DICK'S Sporting Goods Inc (DKS) 2002 Q4 法說會逐字稿

Good morning and welcome to the Galyan's fourth quarter 2002 earnings conference call. All participants will be able to listen-only until the formal question and answer session. At that time you will be instructed on how to ask a question. This conference call is being recorded. Should anyone have an objection, please disconnect at this time.

I would now like to introduce your host for today, Mr. Ed Wozniak, chief financial officer of Galyan's. Sir, you may begin.

Good morning and thank you for joining us on our fourth quarter and fiscal year 2000 conference call.

Before we start our prepared remarks, I would like to briefly comment on forward-looking statements. The information in today's press release, this call and the webcast contain certain forward-looking statements which reflect Galyan Trading Company's current view of future events and financial performance. For these statements we claim the protection of 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 are described in the company's form 10-K filed with the Securities and Exchange Commission for the year ended February 2, 2002. 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.

Also, please keep in mind on this call when we discuss fourth quarter and full year results we are referring to our fiscal year which ended February 1, 2003.

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

Thank you, Ed, and good morning.

I would like to start by welcoming everyone to Galyan's conference call for the fourth quarter and fiscal year 2002. We are pleased with Galyan's performance, particularly given the continued challenges facing the retail sector and global economy. While we have seen pervasive weakness in consumer sentiment which has been affecting consumer spending, we have run the business efficiently and have achieved record bottom line results -- at the same time, continuing to position the company for long-term success by executing our plan for new store openings in both established and key new markets.

Expanding the company's footprint and reach is a long-term goal and one that we expect will deliver results for Galyan's, despite the short-term challenges posed by the struggling economy as well as any potential geopolitical overhangs.

As we reported in early February, net sales rose to $212.4 million, up 21.4% in the fourth quarter while comparable store sales for the fourth quarter of 2002 declined 1.4%, with 25 stores used in the comp store comparison, excluding the one store closing as a result of tornado damage.

For the year, net sales increased 23.9% on sales of $597.7 million. Comp store sales increased one half of 1% year-over-year. On a GAAP basis for the fiscal year 2002, earnings per-share on a fully diluted basis were $1.09, which represents an increase of 26.7% versus the 86-cent pro forma reported last year. It's important here to note that this year's figure is on a GAAP basis, while 2001's figure was on a pro forma basis due to several adjustments in fiscal 2001 related to the initial public offering.

Looking back on the full year of fiscal 2002, sales were driven by the winter sports athletic apparel, athletic footwear and accessories categories. Those trends were offset to some degree by tough sales in casual apparel and footwear. Strong performance in the Indianapolis, Ohio, D.C. and Atlanta markets were mitigated by difficulty in Minnesota, Denver and Kansas City.

In fiscal 2002, we opened nine new stores bringing our total at year-end 2002 to 34 stores in 17 states. We are extremely excited about our progress in expanding the company's footprint to new and key markets around the country. Among our nine stores opening in 2002, Galyan's opened its doors in the Boston and Las Vegas markets as well as the St. Louis market, while expanding our presence in Chicago, Denver and Dallas.

2003 will bring the Galyan's experience to the New York City market with two stores, as well as first entries in Cleveland, Richmond, Omaha and Peoria. Two additional stores in the Chicago market are planned as well bringing our Chicago store count to six. The ninth new store will replace our store in Greenwood, Indiana, that was struck by a tornado on September 20th of 2002.

By the end of 2002, our nine new stores, excluding the one store closing as a result of a tornado added 727,000 gross square feet to our store base. Our nine planned stores in 2003 would increase that total by 773,000 square feet. We continue to believe in our unique business model and the success we feel our concept will bring. It is our goal to be recognized as the premier active lifestyle retailer and our ability to grow our business and expand our reach has us off and running.

We believe in providing an unmatched combination of merchandise depth and breadth, superior customer service, everyday value pricing and most importantly a large, dramatic and interactive shopping experience. While the competitive and operating environment has been pressured by economic and political factors, at Galyan's we have remained focused on running and growing the business efficiently, expanding into new key markets and achieving our long-term vision.

We believe Galyan's will continue on this growth trajectory, capitalizing on our recognition as the most compelling concept in sports and outdoor adventure.

Now I'm going to turn the call back over to Ed Wozniak, who will review the financial results in detail.

Thanks, Bob.

For the fourth quarter, gross margin increased to 33.6% of sales, up 50 basis points from last year, driven equally by improved merchandise margins and leveraging the cross components. For the fourth quarter, SG&A was 20.2% of sales compared to 20.8% in the fourth quarter of '01, a 60 basis point improvement. SG&A dollar spending was favorable to company guidance. SG&A reflects payroll leverage more than offsetting increases in other expense areas including health insurance. Greenwood insurance proceeds accounted for approximately 50 basis points of leverage and marketing spending was up approximately 20 basis points.

Operating margin was up 120 basis points over the prior year to 13.4% for the quarter versus 12.2% last year. Galyan's had significant improvement in the fourth quarter as you measure our performance on operating profit dollars and margin. For fiscal year 2000, gross margin increased to 30.4% of sales, up 40 basis points from last year. Most of the increase was from leveraging the cross components.

For the fiscal year, SG&A was 24.8% of sales, up 30 basis points from 24.5% last year. Marketing was up approximately 40 basis points. Pre-open was up approximately 20 basis points reflecting nine new stores this year versus five last year. Greenwood insurance proceeds for the year accounted for approximately 20 basis points and payroll produced approximately 40 basis points of favorable leverage for the year.

Operating margin was flat to last year at 5.5% of sales and interest expense was favorable of 110 basis points reflecting the full year benefit in fiscal '02 from our IPO proceeds.

Regarding the balance sheet. First inventory, on a reported balance sheet basis, inventory was up 24.3% year-over-year compared to total year sales increase of 23.9%. However, it is important to understand that when you adjust reported balance sheet inventory to exclude both inventory for new stores not open at the end of the period and in transit inventory, total inventory would have increased 21.5%.

Additional inventory metrics for the year are as follows -- inventory turnover on a reported basis was 2.84 times this year versus 2.96 times last year; however, if you adjust inventory turnover, excluding new stores and in transit, this year would have been 3.01 times, last year 3.04 times essentially flat performance.

Regarding inventory per store for stores open at the end of each period -- on a reported basis this year, inventory per store was 4.1 million versus 4.3 million last year -- a 5% reduction. Adjusting this statistic would have resulted in a 10% reduction. Inventory for gross square foot was $46.83 this year on a reported basis versus $49.90 last year, a 6% reduction, and again adjusting it for new stores and in transit inventory, that reduction would have been 8%.

As we mentioned in the press release, our aging improved by over 400 basis points from last year. Our ability to improve gross margin in a challenging sales environment is a testimony to our ability to successfully manage our inventory. Working capital as a percent of sales was 9.1% in fiscal '02 compared to 10.8% in fiscal '01, reflecting ewe strong year of working capital management.

At year-end we had no outstanding commitments on our credit line other than letters of credit. As you all know, our current facility of 160 million expires in May of 2004. With favorable marketing conditions, we are now working with an extremely strong bank group with the objective of putting in place a new credit facility that will significantly expand our funding capacity and bridge the time required for the company to achieve self-funding status at our current rate of growth. We expect this new facility to be in place no later than the end of the second quarter.

Regarding new store openings and performance -- in fiscal '02 we opened nine new stores. Eight of those stores received a landlord contribution which averaged approximately 15% -- 50%. In fiscal '03 we plan to open nine new stores for which we have nine signed leases. Six of the nine stores will receive a landlord contribution that again averages approximately 50%.

New store productivity for fiscal '02 was almost 91% which was in line with our previous guidance. All stores were profitable in fiscal '02 on a four wall EBIT basis and stores opened in fiscal '01 and fiscal '02 as a group produced EBITDA margins in the mid teens consistent with our new store expectations.

Regarding other operating metrics, transaction growth continued to outpace sales growth. Sales was up in the fourth quarter 21.4%, transaction growth was up 25.7%. Our average sale for the quarter was $62.39, down approximately 3% from last year. Our average unit retail was $24.89, again down 3% versus last year, units per transaction remained flat at 2.5. Our average sale on average unit retail were down reflecting pressure on big ticket items.

At the end of the fourth quarter, we had gross square feet of 2,968,000 and selling square feet of 2,278,000. And both of these metrics exclude the old Greenwood store which was approximately 42,000 gross and 37,000 selling square feet.

Regarding guidance, we're operating in a very difficult environment with a lot of uncertainty. We gave you our current expectation of first quarter and full year fiscal '03 guidance in this morning's press release. The major factors being, for the full year '03, sales in the range of 740 to 750 million, comps essentially flat, and operating margin plus or minus 10 basis points, which would translate to EPS between $1.25 and $1.30 for the year. For the first quarter of '02, we are currently forecasting an EPS loss between eight and 12 cents per-share and we are not giving specific sales guidance for the first quarter and we can give no assurance that this guidance will prove correct.

Additional guidance for '03 is as follows -- fiscal '03 capital spending is forecasted to be between 85 and $90 million. Three of the nine new stores have no landlord financing in fiscal '03 versus only one last year. But all three of these stores are in excellent locations and meet the company's return on invested capital expectations. Spending on '04 stores is included in this year's spending as well. Some of our real estate is slightly more expensive but we feel we have excellent locations for our new store openings in '03. And we are also planning this year some remodeling spending on our older stores which is new for us this year.

Depreciation for the year estimated to be between 23 and $24 million. New store openings by quarter -- first quarter, two new stores; second quarter, one; third quarter, six.

And a final point on guidance, our '03 guidance does not give effect to the EITF 02-16 which will be adopted by the company in the first quarter of '03 and may require the company to record some of its co-op advertising as a reduction to cost of sales rather than a reduction to marketing expense.

In closing, we again delivered expected results. We have and will continue to operate the company on strong financial disciplines. Our balance sheet remains solid and our cash flow is improving. Fiscal '02 EBITDA was over $50 million and fiscal '03 guidance is between 63 and 65 million. The result of all this is that we are well-positioned to fund our future growth.

Operator, we would like to turn the call over to Q and A.

Thank you. At this time we're ready for the Q and A session. If you would like to ask a question please press star one. If you're on a speakerphone please pick up the handset and remove the mute feature before pressing the appropriate keys. If anyone has a question, please press star one now. I will wait a moment for questions to register.

The first question comes from Brent Rystrom of Piper Jaffray.

Good morning and congratulations on a good job in a tough environment.

Thank you.

You mentioned Minneapolis being weak and I am curious, being located in Minneapolis, the Best Buy headquarters had to be just very tough on your - I guess it would be Richfield store?

That would be right.

Would that be the bulk of the problem that you had in Minneapolis or was it also somewhat the impact in hunting from chronic wasting?

The combination of the chronic waste disease issue in hunting, the weather which was particularly mild in Minneapolis this year, and the Richfield disruption with the Best Buy headquarters affecting our business in Minneapolis.

Could you qualify which one of those was the most important?

The disruption in Richfield.

Also, a question for you in regards to chronic wasting disease, it appears from what we can see watching other markets it has not really left the Wisconsin area. Is that your assessment as well, that it isn't really -- you have not seen anything spreading into Illinois or Indiana or anything like that?

You know, I think there is an awful lot of speculation about it, but it doesn't seem to be as big an issue in Illinois and Indiana as it is in Minnesota. But I think a lot of people in Wisconsin tend to go over and hunt in Minneapolis and it could have some affect there. We're not operating there yet but -

The stores you're opening in Omaha and Peoria, I know Peoria is a -- is it the first prototype of the small market store?

We actually have a 65,000 square foot model in the Indianapolis market and given its productivity, we felt that that would be a good model to test in a secondary type market like Peoria.

Is Omaha also one of those?

Omaha is not. Omaha is a two-level prototype store.

Okay. Well, thank you very much.

The next question comes from Dana Cohen from Banc of America Securities.

Hi everybody. Can you hear me?

Yes, we can, Dana.

Thanks. I just had to pick up. Can you just-- I know you just talked about Minneapolis but there was a number of cities you talked about as being tougher than the others. I think you mentioned Denver and Kansas City, was that correct?

Correct.

I mean, if you look at the cities in general and compare them with the cities that were better, is there a common theme to that?

Well, I think in Denver in particular you had a couple of issues -- one certainly again was the weather issue where in the East and to some degree in the Midwest we had a significantly colder winter than a year ago. In Denver we did not. Secondly, in Denver for the total year you had the affect of the fires. And third in Denver we think that the economy there is a little rougher given the high amount of technology business that is done in the Denver market.

You know, each market has got some of its own unique characteristics. Also as was mentioned earlier, the chronic waste issue in Colorado, that is probably the biggest state affected by chronic waste disease and, you know, that affects our Denver business.

Were there any competitive issues in any of these markets?

I think there is competitive issue in the Kansas City market in that with our penetration in the outdoor zone and the arrival of a formidable Cabella's competitor, we have seen some tough results in our outdoor business but as I mentioned earlier, our athletic business there continues to flourish.

Right. Okay, and then on the SG&A, it sounds like most of the leverage in the fourth quarter was this Greenwood insurance issue. Is that a fair assessment?

No, Dana. I think payroll was clearly the biggest leverage item in the fourth quarter. Greenwood was certainly significant in the quarter itself, 50 basis points is what we said earlier on the call, but I would tell you we leveraged payroll very well in the fourth quarter both stores and home office and distribution center.

Okay. And I guess the -- is the issue for '03 just so I can understand how you're budgeting, is it the delta in the comp that gets just sort of flattish give or take operating margin?

You're talking the year or the quarter?

For the year, because you're just giving an EPS for the first quarter. I'm trying to understand the leverage point is like -- is the flat operating margin sort of the difference between, you know, three comp and zero comp?

I think certainly that has an impact. You know, part of it is our continued investment in infrastructure, we are going to continue to spend on marketing. We think that is really paying us dividends today and in the long run and there are-- you know, we have a full year in '03 of this new planning and allocation organization that was established, you know, as we implemented JDA so we're getting some full year versus half year of SG&A. So it's a little bit of spending where we think it's prudent but also certainly the top line is a significant impact, and there is no way around that. More sales will certainly help the leverage.

So should we be thinking that you're getting negative leverage on SG&A on a flat comp?

Excluding investment spending, no. With the investment spending, maybe a little. And we will-- look, as we ratcheted fourth quarter this year on investment spending, we clearly saw the sales trends and adjusted accordingly and I think we're planning very realistically next year and we will do the same. If sales pick up we will invest where appropriate and if sales don't work out the way we think they should, we'll take a hard look at any discretionary products that we have and manage our payroll appropriately.

Your last question. You're opening up two new stores in the first quarter so you have inventory for those stores.

Right.

Didn't you open up two stores in the first quarter last year so shouldn't there be similar amounts of inventory on hand for those stores?

Yeah. It's similar but what we do is exclude the inventory, the sales and the cost of sales totally from the turnover calculation just to get it apples to apples. So, yes, there was. But there is clearly a difference in the timing of those openings because you have all the inventory and if the store is only open for a few weeks of a quarter it's just not a -- it's not an appropriate comparison. So when I adjust turnover, I'm taking out sales, cost of sales and inventory for the stores that weren't opened for the full quarter.

So you're doing it for both years?

Both years.

Got it. Okay. Thank you.

Yeah.

Once again, if anyone has a question, please press star one now.

The next question comes from Matt Fassler (ph) of Goldman Sachs.

Thanks a lot and good morning. A couple of questions if I could. First of all, as you think about the impact of weather on the quarter, particularly for gross margins, to what degree did you benefit from lower markdowns and higher IMU's this year in the fourth quarter? And as you think about your gross margins, specifically for the fourth quarter, as a launching pad for next year, is this the kind of margin that you can only hit with similarly -- similar weather conditions in the eastern part of the country or is it not a particularly tough comparison in your view?

Matt, let me start by maybe making a statement of the obvious. We engaged in a weather reporting service last year so that we could more accurately predict the flow of product into our stores and have the right merchandise in the right place at the right time and the right quantities, you know, at the right prices. And we had a -- what we thought was a very sound plan in terms of receiving outer wear in particular. We got very good results where the -- when the weather was favorable and clearly we didn't get as good of results where the weather was unfavorable and remember we had critical mass in a up couple of markets where we had unfavorable conditions in our stores in the Denver market and in the Minneapolis market.

But as important, there was a lot of panic at the beginning of November when the weather got cold and people who had preplanned breaking outerwear in the beginning of November broke it. JC Penny on the front page of their insert in early November had a major outerwear break with some pretty well-known brands that are in the outdoor zone, and Kohl's was aggressive as well in promoting outerwear early in November. And as you know, we don't run a sale beat in our business, but we do competitively price our product. So we responded to, you know, meet prices competitively frankly that were foolhardy on the part of some of our competitors that would have sold all that product in -- with the weather conditions that existed any way.

So that is --that to some degree affected our gross margin. You know, we -- we think that our -- on balance, you know, with the warm weather and with maybe a little bit different sales environment this year, our gross margins will be fine. But we're also taking a hard look at the kind of margin opportunity that might be available to us in outerwear so I'm comfortable that our margins will continue to be in good shape.

Got you. My next set of questions are really for Ed. I guess the first biggest picture question is sort of a follow-up on the question that Dana asked for the year but I would like to ask it for the first quarter. Given the decline that you guided to I guess there is a number of ways to get there and I know you're not looking to give a firm sales guidance for the first quarter, but as we look at that EPS decline, should we think about the increase or the decline in operating margin being the bigger culprit or should we think about the comp number probably being the bigger driver of that decline?

Matt, we're all operating in a very difficult sales environment and I think we all read the same information, so I think it's certainly and we said it in the press release the trend of our business to date, we manage this very closely day in and day out so I think that was in the press release. I'd also remind you that the first quarter is clearly our weakest quarter in terms of sales contribution, ranges between 18 and 19% of the total year. All of the fixed cost of rent depreciation and we have all had run-up in insurance costs are really booked on a ratable basis over the year. So it's the leveraging of those fixed expenses. I think everyone saw how we can leverage this business in the fourth quarter and, you know, like it or not, it's still a fourth quarter business because of the size of the plan.

Okay. And just two follow-up questions.

One other thing though, Matt.

Go ahead.

On looking at this year's first quarter versus last year, you know, we had very favorable lift in last year's first quarter as a result of the Olympics and our participation in the Olympics total company as well as our Salt Lake City stores' Olympic performance and that is worth a few cents a share.

Fair enough. I guess my last two questions are just quick ones for Ed. If we think about the Greenwood store and obviously there is an offset to SG&A, would you say that that insurance payment would have acceded the contribution to the store of the fourth quarter? Have there been no problems or -

No, Matt. The insurance proceeds clearly did not replace all of the lost profitability.

So while leveraged expenses it was not a net positive.

Think of it this way, Matt. That insurance proceed replaced some of the lost direct store contribution.

Fair enough, okay. Then finally the tax rates coming down a little bit. We saw it in the quarter. We saw it in your guidance for next year as well.

Yes.

Could you give us a sense how you're able to achieve that?

You know, you really can't get a hold on taxes until you file your tax returns for the previous year and kind of look and see how everything comes out with the deferred. It's really a result of a very thorough analysis of our year-end tax provision and you know we have a Nevada subsidiary and I think it's working. It's just a result of the true-up of our tax expense and what we and the accountants feel is appropriate, so I think it's good news that we clearly have a good subsidiary in place.

Thank you so much.

All right.

The next question comes from R.J. Jones (ph) of Delafield Hambrecht.

This question is for Bob, and it's just a higher level, could you give us a couple of broad strokes about what plans you have to drive consumers into your stores throughout 2003 in a forecasted tough environment?

Well, if you grab our press release and some of my comments, I really hit on the key 2003 initiatives that we put in place. Our consumer research has told us that we really don't get credit from the customer for our everyday value pricing. They're constantly seeing people in the sporting goods business, you know, banging away at, save 50%, save 40%, buy one, get one, where our everyday value pricing paradigm is not screaming a savings message all the time. In order to reinforce our competitive pricing, we have put in place 110% guaranteed best price program.

We track all of our competitors' advertising and we know that our everyday value prices are generally their sale prices. Occasionally we get nicked, but we want to make sure that the customer feels confidence in our pricing so we have rolled out this competitive pricing program with signs in all our stores.

We are adding some new customer services, and I won't get into the specifics there, but things that will make the customer feel good about the -- better about the products they buy from Galyan's. We're adding trade-in programs and have a series of guaranteed in-stock programs. We are expanding our proprietary brand offerings and we introduced just this quarter workwear in the work apparel category. We've introduced the Brand 46 in the young men's area. It's kind of a retroactive brand. They will be a proprietary brand of ours. And we have a couple other new brands we'll be launching in the second half that we're pretty excited about.

In terms of driving business, we also really believe our new marketing program, which is a multimedia campaign, will drive a lot of traffic into our stores and the initial tests we've gotten have shown very high response rates. In addition to that, last year we ran 17 tabs. They were sort of total store tabs, you know, this is the Galyan's assortment reinforcing our depth of category offering and depth of product. This year we'll be increasing our frequency on tab advertising significantly and they're very focused and very event-based tabs so we think that will drive a lot of traffic into the store. The last initiative, which is not necessarily there to drive traffic into the store but that we think will pay major dividends this year is, we spent quite a bit of time, energy and money last year rolling out JDA merchandising into our company and integrating a planning and allocation organization into our merchandising function. We think the dividends of better skew management by store will pay off as we get into 2003. So that is a pretty comprehensive list of the '03 strategies that we're focused on to drive our business and make more money.

All right, thank you very much.

Once again, to ask your question, please press star one now.

The next question comes from Brent Rystrom from Piper Jaffray.

Just a quick follow up on a couple of thoughts. The Cabella's store opening and impact on your Kansas City market -- was that opening closer than Cabella's stores have been previously?

Yes, it is about 20 minutes away and the closest Cabella store was about half an hour away.

Out of curiosity, when you opened the doors in the Twin Cities, did you open before or after Cabella's?

Before.

So the proportional impact from this was more damaging than I would assume the one from the Twin Cities?

Yes.

Just a follow up from the comment you made about self-funding the credit would be able to get you through the sale position. Have you said at what point or what time in the future you expect to be self funding?

We have not said specifically, Brent, because it really depends on store growth and it is really store growth. These stores are operating in the mid teens on an EBITA basis and throw off a lot of incremental profit. We opened nine stores last year, nine stores this year. If we could step that growth up with a better facility, we could achieve self-funding sooner. So I think it really depends on the different models you look at. We're currently looking at a five-year facility that we feel will get us to self-funding and could get us there sooner if we're able to find the appropriate real estate and step up the growth.

Thank you.

Sure.

Thank you. At this time I'm showing no further questions.

I would like to thank you all for joining us on the call today and we look forward to talking to you at the end of the first quarter.

Thank you. At this time this concludes today's conference call. You may disconnect at this time.