Good morning, and welcome to the DICK'S Sporting Goods Third 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Nate Gilch, Senior Director of Investor Relations. Please go ahead.
Good morning, everyone, and thank you for joining us to discuss our third quarter 2020 results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer, Lauren Hobart, our President, and Lee Belitsky, our Chief Financial Officer. A playback of today's call will be archived on our investor relations website, located at investors.dicks.com, for approximately 12 months. As a reminder, we'll be making forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and cautionary statements made during this call. We assume no obligation to update any of these forward-looking statements or information.
Please refer to our investor relations website to find a reconciliation of any non-GAAP financial measures referenced in today's call. Finally, a couple of admin items. First, a note on our same-store sales reporting practices. Our consolidated same-store sales calculation includes stores that were temporarily closed as a result of COVID-19. The method of calculating comp sales varies across the retail industry, including the treatment of temporary store closures as a result of COVID-19. Accordingly, our method of calculation may not be the same as other retailers. Second, for your future scheduling purposes, we are tentatively planning to publish our fourth quarter and full year 2020 earnings release before the market opens on March 9, 2021, with our subsequent earnings call at 10:00 A.M. Eastern Time. With that, I'll now turn the call over to Ed Stack.
Thanks, Nate. Good morning, everyone. Before we begin, I'd like to discuss the executive transition we announced this morning. As of February 1st, 2021, I will assume the role of Executive Chairman while continuing my responsibilities as Chief Merchant. I'll also oversee the strategic growth initiatives for the company. As I make this transition, I want everyone to know, as the largest and controlling shareholder of DICK'S Sporting Goods, I remain as committed and as excited about this business as I have ever been. The board unanimously elected Lauren as President and CEO of DICK'S, also effective February 1st. Lauren brings more than 25 years of finance, consumer, and retail experience, having spent five years in banking and 14 years at PepsiCo in various leadership roles before joining us nearly a decade ago as our Chief Marketing Officer.
She was appointed President in 2017 and joined the Board the following year. Since joining the company, Lauren has been instrumental to our growth and success, revamping our marketing efforts, helping drive our robust omni-channel offering, and elevating our athletes' experience. Lauren's appointment is an important step in the succession planning committee's process to put the right leadership in place. Our business is thriving. We have the best management team in the company's history, making this the perfect time for the transition. I'd now like to turn it over to Lauren Hobart for a few words.
Thanks, Ed, and good morning, everyone. I want to start by extending a heartfelt thank you to Ed. He built this company from the ground up, and it is because of his ability to look around corners, innovate, take risks, and develop and nurture talent, all while never losing sight of our values and making sure that we're a good member of our communities, that DICK'S is what it is today. It is truly an honor working alongside him. I also want to thank our board and our teammates. I look forward to continuing to work with them, the rest of the extended DICK'S family, and all of you in the coming months and years ahead. Under Ed's leadership, we've accomplished so much, fostering a stronger and more inclusive culture and developing a powerful omni-channel experience for our athletes.
We're in great shape from both a financial and managerial standpoint. I look forward to continuing to work with Ed to lead DICK'S into the next phase of its growth. Now I'll turn the call back over to Ed to discuss the third quarter results.
Thanks, Lauren. As announced earlier this morning, we delivered another exceptionally strong quarter from both the sales and profitability perspective. The strength of our diverse category portfolio once again helped us capitalize on the favorable shifts in consumer demand as the trends across golf, outdoor activities, home fitness, and active lifestyle continued throughout the third quarter. Our Q3 consolidated same-store sales increased a record-setting 23.2% and was on top of our 6% comp increase in the same period last year. Our stores were the key to this unprecedented growth and serve as the hub of our industry-leading omni-channel experience. Brick-and-mortar stores comps grew double digits, and our stores fulfilled 70% of our online sales, which increased nearly 100% for the quarter.
In fact, our stores drove 90% of our total Q3 sales growth, whether an athlete purchased at the register, picked up curbside, or had their order delivered to their home through Ship-from-Store . We saw increases in both average ticket and transactions, as well as significant growth across each of our three primary categories of hard lines, apparel, and footwear. Lastly, our private brands continue to be a significant source of strength with comps outperforming the company average by over 1,000 basis points. I'll talk a little more about private brands later. During Q3, we remained very disciplined in our promotional strategy and cadence, and certain categories in the marketplace remained supply constrained. As a result, we expanded our merchandise margin rate by 277 basis points. This merchandise margin expansion contributed to a significant improvement in gross margin, which increased 532 basis points.
In total, our third quarter non-GAAP earnings per diluted share of $2.01 represented a 287% increase over last year. Now let me touch on the fourth quarter performance to date. Overall, the favorable trends in our business have continued into Q4. These strong results have been partially offset by warmer weather that has negatively impacted sales in the important cold weather categories. Taken together through this past weekend, our comp sales have increased in the high teens. As I look at our business, we have a lot to be excited about. One of the strategies I'm most enthusiastic about is our private brand strategy, which we now refer to as our vertical brands. There can be a perception that private brand or private label means opening price point. In contrast, our vertical brands are high quality, on-trend brands with compelling technical and performance attributes.
These vertical brands have clear DNA and specific consumer targets for which we control everything, including design, supply chain, and marketing. We've already done some great things to date. In just five years, CALIA, which serves as the trend-right athletic female at premium price points has become the second largest women's brand in our company. Our DSG brand, which spans men's, women's, and youth athletic apparel, as well as hard lines categories, has also been extremely successful and has grown to become our largest vertical brand just one year following its launch. Collectively, our vertical golf equipment and apparel brands represent our number one brand in golf while Fitness Gear is our single largest fitness brand. Looking ahead, we will invest in making our vertical brands even stronger. This includes improved space in store, increased marketing, and expanding into additional product categories.
At the same time, we will also continue to invest in our strategic partnerships with key national brands such as Nike, Callaway, and The North Face. We recognize that these important brands are real differentiating factors that create authenticity and credibility with our athletes. As I discussed on the last quarter's call, we're really in a great lane right now. We deliver a premium multi-branded assortment that is well tailored to the consumer trends. We have an industry-leading omni-channel experience with rapidly growing in a highly profitable e-commerce business. Importantly, we are in a strong financial position with nearly $1.1 billion in cash. Before concluding, I want to address something incredibly important to our country, our company, and to me personally. The recent racial injustices across our nation led us and many companies to take an honest and critical look inside our organization.
We realized we had work to do and committed to make DICK'S be a more inclusive and diverse company. This change started at the top, and over the past several months, we've brought a much-needed diverse perspective to our board of directors. Furthermore, our Inclusion and Diversity Council, which was launched last year and is comprised of a group of teammates who represent a wide range of backgrounds, roles, and communities, established nearly 20 impact teams to accelerate our efforts. We have already delivered meaningful progress in several areas, including adopting a new recruitment and talent development process to build a more diverse workforce and expanding inclusivity training across our entire organization. Earlier this month, we published this year's Purpose Playbook, where you can read more about our efforts to drive positive change in our communities and our world.
Separately, we announced our investment in the Black Economic Development Fund, which supports Black-owned banks and financing for minority businesses, charter schools, affordable housing, and athletic facilities. Today, as we talk about another strong quarter as a team, I cannot be more pleased with what we've been able to accomplish, and I want to thank all of our 45,000 teammates, especially our frontline workers in our stores and distribution centers for their hard work and unwavering dedication to safely serving our athletes. As the retail industry continues to evolve, DICK'S will continue to lead the way, and I look forward to working with Lauren and the entire team to build our success and deliver sustained value to our shareholders. I'd now like to turn the call over to Lauren.
Thanks, Ed. I want to start also by thanking our teammates. They continue to serve our athletes and our communities safely. Their efforts helped us execute a seamless omni-channel experience and deliver a record-setting comp sales increase for Q3. I am so grateful to work alongside and support each of them. Our third quarter performance reflected a strong, well-balanced omni-channel offering with both our stores and e-commerce delivering exceptional results. In fact, our brick-and-mortar store comps increased double digits, the best quarterly store comp performance in our history as a public company. Our online sales increased 95%, representing 21% of our total business, compared to 13% in the third quarter of last year.
Year to date, our e-commerce sales of over $1.8 billion have already surpassed our full year e-commerce sales in 2019, even with the holiday shopping season still ahead of us. Within e-commerce in the third quarter, mobile sales penetration was over 50%, and we saw a significant increase in mobile app downloads. Importantly, this incredible strength in our e-commerce business happened with all of our stores fully open throughout the quarter. Our stores are the hub of our omni-channel experience. They serve our in-store athletes while also providing over 800 forward points of distribution for digital fulfillment. In the third quarter, even while facing exceptionally high levels of omni-channel demand, our stores fulfilled approximately 70% of our online sales. This includes curbside and in-store pickup, which increased over 300% when compared to BOPIS sales last year.
With curbside available at all of our stores, the service is widely accessible, and our athletes are responding well to the same-day convenience that it offers. In fact, in the third quarter, our curbside athletes shopped more frequently, transacting 20% more often than our non-curbside e-commerce athletes. We continue to make enhancements to the service, including the ability to do curbside returns, and we've got dedicated parking spaces at nearly all of our stores, along with improved w ay finding and signage. While we initially launched curbside as a stopgap to provide a safe, contactless solution to our athletes as a result of COVID-19, it's become quite clear that it is a highly convenient way to shop that is here to stay.
Importantly, while our e-commerce business continues to be highly successful and penetration continues to increase, we also continue to improve the profitability of the channel, especially as stores play a larger role in fulfillment. In the third quarter, we saw significant improvement in e-commerce gross margins, driven by higher penetration of curbside and BOPIS sales, as well as fewer promotions and leverage of fixed costs. Furthermore, we continue to make technology enhancements to provide an increasingly seamless omni-channel experience. In fact, as part of this year's holiday campaign, we're highlighting the technology and logistics systems in our supply chain in a unique and an engaging way.
From a store perspective, we recently rolled out a contactless self-checkout app called Scan, Pay & Play to over 300 stores, which enables an efficient checkout solution for our athletes while also giving them the ability to quickly look up pricing information and product descriptions as they shop in our stores. We will continue to refine this technology and roll it out to additional stores in the near future. We also recently launched HomePlate, a mobile communications app that provides our store teammates with real-time metrics and important communications all while on the sales floor, giving them more time to focus on providing great service to athletes. Another key to our omni-channel offering is our ScoreCard loyalty program, which provides robust data that we can leverage to increase engagement and drive traffic.
With over 20 million active members, our ScoreCard loyalty program drives over 70% of total sales through more meaningful and effective personalized offers and communications. We value our ScoreCard loyalty members deeply, and with members spending approximately 30% more per transaction than non-members, retaining existing members and bringing new customers into the program is extremely important to us. Speaking of new customers, in the third quarter, nearly 2 million new customers joined the DICK'S Sporting Goods ecosystem, with sales from new customers increasing over 70% compared to last year. Relative to our existing customers, our new customers skew female and younger, representing a great opportunity for future growth. In closing, as we continue to refine and enhance our industry-leading omni-channel experience, data science and technology have never been more important.
They're the keys to creating a personalized, one-to-one relationship with our athletes and serving them in the most convenient ways possible. Looking to the fourth quarter, we're very enthusiastic about our business, and we look forward to serving athletes this holiday season. I'll now turn the call over to Lee Belitsky to review our financial results in more detail.
Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our third quarter results. Consolidated sales increased 22.9% to approximately $2.41 billion. Consolidated same-store sales increased 23.2%, driven by a 19.6% increase in average ticket and a 3.6% increase in transactions. Brick-and-mortar comps grew double digits. Our e-commerce sales increased 95%, and as a percent of total net sales, our online business increased to 21% compared to 13% last year. Lastly, we delivered significant growth across each of our three primary categories of hard lines, apparel, and footwear. Gross profit in the third quarter was $842.2 million, or 34.91% of net sales, a 532 basis points improvement compared to last year. This improvement was driven primarily by merchandise margin rate expansion of 277 basis points and leverage on fixed occupancy costs of 259 basis points.
The merchandise margin rate expansion was primarily driven by fewer promotions. Gross profit also included about $4 million of incremental COVID-related compensation and safety costs. SG&A expenses were $591.1 million, or 24.51% of net sales, and on a non-GAAP basis, leveraged 174 basis points from last year. This leverage was primarily driven by our significant sales increase as well as strong expense control efforts. As expected, this was partially offset by $44 million of incremental COVID-related compensation and safety costs. Driven by our strong sales and merchandise margin rate expansion along with our disciplined expense management, non-GAAP EBT was $243.8 million, or 10.11% of net sales, and on a non-GAAP basis, increased by $183.8 million, or 706 basis points from the same period last year.
In total, we delivered non-GAAP earnings per diluted share of $2.01, compared to non-GAAP earnings per diluted share of $0.52 last year, a 287% year-over-year increase. On a GAAP basis, our earnings per diluted share were $1.84. This included $6.7 million in non-cash interest expense, as well as 6 million additional shares that will be offset by our bond hedge at settlement, but required in the GAAP diluted share calculation, both related to the convertible notes that were issued in Q1. For additional details on this, you can refer to the non-GAAP reconciliation tables of our press release that we issued this morning. Now we'll briefly review our 2020 year-to-date results. Despite temporary store closures during March, April, and May, consolidated same-store sales have increased 5.8%, and that was on top of our 3.1% comp increase in the first 39 weeks last year.
Within this, our e-commerce sales have increased 135%, and as a % of net sales, our online business increased to 28% compared to 13% last year. Non-GAAP earnings per diluted share were $3.65. This included $124 million, or $1.01 per diluted share of incremental COVID related compensation and safety costs, and it compares to non-GAAP earnings per diluted share of $2.39 for the first 39 weeks last year, a 53% year-over-year increase. Moving to our balance sheet. As Ed stated, we are in a strong financial position, ending Q3 with nearly $1.1 billion of cash and cash equivalents, and no outstanding borrowings on our $1.855 billion revolving credit facility. Our quarter-end inventory levels decreased 9.8% compared to the same period last year. Looking ahead, our inventory is clean, and we will continue to chase product to improve our in-stock positions in the most in-demand categories.
Touching on our third quarter capital allocation, net capital expenditures were $51 million, and we paid $26 million in quarterly dividends. With respect to our full year outlook, there is still a high degree of uncertainty surrounding the scale and duration of key external factors. Given this uncertainty, we will not be providing a 2020 outlook for sales and earnings at this time. We will continue to reassess the practicality of resuming guidance in future quarters. While mindful of the uncertainty in the current environment, we are extremely pleased with our significant Q3 results as well as our Q4 sales trends. We remain very enthusiastic about the future of DICK'S Sporting Goods. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for question.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on you telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Kate McShane with Goldman Sachs. Please go ahead.
Hi. Good morning. Thanks for taking my question. Ed, congratulations, and Lauren, congratulations to you.
Thanks.
Thank you.
My question first was just around back to school. I know you mentioned last quarter had started off a little bit slower as it did for most retailers. With your team sports exposure, I know it must have been a little bit of a drag, but just was wondering if you did see any pickup in back to school as the quarter went on and schools opened a little later? With certain sports staying outside longer, did team sports improve at all?
Yeah. When we last had our quarterly announcement, I think we were up 11% in the quarter, and we had been through a back-to-school that was a little delayed and team sports were slow. That did improve as the quarter went on. There was some delay in team sports and a delay, frankly, in some of the back-to-school categories that helped contribute to the strong growth.
Okay, great. My follow-up question is just about your omni-channel efforts. I know a lot of investment has been accelerated and pulled forward, but are there any major capabilities that you need to invest in at this point, or are you pretty happy with how you're positioned now, once we exit the pandemic?
I think our platforms are very capable and have enabled us to innovate as much as we have, including spinning up the curbside so quickly, and now the Scan, Pay & Play app. We've improved our teammate efficiency with technology. We feel we're in a very good place from a technology platform and foundation standpoint.
Thank you.
You're welcome.
The next question will be from Adrienne Yih with Barclays. Please go ahead.
Yes. Good morning. Ed, thanks for all the work driving the strategy. Lauren, congratulations. Lauren, my question is on inventory position at the end of the fourth quarter, and frankly, coming into this quarter was very clean. It does not seem to be capping the sales demand or your ability to fulfill the demand. Is that because you are majority branded and have access to replenishment fairly quickly? As you look at spring and see the demand from stores opening, how are you envisioning building inventory into that demand? Lee, my second question for you. A lot of retailers who have put up these huge margin growth year-over-year, they've discussed which portions of the margin expansion are permanent and which are more one-time in nature, and that we should be cautious about modeling going forward.
If you could help us with that would be great. Thank you.
Great, Adrienne, I'll start off. In terms of our inventory position at the end of Q3 coming into Q4, you're right, our inventory is clean. It's good. We are still chasing in several key categories, and if you were to ask whether we have left some sales on the table, it's likely that we have. I do agree with you that our preferred and partner strategic partner status with some of our key vendors has enabled us to keep a steady supply chain coming through and is helping us with the tailwinds that we have already. As we go into spring, we're making all the reasonable bets that one would make, expecting certain key trends to continue. In fact, some of the ones that started this year that we believe will continue on, things like golf, as well as some other fitness activities.
Then, of course, hoping for a strong return to school and team sports in the spring as well. Lee?
Thank you.
With regard to margin, we've seen some great improvement in our gross margin rates over the last couple of quarters. As we look forward, reflecting on it a bit, I think that some of the items that will tend to be permanent will be leverage over some of our fixed fulfillment costs. We built a couple of distribution centers for e-commerce fulfillment last year, and we've been able to leverage those costs. We're past the startup costs of those. Curbside pickup represents a big leverage point for us because we don't incur shipping expenses to ship products to customers and to the extent that we've had significant adoption there, and that continues, which we believe it will. That represents permanent gross margin improvement.
I believe that the growth of our private brands that we can continue to invest in have a higher gross margin profile than the national brands. We're excited about that. We've also been able to pull back pretty meaningfully on site-wide promotions on our e-commerce site. We believe that some of that will be permanent going forward. It remains to be determined, really, as we get into next year and everybody gets back in stock. It's our intention to really be much more cautious with site-wide promotions going forward. Some of the things also temporary. It's hard to say. A lot of it's going to be around the promotional environment going forward.
We have been able to be less promotional because there's been a lot of product shortages out there, and we haven't had to put product on sale, and frankly, we haven't owned enough product in a lot of categories to put it on sale and provide a great customer experience there. That one, which is a big lever for us, remains to be seen. We'll probably give some of that back as inventory levels normalize. Some of the leverage that we're getting over our fixed rent expenses. We continue to be able to modestly bring down our rent expense each year, through better leverage and negotiating our rent deals and rent renewals. We expect that to be permanent as well. A lot of that leverage is driven by higher sales.
The extent we can continue to drive higher sales going forward will create leverage over all of our fixed costs, both rent, and our fixed distribution costs as well.
Great. Thank you very much. Good luck.
Thank you.
The next question will be from Robert Ohmes with Bank of America. Please go ahead.
Thanks for taking my question. First, Lauren, congrats on your new expanded role. It's really a follow-up question on the last question, probably for Ed, as the chief merchant. Obviously, some tough comparisons next year. We get a lot of questions about how much is pent-up demand that you're seeing right now from earlier this year, how much is pull forward. Can you just give us some color as a merchant, how you think about next year and things that we should think about? Another question would be on team sports. How big is that as a percentage of your business? Is team sports, is that down this year, or how is that overall looking, and is that an opportunity for next year?
Maybe some of the puts and takes that we should be thinking about as we make our guesses about how next year could play out for you guys from a sales standpoint.
Sure. Thanks, Robert. I don't think it's pent-up demand any longer. I think in the second quarter, that was probably some pent-up demand. Now I just think it's a transformation of what people are doing and what they want to do to not only be safe, be in better physical condition from what's happening in our running business or athletic apparel business, the fitness business.
Also the fact that they want to get outdoors and do things, and they want to feel safe. Being outdoors is talked about one of the safest places to be. People are playing golf. They're running, they're kayaking, they're doing all of those things. I do think that going into next year, we remain pretty optimistic. Because as some people have come back into some of these activities or have taken them up for the first time, they've realized they really enjoy this. They may have done it because they had nothing else to do, but they've gotten to the point where they've really realized that they like golf or they like golf again, or they like to be out hiking with their families. We think this is sustainable.
As we take a look at next year, our team sports business is not good right now. Certain categories are a little bit better than others. Baseball is pretty good, but other ones have been difficult. We do think that the team sports business, there will be quite a bit of pent-up demand next year that will help us offset some of the tough comps that we're going to have this year. We're not providing guidance into next year. I think it's really too early to tell, but we think we're in a very good lane. I think that how people view their lifestyle is not going to meaningfully change next year. They're still going to want to be outside. They're still going to want to be active. They're still going to want to play golf.
I think the work from home change is good for our business from the fact of the clothes that people are buying. I don't believe next year we're going to be fully back to being in an office from 9:00 to 5:00, five days a week. I don't know if we're ever going to go and do that. I know in our company, we're talking about what we think the office environment will look like going forward. Quite frankly, we don't see it five days a week going forward. We're in a pretty good lane. We're pretty enthusiastic. The changes that we've made in our business from an online standpoint, the technology investments that we've made over the last several years have really started to pay off.
We got a little bit lucky with the timing, and we said that they were starting to pay off, and we're starting to see those, and then COVID hit, and that online component, that digital component of our business was so very important. We are so pleased that we made those investments a few years ago. Robbie, we're as optimistic as we can be about not only our business going forward the balance of this year, but into next year also.
Really helpful. Thanks so much. Congrats again.
Thanks.
The next question will be from Simeon Gutman with Morgan Stanley. Please go ahead.
Thanks. Good morning. Ed and Lauren, congratulations. My first question on the margins, and related more to gross margin. One of the frameworks we were thinking about for 2021 is anchoring it to 2019. I want to ask about gross margin in particular. Promotions will likely normalize, Lee, you mentioned that. We were thinking that gross margins can still be higher than they were pre-COVID because of the other things you mentioned, private brands, lower fulfillment costs, et cetera. Is that a fair way to think about it?
I think for the most part, yes. With regard to promotions, I don't know that they'll go back to 2019 levels. I don't think we really know for certain. It'll be our intention going into next year that we wouldn't return to 2019 levels, that we'd certainly start out the year being less promotional. Then we'll see how the year evolves from there. We're not just going to pull out the 2019 promotional cadence and go back to that as we go into next year.
Yeah, Simeon, I think it will be higher for a couple of reasons. As Lee said, I don't think we're going to get really that promotional as we were in 2019. I think there's also a couple of other things that are working in our favor, which is mix. The firearms business and the hunt business will be meaningfully less for us in 2021 than it was in 2020 or in 2019. That mix will help our margins. The private brands will help our margins. The way that we've differentiated product that we buy in the marketplace from our key brands will help that mix. We are anticipating that the merchandise gross margin level will be better in 2021 than it was in 2019.
Yep, that's helpful. My follow-up is, I don't think you mentioned lower fulfillment costs year-over-year in the gross margin bridge. Can you mention how that's having an impact and realizing that you may not have the same level of comp growth at the store level, but if you're going to mix back to e-commerce in some way and shipping, how the fulfillment costs or curbside even, how the fulfillment cost benefit could help the gross margin line as well?
Yes, Simeon. The more curbside certainly helps the gross margin line. We saw that this quarter. The whole profitability of the channel, the e-commerce channel is improved. A lot of that's due to things like that as well as just leverage of some of our investments from the past. We didn't mention it because it didn't have a material impact on the quarter due to some leverage that we had in the gross margin line. There were increased shipping expenses, obviously, due to the fact that e-commerce was up 95%. Net-net, it didn't have a material impact on the margin for the quarter.
Yeah.
I'm sorry. I think that it's definitely going to be as a percent. I think we can make some positive changes there. Because as Lauren said, the curbside pickup, we've started to see that what started out as a service from a public health standpoint is now migrated to be a convenience standpoint for the athletes that we serve. And we've gotten so many really positive comments about how Lauren and the team, and Don and his team in the stores have executed this. We think that's going to continue to be a bigger part of our business, which will help leverage the costs from an e-commerce standpoint, a digital standpoint.
Great. Thank you very much.
The next question will come from Seth Sigman with Credit Suisse. Please go ahead.
Thanks for taking the question, congrats, everybody. I wanted to follow up on the gross margin and specifically how you're planning the fourth quarter. Just what is your sense of promotion so far in the fourth quarter, how are you planning for that? I guess related, inventory levels in cold weather categories, is there any sort of risk if the weather doesn't turn? How are you thinking about that?
For gross margin, we're not going to get into how we're planning Q4 other than to say we'll know a lot more in a week or two how Q4 is going to look. We're quite confident and optimistic and happy with our quarter to date results that we shared on the call. Cold weather is obviously important to us in the fall. In the winter, we often have said, I quote Ed on this one, that if we're playing golf in December, it's not great for the outerwear business. It is good for the golf business, however, which is great. We have a good inventory position. We've got the product. We think people are going to want to be outside even more, and need to be outside. We don't perceive that we have a significant inventory risk there.
Okay, that's helpful. From an investment perspective, I may have missed this, but I think CapEx has been running below your original expectations year to date. Are you still expecting some level of catch up in 2021? If you could just give us some context on that. Also, does that have any implications from an SG&A perspective? Where do we stand relative to prior years where you did have higher SG&A growth? Are we at a more stable run rate as we think about that over the next couple of years? Thanks.
Well, with regard to capital expenditures, we did defer a couple of initiatives into next year. One that we had planned on for this year was the completion of a space reallocation of 440 stores out of hunt and into other more productive categories. We completed 200 of those stores. We have about 240 to go that we've deferred into next year. We'll get going on those as we get into the first quarter of next year. There are certain other in-store programs that we deferred to next year, some around technology in the golf space, around making some improvement in our premium full service footwear decks and expanding those as well. Certain of those CapEx have been deferred into next year.
I really don't want to comment right now on what our SG&A expense run rates are for next year, as we're still working through our budgeting process for next year, and we'll give you some more details on that as we get into the year-end call in March.
Okay, understood. All right. Thanks very much.
The next question is from Michael Lasser with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Ed and Lauren, congratulations.
Thank you.
Yeah, of course. DICK'S is going to be on pace to have, call it, a 7.5% operating margin this year. That's still below where DICK'S peaked out a few years ago at 9%. Obviously, the e-commerce penetration of the business is much higher today than where it was five years ago when DICK'S had a 9% operating margin. Is it reasonable to expect with all the changes that the company's making, that you can get back there or even see growth off of this level where you're going to be today?
Well, Michael, one of the things you have to think about is we have about, I think it's $170 million of COVID expenses in there, which is impacting our operating margins nearly 200 basis points this year. We didn't have that back then. We still think that we can make some meaningful improvements in our operating margins going forward, and we're optimistic about having that opportunity both on gross margin rates as we continue to address our occupancy expenses and the changes that we've made in our merchandise assortments around hunting and private brands and working with our key vendors as they continue to narrow their distribution could reduce the pressure on promotions going forward. We believe there's a lot of opportunity to increase our operating margins going forward.
Just to clarify, is your point around COVID costs an indication that those are going to be permanent, or you expect them to roll off as we move into the next phase of this situation?
We're still working through that on how much is going to carry into next year as COVID goes forward. Probably there continues to be some pressure on wage rates in the stores. Certain things that we've got, like ambassadors, people standing at the front of the store handing out masks and doing customer counts in and out of stores and cleaning expenses and things like that will go away. Some of the wage rate p ressure that we've got this year around paying hero pay will go away. Wage rates continue to be under pressure going forward, and we still have to assess how that will be, what impact that will have for next year.
That's helpful. If I could add a follow-up question. I'm curious about your perspective on some of the demand that's being pulled forward. There are categories like bicycles and free weights that were very strong earlier this year. Are you seeing a continuation of those categories that were in heavy demand, or has the business transitioned from strength in those areas into strength in others? What does that say about as we get into next year and lap some of this?
They've continued, and we expect them to continue. As I said before, I think people realize that the best way to stay healthy is to be in better shape. Riding a bike, working on a treadmill or dumbbells, I think is something that's here to stay for some time into the future. People do realize that to get through this pandemic and what other health crisis they may have personally or we may have in the world, that we just need to be in better shape. I think that lifestyle, if you will, is not going to change anytime soon.
I definitely fit in the camp of could be in better shape, so I appreciate that. Have a great holiday.
You and me both, Michael.
The next question will come from Paul Lejuez with Citigroup. Please go ahead.
Hey, thanks, guys. I think you guys mentioned adding 2 million new customers this quarter, highly concentrated, younger or skewed younger, and female. Just curious what they're buying as they come and get introduced to the concept. What are they spending money on initially? Also separate, can you talk a little bit about your footwear business and what price strata has been the strongest for you guys, how AURs are trending in that category? Thanks.
With regard to the 2 million new customers, they do skew younger. They skew slightly more female. That's relative to our norm. Just in those new customers, they also skew slightly more urban, which we think might have something to do with the people sort of leaving the urban centers and going out into the suburbs. In terms of what are they buying, they're buying everything that has driven our comps this quarter. It's exactly what we've been saying in terms of the surging categories, but they're buying fitness, they're buying golf. They're buying every category, athletic apparel, footwear. Regarding footwear, do you want to take that one, Ed?
It doesn't matter.
Okay.
From a footwear standpoint, we're really pleased with what's going on in footwear. We were not going to talk too much at a granular level from a competitive standpoint, but the AURs in footwear have definitely gone up. That's a combination of some allocation of shoes that we have as we've transitioned our footwear department to a premium full-serve department to what's happening from a running standpoint in running shoes at higher price points, and again, from people wanting to be in better shape. That doesn't mean that they have to run a marathon or a 10,000, but just people getting out to run a couple of miles a day or get out and walk. The running shoe silhouette is the shoe of choice, and the majority of those are well above $100 that we're selling, and it's helped increase the AUR. We think that will continue.
Thank you. Good luck.
The next question is from John Kernan with Cowen. Please go ahead.
Excellent. Thanks for taking my question. Lauren, congrats on the promotion, and Ed, congrats on a great run.
Thank you.
Real quickly on e-commerce, on reasonable assumptions, the business is going to be pushing $2.8 billion-$3 billion on an annual run rate by the end of the year. Could you walk us through the margin improvement you're now seeing in digital? Obviously, curbside is playing a role in that. I think historically, e-commerce had been a negative mix shift on the overall margin structure. Sounds like given the leverage it's producing now, it's a real driver of margin. Any commentary you can give us on how we should think about the digital mix shift on the margin profile of the business would be helpful.
Yeah. The margin in the e-commerce channel is improving significantly when you look at it versus year-over-year. Some of that is gross margin improvements, as Lee said, just the reduction in needing to be promotional. Some of it is the shift to the curbside channel, which is permanent and great shift in terms of consumer benefit and then also cost structure. Some of it is just leverage of the investments that we've made over the years that were, frankly, some of the reason we took the e-commerce platform in-house was so that we could scale more profitably. So we're seeing the benefits of that as well. In-store versus e-commerce, they'll always be a slightly different profitability. You've got fixed costs in one and some variable costs in the other. Net-net, we're really pleased with the profitability of the e-commerce channel.
We have been for some time, and this year it's been standout.
Excellent. That's helpful. Maybe a bit of a follow-up question to Paul's question. Just the relationship with Nike. Clearly, we can see improved allocations both in apparel and footwear. That really began last year and have continued into this year. Maybe just add a few comments on your relationship with Nike and where that can go going forward as they reduce their undifferentiated retail exposure.
I think our relationship with Nike is great. It's been great. We've done business with Nike since the early 1970s. The relationship continues to get better. I think that we find common ground where we can provide a platform for Nike to showcase their entire brand, which there's not a lot of retailers that are able to do that. They've got the hottest brand in the marketplace right now. We're pleased with the allocations that we've been getting from them. I think if you talk to Nike and you talk to us, the relationship has probably never been in a better position.
Excellent. Thanks.
Yep.
The next question will come from Chris Horvers with JPMorgan. Please go ahead.
Thanks. Good morning, and congratulations to the both of you.
Thank you.
My first question is on the gross margin as well. Typically, the private label, what sort of margin rate is that relative to the corporate average? I would have thought, given the strength in some of these hard good categories, that maybe mix would have been a headwind to your business overall. Was it just that the private label actually at least offset that? It seems like perhaps it more than offset that hard goods mix headwind.
The difference in margin rate in private brand is we try to keep at least 600 basis points- 800 basis points. In some cases, it's even higher than that. That certainly has helped the mix. I think the one thing the Street doesn't understand about our business, every once in a while when we're in a conference when we can actually be face-to-face, which seems like 100 years ago that we were able to do that. One of the things that I get asked every once in a while, "What does the Street not understand about your business?" One of the things I don't think that they understand is that the hard line side of our business is really quite profitable. The margin rates in golf have moved up quite a bit. Team sports is good. The fitness business is good.
The hunt business was not, we're exiting that. I just don't think that the Street really understands how profitable the hard line side of our business is. In some cases, as the hard line business has escalated, it's actually helped our margin rates with some categories. We're very pleased with our hard lines business, and so I'd like to go on record to let everybody know that our hard lines is really pretty profitable.
Right. Then you add the private label, which you get that advantage, so that sort of mix overall was a good guy in there.
It is, yes.
Got it. Then, I guess, you talked about being very strong quarter to date, some weather headwinds. I guess, to what extent do you think starting Black Friday earlier maybe mitigated some of that headwind? As you think about 4Q, what's your latest thought process around as you get into these, like later in December, I would love to be playing golf in New York late in December. Probably not going to happen. As some of those outdoor categories get mitigated in parts of the country, would you expect your overall comp to decelerate from the past two quarter level?
We're not going to get into providing any of that guidance. First of all, I'd like to say, I hope you're not playing golf in New York in December. I hope you're skiing instead. As we take a look at this, I think every retailer tried to pull sales forward in October and November, so even before this quarter started, because of what was the uncertainty around that Black Friday weekend. Many retailers have made the decision not to open on Thanksgiving, which I think is great. My hope would be that all retailers decide, "You know what? We actually got through this year. We don't need to open on Thanksgiving.
We can allow all of our teammates to spend Thanksgiving at home with their families. We can open up early on Friday morning and kind of get back to it. Hopefully, we can keep Thanksgiving as a family holiday." What's going to happen after this, we really don't know. I don't think any retailer does. We have a nice cushion. As we said, through this last weekend, we're in the high teens from a comp standpoint. We've got some cushion for what's going to happen this weekend. We clearly don't know. We're pretty optimistic once we get past this weekend of where we are. We've gotten in more exercise equipment. We're pleased with where we are from an apparel standpoint. The golf business continues to do well.
Even if you're not playing golf in December, I think golf is going to be a great gift item for this holiday season. All in all, we remain as optimistic as one should be in such an uncertain environment.
Understood. Best of luck, have a great holiday.
Thank you. You too.
Next question comes from Joe Feldman with Telsey Advisory. Please go ahead.
Yeah. Thanks, guys. Again, congratulations, Ed and Lauren, on the new roles. I wanted to ask. You did talk a little bit about data science earlier in the call. I was just wondering kind of where things stand with that. H ow big a team you have, or what kind of team you have? Do you have any needs or areas you want to grow in that area? How you're starting to leverage the data better to communicate with customers, and what kind of opportunity that is for the future?
Yeah. We do believe that data science is a huge unlock. It's a huge unlock for every retailer, but we have such large data in our data set between having 22 million ScoreCard members and 70% of our sales going through our ScoreCard database. We also have our GameChanger system, which has a ton of team sport information, which is now merged in the back end so that we can look at the athlete holistically. We have a ton of insights that we get out of this. It is a driver of our entire marketing engine, our personalized marketing engine. It drives our digital buys. It drives how we find lookalike customers. We have a small but mighty data science team. If you know of any people, you can throw them our way. We'd be happy to keep building the data science team.
This is an enormous strategic initiative for us.
Got it. That's helpful. Thank you. I have another question. Given the way digital has really been ramping, just broadly across retail, has that changed how you guys are thinking about the store? I know you have the store of the future format in place. Are you rethinking what the right size of the store might be, the format of it? Do you even need as many stores in some markets, given the way e-commerce is playing out?
Yes. I'll take that one. I think if anything, the digital explosion has shown us, especially over the past year, is that our stores are an enormous asset, a huge strength. We've got 70% of our e-commerce sales flowing through the store. It enables us to open up inventory to the athlete in a one-to-two-day perimeter around their house. It enables them to pick up curbside. We're probably one of the few retailers out there that we feel constrained by the size of our box. The hunt redeployment has opened up opportunities where we think we have growth areas that we've been underserving, that we have an opportunities to grow. Sure, we have real estate opportunities, and sure, we're going to continue to optimize, and we will continue to get reductions in the marketplace when leases come up and rethink our real estate strategy.
Overall, the stores have become a bigger and bigger piece of our omni-channel pie this year, more than ever.
That's helpful. Thanks so much, and good luck with the holiday season. Thanks, guys.
Thank you.
Thank you.
The next question is from Mike Baker with D.A. Davidson. Please go ahead.
Hi. I expect not, but I wonder if you can quantify the drag from team sports, understanding that it has been a net negative this year. Any color on how big team sports usually is versus how big it is this year? Just trying to get a sense of how big of an opportunity that could be next year.
Well, we're not going to get to that granular level, but it's been a drag. The one thing about our business that we're really proud of that we've built is we've got this portfolio of categories that we can weather these ups and downs. I think we've shown that pretty well here. I think next year, we'll have some categories that won't perform quite as well as they have this year. We think team sports will be one of those areas that should be able to help offset that. Not only team sports just from a hard goods standpoint, but also on the footwear side of that, from a soccer cleat, football cleat, lacrosse, wrestling, all of that.
As team sports or sports in general come back to the junior high school, high school, and municipal level, we think that we've got some pent-up demand there that we think will help us next year.
Yeah. Agreed. Definitely pent-up demand in this family. One more question, if I could. Are you seeing anything different in your business in areas where COVID is sort of respiking? Any discernible trends in areas where we're seeing bigger COVID costs? Or just in general, throughout the country, anything as COVID comes back? Are you seeing people stay home even more than they were and participate in outdoor sports?
I think in the recent couple of weeks, the whole country is spiking and surging, so it's no longer productive to look at those trends. Everybody is reacting to the current environment, and we haven't noticed a significant regional difference or geographic difference.
Okay. Appreciate the color. Thank you.
Yep.
The next question comes from Sam Poser with Susquehanna. Please go ahead.
Good morning, and thank you for taking my question, and congratulations, Lauren, and Ed as well. Just real quick. One, you talked about a lot of the new customer acquisitions that you've had. What are you doing to make sure that they stick next year, and how many customers, new ones, have you seen repeat purchase already? What percentage are you seeing them come back once they've engaged DICK’S Sporting Goods?
Yeah. We have an absolute dedicated strategy on trying to get re-engagement. I'm not going to get into specifics, but we do see people re-engaging. New customers are re-engaging. We see that even more so with the curbside athletes, the people who are new to the system there. We are very pleased with how the new customers are doing, and we're very focused on bringing them and keeping them into the ecosystem.
Secondly, thank you very much. Secondly, given the outdoor, the way people are moving outdoors for a lot of things, we've heard that you may have a new concept coming in the middle of next year, a real outdoor concept. Can you give us any color there as to what might be going on?
Yeah, sure, Sam. We've been working on this for a couple of years, and as we look to exit out of the Field & Stream business and the firearm business, one of the places where we think there's a great opportunity is the outdoors. We've been working on this even prior to COVID. Now with what's happened with the virus, I think it's even more timely, if you will. We're going to have a couple of stores. As you know, we always test new things. We think this is really a big concept, an outdoor concept called Public Lands, that we will be opening two stores in this next year, one in probably August, another in October, one of them here in Pittsburgh that will take over a Field & Stream store, another one in Columbus, Ohio, that will take over another Field & Stream store.
We think this is going to be a terrific concept. As we normally do in all of our business, it's going to be very cause-based. In the DICK'S business, we've been very cause-based around our Sports Matter Foundation and how important we think it is that kids have an opportunity to get out and play. The character development for kids from sports and the investment we've made in Sports Matter over the years is, we think we've touched over 1 million kids that have given them the opportunity to continue to play sports. We hope that we're going to be able to impact another 1 million over the next several years. In Public Lands, we're going to focus on exactly what the name of the concept is, which is Public Lands.
We think it's important to protect our public lands, to protect the environment, and this concept will really be focused on that. We think there's a real opportunity for people getting outdoors, camp, hike, bike, kayaking, fishing. It'll be different than what you would see with REI and carve out a different niche. We're really excited about this, the research we've done about this. We think there's a real opportunity in the marketplace, and this will help us from real estate that we already own that has the Field & Stream concept in it, and we'll be able to very seamlessly change this by taking out the hunt department and modifying a couple of other departments, but it's real estate that we own.
The architecture that we have from a Field & Stream standpoint works very well with this outdoor concept, we couldn't be more excited about it, we'll be happy to provide some more detail when we get it opened early next fall, the two stores. We think that there's a real opportunity here for a real growth vehicle.
Just a real quick follow-up. Is that going to be from what I've heard, this is maybe a little more elevated in the outdoor categories or in at least portions of the outdoor categories than the outdoor categories within DICK'S Sporting Goods. Is that inaccurate?
Very much so, Sam. It'll be very different than what we do at DICK'S today. DICK'S from an outdoor category, our camping category, is we're really a bit more backyard camping, if you will, kind of day camping. This will be much more elevated. We think that the overlap between the products that we carry in this new concept and the products we carry in DICK'S will be somewhere around 20%, maybe a little bit less. This will be more elevated equipment, apparel, footwear at elevated price points with elevated brands, elevated service. We're pretty excited about this, and this is one of the things that I'm going to be focusing the majority of my time in the new role is to help spearhead and lead this concept and really grow this into a real growth vehicle.
Thank you very much and continued success and happy holidays.
Thanks, Sam. You too.
The next question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead.
Good morning. Scot Ciccarelli, guys. I guess I had another follow-up on the private brands. Is the outperformance you're seeing coming more at the store level, or is it more from the e-commerce channel, or similar to both, at both? Related to that, has the improvement coincided with greater marketing efforts on your part, or has it been more of a function of pull from the customer? Thanks.
Yeah. Both in store and online are doing really well with private brands. I think it's certainly dedicated marketing, but it's also the product really surprising and delighting. In the case of our DSG brand, people have found it sometimes in the store. It was a white space opportunity. It was for an opening price point, high value, high fashion product. That one's really driven more by trial and the product being so excellent. It's a combination of all, but we are very dedicated to keep driving the, I'm sorry, vertical brands. We've been bad at using that new term, vertical brand business.
Lauren, has anything been de-emphasized as you try and put a greater emphasis on the vertical brands?
Well, I may have misunderstood your question. I was thinking that Field & Stream vertical brand within the vertical brands has been de-emphasized. No, this is not a trade-off. This is a one plus one equals three.
Got it. Thank you.
The next question is from Tom Nikic with Wells Fargo. Please go ahead.
Hey, good morning. Thanks for taking my question, and let me add to the congratulations for Lauren and Ed.
Thank you.
I want to follow up on some of the questions earlier about real estate and your stores. I think it kind of seems like one of the big messages that you're putting forth today is the importance of your stores and how important it is even for fulfilling digital demand. I would imagine that maybe their landlords would be looking for strong concepts, strong brands, strong retailers to potentially take up some space. Would you kind of view that as an opportunity to maybe re-accelerate store growth after you had sort of pumped the brakes a little bit pre-COVID?
We're certainly looking at those opportunities that are out in the marketplace right now. I wouldn't expect there to be a rapid acceleration in our store growth. It gives us a lot of opportunity to reposition stores to achieve lower rents. There are certain markets out there right now and trade areas that are important where we don't have a presence right now that I think it is important to us to get into those markets. I wouldn't expect a meaningful acceleration in store growth.
Understood. One quick follow-up. Obviously, you have a very clean balance sheet, a lot of cash, good free cash flow. At what point do we think about share buyback coming back into the equation?
That's something we talk about from time to time. Obviously, we bought back an awful lot of shares over the last several years. To be honest with you, Tom, right now, we think that with such an uncertain environment and who knows what's going to happen from a COVID standpoint and whether there's going to be additional lockdowns. Right now, we think that cash is really important, and I wouldn't expect you to see much from a share buyback standpoint right now. I think it's just too uncertain of an environment. We always keep, and if we think we can be opportunistic, we'll do that. I think right now, to be a little bit more conservative is the appropriate play.
Makes sense. Thanks for the color, and best of luck this holiday season.
Thanks.
The last question will be from Chris Svezia with Wedbush. Please go ahead.
Good morning, everyone. Thanks for taking my questions and congratulations to you both as well.
Thank you.
I guess first, I just want to go back to the outdoor cold weather categories. Just a point of clarification. Are they still comping positive, or are they actually turning negative? In other words, are they just underperforming the overall company average, or are they actually turning negative, reference to your comments about the weather and cold weather categories?
Well, we're not going to get to that level of granularity right now. The quarter is only three weeks and two days old. We're just saying that in the beginning, it was a bit of a headwind. The weather has gotten colder. The trajectory has changed. There's just so much time left in this quarter going into the holiday season, and we hope it gets cold, but if it doesn't, we've got our inventory planned in such a way that we're really not concerned about big markdowns or inventory issues if it doesn't get cold. Again, from our portfolio standpoint, if it doesn't get cold and, as we said earlier, if they're playing golf in New York in December, our golf business will be really good, and how good the golf business is right now will offset a lot of the cold weather merchandise.
If it gets cold, the cold weather merchandise, we suspect, will be really very good. Golf, we think, will be a very good holiday gift item this year, more so than in the past. Overall, as I said before, we are as optimistic about our business as we think one should be in this somewhat uncertain environment. Looking forward into next year and the year after, we are very excited about our business, which is one of the reasons why that I think this was the perfect time to make this transition from me as the CEO to Lauren as the CEO. It's always good to do these things when you've got positive momentum, and we've got positive momentum, and we see that momentum into the future also.
Got it. Thank you for that. I wanted to just ask for Lee, for you on the merchandise margin. Past two quarters have been quite impressive. Maybe if you can break out between what's partially driven by supply constraints, leading to somewhat less promotional activity, the curbside pickup that's enhanced e-commerce, and just mix the private brand growth. Is there any way just to separate if you can just rank them in terms of what's been the biggest driver on that front?
There's really not a silver bullet. It's a combination of, as you said, it's a combination of mix, it's a combination of fewer promotions, it's a combination of our private brand, it's a combination of digital moving to curbside or stores moving to curbside. There's a lot of puts and takes in this. As I said, we think we're in a great lane right now. We think that we've got upside from a margin rate, as Lee said earlier, and overall, we are pretty optimistic about our business.
Okay. Thank you. Just a final thing. What do you think from a planning perspective for 2021? I mean, just given what you saw in 2020, looking at both sales and just the operating expense and just merchants and inventory, it looks like you're looking at possibly a hybrid from a planning process because you get some obviously favorable comparisons, one because of COVID and then obviously you have the more tougher comparisons from thereafter. I guess what I'm just trying to understand as we all try to think about 2021, is it fair to say there isn't one single way to look at this? We should be looking at both planning from 2019 and 2020, or maybe any color about how you would think about it internally, how your teams are thinking about first half, second half from a planning perspective and what's the baseline?
We're building off of 2019 because 2020 has been so volatile with very tough first quarter when we were closed, and then we had surges of business in Q2 and Q3. We're building it off of 2019. We're optimistic that we can make some meaningful improvements in the business versus 2019, both on the sales and margin side, but we're not ready to give guidance on 2021 at this point.
I can appreciate that. Well, thank you all. Congratulations and all the best around the holidays.
Thank you.
Thank you.
Ladies and gentlemen, this concludes our question and answer session. I would 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 quarterly call, and look forward to Lauren and Lee. We'll look forward to being with everybody on the next quarterly call. I can promise you're all in good hands with Lauren at the helm. Thank you very much, everybody. Have a great holiday.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.