DICK'S Sporting Goods Inc (DKS) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Dick's Sporting Goods second-quarter earnings release call. (OPERATOR INSTRUCTIONS).

I would now like to turn the program over to your host for today's conference, Mr. Jeff Hennion, Vice President of Finance.

Thank you and good afternoon to everyone participating in today's conference call circle on the second-quarter financial results for Dick's Sporting Goods.

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 www.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 that 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 second quarter financial and operating results and review the guidance contained in our press release.

Bill Colombo, President and Chief Operating Officer, and Mike Hines, EVP and CFO, also join us here.

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

I would like to now turn the call over to Ed Stack.

Thanks, Jeff.

I would like to thank everyone for joining the call today.

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

This quarter our net income of 15.5 million increased 31 percent over the pro forma net income of 11.9 million in last year's second-quarter.

This equates to EPS of 62 cents per fully diluted share as compared to 53 cents per share pro forma last year, an increase of 17 percent.

We are extremely pleased especially in this environment to able to deliver this kind of year-over-year growth in earnings again.

Income from operations increased 23 percent to 25.1 million compared to the second quarter of last year.

Total sales increased by 43.4 million or 14 percent to 354 million for the quarter.

This includes a comp sales gain of 1.5 percent which is on top of last year's second-quarter comp sales gain of 5.3 percent.

During the second-quarter, we saw favorable results out of our businesses in women's apparel, water sports, exercise and team sports.

Those results were generally offset by a handful of businesses specifically in-line skates, bikes and fishing tackle.

A significant component of our higher merchandise margin continues to be the growth of our private-label business.

In the second-quarter, we had private-label sales of 37.3 million which represented 10.6 percent of our sales compared to the same period last year which was 5.1 percent of that quarter's sales.

It is also worth noting that all major areas of the store continue to develop product and present new private-label opportunity as we grow this business toward the 15 percent goal of private-label sales.

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

We expect our net income for the third quarter to be in the range of 3.8 to 4.3 million which compares to last year's pro forma net income of 2.9 million and represents an increase of between 31 and 48 percent.

Assuming 25.5 million fully diluted shares outstanding, this equates to earnings of 15 cents to 17 cents per share compared to 13 cents per share pro forma last year, an increase of 15 to 31 percent.

Net income in the first half of the year of 22.1 million represents a 32 percent increase over last year's pro forma net income of 16.7 million.

We are also updating our full year guidance as follows.

We continue to expect to report fully diluted earnings per share for the full year of $1.95.

We now expect to deliver net income for the full year of 49 million, an increase from our prior guidance of 48 million.

As a result of the exercise of employee stock options and our increased stock price, we now expect to have 25.1 million fully diluted shares outstanding for the year, an increase of 500,000 shares over prior guidance of 24.6 million.

We are also now expecting comp sales for the year to increase approximately 1 to 2 percent reflecting actual results for the first half of the year.

In summary, given the challenging environment for sales in the quarter, we are extremely pleased to have been able to drive comps higher while increasing our gross margin rate which drove a 23 percent increase in our operating income.

In addition, our inventory is in great shape.

Average inventory per store was 2 million or $41 per square foot this year as compared to 1.9 million or $38 per square foot last year.

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

And secondly, this year we are opening ten new stores in the third quarter versus seven new stores last year with the stores opening earlier in the quarter.

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

Thank you, Ed.

During the second-quarter, we opened another two new stores taking our total to 151 stores in 27 states.

The two stores we opened were in East Hanover, New Jersey, our fourth store in northern New Jersey and Portland, Maine, our first store in the state.

In addition, we completed the remodel of one of our stores in Binghamton, New York.

We ended the second-quarter with a total of 7.3 million square feet versus 6.5 million square feet at the end of the second-quarter in 2002.

Looking to the third quarter, we are expecting to open 10 stores, two of which in Watertown, New York and Plattsburgh, New York already opened.

The remaining stores will be located in Garner, North Carolina -- our fifth store in the Raleigh/Durham market -- Richmond, Virginia at Short Pump Mall -- our third store in the Richmond market -- Waterford, Connecticut;

Millbury, Massachusetts -- our second store in the Worcester market -- Smithville, Rhode Island -- our third store in the Providence market -- Manassas, Virginia;

Charlottesville, Virginia and Waldorf, Maryland.

We continue to execute our strategy of filling in existing markets and opening up new markets in our current geographical footprint.

As a result, we expect to be operating 161 stores in 27 states at the end of the third quarter after having opened 20 new stores in 2003.

We are also increasing our store opening guidance and now expect to open 22 new stores this year with the last two stores opening up during the fourth quarter.

Note that the opening of these two additional stores will be P&L neutral for the year after taking preopening into account.

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

Sales for the quarter increased 14 percent to $354 million with a comp store sales gain of 1.5 percent.

Gross profit increased increased 140 basis points to 27.3 percent.

The majority of this increase was due to an expansion of our merchandise margin including the growth in private-label products where we also saw lower shrink expense and improved productivity at our distribution center that resulted in lower costs as a percentage of sales.

Our SG&A expenses increased by $11 million to $70 million for the quarter, an increase as a percentage of sales from 19 percent to 19.9 percent or 87 basis points.

The basis point increase in SG&A was primarily due to increased advertising expense, additional professional fees and insurance costs relating to being a public company and additional payroll taxes of about $700,000 associated with the exercise of employee stock options.

One of the most important lines -- operating income -- increased 23 percent over last year to $25.1 million or 7.1 percent of sales.

This represents an improvement of approximately 52 basis points over last year.

The second-quarter results include a gain of $1.2 million resulting from the sale of a portion of our non-cash investment in our third party Internet commerce provider.

Interest expense decreased by $351,000 to $535,000 this year as a result of lower borrowing levels and lower interest rates.

Net income of $15.5 million this quarter was a 32 percent improvement over the $11.7 million of net income last year.

This equates to 62 cents per share versus 61 cents per share last year on a GAAP basis and the guidance provided on May 22nd of 58 to 60 cents per share.

Pro forma fully diluted earnings per share increased 17 percent from 53 cents per share last year to 62 cents this year.

We do compare this year's second quarter results against pro forma results for the second-quarter of last year.

These results give (inaudible) the IPO as if it had not occurred at the beginning of each period presented.

The only line items affected are interest expense, net income and shares used in computing EPS.

Year-to-date sales had increased 12 percent to $658 million with a comp store sales gain of .4 percent.

Gross profit increased 162 basis points to 27.3 percent.

The majority of this increase was again due to an expansion of our merchandise margin, lower shrink expense and improved productivity at our distribution center.

Our SG&A expense increased by $21 million to $139 million, an increase as a percentage of sales from 20.1 percent to 21.1 percent or 100 basis points.

The increase as a percentage of sales is primarily the result of higher advertising expenses, additional professional fees, insurance costs related to being a public company and additional employer payroll taxes associated with the exercise of employee stock options.

Operating income increased 26 percent over last year to 36.7 million or 5.6 percent of sales.

This represents an improvement of 60 basis points over last year.

Interest expense decreased by $700,000 to $1 million this year, and year-to-date net income of $22.1 million was a 34 percent improvement over the $16.4 million net income last year.

This equates to 90 cents per share versus 85 cents per share last year on a GAAP basis.

Pro forma fully diluted earnings per share increased 20 percent from 75 cents last year to 90 cents this year.

Our fully diluted share account has continued to increase as a result of the increase from the stock price and the exercise of stock options.

As the price of the stock increases, fewer shares are repurchased under the treasury stock method.

Over the last three earnings releases, our projected fully diluted share count has gone from 23.9 million to 24.6 million to the current guidance of 25.1 million shares for the full year.

This is a 5 percent increase from our initial guidance.

Increases in net income have the effect of this higher share count in our EPS guidance.

Moving to the balance sheet, inventories in line with last year's levels adjusted for private-label in transit inventory and unopened store inventory.

Accounts Payable as a percentage of inventory were essentially unchanged at 50 percent, and we had $22 million of borrowings under our revolving credit facility at the end of the quarter as compared to 90 million at the end of the second-quarter last year.

This decrease is attributable to $28 million in net proceeds from our IPO, cash generated from operations, and the effective tax savings associated with and proceeds received from stock option exercises and employee stock purchases.

Excess borrowing availability totaled $137 million at quarter-end.

At this point operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS).

Our first question comes from Gary Balter with UBS Warburg.

Just a follow-up on the gross margin.

Obviously it was a really strong gross margin.

It looks like Q3 should be a strong gross margin as well.

When you hit fourth-quarter, you start running at the tougher numbers.

Could you give us your thoughts about as you compare against those numbers, then going forward into next year whether the move to private-label and some of the other moves are enough to offset the comparison?

We continue to expect to increase the gross margin.

The fourth-quarter as we have indicated previously expects to be more difficult than the previous quarters based on just the perfect winter we had last year.

We think as we continue to expand private-label, continue to work our inventory controls and through better buying, we feel there is still upside potential in the margin rate.

And that continues into next year?

Yes.

As you look at the comps, your comp guidance -- we understand the adjustment because it really reflects Q1.

I don't know if you're giving any projections up to next year, but with more stores opening and a bigger base, are you expecting an acceleration, a slight acceleration in comps next year?

We're not providing any guidance into '04 at the present time which is consistent with what we did last year.

Okay.

Thank you very much.

Our next question comes from Matt Fassler with Goldman Sachs.

Good afternoon.

You did not mention the whether, which is really to your credit.

But clearly it created some unseasonable conditions relatively early in the quarter.

I would be interested in your comments on the promotional environment, what you had to do to your promotional calendar to make sure that you were ahead of any potential markdowns later in the period on seasonal product?

Matt, you are right.

The weather was certainly difficult in the first quarter and in through a big part of the second-quarter, which I think some other people in the category have talked about.

But from a promotional standpoint, it has been a promotional environment.

We have seen some additional advertising expense which we talked about here to be involved in that to keep our marketshare.

We have been able to control the inventory as you can see.

We don't have markdown exposure coming forward, and that is all based on the strict inventory controls we have in place.

Thank you.

Second question if I may.

If you could just comment on the traffic versus ticket trends that contributed to 1.5 percent comp store increase?

The average ticket has remained pretty consistent, so it really has been and continued to increase in transaction account on a comp basis that drove the comp sales.

In terms of the employee stock option and tax issue, obviously it was a -- I would not call it material -- but a noticeable number this quarter.

How recurring would you expect an expense of that magnitude to be?

How often would we see expenses like that?

It is difficult to project now how people are going to behave, but it is fair to note that we were a pretty sizable company by the time we came public last year, and people had had stock options for a number of years.

So we are not terrifically surprised by the volume of activity.

It is just difficult to project what is going to happen on a go forward basis.

I will just comment if you look at the cash flow, one interesting note is that we did generate net proceeds from the IPO of about $28 million.

When you add up the tax benefit from the stock options and the proceeds from the exercise of stock options, that totals $33 million.

It actually acted as (inaudible) financing for us.

The next question comes from Anthony Lebiedzinski with Sidoti & Co.

Good afternoon guys.

Could you just comment a little bit further about the sales trends throughout the quarter and by region?

We don't provide guidance by region.

Through the quarter, they got better through the quarter.

As Matt indicated, the weather had been in difficult through the first part of the quarter.

As summer finally got here toward the end of the quarter, we saw an uptick in sales.

Could you comment on the current sales trends in the October quarter?

No.

We don't make any comments on the existing quarter to date.

Okay.

You mentioned before that the average ticket was consistent.

What is the dollar amount for that?

It is approximately $50.

$50.

Okay.

Well, thanks very much.

The next question comes from Murrey Wanstrath with Hibernia Southwest Capital.

One quick question on your SG&A spending.

It looks like advertising expense -- if you could just breakout maybe how that is allocated amongst the 87 basis points?

Because that looks like to me the only one you guys really had a lot of (inaudible) influence over.

For competitive reasons, we actually are not going to get that granular on the line.

It was significant enough of an increase to warrant referring to it as a reason for the increase.

Is this going to come out of maybe the back half or maybe the trend will continue into the back half?

The increase in advertising?

We're not planning on reducing advertising in the back half because of what we felt that we needed to do in the second-quarter.

It is business as usual going into the third and fourth quarter.

Okay.

Great.

Thank you very much.

The next question question comes from Sean McGowan with Harris Nesbitt Gerard.

Thank you.

Two questions.

One, can you give us a little bit of detail to the extent you are comfortable on geographic targets for expansion next year?

As we have provided in the past, we expect to continue to grow the business in the geographic area that we are in today.

As you can see, the stores that we are going to be opening in this next quarter is that Eastern Seaboard up into New Jersey and New England that has got our attention right now.

Should we be expecting about the same number of stores next year?

We have not provided guidance as to the number of stores, but that would be a safe assumption.

The second question is on private-label in two parts.

Can you give us some idea of where you think that business ultimately can go or where you would like to take that as a percentage of total sales and the categories that you see yourself expanding into?

We expect to have it over the next couple of years to approximately 15 percent of our total business.

It is really a very well rounded program right now.

We have product development involvement in hardlines, footwear and the apparel side of our business.

It is pretty well balanced between all three of those businesses.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Our next question comes from Cliff Josepy with HD Brous.

I apologize if you have gone over this already.

Branded as a percentage of total revenue, did you give that out for the quarter?

We did not, but you could back into it.

We gave private-label at just over 10 percent, so branded would then be 90.

Okay.

This construction in progress, is this the first time it has been on your balance sheet?

Correct.

What is the reason that is on your balance sheet for the first time?

It is on there in connection with an accounting pronouncement called 9710, that essentially if there are particular conditions in a lease that provide some business -- there is series of six to eight tests that one goes through, and to the extent you meet any of these ownership-like tests, there is a non-cash accounting entry required.

You will note that the construction in progress lease facilities of 7 million is in the same amount as the non-cash obligations to lease a facility down in the long-term liability section.

So it's a non-cash activity that is booked to the balance sheet and then is reversed off when the lease commences.

And that is a new accounting pronouncement?

That is why it has not been on previous balance sheets?

It's the first time we have run into that accounting pronouncement.

Is called EITF 9710.

So I guess this category -- where do you see this category going in the future?

Do you see it going up from the 7 million or down?

I expect that it would go up, but given its non-cash nature, I don't think it's terribly meaningful.

The next question comes from Bob Simonson with William Blair.

Good afternoon.

Just so I have this clear, your forecast (inaudible) is a $1.95 for the year.

You have not changed your guidance.

Does that assume in the first quarter 28 cents and 62 in the second quarter, which would be 90 cents, which means you would be comfortable with $1.05 in the second half?

With all of these pro formas and GAAPs, is that the right way of looking at it?

We reported 28 and 62 cents.

So that is 90 from $1.95 made you have a $1.05 in the second half.

That is 25.1 million estimated shares or 26.4 million in net?

Yes.

I actually have not looked at it that way.

I think it is true.

Let me just add this.

Because of the share count, the way this thing was working with the change in fully diluted shares, that should be some of the quarters does not necessarily have to equal the total year.

I just assumed it would be 25.1 -- maybe that is not right. 25.1 for the second half in each of the two quarters?

Maybe it is even higher than that?

Well, the guidance we provided is 25.5 for the third quarter.

For the third quarter.

And for the fourth?

We have not provided guidance on the fourth.

We will provide guidance on the fourth after we look at what the stock price is trading at the end of the third.

So it is 25.5 million for the third quarter and 25.1 million for the full year.

I go backwards.

One little question.

You did not talk too much about weather in the third quarter or its influence.

You got a couple of questions.

Is there any impact from the blackout that is noticeable?

Nothing meaningful.

We had some stores closing at around 4:00 because of the blackout, and then all but five or six were up and running the next morning.

Okay.

Thank you.

The next question comes from Sam Hoser with Mosaic Research.

Good afternoon.

I just want to ask you about your footwear business.

If you can break out the brown shoe versus athletic business, and also talk about also any kind of early reads you are getting on the boot business?

We have not provided that type of a breakout.

But we have always talked about how we are focused on that core athlete and outdoor enthusiast.

So the vast majority of our footwear business is athletic inspired and outdoor enthusiast boots.

The brown shoe fashion aspect of the business is really insignificant.

If I could just follow real quick on that.

I am really interested in the brown shoe, not in the fashion but in the technical.

Could you talk about the breakout between your boot business and your athletic business?

We have not provided that granular detail in the past.

There are no further questions at this time.

Mr. Stack, please proceed.

I would like to thank everyone for joining the call today.

Again, we are very pleased to be able to report the second-quarter earnings that we did in such a difficult environment, and we are looking forward to a very positive third quarter.

Thank you very much.

This conclude your conference call.

Thank you for your participation today.

You may now disconnect.