DICK’S Sporting Goods, Inc. (NYSE:DKS) Q3 2022 Earnings Call Transcript November 22, 2022
DICK’S Sporting Goods, Inc. beats earnings expectations. Reported EPS is $2.6, expectations were $2.21.
Operator: Hello, everyone, and welcome to the Q3 2022 DICK’S Sporting Goods, Inc. Earnings Conference Call. My name is Emily, and I’ll be your operator for today’s call. . I will now turn the call over to our host, Nate Gilch, Senior Director of Investor Relations. Please go ahead, Nate.
Nathaniel Gilch: Good morning, everyone, and thank you for joining us to discuss our third quarter 2022 results. On today’s call will be Lauren Hobart, our President and Chief Executive Officer; Navdeep Gupta, our Chief Financial Officer. A playback of today’s call will be archived in our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will 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. During this morning’s call, we will discuss earnings per diluted share on a non-GAAP basis, which eliminates the impact of certain items related to our convertible senior notes issued in Q1 2020. For additional details on this or to find a reconciliation of any non-GAAP financial measures referenced on today’s call. Please refer to our Investor Relations website. And finally, for your future scheduling purposes, we are tentatively planning to publish our fourth quarter 2022 earnings results on March 7, 2023. So with that, I’ll now turn the call over to Lauren.
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Lauren Hobart: Thank you, Nate, and good morning, everyone. As we announced earlier this morning, we delivered an exceptionally strong quarter. Our Q3 results demonstrate the continued success and strength of our business based on our transformational journey and the foundational improvements we’ve made over the past 5 years. Our strategies are working and are clearly resonating with our athletes. While consumers continue to face macroeconomic uncertainties, our athletes have held up very well as we continue to offer them a compelling and differentiated assortment as well as a best-in-class omnichannel experience. In fact, during the quarter, we saw three important consumer trends. More athletes purchased from us, they purchased more frequently and they spent more each trip compared to the same period last year.
Our industry has strong momentum given a lasting shift in consumer behavior and our differentiated assortment, elevated service standards and best-in-class omnichannel athlete experience are setting us apart in the marketplace. This Q3, we achieved record sales of $2.96 billion and our comps increased 6.5%, driven by increases in both transactions and average ticket. This strong comp was on top of a 13% comp last year, a 23% comp in 2020 and a 6% comp in 2019. As you’ve heard us say many times, DICK’S is a growth company, and our Q3 results are powerful evidence of our sustainable growth story. As we indicated on our last call, at the end of Q2, our inventory position was strong, and we were back in stock in key items. This enabled us to deliver a very strong back-to-school season and meet robust consumer demand.
Additionally, we also mentioned that we have pockets of apparel inventory to address and we have addressed much of that overage this quarter. As a result, and as expected, we saw a merchandise margin decline of 438 basis points versus last year. Importantly, our merchandise margin remained elevated compared to 2019. And looking ahead, we continue to be very confident that our merchandise margin will remain meaningfully higher than pre-COVID levels on an annual basis. We achieved double-digit EBT margin of 10.3% in the quarter, over 3x our 2019 rate on a non-GAAP basis. This was driven by our structurally higher sales, expanded merchandise margins and greater operating efficiency. In total, we delivered non-GAAP earnings per diluted share of $2.60, significantly ahead of any pre-COVID third quarter in our history.
Looking ahead, our inventory is healthy and well-positioned, and we’re excited about the assortment that we have in place for the holiday season. Because of our continued strong performance, quality of inventory and the confidence we have in our business, we’re raising our full year outlook. We now expect comparable store sales for the year to be in the range of negative 3% to negative 1.5% and non-GAAP earnings per diluted share to be in the range of $11.50 to $12.10. In closing, I’m very pleased with our strong third quarter results and remain enthusiastic about the future of our business. I’d like to thank all of our teammates for their hard work and commitment to DICK’S Sporting Goods, which helped make this performance possible and for their upcoming efforts during the holiday season.
I’ll now turn the call over to Navdeep to review our financial outlook and results in more detail.
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Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Let’s begin with a brief review of our third quarter results. We are excited to report a consolidated sales increase of 7.7% to $2.96 billion. As Lauren noted, comparable store sales increased 6.5% on top of a 12.8% increase in the same period last year, a 23.2% increase in Q3 of 2020 and a 6% increase in Q3 of 2019. Our strong comps were driven by a 3.7% increase in transactions and a 2.8% increase in average ticket. Within our portfolio, the back-to-school categories did very well, driven by our differentiated assortment across footwear, apparel and team sports. When compared to 2019, sales increased 51%. This reflects a significant sequential acceleration in our sales trends versus 2019 from recent quarters.
Gross profit in the third quarter was $1.01 billion or 34.22% of net sales and declined 423 basis points versus last year. However, it increased 463 basis points over Q3 of 2019. As expected, the year-over-year decline was driven by merchandise margin rate decline of 438 basis points. During the quarter, we focused on cleaning up some targeted inventory overages due to late arriving spring products. We moved excess apparel inventory to our value chain concept and have been very successful in liquidating much of this product. We intend to continue addressing this overage in Q4 in order to start 2023 clean. Our Q4 merchandise margin expectations are appropriately reflected within our annual outlook. Compared to 2019, our merchandise margin rate is 141 basis points higher driven by a differentiated assortment, combined with our sophisticated and disciplined pricing strategies and a favorable product mix.
Because of these structural drivers, we continue to expect our merchandise margin rate to remain meaningfully higher than pre-COVID levels on an annual basis. SG&A expenses were $679.7 million or 22.97% of net sales and leveraged 3 basis points compared to last year on the increase in net sales. The $48 million increase in SG&A dollars was driven by investments in hourly wage rates, talent and technology to support our growth strategies. Interest expense was $26.1 million, an increase of $20.1 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to $13.8 million of interest expense related to our $1.5 billion senior notes issued during Q4 of 2021. The current quarter also included $8.8 million of inducement charges related to our exchange of approximately $221 million of outstanding principal of our convertible senior notes.
Driven by a structurally higher sales, expanded margins and operating efficiency compared to pre-COVID levels, EBT was $304.1 million or 10.28% of net sales. This compares to a non-GAAP EBT of $59.9 million or 3.05% of net sales in 2019 and an increase of $244.2 million or 723 basis points as a percentage of net sales. In total, we delivered non-GAAP earnings per diluted share of $2.60. This compares to a non-GAAP earnings per diluted share of $3.19 last year and represents a 400% increase over 2019’s non-GAAP earnings per diluted share of $0.52. Now looking to our balance sheet. We ended Q3 with approximately $1.4 billion of cash and cash equivalents and no borrowings on our $1.6 billion unsecured credit facility. Our quarter end inventory levels increased 35% compared to Q3 of last year.
As a reminder, we were chasing inventory last year amidst industry-wide supply chain disruptions. Therefore, the better comparison is against Q3 of 2019. And compared to Q3 2019, our 51% increase in sales was well ahead of our 31% increase in inventory. Our inventory is healthy and well positioned. Now turning to our third quarter capital allocation. Net capital expenditures were approximately $100 million and we paid $41 million in quarterly dividends. During the quarter, we exchanged approximately $221 million of outstanding principal of our convertible senior notes for cash and unwound the corresponding portion of the convertible note hedge and warrants or 4.3 million shares of our common stock. After completing this exchange, we have taken out approximately $421 million with approximately $154 million in aggregate principal of the convertible notes still outstanding.
Beyond retiring nearly 3/4 of our convertible notes, year-to-date, we have returned $485 million to shareholders through dividends and share repurchases while continuing to invest in the profitable growth of our business. So let me wrap up with our outlook for 2022. As a result of our strong Q3 performance and the quality of our assortment for the holiday season, we are raising our 2022 guidance. Importantly, our updated outlook continues to incorporate an appropriate level of caution given the uncertain macroeconomic backdrop. For the year, we now expect comparable store sales in the range of negative 3% to negative 1.5% compared to our prior expectation of negative 6% to negative 2%. In addition, we now expect non-GAAP earnings per diluted share in the range of $11.50 to $12.10 compared to our prior expectation of $10 and $12.
EBT margin is now expected to be approximately 11.4% at the midpoint, more than double our 2019 rate. Our earnings guidance assumes an effective tax rate of about 25% and is based on approximately 88 million average diluted shares outstanding. In closing, we are very pleased with our Q3 results, and we remain very enthusiastic about the future of DICK’S. This concludes our prepared comments. Thank you for your interest in DICK’S Sporting Goods. Operator, you may now open the line for questions.
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