Good morning, and welcome to the Dick's Sporting Goods Second Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anne Marie Megulla, Vice President, Treasury Services and Investor Relations.
Please go ahead.
Thank you. Good morning and thank you for joining us to discuss our Q2 2014 financial results. 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. In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today's discussion includes some forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to, our views and expectations concerning our future results.
Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward looking statements. For a summary of the risk factors that could cause results to differ materially from those expressed in the forward looking statements, please refer to our periodic reports filed with the SEC, including the company's annual report on Form 10 ks for the year ended February 1, 2014. We disclaim any obligation and do not intend to update these statements except as required by the securities law. We have also included some non GAAP financial measures in our discussion today.
A presentation of the most directly comparable financial measures calculated in accordance with the generally accepted accounting principles and related reconciliations can be found on the Investor Relations portion of our website at dicks.com. Leading our call today will be Ed Stack, our Chairman and Chief Executive Officer. Ed will review our Q2 results and key business drivers. Joe Schmidt, our President and Chief Operating Officer will then review our omni channel development program and specialty concepts. After Joe's comments, Andre Howell, our Chief Financial Officer will provide greater detail regarding our financial results, capital allocation and future expectations.
I will now turn the call over to Ed Stack.
Thank you, Ann Marie. This morning, we announced our Q2 2014 results, including consolidated non GAAP earnings per diluted share of $0.67 at the high end of our guidance of between $0.62 $0.67 for the quarter. Our consolidated same store sales increased 3.2% compared with our guidance for the quarter of between 1% 3% same store sales. Our results reflect strong performance across most areas of our business, partially offset by the performance of our golf and hunting businesses. In fact, excluding these two categories, our aggregate comp for the quarter increased by approximately 7.8%.
Areas where we've made investments in reallocated space such as women's and youth athletic apparel have been very positive. We shifted floor space away from golf and fitness and now have a broader more compelling of women's apparel and youth apparel supported by an enhanced product presentation. We also saw strong performance in team sports and licensed merchandise during the Q2 with a meaningful impact from the World Cup. Our aggressive merchandising strategies resulted in average store sales of World Cup merchandise that were more than double the sales on an average store basis of the World Cup held in 2010. We anticipated we can as anticipated, we continue to see headwinds in our Hunting and Golf businesses, both of which were impacted by the trends we discussed in detail last quarter.
Specifically, the Hunting business capped down high single digits. We expect our Hunting business to continue to trend down in the 3rd quarter and then flatten out in the 4th quarter. Other segments of our Outdoor business performed well, offsetting the declines in Hunting. This enabled our overall outdoor business, which includes hunting, fishing, camping, boots boats and other outdoor categories to deliver flat comps. Golf continues to be our most challenging business.
Our significant promotional activity, particularly around Father's Day, led to better than expected sales, but negatively impacted margins. Golf Galaxy comps were down 9.3% and our DICK'S golf business was down somewhat less. In order to realign this business more closely with current and expected golf demand, we have taken steps to reduce our cost structure. As part of this, we have eliminated specific positions in our golf area within our Dick's stores. We have retained a strong team of associates who have the training, experience and skills necessary to meet the demands of our golf customers.
We will reinvest these savings by providing a higher level of service in the strategic growth businesses inside our stores. We have also reduced the cost structure of our golf business by consolidating our golf related corporate operations. This includes merging the buying and back office function of our Dick's Golf Business and Golf Galaxy into a single cost effective operation. We will be reinvesting these cost savings from the consolidation into the growth areas of our business. The growth drivers of our business include e commerce, which delivered another strong quarter representing 6.3% of sales from 5.6% last year in the Q2.
Other drivers include our women's and youth initiative, footwear and field and stream. As we look at the second half of twenty fourteen, we are cautiously optimistic, although we do expect due to the cautious consumer and sluggish economy, promotional activity will increase, with margins and advertising expense continuing to be under pressure, impacting earnings per diluted share by approximately $0.04 In summary, we were pleased to deliver results at the high end of our range from both sales and earnings perspective. Although we continue to face headwinds from golf, we're enthusiastic about the balance of our business. This is demonstrated by the improving trends in the Hunting and Outdoor business, our Women's and Youth initiative, along with the balance of our business that delivered comps over 7%. We further demonstrated the confidence in our business long term by repurchasing $100,000,000 of stock during the quarter.
We will continue to manage our business for the long term as we weather these shorter term issues. I would also like to thank our associates throughout our company for the hard work and determination they showed to deliver our Q2 results. I'd now like to turn the call over to Joe. Thanks, Ed. During the Q2 of 14, we continued to expand our omnichannel platform, growing both our store base and e commerce operations, while driving productivity in our stores.
We opened 8 new Dick's stores and relocated 3 stores that were at the end of their leases. At the end of the second quarter, we had 574 Dick's stores. In the second quarter, we reallocated space within our existing Dick's stores to increase our offering of women's and youth athletic apparel. As Ed discussed, our initiatives to rationalize our golf cost structure will allow us to reinvest payroll into other areas of the store, which we believe will also enhance the customer experience and drive productivity. Our new Dick's stores continue to perform well with new store productivity of 97.8 percent and our store base also supports the growth of our e commerce.
As many of you know, all of our existing and new Dick's stores feature ship from store capabilities, allowing us to connect online customers with in store inventory. With each new store, we enhance our distribution network as new stores are able to fulfill e commerce orders. We continue to optimize our ship from store fulfillment to improve inventory utilization, reduce shipping costs and speed the delivery of merchandise to our customers. We recently introduced a completely redesigned mobile app, which features a new look and feel as well as a better user experience. The new app will serve as a foundation to expand our mobile platform and further integrate the online and offline experiences.
Our new app follows on the heels of a very successful new tablet optimized site we launched last year. Turning now to our specialty concepts. In the Q2, we opened our 3rd Field and Stream store. We plan to open 7 additional Field and Stream stores in the 3rd quarter, bringing our store base to 10 stores. In the Field and Stream stores, we see strong productivity and we believe we have additional opportunities to drive both sales and margin.
Now I'll turn the call over to Andre to discuss our financial performance, capital allocation and outlook in more detail. Thank you, Joe, and good morning to everyone. Today, I will cover 3 topics with you: first, our second quarter results second, our capital allocation strategy and third, our outlook for the Q3 and full year. Beginning with our 2nd quarter results, total sales increased 10.3% to nearly $1,700,000,000 Consolidated same store sales increased 3.2%, slightly above the high end of our guidance for 1% to 3% same store sales growth and compared to a shifted comps of negative 0.4% in the Q2 of last year. DICK'S Sporting Goods consolidated same store sales increased 4.1%, while Golf Galaxy decreased 9.3% in the 2nd quarter.
The 4.1% consolidated increase in the Dick's business was driven by a 2.3% increase in traffic and by a 1.8% increase in sales per transaction. E commerce penetration was 6.3% of the total sales in the Q2 compared to 5.6% in the Q2 last year. Moving on to gross profit. 2nd quarter non GAAP gross profit was $505,000,000 or 29.9 percent of sales and was down 140 basis points for the Q2 of 2013. This was due primarily to lower merchandise margin and increased shipping expenses as our e commerce penetration continued to grow, partially offset by occupancy leverage.
Our merchandise margin declined 112 basis points due to increased promotional activity. Non GAAP SG and A expenses in the 2nd quarter were $365,100,000 or 21.62 percent of sales and deleveraged 13 basis points from non GAAP SG and A expenses in the Q2 of last year. This was due to increased advertising to support our promotional activity, increased store expenses and partially offset by lower administrative expenses as a percentage of sales. Pre opening expenses were $7,900,000 a $2,700,000 increase from the Q2 of 2013. The increase in our pre opening expense reflects an increase in the number of stores opening this year relative to the prior year.
In the Q2, we recorded a $20,400,000 of pre tax charges related to the restructuring of our golf business. The charges include a $14,300,000 non cash impairment of golf trademark and store assets, severance charges of $3,700,000 related to the elimination of specific golf position from our Dick's stores and the combination of Dick's Golf and Golf Galaxy corporate and administrative functions and a $2,400,000 write down of golf related inventory. We took these actions to align our cost structure with the current and expected trends in golf. As Ed mentioned earlier, our golf sales responded during the quarter when we promoted the business, but we gave up significant margins to generate the sales. The level of promotions necessary to drive the top line are not sustainable for the long term and contributed toward our decision to better align our cost structure with the current realities of the golf business.
As we valued our inventory, store assets, trademarks and trade names at the end of the quarter, we believe we have given appropriate consideration to the trends in golf, which led to the adjustments in the current period. For the Q2, we generated non GAAP earnings of $0.67 per diluted share compared to non GAAP earnings of $0.71 per diluted share in the Q2 of last year. Now turning to our balance sheet. We ended the Q2 of 2014 with $100,000,000 of cash and cash equivalents and no outstanding borrowings under our revolving credit facility. Last year, we ended the 2nd quarter with approximately 100 and $35,000,000 in cash and cash equivalents and no outstanding borrowings on our revolving credit facility.
Over the past 12 months, we've invested in our omni channel growth, including our Field and Stream stores, and we have returned over $360,000,000 to shareholders through share repurchases and dividends. Total inventory increased 11.2% at the end of this year's Q2 compared to the end of last year's Q2. Approximately 2% of this increase reflects inventory to support the growth of our Field and Stream stores, including the 7 new stores scheduled to open in the Q3. Net capital expenditures in the 2nd quarter were approximately $66,000,000 or $86,000,000 on a gross basis. This compares to net capital expenditures of $56,000,000 or $62,000,000 on a gross basis in the Q2 of 2013.
Turning now to our capital allocation strategy. As Ed mentioned, we repurchased an additional $100,000,000 of our stock in the second quarter of 2014, bringing our first half twenty fourteen repurchases to $125,000,000 As we've discussed in the past, we expect to repurchase shares to both offset dilution and opportunistically repurchase shares. Since we started our $1,000,000,000 authorization at the beginning of 2013, we have repurchased over $380,000,000 of stock and have approximately $620,000,000 remaining under the current authorization. Now turning to our guidance. As we contemplated our guidance for the Q3 and full year, we took into consideration our golf related actions and our share repurchases to date.
We expect to reinvest the ongoing cost savings from our golf restructuring into other aspects of our store operations and into the growth areas of our business. As we look to the second half of twenty fourteen, we expect the consumer to continue to be cautious. Our guidance incorporates these factors and promotional actions that will be required to drive sales in the second half. For the Q3, we anticipate consolidated earnings per diluted share of $0.38 to $0.42 dollars Consolidated same store sales are expected to increase approximately 1% to 3% compared to a 3.3% increase in our shifted comp in the Q3 of last year. Gross profit margins are expected to decrease as a result of the planned promotional activities.
SG
and A expenses as
a percentage of sales are expected to leverage slightly. We are anticipating pre opening expenses to increase year over year in the Q3 due primarily to the higher cost of the 7 expected Field and Stream store openings. This is expected to have an approximate $0.02 impact on our Q3 EPS. For the full year 2014, we expect consolidated non GAAP earnings per share to be between $2.70 to $2.85 We expect same store sales to increase 1% to 3%. Gross margin is expected to decline and SG and A is expected to leverage slightly.
Pre opening expenses are expected to be higher due to the increase in store openings compared to last year. In summary, our 2nd quarter results were at the high end of our guidance. Excluding the anticipated headwinds in golf and hunting, the rest of our business generated over 7% comps with strength across most categories. Looking to the second half of the year, we are cautiously optimistic about the opportunities we see. However, we expect the retail environment to remain challenged due to the cautious consumer and anticipated promotional activity.
This concludes our prepared comments, and I'd like to thank you for your interest in Dick's Sporting Goods. Operator, you may now please open the line for questions.
We will now begin the question and answer
session. I had a couple
of questions about the outdoor business. Maybe just first, the improvement in the hunting category, so down high single digits this quarter versus down high teens last quarter. I think it seemed to improve from your commentary on the last call. Can you maybe just elaborate on what changed there? Where you're seeing some improvements?
And then everything excluding hunting, it seems to continue to perform pretty well. Just wondering what's going on there? Are you seeing some wallet share shifts away from hunting that may be helping? Are you getting better brands maybe as a result of the Field and Stream initiative? Any color there would be helpful.
The hunt business was down. We got a bit more promotional with ammunition. We had a bit more ammunition in the store, which has been difficult to get. So that helped the hunt business. I think we're also kind of you've seen some other retailers, their Q2 was a little bit better than what their Q1 was also.
Just that comparing the Q1 from last year versus the year before after some of the tragedy that happened is just a natural change in the business. So we were happy to see the business starting to come back. The other areas of the business, the tackle business, the camping business has just been especially the camping business has been really good for us. We did a good job from a merchandising standpoint, a good job from a marketing standpoint. The boat business has been very good.
So there's been a variety of other areas in this category that have been good. That helped us overall. Our overall outdoor business was basically flat in the Q2.
Okay. And are you getting access to brands in the core Dick's format that maybe in the past you would not have had access to?
No, there really hasn't been any meaningful change there.
Okay. And then maybe just one question on pricing. A lot of talk about planned promotional activity. Obviously, this quarter, merchandise margins were down. Just the 112 basis point decline in merchandise margins due to promotional activity, how much of that was actually golf versus other categories?
I mean, there was the majority of that was golf. We got really aggressive in the golf category in the 2nd quarter, especially around Father's Day to try to drive some sales and clear out the inventory. We still have inventory. We still have ways to go with that and that's part of the issue with the margin pressure going forward.
Okay, understood. Thanks and good luck.
Sure. Thank you.
The next question comes from Michael Lasser of UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. So on the $0.04 that you're talking about from increased promotional activity and marketing, is that all due to golf? And is that all going to be spread out in 3rd and 4th quarters?
Well, it's going to be the golf piece will be in the 3rd and 4th quarters, but it's not all that. We just kind of and you've kind of heard some other retailers talk about it. There is just a concern that based on kind of the cautious consumer that there's going to be promotional pressure in the back half of the year and we're not going to be immune from that.
So are you expecting that in the non golf categories the promotional activity will be greater than what you saw in the 2nd quarter?
I don't think it will necessarily be greater, but it will still there will be promotional pressure in other areas of the business that will put some pressure on the awareness.
Okay. And then my last question is on the 2nd quarter comp. Can you give us any more insight into how much of it was driven by the reallocation of space to women's and youth in the World Cup? You told us the World Cup sales doubled per store. We don't have a sense for what the sales were for the
first time around, last time around. So from a competitive standpoint, we're not going to give a granular answer to the question. But it was the World Cup was pretty meaningful for us and the merchants and the team that was responsible for the World Cup did a great job. And the other areas of the business as we indicated where we increased space was extremely helpful, big north of double digit cap gains in the youth and women's area.
And that should those portions of the business only increased in the third and Q4 because golf becomes a smaller portion of the total during that time? Rodney McMullen:]
Golf becomes a smaller portion, but hunt becomes a bigger portion.
Rodney McMullen:] Okay.
Rodney McMullen:] But we expect those areas of the business to continue, not World Cup, but World Cup is over. Okay. And I know you know the World Cup games are over, but the sales associated with some of the World Cup product doesn't continue past the game.
Understood. Thank you so much. Sure.
The next question comes from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good morning. Thanks for taking my question. First question and maybe a bigger picture question on the golf category. You discussed in your prepared comments, we are adjusting the labor model within the golf sections of your DICK'S stores. Maybe elaborate a little bit further on just on the thinking behind that.
I've followed DICK'S for a long time now and golf has always been a focus so to say and having the PGA professionals in such new stores has been a key differentiator for Dick's. So as you adjust this labor model now, I mean, I guess it's an indication of what you see is kind of going forward with the golf business, but is it also could it potentially put you at a strategic or a competitive disadvantage by taking labor out maybe at a time when you should try to when we should be looking to try to try better sales in that category?
Yes, Brian, I don't think so. We didn't have those positions filled in all of the stores. And as we looked at the results that we were getting based on what's happening in golf today, there wasn't a meaningful difference between the stores that had that labor model and didn't have that labor model. And we just think that as much as we all love golf, the business reality of it is that golf from a retail standpoint is under pressure and we had to change that labor model to meet the demands and the sales. We're taking those dollars and reallocating those into other areas of our business that are doing extremely well such as the women's area, youth area, the team sports area and I think it will serve the company well.
We've got very good people who are there. They can still help people fit golf clubs, go through all the things that those other individuals were able to do. And we don't really think it's going to have a negative impact on the business.
Got it. And then just as
a follow-up to that, maybe some quantification, when
you do and on
the Q1 call, we discussed golf a lot and it sounds like you really saw a significant issue there. Golf problems persist. Is golf getting worse now? I mean, I guess what I'm asking is the weather got better. So that should have been somewhat of a lift to the golf business I would assume.
But even despite that, do you think golf is still getting worse than it wasn't earlier this year?
Rodney McMullen:] Yes. I think golf is in golf from a participation standpoint and how it translates to retail is in a structural decline. And we don't see that changing. We're not sure exactly where the when that will flatten out, but we don't see that yet. And so we've made the moves that we felt were appropriate of where we're going to invest capital and where we're going to invest resources to drive specific businesses.
Okay. Thank you. Sure.
The next question comes from Paul Swinand of Morningstar Inc. Please go ahead.
Good morning and again thank you for the patience for all the questions. Going to continue to beat the golf horse here. I know last call we talked about the golf innovation cycle and you had mentioned that the consumers didn't really connect with some of the new technologies. And one of the other comments was that a lot of the comp decline was actually just average unit retail and that the purchases were, I think, rolling down 2%. What's the prospect for that turning around next year?
You've probably seen some of the products or getting some advanced views of what's going to happen for next year in the innovation cycle. And is there anything more color you can give us on why the innovation cycle didn't work this time and might it work next time?
Well, I think the innovation cycle was so different in exactly the opposite of what golfers had always thought they were supposed to do, especially around the driver category to hit the ball further. We are just starting to set up some meetings of what we're going to see next year. So I really can't comment yet on how we feel about that innovation cycle. But we think that golf is going to continue to be a smaller portion of our business. It's still going to be an important part of our business.
We're still going to continue to be in the golf business and support the golf business the best we can based on the size of the market. But golf was a few years ago was 20% of our business including Golf Galaxy as Canada is sitting down now around 15%. And we think over the next 3 to 4 years it could move to 10%, not from that big of a continued move down in Gulf, but just as other areas are continuing to grow, we expect that we'll continue to see Gulf as a smaller and smaller percent of our total business.
Got it. And then quickly on the inventory, I know your inventory is controlled compared to your growth rate, but with companies such as Taylor Made doing negative 34% in Q1, negative 17% Q2, is a lot of the golf inventory buildup still just in the clubs? And then is the are the other categories a little lighter? Or is it just because there's less traffic through the store in golf has led to inventory in all different product types?
The inventory issues is more prevalent in some areas than others, but everything in golf has had its sales issues and there's some buildup in inventory across the most of the categories.
Okay, great. Thanks and best of luck.
Thank you.
The next question comes from Robbie Ohmes of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, Ed.
Hey, Robbie.
Hey, two questions. First, the traffic comp was that you guys put up for the quarter was pretty impressive I think relative to a lot of other retailers. Can you maybe talk about how what maybe helped drive that? And also Ed, I don't know if you can weave into it or it's weevable into that, but I think you relatively recently started working with Dun Humby and I was hoping you could maybe shed some light on how that could potentially be a benefit to your business over time. And the second question, the press release and through this call, you guys have talked about how you're expecting the back half to be promotional, etcetera.
A lot of your stores are solidly in the back to school now, like in the peak of it. Have you seen that promotional issue playing out? Can you give us any color on what you've seen in your earlier back to school markets? Thanks.
Rodney McMullen:] Bobby, I think to talk about the quarter, we don't talk about anything inside the quarter. Kind of what we've seen so far is baked into our guidance and we're obviously pretty comfortable with that. On the traffic side, what we've done really in the second quarter helped that was the golf promotion. We got very promotional from a golf standpoint to drive traffic in. And we also put together a tent sale where we took some products and put them out in the tent and had a bit of a carnival, if you will, which certainly helped drive traffic into our store also.
So we're pretty pleased with the traffic and kind of what we did in the Q2.
And then on Dun Humvee?
It's really too early, Robbie. We're not going to talk a whole lot about that. We'll from a competitive standpoint, we're just going to we're not going to talk much about that right now.
And then just one quick follow-up. I think the store growth is now plus 46%. I think you guys might have been looking at doing 50%. Is are you guys tweaking down your store growth rate for next year as well?
No. Robbie, we're really not. Really, it's just construction slides sometimes in the back half of the year. And if we don't hit a particular landlords don't turn store over to us on a particular date, We've got the ability to move that to the spring and that's what we've done. And that's because we didn't want to open it up.
It's just past the timeframe by which we want to open up stores. Got it. Thanks a lot, Ed.
Thanks, Robbie. See you. The next question comes from Christopher Horvers of JPMorgan. Please go ahead.
Hi. This is Mark Fox on for Chris. Thanks for taking my question. Just a follow-up on traffic and the golf comments earlier. Any way to parse out what the lift to the comp was if you speak directly to the golf promotions in the quarter?
No, there's really no. No.
Okay. Maybe sort of triangulate it in a different way. Thanks for the commentary on the comps ex golf and hunting. They look like there was a little acceleration this quarter. Can you maybe share what the compares look like in Q1 and Q2 last year, just given the amount of moving pieces with World Cup and golf motions, etcetera?
Just trying to get a better sense of the comp. Thanks.
Yes. Well, the comp, as we said, was north of 7% this year. We didn't call it out what it was last year versus going back to 12% and we're not going to go back and do that. But we wanted people to understand that the big part of our business is doing reasonably well with comps north of 7% and just under 7% in the Q1. And this is really an issue around golf, which we think is going to continue, which we've laid out and one of the reasons why we restructured the golf business in the hunt business, which we think is temporary.
But we're pleased with what the rest of the businesses did.
And one final question. The Field and the Stream concept is anniversarying its first store open. Maybe kind of share what you're seeing there and then how you're feeling about that new concept?
We continue to be enthusiastic about that new concept. The anniversary date is less than a week old and so we're going up against grand opening numbers. So it's still pretty new. But we continue to be enthusiastic about that business. Hence, we're opening up 7 more stores through the balance of the year and we'll continue to open stores into next year probably roughly 10 to 15 stores next year.
We're pretty excited about this business.
Great. Thanks.
Sure.
The next question comes from Sean McGowan of Needham and Company. Please go ahead.
Thank you. One housekeeping question. Could you break out those charges that were taken related to the golf restructuring? Was anything other than that inventory charge in cost of sales? Or was that whole inventory charge in cost of sales and everything else would be in below that line?
That's correct. The inventory was in cost of sales. The rest of the impairment and severance was in the SG and A space.
Thanks, Andre. And then Ed, could you ask DeBrisk again of beating the golf dead horse? What would you say would be the commentary now on what to do with the stores that you do have? Are you planning to scale them back? I mean, certainly not opening in the plans, but are you planning to scale back the number of stores that you do have
in Gulf of Mexico? We're not. We continue to look at what's going on from a Gulf standpoint. We have roughly 63% of the Golf Galaxy leases will be coming due in the next 3 years. So we'll have an opportunity to take a look at some of those stores that may not be performing very well.
And if we decide, we may close a few of those. I don't expect a lot of them, but we may close some of those. Some other stores that are doing very well, we may relocate, which we've done in the past also. But we're still being cautious about what's going on in golf. And as I said, with 63% of the Golf Galaxy leases coming due over the next 3 years, we've got a lot of flexibility as to what we want to do.
Would any of those stores be appropriate for another category?
No. I don't think so. Nothing that we have on the shelf today. And those stores, if they're at the end of the lease, there would be virtually no store closing charge associated with these. So we could just close a store at the end of its lease with virtually no charge at all.
Okay. Thank you very much. Sure.
The next question comes from Kate McShane of Citi Research. Please go ahead.
Hi, thanks. Good morning. Just a couple of questions back to the promotional environment. Just given the stronger macro backdrop and certainly the strength of the category, particularly in footwear, athletic apparel and team sports, do you have an idea of why it would need to be more promotional year over year?
I just think that the consumer is cautious. People are going to promote to try to drive sales. We still have some golf inventory that we need to get rid of. I think the hunting category is going because hunting has been a bit difficult, I think that the hunt category is going to get to be promotional in the 3rd Q4 also. So we're just we're being cautious on what the environment is out there that we see.
We'll see you've kind of heard that from a number of other retailers and a couple in this space that pre announced. So we just think that that's the reality of what's going on out there right now.
Okay. And as we get into Q3 and Q4 with winter product and outerwear sales, can we expect to see any merchandising changes around your outerwear as vendors maybe get a little bit more savvy with how they're distributing their orders and their wear now orders? No.
We don't see any real difference. We'll still be focused on the same brands in relatively the same percentage or market share that we bought them with as we did last year. So no, we're not you wouldn't see anything meaningfully different.
Okay. Thank you. And then my final question is on the women's and youth expansion. That sounds like it's doing very well and it's been successful. As you continue to learn more about these categories, do you anticipate carrying new brands or enhancing the spaces at all as we get into 2015?
Yes. We do expect to see some new brands. I'm not going to go into those right now, but we do expect to see some additional brands that we will put in the store. The We've done most of the space reallocation. There will be some new fixtures, but nothing significant.
But we are excited about some of the new brands that we've got coming into the store. And one in particular that we already have that's done pretty well is Lucy. So we were surprised at that and it's resonated pretty well.
Thank you. Sure.
The next question comes from Matt Namer of Wells Fargo Securities. Please go ahead.
Good morning. Thanks for taking my questions. On the Golf business, I'm wondering if you could quantify the annual expense savings related to the restructuring that you are now able to reinvest in your other growth categories?
Yes. From we're not going to get that granular with it. We want you guys to let you know that we've restructured that business and the savings are going to go back into areas of the business that we really feel have meaningful growth potential. So in fact, there's not really going to be a we're going to reinvest those into these growth areas of the business.
Okay. And then secondly, is there any way to parse out the incremental profit dollars from the Gulf sale activity in Q2 in the second half assuming that we don't want to repeat those dollars next year, we want to take it out of our forecast, how much should we be thinking about in round numbers?
No, we're not going to parse those out for a lot of reasons, but no, we're not going to share that information.
Okay. And then just lastly, on the hunting business, is it reasonable to assume that firearms could be flat or up in Q3 and that the decline in ammo is a big part of what takes the hunting category down? Or do you think that both of those subcategories are down in Q3?
I think both of those subcategories will continue to be down.
Okay. Thanks so much. Sure.
The next question comes from Sam Poser of Stern AG. Please go ahead.
Hi, good morning. It's Ben Shamsky in for Sam. Thanks for taking my question. My first question, you called out team sports is doing well. We are hearing competitors talk about lower participation rates across the country.
Can you just help us in this area? What are you seeing there? Is there share gains that you're having? Is your e commerce business is helping you? If you could provide some color on the team sports category?
I think we're probably gaining some share. Participation in some sports is down and it's moved to other sports. So soccer participation has been doing very well. Basketball participation is doing pretty well. Baseball, we think we're gaining market share.
While lacrosse continues to grow. And I think one of the biggest issues that you hear about what's going on from participation standpoint is around football. And we see that around football. But overall team sports, we continue to be pretty enthusiastic about.
Got it.
Great. And then now that you've realigned some of the costs with Golf, can you help us out what kind of consolidated same store sales do you need to lever the SG and A now going forward?
I don't think we look at it that specifically, Ben, relative to just for golf. I think our SG and A trends as are we feel very good about where they are. And as Ed mentioned, we're reinvesting a lot of the things that we did into other aspects of our business that are growing. So the same holds true for the data that we've had in terms of what we have to do to leverage those lines. So nothing as a result of Golf sort of changes that.
Okay, great. And last question, just with regards to the repurchases, obviously a bigger quarter than you've had traditionally. Has the thought around repurchases changed? Are you being more aggressive? If you can help us out there as well.
I think we've talked about this, Ben, in terms of what our priorities are with respect to capital allocation. Number 1 is really investing in the growth areas of our business and you continue to see us demonstrate that we do that. The second piece would be returning cash to shareholders via that methodology of buying back shares to both deal with dilution, but also opportunistically go buy shares and obviously our dividend. We believe that today our shares are undervalued. And so in the Q2, we went out and bought some shares.
So we're going to continue to do that opportunistically when we feel the timing is right and we'll continue to do that.
Great. Thank you so much.
The next question comes from Matthew Kessler of Goldman Sachs. Please go ahead.
Thanks so much and good morning. My first question relates to gross margin ex golf. Can you talk about what you're seeing for merch margin, I guess ex golf and hunting outside those two businesses that are distressed and I guess golf in particular where you had to be more promotional?
So Matt, I'll start with that and we're not going to get into any degree of specificity, but I believe as I've said, we were we did a lot in Q2 relative to promotions to drive the golf business, especially around Father's Day, which is the real holiday for golf. We saw those margins degrade significantly and felt that over the long term, those aren't investments we want to continue to make, and it took us a lot to move the business. We did also have a relatively large tent event that where we brought consumers into our stores where we not only promoted golf, but we promoted other categories as well. So I'll leave it at that. I think what our investors can take a look at is we are going to be promotional in the back half of the year year over year, but I do not believe you're going to see the kind of margin degradation that you saw in Q2 in terms of the 111 basis points in
the quarter.
Related to that, Andreas, the $0.04 that you had in the press release associated with promotional activity part of the guidance cut that you had back in May or is that incremental to that?
That's as of now. We're thinking about it as we're looking at the business in Q3 and Q4.
So digging a little bit deeper than you thought you might at that time as you think about second half promotional activity?
That's correct.
Got it. Okay. A second question, just as it relates to Field and Stream and the economics of the box, clearly you feel good and you're opening a lot more of these. The concept, I guess, was hatched last year and we now know that last year was an extraordinary year for the hunting business in particular. So with that in mind and the fact that you got sort of proof of concept if you will in an unusual year, can you talk about what the economics of the box look like for Field and Stream versus the core Dick's stores?
And also how perhaps you've tweaked that business to enhance the box level returns?
So Matt, I'd just like to I don't want to say take issue with, but we didn't really open these stores up in kind of the extraordinary time of the hunt business. The extraordinary time of the hunt business last year was really in Q1 and Q2 started to wane in Q3 and was basically over in Q4. So when we opened these stores up, it was kind of right at the tail end of when things were going really well in that category. So and we understand that proof of concept, we've got 3 stores open. So we're enthusiastic, but we've got some we still have some work to do to really prove this concept.
We are continue to be enthusiastic. The stores do meaningfully more than an average Dick's store does. The mix of product is a slightly lower margin rate and we think we've got some opportunities inside the box to increase the margin rate pretty significantly in what we're seeing today. So we still got work to do on this. We probably won't be able to give you guys what you're looking for from a model on this until we've got a few stores opened up at least 18 months to 24 months.
And right now, we've only had one store who's been opened up for 53 weeks and another store that's been opened up for 40 weeks and another one that's been opened for 24 weeks. So we're still really early in this process.
Point taken on timing and thanks for the clarity there.
Sure.
The next question comes from Scot Ciccarelli of RBC Capital Markets. Please go ahead.
Hi, guys. Can you talk about your ecom business? Obviously, it's a growing portion of the overall business. You guys have given us some parameters in the past just regarding profitability trends, etcetera. Can you give us an idea regarding what you're seeing today with average ticket profitability?
Any kind of updates there as well as how is the mix different in e commerce relative to kind of what your general store mix is? Thanks.
Well, from a profitability standpoint, that we're not going to provide that level of granularity. But the mix is not significantly different than what we're seeing in the stores once you take out the gun and ammunition piece of the business or some of the tackle products that we don't sell online. It's not a whole lot different. The margin rates that we're having on the products that we sell online not meaningfully different than what we're doing in the store. And our team our e commerce team has just done a great job of driving volume that increases the productivity and profitability and really making some meaningful changes in the distribution model to the consumer with what we've done with the ship from store and what we're in the process of doing with the buy online, pick up in store.
So we're right on target for what we think we're going to be able to do with from an e commerce standpoint. We are almost to the same profitability of the 4 wall costs, if you will, on e commerce as we are in the stores. And by 2017, we will be completely ambivalent from a profitability standpoint. And there's we think that there's the possibility that the e commerce business will actually be more profitable. And also build on what I'd said.
This is Andre. I think we're seeing faster growth in both mobile and tablet. And as Joe mentioned, we've been very aggressive in upgrading our capabilities both with the tablet site a while back and then as Joe articulated a new mobile site that we're developing. That's been really helpful because we've seen consumers now shift from what desktop or a laptop to buying to moving a lot of their purchases to a mobile app, be it a tablet or be it an iPhone or a phone, I'm sorry. So I think we're doing a lot of things off of the infrastructure there to really help that business.
Got you. And just to clarify, the profitability is ex shipping?
No, that's total.
So even with shipping, you think it can reach the same profitability as the store?
We do.
Okay. Thank you. Sure.
The next question comes from Lee Giordano of CRT Capital. Please go ahead.
Thanks. Good morning, everybody. You've talked in the past about the opportunity for smaller market stores. Can you talk about how some of those smaller market stores have been performing? And then also update us on the long term outlook for either number of stores or type of markets?
Thanks.
Yes. The smaller market this is Joe. The smaller market strategy is one that we continue to invest in. Roughly 20% to 25% of the stores that will open in 2014 will be in that smaller market variety. Just to refresh, those stores are typically 35000 to 40000 square feet and we're really looking at general population and market sports market opportunity as to whether or not we'll open a store in these markets.
These markets are performing every bit as well as some of the bigger stores are performing. So we're still very encouraged by the results and we'll continue to look at smaller markets as we open stores in the future.
Thanks. And then secondly, have you seen any improvement or continuing improvement in the fitness category? An update there would be helpful. Thank you.
Yes. I mean, we're seeing let's put it this way. It's a stable business for us right now. And some months it can be up and some months it can be a little bit down. But overall, it's a relatively stable business right now.
Thank you. Sure.
The next question comes from Rick Nelson of Stephens. Please go ahead.
Thanks. Good morning. Ed, can you comment on the footwear category, particularly basketball, as that's going to become a bigger growth driver in that type of business?
Yes. I won't get too specific with it. But yes, the footwear business has been good and the basketball business has been very good and we expect basketball business to continue to be good for at least the near to medium term.
Great. And capital allocation question follow-up. You're sitting on $100,000,000 in cash. You have very little debt. If you hit your earnings estimates for the year, where do you see that cash position?
And would the company contemplate debt financed buybacks if the opportunity were there?
Rick, I'm just going to sound like a broken record here, but I think our capital allocation strategy is exactly as I've articulated. Our first and foremost use of cash is to invest in our growth areas of our business. 2nd piece is to return is to handle dilution. And the 3rd piece is opportunistically to buy back shares. I don't think our cash position weighs on that.
We have access to the capital markets such. We have access within our revolver. So again, I'm not our philosophy is exactly as I've articulated it.
Got you. Thank you. Good luck. Thanks. Thanks.
The next question comes from Kamalow Lyon of Canaccord. Please go ahead.
Thanks. Good morning, everyone. Good morning. Ed, you've been on a shop in shop opening campaign for about the last 3 years or so if memory serves. I'm curious to know what's the performance of those shopping shops that were first opened today relative to those stores that don't have a shopping shops in them?
In other words, is that predictively still outpacing the store average?
So the answer to that is yes. And a lot of those original ones we've gone back and we've updated whether from a content standpoint or some fixturing, but the specific answer to your question is yes.
Okay, great. And then just going back to the square footage rationalization in the golf category. I think you mentioned last quarter that you took out about 1,000 square feet from that space, presumably that went to the women's and kids hats. Is there any thought to accelerate that square footage contraction in golf that we all get it sort of those categories that are significantly comping above in that mid to high single digit range?
We're continuing to look at that and there is a possibility we may do a bit more, but it won't be near that 1,000 square feet. But we are looking at some ways to take some of the golf apparel further inside the shop, but we haven't decided on anything. We're still kind of working through it on paper right now.
So the first major cut really has happened and that's pretty much going to be how it looks going forward with minor tweaks? With minor tweaks. Okay. And then just finally on the women's studio square foot shop in shop concept where it's got the multiple brands. Was that the driver of the women's business?
Or was the preexisting women's business by brand the bigger driver? Or was it really a function of both?
It was very broad based.
Got it. Thanks. Good luck for the back half.
Thank you. Thank you.
The next question comes from Mike Baker of Deutsche Bank. Please go ahead.
Thanks. Hard to believe I still have some questions, but I do, 1 or 2. 1 on the golf and then 1 on the golf. On golf, we know you had a lot of inventory to clear. I mean, I guess no one's really after or maybe I missed it, but where are you relative to your expectations when you talk to us in the Q1?
Has the clearance gone better than expected, not quite as good as expected, somewhere in between? It seems to me as if maybe not quite as good as expected and that's why you're taking out talking about that $0.04 for the back half, but if you could help us there. And then the second question, Q4, what's your comp expectation there? We know your back half comp expectation, but very difficult comparison in the Q4. How do you
get over that hurdle? Thanks.
The Gulf clearance has gone about what we had anticipated. We still have some obviously some work to do on the back half of the year with this. But it's gone kind of within a small tolerance level close to what we had anticipated. And our 4th quarter comps would be we kind of indicated it'd be 1 to 3. We are anniversarying a really difficult comp at over 7%.
So we think the plans that we have in place, we can get in we can get to that 1% to 3% range. Okay. Thank you. Sure.
The next question comes from Dan Reed of Barclays. Please go ahead.
Thanks guys for taking my questions and congrats on the quarter. A quick question here, would you guys be able to parse out the relative strength this quarter in men's apparel versus women's apparel? I realize women's was very strong this quarter and that's obviously an emerging growth category for you guys still. But just kind of trying to
get your sense as to sort
of what that more mature men's category looked like relative to the women's?
Well, we won't kind of give you the numbers of each, but based on the additional square footage that we provided women's and some of the additional marketing that we provided women's, that the women's performed better than men's.
Got you.
And then how would you parse out kind of just looking longer term at sort of the ultimate opportunity between women's versus men's in terms of sizing and everything like that?
I think there's still more upside in women's than there is in men's.
Got you. And then I hate to squeeze a golf question here, but just really quickly, at the beginning of last quarter when you guys reported results, you said that golf was down kind of in that high teens or not high teens, but kind of low teens level. And then obviously, your comps seem to indicate things improved. Would you attribute all of that to the higher promotions during the quarter? Or would you say some of that was due to the fact that the business is getting less worse than it has been?
I would say it's the promotional activity.
Got you. All right. Well, hey, thank you so much. Best of luck in the back half of the year.
Thank you.
The next question comes from David Magee of SunTrust. Please go ahead.
Yes. Hi, good morning. Just a couple of quick questions. Good morning. Have you had any comment on the regional performance across the country, what region is doing better than not?
Yes. We've never really called that out specifically, but there's not a meaningful difference between one area of the country and the other. And then secondly, any update in terms of how you see your competition with Academy in the South? Yes. I think we've indicated even before we went into the Texas market that Academy would be the best competitor that we face.
They run a they really run a nice operation. They're a tough competitor and we don't see anything really changing there. Okay, great. Thank you. Sure.
The next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.
Good morning. This is Patrick O'Brien on for Simeon. Thanks for taking the question. Can you talk a little bit about where you are relative to your goals with regard to your investment hiring, any other items pertaining to your omnichannel platform?
We're really in we're in good shape from a hiring standpoint. We continue to invest in this area, but we don't feel we're not behind in any areas that we felt that we needed to invest more heavily in. We feel that we're in pretty good shape. With that being said, we will have we will continue to invest in this area, not only from a technology standpoint and a human resources standpoint, but also marketing. We think this is a very big opportunity and hopefully you can see how enthusiastic we are about it as the sale penetration continues to move up at a pretty rapid rate.
Very good. Thank you.
Sure.
The next question comes from Peter Benedict of Robert Baird. Please go ahead.
Hey, thanks guys. Andre, a quick one for you. What level of comp do you think you need to lever occupancy? We're just kind of thinking up in the gross margin area. And then longer term, do you think occupancy leverage can help offset the gross margin pressure from e commerce and shipping and those types of things?
That's basically our question.
Yes. I mean, I think the way you have to take a look at our occupancy cost, we've historically talked about everybody's kind of pigeonholed it around a comp number. We believe it has to be what you have to look at as sort of a total sales number. And I think for occupancy for us to leverage it, we've got to have and we did actually leverage it this quarter just to remind our investors that we did in fact leverage it. We have to be in that 9% to 10% range.
I think that works for us pretty well to leverage occupancy. And I apologize, Peter, what was your second part of your question?
Well, and just longer term, do you think occupancy leverage can offset the pressures that you'll probably see from e commerce and shipping over time? Do you think those can kind of neutralize each other? Yes, I think they can, but
I also think our team does a really good job leveraging the stores to help us reduce shipping expense and things like that. I mean, as Joe mentioned, whenever we turn on a store and open up a new store, it automatically goes into a ship from store mode right away. We're doing some work as we've talked to investors in the past and we're piloting some areas around buy online, pick up in store that also allows us to leverage freight that we're already bringing to the store. So I think we're doing a lot of things. Our team is doing a lot of things to go ahead and leverage that.
Certainly, the occupancy will help, but all the other ways we have to get product to consumers will actually help us with that as well. Okay.
And then one quick follow-up. When we think about the cash you carry on the balance sheet, is there a level that we should think about that you don't want to go below over time as we think about kind of opportunistic buyback activity, that type of thing? Thank you.
As I've said before, I don't think the cash we have on our balance sheet is indicative of whether we're going to buy shares or not buy shares. We have plenty we have the ability to access capital markets if we need to. We have a revolver that helps us as a back stop as well. Again, looking at cash balances for us, I think is not relevant as we look at our share repurchase activity.
Okay. Thanks very much.
Thanks, Peter.
The next question comes from Chris Svezia of Susquehanna Financial Group. Please go ahead.
Good morning, everyone, and thanks for taking all the questions. Most of mine have been asked already, but hopefully a quick and easy one here for you. Just I'm curious, the reinvestment of some of the payroll savings within the Dick's Sporting Goods stores, where is that going exactly? I do recall, I think, Q3 last year, you did reinvest in payroll hours within the stores. I do believe that helped you.
Just curious where else do you see the reinvestment opportunity and payroll within the stores?
That is indicated is going to go into those growth areas of the stores, which is going to be the women's initiative, the youth initiative, footwear. Those are going to be the main drivers of where we're going to put that those payroll dollars.
Okay. All right. Thank you very much. All the best.
Sure. Thank you. The next question comes from Joe Feldman of Telsey Advisory Group. Please go ahead.
Yes. Hi, guys. Thanks for taking the questions and congratulations on the quarter. Question about sort of bigger picture. As you think about the consumer, I understand the consumer is cautious, but when you look at the guys that are coming in and shopping with you, are you seeing anything a trend among them?
Meaning, are you seeing a more affluent consumer come in and buying? Or is it still pretty broad based amongst the consumer that is shopping? That's sort of the first question I had.
Yes. We don't really see any difference in the meaningful difference in the consumer that we have shopping. We've it's been pretty consistent. We haven't seen any difference.
Got it. And then I guess sort of related to that, any updates on the loyalty card or things you're doing there that maybe helping to drive incremental traffic in? I know I get those rewards and come into the store. I assume others do that. I mean anything with personalization and I know it's early on the Dunhamby thing, but just related to the loyalty card that you've been doing differently or learning?
Well, we're learning a lot and it's nice to hear that they're working and I hope when you get the mailings you continue to come in and bring a couple of friends. But we continue to learn a lot from the royalty program. There's a meaningful amount of our sales, which we're not going to get into what that is. But we've done our group has really done a much better job of mining the data that we have in our scorecard and be able to personalize promotions and communications directly to you that meet your needs and what you like to do. So we continue to make improvements there.
I think we've done really well, but we all think that we've got some we're kind of in the mid innings of how to execute that. So that's a part of our business we're pretty enthusiastic about. We're using the same type of program with the field and stream concept and that's gotten off to a really terrific start also.
That's great. Thank you for that. And I guess just one final one, and this is always the tricky one, but with that the stronger than expected comp, even relative to your plan, it's always were you too promotional during the quarter? Like could you have pulled back on that a little bit to preserve some of that merchandise margin? I know a lot of it was golf, but were there some areas where that will I guess you'll see less of it going forward?
Yes. I mean, I think hindsight is always 2020, but I can tell you from the conversations we've had post Q2, we don't think that we we don't think we overdid it. We think we did pretty close to what was right for the inventory and for the business and to clear out inventory. And we think we did what was right and we would do it all over again pretty close to the same.
Got it. Helpful. Thanks very much guys. Good luck with this quarter.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Edward Sacks, Chairman and Chief Executive Officer for any closing remarks.
I'd like to thank everyone for joining us on our quarterly call and we'll look forward to talking to everybody in a couple more months. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.