Aug 19, 2014
Executives
Anne-Marie Megela - VP, IR Ed Stack - CEO Joe Schmidt - President and COO André Hawaux - EVP and CFO
Analyst
Seth Sigman - Credit Suisse Michael Lasser - UBS Brian Nagel - Oppenheimer Paul Swinand - Morningstar Inc. Robby Ohmes - Bank of America Merrill Lynch Mark Becks - JPMorgan Sean McGowan - Needham & Company Kate McShane - Citi Research Matt Nemer - Wells Fargo Securities Ben Shamsian - Sterne, Agee Matthew Fassler - Goldman Sachs Scott Ciccarelli - RBC Capital Markets Lee Giordano - CRT Capital Rick Nelson - Stephens Camilo Lyon - Canaccord Mike Baker - Deutsche Bank Dan Reed - Barclays Patrick O'Brien - Morgan Stanley Peter Benedict - Robert Baird Chris Svezia - Susquehanna Financial Group Joe Feldman - Telsey Advisory Group
Operator
Good morning, and welcome to the DICKS Sporting Goods' Second Quarter Earnings Conference Call. All participants will be in a listen-only mode.
(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.
Anne-Marie Megela
Thank you. Good morning and thank you for joining us to discuss our second quarter 2014 financial results.
Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our Web site located at www.dicks.com for approximately 30 days. In addition, as outlined in our press release, a dial-in replay will also be available for approximately 30 days.
In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today's discussion includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to, our views and expectations concerning our future results. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties.
Our actual results or actions may differ materially from those projected in the forward-looking statements. For a summary of the risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to our periodic reports filed with the SEC, including the Company's annual report on Form 10-K for the year ended February 1, 2014.
We disclaim any obligation and do not intend to update these statements except as required by the securities law. 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 Web site at www.dicks.com. Leading our call today will be Ed Stack, our Chairman and Chief Executive Officer.
Ed will review our second quarter results and key business drivers. Joe Schmidt, our President and Chief Operating Officer will then review our omni-channel development program and specialty concepts.
After Joe's comments, André Hawaux, our Chief Financial Officer, will provide greater detail regarding our financial results, capital allocation and future expectations. I will now turn the call over to Ed Stack.
Ed Stack
Thank you, Anne-Marie. This morning we announced our second quarter 2014 results, including consolidated non-GAAP earnings per diluted share of $0.67 at the high end of our guidance of between $0.62 and $0.67 for the quarter.
Our consolidated same store sales increased 3.2% compared with our guidance for the quarter of between 1% and 3% same store sales. Our results reflect strong performance across most areas of our business, partially offset by the performance of our golf and hunting businesses.
In fact excluding these two categories our aggregate comp for the quarter increased by approximately 7.8%. Areas where we have made investments and reallocated space such as women’s and youth athletic apparels have been very positive.
We shifted floor space away from golf and fitness and now have a broader, more compelling selection of women’s apparels and youth apparel supported by an enhanced product presentation. We also saw strong performance in team sports and licensed merchandise during the second quarter with a meaningful impact from the World Cup.
Our aggressive merchandising strategies resulted in average store sales of World Cup merchandise that were more than double the sales on an average store basis of the World Cup held in 2010. As anticipated we continue to see headwinds in our hunting and golf businesses, both of which were impacted by the trends we discussed in detail last quarter.
Specifically the hunting business comped down high single digits. We expect our hunting business to continue to trend down in the third quarter and then flatten out in the fourth quarter.
Other segments of our outdoor business performed well, offsetting the declines in hunting. This enabled our overall outdoor business, which includes hunting, fishing, camping boots, boats and other outdoor categories to deliver flat comps.
Golf continues to be our most challenging business. Our significant promotional activity, particularly around Father’s Day led to better than expected sales but negatively impacted merchants.
Golf Galaxy caps were down 9.3% and our Dicks golf business was down somewhat less. In order to realign this business more closely with current and expected golf demand, we have taken steps to reduce our cost structure.
As part of this, we have eliminated specific positions in our Golf area within our DICK stores. We have retained the strong team of associates, who have the training, experience and skills necessary to meet the demands of our Golf customers.
We will reinvest these savings by providing a higher level of service in the strategic growth businesses inside our stores. We have also reduced the cost structure of our Golf business by consolidating our golf related corporate operations.
This includes merging the buying and back office function of our Dicks golf business in Golf Galaxy into a single cost effective operation. We will be reinvesting these cost savings from the consolidation into the growth areas of our business.
The growth drivers of our business include e-commerce, which delivered another strong quarter representing 6.3% of sales from 5.6% last year in the second quarter. Other drivers include our women’s and youth initiative footwear and Field & Stream.
As we look at the second half of 2014, we are cautiously optimistic although we do expect, due to the cautious consumer and sluggish economy promotional activity will increase with margins and advertising expense continue to be under pressure, impacting earnings per diluted share by approximately $0.04. In summary we are pleased to deliver results at the high end of our range from both sales and earnings perspective.
Although we continue to face headwinds from golf, we are enthusiastic about the balance of our business. This is demonstrated by the improving trends in the hunting and outdoor business, our women’s and youth initiative along with the balance of our business to deliver comps over 7%.
We further demonstrated the confidence in our business long-term by repurchasing a $100 million of stock during the quarter. We will continue to manage our business for the long-term as we weather the shorter term issues.
I would also like to thank our associates throughout our Company for the hard work and determination they showed to deliver our Q2 results. I’d now like to turn the call over to Joe.
Joe Schmidt
Thanks Ed. During the second quarter of 2014, we continue to expand our omni-channel platform, growing both our store base and ecommerce operations, while driving productivity in our stores.
We opened eight new DICK stores and relocated three stores that were at the end of their leases. At the end of the second quarter we had 574 DICK stores.
In the second quarter we reallocated space within our existing DICK stores to increase our offering of women’s and youth athletic apparel. As Ed discussed, our initiatives to rationalize our golf cost structure that allow us to reinvest payroll into other areas of the store which we believe will also enhance the customer experience and drive productivity.
Our new DICK stores continue to perform well with new store productivity of 97.8% and our store base also supports the growth of our ecommerce. As many of you know, all of our existing and new DICK stores future shipment store capabilities, allowing us to connect online customers with in-store inventory.
With each new store we enhance our distribution network as new stores are able to fulfill ecommerce orders. We continue to optimize our ship-from-store fulfillment to improve inventory utilization, reduce shipping costs and speed the delivery merchandise to our customers.
We recently introduced a completely redesigned mobile app, which features a new look in feel as well as a better user experience. The new app will serve as a foundation to expand our mobile platform and further integrate the online and offline experiences.
Our new app follows on the heels of a very successful new tablet optimize site we’ve launched last year. Turning now to our specialty concepts.
In the second quarter we opened our third Field & Stream store. We plan to open seven additional Field & Stream stores in the third quarter, bringing our store base to 10 stores.
In the Field & Stream stores, we see strong productivity and we believe we have additional opportunities to drive both sales and margin. Now I’ll turn the call over to Andre to discuss our financial performance, capital allocation and outlook in more detail.
André Hawaux
Thank you Joe and good morning to everyone. Today I will cover three topics with you.
First, our second quarter results, second our capital allocation strategy and third our outlook for the third quarter and full year. Beginning with our second quarter results, total sales increased 10.3% to nearly $1.7 billion.
Consolidated same store sales increased 3.2%, slightly above the high end of our guidance for 1% to 3% same store sales growth and compared to shift of comps of negative 0.4% in the second quarter of last year. Dicks Sporting Goods consolidated same store sales increased 4.1%, while Golf Galaxy decreased 9.3% in the second quarter.
The 4.1% consolidated increase in the Dicks business was driven by a 2.3% increase in traffic and by a 1.8 increase in sales per transaction. Ecommerce penetration was 6.3% of the total sales in the second quarter, compared to 5.6% in the second quarter last year.
Moving on to gross profit, second quarter non-GAAP gross profit was $505 million or 29.9% of sales and was down 140 basis points for the second quarter of 2013. This was due primarily to lower merchandize margin and increased shipping expenses as our ecommerce penetration continue to grow.
Partially offset by occupancy leverage our merchandise margin declined 112 basis points due to increased promotional activity. Non-GAAP SG&A expenses in the quarter were $365.1 million or 21.62% of sales and deleveraged 13 basis points from non-GAAP SG&A expenses in the second quarter of last year.
This was due to increased advertising to support our promotional activity, increase store expenses and partially offset by lower administrative expenses as a percentage of sales. Pre-opening expenses were $7.9 million, a $2.7 million increase from the second quarter of 2013.
The increase in our pre-opening expense reflects an increase in the number of stores opening this year relative to the prior year. In the second quarter, we recorded a $20.4 million of pre-tax charges related to the restructuring of our golf business.
The charges include a $14.3 million non-cash impairment of golf trademark in store assets, severance charges of $3.7 million related to the elimination of specific golf position from our DICK stores and the combination of DICKS golf and Golf Galaxy corporate and administrative functions, and a $2.4 million write-down of golf related inventory. We took these actions to align our cost structure with the current and expected trends in golf.
As Ed mentioned earlier, our golf sales responded during the quarter when we promoted the business but we gave up significant margins to generate the sales. The level of promotions necessary to drive the top line are not sustainable for the long term and contributed toward our decision to better align our cost structure with the current realities of the golf business.
As we valued our inventory, store assets, trademarks and trade names at the end of the quarter, we believe we have given appropriate consideration to the trend in golf which led to the adjustments in the current period. For the second quarter, we generated non-GAAP earnings of $0.67 per diluted share, compared to non-GAAP earnings of $0.71 per diluted share in the second quarter of last year.
Now turning to our balance sheet, we ended the second quarter of 2014 with a $100 million of cash and cash equivalent and no outstanding borrowings under our revolving credit facility. Last year we ended the second quarter with approximately $135 million in cash and cash equivalents and no outstanding borrowings on our revolving credit facility.
Over the past 12 months we have invested in our omni-channel growth, including our Field & Stream stores and we have returned over $360 million to shareholders through share repurchases and dividends. Total inventory increased 11.2% at the end of this year’s second quarter compared to the end of last year’s second quarter.
Approximately 2% of this increase reflects inventory to support the growth of our Field & Stream stores, including the seven new stores scheduled to open in the third quarter. Net capital expenditures in the second quarter were approximately $66 million or $86 million on a gross basis.
This compares to net capital expenditures of $56 million or $62 million on a gross basis in the second quarter of 2013. Turning now to our capital allocation strategy, as Ed mentioned we repurchased an additional $100 million of our stock in the second quarter of 2014, bringing our first half 2014 repurchases to $125 million.
As we discussed in the past, we expect to repurchase shares to both offset dilution and opportunistically repurchase shares. As we started our $1 billion authorization at the beginning of 2013, we have repurchased over $380 million of stock and have approximately $620 million remaining under the current authorization.
Now turning to our guidance, as we contemplated our guidance for the third quarter and full year, we took into consideration, our golf related actions and our share repurchases to date. We expect to reinvest the ongoing cost savings from our golf restructuring into other aspects of our store operations and into the growth areas of our business.
As we look to second half of 2014, we expect the consumer to continue to be cautious. Our guidance incorporates these factors and promotional actions that will be required to drive sales in the second half.
For the third quarter we anticipate consolidated earnings per diluted share of $0.38 to $0.42. Consolidated same store sales are expected to increase approximately 1% to 3% compared to a 3.3% increase in our shifted comp in the third quarter of last year.
Gross profit margins are expected to decrease as a result of the planned promotional activities. SG&A expenses as a percentage of sales are expected to leverage slightly.
We are anticipating pre-opening expenses to increase year-over-year in the third quarter due primarily to the higher cost of the seven expected Field & Stream store openings. This is expected to have an approximate $0.02 impact on our third quarter EPS.
For the full year 2014, we expect consolidated non-GAAP earnings per share to be between $2.70 to $2.85. We expect same store sales to increase 1% to 3%.
Gross margin is expected to decline and SG&A is expected to leverage slightly. Pre-opening expenses are expected to be higher due to the increase in store openings compared to last year.
In summary, our second quarter results were at the high end of our guidance. Excluding the anticipated headwinds in golf and hunting, the rest of our business generated over 7% comps, with strength across most categories.
Looking to the second half of the year, we are cautiously optimistic about the opportunities we see. However we expect the retail environment to remain challenging due to the cautious consumer and anticipated promotional activity.
This concludes our prepared comments, and I’d like to thank you for your interest in DICKS Sporting Goods. Operator, you may now please open the line for questions.
Operator
(Operator Instructions) First question comes from Seth Sigman of Credit Suisse. Please go ahead
Seth Sigman - Credit Suisse
Okay. Thanks very much.
I had a couple of questions about the outdoor business. Maybe just first the improvement in the hunting category.
So down high single digits this quarter versus down teens last quarter. I think it seemed to improve from your commentary on the last call.
Can you maybe just elaborate on what changed there, where you’re seeing some improvements? And then everything excluding hunting, it seems to continue to perform pretty well.
Just wondering what’s going on there. Are you seeing some wallet share shifts away from hunting that maybe helping?
Are you getting better brands maybe as a result of the Field & Stream initiatives? Any color there would be helpful.
Ed Stack
The hunt business was down. We’ve got a bit more promotional ammunition.
We had a bit more ammunition in the store which has been difficult to get. So that helped the hunt business.
I think we’re also -- you've seen some other retailers. Their second quarter was a little bit better than what their first quarter was also just that comparing the first quarter from last year versus the year before after some of the tragedy would happen is just a natural change in the business.
So we’ll happy to see the business starting to come back. The other areas of the business, the taco business, the camping business has just been -- especially the camping business has been really good for us.
So we did a good job from a merchandising standpoint, a good job from a marketing standpoint. So both business have been very good.
So there has been a variety of other areas in this category that have been good, that helped us overall. Our overall outdoor business was basically flat in the second quarter.
Seth Sigman - Credit Suisse
Okay. And are you getting access to brands in the core Dicks format that maybe in the past you would not have had access to.
Ed Stack
No, there really hasn’t been any meaningful change there.
Seth Sigman - Credit Suisse
Okay. And then maybe just one question on pricing.
A lot of talk about planned promotional activity. Obviously this quarter merchandised margins were down.
Just 112 basis point decline in merchandise margins due to promotional activity, how much of that was actually golf versus other categories.
Ed Stack
The majority of that was golf. We got really aggressive in the golf category in the second quarter especially around Father’s Day to try to drive some sales and clear out the inventory.
We still have inventory. We still have ways to go with that and that’s part of the issue with the margin pressure going forward.
Operator
The next question comes from Michael Lasser of UBS. Please go ahead.
Michael Lasser - UBS
So on the $0.04 that you’re talking about from increased promotional activity and marketing, is that all due to golf and is that all going to be spread out in third and fourth quarters?
Ed Stack
The golf piece will be in the third and fourth quarters but it’s not all that. We just -- and you've heard some other retailers talk about it.
There is just a concern that based on cautious consumer that there is going to be promotional pressure in the back half of the year and we’re not going to be immune from that.
Michael Lasser - UBS
So are expecting that in the non-golf category the promotional activity will be greater than what you saw in the second quarter?
Ed Stack
I don’t think it necessarily will be greater but still there will be promotional pressure in other areas of the business that will put some pressure on the margins.
Michael Lasser - UBS
Okay. And then my last question is on the second quarter comp.
Can you give us maybe more insight into how much of it was driven by the reallocation of space that women’s and youth and the World Cup. You told us the World Cup sales doubled for store.
We don’t have a sense for what the sales were for the first time around, last time around [ph].
Ed Stack
So from a competitive standpoint, we’re not going to give answer to the question but the World Cup was pretty meaningful for us sort of in the merchants and the team that was responsible for the World Cup did a great job and the other areas of the business as we indicated where we increased space was extremely helpful, big north of double digit tough gains in the youth and women’s area.
Michael Lasser - UBS
And those portions of the business only increase in the third and fourth quarters because golf becomes a smaller portion of the total for net asset.
Ed Stack
Golf becomes the smaller portion but hunt becomes a bigger portion. But we expect those areas of the business to continue.
Not World Cup. The World Cup is over and I know you know the World Cup games are over but the sales associated with some of the World Cup doesn’t continue past the game.
Michael Lasser - UBS
Understood. Thank you so much.
Operator
The next question comes from Brian Nagel of Oppenheimer. Please go ahead.
Brian Nagel - Oppenheimer
First question and maybe a big picture question on the golf category, you discussed in your prepared comments we are adjusting labor within the golf section of your DICK stores. Maybe elaborate little bit further on the thinking behind that.
I've followed DICK for a long time now and golf has always been a focus so to say and having the PGA preparations in 30 new stores has been a key differentiator for DICK. So as you adjust this labor model now, I guess as an indication of what you see as kind of going forward in the golf business, but it is also -- could it potentially put you at a competitive disadvantage by taking labor out maybe when we should be looking to drive better sales in that category?
Ed Stack
I don’t think so. We didn’t have those positions filled in all of the stores and as we look to get the results and we were getting based on what’s happening in golf today, there wasn’t a meaningful difference between the stores that had that labor model and didn’t have that labor model and we just think that as much as we all love golf, the business reality of it is that golf from a retail standpoint is under pressure and we had to change that labor model to meet the demand and the sales.
We're taking those dollars and reallocating those into other areas of our business that are doing extremely well, such as the women’s area, youth area, the team sports area and I think it will serve the Company well. We have got very good people who are there.
They can still help people. Fit golf clubs go through all the things that those other individuals were able to do and we don’t really think it’s going to have a negative impact on the business.
Brian Nagel - Oppenheimer
And then just as a follow-up to that and maybe some quantification, on the Q1 call, we discussed the call a lot and it sounded like you really saw a significant issue there. Golf problems persist or you think -- is golf getting worse now?
I guess what I'm asking is the weather got better. So that should have been somewhat of a lift to the golf business I would assume but even despite that, you think golf is still getting worse than it wasn’t earlier year?
Ed Stack
Yes, I think golf is -- golf from a participation standpoint and how it translates to retail, it is in a structural decline. We don’t see that changing.
We're not sure exactly when that will flatten out, but we don’t see that yet and we’ve made the moves that we felt were appropriate of where we’re going to invest capital and where we’re going to invest resources to drive specific businesses.
Operator
The next question comes from Paul Swinand of Morningstar Inc. Please go ahead.
Paul Swinand - Morningstar Inc.
I am going to continue to beat the golf horse here. I know last call we talked about the golf innovation cycle and you had mentioned that the consumers didn’t really connect to it some of their new technologies and one of the other comments was that a lot of the comp decline was actually just average unit retail and that the purchases are I think rolling down 2%.
What’s the prospect for that turning around next year? You’re probably seeing some of the products getting some advance use of what’s going to happen for next year in the innovation cycle?
And is there anything more color you can give us on why the innovation cycle didn’t work this time and might have worked next time?
Ed Stack
I think the innovation cycle is so different and exactly the opposite of what golfers had always thought they were supported to do, especially on the driver category to hit the ball further. We are just starting to set up some meetings of what we’re going to do see next year.
So I really can’t comment that and how we feel about innovation cycle. But we think the golf is going to continue to be a smaller portion of our business, still going to be an important part of our business.
We’re still going to continue to be in the golf business and support the golf business the best we can based on the size of the market. But golf was -- a few years ago was 20% of our business including Golf Galaxy.
It’s kind of sitting down around 15% and we think over the next three to four years it can move to 10%, not from that big of continued move down in golf but just as other areas are continuing to grow, we expect that we'll continue to see golf as a smaller and smaller percent of our total business.
Paul Swinand - Morningstar Inc.
Got it and then quickly on the inventory, I know you inventory is controlled compared to your growth rate but with companies such as TaylorMade doing negative 34 in first quarter, negative 17 second quarter, is a lot of golf inventories build up still just in the clubs and then are the other categories a little lighter or is it just because the less traffic through the store in golf has led to inventory in all different product types?
Ed Stack
The inventory issue is more prevalent in some areas than others but everything in golf has had its sales issues and there is some build up in inventory across most of the categories.
Operator
The next question comes from Robby Ohmes of Bank of America Merrill Lynch. Please go ahead.
Robby Ohmes - Bank of America Merrill Lynch
Two questions. First, the traffic comp that you guys put up for the quarter was pretty impressive I think relative to a lot of other retailers.
Can you maybe talk about how -- maybe helped drive that and also Ed I don’t know if you can weave into it or it’s weavable into that but I think you relatively recently started working with Dunnhumby and I was hoping you can maybe shed some light on how that could potentially be a benefit to your business over time? And the second question on, the press release and through this call you guys have talked about how you’re expecting the back half to be promotional et cetera.
A lot of your stores of solidly in the back to school now, like in peak of it. Have you seen that promotional issue playing out?
Can you give us any color on what you’ve seen in your earlier back to school markets? Thanks.
Ed Stack
I think to talk about the quarter, we don’t talk about anything inside the quarter and what we’ve seen so far is baked into our guidance and we’re obviously pretty comfortable with that. On the traffic side, what we have done really in the second quarter help that was the golf promotion.
We got very promotional from a golf standpoint to drive traffic in and we also put together a tent sale where we took some products and put them out in the tent and had bit of a carnival if you will, which certainly helped drive traffic into our store also. So, we’re pretty pleased with the traffic and kind of what we did in the second quarter.
Robby Ohmes - Bank of America Merrill Lynch
And then on Dunnhumby?
Ed Stack
It's really too early, Robby. We're not going to talk a whole lot about that.
From a competitive standpoint, we're just going to -- we're not going to talk much about that right now.
Robby Ohmes - Bank of America Merrill Lynch
And then just one quick follow up. I think the store growth is now plus 46.
I think you guys might have been looking at doing 50. Are you guys tweaking down your store growth rate for next year as well?
Ed Stack
Robby, we’re really not -- really it's just construction slides sometimes in the back half of the year and if we don’t hit -- if the landlords don’t turn store over to us on a particular date we’ve got the ability to move that to disclaim and that’s what we’ve done and not because we didn’t want to open it up. It’s just that the time frame by which we want to open up stores.
Operator
The next question comes from Christopher Horvers of JPMorgan. Please go ahead.
Mark Becks - JPMorgan
This is Mark Becks on for Chris. Just a follow up on traffic and the golf comments earlier.
Any way to parse out what the lift to the comp was if you speak directly to the golf promotions in the quarter?
Unidentified Company Representative
No, there is really no, no.
Mark Becks - JPMorgan
Okay, maybe still trying it in a different way. Thanks for the commentary on the comps exit golf and hunting.
It looked like there was a little acceleration this quarter. Can you maybe share what the compares look like in Q1, Q2 last year, just given the amount of moving pieces with World Cup and golf promotions et cetera, just trying to get a better sense of a comp.
Ed Stack
Yes, the comp as we said was north of 7% this year. We didn’t call it out, what it was last year versus going back to 12, we’re not going to go back and do that but we wanted people to understand that a big part of our business is doing reasonably well with comps north of 7% and just under 7% in the first quarter and this is really an issue around golf, which we think is going to continue, which we’ve laid out and one of the reasons why we've restructured the golf business and the hunt business which we think is temporary but we’re pleased.
The rest of the business is good.
Mark Becks - JP Morgan
And one final question, the Field & Stream concept is anniversarying its first store open, maybe kind of share what you’re seeing there and how you’re feeling about that new concept?
Ed Stack
We continue to be enthusiastic about that new concept. The anniversary date is less than a week old and so we’re going up against grand opening numbers.
So it’s still pretty new but we continue to be enthusiastic about that business and so we’re opening up seven more stores through the balance of the year and we’ll continue to open stores into next year, probably roughly 10 to 15 stores next year we'll open up and we’re pretty excited about this business.
Operator
The next question comes from Sean McGowan of Needham & Company. Please go ahead.
Sean McGowan - Needham & Company
One housekeeping question. Could you break out those charges that were taken related to the golf restructuring?
Was anything other than that inventory charge in cost of sales or was that whole inventory charge in cost of sales and everything else would be below that line?
André Hawaux
That’s correct. The inventory was in cost of sales.
The rest of impairment and severance was in the SG&A space.
Sean McGowan - Needham & Company
Thanks, Andre. And then Ed, could you at the risk again of beating the golf dead horse, but what would you say would be the commentary now on what to do with the stores that you do have?
Are you planning to scale them back? Certainly not opening in the plans but are you planning to scale back the number of stores that you do have, Golf Galaxy?
Ed Stack
We’re not. We continue to look at what’s going on from a golf standpoint.
We have roughly 63% of the Golf Galaxy leases will be coming due in the next three years. So we have an opportunity to take a look at some of those stores that may not be performing very well and if we decide we may close a few of those, I don’t expect a lot of them but we may close some of those.
Some other stores that are doing very well, we may reallocate which we’ve done in the past also. But we’re still being cautious about what’s going on in golf and as I said with 63% of the Golf Galaxy leases coming due over the next three years, we’ve got a lot of flexibility as to what we got to do.
Sean McGowan - Needham & Company
Would any of those stores be appropriate for another category?
Ed Stack
No, I don’t think so. Nothing that we have on the shelf today and those stores, if they’re at the end of the lease there would be virtually no store closing charge associated with these.
So we could just close a store at the end of its lease with virtually no charge at all.
Operator
The next question comes from Kate McShane of Citi Research. Please go ahead.
Kate McShane - Citi Research
Just a couple of questions, back to the promotional environment, just given the stronger macro backdrop and certainly the strength of the category particularly in footwear, athletic apparel and team sports, do you have an idea why we would need to be more promotional year-over-year?
Ed Stack
I just think the consumer is cautious. People are going to promote to try to drive sales.
We still have some golf inventory that we need to get rid of. I think the hunting category is down because the hunting has been a bit difficult.
I think that the hunt category is going to get to be promotional in the third and fourth quarter also. So we’re being cautious on what the environment is out there that we see.
You’ve kind of heard that from a number of other retailers and couple in this space that we announced. So we just think that’s the reality of what’s going on out there right now.
Kate McShane - Citi Research
Okay. And as we get into Q3 and Q4 with winter product and outerwear sales, can we expect to see any merchandising changes around your outerwear as vendors maybe get a little bit more savvy with how they’re distributing their orders and their wear now orders
Ed Stack
No, we don’t see any real difference. We’ll still be focused on the same brands, in relatively the same percentage or market share that we bought them with as we did last year.
So no, we’re not -- you wouldn’t see anything meaningfully different.
Kate McShane - Citi Research
And then my final question is on women’s unused expansion. It sounds like it’s doing very well and it’s been successful.
As you continue to learn more about these categories, do you anticipate carrying new brands or enhancing the spaces at all as we get into 2015?
Ed Stack
Yes, we do expect to see some brands. I'm not going to go into those right now but we do expect to see some additional brands that we will put in the store.
We’ve done most of the space reallocation. There will be some new fixtures but nothing significant but we are excited about some of the new brands that we’ve got coming into the store and one in particular we already have that's done pretty well is Lucy.
So we were surprised at that and this resonated pretty well.
Operator
The next question comes from Matt Nemer of Wells Fargo Securities. Please go ahead.
Matt Nemer - Wells Fargo Securities
On the golf business, I’m wondering if you could quantify the annual expense savings related to the restructuring that you are now able to reinvest in your other growth categories.
Ed Stack
We’re not going to get that granular with it. We wanted you to let you know that we’ve restructured that business and the savings.
We're going to go back into areas of the business that we really feel have meaningful growth potential. So there’s not really going to be – we’re going to reinvest those into these growth areas of the business.
Matt Nemer - Wells Fargo Securities
Okay. And then secondly, is there any way to parse out the incremental profit dollars from the golf sale activity in Q2 in the second half, assuming that we don’t want to repeat those dollars next year, we want to take it out of our forecast, how much should we be thinking about in round numbers/
Ed Stack
No, we’re not going parse those out for lot our reasons, but no we’re not going to share that information.
Matt Nemer - Wells Fargo Securities
Okay. Just lastly, on the hunting business, is it reasonable to assume that firearms could be flat or up in Q3 and that the decline in ammo is a big part of what takes the hunting category down or do you think that both of those sub-categories are down in Q3?
Ed Stack
I think both of those sub-categories will continue to be down.
Operator
The next question comes from Sam Poser of Sterne, Agee. Please go ahead.
Ben Shamsian - Sterne, Agee
It’s Ben Shamsian for Sam, thanks for taking my question. My first question, you called that team sports is doing well.
We are hearing competitors talk about lower participation rates across the country. Can you just help us in this area?
What are you seeing there? Is there share gains that you’re having?
Is your eCommerce business helping you? If you could provide some color on the team sports category?
Ed Stack
I think we’re probably gaining some share. Participation in some sports is down and it’s moved to other sports.
So soccer participation has been doing very well. Basketball participation is doing pretty well.
Baseball we think we’re gaining market share. Lacrosse continues to grow I think one of the biggest issues that you hear about what’s going on from participation standpoint is around football and we see that around football.
But overall, team sports, we continue to be pretty enthusiastic about.
Ben Shamsian - Sterne, Agee
Great. And then now that you've realized some of the costs with golf, can you help us out?
What kind of consolidate same store sales do you need to lever the SG&A now going forward?
André Hawaux
I don’t think we look at it that specifically Ben relative to just for golf. I think our SG&A trends are still very good about where they are, and as Ed mentioned we’re reinvesting a lot of the things that we did into other aspects of our business that are growing.
So the same holds true for the data we shared in the past in terms of what we got to do the leverage of those lines. So nothing as a result of golf sort of changes that.
Ben Shamsian - Sterne, Agee
Okay great and last question just with regards to the repurchases, obviously a bigger quarter than you’ve had traditionally. Has the thought around repurchases changed?
Are you being more aggressive? If you can help us out there as well?
André Hawaux
I think we’ve talked about this Ben in terms of what our priorities are with respect to capital allocation. Number one is really investing in the growth areas of our business and you continue to see us demonstrate that we do that.
The second piece would be returning cash to shareholders by that methodology of buying back shares to both deal with dilution but also opportunistically to buy shares and obviously our dividend. We believe that today our shares are undervalued and so in the second quarter we went out and bought some shares.
So we’re going to continue do that opportunistically when we feel the timing is right and we’ll continue to do that.
Operator
The next question comes from Matthew Fassler of Goldman Sachs. Please go ahead.
Matthew Fassler - Goldman Sachs
My first question relates to gross margin ex-golf. Can you talk about what you’re seeing from merch margin I guess ex-golf and how the outside two businesses that are distressed and I guess golf in particular where you have to be more promotional?
André Hawaux
I'll start with that and we’re not going to get into any degree of specificity but I believe as I had said, we did a lot in Q2 relative to promotions to drive the golf business, especially around Father’s Day which is the real holiday for golf. We saw those margins degrade significantly and felt that over the long-term those are investments we want to make and it took us a lot to move the business.
We did also have a relatively large tent event where we brought consumers into our stores where we not only promoted golf but we promoted other categories as well. So I'll leave at that.
I think what our investors can take a look at is we are going to promotional in the back half of the year-over-year, but I do not believe you’re going to see the kind of margin degradation that you saw in Q2 in terms of 111 basis points in the quarter.
Matthew Fassler - Goldman Sachs
Related to that André, is the $0.04 that you had in the press release associated with promotional activity part of the guidance cut that you had back in May or is that incremental to that?
André Hawaux
That as of now [indiscernible] as we're looking at the business in Q3 and Q4.
Matthew Fassler - Goldman Sachs
So digging a little bit deeper then you thought you might at that time as you think about second half promotional activity?
André Hawaux
That's correct.
Matthew Fassler - Goldman Sachs
Got it, okay. Second question, just as it relates to Field & Stream and economics of the box, clearly you feel good and you’re opening a lot more of these.
The concept I guess was hatched last year and we now know that last year was an extraordinary year for the hunting business in particular. So with that in mind and the fact that you got sort of proof of concept if you will in an unusual year, can you talk about what the economics of the box looked like for Field and Stream versus the core Dicks stores and also how perhaps you’ve tweaked that business to enhance the box level returns?
Ed Stack
So Matt I'd just like to kind of -- I don’t want to say take issue but we didn’t really open these stores up in the extraordinary time of hunt business. The extraordinary time of hunt business last year was really in Q1 and Q2, started to wane in Q3 and was basically over in Q4.
So when we opened these stores up, it was kind of right at the tailwind when things were going really well in that category. And we understand that proof of concept we’ve got three stores open.
So we’re enthusiastic that we’ve got some -- at least we'll have some more to do to really prove this concept. We continue to be enthusiastic to stores meaningfully more than an average DICK store does.
The mix of product is a slightly lower market, is a lower margin rate and we think we’ve got some opportunities inside the box to increase the margin rate pretty significantly in what we’re seeing today. So we've still got work to do on this.
We probably won’t be able to give you guys what you’re looking for from a model on this until we’ve got a few stores opened up at least 18 months to 24 months and right now we’ve only had one store who has been opened up for 53 weeks and another store that’s been opened up for 40 weeks and another one that’s been opened for 24 weeks. So we’re still really early in this process.
Operator
The next question comes from Scott Ciccarelli of RBC Capital Markets. Please go ahead.
Scott Ciccarelli - RBC Capital Markets
Can you talk about your ecom business? Obviously it's a growing portion of the overall business.
You guys have given us some parameters in the past just regarding profitability trends et cetera. Can you give us an idea regarding what you're seeing today with average ticket, profitability, any kind of updates there as well as how is the mix different in ecommerce relative to what your general store mix is/
Ed Stack
Well from a profitability standpoint we’re not going to provide that level of granularity, but the mix is not significantly different than what we’re seeing in the stores, won’t you take out the gun and ammunition piece of the business or some of the tackle products that we don’t sell online. It's not a whole lot of different from margin rates that we’re having on the products that we sell online, not meaningfully different than what we’re doing in the store and our team, our eCommerce team has just done a great job of driving volume that increases the productivity and profitability and really making some meaningful changes in the distribution model to the consumer with what we’ve done with the shift from store and what we’re in the process of doing with the buy online pick-up in store.
So we’re right on target for what we think we’re going to be able to do from an eCommerce standpoint. We are almost to the same profitability of the four wall cost if you will on the eCommerce as we are in the stores and by 2017 we will be completely ambivalent from a profitability standpoint and we think that there is a possibility that the eCommerce business will actually be more profitable.
André Hawaux
And also build on what I say, this is Andre. I think we’re seeing faster growth in both mobile and tablet and as Joe mentioned, we’ve been very aggressive in upgrading our capabilities both with the tablet side a while back and as Joe articulated a new mobile site that we’re developing.
That’s been really helpful because we’re seeing consumers now shift from what desktop or a laptop to buying to moving a lot of their purchases to a mobile app, be it a tablet or be it a phone. So, I think we’re doing a lot of things on the infrastructure there to really help that business.
Scott Ciccarelli - RBC Capital Markets
Got you, and just to clarify. The profitability is ex-shipping?
Joe Schmidt
No, that’s total.
Scott Ciccarelli - RBC Capital Markets
Even with shipping, you think it can reach the same profitability as the store?
Joe Schmidt
We do.
Operator
The next question comes from Lee Giordano of CRT Capital. Please go ahead.
Lee Giordano - CRT Capital
You've talked in the past about the opportunity for smaller market stores. Can you talk about how some of those smaller market stores have been performing and then also update us on the long-term outlook for either number of stores or type of markets?
Thanks.
Joe Schmidt
That is smaller market, this is Joe. The smaller market strategy is one that we continue to invest in, roughly 20% to 25% of the stores that we’ll open in 2014 will be in that smaller market variety.
Just to refresh, those stores are typically 35,000 to 40,000 square feet and we’re really looking at general population and market -- sports market opportunity as to whether or not we'll open a store in these markets. These markets are performing every bit as well as some of the bigger stores are performing.
So we are still very encouraged by the results and we’ll continue to look at smaller markets as we open stores in the future.
Lee Giordano - CRT Capital
And then secondly, have you seen any improvement or continuing improvement in the fitness category? Any update there would be helpful.
Thank you.
Joe Schmidt
We're seeing -- let's put it this way. It's a stable business for us right now.
And some months it can be up and some months it can be a little bit down but overall it's a relatively stable business right now.
Operator
The next question comes from Rick Nelson of Stephens. Please go ahead.
Rick Nelson - Stephens
Ed, can you comment on the footwear category, particularly basketball, if that's going to become a bigger growth driver in that business.
Ed Stack
Yes, I won’t get too specific with it but yes, the footwear business has been good and the basketball business has been very good and we expect basketball business to continue to be good for at least the near to medium term.
Rick Nelson - Stephens
Okay. And capital allocation question, follow-up.
You're sitting on $100 million in cash. You have very little debt.
If you hit your earnings estimates for the year, where do you see that cash position and would the Company contemplate debt financed buybacks if the opportunity were there?
Ed Stack
Rick, I’m just going to sound like broken record here but I think our capital allocation strategy is exactly as I've articulated. Our first and foremost use of cash to invest in our growth areas of our business.
Second piece is to return -- is to handle dilution and the third piece is opportunistically to buy back shares. I don’t think our cash position weighs on that.
We have access to the capital markets. If we need such we have access within our revolver.
So again I’m not -- our philosophy is exactly that I’ve articulated it.
Operator
The next question comes from Camilo Lyon of Canaccord. Please go ahead.
Camilo Lyon - Canaccord
Ed, you've been on a shop-in-shop opening campaign for about the last three years or so, if memory serves. I'm curious to know what's the performance of those shop-in-shops that were first opened today relative to those stores that don't have the shop-in-shops in them?
In other words, is the productivity still outpacing the store average?
Ed Stack
The answer to that is yes and a lot of those are really the ones we’ve gone back in and we’ve updated whether from a content standpoint or some fixturing, but the specific answer to your question is yes.
Camilo Lyon - Canaccord
And then just going back to the square footage rationalization in the golf category. I think you mentioned last quarter that you took out about 1,000 square feet from that space.
Presumably that went to the women’s and kids pads. Is there any thought to accelerate that square footage contraction in golf as we allocate it toward those categories that are significantly comping in that mid to high single digit range?
Ed Stack
We’re continuing to look at that and there is a possibility we made a bit more but it won’t be near that 1,000 square feet. We are looking at some ways to take some of the golf apparel further inside the shop, but we haven’t decided that and I think we’re still kind of working through on paper right now.
Camilo Lyon - Canaccord
So the first major cut really has happened and that’s pretty much going to be how it looks going forward with minor tweaks?
Ed Stack
With minor tweaks.
Camilo Lyon - Canaccord
Okay. And then just finally, on the women’s studio square foot shop-in-shop concept where it’s got mutual brands, was that a driver of the women’s business or was the pre-existing women’s business by brand a bigger driver or was it really a function of both?
Operator
The next question comes from Mike Baker of Deutsche Bank. Please go ahead.
Mike Baker - Deutsche Bank
Thanks. Hard to believe I still have questions but I do, one or two.
One on the golf, and one not on golf. On golf, we know you had a lot of inventory to clear out and I guess no one has really asked or maybe I missed it but where are you relative to your expectations when you talked to us in the first quarter?
Has the clearance gone better than expected, not quite as good as expected, somewhere in between? It seems to me as if maybe not quite as good and expected and that’s why you’re talking about that $0.04 for the back half, but if you could help us there.
And then the second question, fourth quarter, what’s your comp expectation there? We know your back half comp expectation but very difficult comparison in the fourth quarter.
How do you get over that hurdle? Thanks.
Ed Stack
The golf clearance has gone above what we had anticipated. We still have obviously some work to do in back half of the year with this but within a small tolerance level close to what we had anticipated and our fourth quarter comps would be indicted as one to three.
We’re inversing a really difficult comp at over 7% but we think the plans that we have in place we can get to that 1 to 3 range.
Operator
The next question comes from Dan Reed of Barclays. Please go ahead.
Dan Reed - Barclays
Quick question here, would you guys be able to parse out the relative strength this quarter in men’s apparel versus women’s apparel? I realize women’s is very strong this quarter and that’s obviously an emerging growth category for you guys still but just kind of trying to get your sense as to sort of what that more mature men’s category looked like relative to the women’s.
Ed Stack
We won’t give you the numbers of each. But based on the additional square footage that we provided women’s and some of the additional marketing that we provided women’s, the women’s performed better than men’s.
Dan Reed - Barclays
And then how would you parse out kind of just looking longer term sort of the ultimate opportunity between women’s versus men’s, in terms of sizing and everything like that.
Ed Stack
I think there is still more upside in women’s than there is in men’s.
Dan Reed - Barclays
Got you. And then I hate to squeeze a golf question in here but just really quickly, at the beginning of last quarter when you guys reported results, you said that golf was down in that high teens or not high teens but low teens level and then obviously your comps seem to indicate things improved.
Would you attribute all of that to the higher promotions during the quarter or would you say some of that was due to the fact that the business is getting less worse than it has been.
Ed Stack
I would say it’s the promotional activity.
Operator
The next question comes from David Magee of SunTrust. Please go ahead.
David Magee - SunTrust
Just a couple of quick questions. Have you had income on the regional performance across the country, what regions are doing better than not?
Ed Stack
We’ve never really called that out specifically, but there is not a meaningful difference between one area of the country and the other.
David Magee – SunTrust
Then secondly, any update in terms of how you see your competition with Academy in the south?
Ed Stack
I think we’ve indicated even before we went into the Texas market that Academy would be the best competitor that we face. They really run a nice operation.
They're a tough competitor and we don’t see anything really changing there.
Operator
The next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.
Patrick O'Brien - Morgan Stanley
This is Patrick O'Brien on for Simeon. Can you talk a little about where you are relative to your goals with regard to investment hiring, any other items pertaining to your omni-channel platform?
Ed Stack
We’re in good shape from a hiring standpoint. We continue to invest in this area but we don’t feel -- we're not behind in any area that we felt that we needed to invest more heavily in.
We feel that we're in pretty good shape. With that being said we will have -- we will continue to invest in this area, not only from a technology standpoint and a human resources standpoint but also marketing.
We think this is a very big opportunity and hopefully you can see how enthusiastic we are about it as the sale penetration continues to move up at a pretty rapid rate.
Operator
The next question comes from Peter Benedict of Robert Baird. Please go ahead.
Peter Benedict - Robert Baird
André, a quick one for you. What level of comp do you think you need to lever occupancy?
We're just thinking up in the gross margin area. And then longer term, do you think occupancy leverage can help offset the gross margin pressure from e-commerce and shipping and those types of things?
That's basically our question.
André Hawaux
I think the way you have to take a look at our occupancy class we’ve historically talked about everybody’s kind of pigeonholed around a comp number. We believe it has to be -- you have to look at it as sort of a total sales number and I think for occupancy, for us to leverage it, we got to have and we did actually leverage it this quarter, just to remind our investors that we did in fact leverage it.
We have to be in that 9% to 10% range. I think that works for us pretty well to leverage occupancy.
And I apologize, Peter, what was the second part of your question?
Peter Benedict - Robert Baird
Just longer term, do you think occupancy leverage can offset the pressures that you'll probably see from e-commerce and shipping over time? Do you think those can neutralize each other?
André Hawaux
Yes, I think they can but I also think our team does a really good job leveraging the stores that help us reduce shipping expense and things like that. As Joe mentioned, whenever we turn on a store and open up a new store, it automatically goes into ship-from-store mode right away.
We’re doing some work as we talked to investors in the past and we’re piloting some areas around buy online, pick-up in store that also allows us to leverage freight that we're already bringing to the store. So I think we’re doing a lot of things.
Our teams are doing a lot of things to go ahead and leverage that. Certainly occupancy will help but all the other ways we have to get product to the consumers will actually help us with that as well.
Peter Benedict - Robert Baird
Okay and then one quick follow-up. When we think about the cash you carry on the balance sheet, is there a level that we should think about that you don't want to go below over time as we think about opportunistic buyback activity, that type of thing?
André Hawaux
As I said before, I don’t think the cash we have on our balance sheet is indicative of whether we’re going to buy shares or not buy shares. We have the ability to access capital markets if we need to.
We have a revolver that helps us as a back stop as well. Again looking at cash balances for us I think is not relevant as we look at our share repurchase activity.
Operator
The next question comes from Chris Svezia of Susquehanna Financial Group. Please go ahead.
Chris Svezia - Susquehanna Financial Group
Hopefully a quick and easy one here for you. Just I'm curious, the reinvestment of some of the payroll savings within the DICK Sporting Goods stores, where is that going exactly?
I do recall I think third quarter last year you did reinvest in payroll hours within the stores. I do believe that helped you.
I'm just curious where else do you see the reinvestment opportunity in payroll within the stores?
André Hawaux
As we indicated it's going to go into those growth areas of the stores which is going to be the women's initiative, the youth initiative, footwear. Those are going to be the main drivers of where we're going to put those payroll dollars.
Operator
The next question comes from Joe Feldman of Telsey Advisory Group. Please go ahead.
Joe Feldman - Telsey Advisory Group
Question about sort of bigger picture, as you think about the consumer, I understand the consumer is cautious but when you look at the guys that are coming in and shopping with you, are you seeing anything, a trend among them? Meaning, are you seeing a more affluent consumer come in and buying or is it still pretty broad-based amongst the consumer that is shopping?
That's the first question I have.
Ed Stack
Yes. We don't really see any difference in -- meaningful difference in the consumer that we have shopping.
It's been pretty consistent. We haven't seen any difference.
Joe Feldman - Telsey Advisory Group
Got it. And then I guess sort of related to that any updates on the loyalty card or things you’re doing there that maybe helping to drive incremental traffic in?
I know I get those rewards in coming of the stores I assume others do that. Anything with personalization?
And I know it’s early on the Dunnhumby thing but just related to the loyalty card that you’ve been doing differently you're learning?
Ed Stack
We’re learning a lot and it’s nice to hear that they're working and I hope when you get -- the mailing should continue to come and bring a couple of friends. But we continue to learn a lot from the loyalty program.
There is a meaningful amount of our sales, which we're not going to get into what that is but we’ve done -- our group has really done a much better job of mining the data that we have in our score card and be able to personalize promotions and the communications directly to you that meet your needs and what you like to do. So we continue to make improvement there.
I think we've done really well but we all think that we’ve got some -- we’re kind of in the mid-innings of how to execute that. So that’s a part of our business we’re pretty enthusiastic about.
We’re using the same type of program with the Field & Stream concept and that's gotten off to a really terrific start also.
Joe Feldman - Telsey Advisory Group
And I guess just one final one and this is always the tricky one, but with the stronger than expected comp even relative to your plan, it’s always -- were you too promotional during the quarter like could have pulled back on that a little bit to preserve some of that merchandised margin. I know a lot of it was golf but were there some areas where that -- I guess you'll see less of it going forward?
Ed Stack
I mean I think the hindsight’s always 20/20 but I can tell you from the conversations we’ve had post Q2, we don’t think overdid it. We think we did pretty close to what was right for the business and to clear out inventory and we think we did what was right and we'd do it all over again pretty close to the same.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Edward Stack, Chairman and Chief Executive Officer for any closing remarks.
Ed Stack
I would like to thank everyone for joining us on our quarterly call and we'll look forward to talking everybody in a couple of more months. Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.