Good morning, welcome to the DICK'S Sporting Goods fourth quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela, Director of Investor Relations. Please go ahead.
Thank you. Good morning. Thank you for joining us to discuss our fourth quarter 2012 financial results. Please note that a brief broadcast 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 statement.
For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statement, please refer to our periodic reports filed within the SEC, including the company's annual report on Form 10-K for the year ended January 28th, 2012. We disclaim any obligation and do not intend to update any statement except as required by the securities laws. We've also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the investor relations portion of our website at dickssportinggoods.com. Leading our call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our fourth quarter and full year financial and operating results and discuss planned investments and guidance for 2013.
Joe Schmidt, our President and Chief Operating Officer, will then review our store development program and discuss recent and expected system implementations, as well as provide insight into our new concepts. After Joe's comments, Tim Kullman, our Executive Vice President of Finance and Administration and Chief Financial Officer, will provide greater detail regarding our financial results, investments, and expectations. Ed will then provide some closing comments before opening the lines for Q&A. I will now turn it over to Ed Stack.
Thank you, Anne-Marie. I'd like to thank all of you for joining us today. In the fourth quarter, we again generated record results with earnings per diluted share increasing 17% to $1.03. These earnings compare to our original guidance of $1.03-$1.05. The fourth quarter included a 14th week, which contributed $0.03 of earnings to the quarter. Sales increased 12% in the fourth quarter, driven by the growth of our store network, a 1.2% increase in consolidated same-store sales on a 13-to-13-week basis, and the inclusion of a 14th week. The 1.2% increase in consolidated same-store sales compared to our comp expectation of 4%. Same-store sales in the fourth quarter of 2012 for DICK'S Sporting Goods were down 2.2%, Golf Galaxy sales were up 1.3%, and e-commerce sales were up 54.2%.
Higher than anticipated sales in hunting were more than offset by significantly lower expected sales in outerwear and cold weather accessories as we experienced warmer weather relative to this year versus last year during peak selling periods, as well as in fitness, where we experienced a significant decline in the sales of ellipticals and treadmills. To demonstrate the magnitude of this impact, these businesses, our consolidated comps, would've been 5.4% for the quarter, excluding cold weather related categories and the fitness category. In December, the warm weather again. This year, we significantly reduced receipts of our partnership orders in winter outerwear and related accessories. The catalyst driving this decision was our intent not to carry over winter inventory for another year following two warm winters.
Compared to last year, our winter inventory is down 17% on a per square foot basis, and our clearance inventory is down 14% per square foot versus last year. This decision helped maintain our margin rates and allowed us to keep our inventory clean. As we finally received cold weather along with snow in January, it had a negative effect on our store sales performance for the back end of Q4 and into Q1. Looking to fitness, the sales decline was a result of lower large equipment sales, as I mentioned, treadmills and ellipticals. We understand the issue that contributed to this sales decline and are taking action to correct them. For the full year 2012, and on a 53-week basis, we increased our non-GAAP earnings per diluted share by 25% through 12% sales growth, operating margin expansion of 72 basis points.
We also opened up 38 new stores, which are demonstrating solid productivity, and our growth brought our total number of stores to 518. We also made several achievements that demonstrated our commitment to driving continuous improvement. For example, we opened up a number of new specialty shops in our stores with Nike, Under Armour, Adidas, and The North Face. We also bought two established brands during the year, Top-Flite and Field & Stream, which have great sales and margin growth potential. Additionally, we invested in our True Runner retail concept and have opened a new concept store for our Golf Galaxy brand. We also made significant achievements with our omni-channel strategy. We have demonstrated that we can meaningfully grow our e-commerce business at an aggressive pace in a way that is both profitable and is increasing in profitability.
We generated nearly 50% growth in our e-commerce business, rolled out ship-from-store capabilities, significantly enhanced our mobile site, and launched a new mobile app, which provides a mobile shopping platform and the ability for customers to look up and redeem their loyalty points. Two extremely powerful and strategic assets that are making our progress with omni-channel possible. The first is our talented team of associates. We've invested heavily in talent over the past couple of years, building our knowledge base in many areas, including site merchandising, website development, search engine optimization, and analytics. We will continue to aggressively make these investments at e-commerce area. The second strategic asset is the distribution network that exists within our store base. We have 518 stores across the country, and today, each and every store is set up and running with ship-from-store capabilities.
We're very pleased with the progress we made this year, but we recognize we have a lot more to do. As a result, we will be making meaningful investments in our business for the continued long-term benefit of the company and our shareholders. In 2013, these substantial investments include growing our omni-channel platform through advanced mobile capabilities, the piloting of pick-up in store, and growing our e-commerce team. We will also be remodeling existing stores, implementing new systems, and developing our new concepts. In total, we expect these investments to have a $0.12 impact on earnings per diluted share in 2013 while building the capability for future sales and margin growth. Our 2013 guidance takes these investments into consideration. I would also like to point out 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 full fiscal year, but will impact our quarterly results. Our reported comparable sales and earnings will be positively impacted in quarters 1 and 2, but this will be offset in quarters 3 and 4. The first quarter of 2013, we anticipate consolidated earnings per diluted share of $0.47 to $0.49, compared with consolidated earnings per diluted share of $0.45 for the same period last year. Our earnings expectations include a $0.02 impact from long-term growth investments I just mentioned, and a $0.05 benefit from the shifted calendar. On a shifted basis, consolidated same-store sales are expected to be -2% to -1% on top of an 8.4% increase in the first quarter last year. On an unshifted basis, consolidated same-store sales are expected to be flat to +1%.
For the full year, we anticipate consolidated 2013 same-store sales will increase 2%-3% on a 52-to-52-week basis on top of a 4.3% increase in 2012. We are anticipating consolidated earnings per diluted share between $2.84 and $2.86. This compares to non-GAAP earnings per diluted share of $2.53 in 2012, including the 53rd week and excluding the impairment charge from JJB. 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. In summary, we had a strong year with steady progress in growing all aspects of our business. We made several important investments in the future, including adding locations, acquiring established brands, developing and testing retail concepts, launching e-commerce technologies, and creating new marketing strategies.
All of these investments have strengthened our foundation and positioned us for continued growth. We're optimistic about the outlook for the coming year and excited about our prospects for the future. We're also proud of the people who continue to prove that focus and drive are key to staying on top of our game. I want to thank our entire team of associates for their hard work and commitment. I'll now turn the call over to Joe.
Thanks, Ed. In 2012, we continued to grow our store base, augment supply chain efficiency, and support omni-channel initiatives. We opened 38 new DICK'S Sporting Goods stores and relocated five DICK'S Sporting Goods stores to preferred locations. Our new DICK'S Sporting Goods stores continue to perform well, with new store productivity of 93.5% in the fourth quarter of 2012, compared to 94.2% in the fourth quarter of 2011. The detailed calculation of new store productivity can be found in the tables section of the press release we issued this morning. Looking to 2013, we expect to add more stores while increasing investments in our existing store base. On the real estate front, our plan is to open approximately 40 new DICK'S Sporting Goods stores and relocate one DICK'S store to a preferred location.
In addition, we will increase capital expenditures to further upgrade some of our existing stores to improve the shopping experience for our customers. Keep in mind that we did not conduct any full-store remodels in 2012, as we were finalizing our new store prototype. In 2013, our plan is to complete approximately four full remodels, as well as approximately 75 partial remodels. Our 2013 remodel plan is one step in a multi-year program, which is expected to span across a significant portion of our store base. The partial remodels focus on strategic growth categories and when completed, will feature Nike and Under Armour shops. These vendor shops continue to perform well as they generate higher sales and margin while increasing product exclusivity. At the end of 2012, we had 171 Nike Fieldhouse shops, 97 Under Armour All-American shops, 10 Under Armour Blue Chip shops, and 91 North Face shops.
In 2013, we plan to accelerate the pace of these new vendor shops by adding approximately 100 Nike Fieldhouse shops, 70 Under Armour All-American shops, as well as 65 new brand shops with Adidas. We are working closely with The North Face to add new shops in conjunction with store remodels, as well as elevate their branding in our seasonally expanded shops. We continue to see strong financial results and positive customer feedback in stores with shared service footwear decks. As of 2012 year-end, they are featured in 174 DICK'S locations. In 2013, shared service footwear decks are planned for all new and fully remodeled stores. Given the anticipated investment in our new stores, relocated stores, remodels, and vendor shops, we plan to nearly double our CapEx spend on stores in 2013 over 2012. Our strategy for new store growth is expanding to smaller markets.
Based on our research in smaller markets and considering the success of our smaller market format stores, we believe this strategy opens up a range of new expansion possibilities for us. In the past, we have stated that we believe there was an opportunity for at least 900 DICK'S Sporting Goods stores in the U.S. This new growth strategy allows this ultimate goal to grow to over 1,100 stores. In addition to our excitement surrounding our growth opportunities, we are beginning to see benefits of recent investments in our supply chain, such as freight savings generated by the opening of the new distribution center in Goodyear, Arizona, this past January. These savings are expected to more than offset the related DC costs. We are also pleased with the implementation of systemic solutions such as merchandise assortment planning, which helps optimize inventory across categories by store size and by region.
Size scaling and pack optimization, which generates apparel size combination based on store-level sales data. Additionally, we are seeing positive results from testing and implementing other systems, including price management and optimization, which maintains item pricing across channels, and space planning, which enables consistent and efficient execution in our stores by taking into account the subtle differences in fixtures and square footages across the chain. In 2013, we will continue to invest in these systems while we deploy additional mobile technology in our stores, implement merchandise demand forecasting capabilities, and better align our store associates with customers by utilizing our new workforce management system. Moving to Golf Galaxy, we repositioned one store in the fourth quarter of 2012. This store is significantly larger than our current format and includes a greater focus on golf services and more experiential shopping, with an increased presence of our key vendor brand shops.
The initial reads on this store have been very encouraging. We are planning to open one new store and relocate another store in 2013, both of which will be in the larger format. In 2012, we developed and tested a new concept running store, True Runner. These stores allow us to further connect with the enthusiast runners, giving us valuable insight that we can apply across our businesses. Our plans are to open two additional locations in 2013. Finally, we plan to introduce an 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.
The planned investments in new stores, existing stores, and supply chain, combined with the continuing evolution of e-commerce outlined by Ed, is evidenced by a powerful omni-channel platform that is taking hold. One that continues to drive sales, improve profitability, and most importantly, provide more choices and shopping options to our customers. I will now turn the call over to Tim to review our financial performance investments outlook in greater detail.
Thanks, Joe. Sales for the quarter of 2012, which was a 14-week quarter, increased by 12% to $1.8 billion, compared with the 13-week quarter a year ago. On a 13-week to 13-week comparative basis, same-store sales at DICK'S Sporting Goods stores decreased 2.2%, Golf Galaxy increased 1.3%, and our e-commerce business increased 54.2%. The decrease in same-store sales in the DICK'S Sporting Goods stores was driven by a 3.2% increase in sales per transaction and by a 5.4% decrease in traffic. I would also like to remind everyone of the change in our disclosure policy for same-store sales in 2013. Beginning with the first quarter of 2013, we will report same-store sales for our DICK'S Sporting Goods stores e-commerce business together with the business for our stores. We will continue to provide the size of the e-commerce business as a percentage of total sales.
To provide an example, had we reported fourth quarter results with this new methodology, the comps have been as follows: a 1.2% increase in consolidated same-store sales, with same-store sales for DICK'S Sporting Goods up 1.2% and Golf Galaxy up 1.3%. E-commerce penetration would be reported as 8.6% of total sales. We are making this reporting change because as we build out our omni-channel platform, it is becoming 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. Looking to gross profit. In the fourth quarter of 2012, consolidated gross profit was $588.7 million, or 32.61% of sales, and was 79 basis points higher than the fourth quarter of 2011.
This increase was driven by merchandise margin expansion up 46 basis points and occupancy leverage of 48 basis points, partially offset by freight and distribution deleverage, which was driven by the increase in e-commerce sales. SG&A expense in the fourth quarter of 2012 was $375.8 million or 20.82% of sales, compared to SG&A expenses of $326.6 million or 20.26% of sales in last year's fourth quarter. This deleverage of 56 basis points was due to increased administrative expenses, primarily related to payroll for IT and e-commerce as we continue to strengthen our omni-channel platform. On the balance sheet, we ended the fourth quarter of 2012 with $345 million in cash and cash equivalents and with no outstanding borrowing under our $500 million revolving credit facility. Last year, we ended the fourth quarter with $734 million in cash and cash equivalents and with no outstanding borrowing under the facility.
Over the course of the past 12 months, we've utilized capital to fund the $200 million share repurchase program, pay quarterly dividends, purchase our store support center, invest in JJB, acquire intellectual property rights to the Top Flite and Field & Stream brands, build our new distribution center, and fund a $246 million special dividend. Inventory per square foot increased by 0.7% at the end of the fourth quarter this year compared to the end of the fourth quarter of last year. At year-end, clearance inventory was down 14% per square foot. Net capital expenditures were $51 million in the fourth quarter of 2012, or $62 million on a gross basis, compared with net capital expenditures of $36 million or $54 million on a gross basis in the fourth quarter of last year.
For the full year, net capital expenditures were $187 million or $219 million on a gross basis, compared with the net capital expenditures of $154 million or $202 million on a gross basis last year. Recall that 2012 includes CapEx related to our new distribution center. Looking to guidance, keep in mind that because fiscal 2012 includes 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 omni-channel platform, stores, information systems, and 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 in 2013 by quarter is expected to be $0.02-$0.03 in the first quarter and $0.03 for Quarters Two, Three and Four. For the first quarter of 2013, we anticipate consolidated earnings per diluted share of $0.47-$0.49, compared with consolidated earnings per diluted share of $0.45 for the same period last year. Our earnings expectations includes a $0.02-$0.03 impact from the growth investments and a $0.05 benefit from the shifted calendar.
Gross margin is expected to increase year-over-year, driven by higher merchandise margins, partially offset by occupancy deleverage and an increase in freight and distribution costs as a % of sales. The occupancy deleverage is a result of an increase in new store costs. SG&A as a % of sales is expected to increase in the first quarter due to increased administrative expenses, primarily as a result of payroll expenses related to IT and e-commerce as we continue to build out our omni-channel offering. On a shifted basis, consolidated same-store sales in the first quarter of 2013 are expected to be -2% to -1%, on top of an 8.4% increase in the first quarter of last year. On a shifted basis, consolidated same-store sales are expected to be flat to 1% in the first quarter.
For the full year, we are anticipating consolidated earnings per diluted share between $2.84 and $2.86. As we mentioned earlier, this guidance includes a $0.12 impact for the meaningful growth investments being made in 2013. For the full year, gross margin is expected to remain relatively flat in 2013, driven by merchandise margin expansion, primarily offset by an increase in occupancy costs. Occupancy is expected to deleverage in 2013 due to the 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 as we continue to build our omni-channel infrastructure and develop additional growth drivers. Diluted shares outstanding are expected to be approximately 126 million for our full year, compared to the 126 million outstanding shares in 2012.
We anticipate consolidated 2013 same-store sales will increase 2% to 3% on top of a 4.3% increase in 2012. For the full year, net capital expenditures are expected to be approximately $258 million, or $299 million on a gross basis. Net capital expenditures for 2012 were $186 million, or $219 million on a gross basis. The anticipated increase in capital expenditures from 2012 to 2013 is primarily the result of the planned growth investments in the business in 2013. As we consider our capital allocation strategy for 2013, there are four main components. First is investing in the growth of our business. Second is the quarterly dividend plan. Third is the stock repurchase plan, which was announced this morning. Fourth is the consideration of opportunistic acquisitions that fit within our strategic plan.
As discussed, we will make substantial investments in the growth of our business by investing in our omni-channel strategy, opening new stores, remodeling existing stores, implementing system enhancements, and opening new store concepts, which includes the repositioning of two Golf Galaxy stores, the addition of two new True Runner stores, and the opening of our first two Field & Stream stores. The second component, the quarterly dividend plan, was initiated as a declaration of an annual dividend in 2011 and subsequent quarterly dividends. On February 19th of this year, we announced that our board declared a quarterly dividend of $0.125 per share, payable in cash on March 29th to stockholders of record as of the close of business on March 8th. The third component, the share repurchase authorization, is a five-year, $1 billion program.
At a minimum, it is intended to be used to keep the share count flat, which is contemplated in our guidance. The last capital allocation component is the consideration of opportunistic acquisitions. We will evaluate those that are strategically important to our business. I will now turn the call back to Ed.
Thank you, Tim. We see significant opportunity ahead. Over the next five years, we plan to make meaningful investments that will position us to capture it. Today, we provided you with insight into our expectations for this year, including our planned growth investments. To discuss our long-term strategic growth opportunities and investment plans, we are hosting our first-ever Analyst Day this September. During this event, we'll explain how we're leveraging the focus and drive of our team to grow our company and continue to lead our industry. Our commentary will include an overview of our merchandising strategy, a discussion of the omni-channel opportunities we plan to pursue through e-commerce, our stores, and marketing. We'll also review our plans for technology advancements and review our longer-term capital investments. During the day, we'll offer guided tours of a nearby DICK'S Sporting Goods store and our first Field & Stream store.
It promises to be a great event, and we look forward to seeing you there. This concludes our prepared remarks. We'd now be happy to answer any questions you may have.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been answered and you would like to withdraw from the queue, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good morning.
Morning.
The question I wanted to ask a question about your fitness equipment. You clearly called that out as one of your weaker spots here in the quarter, and it was a reason for the drag in total sales. My question is, and having followed DICK'S for a while now, fitness equipment it's had its issues. Did something else happen? Was there a reason for incremental weakness here in Q4? Going forward, what sort of say, levers can you pull there to improve the performance of that category? Thanks.
Yeah, Brian, we got kind of thrown a curve ball here with fitness with the Livestrong brand is a little bit more than 50% of our treadmill and elliptical business. Unfortunately, when the news came out about Lance and the issues that he had, and that being confirmed, people had a very negative reaction to the Livestrong brand, unfortunately. Even though with Lance, he's no longer with the foundation, the foundation does great work. The customers had a very negative reaction to the Livestrong brand. The business with the Livestrong treadmills and ellipticals, which as I said, were over 50% of our business, just stopped. As long as it takes to get product in, we couldn't get new products in in order to offset that.
We still have some of that inventory here, which we will get through, there'll be some costs associated getting through it, which are all baked into our guidance going forward. That's the biggest issue around the fitness business.
Just to be clear on that then, in your stores now, you've started to significantly de-emphasize the Livestrong brand in those categories?
Yes. We're marking that product down and attempting to clear that off the floor and make arrangements for other products to come in.
Got it. Thank you.
Sure.
The next question will come from Michael Baker of Deutsche Bank. Please go ahead.
Thanks. Geez, lots to ask here. I'll ask, pace of business, can you sort of discuss what November and December looked like relative to January and then even early February? What's new, guys? I think you can figure out by the way you're talking about shift and non-shift, that the end of January or early February was probably pretty bad for a week in there, then got better. Can you confirm that?
We've never talked about what's going on in a particular quarter. We've indicated that with the cold weather not coming again in December, we made a decision to cancel the partnership orders that we have on that product, and we didn't want to have two years of inventory backed up as we did last year. Last year, we were able to get through this, and last year it was fine. To have two years of this, we made the decision to cancel those partnership orders. It didn't look like winter was going to come again. Then when we did get some of the colder weather, we didn't have enough inventory to really support those sales. As we said in the prepared remarks, that had an impact on Q4 sales and that had an impact going into Q1.
If we had the decision to do over again at the time that we made the decision, we'd probably make the same decision because we wanted to have this inventory clean, and we didn't want to have two years of cold weather merchandise back up on us.
Let me ask it another way. Just the terminology shifted and non-shifted is a little confusing. When you talk about your shifted comps, what weeks are you looking at this year versus last year? Is that sort of looking at the weeks ending May 4th, 2013, which I think is when your quarter is going to end, versus April 28th last year? If you give us those dates, we can probably figure it out from there.
I don't have those dates right off the top of my head. The quarter ends a week later this year every quarter. There was 53 weeks, unfortunately, in the retail calendar, every number of six years, there's a 53rd week. That pushes everything out a quarter, which means.
I think we understand that. It's just when you say shifted or non-shifted, so non-shifted means you're going back to the same weeks that you had in your fourth quarter last year. Is that the non-shifted part?
No.
The non-shifted or unshifted is our reported. The shifted is being more comparable to the prior year weeks.
Correct.
Okay. Thanks.
Sure.
The next question will come from Matthew Fassler of Goldman Sachs. Please go ahead.
Thanks a lot. Good morning. I've got one question on investments and then just a quick follow-up on store growth. On the investments, you invest money every year. What makes this $0.12 incremental? As to P&L geography, it was a little surprising that it sounds like the expenses will lever anyway, even with this. What's happening to the so-called core expenses above and beyond these $0.12?
A couple of these are pretty big investments, Matt, that haven't been in the normal course of business. One is around e-commerce. We know that what we're looking to do from an e-commerce standpoint and the traction we have here, we're going to continue to make additional investments in our e-commerce business around infrastructure of people to make sure we've got the right people in place here. We're in the process of building out a new platform that we haven't done in the past. We think that in order to be truly relevant going forward, we need to be very relevant from an e-commerce standpoint or an omni-channel standpoint. This is different than what we've done in the past.
As we continue to take a look at what our growth opportunities are going to be going forward, we want to have the ability to have growth outside of DICK'S Sporting Goods when the growth of DICK'S Sporting Goods starts to slow down as we kind of hit that end of the runway of the number of stores that we would have. We think that the outdoor category is extremely important and a great growth opportunity for us. We're making meaningful investments in that channel. There's also a difference in the competitive dynamics out there in the outdoor category with what Cabela's has done with the next generation stores. In their 80,000-100,000 sq ft stores and their 40,000-50,000 sq ft stores and the real estate strategy that they're going to employ.
We really feel that it's important for us to have a competitive answer to that concept.
Understood.
We're also going to be doing some meaningful remodeling of our stores, that we haven't done in the past, where we're going to be taking the Nike shop, the Under Armour shops, the North Face shops, and Adidas shops, and making meaningful investments in roughly 75 additional stores that are above and beyond what has been our normal run rate. With the investments that we've made in these shops, we've seen meaningful increase in sales and margin rate because those products have a higher margin rate, that we think that this is really a terrific investment to have. We have several hundred stores that don't have these shops in here, and we've decided to really distance ourselves from our competitors, it's important to do this.
I know this is somewhat painful, is the only word I can think of it as, somewhat painful from an investment standpoint to swallow. We're really taking a look and making these investments for the long-term benefit of the company and not just trying to manage the business quarter to quarter. I know that that's difficult. A lot of people really articulate that that's the way a business should be run, until you run it that way, and then there's some pain associated with it. We feel that these are absolutely the right things to do for the company going forward.
If I can slip in the second part of my question.
Sure.
From an ROI perspective, clearly you're doing well in e-commerce and that business is growing. Your store growth continues apace as well. Presumably, if you look at your traffic trends and where the growth is coming from, more of the business is going to be done online as a proportion of the overall on an ongoing basis. Talk to us about how you think about ROI on the box itself and how essential it is that you have that unit growth to ultimately capture that revenue.
We think that the ROI that we look at, or the IRR that we look at from a real estate standpoint, has not changed. We still expect to have that same IRR with our new stores going forward. We're excited about a couple of these concepts that we've tested in these smaller markets that have done extremely well. We still think we've got meaningful growth opportunity in the DICK'S Sporting Goods stores, and that isn't going to change. We'll open up next year north of 40 stores again.
That IRR is reflective of some of the earnings from online, or is it purely for sales that are coming through the retail channel?
That's strictly coming through the retail channel. We do know that we have seen, as we've opened up stores, the e-commerce business that we get from that geography increases pretty substantially as we open up stores in those markets.
Thank you.
Sure.
The next question will come from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good morning, everyone. Joe, I was hoping you could shed a little bit more light on the definition of the smaller markets that you reference and how that's enabling you to extend your long-term square footage growth runway.
Sure. Over the last couple of years, we've experimented opening some of these smaller market stores with stores that are reduced in square footage. Those stores range anywhere from 35,000 to 45,000 square feet. We've had very good success in some of these smaller markets. Based on that success, we've done some additional studies that tell us we have the opportunity to grow an additional 200 stores across the country.
Those smaller markets, how would you define that?
You mean, like, what are some of those markets?
Yeah. Population sizes of 100,000 people, 200,000 people, whatever measure it is that you use.
Less than 200.
Okay. How should we look at or think about the mix of those smaller stores or the smaller market opportunities versus your normal bigger box opportunities?
I think you can think about 15%-20% of our stores on an annual basis will be below 45,000 sq ft.
Got it. Just shifting to the shop-in-shops that you mentioned. I think to date, most, if not all, of the Under Armour shop-in-shops are in stores that have the Nike Fieldhouse concept in them. With respect to the Adidas shops you'll be opening, are those Adidas shops, will they also be in stores that have both Under Armour and Nike shops in them, or is Adidas going to be housed in a non-competitive store?
No, you can think about the shops that we will add for Adidas will be in those stores that currently have Nike and Under Armour shops today.
Got it. Thanks a lot, and good luck.
Thanks.
The next question will come from Chris Horvers of J.P. Morgan. Please go ahead.
Thanks. Good morning. Just wanted to parse out some of the impact. The 400 basis point hit from fitness and weather, would you say that was roughly evenly split, or was the cold weather categories more? Did you see any impact from Hurricane Sandy in the quarter?
It was relatively even between the two categories. We're not going to break out Hurricane Sandy's impact. Some of the stores around there that were hardest hit, yeah. In a meaningful aspect, no meaningful issue around Hurricane Sandy.
Okay. On the fitness equipment, do you think that you'll get through that inventory here in the first quarter? Can you talk about what's the seasonality of that business, fourth quarter versus the first half?
Well, let's put it, the fourth quarter and the first quarter are the two key fitness quarters. We're kind of in that, and it's really the first part of the first quarter. We're kind of coming out of the back half of this. The team has done a nice job starting to reduce that inventory, but we still have some work to go, but it's all planned in the guidance, and there shouldn't be an earnings impact from markdowns.
Yep. In terms of the investments that you're making in the step-up, the $0.12, was just curious, how much of that is really on the systems side, the e-commerce side, versus the store remodel program?
Let me give you a rough breakdown, Chris. As Ed mentioned, e-commerce is really leading the pack. That's about $0.04 of that investment.
The new concepts, as we build those out, will be about $0.03. The IT impact and systems that Joe has mentioned is about $0.03. The additional depreciation for these remodels, as well as the 75 store partial remodels, will be about $0.02.
That depreciation is just an accounting question. Does that go through cost of goods, or does that go through SG&A?
The $0.02 that I just spoke of goes through cost of goods.
Okay. Finally, just to follow up on Michael's question, what you'll report for the first quarter for the period that started February 3rd, that is zero to plus one. That's your guide for that.
Yes.
Okay. Understood. Thanks very much.
The next question will come from Sean Naughton of Piper Jaffray. Please go ahead.
Hi. Thanks for taking the question. Just on the hunting category, this has obviously been a relatively interesting year from a demand perspective over the last several months. Just curious if you could talk about any supply constraints in this particular department, as well as potentially any changes you're making in terms of the product assortment in that particular area of the store.
The inventory has certainly been a struggle as it relates to ammunition. On the hard lines aspect of it, we haven't seen as much. You may or may not know, we don't sell handguns and haven't sold handguns for 20 years. We're not experiencing any issues around handguns. The ammunition has been very difficult to keep in stock. We actually have people who call the store every morning and find out if we got ammunition, they come in and buy it. We don't expect the ammunition supply to be fixed anytime soon.
Okay, there's no changes in the types of long guns that you're carrying in the store then at this point in time.
We haven't. We focus on the hunter. We suspended the sale of MSRs after the tragedy at Sandy Hook, and have not put those back in the store, but we don't expect any other modifications to what we sell. We focus our products primarily on the sportsman and the hunter.
Okay. Then just a follow-up on the systems implementations you're working on. This has been going on for a number of years now, maybe you could just give us an idea of where we are in the assortment planning and price optimization process, and when we should start seeing some of the benefits from those systems come into play.
Where we stand today is those systems were implemented in 2012. Keep in mind, as you implement those systems, there's 6-9 months' worth of beginning to understand how they work and getting them up to full capacity. Late 2013 is where we expect to see some results from those systems implementations.
Okay, really on the full year, maybe 2014, we'll start to see the full benefit.
That's correct.
Okay, great. Thank you. That's all I think you want.
The next question will come from Rick Nelson of Stephens. Please go ahead.
Thank you. Good morning. I'd like to ask you about the gun and ammo sales, how that affected your comp in the period, and how you're planning that business for the remainder of 2013.
Well, it had a positive impact. We don't call out specifically category by category, but it was certainly a positive impact. We think it's going to be relatively neutral, maybe down a little bit as we go into 2013, just because of the lack of inventory from an ammunition standpoint.
The size of these Field & Stream stores, what are you talking about here?
I'm sorry, could you repeat that?
The size of the Field & Stream stores.
Yeah. The first two Field & Stream stores will be 50,000 sq ft. The research that we've done, we think we can get everything we need to do in roughly 50,000 sq ft.
Great. Thanks. Good luck.
Thank you.
The next question will come from Robert Ohmes of Bank of America Merrill Lynch. Please go ahead.
Hey, Ed. How are you?
Good, Robbie. How are you?
Hey, good. Ed, I was hoping you could comment on one of the places where you did have good momentum, which you call out apparel and footwear. Could you talk a little more about what was working in those categories in the fourth quarter and maybe help us understand how you're thinking about maintaining that momentum in 2013 and some examples of things that can keep it going? Thanks.
Sure. The athletic apparel business was really very good. Fleece product was very good. The women's athletic piece was really very good. The footwear business, as we indicated, was good for us. We're seeing, as some other people are, a resurgence in the basketball business. The basketball silhouette has been very good, and we will be taking a much more aggressive stance in basketball going forward into 2013.
Great. Thanks very much.
Thanks.
The next question will come from Paul Swinand of Morningstar Investment Research. Please go ahead.
Good morning. Thanks for taking all the questions as usual.
Sure.
I guess the first question is maybe a tough one. Retailers have been dealing with weather problems for as long as they've been around, but is there any new technology that you think will help this type of problem? My visits to the stores definitely showed stuff sold out in January, just when the weather turned. Not to give you guys too much of a softball, but is there anything that's going to be different next year?
I don't think there's going to be anything different. We look at Planalytics to try to get some sense of what's going to happen. We can kind of predict based on the weather. Starting in November of the fourth quarter and through probably middle of April, based on the temperature, we can pretty much predict on a day-by-day basis what our business is going to do. The issue is we can't influence the temperature. This next week, we're going to be on average. I was just talking to our team today. On average, next week, temperature's going to be 15 degrees colder than it was last year, which was one of the things that helped drive that 8% gain we had last year. As we take a look at this from an outerwear standpoint, we think the outerwear business is still really very good and an important business for us.
I've said this 100 times. When it's been cold and we've had a lot of snow, I've indicated to the Street, "Hey, we're not as smart as we look. The weather was helpful to our business." When the weather isn't helpful to our business, we're not as dumb as we look. What we can do to change how to predict the weather and how sales are going to be based on the weather, I don't see anything different next year than this year, and I don't see anything different five years from now than this year.
Does the customer exhibit any learning behavior, like buying earlier instead of waiting, or have you ever seen that in your experience?
No, I don't. Well, I shouldn't say that. There's some of the fashion items, colors, some hot products that might sell out earlier in the season that people want. For the most part, most of the time, people buy very close to need. When a snowstorm is coming or cold weather is coming or when it's here is when they buy it.
Got it. Then a quick question on the ellipticals and treadmills versus the apparel and the Livestrong brand. It seems like you've got a lot of apparel still. Is that still doing pretty well?
The apparel didn't do as well either. We had a hit from the apparel standpoint also.
Okay, great. Thank you very much.
Sure.
The next question will come from Peter Benedict of Robert W. Baird. Please go ahead.
Hi, guys. Thanks. Couple questions. First, think about the e-commerce business. Obviously, the penetration up big this year, and it was as high as 8.6% in the fourth quarter. When you think about next year's fourth quarter, are there any merchandising strategy adjustments you have to make recognizing that? E-commerce being around 4% of sales Q1, two, and three, but then more than doubling in the fourth quarter. Can you talk about maybe how that changes your thinking going forward about the fourth quarter?
a couple of the things that helped our fourth quarter was earlier in the year, we didn't have as much set up from ship-from-store. Having ship-from-store being as fully robust as it was in the fourth quarter was certainly helpful. With that being said, we think that next fourth quarter will be the highest penetration of e-commerce business versus the other quarters. Yeah, we take a look at where those products sold, where we think that the trend is going to be, and make sure that we have those products in place. Some of the things that we'll do to try to do a better job in next year's fourth quarter is on the marketing front, we won't be as outerwear-focused. We were really enthusiastic about the outerwear business.
We probably over-invested from a marketing standpoint in outerwear, both online and in the stores, and we will modify that to be more balanced next year than we were this year.
Okay, thank you. If we look at the square footage growth of the business last couple of years running around 7% or so, you talked about the new smaller market opportunity. As we think about making our way towards the 1,100-store target, should we think about a square footage growth backdrop that's somewhere around that 7%? Do you still think you can get that closer to 9%, 10%, or should we think seven's the number or less?
I think you can think about 7%-8% in 2013, but we think we can move that up to 9%, maybe 10% in the coming years. We do think there will be an opportunity to increase that slightly over the next couple of years once we get through 2013.
Great. That's helpful. Then just lastly, a clarification. The $0.12 investment expense that's coming this year, clearly, it's a step up, but we're not to think of this as being a one-time. It's a new level of expenses, and it'll probably persist as we go forward. Is that the right way to think about it?
You should consider this part of the infrastructure.
Great. Thanks, Tim.
The next question will come from Daniel Weaver of Raymond James. Please go ahead.
Thanks. Ed, I know that golf category becomes significantly more important in the next two quarters, given the late start to spring, I think you alluded to, it's going to be 15 degrees colder next week. I was unaware of that. Is that one of the reasons why you're guiding conservatively on 1Q, that you would expect golf to get off to a slower start?
Yeah, I think everything in the spring is going to get off to a little bit slower start this year. What I looked at from a forecast standpoint at 15 degrees colder next week, that has an impact. What I will tell you, though, is I think between the first quarter and second quarter, it will even out. We talked about last year that in the first quarter, we moved business from the second quarter to the first quarter. I think this year it's going to be more normalized, and when we take a look at the two quarters combined, we anticipate that it's going to be fine, but it's just going to be difference between the first and second quarter.
Somebody asked me one time, about a year ago, what Wall Street doesn't understand about our business, and I kind of smiled and kind of tongue in cheek said, what Wall Street doesn't understand about our business is that our customers don't understand the concept of quarters. They don't understand when they begin and end. Season-wise, as we go into the first and second quarter combined, I think it's going to be fine. We're really pretty enthusiastic. We think the golf, there's some great new technology out there from a golf standpoint. TaylorMade RocketBallz Stage 2, the R1 from TaylorMade, the new Nike Covert driver is doing very well. The Callaway products are doing very well. This is a great product cycle from a golf standpoint right now.
You talked about moving to the large store format for Golf Galaxy, but I think there's only one relocation and one opening this year. What makes your large store format different than a PGA TOUR Superstore or different than the new Golfsmith format?
Well, it's still smaller than PGA TOUR Superstore. As you take a look at what we're going to do there'll be fitting similar to what you get at the PGA TOUR Superstores. What will really be a big differentiating factor with us is going to be the apparel aspect we have in the store. When you take a look into, we're not going to talk about it right here, when you take a look at some of the services and the way we're going to provide some of the services, it's going to seem much more like what happens on tour than what happens when somebody goes into the back room and takes care of your club. We're going to provide much more of a tour experience in our store than you'll find anyplace else.
Great, thanks.
Sure.
The next question will come from Kate McShane of Citi. Please go ahead.
Thanks. Hi, good morning.
Good morning.
Most of my questions have been answered. With regards to the commercial real estate opportunity, I wondered if you could update us on if you're seeing any improvement in the build-out or availability, and what costs are like, just based on your mentioning of the deleveraging on occupancy in 2013.
Sure, Kate. We're not seeing a significant change in new construction of shopping centers. What we are seeing is that REITs are buying more property from department stores. They're repurposing small shop space, vacant department stores, movie theaters, junior anchors. Obviously, Sears, with what's going on with Sears, we are seeing some opportunity there to repurpose some of those properties. With what's going on with Best Buy, Barnes & Noble, Office Depot, OfficeMax, potential store closures there. As you would expect, we are looking at all of those opportunities as we become aware of those. New growth has been pretty consistent over the last couple of years, where we've been about 50% new construction versus repurposing existing boxes. I think you can expect to see 2013 pretty similar in that regard.
As far as prices, we are seeing prices escalate a little bit in some of the major metros. As you think about Chicago, New York, L.A., and some of the major metros across the country, we are starting to see some increases there. Elsewhere around the country, I think you'd see pretty consistent pricing over the last couple of years and expect it to be pretty similar moving forward.
That's very helpful. Thank you. Then my second question is just a follow-up with regards to real estate. How is DICK'S viewing the metro market opportunity for this 1,100-door strategy? The four walls basically.
Kate, we think there's an opportunity there. We have tested some close to urban settings, but this year I think we're going to add a couple of stores in the urban area of Chicago. We think there's an opportunity there to expand some store growth as well.
Thank you.
The next question will come from Sam Poser of Sterne Agee. Please go ahead.
Thanks for taking my question. Can you talk about week 53 specifically, and if you were impacted by the delay of the tax refunds and how that's all working into the story right now?
The refund, Sam, I have no idea. We haven't tracked that. Some people have talked that that's been an impact, and maybe it is somewhat of an impact because people aren't getting their checks back early enough. We can't quantify that, so we can't really make a comment.
Can I ask you this? Some larger boxes, not competitors, but commented when they gave their January same-store sales. Basically, it shows significant falloff in the week 5 of January, even though it wasn't in their comp. The comps were okay. Did you see a similar kind of thing? Did week 5 live up to your expectations even though you made the guidance, the EPS addition? Did it do what you expected it to do, or was it disappointing?
Well, we had always indicated that we thought the 53rd week was going to be approximately $0.03 in earnings impact, and that's exactly what it came in at. Okay. Just to confirm, you're saying that quarters 1 and 2 will be helped by the calendar shift. You're saying that your reported or your comp sales on a fiscal basis are going to be down, but your comp stores on a calendar basis will be flat to up. Doesn't that say that there's a negative impact in the first quarter, and that should be the other way around in Q2 and 4, I would say. Sam, let's back up. On a fiscal year basis, there is no change. Understood. All right. On a reported basis, we have to report as the weeks fall out. Correct.
From a reported basis, we get a $0.05 benefit in the first quarter. As we indicated, we get a little bit less than that in the second quarter, and then it completely turns around in Q3 and 4. If you look at how we guided our comp, for example, our reported or unshifted comp is flat to 1, whereas the shifted comp is negative 2 to negative 1. You understand that with a positive comp, we get better earnings. With a negative comp, we have lesser earnings. The shift is really taking a look at, if I can explain this. This does get confusing, and a number of retailers are going through this right now. With Q1, we replace the first week of Q1 with the last week of Q1.
Last year, the first week of Q1 would've been the first fiscal week of February. This year, it's the second week of February, which gets offset with a week in April, which was really the first week of May. We do a lot more business in the first week of May than we do in the first week of February. If that makes it any clearer, Sam. I hope it does. No, it does. A lot of other companies do more business that first week of February than the first week of May, so the shift is different because of that. Yeah. We do a lot more business the first week of May than we do the first week of February.
Most of that, I would assume, comes from your active outside equipment stuff, your camping and all the stuff that people do outside versus a lot of the athletic footwear guys and so on that sell a lot more basketball and that kind of stuff earlier as a % of your total business. Is that correct in thinking that? A lot of stuff that we do outside. You've got people who are buying running shoes. You've got people who are buying apparel to run. Our golf business, baseball business, hunting business, camping business. All of that. When people start to get outdoors in the spring, we do a lot more business. Then in Q3, you basically lose a big week of back to school, and you gain a smaller week at the end of October. That's exactly correct. Okay. I understand the difference.
Thank you so much for clarifying that. Sure.
The next question will come from Matt Nemer of Wells Fargo Securities. Please go ahead.
Hey, good morning. I just want to sneak in two questions. First is, the competitive response to Cabela's next generation small market store that you mentioned. Have you seen an impact in your stores where there's geographic overlap to these concepts? Secondly, I know it's early, but can you comment on the volume that you're pushing through ship-from-store, any impact that you've seen in terms of shipping speed to the customer and margins. Thanks.
With Cabela's stores, anytime a competitor opens up, there's always some impact. I have to give the guys at Cabela's credit. They've done a really nice job with these stores. Yeah, we do see an impact and we'll take a look at what we're going to do from a competitive standpoint. We think testing these stores is the appropriate course of action. We're really very excited about it's in an expertise area that we have. As far as ship-from-store capabilities and for volume, we're not going to comment at that granular level. We laid out to you what our total e-commerce penetration was. Ship-from-store is certainly a meaningful part of that. One of the things that we look at is that we have 500 distribution centers around the country very close to the customer.
We can get product to people very quickly and at relatively inexpensively from a shipping standpoint by having the ability to ship-from-store.
Is the goal of that program primarily to increase shipping speed, or is it more around rebalancing inventory and reducing markdowns?
The primary objective is not to rebalance inventory, although as we get more sophisticated, I think that we'll be able to do that. The primary objective is to provide the customer with the best service possible and get them their product as quickly as we can.
Great. Thanks so much.
Sure.
The next question will come from John Zolidis of Buckingham Research Group. Please go ahead.
Hi, good morning.
Morning.
A big picture question. We've got the True Runner concept you're opening. You're doing another concept with the Field & Stream. We're looking at the smaller markets now. When we take all that together from a strategic standpoint, should that tell us anything about how you feel about the core concept? It would suggest that maybe you're somewhat less enthusiastic about the core concept. Thank you.
Sure. Good question, but the answer is not even close. We are extremely enthusiastic about the core business, one of the dots you connect to say how enthusiastic we are about this is that we're renovating 75 stores and putting in 75 of these Nike concept shops, Under Armour, Adidas, North Face. No, the stores are doing extremely well. Still the vast majority of our earnings are coming from those stores, and we're very enthusiastic about it going forward. What we want to do is we think from a competitive standpoint, it gives us another part of the competitive arsenal for us with the Field & Stream concept, with the Golf Galaxy concept, and with the True Runner concept. We are looking for an area to grow the business once that tail slows with the DICK'S stores. We're going to hit that particular number of stores.
That growth curve is going to be more difficult for us. At that point, the Street will be asking us, "Well, why don't you have anything in your back pocket to grow?" We've looked at a lot of other retailers who have not really positioned themselves for that day. We want to position ourselves for that day.
One just follow-up. How do you ensure that management doesn't get distracted by these smaller new concepts with the ongoing challenges that you would face in the course of ordinary business in the core business?
The best way to do that is hire great talent to run them, which is what we anticipate, which is why part of the $0.12 is for talent infrastructure. The best way to make sure that our present management isn't distracted and that the new management has the best chance of success is to hire great talent.
Thanks very much and good luck.
Sure.
The next question will come from Michael Lasser of UBS. Please go ahead.
Hi. Good morning. Thanks a lot for taking my question. Just one. Ed, you've dealt with product cycles, weather in the past. As you become a bigger organization, is it more difficult to manage through those types of issues than when you were a smaller company? Thanks a lot.
Is it more complex. I don't think it's necessarily more difficult. When we were a smaller organization, we didn't have the talent we have today. We didn't have systemic solutions we have today. I don't think it's more difficult. I just think it's more complex, and I think we have the resources at our disposal to work through those complex issues.
It doesn't lead to greater volatility in sales because you can manage through it?
I think we can manage through it. At the end of the day, we guided to $103 to $105. We wish we had been at $105 instead of $103, but we still got within our guidance. When we take a look at the original guidance we provided for 2012, the high end of that guidance was $241. We beat the original guidance by a pretty wide margin. I wish we had had a better fourth quarter. Some of the things were beyond our control. Some of them weren't beyond our control. We could have held a little tougher on reducing the incoming cold weather accessories. That was a decision I made. I didn't want to have that inventory backed up again. Should I have made a different decision?
You could say that, we continue to manage through these with still pretty good earnings, although not what we had anticipated, which is disappointing to us.
Thank you very much.
Sure.
The next question will come from David Gober of Morgan Stanley. Please go ahead.
Hey, guys. This is Sean on for Dave. Just one on the new store rollouts, in particular in the South with the four Oklahoma openings and one in Louisiana this quarter. What are you seeing in those markets and how do you describe the competitive dynamics relative to your existing markets?
We don't give specific information by market. You can expect that we're pleased with how the business has gone in Oklahoma. In the South in particular, we're very pleased with how business is going.
Okay, just one more follow-up. Sorry, go ahead.
I was just going to say, which you can see in our new store productivity numbers.
Got you. Just one more follow-up on the incremental SG&A spend. Given that those investments are going to be ongoing in nature, do you think there's going to be any impact on your operating margin goal long term, or how long it might take to get there?
No, you know what? I don't think so. Although these expenses are ongoing, what we're doing is we're building the infrastructure ahead of the sales. We'll talk more about this at the Analyst Day, but we're building the infrastructure for the new concept. We're building the infrastructure for the e-commerce business, which we now have a lot of that done through GSI. We're building this infrastructure ahead of what the sales are.
Thank you.
The next question will come from Joe Feldman of Telsey Advisory. Please go ahead.
Yeah. Hi, guys. Thanks for taking the question. I'll try to be brief as well. E-commerce, just wanted to drill down a little bit. Can you talk about the profitability that you're seeing in e-commerce these days relative to the stores? I know there's a lot of investment going on, and I know what the game plan has been with e-commerce, but just wanted to better understand that because it is growing pretty rapidly, and it's now 8% or 9% of sales and just kind of wanted to go down that path with you.
We think that the e-commerce business is going to continue to be an important part of our business. We think that there's a lot of opportunities out there from an e-commerce standpoint, and we want to go capture that. We expect to do the same thing from an e-commerce standpoint as we have with the DICK'S Sporting Goods stores.
Thanks. Just one more question. The remodels that you guys are doing this year, I guess what's different than what you've done before, is it mainly just that you're adding the vendor shops and I guess, just wondering if you could talk about the split between your cost of the vendor shop versus the vendors themselves and what kind of lift you would expect, because with the 2%-3% comp lift, it seems a pretty conservative number given that you're adding some of these new in-store shops with the remodels.
These in-store shops haven't been added yet. We're doing this during the year. The cost split between us and the vendors, we haven't talked with them about articulating what that is. We're not going to articulate that. We think that this is going to have an important impact on our business going forward. These shops won't be fully done until roughly halfway through the year.
Got it. Is that the bulk of what's going on in the remodel, just the in-store shop and the shared footwear model, or are there other things?
Understand that it's not just as simple as adding the shop. We're basically taking the center part of the store, both sides of the center part of the store, and rebuilding it. Yeah, the simple answer is putting the shops in, but there's a lot more to it than just dropping a shop in there. We've got to build the infrastructure, the walls to house these shops. We've got a different traffic pattern that will go into the store, different lighting, different graphics. There's a lot that goes into this, really from the front of the store all the way back to footwear. It's really not as simple as it sounds.
Got it. That's exactly what I was trying to get. Okay, thank you so much, guys. Good luck-
Sure.
-with the quarter.
Thank you.
The next question will come from David Magee of SunTrust. Please go ahead.
Yeah. Hi, good morning. Just two quick questions. First, on the renovations, are they going to be taken on the comp pool during the construction period?
They are not.
Okay. Secondly, with regard to the e-commerce business, have you said what your ultimate penetration goal would be there? Is there a point at which it becomes a little bit alarming to you, given that it's growing so fast?
We haven't provided guidance as to what we think it would be long term. We think it will be meaningfully better than it is today, but we're not going to go out on a limb and give you that guidance.
Is a big part of this coming from areas that don't have stores right now?
No, it's mixed but as I said earlier, as we open up stores in new markets, our e-commerce penetration goes up pretty dramatically.
Great. Thank you.
Sure.
The next question will come from Sam Poser of Sterne Agee. Please go ahead.
Just a quick follow-up. You talked about the new smaller market stores. Can you tell us which two markets the current test stores are in so we can get some idea of the kind of actual market it is?
Oneonta, New York is one of them. We did a couple here outside Pittsburgh. We did one in Washington, Pennsylvania, a few years back. Excuse me.
We just opened one in Holly Springs down in North Carolina, which would be a good example of that as well.
Yep.
Okay. Thanks very much.
Sure.
Thanks very much.
The next question will come from Chris Svezia of Susquehanna Financial Group.
Hey, thanks for taking my question. Tim, for you, just curious on the gross margin outlook. In the fourth quarter, you leveraged some occupancy. I'm just curious, you said for the year you wouldn't do it, but in the fourth quarter, you did on a pretty low comp. Just maybe talk about that for a sec.
Well, I think you also have to look at the high comp that we had on the e-commerce side.
Okay.
That helped a great deal on the leverage on the occupancy.
Okay. You don't anticipate that as much in 2013 given the store remodels and store growth?
That is correct.
Okay. Then just lastly, as you guys think about competitive environment, particular in outdoor and fish, as Sports Authority continues to de-emphasize those categories. What are you seeing in those markets? Are you picking up that market share opportunity as they continue to de-emphasize those categories?
I think they talk about de-emphasizing those categories, but I don't think they had much market share in the first place. I don't think it's a big impact.
Okay. All right. Thank you very much, and all the best.
Sure. Thank you.
The next question is from Matthew Fassler of Goldman Sachs. Please go ahead.
Thanks a lot for taking the follow-up. Just two modeling questions that hopefully will be of broad interest. First of all, can you talk about or can you size the sales shift by quarter associated with the movement in the weeks?
Well, can we?
Yeah, we can do that.
Matt, we've never gone that granular before. We've laid out what the shifted basis is and unshifted basis, which we think gives you a sense of where business is at.
Yeah. I guess I'm asking you for Q1, we can figure it out, there's a piece for Q2. I'm not sure if that's bigger or smaller than the Q1 shift. If the payback in the second half is split evenly or disproportionately weighted to one quarter or the other. Even that would be very helpful for getting the quarters figured out.
What we can do, Matt, is, much like we did in the press release where we laid out now the consolidated comps when we include e-commerce, we could give you an idea of what the difference is in the comp guidance on a quarterly basis as we get through the next quarter.
There we go. Okay, that's fine. Secondly, just coming back to the notion of the gross margin guide versus the SG&A guide. You cited the store remodel effort as weighing on occupancy cost. If that's $0.02, that's about seven basis points to gross margin and your merch margin rate has run up 40 bips or better with some continuity. I'm not sure if giving back the leverage associated with the extra week in the fourth quarter of last year is a decisive factor, or if you're modeling a much lower merch margin improvement than you've had to date. Just trying to figure out why occupancy with a two or three comp, which should be okay, is that much of a weight for you.
Well, there's two components that we outlined, Matt. It was the impact of the remodels, we also have the carryover impact of the 2012 stores coming online.
Yep. Okay. Thank you very much.
Thanks.
That will conclude our question and answer session. I would like to turn the conference back over to Mr. Edward Stack for his closing remarks.
I'd like to thank everyone for joining us today on the call to discuss our fourth quarter earnings, and we'll look forward to talking to everybody about first quarter. Thank you.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.