DICK'S Sporting Goods, Inc. (DKS) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the DICK'S Sporting Goods' Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela, Vice President, Treasury Services and Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us to discuss our fourth quarter 2015 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer; and Teri List-Stoll, our Chief Financial Officer. André Hawaux, our Chief Operating Officer, will join us for Q&A. Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website located at dicks.com for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will also be available for approximately 30 days. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release and the comments made during this conference call and in risk factors -- and the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. We have also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in accordance with generally accepted accounting principles and related reconciliations can be found on the Investor Relations portion of our website at dicks.com. I will now turn the call over to Ed Stack.

Thank you, Anne-Marie. Good morning. As we close out one of our more challenging years, it's important to step back and assess the state of our business in light of the opportunities that lie ahead. During 2015, we meaningfully grew our omnichannel platform, ending the year with 644 DICK'S stores, 73 Golf Galaxy stores, 19 Field & Stream stores including 4 combo locations. We maintained a very strong new store productivity well over our goal of 90% in these new stores. And our stores continued to support our eCommerce business, which for the full year increased approximately 19% to over $748 million. We also made significant progress transitioning our eCommerce business on to our own web platform. We relaunched golfgalaxy.com on to this platform including ship-from-store capabilities. We launched Field & Stream's first ever eCommerce website, and both have been very successful. Finally, we have a very strong balance sheet, ending the year with over $100 million in cash with no borrowings outstanding on our $1 billion credit facility. We returned over $420 million to shareholders through dividends and share repurchases, representing a 9.5% cash yield. We believe we are very well positioned to capitalize on the opportunities we see ahead. They will require some investments and some time to see the returns, but we remain confident in our ability to create substantial long-term value from here. Before I get into more details on that, let's cover the fourth quarter. We delivered earnings per diluted share of $1.13, which is within our guidance range. Total sales for the quarter were $2.2 billion, up 3.7%. Consolidated same-store sales decreased 2.5%, below our guided range. The results for the quarter were significantly impacted negatively by performance of cold weather related categories. These categories include jackets, fleece, cold-weather compression, boots and accessories. They represent a significant portion of our business in the fourth quarter, and they were down double digits. Our team did a great job managing the inventory in these categories by taking aggressive markdowns, working with our vendors. And along with packing up some basic winter items for next year, we are well positioned as we exit this quarter. Looking outside the cold-weather categories, the balance of our business performed very well, comping up nearly 3%. In particular, we continue to be very pleased with our performance across important growth categories such as athletic footwear, licensed and our women's business where we have invested in improved product content, merchandise presentation, shopping experience and marketing. As anticipated, the hunt business remained under pressure due in a large part to warm weather. Within this category, guns and ammunition comped positively. For the second straight quarter, margins in our golf business expanded over 200 basis points compared to last year, reflecting cleaner inventory levels and less promotional product in everyone's pipeline. Our consolidated golf comps were relatively flat for the quarter, supporting our view that this business is beginning to stabilize. In summary, given the challenging conditions we faced with the unseasonably warm weather, we operated very well in the fourth quarter. We delivered earnings per share within our guided range and continued to drive results in the important categories. I'd now like to turn the call over to Teri.

Thanks, Ed. Good morning, everyone. Beginning with our fourth quarter financial results, as Ed mentioned, consolidated sales increased 3.7% to approximately $2.2 billion. Consolidated same-store sales, which includes all banners, both online and in-store, decreased 2.5%. Within this, DICK'S Sporting Goods omnichannel same-store sales, which includes dicks.com and DICK'S stores only, also decreased 2.5%. Our eCommerce business grew 13% despite being impacted by the unseasonably warm weather throughout the quarter. Gross profit for the fourth quarter was $672 million or 30% of sales, and as expected, contracted year-over-year. This 200 basis point decline in gross profit margin was primarily driven by 131 basis points of merchandise margin contraction due to a more promotional holiday season and markdowns due to the persistently warm weather. The balance of the decline was due to occupancy deleverage and increased shipping expense as a percentage of sales resulting from the growth of our eCommerce business. SG&A expenses were $461 million for the quarter. This is 20.6% of sales, deleveraging 29 basis points from the fourth quarter of last year. The deleverage primarily was due to store payroll and planned investments in building our brands and eCommerce, partially offset by lower incentive compensation. We delivered earnings per diluted share of $1.13, within our guidance of between $1.10 and $1.25. Within this, there's approximately $0.02 per share benefit associated with discrete tax items. Now looking to our balance sheet. As Ed mentioned, we ended the fourth quarter with approximately $119 million of cash and cash equivalents, and no borrowings outstanding on our revolving credit facility. Total inventory increased 9.8% versus the end of last year. About $90 million of this is either merchandise being returned to vendors in the first quarter or cold-weather merchandise that is being packed away for the 2016 winter season. This is split roughly 50-50. As Ed mentioned, our merchants did a great job managing our inventory exposure through this weather-challenged quarter, but we also recognize the need to stay focused on our overall inventory management. Turning to our fourth quarter capital allocation. Net capital expenditures were $49 million or $96 million on a gross basis. Additionally, during the quarter, we paid dividends of $15.5 million. As you know, we recently increased our quarterly dividend by 10% to $0.15125, at an average, payable on March 31. We also completed share repurchases of $57 million at an average price of $36.44, taking advantage of what we believe is a very good value. Since we started our $1 billion authorization at the beginning of 2013, we have repurchased approximately $813 million of common stock and have approximately $187 million remaining under that authorization. Now let's turn to our 2016 outlook. As Ed will cover in more detail, 2016 will be an important investment year for us. First, we will continue to invest in eCommerce to transition to full operational control in January 2017. Second, we are partnering with the United States Olympic Committee and Team USA in a way that will have far-reaching impact on our brand. And last, we have exciting plans to enhance the shopping experience in our stores, including an elevated athletic footwear business. We estimate these strategic investments will have an approximate $50 million to $55 million impact on EBT in 2016. And due to the timing of the spend, this will cause earnings per diluted share to decline year-over-year in both the first and the third quarters. While investing in these important areas, we remain committed to operate with a lean mindset, focused on reducing discretionary spending and driving productivity throughout the company. Importantly as we look beyond 2016, these investments will benefit our business for many years to come. For example, we expect our eCommerce business to generate at least 30 basis points in consolidated operating margin benefit in 2017 as compared to 2016. All this considered, for 2016, we expect full year earnings per diluted share of between $2.85 and $3. We expect consolidated same-store sales to be approximately flat to up 2%. Operating margin is expected to decrease year-over-year driven by SG&A deleverage as we make these strategic investments in our business. This will be partially offset by an expected increase in gross margin. Net capital expenditures for the full year of 2016 are expected to be approximately $230 million or about $420 million on a gross basis. 2015 net capital expenditures were $204 million or $370 million on a gross basis. As we noted in our press release this morning, our earnings guidance includes the expectation of approximately $100 million to $200 million of share repurchases in 2016. While the exact timing of the repurchases during the year may vary, we remain committed to returning capital to shareholders through both share repurchases and dividends. In 2016, we expect to open up approximately 36 new DICK'S stores and relocate approximately 9 DICK'S stores. We also expect to open approximately 2 new Golf Galaxy stores and 9 new Field & Stream stores, with all but one of those in the combo-store format. For the first quarter, we anticipate earnings per diluted share of between $0.48 and $0.50. Consolidated same-store sales are expected to be approximately flat to up 1%. Operating margin is expected to decrease driven by SG&A deleverage, while gross margin is expected to be relatively flat. During the quarter, we expect to open approximately 3 new DICK'S stores, relocate 3 DICK'S stores and open 2 new Field & Stream stores. Before concluding, I would take just a moment for a quick housekeeping item. Due to the fact that Golf Galaxy is only approximately 3% of our total sales, 2016 will be the final year we will disclose Golf Galaxy same-store sales. With that, I'll turn it back over to Ed to review our 2016 strategy.

Thanks, Teri. This is certainly a unique time in the industry. The competitive landscape is evolving, which is creating pressure for some and opportunities for others. As the largest and most profitable full-line sporting goods retailer in the country, we are continuing to make strategic transformative investments in our business during 2016, as we did in '14 and '15, to capture this opportunity and further solidify our leadership position. These investments align to our growth initiatives to drive store productivity, grow our store presence in new and underpenetrated markets, grow and control our eCommerce and expand our presence in the outdoor space. In 2016, we will enhance our assortment, our merchandise presentation and the shopping experience. As part of this, we will elevate our athletic footwear business through the industry-leading presentation in service and an increased marketing effort. We will also continue to drive growth and differentiation through our private brands. For example, CALIA will be expanded to all doors, and it remains well positioned to become our third largest women's athletic apparel brand by the end of this year. Additionally, we have several new projects underway that we'll begin to launch in 2017. On the marketing front, our partnership with the United States Olympic Committee and Team USA will provide us the ability to significantly broaden our reach. The Olympics are one of the few mass sporting events that appeals equally to both men and women, and will enable us to build our brand equity on a much bigger stage. In addition, the contenders program, through which we are employing nearly 200 Olympic hopefuls, brings our sponsorship to life in our stores and greatly enhances our customer service. There is not a sporting event or set of athletes that align better with our company's core belief that sports matter. And we are thrilled to be able to provide these Olympic contenders with flexible work arrangements, so they can pursue their Olympic dreams. Beyond that, we'll continue to leverage the valuable customer data from our ScoreCard loyalty program to provide more tailored and effective digital marketing and improve consumer insights. We will aggressively seek to capture the displaced market share that we expect will continue to be available in the marketplace in 2016. We will also continue to invest in our omnichannel platform through both new stores and eCommerce. Our store growth will remain focused on new and underpenetrated markets. We remain on track to transition our eCommerce business to full operational control in January 2017. This will position us to capitalize on the significantly improved economics and other strategic benefits, including the control to create a differentiated online experience, easier access to data and the ability to leverage cross-channel data, control over development cycles include our fasting, testing and implementation and the ability to quickly stand up new sites. Lastly, we remain enthusiastic about expanding our outdoor business through the colocation and cross-shopping experience of our DICK'S and Field & Stream stores. We believe the merging of brands differentiates us from the competition and will enable us to capture share in this highly fragmented market. In summary, 2016 is a very important year in which we are making strategic transformative investments to further solidify our leadership position. These investments are laying the groundwork to build meaningful momentum as we progress through 2017 and beyond. I'd also like to take a moment to thank our associates for all of their hard work and dedication. They bring the skill and commitment that will drive our performance and create substantial value for our investors. This concludes our prepared comments. We appreciate your interest in DICK'S Sporting Goods. Operator, please open the line for questions.

[Operator Instructions] Our first question will come from Seth Sigman of Credit Suisse.

I think one of the key investment questions here just centers on the investment outlook for this year. You guys outlined that $50 million to $55 million of spending in 2016. Can you clarify how much of that is incremental year-over-year and also parse that out between the various buckets you mentioned? And I guess just the final piece of that most importantly, how do you think about those costs and how they play out in '17, which of that actually goes away?

So Seth, I'll start and then I'll turn it over to Ed for some additional perspective. The $50 million to $55 million is the incremental spend. Not all of it is new news, so a portion of that is what we've referred to as Project Eagle, the eCommerce platform work. And we've disclosed previously that that's about $20 million -- $20 million to $23 million, I think -- $20 million to $21 million, Anne-Marie is helping me correct the numbers. So that number remains about right. The other 2 pieces are for the additional store investments that Ed mentioned and then for the Olympics investment. So those incremental of the remainder tilted a little towards the store environment, but split fairly evenly between those 2. As we think about those our current year investments, the Eagle investments then, we expect very little to go into 2017. I think in private -- previous conversations, we've talked about $6 million essentially being carried over into '17, so somewhere in that range for '17. And the rest of those investments, at this point, we don't have a plan for 2017. We obviously will look to see the benefits of the Olympics piece is obviously a 1-year thing. But the store environment, we will continue to look at and see the returns we generate and what may be necessary in the future.

Okay, got it. And then just specifically on eCommerce, in the past, you've use discussed $25 million to $30 million of net savings from that transition. How is your line of sight into those numbers today? And as we look out over the next 12 months, what are the biggest milestones towards that goal?

So when we talked about today was the 30 basis point improvement in consolidated operating margin that we expect to be able to deliver from Eagle. We've used other benchmarks in the past to talk about annual savings. And that was really a bit more kind of on a pro forma basis if we had compared the future steady state, if we had stayed with our current provider versus an in-sourced benefit. So it doesn't translate directly into financial statement modeling. So that's why we wanted to give you the basis point benchmark today, so that you can understand exactly how to play it through in the financial model. Ed, do you want to talk a bit about the milestones?

Sure. I think Seth, the milestones for us continue to be to add features and benefits to the 2 sites that we have up and running, Golf Galaxy and Field & Stream, such as continuing the ship-from-store methodology there as well as by online, pick up in store, and then getting ready for the dicks.com site to be ready by the time we transition. And there's a lot of things we're doing in advance of that to make sure that it's not big bang that we're installing new feature packs and things like that. So those are the big milestones as well as getting our fulfillment center contracts lined up for some of the fulfillment that we'll do outside of our stores and outside of office. So those are the big milestones that we see coming down the road.

The next question will come from Chris Horvers of JPMorgan.

So following up on that, the 30 basis points you mentioned for the eCommerce, that seems to be, I mean, look at the numbers you put out for the spending side, it seems to be solely the benefit from less spending in '17 versus '16. So is there -- there's benefits on top of that in terms of fees that you pay to GSI. So is that accurate? And last year, you talked about a 3-year algorithm in the mid-teens, which would have implied earnings growth in sort of the high teens percent as you looked at '17. So are you still comfortable with that overall?

Well, the 30 basis points that we've talked about from an improvement in the consolidated operating margin is around $24 million, $25 million, and we're very comfortable with that.

And that includes the benefit of lack of GSI fees?

That's right. In the first year, yes.

Correct. And the benefits will ramp up over time.

Understood. So as you think about algorithm you talked about in this sort of weighted nature of it to 2017, are you still comfortable with what you implied last year at the Analyst Day?

With regard to -- I'm not sure what the question is.

Last year, you talked about a mid-teens algorithm, '16 -- '15, '16 and '17 at the Analyst Day. And in the Q&A, based on the eCommerce savings and the investments that you are making, it was weighted towards 2017. So -- and it seems to back into like high teens type algorithm. So is that still intact for next year?

I think the issue we're having is that we don't ever remember talking about an algorithm. Are you talking about an EPS growth rate?

Yes.

We never use the word algorithm.

We do.

You guys might. We didn't. But yes, we're still comfortable in that from where we are right now that growth rate of mid-teens.

Understood, and then one last question. What did you embed for the potential impact of TSA and what's going on with Chapter 11? Obviously, if they close doors, there is to some potential comp lift. But at the same time, if they go through a clearance phase, they're going to be very loud in the market. And that of course, could cause some promotional pressure and some traffic shifts. So could you share with us how you think about how you being impacted that into the guidance?

Yes, sure. So right now with TSA, we really don't have anything positive or negative impact in the guidance. Because as you said as they go through this clearance time, and I suspect even the stores that they're going to leave open, will start to do some clearance to kind of clear through some inventory, but there'll be some more promotional activity that could be a bit negative. But then as we get to the back half of the year when they start to -- when those stores are closed, there should be a positive benefit. So we're really not sure exactly how to look at this right now and we haven't baked anything into it. But I think as we go forward into '17, net-net, it will be positive. And we're going to be -- as we said in here, we're going to be pretty aggressive going to try to capture some of that displaced market share that we expect is going to become available.

Our next question will come from Robby Ohmes of Bank of America Merrill Lynch.

Actually 2 questions. The first question, Ed, could you talk a little bit more about the elevated athletic footwear investment, and specifically, maybe exactly what elevated means? And also, do you expect significant improvements in the type of allocations you get from the vendors in footwear related to this? And when could we look to see that in your stores? And the second question is just a little more on the competitive environment, appreciate what you're saying on Sports Authority, but also wanted to just ask about really about the mid-tier channel, like Kohl's who is talking repeatedly about how well they're doing with Nike, and also the off-price channel, which looks like they're getting a lot more stuff from some of your key vendors and how you're thinking about that as we look over the next 6 months?

Well, with the footwear, we've got this in a number of stores, this full service presentation, which is an elevated presentation not only from how the product is displayed, but also the service level and the technology that we've employed in the stores to better take care of the consumer. So -- we've got several of these open. We've found those pretty -- we're pretty enthusiastic about this, and we've got quite a few more that we're planning to do through this year. As far as the competitive landscape, there are 2 things that the mid-channel Kohl's and those they may be doing fine with Nike, but we've got more of an elevated presentation and assortment than Kohl's does with the products for that runner for that fitness of women, men, the young athlete presentation we have. We certainly keep an eye on them, but they haven't really impacted our business. And as far as TSA goes, it will be interesting to see what happens. We've got -- there's a list of number of stores that they're closing. And as I said, we're going to be very aggressive to go after that displaced market share. So it comes to us versus another competitor, and. We expect that maybe -- may not be accretive to these investment we're are going to make in those markets where they're closing stores right now in 2016, but we expect it to be accretive as we move into '17.

And just to clarify, the stores you've done, the full-service presentation, are the assortments significantly different from the stores you haven't?

There is some difference in assortment, yes, and we're enthusiastic about what we can do with that assortment, but it is a bit different, yes.

The next question will come from Peter Benedict of Robert Baird.

Just I got to follow up on Chris' question a little bit. Teri, the 30 basis points lift in margins in '17 from eCommerce coming in house, I think the 3-year plan that was laid out last year implied roughly something in the 50 to 100 basis points of improvement in '17. So my question is really that incremental, call it, 20-plus basis points. What were those factors that you had, were thinking about at least a year ago, and are they still relevant as you sit here today?

And I think this is where we were afraid there might be a little bit of confusion, so we wanted to provide clarity on how to think about the impact. So we had been talking about the benefit, and it was really more of a pro forma modeling of kind of -- if we kept going with our current provider versus in-sourcing, we would see that much of a differential, but that doesn't translate directly into a year-to-year impact as we tried to model our future results. And so there hasn't really been as any kind of substantial change in any of the assumptions related to the eCommerce project. We feel if we ran that pro forma analysis today, we'd look about the same. We would ramp up to about the same level. So really, we just wanted to make sure that everyone understood what those numbers represented, and then also provide a benchmark that's more relevant to the actual task of trying to model the outlook.

I don't believe we ever said that there was a 100 basis point improvement in margin or a 50 to 100 basis points improvement in margin rate from an eCommerce standpoint. We said a consolidated overall margin rate increase, which will be across all banners. And we're still comfortable with that.

Yes. That's what I was referring to, but thank you for the color. My second question was just beyond kind of gross margin. First of all in the fourth quarter, the 70 basis points or so of occupancy in shipping pressure, any color on those 2 in terms of order of magnitude between the 2? And what really gives you the confidence in forecasting gross margin expansion for 2016?

I think as we continue to move through a mix shift as we focus more on the athletic footwear business, the athletic apparel business, the Team Sports business, we think the hunt business is going to continue to be under a little bit of pressure, which is lower margins. So we think from a mix standpoint, it will be better. And we also believe that we took some pretty aggressive markdowns in the fourth quarter to clear out merchandise that we don't expect that we'll have to -- we'll have to do next year, and that should help margin rates.

The next question will come from Kate McShane of Citi Research.

This is Ryan Wallace filling in for Kate. Just 2 quick questions on our end, yes. First one, can you just talk a little bit about the timing of the incremental investment and sort of why now makes sense to move forward with those? And then in the shorter term, can you just help us understand which categories you expect to drive comp the most in Q1?

Well, we'll tell you our comp drivers or business drivers, we think that the footwear business is going to continue to be strong. We feel that the Team Sports business is going to be strong, and the apparel business is going to continue to be strong. We think the golf business has stabilized. They won't be -- I don't think that will be dilutive to the business. And we think that there's a possibility the golf business could even comp positively. And from a timing standpoint of why now, there's a lot going on in this marketplace right now. There's a lot of displaced market share that's going to become available as we know from not only -- Sports Authority is closing 140 stores. Last year, City Sports went out of business up in -- kind of in the Northeast. And Golfsmith is closing stores. And it's a big Olympic year. So there's a lot going on and we need to take advantage of what's going on in the marketplace. And we're doing what's right for the business long term. And although some people on the Street may not agree with that, we're doing what's right for the business long term, not for what's from one quarter to the next.

The next question will come from Matthew McClintock of Barclays.

I was wondering if you could, Ed, talk a little bit more about the hunt business specifically? It sounds like in the near term, you still expect softer results for that business. Can you elaborate that and take that over to store expansion plans for Field & Stream, how to think about that? And then just bigger picture longer term, how -- what's necessary to get that hunt business back on track?

I think that the -- it's just going to be a little bit softer. We think that long term, it's still a very good business. And we have consolidated the Field & Stream business into the DICK'S business with these combo stores. And we will provide the consumer a shopping experience of Field & Stream right next to a DICK store, and they can cross-shop. They can move in between the 2 banners once inside the store. We found that to be very compelling. There's only one independent or freestanding Field & Stream store that we'll open this year, and we've got nothing else on the drawing board there. They're all part of this DICK'S, Field & Stream combo. And the results we've had there, we're really quite pleased with.

The next question will come from Simeon Gutman of Morgan Stanley.

I may have missed this, Ed, but the investment back in stores in Olympics, are you building in a meaningful benefit from those in the outlook? I mean, the 0% to 2% against relatively easy comparison would suggest that maybe there's not much of a benefit in there from those investments?

Well, we're not looking at a big investment in '16. we think it will be in '17 we're making in footwear, we're building out these new footwear platforms. There is a training component of that to get the people up and running to be able to service the consumer. We've got some write-offs associated with what we've got in the store today. We think it's the right thing to do with the business long term, but there's not a huge benefit to this in 2016. We believe we will get that benefit in 2017. If some of it comes in 2016, terrific, but we think that there is a learning curve and an investment curve that we need to make here to make sure we're positioned going forward into '17.

Okay, and then my follow-up on the eComm growth in the quarter. Was that entirely is a symptomatic of the tough weather, and it just followed the toughest categories sales, and it was those categories that dragged down the overall growth in eCommerce?

Absolutely. It was cold weather related across the entire omnichannel platform, both in-stores and online.

The next question will come from Camilo Lyon of Canaccord Genuity.

Ed, you made a comment a few different times about being aggressive in picking some of the market share resulting from the disruptions. Can you just articulate what that means? Does that mean that there's going to be incremental expenses that you anticipate engaging into to capture some of the lost TSA sales in the marketplace? Or are you just trying to reign in those customers that will be looking for places to shop?

Yes, there will be increased expenses. We'll increase our marketing expense in these markets. We'll be increasing some payroll dollars to make sure that those customers are serviced once we get there. Yes, we're making the investments that we feel necessary to capture a big part of that vacated market share with the TSA closings. We want that business to come to us versus somebody else. And we're going to be very aggressive going after this.

And that's embedded in the guidance you've provided?

It is.

And then just with respect to the recapture rates that you might contemplate in those markets where closures are happening, how should we think about that? Maybe you can use an analog from maybe some of the City Sports locations or prior store closures in markets that have -- that are experiencing the same, or did experience same sort of phenomenon that the TSA markets are experiencing. How do we think about what your benefit is from those actions?

Well, we're going to try to get as much of that market share as we possibly can. We can't really -- can't lay out to you what we think that benefit's going to be. We don't really know what Sports Authority's sales are on a per store basis. Each market is going to be a little different because each market has a different competitive landscape, where we have a market where there is no other full line sporting goods retailer. We'll get a bigger market share than the place where there might be 2 or 3 other competitors. So we really -- I can't really lay out something for you to take a look at because each market is so different.

Okay. And then just 2 more final questions. Would you consider taking any of the leases over that are coming up for auction from TSA?

Well, we're certainly going to take a look at some of those. They've got some real estate that we would be interested in. And we'll be taking a look at that and see if there is -- if it makes economic sense with what the value of the lease is, what the term left is on the lease, what they're paying from a rent standpoint. So there's a number of different things that go into evaluating a store. But we are going to be taking a look at some of those, yes.

Okay. My final question just relates to the Q1 comp guidance of flat to up 1. It looks like it's a bit of an acceleration. Is that representative of how you're comping right now in the quarter? Or is that something that you expect to attain as the quarter progresses?

Well, we're not going to talk about exactly how the quarter is progressing. We've never done that, but it's a couple of different things. Last year, the weather really hammered us in the first quarter, if you remember, the -- a year ago right now, the Northeast and Boston, New England in particular, was buried under roughly 8 feet of snow. So the weather has been more conducive to us right now. And last year a number of DICK'S Sporting Goods and a number of other retailers were also impacted by the port strike and didn't get some inventory in on a timely basis and we don't have that. So between the easier comps, the better weather and the lack of any merchandise issues resulting from port strike make us feel confident that we can hit these numbers.

The next question will come from Paul Swinand of Morningstar.

A lot of stuff going on and I know you're saying it's a little early with the closures of the competitors. But given that you're seeing the positive outlook for the Field & Stream coupled with the DICK'S and obviously you've got a lot of competitive closures, would you still feel comfortable with your end game of how many stores you think the -- your national network will be in approximately 5 years?

Yes, we don't really see anything meaningfully different.

The other thing I notice was that the net CapEx to gross CapEx is the spread got larger. Is that because you're getting more incentives from landlords? And then just as a follow-up to that, is that -- that's off cash this year because and that falls into the deferred construction allowances? Is that correct?

That's correct.

The next question will come from Sam Poser of Sterne Agee CRT.

I just wanted to follow up on the $50 million to $55 million incremental spend this year on the Olympics and the store build. How much of that falls away next year, I mean, as you see it?

There's a fair amount of that. We're not going to tell you -- we're still working through some of that. But there's a fair amount of that, that falls through, falls away next year. We'll take a look and see what kind of a return we get from the footwear component of this. And if it's what we think it is, we could come back and say we want to do this again in next year. But we would not see that accelerate to a greater degree than it was this year.

And you'll be living off the payoff you'll be getting from it this year that you're not seeing -- because you already have a number of stores set up that way.

That's correct, yes.

And then secondly, when you look at Field & Stream, the Field & Stream businesses, do you see a time where you start really accelerating that, that -- those store openings there? Or how are you thinking about that right now?

We think it's -- we think that the rate of growth rate now is where we feel comfortable. We feel that this is definitely a combo play of both the DICK'S and Field & Stream combined. There are certain places that this works and there are other places that we wouldn't put it there. So we're very comparable with the growth rate right now and don't see that accelerating anytime in the next year or 2.

And then lastly on the inventory levels, you talked about the split of 45 RTVs and it sounded like in 45 of pack and holds. As we look at the inventory to sales ratio, where do you -- when do you see those falling into line this year? What quarter would we expect sales and inventory to be in line?

Well, there's going to be -- the pack away merchandise is going to be with us through next year. So that's going to be built into this base. And this is merchandise that we will just go back and buy again next year. It's black ski pants. It's black gloves. It's base layer product. It's all very basic merchandise that has no -- has really no end of life or fashion risk to it at all. The fashion risk product, the vendors were very helpful with us as we canceled some merchandise and as we marked down some merchandise. We don't have a lot of this with fashion risk. So for the balance of this year, that inventory is going to be a little bit higher than we would like it to be because of what we're carrying forward.

So basically, by the end of next year, you expect inventories to be basically be in line with -- by the end of this year, you would expect inventories to be in line with sales [indiscernible] to be slightly elevated.

They could be slightly elevated through the balance of this year because of this pack and hold.

And as you know, Sam, the inventory we carry at any given point in time is to match the expected sales going forward as opposed to the sales we just experienced. So that number isn't always the best one to look at to indicate. We look at the quality of the inventory, the aging, the turn. There are a number of metrics that we use internally to make sure we're comfortable with the amount and quality of the inventory.

When I looked at it, it looks like if you take out the $45 million of the RTVs, you're going to have about 15-plus weeks of supply on a go-forward basis. Is that higher than you'd like? What is a good forward weeks of supply kind of thing for you guys?

As Ed said, he talked about the factors that we have at the moment. Our overall, as we look at it, is we feel comfortable with where we are.

Our next question will come from Brian Nagel of Oppenheimer.

First question on Sports Authority and recognizing it's very early in the process there. But as you've been talking to your key vendors, is that the conversations changed at all? Is their positioning now for a potentially smaller major competitor in the marketplace?

With regard to -- I'm not sure of the question.

I guess what I'm asking is, simplistically now DICK'S has a even greater standing with some of these vendors if Sports Authority begins to shrink.

Right.

And so, recognize -- my guess, recognize it's early. Are you seeing this in your conversations with vendors? And how should we think about that, either potential positive or negative going forward?

Well, I would think it would be -- we've got great relationships with our vendors, whether it would be Nike, Under Armour, TaylorMade, Callaway, North Face. We've got great relationships with them. We feel that we can -- we'll continue to have those great relationships, and they've always been a partnership as opposed to who really has the upper hand. We work very closely with those brands. They work very closely with us. So we don't expect an awful lot to -- an awful lot to change. I think we'll have access to -- as TSA closes some stores and maybe cancels some inventory, we are going to have -- and we've had a couple of people call us and we've been able to buy some product off-price that has been canceled or doesn't want to be shipped to Sports Authority. So we'll get bit of a benefit from things like that.

Got it. And second question I had with respect to weather, clearly weather had a -- warm weather had impact on your business early in the fourth quarter. But recently in the northeast, late in the quarter, did get cold with a big storm. Was that -- did that benefit your sales at all of that kind of product later in the period? Or was it simply too little too late?

Anytime it gets cold in the month of December or January or even the beginning of February, if it gets cold, it's helpful to our business. As I've always said, if you're playing golf in Pittsburgh on December 15, it's going to be relatively tough quarter and they were playing golf in December in Pittsburgh -- the middle of January, they weren't. So it was a little better.

The next question comes from Michael Lasser of UBS.

So you previously outlined $21 million to $25 million of incremental spend for the eCommerce transition in 2016. Presumably, that amount is the same based on your previous commentary. So that would mean there's an incremental $30 million to $35 million of spend associated with this full-service footwear build-out, the Olympic partnership and some spending on marketing and payroll associated with the TSA transition. Is that right?

That's pretty close.

On the footwear piece, are -- is this a reversal of the move to the shared service footwear decks that you've been undertaking over the last few years? And if it is, are there other parts of the business, other parts of the store that you can -- that we should anticipate you might reverse or change in a similar way to the footwear piece?

So it is a change from what we have been doing with the shared service footwear. We felt that it was the right thing to do at that time as we've kind of gotten in there. And we tested this based on what people are looking for from a service standpoint, what they are looking for from a presentation standpoint. We've tested this. We've talked with some vendors on this. It's been very well received. So yes, it's a change in direction here, going back to basically our original roots of what we've done in footwear. As far as is there something in other areas of the store that you would see a big change in, the answer is no, it's just footwear.

Are you doing this because you think you're losing share within the footwear category?

We're doing this because we feel that we can give the customer an elevated and differentiated presentation in the marketplace. And no one else is delivering footwear the way that we've done this in these test stores. The results have been very good, and we plan to -- we plan to now go roll this out.

[indiscernible] things that have changed in the time that we went from full service to shared. In fact, now the full service is technology. And so the experience previously was really quite slow for the customer. They come, they'd ask for a shoe, we'd go in the back room, we hunt and peck and try to find it. We come back and say, "No, we're out of that size." And now with new technology that we're investing as part of this, there's that instantaneous checking of inventory. The ability to service the customer at a much higher level and provide even more opportunities to go beyond just the sale of the shoe to other items. So technology is a big enabler for this.

And on the Olympics piece, Olympics occurs every couple of years. Your business is already exhibiting increased volatility because of the weather. How do you think about the economic return and the variability from leveraging a partnership with an event that only takes place a couple of years?

We're using this as a great marketing effort to broaden the reach of our brand. And what we're doing with these Olympic -- the Olympic hopefuls, the marketing effort we doing there is all around building our brand, and it's not necessarily tied to how much business we'll do around the Olympics. It's around building our brand in a terrific sporting event that has equal interest for both men and women.

And my last question is on the labor in the stores. You're going to be asking your stores to do a lot more as you transition to the -- away from the relationship. Do you think your stores are appropriately staffed? Do you think you have the right amount of labor? Or is that something that could be an incremental investment above and beyond the $50 million to $55 million that you're talking about today?

When we make this transition, it's got nothing to do with store labor. We already have a significant amount of the merchandise is in the ship-for-store channel of distribution. So as we move out of GSI -- the GSI contract, it's got nothing to do with store payroll. We've already got all that covered. We're doing that today.

The next question will come from Mike Baker of Deutsche Bank.

So just to -- you talked about may be taking looking at some of the Sports Authority leases which make sense. If you were to take some of those, do you think those would be above and beyond your store growth plan -- what your store growth plan otherwise would be? Or would those sort of be embedded into the 36 this year and whatever else you were already thinking about for future years?

If we -- if we got to some of these, it would be above and beyond what we're doing right now.

Okay. And then related to the store openings, just on Field & Stream, including the stand-alone ones you have and the combo stores, what do you now think is the ultimate number of Field & Stream stores that you would have?

Can't tell you that yet. We're still working through that. But we think it can be pretty meaningful.

So originally, I think, when you first talked about those few years ago, number of stores is 50 to 55. Is that still the number? Or then I since recall it got cut down to 30 or so at one of the subsequent analyst days. So would you...

Are you talking about total stores that we can put in the marketplace or...

Correct. Total Field & Stream stores that you'll have including the combo stores.

In the marketplace and over what period of time?

I guess sort of total that you think the market can support.

I'd go back and look at that. I don't think that's what we said.

I guess it was over 5 years or so.

Meaningfully more than 50 or 55. what we -- how many we can put in the marketplace, we're not sure yet, but I can tell you that it will be well north of 55.

And then one last follow-up to that, the side-by-side stores. So those are roughly 50,000 square foot DICK'S stores right next to a 50,000 square foot Field & Stream, right? It's a sort of total of 100,000 square foot. Is that right?

The Field & Stream is 40 to 50.

The next question will come from Rick Nelson of Stephens.

The closings of TSA at the 140 that they have outlined. How many of those do you think directly overlap with an existing DICK'S store?

There's probably close to 90 to 100 of them, give or take.

And the potential share gains in those 90 to 100, can you frame that up sort of low end, high end?

Rick, we really can't. It depends on what's going on in the marketplace, what the competitive set is, how far away a TSA store is from a DICK'S store. If there's one 1 mile away, it's going to be a different number than if it's 10 miles away. So I really can't. I can tell you that we're taking a looking at this, and we're going to after this market share that's displaced pretty aggressively. And we will go more aggressively with stores that are closer to us than that are farther away.

And also I'd like to ask about the hunting business. We've seen a big increase in [indiscernible] charge. How you're thinking about that as 2016 unfolds?

We think that -- we think this business is going to continue to be under a little bit of pressure. Some of the -- what's driving the mix, we're not into, so a lot of it is handguns. In the DICK'S stores, we have handguns in not many stores.

The next question will come from Stephen Tanal of Goldman Sachs.

I guess just on TSA and kind of round this out, Ed, you mentioned you're going to go aggressively after the share gets placed. You also mentioned looking at leases. Can you make any sort of comment on how big the lease piece could be? The big thing here that is gaining share organically or is there potentially something bigger strategically that could happen here that we should be aware of?

Well, we can't lay this out. We're -- this is all very new information. We're just taking a look at the stores that they're closing. We're taking a look at what stores might -- that we may be interested in. And then we've got to do a deep analysis of what's associated with those leases. So what's the rent, what's the CAM, what's the whole occupancy cost, how much term do they have left on the lease, do they have any options left on the lease, and what we think our sales and profitability could be in that. So we're way too early on this to be able to give you any of that information. We'd love to, but we just can't. It's too early in the process.

Understood. That makes sense. Then, thinking about the hunt business, obviously [indiscernible] state has been strong, clearly that's handgun-driven and that's what's helpful to you guys. Is there anything you care to say about competitive pressure? I mean, it seems like the store growth in that sector broadly is slowing down. Do you take any salt in that? Does that help your outlook? Or how are you thinking about the competitive environment?

The outdoor competitive set from a store opening -- additional square footage is slowing down, and that will help our business. It would be less of a competitive intrusion into our business. So, yes, it will help our business.

Okay. And then lastly here, the ramp that sort of innately embedded in the '16 guide with 1Q kind of below -- at the lower half of the range. Is there anything more than sort of easier back half compares, which of course is real, we can see that. Is there anything more than that to that kind of a ramp?

Well, we think that the Olympics will be happening in the third quarter. We'll have those footwear decks in a pretty good shape at that point. And in the fourth quarter, we could have a fourth quarter weather pattern exactly the same way as we did last year. But we're counting on something slightly different, not meaningfully different, but slightly different. And if no -- the margin rate should be better because we've got -- we're a bit more conservative from a buying standpoint.

The next question will come from Matt Nemer of Wells Fargo Securities.

Two quick questions. First, your interest in some of the TSA real estate, does that indicate a willingness to look at some smaller store formats? And how much would you need to change the DICK'S planograms to fit into one of those boxes? And then secondly, could you remind us what the historical benefit is of a Summer Olympics to your business?

Yes. So, as far as do we go a smaller box, we've got a smaller box. So we've done a smaller concept box. And if the trade area of the TSA is in warrants a smaller box, we'll take a look at it. If all the other attributes fit into our -- kind of into our game plan. And as far as Summer Olympics, what it does to our business, it actually doesn't do an awful lot to the business from selling of Olympic product, et cetera. It is -- we think it is a great marketing opportunity to support. It's a great opportunity for us to support the U.S. Olympic Committee and Team USA. It's a great opportunity for us to market and broaden the reach of our brand in partnership with the U.S. Olympic Committee and Team USA, has given us a great opportunity, which we think is really important around that sports really matter in people's lives, to give these Olympic hopefuls an opportunity for a flexible work arrangements while they're trying to make the Olympic team. So this is not as much about how much business are we going to get because of the Olympics, it's how we can market our brand and align ourself with a great partner like the U.S. Olympic Committee and Team USA.

The next question will come from Joseph Feldman of Telsey Advisory Group.

I wanted to ask about Chelsea Collective, and what you're learning, I guess, from the 2 test stores right now, and how that's impacting the store -- the actual DICK'S chain? Are you rolling out anything? Have you learned any brands or things you can chat about?

Yes. So what we're learning is that there's different brands that we put into the Chelsea Collective that are -- can play in the DICK'S store. We're just starting to role some of those out. I'm not going to get into any details on those or who they are. But we're learning a lot about that consumer, about the different brands, about the products, around footwear, the accessory piece of this. And we continue to be excited about this test with the Chelsea Collective. We couldn't be happier that we put it in place.

That's great, that's great. And then one other sort of unrelated question. When you're talking about gross margin and the impacts in the quarter, I know shipping expenses were part of that. Can you remind us -- maybe I missed it, but the -- what that impact actually was and how should we think about that going forward, especially as you guys do ultimately take full ownership of the website next year? How that -- how you're baking that in?

I'm sorry, could you just repeat the last part of your question?

Yes, I was just thinking -- I wanted to understand how you're thinking about shipping costs as you have full ownership of the eCommerce business? And if that actually continues to ramp or if it's sort of a stable level, how you think about that going forward because, obviously, with shipping cost pressures on the web sales is a big factor? So we're just trying to figure that out.

Okay. So what we found in the quarter was nothing extraordinary. We just matched with the growth of the business. So we would expect that to be proportionate as we move forward.

The next question will come from Mitch Kummetz of B. Riley.

I've got a few. Ed, let me start with you. You made some comments about -- around kind of the Q1 comp environment, talking about an easy compare as it relates to weather and the port situation last year. So that sounds like a pretty favorable backdrop. So I guess I'm wondering why your comp outlook there isn't a little stronger than flat to plus 1. Is that more of an indictment of the consumer these days? Or is that because maybe February was a little soft, given that I would suspect that you still may be hoping for some colder weather in February? Could you speak a little bit to that comp guidance based on what I -- what, again, sounds like kind of a favorable backdrop to last year?

You can look at it as a favorable backdrop to last year. But the consumer, I think the consumer is fine. But the consumer, as a couple of other retailers have indicated, has kind of cycled out into some other categories right now. And so I think that's a bit of an issue with traditional retail. We're being -- or taking a look at what's happening in the hunt business still based on the recent trends that we've had, and we feel that we're -- this is the guidance we are comfortable giving right now.

And then on the -- go ahead.

The other component of this too was that we feel there'll some be pressure from the TSA closings in this first quarter, second quarter, I don't know how far they'll go. Longer term, I think they will be -- it will be a net positive for us. But the TSA closings and the promotional activity will -- could have an impact. In those stores, I suspect that they are closing and running some, going out of business sales, they will move merchandise from other stores in there to try to clear it out. If they have a liquidator, liquidator will bring in some additional merchandise to try to clean out of there. So there's going to be some competitive pressure on that in the first quarter with the TSA closings, we suspect.

Got it. That makes sense. And then on the Q1 gross margin guide, you're saying flat. I'm guessing from a merchandise margin standpoint, you're not really looking at much pressure in Q1. It sounds like the $90 million in excess inventory, that's RTV and pack aways, I mean that's not going to put any pressure on your margins really. I mean, you're not expecting a lot of inventory liquidations occurring in the first quarter. Is that correct?

That's not entirely true. I mean, we did have outerwear that post the end of the fiscal, we were still clearing through. So, well, it was kind of a mix of things. As Ed said, we managed our orders. We did promotion, which carried through in the part of the first quarter and then we have the vendor agreements as well as the pack away, and then we do have some of the ramp up of the investments that we talked about. So some of those will start to hit in the first quarter and will impact that.

And remind me, can you leverage occupancy on a flat to plus 1 comp?

No.

No.

Okay. So I guess I'm still, maybe I'm having a tough time reconciling the flat gross margin in Q1, but I'll move on. Last question, just in terms of -- I know you talked about, I think it's 47 new stores for the year when you add up the concepts, but I assume that's a gross number, is there a net number that you can give us? I don't know what kind of store closings you have baked into that.

We've got -- we are relocating some stores, but we don't have any... André Hawaux: it's a gross number.

Okay. What is the net number? André Hawaux: We don't typically disclose what we're going to close during the year. We talk about it when we're actually close those stores what our gross numbers were.

There's not much though. André Hawaux: Right.

The next question will come from Scot Ciccarelli of RBC Capital Markets.

This is Mike Lehrhoff for Scot Ciccarelli. Sorry if you already mentioned this. I was wondering if you could give some more detail on the cadence of the investments you're making over the next year as far as quarter-to-quarter?

Yes, we haven't been specific quarter-by-quarter other than to indicate that the way the variety of factors will fall. We do expect the first quarter and the third quarter to be below prior year. And then the second half will start to see, particularly in the fourth quarter, better progress.

I'm sorry, from an investment perspective?

Yes. Well, in the fourth quarter, we'll have, from an overall earnings standpoint I was talking.

Okay. But I'm sorry, what about the $50 million to $55 million, what -- should we expect kind of on the cadence throughout the year?

So there will be peaks of spending. So for example, as Ed mentioned, in the third quarter, that's where the bulk of the Olympic spending will be, which is why we expect that quarter to be below prior year. The footwear investments and the store environment investments will be more pro rata, slightly less in the fourth quarter. So you start to get some slowdown in the fourth quarter.

Okay. And then just a quick question on team sports. It seemed like you call that out as a positive. I saw a report from Performance Sports Group this morning calling out weakness in baseball. I'm just wondering if you've seen any of that, or have any thoughts there?

I mean, we don't talk about category by category specifically, but the team sports area we think still going to -- is an important business for us. It's a growing business for us. And the longer term with the TSA sports closings, that business should get even better for us longer term.

The next question will come from John Kernan of Cowen.

A lot of questions obviously got answered, but I wanted to go back to the deferred construction allowances. It looks like it's going to be about $190 million this year, up from $102 million in 2014. So is there anything that's going to reverse there? Or is that type of run rate for the deferred construction allowances sustainable for the next couple of years?

So that's really more a function of the nature of the lease terms. And so as we do more -- it really is to noncash accounting kind of effect as opposed to a cash effect. So it really is a function of moving more towards a reverse build-to-suit, where we take on some accelerated timing of the recognition of rent, which then reverses itself over the remaining term of the rent. So as we have particularly with our combo store format, they tend to be more in that kind of lease structure. And so that's where you're seeing the elevation.

Okay. And then just on the $90 million of inventory you're planning on return to some of the vendors. Is that concentrated with any vendor or any specific category?

Just want to be clear, the $90 million is not all being returned to vendors. It's split between that and pack away.

And it's through a broad range of vendors that have been -- that we've cooperated with and cooperated with us. But I wouldn't call out any 1 or 2 vendors that is the majority of it.

Okay, and then just finally, the mid-teens earnings growth that you're comfortable with, that's off of 2016 numbers into 2017?

Correct.

The next question will come from of Chris Svezia of Susquehanna Financial Group.

I guess first to clarify, The Sports Authority, the 140 stores that are closing, you're anticipating investments to go after their market share, but -- this year, but absolutely no benefit as you think about the P&L. Is that fair?

Chris, we didn't say there was no benefit. We said that there was -- there may not be any net benefit this year. There could be a -- there could be pressure as they go through the liquidation. And then as we get to the back half of the year, we could be picking up some market share. Net net, it could be neutral this year. We expect it to be positive next year.

Okay. And you're not making any assumptions if there is additional -- potentially additional store closures either?

No, we're reacting to what they have disclosed, which is 140 stores. If it's more than that, then we'll go after -- we'll take a look at what those stores are, and we'll try to go after those stores also. Right now, they've announced 140. That's all we know.

Fair enough. And on the full-service footwear, just remind us at how many stores you'll have this year with full-service footwear? And is it just Nike that you're doing it with? Or there's host of other brands that are supporting it?

There's a host of other brands that will be supporting us also. And we're going through the process right now. And we'll let you know next quarter how many we think we'll get done for this year.

Okay. And then the last question I have is just on the last call, you made some reference for the long-term targets, 9%, 9.5% operating margins by '17. And at that point, we're not willing to say it's off the table. Since we stepped into this year, you've added plus 40 basis points of additional expense related to the Olympics and the full-service footwear. So I guess maybe you can just refresh back to this target of 9%, 9.5% is how we think about it for '17? Is it completely off the table or just sort of your thought process in and around that?

Well, there's some things that have changed. So what the pressure is going to be with TSA right now, what the opportunity will be with TSA going forward, what's happening with some other competitors. So we'll try to come back to you with some more information over the next couple of quarters, but there's just -- there's too much uncertainty in the marketplace right now to talk very meaningfully about that.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Ed Stack for his closing thoughts.

I'd like to thank everyone for joining us today as we discussed our fourth quarter call and look forward to talking about our first quarter call in next couple of months. Thank you.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.