DICK'S Sporting Goods, Inc. (DKS) Earnings Call Transcript & Summary

Okay. Good morning, everyone. We're going to get started. It's my pleasure to introduce DICK'S Sporting Goods to our fireside chat. Today, we have with us Lauren Hobart, President and Chief Executive Officer; of DICK'S Sporting Goods, Lauren joined DICK'S in 2011 as Senior Vice President and Chief Marketing Officer and became President and CEO in, I don't know, if it's 2017, that's not right.

No, President in 2017.

President in 2017.

And in 2021 was CEO.

Okay. Sorry about that. And we also have Navdeep Gupta, Chief Financial Officer of DICK'S. Navdeep joined DICK'S in 2017 as Senior Vice President, Finance and Chief Accounting Officer and became CFO in 2021. That's right I think. That's correct. Is that correct?

Yes.

Okay. Okay. So DICK'S just reported Q2 results yesterday. So I think we'll spend some time asking some questions about that. But I thought we could maybe just kick off what you're seeing with the consumer. Your comps yesterday were extremely strong. There's a lot of debate about what is going on with the consumer. And so if you could maybe start there and tell us what you're seeing, that would be helpful.

Great. Thanks, Kate, and thanks for having us here. Thank you all for your interest in DICK'S Sporting Goods. For those of you who heard or didn't hear our call yesterday, we did deliver Q2 a comp of 4.5% on top of the 2% the year prior. And we are feeling really good about both the momentum in our business and the state of our consumer. We call our consumer athletes and this past quarter, we saw strength in our athletes in terms of increased ticket, increased transactions, more people joining our systems, so 1.6 million new athletes. And we didn't see trade down in any -- we saw growth across every income demographic. So that is maybe a little bit of an outlier. I think it speaks to the fact that the value that people are putting on healthy, active lifestyle, outdoor lifestyle team sports, but it also speaks to the strength of our long-term strategies, which I think are working really for I know, are working really well. And I would speak to a couple of them, in particular. One is differentiated product. So we've made a really concerted effort over many, many years now. This is the long term, I would say, 5, 6, 7 or longer year strategy to make sure that we have the best product for people, whether they're introducing to a new category or the most elite and looking for high performance. And we've worked particularly on our premium full-service footwear experience, which enable us to bring in all of the product that people want from a product, but also from a lifestyle standpoint, the cool shoes. So the product -- differentiated products is a huge piece of what's driving that engagement with our athletes and I would say the biggest or the second one I would love to talk about is what we call athlete experience. So how we treat our consumer, our athletes when they're in store, when they're online, the focus on service, getting them into the right product for them. And then the reinvention of our entire portfolio. We've got House of Sport. Hopefully, some of you guys have seen House of Sport. If you haven't, I strongly encourage you to come and visit us. We'll give you a tour. Kate seen in. It is a complete reinvention of how we come to life. And it's bringing our brand partners to life in new and different ways that are very exciting for them, but athletes are reacting in incredible ways. So we keep reinventing ourselves. That learning sort of how the sport have translated down into what we're calling our field house concept as well as across our entire portfolio. And we feel really good about the state of the business, proud of the 4.5% comp. Feel good about the consumer.

Yes. Well, that's great to hear. I mean, I think it's interesting to hear too that the health and wellness piece is driving a lot of this. But I think you've said in the past, just for your expectations for '24 that the industry for itself is pretty much flat. And whatever you're seeing in terms of growth is mostly market share gains. So could you maybe talk about what you were seeing pre-pandemic when it came to industry growth and what you expect maybe will be normal for the industry once we get out of '24.

Good morning, Lauren. Yes. So before I get started, Nate reminded me that I need to do the safe harbor disclosure. So we'll get that out of the way and then we can talk about the industry. So Kate, thank you. Great question. First of all, let's start with the overall industry, the TAM that we operate in and that's $140 billion industry, like Lauren said, our share is just 8.5% share today. So when we see the opportunity ahead of us, not only it's about the industry growth itself, but we feel there is a tremendous amount of opportunity for us to continue to gain the share that we have -- that we feel is deservedly ours. The work that we have done around House of Sport, the work that we have done on our field house concept, the work that we have done on premium full service footwear is allowing us to differentiate our and showcase the product in a very different way and provide the experience and service to our athlete in a differentiated way as well. But then coming back to the overall industry, it's $140 billion industry, and you look at it, pre-pandemic was growing probably in low single digits. And over the last 6 years, 5 years now, it's been growing at around 6% CAGR. There is a maturation that has happened in the industry since just there was such a demonstrable growth that happened right after pandemic. But as we see it, we see the opportunity for us to continue to differentiate ourselves and gain share even if the industry continues to remain relatively neutral to flat. The other aspect that I would add is what Lauren called out, the propensity to afford an active and healthy lifestyle. 3/4 of the U.S. population today is participating in an active lifestyle. There are 27 million kids that are active -- under the age of 17 that are active in youth sports. And those we see as the core customer that we are going after and trying to provide them a very differentiated product and an experience in our stores and on online.

And you mentioned differentiation of products too, which is very obvious. As you walk through the store and DICK'S has continued to benefit, we think, from more premium products from some of the bigger brands. How does the level of access compare versus pre-pandemic? And sorry to keep going back to pre-pandemic. But I do feel like the business had a certain CAGR, pre-pandemic, and now it's a little bit different. So I feel like that's why we keep comparing it to that. And just how do you think about the differentiation and your access of brand heat and exclusives going forward?

Yes. I think you're right to point out that the business is meaningfully different. And you could say pre-pandemic, you could even say, longer. But from 2016 on, we say nothing about our business is the same. Absolutely nothing. And that's because we have invested so much in the athlete experience that when they come in, that they can have a premium experience that went in footwear. There's a premium sit and fit environment, that we do have access now to the cool footwear, the cool kids. And it used to be -- we've always been rooted in sport, and sports is always going to be our core heritage. But sport and culture have come together now in such a way that our House of Sport stores, for example, are just right in the center of sport and culture and lifestyle and performance. And so we can now outfit the entire athlete, and it used to be that they maybe have to go somewhere else for the cool shoes. And so our access is a huge piece. Our merchant team has done an absolutely incredible job getting -- making partnerships with strategic -- our vendor partners. In fact, those relationships are at an all-time high. And I think access will continue to be a really important part of our story. And it's not just footwear. It's across the board, even the depth of soccer cleats that we're getting access to now, just really -- and not as a piece of footwear, but its performance footwear, all different than it was before and much higher elevation.

Kate, if I could just build on. I think it's beyond product as well. If you think about it, right, the capabilities that we have in the company, how well our website is functioning, how differentiated the experience that we are able to provide within our stores, even from a balance sheet and the financial transformation that we have done from the capital structure of the company is at a very different level than where we were pre-pandemic. So that's where going back to where [indiscernible] nothing about our business today where and it was pre-pandemic. Literally, every aspect of the business, we have gone through a significant transformation.

And I think that's important to flag because one question we do get is that there is a brand who might be looking to go back into wholesale distribution versus pursuing direct to consumer. And I think there's been some thought that DICK'S has been a beneficiary of being the preferred wholesale location for that particular brand. How do you think about something like that or a change like that?

Yes, it's a great question. We are -- many of our preferred partners, I think, are realizing the benefits of wholesale, and that's a positive for us. We are able to bring a brand to life in a way that's really unique. We've got the square footage to bring brands apparel and footwear, performance on lifestyle and showcase like in a House of Sport, we have these collaborative spaces, the collab spaces where we can tell a brand story, such an impactful way, be that one of our partner brands or a new brand. So we view the return to wholesale. We had strong partnerships throughout some of the back and forth over the last few years, but even stronger now. And we feel very confident that we can bring our brand partners' life in a way that is very unique in the industry.

And how important of a role is your scorecard or your loyalty program with regards to this partnerships?

Our loyalty program is incredibly important to us. Over 70% of our sales go through a loyalty, our scorecard program, which does several things. First of all, it indicates just that people are finding value in the program, but it also gives us a data set that we believe and what we know is the best data set in youth sports. And our data is such a powerhouse of an asset. And you think about working with some of our vendor partners, if they want to target a certain type of athlete, we know the first-party data, we can actually work with them to target reaching those athletes, and it's just going to keep growing. It's a big, big part. I think our loyalty program is something that we -- we've had in place now for 20 years at least. And it is so ubiquitous in terms of consumer acceptance, there's only upside in terms of how we can make it even more exciting, more access to cool and different product, but it's a great, great foundation.

Kate, if I could build on one more point. So yesterday, we shared one of the another important statistics about the game business. There are 6 million athletes on the GameChanger platform. these athletes that are on the GameChanger platform, these are parents, coaches, there are families that are watching their youth athletes perform different sports, in different stat, their video highlights. What we are seeing is the athlete that is on the GameChanger platform and is part of the scorecard, program that Lauren talked about, their revenue is 2x higher than an average scorecard user. So the profitability, the level of engagement, the level of relationship that we have with these 6 million athletes is significantly different than even on the scorecard. So we see tremendous opportunity to continue to build that deeper relationship with the athletes that we have across the portfolio.

I'm going to skip around then and ask about GameChanger, if that's okay. And then we can go back to some of the brand questions we have. But just since you mentioned it, GameChanger definitely seems to have gotten more airtime on the first quarter and second quarter call. I know it's been -- you've owned it for quite some time actually. I remember talking years ago at another conference about watching my son's baseball game. It is very different at the time. It was really just...

You were watching the DICK'S move -- [indiscernible] move and now you're watching the kids.

Yes, it's amazing how it's changed. But on a stand-alone basis, how big can this business be? What does it mean for your margins? Where can this take DICK'S?

I think we're starting to talk more about it because I think it is such a powerful asset, both in its own right. And then also to Navdeep's point, the collaboration that DICK'S and GameChanger can have to really develop an athlete experience. I don't know is there any -- I'm looking for head nods if anybody uses GameChanger with their kids. All right. So I'm going to take time to explain what it is because you're probably all like what the heck is GameChanger, but it is the largest scoring and statistics app in youth sports started in Diamond Sports, baseball, softball, and what keeps -- remembering is in the old days, literally, if you missed your kid's game, you could watch sell and so advance and you'd see it on a drawing, honestly, that the kid was moving and who scored this run and such. It's now been completely updated with video. So you can not only -- you can get highlights of just your kid and what they did in this past game, you get statistics on how they're performing scatter charts on how the team is doing. You can use it as a recruiting tool. It's incredibly addictive. Addictive because it's such a great content that people want for their families, addictive in the best way. And the fact that they're spending 45 minutes a day really speaks to the fact like that's like TikTok levels of engagement in terms of -- and it's because it's your kid, it's really, really engaging. So we have -- you asked about the financial aspect of it, we have said it's $100 million in revenue this year. It's highly profitable. Software as a subscription. It's a freemium model. So you can start, but the more you -- if you engage and it's relatively inexpensive, you get access to some of those really cool video clips. It does a postmortem article about the game, like a wheel, there's radio where you can listen to the game. And we think it's a huge, huge asset in its own right and increasingly with our data.

Yes. And Kate to add to what Lauren said, the growth that we have seen in the recent 5 years is about 35% to 40% CAGR. So we see this business continuing to evolve, continuing to go deeper. We started out with the Diamond Sports, but we have now expanded the product and the solution to include basketball, volleyball. The team is working on AI capability that if you're sitting and watching the game and you're holding the camera right this because you want to get the full view of the field, you no longer have to pan the camera. There's AI capabilities that are now built into the app itself that automatically pans the camera, and it gives you that wider view of the field, it can actively automatically generate the highlights at the end of the kilobase -- end of the game to be able to -- and then e-mail directly to the families. And that's the reason that the engagement that we are seeing with this platform is really, really exciting.

If we could go back to the merchandising and the store, we talked about national brands. But I think we should talk a little bit about private label, too, because I think you have seen a lot of success in your private label. You remember the days of exclusive partnerships with Umbro, I mean I'm really going back here where there was a lot of testing about what you wanted -- you wanted your private label business to be Nike ACG was another one that I remember. But why do you think the suite of private label brands that you have now with VRST and CALIA and the DICK'S Sporting Goods brand. Why is that working? What has come together for that to be so successful?

Yes. The one thing that -- maybe it sounds like it's a word change, but it's really meaningful changes. We don't call them private labels anymore. We call it vertical brands. And that's because we have chosen as opposed to just filling white space gaps with a product that doesn't have a personality or brand. We are now building brands. And yes, they do fill some white space in our portfolio. So for instance, DSG is an opening price point brand that is incredibly attractive to somebody who's looking for high fashion, high function, and a really attractive price point, something we didn't really carry. But we are building a brand here. So it's filling an opportunity, filling white space and we're creating -- DSG has become a brand. We're advertising it. We're building it and it's doing incredibly well. CALIA and VRST, CALIA is the women's apparel line, VRST is our men's apparel, both have had incredible innovation, both strong brand building, but the CALIA Inspire collection for anyone who wants to go try it, I really recommend it, but it's also too from the gym, too from your life, so you can live in it, you can work out in it. It's really testing to the insight that women want to have a comfortable casual but be able to work out and still have a decent -- look good. So -- and then for the men's brand VRST, there's a new limitless pant that if you've tried the VRST pant before, I would say, come back, try the limitless pant, it's amazing. And we've built these brands into really -- so it's nothing like what you remember when we were sort of slapping labels and trying different things. These are meaningful brands, and they're doing incredibly well.

Part of what I think the vertical brands has done as well as contribute to your gross margin. And gross margins do remain, again, back to pre-pandemic, well above pre-pandemic levels. You've walked around several calls about why you think the gross margins are structurally higher. What about going forward in terms of how you think about gross margins and driving them?

Yes. I would say the same drivers that we have consistently said in the recent past that there are 3 big drivers of gross margin, merch margin improvement. And to start with the merch margin, the differentiated product, where this whole experience begins from the differentiated product, having access to differentiated products. Being able to really relate with the athlete with those differentiated products allows us to, one, be a little bit more controlling of the pricing and the promotionality that is associated with these products. So that is the first part of this. The second, I would say the work that we have done on the vertical brand side, we said like for -- even in Q2, the performance that we saw from the vertical brands, actually, they outperformed the company average. And these brands carry 600 to 800 basis points of higher margin rate. So that's the mix that we are able to get from the vertical brand penetration. The third, the work that collectively our team has done over the last several years in pricing and promotions management capability. So we can be really selective and targeted and where and how deep do we want to partner even if there is some promotionality within the marketplace. As evident by the fact, like a lot of retailers have called out that the Q2 marketplace was much more dynamic compared to where the Q1 was. But if you look at it, we delivered 90 basis points of merch margin expansion, again, driven by the same 3 factors that I'm talking about. So the same factors that have contributed to the merch margin expansion so far to date, we continue -- we believe are the continued drivers as we look into the future as well.

And then, in fact, I thought we could spend like the last few minutes talking about unit growth. House of Sport has been a big initiative. And again, it's a pretty different store experience than just a normal DICK'S store. And so I wondered if you could talk a little bit about how the customer profile differs for House of Sport. And additionally, you mentioned that you're opening 75 to 100 locations by 2027. Can you walk through how you're thinking through store conversions, how you're picking the locations and a little bit more background on the concept?

Yes. I'll start just with the -- for anyone who hasn't been in the House of Sport. These are over 100,000 square feet. They are fully experiential. So lots of interactive elements. There is a tracking field, there is a rock-climbing wall there, you can swing a bat, you can swing a golf club and higher levels of service. There's these collaborative collab spaces, as I mentioned, and elevated product as well. Elevated fitting room experience. It's really the -- it is the best expression of the DICK'S brand but it is translating into the -- into our 50,000 Fieldhouse concept as well. The House of Sport, I'll turn it to you to talk about the units, but it has done an incredible job resonating with athletes, with consumers, with communities, bringing to life in the community, but also our vendor partners who are excited to bring their brands to life and then mall developers and landlords who are noticing when they put in a House of Sport, they're seeing increased traffic to their malls, increased sales per square foot, and that's getting us access to a whole different real estate base. So it's been a win-win-win profitability we shared last quarter, really great returns. And so we are moving forward aggressively with 75 to 100 but also the Fieldhouse concept, which is a takedown of it, is really the scale model for the rest of our portfolio.

Yes. So Kate, just building on what Lauren said, we finished last year with 12 House of Sport location. Our goal this year is to open 8. We have opened 2 this year. So you can imagine there are 6 more that are coming here in the next, I would say, just quarter and plus. Couldn't be more excited about how well these stores are performing. In terms of the unit count, we have -- I would say that approximately about 15 locations as we see opening -- being opened in 2025. So what you're seeing is a little bit of a ramp-up because as like Lauren said, it's not just finding the real estate, first of all, you have to be able to find 100,000 to 120,000 square foot location to be able to have the real estate available. You want to make sure that it is in the right node as well. At the same time, we have also been learning as to what type of market demographics work with this and what we have been very, call it, encouraged by the fact that we opened our first location in Victor, and then the next one was opened in small markets like Knoxville, and they have done fantastic. And so we are -- now we are taking the learnings out of that and we have the confidence to open Prudential Center earlier this year. We have -- in our backyard, we have opened Ross Park Mall. So what we are learning is that these stores can work really well in a small market to a mid-market as well as in a really urban location like Prudential Center. So you will see us continuing to march towards the 75 to 100 locations by 2027. We'll finish with around 20 locations by the end of this year and with the goal to open another 15 next year.

And then the next-gen stores, the 50,000 square foot stores you mentioned. Can you just remind us, is that more being looked at as a store remodel of existing stores into this better concept? Or are you opening new doors?

It will be a combination, very similar to what we said, maybe I'll back up and say the premise that we talk internally a lot about is we don't want to have a tired old chain. What we have done really well is invested into our store, into that athlete experience, providing that differentiated assortment and providing that excitement that the brands want to be represented when they come into our store in terms of the expression to the athlete and that's what you're seeing us do, whether it is through House of Sport, through the Fieldhouse or what we are doing even with the Golf Galaxy locations. So just on the Fieldhouse concept, which has covered our internal name for the next-gen 50,000 square foot format store, which is a mouthful to say. So we call them Fieldhouses. The expectation is that we will open about 11 of those this year, and that will reach around '26. But keep in mind, we don't own any of our stores, a vast majority of a store, except with a few exceptions that we have done with the House of Sport are all lease locations. On an average, we have about 100 stores that come up for lease renewal each year. So we see this as a great opportunity for us to reposition our store if it's needed to be repositioned or take -- or partner with the landlord to remodel the store and bring this new excitement and the new expression of DICK'S Sporting Goods to the malls.

And then the same question is for Golf Galaxy because you're taking a look at Golf Galaxy as well in terms of unit growth. Just what can we expect to see in some of the newer Golf Galaxy stores versus the heritage stores?

Yes. So there's a little bit of a nuance in Golf Galaxy as well. We call them Golf Galaxy Performance Center because the focus is not just on having the product, providing that access to both the equipment and the apparel side, the focus is as much on the fitting experience to be able to provide that differentiated and elevated level of specialty store experience in the Golf Galaxy performance location. So our goal that we have stated is about 45 to 50 Golf Galaxy performance locations. Most of the new Golf Galaxy locations that we are opening are in the performance center type approach, where there is an elevated level of tracking -- TrackMan technology that has been installed, where you can go not only take -- get fitted for the club, but you can actually go and take lessons with the PGA approach. And so that will continue to be our focus as we look to the Golf Galaxy.

And then anything from the Golf Galaxy performance centers that you bring into the Fieldhouse or is it going to be kept separate because you will have golf in the Fieldhouse as well?

We'll have golf there as well because there is a different athletes we feel we serve. There is an enthusiast level athlete that wants a specialty store experience. They tend to go to a gross-sales performance center location. But even in a Fieldhouse location, you're going to have the TrackMan technology installed in the base that we have within the store.

Okay. Historically, DICK'S has always experimented with new banners. And again, I might be dating myself, but there was a time where you could see a pop up in Pittsburgh with some new concepts. Is that still part of the formula? Are you still looking to think outside the box when it comes to new retail concepts?

We -- I think what you're thinking of is like our True Runner concept and Chelsea Collective. We are incredibly innovative at our core. We love to try things. And I think our newest baby is public land. And so we've -- we're iterating on that model to figure out what the right size of the store is, how we're going to serve our outdoor customers in that way. But I'll never say never, but that public lands is there and we have so much work we're doing right now in terms of just the reinventing of our entire portfolio, be it House of Sport, Fieldhouse, Golf Galaxy Performance Center, that there aren't too many offshoots like that.

We launched the Going, Going, Gone! chain, which is about 50 stores there, and we are really happy with the performance that we are seeing from these clearance location. It allows us to move the clearance out of the regular store into the Going, Going, Gone! store where you are able to provide a very differentiated service and experience with a much more value-conscious athletes. So it's bringing us new form of athletes to our overall database. You're able to provide the full size and color run. Sometimes it gets broken in a store and the activation and the engagement that we're seeing then on the online platform is fantastic. So like Lauren said, we're never too comfortable with where we are. We are always trying to push ourselves with the...

Relentless improvement.

Relentless improvement, there you go. Thanks, Lauren.

We're asking 5 questions of every company that sits on stage with us during the conference. So we thought we'd go a little rapid ground in the last 5 minutes here with these questions. We talked about the health of the consumer. Just what are your expectations for the consumer environment in the second half of '24 versus the first half saying better or worse?

We've seen strong momentum with our consumer, and we expect that to continue into the back half.

And we actually raised our guidance.

We did raise our guidance, so things are better.

Right. On the topic of margins and cost pressures, we've seen some tailwinds this year with freight coming down and certainly inflation dissipating a little bit. But as we look to '26, how are you looking at costs when it comes to the materials, labor, maybe even tariffs just saying better or worse than '25.

Yes. I would say tariff is still unknown. So I don't know if we can comment on that. In terms of the cost pressure, I would say that it will moderate compared to what we have seen in the recent past. But probably we'll see some pressure, especially on the labor side.

One expression we've heard throughout the conference is about the consumer behavior of looking for value. And we wondered in your opinion, is this more something that's happening because of what's happening with the macro, it's cyclical? Or is it more of a secular trend in terms of what the consumer is looking for and how they're shopping?

I think consumers are choosing where to spend their money. And of course, they're looking for value, but there's also opportunities where they're willing to spend if it's something that they're passionate about or that part reflects who they are or their performance desires. So we see it as both. And that's part of the -- we're seeing growth across every income demographic, but partly because of that.

We also kind of talked about this. We've been asking every company if they expect to have more or less points of distribution in the U.S. We just talked about more House of Sport.

Go ahead.

Yes, we would -- we see us having more points of distribution. We returned to positive square footage growth this year. We are expecting our square footage to increase by about 2%. So we see us continuing to evolve our points of distribution. We are also excited about the new distribution center that we'll be opening in 2026, which will allow us to continue to serve the athletes in a differentiated way, both from online as well as from our stores.

As we grow some square footage in stores, we are -- our stores are very critical points of e-commerce fulfillment and distribution for us, too. So inherently, there's more -- just more fulfillment there, more distribution.

And then our last question is on promotionality, which we didn't talk about too much before. But just do you expect to be more or less promotional this holiday season versus last year?

I expect to be us or the industry.

Well, you and then the industry, yes.

The industry was extremely promotional last holiday. So I would hope it will be slightly less so, but we would expect a level of promotionality. We navigated through it well last holiday, we'll navigate it. Well, I don't expect it to be materially different.

Well, thank you so much for joining us today. Thank you for the time.

Thank you. Appreciate it.

Thank you.