DICK'S Sporting Goods Inc (DKS) 2003 Q1 法說會逐字稿

Good day everyone, thank you for holding and welcome to the Dick’s Sporting Goods Incorporated First Quarter Conference Call.

Today’s call is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Jeff Hennion, Vice President of Finance.

Please go ahead, Jeff.

Thank you, and good afternoon to everyone participating in today’s conference call on our first quarter financial result.

We are pleased that you could join us today.

Please note that a rebroadcast of today’s call will be archived on the Investor Relations portion of our website located at dickssportinggoods.com for approximately 30 days.

In addition as detailed in our press release, a dial-in replay will be available for approximately seven days.

In order for us to take advantage of Safe Harbor rules, I would like to remind you, any projections or statements made today reflect our current views with respect to future events and financial performance.

There is no assurance that such events will occur or that any projections will be achieved.

Our actual results could differ materially from any projections due to various risk factors which are described from time to time in our periodic reports with the SEC.

Leading our call today will be Ed Stack, Chairman and CEO.

Ed will discuss our first quarter financial and operating results and review the second quarter guidance contained in our press release.

We are also joined here by Bill Colombo, President and Chief Operating Officer; and Mike Hines, EVP, Chief Administrative Officer, and CFO.

Bill will be discussing our recent store openings, and Mike will review in more detail our financial results.

I'd now like to turn the call over to Ed Stack.

Thank you, Jeff, and I would like to thank everyone for joining the call today.

We are pleased to be able to report the results of our first quarter which represents another quarter with a significant year-over-year increase in net income.

This quarter, our net income of $6.7m increased 37% to the pro forma net income for $4.9m in last year’s first quarter.

This equates the EPS of 28 cents per fully diluted share as compared to 22 cents per share pro forma last year, a 27% increase.

We are especially pleased to be able to deliver this kind of earnings growth in a quarter that has been fairly challenging for many retailers.

From a sales perspective, our total sales increased by $28.1m or just over 10% to $304m for the quarter.

Included in this is a comp sales decline of 0.9% primarily due to the colder weather we had through the first half of the quarter and is on top of last year’s first quarter comp sales increase of 5.6%.

As we talked to you on our last quarterly call, spring is an unpredictable time of the year given there is no specific holiday or calendar event driving sales.

It’s primarily weather driven.

We told you in March that the delay of the spring weather was expected to shift some of our sales to later in the season.

When the weather warmed up, we expected sales would be improved and in fact, that’s exactly what happened.

The quarter started out very cold, as many of you are well aware.

Aside from affecting sales from a spring merchandise perspective, it also adversely impacted our customers’ ability to get to the stores at an important time such as President’s Day weekend.

As an example, during the month of February, we had 40 stores where the store either never opened or closed early, at least one day during the month.

However, when the weather did warm up, sales picked up significantly through the end of the quarter.

Specifically the businesses that did the best for us were team sports, women’s apparel, and the excersize area.

Both sales were offset by lower sales of Golf, In-Line Skates and Fishing Tackle, all of which we believe were influenced by the unusually poor weather early in the quarter.

We also continue to focus this quarter on expanding margins.

Specifically we saw an increase in gross profit from 25.3%-27.2% for the quarter, an increase of 190 basis points.

This increase was driven primarily by improved merchandize margin, lower shrink expense, and improved productivity at our distribution center.

From an inventory perspective, many of you know, we continue to focus on turning inventory quickly and expanding our industry lead in this important metric.

For the trailing 12 months through the first quarter, even with the slight comp sales decline and a growth in our private label business where we take title of goods much earlier, we have been able to manage our inventory levels, and our trailing four quarter's inventory increased slightly to 3.64 times versus 3.62 times at the end of last year's first quarter.

Our sales in private label products continue to grow.

In the first quarter, we had just over $21m of sales in private label products, which equates to approximately 7% of sales for the quarter.

This is an increase over last year's first quarter of 2.9% of sales.

Before I turn the call over to Bill, I wanted to touch on the guidance we've provided in our press release.

For the second quarter, we expect to deliver another quarter of solid growth in net income.

Our outlook is net -- for net income for the second quarter will be in the range of $14.3m-$14.8m, which compares to last year's pro forma net income of $11.9m and represents an increase of between 20%-25%.

From an EPS perspective, this would be earnings of 58 cents-60 cents per share, compared to 53 cents per share pro forma last year.

For the full year, we are still comfortable with the EPS guidance we provided last quarter.

We are on track to opening 20 stores, delivering comps of 2%-3%, and earning $1.95 per share and $48m of net income.

At this time, I would like to turn the call over to Bill.

Thank you Ed.

As we mentioned in our release, during the first quarter, we opened another eight new stores taking our total to 149 stores in 26 states.

The stores we opened for the quarter reflect our strategy to both open stores in new markets and continue to sell in existing markets where the projected return on investment exceeds our hurdle rates.

In the first quarter, the eight stores we opened were Mooresville, North Carolina, which was our fifth store in the Charlotte market;

Warwick Rohde Island in North Attleboro, Massachusetts, our first two stores in the providence market;

East Brunswick, New Jersey, our third store in Northern New Jersey;

Orange, Connecticut;

Wichita, Kansas, which was our second store in that market;

Lynnhaven Mall in Virginia beach, Virginia, our first store on the Virginia beach market; and Clarksburg, West Virginia.

In addition, we also relocated a store in Poughkeepsie, New York.

If you are tracking total square footage, we ended the first quarter with total square footage of 7.2 million square feet versus 6.8 million at the end of 2002.

Looking to the second quarter, we are expecting to open up one store in East Hanover, New Jersey.

In fact, the store actually opened this afternoon.

This is our 150th store.

We have no other stores currently expected to open in the quarter, therefore we expect to be operating 150 stores in 26 states at the end of this quarter.

Based on our guidance for 2003 of opening 20 stores this year that leaves us with 11 more stores to open during the remainder of the year, which will again be a similar blend of new market and instill locations.

I will now turn the call over to Mike to go through our financial performance in more detail.

Thanks Bill.

I would like to make a few points on the operating results.

I am going to speak first to the GAAP results and then follow that up with comments on the pro forma results.

Sales for the quarter increased 10% to $305m with a comp store sales decline of 0.9%.

We did open eight stores during the quarter and ended the quarter with 149 stores.

Gross profit increased to 190 basis points to 27.2%, and the majority of this increase was an expansion of our merchandizing margin, but we also did see lower shrink expense, improved productivity in the distribution center which resulted in lower cost as a percentage of sales.

Our SG&A expenses increased by $9.7m to $68.8m for the quarter, an increase as a percentage of sales from 21.4% to 22.6% or 120 basis points.

The basis point increase in SG&A was primarily due to increased advertising expense, IS cost, and additional professional fees and insurance costs associated with being a public company.

Pre-opening expenses were essentially flat.

They increased by $200,000 to $2.4m this quarter as we opened eight stores this quarter compared to six stores opened last year.

Operating income increased 32.7% over last year to $11.6m or 3.8% of sales.

This represents an improvement of 65 basis points over last year.

Interest expense decreased by $350,000 to $500,000 this year as a result of lower borrowing levels and lower interest rates.

Net income of $6.7m in this quarter was a 41% improvement over the $4.7m of net income last year; this equates to 28 cents per share versus 24 cents per share last year in the guidance provided on the March 13, 2003, guidance of 25 cents-27 cents per share.

We also compare this year’s first quarter results against pro forma results for the first quarter of last year.

These results give effect of the IPO as if it had occurred at the beginning of the period.

The only line items affected are interest expense, net income, and the number of shares used in computing earnings per share.

There is a $200,000 reduction in interest expense in the first quarter of 2002.

There was no adjustment made in the first quarter of 2003.

Pro forma fully diluted earnings per share increased 27% or 22 cents per share last year to 28 cents per share this year.

I'd also like to take a minute to call out some information on our fully diluted outstanding shares.

In 2002, we had $22.5m pro forma fully diluted shares outstanding.

We have provided revised guidance for fully diluted shares for 2003.

The estimate for the year of $24.6m shares is an increase of 3% from the $23.9m shares that we have projected in our initial 2003 guidance.

That potential dilution has been offset by an increase in our 2003 net income guidance which increased to $48m from the $46.6m in our initial guidance.

As a result, our EPS outlook for the year remains unchanged at $1.95.

Moving on to the balance sheet, inventory per average store was $1.9m or $39 per square foot this year as compared to $1.8m or $38 per square foot last year.

This increase is primarily due to the increase in the private label business where we source product directly which results in our recording inventory earlier as we take title overseas.

Accounts payable as a percentage of inventory remained flat at 47%.

We had $45m outstanding under our revolving credit facility at the end of the quarter as compared to $96m at the end of the first quarter last year.

The reduction is attributable to $28m in net proceeds from the IPO and cash generated from operations.

Excess borrowing availability totaled $122m at the quarter’s end.

At this point operator, I would like to turn it over and open it up for Q&A.

Absolutely.

If anyone would like to ask a question today, you may do so by pressing the "*" key followed by the digit "1" on your touchtone telephone at this time.

If you're on a speakerphone, we ask that you please depress any mute button feature you may have to allow your signal to reach our equipment.

Again that’s "*" "1" now.

We got a Matthew Fassler with Goldman Sachs.

Thanks a lot, good afternoon, and congratulations on a great showing in a tough environment.

I have a couple of questions.

First of all on the gross margin front, clearly, you continue to take this metric up pretty dramatically and pretty consistently.

Will there be any reason why the magnitude of increases that you showed on the first quarter would subside as the year progresses or there is kinds of structural shifts to your mix that should continue through the year?

Matt, we continue to -- we continue to focus on inventory control and continue to try to turn this inventory quicker which helps to mitigate any mark down exposure.

We continue, as we’ve guided previously, to look at the private label business and continue to increase the sales penetration and that's something we expect to continue on a go forward basis through the balance of this year also.

And this effected inventories, you know, up a little more than it typically would be for reasons that you discussed -- influence the gross margin outlook for the second and third quarters?

Or is that something we should assume is not an issue?

It’s not an issue.

The inventories are inline.

It’s primarily driven by when we have to take title to inventory overseas and there should be nothing read into that as an issue at all.

Got you.

Second question.

Your new space productivity based on my initial calculations looked to exceed the levels that you showed in the past few quarters.

Can you tell me if I’m right and you know, in general what kind of results you have seen from non-comparable stores?

Actually Matt I don't -- taken a look at that and they don't seem to me to be materially different.

I do think there is one call out when you go through the exercise you are trying to go through, is that with respect to relocated stores, our policy is to pull those out of the comp base and that can influence the product that you are looking at.

And can you remind me how many there are -- that were relocated in the last four quarters or so?

There were three.

Got you.

And one final question, can you give us, kind of, your philosophy on how you approach your SG&A spending program over the course of the quarter?

And you clearly you beat your net income targets, certainly the streets and you know with the soft top line in gross margin clearly took you there.

And in an environment like the one that we are in right now, do you pull back on spending at all or given the margins, are you able to just basically keep the SG&A spending where it had been?

Well, the SG&A spending is consistent with what we talked about that there would be -- as a percent of sales that would go up slightly this year, and we would lower the SG&A number in 2004.

As we go through the quarter, we certainly look at expenses and the employee expense controls were appropriate, and if we get into a particularly difficult environment, we would be able to pull back on those expenses.

Got you, thank you so much.

And again if you would like to ask a question today, you may do so at this time by pressing "*" "1" on your phone.

We will move to Bob Simonson with William Blair.

Yes, good afternoon.

A couple of questions.

Mike, I think it was you who said that the shares outstanding are now estimated to be 24.6 on a fully diluted basis versus just under 24 before.

Is that just more shares that are in the money on options or --?

It's actually as a result of the stock price moving up as it has as you go through the impact of treasury shares, you can buyback fewer shares with the proceeds of those of -- assumed to be exercised options.

So the primary driver frankly is the increase in the stock price.

And when you do this calculation, does it assume that the stock price is comparable to where it is now?

Yes.

Okay.

And qualitatively you talked about the sales being weak in the first half of the quarter on a comp basis and then picking up in the second half.

Do you think that the second half strength offset -- was simply an offset to the late start or do you think business is just picking up, and can it be sustained at maybe the better numbers that you had at the tail end of the quarter, or is that just too fast?

I think it's -- as we have projected back in March that the catalyst for this spring business is weather, and once spring shows up, we saw a return to more normalized business activity levels, and we see no reason for that to change going forward.

And the last one on your private label business, have -- it looks like you are having some -- some very, very good success with it.

Is your expectation for its contribution on a full year basis or I think the last time you talked about it out in three years, is that changing at all?

No, it's not.

We expected to be able to -- to it would be approximately 15% over the next few years and we haven't changed that.

Very good, thanks.

Sure.

Next, we will go to Edward Weller (ph), Think Equity Partners.

I was just looking at the balance sheet.

It jumped out to me that your fixed assets are lower than they were at year end.

Can you explain how that happened?

I think I read that line.

Actually, I don't think that's correct.

Well, property and equipment noted $76m at year end and February 1 it was $80m.

That's net.

Yes.

So that will be net of accumulative depreciation.

How much was the depreciation in the quarter?

It's approximately $4m.

And you opened eight stores in the quarter.

Didn't they add to your gross fixed assets?

We don't put money into our stores.

So, I mean, essentially --

Do the stores apparently turn key and we don't have -- in vast majority of the stores we don't have much from at least those improvement standpoint.

So you mix the stores, how do you mix -- and in these stores you mix the equipment and you mix the store and you don't get white box you get a store that is ready for merchandize.

That's correct.

And what about the cash registers, computers, RF equipments?

Much of that is leased.

: Are there any other questions from anyone?

At this time there are no other questions.

Do any of our speakers have any additional comments today?

No, we would like to thank everyone for joining the call and we will see in our next quarterly call.

Thank you.

That will conclude today's audio conference.

Again, we do thank everyone for their participation.