DICK’S Sporting Goods, Inc. (NYSE:DKS) Q4 2022 Earnings Call Transcript March 7, 2023
Operator: Hello, everyone, and welcome to the DICK’S Sporting Goods Q4 2022 Earnings Conference Call. My name is Emily, and I’ll be coordinating your call today. I will now turn the call over to our host, Nate Gilch, Senior Director of Investor Relations. Please go ahead.
Nate Gilch: Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2022 results. On today’s call will be Lauren Hobart, our President and Chief Executive Officer; and Navdeep Gupta, our Chief Financial Officer. The 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. Please refer to our Investor Relations website to find a reconciliation of our non-GAAP financial measures referenced in today’s call. And finally, for your future scheduling purposes, we are tentatively planning to publish our first quarter 2023 earnings results on May 23, 2023. With that, I will now turn the call over to Lauren.
Lauren Hobart: Thank you, Nate, and good morning, everyone. We are very pleased with our 2022 results, which demonstrate the continued success and strength of our business as we realize the benefits of our long-term transformation through focused strategies and strong execution. Our athletes are passionate about healthy active lifestyles and they’ve continued to prioritize sport and rely on DICK’S Sporting Goods to meet their needs. Importantly, we continued to gain market share at an accelerating pace with considerable growth in our largest and most important categories. Our fourth quarter was a strong ending to another strong year. This Q4, we achieved record quarterly sales of $3.6 billion, and our comps increased 5.3%. This strong comp was on top of a 6.6% comp last year, a 19.3% comp in 2020 and a 5.3% comp in 2019.
And for this fourth quarter, we delivered non-GAAP EPS of $2.93, significantly ahead of any pre-COVID Q4 in our history. For the full year, we achieved sales of $12.4 billion. Our non-GAAP EBT margin was 11.4%, and we delivered non-GAAP EPS of $12.04. To put this in context, when you look at our 2022 performance versus 2019, our sales increased 41% or $3.6 billion. Our merchandise margin increased more than 300 basis points. Our non-GAAP EBT margin more than doubled and our non-GAAP EPS is more than 3 times higher than 2019. Our strong performance and financial strength position us to increase the rate of investment in our business to fuel long-term growth opportunities and also return significant capital to shareholders. The step change increase in our dividend that we announced today, more than doubling our annualized payout to $4 per share or $1 on a quarterly basis, clearly reflects our strong conviction and a structurally higher sales and earnings profile of our business and our ongoing focus on delivering shareholder value.
With 2023 marking our company’s 75th anniversary, this is an incredibly exciting time for DICK’S Sporting Goods. Our company was founded in 1948 by Dick Stack with a dream and $300 from his grandmother’s cookie jar. Under Ed’s leadership, it’s grown from a small bait-and-tackle shop to become the preeminent sporting goods retailer in the country. I’ve had the honor of working alongside Ed for over a decade and we will continue partnering to drive the business forward. While we will take the time to celebrate our heritage, we believe it’s just as important to use this milestone as an opportunity to look forward. Our future is extremely bright, and we have great momentum as we write the next chapter in our growth story. Our 2022 results provide a strong foundation upon which we will build in 2023 and in the years ahead.
In 2023, we will grow both, our sales and earnings through positive comps, a return to square footage growth and higher merchandise margin. We expect our comparable store sales to be in the range of flat to positive 2%. We expect our earnings per diluted share to be in the range of $12.90 to $13.80, which at the midpoint is up 11% versus 2022. We will continue to create and define our future. And as the largest U.S. sporting goods retailer, we are well positioned to extend our lead and continue gaining share in a fragmented $140 billion industry. I’d like to thank all of our teammates for delivering another strong year and for their passion, hard work and dedication to our business. At DICK’S, it is our people who make us great. And none of what we would have accomplished — none of what we have accomplished — excuse me, would have been possible without our exceptional team.
I’ll now turn the call over to Navdeep to review our financial results, outlook and capital allocation in more detail.
Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Let’s begin with a brief review of our full year 2022 results. Consolidated sales increased 0.6% to a record-setting $12.37 billion and the comparable store sales decreased 0.5%. When compared to 2019, sales increased 41.3% or $3.62 billion, demonstrating the sustainability of our structurally higher sales compared to pre-COVID levels. Importantly, if you look at some of the slides that we have inserted in our investor deck, you will see that approximately 80% of our growth was driven by sales in our priority categories of footwear, athletic apparel, team sports and golf, where we gained considerable market share. These gains are the direct results of our differentiated product, enhanced service and elevated experience we provide to our athletes.
On a non-GAAP basis, gross profit for the full year was $4.29 billion or 34.65% of net sales and declined 368 basis points from last year. However, our gross profit increased 531 basis points over 2019 on a non-GAAP basis. As expected, the year-over-year decline was driven by merchandise margin rate decline of 303 basis points. When compared to 2019, our merchandise margin rate was up 308 basis points. It’s important to highlight that we maintained the majority of the merchandise margin expansion that we drove over the prior two years. We also saw a significant leverage of 306 basis points in occupancy cost due to our structurally higher sales. On a non-GAAP basis, SG&A expenses were $2.78 billion or 22.45% of net sales and deleveraged 78 basis points from last year.
SG&A dollars increased $112 million, primarily due to investments in hourly wage rates, talent and technology to support our growth strategy. This was partially offset by lower incentive compensation expense. When compared to 2019, on a non-GAAP basis, SG&A leveraged 178 basis points due to the significant sales increase. Interest expense was $95.2 million, an increase of $68.2 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to $52.8 million of interest expense related to the $1.5 billion senior notes issued during Q4 of 2021. The current year also included $23.3 million of inducement charges that were partially offset by cash interest savings, both related to our exchange of approximately $516 million, a principal of our convertible senior notes.
Driven by our structurally higher sales, expanded merchandise margin and operating efficiencies compared to pre-COVID levels, non-GAAP EBT was $1.41 billion or 11.43% of net sales. This compares to a non-GAAP EBT of $440.5 million or 5.03% of net sales in 2019, an increase of close to $1 billion, or 640 basis points as a percentage of net sales. The additional slides that we have included in our investor deck highlight the key drivers of our structurally higher profitability today versus pre-COVID. These include significant leverage of fixed costs due to our structurally higher sales base, a structurally higher merchandise margin due to our differentiated product assortment, more granular pricing management and the merchandising mix benefits and the improved e-commerce profitability, which is now in line with the total company EBT margin.
In total, we delivered non-GAAP earnings per diluted share of $12.04. This compares to a non-GAAP earnings per diluted share of $15.70 last year and is more than 3 times our 2019 non-GAAP earnings per diluted share of $3.69. Now moving to our Q4 results. We are very pleased to report a consolidated sales increase of 7.3% to $3.6 billion. This was the largest sales quarter in the history of DICK’S Sporting Goods. Comparable store sales increased 5.3% on top of a 6.6% increase in the same period last year and 19.3% increase in Q4 of 2020 and a 5.3% increase in Q4 of 2019. Our strong comps were driven by a 7.6% increase in transactions, partially offset by a 2.3% decline in average ticket. Within our portfolio, our priority categories did very well, driven by our differentiated assortment across footwear, athletic apparel and team sports.
When compared to 2019, sales increased 37.9% or $988.1 million. On a non-GAAP basis, gross profit in the fourth quarter was $1.17 billion or 32.44% of net sales and declined 514 basis points versus last year. However, our gross profit increased 384 basis points over Q4 of 2019 on a non-GAAP basis. The year-over-year decline was driven by merchandise margin rate decline of 640 basis points and partially offset by lower supply chain costs. As planned, during the holiday season, we provided our athletes with a series of compelling item level deals. Additionally, we continued to address targeted inventory overages due to the late arriving spring product. As a result of these actions, our inventory is in great shape as we start 2023. We are taking in new receipts and could not be more excited about our spring assortment.
Importantly, when compared to 2019, Q4 ’22 margin rate is 209 basis points higher, driven by a differentiated assortment, combined with our sophisticated and disciplined pricing strategy and a favorable product mix. These are the same key contributors to our structurally higher margins that we have been emphasizing. On a non-GAAP basis, SG&A expenses were $823.7 million or 22.9% of net sales and leveraged 48 basis points compared to last year. Interest expense was $18 million, an increase of $9.2 million on a non-GAAP basis compared to the same period last year. This increase was primarily due to $11.4 million of interest expense related to the $1.5 billion senior notes issued in January of fiscal ’21. Driven by our structurally higher sales, expanded merchandise margin and operating efficiencies compared to pre-COVID levels, non-GAAP EBT was $350.5 million or 9.74% of net sales.
This compares to a non-GAAP EBT of $148.6 million or 5.7% of net sales in 2019, an increase of $201.9 million or 404 basis points as a percentage of net sales. In total, we delivered non-GAAP earnings per diluted share of $2.93. This compares to a non-GAAP earnings per diluted share of $3.64 last year and represents a 122% increase over 2019’s non-GAAP earnings per diluted share or $1.32. As Lauren said, we are very excited about the opportunities ahead of us, particularly in our core business with DICK’s House of Sport. As a result, we plan to convert our 17 existing Field & Stream stores, the majority of which are part of DICK’S Field & Stream combo store to DICK’s House or Sport or larger format DICK’s stores and exit the Field & Stream brand.
Photo by Ashkan Forouzani on Unsplash
We closed 12 of these stores during Q4, and we plan to convert the remaining stores by 2024. As a result, in Q4, we incurred pretax charges totaling $30.1 million, primarily noncash impairments of Field & Stream store assets. These charges, along with certain items related to our convertible senior notes were included in our GAAP earnings per diluted share of $2.60. For additional details on this, you can refer to our non-GAAP reconciliation table of our press release that we issued this morning. Now, looking to our balance sheet. We ended Q4 with approximately $1.9 billion of cash and cash equivalents, with no borrowings on our $1.6 billion unsecured credit facility. Quarter-end inventory levels increased 23% compared to Q4 of last year. As a reminder, we were chasing inventory last year amidst industry-wide supply chain disruptions.
Therefore, the more useful comparison is against 2019. Compared to Q4 of 2019, a 38% increase in sales was well ahead of our 29% increase in inventory. Our inventory is healthy and well positioned. Turning to our fourth quarter capital allocation. Net capital expenditures were $89.8 million, and we paid $39.3 million in quarterly dividends. We also repurchased approximately 610,000 shares of our stock for $66 million at an average price of $107.53. Furthermore, following the exchange of approximately $95 million of the outstanding principle of our convertible senior notes, we gave notice in February to the convertible noteholders that the remaining $59 million will be redeemed in shares for the total principal plus the accrued interest. We expect these notes to be fully paid off by April 18th.
Now, let me move to our 2023 outlook, which will be for 53-week year. Coming off of two consecutive record years in 2020 and 2021, our 2022 results provide a strong foundation upon which we will build in 2023 and in the years ahead. Let’s review the details. Comparable store sales are expected to be in the range of flat to positive 2%, with comps expected to be stronger in the first half due to improved inventory availability. At the midpoint, EBT margin is expected to be approximately 11.7%, driven by increase in gross margins. This includes an expected improvement in merchandise margin and lower supply chain costs. Q1 gross margin is expected to meaningfully improve versus Q4, but be modestly down year-over-year primarily due to lower merchandise margins partially offset by improving freight expenses.
We expect both, gross margins and merchandise margins to sequentially improve through the year. SG&A expenses are expected to deleverage primarily due to investments to fund our growth strategy. Interest expense is expected to be approximately $55 million, which is down approximately $40 million year-over-year due to the inducement charges that we incurred throughout 2022 as we repurchase our convertible debt and related interest savings. In total, we anticipate earnings per diluted share to be in the range of $12.90 to $13.80, which includes approximately $0.20 coming from the 53rd week. At the midpoint of this range, EPS is up 11% versus 2022 or up 5% on a 52-week comparable basis. Our earnings guidance is based on approximately 88 million average diluted shares outstanding and an effective tax rate of approximately 22%, which is driven by a favorable rate impact on the vesting of employee equity awards in the first quarter.
I’ll conclude with a brief discussion around capital allocation priorities. Investing in our business to drive profitable organic growth remains our top priority. We also remain committed to returning significant capital to our shareholders through our quarterly dividend and through opportunistic share repurchases. In fact, over the past two years, we have returned nearly $2.4 billion to shareholders, which included approximately $1.6 billion of share repurchases and $766 million of dividend, all while continuing to invest in the profitable growth of our business. Where appropriate, we will pursue acquisitions to amplify our growth and add new capabilities for the future. All of this is underpinned by our commitment to a healthy balance sheet and maintaining our investment grade credit ratings.
For 2023, our capital allocation plan includes capital expenditure of $550 million to $600 million. We will make significant investments to grow our business and drive athlete engagement. And as Lauren said, we are excited to return to growing our square footage. DICK’S House of Sport will be the primary driver of the square footage growth. In 2023, we will open nine new DICK’S House of Sport locations, eight of which are existing DICK’S and Field & Stream combo store conversions along with one relocation. We will also begin construction on more than 10 new DICK’S House of Sport locations that will open throughout 2024. In 2023, we will grow the footprint of our Golf Galaxy business through Golf Galaxy Performance Center and convert temporary value chain stores to permanent locations.
In addition, we will convert over additional 100 stores to premium full-service footwear, taking this elevated athlete experience to over 75% of our DICK’S locations. In terms of returning capital to shareholders, today, we announced a considerable increase in our dividends of 105% to an annualized payout of $4 per share or $1 on a quarterly basis. This dividend increase is based on our confidence in our structurally higher sales and earnings profile and reflects our conviction in our strategies and future growth trajectory. In addition, our 2023 plan includes our expectation of $300 million of share repurchases to offset dilution, the effect of which is included in our EPS guidance. However, we will consider using our excess cash flow to opportunistically repurchase shares beyond the $300 million.
With that, I’ll turn it back over to Lauren to review some of the key initiatives that will propel our profitable long-term growth.
Lauren Hobart: Thanks, Navdeep. At DICK’S, we’ve been reinventing sports for 75 years. Over this time, we’ve grown significantly to become the largest omnichannel sports retailer in the U.S., a $140 billion industry, and the number one premium golf and team sports destination in the world. We provide an unrivaled athletic apparel and footwear experience to our athletes. And we are the most important U.S. retail partner to many of the world’s leading sports brands. Since 2017, we have transformed virtually every aspect of our business and have added $3.6 billion in sales over the last three years. We are well positioned to extend our leadership in a large fragmented industry and have never been more excited about the future of DICK’S.
Within merchandising, we’ve built an industry-leading assortment known for differentiated and on-trend product. Our ability to showcase an entire brand portfolio is highly valued by our strategic partners, and our relationships with key brands remain stronger than ever. We’re also developing relationships with new and emerging brands, and at the same time, have created powerhouse vertical brands that collectively represent the second largest brand in our company. In our stores, we’ve invested in our teammate experience in training to heighten our team’s ability to provide an enhanced level of service to our athletes, all while continuing to make DICK’S a fun and rewarding place to work. We believe strongly that highly engaged teammates are critical to providing a great experience for our athletes.
And our culture is one of our key competitive advantages. In 2022, we were named one of Fortune’s Best Workplaces in Retail. And just last month, we were named one of America’s Best Large Employers by Forbes. Along with enhanced service, we’ve leveraged distinct in-store elements powered by technology to provide an unparalleled athlete experience. Experiential in-store elements such as HitTrax batting cages, TrackMan golf simulators and premium full-service footwear decks, inspire confidence in our athletes and reinforce the power of our expertise. These strategies in combination with our personalized marketing engine and brand building efforts are working. We added 7 million new athletes during the year and reached record highs in our active athlete database in Q4.
Our new athletes continue to skew younger and more female, representing a great opportunity for future growth. Importantly, our gold athletes, our most valuable cohort hit a record high of over 7 million people, equating to nearly 30% of our active scorecard members. We’re seeing very strong retention with our gold athletes and they continue to drive meaningful sales growth, representing well over 40% of total sales. We’ve also launched new concepts such as Public Lands and Golf Galaxy Performance Center to better serve enthusiast outdoor athletes and golfers, and recently announced that we will be acquiring leading outdoor retailer, Moosejaw, a real affirmation of our commitment to growth in the multibillion-dollar outdoor category. However, there is no greater example of our commitment to innovation within the athlete experience than DICK’S House of Sport.
DICK’s House of Sport is redefining sports retail. It’s an experiential destination that was inspired by Ed as he challenged us to create a concept that is built across the street from a DICK’S Sporting Goods store would put that store out of business. It’s this way of thinking that drives us to continue to innovate and create market-leading disruption. House of Sport is an experience that fosters deep community involvement, goes well beyond traditional retail and has become a destination where athletes can fuel their passions. Since launching House of Sport in 2021, our initial three locations have exceeded our expectations, driving strong engagement with our brand partners while delivering much higher total sales and profit as well as much higher sales and profit on a per square foot basis.
House of Sport will be a significant part of our future growth story. Over the next two years, we plan to open around 20 additional locations, including Downtown Boston and our two hometowns of Pittsburgh and Binghamton, New York. And over the next five years, we could have as many as 75 to 100 Houses of Sport across the country. We are also continuing to pull key learnings into our core DICK’S fleet. In fact, later this year, we’re excited to open the next-generation 50,000 square foot DICK’S store in South Bend, Indiana, which will reflect the House of Sport learnings for our athletes. For those who haven’t yet had the chance to visit a House of Sport in person, which we highly recommend, we’ve added a short video to our Investor Relations website to help bring the experience to life.
Across our ecosystem, we will continue to improve our omnichannel experience. For decades, we focused on making meaningful investments in technology with the long game in mind. Our athletes desire touch points have evolved significantly over the years, and we think about how to best meet their needs through a personalized experience enabled by technology and arguably the best data set in sports. We continue to see growth in our omnichannel athletes who spend more with us and shop more frequently than single-channel athletes. We’re excited by the results these investments are generating and believe our capabilities are distinctive in our industry and provide a long-term competitive advantage. As we expand our leadership position in new sports, GameChanger plays a pivotal role.
GameChanger is the premier scoring and statistics mobile app for youth sports and is a leader in the multibillion-dollar sports technology market. As a recurring revenue Software-as-a-Service company, GameChanger has delivered five-year revenue CAGR of 35%, while also being profitable, a function of its business model, which delivers some of the best unit economics in consumer technology. With GameChanger, we are connecting youth athletes to their teammates, coaches and families through score-keeping and live streaming, all on one easy-to-use mobile app. Over the past two years, our GameChanger team transformed its user experience to incorporate video streaming highlights and eight new sports, all delivered to athletes and their families on their phones and tablets, anywhere they are.
Every year, nearly 6 million games are covered on GameChanger and athletes and their families engage with the platform for over 280 million hours. To put this in perspective, more games are covered in a single spring month on GameChanger than have been played in the entire history of Major League Baseball. We were honored to see GameChanger named to Fast Company’s list of the World’s Most Innovative Companies for 2023 and also be named as a finalist for the Sports Business Journal: Tech awards that will be held later today. Looking ahead, we will continue innovating within e-sports technology and strengthening this important connection with athletes. Lastly, we have big plans for our brand in 2023. Over the years, our brand marketing has inspired athletes to participate in sports and our Sports Matter program has made it possible for more youth athletes to experience the unique and life-altering benefits that youth sports provide.
We believe it’s time to blend the inspiration and aspiration that’s always been a part of our brand marketing efforts with the raw power and a motion of our Sports Matter initiative. To make that happen, we’re really pleased to share that we will be relaunching our brand during the upcoming NCAA tournament with a campaign focused on the power of sports to change lives. We are so proud of the great work our team has done. And if you’re watching the tournament, men’s or women’s, I promise you will not miss it. In addition, we’re combining this with a commitment from our foundation of more than $5 million to fund 75 youth sports organizations, each with a $75,000 grant to keep kids playing. In closing, we want to reiterate that our strong Q4 and 2022 performance is the direct result of our strategies, our agility in meeting the evolving needs of our athletes and our relentless drive to innovate all supported by outstanding execution from our team.
Since 1948, DICK’S has believed in the power of sports to change lives, and we are committed to bringing this belief to life through our athlete experience, brand engagement, differentiated product and, most importantly, our people. These are the pillars of the new foundation of growth for our business, and we believe that no one is better positioned to lead in the marketplace. Before concluding, I’d like to thank all of our teammates across our stores, distribution centers and customer support center for their outstanding efforts and continued commitment to our business. This concludes our prepared remarks. Thank you for your interest in DICK’S Sporting Goods. Operator, you may now open the line for questions.
See also 14 Best American Dividend Stocks to Buy Now and 11 Best Cryptocurrencies to Invest in for Beginners.
To continue reading the Q&A session, please click here.