IMAGE SOURCE: THE MOTLEY FOOL.
DICK's Sporting Goods, Inc. (NYSE:DKS)
Q3 2018 Earnings Conference Call
Nov. 28, 2018, 10:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the DICK's Sporting Goods' Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchtone phone. To withdraw your question, please press * then 2. Please note this event is being recorded.
I would now like to turn the conference over to Jennifer Mejia, Manager of Investor Relations. Please go ahead.
Jennifer Mejia -- Manager of Investor Relations
Good morning, everyone, and thank you for joining us to discuss our third quarter 2018 results. On today's call will be Ed Stack, our Chairman and Chief Executive Officer; Lauren Hobart, our President; and Lee Belitsky, our Chief Financial Officer. Today's call will be archived for approximately 30 days on our Investor Relations website located at investors.dicks.com.
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 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 at dicks.com to find the reconciliation of non-GAAP financial measures referenced in today's call.
With that, I will now turn the call over to Ed.
Ed Stack -- Chairman and Chief Executive Officer
Thanks, Jenn, and good morning everyone. This morning, we reported third quarter earnings per diluted share of $0.39, compared to GAAP earnings per diluted share of $0.35 and non-GAAP earnings per diluted share of $0.30 last year. Adjusted for the calendar shift due to the 53rd week last year, our consolidated same-store sales declined 3.9%, and our eCommerce business increased 16%. As a percent to total net sales, the online business increased to approximately 12% compared to approximately 10% in the same period last year. Revenue declined 4.5% to approximately $1.86 billion, including the impact of the calendar shift, which negatively impacted sales by $41 million.
Comp sales were in the range of our expectations for the quarter. As expected, sales were negatively impacted by the continued weakness in hunt and electronics, which contributed to approximately 255 basis points comp decline. Despite these challenges, we have focused on driving profitable sales and managing our business to deliver higher earnings.
Merchandise margin expanded 213 basis points during the quarter, as we benefited from the mix of the sales decline and low-margin hunt and electronic categories, fewer promotions, and improved product cycle. This merchandise margin expansion drove an improvement in gross margin, which increased by 72 basis points.
Looking ahead, we will continue to optimize our assortment with a stronger emphasis on key items and a renewed focused on the enthusiast athlete. We remain encouraged by the improved product we're seeing from many of our partners and are optimistic about the pipeline into next year. Our relationships with many of these partners have never been stronger, and we will continue to work together to elevate the assortment and presentation at DICK's.
Our private brands continue to grow and are an integral part of our strategy to drive differentiation and exclusivity in our assortment. We have seen great success in expanding our existing brands into new categories, and that will be a priority going forward. We will also be launching new brands. Earlier this quarter, we launched the outdoor apparel brand Alpine Design and have been very pleased with the early success. We expect our private brands to continue to deliver growth for us well into the future.
Finally, we continue to reallocate floor space to growth categories in key brands and adapt our product offering to better align with the categories our athletes demand. Late in the third quarter, we removed virtually all hunt products from 10 DICK's stores where the category underperforms and have replaced it with more compelling assortments in categories such as baseball, licensed products, and outerwear. Though it's too early to discuss performance, we're optimistic these changes will better serve the athletes in these communities.
In closing, we're confident in the future of our business and believe we can strengthen our leadership position going forward. I'd like to thank all of our teammates for their hard work and dedication to this Company and for their upcoming efforts during the holiday season. I'd now like to turn the call over to Lauren.
Lauren Hobart -- President
Thank you, Ed, and good morning everyone. As we enter the holiday season and look toward next year, we remain focused on providing an optimized omni-channel experience for our athletes through our three key strategic initiatives. These include improving our core execution, leveraging the power of our expert opinion to deliver a stronger merchandise assortment and presentation, and increasing our productivity.
Beginning with improving our execution, we are delivering a better customer experience across our omni-channel platform. In stores, we've driven efficiencies within our processes, which have allowed our teammates to spend less time tasking and more time servicing our athletes. We're also providing a stronger experience online by enhancing the functionality of the website and shortening our estimated delivery times.
We're working to deliver eCommerce orders within two business days to the majority of our athletes in the future. To achieve this, we are investing significantly in our fulfilment and delivery capabilities, including the creation of dedicated eCommerce fulfillment centers in New York and California. The state-of-the-art facility that we're building in New York will be highly efficient as we invest in robotics to drive automation and reduce labor costs. We also recently enabled all of our store-focused regional distribution centers to fulfill online customer orders. Additionally, we continue to leverage our proximity to our customers by shipping from all of our stores.
Next, we will continue to deliver a stronger product assortment and leverage the power of our expert opinions to guide and inform athletes to select the right product for them. From a merchandising perspective, we continue to be pleased with how athletes have responded to our strikepoint presentations, which showcase key items in a very impactful way throughout the store. An example of this is the new Yeti display that we have incorporated in many of our stores for the holiday season, which is a powerful presentation of that brand. Year-to-date, many of these strikepoints have resulted in strong double-digit sales growth.
In marketing, we're focused on building an emotional connection with our brand and driving traffic to our stores and our eCommerce site. We're currently running a holiday campaign featuring a family and their ping-pong table, through which we show that giving the gift of sport lasts a lifetime and actually has the power to bring families together. We're also driving digital transformation across all aspects of our marketing, leveraging our vast ScoreCard and Team Sports HQ datasets to drive traffic with athletes through timely and targeted messaging. And we continue to utilize our strong brand partnerships to drive growth through joint marketing efforts with many of our key vendors.
Finally, we remain focused on increasing our productivity. Across the company, we will have eliminated approximately $25 million of expenses by year end, much of which has been reinvested in our strategic growth drivers. We will continue to make critical investments to support the long-term growth of our business, particularly in key growth areas such as eCommerce, Team Sports HQ, and our private brands. Improving productivity to help offset some of these investments will be a major priority going forward.
In closing, we remain optimistic that the continued execution of these strategies will lead to stronger results and drive competitive advantage in the marketplace.
I will now turn the call over to Lee to review our financial statements and outlook in more detail.
Lee Belitsky -- Chief Financial Officer
Thank you, Lauren, and good morning everyone. I would like to start with a brief overview of our third quarter results. Adjusted for the calendar shift, consolidated same-store sales declined 3.9%, including a 16% increase in our eCommerce business. Transactions declined by 5.5%, and average ticket increased by 1.6%. Consolidated sales decreased 4.5% to approximately $1.86 billion. This reflects the impact of the calendar shift, which negatively impacted sales by $41 million or $0.10 a share in the quarter.
During the quarter, our best performing categories included outdoor and athletic apparel, which combined for a mid-single digit comp sales increase, and our private brands continued to comp positively with higher penetration, as well.
Notwithstanding these strengths, sales continued to be negatively impacted by double-digit declines in hunt you electronics, which contributed approximately 255 basis points in a comp decline, as well as weakness in our outdoor equipment. Specific to hunt, in addition to the strategic decisions we made regarding firearms earlier this year, the broader industry has decelerated and remains weak, as evidenced by most recent national background check data. We believe this also contributed to the decline we saw during the quarter.
Gross profit for the third quarter was $523.6 million or 28.19% of net sales, a 72 basis point improvement versus last year. Within gross margin, merchandise margin increased 213 basis points and was partially offset by occupancy deleverage and higher freight and shipping and fulfilment costs. The merchandise margin expansion was primarily driven by a favorable merchandise mix, fewer promotions, and improved product.
Additionally, a favorable timing shift related to the expense recognition or changes we made to our ScoreCard loyalty program last year also benefited gross profit by $7 million during the quarter. This shift in timing will negatively impact gross profit by approximately the same dollar amounts during the fourth quarter.
SG&A expense dollars were $468.7 million, a 1.5% decline from last year, as expense reductions more than offset strategic investments and higher incentive compensation. As a percent of sales, SG&A deleveraged 76 basis points to 25.42%. In total, we delivered third quarter earnings per diluted share of $0.39, compared to GAAP earnings per diluted share of $0.35 and non-GAAP earnings per diluted share of $0.30 last year.
Now looking to our balance sheet, we ended the third quarter with approximately $92 million of cash and cash equivalents and $382 million of borrowings on our revolving credit facility. Additionally, our inventory levels increased by 0.8% in the quarter, or down 1.2% on a shifted basis as our quarter ended one week closer to Thanksgiving than last year.
Turning to our third quarter capital allocation, net capital expenditures were $28.5 million. We repurchased approximately 3.1 million shares for $108 million at an average price of $35.29. These repurchases are indicative of our confidence in long-term prospects for DICK's Sporting Goods. We also paid approximately $22 million in dividends during the quarter.
Before we move on to our fiscal 2018 financial outlook, giving the timing of our call as it relates to a holiday weekend, I'd like to briefly comment on our performance. As we reflect on the Thanksgiving shopping weekend, we are very pleased with our results both online and in our stores, and we have incorporated the results of the weekend in our guidance.
For the year, we continue to expect full-year comp sales to decline by 3% to 4% and gross margin to be approximately flat versus last year. As a result of our strong earnings results in Q3, we are raising our full-year earnings per share guidance for the third time this year from $3.15 to $3.25, which represents a $0.25 increase to the high end versus our original guidance that we gave this year of $2.80 to $3.00.
Our inventory is clean and well positioned as we enter the holiday season, and throughout the fourth quarter we expect to build inventory versus last year to be ready for the important spring businesses. Upon fully executing this strategy, we expect inventory levels at the end of the first quarter will increase over last year. We will provide fiscal 2019 guidance on our fourth quarter call in March, and this concludes our prepared comments. Thank you for your interest in DICK's Sporting Goods. Operator, you may now open the line for questions.
Questions and Answers:
Operator
We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2.
The first question is from Mike Lasser of UBS. Please go ahead.
Michael Lasser -- UBS -- Analyst
Good morning. Thanks a lot for taking my question. Lee, can you reconcile your comments about being pleased with your holiday shopping results online and in stores with your guidance that calls for basically a 3% to 4% comp decline in the fourth quarter? Is that -- were your comments about the holiday shopping period so far, or at least the last week or so, an indication that you are seeing performance that's in line with what you're guiding to for the fourth quarter?
Lee Belitsky -- Chief Financial Officer
So, our guidance that we gave for the full year coming out of the third quarter was negative 5% to 4%, and we're sticking with that negative 3% to 4% for the full year. We are pleased with the results coming out of the weekend, but we did have very favorable weather for us, which helped drive some of our weather-sensitive businesses. I'm not sure if that's going to hold up all the way through Christmas right now. So, we're pleased with the results, but there's a long way to go.
Michael Lasser -- UBS -- Analyst
Okay. And my followup question is, so hunting and activity trackers counted for a little bit more than half of your comp decline in the quarter. What was driving the weakness in outdoor equipment, and how did the footwear category perform? And based on the answers to that, and I know it's early, but is it reasonable to expect that the business can comp positive in the 2019 totality?
Lee Belitsky -- Chief Financial Officer
Well, with respect to the footwear business, overall the footwear business was about even for the quarter. Some of the equipment businesses, particularly outdoor equipment, the comp sales were down, some of that driven a little bit by weather and probably some of it driven by some of the firearms customers that we have also involved with the outdoor equipment and camp categories and so on that slowed that business down a bit, as we start to see during the second quarter and into the third quarter, as well.
Again, our view for next year really hasn't changed on that. Our apparel business has been gathering momentum. Footwear business is decent right now. As we anniversary the hunt business, the changes we made there, the electronics business and some more of the Under Armour pieces from the early part of last year, our view hasn't changed. We think that the vast majority of these headwinds will diminish and we'll be in a better position to drive more favorable comps.
Michael Lasser -- UBS -- Analyst
Okay. Thank you very much, and good luck with the rest of the holiday.
Lee Belitsky -- Chief Financial Officer
Thanks.
Operator
The next question comes from Simeon Gutman of Morgan Stanley. Please go ahead.
Simeon Gutman -- Morgan Stanley -- Analyst
Thanks. Good morning, guys and gals. My first question is in the second quarter you left us with the impression that ex the hunt and electronics, and I don't want to say the brand because I'm not sure you'll comment on it specifically, but I think ex Under Armour the business was running somewhere in positive territory. I think that's what Michael was, I think, trying get to. Can you share a similar number? So, if we take out the piece that hunt and electronic hurt this quarter and then maybe take out -- if it's the Under Armour drag or not -- what would the core categories have done in the in third quarter, and how does it compare on a run rate basis?
Ed Stack -- Chairman and Chief Executive Officer
We said our comps were what they were, and the hunt piece accounted for a big portion of that. We think the outdoor category, which is a spillover to the hunt business, is a portion of that, too. We didn't call Under Armour out this time, although the sales were still pretty soft in Under Armour. We had been able to plan for that, and we offset the apparel categories in the third quarter. As we had talked about, we were mid-single-digit comps in the apparel categories between the outerwear categories and the athletic categories.
Simeon Gutman -- Morgan Stanley -- Analyst
Got it. Okay. And would it be fair to leave with an impression that the underlying business looks about the same and may be slightly a little better if I include what happened over Black Friday, granted it's a promotional weekend, but it sounds like you were pleased; and I'm assuming the complexion of what you're pleased with shows that some of the things you're doing are gaining traction?
Ed Stack -- Chairman and Chief Executive Officer
That would be accurate.
Simeon Gutman -- Morgan Stanley -- Analyst
Okay. And my followup -- it's kind of similar to the last question. The margin profile of the business looks pretty good. Electronic and hunt are almost out of the way. Inventory looks OK. As we head into next year, Ed or Lee, do you feel stronger about the margin profile of the business or about the sales position?
Ed Stack -- Chairman and Chief Executive Officer
You know what, Simeon, we've never commented going forward. So, as Lee indicated -- and I don't mean to dodge your question, I just want to be consistent with what we've done in the past -- is that we'll guide next year at our fourth quarter call. But as I said in my comments and Lauren said in hers, we're optimistic about our business.
Simeon Gutman -- Morgan Stanley -- Analyst
No problem. Understood. Thanks and good luck
Ed Stack -- Chairman and Chief Executive Officer
Okay, thanks.
Operator
The next question comes from Chris Horvers of JPMorgan. Please go ahead.
Christopher Horvers -- JPMorgan -- Analyst
Thanks. Good morning. So, a couple questions. First, on the hunt side. I guess how was the impact relative to where you thought, the thought process being as that customer comes back are they remembering the decisions and the publicity around the spring such that the business got worse? Or is that more a function of the business stayed the same, but maybe the industry got worse?
Ed Stack -- Chairman and Chief Executive Officer
Well, the industry is difficult, and you can see that from the NICS checks and some of other things going on in the industry, but the comps were king of overall in the zone of what we anticipated. So, we didn't have...Let's put it this way -- from a sales standpoint, we didn't have a surprise.
Lee Belitsky -- Chief Financial Officer
The one thing on the hunt side is in the fall the penetration of the hunt business has doubled in the fall of what it is in the spring, so third quarter and fourth quarter about even and first and second quarter about even. It's about doubled the fall over the spring. So, it has a bigger drag on the business in Q3 and Q4, just based on the size of the business.
Christopher Horvers -- JPMorgan -- Analyst
And then presumably electronics went up in the fourth quarter-goes up in the fourth quarter on a mixed basis relative to the rest of the year. So, does the combined hunt and electronics headwind -- is that more significant versus the 255 basis points that you just quoted on 3Q?
Ed Stack -- Chairman and Chief Executive Officer
A little bit.
Lee Belitsky -- Chief Financial Officer
A little bit. I mean, yeah, it is a little bit more. But as we said, we've baked that all into our guidance, and we think it's still going to be negative 3% to negative 4%, and we raised our EPS guidance.
Christopher Horvers -- JPMorgan -- Analyst
Got it. And then the last piece is the SG&A trend. If you look at the SG&A dollars relative to history sequentially year over year, this sort of looked like a big shift versus what we would have expected. So, was there anything unique in there, and is this the new trend that we should sort of build out or SG&A off of going forward?
Lee Belitsky -- Chief Financial Officer
We've been working hard throughout the year to reduce our SG&A expenses, and some of that involved contract negotiations that have a little bit of a longer tail from they negotiated to when it gets implemented. But the short answer is, we believe we're going into a new period of better expense management going forward. What we saw in the third quarter is a very strong performance on expenses. A little bit of it is driven by the calendar shift in that we have a little bit less payroll expense and a little bit less marketing expense due to the calendar shift. But a lot of it is due to better expense management overall, and we expect that to continue going forward. There are not a lot of one-time items in there that will go away.
Christopher Horvers -- JPMorgan -- Analyst
Understood. Have a great holiday.
Lee Belitsky -- Chief Financial Officer
Thanks. You too.
Operator
The next question is from Seth Sigman of Credit Suisse. Please go ahead.
Seth Sigman -- Credit Suisse -- Analyst
Hey, guys. Thanks for taking the questions. So, my first question is on the merchandise margins up over 210 basis points. Obviously, you recouped a lot of the decline from last year, but the offsets this quarter through occupancy and fulfilment costs, it seemed to be greater than prior quarters. Now, some of that may be lower comps, but I'm just wondering are you seeing greater pressure from eCommerce and fulfilment? And then as I look out over the next couple of quarters or so as you lap the merchandise margin recovery that we saw this year, I'm just wondering does that imply less upside coming from gross margin looking out? Thanks.
Lee Belitsky -- Chief Financial Officer
The one thing to consider in looking at the gross profit is -- once again, it's the calendar shift. Because we have in Q3, due to the calendar shift, we've kind of lost $40 million in sales, and that's $40 million less that we can leverage against our occupancy expense and our fixed distribution expenses. So, that's a piece of it, and that will continue to be a concern in the fourth quarter, as well, as we have another similar reduction in sales and we have 13 weeks against 14 weeks coming in. So, that's affecting it.
And the other piece of that is the higher penetration of eCommerce sales. So, we went from about 10% penetration to 12%. That's a lower gross margin business for us, primarily because of the delivery expenses associated with the eCommerce business. So, it's a lower SG&A structure there, and it's a higher cost of goods sold structure in eCommerce. So, as we do higher penetration in the business in eCom, that dynamic will change on the P&L, as well.
Seth Sigman -- Credit Suisse -- Analyst
And, Lee, can you just quantify how much did that week shift impact the gross margin specifically?
Lee Belitsky -- Chief Financial Officer
So, it was $0.10 a share was the impact overall, and that's mostly gross profit dollars delivered. There's a little bit of SG&A in there, but it's mostly gross profit dollars.
Seth Sigman -- Credit Suisse -- Analyst
Okay. And my followup question is around the reallocation of square footage that you're testing here. You're taking space away from outdoor. I know it's too early to talk about the sales lift, but I'm just curious the categories that you are giving more square footage to, I guess what is it about those categories -- the demand trends in those categories, is it stronger? Did they not have enough space previously? Are they higher margin? Just how do we think about that strategy to reallocate square footage? Thanks.
Ed Stack -- Chairman and Chief Executive Officer
Well, it's a little bit of everything. So, we talked about the outerwear business. We talked about the license business -- the Team License business, and also the baseball business. We think there's a big opportunity from a baseball standpoint. That's a business that's growing pretty significantly, primarily at the expense of football. As the football business has declined, the baseball business and soccer have picked that up. All of these businesses are a significantly higher margin business than the hunt business.
Now, I just want to...It's a bit of semantics, but when you said you're taking business out of outdoor, we look at it a little differently. We're taking business out of hunt, but the outdoor categories -- if you take a look at camp, pedal sports, we're not taking space out of those categories. It's only the hunt category.
Seth Sigman -- Credit Suisse -- Analyst
Gotcha. All right, thank you.
Ed Stack -- Chairman and Chief Executive Officer
Sure.
Operator
The next question is from Kate McShane of Citi. Please go ahead.
Kate McShane -- Citi -- Analyst
Hi, good morning. Thanks for taking my question. Just with regard to the fourth quarter and holiday, could you talk a little bit about your approach for promotions and traffic drivers, given that inventory is a lot tighter and the categories are a lot healthier versus last year?
Lee Belitsky -- Chief Financial Officer
We see that our inventory is in great shape. We don't see need to be as promotional. We've got more exclusive product. The product cycle is a terrific product cycle that's out there right now. So, we see this being much less promotional this year than it was last year, which is one of the reasons we're able to continue to increase our guidance.
Kate McShane -- Citi -- Analyst
Okay, that's helpful. Thank you. And then with regard to footwear, it sounds like it was flat during the quarter on a comp basis. Was that in line with your plan just given the level of newer innovation that you're seeing from the brands? And can you talk at all about how you're full-service footwear stores are doing compared to the rest of the chain?
Lee Belitsky -- Chief Financial Officer
So, we won't give specific guidance on the full-service footwear chains, but we're very pleased with that. We continue to gain momentum in those areas between access, et cetera. The sales were primarily flat, primarily because our inventory was probably too low in the key back-to-school time. We were a bit under-inventoried there, and we're fixing that going forward into this quarter and into next quarter.
Kate McShane -- Citi -- Analyst
Was that a function of just how you planned, or was it because it was harder to get your hands on inventory this period for footwear?
Lee Belitsky -- Chief Financial Officer
It was a planning piece, a strategy piece, which has been rectified.
Kate McShane -- Citi -- Analyst
Thank you.
Operator
The next question is from Robbie Ohmes of Bank of America Merrill Lynch. Please go ahead.
Robbie Ohmes -- Bank of America Merrill Lynch -- Analyst
Hey, good morning guys. Ed, I was wondering if you could talk about the investment in the new eCommerce piece and maybe walk us through how you think about buy online/pick up in store versus shipping from store versus automated -- putting up these two now facilities that are going to be very automated and are online only? Just maybe paint us the picture of where ultimately you see your omni-channel business shaking out?
Ed Stack -- Chairman and Chief Executive Officer
Well, I think that these are all important distribution points. The consumer, as we all know, wants their product how they want it, when they want it, and delivered in the way that they want it. This just gives us all the options to be able to do that. We feel that the investments we're making on the omni-channel fulfilment center in New York and California will get us to the customer, because we have to do a better job of working on speed to customer. Lauren's been heading this up, so I'm gonna let her kind of answer the balance of the question here.
Lauren Hobart -- President
I would just say, Robbie, we've been very focused on improving our speed and speed to customer. We've made small gains this year, but our goal is to get to the vast majority of our customers within two days. And to do that, we just need to make sure that we have the right inventory in the right place around the country. We're leveraging our entire store network, and we're building these mini fulfilment centers and larger fulfilment centers so that we can take the speed question sort of off the table.
Lee Belitsky -- Chief Financial Officer
And let me just add one more thing to it. With these fulfilment centers, we're able to carry a larger assortment that what we carry in stores, so it allows us to keep orders together. They're more efficient than the stores -- the automated facilities are more efficient. As labor costs go up, that efficiency is going to be important to us. And we expect to continue to have significant growth in our eCommerce business over time. And while we're not looking at real meaningful growth in our store count, we're already doing a tremendous amount of ship-from-store orders from our stores, we're concerned with keeping those stores in stock. As our eCommerce business continues to grow, we want to keep that kind of ship-from-store business relatively level within our stores so we can stay in stock for the walk-in customers. So, we've got a number of reasons from speed, to quality of delivery, to efficiency, to staying in stock in stores. There are multiple reasons why we're adding a couple of distribution centers.
Robbie Ohmes -- Bank of America Merrill Lynch -- Analyst
That's helpful. And just a quick followup. When you look through Black Friday and Cyber Monday, any color on just the balance of was digital much stronger or less strong relative to store traffic? Any kind of thought on how the shift is playing out?
Ed Stack -- Chairman and Chief Executive Officer
Well, we're very pleased with both channels, which we've said. But as Lee said, it was the coldest Thanksgiving in a long time, which really played into our strengths. But we were pleased with both online and stores.
Robbie Ohmes -- Bank of America Merrill Lynch -- Analyst
That's great. Thanks so much.
Lauren Hobart -- President
Thank you.
Operator
The next question is from Peter Benedict of Baird. Please go ahead.
Peter Benedict -- Robert W. Baird & Co. -- Analyst
Hi, guys, thanks. Ed, you mentioned improved product cycle a couple times here. Can you just expand on that? Where is that most pronounced? And then talk about maybe the sustainability as you look out into next year. What are you seeing?
Ed Stack -- Chairman and Chief Executive Officer
I think there's some great -- Nike has some great product coming out. We're extremely pleased with Nike on both the footwear side and the apparel side. We're pleased on the hardline side around golf with what we see with Callaway and TaylorMade going forward. We're happy with what's going on with some baseball product we see. We're just in a pretty good product life cycle. Yeti is still doing very well for us. They've got some new innovation out there. Hydro Flask is doing very well. So, we're just pleased with the products that we see out there today.
And not to mention what we're doing with our own products, whether it be CALIA, what we're doing in the fitness products. We're going to be launching a new brand next fall, which we haven't really announced exactly what it's going to be, but we think it's going to be one of the biggest private brands we have. So, we're pretty enthusiastic about the product cycle out there, both from the brands and what we're doing internally.
Peter Benedict -- Robert W. Baird & Co. -- Analyst
That's very helpful. So, on the space allocation comment you had there, two questions. One, the Yeti set -- is that something that is just a holiday increase, or is that something that persists after the holiday? And then are you considering removing hunt from more than just those 10 stores? Is there a certain basket of stores out there that could make sense for as you look out into next year?
Ed Stack -- Chairman and Chief Executive Officer
So, the answer to the first question on Yeti: Yes, this is something we plan to continue into next year. So, we've bought it that way. We think our team -- our merchandising team, store team, visual team that's all worked together, have put together, we think, probably the best Yeti display in the country, and we're very pleased with that.
And as it relates to the 10-store test, we'll have to wait and see how the 10-store test does. Early reactions were pretty pleased, but it's too early to make any conclusions. But we are looking at a number of stores where the significantly hunt business significantly underperforms, and we will assess whether we want to take it out and replace it with these other categories, if that ends up to be a smart thing to do from a business standpoint.
Peter Benedict -- Robert W. Baird & Co. -- Analyst
That makes sense. One last one for Lee. Just on the merchandise margin as we think about the fourth quarter, you guys talked about probably a less promotional position here. There's been a favorable start to the season, presumably mix should be favorable. How should we think about the improvement in merch margin relative to maybe the cadence we saw here in the third quarter? Could it be similar or should we not be expecting that much improvement?
Lee Belitsky -- Chief Financial Officer
I would not expect as much improvement in Q4 as we had in Q3, because Q3 last year we were really very aggressive mark downs. We weren't as aggressive in Q4 last year. So, the compare from a merch margin for us is a little more difficult against Q4.
Peter Benedict -- Robert W. Baird & Co. -- Analyst
Okay, great. Thanks guys.
Ed Stack -- Chairman and Chief Executive Officer
Thank you.
Operator
The next question is from Mike Baker of Deutsche Bank. Please go ahead.
Mike Baker -- Deutsche Bank -- Analyst
Hi. You guys sound like you're doing a lot of investments in eCommerce. How does that impact your P&L next year? Is there going to be an SG&A impact? Would that preclude you from growing your margins next year?
Lee Belitsky -- Chief Financial Officer
Well, Mike, we're not giving guidance on the operating margins for next year. You're right, we're going to continue to invest in eCommerce. A lot of it is in fulfilments in the back half of the year next year. So, those investments will be mostly in CapEx, and then there will be some in gross margin as we open up those buildings in the fall. Not much on the SG&A side.
Mike Baker -- Deutsche Bank -- Analyst
Okay. And then secondly, any update on what you're thinking regarding your Field and Stream stores now that we're through another hunt season?
Ed Stack -- Chairman and Chief Executive Officer
Well, we're not through the...The specific answer to your question is we haven't made any decisions yet, and we are just -- we haven't gotten through the hunt season. The hunt season is an important season in the fourth quarter, too, as big game season opens up in a lot of really high-penetration hunting markets in the Northeast, here in Pennsylvania. So, we still have a little ways to go before we make a decision.
Mike Baker -- Deutsche Bank -- Analyst
Okay. One more quick one. Any impact from the Red Sox winning the World Series? I have to get that one in there.
Ed Stack -- Chairman and Chief Executive Officer
Well, as a Yankee fan I was disappointed, but...It was not a real big impact. We were pleased with it, but Boston has won so many championships out of the last 15 years that it's getting to be expected. So, you don't get as big a jump out of Boston as we once did.
Lee Belitsky -- Chief Financial Officer
Overall, I'd say it was a little bit smaller than Houston, but not material to the overall results for the quarter.
Mike Baker -- Deutsche Bank -- Analyst
Okay. Appreciate it. Thank you
Lee Belitsky -- Chief Financial Officer
Thanks.
Operator
The next question is from David Schick of Consumer Edge Research. Please go ahead.
David Schick -- Consumer Edge Research -- Analyst
Hi, good morning. I just wanted to go back and sort of clarify or understand something a little bit better. You've talked a lot about baseball and the opportunity there and some of the product cycle things you like with a pathway into '19. But, Ed, as you started the call, you said a renewed focus on the enthusiast athlete. I just want to go back to that. Is that baseball, or do you see that in other sports? And would that be more of a topline or margin sort of mixed opportunity?
Ed Stack -- Chairman and Chief Executive Officer
Well, we think it's a bit of both -- a sales and a margin opportunity. And going back to this enthusiastic athlete. We've kind of lost some of the product for that enthusiastic athlete. We're going back and reinvesting in that. In baseball as an example, in six of the 10 stores that we redid taking hunt out, we put in a batting cage and HitTrax, which we're-off the first tee so to speak, we're pretty pleased with. And it's a place where a young man or a young woman can come in and swing a bat. It's similar to TrackMan in golf where they can measure their bat speed, the ball speed coming off the bat, the angle of attack. It gives them a tremendous amount of information about how they're hitting the ball, and we can actually fit them with the best bat for them. So, an enthusiast athlete wants that product.
And these baseball bats are now -- we're moving into some categories that are $300, $400, $500 for these bats. Where last year we had a bat display of roughly 30 feet linear feet, we're going to have 80 linear feet of bats this year; a more enthusiast display of baseball gloves with the A2000 Heart of the Hide. In the outdoor category, we're going to have -- from a kayaking standpoint, we're moving the quality in the enthusiast-level kayaks where we'll have kayaks that will be in that higher price point. We've kind of reduced the investment in the marketing in these better products for the enthusiast athlete. We're making a big change in that going forward into next year. Which is why when Lee talked about the inventory at the end of the fourth quarter will be above last year, that's because we're making these investments in this product to service this enthusiast athlete going forward, and we want to be ready for spring.
David Schick -- Consumer Edge Research -- Analyst
That's very helpful. Would some of those technology sort of in-store experiences, would you think about those in soccer and basketball, as well? I know some of that's out there.
Ed Stack -- Chairman and Chief Executive Officer
I'm not sure we would in basketball right now, but in soccer, yes.
David Schick -- Consumer Edge Research -- Analyst
Okay, thanks.
Ed Stack -- Chairman and Chief Executive Officer
Sure.
Operator
The next question is from Brian Nagel of Oppenheimer. Please go ahead.
Brian Nagel -- Oppenheimer & Co. -- Analyst
Hi, good morning. Thanks for taking my question. So, I wanted to focus on sales, as well. And, Ed, I just wonder if your sales -- at least headline sales numbers have been weak for a while. I was wondering if you could articulate -- there's a lot of moving parts there, particularly with categories like hunt and electronic, but as you look deeper at the numbers, how would you track it from a market share standpoint in some of your key categories?
Ed Stack -- Chairman and Chief Executive Officer
We actually think that we're picking up market share in a lot of the categories. We think we're picking up market share in golf in the Team Sports category. There's a number of ones we think we're picking up market share. We're pretty enthusiastic going forward.
Brian Nagel -- Oppenheimer & Co. -- Analyst
Then this is maybe a followup to that. Overall, in the competitive environment, clearly there's been a pretty significant shake out within your segment, maybe we're lapping past that now, but how do you view competition right now with your physical store standpoint in regard to what's happening with the manufacturers and some of their direct-to-consumer efforts?
Ed Stack -- Chairman and Chief Executive Officer
I'm not sure I understand the question, Michael.
Brian Nagel -- Oppenheimer & Co. -- Analyst
I guess let me ask maybe quickly, how do you view competition at this stage right now? That's been -- competition has been an issue for a while. It seems like maybe it's subsiding. Do you agree that competition is less severe at this point?
Ed Stack -- Chairman and Chief Executive Officer
I think it's better competition. So, what the obviously brands are doing, and I'll come back to that, but the brands are more competitive. What Amazon's doing -- they're clearly our number one competitor. And then you've got Academy and a few people like that. So, the competition has gotten maybe less competitors, but the competition is better than it was in the past.
I think the piece with the brands is -- somebody will crab at me about this, but I think the brand as competitors is a bit overblown as it relates to us and a few other key retailers. Because the brands are very helpful in trying to drive our online business. They're very helpful to let us know what's going on with their business online. We share information. I wish the brands weren't going direct, but they're also very helpful trying to drive our business online, and there's a real partnership there with the vast majority of the brands.
Lee Belitsky -- Chief Financial Officer
Also, Brian, I want to just reflect a little bit more on your market share question. With respect to the apparel business being up mid-single digits this quarter, we're in a pretty strong apparel cycle overall, and some of our competitors have been pretty strong in that space, as well. But I think we're at least holding our own in the apparel space right now, and we're doing that overcoming kind of the Under Armour situation that we're dealing with. So, we think we're doing well on the apparel front.
Brian Nagel -- Oppenheimer & Co. -- Analyst
Thanks for all the clarity. Appreciate it.
Ed Stack -- Chairman and Chief Executive Officer
Thanks, Brian.
Operator
The next question is from Tom Nikic of Wells Fargo. Please go ahead.
Tom Nikic -- Wells Fargo -- Analyst
Hey, good morning everyone. Thanks for taking my questions. I just wanted to followup on Under Armour a little bit. Ed, on the last couple of calls you've spoken about how you feel like the pipeline coming out of Baltimore is a little bit better. Could you just sort of give us any updates on your thoughts on the Under Armour pipeline and also your thoughts around the channel differentiation for that brand and if you think you're seeing better differentiation there?
Ed Stack -- Chairman and Chief Executive Officer
I think we're seeing better going forward as it relates to us. We've worked with Under Armour. We think things with Under Armour in our stores are getting better. We're enthusiastic about some of the plans we've got with Under Armour going forward, and we think the vast majority of this headwind will be behind us as we come out of the first quarter of next year. So, we're enthusiastic about some meaningful parts of the Under Armour business.
Tom Nikic -- Wells Fargo -- Analyst
All right. And one followup just on the cost side. Obviously retail wages, there's been a lot of inflation there the last couple years. How should we think about wage inflation for you guys in store staffing levels and just general sort of labor costs for your business?
Ed Stack -- Chairman and Chief Executive Officer
There's wage pressure for sure, and it's going to continue. We've got that baked into obviously what we're talking about for the fourth quarter, and we're layering in into our budget for next year, which we'll talk about at the end of the quarter. But there's definite wage pressure.
Tom Nikic -- Wells Fargo -- Analyst
All right. Thanks very much. Best of luck for the holiday.
Ed Stack -- Chairman and Chief Executive Officer
Thank you.
Operator
The next question is from Omar Saad of Evercore ISI. Please go ahead.
Omar Saad -- Evercore ISI -- Analyst
Thanks for taking my question. I wanted to ask a couple questions on digital. Last year you announced the new technology officer Paul Gaffney to lead the tech efforts. Would love an update on kind of some of the changes and opportunities he's made and opportunities he sees, changes you guys have made. I think you recently relaunched the new web platform. Maybe help us understand what some of the new capabilities are there, how you tie it into the app. Maybe just a deeper kind of update on what's going on digitally for you guys.
Lauren Hobart -- President
We are incredibly pleased with how we're doing from a digital standpoint, both from a technology standpoint in terms of...We mentioned last Q4 that we were digesting the new platform that had launched January of last year, and at peak volumes in Q4 we had had some issues last year. The technology team, under Paul's leadership, has worked incredibly hard to make the site incredibly resilient and stable, which is a gift that keeps on giving. And then in terms of speed of the site experience, check-out has been improved. And we think we have much more runway to go still to make the site an even better customer experience.
As we mentioned, we're working on the fulfillment aspect of it. The entire company is working on a digital first approach, and I would say that that's beyond technologies in the eCommerce team. It's in the marketing team where we're still spending significant amounts of our marketing investment in the digital channels to help drive both brick and mortar and the eCommerce sites. So, digital is an enormous focus, and we're very pleased with the progress we've made.
Omar Saad -- Evercore ISI -- Analyst
Okay, that's helpful. And one followup, if I may. Any update on the Rock shoe? We've seen Under Armour doing a lot of content in the digital ecosystems talking about that shoe. I think it's exclusive for you guys, but maybe you could just give us an update how you're thinking about that product?
Ed Stack -- Chairman and Chief Executive Officer
So, we're not going to give specifics to a particular product like that, but we're pleased with that, and we think there's a lot of runway on that shoe and the Rock.
Omar Saad -- Evercore ISI -- Analyst
Is it exclusive, Ed?
Ed Stack -- Chairman and Chief Executive Officer
It's not completely exclusive. There's some other people that have it. I mean, Under Armour has it on their on their site, but we're a big player in that.
Omar Saad -- Evercore ISI -- Analyst
Gotcha. Thanks. Good luck for the holiday.
Ed Stack -- Chairman and Chief Executive Officer
Thank you.
Operator
The next question is for Scot Ciccarelli of RBC. Please go ahead.
Jonathan Livers -- RBC Capital Markets -- Analyst
Thanks for taking my question. This is actually Jonathan Livers on for Scot this morning. I was wondering -- given the CapEx guidance has come down significantly, I was wondering if you could give some color around maybe you're store strategy 4Q and then just generally how you're thinking about it going into the next year? Thanks.
Lee Belitsky -- Chief Financial Officer
Well, we did bring down the CapEx forecast from $225 million to $165 million. There's about $40 million of timing differences in there where we thought we were going to get to some of those items kind of in the latter part of the fourth quarter, and they now look like they're going into the first quarter. That is about $20 million of savings there.
With respect to new store openings, we had guided some time ago that we would continue the slow pace of new store openings. We expect that to continue into next year. So, most of our CapEx going into next year are going to be around eCommerce fulfilment, technology, and more general technology around the eCommerce space, as well as some standard kind of refixturing programs that we do in our stores.
Jonathan Livers -- RBC Capital Markets -- Analyst
Gotha. That's very helpful. And just a quick followup if I could on the point you're making around eCommerce fulfilment. Is there a scenario in the future where you perhaps are no longer shipping from stores for eCommerce orders? Or is there always going to be some mix?
Lauren Hobart -- President
This is Lauren. We believe we will always have some mix, and getting that balance right is important. It allows us to open up our entire inventory to all of our customers and maximize availability. So, it's not something that we see going away.
Lee Belitsky -- Chief Financial Officer
Also when we get into the peak holiday seasons, it allows us to maintain the shorter shipping windows. As we get these big surges of business between Thanksgiving and Cyber Monday, it's hard to handle out of a couple of buildings. So, having all 800 locations shipping allows us to get the orders to the customers faster.
Jonathan Livers -- RBC Capital Markets -- Analyst
Understood. Thank you very much and good luck this holiday season.
Lauren Hobart -- President
Thank you.
Operator
The next question is from Sam Poser of Susquehanna. Please go ahead.
Sam Poser -- Susquehanna -- Analyst
Thank you for taking my questions. Most have been answered. I do want to ask you about sort of like how you're handling some of the more apparel -- some of the more fashion versus function apparel, because a lot of these sort of more heritage brands are coming back. But I wanted to see if you were participating in that.
Ed Stack -- Chairman and Chief Executive Officer
We are with some. I mean, the Champion brand has been great. We've got the Champion brand in. It's been terrific. We think that will grow pretty significantly going forward. We've got some work that we're doing with Puma. I know that we're not doing a lot right now, but the team is talking with Fila. So, there's a fashion component of this that we'll play in. We'll be careful with the fashion side. We're really focused on that authentic enthusiast athlete, as we've always been. But that athlete's looking for a little bit more fashion product, and we've got it from those brands. And then Nike, Adidas -- we are really happy about the assortment we see coming in from Nike going forward.
Sam Poser -- Susquehanna -- Analyst
Thank you. And then just two other housekeeping. What share counts do you have sort of assumed in the guidance now? And secondly, what's the tax rates that you have with the guidance.
Lee Belitsky -- Chief Financial Officer
Hold on a moment. Sam, can we follow up with you on that in a call a little bit later?
Sam Poser -- Susquehanna -- Analyst
Sure. Thank you.
Lee Belitsky -- Chief Financial Officer
No problem.
Operator
The next question is from Joe Feldman of Telsey Advisory Group. Please go ahead.
Joe Feldman -- Telsey Advisory Group -- Analyst
Hi guys, good morning. I wanted to ask you about tariffs, I guess. Are you seeing any impact there? Or how are you planning for it? And is that why inventory -- did you accelerate some inventory because of the constraints on the freight coming overseas, or anything related to that would be helpful?
Lee Belitsky -- Chief Financial Officer
There's a little bit of accelerated freight coming in for January. There's not really much of anything to speak of for the November quarter. As of right now, the tariffs are concentrated in our hardline areas that we've got. There's been some devaluation of the yuan since the tariffs have announced. We're going to attack it a number of different ways. We've got a little bit of better pricing we can get out of China to offset some of that. We'll be negotiating with our vendors to absorb some of that, and some of it will come through and we'll have to, in some cases, raise our prices to our customers along the way. But that will play out over the course of the year next year. It's kind of hard to determine what impact it'll have right now on sales or profitability at this point.
Joe Feldman -- Telsey Advisory Group -- Analyst
And can you remind us what your exposure is to the current tariffs?
Lee Belitsky -- Chief Financial Officer
We haven't specifically guided to that. A lot of it has to do with how our brands are going to handle it. We obviously know about it with respect to our own private brands and what we've got there, and it's not --based on the tariffs that are in place right now, it's not meaningful for next year for us. But again, it's going to come down to the negotiations with the brands and the factories going forward to determine the impact.
Joe Feldman -- Telsey Advisory Group -- Analyst
That's helpful, thanks. And if I can follow up with one other one. Given what you've been removing with the hunt category, and I understand the expansion of some of those other baseball and Team Sport or licensed apparel, and it may be too early to say this, but are you guys rethinking the box at all in terms of the size of the box? Or are you still pretty comfortable with it and maybe you just flex the different categories to still fill it and you still get the productivity that you would normally get out of that box?
Lee Belitsky -- Chief Financial Officer
We feel pretty comfortable with the box that we have -- the size of the box we have right now. As we take out the hunt piece and test this, there were categories that we felt were constrained, such as the Team Sports area. Baseball is one in particular. The license business is another category that we feel that we've got a big upside with, that we just haven't been able to provide enough space to. In key cold weather markets, northern markets, that outerwear category we think we've got the ability to expand there and provide a better offering to the athletes in that category. So, to answer your question, we're comfortable with the size of the box.
Joe Feldman -- Telsey Advisory Group -- Analyst
Thank you, and good luck with this holiday period.
Lee Belitsky -- Chief Financial Officer
Thank you.
Operator
The next question is from Matt McClintock of Barclays. Please go ahead.
Matt McClintock -- Barclays -- Analyst
Hi, good morning everyone, and thanks for taking my question. Ed, I was wondering if we could focus on CALIA for a second, because it's been a couple of years, or several years now of pretty positive comments that you've given to the brand. As we look forward now after several years of that type of growth, what are the main growth drivers for the brand? Is it expanded assortment? Is it new innovation? Is it better style? Or is it just increased brand awareness? Thanks.
Ed Stack -- Chairman and Chief Executive Officer
There's a whole bunch...We continue to be really excited about CALIA, and the genesis of CALIA was really from Lauren and her team. I'm going to let her answer that question for you.
Lauren Hobart -- President
CALIA has been an incredible success story, and we have been talking about it, and we keep finding new ways to grow the brand. It's been getting into new categories. We have plans in the future to keep going in terms of expansion of the type of product that we drive. And we think the brand relevancy also just continues to grow. As a heavy user of the product myself, the product itself is beloved by people who wear it. And so, it's doing its own job of just driving incredible loyalty. You should give it as a gift and you'll see. It's a fabulous product -- it's just a fabulous product.
Matt McClintock -- Barclays -- Analyst
Thank you very much for the color.
Operator
The next question is from John Kernan of Cowen. Please go ahead.
John Kernan -- Cowen -- Analyst
All right, good morning guys. Thanks for squeezing me in and taking my question. Lauren, can you talk to the drivers -- what would drive the operating margin on the eCommerce business higher and more in line with stores at this point? We know it's gross margin a little. Just wondering as you make investments in fulfillment and other areas, is there an opportunity for this rapidly growing part of your business to become more profitable?
Lauren Hobart -- President
There absolutely is, and we're working on profitability. Part of the reason for taking the site in house was that we control our experience, and the other part was that we get much more leverage as we grow. So, we are very focused on eCom profitability. There are shifts, as we mentioned earlier, in terms of where expense goes, into gross margin versus SG&A, but overall we look at this business as highly profitable, increasing in profitability, and we do maintain a really indifferent look when we look between stores sales and eCom sales. We don't have a preference for where they come in.
John Kernan -- Cowen -- Analyst
Okay. And then, Lee, just a followup on the CapEx question. It sounds like there are some shifts out of this year into next year, but can you help us understand what you think is a steady run rate or maintenance CapEx level going forward as store growth slows? Because obviously going from where you were last year to where you're guiding this year, it's a big boost to free cash flow. You could be generating almost over $400 million in free cash flow this year. So, I'm just wondering is this CapEx run rate going forward more sustainable?
Lee Belitsky -- Chief Financial Officer
It's probably a little bit low this year, but it's much closer to this year's levels than certainly last year.
John Kernan -- Cowen -- Analyst
Got it. All right, thank you.
Operator
The next question is from Adrienne Yih of Wolfe Research. Please go ahead.
Adrienne Yih -- Wolfe Research -- Analyst
Good morning. Thanks for taking my question, as well. I was wondering if you could talk about the real estate portfolio, or actually just in general rent over the next year. How many lease options do you actually have coming up over the next three years, so just trends on that line item? And then similarly with regard to cost inflation, on freight pressure, are you seeing during the fourth quarter and then heading into first quarter increases in shipping and air rates? Thank you very much.
Lee Belitsky --
