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

Good morning. It's my pleasure to introduce DICK'S Sporting Goods and to moderate our fireside chat. Today, we have with us, Ed Stack, Executive Chairman of DICK'S Sporting Goods. We have Lauren Hobart, President and Chief Executive. Lauren joined DICK'S in 2011 as Senior Vice President and Chief Marketing Officer and became President in 2017 and CEO in '21. And we have Navdeep Gupta, Chief Financial Officer; Navd joined in 2017 as Senior Vice President, Finance and Chief Accounting Officer and became CFO in 2021. Thank you, everybody, for joining us today.

Thanks for having us.

Thank you.

It's great to see you, Ed. I think it's been, I don't know, 7 or 8 years since...

It's been a while.

Yes.

My hair might have been a different color back then.

Great to see you. You guys had a really great second quarter, which we heard about last week. I wondered if you could start talking about what you're most excited about for this year?

Yes. So we did -- we had a great quarter. Comps were 5% on top of a 0.5% the year before. So against a pretty tough comparison. Team, we still had a 5% comp gain. What's really happening and we're excited about out there is anything that's new, anything that's new from a design standpoint, technology standpoint is doing extremely well. Things that have been around for a while are a little bit slower, but anything new we're really excited about. And our team has done a great job of having those new products in the store and they helped drive the 5% comp. And I'm happy to make a comment about what's on everybody's mind, which is the Foot Locker acquisition. And I can tell you, we closed on that on Monday, which we're really excited about. And we're really enthusiastic about Foot Locker. We see a huge opportunity here, not only from what we can do from a global standpoint, but what we can do here in the United States. Foot Locker has always been for so long, it's been a terrific brand. It's been a little bit -- their performance has been a little bit -- they struggled a little bit over the last couple of years. But we see kind of what needs to be done and it's really basically into retail 101 to have kind of the right product at the right place at the right time. We think that they've got a great culture in their stores. The Striper culture in the stores is one of the main reasons why we bought them. These young men and women who work in the stores, they love Foot Locker, they love sneakers. They understand sneakers. They love to talk about sneakers, and we think there's a big opportunity, and we're very excited about that. It's going to be a bit of a -- the next couple of quarters are going to be -- we're going to kind of clean things up, get the real assessment of what's going on, and we can give you a lot more information on our fourth quarter call as we go into '26, but we're pretty excited about it.

Thank you. And you mentioned newness and innovation, and that's definitely clear when you enter your stores. And I wondered if there was a way that you could speak to how much you think is just the health of the sporting goods industry, just all of the increased consumer interest versus how innovative the brands are versus the buffer you have, which is the merchandising. And how is that all playing out?

I think it's a combination of all. So right now, we are -- there's such an intersection between sport and culture right now, and we're right at the center of that. So there are some brands that have come out with some really terrific product that's really kind of bought the consumer's interest, whether that's Nike's new running construct, which has been just fantastic around PEG structure and Vomero has been great. Some of the brands -- the hard lines brands around -- from a diamond sport standpoint on some of the new bats that have come out, have done really, really well from a launch standpoint. And it's hard to believe some of these bats that we're selling are $500 a piece. So these are not inexpensive products, and they're just flying off the shelves that these kids want this particular product. So a number of the brands are doing a great job from an innovation standpoint. Sport is really at -- we're at this intersection between sport and culture, which is going to last for a while here. We've got some really terrific things coming in this country from a sports standpoint, the World Cup in '26, the Olympics in '28. And the way that the World Cup has been structured, I think, is just a genius that it's all of North America. The matches are going to be played in cities all across the country. So the first match in L.A., the final in New York and so many markets in between Dallas and Atlanta and Boston. And so now all through these weeks of the World Cup, these markets are going to be all jazzed and focused on what's going on in the World Cup. So it's not going to be just -- it's playing in some other town for the entire matches. It's coming to my town, these matches, these players, and it's going to be -- it's going to be great for our business, it's going to be great for soccer, and I think it's going to be great for soccer long term in this country. And -- so there's a lot to be excited about.

Great. I would ask you maybe next about the health of your consumer, but if $500 bats are flying off the shelf, the consumer is just fine. Yes.

Yes. I'll just build on Ed's comments about the importance of sport and culture. But our consumer has held up so well. And as you pointed out, 5% comps, but it's the sixth quarter in a row, we've had over 4% comps. And really exciting that, that newness and that growth is coming across the entire portfolio, hardlines, softlines, I'd mention, diamond sports, having launches in a way that footwear -- always had launches. But we're seeing growth across every income demographic, which is really terrific. We're not seeing trade down. People are absolutely voting that these categories that we serve are important that the differentiated product that we have is really appealing to them. And then we are building a better mousetrap in terms of our in-store experience, our online experience, our House of Sport concepts, doing incredibly well, our Field House concept is doing incredibly well. So I just think we're in a position to continue to gain significant market share. The consumer is doing great, and the momentum in the business is quite strong.

If we can maybe focus on market share a little bit, is there any specific opportunity where you think that there's still low-hanging fruit with market share?

The interesting thing is we are such a large -- we're #1 sporting goods retailer in the U.S. soon to be in the globe, but we only have 9% market share. So if you look at it, there's significant market share to continue to get. And we've been focused this year on specifically driving our footwear business. This is pre Foot Locker, driving our e-commerce business and repositioning our entire portfolio. But there's pockets of market share everywhere to go after online in stores, and we're just going to continue to push it and drive it.

If I could maybe switch the conversation to tariffs. It seems like you've been able to manage pretty well so far, but also, I don't think we have fully seen a lot of the price come through yet. So how would you characterize your inventory position and how you're positioned into the second half in this new environment?

Yes. So inventory position, we feel fantastic. If you look at it in Q2, we finished with 7% growth in inventory. And our expectation is that -- first of all, the inventory is really, really clean. We keep a very conscious focus around the clearance levels and those were at historic lows. Inventory and the newness and innovation is the one big focus for us. Overall, from a quantum perspective, 7% growth in inventory and 5% sales growth, we feel great about it. What we have said is we expect our inventory growth to continue to moderate as we go into the second half. The focus for us around tariffs is working very closely with the national brand partners and the manufacturers. The Q2 impact, if you look at it, was -- there was a negligible impact from the tariff. But as expected, as other retailer has said that this will grow as we look to the back half. But we feel like the pricing and the -- the pricing capabilities that we have built to be really surgical and our partnership with National Brand Partners will allow us to continue to be really mindful, balancing what is the right thing for our business as well as balancing what is the right assortment and the innovation we want to showcase to our athletes.

You mentioned just being really clean on inventory. And I know there's been an increased focus to just move the inventory to make way for new inventory, which has been a really successful strategy. But I was curious how you balance that. Your margins continue to be robust and expand, yet it seems like you're clearing inventory a little bit faster. So how are you managing the push-pull of that?

While it all starts with what do you buy and how you buy and the partnership that you have with the national brand partners. And that's where I feel like our merchant team do a fantastic job. One, really, really curating the assortment and really going -- being meaningful in what we are buying and how do we buy there. . The second is, there is a constant level of discussion that happens with the national brand partners. And then at the end, you always have some mistakes. And that's where the focus that we have had around keeping the inventory clean, having the going, going gone chain. So there are 50 stores today that we have, which are clearly focused on handling some of the clearance products that we are able to handle through that. The work that team does is phenomenal. And with all of these things, if you look at it in Q2, we grew our gross margins by 30 basis points, and that was on top of over 200 basis points of gross margin. So that's the balance that the team has been doing a fantastic job at.

Could you maybe talk a little bit about the DICK'S deals Day event in July, and just what the thought process was behind that?

Yes, I'll take that. So we -- this is something we've been doing now for several years. There's a lot of online shopping at that time of time of the year around Prime days. And our DICK's Green Day is a time for consumers to get some amazing values. We don't do anything. We've been so really surgical about where and how we invest. So we don't have enormous light-wide promos anymore. We really surgical and targeted, and we have great success for those few days. .

If we could maybe move on to your vertical brands, that's been yet another very successful strategy. Could you maybe talk to any change in the number of customers trading into the vertical brands this year? And how do you think about the opportunity going forward?

Our vertical brands have been great. They've continued growth. They outpaced the company as a whole. We've got margin rates there 700 to 900 basis points higher. Our vertical brand of Vrst, CALIA, DSG, Walter Hagen have continued to grow, and they've now got a real following out there in the marketplace. So it's not just -- it's -- I came up and pick something up that's inexpensive from a vertical brand standpoint. Some of these vertical brands are really very -- are premium, are priced at kind of what the national brands would be, and they've now got a real following. We had 1 meeting and one of the guy walked in and said, reverse product, I love your reverse product. The DSG brand has just been great as a real family brand. Our team has done a great job marketing that brand and what we bring it to life in the stores. So our vertical brands will continue to grow. Some people have asked us what the percentage of that of our business can be. And it will grow a bit as a percentage, but I don't think it will ever get to be super high because our footwear business is such an important part of that business, and we're not going to be in the vertical brand footwear business. There are certain baseball bats, there's a real technology involved there, and the kids want to be playing what is being played and the College World Series or the Wood Bat tournaments of what the pros are playing. So it's got its niche, and it's very helpful and will continue to grow, and it will help our margins.

Do you want to talk about MaxFly and the success we're having there with Ben and...

Yes. our MaxFly ball has just been great. So we've got a number of people -- a couple of people on tour playing it. Lexi Thompson is playing it, Fred Funk's is playing it, and Ben Griffin is playing it and Ben won twice on tour with it this year. And with the marketing around that and the popularity of Ben, that business has just gone right through the roof. And we couldn't be happier that he's now playing in the Ryder Cup. So we've got our MaxFly ball being played in the Winter Cup. And MaxFly is a brand that has a great history. It's won 13 majors, over 100 tournaments. People have won with MaxFly before we got this thing, heading back on tour again. But this has been a rousing success. And our team did a great job with it. And all you golfers out there if you haven't tried it, try it, you'll really -- you'll love the ball.

This is a good segue just to golf. I feel like maybe golf doesn't get top billing all the time, but it's a huge part of your business. Just how do you think about the category going forward, certainly, the entire industry has had a resurgence? And what does the innovation cycle look like?

The golf business has been -- there was not many good things that came out of COVID. Golf was a real beneficiary of COVID because people got to be outside. And there's some new people -- a number of people came in to golf, they found that I really like to play golf and it's stuck. So the golf business has been great. A lot of people have kind of got an opening price point, set a golf clubs, if you will, went out and played it. And now we're starting to see that cadre of golfers come back and upgrade their equipment. And there's some real technology advances that have come on out there between what's going on with the drivers and hybrids and high lofted fairway woods and the innovation cycle in golf is really very good. And so our golf business has been great. We expect that's going to continue for some time. And it is our third largest department. And we also think there's a huge opportunity from a golf apparel standpoint, of how we merchandise golf apparel in the stores going forward, and we think that there's a real upside from a golf apparel standpoint going forward.

And just to kind of close the loop, I know you have the Golf Galaxy Performance Centers now. Is there anything you can maybe update us on what you're seeing with that?

Yes. They've been really great. And we -- our golf business is really a roll-up of a couple of gold stores that we did originally. And then it's a roll-up of a Golf Galaxy, which was started in Minneapolis and then the number of Golfsmith stores when they went out of business. And as we looked at this, it was -- these stores are good, but they're not great. They're not kind of on the same part of what we should be doing, what we're doing on the DICK'S side. So we developed the Golf Galaxy Performance Center where we've got real performance statistics in there. We've got a better apparel assortment. We've got a broader service assortment, we're given lessons and the Golf Galaxy Performance centers have knock on one -- it worked very well, and we'll continue to open these stores.

Great. If you can maybe move down the P&L and talk the margins for a little bit. Obviously, it's been a big discussion about how much higher your margins today than they were pre-pandemic. Of the drivers you've listed in the past such as differentiated product, what do you think has been the biggest driver? What do you think can be the driver going forward and then go from there?

Yes. So we have talked about consistently 3 big drivers of the gross margin expansion when you look at 2019 versus 2024. The 3 big drivers, first and foremost, is the differentiated product. The access to the differentiated product allows you to get the full price selling, gets you access to some of the product that does not go on any kind of promotion. And you are a little bit immune to the promotional intensity that may be within the marketplace. So that's the first driver. Second, we talked about the work that our vertical brand team has done over the last several years. And sometimes people miss the fact that Field & Stream used to be our largest vertical brand product when we look at 2019. We have exited that category and not only replace that all of that sales into new categories like DSG, CALIA, but these have much higher margins than what Field & Stream margin used to be. The third one I will put it is mix. And within that, there are 2 parts of mix. One, we used to hunt, which was a big part of our business, definitely significantly lower margin than where the operating margins or the merch margins of the company are. And then the second is the work that has been done through our clearance management and going, going gone and the pricing and promotion capabilities that we have built. So those 3, we continue to see as the drivers of the gross margin expansion even into the future. The 2 additional things that we have started to talk more extensively actually since late last year and into this year is the work that the team has done around game changer platform. Game changer platform is the -- is probably the best platform that is out there in the youth sports ecosystem. And that platform, $100 million of sales last year, very profitable. We expect that business to grow to $150 million. This is a SaaS business with recurring revenue. So it has margins not that of a retail product margin. This is a true SaaS business. So that, as it continues to become bigger and bigger part of the portfolio of the business, that drives the gross margin expansion. And then there are retailers that are ahead of us in this journey, but the work our team has done on media network or the retail media network nobody that has an asset that we have from the athlete database access to the customer. And a customer who walks into our store, on an average has more than 1 brand in their basket. So to be able to really understand the basket and the interactivity of that customer with us. We are uniquely positioned to be able to leverage that data to grow the DICK'S Media Network. So those are the 2 new drivers and believe that these will continue to be the drivers of the growth as -- for merch margin going into the future.

I believe both are contributing to margin already. But especially with DICK'S Media Network, which does seem to be maybe an earlier stage, when do you see that becoming more needle moving?

Yes. I'll take that one. We have -- you're right, we've been speaking more publicly about game changer and the revenue and the fact that it's growing 40-plus percent CAGR over year. The media network is a step behind but catching up quickly and really leveraging the power of game changers so that we have this incredibly unique asset with the media network. I think we've invested in infrastructure, technology, reporting for our brand partners and for the people who will be investing in the media network. We're just creating -- we've created a much better mousetrap, and we're ready to go. So we've got a sales force now we haven't guided to how much when and where, but I would expect it's going to become a more meaningful part of our business going forward.

And maybe I'll update on that. I think this is another unique opportunity, right? When you walk into a House of Sport location, and I want you all when you get a chance, we'll slowly expand this even further. The way we are bringing the DICK'S Media Network together in a House of Sport location where you can not only interact with the product, but actually see the information about that product right in front of you when you are in the store will be another differentiating capability on the DICK's Media Network and retail locations.

So that was actually kind of my next question. So it's not just traditional advertising you're going to see on the DICK'S website. It's going to be website, game changer and then in-store as well.