Good morning, and welcome to the DICK'S Sporting Goods first quarter earnings conference call. All participants will be in a 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'll be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, and then two. Please note this event is being recorded. I'd now like to turn the conference over to Anne-Marie Megela, Vice President of Treasury Services and Investor Relations. Anne-Marie, please go ahead.
Thank you. Good morning, and thank you for joining us to discuss our first quarter 2013 financial results. Please note that a rebroadcast of today's call will be archived on the investor relations portion of our website, located at dickssportinggoods.com, for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will 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-K for the year ended February 7th, 2013. 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. 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 dickssportinggoods.com. Leading our call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our first quarter financial and operating results and discuss our guidance.
Joe Schmidt, our President and Chief Operating Officer, will then review our store development program. After Joe's comments, Tim Kullman, our Executive Vice President of Finance and Administration and Chief Financial Officer, will provide greater details regarding our financial results and expectations. I will now turn it over to Ed Stack.
Thank you, Anne-Marie, and I'd like to thank all of you for joining us today. This morning, we announced our first quarter financial results. While we're pleased to announce we generated earnings in line with our original guidance, we weren't pleased with our top-line performance. We had a meaningful sales miss in several key areas of our business. Our Golf Galaxy chain experienced negative comps of 11.8%, while sales in the DICK'S Sporting Goods golf business were moderately worse. We also saw a sales decline in our fitness and baseball business, and to a lesser extent, select outdoor businesses such as bikes, water sports, and camping. Our primary objective in the next quarter is to drive sales while preserving margins. For example, we are working with our vendors to develop promotions and events in key areas of our business, in particularly golf.
We are also continuing the process of divesting or significantly reducing the Livestrong brand in both the fitness business and our apparel business. The Livestrong fitness equipment business represented 50% of our treadmill and elliptical business. These are the two largest categories in the fitness area by a wide margin. We expect to complete this transition by the end of the third quarter. Additionally, we remain focused on our clearance inventory, which was down 7.4% on a sq ft basis versus last year. It was one of the drivers of our margin rate expansion in the first quarter. We have begun a remodeling program in our stores, which is expected to be completed in 75 stores this year, of which 56 will be completed by the end of the second quarter.
These remodels allow us to add the Nike Fieldhouse concept, the Under Armour All-American concept, and to revitalize our youth business under the Young Athlete banner. Finally, we continue to aggressively invest in our e-commerce business. We have experienced terrific results in this area, which represented 5.8% of our business in Q1 this year versus 3.7% in Q1 of last year. Turning to the financial results. In the first quarter, we generated earnings per diluted share of $0.48, excluding an estimated recovery of $4.3 million, or $0.04 per share, of our original investment in JJB Sports. These earnings compare to first quarter 2012 earnings per diluted share of $0.45 and to our guidance of $0.47-$0.49. Sales increased 4.1% in the first quarter, driven by the growth of our store network, offset by a decrease in consolidated same-store sales.
Adjusted for the calendar shift due to the 53rd week in 2012, consolidated same-store sales decreased 3.8% in the first quarter of 2013. This compares to our expectation of approximately -2% to -1%. Shifting same-store sales for DICK'S Sporting Goods were down 3.2%, and Golf Galaxy was down 11.8% in the first quarter of 2013. Our two-year stacked consolidated same-store sales on a shifted basis increased 4.5%. On an unshifted basis, consolidated same-store sales decreased 1.7% compared to our expectation of approximately flat to 1% up. Unshifted same-store sales for DICK'S Sporting Goods were down 1.3%, and Golf Galaxy was down 7.4%. Our two-year stacked consolidated same-store sales on an unshifted basis increased 6.7%. These same-store sales results compared to the first quarter of 2012, where consolidated same-store sales increased 8.4%.
For the second quarter of 2013, we expect consolidated earnings per diluted share to increase 15%-18%, to between $0.75 and $0.77, compared with consolidated non-GAAP earnings per diluted share of $0.65 for the same period in 2012. On a shifted basis, consolidated same-store sales are expected to increase approximately 2%-3%, compared to a 3.8% increase in the second quarter last year. On an unshifted basis, consolidated same-store sales are expected to increase approximately 3.5%-4.5%. For the full year of 2013, we continue to anticipate consolidated 2013 same-store sales will increase approximately 2%-3% on a 52-week basis, on top of a 4.3% increase in 2012. We are anticipating non-GAAP consolidated earnings per diluted share between approximately $2.84 and $2.86, excluding an estimated recovery of $4.3 million or $0.04 per share of our original investment in JJB Sports.
This compares to non-GAAP earnings per diluted share of $2.53 in 2012, including the $0.03 from the 53rd week and excluding $0.22 from the JJB impairment charge. Our guidance also includes a $0.12 impact from our growth investments. Even with the substantial investments we're making in the business in 2013, we expect to generate double-digit earnings growth and deliver operating margin expansion. Despite the challenging sales we experienced in Q1, primarily in the Midwest, Northeast, and Atlantic markets, we were able to grow earnings in line with guidance, maintain our strong balance sheet, and continue to make investments in our future. I'd like to also thank our CFO, Tim Kullman, who announced his intent to retire last December and will be leaving us in June.
Over the past six years, Tim played a vital role here, providing an exceptional blend of financial discipline and insight that has been important to our growth. The board, our associates, and I are sincerely grateful to Tim for his many contributions and wish him well in the future. I'd now like to turn the call over to Joe.
Thanks, Ed. In the first quarter of 2013, we opened two new DICK'S Sporting Goods stores, bringing our total store count at the end of the quarter to 520 DICK'S Sporting Goods stores with 28.3 million sq ft and 81 Golf Galaxy stores with 1.4 million sq ft. We also started our partial remodel program in the first quarter. The partial remodels focus on strategic growth categories and feature Nike and Under Armour shops. Within our stores, we have 176 shared service footwear decks, 178 Nike Fieldhouse shops, and 111 Under Armour shops at the end of the first quarter. By the end of the year, we expect to have 220 shared service footwear decks, 291 Nike Fieldhouse shops, and 240 Under Armour shops. New store productivity of our new DICK'S Sporting Goods stores was 89.1% in the first quarter, compared to 105.8% in the first quarter last year.
In total, for 2013, we plan to open approximately 40 DICK'S Sporting Goods stores, fully remodel four stores, and partially remodel 75 stores. We are also planning to open one new Golf Galaxy store and relocate one store, both in the new format, which includes a greater focus on golf services and experiential shopping. We currently operate two True Runner concept running stores. These stores allow us to further connect with enthusiast runners and provide us valuable insight that we can apply across our businesses. We plan to open two additional True Runner locations in 2013. Finally, we remain on track to introduce our outdoor concept store in 2013. Our Field & Stream stores will be destinations for hunting, fishing, and camping enthusiasts and will offer premium assortments with superior service levels.
Our plans are to open two stores this year, the first of which is scheduled to open in Pittsburgh in the third quarter. Collectively, the strategic investments that we are making in new and existing stores, new concepts, and our omnichannel capabilities position us to drive continued growth in the years ahead. I will now turn the call over to Tim to review our financial performance, investments, and outlook in greater detail.
Thanks, Joe. Before I get into the detailed results, I'd like to remind everyone of a change in our disclosure policy for same-store sales. Beginning this quarter, we will report same-store sales for our stores and e-commerce business together. We will continue to provide the size of the e-commerce business as a percentage of our total sales. We're making this reporting change because as we build out our omnichannel platform
It has become apparent that the traditional sales channels are overlapping with the digital space, and that providing comp sales on a combined basis will be more meaningful. As a result of this change in reporting, we will no longer provide the detailed calculation of new store productivity in the table section of our press release. The calculation includes DICK'S Sporting Goods store comps, which we are no longer disclosing on a standalone basis. Sales for the first quarter of 2013 increased by 4.1% to $1.3 billion. Adjusted for the shifted calendar due to the 53rd week in 2012, same-store sales were negative 3.8%, compared to our guidance of approximately negative 2% to negative 1%. First quarter 2012 same-store sales increased 8.4%. Shifting same-store sales in the first quarter of 2013 for DICK'S Sporting Goods were down 3.2%, and for Golf Galaxy were down 11.8%.
The decrease in same-store sales in DICK'S Sporting Goods was driven by a 2% increase in sales per transaction and a 5.2% decrease in traffic. Unshifted same-store sales for DICK'S Sporting Goods decreased 1.3%, and Golf Galaxy decreased 7.4%. E-commerce penetration was 5.8% of total sales. Moving on to gross profit. In the first quarter of 2013, consolidated gross profit was $411.7 million, or 30.87% of sales, and was eight basis points higher than the first quarter of 2012. Merchandise margin expanded by 84 basis points. This was offset by occupancy deleverage of 47 basis points, as well as freight and distribution deleverage of 26 basis points. Occupancy deleveraged primarily due to lower sales. Freight and distribution deleveraged due to the increase in e-commerce supply chain costs as a result of higher sales.
SG&A expense in the first quarter of 2013 was $312.7 million or 23.45% of sales, compared to SG&A expenses of $296.1 million or 23.1% of sales in last year's first quarter. SG&A leverage of 35 basis points was due to increased administrative expenses, primarily related to payroll for IT, e-commerce, and our new concepts. During the first quarter, we determined that we would recover $4.3 million, or $0.04 per share of our original investment in JJB Sports, fully impaired our investments in the second quarter of 2012. There is no related tax expense as we reverse the portion of the deferred tax valuation allowance previously recorded for the net capital loss carryforward we did not expect to realize at the time the investment in JJB Sports was fully impaired.
This represents our current estimate of expected recoveries from JJB, and we do not expect any material change in such expected recoveries. For the first quarter, we generated non-GAAP earnings of $0.48 per share, which includes a $0.05 benefit from the shifted calendar. Looking to the balance sheet, we ended the first quarter of 2013 with $114 million in cash and cash equivalents, and with no outstanding borrowing under our $500 million revolving credit facility. Last year, we ended the first quarter with $521 million in cash and cash equivalents, and with no outstanding borrowings under the facility. Inventory per square foot increased by 2.5% at the end of the first quarter this year, compared to the end of the first quarter of last year. At quarter end, current inventory was down 7.4% per square foot.
Net capital expenditures were $27 million in the first quarter of 2013, or $34 million on a gross basis, compared with net capital expenditures of $33 million or $41 million on a gross basis in the first quarter of last year. In March, we announced a $1 billion five-year share repurchase authorization. During the first quarter, we repurchased 1.7 million shares of our common stock at an average cost of $47.41 per share for a total cost of approximately $80.6 million. We also paid our regular quarterly dividend of $0.125 per share. Looking to our guidance, please keep in mind that because fiscal 2012 included 53 weeks, any comparison to the 2012 retail calendar will reflect a shift. This shift will not have a net effect on our total results for the fiscal year but will impact our quarterly results.
Our reported comparable sales and earnings will be positively impacted in quarters one and two, but this will be offset in quarters three and four. Keep in mind that our earnings guidance takes into consideration the impact of the substantial investments planned in 2013 in our omnichannel platform, our stores, our information systems, and our new concepts, which are expected to have a $0.12 impact on earnings per diluted share for the full year. The impact of these growth investments is expected to be approximately $0.03 each quarter. For the second quarter of 2013, we anticipate consolidated earnings per diluted share of $0.75-$0.77, compared with consolidated non-GAAP earnings per diluted share of $0.65 for the same period last year. Our earnings expectation includes a $0.04 benefit from the shifted calendar.
Gross profit margin is expected to increase year-over-year, driven by higher merchandise margins, partially offset by an increase in e-commerce supply chain costs as a percentage of sales. Occupancy is expected to remain relatively flat. SG&A as a percentage of sales is expected to decline as a result of a contribution made to The DICK'S Sporting Goods Foundation last year and lower incentive pay as a percentage of sales this year. On a shifted basis, consolidated same-store sales in the second quarter of 2013 are expected to be approximately 2%-3%, compared to 3.8% in the second quarter last year. On an unshifted basis, consolidated same-store sales are expected to be approximately 3.5%-4.5% in the second quarter.
For the full year, we continue to anticipate consolidated earnings per diluted share to be between approximately $2.84 and $2.86 a share, excluding the partial recovery of the investments in JJB Sports. As a reminder, this guidance also includes a $0.12 impact for the meaningful growth investments being made in 2013. For the full year, gross margin is expected to slightly deleverage in 2013, driven by merchandise margin expansion, offset by an increase in occupancy costs relative to total sales. Occupancy is expected to deleverage in 2013 due to the 53rd week in 2012, an increase in new store costs, and store remodels. SG&A as a % of sales is expected to leverage compared to 2012, even with the significant investments in e-commerce, IT, and new concepts, due to lower administrative expenses as a % to sales.
We anticipate consolidated 2013 same-store sales will increase approximately 2%-3% on top of a 4.3% increase in 2012. Diluted shares outstanding are expected to be approximately 126 million for the full year, compared to 126 million outstanding shares in 2012. For the full year, capital expenditures on a net basis are expected to be approximately $258 million, or $299 million on a gross basis. Net capital expenditures for 2012 were $187 million, or $219 million on a gross basis. The anticipated increase in capital expenditures for 2012 to 2013 is primarily the result of the planned growth investments in 2013. We continue to see significant opportunity ahead and plan to make meaningful investments over the next five years to capture that opportunity.
As we announced in our last earnings call, we'll discuss our longer-term strategic growth opportunities and investment plans at our first-ever Analyst Day on September 18th. This concludes our prepared remarks. We'd be happy to answer any questions you may have at this time.
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 a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Gary Balter of Credit Suisse. Please go ahead.
Thank you. Ed, you emphasized that you want to get more back to a value equation. You specifically mentioned golf. What are you seeing that says that that's necessary in your stores and specifically in that space?
Well, the golf business, Gary, as we said, was one of the areas that had been most impacted from a sales standpoint. A number of the vendors are starting to work on promotions in order to drive some business. We're in the process of working with them to offer our opinion and to work with them on how to best support the golf business to try to drive new sales. We thought it would be somewhat difficult to anniversary what happened in the golf business last year. Because of some factors, it was a little bit worse than we had anticipated, which has been pretty well chronicled.
This is one of the areas that we think there's some pent-up demand, and we want to go after that pent-up demand with some better promotions so that we don't have some of these people deferring these purchases till next year.
When you look at other categories, is that extending out past golf? Value equation.
There's some other areas that we're looking at some of these promotions. As we've talked about the fitness business, especially the cardio business, has continued to be difficult, and we're working through some promotions to exit out of the Livestrong product as we start to transition into another brand.
Okay, thank you.
Sure.
Our next question is from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good morning.
Good morning.
First question, just on weather. I know that was a big issue in the quarter, and I apologize if you addressed this in your prepared comments, but weather was obviously an issue for sales through Q1. Has weather improved in various markets? Did you see sales pick up, and maybe some color around that?
Well, weather certainly has an impact. We didn't call out the weather as a specific issue because we didn't want to hide behind the weather. We've got a responsibility to drive sales and earnings irrespective of the weather. Under the circumstances, I think the team did a very good job of driving those earnings numbers. As we've seen weather get better, has there been a change in the sales trend? Yes.
Do you want to quantify that at all?
We've never really, for competitive purposes, gotten to that level of detail to actually say that as the weather got better is different for the disclosures that we've provided in the past, but under these circumstances, I think we should do that. As it got better in different parts of the country, it certainly had a meaningful impact on sales.
Got it. Thank you. The second question on the Livestrong
product. I guess this was called out in Q4. The comments you're making today about further phasing down that product, I think you said by Q3, should we take that as kind of an incremental negative, versus what we heard in the fourth quarter call? Or is this basically just a continuation of the effort you put forth a few months ago?
It's a continuation. I thought we indicated in the call that the fitness business was important in the fourth quarter, but it's very important in the first quarter also. With New Year's resolutions and that, and the Livestrong brand being 50% of that total cardio business, which is the biggest part of the fitness business, it's continued to have an impact. We expect it to continue to have an impact kind of through the second quarter, and I think we'll be in good shape going into the third quarter. We've indicated we'll be out of all of this issue in the fitness side by the end of the third quarter. I actually think it'll be earlier than that.
Is that bringing in a competing brand, or is it actually the process de-emphasizing the category within your stores?
It's bringing in a different brand.
Okay. Cool. Thank you.
Sure.
Our next question is from Michael Lasser of UBS. Please go ahead.
Good morning. I wanted to ask about the experience you've seen with the stores that you've already remodeled. Can you give us some indication of the type of confluence that you're experiencing, and then how scalable that experience will be to the rest of the remodels that you'll be doing over the course of the year?
We haven't talked about what the comps are in the stores that we've remodeled. This remodel program that we're doing here is not a full remodel of the stores. It's substantial, because we're remodeling the entire middle of the store to be able to accommodate the, as I said, the Nike Fieldhouse, the Under Armour shops, and our youth initiative. We've only gotten one of those stores done, and it's only been done for a couple of weeks. It's really too early to say. If we take a look at stores that have these concepts in them and the stores that don't, the sales are higher, the margin rate's higher. As a retailer, all the good things you want to have happen in the stores that have the UA All-American shop and the Nike Fieldhouse concept.
We're pretty enthusiastic about this, not only from a sales standpoint, but also this is part of our initiative that we've talked about over the last 18 months or so to try to influence and focus on higher margin merchandise. The apparel side of our business is certainly higher margin than many other areas.
Is the benefit pretty immediate, such that you will see an accelerating impact from all of these remodels in the second half of the year?
We expect it to be relatively quickly that we get the benefit of it, yes.
Okay. Just a quick clarification question on the ticket and traffic breakdown for the DICK'S business. That 5% decrease in traffic index, is that inclusive of the website traffic, or is that just store-based traffic?
This is Tim. It is not. It's store-based traffic only.
Okay. Then just remind us, in our model, we have that e-commerce sales as a % of the total was about 3.7% in 1Q12. Is that correct?
In 1Q, that's correct, 5.8% in 1Q13.
The business continued to grow about 50%.
Correct. Roughly.
Thank you very much. Good luck with the rest of the year.
Thank you.
Our next question is from Sean Naughton of Piper Jaffray. Please go ahead.
Hi. Just as a follow-up to the e-commerce, you continue to see very strong growth there. Is there any change in terms of the thinking about the total number of stores you're willing to open? I guess as a follow-up to that, from a margin perspective, how are those sales relative to the company average today, and what is the outlook for that particular segment moving forward?
As we look at the number of stores, it hasn't changed the number of stores that we plan to open. It has influenced as we went through that plan of how many stores to open. It's influenced a bit how we look at cannibalization. We're a bit more sensitive to store cannibalization, but we still have so many markets that we don't have stores in. It really looks at more how we cannibalize stores as opposed to the number of stores. The profitability of the e-commerce business, it's not as profitable as the store yet, which we've talked about, but we expect over the next two years or so, that we expect that we would be ambivalent as to where the sales come from.
As we make changes to our merchandise mix, kind of the distribution channel that it comes out of, that it's getting more and more profitable every day. As we move to ship from store and we continue to get better at that, we really look at it that we have over 500 distribution centers around the country that can get product to customers quickly and inexpensively. As we use the stores as a distribution channel to still highlight sales, it's a very profitable venture for us as opposed to using GSI's warehouse.
That makes sense. I guess a clarification on the shop in shops. Is this an increase in the number of UA shops that you plan to open versus your prior guidance? If so, what was the catalyst for that change?
It's certainly more than we've done in years past. It's a big increase from what we've done in years past. Just the sales benefit that we see, that Under Armour sees, that we see, that Nike sees in this, we've all decided that we think it's best to continue to invest in these shops. It pays off for us and for our vendors.
Okay, great. Thank you.
Sure.
Our next question is from Chris Horvers of JP Morgan. Please go ahead.
Thanks. Good morning. First on the clearance inventory levels, down 7% year-over-year is great. Is there any markdown risk as you think about the second quarter or any meaningful markdown risk? Are there any categories that are in better or worse shape than others, perhaps specifically golf and apparel?
We don't see any big risk. We've got that all planned into our guidance. Our inventory is really in very good shape. As we take a look at golf, we work with the vendors in order to help liquidate this inventory. We've got great partnerships there. There's not a markdown. If you're asking because it was down 7.4%, did we take the markdowns? The answer is yes. We don't have any unrealized markdowns that are sitting out there.
Perfect. Just geographically, can you talk about some relative performance in the East and the North versus the South and the West? Did you see positive comps in the more normal weather markets?
We're not going to get to that level of granularity from a competitive standpoint. As you can imagine, the Midwest and the Northeast had a more difficult business trend than the South and the West.
Okay. Finally, as you think about the, following up on the online transaction profitability question, how meaningful is the closing of the profitability gap once you do buy online pickup in store? How much of the delta is really the basket, the fact that the online transaction tends to be a rifle shot and is tougher to attach?
Well, we think we have a lot of opportunity to build the basket. Right now, we don't do a great job of merchandising, if you will, the add-on sale. We think we've got a big opportunity there. We don't think that the way people shop, that it will limit the add-on sales that we can get and build this basket. We think there's a big opportunity for us there, and that will help increase the profitability, but we don't think there's anything structural from the way people shop that would inhibit us from doing that, at least not in our business.
It's building the right systems and algorithms to do that. What about the buy online pickup in store? Is that a meaningful driver of closing the profitability levels?
We think it will be, yes. We'll have that up and operational this year. Yes, the models that we've shown and how we believe this will play out will certainly help increase the profitability, just as the ship from store attribute helped a lot, too, from a profitability standpoint.
Perfect. Thanks very much.
Sure.
Our next question is from Matthew Fassler, Goldman Sachs. Please go ahead.
Thanks a lot. Good morning. A couple questions. The first relates to e-commerce. From what we can tell, you moved your gross margin guidance off a little bit to down slightly from flattish, and distribution costs seem to be making the difference. Can you talk about whether that's a reflection of a mix of online within the business and the fact that that business is growing stronger? Or does it relate to the kind of offers that you're providing or the competitive channels asking you to provide related to free shipping or other deals for consumers?
Matt, there's a lot of things happening in the e-commerce business. We are looking at what happens from a shipping standpoint and what that cost associated with shipping versus trying to look at revenue. We really think eventually, if we fast forward the film sometime, I don't know if it's 12 months from now, 18 months from now, we think the vast majority of everything is going to be free shipping. That's just going to be what the customer wants. As we take a look at how we're mixing out our online business, we're doing a better job from an apparel standpoint in those high margin areas. We think as we go forward, and we're not there yet, as I said, we think that the attachment rate of those building the basket of higher margin merchandise, we can do a better job of.
We're not doing a very good job of that right now. That does impact that margin rate a little bit right now, to drive sock sales, to drive accessory sales when somebody makes a purchase. We're not doing as good a job there as we need to. Some of those constraints are inside the GSI system, which we're working with them right now to modify so that we can be better merchants online, if you will.
My second question, your SG&A was obviously very well controlled during the quarter, I would think that that's particularly tough to do when you have the investments that you laid out at the beginning of the year. Did you have that investment spending in Q1 along with the original plan? If so, what were you able to cut back to enable the SG&A to come down to levels that we saw?
Matt, this is Tim. We indeed had the investment spending that we anticipated for the quarter, approximately an impact of $0.03. As we look through the other expense categories, the business dictates us to take action. If you take a look at what we typically are able to pull in terms of the levers of the business, while we didn't take a great amount out of advertising leveraged for us for the quarter.
If you also take a look at the performance, as Ed indicated, we are not happy with the sales performance. At this point in the year, our overall expense on our incentive pay is also under the accrual we had in last year's first quarter.
Also, as we saw sales trending the way that we were met, the store operations group did a very good job of controlling store payroll.
Understood. Thank you. Tim, best of luck to you.
Thank you.
Our next question is from [Robert Ohmes] of Bank of America. Please go ahead.
Hi, good morning. This is Rafe Jadrosich on behalf of Ravi. Thanks for taking my question. Can you guys give a little color around your youth initiatives and what the plans are for the remodels there?
What we're going to do with the youth initiative is, and we've tested this with great results. We've taken a youth area, and although it won't be necessarily vendor specific, but take a youth area and build it similar to what we've done with the Under Armour All-American or the Nike Fieldhouse concept, pulling the youth product together in a better way, merchandising it better, getting it on the power aisle, the same as we've done with these other brand shops. When we tested that, we had great results. We're quite pleased with that and going after this in a pretty aggressive way.
Can you guys discuss trends in footwear, particularly on the running side? There's a little bit of a slowdown in the industry. Have you seen any uptick with new product launches or as the weather has improved?
Well, as the weather improved, yes, we have, but we haven't seen an issue in the running category similar to maybe some other people in the mall-based retailers, because we're really not in the fashion side of that as much. We're really that core true runner, if you will. Those true runners need to replace their shoes and wear them out. It's not a fashion item for these guys, these men and women. They're actually taking these shoes and going out and running races or working out in them. We haven't seen a big change.
Great. Thank you.
Our next question is from Michael Baker of Deutsche Bank. Please go ahead.
Thanks. I also wanted to follow up on the footwear category and ask how are you doing in basketball, which I think you guys are a little bit behind in merchandising but have added to that product. If you could talk about that. Then two other quick ones. One, guns and ammo, any color there. Then third, can you quantify the contribution to the DICK'S Foundation in the second quarter of last year? Thanks.
On the basketball piece, we've certainly seen an uptick in basketball. The basketball business has certainly been on the rise. We have made great improvements in our basketball assortment from the different brands. Certainly, Nike leads that category. Changes we've made with Nike's assortment, adidas, and some of the other brands, the basketball business has done much better. You'll see a much bigger presentation of basketball in our stores really now then going forward into back to school. The guns and ammo piece, that certainly had a positive impact on our business, but our guns and ammo business is a small portion of our business versus some other people in this industry. We've got a narrower assortment of that product. We don't promote it like others. It's just a smaller part of our business. We didn't see the big pop that some others have.
To your question on the foundation, it was approximately worth $0.02.
Okay. Thank you.
Our next question is from Mark Miller of William Blair. Please go ahead.
Hi, good morning. Regarding the value offerings and the opportunities you're pursuing with vendors, I was hoping to get some perspective also on your market research and what are you seeing from a customer perception in terms of your value. Obviously, some online competitors come in with aggressive list prices. You have the scorecard and other discounts which provide value, but I'm wondering if you feel like you're getting credit from the consumer for that.
Excuse me. I think that we're getting credit from the consumer. We think that there was a couple of categories that hit us particularly hard under the transition in golf. The golf business was up significantly last year versus the year before. Our Golf Galaxy business last year was up roughly 12% in the first quarter. The DICK'S business was relatively the same. It was really a strong cycle last year, a lot of promotion out there. By promotion, I mean advertising around some new technology that would help you play better. This year, it wasn't nearly as robust, and it showed in the sales. We've got an issue around the fitness business and Livestrong, which we talked about.
We're trying to work with the vendors to bring some promotion and excitement to that golf category in order to try to drive through some of this inventory and get people out there buying. We think that there's a concern that there's some pent-up demand, and as we get later into the season, we want to realize that pent-up demand and encourage people to buy as opposed to have them postponing the purchase until next year.
I have a question on e-commerce. I know it's early, but I'm interested to know what you've learned about mobile to this point, and can you share any metrics on what you're seeing as a portion of dotcom traffic and conversion for purchases? Thanks.
Yeah. We're not going to get to specific granularity on that, but as you would imagine, the mobile aspect of our e-commerce business is growing, although from a smaller base, is growing at a much faster rate than any other aspect. Mobile continues to be extremely important. We continue to focus on it, and as everybody believes, mobile is really going to be the future of the e-commerce business.
Okay, thanks.
Sure.
Our next question is from Sean McGowan of Needham. Please go ahead.
Thank you. Some questions on the Field & Stream initiative. To the extent that you care to share it, are you planning to go into markets where there are existing big box competitors in specialty or go where there ain't? Second, can you talk a little bit about how the product offering might be differentiated from what you would expect to find at some of those other stores?
From our outdoor concept, Field & Stream, we don't anticipate right now to go jump in and compete with the other outdoor retailers. We'll get our shoelace under us, see how this concept does. We anticipate it's going to do very well, to open this up, we'll be opening up where they're not. From a product offering point of view, I think you're going to see some greater focus and some differentiation in the Field & Stream store that you would in a DICK'S Sporting Goods store. Some categories to highlight would be fly fishing, archery, casual apparel, food processing. Those are some categories where we think we can really blow out the square footage and sales. Some brands and some better quality merchandise that you might find at Field & Stream that you might not find at DICK'S would be Hoyt, from a bow perspective.
Hunting apparel, we're going to carry Sitka. On the rifle side of the business, we're going to carry Sako and Dakota. Those are just some of the name brands and key brands that we're going to carry that you won't find at a DICK'S Sporting Goods store. One of the other differentiating factors between Field & Stream and some of the other brands that are out there, we'll be very focused from an apparel standpoint on branded hunting apparel, as opposed to some other retailers have done a really wonderful job with their private brand. We're much more private brand focused.
Okay. That's very helpful. Thanks. I wanted to add my congratulations to Tim and say it's been a pleasure working with you over the years. Best of luck.
Thanks, Sean.
Our next question is from Sam Poser of Sterne Agee. Please go ahead.
Good morning. This is Ben Shamsian calling in for Sam. Thanks for taking my question. Given the current spending levels, what same store sales do you need to lever the occupancy line?
The occupancy line is going to take a little bit more than our SG&A line. As we've said in the past, SG&A is about 1% to 2%, and occupancy is closer to between 3% and 4%.
3% and 4%. Got it. Secondly, can you please provide us an update on the merchandising assortment planning system that was rolled out last year? What have you learned so far, and is it what you had hoped for when you started it?
On the merchandise assortment plan, we're still working through the conversion of the merchandise assortment plan. If this were a baseball game, we're somewhere in the sixth inning. We still have some opportunity to learn more about that and really gain the benefits of that program. We're still in the middle of this.
Got it. Thank you so much. Good luck.
Sure. Thanks.
Our next question is from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good morning.
Morning.
Ed, now that you've had a few different branded shop-in-shops in place for a couple of years at least, can you talk about the performance of those shop-in-shops in year two and after? We know that the shop-in-shop performance in year one is pretty dramatic, but I'm curious to see how those shop-in-shops perform after that initial year one lift.
They continue to perform better than the stores that don't have them, even as we go forward into the subsequent years. It's been a very good investment for us and a very good investment for the brands that we've partnered with.
Great. Just my next question is on the smaller market stores. Just wondering if you could share some of your thoughts on how those stores have performed and the learnings that you might have, if there's a difference in the competitive landscape that you're noticing, more different way that the consumer behaves in the smaller town markets.
We continue to be very enthusiastic about these smaller market opportunities. Just in the past year, a couple of examples of small markets, Oneonta, New York. Pinehurst would be another one in North Carolina. These small markets all behave a little bit differently. If they're rural, we think there's an opportunity to do a little bit more with the outdoor consumer. If they're a little bit more suburban, they behave more closely to what a DICK'S Sporting Goods store would behave. Really, it depends on the market, but we continue to be very enthusiastic and are happy about the results of these smaller market opportunities.
Great. Just lastly, I wanted to clarify something. Ed, you mentioned when you prepared remarks about vendors helping you to manage the promotions in some of those key categories that you want to work down. I just want to be clear, though, that you are getting some support from the vendors in managing and marking down the inventory, and they're taking some of the margin reductions that are needed to move it. Is that correct?
Yeah, we are getting help from the vendors, yes.
Great. Good luck with the balance of the year. Thanks, guys.
Good. Thank you.
Our next question is from Matt Nemer of Wells Fargo Securities. Please go ahead.
Hi, it's actually Caitlyn, interim at Nuveen. First, just wanted to follow up on ship from store. I'm wondering what % of your e-commerce orders are being fulfilled from stores today versus this time last year, and if you've made any sort of improvements in shipping speed.
We're not going to get to that level of granularity, but the increase in ship from store has been pretty dramatic. We expect it to continue to move to be a significant move to ship from store. As we said, it's a more profitable distribution channel, and we're doing the best we can to get as much ship from store as possible. It's cheaper and it's quicker.
Great.
I'm not sure if you know, we've now got it in all stores. All stores are available to ship product.
Great. Then second, quickly on Field & Stream, I'm wondering how you feel about being able to offer a robust enough assortment in guns and ammo, given some of the supply constraints that are out there.
At the present time, we've worked with the vendors. We don't think that it's going to be a big issue. Remember, we're only opening two stores this year. It's not like we need. We think these stores are going to do terrific as these two stores open up. In the grand scheme of things, it's not a lot of inventory that's required in the grand scheme of it all. We don't think we have an issue getting inventory.
Okay, great. Thanks.
Our next question is from Kate McShane of Citi Research. Please go ahead.
Hi. Thanks. Good morning.
Morning.
Ed, you mentioned you didn't want to hide behind the weather. I wondered if you thought there was anything else going on in competitive environment that could have impacted your business during the quarter. I was wondering if you could walk us through some of your bigger categories, like footwear and athletic apparel, and how it comps versus the average.
I will tell you that we didn't want to hide behind the weather. As I said, I think we've got the responsibility to deliver to our shareholders the sales and the earnings results that we guided to. We were able to do that on the earnings side, which I think is the more important of the two sides. We were pleased with that. Kind of called out the areas of the business that were difficult and kind of the areas of the country that were more difficult. Take a look, the footwear business and the apparel business, although we're not going to be specific, they were significantly different than the company average.
Okay, great. Thank you. Then just a longer-term question with regards to competitive environment. Could you give us your view on the growth trajectory of some of the other sporting goods retailers as well as some of the vendor retail initiatives and how you manage that along with your own expanded store growth plans?
We keep an eye on what our competitors are doing. Whenever a competitor opens, we don't like to see that happen, it's part of the business cycle. It's been part of the business cycle since we started the business, or since we went public, or after the economy cratered. It's always been there. We'll continue to work through that and provide the customer what we hope is the best alternative out there in this industry today. To date, it's been quite successful. From a vendor standpoint, we continue to drive our online business, although the vendors are out there selling their product online. One thing they've done is it hasn't become a price war with the vendors. They're selling the product at the same price or in some cases higher than what we're selling it for on our site.
We wish they weren't doing it, but that's part of the competitive environment out there, just as their outlet stores have been in the past, and it's something we just have to deal with. We've been pretty good at dealing with competitive issues by providing the customer the best alternative.
Thank you.
Our next question is from John Zolidis of The Buckingham Research Group. Please go ahead.
Hi. Good morning, and let me add my congratulations, Tim, and good luck.
Thanks, John.
Two questions. First, could you talk about the trend in transaction size, which has been increasing probably for about two years on a fairly consistent basis. What's driving the transaction size gains? My second question is around the merchandise margin improvement we saw in the current quarter. Both this quarter and last quarter had difficult sales trends, but yet merchandise margins were up even with presumably some need to discount a little bit more. Could you give us a little bit more color around how you're achieving the merchandise margin improvement? Thanks.
Well, the way that we're achieving the margin improvement has been a couple of things, it's nothing different than what we've talked about that was in our plan. We've been able to continue to focus and drive business in higher margin categories, whether that be in the apparel business or the footwear business. The investments we've made in the athletic apparel, the Field House, the Under Armour All-American shop, The North Face shops, we've really worked hard to drive that apparel business. The changes we've made in the shared service footwear deck has helped drive that business and has helped drive the margin rates. The third component of that is we've really done a very good job managing our inventory and being able to manage that inventory and manage those markdowns. Our buying group has done a really very good job of having the right products.
We haven't made, knock on wood, any real big mistakes other than Livestrong, which was kind of a little bit out of our control. We've done a very good job of buying product and managing those markdowns and clearing out that inventory, as evidenced by the fact that our clearance inventory was down a little more than 7% on a per square foot basis this year versus last year.
My first question was back on the transaction size.
I think the transaction size is driven by that we've done a good job of trying to provide the consumer some of those better quality products. Our technical running business has done very well. The technical apparel business has done very well, a lot of these are at higher price points than have been sold in the past, the consumer's reacted really quite well to them.
Thanks, and good luck.
Sure. Thank you.
Our next question is from Paul Swinand of Morningstar Investment Research. Please go ahead.
Good morning, thanks for taking the long list of questions.
Sure.
Wanted to just ask about the online, you mentioned the mobile is growing very rapidly. Is the current mobile sale and customer different in terms of sale and search? Is it more occasional or more consumable compared to a desktop, you might be doing some more research or something?
I think the desktop, you're probably doing some more research. Mobile is used for a lot of different things. We find mobile is used for commerce, which is growing quickly. There's also to try to find the nearest store, to look up a store number to call to ask a question. There's a lot of things that people are using. They're using their mobile phone for a lot of different things as it relates to the store, the mobile traffic has been extraordinary.
Do you eventually see that converging, though, it sounds like, with the desktop?
When you say converging, what do you mean?
Well, it's just going more research and more engagement in general. I guess what I would think is that people are spending more and more time doing research. As you improve the site, as you improve vendors' links, there's more engagement, more stuff going on, which hopefully involves the customer more.
Absolutely, yes.
Okay. Thanks for that, and best of luck.
Thank you.
Our next question is from David Magee of SunTrust. Please go ahead.
The operator may have your name, please.
Yeah. Hi, good morning. I had a question regarding the store traffic. Obviously, in the first quarter, there was some weather impact with that number being down about 5%. What do you have sort of baked in for the second half, and how should we think about that number over the intermediate term, given there may be some small impact coming from the e-commerce growth. How do you think about that?
We think traffic could be relatively flat, could be down a little bit, could be up a little bit. If we look at this right now into the second quarter, we would think that this would be relatively flat, and we think that there's still some continued upside in the basket size.
As you look to 2014, assuming that we continue to see a macro recovery, would you expect that number to become more positive?
I would expect it to be more positive as we go forward, yes.
Secondly, based on what you know about the real estate over the next 12, 18 months, should the average store size come down modestly? Is that a fair assumption to make?
Actually, no. We expect it to be at relatively the same size. There'll be a change in space configuration. There are some categories that we think we can continue to add space to that can drive sales and margin. We still think there's a big opportunity in the athletic portion of this business. We think there's a big opportunity in the youth portion of the business and in the women's side of the business. We think that those areas are actually undersized for the size of the opportunity.
Okay, great. Good luck. Thank you.
Thank you.
Our next question is from Peter Benedict of Robert W. Baird. Please go ahead.
Hey, guys. Thank you. Quickly, Tim, any comment on the D.C. startup cost, what impact that had on gross margin in the first quarter? I apologize if you already mentioned that.
No, we didn't. For the first two quarters of the year, we still don't expect a whole lot of impact because with the new D.C. in place, we're getting great mitigation of those expenses by the reduction in overall freight costs.
All right, good to hear. Then secondly, just update us, if you guys would, maybe on your latest thoughts on how many stores you ultimately think you can put the Nike Fieldhouse into the Under Armour All-American shops, and remind us what the limiting factors are. Are there a certain number of stores that you'll just never be able to get them in? Thank you.
There will be some stores that we won't be able to get them in or we don't want to put them in. I mean, there's an investment to doing this. We will put them in the ones that we think will get an appropriate investment in.
Okay. Thank you.
Thank you.
Our next question is from Chris Svezia of Susquehanna Financial. Please go ahead.
Good morning, everyone. Thank you for taking my questions. I guess just first going back to the Livestrong product in the ellipticals and fitness category. When you replace that potentially coming to the third quarter, you're replacing it with a branded product or a private label product. What's the thought process about? Is that a one-for-one replacement, or are you going to shift maybe some of that square footage to places like women's athletic apparel, things you just called out?
It will be shifted to a branded brand, if you will. We are going to be having less product on the floor. Some of that space will be shifted to other categories.
Okay, that's helpful. Just on the outerwear business, I guess two parts. One, your decision to pull out of some of the product early in the fourth quarter hurts you a little bit. I would guess it possibly hurts you a little bit in Q1, given what happened with the weather. I wonder if you could maybe comment about that at all. Secondarily, as you think about fall of this year and you show your planning process, is it just planning business as usual, normalize winter and weather patterns or just kind of, I know it's difficult to predict, but just some of your thoughts in and around that.
Yeah. It really didn't have an impact on our first quarter business. I mean, it didn't have any meaningful impact on our first quarter business. We look forward, we're planning this as kind of a normal winter. We've continued to work with our brands to have partnership orders. If it gets cold, we'll be able to chase some merchandise. If it doesn't, we won't have a big impact from an inventory standpoint, our hope is. I have no idea what the weather's going to be like in this fall. We're hoping it's going to be cold, you never know.
Yeah, I hear you. Okay. Well, thank you and all the best. Tim, all the best to you as well.
Thanks.
This concludes our question and answer session. I'd like to turn the conference back over to Ed Stack for any closing remarks.
I'd like to thank everyone for joining us on our earnings call today. We look forward to talking to you all in a couple of months. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.