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Edited Transcript of DKS earnings conference call or presentation 7-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Dick's Sporting Goods Inc Earnings Call

CORAOPOLIS Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Dick's Sporting Goods Inc earnings conference call or presentation Tuesday, March 7, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nate Gilch

Dick's Sporting Goods Inc - IR

* Ed Stack

Dick's Sporting Goods Inc - Chairman & CEO

* Andre Hawaux

Dick's Sporting Goods Inc - COO

* Lee Belitsky

Dick's Sporting Goods Inc - CFO

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Conference Call Participants

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* Kate McShane

Citigroup - Analyst

* Michael Lasser

UBS - Analyst

* Seth Sigman

Credit Suisse - Analyst

* Simeon Gutman

Morgan Stanley - Analyst

* Camilo Lyon

Canaccord Genuity - Analyst

* Stephen Tanal

Goldman Sachs - Analyst

* Scot Ciccarelli

RBC Capital Markets - Analyst

* Brian Nagel

Oppenheimer & Co. - Analyst

* Sam Poser

Susquehanna Financial Group - Analyst

* Adrienne Yih

Wolfe Research - Analyst

* Steven Forbes

Guggenheim Securities - Analyst

* Peter Benedict

Robert W. Baird & Company, Inc. - Analyst

* Mitch Kummetz

B. Riley & Company - Analyst

* David Magee

SunTrust Robinson Humphrey - Analyst

* Jim Duffy

Stifel Nicolaus - Analyst

* Joe Feldman

Telsey Advisory Group - Analyst

* Krista Zuber

Cowen and Company - Analyst

* Chris Svezia

Wedbush Securities - Analyst

* Patrick McKeever

MKM Partners - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Dick's Sporting Good's fourth quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Nate Gilch, Director of Investor Relations. Please go ahead, sir.

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Nate Gilch, Dick's Sporting Goods Inc - IR [2]

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Thank you. Good morning, and thank you for joining us to discuss our fourth quarter 2016 financial results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer; Andre Hawaux, our Chief Operating Officer; and Lee Belitsky, our Chief Financial Officer.

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 the risk factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking 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 in the Investor Relations portion of our website at dicks.com. I will now turn the call over to Ed Stack.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [3]

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Thanks, Nate. I'd like to thank all of you for joining us today. As we announced this morning, we had a strong fourth quarter and delivered non-GAAP earnings per diluted share of $1.32. This exceeded the high end of our guidance and represents a 17% increase over last year.

Our total sales increased 10.9%, and we improved non-GAAP operating margins year-over-year. We delivered comp sales growth of 5% supported by increases in both ticket and traffic. Our e-commerce sales increased 27% to approximately $444 million, and grew to 17.9% of our net sales compared to 15.7% in the same quarter last year.

During the quarter, we continued to realize meaningful market share gains and saw growth across each of our three primary categories, hard lines, apparel and footwear. Our footwear business was strong, and we remain encouraged with the results of our premium full service footwear decks. We were pleased with our apparel business, which benefited from the Chicago Cubs World Series Championship and favorable weather patterns that helped our cold weather business.

Golf was also positive, while the outdoor category was slightly negative driven in part by a decline in hunting. 2016 was certainly a unique time in our industry. We have taken advantage of the market disruption by capturing significant market share left behind by TSA, Sports Chalet, and Golfsmith. As we've studied the consolidation in our industry, we felt it prudent to conduct a thorough review of our business, including our stores, merchandising strategy and vendor structure.

Based on this review, we are implementing a new merchandising and vendor matrix to better serve our customers how and wherever they choose to interact with us. Our vendors will be divided into three segments. Segment A will be strategic vendors. These partners will invest significantly in our business both online and in-store, and we will invest significantly in their business.

These strategic vendors will also provide us exclusive and differentiated products in the marketplace. We will overtly move market share to these partners in an effort to drive growth in our respective businesses. Segment B will be vendors that we simply have a transactional relationship with, and segment C will be vendors who we will eliminate from our stores.

We've already started this process and expect to eliminate up to 20% of our vendors this year. We've identified the merchandise that does not fit within this vendor and assortment strategy, and have taken a $46 million charge to write it down. We also conducted a comprehensive review of our store portfolio and other assets. As a result of this review, we closed only three of our 676 Dick's stores.

Separately, in conjunction with acquiring the best Golfsmith location, we closed 10 of the original Golf Galaxy stores we bought that were located in close proximity to an acquired Golfsmith store that is better positioned to serve our customers. We also impaired the leasehold improvements of 12 additional stores and other assets, as well as incurring TSA and Golfsmith integration costs. In total, these charges were approximately $47 million.

During 2016, we fulfilled the needs of displaced TSA, Sports Chalet and Golfsmith customers. We acquired their best store locations, customer information, and transaction details at the SKU level. Leveraging this data, we reached out to displaced customers and planned for their needs with the right product offerings in the right locations. As a result, we realized meaningful market share gains, both in-store and online.

In 2017, we will remain a focus on aggressively capturing displaced market share. Our new store growth will center on new and underpenetrated markets which were historically served by TSA and Sports Chalet. We will also continue to leverage the transaction details, along with the TSA and Golfsmith customer lists to target millions of new customers.

Turning to digital, I am proud to report that at the start of this fiscal year we successfully relaunched dicks.com on our proprietary Web platform. The relaunch was a critical moment for us, and we're optimistic as we continue to iterate on platform functionality. We believe there is meaningful opportunity for future profitable growth, which we will drive by remaining focused on consistently and deliberately meeting our customers' needs across all channels.

Looking ahead, one way we will continue to meet our customers needs is through our team sports headquarters business, which is a roll-up of Blue Sombrero, Affinity Sports and GameChanger. Our goal is to create a holistic, digital ecosystem to support and equip youth sports. Importantly, through agreements in principle for exclusive partnerships with Little League baseball and softball, Pop Warner football, and US Youth Soccer we have established relationships with millions of players.

Team sports headquarters will also keep us top of mind for athletes and their families, and will create a powerful data set that we will use to develop offers that are tailored and timed to meet the needs of these athletes. We see this as a multi-year initiative that will be a growth driver for us. Lastly, our private brands and premium full service footwear decks are key pillars of our new merchandising strategy.

For example, we remain extremely enthusiastic about CALIA, which has risen to become our third largest women's brand in less than two years. Looking ahead, we will expand offerings and CALIA, Field & Stream, Reebok and other key brands. We will also be launching two exciting new brands this spring. As a result, we expect our private brand business to reach approximately $1 billion in sales this year.

Our premium full service footwear decks also provide us a compelling product offering. With this presentation, we're able to offer products that our customers cannot find at many other sporting good stores and department stores. In summary, during this time of significant disruption in our industry, we are very optimistic about our future and the strategies we have outlined.

I would like to take a moment to thank our associates across the Company for the hard work and commitment they showed to deliver our fourth quarter results and for their upcoming efforts in this fiscal year. I would now like to turn the call over to Andre.

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Andre Hawaux, Dick's Sporting Goods Inc - COO [4]

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Thank you, Ed. In 2016, we profitably grew our omni-channel platform, ending the year with 676 Dick's stores, 91 golf specialty stores, and 27 Field & Stream stores. We maintained strong new store productivity and our stores continue to support our e-commerce business, which for the full year increased approximately 26% to $939 million.

During the fourth quarter, we reopened the first three former TSA stores as Dick's stores and acquired 30 Golfsmith stores, which are being converted to the Golf Galaxy brand. In 2017, we expect to open approximately 43 new Dick's stores primarily located in California, Florida, Texas and the Pacific Northwest, and relocate approximately seven Dick's stores. 19 of these are former TSA stores that will reopen as a Dick's store largely during the first half of the year.

Additionally, we expect to open approximately nine Golf Galaxy stores, relocate one Golf Galaxy store, and open eight Field & Stream stores. Eight of the Golf Galaxy openings will be Golfsmith conversions, while the remaining location will be in the combo store format. All of the Field & Stream stores will be in the combo store format. During the first quarter, we expect to open 16 new Dick's stores, including 10 former TSA stores, and relocate two Dick's stores.

We also expect to open two Field & Stream and nine Golf Galaxy stores, including eight former Golfsmith stores. Lastly, we continue to drive store productivity through our premium full service footwear decks. At the end of 2016, we had 184 in place and expect to add approximately 50 additional decks in 2017, primarily within our new Dick's stores. I will now turn the call over to Lee to review our financial performance in greater detail.

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [5]

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Thank you, Andre, and good morning, everyone. Beginning with our fourth quarter financial results, consolidated sales increased 10.9% to approximately $2.5 billion. Consolidated same-store sales, which includes all banners both online and in-store, increased 5%.

Within this, Dick's Sporting Goods omni-channel same-store sales increased 5.3% driven by a 2.4% increase in ticket and a 2.9% increase in traffic. Golf Galaxy omni-channel same-store sales increased 13.2%. We continue to see strong growth in our e-commerce business which increased 27%. On a non-GAAP basis, gross profit for the fourth quarter was $766 million, or 30.85% of sales, up 85 basis points over last year as merchandise margins expanded and we leveraged occupancy expenses, partially offset by higher shipping costs associated with our rapidly growing e-commerce business.

Non-GAAP SG&A expenses were $533 million for the quarter or 21.46% of sales, an increase of 86 basis points from the same period last year. The deleverage was primarily driven by higher incentive compensation expense. In total, led by our strong comp sales performance, we delivered non-GAAP earnings per diluted share of $1.32 which represented a 17% increase over the same period last year.

On a GAAP basis, our earnings per diluted share were $0.81, which as Ed discussed, included approximately $93 million in charges. For additional details on this, you can refer to the non-GAAP reconciliation in the tables of our press release that we issued this morning. Now looking to our balance sheet, we ended the fourth quarter with approximately $165 million of cash and cash equivalents and no borrowings outstanding on our $1 billion revolving credit facility.

Total inventory increased 7.3%, which is below our 10.9% sales growth in the quarter. This increase includes inventory purchased for the 30 Golfsmith conversions, as well as our 27 new store openings planned for the first quarter. As we transition into the spring season, we are comfortable with our inventory levels for our go-forward merchandise and are confident that our new merchandising strategy will drive better inventory productivity.

Turning to the fourth quarter capital allocation, net capital expenditures were $49 million, or $115 million on a gross basis. Additionally, during the quarter we paid $16.7 million in dividends, and as you know, we recently increased our quarterly dividend by 12% to $0.17 per share. We also repurchased $29.7 million of stock at an average price of $54.06. In total for 2016, we repurchased 3.13 million shares of stock for $145.7 million, and we have approximately $1 billion remaining in our authorizations.

Now let me wrap up with our outlook for 2017 which will be 53-week year. For 2017, we anticipate 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. We expect consolidated same-store sales to increase between 2% and 3%. As we discussed, digital is a top priority.

Within our guidance, we have contemplated continued investments to enhance our digital capabilities, including our team sports headquarters business. This also include support for new e-commerce platform primarily within the first quarter which we previously planned for as part of the launch. Additionally, we will maintain our investment in premium full service footwear. All this considered, we expect operating margin to increase year-over-year driven by SG&A leverage and expected expansion in gross margin.

Net capital expenditures for the full year of 2017 are expected to be approximately $350 million, or about $465 million on a gross basis. 2016 net capital expenditures were $242 million, or $422 million on a gross basis. Our earnings guidance assumes an effective income tax rate of approximately 37.5% 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. Turning to the first quarter, we anticipate non-GAAP earnings per diluted share of between $0.50 and $0.55, with an increase in consolidated same-store sales of between 3% and 4%. We expect earnings growth in Q1 to be a little lower than our annual rate of growth, as we will have higher pre-opening expenses due to opening 22 more stores compared to the same period last year, and previously planned one-time expenses to support the launch of our new e-commerce platform.

These items account for about $10 million of incremental expenses in the first quarter. Looking ahead, we expect to deliver accelerating earnings growth in the second quarter. Please note that our first quarter and full year non-GAAP earnings per diluted share guidance does not include approximately $3 million of occupancy and professional fees to convert former Sports Authority stores. We will continue to report these costs to you in future periods.

Before concluding, I'll take just a moment for a quick housekeeping item. As previously indicated, since Golf Galaxy was only approximately 3% of our total sales in 2016, we are not planning to specifically call out Golf Galaxy comps, rather, we will speak to our golf business on a consolidated basis. This will conclude our prepared comments. We appreciate your interest in Dick's Sporting Goods, and, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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Thank you, sir.

(Operator Instructions)

Kate McShane of Citi Research.

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Kate McShane, Citigroup - Analyst [2]

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Hi, good morning, thanks for taking my question. My question is around the vendor consolidation. Just why is the right time now, and with the change in the vendor strategy and the competitive landscape changing, how are you viewing your balance of opening price points in your mix of good, better, best?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [3]

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Kate, this is the right time. Based on the disruption that has happened in this industry over the last year, we felt that it was really the right time to review, really, an in-depth review of everything that we do in the business. As we looked at this, we felt that it was the right time to consolidate our vendors, and we will continue to have a good, better, best strategy that isn't really going to change. We will still have opening price point product, we'll have good product, and we will start of the product to be able to serve that enthusiast.

But some of those tertiary vendors, like I said, we will be probably be eliminating up to 20% of our vendor base. We think it's the right thing to do long term for the business.

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Kate McShane, Citigroup - Analyst [4]

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Is there a particular category where that vendor base is concentrated or is it across the board?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [5]

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It is really across the board, and we're not going to get into the vendors that we are eliminating. We're not going to get into talking about what vendors are in what particular segments. But it will be across the board.

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Kate McShane, Citigroup - Analyst [6]

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Okay, thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [7]

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Sure.

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Operator [8]

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Michael Lasser of UBS.

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Michael Lasser, UBS - Analyst [9]

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Good morning. My first question is on the vendor consolidation, as well. What do you expect the sales and margin implications of this strategy to be, and is it really a play on trying to get more exclusive product, or is it really about getting better margins and terms from your partners?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [10]

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It's really across all of those. So what -- we don't expect to, with the comp sales gains in the earnings that we've anticipated, we don't expect to give up any sales or any margin rate. It's going to be across a broad range of products, and it will also give us an opportunity to showcase our private brands more and drive that business, which we've indicated we expect to be approximately $1 billion this year.

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Michael Lasser, UBS - Analyst [11]

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Okay. And recognizing that you don't want to call out specific vendors, but should we expect any major vendors to be no longer featured in your stores?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [12]

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Yes. I would tell you that the top 10 vendors we do business with today, they will not be -- there is none of our top 10 vendors being eliminated.

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Michael Lasser, UBS - Analyst [13]

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Okay. My questions on store growth, Ed, you said you did a comprehensive review of the business. You're going to opening and converting a bunch of stores this year. What's the outlook beyond that?

When do you start to get to the point where you say, look, we're comfortable with our store base, we don't need to open many more locations to reach that incremental consumer, and we probably have more productive uses for capital as a result?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [14]

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Well, I think we are still kind of at that point in a number of markets, but there are some markets that are still wide open. We still don't have many stores in California. Take San Francisco, for example, the Bay Area, we only have a handful of stores. Down in South Florida, Miami we have a handful of stores. We've got nothing in the five boroughs.

We've only got six Dick's stores in Houston which I think is the fourth largest market in the country. So we're going to be just, as we said, we're going to be opening in new or very underpenetrated markets is our plan going forward.

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Andre Hawaux, Dick's Sporting Goods Inc - COO [15]

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And, Michael, this is Andre. Again, we use a very rigorous criteria. That new store productivity number for us, as well as very strong return criteria, otherwise we don't open stores. And to Ed's point, it is really right now in markets where we are largely either light or very severely underpenetrated where we will open stores, otherwise we won't.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [16]

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We look at this going forward that now is absolutely the right time to be patient from a real estate standpoint, with all the real estate that's going to come up on the market. Penney's announcing stores that they're closing, Macy's announcing stores. Some other people that are rumored to be closing stores, or -- consolidation in this industry is not over. And this is a time that we are going to be very patient going forward.

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Michael Lasser, UBS - Analyst [17]

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Okay, thank you very much.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [18]

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Sure.

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Operator [19]

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Seth Sigman of Credit Suisse.

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Seth Sigman, Credit Suisse - Analyst [20]

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Thanks, good morning. I wanted to follow up on the guidance. So you relaunched the e-commerce site, previously discussed 30 basis points margin benefit from that transition. Has that math changed at all? And maybe you could give us a sense of how to think about the timing of that benefit?

And related, you had talked about $6 million to $7 million of investments falling into 2017, obviously, less than last year. But are you assuming the need to reinvest in perhaps other areas, specific to online and how that could impact the P&L?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [21]

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So the 30 basis points is still a good number. And we expect that number. It be toward the second quarter, third quarter, and beyond. We've got some investments around the launches, as Lee indicated in his remarks, that we had previously announced in that $6 million to $7 million range that we would be investing to launch the brand.

Other investments, we are extremely excited about team sports headquarters, and the acquisitions that we've done over the last couple of years and couple of them last year around Blue Sombrero, Affinity and GameChanger. We think this truly is a big unlock for how we're going to approach these young athletes going forward. And there will be some investments that we will be making there to drive that business.

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Seth Sigman, Credit Suisse - Analyst [22]

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Okay, thanks. That's helpful. And then one follow-up on the merchandising strategy, the change seems to imply a higher concentration of certain vendors. Correct me if I'm wrong. But can you give us a sense of what is embedded, if anything, for the financial benefits in 2017 related to the strategy to perhaps balance some of the long-term risks associated with that concentration?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [23]

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Well, we haven't played -- we think that there will be -- there can be some margin rate expansion here going forward. We haven't played a lot of that into this guidance. We think that the brands that we have worked with are providing us, as we said, exclusive and differentiated product. They are making meaningful investments in our business, and we think it will be very good for our business going forward. But we don't have a whole lot baked into this year for this consolidation.

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Seth Sigman, Credit Suisse - Analyst [24]

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Understood. Thank you.

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Operator [25]

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Simeon Gutman of Morgan Stanley.

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Simeon Gutman, Morgan Stanley - Analyst [26]

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Thanks, good morning. I want to follow up first on the vendor question. Ed, I guess, it's hard to say where the concentration is going to go, but I guess, the first assumption is that it could be a greater concentration with some of the bigger vendors. I don't know if you agree with that, or if within the top 10 you go bigger, such that the numbers one and two don't get too big?

And then related to that, I guess, is there a risk here? You're going to eliminate certain vendors, I'm guessing they will look for other outlets, maybe look for DTC channels, but is there a risk that some of the existing vendors look for that exposure, as well, I don't know, different than normal, but just curious how your thoughts are there?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [27]

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I don't think, there's going to be a concentration of more with these vendors, but the investments that they are going to be making in our business and the investments that we are going to be making in their business are going to be great investments.

As far as some of these other vendors looking for other avenues, they probably will, but you have to remember, they are not that important to us as we are eliminating them from the mix. And then being able to look at terms and conditions of sales and how we come to market with other brands that really make a difference. And what we think is absolutely the right thing to do, and the brands that we have talked with so far our plan is playing out very nicely.

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Simeon Gutman, Morgan Stanley - Analyst [28]

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Okay. And then, different topic, just on the outlook for earnings. It looks like the second half there is a pretty good step up in both earnings growth, despite some tougher compares. Just curious, what's behind the forecast, and if you could shed any light on color between GM and SG&A in the back half?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [29]

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Part of this, and I will let Lee jump in if he needs to, but part of this is some of the investments that we're making in the first quarter. As we said, there's about $10 million of investments in the first quarter, and depressing the first quarter, and we expect accelerated growth going forward after that.

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [30]

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And I wouldn't bank on it all in the second half. I think we will really get this going in the second quarter, as well.

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Simeon Gutman, Morgan Stanley - Analyst [31]

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Okay, thanks, good luck.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [32]

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Thanks.

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Operator [33]

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Camilo Lyon of Canaccord Genuity.

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Camilo Lyon, Canaccord Genuity - Analyst [34]

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Thanks, good morning, guys. Maybe asking just another question on the vendor change program. So is it right to assume that with the 20% reduction in vendors in the inventory that there will be a 20% reduction in square footage that was allocated to them that will be reallocated to the top brands, the top 10 brands, or is that going to go to private label? And does that impact how you think about future store size as you go forward with new openings?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [35]

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You have to remember that 20% of our vendors isn't 20% of our business, or 20% of our square footage. These are vendors that we think don't really have significant growth going forward. But there will be a combination of some of this will go to existing vendors that we're going to partner with, and part of this will go to our own private brands.

And as we said, our private brand business, we expect to be $1 billion this year. That's a pretty good chunk of change. We're pretty excited about what we're doing from a private brand standpoint. And you take a look at what we've done with CALIA, it's gotten to be the third largest women's athletic brand in the Company and it is growing pretty rapidly.

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Camilo Lyon, Canaccord Genuity - Analyst [36]

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Great. And then just switching topics to, I believe it was in the December period, that you began to mine the customer data that you purchased from the bankruptcy proceedings. Were you able to see any monetization of that data or is that still yet to unfold?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [37]

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We have seen some, but it's yet to -- the biggest benefit, we think, is ahead of us, not behind us.

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Camilo Lyon, Canaccord Genuity - Analyst [38]

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And did you see a materialization of any of that benefit in the fourth quarter?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [39]

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We did, yes.

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Camilo Lyon, Canaccord Genuity - Analyst [40]

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Okay.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [41]

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More from TSA them from Golfsmith.

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Camilo Lyon, Canaccord Genuity - Analyst [42]

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Got it. And then just a longer-term question, as you see your, the share gains continue to accrue to you as the industry continues to consolidate, how do you think about your EBIT margin potential, and where the right EBIT margin should rest for this business on a go-forward basis once things have settled out and there is, obviously, more of a share opportunity that you have in front of you to capture?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [43]

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We're not going to get to the point where we're going to provide that guidance, but we do think that there is meaningful upside, and we will start to see that some of that growth this year.

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Camilo Lyon, Canaccord Genuity - Analyst [44]

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Got it. All the best, guys.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [45]

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Thank you.

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Operator [46]

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Stephen Tanal of Goldman Sachs.

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Stephen Tanal, Goldman Sachs - Analyst [47]

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Good morning, guys, thanks for taking my question.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [48]

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Sure.

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Stephen Tanal, Goldman Sachs - Analyst [49]

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Just wanted to understand. I think, it seems like same-store sales are maybe slowing a little bit in the [core], and I guess weather was said as being fine. Is there anything else to call out, potentially impacts from department stores pushing in or any change in the TSA share capture that you think you got in the quarter versus 3Q? Any color there, or maybe by category it would be a better way to approach it, just how do we think through that?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [50]

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Are you talking about in the fourth quarter?

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Stephen Tanal, Goldman Sachs - Analyst [51]

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Yes, the fourth quarter same-store sales rate.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [52]

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We thought a 5% comp sales gain is pretty good. Part of it was driven by the Cubs were helpful, the weather pattern was helpful, and our team just did a really good job of going out there and grabbing business. We were pretty pleased with 5% in the environment that was out there.

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Stephen Tanal, Goldman Sachs - Analyst [53]

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Got it. And I guess there's nothing to call it by category, apparel was fine versus the others?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [54]

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We did say that the hunting business was difficult. So that hunting business continued to be -- continues to struggle and struggled in the fourth quarter, both firearms and a bit from an ammunition standpoint.

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Stephen Tanal, Goldman Sachs - Analyst [55]

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Got it, and --

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [56]

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Which I think you've seen, has been a problem in the marketplace right now.

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Stephen Tanal, Goldman Sachs - Analyst [57]

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Also in looking at the consolidated comp, obviously, in this [quarter's] decks, we sort of flushed out that Field & Stream must have been pretty tough, but I don't know if you can provide any other color there?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [58]

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No. Field & Stream was a bit more difficult, down kind of mid-single-digits. And the hunt business inside Dick's was difficult. That structurally is a difficult business right now. We think we did a very nice job offsetting that with what's going on with the golf business and with the TSA market share gains.

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Stephen Tanal, Goldman Sachs - Analyst [59]

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Got it. And just last one for me then, can you help us think about what percent of sales would be represented by sort of the segments and vendors, just to get a sense for how things will shift, specifically segment C, I'm just curious around that?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [60]

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We're not going to get to that level of detail, especially in segments one and two, but segment C is 20% of our vendor base, and it's meaningfully less of our business than the 20%.

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Stephen Tanal, Goldman Sachs - Analyst [61]

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Got it, that helps.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [62]

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And we've got to solve for -- anything that we're eliminating we've got to solve for how we make up that business.

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Stephen Tanal, Goldman Sachs - Analyst [63]

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Understood. Thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [64]

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Sure.

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Operator [65]

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Scot Ciccarelli of RBC Capital Markets.

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Scot Ciccarelli, RBC Capital Markets - Analyst [66]

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Good morning guys, two questions. First, how large was the compensation swing 4Q 2015 to 4Q 2016?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [67]

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It made up most of the change in SG&A expense, and the SG&A expense as a percent of sales. We had a really solid year this year off a relatively weak year last year.

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Scot Ciccarelli, RBC Capital Markets - Analyst [68]

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Most of the change on a percentage basis?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [69]

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Yes. Not dollar basis, but basis points, yes.

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Scot Ciccarelli, RBC Capital Markets - Analyst [70]

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Okay. And then, second question, you guys have been talking about private label, you think it's going to hit $1 billion. Can you give us an update, kind of where private label ended the year on a percent mix, and then kind of how much it was up this year, just so we can kind of gauge the trend line that is following?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [71]

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It was up a bit, can't get into real specifics right now for competitive reasons. But it was up and we expect it to -- that growth to accelerate going forward. We've got some terrific plans for our PD business. We saw some of that materialize last year, and we're pretty confident we can get this to roughly $1 billion this year.

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Scot Ciccarelli, RBC Capital Markets - Analyst [72]

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And is the margin, Ed, still much better on that, I think we've talked about several hundred basis points historically?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [73]

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Probably 600 to 800 basis points different than the brands that it is eliminating.

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Scot Ciccarelli, RBC Capital Markets - Analyst [74]

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Got it. All right, thanks a lot, guys.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [75]

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Sure.

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Operator [76]

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Brian Nagel of Oppenheimer.

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Brian Nagel, Oppenheimer & Co. - Analyst [77]

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Hi, good morning. Thanks for taking my question.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [78]

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Sure, Brian.

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Brian Nagel, Oppenheimer & Co. - Analyst [79]

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First question, just with respect to market share gains. Ed, you had mentioned that market share gains remained a driver of the business here in the fourth quarter. Can you help us understand whether it was more or less the driver in the third quarter? Can we break out, look into your [5%] or so comp, how much of that came from market share gains?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [80]

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I would say a big part of that was market share gains, then also. If you remember, we talked about, at the end of the second quarter we were a little bit conservative in our guidance, we weren't sure what those market share gains were going to be. We thought the liquidation of Sports Authority would have a bigger impact than it did.

It didn't. Those gains continued into the fourth quarter, and we were very pleased with the way that the marketing team, the operations team, and the merchandising team went after that market share.

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Brian Nagel, Oppenheimer & Co. - Analyst [81]

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And then looking into 2017, we have your initial guidance now. How should we think then about -- given what you've seen so far with the market share gains, the cadence of those gains continuing through 2017?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [82]

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Q1, Q2 should be pretty good. We'll start to come up against them in Q3, but based on the fact of how we are mining the data, we think that -- we don't think the market share gains necessarily end beginning with the third quarter because we continue to mine this data, understand this data, test this data, and we think there's still more upside for us and it doesn't stop in the beginning of the third quarter.

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Brian Nagel, Oppenheimer & Co. - Analyst [83]

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Got it. And then just a follow-up, a separate topic, with respect to the merchandising changes you're making. How should we think -- the product you have written down or taken the charge for here in the fourth quarter, how should we think about the flow of that product through your stores? Has a lot of it been cleared already, or will it be cleared here as we work into 2017? Is there some strategic use for it as a traffic driver as you clear that product?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [84]

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We have cleared it, Brian. We've taken it off the floor and made room for the spring receipts, and we have cleared that often and we are jobbing some of that, we're jobbing some of that out. But it's gone.

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Brian Nagel, Oppenheimer & Co. - Analyst [85]

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Great, thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [86]

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Sure.

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Operator [87]

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Sam Poser of Susquehanna.

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Sam Poser, Susquehanna Financial Group - Analyst [88]

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Good morning, thank you for taking my question. What impact in your guidance, can you give any impact you would've had from the later tax refund for the first quarter?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [89]

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Yes, we are not aware of any particular impact delayed tax refunds that had, we haven't really tracked that historically. So if there is anything from that we pick up later then that's fine, but we're not counting on it in the first or second quarter.

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Sam Poser, Susquehanna Financial Group - Analyst [90]

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Okay, thank you. You may have said this, can you give us what your annual pre-opening expenses are looking like this year?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [91]

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We can. Just give us a second, Sam, we will get to those. In the first quarter they are significantly higher. We're opening 22 more stores in the first quarter than we did last year, of which, roughly, eight of them or so are converted TSA stores. But that increase in pre-opening is a big number in the first quarter.

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Sam Poser, Susquehanna Financial Group - Analyst [92]

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Almost double in Q1 and then it would sort of settle down?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [93]

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Right. It's roughly, expected to be roughly flat year-over-year, pre-opening, so there's really a shift into the first quarter and out of future quarters. So year-over-year assume it's flat and then just more weighted to the first quarter than it's been in the past.

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Sam Poser, Susquehanna Financial Group - Analyst [94]

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And then lastly, you mentioned these -- the new private label or private brands that you're working on. Can you give us some idea of what categories you may be looking at there?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [95]

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Not yet, Sam. But we will at the, if not the next call, then our call at the end of the second quarter.

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Sam Poser, Susquehanna Financial Group - Analyst [96]

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Okay. One more then, in the 20% of the vendors that are going to go way, you talked about much less in sales, I would assume also that their profitability is also under the -- their EBIT is under the Company average, as well. Is that a fair assessment?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [97]

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Actually, Sam, it might not be. It's just that we've decided that some of these vendors that are smaller vendors we can replace them someplace else where we can get a bigger bang for our buck. Or we can take some of this and we can put our own private brand on it, which would increase our profitability.

So all the brands that we're getting rid of are not necessarily less than acceptable returns. We just think as we go forward we can get a better return.

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Sam Poser, Susquehanna Financial Group - Analyst [98]

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Part of that would come in [call-up] advertising and things like that from the more important brands as you would grow them?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [99]

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Yes. And different terms and conditions of sales and a number -- as we kind of look at the whole thing, it's better to move some of these brands out.

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Sam Poser, Susquehanna Financial Group - Analyst [100]

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Thank you very much. Good luck.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [101]

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Thank you.

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Operator [102]

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Adrienne Yih of Wolfe Research.

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Adrienne Yih, Wolfe Research - Analyst [103]

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Good morning. Congrats on the fourth quarter, on the comp there, very nice. My question is also on the inventory write-off. Can you talk about whether the composition of that was mostly the non-go-forward branded category, was it seasonal, if you can give us any more color on that would be very helpful? Thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [104]

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Adrienne, it was a combination of all. It was a combination of some non-go-forward merchandise with brands that we do business with. Some brands that we are doing business with also that are going to the transactional segment are -- we are eliminating or scaling back categories of merchandise that we do with those brands.

So it was some non-go-forward product with brands that we're going to continue to go forward with, and then it's -- also in there are the brands that we're not going forward with.

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Adrienne Yih, Wolfe Research - Analyst [105]

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Okay, fair enough. And then just, secondarily, the golf comp was so strong, just wondering if we should expect sort of to model in that type of double-digit comp as we go into Q1, or whether we should look for some moderation there, as well?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [106]

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Yes, I wouldn't be quite as enthusiastic. The Golfsmith stores that closed were really helpful around the holiday season at both Golf Galaxy stores and Dick's stores, and we've got to just see how this plays out a little bit. But a double-digit comp in golf would be fantastic, but I wouldn't necessarily get too enthusiastic and model that right now.

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Adrienne Yih, Wolfe Research - Analyst [107]

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Okay, fair enough. Thank you very much, and best of luck.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [108]

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Thank you.

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Operator [109]

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Steven Forbes of Guggenheim.

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Steven Forbes, Guggenheim Securities - Analyst [110]

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Good morning.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [111]

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Good morning.

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Steven Forbes, Guggenheim Securities - Analyst [112]

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You mentioned an incremental 50 premium footwear effect, right, this year, mostly in the new stores. I know the plan was always to digest last year's rollout, but given that we are farther along here, can you come out on the pace of the rollout, why not go faster? Where are we relative to expectations? And maybe also, how has it impacted your relationships where, your go-forward relationships with your footwear vendors?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [113]

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It has been very positive. We're making some additional modifications to the footwear deck. You'll see a much bigger Adidas presence in the footwear decks now with how we are positioning that brand. You will see some new things that we're doing from Nike on the wall.

So it's been very good. We're going to open up about 50 more, a lot of those will be, not all of them, but a lot of them will be in new stores, and we're taking some other relocated stores and doing this. So we're comfortable with the pace that we are going at right now, and you will continue to see these things expand.

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Steven Forbes, Guggenheim Securities - Analyst [114]

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And then maybe just a quick follow-up as we kind of try to a digest what's going on in the marketplace, and I'm sure you guys are, as well. As you think about your ability to maybe put out an updated long-term target, is it something you envision doing? You probably don't want to give a specific timeline on it, but do we have to get through this year first before we can revisit those?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [115]

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I would say probably right now we'd like to see how the whole thing shakes out. There's probably, as I said, there seems to be more consolidation probable in the marketplace that we see. So I think this consolidation is not over yet and we've got to get through it all before we are going to make any long-term targets.

We are extremely enthusiastic of the position we sit in right now in the marketplace with the profitability of our stores, what we're doing from an e-commerce standpoint, what our balance sheet looks like. We like a lot the position we're in.

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Steven Forbes, Guggenheim Securities - Analyst [116]

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Thank you.

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Operator [117]

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Peter Benedict of Robert Baird.

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Peter Benedict, Robert W. Baird & Company, Inc. - Analyst [118]

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Hey, guys, thanks for taking the question. First, just rough math on the guidance, maybe implied something in the neighborhood of 50 basis points of EBIT improvement this year. You mentioned gross margin and SG&A will both be favorable. Do you expect it to be more favorable for one versus the other, or is it a pretty even split?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [119]

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I don't think we're at the point right now where we are ready to give more detailed guidance on that, but they will both be going in the positive direction.

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Peter Benedict, Robert W. Baird & Company, Inc. - Analyst [120]

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Okay. And then just over on CapEx, a couple years ago the plan that was laid out had 2016 as kind of the peak CapEx year, I know a lot of things have changed, of course.

So how should we think about CapEx beyond 2017? Is 2017 kind of a peak, it sounds like maybe a little bit more rational or slowing down on the store growth as you look longer term. Should we assume that 2017 level persists, or does CapEx start to step down after 2017?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [121]

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In 2017, we have just one unusual item in that we're adding a distribution center in 2017. So I would say that's kind of an unusual blip for this year.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [122]

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This would be primarily the peak year.

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Peter Benedict, Robert W. Baird & Company, Inc. - Analyst [123]

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Okay, good, that helps. And then just lastly, around e-commerce and the team sports stuff, as you guys look out to 2017, do you think a 20%-plus e-commerce growth rate is sustainable? There's, obviously, great momentum in the business, just trying to get your feeling around that? Thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [124]

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I think right now I would say it's probably not, as you launch a new platform like this you've got natural surge that needs to reset, we've got some things that we need to continue to do, improvement from a functionality of the site.

So in 2017 I would say probably no going forward. After that, I think, or the back half of this, I think you'll start to see we're probably confident of what we can do from an e-commerce standpoint.

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Peter Benedict, Robert W. Baird & Company, Inc. - Analyst [125]

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Okay, great, thanks. I appreciate the perspective, thank you.

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Operator [126]

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

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Mitch Kummetz, B. Riley & Company - Analyst [127]

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Thanks for taking my questions. I've got a few. Let me start on the vendor matrix. You talked about one of the benefits of focusing more on strategic vendors is more exclusive differentiated product. Is there any way you could speak to what that is like, what level of that, or percentage of that has been historically? Like how much of that bumps up, and maybe how much margin benefit you can see from that? Is there any way to kind of break out margins, differentiated versus non-differentiated products like you talked about, the difference between private label and brands?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [128]

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We are looking through that. We're not ready to provide all of that as we're still going through some of these conversations with some brands. We've had a number of brands that we've had these conversations with.

We've come to an agreement on where they're going to be from a strategic standpoint, a transactional standpoint, or there's some of them that are going to be eliminated. But how that all flows through yet, we're still working through that. But we've got a model that we are confident that we can meet or exceed.

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Mitch Kummetz, B. Riley & Company - Analyst [129]

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Is it fair to assume the more differentiated product you have the better it is for your margins?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [130]

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Yes. You've got less competition out there. Yes, definitely.

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Mitch Kummetz, B. Riley & Company - Analyst [131]

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And then on the full year guide, I know a year ago when you guys provided the out-year guidance, you talked about some discrete items that were pressure points on the earnings.

Is there anything that you'd like to call out in terms of the 2017 guidance? It sounds like the e-commerce helps you in terms of the 30 basis points of EBIT there, but anything else in terms of like mark, I know last year there was some Olympics spend and the footwear deck investments. Is there anything that's worth calling out?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [132]

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What we're going to do from a, how enthusiastic we are about team sports headquarters and these technologies of Blue Sombrero, Affinity and GameChanger that we acquired, and we think this is, there is a big unlock here that we are working through.

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Mitch Kummetz, B. Riley & Company - Analyst [133]

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Okay. And then last question on the margins, I know shipping was a drag on the quarter. Is there any reason to believe that won't change going forward, and is there any way to speak to the overall e-commerce margin versus the store margin, how do they compare?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [134]

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Still the -- so what we expect is as we continue to grow the business that the shipping costs are going to become a bigger piece of the expense structure as the business becomes a bigger piece of the entire business.

We're looking at ways at how we might be able to slow those shipping costs, and we're working through those. But to kind of call out the profitability of e-commerce versus the profitability of the store, we are not ready to do that. But I will tell you that the e-commerce business is probably more profitable than you think.

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Mitch Kummetz, B. Riley & Company - Analyst [135]

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Okay. All right, thanks, good luck.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [136]

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Sure.

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Operator [137]

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David Magee of SunTrust.

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David Magee, SunTrust Robinson Humphrey - Analyst [138]

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Yes, hi, good morning. You mentioned the success of the footwear decks, which makes a lot of sense to us. Are there other things that you're doing in the stores that would have also have an impact, whether it be additional vendor shops, or what have you?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [139]

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I think a big piece of what we're doing are two things. The vendor consolidation that we've implemented and re-looking at our vendor structure, and what segment a vendor is in, and then what rights or privileges those vendors have inside our business, the investments we're going to make, the investments they are going to make.

And then also, what we're going to be doing from a private brand standpoint. We have gotten much more aggressive with private brand. You can see what we've done with CALIA. Field & Stream has been great from a private brand standpoint.

One of the biggest issues that we have going forward -- biggest opportunities -- is private brand, and we are investing very heavily in them. From an infrastructure standpoint, you're going to see more marketing of these, and over the next few years you will see our private brand business grow pretty dramatically.

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David Magee, SunTrust Robinson Humphrey - Analyst [140]

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Thanks, Ed. And then, secondly, with regard to Field & Stream, how do you feel about how that is positioned right now, just given the sector backdrop, the probable consolidation that's going to take place in that sector? Are you still happy with the combo store format, and also the price points within Field & Stream?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [141]

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Yes, we are happy with that. We think if some of this additional consolidation happens, we're in a great position to pick up a significant amount of that market share, whether it be at Dick's or Field & Stream, the same way as we were able to pick up, and we think we can pick up market share in the golf business when Golfsmith has gone out and both Golf Galaxy and in Dick's.

So we like the position we're in. This industry is a bit more difficult right now. We think it's going to continue to be that way on a macro basis, but we do expect some consolidation. And if that happens, we are in a great position to pick up that market share.

I actually think toward the back half of the year that could be a good business for us. But we're not planning on that right now.

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David Magee, SunTrust Robinson Humphrey - Analyst [142]

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Great, thank you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [143]

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Sure.

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Operator [144]

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Jim Duffy of Stifel.

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Jim Duffy, Stifel Nicolaus - Analyst [145]

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Thank you, good morning. Believe it or not, I have more questions on the merchandising direction. Ed, can you --

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [146]

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Shocking. (laughter)

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Jim Duffy, Stifel Nicolaus - Analyst [147]

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Can you talk about the development timeline for this strategy? How long has this been in the works, how long have you been in conversations with the vendors? Will we see a lot of these exclusives in the spring assortments?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [148]

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You won't see as many of them in the spring assortments as you will toward the back half of this year. We've been talking about this for quite awhile. And as we have talked about this, done this analysis of the business, and we decided we've got to pull the trigger and we've got to do this.

And it's difficult to do. Is difficult to tell people that you've done business with for a long time that we're not going to do business going forward. So this is something we've been talking about for awhile, and based on what's going on in the industry today, we felt this was the right time we had to do this.

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Jim Duffy, Stifel Nicolaus - Analyst [149]

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Ed, following the change in strategy and inclusive of the $1 billion private brand business, how much of the volume do expect will be exclusive to Dick's versus in-line product that may be available at other retailers?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [150]

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So we're not going to guide to that right now. We're still working through this. We're still working through some vendor agreements, and how we're going to do this, and how we're going to either -- our private brand business, how we may come create with some brands product, but this has definitely been the right thing for us to do.

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Jim Duffy, Stifel Nicolaus - Analyst [151]

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And then final question on this, beyond the exclusive, what are some of the other investments these vendors are making in the business? Does the vendor concentration bring you better pricing, better terms? If you could help with that, that would be great?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [152]

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Every vendor is a little bit different and every category is a little bit different, but you should look at that we will get some combination of -- and this is a two-way street -- so we are also investing also. We are providing them additional square footage.

We are investing with them to be a bigger part of our marketing campaign. But you should look at this as it's around pricing, it's around discount, it's around marketing, it's around in-store presentation. So this is not a one-size-fits-all, and every category and every vendor would be different.

We'd be looking for something different from, somebody in the golf business might be different than what we'd be looking for from someone in the baseball business. But this has been pretty successful out of the gate, and as you can imagine, the vendors that are going into that strategic bucket are very excited about it.

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Jim Duffy, Stifel Nicolaus - Analyst [153]

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Thanks for that perspective. I will leave it at that.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [154]

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Great, thank you.

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Operator [155]

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Joe Feldman of Telsey Advisory Group.

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Joe Feldman, Telsey Advisory Group - Analyst [156]

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Hi, guys, thanks for taking my question. Wanted to go back to the digital ecosystem for a minute, I think it's a pretty innovative way to get at customers, can you share any thoughts to dimensionalize it for us, like how much you think it could become one day, or even in this year, how much it might contribute to sales or profit? And how you might work these partnerships with Little League and Pop Warner?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [157]

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Well, we're not going to get into the economics around this right now. But the way this works is, leagues will sign up on our platform, whether it be a Blue Sombrero, the governing bodies sign up on our platform which is Affinity. And then GameChanger is an interactive application that, primarily baseball right now, but is going to be broadened out to other sports.

And they interact with this, we're able to understand who is doing what, who is playing what sport, and be able to market to them. I thought there was a great comment when we were looking to buy GameChanger with their CEO, who said, I don't remember exactly the number of teams, but they've got an awful lot of teams, and said, I know everybody in Little League that bats cleanup. I know in high school baseball almost everyone who plays the position of catcher.

So we can market to them that particular way. And it's a great database that we have only begun to mine. So there's still a lot to do. But we can get to that level of detail with people, and these young athletes that I think we will be able to serve them better, and we will be able to provide them what they really need.

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Andre Hawaux, Dick's Sporting Goods Inc - COO [158]

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Another great thing about it is that it is a database that continuously refreshes. So as you have new kids coming into each of the sports, we know who those new kids are as they enter the sport, and we have the ability to get the right kind of offers to them and their parents so they know what to buy at the right time. So the constant refreshing aspect of this is really important to us, as well.

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Joe Feldman, Telsey Advisory Group - Analyst [159]

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That's great, thanks. As a user, I know how effective it can be, it's great. Thanks.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [160]

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Who are you using?

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Joe Feldman, Telsey Advisory Group - Analyst [161]

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The GameChanger app, quite a bit, and actually Blue Sombrero, our softball league uses that.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [162]

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They're both terrific companies.

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Joe Feldman, Telsey Advisory Group - Analyst [163]

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Yes, yes. One other question, wanted to ask, when you guys look at the way the comps, maybe by region or by area, presumably those closest to outgoing TSAs perform better. Was there any variance you can share, those closest or furthest away from TSA, or the non-effective ones?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [164]

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As you can imagine, the closer our store was to a TSA store, the better it did. And the further away, then not as good as the one that was close. We've got a transaction data for all of their business down to the SKU level. So we can target by store from a marketing standpoint and we can target by store from an assortment standpoint to better serve those athletes.

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Joe Feldman, Telsey Advisory Group - Analyst [165]

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Got it, thanks. And then, just one other bigger picture question. We get asked a lot on our side of the table, if there's so much consolidation going on in the industry and it seems like there's others out there with a lot of pressure, and we are definitely seeing it, as you are, but yet Dick's continues to outperform and do well. Does it ultimately get to a point where Dick's gets caught up in that, as well? Is it more a sign of a lousy industry versus or an industry in decline? How would you respond to that, I guess?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [166]

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Well, as we have taken a look at that, we've done a deep dive into not only our business, but some of the businesses that have consolidated. And we took a hard look at this and said, we've got to make sure that we don't have symptoms of the disease that these other companies atrophied from and died. And some of the things that we looked at that they had issues with is they had extremely high debt, private equity owned, high debt.

They didn't invest in their e-commerce business the way that we've invested from an e-commerce standpoint. They did not invest from a product development standpoint the way that we have across, not only good, better, and best categories of product. They also did not invest in their stores, and they also had a constant revolving door from a leadership standpoint. And as we looked at these, we don't have any symptoms of those disease.

We have no debt, we continue to invest in our e-commerce business pretty aggressively, and you've seeing the growth there. This past year our e-commerce business was almost $1 billion. As we take a look at what we're doing from a PD standpoint, our PD business is going to be roughly $1 billion. We expect margin rates to expand. We've developed great partnerships and relationships with the vendors that the others didn't.

So is this a great industry right now? I think it really is a very good industry that there were some weak links and some companies that couldn't survive. And I think you're seeing this in some other retail industries too. So I don't think this is something that we get caught up in.

As long as we continue to run and manage our business, which is why when this whole thing happened, we didn't take a lot of time to -- we didn't take time to celebrate, we said, okay, let's do a thorough review of our business and make sure we don't have symptoms of this disease, which is why we've gone back and we did -- we've redone the vendor structure and took some of these charges to clean out a little bit of the issues to make sure that we don't have these issues going forward.

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Joe Feldman, Telsey Advisory Group - Analyst [167]

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That's really helpful. Thanks so much, guys, and good luck this quarter.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [168]

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Thank you.

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Operator [169]

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John Kernan of Cowen and Company.

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Krista Zuber, Cowen and Company - Analyst [170]

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This is Krista Zuber on behalf of John. Thanks for taking our questions and fitting us in. Just a few here to add. Are there any anticipated inventory write-downs embedded, or future write-downs embedded in the 2017 guidance?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [171]

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No. It's all behind us.

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Krista Zuber, Cowen and Company - Analyst [172]

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Okay, great. And then, secondly, did you anticipate any additional investments in fulfillment, or technology, or even digital that could sort of increase CapEx, kind of going back to another colleagues question earlier in the call, going forward beyond FY17?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [173]

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At some point it would just depend, from a fulfillment standpoint if we developed our own fulfillment center, but other than that, I don't think so. And we've got a terrific fulfillment partner right now in Radial and we're very happy with them.

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Krista Zuber, Cowen and Company - Analyst [174]

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Okay, great. And then final question, in the 2017 CapEx guide, you mentioned that there is a new DC included in that. Could you just sort of give us a sense of the cost of the DC so we can strip it out?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [175]

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This year, we anticipate putting an additional $50 million into that building.

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Krista Zuber, Cowen and Company - Analyst [176]

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Okay. Terrific, thank you very much.

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Operator [177]

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Chris Svezia of Wedbush.

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Chris Svezia, Wedbush Securities - Analyst [178]

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Good morning, everyone, thanks for taking my questions. I guess, first, Andre, for you, if you could talk to the store productivity rate at the Dick's stores Albany, can you give any color where that ended up in the fourth quarter?

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Andre Hawaux, Dick's Sporting Goods Inc - COO [179]

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Certainly. It was north of 90%, and you will recall, when we talked to you we said 90% is really that waterline for us in year one. So we plan our stores to be 90%, 95% and 100% in the three-year ramp and we were north of 90% in the fourth quarter.

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Chris Svezia, Wedbush Securities - Analyst [180]

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Okay. And just on the gross margin for the year, could you maybe just decipher between product margin opportunity versus occupancy, either leverage or deleverage, and I know there is a shipping cost element on e-commerce, but any color you can give on some of those buckets, one way or the other, would be helpful?

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Lee Belitsky, Dick's Sporting Goods Inc - CFO [181]

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I don't think we're going to guide specifically on those basis points right now, but we do think it will be up somewhat in total for the year.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [182]

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We do expect merchandise margins to expand.

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Chris Svezia, Wedbush Securities - Analyst [183]

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Okay, got it. Ed, for you, just on the e-commerce versus physical store, at what point do you become agnostic in terms of where that consumer transacts from an operating margin perspective?

Is that potentially -- does it get into the second half of the year, as you maybe lapse some investments in the first quarter? Just sort of where is that inflection where it doesn't make any difference, the operating margins are pretty similar one way or the other?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [184]

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Actually, I don't think we get there this year, but we are very agnostic as to where they shop. We just want to make sure they shop with us, whether it be in the store or online.

But the store right now is still a bit more profitable than the e-commerce business, and we expect that to continue throughout the year as we continue to heavily marked this because of the new site. With a new site, you've got to treat it with some tender loving care. And we've got some investments that we're going to make there from a marketing standpoint, infrastructure to make sure that we do that.

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Chris Svezia, Wedbush Securities - Analyst [185]

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Okay. Two final things real quick here. Is lucy, because I know you sell lucy in your stores, because I think VF is winding down the lucy brand, is that one of the brands that exits your business and is replaced by something else, whether it's another brand, or CALIA, for example?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [186]

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It would be safe to make that assumption.

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Chris Svezia, Wedbush Securities - Analyst [187]

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Okay. And then finally, just on the market share opportunity, once you get into the third and fourth quarter, I know you answered this a little bit earlier, but just your confidence level to be able to get same-store sales growth out of the Dick's concept as you go to the back half of the year, even though you are anniversarying the comparisons? Just your level of confidence you're able to do that, maybe if you can talk a little bit more about that specifically, because there still is this notion that once you get to the second quarter, just sort of, it is all gone, which I don't believe is true, but I'm just curious, your response to that?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [188]

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We don't think it's gone either. We think there are still opportunities. As I said, we've got the data that we were mining in the third and fourth quarter, we're much better at it going forward. We think that there is still more market share to get. And, as we said, we think there's still more consolidation to happen in this industry. The consolidation is not done.

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Chris Svezia, Wedbush Securities - Analyst [189]

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Okay, all right. Thank you very much, and all the best to you.

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [190]

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Sure. Thank you, you too.

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Operator [191]

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Patrick McKeever of MKM Partners.

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Patrick McKeever, MKM Partners - Analyst [192]

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Okay, thank you. Question on just performance of your mall-based stores versus the off-mall stores, wondering if there is any meaningful difference there, especially as it relates to store traffic, which I think you said was up 2.9% for the Dick's stores?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [193]

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Not a lot of difference. We are a destination retailer. We don't need the mall traffic to drive our business. We are a destination. We actually help the mall traffic, so there's no real difference.

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Patrick McKeever, MKM Partners - Analyst [194]

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And as you look forward, I know a good number of the stores that you were opening in 2017 will be conversions of former TSA stores or Golfsmith stores, but how would the -- as it relates to new stores -- how would the mix be mall versus non-mall or off-mall stores?

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Andre Hawaux, Dick's Sporting Goods Inc - COO [195]

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This is Andre, the bulk of the TSA conversions really, they were not very mall-based, so many of them are in power centers or standalone locations. So the bulk of this will largely be in the first two quarters, the bulk of them will be conversions, and many of them are freestanding, or as I said, power center. There are a few mall-based stores that we're opening in some other markets in the first and second quarter. But it tilts mostly to power centers.

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Patrick McKeever, MKM Partners - Analyst [196]

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And then just a last question, for me, on the earnings guidance, it sounds like a lot of the difference, I guess, between Street expectations and guidance is in planned investment spending, including more spending on e-commerce. I think you said gross margin, up for the year, and looking for stronger merchandise margins, but right now I'm looking at the MC Sports website, and they are doing a going out of business sale, obviously, it's not a huge company, but it's $110 million in inventory that they are talking about has to be sold. So my question is, in gross margin, are you anticipating any negative impact from competitor liquidation sales?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [197]

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Not MC.

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Patrick McKeever, MKM Partners - Analyst [198]

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Okay. Just too small?

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [199]

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Yes, too small. No, nothing there.

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Patrick McKeever, MKM Partners - Analyst [200]

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Okay, thank you.

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Operator [201]

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

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Ed Stack, Dick's Sporting Goods Inc - Chairman & CEO [202]

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I would like to thank everyone for joining us on our fourth quarter earnings call, and we'll look forward to seeing everyone when we report the first quarter. Thank you very much.

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Operator [203]

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