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

Okay. Good morning, everyone. 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. Ed served as the company's Chairman and CEO from 1984 through January 2021. We also 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 she became President in 2017 and CEO in 2021. We also have with us Navdeep Gupta, Chief Financial Officer of DICK's Sporting Goods, Navdeep joined DICK'S in 2017 as Senior Vice President, Finance and Chief Accounting Officer, and he became CFO in 2021. Navdeep, I'll turn it over to you.

Well, fantastic. Good morning, everyone, and thanks for joining us. I wanted to read the disclaimer, but I'm guessing nobody is interested in reading it. So our our nondisclosure agreement is actually filed on the website and Nate, wherever you are. Thank you for doing the reminder for me for that.

Great. Okay. So we'll get started. I guess right out of the gate, we'll just talk about the state of the athletic category, if that's okay. I think there is a good amount of concern out there about what is going on in footwear and apparel. So if I have this right, since COVID, we've been seeing a strong casual athletic trend, which has been underpinned by increasing health and wellness focus. But more recently, I think we've seen more cautious commentary out of the brands and more challenged results out of other athletic retailers. So could you maybe level set where you think we are in the athletic cycle for both footwear and apparel?

Yes. I think that the -- so thanks for the question, and thanks for inviting us. I think the idea that the athletic cycle is overdone, okay? But when you take a look at what our footwear business is on the DICK'S side, our business on the IC side is really very good. The specialty channel has been a bit more challenged. But on the DICK'S side, it's very good. And a couple of things. And it's more of the specialty channel. So Foot Locker on launch shoes was much more dependent on kind of the high launch retro shoes than we are at DICK'S, the same with some other of the specialty players. But that business has slowed, and there's the ability to pivot to other areas of the business, which is I think what we've done at DICK'S extremely well, whether it's new brands that I would say are not emerging anymore, but have emerged, such as on and HOKA have been great. And on the DICK'S side, we transitioned to those pretty quickly. Foot Locker was not able -- they didn't do that and wasn't able to do that. You see other brands now coming up with it. [Audio Gap] Polaris less expensive on such and such a site. We didn't want them to go someplace else to buy that product. We felt that we really wanted to retain that consumer. And we felt that, that was a the right investment to make in our business. And we talked on our call, I used the word investment very purposefully that we do feel it was an investment in our business to make sure that we we keep that consumer. We wanted that consumer to come back and shop with us at Christmas. We want that consumer to shop with us in the spring for his or her baseball cleats, softball cleats, soccer cleats, other product, and we didn't want to be viewed as high price in the marketplace, and they get that mindset and don't come back and shop with us. So it was an investment in our business. We talk all the time that we make investments in our business not for a quarter or 2, but for a lifetime, and we look at it that this was really a lifetime investment that we're making in our business. And we do think it's going to continue through the fourth quarter. But if we had a mulligan to do it all over again, what we did in the second quarter, we do it all over again exactly the same way because we look at this in a very long-term way.

Okay. If we could maybe just go back to the legacy silhouette comment. It's been a category or a subcategory that I think that's been under pressure for a while. But Foot Locker U.S. was able to comp in the first quarter in sight of, I think it's still being somewhat challenging. So why do you think some of the slower growth in these styles may be caught up to Foot Locker in the second quarter? Did something meaningfully change -- and when you think about the inventory situation, how many quarters do you think the industry needs to work through this inventory?

I think that there's a couple of things. So those legacy silhouettes, Foot Locker did really very well in the first quarter. And a lot of it was really helped by the launch product, the Jordan Retro product. The second quarter was a disappointment in that product across the DICK'S business, the Foot Locker business, other direct competitors businesses and the brands. So we think that, that was a big issue there. These legacy silhouettes, just they had been kind of trending down, but somewhere in the second quarter, they really slowed, but when couple of these brands in Nike, in particular, brought out different materials and different embellishments on some of those legacy silhouettes, Air Force 1 or Dunk, so to speak, you couldn't keep them in stock. So if you take an Air Force 1 silhouette, in a traditional Triple White, Triple Black or a traditional white shoe with like the Verity colors, RedBlack -- those have slowed significantly. But a Triple white Air Force One and patent leather, a triple white Air Force One in black, you can't keep those in stock today. So it's trying to get enough of those in the marketplace. Now how long that has to run? I don't know. But right now, there's the ability if we had more of those products it would be a very different scenario. And the discounting got pretty aggressive in the second quarter. And like I said, we expect that to continue through the balance of the year.

So maybe if we could go back to the guidance cut, obviously, the market was surprised by the cut both on the DICK's core margins and on the Foot Locker comp and margins. And you talked a little bit before how promotions are important and you're using it as an investment. But if maybe we could just focus on Dick's first. Do you think there's a degree of conservatism in your guidance just given the strength of what you've seen so far in demand at the store, footwear grew in the second quarter. So how much discounting do you think there really needs to happen -- and is there any kind of broader discounting here beyond the footwear that we should be aware of?

I will start with. So DICK's, we're really pleased with how the business is doing at DICK. And in fact, -- as you know, we kept our comp guidance the same. We did reflect some of the promotionality from the legacy footwear, which affects the DICK'S business as well, and we also reflected some services toward fuel costs and health care costs, which we have been experiencing all year. But overall, we're bullish on the entire business, but the DICK'S business is very strong. we'll continue to manage through some of the impact of the margin and some of those other existential or exogenous impacts from fuel and health care. But overall, we never guide to the best possible outcome, but we feel really good about our guidance.

I think there's a concern out there that the contagion that is in Foot Locker will spread to DICK'S, and we don't see that. If you took a look at our footwear, we don't guide or or disclose category by category what those comps are. But if you were to take a look at our comps in footwear, they're really quite good, you'd be pretty pleased. And part of this is this transition that the DICK'S team we've been ahead of that from a legacy silhouette standpoint, but we still had to be competitive in the marketplace on those. But when you take a look at what's happening from a transition out of some sneakers, so to speak, into some other categories, whether it's Birkenstock hugs, timberland. That's all part of the footwear business. And we really believe that an athlete kid play in high school sports, male, female, they really need 5 different shoes. There's 5 shoes on their shopping list. One is the shoe that they're going to wear in their sport, whether it's baseball cleats, basketball shoes, whatever it might possibly be, then it's also going to be the running shoe because everybody's got a train from a running standpoint. And then training today, those of you who watch from what's going on from a fitness standpoint, whether it's HiRox, whatever it might possibly be, this training, there's a very different pair of shoes that you're wearing to train in. It's not a traditional running shoe. So you need that training shoe. And then the recovery piece of this has gotten really extremely hot. The mine shoot -- so the whole recovery aspect is really important. And then you still have the shoe that the young man or young woman is going to wear to be kind of say who they are, what they're wearing to school, what they're wearing out with their buddies on a Friday night. So there's 5 shoes that they really have under consideration. And between DICK'S and Foot Locker, we are the retailers best positioned to service that need.

So then maybe if we can go to the Foot Locker guidance cut, we'll start with the comp first. I guess we're curious why you think same-store sales will take such a meaningful step back from what you originally predicted outside of the lifestyle silhouette issue that we just went through. Because just thinking about it in another way, you have a new assortment coming through all the Foot Locker stores. You had an ad campaign that only started to make its way to the consumer maybe 5 or 6 weeks ago. And you've only remodeled 250 stores to fast break getting them to, I think, 350 by the end of the year. So just given the amount of change and the time it might take to work through the system, do you think you might be underestimating what the comp response could be?

So our General Counsel would say that's a very dangerous question, but under resting, I think we're giving the guidance that we think is best kind of looks at where the business is today. And there are some things that are happening. So what has surprised us and surprised the industry as a whole is the launch and retro product has been very difficult. And that's well chronicled. When we originally looked at giving our guidance for the year, we didn't anticipate that. And Q1 was pretty good. Q2 was pretty difficult. A couple of other things of what we did from a Foot Locker standpoint, taking this down, EMEA has been very difficult. And when we originally gave our our guidance for the year of what we thought we were going to do from a Foot Locker standpoint, there was not a war going on in the Middle East. And that has had a really meaningful impact on Europe. And you can see that from other retailers in Europe of what they've talked about. And then the legacy silhouettes, it's taking longer than we thought to pivot some of these products and get more of these products in the store as the industry is -- the industry has got a really interesting problem that is short term, but they've got a capacity -- an overcapacity issue in some of the legacy silhouettes and there's an undercapacity issue on some of these new shoes that have come out that are really resonating with the consumer. So there's an imbalance going on right now. And we're not able to get more of these shoes in based on manufacturing constraints as we would like.

And so it sounds to me like this is more of a supply issue than a real demand issue.

Don't see this as a demand issue whatsoever. If you've got something that's new and innovative, that consumer step into the plate to buy that product, whether you can see that from an on-cloud tilt shoe that's really hot right now. or what's going on with the Nike Mine shoot, the Nike running construct around the 9 block between Pegasus structure in Vomero has been great. If there's something new and different out there that the consumer views as different and innovative, it's doing very well. That's most on the footwear side. And then on the other side, which is why we don't think there's a contingent from a DICK'S standpoint, whether it's baseball bat launches, what's going on from some other brands that we brought into the stores such as Viri, we've gotten a number of stores. Jim Shark, pre-people movement. There's just -- there's a there's a transition going on right now, and we're right at the center of it, and I think we are extremely well positioned.

Okay. When it comes to discounting and moving some of the inventory, I would imagine it has to be a little bit delicate to have product discounted in the stores while trying to showcase new assortment and sell that through at full price. So how do you balance that? And how big of a role could going on have as you manage through this?

Yes. It's not that difficult. The consumer knows what's new and what's hot and what's not. And the consumer is very very intelligent out there. They know what's going on. And if you've got a mine shower, you've got the running -- Nike running construct or you've got the cloud tilt, you've got an adidas running shoe and it's new and innovative, the consumer wants it. They'll know they'll come in and get that. And then the product that needs to be discounted as those legacy silhouettes. And right now, those are out of favor right now.

This is, I think, one of the benefits of bringing these 2 companies together as Foot Locker often will experience a trend a little bit ahead of where DICK'S would experience a trend. And so on the DICK'S side, we can see, okay, this franchise is slowing or -- and there's several examples I don't want to be specific, but we can taper our buy at DICK's accordingly, knowing that there's some softness that may come. And then at the same time, we are using going, going on. And our teams are working really well together to just help each other out when there is a clearance opportunity and just SP1 Get through it.

There's also -- DICK'S has a longer tail with these franchises than Foot Locker does. The Foot Locker customer is more fashion conscious, faster customer than the DICK'S consumer and we can see what happened what's happened at Foot Locker and then we can build to that. An example of new balance is a bit more difficult at Foot Locker, it's rocking indexed. So we can kind of see -- we have the ability on the entire -- with our acquisition of Foot Locker, we have visibility to the entire ecosystem of athletic footwear now. So with Foot Locker, we own a company in Tokyo called Atmos, which is a Tier 0 retailer, very similar to Kit here in the U.S. which gets all of the new product that a brand is trying to seed in there. It was an example I was walking through the brand rooms in Germany with Bjorn and there was a shoot that I looked at, and I picked it up when I said -- that is a very cool shoe. And Bjorn said, you don't get that show. And I looked at them and I won't tell you exactly what I said, but I said, what do you mean we don't get that show. He said, you don't get that to. He said, "Foot Locker won't get that to right now, at most, they'll get that shot." We're going to see it there. So we've got Atmos that we can see what's coming with shoes that are being seated -- and then as I talk about igniting franchise, we can see that and do that with Foot Locker in those street kind of fashion doors that Foot Locker has an DICK's houseosport. And then when it scales, we've got that in the DICK'S stores and the traditional Foot Locker stores. and then also the end-of-life product in our value chain of going on. So we've got visibility to the entire ecosystem of athletic footwear and nobody else has got that kind of visibility that we have. So we've built this ecosystem across the entire platform that nobody else has and will really positively impact our business.

Great. If I can maybe drill down on what's happening with Foot Locker. I think one of the critiques or concerns is that Foot Lockers and assets that would require quite a bit of CapEx and maybe take valuable attention and dollars away from a very healthy core DICK's sporting goods. How are you feeling about the asset today and is there anything in your guidance acknowledging that there might be a bigger issue with Foot Locker other than this sluggishness in the footwear category?

Yes. I think that -- so we're not taking assets away from DICK'S to be able to do that. We've got significant amount of capital available to us. We've got $1 billion on the balance sheet right now. We've kind of started well on our way on the fast break process. And this is a pretty low capital intensive change in the business. So we don't see that Foot Locker is going to take a significant amount of capital to get this thing kind of where it needs to be. This is really how do we pivot away from some brands that aren't doing as well right now and into new brands. I was with a a very important brand in the industry that we do a lot of business with that Foot Locker didn't. And when I sat and talked with the CEO, he said, in the past, we didn't really trust Foot Locker. We didn't really want our branded Foot Locker. We really weren't sure where Foot Locker was going to go. So Foot Locker couldn't transition to this brand because the brand wasn't going to be supportive to them. As we sat and talked and he said, now that you guys own it, he said, we are fully invested in support of a Foot Locker. So we've got that with a couple of different brands. So Foot Locker, believe me, this is not easy with Foot Locker. But there are some things here that we've got transition into some other brands and changed some allocation of inventory, and we're in the process of doing this. It's just taking longer than we anticipated. And we thought it would be quicker we thought some other brands would be able to be more supportive, quicker than they have been more legacy brands, and that hasn't happened. But with that being said, though, we are looking at -- I've had a number of people say, kind of how are you looking at this? We are -- and I think kind of what you're getting to a little bit is we are creating a menu that all of you would expect us to create based on the environment we're in today and what we're seeing. So we've got no preconceived ideas of what has to be done. We're not going at this like damn the torpedoes, we're going to make this thing work. We're going to -- we've owned it for 1 year a week now. And now through this year, we've taken our time to really understand the business, what's working, what's not working. -- what's not working it could work in work and what's not working, it's not going to work. And we're creating this menu that you would expect us to create. And as we go forward, we'll give you more details as we kind of make some final decisions.

I would add one other thing. You mentioned or you asked -- the first question was sort of is Foot Locker distraction for DICK'S. I would say absolutely not. But on top of that, I think actually, it's helpful to the DICK's business that we're going to our core brand partners together, getting access to product, knowledge that we have allocation. I think it's actually been -- it's been a positive for the DICK'S business.

And maybe, Kate, I'll build on that. If you think even from a P&L intensity perspective, we have talked about $100 million to $125 million of synergy, and that's a collective company synergy similar to what Lauren was saying you're now able to go and negotiate as a DICK's sync. And so the benefit of that is not only on the DICK'S side but also on the Foot Locker side. So that's where the 1 plus 1 definitely is accretive. Like I said, it's going to take a little bit of time and we are working through those scenarios.

Great. Navdeep, maybe I can keep it with you for a minute just on the DICK'S core and SG&A. I do think that the flow-through has not been awesome. Great. Just because...

Well, thank you for getting an awesome.