Prepared remarks
Ladies and gentlemen, thank you for your patience. My name is Krista, and I will be your conference operator today. I would like to welcome you to the DICK'S Sporting Goods Third Quarter 2025 Earnings Conference Call. I will now turn the conference over to Nate Gilch from Investor Relations. Nate, please proceed.
Good morning, everyone, and thank you for joining us to discuss our third quarter 2025 results. On today's call will be Ed Stack, our Executive Chairman; Lauren Hobart, our President and Chief Executive Officer; and Matthew Gupta, our Chief Financial Officer. A playback of today's call will be archived on our Investor Relations website located at investors.dicks.com for approximately 12 months. As a reminder, we will be making forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K and our quarterly report on Form 10-Q for the first fiscal quarter as well as cautionary statements made during this call.
We assume no obligation to update any of these forward-looking statements or information. Please refer to our Investor Relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. And finally, a couple of admin items. First, a quick note on our comparable sales reporting. Foot Locker will be included in our comp base beginning in Q4 of next year, which will mark the start of their 14th full month of operations post acquisition. As such, all reported comp sales for this quarter and for the upcoming year pertains to the DICK'S business only. Second, I want to provide clarity on certain terminology we'll use throughout today's call and going forward. First, when we refer to the DICK'S business, we mean our existing DICK'S Sporting Goods operations, including the DICK'S Sporting Goods, Golf Galaxy, Going, Going, Gone! and Public Lands banners as well as GameChanger.
Earnings per diluted share results for the DICK'S business excludes the dilutive effect of the 9.6 million shares issued as part of the Foot Locker acquisition. Second, the Foot Locker business refers to our newly acquired operations, including the Foot Locker, Kids Foot Locker, Champs Sports, WSS and Atmos banners. And finally, for future scheduling purposes, we are tentatively planning to publish our fourth quarter 2025 earnings results on March 10, 2026. With that, I'll now turn the call over to Ed.
Thanks, Nate. Good morning, everyone. Thanks for joining us today. This is an important call. It's our first earnings call as a combined company with Foot Locker. We have a lot to share. There's a lot of detail and a lot of numbers. We want to make it clear, we're doing all that our shareholders would expect us to do to make the Foot Locker business accretive in 2026. And I have to tell you, as the largest shareholder, I couldn't be more excited about the progress we're making and the opportunities ahead. As announced earlier this morning, we delivered another great quarter with comps of 5.7% for the DICK'S business and we continue to operate from a position of strength. Our momentum in the DICK'S business remains strong as we execute against the key priorities that have fueled our success: a differentiated on-trend product assortment in an industry-leading omnichannel athlete experience.
This is the flywheel of our success as a company, and it's driving consistent growth and performance. Now I will discuss the tremendous opportunity we see with Foot Locker. Completing this acquisition on September 8 marks a bold and transformative moment for DICK'S. Together, we're building a global platform that is at the intersection of sport and culture, one that we believe will redefine sports retailing. This powerful combination will allow us to serve a broader consumer base, deepen our partnerships with the world's leading sports brands and significantly expand our total addressable market. When we announced this acquisition, we knew that business was going to need work. Let me be candid. Foot Locker strayed from Retail 101 and did not execute the fundamentals. Post-COVID, Foot Locker did not react quickly enough when its largest brand pivoted toward a direct-to-consumer model, leaving Foot Locker with the wrong inventory.
Too much of what didn't sell and not enough of what did sell. Consequently, as we enter this transitional phase, the Foot Locker business, as expected, comped negatively with pro forma comp sales for the full third quarter declining 4.7%, including a 10.2% decline internationally. Now after looking even deeper under the hood as the owners of Foot Locker, our conviction that we can turn this business around has only grown. We will bring our operational excellence, our supplier relationships and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. Today, we're even more excited about the long-term value we believe this acquisition will deliver to our shareholders. We're committed to investing in Foot Locker's business to return it to profitable growth. We've assembled a world-class management team to lead the Foot Locker business, and I'm personally excited to guide this next chapter.
As previously announced, Ann Freeman a long-time former Nike executive, is now serving as Foot Locker North America President. Ann brings deep industry expertise and leadership experience, and she is supported by a high-caliber team of senior leaders, a combination of key executives from Foot Locker, all of whom are well respected by the Stripers, Blue Shirts and our brand partners, experienced leaders from DICK'S and talent from other world-class companies. This team was handpicked to return Foot Locker to its rightful place in our industry, and we're already moving quickly in North America to build momentum. In addition, we're thrilled to have just announced that Matthew Barnes, former CEO of Aldi, will be joining our team next month as President of the Foot Locker International business. Matthew has nearly 3 decades of experience in global retail and a track record of transforming brands.
We look forward to working to stabilize and ultimately accelerate that business with targeted turnaround strategies to meet the evolving needs of consumers globally. There's a lot happening to position the business for the short term and build for the long term. Our first priority is clear. We need to clean out the garage of underperforming assets. This means clearing out unproductive inventory, closing underperforming stores and rightsizing assets that don't align with our go-forward vision for the Foot Locker business. This is the groundwork for the transformation. We began this work shortly after the closing on September 8. We have identified an initial number of underperforming assets around the globe, including inventory that needs to be marked down and liquidated along with a preliminary number of stores that need to be impaired or closed. We initiated certain pricing actions in late Q3 and will be more aggressive in Q4 to clean up unproductive inventory.
Our intent is to get the vast majority of the inventory charges behind us by the end of the year, so we can start 2026 fresh and position Foot Locker for an inflection point during the back-to-school season in 2026. As a result, we expect Q4 margin rates for the Foot Locker business to be down between 1,000 and 1,500 basis points with pro forma Q4 comp sales being down mid- to high single digits. We believe this aggressive purging of underperforming assets is what needs to be done to return Foot Locker to its rightful position as a key leader in this industry. Navdeep will share more details in his remarks about the charges we anticipate as part of this important cleanup effort. Importantly, we've met with all of our key vendor partners, and they are fully aligned with our vision and are eager to support a thriving growing Foot Locker. They indicated they are committed to investing alongside us to reignite the Foot Locker business.
We're moving with urgency and have already kicked off an 11-store pilot to begin testing changes in product and the in-store presentation. It's early, but we're encouraged by what we're seeing and learning. Looking ahead, we expect back-to-school next year to be an inflection point as our new strategies, assortments and processes align to drive meaningful progress in the Foot Locker business, all supported by the work we're doing now by cleaning out the garage to position Foot Locker for future success. With these actions, we continue to expect Foot Locker to be accretive to our EPS in fiscal 2026, excluding one-time costs. What amplifies our confidence are the talented people we found inside the Foot Locker business. Over the past 2 months, we spent time in Foot Locker stores, offices and distribution centers. Our teammates' passion is real, especially among the stripers and blue shirts along with the rest of the team members.
They love sneakers, they're hungry for leadership, and they want to get back to playing offense. That energy is validating our excitement and building focus for what's ahead. In closing, at DICK'S, we've built a business that leads our industry in performance, innovation and customer loyalty. DICK'S has generated consistent growth and strong margins with a relentless focus on delivering shareholder value. While we're just getting started on Foot Locker's transformation, our deep expertise and our track record of growth and success fuel our conviction that we can turn this business around, and we are confident that Foot Locker will reemerge as a stronger, more resilient and more dynamic business. We will do this with the same grit vision and execution that got DICK'S to where it is today. Before turning it to Lauren, I want to take a moment to thank our more than 100,000 teammates across all of our banners for their passion and commitment during this exciting chapter for our company and wish everyone a happy Thanksgiving. With that, I'll turn it over to Lauren to share more on the continued momentum across the DICK'S business.
Thank you, Ed, and good morning, everyone. We're very pleased with our strong third quarter results for the DICK'S business, which continue to demonstrate the strength of our operating model and our team's disciplined execution. We are entirely focused on delivering on our strategies and sustaining our strong momentum. As always, our performance is powered by our compelling omnichannel athlete experience, differentiated product assortment, best-in-class teammate experience and our ability to create deep engagement with the DICK'S brand. Today, we are raising our full year outlook for the DICK'S business. This updated guidance reflects our strong Q3 results and the ongoing confidence we have in our business, grounded in our team's execution of the four strategic pillars I just mentioned. We now expect comp sales growth of 3.5% to 4% for the year and EPS to be in the range of $14.25 to $14.55 for the DICK'S business.
Now moving to our third quarter results for the DICK'S business. Our Q3 comps increased 5.7% with growth in average ticket and transactions. These strong comps were on top of a 4.3% increase last year and a 1.9% increase in 2023 as we continue to gain market share. Our gross margin expanded 27 basis points in line with our expectations, and we delivered non-GAAP EPS of $2.78 for the DICK'S business, up from $2.75 in the prior year's quarter. As we continue to execute through our strategic pillars, we're seeing strong momentum across the three growth areas for the DICK'S business that we are focused on for 2025. First, we're incredibly proud of the progress we're making in repositioning our real estate and store portfolio. In Q3, we opened 13 new House of Sport locations, the most we've ever opened in a single quarter, bringing our year-to-date total to 16 openings. This achievement reflects the outstanding work of our team whose focus and execution made this ambitious rollout a reality.
We now have 35 House of Sport locations nationwide, a major milestone in the growth of this transformative concept. We also opened 6 new Field House locations in Q3 and opened another just last week, completing our 15 planned openings for the year and bringing us to a total of 42 Field House locations across the U.S. These innovative formats are delivering powerful financial results, deepening engagement with our athletes, brand partners and landlords, and laying the foundation for long-term profitable growth for the DICK'S business. The second of our three major focus areas is driving growth across key categories. Our unparalleled access to top-tier products from both national and emerging brand partners continues to fuel athlete demand and excitement, driving strong growth across the DICK'S business. At the same time, our vertical brands are resonating incredibly well with our athletes, further contributing to this momentum.
For Q3, this growth came from having more athletes purchase from us with more frequent purchases and more spending each trip. We feel great about the product pipeline from our brand partners, and our inventory is well positioned to meet athlete demand this holiday season. I also want to highlight our ongoing expansion into trading cards and collectibles. In partnership with Fanatics, we've launched the Collectors Club House in 20 Health of Sport locations with plans to include it in every new location going forward. These spaces feature trading cards, autograph memorabilia and more, and the athlete response has exceeded our expectations. It's a unique and fast-growing category that's a great complement to everything we do, and we're very excited about the opportunity ahead. And our third major focus area, our multibillion-dollar, highly profitable e-commerce business continues to stand out as a growth driver, once again growing faster than the DICK'S business overall.
I'd like to highlight three examples of ways we're building strength and differentiation in e-commerce. First, we're really leaning into our app experience, including app-exclusive reservations that are establishing us as a leader in launch culture across many key categories. Second, we're continuing to invest in capabilities to deliver more personalized experiences, content, product recommendations and search results. An example of this is how we're targeting NFL fans with personalized creative messaging and product recommendations for their favorite team. Third, for the holiday season, we're making it easier than ever to find the perfect gift with a new capability for athletes to build and share their wish list with family and friends. Lastly, as part of our broader digital strategy, we're harnessing the power of our athlete data and continue to be enthusiastic about the long-term growth opportunities we see with GameChanger and the DICK'S Media Network.
Our GameChanger platform keeps expanding with new features, partnerships and content that enriches the whole youth sports experience and reinforces our leadership in the multibillion-dollar youth sports tech ecosystem. A great example is our new game insights feature, which gives coaches fast, actionable takeaways after every game, further elevating the value we provide to athletes, coaches and families. We're also seeing great momentum with our DICK'S Media Network, which is deepening engagement with consumers and key brand partners while expanding across new ad platforms. In addition to our collection of owned and our full spectrum of off-site channels, we're ramping up our in-store capabilities like our interactive digital experiences and programmable spaces that are driving impactful brand activations in our House of Sport locations. In closing, we're very pleased with our strong third quarter results and remain highly confident in our long-term strategies to drive sustained sales and profit growth for the DICK'S business.
We believe the power of our omnichannel athlete experience and our compelling differentiated product offering will resonate with our athletes this holiday season, supported by our fantastic holiday brand campaign, which launched a few weeks ago. I'd like to thank all of our teammates for their hard work and commitment and for their focus on delivering great experiences for our athletes throughout the season. And also a warm welcome to all Stripers, Blue Shirts and team members from the Foot Locker business. We're excited to have you as part of the DICK'S family and to achieve great things together. I share Ed's excitement about how we will bring our operational excellence, our supplier relationships and our merchandise expertise to return Foot Locker to its rightful place as a top player in the specialty athletic channel. With that, I'll turn it over to Navdeep to share more detail on our financial results and 2025 outlook. Navdeep, over to you.
Thank you, Lauren, and good morning, everyone. Before I begin my review of our third quarter results, I would like to take a moment to provide important context for Foot Locker's performance included in our consolidated financial results. As noted in this morning's release, our acquisition of Foot Locker closed on September 8. As a result, our third quarter consolidated financials do not include the peak back-to-school selling season in August for the Foot Locker business. They reflect just eight weeks of post-acquisition results in September and October, historically an unprofitable time period for the Foot Locker business. Let's now move to a brief review of our third quarter results for the consolidated company, including continued strong performance for the DICK'S business. Consolidated net sales increased 36.3% to $4.17 billion, driven by an approximate $931 million sales contribution from a partial quarter of owning the Foot Locker business and a 5.7% comp increase for the DICK'S business as we continue to gain market share.
On a two-year and a three-year stack basis, comps for the DICK'S business increased 10% and 11.9%, respectively. These strong comps were driven by a 4.4% increase in average ticket and a 1.3% increase in transactions. We also saw broad-based strength across our three primary categories of footwear, apparel and hardlines. As Nate said, Foot Locker will be included in the comp base beginning in Q4 of next year, which is when they will commence their 14th full month of operation following the closing of the acquisition. For reference, pro forma comp sales for the Foot Locker business in Q3 in its entirety decreased 4.7%, with the comparable sales in North America decreasing by 2.6% and the comparable sales in Foot Locker International decreasing by 10.2%, primarily driven by softness in Europe. Consolidated gross profit for the quarter was $1.38 billion or 33.13% of net sales, down 264 basis points from last year.
For the DICK'S business, gross margin increased by 27 basis points and was in line with our expectations. Notably, the year-over-year decline in consolidated gross margin was driven entirely by the mix impact from the lower gross margin Foot Locker business. On a non-GAAP basis, consolidated SG&A expenses increased 40.8% or $320.9 million to $1.11 billion and deleveraged 84 basis points compared to last year's non-GAAP results. $259.9 million of this consolidated increase was driven by the Foot Locker business. For the DICK'S business, expense dollars increased by 7.7% and deleveraged 45 basis points, which was in line with our expectation and driven by strategic investments digitally, in-store and in marketing to better position the DICK'S business over the long term. Consolidated preopening expenses were $30.6 million, an increase of $13.8 million compared to the prior year. As Lauren mentioned, this supported the opening of 13 new House of Sport locations in Q3, our highest numbers opened in a single quarter to date, plus another six Field House locations we opened in the quarter.
Consolidated non-GAAP operating income was $242.2 million or 5.81% of net sales compared to $289.5 million or 9.47% of net sales last year. For the DICK'S business, non-GAAP operating income was $288.6 million or 8.92% of net sales. This year's consolidated results included a $46.3 million operating loss in the quarter from the Foot Locker business, which was primarily driven by the gross margin decline as we initiated certain pricing actions in late Q3. Importantly, since the acquisition of Foot Locker closed on September 8, these results exclude a profitable back-to-school season for the Foot Locker business in August and through Labor Day. For reference, pro forma non-GAAP operating income for the Foot Locker business in Q3 in its entirety was approximately $6.8 million. On a non-GAAP basis, other income comprised primarily of interest income was $12.7 million, down $7.8 million from prior year.
This decline was from lower cash on hand and a lower interest rate environment. Consolidated non-GAAP EBT was $239.9 million or 5.76% of net sales, including the Foot Locker business. This compares to an EBT of $297.1 million or 9.7% of net sales in Q3 of last year. Moving down the P&L, consolidated non-GAAP income tax expense was $59.4 million or a rate of 24.7%. While the income for the DICK'S business was taxed at a low 20% rate, the combined company was subject to a higher tax rate, primarily driven by the Foot Locker's EMEA business, where full valuation allowance remains in place. In total, we delivered a consolidated non-GAAP earnings per diluted share of $2.07 for the quarter. These results included non-GAAP earnings per diluted share of $2.78 for the DICK'S business based on a share count of 81.2 million, which excludes the dilutive effect of the shares issued in connection with the acquisition of Foot Locker.
This is up from the earnings per diluted share of $2.75 last year. The DICK'S business results were partially offset by the effects of the partial quarter of contribution from the Foot Locker business, which included a $0.52 negative impact from Foot Locker operations, including the gross margin decline as well as the higher tax rate, a $0.19 negative impact from the increased share count, which was up $5.9 million prorated for the eight weeks of the Foot Locker ownership. On a GAAP basis, our earnings per diluted shares were $0.86. This includes the noncash gains from our non-operating investment in Foot Locker stock as well as $141.9 million of pretax Foot Locker acquisition-related costs. For additional details on this, you can refer to the non-GAAP reconciliation table of our press release that we issued this morning. Now turning to our balance sheet. We ended Q3 with approximately $821 million of cash and cash equivalents and no borrowings on our $2 billion unsecured credit facility.
Our quarter-end inventory levels increased 51% compared to Q3 of last year. Excluding the Foot Locker business, inventory levels for the DICK'S business increased 2% compared to Q3 of last year. We believe the inventory in the DICK'S business is well positioned to continue fueling our sales momentum. For reference, on a pro forma basis, inventory levels for the Foot Locker business increased approximately 5% as compared to the same period last year. As Ed mentioned, the work is underway to clear out the unproductive inventory at the Foot Locker business. Turning to our third quarter capital allocation. Net capital expenditures were $218 million, which included $201 million for the DICK'S business and $17 million for the Foot Locker business. We also paid $109 million in quarterly dividends. Before I move to our outlook, I want to address a few key expectations surrounding the Foot Locker acquisition.
First, as Ed discussed, our immediate priority is to clean out the garage of unproductive assets as we look to optimize the inventory assortment and store portfolio of the Foot Locker business. We expect these actions, along with other merger and integration costs, to result in a future pretax charge of between $500 million and $750 million. Importantly, these future pretax charges are excluded from today's outlook. Second, we remain confident in achieving the previously announced $100 million to $125 million in cost synergies over the medium term, primarily from procurement and direct sourcing efficiencies. Third, as Ed said, we continue to expect the acquisition to be accretive to EPS in fiscal 2026, excluding one-time costs. Now moving to our outlook for 2025. Today, we are providing an updated outlook that is specific to the DICK'S business and does not include the Foot Locker business, which we will address separately.
We are taking this approach to ensure comparability of our performance across the quarters and to provide ongoing visibility into the DICK'S business. This outlook also excludes the investment gains as well as the merger and integration costs related to the Foot Locker acquisition. As Lauren said, we are raising our expectation for comp sales and EPS for the DICK'S business. Our updated guidance reflects our strong Q3 performance and includes the expected impact from all tariffs currently in effect. This outlook balances our confidence in the outcomes we are driving through our strategic initiatives and our operational strength against the ongoing dynamic macroeconomic environment. We now expect full year comp sales growth for the DICK'S business in the range of 3.5% to 4% compared to our prior growth expectation of 2% to 3.5%. Total sales for the DICK'S business are expected to be in the range of $13.95 billion to $14 billion compared to our prior expectation of $13.75 billion to $13.95 billion.
Driven by the quality of our assortment, we continue to expect to drive gross margin expansion for the full year. We anticipate this expansion will be offset by SG&A deleverage as we are making strategic investments digitally, in-store and in marketing to better position ourselves over the long term. We still expect operating margins to be approximately 11.1% at the midpoint. At the high end of the expectations, we continue to expect to drive approximately 10 basis points of operating margin expansion. We now expect EPS for the DICK'S business in the range of $14.25 to $14.55 compared to our prior expectation of $13.90 to $14.50. Our earnings guidance for the DICK'S business is based on approximately 81 million average diluted shares outstanding and excludes the dilutive impact of the 9.6 million shares issued in connection with the acquisition. This outlook for the DICK'S business also assumes an effective tax rate of approximately 24% compared to our prior expectation of approximately 25%.
We continue to expect net capital expenditures of approximately $1 billion for the full year for the DICK'S business. Turning now to the Foot Locker business. We want to provide some perspective on our expectations for the fourth quarter. As Ed discussed, our priority is to position Foot Locker for a fresh start in 2026 and reset the business for long-term success. This includes taking strategic actions to address unproductive assets, including the optimization of inventory and the closure of underperforming stores. As a result of our actions to optimize Foot Locker's inventory, we expect Q4 gross margins for the Foot Locker business will be down between 1,000 and 1,500 basis points as compared to Foot Locker's reported results in the same period last year, with the pro forma comp sales being down mid- to high single digits. Excluding the one-time costs associated with our actions to address unproductive assets, we expect Q4 operating income for the Foot Locker business to be slightly negative.
Looking ahead, we expect next year's back-to-school season to be an inflection point to drive meaningful progress in the Foot Locker business. As a reminder, we continue to expect the Foot Locker acquisition to be accretive to our EPS in fiscal 2026, excluding the one-time costs. Before we wrap up, I want to provide a couple of consolidated company assumptions to provide clarity for your models. For the fourth quarter, we expect approximately 91 million average diluted shares outstanding, which includes the dilutive impact of the 9.6 million shares issued in connection with the Foot Locker acquisition. We also anticipate a consolidated company effective tax rate of approximately 29% for Q4, impacted by the expected Foot Locker losses in EMEA, where no corresponding tax benefit is anticipated. As Ed and Lauren said at the top of the call, we are proud that we continue to operate from a position of strength with robust momentum in the DICK'S business and a significant effort underway to return the Foot Locker business to growth.
We are doing all that our shareholders would expect to make the Foot Locker business accretive in 2026. We could not be more excited about our future together. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.
Questions and answers
Your first question comes from the line of Robbie Ohmes with Bank of America.
My first question is, I know we're going to be talking a lot about Foot Locker today. But on the DICK'S business, it looked like a really, really great quarter, comps up 5.7%, et cetera, and you raised guidance. But just how are you driving that? And how are you guys thinking about your confidence going into the holiday here?
Thanks, Robbie. We are extremely proud of the team for achieving a 5.7% comparable sales increase. Importantly, we are also looking at strong comparisons with a two-year stack of 10%. This marks seven consecutive quarters with over a 4% comparable sales increase, indicating that our long-term strategies are effective. I want to highlight the unique product offerings we've introduced, which include new items from our strategic partners, emerging brands, and our vertical brands that have resonated well with consumers and athletes. Our team is dedicated to providing an engaging experience for athletes, whether in our stores or in our digital platforms. We are focused on excelling and ensuring that customers receive products that instill confidence and excitement for their best performances. In Q3, we witnessed growth across all key categories, including back-to-school, back-to-sport, footwear, apparel, and team sports, performing exceptionally well. Golf, our licensed business, and trading cards also showed strong results. As we transition into the holiday season, these positive trends are why we feel excited and confident about Q4, especially with our impressive product range for athletes. Consumers are fully engaged with sports, and we are perfectly positioned at the nexus of sport and culture, offering great gifts across our portfolio. We are very pleased heading into Q4.
That's really helpful. And then just my follow-up, just on Foot Locker, what kind of assumptions did you make about Foot Locker's cleanup of inventory in the fourth quarter having on DICK'S Sporting Goods? And also how many stores are you guys planning to close? And what would the timing be there?
Thanks, Robbie. As we take a look at store closings, we're still addressing that. We've got some stores that we think we're going to close. We're also looking to address just the upside that we think we have in these stores and how many really need to be closed and how many can we make more profitable. So we'll give you some more guidance on that at the end of our fourth quarter call.
Robbie, let me quickly add on to the Foot Locker cleanup of the inventory in the fourth quarter. So what Ed said in his prepared remarks as well as what I said that we expect the gross margins in the Foot Locker business in the fourth quarter to be down between 1,000 to 1,500 basis points. As you can imagine, that is primarily driven by us quickly addressing the unproductive inventory that is in the system right now and have the room available to bring the excitement assortment that will position the business really well for 2026.
My first question on Foot Locker. So it looks like the business may have been a bit softer than the Street was expecting in Q3, and you're anticipating a slightly negative operating income in Q4, yet you're expecting the acquisition to be accretive to EPS in '26. Can you walk through the building blocks to achieve it? And then what gives you confidence?
Sure. Thanks, Simeon. We are really excited about Foot Locker and the opportunities it presents. However, there is work to be done to prepare it for 2026 and ensure it contributes positively to our business. One of our steps is to clean out unproductive inventory and impair underperforming assets. These actions are part of the foundation we need to establish for 2026. We have great confidence in the management team we’ve assembled in North America, led by Ann Freeman, a respected long-time Nike executive. We also recently announced that Matthew Barnes will oversee our international business; we believe a European perspective is essential for EMEA. We are making significant changes to our approach in the international market, which we expect will yield positive outcomes. One of the things we appreciate about Foot Locker is the passionate team in the stores; they truly love sneakers and Foot Locker, making them a vital asset as we move forward. Moreover, we have spoken with every brand, and they have shown renewed interest in supporting Foot Locker, expressing their desire for a stable and growing partnership. This is beneficial not only for our business but also for the brands. We are fully aligned with them, and we are confident that if we put all these pieces in place, Foot Locker will enhance our earnings in 2026.
So my follow-up, I guess I'll make it 2 parts. First, just to that point on '26 accretion. That's Foot Locker stand-alone, including synergy. That's not, let's say, DICK'S Sporting Goods electing to buy stock back. That's part one of the follow-up. And then part 2, you don't tell us what your footwear gross margin is inside of core DKS. But if you look at Foot Locker, they've been on a steady decline for the last several years, and a lot of it does track with one of your major suppliers' proliferation of product. Is it feasible once you're done with your cleanup that you can get gross margins at parity with DICK'S Sporting Goods? Or is there something about the mix and the selection that you can't get it quite to that level? Meaning how much quick repair could there be once you clean up the assortment?
We're not providing guidance right now, but we will share more at the end of Q4. While we won’t specify how we compare to DICK'S Sporting Goods, we believe there is a significant opportunity for improvement. One factor hindering us has been the lack of access to key products, resulting in stock shortages in several stores. For example, I visited a store in New York recently, and the manager mentioned that they just received a new shipment of Nike running shoes. This illustrates the opportunity we have, especially since those products are being sold at full price. We're confident there will be a notable increase in gross margin, and we will offer further insights at the end of the fourth quarter.
And then I don't know, Ed, sorry, it was a follow-up to the accretion comment, if you can comment any more on that, whether that included buyback or that's just core Foot Locker?
That's core Foot Locker. We may be opportunistic based on what happens with the stock and may buy back some stock, but we believe that from a core Foot Locker perspective, it can be beneficial to our earnings in 2026.
We were curious about how you're going to manage the markdowns at Foot Locker. I guess the concern is, is that if you do discount aggressively in the fourth quarter, do you think you'll be in a position where you can go back to full price selling and the customer be ready for that as new product comes into the store? And our second question on the discounting is, do you feel like the market is going to be heavy with discounts now in Q4? And how much do you expect that to impact the market and DICK'S own footwear sales?
Sure. Thanks, Kate. I don’t really think that markdowns going back to full price will be an issue because we’re marking down older products that haven’t sold and have been sitting around for a while. When we receive new, fresh products, we are confident we can sell those at full price. Consumers are looking for new, innovative products, which is something Foot Locker currently lacks, but we will be introducing that as we move into 2026. As for discounting, things could change, but at the moment, we don’t anticipate that it will differ significantly from last year. As Lauren mentioned, we have different, innovative, and more premium products coming in that aren’t as widely distributed in the marketplace, and we don't expect promotional activity to heavily impact our business.
It's encouraging to see the ongoing momentum at the DICK'S brand. Lauren and Ed, I have a question regarding Foot Locker. Is this situation primarily due to historically underperforming operations, and could improvements through closures and inventory management help turn the business around? Or are there more significant infrastructure investments or structural issues at play? Additionally, are there specific brands within Foot Locker that might no longer be viable? I would also like to follow up on inventory. A decline of 1,000 to 1,500 basis points is substantial. Is there a write-off reserve associated with that? Is it primarily due to the depth of the promotions, or are you utilizing third-party channels? I'm trying to grasp the scale of this and the speed at which you plan to resolve it in the upcoming months.
That's a lot, Adrienne. Let me start by saying that the focus here is on historically underperforming operations, which is a significant aspect of this. Foot Locker has strayed from basic retail principles, such as offering the right products in the right stores. We believe turning this around will require some capital investment in the stores. We recently conducted a test in 11 stores, which was fairly capital efficient. We removed most of the inventory and revamped the store layout. The DICK'S team excels in merchandising, and we're bringing that knowledge to Foot Locker to enhance visual merchandising that drives store performance. Previously, if you walked into a Foot Locker store, you would see a cluttered display of products. Now, we have organized the inventory to highlight what is important to consumers. While our test only included 11 stores, we are very optimistic about the results. We truly believe we can make a significant turnaround. Regarding inventory, with a decrease of 1,000 to 1,500 basis points, we plan to use markdowns to remove aged underperforming SKUs. By the end of the year, we expect to implement a program to sell residual inventory to a jobber, allowing us to start fresh in 2026. That’s why we are moving quickly to achieve a fresh start in 2026.
I want to add to what Ed is saying from my perspective. When looking at the core challenges we face in the business, it really comes down to underperforming operations and inventory management. It's fundamental retail. What’s impressive is how the team is collaborating, and Ed is dedicating a lot of time to them. The core expertise at DICK'S, including merchandising and the balance between creativity and analytics, is evident in his remarks about being a marketing-driven company that believes in brand. Plans for next year are being developed, with a strong operational focus on brand relationships. All of this knowledge is being shared through coaching and mentorship, which gives me confidence that we are progressing in the right direction.
I wanted to ask a question on the vision for the merchandising and Foot Locker. That business historically was heavy on basketball, sneaker culture and kids. So as you look at where there can be improvement, do you see that mix materially changing on the apparel side? Are you looking to lean more into private label? Or do you also see national brands playing a big role in their apparel expansion?
Foot Locker has always been deeply rooted in basketball culture, and basketball will continue to be a significant focus for us. We are very excited about the upcoming basketball products from various brands. In terms of the apparel business, we recognize that the national brands had previously pulled back and shifted towards private brands. While private brands certainly have their place, we believe that national brands will experience meaningful growth in Foot Locker's apparel segment, which will help boost the average unit retail prices and will likely be highly profitable. I believe the reimagined Foot Locker stores have been an interesting experiment. During our review, we found that some elements of the new design are quite successful, while others need improvement, and we are currently addressing those issues. For instance, we plan to remove the Kick It Club and drop zone areas right as you enter the store. Instead, we will redesign that space to provide better visibility throughout the store and repurpose areas that have not been effective, which were more social in nature. Our goal is to allocate more space for better apparel displays, with the expectation that this focus will enhance sales.
We reported a 27 basis points increase in our gross margin, which is in addition to the 70 basis points increase we experienced before. The overall marketplace continues to be dynamic, and we participated in select promotions during the important back-to-school season. The tariff impact was present in that quarter, affecting our merchandising margin, but we still achieved a merchandising margin increase of 5 basis points on top of nearly 60 basis points of positive impact from last year. There was a slight unfavorable impact from the product mix, as the license business performed well, presenting a strong growth opportunity but with a slightly lower margin. Overall, we expect our gross margin to expand on a full-year basis in the back half and in the fourth quarter. We are confident in our merchandising capabilities and the efforts of the GameChanger team and the DICK'S Media network. These factors continue to drive our confidence in gross margin expansion for this year and beyond.
The first one is relatively straightforward. The expectation that Foot Locker will be accretive next year is based on the $14.25 million to $14.55 million for this year. Is that correct? And how dependent is the accretion expectation on inflecting the sales that you would anticipate by back-to-school for next year?
Michael, thank you for your question. To clarify, the basis for the 2025 results is between $14.25 million and $14.55 million. It starts with what Ed mentioned about the fundamental building blocks. We need to clear out the old inventory and create an exciting assortment of new products that are resonating well with customers at DICK'S Sporting Goods. This strategy, which includes gross margin improvement and merchandising margin enhancement, will be our top priority as we explore ways to make this business more profitable. We are also reviewing our store portfolio for unproductive assets, including some unprofitable stores. Our approach is not only to consider closing these stores but also to assess whether, with the right products, innovations, and new offerings, we can turn them around and make them profitable. We are committed to addressing unproductive assets that will not be part of our core operations moving forward. Ultimately, everything begins with sales and margin, and we aim to set the business up for profitable growth in 2026, particularly in preparation for next year's back-to-school season.
Got you. My follow-up question pertains to the ongoing discussions regarding the combined enterprise strategy, specifically how to protect the core DICK'S business to ensure that the integration of Foot Locker does not distract from or hinder the core business's momentum. It seems that in the fourth quarter, you are expecting a notable slowdown, predicting flat to slightly positive comparable sales for the core business. What is driving this expectation? Additionally, considering you have only owned this business for a few months, how do you foresee preventing any distractions that could hinder the core business's ability to accelerate and contribute to growth alongside the gains you anticipate from Foot Locker? Sorry, I know that was a lot to unpack.
Thank you, Michael. One of the key requirements for this acquisition was exactly what you mentioned. We needed to ensure that the DICK'S team remains focused on driving our growth and strategic priorities, and that is precisely what we are doing. After 8 to 10 weeks, I am even more confident in our approach. The team at Foot Locker is established, and Ed is spending time there, while the DICK'S team is completely dedicated to their own priorities. We will continue to allow both teams to share insights without distracting each other from their main goals. Regarding Q4, I want to clarify something. We just reported a 5.7% comparable sales increase and we are comparing that to a 6.4% increase from last year. Although our comparable sales might show a slight moderation in Q4, we have actually raised our guidance, with the high end of our previous expectations now representing the low end of our current guidance. We are very optimistic about the holiday season, but we are balancing that with a sensible level of caution, as we always do. We do not project to the best-case scenario, but we are excited and prepared for Q4 on the DICK'S side.
Great. A couple to start on. First, a little bit more detail on that 11 store test. Maybe any initial results or pop in sales? And I mean, is it just as simple as relaying a back wall or there's got to be more to what you're doing. So if you could address that, please.
We are not ready to share specific results yet, but we are really encouraged by what we are seeing. It involves more than just rearranging the store displays. We've replaced some older products with newer, fresher ones that we've sourced. Additionally, we are reintroducing the apparel business at Foot Locker, which had previously diminished. If you visit these stores, you'll notice the apparel section is back, and it is performing quite well. We believe there's potential for growth in both footwear and apparel moving forward. We will likely provide more insights about this test as we approach the end of the fourth quarter and offer guidance for 2026. It's essential for Foot Locker to focus on fundamental retail practices, as this will significantly impact their business. I think that's a really good question. The main reason is our merchandising philosophy and the way we are purchasing the product; we did not make that purchase, it was made by the previous management team. We believe there are some gaps, and we will discuss with the brands how to address those. The third quarter, or back-to-school period, will be the first time we have complete control over the assortment moving forward.
This is Jolie Wasserman on for Chris. Just following up with DICK's ability to affect inventory orders for Foot Locker. So just confirming that you're saying that you won't be able to fully affect it until the start of the third quarter, but are you able to have any sort of impact even if it's lighter in the first half? And just specifically on the percent of spring ordered since the acquisition, how much of that have you been able to order thus far? And how do you see that flowing into the fall?
We can have some impact on Q1 and Q2, probably hopefully a little bit more on Q2 than Q1, but we're working through that and working with the brands and they are being as helpful as they can to try to get product to us that we need. But it's really going to be in that third quarter that you'll see the big difference that our team will have fully bought that product and merchandise that product.
We reported a 27 basis points expansion in our gross margin today, which builds on the 70 basis points expansion we achieved previously. The overall marketplace remains dynamic, and we participated in select promotions during the critical back-to-school season. The tariff impact was factored into our results for the quarter, but we still managed to deliver a 5 basis points increase in merchandising margin, on top of nearly 60 basis points of positive impact from last year. There was a slight unfavorable impact from our mix, as the license business, which showed strong performance and growth potential, has a lower margin. Looking ahead, we expect our gross margin to continue to expand on a full-year basis, particularly in the second half and the fourth quarter. Overall, we're confident in our merchandising capabilities and the ongoing work from the GameChanger team and the DICK'S Media network, all of which support our expectations for gross margin expansion this year and moving forward.
Can you talk about the $500 million to $750 million in charges that might be coming? How much of that is cash versus just write-offs? And how many stores are actually being reviewed when you think about that range of $500 million to $750 million? And any split that you can share in U.S., international or banner?
Yes, Paul, we will provide more detailed assumptions. We are currently ten weeks into this acquisition, and as I mentioned earlier, we are balancing our evaluation with the growth and profitability opportunities we see on a store level. We will reveal more detailed plans regarding stores during our Q4 call. Regarding the $500 million to $750 million, there are three main categories. The most significant portion, as Ed mentioned, is unproductive inventory, which we will address largely in Q4. This will involve some evaluation of the store portfolio. We are also taking a closer look at our existing assets, including certain technology and legacy contracts, as part of the fourth quarter to prepare the business and improve profitability for 2026. As for cash versus noncash, it will be a mix of both; inventory will definitely involve cash, while cleaning up certain existing assets on the balance sheet will be noncash. We will share more detailed assumptions during our fourth-quarter call.
Great. And then just on the synergy number, the $1 million to $1.25 million, how much of that are you assuming you can capture in F '26 to get to those accretion numbers? I'm curious if you're thinking that you might be actually playing for a bigger number than that $100 million to $125 million in longer-term.
Yes. The $100 million to $125 million target includes a significant amount of work that has already been completed. Currently, we are engaged in discussions with the brands and non-merchandising vendors, and those conversations are underway. We expect to have a clearer perspective, roughly 12 weeks from now, as we approach the fourth quarter. Additionally, regarding the pursuit of further opportunities, we remain committed to enhancing both top-line and bottom-line results for the entire business. This continues to be a priority for our organization.
I wanted to ask a question on the vision for the merchandising and Foot Locker. That business historically was heavy on basketball, sneaker culture and kids. So as you look at where there can be improvement, do you see that mix materially changing on the apparel side? Are you looking to lean more into private label? Or do you also see national brands playing a big role in their apparel expansion?
Yes. Foot Locker has always had a strong connection to basketball culture, and basketball will continue to be a significant aspect of that. We are very excited about the basketball products coming from several brands. In terms of the apparel business, we have noticed that while some national brands have stepped back and focused more on their private labels, we believe there is still substantial potential for the national brands. We anticipate that this will result in a notable increase in Foot Locker's apparel business, which will help boost average unit retail prices and ultimately be very profitable. I believe the reimagined Foot Locker stores have provided an interesting opportunity for testing. As we've explored them, we've found elements that are very effective while others require some reevaluation, which we're currently undertaking. For instance, we plan to remove and redesign the Kick it Club and drop zone area located in the center of the stores. Our goal is to improve visibility throughout the store and repurpose that space, which has not been productive and has primarily served a social function. Instead, we intend to allocate more space for apparel presentation and focus on apparel offerings, which we believe will enhance sales performance.
We reported a 27 basis points increase in our gross margin today, building on the 70 basis points increase we had previously. The market remains dynamic, and we engaged in select promotions during the key back-to-school season. The tariff effects were accounted for in that quarter, and despite these challenges, we achieved a merchandising margin expansion of 5 basis points, following nearly 60 basis points of positive impact from last year. There was a slight negative effect from our product mix, as the license business, while growing well, has a lower margin. Looking ahead, we expect our gross margin to continue expanding in the second half of the year and into the fourth quarter. Overall, we're optimistic about our merchandising capabilities, supported by the efforts of the GameChanger team and the DICK'S Media network; these factors reinforce our confidence in gross margin growth this year and beyond.
Can you talk about the $500 million to $750 million in charges that might be coming? How much of that is cash versus just write-offs? And how many stores are actually being reviewed when you think about that range of $500 million to $750 million? And any split that you can share in U.S., international or banner?
Yes, Paul, we will provide further details on our assumptions. We are currently 10 weeks into this acquisition, and we are carefully evaluating the opportunities to drive growth and profitability on a store-by-store basis. We will present more detailed plans during our Q4 call. Regarding the $500 million to $750 million, there are three main components. The most significant part, as Ed mentioned, is the unproductive inventory, which constitutes a substantial portion of that amount and will primarily be addressed in Q4. This also includes an evaluation of some of our store portfolio. Additionally, we are examining our existing assets, including technology and legacy contracts, which we will assess in the fourth quarter to position our business for profitability in 2026. As for the breakdown of cash versus noncash, it will be a mix of both. Inventory will definitely involve cash, but any existing assets on the balance sheet that we review will be noncash. We will provide more insights into this during our fourth-quarter call.
Great. And then just on the synergy number, the $1 million to $1.25 million, how much of that are you assuming you can capture in F '26 to get to those accretion numbers? I'm curious if you're thinking that you might be actually playing for a bigger number than that $100 million to $125 million in longer-term.