DICK'S Sporting Goods Inc (DKS) 2003 Q3 法說會逐字稿

At this time I'd like to thank all parties for standing by. Your lines will remain on listen-only until the question-and-answer session of today's conference. Today's conference is being recorded. At this time I would like to turn the call over to Mr. Ed Wozniak. Sir you may begin.

Thank you for joining us on our third quarter 2003 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 contains certain forward-looking statements which reflect Galyan's Trading Company current view of future events and financial performance. We caution that any forward-looking statements contained in this press release or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as estimate, project, plan, believe, expect, anticipate, intend, and similar expressions may identify forward-looking statements. 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. The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results for fiscal 2003 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this press release or otherwise made by our management. Risks associated with our ability to implement our growth strategies including the availability of suitable store locations, appropriate financing and other terms and the availability of adequate financing sources. The impact of increased competition and its effect on pricing and expenses associated with advertising and promotion in response thereto. Risks associated with the seasonality of the retail industry, the retail sporting goods industry, and our business, the potential impact of natural disasters or national or international security concerns on the retail environment, and risks related to the regulation of the products we sell including firearms. See our annual report on form 10-K for the year ended February 1st, 2003, as filed with the Securities & Exchange Commission for a more detailed discussion of these matters and other risk factors. We do not undertake to publicly update or revise our 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. Good morning everyone and welcome to Galyan's third quarter conference call. With me this morning are Ed Holman, our president and Chief Operating Officer and as you've already heard Ed Wozniak our Chief Financial Officer. After I review our third quarter and provide you with some comments on our outlook, Ed Holman will review our operating results in summary and our store performance and Ed Wozniak will go into more detail regarding our financial results. The first and second months of our third quarter were solid. With promising sales in both August and September that were significantly better than our sales in previous months. However, an unseasonably warm October impacted our sales at the end of the quarter. The good start to our third quarter was due to strong sales in a couple of key categories. Primarily athletic apparel and equipment as well as snow sports. However, the warm weather in October negatively impacted our sales in outdoor and casual apparel and outdoor equipment. Our industry high penetration of casual and outdoor business and its continued weak performance is offsetting the gains we've achieved in the athletic business. Our focus going forward will be to reposition these outdoor businesses to deliver improved performance.

On the inventory aging front, we continue to focus on keeping our inventory current. And have met our aging standards and improved versus last year. We are anticipating a slight improvement in sales trends in the fourth quarter. We expect comparable store sales to be in the flat to low single digit negative range which indicates a slight sequential improvement over third quarter results. The outdoor businesses will continue to underperform the athletic business in the near term.

During the fourth quarter we remain focused on delivering the right products to our diverse customer base. We're well positioned to do this with regard to two areas. In marketing, our marketing campaign that was launched earlier this year is expanding and in some cases reinforcing the Galyan's brand and reputation. It is this proliferation of the Galyan's name that will help us grow sales in the future. And our product offering. With inventory currency in line with our expectations we're positioned to offer the best new products in the market. Our assortments are not only current but I believe the most compelling in the sporting goods business. Looking beyond the fourth quarter, we believe that our business strategy is sound. We feel very strongly that the steps we've taken with new store openings and new product initiatives will better position us for future growth. At this point I'd like to turn the call over to Ed Holman, our Chief Operating Officer, to go into more detail about our operating results and activities of the store level.

Thank you Bob. As probably most of you know I'm relatively new to Galyan's. On December 2nd I will be here for three months. I am pleased to be a member of the Galyan's team, and very optimistic about the future of the company. I've spent my first three months meeting the management team and understanding the company's business model and strategy bring for the future. I've also had an opportunity to visit 25 of our 43 stores, with the goal to visit every one of them by the end of the fiscal year. I also look forward to meeting as many of you as possible in the future. My role in today's call is to provide you a summary overview of the company's third quarter results and operating performance with a brief update on new stores.

Let's first start with an overview of the third quarter results. Third quarter sales were $147.7 million, representing a 13.8% increase over the same period last year. As it relates to the first nine months of fiscal 2003, net sales were $440.9 million, representing a 14.4% gain over the same period last year. Comp stores declined 5.7% during the third quarter and 6.6% for the nine-month period.

Looking at sales by month as Bob mentioned, August and September were consistent with our plans. However, October fell short of our plan due to unexpected -- due to warmer than expected weather in most of our markets adversely impacting, particularly, our outdoor business. For the third quarter of fiscal 2003 we incurred a net loss of 3.6 million or 21 cents per share on a fully diluted basis as compared with a 1.5 million loss or 9 cents per share on a fully diluted basis in the third year and compared to prior year's third quarter. Which is slightly better than analyst consensus. The company's adoption of EITF 2-16 at the beginning of 2003 reduced earnings for the third quarter by 19 basis points. The nine-month loss was 6.4 million or 37 cents a share, on the fully diluted basis compared to earnings of 2.0 million and 12 cents per share on a fully diluted basis as reported for the same period last year. The impact of EITF 2-16 reduced earnings for the first nine months of 2003 by approximately 4 cents a share.

Let's next look at our stores. Our most recent openings in Roosevelt Field, Long Island, New York and Stony Point in Richmond, Virginia and Legacy Village in Cleveland, Ohio are nicely had ahead of plan. Our other stores opening include the one in New Jersey in the Woodbridge center, our sixth store in the Chicago area at Glenview, Illinois, we have completed all our nine new store openings for 2003. We have signed leases for seven stores that we anticipate opening in 2004. We have seven signed leases for the stores and new markets of Birmingham Alabama, Milton,Wisconsin which is a suburb of Madison, and Virginia Beach Virginia. We plan to open our seventh store in the Chicago market, in Algonquin, Illinois, our fourth store in the Denver market in Lakewood, Colorado,our third store in the New York tri-state market in Freehold New Jersey, our second store in the Cleveland market in North Olmstead, Ohio. Our plans call for two additional stores in 2004 and we will update you on our progress regarding these leases next quarter. The plan is to open four stores in the first quarter, two stores in the second quarter, one in the third quarter, and one in the fourth quarter. We have received landlord financing for approximately 50% of the capital cost consistent with past levels. In closing, we feel as Bob mentioned we are properly positioned for the fourth quarter and cautiously optimistic. I think both in terms of the total retail business and our market penetration. Now I'm going to turn the call over to Ed Wozniak our Chief Financial Officer, so he can review the financial results in greater detail. Thank you and again, I look forward to working request you in the months ahead.

Thanks, Ed. Income statement highlights for the third quarter, gross margin decreased to 24.8% of sales down 290 basis points from last year. The results of higher mark downs directed at reducing inventory levels and higher occupancy store costs. SG&A was 28.5% of sales compared to 29.2% in the third quarter of 2002. The decrease of 70 basis points was a result of lower selling payroll costs, leveraging our corporate overhead, and the recognition of the final settlement with our insurance company for damages to our old Greenwood, Indiana store. These items were partially offset by increasing marketing cost due to EITF 02-16 and insurance costs, particularly, D&O.. Cash flow statement we provided you in today's press release depreciation is up significantly year over year. Pre-opening expenses for the quarter were $2.7 million versus $2.5 million last year. We opened five stores in each period in the third quarter. The increase reflects the cost of opening two stores in the New York-New Jersey metropolitan area. GAAP net loss of 3.6 million or 21 cents per share, if you exclude EITF 02-16 the loss would have been 19 cents a share, and as a reminder you all know that EITF 02-16 addresses the classification of cash consideration received from vendors as either a reduction to advertising expense or an adjustment to cost of sales. Last year the company recorded all of these contributions as a reduction to advertising expense.

Interest expense net of interest income as a percent of sales was flat to last year. Regarding balance sheet highlights, inventory on a balance sheet basis was up 11.9% year over year compared to a sales increase of 13.8%. As we expected, inventory metrics for the third quarter reflect significant improvements over previous quarters and last year. Inventory turnover for the quarter is up slightly, and inventory per store and inventory per gross square foot are both down year over year approximately 14%. Working capital as a percent of sales was 20.3% in the third quarter of '03, compared to 22.2% last year. This performance again demonstrates our ability to effectively manage our working capital. At quarter-end our outstanding commitments on our credit line were approximately $80 million, which consumed only 57% of total availability under our credit facility. Regarding transaction growth, it was up 18.9% for the quarter, compared to a sales increase of 13.8%, consistent with past quarters' performance.

Our average sale for the quarter was $57.11, that was down 4.5% from last year. Average unit retail was $21.81, that was up 1.6% versus last year. And units per transaction were down 6%, continuing a trend we've seen throughout fiscal '03. Gross square feet at the end of the third quarter were $3,786,000 and selling square feet of 2,886,000. New store productivity for the third quarter was 68%. As we mentioned in today's press release, actual sales results for the fourth quarter and full year 2003 will be reported with fourth quarter year-end financial results. Operator, we'd like to open the call up now to Q&A.

At this time if you would like to ask a question, please press star-one. It's star-one on your touch tone phone to ask a question. You'll be announced by your name. Once again, it's star-1. It will be one moment for the first question. Your first question comes from Ellen Vickman and please state your company name.

It is Ellen Vickman from William Blair. A couple of questions for you guys. First of all you did a nice job bringing your inventory down at the end of this quarter. What are your plans for inventory ending the fourth quarter, and actually even averaging out through the fourth quarter?

Ellen, this is Bob. Thanks for your compliment. We have really been focusing for the past six months on inventory and we've instituted some new procedures in the company with regard to how we manage our inventory. First of all, we have weekly opened the buy meetings now. Secondly, we are reducing our inventory by the amount of excess mark-downs we take so that we don't institutionalize buying back into more product than we sell through. Those are the two big changes that we've made in terms of operating procedures. Historically, the company carried heavy inventories and carried them over. And as I think as reflected in our significantly improved currency performance, you can see that those programs are starting to kick in. We will continue to control our inventories and keep them in line as we go through the fourth quarter. And into the first half of next year. I'm very confident that the procedures we have in place now will continue to bear fruit as we move forward.

So we should expect some low levels of decline?

You should expect to see us continuing to reduce our inventory per square foot. And having a much better relationship between our inventory and our sales, yes.

Okay, great. And then can you comment on the mix of private label in the quarter and where you see that going, you know, over the next couple of years, especially as Jeff has joined you, does he have a new strategy for private label in apparel?

Our private label penetration is highest in casual apparel, where it's significant portion of our business, about a third. And the casual apparel business has been one of the tough zones for us. So our penetration of private label in that zone actually has declined. Our penetration in private label athletic apparel has been good, and in private label outdoor apparel has been good. Unfortunately, with the weather impact of October in the third quarter, you know, our private label business is not increasing in terms of penetration.

Jeff has gotten very involved. We are introducing and have introduced a couple proprietary brands now. We're in the early test phases of those new brands. We've had respectable performance on those brands. There's some tweaking to be done. We do see an opportunity to continue to grow the private label apparel business in the company, and you know, over the long haul, I think it could get up to 20% of our business, you know. Right now, in apparel it's somewhere in the 13 to 15% range. And you know, I think we will continue to manage that prudently. Part of the issue for us, Ellen, as you know is we don't have 150, 200 or 400 stores yet, and are not really able to leverage the big quantity discounts that you can get offshore. So you know, we have to play this game a little more prudently than some of our competitors out there who already have, you know, the billion dollar critical mass to really leverage private label. But our eye is on the ball there and we'll continue to focus on growing private label.

Okay, thanks. The proprietary brands that you mentioned are those in casual athletic or outdoor?

They're mostly in casual and outdoor. 46 is one of the brands. Work wear is one of the brands, blue sky lines is one of the brands.

Okay. And then aside from having lower inventory levels per square foot from last year, how else are you if at all positioned differently? are you investing in different areas across the company differently, or how does the overall makeup of the inventory differ aside from just level going into the fourth quarter?

Ellen, for the last several quarters, at least, the drag on our business has been outdoor hard goods. And you know, we've continued to have very respectable performance in the athletic zone. And one of the things that I mentioned early is that we pay a price for our very -- our industry-high penetration in casual apparel and outdoor. Certainly, that worked for the company when the casual apparel trends were through the roof. But our penetration of outdoor has been a drag on us. And as we go forward, we're really focusing on the athletic apparel, the athletic equipment zones and the footwear business, where we think we have major upside potential. And we will also be increasing our presence in the action sports area and compressing our penetration in outdoor hard goods.

Okay, thank you.

Your next question comes from Anthony Ledbiedzinski. Please state your company name.

Sidoti and company. Questions, can you talk about the performance of new stores and this is in particular new markets versus existing markets?

Well, as is always the case, some our new stores are beating their plan, some of them are making their plan and a few of them are not where we expected them to be. We report the stores as a total, really, so that we don't disclose any competitive information to many of our friends who listen to these calls as well. Overall, our class of 2003 is performing right at about where we expected it to be. You know, it's hard to read the numbers in the third quarter when you open five stores, and you only have part of the quarter in terms of productivity for those stores. I think you have to look at that overall. But this group of stores is performing at about expectation in the aggregate.

Okay. The new stores for 2004, are those primarily existing markets or some new markets if you could just talk about the nine stores for next year.

There's a combination of existing stores, or existing markets and new markets. One of the things that I guess I'd like to emphasize with regard to our growth plans is, I think the Chicago market is a very good example. Couple of years ago we had two stores in Chicago and then we went to four stores in Chicago and now we've gone to six stores in Chicago. And you know, by the end of next year we'll be at seven, possibly eight stores in Chicago. We have diluted ourselves in that market but have gained significant market share in the Chicago market. And our presence there gives us enough critical mass to really start leveraging some expenses. We will continue to do those kinds of things because there are major opportunities around the country for us to backfill key markets. That will result in some self-dilution. But certainly, we're happier about self-dilution than we are about any competitive dilution. You know, I think we read in the release about I think four of the stores were in existing markets and three in new, the ones we announced for '04, is that correct?

Correct.

Right. Also what's your capex estimate for this year and also for 2004?

For this year, Anthony, I'm looking at a range of 80 to 85 million, probably trending toward the low side. And for '04 we're in the process of finalizing our plans. But just as a reminder to you, in this fiscal year, we had three stores that were not landlord financed. That was unusual given our past history. The prior year we had only one. In fiscal '02 our capex spending was in the $50 million range. So with nine stores, the number that we are comfortable with for next year, and the fact that we're looking to do all of those on landlord financing or turnkeys, certainly the capex number will be lower next year but we're not in a position now to give you firm guidance.

Okay, one last question. Regarding your debt levels, where do you expect that to be at the end of the year?

I expect we'll be in the, you know, 40 to $50 million range at the end of the year. It will really depend on sell-throughs, it will depend on receipts for the important first quarter. But that's what I'm looking at and that would exclude the cap leases or the lease amortization that we have on the balance sheet now and that's related to the sale lease back.

Thank you.

Sure.

Your next question comes from Harry Iverson. Please state your company name.

First Capital. First I'd like to follow up on a few things. Inventory could you give us the goal on what inventory for square feet for the next year would be? Second we could we break out the impact of EITF whatever that number was on SG&A? Third, could you give us a little bit relative quantification on the laggingCalupo categories, how much worse they were or some sort of quantification. Thank you very much.

Let knee try the inventory and the SG&A. Our performance this quarter was down 14% by store or by square foot. Last quarter we were down nine, and the quarter before that I think we were down in the low single digits.

That's our inventory levels.

Levels. But going forward, we're going to start comping against those. So you're certainly not going to see the kind of year-over-year performance next year that you've seen this year. Although our goal here is to continue to drive inventory down and improve turn and we will be working on that as Bob mentioned.

Let me just add a little color to that Harry.

Thank you.

As you know, we have had this very high penetration of outdoor business, all our documents I think reflect that 48% of our business being done in the outdoor zone. We have been vastly overassorted in that business. And we are really focusing on a program of SKU rationalization in that zone. The margins are low there, the turns are slow there. And you know, we have given too much of our real estate and too much of our focus to that business. The competitive landscape has changed there as well, with the expansion of Gander Mountain and Cabella's into some of our markets. It is hard for a sporting goods retailer to take on a category killer in that zone. We think we have a good formula there, we think we have a good following there but we think we can get better productivity out of that inventory. Conversely, we do have respectable turns in our apparel area and footwear area. But we have a major opportunity to expand our presence in the athletic equipment business. I don't think we'll be doing major SKU rationalization in that zone, in fact I think we'll probably be expanding our offerings in that zone so that we can be more competitive with our big box sporting goods competitors. You know, so I think you're going to see as a result of that change in focus a continued emphasis on, you know, holding the line on inventory per square foot, and getting better turns. Additionally, the comment I made to Ellen with regard to, you know, our focus on inventory and flow I think is going to bode well for us in the future.

Okay, thank you.

EITF impact.

Can we script that out what SG&A would have been without that.

For the quarter it was a million one Harry and year to date two million nine.

Okay.

What was the last part of the question?

Okay then on the previous quarter I think you gave a little bit more quantification as far as how much the lagging categories were, you know, and you just said -- could you quantify it a little bit more for us?

You mean the impact on the total business?

Yeah, how much they might have been worse than others, or any quantification you can give us.

I can just tell you that our outdoor equipment and our outer wear business for the third quarter were high single digit worse comps that our athletic business. You know, so relative, you know, probably seven to 9 point spread.

Okay, that's helpful. And then I had -- one other follow-up question, and you started talking a little bit about how you might reposition merchandise a little bit. Could you give anything else on other plans or a little bit more depth on merchandise changes or any other changes going forward to improve operation that we haven't talked about yet?

I think maybe the single biggest thing that we're focused on, Ed shared some of the performance metrics, and we continue to see marketing driving traffic into our stores. And for quite some time our transaction counts have been up and our foot fall in the stores have been up at a higher rate than our sales. And with some of the new credit things that we've put in place, we see our average unit sale up. What has impacted us dramatically is this units per transaction, and the implication there is that we have an opportunity to enhance our customer service. So we have a major program in place focusing on better customer service and, you know, it's a part of the business that Ed Holman ex and understands extremely well and that he's going to focus on his top priority in the company right now is to focus on this customer service effort.

Thank you very much.

Your next question comes from Sean McGowan. Please state your company name.

Harris Nesbitt Gerard. Could you give us the benefit from the insurance settlement please, thank you.

The question was -- the benefit from it?

Yes, sound like in the quarter, you got maybe a settlement from --

On the P&L that we attached to the press release it was about a million dollars net. It was a result of business interruption insurance. And just to review for everybody, we had a tornado destroy our Greenwood store last year in September, so we were out of business in that store until we opened the new Greenwood store this year in May. That business interruption insurance covers the loss profitability of that store from the time the storm hit until the time we opened the new one. So it all hit in the third quarter. We could only recognize it once we received the insurance proceeds. But I think you have to look at that as a recovery of lost profitability of a store for the whole year up to May.

Thank you.

Your next question comes from Matthew Feisler, please state your company name.

Goldman Sachs. This is actually Matt Weir for Matt Feisler. How did you guys generate expense savings for labor hours or your compensation plans you mentioned in the press release, could you go into more detail?

It is really leveraging on hire sales, and open positions in the home office that we elected not to fill. And better productivity of our store associates.

Second question is, beyond performance of new stores, comps by class of store, did new stores comp positive?

New stores comp positive? We don't comp new stores.

Right. How did new stores perform during the quarter?

The group of new stores performed at expectation, the total group.

Thank you.

Your next question comes from Brad Leonard. Please state your company name.

ETG. Hi. I was wondering if you could just comment open the same store sale trends. I think this is five quarters in a row of negative trends. An I just noticed that some of the competitors have had some better trends. What do you think, you've talked about it a little bit as far as the mix of the products. And when do you think they're going to go positive, and what are the, you know, the plans to get them there?

Well, as I mentioned in the earlier part of the call, we have an extraordinarily high penetration of outdoor business. And you know, that has been the lagger of performance in our company. We are in the process of making management changes there. We think we'll have a different kind of focus on that business. And as I mentioned to two previous questioners, we're going to slim those inventories down, compress that space and focus on growing the opportunity businesses in the athletic zone. I think you know if you study the industry, the sporting goods industry, and sort of apply some of these trends, you'll see over the past four, five, six quarters, people who reported publicly have continued to report that the zones performed for them have been in the athletic equipment and apparel zone. We have had great performance in athletic apparel and footwear. The drag on our business has been outdoor business and as I mentioned previously we're focused on correcting that. When do I expect comps go positive, certainly in the first half of next year. I gave comp guidance for the fourth quarter. I think we could be flat to slightly down, you know, low single digit down. We could be up, you know, we have terrific marketing in place for the fourth quarter, where our inventories are the most current they've ever been in the history of the company. So I think we could be positioned with, you know, favorable weather, and a couple of other breaks, to have very positive comps. But I'll tell you, this is a comment that we constantly have to respond to, and it's very difficult, because the other big box sporting goods companies have a much higher penetration of athletic in their box. And you know, when you just purely look at our athletic trends versus our outdoor trends, they're pretty favorable. Our athletic trends, you got to take October out of the quarter, because the impact of the weather, our athletic trends in September and -- or August and September were nicely positive on a comp basis. So you know, I think we've got our arms around some strategies here to position ourselves much more competitively against the sporting goods industry and reduce our reliance on that high penetration of outdoor hard goods that has not served us well over the past year.

Okay. I have one more question if I can. I wasn't aware that you were going to expand that Castleton store. And I'm just wondering I guess the logic behind adding 20-some thousand square feet there when you have another one of your competitors throwing in 45,000 square feet a few blocks away. Just your thoughts on that if you could.

The Castleton store has been our most productive in the company. Whether we had competition or not we had plans to expand that store or add another store in that area. Given the fact that we have a new competitor in town we thought that the prudent thing to do there would be to expand that store as opposed to add a new store and so far the customers are very excited about that expansion.

Okay, thank you.

Your next question comes from Sam Poser. Please state your company name?

Mosaic Research. Thank you. In regard to the -- you mentioned you saved the money through the store, you stay SG&A through store savings, payroll savings. I mean, you're also -- to what effect are you affecting your top line?

We didn't say we saved it through store payroll.

Is that mostly corporate, is that --

That's correct.

And are you -- have you rehired the -- or in the process thereof of rehiring I gets your head merchant for outdoor?

As I mentioned, that's been an area that has lagged for some time for us. And part of our plan as we brought a third GM in was to reduce our reliance on that business. We are currently looking for a divisional merchandiser in that zone, not a general merchandiser. We don't think going forward that business is going to require a general merchandise manager focus. You get out to a lot more stores, we may rethink that and I wouldn't close the door on that totally. But you know, I hope everybody noticed that once we made those management changes we had a game plan in place and you know, did move footwear over to Jeff Brown, along with the apparel. He'd been in the company for five or six months. Gotten his feet on the ground with the apparel business, and this is a guy with ten or 12 years of footwear experience in his resume. And then Lindsay Rice picked up the outdoor hard goods piece as footwear moved over. So it's just a different approach to merchandising the company. The company in the past was merchandised outdoor athletic. The company now is going to be merchandised much more in line with the product categories, with Jeff Brown having the soft lines side of the business and Lindsay Rice having the hard lines of the business.

Thank you. I have one other question. Your accounts payable was up around 13 -- I think it was around 13% year over year. Can you -- is that a terms issue, or -- little over 12%.

Well, if you look at the inventory increase it's just about the same number. AP as a percent of inventory is very consistent year over year. And about a year ago is when we started looking for better terms from our vendors. So we're starting to cycle that. And that's the, you know, we plan to maintain that going forward.

We've done a little bit of follow-up, and as well as some credit reports, and we're hearing that there may be some issues as far as some of the -- even with those extended terms, that some of the payments may be going past those dates. Do you have any comments on that? And some of the vendors are not too happy about it.

I don't have any comment any comment to make on that at all. If there are specifics we'd be happy to look into it. We maintain very good terms with our vendors so I'm not going to comment to a general statement like that.

Can we talk about that offline? Off the call?

Absolutely. Absolutely. Absolutely.

I appreciate it. Thank you very much.

Your next question comes from Dennis Cantalupo. Your line is open.

This is Dennis Cantalupo from Creditntell. Debt has increased a lot year over year and lot of it has to do with growth in the company. You mention right now bank availability is about 43% of the total amount that would be available to you.

Yes.

And you're going to get that debt down to about 40 or 50 million at the end of the fiscal year. What would availability percentagewise be? Availability would have dropped at that point.

I think it would be around that availability level.

43 % range?

40 to 50% would be my estimate.

Okay. Also, I imagine since a lot of times when you open new stores, the first year has been somewhat successful, so anniversarying those sales is a bit difficult. So that's why I expected some drop in comps. Has this drop in comps been more than you expected so far this year?

I think the biggest surprise for us has been warm weather in October.

Okay.

You know, I don't think it has anything to do with our comp store performance. We're up against some grand openings last year that were pretty successful.

That's the point I was trying to make.

There are a lot of moving parts in this business. The impact of weather on our business, because of the large impact of outdoor and outer wear apparel has cost us in the number of quarters over the past couple of years. We've got to reduce our reliance on those portions of business. It just has not served us well.

Okay. Also seen EBITDA margins has dropped substantially, dropped over the past year. And where do you see it settling down as the company reaches its maturity?

I think we have an opportunity to recover some margin. The margin has gone down because we've had to take excess mark downs to carry inventory that we were no longer willing to carry over. As I said earlier we're reducing our inventory levels by the amount of mark downs we're taking so we don't institutionalize the problem. That's not a process that existed in this company previously. And I think we can return to our historical gross margin rates you know over the next 12 to 18 months.

Okay, two more quick questions. The rising debt, is there anything in place now that -- is this something that you're concerned with or is there anything in place to kind of reduce spending and also, if you can elaborate on exactly the effects of landlord financing?

Our debt levels are right in line with all of the long range planning that we had done before. It's not a surprise to us. In fact if anything our debt levels are going to be a little bit lower because of our working capital management. Landlord financing is a question we get all the time. We still get a lot of good deals and we don't take them all but as Ed mentioned earlier in his comments, 50% is what we continue to receive on average. So we don't see that as an issue at all.

Okay and that 50%, that means the landlord has helped fund Cantalupo leasehold improvements?

The landlord really contributes the building and land we pay in rent. We take care of the fixtures the inventory in the preopen.

The land wasn't worth as much he takes on some of the expense, is that the idea behind that?

The idea behind it is we don't want to own real estate.

Okay. Got you. All right, thank you very much.

Sure.

Next question comes from Steve Martin. Your line is open and please state your company name.

Slater Capital Management. There are a couple of stores that clearly have underperformed. Now that you look at your store base is there any thought to closing any of the older stores that have underperformed?

There is no thought to closing anything. Every store contributes to overhead. Every store makes a four-wall profit. We've learned a few things. We've certainly learned that we perform better in four season climates. We have learned that we perform better in suburban locations as opposed to urban locations. And you know, I don't think we currently are entertaining anything in terms of a store closure. If we got to a point where a store was not making a contribution, we would entertain that, go and look at it see if we could reposition ourselves. But at this point in time that's not the case.

The store in Freehold, the Woodbridge store is awful damn close to that. Does that make a lot of sense? What do you think your draw is in terms of radius from those two stores?

We typically do a 20-minute drive time to crunch our numbers. And we don't see significant dilution. There could be some dilution from Freehold. The lion's share of the Woodbridge customer base is to the northwest of the store.

All right. Thank you very much, the rest of my questions have been answered.

And your final question comes from Steve Monticelli. Please state your company name.

Mosaic Investments. I have two questions, first regarding cap ex. Your financial statement shows 66 million in cap ex for the first nine months of the year. And in your press release you talk about having opened all the stores you intended to open by the end of the third quarter. Yet you're talking about cap ex for the year being 80 to $85 million. Can you fill us in on the differential there?

Payments lag the actual building of the store. It's all around land lord financing, it's all about paying the bills and getting the assets on the books.

So the extra 15 to $20 million is part of your, what, accrued expenses?

You have -- we're opening four stores in the spring. There's already capital expenditures for those four stores in the spring.

Plus home office expenditures as well.

Right. I'm trying to focus on the openings for this current fiscal year.

: Well, but I think Bob's point that he just made is very important. One, we're already spending money for next year's store openings.

I understand what you're saying. Second question has to do with advertising. A couple of months ago there was a story in the local Indianapolis paper about a substantial increase in your media spend for the second half of the year which I don't think you've talked about previously. Can you shed some light on what your intentions are for balance of the year and what markets and what media? In other words, little bit of color on your plans.

We have been, I guess the best way to describe it is testing our branding effort based on consumer research. You know, our consumer research indicates that we get great credit in our -- with our customers for the dramatic interactive fun shopping environment we provide. We get great credit for the assortments and other motivation to come to Galyan's is looking for the newest products. So we wanted to reinforce that with our customers. We've been testing that in a handful of markets. You know, we are trying to figure out exactly when we're going to roll that out, and you know we certainly want to roll it out when we can afford to roll it out. But primarily at this point in time we're in the testing phase of that concept.

So the rollout if it takes place would be next fiscal year?

Yes.

Okay. And can you share with us which markets you've been testing?

No.

All right, thank you.

Well, I see we have no more questions so I'd like to thank everybody for joining us on the third quarter conference call. We'll be speaking to you next year on fourth quarter and year end results.

This concludes collude today's conference call. You can disconnect at this time.