May 16, 2017
Executives
Nate Gilch - IR Ed Stack - Chairman & CEO Lee Belitsky - CFO Andre Hawaux - COO
Analysts
Robbie Ohmes - Bank of America/Merrill Lynch Kate McShane - Citi Seth Sigman - Credit Suisse Stephen Tanal - Goldman Sachs Camilo Lyon - Canaccord Genuity Adrienne Yih - Wolfe Research Steve Forbes - Guggenheim Securities Christopher Horvers - JPMorgan Scott Ciccarelli - RBC Capital Markets Simeon Gutman - Morgan Stanley Brian Nagel - Oppenheimer Omar Saad - Evercore ISI Mitch Kummetz - B. Riley Michael Lasser - UBS Sam Poser - Susquehanna
Operator
Good morning and welcome to the Dick's Sporting Goods First Quarter Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded.
At this time, I would like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead, sir.
Nate Gilch
Thank you. Good morning and thank you for joining us to discuss our first quarter 2017 financial results.
On today's call will be Ed Stack, our Chairman and Chief Executive Officer; and Lee Belitsky, our Chief Financial Officer; Andre 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 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 statement. 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.
Ed Stack
Thank you, Nate. I'd like to thank all for joining us today.
Before we get started I want to take a moment to talk about a few important leadership changes we announced last week. Andre Haw will be retiring from his position as Executive Vice President and Chief Operating Officer in the third quarter.
Since joining the company as Chief Financial Officer in 2013, he's been a valuable partner on the executive leadership team, he has played a key role in executing our strategic plan. I would like to thank Andre for his significant contributions and for his continued partnership to facilitate a smooth transition.
We also announced a number of leadership changes designed to position us for the future with increased focus on our omni-channel customer experience, digital transformation, product development and merchandising. To that end, I'm pleased to announce that Lauren Hobart has been appointed President of Dick's Sporting Goods effective immediately.
Lauren will continue to lead the company's customer and digital efforts overseeing marketing, e-commerce and Dick's Team Sports HQ and will also be responsible for our store organization. Since joining the company's as Chief Marketing Officer in 2011, Lauren has proven to be an invaluable and inspirational leader.
During six years with the company, she's elevated the Dick's brand, led the development of Dick's Team Sports HQ, built the CALIA by Carrie Underwood brand and was instrumental in creating the Dick's Sporting Goods foundation. I'm confident that Lauren's vision and extensive leadership experience will help drive the continued growth and success of the company and like to congratulate her on her appointment.
In addition we announced that Keri Jones will be joining the company later this month as Executive Vice President and Chief Merchant. Keri will be responsible for the strategy and execution of our merchandising, product development and merchandise planning, also allocation and the replenishment organization.
She comes to Dick's with 30 years of retail experience most recently served as Targets Executive Vice President of Global Supply Chain. We also announced that Don Germano will re-join the company later this month as Senior Vice President of Operations.
Don led our store organization from 2010 through 2013 and most recently served as President of Follett Higher Education Group. His background also includes a number of leadership positions at Sears Holding, Kmart and Nabisco and he served as an officer in the United States Marine Corps.
I am excited about this leadership team and lot of confidence that we will be able to accomplish the future strategies of Dick's Sporting Goods. Now turning to our results, we announced this morning our first quarter non-GAAP earnings per diluted share of $0.54 due to our high-end of our guidance between $0.50 and $0.55.
Total sales for the quarter increased 9.9% to approximately $1.8 billion. Within this consolidated same-store sales increased 2.4%.
Importantly our sales trended higher in the quarter as April comp store sales increased approximately 5%. As we get in through the past year, we successfully re-launched Dicks.com and our proprietary web platform on January 29 replacing the original radio technology we've been using.
We're pleased to report that our e-com sales increased 11%, included 9.3% of net sales compared to $9.2 on the same quarter last year. Our e-commerce sales trended hired throughout the quarter and April sales increased approximately 20%.
Over the next few quarters we will continue to make our plan enhancement system and expect sales to continue to improve. Despite a challenging retail environment, we saw across each of our three primary categories growth hardlines, apparel and footwear.
We also saw increases in both ticket and transactions. Our golf and footwear business remains strong, while the outdoor and electronics business comped negatively.
Our private brand portfolio continue to gain traction, our Korea brand which is focused on the highly competitive women's athletic apparel segment continues to grow double-digits. Korea combined with the revised product we designed and source independently to our licensing agreement with Adidas now contribute over 20% of our total women's just like apparel business.
While this results in our private brands ranking number three from a sales perspective, they represent the second highest gross margin dollar component of our women's athletic apparel business. Next year we plan to broaden Korea again through an expanded assortment and increased square footage in our stores.
We have seen ongoing growth in our other brands as well and continue to expect our private brand portfolio to contribute approximately $1 billion in revenue this year. We continue to see market share gains in those markets that TSA and Golfsmith have exited.
Additionally it's been reported that Gander Mountain will be liquidating all of its 160 stores by the end of August. We understand that as many as half of these stores could reopen under new ownership of camping world.
However, we believe the reduction in Gander Mountain stores provides an opportunity to gain market share once the liquidation is complete. That being said, we expect are going out of business sale could have negative impact on our sales through the third quarter as customers stock up on discounted firearms, ammunition and other hunting and fishing products.
We're continuing to invest across our digital channels to deliver the best possible customer experience and expect to drive these sales and increase profitability through this channel. As part of this, we are making significant investments in our Team Sports HQ business and data-driven customer engagement platform which we see as a multiyear initiative in a meaningful growth driver.
Similar to how we grow our e-commerce business to nearly $1 billion, we believe there is a tremendous opportunity with Dicks Team Sports HQ platform with nearly 30 million participants in Team Sports at the high school level or below, we expect these investments to drive both digital and store sales resulting in profitable growth over time. Turning to our store development program, based on what's happening up here in the real estate arena, we plan to significantly reduce our store growth.
In 2017 we expect to open approximately 43 Dick stores of which 19 are former TSA stores. In 2018 we expect to open between 15 to 20 stores most of these leases are already signed and in 2019 it can be as few as 5 to 10.
An important note here is our new stores continue to perform very well with new store productivity in excess of 90%. We are slowing our growth as we see more and more real estate coming after the market with other retailers closing stores.
We are starting to see prices come down and we believe this trend will only accelerate in all True A malls. We also have tremendous amount of flexibility within our existing real estate portfolio.
Approximately 25% of our Dick stores will be up for lease renewal at our option in the next three years. We're well positioned with significant flexibility related to our future real estate opportunities over the near-term and intermediate-term.
Last quarter we announced our new merchandising strategy to narrow our vendor base and overtly move market share to our two strategic partners in our own private brands. We are encouraged by the progress we're making in a positive response we've received from our go forward vendors.
We remain on track to eliminate up to 20% of our vendors this year by moving costs and complexity from our business. As we continue to evaluate and adjust our business model such as slowing our store development program, consolidating our vendor base and reducing our dependency on traditional marketing vehicles, we've identified significant costs that need to be eliminated and reinvested in digital, e-commerce and marketing, Team Sports HQ and increase development of our private brands.
Consequently, we have eliminated approximately 160 positions primarily from our store support center. This will result in a charge of approximately $7 million in the second quarter related to severance and other employee -related costs.
These actions were incredibly difficult but necessary to provide us the headroom to fund and develop our longer-term strategic initiatives. The past couple of days have been difficult for all of us at Dicks' Sporting Goods.
On behalf of our board and management team we appreciate the efforts of our associate as we move the company into the future. In closing, we want everyone to know we remain extremely confident in our strategies.
I’m excited about the future growth of our business. I'd now like to turn the call over to Lee for financial performance.
Lee Belitsky
Thank you, Ed, good morning everyone. Beginning with our first quarter financial results, consolidated sales increased 9.9% to approximately $1.8 billion.
Consolidated same-store sales which includes all banners both online and in-store increased 2.4%. The comp increase was driven by a 1.6% increase in ticket and a 0.8% increase in transactions.
Our e-commerce business increased 11%. Gross profit for the first quarter was $542 million or 29.69% of sales down 17 basis points versus last year.
Within this merchandise margins expanded 13 basis points. However this improvement was more than offset by higher shipping and fulfillment costs as a percentage of sales.
SG&A expenses were $439 million for the quarter or 24.07% of sales deleveraging six basis points for the same period last year with slight deleverage was primarily driven by higher store payroll expenses associated with our premium full service footwear deck. Non-GAAP preopening expenses increased from last year and deleveraged approximately 10 basis points due to a greater number of store openings during the period.
Our tax rate of 36.6% on a non-GAAP earnings benefited by nearly 100 basis points from newly adopted accounting rules related to the tax treatment of equity compensation. In total, we delivered non-GAAP earnings per diluted share of $0.54 near the high-end of our guidance range.
This excludes approximately $3.5 million of pretax TSA conversion costs. For additional details you can refer to the non-GAAP reconciliation in the tables of our press release issued this morning.
Please note due to the materiality of these cost going forward we will no longer separately report this to you that shows respect to the TSA cost. Now looking to our balance sheet, we ended the first quarter with approximately $108 million of cash and cash equivalents and $92 million in borrowings outstanding on our billion dollars revolving credit facility.
Turning to our first quarter capital allocation, net capital expenditures were $89 million or $114 million on a gross basis. Additionally, during the quarter we paid $19.3 million in dividends and repurchased approximately 500,000 shares for $23.2 million at an average price of $47.92.
We have approximately $1 billion remaining in our share buyback authorization. Now let me wrap up with our outlook for 2017.
For the year we continue to expect non-GAAP earnings per diluted share in the range of 3.65 to 3.75 which includes approximately $0.05 coming from the 53rd week. Due to our lower sales in the first quarter as well as the potential for short-term headwinds from Gander Mountain liquidation sales and broaden distribution of product from a key vendor partner, we now expect consolidated same-store sales to increase between 1% and 3% for the year.
This compares to our previous guidance of 2% to 3%. As Ed discussed we have taken actions to remove costs from the business.
A portion of these savings will flow to the bottom line and a meaningful amount will be used to maintain our plans, investments in key growth areas including digital, Dick's Team Sports headquarters and the continued development of our private brands. Both the savings and these investments have been contemplated within our guidance.
All this considered we continue to expect operating margins to increase year-over-year driven by SG&A leverage and gross margin expansion. For the year we continue to expect net capital expenditures at approximately 350 million or about 465 million on a gross basis.
Our earnings guidance assumes an effective income tax rate of approximately 37.5% for the balance of the year and is based on an estimated 111 million to 112 million diluted shares outstanding. This includes the expectation of share repurchases to fully offset dilution in 2017.
For the second quarter based on an increase in consolidated same store sales between 2% and 3%, we anticipate non-GAAP earnings per diluted share to be between $1.02 and $1.07. Operating margin is expected to expand driven by gross margin expansion and SG&A.
Please note that our second quarter non-GAAP earnings per diluted share guidance does not include an expected $7 million charge related to severance and other employee-related costs associated with the additions we have eliminated. This will conclude our prepared comments.
We appreciate your interest in Dick's Sporting Goods. Operator, please open the line for questions.
Operator
[Operator Instructions] And your first question will be from Robbie Ohmes of Bank of America/Merrill Lynch. Please go ahead.
Robbie Ohmes
Two follow-up questions, just - the first is - maybe Lee on the guidance of 1% to 3%. Can you help us think about how that plays out through the year, how you think about same-store sales in the back half, I know you have some tough comparisons in licensed apparel maybe some thoughts on what your comp guidance 1% to 3% implies for the back half.
And then just the other question was, you guys mentioned Gander Mountain, you also mentioned distribution of a vendor elsewhere. There is also other store closings slated to happen through the year from people like Macy's and JCPenney that also deal in parts with other vendors I was just curious how you see that playing out, is that similar to Gander Mountain, is that a short term pressure but a long-term opportunity, just thoughts on that would be great.
Thanks.
Lee Belitsky
So with respect to the guidance for the year we produced 2.4% comp in Q1. We're guiding to 2% to 3% in Q2 and the guidance for the year is 1% to 3%.
So we're expecting a small slowdown in Q3 and Q4 versus where we are on Q1 and Q2. We are expecting to be between 2% and 3% in the first half of the year.
Ed Stack
And Robbie on the other store closings, we see a - we're not sure exactly who is going to close what and what stores that hasn't been fully defined yet. So, I'm not sure what the competitive component of that's going to be.
The Gander the outdoor category is a big part of our business. We think it's really a long-term benefit to us but there is going to be some short-term pain as they go through the liquidation here.
It wasn't as bad with Sports Authority as we thought because Sports Authority didn't really have a lot of the inventory that people were looking for going into the third quarter but firearms, ammunition, hunting accessories, they've got their product - there's no fashion component to that. So I think it’s going to have a bit of an impact on our business in the second quarter and the third quarter.
Robbie Ohmes
And just quickly, what's the e-commerce expectation for the balance of year? So it reaccelerated I guess through the quarter, but what do you guys think the e-commerce will be for the year in terms of growth?
Ed Stack
We haven't guided to that nor have we. But it got much better as we went through the quarter.
And one of the reasons was when we turn the site on, when we launched the site, you're never really sure how everything is going to work. And we cut back on the marketing associated with our e-commerce site to make sure that we were able to handle the traffic, there was nothing broken.
There were a couple of bumps in the road to begin that the team quickly fixed and as we did that, we started to increase our marketing and the conversion of the site get better, and in April, we were 20%. So we’re pretty confident we’ll be fine from an e-commerce standpoint.
Operator
The next question will come from Kate McShane of Citi. Please go ahead.
Kate McShane
The area that I noticed where it seems like you’re having a lot more success in pushing private labels in women’s. Did you read anything into that push with regards to how you’re thinking about some of the national brands?
Or there be some kind of give-and-take in terms of private label versus national brands depending on the rollouts for women’s products? And how should we think about some of the smaller vendors and women's and child business?
Ed Stack
One of the things we talked about was that we would be eliminating up to 20% of our vendors. Some of those smaller vendors in the women's business are being eliminated and part of that will be the benefit to our private brand.
The CALIA brand in particular has been terrific. Carrie has been a great partner, and we see that business continuing to accelerate, and we’ll expect it to continue to do that.
Kate McShane
And if I could just follow up quickly, Ed, with the new hires that you’ve made. I know that you were in charge for the merchandising decisions prior.
Just what role do you expect this will play in those decisions going forward?
Ed Stack
Well, I’ll still be very involved. Carrie will work directly with me.
I think she's come in with great experience. The two of us have watched stores in the past.
I think we’ll have a great relationship, and we’ll work very, very closely together going forward.
Operator
The next question will be from Seth Sigman of Credit Suisse. Please go ahead.
Seth Sigman
My first question is around the change in the comps guidance. So the first quarter comps, they came in at 60 basis points below guidance.
The full year impact of that is just 10 basis points to total comp. So you lower the full-year comp guidance by a 100 basis points at the low-end.
And so I’m just wondering if the updated guidance for the year reflects lower comps than expected previously for the next couple of quarters.
Ed Stack
Well, we saw things a little bit slower. The first quarter is not as a big percent of our business as going into the fourth quarter.
We do have some of those tailwinds with The Sports Authority that we do expect will somewhat subside. And don't minimize the impact of Gander Mountain liquidation.
The third quarter - the back half of the second quarter and the third quarter is an important part of business for that outdoor category. And we've seen some broader distribution in the athletic apparel business that we hadn’t anticipated when we first did our plan.
Seth Sigman
And then when you look at the guidance for the second quarter for EPS growth, it implies a pretty significant acceleration in growth actually the highest of the year. The comps will be similar to Q1.
So I’m just wondering what drives that acceleration, and if you could give us a sense of sort of that gross margin and SG&A moving pieces there. That would be helpful.
Ed Stack
So last year's second quarter was pretty heavily promotional from a - depressed our gross margin rates a bit. So we can get opportunity on the gross margin side, and we also have an opportunity on the SG&A side as well as we put through the expense reductions that we've talked about, we’re going to be a little smarter about our marketing spend.
In Q2 of last year little more targeted there and last year there was a lot of payroll that was spent. That was involved with setting up all the premium full-service footwear decks that were under construction at that time.
So there are some meaningful investment that we did in the second quarter from expense perspective. So we've got opportunity on both the gross margin and SG&A expense line in Q2.
Seth Sigman
And just to clarify on the cost restructuring that you're talking about, was that reflected in the original guidance?
Ed Stack
The original guidance that was issued today or guidance from March?
Seth Sigman
The guidance from March.
Ed Stack
No, we just made those decisions over the last few weeks.
Operator
The next question will come from Stephen Tanal of Goldman Sachs. Please go ahead.
Stephen Tanal
I guess just to start given that you did give some color on April, can you talk a little about February and the rest of the quarter to give us a flavor for what may have slung there, maybe tax rate refunds, if you have any thoughts there and whether that impacted the quarter as well.
Ed Stack
I know people talk about tax refunds, I’m not sure that tax refunds had much of an impact. We had some weather impact earlier in March.
Some baseball leagues started later, people couldn’t get on the golf course because of the snow and the cold weather, you didn’t get out fishing. So there was some weather impact.
February wasn't bad, March was not quite as good, and April came back really very nicely.
Stephen Tanal
And then just a comment on the broader distribution on a key vendor partner. Is there a particular partner that you’re looking at there?
Do you think that - just a little more color on that essentially?
Ed Stack
I’m not going to get in that. You've seen some broader distribution in the marketplace and that definitely will have - the market is just so big and as the market gets diluted across retails, it’s going to have an impact.
Stephen Tanal
And then just lastly for me. Just to understand the kind of gross margin cadence here.
It's down a bit 1Q but clearly up in 2Q. Can you talk about what may have been unusual in 1Q or what you expect to get it back as you guide that line?
Ed Stack
We’re still going through some clearance merchandise. We'd taken the charge and cleared out some merchandise.
There was some merchandise that we didn't think we had to write off that we can recover some dollars for but not at our normal margin rate. So we tried to optimize that.
So that drove the margin rate reduction.
Stephen Tanal
So merchandise is what improves from here.
Ed Stack
Yes.
Operator
The next question will come from Camilo Lyon of Canaccord Genuity. Please go ahead.
Camilo Lyon
Ed, you talked about contained fee share gains in your prepared remarks. I’m hoping to get some color on that.
Are you seeing an accelerating share gain profile, or this change is more consistent with what they have been? Now that there's more time than the last since the initial closures from TSA back in Q3.
Ed Stack
They've been kind of in roughly in the same zone. April was really very good.
But they've been kind of in the same zone going forward.
Lee Belitsky
They certainly haven't abated at all. We’re continuing to pick those up relatively at the same level.
Camilo Lyon
And are you still able to mine the data from the IP that you collected, and you said your advantage - is that still more in its infancy and present further opportunity going forward?
Ed Stack
Yes, we’re able to do that. And also the same not only with just Sports Authority but also with Golfsmith.
Camilo Lyon
And then on that topic again, if you could just provide some commentary on the golf business. I know you said it was a little bit weaker.
But as we get into Q2 seasonally strong part of the year for the category, they're lapping or you're benefitting from Golfsmith going away. How should we think about that business starting to contribute and maybe what did you see in April that should give you some more confidence in that contributing to the Q2 results?
Ed Stack
We actually didn’t see the golf business was tough. We said the golf business was strong, we set the categories that were difficult was the outdoor category and the electronics.
So our golf business has remained really very strong comping positively mid to high single digits.
Camilo Lyon
And the last one for me, the commentary that you made on square footage, reductions of the next three years, how should we think about the component around expenses in that context and where do you have an opportunity to really cutback on your expense structure in light of your store opening that you’re planning?
Ed Stack
We’ve done that with some of the 160 jobs that were unfortunately eliminated preopening costs will be reduced and your own costs associated with hiring, preopening will be reduced. We do think that over time – the rent expensing and our capital requirements will also come down with what we see with so many stores that are closing or purported to close or you expect will close there is going to be just a flood of real estate and the market.
Our view is that we should not be opening a whole lot of stores right now because we’re going to pay a higher rent today than we would two or three years from now. We’re very patient about our business, we're very investment minded and the Wall Street doesn’t necessarily like this, but we're really making investments and taking strategies, putting strategies in place for the long-term benefit of the company not necessarily for the next quarter or two.
But what we just think what’s going to happen with the rent and the amount of real estate that’s coming on the market that the prices are going to come down. And we also have the ability when that happens to be able to make deals at lower rents now because we can take relatively large pieces of real estate whether it's in the Dick store or whether in the Campbell’s store with Dick's Field & Stream and Golf Galaxy we give a great consumer experience that real estate developers we are seeing really want and they understand the value we bring this.
So over the long-term I think we’ll be paying lower rents.
Operator
The next question will come from Adrienne Yih of Wolfe Research. Please go ahead.
Adrienne Yih
Along the lines of sort of long-term strategy can you talk about the investments that you’re making to drive e-commerce and to compete against say the likes of Amazon in its space the IT that you’re implementing specifically the plans for personalization and you think CRM?
Ed Stack
So we continue to make investments in this area you can see what happened with our e-commerce business over the last several years it’s continued to grow at a very rapid rate. We’re making those investments from a personalization standpoint, direct marketing standpoint, one of the things we do have to solve as we have to solve for the increased shipping costs so we do have some work to do around there.
But our e-commerce business you've seen us start to market from an e-commerce standpoint more aggressively than we have in the past and we think we’re doing all the right things that prove out from a sales standpoint.
Adrienne Yih
And then Ed just secondarily can you talk about – there seems to be a change in tone through this quarter about how competitive the environment is and then kind of the impact on the next couple of years. What do you think – what happened in the past call it three to six months that sort of led to slow down store growth.
And then – is there an update to the number of store closures those would be the net openings right?
Ed Stack
So we’re not planning to close many store we don’t have stores that have problem we talked about that in our call last year.
Adrienne Yih
Okay.
Ed Stack
At the fourth quarter call we don’t have store closings on the horizon are fleet of stores is in great shape from a profitability standpoint. We indicated that we are slowing down our store growth not because there's an issue our new stores are doing extremely well.
New store productivity over 90% we’re happy with the returns, cash on cash returns, the internal rate of turn we’re slowing this down because we see how it had over the next couple of years. We expect the price of real estate to come down significantly because of all the store closing the stores that Macy’s are closing, Penny's, HHGregg is liquidating went out of business, Gander Mountain is liquidating 118 stores or so.
Some of them are open back up this camping world that still probably half those stores are going to be vacant. We all remember our college economics course the law of supply and demand, the supply is coming up significantly, there is not a huge demand associated with this real estate right now.
So the price we expect is going to come down and that's why we had to put our hands in our pocket from a store development standpoint right now focusing on our e-commerce business, focusing on the stores we have now because we don't want to get caught in paying rent higher today than we think we’ll pay two years from now.
Operator
The next question will be from Steve Forbes of Guggenheim Securities. Please go ahead.
Steve Forbes
Ed, if you can you just revisit the primary benefits of the recent leadership changes what do you think the business gets about having a President and head merchant as compared to the previous reporting structure. And then second on that - how does your structure change impact how you plan on spending your time as you look out strategically here?
Ed Stack
Well what the new structure will be the business has gotten increasingly complicated over the last couple of years. And to have a President in place now with Lauren and her digital experience and marketing experience I think is going to be very beneficial to the business bringing Keri from a Chief Merchant standpoint we’ll really allow me to focus on some broader business and as I said it is gotten become more complicated between the Dick's business, Field & Stream we made a great deal on the Golfsmith stores to become Golf Galaxy stores that's different business.
What we’re doing with team sports HQ the technology companies that we rolled up it's a very exciting time here and we’re pretty excited about what's going on in this business and it will give me the opportunity to take a broader view of the business as opposed to being just focused primarily from a merchandising standpoint as I thought I have been in the past. As far as the new management team going Lauren we think will be terrific, Keri comes with great experience, Don Germano rejoin us we were sorry to see Don leave when he left and Andre retiring – there are times that there has been some things written about Andre’s retirement and I just like to let everybody know sometimes the retirement truly is actually a real retirement.
Andre has been at this a long time he has done a great job, he has got a new grandchild, we want to spend time with his family and retirement sometimes really is retirement and this is one of those times.
Steve Forbes
And then just quick follow-up obviously noting the call stream running efforts at the corporate level can you touch on what the breakeven comp is or need to be at the store level to maintain the four wall margin structure?
Ed Stack
Doesn’t have to change a whole lot our cost structure – I don’t really understand the question there is nothing that’s really changed inside in the four walls other than what we’ve done with the investments we've made in the premium full service footwear decks but there is no real different change in the four wall requirement to breakeven. What we have made investments since we’ve continued to make investments from an e-commerce standpoint and we’re making significant investments and all those go out at the next call for making significant investments in the technology companies that we bought which is Affinity, Blue Sombrero and GameChanger and Dick's Team Sports HQ business.
And this again our investments we're making for the future that are negatively impact the next several quarters but we look at this as what’s right for the business long-term and those are the way – we’ve made decisions in the past and we’ll continue to make those decisions going forward.
Operator
The next question will come from Christopher Horvers of JPMorgan. Please go ahead.
Christopher Horvers
The e-commerce growth rate during the quarter and I believe we expected some slowdown due to transition and then pausing a bit on the marketing. So how did that contribute to the overall comp performance in the first quarter relative to plan and you mentioned being more aggressive on marketing on e-commerce now.
Is that year-over-year relative to what you did a year ago and when did you start to do that?
Ed Stack
So the e-commerce business – it didn’t have a lot of impact on our comps it was kind of in the zone of what we had anticipated. The comps still short a number of other retailers indicated they got off to a slow start in the beginning of the quarter also but some weather concerns as I said some leagues started late.
And that was really the issue as we talk about increasing our marketing it was increasing over what we had done in the early parts of the quarter getting it back to more normalized levels.
Christopher Horvers
And so is the right way to think about the trend in the business looking at margin April together especially as you think about it seems like spring shifted by a month year-over-year then you had Easter also shift which should have some impact to the business. So is that the right way to think about and can you share how those two months performed on a combined basis.
Ed Stack
Well, on a combined basis, we’re not going to get to that granular level of detail, but as I said, February was not too bad, March was not – nearly as good driven primarily because of some weather issues. Primarily up in the Northeast and Midwest which we have a big amount of our stores.
And then when things turned, April our business was very good as our e-commerce business got back to approximate 20%. And that the comp business was overall was about 5.
Christopher Horvers
And then my last question is, is there a way to size how much market share as you think about by the end of 2017 and looking back at the past couple of years, is there a way to size or could you size for us how much market share has come out of the sporting goods market broadly?
Ed Stack
I don't know that specifically right now. We can take a look that, but I couldn’t give you that number off top of my head.
We still have ways to go.
Operator
The next question will be from Scott Ciccarelli of RBC Capital Markets. Please go ahead.
Scott Ciccarelli
First of all, what have your learning been as you’ve gone through your vendor consolidation process? And related to that are you getting the concessions you expected from your strategic partners?
What’s the reaction’s been from your plan strategic partners et cetera?
Ed Stack
We’ve gotten great reaction from our strategic partners. And if you remember, we said that we would have only one or two strategic partners in a particular category.
And where we've moved to those strategic partners and have been able to make those investments in their brand, in them, in us, our brand, it’s worked out extremely well. It’s worked out very well in the golf business it’s worked out very well in the footwear business.
We continue to see those – the reactions have been great. And also in the transactional vendor, remember we have three bucket.
We have a strategic bucket, we have a transactional bucket, and we have an eliminated bucket. So we’ve eliminated a number of vendors.
And the vendors that we do business with and the transactional components have really worked hard and provided us opportunities to increase their brand, increase margins, increase – returns to clean up our inventory. It’s been great.
What we’ve found is that especially in the strategic partners, we really do have true strategic partner. They’ve been great.
Scott Ciccarelli
Okay, that’s very helpful. And then you talked about the impact of the Gander Mountain liquidation.
Can you guys help size that impact so that we can kind of understand the impact it will have on the comps and the back half are expected impact?
Ed Stack
We don't really know yet. It depend on when the liquidation starts, when it ends, how aggressive they get, how quickly camping world takes over, whatever number of stores they’re going to.
So there's too many variables out there for us to give you a number yet.
Scott Ciccarelli
But just to be clear, is that the primary change to the back half comp guidance, or is that you had lower 1Q trends and you just think that overall it’s a more competitive environment?
Ed Stack
Well I think there was a couple things. I think – the liquidation of Gander Mountain – the broader distribution of the athletic product in the marketplace today which was part of the cause of the reduction in Q1 that we think is going to continue.
So I think the market is going to get to be a bit more competitive before where everything shakes out.
Operator
The next question will be from Simeon Gutman of Morgan Stanley. Please go ahead.
Simeon Gutman
My first question Ed, is on the store growth. I think it was on TV last week, you did an interview and you said maybe in 25 years.
I didn’t know if you’re referring to Dick’s or the segment or retail, you said we will probably have around the same stores as we do now. Just what’s think the comments on this call.
I don’t know if you meant that specially for Dick’s because it sounds like you’re still going to be opening stores with no expectation to close?
Ed Stack
So I said that I don't think that we’ll have significantly more. As we go forward, and there’s probably an opportunity for us to kind of get -- it depends on what happens with the real estate, what happens from real estate standpoint, but there may be an opportunity for us to consolidate some stores in certain markets.
The number of these malls close, or some of these shopping centers close – it will have a number of these key tenants and we’re left there alone. We have the ability in the vast majority of our leases to go to a significantly reduced rent.
They have a cure period. After the cure period if they are not able to cure and a number one, we have the opportunity to leave the center.
So it really depends on what happens in the whole market. I think you’re going to see a – lot more store closings.
And I think we’ll have the ability to consolidate some of our stores. Where we had three stores, we might be able to have two stores and service the market the same way.
And that could be with either – to just a Dick store or a combo store of Dick and Field & Stream, or all three banners together. So we’ll wait.
But I don't think we’ll have significantly more stores in five years from now than we do today. And as we said, we’re probably moving to five or 10 stores in a couple of years.
And when I said that how we’re going to look to do it, we have roughly 25% of our store base comes up for renewal in the next three years. We don't have to close stores because they're not performing well.
But we may relocate stores, we may consolidate stores to where the retail intensity is better and we’ve got tremendous amount of flexibility. And we can do this with 25% of our stores if we needed to with virtually no closing charges because they’re at the end of the lease.
But what I don’t think the street understands about our real estate business is that we have the right to these stores for approximately 20. Our average lease time that we’re committed to -- because we’ll sign a lease that will be roughly a 10 year lease with usually, four sometimes three, usually four or five-year options after that so we control the buildings for a long period of time.
But after that first 10-year period, which most of the stores have gone past that, we only are obligated for roughly a little more than five years on an average store going forward. So we’ve got great flexibility in our real estate which I don't think people understand.
Simeon Gutman
That’s helpful, my follow up maybe for Lee. Seth asked an earlier question about I think Q2 and some of the margin of progress or trajectory as the year unfolds.
My follow up, is there anymore granularity that you can walk us through? Maybe the key drivers in the areas of margin what specific drivers, either in margin or in dollars, changed from first quarter to second quarter?
I’m thinking there is some marketing spend, some Eagle investments, or the Eagle profit improving. So can you just walk us maybe from Q1 to Q2, maybe the rest of the year because there is a good jump in the EBIT dollar and margin progression and I’m just trying to pin points, some of the drivers?
A - Lee Belitsky Well, I don’t know if I can walk you from Q1 to Q2. But Q2 versus Q2 last year, we were pretty promotional last year, and we expect to be less.
We had a lot more clearance inventory last year we’ll have less this year to work through. So we expect the margin rates to be higher, the merchandise margin rates to be higher.
And I don’t want to get into specific dollars for each item that we’re spending on. But last year, we were kind of at our peak footwear investment that we had as we were converting the footwear decks.
We should get some of that back. We had some investment spend on the marketing side as well that we should get some savings on the marketing side.
So we’ve got opportunities on both the expense side and the gross margin side in Q2. Not so much to build Q1 versus Q2, but as we look at it versus last year.
Operator
The next question will be from Brian Nagel of Oppenheimer. Please go ahead.
Brian Nagel
So a couple of questions here. First of all on real estate.
Ed, you mentioned in your comments about store growth, just the mall versus non-mall dynamic. So the question there, are you seeing of more difference down in the performance – or any type of difference in performance between your more standalone stores versus those in the mall?
And then my follow up just on e-commerce so it separate but on e-commerce I know there have been a number of adjustments you’ve made to the business. And how should we think about the profitability of e-commerce now and how that continues to evolve going forward?
Thanks.
Ed Stack
So I’ll answer the second one first. We expect our e-commerce business to continue to become more profitable as we go forward from whether that's how we fulfill our e-commerce business, the mix, our vendor direct program.
We expect the e-commerce to become more profitable as we go forward as it has over the last over the last several years. As it relates to the performance of our standalone stores, and we don’t have many standalone stores.
The vast majority of our stores are either in a strip center, a power strip, or in mall. And we’re not seeing any difference between either one of those.
And the main reason we believe that we’re really a destination. We're a destination shop for sporting goods, for footwear, for apparel, for those items those customers want.
So we haven’t seen a big difference. We do think that based on the fact that we’re a destination, we have an opportunity as long as we’re in the right retail, or the retail density is, we feel that we’ve got the ability to be in a strip center or at a mall.
And I think strip center, you’re going to see increased vacancies in malls and also I think in some strip centers going forward. So again, we think the price of real estate is coming down, and we’re going to be very patient as we take a look at what our development program is going forward.
Brian Nagel
Perfect maybe just a follow-up on that, on the e-commerce question I had. So the profit rate of e-commerce continues to improve.
How should we think about right now the difference in profitability between a sale online versus a sale in your store?
Ed Stack
Well I would say that a sale in the store is more profitable. An incremental sale in the store is more profitable than it is in the online which we talked about in the past.
And we’re moving pretty quickly from how we handle our cost, and from a scale standpoint, that we’ll be able to be truly ambivalent on where that sale comes from. As we move to this new platform, our costs significantly changed.
In the past when we were working with radio, we paid a percentage fee based on the sales that we did. So if we sold a $100 pair of shoes, or we sold an $80 pair of shoes, we paid a percentage of that retail price.
So you really couldn’t leverage your costs. As we go forward now, the fee is on a per unit basis and we’re able to leverage those.
If we sold a $100 pair of shoes, it's more profitable for us than if we sold a $80 pair of shoes. We weren’t able to do that before.
So as we move forward over the next couple of years, we truly believe that we will be ambivalent from a profitability standpoint.
Lee Belitsky
In addition to that, we now own our platform. So that's largely a fixed cost.
So we have our variable cost really by the unit, but we have a bigger fixed costs component as well on e-commerce that we can leverage. The higher the sales, the greater leverage we have on our fixed cost.
Whereas in the past, it was all the variable cost when we’re using the radio platform. Operator The next question will be from Omar Saad of Evercore ISI.
Please go ahead.
Omar Saad
Couple of questions. Wanted to ask about the TSA and Golfsmith customer list.
I think you guys pick those up post those bankruptcies, what you learning from those list, if you’re able to convert some of those customers, is there a lot of overlap, or is there is a chance that you see a lot of the customers? And then I have a couple follow-ups.
Ed Stack
So the answer that is, there is some overlap in their own customers. And how far it was from a store that we operated, the closer the store, the more the overlap.
the further away that the store was from a Dick store, the less the overlap. What we’re able to find is now that we're opening, we’re really hot and heavy into the opening of the former TSA stores, we’ll be able to use that data to really drive business, and we’re really pleased with the way those stores have opened.
Omar Saad
And I wanted to ask, I think the last quarter you’ve mentioned two new brands this spring that you’re pretty excited about. I think one of them was the compression brand maybe, the private label compression brand you’re launching.
A) is that right, and B) what’s the other brand that's out there that's new to the assortment?
Ed Stack
The athletic brand is the Second Scan. We’re very excited about that athletic brand, and our hope is that we can move that to be as successful as the CALIA brand.
The other brand is called ETHOS. It's an exercise brand, higher-end exercise brand of weights, kettlebells, accessories benches all of that and early indication that it's pretty early in that but we’re pretty excited about that.
Omar Saad
It seems like you guys having some good success moving higher-end. Some of your customers clearly looking for more premium offering.
Should we think about that generally speaking across all of the different categories moving forward, or do you like your price points are in the right place?
Ed Stack
We feel our price points are in the right place but as we take a look at some other brands that will be introducing we’re going to be introducing a winter apparel brand called Alpine design that will be in 2018. We're excited about that they’ll be a mid price point product.
So we’re trying to take the price points of our private brands a bit higher, we'll also going to be developing an opening price point test with the apparel brand also probably sometime in 2018. So we're trying to cover the Gander.
Omar Saad
And one last question if it's okay, more of product question. Specifically with the sneaker business and maybe on the apparel side too, as we think about this kind of broader shift in the marketplace, more towards sports fashion, retro, the kind of that sports street wear.
Do you feel like you're offering as the right mix of those products and brands that play in that area or is your customer base little bit different and that’s not quite the same kind of a feel as you might see and maybe more urban locations just thoughts around that kind of product shift that’s going on the marketplace?
Ed Stack
I think that product - we have it in our stores it sells very well the kids want that product he is coming in to buy, his football cleats or her soccer cleats or baseball cleats, softball cleats and they want that product and when we have that product the store extends very well and we expect that to be - the product offering to be available much broader range of stores over the next six to nine months.
Operator
And the next question will come from Mitch Kummetz of B. Riley.
Please go ahead.
Mitch Kummetz
Ed on the real estate side, you mentioned renewals couple of times I think you said 25% of your stores up in the next three years. Can you talk a little bit about what you're seeing there as you go through that process and to what extent might that benefit you guys on the margin side?
Ed Stack
What we’re seeing there with it - we got the stores that the lease term is up and now we have an option to continue but one option to move or close the store or whatever we decide to do. But we got an option to go somewhere else we've got a lot more leverage and we've been able to negotiate allowance money to update our store.
We've also been able to leverage real estate prices to come down or we've been able to relocate and get a brand new store and a center might be half a mile away where the retail intensity has changed what gives us tremendous flexibility like I said we've got - what we’re committed to any store kind of on average it’s a little more than five years. So we’ve got tremendous flexibility and we’ve been putting it to pretty good use.
Mitch Kummetz
The decision you make there just depends on a per store basis, so it might not just be something that drives better margins but it actually might drive greater productivity if you go to a different center so that might?
Ed Stack
We primarily drive this based on underwriting sales piece. If all else is equal the rent is equal or the rent might be a little more or little less depending but we’ll take a look at this and see where we can drive the most amount of sales and which location will be the most profitable from a true sense of profitability as opposed to just the margin rate.
Mitch Kummetz
And then can you talk a little bit about your pricing strategies to what extent does it or can it vary on a market-by-market basis or even maybe on a store-by-store basis because I would imagine you have some stores that there is now less competition based on the TSA bankruptcies and maybe there's some opportunity to be a little less aggressive on pricing there versus the other markets where you might see a vulnerable competitor that you want to get more aggressive with. To what extent are you doing that are can you do that?
Ed Stack
I will comment specifically on pricing strategy per areas. We're really focused more on categories of business.
If we think there is a category that we want to try to gain market share we may be a bit more aggressive, but our pricing strategy for the most part is consistent throughout the country.
Operator
The next question will come from Michael Lasser of UBS. Please go ahead.
Michael Lasser
Ed you mentioned previously that you’ve been making investment with a view long-term lends but you've be making investments for quite some time and how are you measuring the return on those investment is 2.5% comp the type of return that you get on those investment that you making for a long run?
Ed Stack
No, we would like our comps to be higher than 2.5% but we’re making investments from an e-commerce standpoint, from a marketing standpoint, from an infrastructure standpoint and I think it's just a difficult time in retail right now but we’re not going to take those difficult time in retail and be scared off from making the investments that we should make that are for the long-term benefit of the company and where this industry is going. We think the investments that we made in e-commerce starting to pay great dividends.
We think that the investments we're going to make in Team Sports HQ it’s going to make for a great investment and great growth going forward. If you take a look at what other retailer is doing out there, it's pretty difficult.
Our business is really a month - so our cost of 2.5% may not be what we originally guided to. We had some issues we’re not going to make excuses for those, but they're still pretty healthy compared to what else is going on in the marketplace.
So we’re going to continue to make these investments we believe in what we're doing, we see where the future is going, we see where the clock is going and we remain extremely excited about where this company is going to go and can go and we won't back off from that.
Michael Lasser
And my follow-up question is Ed, every quarter there's parts of the product portfolio categories the working categories that don't work. So based on that volatility especially in light of all the share gains that you're seeing and where you are with the business right now, is that maybe rethink the size of the store or rethink any areas that you're leading and investing to such as golf or outdoor?
Ed Stack
We take a look at some opportunities in our stores and move categories expanding contract all the time. This is no different than when we run the business for the last 50 years that those categories the expanding categories that contract categories that are contracting today maybe expanding it in several years.
So we are constantly making those management decisions as to where to invest and this is nothing new and we’ll continue to do that.
Michael Lasser
Get back to the question, certainly there’s been a long history and heritage to the business but do you think that the lessons from a long ago are still as relevant today when more of the business going online and how you think about categories or store size?
Ed Stack
We still feel from the store size standpoint we're in the right size with what the customer is expecting from what they want from a footwear standpoint, the specialization and investment golf standpoint, from a Team Sports standpoint, from an athletic apparel standpoint, we’re very comfortable with our store size. And as we've indicated that our new store productivity is greater than 90%, the customer is still telling us we've got the right size store.
Operator
And the final question today will be from Sam Poser of Susquehanna. Please go ahead.
Sam Poser
Thank you for taking my question and still have some after all of that. I guess one is the Gander promotional activity couldn’t that help your gross margins just because they are selling – arguably one of your lowest margin businesses so from a mix perspective that could help your margins during that time even though it might hurt comp?
Ed Stack
Yes Sam, you could think that but - and some of these categories we may be taking some ammunition prices down, some gun prices down to not lose that market share through this. So I don't think it's helpful to our gross margins right now.
Operator
And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Ed Stack for his closing comments.
Ed Stack
I would like to thank everyone for joining us on our first quarter conference call. We look forward to talking to everybody in a couple of months for the second quarter.
Thank you.
Operator
Thank you. Ladies and gentlemen, the conference has now concluded.
Thank you for attending today's presentation. You may now disconnect your lines.