DICK'S Sporting Goods Inc (DKS) 2002 Q3 法說會逐字稿

Good morning. All participants will be in a listen-only mode until the question-and-answer session of the call. And welcome to the Galyan’s third quarter 2002 earnings conference call. At the request of Galyan’s Trading the call is being recorded today. If anyone has any objections, please disconnect at this time.

I would now like to introduce your moderator, Mr. Ed Wozniak. Sir, you may begin when ready.

Thank you. Good morning and thank you all for joining us on the Galyan’s third quarter 2002 conference call. I’m Ed Wozniak, the CFO of the Company, and with me is Bob Mang, CEO and Chairman of the Company.

Before we start our prepared remarks I would like to comment briefly on forward-looking statements. The information in today’s press release, this call, and Webcast contain certain forward-looking statements, which reflect Galyan’s Trading Company Inc.’s current view of future events and financial performance. For these statements we claim the protection for the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, which could cause the Company’s future results of operations to differ materially from historical results or current expectations. The risks and uncertainties, which could cause results to differ materially from those expressed in the forward-looking statements, including the risks involved in the opening of new stores, are described in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

At this point I would like to turn the call over to Bob Mang, CEO and Chairman of the Company.

Thanks Ed, and good morning everyone. I’d like to start by welcoming everyone to Galyan’s third quarter 2002 conference call. I’ll begin by reviewing our third quarter performance, go over our strategy, and then we will also provide a framework for our outlook for the 2002 fourth quarter.

We’re pleased to report Galyan’s achieved solid operating results for the third quarter of 2002. We sustained a loss of nine cents per share on a fully diluted basis, which falls at the mid-point of the Company’s guidance of eight to 10 cents per fully diluted share. This compares to a loss of one cent for the same period a year ago. The increased loss is predominantly due to investments we have made in the future of the business, including increased pre-opening and marketing expenses resulting from more store openings this quarter versus the same quarter a year ago.

Net sales increased 23.7 percent to $129.8 million from $104.9 million a year ago. As to performance by business segment, we continue to see very healthy performance in our athletic footwear and apparel categories, in fact we believe better than anyone else in the industry. Our accessories business is also performing very well. Further, we’re pleased to report our ski business is off to an early and very good start.

Negatively impacting the quarter, outdoor categories experienced extreme growth in the third quarter of last year after the events of September 11th and presented tough comps. Additionally, the hunting category has suffered in 2002 due to an outbreak of chronic waste disease affecting wildlife in several important states, and there’s a reference to the chronic waste disease issue in today’s issue of USA Today for anybody who is interested.

Our comparable store sales for the third quarter declined 2.2 percent. Again, the declines in hunting, camping, and outerwear offset gains in athletic footwear, athletic apparel, fitness accessories, and ski equipment.

I’d like to take this opportunity to comment on store activity during the quarter. Our Greenwood, Indiana, store was struck by a tornado on September 20th and was severely damaged. Due to swift and decisive actions by our employees, there were no injuries to any of our customers or employees who were in the store at the time. Since that date the store has been closed and we have removed it from both comp store sales figures from that date as well. Both third quarter and year-to-date sales have been impacted by an estimated $1.6 million of lost sales due to the closing of this store. Had the store not been damaged and closed, Galyan’s sales would have been approximately $131.4 million for the third quarter, comfortably within the Company’s previously stated guidance of $130–$136 million.

We are pleased to have opened all nine of our planned stores for fiscal 2002. During the third quarter, we opened five stores. The locations of these new stores are Arlington, Texas in the Dallas market; Colorado Springs in Colorado; Geneva, Illinois in the Chicago market; St. Louis, Missouri; and Henderson, Nevada in the Las Vegas market.

We are very excited about our one fourth-quarter opening, which just took place this past week in Danvers, Massachusetts in the Boston market. The Boston market has consumers that we’re looking for, people who are passionate about their outdoor activities, like skiing, hiking, and camping, as well as the sports-based life. With our breadth and depth of products, we’re presenting a much needed shopping experience in this market.

Looking ahead to 2003, we expect to continue our strategy of opening new stores in markets that we feel present tremendous opportunities for us. To that end we are planning to open nine stores in the next year. Financing for these new stores has already been secured and we have executed eight leases to date. These nine new stores will allow us to further penetrate existing markets as well as bring the Galyan’s shopping experience to some brand new markets. In 2003 Galyan’s will enter the Cleveland, Ohio market; Richmond, Virginia; Omaha, Nebraska; the New Jersey market; and Peoria, Illinois. And we will extend our reach in the key market of Chicago where we will open two additional stores, bringing our total presence in that market to six stores.

We are also replacing our Greenwood, Indiana store with an 80,000 square foot, two-level prototype store. This store will be located in both — these stores — the new stores will be located in both malls and lifestyle centers. Our expansion program will be executed within the parameters of our current capital structure and within our financial capacity to open additional stores.

Our long-term strategy of providing everyday value pricing and interactive and fun-to-shop store environment, highly trained sales associates, superior customer service, and competitively dominant merchandise assortments has enable us not to get dragged into significant discount and promotional activities that have driven sales by some of our — in some of our competitors.

We are proud of our growth in sales and in our profits, especially keeping in mind the less-than-favorable macro environment in which we have had to operate. For the 2002 fourth quarter, we are up against some weak comps from last year when we saw a negative 3.8 percent in the 2001 fourth quarter that was a result of an exceptionally warm winter. We believe we are extremely well positioned moving into the fourth quarter.

If the trends we have seen with both traffic and transactions over the past several weeks continue, we expect a healthy performance in the fourth quarter. Even in this current environment, we believe our strategy of providing a broad and deep selection of merchandise, larger stores with an exciting and interactive experience, superior customer service, everyday low pricing, and by being much more than a sporting goods retailer, allow us to remain on track to deliver EPS growth of 25 percent.

We continue to monitor and review our results on a daily, weekly, monthly, and quarterly basis and continue to implement strong financial controls. We’re committed to running our business with an eye on both growth and financial responsibility. We firmly believe in our concept and the unique Galyan’s shopping experience, as well as our ability and commitment to deliver long-term value to our shareholders.

I’d like to now turn the call back to Ed who will go through the financials.

Thanks Bob. My comments will cover our financial results for the third quarter and guidance for the fourth quarter and full-year ’02.

The third quarter gross margin was flat to last year at 27.7 percent, and that is consistent with our third-quarter Company guidance. SG&A was 29.2 percent of sales, compared to 27.6 percent last year, an increase of 160 basis points. Total marketing was up 90 basis points, primarily in support of more stores this year. And as the press release indicated, the year-over-year increase of approximately $1.9 million translated to about six cents per share.

Pre-opening was up approximately 70 basis points, with five new stores this year versus three last year, and again, as indicated in the press release, the year-over-year increase of approximately $1.3 million translates to about four cents a share. Therefore, the total of marketing and pre-opening increase of 10 cents a share more than explains the total EPS change — year-over-year EPS change of eight cents.

Also included in SG&A are insurance proceeds to offset the estimated loss of Greenwood’s direct store profit. SG&A expenses were tightly managed in the third quarter in a challenging sales environment. In terms of dollars spending, our actual results were at the low end of the Company’s guidance.

Interest expense for the third quarter was below our guidance due to the flow of receipts, the timing of capital spending, and our overall working capital management. For the nine months, gross margin was 28.6 percent of sales versus 28.2 percent last year, an increase of 40 basis points, primarily due to leveraging the cost components of buying, occupancy, and distribution.

SG&A was 27.4 percent of sales compared to 26.5 percent last year, an increase of 90 basis points. Total marketing was up 50 basis points, again primarily in support of new stores. And pre-open was up 30 basis points, supporting nine new stores this year versus five last year.

One of the key assets of the Company is a strong balance sheet, which is again the case at the end of third quarter. Inventory requires a little explanation.

The total balance sheet reflects an increase of 33.2 percent year over year. However, we think to properly understand the operational change you need to measure inventory turnover for the third quarter based on stores opened for the entire quarter in both years. Inventory for the five stores that we opened in the third quarter and the one store that we just opened in the fourth quarter this year was $27.1 million this year, compared to three new stores in the third quarter of last year, which carried a total inventory of $15 million. That’s a year-over-year increase of $12.1 million. Making this adjustment would result in a year-over-year inventory of 27.8 percent. Inventory turnover for the quarter would be .59 this year compared to .62 last year, and inventory per gross square foot for all stores opened at quarter end was up approximately three percent year over year.

Given the challenging retail environment and the complications of the West Coast dock strike, Galyan’s managed inventory levels and flow of receipts in an exceptional manner during the third quarter.

Working capital for nine months decreased from 27.3 percent of sales in 2001 to 22.1 percent this year. At the end of the third quarter we had excess availability on our credit line of approximately 66 percent after giving effect for outstanding Letters of Credit. The third quarter represents the Company’s highest levels of working capital in preparation for the fourth quarter selling season. We’ve remained well within our financial capacity to fund our growth.

Regarding new store performance and financing, we’ve signed eight leases for new stores to open in ’03. We’ve obtained land or financing for six of these eight stores and the average contribution is approximately 50 percent. Two stores have no landlord contribution and will be funded totally by the Company.

Regarding new store productivity, as evidenced by the new store productivity metric I believe we are all familiar with, our new store performance in the third quarter demonstrated significant improvement from the second quarter. New store productivity registered a healthy 93 percent for the quarter. Every new store is contributing incremental EBITDA dollars to the bottom line, which will leverage our existing infrastructure and contribute to higher operating results and margins in the future.

Regarding other operating metrics, transaction growth continues to outpace sales growth. For the third quarter, sales were up 23.7 percent; our transaction growth was up 26.6 percent, a 2.9 percentage point increase. Average sale is $59.83 for the quarter versus $61.22 for the same period last year, a decrease of about two percent. The average unit retail was also down about two percent, while units per transaction remained essentially flat. The average sale and average unit retail were down due to big-ticket items, although we did see strength building in the third quarter with fitness equipment and table games.

At the end of the third quarter, our gross square footage in the chain was 2,889,000 gross square feet, and 2,244,000 for selling square feet. And both of those statistics exclude the Greenwood store, which was approximately 42,000 gross and 37,000 selling square feet.

In terms of future guidance, the economic and retail environments remain challenging and uncertain. These are also times where world events could have a significant impact on our economy and the performance of all retailing. We are also faced with a shortened Christmas selling season this year, which could have a negative impact on consumer spending.

On the positive side, we have seen improving trends in our business and we have the favorable comparison of last year’s record warm winter.

Given these factors and the overall assumption that the economy and retail climate do not weaken, we expect the fourth quarter to produce sales in the range of $215–$220 million, recognizing the loss of the Greenwood store and our third quarter sales results versus our original expectations for the quarter. We see comp sales flat to the minus low single-digit range. We see gross margin leverage of approximately 60–70 basis points, and we expect SG&A leverage of approximately 70–80 basis points, including the impact of insurance proceeds for the Greenwood store.

We expect interest expense in the range of about $700,000; fully diluted shares outstanding approximately 17.4 million; and effective tax rate of 41 percent.

All of this translates to EPS guidance in the range of 97 cents to $1.01 per share on a fully diluted basis, which is consistent with our previous guidance. While we have adjusted our sales and comp expectations for the fourth quarter from the guidance we gave you last quarter, we remain comfortable in our ability to deliver the EPS.

Our fourth quarter guidance will translate to full-year results of sales between $600–$605 million, comps essentially flat to last year, gross margin improvement in the range of 40–50 basis points, and higher SG&A in the range of 20–30 basis points. And that will translate to an EPS range for the year of $1.09–$1.13 per share, again, on a fully diluted basis.

In wrapping up the quarter, we achieved what we expected. Both sales and earnings were within the range of our guidance. What’s important is the future. We have realistic expectations of the fourth quarter, given the difficulties and uncertainties we have mentioned. Our inventory is in great shape and our stores look terrific. We are optimistic about the future to become the premier sports and outdoor adventure active lifestyle retailer and we plan to accomplish our growth into fiscal ’03 and beyond within the parameters of our current capital structure and within our financial capacity to open new stores.

We’d like to now open it up to Q&A.

Thank you. At this time we are ready to begin the question-and-answer session of the call. If you would like to ask a question, please press star, one, on your touchtone phone. You will be announced prior to asking your question. Once again, to ask a question, please press star, one, now.

Our first question comes from Matt Fassler.

Thanks a lot and good morning. I’d like to focus my questions on two issues. First of all, I want to delve into a little more detail into the inventory numbers. You talked about the three percent increase in inventory per square foot. Sales per square foot, I think, were down three or four percent. Can you talk a little more specifically about the role of the dock strike at driving your in-stock position, and, you know, in addition to the reality of the new stores, you know, where you feel you might be heavy, and if in fact you are heavy to your plan going into the fourth quarter?

Matt, it’s Ed. The dock strike resulted in us having to make some adjustments on advertised items that just weren’t going to make it in time. I think the flow of receipts in some cases was earlier where vendors took in product early that was available and we took it in, and others were late. And we reacted throughout the third quarter to bring in merchandise as soon as we could. And where you can analyze this thing to death and come up with all kinds of different things year over year, we certainly made a conscious decision to bring a lot of our outerwear in early, in earlier from our plans and earlier from last year.

It did not have a material impact on our business because we really made the adjustments. I think what’s really important here is the fact that we are set for the fourth quarter. Our inventory is in line with our sales expectations, and I think the inventory of the third quarter is just a snapshot in time. But we feel very good about our position, our currency levels, and our ability to have good sell-throughs in the fourth quarter.

Was the inventory high versus your plan?

Slightly.

OK. Second question, on the expense front, if you could delve into a little more detail on the marketing spend. Obviously, you know, if it’s just pre-opening, just structurally was going to be there, like it or not, this was the driver of the negative expense leverage. Can you talk in a little more detail about how you spent that money and what the prospects are for that kind of spend to be recurring, be it in the fourth quarter or out into next year?

Matt, this is Bob. There are a couple of things on the marketing front that really you need to be aware of. One is, as we move into single-store markets, you know, there’s a higher marketing cost in those markets.

Secondly, the expansion of our marketing thrust beyond the cap portion of it into direct to the consumer has been an upfront spend and we’ve actually gotten very, very good response rates by layering in that element. We’ve now grown our preferred customer base from last year’s half-a-million customers to well over a million, and marketing directed to those people at a high incremental cost, but a very good investment in the future of the Company.

Seventy-five to 80 percent of the marketing increase is in support of the new stores. The balance of it is in support of extending our preferred customer program, which we know, particularly in the fourth quarter, should pay very good dividends for us.

Right. And do you see — I guess two follow-ups — do you see that investment in new stores continuing and will that continue to ratchet up the cost structure?

You know where we open in single-store markets and when you look at next year, we have a number of stores that we’re opening in single-store markets. We’ll continue to see that. But I think, you know, on the other side of the coin we’ll start to reap the benefits of the direct marketing programs where we have the high response rates and the more targeted programs that we’ve put in place in marketing. So, I think one will offset the other.

Sure.

And we look at, as we go forward, our net media expense flattening out into ’03.

OK. And then, my second follow-up, if you look at the fourth quarter guidance that you gave, based on Ed’s comments, you would look for expenses to be up, you know, 20–22 percent in dollars on a year-to-year basis. Over the first nine months of the year they were up by 29 percent. You had one opening this year in the fourth quarter versus none last year. That can make — that actually hurts the expense compare a little bit, so it seems like you’re planning for a sharp deceleration in expense growth. Can you talk about how that math works out? Why you’re confident with a slower expense increase on a parallel sales increase essentially, or rather how are you going to keep the expense increase down on a parallel expense increase?

Matt, I think it’s more the top line. I mean, look at the sales contribution of the fourth quarter compared to the other quarters. And you think about, you know, the base level of payroll in a store, the fixed rent, the fixed payroll expenses in the home office, the fourth quarter is where we leverage these expenses to a very high degree. We’ve also got the bulk of the pre-opening behind us. There will only be some pre-opening expenses in the fourth quarter for Danvers, so it’s the way those flowed as well, so I really think you have to isolate that item specifically.

But I think it’s really the leveraging aspect and I think, again, when we get the sales in the top line, we have the ability to leverage this infrastructure to a very significant degree.

OK, thanks a lot.

Our next question comes from Dana Cohen:

Yes, hi guys. A couple of questions, it sounds like you may have [indiscernible] expectation here slightly for the fourth quarter and I’m just wondering, you know, we all know the macro issues, but on the other hand it sounds like business is a bit better and I’d just like to get behind your thoughts here.

Dana, again I think it’s our posture to be as realistic as we can and to put expectations in front of you and the investors that we feel comfortable with. I think there are three factors: (1) The Greenwood store is not with us, so right off the top you’ve got to adjust for that from the previous guidance. That’s not going to affect comp, but it’ll affect top line sales; (2) Our performance versus our guidance in the third quarter was at the low end of the range, so we took that into account as well; and, (3) I think it’s just the total uncertainty out there. It’s a very difficult environment to predict, but we feel comfortable with the way our inventory is positioned and the way we’re set for the fourth quarter, that we’ll get our share of business. But it’s very difficult. There are events that could take place that could just put everything on hold.

So, I just — yeah, we did take them down and I did comment to those, but again, we feel very comfortable that we can, you know, leverage the expense structure to deliver the earnings.

And then, what do you see happening on the promotional front here?

No change.

OK, great! Thanks.

Our next question comes from [Brian Trystrom].

Thank you. A couple of quick questions, your comments on the ski area, is the ski strong across the country for you, or is it specific to any region?

Oh, was it ski?

Yes.

We didn’t hear the question Brian.

Can you ask it again?

Sure. I think you had mentioned that ski and winter sports were doing well for you this fall. Is that across the country or is regionally at all?

No, no, it’s across the country.

Alright! The second question, on the chronic waste disease, I would assume that your hardest hit stores were Minneapolis and Chicago.

And out west.

Yes, and out west.

So that was going to be a follow-on question. Even though our west has had chronic wasting for 20 years, they saw a negative impact of all the publicity coming here out in the east from that? Is that a fair assessment?

Yes, and, you know, it’s at epidemic proportions.

And out of curiosity, were the comps in hunting worse in Chicago than they were in Minneapolis, because I would assume the Chicago hunters hit Wisconsin?

You know we really don’t get into that kind of specific detail for competitive reasons, but it’s fair to say that Chicago and the Minneapolis markets were affected.

OK, thank you very much.

Our next question comes from Richard [Kyme].

Hi. Most of my questions have been answered, but one I did have was you gave sort of long-term guidance at 25 percent growth and if you took that 25 percent growth, I was wondering if that is applicable to next year.

Yes.

Absolutely.

Right, OK. So you’re — so we’d be talking minimum, you know, what, $1.36 next year as the low guidance figure? Is that fair?

In that range.

Thank you.

At this time I’m showing no further questions. I’ll turn the call back over to you, sir.

OK. Well, we thank you all for participating on the call and we’re certainly available to answer further questions and look forward to talking to you at the end of the fourth quarter. Thank you.

That concludes today’s call. You may disconnect at this time.