products when comparing your assortment versus, let's say, nike.com and underarmour.com? Is that changing at all at the margin?
Yeah. I think that we still have I don't know specifically what colors we have that are different from the brands, but the relationship we have with the brands, I do think that this is a bit overblown right now from the investor community. If you read some of the things from some of the vendors, they talk about how their e-commerce business is growing, they also talk about how they continue to make investments their wholesale business is going to grow. For the most part, if we're not the largest, we're one of the largest and the most important brands for the wholesale side to continue to support. We've got a great relationship with them. One of the things that we have over the brands themselves is that customers are looking for a broad selection across brands also.
They want to be able to shop in a place where they can take a look at Nike product, Under Armour product, Adidas product. They want to be able to take a look at North Face product, Spyder product, Columbia product, in all of those different categories. We offer that, and we offer the best assortment and the best shopping experience, not only in the store, but online, where they can cross-shop across all categories. We think that's an advantage. The brands are going to do a very good job. They're going to grow that business, and I think it's going to have an impact on some other brands, but I think we'll be able to compete very effectively, and have been able to compete very effectively.
Just one follow up to that. Has there been a situation where you've gone back and say, "Hey, that certain shoe or that certain top or certain running short," where you say, "That's a really hot product, and we would like some of that," and you just hadn't had access to it, and it's been on their direct website?
Well, Nike's got a segmentation policy, a few other ones do, and there are some products that we don't have in every single one of our stores. We've got a broad selection of product, and we don't really think the competitors are brands. Our partners are going to be as big a competitors as the street thinks because those brands continue and will continue to invest in us at an increasing rate. You can see that with the Jordan shops. You can see that what Nike's doing with the footwear deck, what Under Armour's doing with the new shop that they're looking at, what Adidas is doing with us. Even if you take a look at some of the statistics, if the e-commerce business gets to be 25% of the total business. People think 20%-25%.
Even if it got to 30% of the total business, that still means 70% is going to be done in a traditional store. That's still a big part of the business. I think some other people are going to have a difficult time operating in that environment. We're not, and we're well positioned to take care of any of that displaced market share that happens if some other people aren't able to weather these storms.
Thanks very much. That's very helpful.
Sure.
Our next question comes from Matt Nemer of Wells Fargo. Please go ahead.
Thanks so much. I'm wondering if you could talk to comp trends in markets where weather would be less of a factor, like in Florida or some of your stores in the Texas market.
We're not going to talk about specific markets, but I did say where we did see some markets that weren't as impacted by the weather right now that we're pleased with their performance. They're comping positively.
Okay, secondly, can you just clarify if the guidance follows the forecast that we're seeing from Planalytics and that things sort of stay cold this month and get a little better in December? Or is there something else that you're tracking to?
You mean stay warm this month?
Stay warm. Yeah, I'm sorry.
Yeah. We think according to Planalytics, it's going to continue to stay warm for the balance of this month. It might get a little bit better, also, we've incorporated this margin rate pressure from a promotional environment and the fact that we're going to want to clear through some inventory.
Lastly, does the NSP calculation, the new store productivity calculation, is that impacted at all by store size or a mix shift to higher volume stores in California and other markets? Or do you feel like the output of that calculation is fairly apples to apples?
It's apples to apples because it does it on a per square foot basis, so it's apples to apples.
Great. Thanks so much.
Our next question comes from Michael Baker of Deutsche Bank. Please go ahead.
Thanks. A couple real quick. One, Field & Stream, you have 19 of the standalone stores open, I believe you said, but you're going forward with the combo. What happens to those 19, and have your thoughts changed on what the sort of long-term footprint of that concept looks like, both standalone and the combo stores?
Well, just so we've got the right numbers, it's 15 standalones and four combos.
Okay.
19 in total.
Understood.
We've got another store coming up in Michigan next year, and we've got nothing else Field & Stream standalone. Anything else we've got going forward is going to be in the combo stores. I wouldn't say that we're not going to do any more standalone Field & Stream stores, but this combo store we think has really been great and is where we're going to be heading in the future.
Do you have a sort of total number of Field & Stream, both standalone and combo combined?
No, we haven't done that yet.
Okay.
We have not Yeah.
Understood. Two other real quick here. One, just market share. I understand a lot of the public guys are weak as well, but if you look at some industry data, citing some of the retail sales numbers and the NAICS 45111 growing a lot faster than your comps and has been for the last few quarters. Do you think you're losing market share to anybody?
We don't. If you take a look at some of the other publicly held companies out there, ex Foot Locker, I think we're growing at least a faster rate than the others.
Okay. One more. We've talked a lot about weather hurting things. Golf is getting better. Could the weather be helping the golf business so that being sort of an offset on this whole weather thing? I know I was playing golf just recently up here in Boston.
I'm sorry to hear that, to be honest with you. Yeah, the weather has definitely helped the golf business, yes.
Okay. My playing partners would agree with you on that. Thanks. Appreciate it.
Yeah, sure.
Our next question comes from Scot Ciccarelli of RBC Capital Markets. Please go ahead.
Hey, guys. How are you?
Good. How you doing?
Ed, I think you gave us a step for when the golf and hunting business came under a lot of pressure. You told us roughly 20% of your sales were levered to those two categories because that was a major call-out. Historically, when you look at these cold weather categories that are being impacted, can you give us a percentage of sales of what they typically comprise in the fourth quarter, just so we have a magnitude that we can kind of get our heads around?
I could, but I won't. It's meaningful. I mean, this is an important part of our business, that outerwear business. Just not only the outerwear business, but all the things that go with outerwear. You've certainly got the jackets and ski pants and all that, you've got base layer products, you've got fleece products, you've got boot products, we've got socks, we've got gloves, we've got hats. You've got cold weather running apparel, you've got cold weather running accessories, hats, gloves, headbands. The weather-related product is a very important part of our business in the fourth quarter.
All right, no other color in terms of better able to understand kind of the quantification of it, of the impact?
No, it's very meaningful.
Okay. The second question kind of related to that, and I don't know if this is something that you're willing to answer in that case.
Okay.
When you try and work with the vendors to help alleviate some of the heavy inventory positioning, can you give us an idea of how much you can kind of put back on the vendors and then how much is going to be up to you to clear?
Well, we're still working through those issues, so We've got some final agreements. We don't have all of those in place right now. We're working through that. The vast majority of them, this will happen after holiday. At the end of December. We don't want to send back product, nor do the brands want to take back product until we get through this holiday season to see how it sells. If it gets cold, it's going to do well. But we'll work through this. But we've got handshake agreements that they will help us either take back product, give us markdown dollars, and we have already canceled some merchandise.
Got it. Okay. Thanks a lot, guys.
Sure. Thanks.
Our next question comes from Rick Nelson of Stephens. Please go ahead.
Thanks. Good morning.
Hey, Rick.
You're sitting about $74 million in cash. That tends to build in the fourth quarter, particularly with this inventory reduction program you have in place. If you hit your EPS estimates and absent buybacks, where would that cash position look like at year-end?
Yeah. I don't have that number right off the top of my head. We don't usually project cash at that level. If you want to talk offline, we can give you some more color on what kinds of things might be puts and takes.
Gotcha. Thank you. Curious about your comfort level with debt.
We don't have any debt to speak of. What you're seeing as we have the facility balance at the end of this quarter is our traditional pattern as we head into the holiday season. There's nothing unusual. The movement there is consistent with the inventory build.
We would expect that that would all be cleaned up by the end of the year. There'll be no debt at the end of the year.
Yeah.
Yeah. I guess, terms of capital allocation, buybacks, obviously, one potential. If you could sort of rank the alternatives with that cash position.
With regard to what would buy back stock, dividends, and invest in the business?
Exactly.
Well, invest in the business would be number one. Based on where our stock is right now, probably buying back stock would be number two, and dividends would be number three.
Okay. Thanks a lot, good luck.
Our next question comes from John Kernan of Cowen. Please go ahead.
Hey, good morning, everyone. Thanks for squeezing me in.
You're welcome.
A lot of my questions got answered. Just wondered if you could help us understand where you think inventory levels will end in the fourth quarter if you hit your comp guidance. Is there going to be some type of inventory overhang as we head into 2016?
Will there be? I'm not sure yet. I think that the team has done a really good job of working with the vendors to take back the product, as we've talked about. I don't think we'll have any meaningful inventory issue.
Just finally, can you help remind us, as the relationship with GSI rolls off, what the margin benefit should be as we head into 2017 and beyond?
We haven't provided that yet, it's very meaningful. Those fees that we have with GSI go away. The fulfillment fees, if we still use GSI or whoever we'll use, we'll use a third-party provider for a while. Those fees get to be activity-based, which today they are percentage-based. We provide, I won't give you the exact percentage, but we provide the same percentage whether we sell a pair of $50 shoes or a pair of $100 shoes. It doesn't cost GSI any more to pick a $50 pair of shoes than we do a $100 pair of shoes. What we will be able to do as we go forward is to leverage those costs, which we can't do today because they're all variable. There's a very meaningful increase in profitability when we roll off this GSI contract.
Okay, thanks, and best of luck.
Sure. Thanks.
Our next question comes from Peter Benedict of Robert Baird. Please go ahead.
Yeah. Hey, guys. Thanks. Pretty much all has been asked here. Just, I guess, one final one would be the fourth quarter comp guidance. Does that assume that trends improve over the balance of the quarter, or are you just basically guiding to where you guys are trending quarter to date? Thank you.
As we said, what we're doing today is we're looking at November weather trends to continue pretty much as we've been seeing, a little warmer. As we look forward into December and January, as we file the Planalytics platform, it does show some improvement in weather. It's not a complete extrapolation of today's trends, but it's not assuming a huge improvement either.
That's helpful, Teri. Thank you. I guess one more would be just on the Jordan shops. Can you remind us how many you have and what the plan is for the rollout of those as you're looking next year? Thank you.
We've got 10 of them right now. We're still working with Nike and testing these stores to see where the right place is, what the right assortment is. We will have more of them next year, but we're not ready to guide what they are.
Okay. Thanks very much, guys.
Sure.
Our next question comes from Christopher Svezia of Susquehanna Financial Group. Please go ahead.
Good morning, everyone. Thanks for taking the questions. Most have been answered. Just want to circle back, Ed, for you, just on the footwear deck, just the full-service footwear deck that you're talking about. Is that just in those stores where you're doing this Nike full service, or is it across the entire store base? Just a little color about that, please.
In the new stores we're doing it. In new stores that we open up, the vast majority of them are going to be the new full-service deck, not necessarily the Nike deck. We developed our own. We've got two stores that have this Nike deck. The balance of them have this deck that we've done, but it's full service. It looks terrific. The customers responded very positively, and the brands have responded very positively also.
All the other stores, you're going to start retrofitting the older stores to have this full service? Or are you going to still have a hybrid model in the older ones?
There'll still be this hybrid model in the older ones, but based on what we're seeing, we will probably go back and start testing renovating some of those stores into this new format, and we'll see what kind of reaction we get.
Okay. Just lastly on the Polo, just any color about how that's performing? I know it's early days, but just any thoughts about that at all?
It's very early yet, and we'll have a better idea through holiday.
Okay. All right. Thank you very much. All the best.
Sure. Thank you.
Our next question comes from David Magee of SunTrust Robinson Humphrey. Please go ahead.
Yes. Hi, everybody. Good morning. Just a couple of quick questions on e-commerce. Number 1, the differential and the growth in the third quarter versus what we had seen in the second quarter, is most of that the warm weather impact?
Vast majority of it, yes.
Thank you. Secondly, you had mentioned earlier that the new stores are a contributor to the growth of the e-commerce business, which makes sense. Any idea what the growth rate would be if you stopped opening stores?
I don't. Because there's a difference between, as we said, in new markets where we open up where we don't have a presence. It goes up significantly. In markets where we have a presence but it's a new trade area, it's not nearly as much. I can't give you that answer.
Okay. Fair enough. Thanks, Ed.
Sure.
This concludes the question and answer session. I'd like to turn the conference back over to Mr. Stack for any final remarks.
I'd like to thank everyone for joining us today and hope everyone has a great holiday, and we'll talk to you about our fourth quarter in March. Thank you.
Thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.