Good morning, ladies and gentlemen, 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 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. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. At this time, I would like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead, sir.
Good morning, everyone, thank you for joining us to discuss our fourth quarter of 2018 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 the reconciliation of any non-GAAP financial measures referenced in today's call. Finally, for a couple of admin items. First, we have added a short presentation to our Investor Relations website to help visually depict several of the strategies we will discuss in today's call. Second, a reminder as it relates to quarterly dividend announcements. We will be announcing future quarterly dividends in conjunction with our quarterly and year-end earnings releases. Lastly, for your future scheduling purposes, we are tentatively planning to publish our first quarter 2019 earnings release before the market opens on May 29th, 2019, with our earnings call at 10:00 A.M. Eastern Time. With that, I will now turn the call over to Ed.
Thanks, Nate, welcome back to the IR team. I'd like to thank all of you for joining us today. As we announced this morning, we're very pleased to deliver full-year earnings per diluted share of $3.24. This was near the high end of our guided range of $3.15- $3.25 and represents an 8% increase over last year, which included $0.09 for the 53rd week. For the fourth quarter, on a 13 to 13 week basis and adjusted for the calendar shift, our consolidated same-store sales declined 2.2%, in line with our expectations. Our e-commerce business remained strong and increased 17% over last year. As a percent of total net sales, our online business increased to 23%, compared to 19% in the same period last year. We're very pleased with the performance of our core business during the quarter.
Our athletes have responded positively to many of our initiatives across merchandising, e-commerce, and marketing, and drove comp gains across key categories including apparel, athletic footwear, outdoor equipment, fitness, and our private brands. As expected, our prior actions in hunt and electronics offset these gains. Taken together, these two categories negatively impacted our fourth quarter comps by 3%. As we enter 2019, we're enthusiastic about our business. We're excited about the strategies we're pursuing, encouraged by our athletes' early response to them, and confident in our ability to convert this momentum into positive comp sales beginning in the second quarter. While we're pleased with the results achieved so far, we know that we need to continue to reinvest in our business to meet the changing needs of our athletes and increase their engagement with us. With this in mind, we are focused on three categories of investment in 2019.
Enhancing the athlete experience in our stores, improving our e-commerce fulfillment capabilities, and implementing technology solutions to improve the athlete experience and our teammates' productivity. Enhancing the athlete experience in our stores is critical to our long-term growth as our stores generate approximately 80% of our total revenue. We therefore need to ensure that they meet the demands of all athletes, from the beginner to the enthusiast. That said, we will continue to optimize our assortment, reallocate floor space to regionally relevant and growing categories, and make our stores more experiential. We tested several initiatives last year and have been pleased with the early response from our athletes. Late in the third quarter, we removed the hunt category from 10 DICK'S stores where it underperformed and replaced it with a more compelling assortment.
These 10 stores generated positive comp sales and had a strong margin rate improvement during the fourth quarter. Following this success, we will remove hunt from approximately 125 additional DICK'S stores in 2019 where the category underperforms. It will be replaced with merchandise categories that can drive growth, each based on the needs of that particular market. We also tested bold merchandise presentations last year, which we call strike points. These strike points provide our athletes with a clear point of view of what's important and showcase key items in a very impactful way. We've been very pleased with how our athletes have responded in our test stores. Beginning late in the first quarter, we will deliver a much more dominant presentation as we expand our strike points across the chain.
Key merchandise categories will benefit from this improved presentation, along with a strong product pipeline from several of our key strategic vendors, as well as our private brands. Our relationship with our brands have never been stronger, and our access to differentiated and premium product continues to improve. To make our stores more experiential, we tested the addition of HitTrax technology and batting cages in several stores. This fun and interactive experience allows our baseball and softball athletes to determine the best bat for them by testing and measuring their launch angle, exit velocity, and distance. The strong engagement and response from our athletes led us to expand this test, which is now in 150 stores across the country.
We believe our HitTrax experience, and expanding a more compelling product assortment, and improving the integration of our GameChanger app, will make us the destination for baseball athletes from the recreational to the enthusiast player. Lastly, our private brands will continue to be an integral part of this strategy to drive differentiation and exclusivity in our assortment. During 2018, our private brands remained strong, growing double digits. As a percent of total net sales, our private brand sales increased to approximately 14%, compared to 12% last year. In 2019, we expect a continued strength, as our private brands will play an important role in our space allocation and assortment strategies. We will expand CALIA's footprint in approximately 80 stores, launch a new athletic apparel brand in time for back to school that will replace Reebok, and enhance the quality of our existing offerings with a focus on product innovation.
To support this strategy, we will continue to invest in our product development team to help us reach our $2 billion sales goal in private brands. In closing, 2019 is an important year in which we are making critical investments to fuel long-term growth and further solidify our leadership position. I'd like to thank all of our teammates for their hard work and commitment this past year, and for their upcoming efforts in 2019. I would now like to turn the call over to Lauren.
Thank you, Ed, and good morning, everyone. As we enter 2019, we remain focused on building the best omni-channel experience in sporting goods. As Ed outlined, we are increasing our investments in the store experience, e-commerce fulfillment, and technology. This morning, I'll provide some additional details on these initiatives. In addition, I will discuss how we are leveraging the power of our expert opinion to guide athletes, and will provide an update on our productivity efforts. Our teammates are critical to bringing our improved store experience to life. One of our key investments, therefore, is in our stores, where we will deliver more robust training and education. For example, in partnership with key brand partners, we're launching a new multi-day footwear training summit to elevate our teammates' product expertise and selling skills.
[audio distortion] The focus on training will enhance our service model, and it will also support new and differentiated experiences for our athletes, such as HitTrax. Turning to e-commerce, during 2018, we were pleased to deliver 17% growth in our e-commerce business. We provided our athletes with an improved online shopping experience this holiday season through an enhanced assortment and better functionality. We also worked closely in partnership with industry leaders, Google and Facebook, to dial up our digital marketing and drive increased traffic. Looking ahead, we believe a big opportunity to continue improving our online experience is through faster and more reliable delivery. To achieve this, we're investing significantly in our fulfillment capabilities. As I mentioned last quarter, we're building two new dedicated e-commerce fulfillment centers in New York and California.
These new facilities will open during the third quarter and will enable us to deliver the majority of our online orders within two business days in the near future. The state-of-the-art facility in New York will be highly efficient as we invest in robotics to drive automation and optimize our cost per shipment. We will also continue to improve the functionality and performance of our website. This will include a faster and more convenient checkout, improved page responsiveness, and exciting new content through our Pro Tips platform. Later this year, we will re-platform our mobile and tablet sites. This will allow us to control our own mobile destiny and deliver quality features to our athletes faster. Our technology investments extend beyond just improving our website.
We will continue to increase our investments in technology talent and capabilities to make the shopping experience easier and more convenient for all athletes, regardless of when, where, or how they shop with us. We'll also aim to leverage technology to improve the productivity of our teammates. For example, we recently delivered an application, which we've named Merch Search, to all DICK'S stores nationwide. This app provides real-time product information, including detailed product descriptions, inventory availability, and alternative product recommendations so that our teammates can guide athletes through their shopping experience. Additionally, we will continue to leverage the power of our expert opinion to guide and inform our athletes throughout their entire sports journey. As Ed mentioned, our Strike Point presentations are making it easy for athletes to see and react to the products that we strongly believe in.
Our new integrated marketing campaign, "Better Starts Here," will inspire our athletes and invite them to DICK'S to explore our newly expanded enthusiast-level assortment. We continue to expand our ability to leverage our BAS scorecard and Team Sports HQ datasets to drive traffic through timely and targeted messaging. Finally, we remain focused on increasing our productivity as we lower costs and eliminate unnecessary spending across all areas of our business. During 2018, we eliminated approximately $30 million of expense and identified a pipeline of additional savings of similar magnitude for 2019. We plan to reinvest these savings to help offset the strategic growth investments that we outlined this morning. Both the investments and the savings have been incorporated into our 2019 earnings guidance, which we will cover in greater detail. In closing, this is a very exciting time for our company as we execute against our strategic priorities.
We see tremendous opportunity as we continue to transform our business to meet our athletes' ever-changing needs. I will now turn the call over to Lee to review our financial results and 2019 outlook.
Thank you, Lauren, good morning, everyone. I'd like to start with a brief review of our fourth quarter results. On a 13 to 13-week basis, adjusted for the calendar shift, consolidated same-store sales decreased 2.2%, with a 17% increase in our e-commerce business. Consolidated sales decreased 2.6% to approximately $2.49 billion. This also reflects the impact of the calendar shift, which negatively impacted sales by $39 million. Transactions decreased 3.1%, while average ticket increased 0.9%. On a 13-week to 14-week basis, consolidated sales decreased 6.5%, or $172 million, which was negatively impacted by sales of $105 million from the extra week last year, the previously mentioned calendar shift of $39 million. During the quarter, our best performing categories included apparel, athletic footwear, outdoor equipment, fitness, and our private brands. Apparel and athletic footwear each delivered low single-digit comp increases.
The strength in athletic footwear is driven by key brands and represent an improvement compared to the prior quarter. Additionally, we were pleased with the performance of outdoor equipment and fitness, each posting strong comp increases. The strength in outdoor equipment was driven by improved in-stocks and strike points across strategic vendors. Our private brands also continue to comp positively with higher penetration. We continue to see double-digit declines in hunt and electronics, which together impacted the comp sales by 3% for the quarter. Excluding these impacts, our consolidated same-store sales increased 0.8%. Team sports also declined, driven by youth baseball bats as we began to anniversary last year's bat regulation change. Gross profit in the fourth quarter was $694.6 million, or 27.87% of net sales, a 168 basis point decline versus last year on a non-GAAP basis.
The decline in gross margin was driven by higher shipping, fulfillment, and freight costs as a result of our strong e-commerce growth and by occupancy deleverage. Merchandise margin decreased by 37 basis points. The decline is attributable to expense recognition for changes in our scorecard program and revenue recognition and reporting changes for gift card breakage. Our merchandise margin rate otherwise was flat for the quarter. SG&A expenses were $552.2 million, a $38 million decrease from last year on a non-GAAP basis, which included $26.5 million in expense savings from the extra week. Excluding the extra week last year, SG&A expenses decreased $11.5 million. During the quarter, the expense reductions that Lauren referenced more than offset strategic investments and higher incentive compensation. As a percent of net sales, SG&A was flat compared to last year at 22.16%.
In total, we delivered fourth quarter earnings per diluted share of $1.07, which was negatively impacted by approximately $0.08 due to the shifted calendar. This compared to the GAAP earnings per diluted share of $1.11, non-GAAP earnings per diluted share of $1.22 last year, which were positively affected by $0.09 for the 14th week last year. For the full year, we delivered earnings per diluted share of $3.24. This compares to $3.01 last year, which was positively impacted by $0.09 for the 53rd week. On a 52 to 52-week basis, adjusted for the calendar shift, consolidated same-store sales decreased 3.1%, with the headwinds from hunt and electronics categories negatively impacting comps by 2.3%. We delivered a 17% increase in our e-commerce business. During 2018, we opened 19 DICK'S stores and closed six. Now looking to our balance sheet.
We ended the fourth quarter with approximately $114 million of cash and cash equivalents and no borrowings on our revolving credit facility. Additionally, our inventory levels increased by 6.6% in the quarter as we made strategic investments in support of key growth categories. Our inventory going into the first quarter is clean, and we're confident in our inventory position as we enter the spring season. Turning to our fourth quarter capital allocation, net capital expenditures were $58.6 million. We repurchased 957,000 shares of stock for $33.7 million at an average price of $35.23. In total for 2018, we repurchased 9.6 million shares for $323 million and have approximately $433 million remaining under our authorization. We also paid approximately $21 million in dividends during the quarter, and a few weeks ago, we announced an increase in our quarterly dividend of 22% to $0.275 per share.
Turning to our outlook. For 2019, we anticipate earnings per diluted share to be in the range of $3.15- $3.35 and consolidated same-store sales to be approximately flat to up 2% for the year. We expect to deliver positive comps beginning in the second quarter by the execution of our strategies, as well as the hunt and electronics headwinds we faced last year meaningfully abating. Specific to hunt, we anniversaried our firearms announcement at the end of February. With the exception of the month of February, in those stores where we will reallocate space to growing categories, we now expect our hunt business to generally follow industry trends. With respect to electronics, we anniversary exited from this business at the end of the fourth quarter.
As Ed and Lauren discussed, within our guidance, we have included strategic investments that we believe will benefit our business in 2019 and over the long term. These investments will have an approximate $60 million on EBT in 2019, which includes $35 million to enhance the athlete experience in our stores, $15 million to improve our e-commerce fulfillment capabilities, and $10 million in technology. The enhancements to our store experience include our space reallocation efforts, rollout of our HitTrax technology and batting cages, expansion of our Strike Point presentations, and investment in our product development teams. Improvements in our e-commerce fulfillment capabilities include the operating expenses associated with our two new dedicated fulfillment centers in New York and California. Lastly, our technology investment is concentrated around elevating our talents and capabilities, which will better position us to deliver solutions that improve the athlete experience and our teammates' productivity.
While making these investments, we also remain focused on improving our productivity and eliminating unnecessary spending. For 2019, we have identified additional productivity opportunities through which we expect to eliminate about $30 million of expenses, which has also been contemplated within our guidance and will fund about half of our strategic investments. All of this considered, operating margin is expected to decline by 20- 40 basis points year-over-year as we make strategic investments in our business. Gross margin rate is expected to be approximately flat to down slightly, driven by anticipated double-digit sales growth in e-commerce, which has a lower gross margin rate, and from the investments we are making to improve our fulfillment capabilities. SG&A is expected to deleverage as a result of our strategic investments.
Additionally, our guidance contemplates an opportunity for modest merchandise rate expansion, the previously discussed productivity savings of approximately $30 million, and meaningful inflationary headwinds from increasing hourly wages and higher freight costs. Our earnings guidance assumes an effective tax rate of 26% and is based on an estimated 95 million diluted shares outstanding. This includes the expectation of share repurchases to fully offset dilution in 2019. In 2019, net capital expenditures are expected to be approximately $200 million, which will be concentrated in improvements within our existing stores, technology, and e-commerce fulfillment, and also includes seven new DICK'S stores and two new Golf Galaxy stores. In 2018, net capital expenditures were $170 million. Before concluding, I will take just a moment to provide an update on the new lease accounting standard.
During the first quarter, we will adopt the new lease accounting standard using the optional transition method, which allows for a prospective application of the standard. We estimate the adoption will result in recognition of additional net lease assets and lease liabilities of approximately $2.3 billion, respectively. We do not believe the new standard will materially affect our P&L. This concludes our prepared comments. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.
Thank you, sir. 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 addressed, you may withdraw from the queue by pressing star then two. Your first question will be from Michael Lasser of UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Can you give us more details on the gross margin outlook for the upcoming year, especially in light of how it performed in the fourth quarter? It seems like you're expecting a considerable step function change in the impact from e-commerce fulfillment costs. To what degree will this come from the new facilities coming online, and to what degree is it from other factors?
With regard to gross margin, the fourth quarter I don't think is a good indicator looking at the year-over-year because we have 13 weeks against 14 weeks. We have a shifted calendar, and we have our highest period of penetration for e-commerce sales in the fourth quarter compared to the rest of the year. The fourth quarter would have a disproportionate drag on the gross margin rate. We'd expect gross margin impact to be significantly lower as we look out over the full year for next year than it would have been in the fourth quarter this year.
How does the push and pull unfold compared to fulfilling from your stores versus these new e-commerce fulfillment centers? Is that a big part of the story?
For the fourth quarter of this year, there are startup costs involved with it. We think that over the intermediate to long term, the cost of fulfilling orders out of our distribution center, if you look at the cost of fulfillment plus the cost of shipping, is slightly favorable for us versus fulfilling from our stores. We think we get a better quality and better predictability in that. We do have two facilities we're starting up at once in the back half of the year. There are some startup costs that we have embedded within the forecast for 2019. Excuse me. Yeah, 2019.
My follow-up question is: where is the $30 million of savings coming from? How do you ensure that this doesn't impact the customer experience and potentially jeopardize sales? Thank you so much.
A couple of big pieces. We have a big part of the savings are in supply chain. We've kind of reworked some of our benefits programs a bit. We got some significant savings coming out of rent as well. Those are three chunks, none of which will really impact the customer experience.
Good luck with the year.
Okay, thank you.
Thank you.
The next question will be from Simeon Gutman of Morgan Stanley. Please go ahead.
Thanks. Good morning, everyone. My first question's on operating margin. I want to clarify that even excluding the investments, if we take them out, is operating margin at the midpoint is still expected to be down? If that's correct, can we talk about the drivers ex the investments of it, if that's the case.
Operating margin, including the $30 million of investments. The operating margin, would, I think, would be up slightly on that pre-tax margin at the midpoint. That's really what's driving the decline. It's relatively level to top a little bit, including the $30 million. The second half of your question?
I'll ask a follow-up then. We've talked about the underlying run rate of the business, ex some of the hunt, electronics, and then in the past, we've talked about one of the brands. Can we talk about, I guess, the underlying health of the business excluding those impacts? The 0%-2% seems to capture, I think, a consistent picture of what we were portraying last year of where the business should end up. Does the 0%-2% reflect some of the productivity improvements that you should see from a sales perspective, given some more efficient inventory, product cycles, et cetera?
Yeah. We're really confident about the business. We expect to get to flat to 2% at the end of the year, beginning in the second quarter and for the year. The categories that we think that'll come from are what you would expect that we've been talking about. The apparel category and what we're doing with our Strike Point merchandising, what we've done from a footwear standpoint and access to different product. The team sports area. Once we get past the bat change last year, which was very significant for virtually every little leaguer had to buy a new bat last year. They don't have to do that this year. We are really very confident and excited about our business.
Okay. If I can just follow up. How would you describe the underlying momentum in the fourth quarter relative to third? Is it about the same? Is it getting better? Some of the internal metrics that you look at.
A bit better.
Okay, great. Thanks.
Sure.
The next question will be from Christopher Horvers of JPMorgan. Please go ahead.
Good morning.
Hey, Chris.
Can you talk about traffic and ticket a little bit? Ticket has been up very nicely the past couple of quarters. Would it have been up more if it weren't for the hunt and electronics headwind? Would think that the hunt side in particular is a bigger ticket. Is that right? What's driving the ticket up? Is it sort of AUR recapture from what was a very promotional period in the back half of 2017? How are you thinking about the ability to continue to drive ticket and traffic in your outlook for 2019?
I think there were a couple things that drove the ticket. The AURs were up. It was less promotional than it was last year. We had a very good winter from a cold weather standpoint, so the apparel piece was very good. The hunt piece is still. It kind of helped. You sell a lot of ammunition. You sell guns, but a lot of ammunition that is lower priced. The underlying health of the business and what we see happening, we're pretty excited about, and we think that the ticket will continue to be positive.
Understood. Lee, you talked about the detail around the margins outlook for the year and understand that we have to get past the bats and the Eagles here in the first quarter, but any other cadence commentary around comp or gross margin in SG&A, particularly as we have these DC openings? Does that sort of front-load some expense into the first three quarters for the versus the fourth quarter and so forth?
There's a little bit, not a huge amount, but a little bit of extra expense in the second quarter related to a lot of floor reconfigurations as we're looking to expand some of the departments that are really growing for us, reallocate some of the floor space there, and remove hunt from those stores as well. We have some extra costs in the second quarter related to that. Other than that, some of the gross margin headwinds will be in the third and fourth quarter as we bring up our two new facilities there.
The floor resets, that's an SG&A item?
That is principally an SG&A item, yes.
Got it. Thanks. Have a great year.
Thank you.
The next question will be from David Schick of Consumer Edge Research. Please go ahead.
Hi. Thanks for taking my question. My first question, Ed, can I quote you to my kids that they don't need new bats this year?
No, please don't do that. They probably do need a new bat this year.
Yeah, no, it would just be at dinner tonight, letting them know the bad news. Okay. My first—hopefully, that doesn't count. My first question would be, as we think about the longer-term model, is this a new level of investment, those impacts you're talking about, or is there a discrete line of sight that they fall back as we get past calendar 2019?
The majority of these costs are going to carry forward into-
Okay.
The following year.
Great. Thank you. Within e-commerce, understanding e-commerce mixing in drives your gross margin lower, if I just compared e-commerce gross margin to e-commerce gross margin on a rate basis, is the margin within e-commerce getting better or worse or moving substantially one way or the other?
Are you talking about operating margin? [crosstalk]
[crosstalk] I'm talking about gross margin. Yeah.
I don't think we want to get into that level of granularity on the P&L individually for it. We've had significant improvements in the profitability of our e-commerce business, and it's nicely profitable for us, and we're pleased with that trajectory. We haven't broken down the individual components.
Okay. That's fair. Thanks very much.
The next question will be from Mike Baker of Deutsche Bank. Please go ahead.
Hi. Thanks. I'll just follow up on Dave's question. The costs are ongoing, but do they increase, I guess, in 2020, or is it that same sort of run rate such that, if you were able to comp positively beyond this year, you would leverage those costs?
Well, we haven't worked out our detailed plans yet for 2020, but the investments that we're making this year, we wouldn't expect those to be increasing in the following year. Now, we may do some other new things that we haven't got to yet, but we haven't got into guiding for 2020.
We wouldn't expect those to increase going into the next year meaningfully.
Nope.
Understood. Okay. Thank you. Also a follow-up. Someone had mentioned, in the past, you've talked about three impacts to your business this year, the hunt being the electronics and also one of your brands hurting you. You haven't mentioned that this quarter, but how much did that drag the 3.1% comp for the year? In other words, you quantified 230 basis points. Of the remaining 80 or so, how much was from Under Armour?
We're 80 basis points positive excluding hunt and electronics. Again, Under Armour continues to be difficult, but we have mentioned now for the second quarter in a row that our apparel businesses are positive. We've been able to replace the lost Under Armour apparel business with other brands in the stores at this point. To the extent we can get that Under Armour business into a better position going forward, it would bode better for the business as well.
As I indicated on the last call, we're much more enthusiastic about the Under Armour business going forward. We've made some changes to the assortment. Under Armour has been very helpful with that, and we see a very different trajectory from Under Armour going forward.
Understood. Last one, if I could. The comping down in the first quarter, how much of that is due to not yet full cycling the Parkland issue? How much is due to the bat issue? Presumably, the spring season hasn't started off great because the weather hasn't been cooperative for a lot of seasonal businesses. How much is that impacting?
Yeah. That's the impact. I'm not going to quantify each one of those as to what percent of that is, but those are the three main things that are impacting the business in the quarter. We haven't fully anniversaried the gun issue. As a number of other retailers have said, it's been a bit of a slower start. We're pretty positive going forward.
Okay. Understood. Really appreciate it. Thank you.
Sure.
The next question will be from Seth Sigman of Credit Suisse. Please go ahead.
Hey, guys. Good morning. Thanks for taking the question. My question is really around inventory growth. If you could talk a little bit more about the growth that we're seeing. Seems to be the fastest growth we've seen in some time. Maybe just any view on the situation across the competitive landscape. Just trying to better understand the risk of more promotional activity here. Obviously, coming into 2018, sector seemed to be pretty lean with inventory. Seems to now be picking up. Just curious how you guys are thinking about that.
Yeah. You'll see our inventory grow this quarter, next quarter, and through the year. As we've taken a look at this, we think one of the issues we've had is we probably had the inventory running a bit too lean. We're investing back in inventory. What we're doing, though, is we're investing in inventory in what we characterize as non-toxic inventory. Inventory that are basic products, whether it be the Nike Legend tee, certain Nike running shorts, adidas key running shoes, training shoes. Product that is really a go-forward product that is not toxic and doesn't have a short shelf life. They've been extremely successful. Excuse me. I can't stress enough also the change we made in the 10 stores in the fourth quarter. That they comped positive. We reset these 10 stores.
We're going to do this with 120-some stores this year. It will be completed at the beginning of the third quarter. These changes that we're making is growing that inventory. Again, it's non-toxic inventory. It's go-forward inventory. We don't expect that, it's not product that we expect that we're going to need to be promotional around.
Okay. Then specifically on the removal of those hunting categories in the 120 stores you're talking about here. The net impact from that should actually be positive, I assume, as you replace hunting with more productive categories. Is that right? Is that included in the guidance?
That's what we expect to be, understand, we won't have this project completed until the beginning of the third quarter.
Got it. Okay. Then just my final follow-up is on the investments you talked about and potentially continuing into next year. How do we think about the long-term EBIT margin or EBIT dollar growth outlook? At what point do you feel like you can get to a point where you could actually start to grow EBIT dollars again?
Right. You know, we really, at this point, we haven't guided beyond this year. We continue to work through what level of investment we need to make in the business going forward, we're getting increasingly confident about our ability to drive comp sales. We're not going to be guiding beyond this year at this point.
Okay. Got it. Thanks and good luck.
Thank you.
Thank you.
The next question will be from Steve Forbes of Guggenheim Securities. Please go ahead.
Good morning. I wanted to focus on those 10 stores, right? You mentioned positive comps, can you expand on the learnings around customer engagement, right, and sort of the pace of the change that transpired within the stores? Really just any color would be helpful for us to understand how impactful this could be.
Well, don't get ahead of yourself. We're really excited about this. The comps were positive. The things that we we're even—the comps were positive. The margin rates were better because of the mix. If you get positive comps and an increase in margin, as we all know, that's a very good thing. The thing we were very excited about is traffic in those stores was actually up.
Just a quick follow-up on that as well. As you think about the 125 stores poised to sort of receive that refresh, as you would call it, does this capture sort of all the underperforming stores in the base as it relates to hunt? Do you kind of view this as a multi-year initiative?
We look at this as a multi-year initiative. The 10 stores, we were very pleased with. We're expanding it to the 120-some stores, we'll see how that goes. If it goes as well as expected, we'd probably take another batch of stores next year. This is around having productive space, there's some places that the hunt business is very good, other places that it's not very good. We're just allocating floor space to make our boxes more productive. The 10 stores, we were pretty enthusiastic about the response we had there.
Just last one, I apologize for the quick one here. Was there any difference within the 10 stores, you think about the six stores that had a batting cage versus the four that didn't have a batting cage or HitTrax? What's sort of the outlook for the 125? Do they receive both of those experiences?
Not all of them do. Some do, some don't, it's really too early to kind of say what the difference is between those that had the hunt and the batting cages. We did the batting cages in six stores. Some of the 125 have the batting cages, some of them don't.
Thank you, Ed.
Sure. Thank you.
The next question will be from Camilo Lyon of Canaccord Genuity. Please go ahead.
Hi. Thank you. Good morning. Ed, hopefully you can give us a little bit more detail on the incremental comp opportunities. You talked about the initiatives that you're doing. You talked about the experiential components and how you're reformatting the stores, but I'm curious to know, what's the key driver that gets you from a 0% comp to a 2% comp? What are the rank order opportunities that can get you from flat to up 2%?
Well, I think there's a number of things. We're pretty enthusiastic about the baseball business, but we got a big headwind there with the bats that will subside a bit going into the second quarter. As we take a look at the full year, if we have another weather year like we had this past year, that will be helpful. One of the things that we think will be very important is being in stock. These key non-toxic go-forward products that are in stock were not nearly as robust as we would like them to be as we scaled our inventory back a bit too far. Having these in stock is going to be a big part of it.
Great. That's very helpful. Thank you. My next question is going back to the athletic apparel category. You talked about the relaunch of your private label athletic apparel brand. Can you shed some color on the components of that, what will that look like? Maybe shed some light relative to what Second Skin was. I think you probably had some learnings around pricing. I'm curious to know how are you going to price this product, how it's going to be set up in the stores, then how does this all fit within the context of the comment you just made on Under Armour, and seeing the improvements there.
Should we expect to see a reallocation of square footage go back to the Under Armour brand that had been taken away last year, or will the square footage be more allocated to the new brand that you're going to be launching before back to school?
The new brand is very different than Second Skin. Second Skin, we still have, we're working through what we're going to do with Second Skin. The brand that we're going to have is more of an opening price point product. Opening price point for us. Very good quality, terrific value. The research we've done on this has been very well-received. We're pretty excited about it. It'll have meaningful floor space, so when you walk in, you will know that we're in this business. It will primarily-- we had a licensing agreement with the Reebok brand, and it will take the place of Reebok, and we think that we'll do more business there than we did with Reebok. It'll be across men's, women's, boys, and girls product. We're very excited about that. Like I say, the initial research has been really very positive.
As far as UA goes, we're enthusiastic about our Under Armour business going forward, but it will remain in the floor space that it has today. There won't be any additional floor space allocated there. A couple of our brands, we're really excited about the product they're bringing to market. Nike, in particular, we're really enthusiastic about between the apparel product and the footwear product that they're bringing to market, and we've made a big bet there.
If I could just add that the brand that we are creating is actually meant to be white space in the store. It's an occasion that we are not currently getting in the opening price point area and feel that we can drive new traffic and occasions into the store.
That's great color. My last question, if I could. This is more of a philosophical question. You've talked a lot about changes you're making to the store, trying to make it more experiential and more productive, and I very much appreciate that. My question is, last week, there was a department store competitor that reported its intent to expand its activewear section even more than it already has, while also announcing a pretty interesting partnership with Planet Fitness. I'm curious about your thoughts about those moves and if you would entertain the idea of giving up some of your square footage for external partnerships to drive incremental traffic.
Well, it depends. We look at opportunities all the time, what somebody else is going to do seems like that might be good for their business, and we'll continue to do what we think is right for our business. I can't express strongly enough how enthusiastic we are about our business and enthusiastic about the partnerships we have with a number of our key brands going forward. We very much like the position we're in right now.
Fantastic. Thanks so much. Good luck.
Thank you.
The next question will be from Sam Poser of Susquehanna. Please go ahead.
Good morning. Thank you for taking my questions. I've got three. One, in the quarter, the merchandise margin was flat, ex those other charges. Given the mix change, why didn't we see a better improvement in the merch margins there?
Well, we did have to get a little bit more promotional in the month of December as the weather warmed up there, to try to capture some of that business leading up to Christmas. We had a pretty strong Black Friday, and the weather got favorable in January. We were a bit more promotional in December. We also noted that our merch margin, absent some of the scorecard changes and everything, was about even year-over-year. There was some tailwind from the reduction in hunt, but I'd say a little bit more promotional leading to Christmas was the offset.
Thank you. Secondly, the inventory levels or the inventory decision to bring stuff in early, was any of that based on the potential change of tariffs when those decisions were made to move stuff up? Was this all strategic, as you talked about building up the depth in key items?
Not much of it was related to tariffs. It was really related to trying to get our southern stores set earlier and be ready for this spring season across the country. It was all part of getting these strike points set, reallocating. We redid our footwear deck also with better product for the enthusiasts that we think we've missed in the past. It was really very strategic about what our merchandising philosophy was going to be going forward.
All right. Just to follow up on that, one last thing. You mentioned making sure you're in stock and having more of these better-selling full-price items. Given your inventory levels, doesn't that imply that there is a good amount of slower-selling promotional items that you still need to reduce that amount? I guess that might take a little bit of time.
No, we've basically cleaned that up in the fourth quarter, Sam.
Okay. Lastly, you talked about the store, how you're putting training to improve the experience. What are you doing with your store staffing levels, in that regard to, also to ensure to make sure that there are always people there to ask when you're visiting.
Yeah. We're protecting those staffing levels.
Yeah.
Okay. Well, thank you very much.
We're not reducing staffing levels. Thanks.
All right. Thank you so much.
The next question will be from Peter Benedict of Robert W. Baird. Please go ahead.
Oh, hey, guys. First question, just on the slide deck that you guys sent out. One of the strike points that you highlighted was YETI. Just trying to understand maybe where you stand with those sets today, versus maybe where you'll be six, nine, 12 months from now. Is that all where you want it, or are you going to continue to build that out? That's my first question.
We're pretty pleased with where we are with YETI. It's been a great brand for us. If you take a look at that slide that we put out there, I'm not sure what else we could do. That's a pretty impressive presentation of YETI. I don't think anybody else has got that kind of presentation.
How many stores is that in? Is that already fully—that's basically my question. Is that already in every store that it's going into?
Well, that's what it looked like in the vast majority of the stores for holiday. We didn't have the T-shirts in all of the stores for holiday. The T-shirts will be in all the stores. Some will have a double table, which we show there. Some will have a single. That's pretty much what you'll find in 90% of our stores going forward. Some have a single table versus a double table.
Got it. Okay. No, that makes sense. Secondly, on the marketing message, the "Better Starts Here." To help us understand what's most incremental, I think, when we think about 2019 versus 2018 in terms of marketing, as you guys try to invite more folks into the store to see some of the changes. What should we be thinking about?
Well, in terms of the media types, we are pushing significantly toward digital and to our direct channels. Things like direct mail, email, things where we can leverage our data sets. The digital channels have become the vast majority of our marketing spend. The "Better Starts Here" campaign is launched in digital, trying to reach the enthusiast athlete as well as the parent, but also in TV and radio, where we're also finding effective marketing mix.
Okay. My last question is just as you think about the comp plans for the year coming up, if we think about the higher end around 2%, would that assume kind of a flattish in-store comp? I know you guys think about it more holistically, but it seems that the guidance certainly assumes that the trajectory, or at least the declines in the store comps, are going to moderate as we move forward. Just trying to get a sense for maybe how much moderation you guys think you can achieve, if everything goes as planned.
Yeah. It would still be kind of down slightly in the stores.
Moderating-
Yeah, much better than this year
Moderating significantly.
Understood. All right. Makes sense. Thank you.
Thanks.
The next question will be from Joe Feldman of Telsey Advisory. Please go ahead.
Yeah. Hi. Good morning, guys. Thanks for taking the question. Wanted to ask, with regard to the hunting industry, how are you guys thinking about that industry growth? I know you're talking about growing in line with industry, but is that flattish? Is it still down for 2019?
We would expect that to continue to be down.
Yeah.
Okay.
NICS checks were down.
Yeah. NICS checks continue to be down and we expect it to continue to be down.
Got it. Sort of related to that, with regard to the Field & Stream stores themselves, can you just talk a little maybe how well those have been performing, presumably about that industry, and what your thoughts are more at a higher level as to what to do with those stores?
Well, we talked about this. We're not sure exactly what we're going to do with it. We're going to let it play out for a little while longer as we anniversary our announcement, and then make a decision as what we're going to do with Field & Stream. We're not opening any new Field & Stream stores though.
Right now, on a four-wall basis, they cash flow positive and they're not a drain on the company.
Got it. That's good. Real quick on the space allocation, just one more question there. How disruptive is that to the store when you do it? Does it take a week? Does it take a few days? I know you guys said it would be mostly second quarter. Does that have more of an impact then on the comp in the second quarter relative to the others, or I know you said you expect positive, so just trying to blend it all together.
It's somewhat disruptive, but we're pretty good at this. We've been, you know, our construction team and store team work really well together, and they have a plan. It'll take a few weeks to get each one of them done, and then we've got to get inventory back in there. It'll take a little bit of time, but the overall comps that we expect to have in the year, we don't think it's going to have a meaningful difference as we go through this transition.
That's great. Thanks, guys. Good luck this quarter.
Thanks.
The next question will be from Omar Saad of Evercore ISI. Please go ahead.
Hey, thanks for taking my question. Most of my questions have been answered. I wanted to kind of ask from a bigger picture level, hearing you guys talk about the investments you're making in the store experience, technology investments. Coupled with the fact that I think you're only planning to open less than 10 stores this year, is it fair to say that the direction of the company is really focused on maximizing the productivity of its existing store network, amplifying it with digital and e-commerce, less so than the square footage path in the past? Is that really just more of a temporary hold on new store openings as you wait for rents to come down and other kind of real estate opportunities to crop up? I'm just trying to frame the bigger picture here. Is there a change in tone? Thanks.
We think that our biggest opportunity going forward is to maximize the boxes that we have, both from a sales standpoint, margin, productivity. We think that's where the biggest piece comes from. We still think that there's opportunity to continue open stores. We also think that rents are going to continue to come down. We've got—depending on what happens with Sears now, with JCPenney, with a number of other retailers that are probably going to continue to close stores, we're in a pretty good position to take a fair amount of space, that landlords need somebody to take a fair amount of space. We're just being very patient and very selective in our real estate process.
Understood. Is it fair to say, Ed, that the discussion around investing in store experience, technology investment, that there's even a greater emphasis on this call today than there has been in the past? Is there something that's changed there and really crystallized in the management team's mind? Thanks.
Yeah. I would say that our stores, we think of them as one of the greatest assets, if not the greatest asset that we have. Trying to optimize the omni-channel experience in the stores is top of mind. We are extremely focused on the experience that athletes will have when they come to the store, the service that our teammates provide to athletes when they come to the store, and making it just the hub of a big omni-channel wheel. You are noticing, we are very focused on the store experience.
That's helpful. Thank you. Good luck.
Thanks.
The next question will be from Scot Ciccarelli of RBC Capital Markets. Please go ahead.
Good morning, guys. For your comp guidance for 2019, is the assumption that, I know Peter asked a question similar to this, but is the assumption that traffic can get back to flat or turn positive as you make all these merchandise changes? Or do you expect ticket will still be the primary driver of the year-over-year improvement?
I don't think we're going to provide guidance to traffic and ticket right now. We hope that traffic will be better. We think that the comps in the stores will moderate, which will imply better traffic. We do think that we can increase our UPTs, and we can continue to increase ticket. All of that combined, we feel over the year comps will be flat to +2%.
Okay. Got it. Just a clarification, if you would. When you guys talk about the three points of comp drag from hunt and electronics, is that guns and ammo only on the hunt side, or are you including other outdoor products that may have had, let's call it, a peripheral effect from the removal of those products?
Well, it would be hunt, which would include anything that has to do with hunting. It doesn't include fishing and other outdoor categories. It's specifically hunt. Included in that would be, obviously, guns, ammunition, accessories associated with firearms, hunting apparel, anything associated with hunting. It would not include kayaks and other outdoor activities like that.
Roger that. Okay. Thanks, guys.
The next question will be from Jim Duffy of Stifel. Please go ahead.
Hi, this is Peter McGoldrick on for Jim. Thanks for taking my questions. First, I'd just like to ask about technology talent investments. What are the key needs of the business, and can you talk about your expectations for organizational improvements from these changes?
We have actually transformed our technology group into a very agile organization that is focused on product teams that are enhancing the experience across almost every aspect of how we do business. That's everything from the website and the athlete experience to even productivity of everybody in our support center as well as in our stores. It's a change in approach to how we actually implement technology. It's become an enormous strategic weapon for us, and they are focused on absolutely every aspect of our internal and external experience.
Thanks. Then, I wanted to focus on the improvement on in-stocks and efforts to remain in stock. Was there any amount of lost sales that you were able to measure in 2018, or was there a partial recapture in e-commerce business attributable to in-store, out of stocks?
I'm going to try to take that question in two different chunks. Did we measure lost sales from an in-stock standpoint? We've got a pretty good idea of what that is. We're investing in key items to be able to do that. One of the things we're taking a look at, some of it was shipping challenges, some of it was we just didn't buy enough. Fleece product going into the holiday season, we were very under-invested in. Which is a very key item going into those last few days of holiday. We're going to make sure that that doesn't happen. We're going to be in stock on key items in the holiday that we feel comfortable going forward with. Some of those items will be Nike Fleece, Nike tights, CALIA product.
Golf apparel in our southern stores will set earlier where we felt we missed quite a bit of sales. We've really made a very big change from how we're merchandising and buying our stores from an in-stock standpoint and an assortment standpoint going forward. We're confident in what we've been able to do. The YETI piece that we put in the presentation of that strike point, we had a very good YETI fourth quarter, and that's because we were in stock in those products, very similar to the presentation we put out with this release.
On the second part of your question, we do not look at the out-of-stocks as something that was a key to our driving of our e-commerce business, if that's what you were getting at. We actually think that the out-of-stock issue affected both channels and will be an improvement across the board.
Okay. Thank you for taking my questions.
Thanks.
The next question will be from Tom Nikic of Wells Fargo. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question. Most of my questions have been answered already, but just a quick clarification on the investment. It's $60 million of investments, partially offset by $30 million of cost savings, which yields a net $30 million headwind for the year. I'm thinking about that correctly, right?
That's correct.
All right. That's all I had. Best of luck this year.
Thank you.
Thank you.
The next question will be from John Kernan of Cowen. Please go ahead.
All right. Good morning, everybody. Thanks for taking my question.
Welcome.
Can we talk about fulfillment costs and the change there, the direction it's heading? I know you're making a lot of investments in new fulfillment centers. I think the one in New York is going to be fully automated. Can you just talk about the direction of fulfillment costs and how that's going to affect your e-com profitability as we move throughout this year and into next?
Yeah. The overall profitability, once we get past the startup stage of those facilities, will be favorable. The combination of the fulfillment and the delivery costs will be a little bit lower coming out of the centralized fulfillment centers than they will be if we do it in stores. We'll also be able to do a better job keeping our items together on an order, which saves us as well. We believe the quality of the shipments going out to the customers will be improved as well. There are multiple reasons to do it.
Got it. Then just one follow-up on athletic apparel. It felt like the category was much more full price this holiday season versus prior seasons. Can you just talk about where you are from an AUR perspective overall in that business? Is there additional AUR recovery as you get back to a higher level of full price selling within that core athletic apparel category?
We expect our AUR to be higher.
Just any detail on how much more recovery there is given that you are lapping several seasons of pretty high promotions.
Yeah. I don't want to get to guide to that, we do expect our AURs to be higher, driven by hopefully less promotion. We'll see if that continues. Also differentiated product that we're bringing in for more of the enthusiast athlete, which we think we missed last year.
Got it. Thank you.
Thanks.
The final question this morning will be from Chris Svezia of Wedbush. Please go ahead.
Good morning, everyone, and thanks for getting me in here.
No problem.
I guess first, just on the SG&A investments, because we all love to talk about this, but just on the SG&A, just so I'm clear about this, as you move forward, what is the leverage point on SG&A? I think it's been low single digit comp. Is that still the viewpoint? Is that possible to get leverage this year, or just given the magnitude of the investments, that's unlikely.
The guidance that we've got right now suggests that we will not leverage SG&A, and I think it's due to the volume of the investments that we've got for this year.
Lee, if you were to take those out, I guess to a degree, what do you think that go forward would allow you to leverage the business on SG&A?
Yeah. I don't think I'd want to guide to that at this point.
Okay. Switch gears for a second. Just on the DC and the automation and the two facilities that are opening up, are you embedding any benefit to comp or anything along those lines once these facilities getting product to people faster, just any incremental benefit you're assuming in the comp or no?
There's no implicit comp benefit resulting from adding these buildings.
Okay. Lastly, I know you've spoken about a lot of brands, talked about private label. I'm just curious, I know adidas grown significantly in 2018 in terms of in the stores, product availability, apparel, footwear. I know Reebok comes out a bit, but that's a different situation. I'm just curious how you think about that brand for 2019 and going forward.
We continue to be enthusiastic about that brand. We are very enthusiastic about the Nike brand, and we think that Under Armour will turn around in our stores. The whole athletic category, we're pretty enthusiastic about.
Okay. Thank you, and all the best.
Thank you.
Thank you.
Thank you.
Ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Ed Stack for his closing remarks.
I'd like to thank everyone for joining us on our fourth quarter call and look forward to talking to you as we report our first quarter results. Thank you.
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.