DICK'S Sporting Goods Inc (DKS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Dick's Sporting Goods, Inc. earnings conference call.

My name is Carlo, and I will be your coordinator for today's call.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this presentation. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the presentation over to your host for today's call, Mr. Jeff Hennion, Senior Vice President of Strategic Planning.

Please proceed, sir.

Thank you, and good morning to everyone participating in today's conference call to discuss 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 DicksSportingGoods.com for approximately 30 days.

In addition, as detailed in our press release, a dial-in replay will be available for approximately 30 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 second-quarter financial and operating results, review the guidance contained in our press release and provide an update on the Galyan's conversion.

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

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

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

Thanks, Jeff.

I'd like to thank everyone for joining us this morning.

We are pleased to be able to report the results of our second quarter, which represents another quarter of double-digit earnings growth.

This quarter, our net income of 17.9 million increased 16 percent over the net income of 15.5 million in last year's second quarter.

This equates to EPS of 34 cents per fully-diluted share, as compared to 31 cents per share last year, an increase of 10 percent.

Last year's earnings included the effect of a 1.2 million pre-tax gain resulting from the sale of a non-cash investment in an Internet service company, and this year's results include 1.2 million of pre-tax store relocation expense.

Adjusting for those two items, earnings per share increased 21 percent, from 29 cents per diluted share to 35 cents per diluted share.

We completed the acquisition of Galyan's on July 29, through a stock purchase at 16.75 per share, as described in earlier press releases.

Included in the second-quarter results are three days of Galyan's activity, which was not significant.

Sales for the quarter increased 18 percent to $416.1 million, and comp sales increased 2.9 percent.

During the quarter, we saw favorable results in men's, women's and kids' apparel, footwear, baseball and licensed merchandise.

Those favorable results were somewhat offset by a few businesses, including inline skates, street shoes and camping.

Our private-label business continues to grow.

In the second quarter, private label product sales totaled $50 million or 12 percent of sales, compared to 10.6 percent last year.

On a year-to-date basis, our private label product sales represented 11 percent of sales compared to 8.9 percent last year.

We continue to be excited about the quality of the growth in our private label business, in particular the line of exercise equipment we launched under the Fitness Gear name, a number of products in men's and kids' golf, our line of boots licensed under the Field & Stream label, and our Quest canopy and tent series all contributed to the growth in the first half of this year.

Net income in the first half of the year increased 30 percent to 28.8 million over last year's net income of 22.1 million.

Comp-store sales for the first half of the year increased 3.8 percent.

We are pleased with what we've learned in the two and a half weeks that we've owned Galyan's, and have had access to people and more detailed information.

As you will recall, we said initially that Galyan's acquisition would be slightly accretive in 2004, and we've raised our EPS guidance to $1.28 to $1.30 a share.

Factored into that earlier guidance was the potential that the Galyan's transaction could close as early as the end of the second quarter.

Today, based on our current forecast the remainder of the year, we are raising our guidance by 5 percent to $1.35 to $1.37 a share.

We estimate the Galyan's acquisition to be approximately 6 cents per share accretive for the year, before merger integration and store closing costs.

This revised guidance includes account sales assumptions for the year of 2 to 3 percent.

Galyan's stores are not included in the comparable store base until 13 months after the completion of the rebranding and remerchandising effort expected to occur in the first half of 2005.

Net income is expected to be approximately $71.7 million.

We are also raising our earnings per share guidance for the full year of 2005 to $1.77 to $1.82 a share, from $1.70 to $1.75 a share.

Beginning in 2005, our earnings guidance includes $20 million in estimated annual savings and merchandising buying improvements, and includes merger integration and store closing costs associated with the Galyan's purchase.

For the third quarter, we expect earnings of 3 to 4 cents per share, which includes a 9 cent loss from the operation of Galyan's and excludes merger integration store closing charges.

This compares to earnings of 9 cents per share last year.

We expect our net income for the third quarter to be approximately 1.9 million, which includes an estimated $4.5 million loss from the operation of Galyan's and compares to last year's net income of $4.7 million.

Comp sales for the third quarter are expected to increase 2 to 3 percent.

We also are providing guidance today for our fourth quarter.

In the fourth quarter, we expect EPS of 77 to 78 cents per share, excluding merger integration and store closing costs, as compared to 50 cents per share last year.

Included in this guidance is an estimated income of approximately 15 cents per share from operations at Galyan's, or approximately $8 million.

We closed on the Galyan's transaction two and a half weeks ago.

A more detailed conversion plan is being refined, with our primary objectives being the synchronizing of the merchandising assortment and the reopening of the Galyan's stores as Dick's Sporting Goods stores during the first half of 2005.

We are well underway with the conversion process.

We have interviewed Galyan's corporate personnel, extended and have received acceptances for about 30 new positions in Pittsburgh.

We have visited every Galyan's store, meeting with store personnel to talk about their business problems and opportunities.

We have accessed the Galyan's systems in conjunction with the transition plans.

Galyan's head plant opened four more new stores in 2004.

We have begun the effort to open three of the stores as Dick's Sporting Goods stores.

The fourth opens as a Galyan's pending conversion of the Chicago market in early 2005.

We have been in contact with a number of vendors to ensure the continued flow of merchandise in order to make earnings forecasts for the remainder of the year.

As previously discussed, as a result of the acquisition, we expect to closed a relatively few number of stores, some from each chain due to overlap or financial performance.

Given that we have had access to detailed Galyan's information for less than three weeks, we are still in the process of evaluating potential store closings, and are not prepared at this time to discuss which stores we expect to close, or our expectation for total integration costs.

All in all, it has been a busy quarter.

We are pleased to have been able to deliver such solid results.

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

Thanks, Ed.

During the second quarter, we opened four new single-level Dick's stores.

These new stores were all planned to open at the beginning of the third quarter, but we soft-opened them the last week of the second quarter.

Two of these stores were in new markets -- one in Springfield, IL and the other in Steubenville, OH.

Two of the stores opened were in existing markets -- our seventh store in Cincinnati, OH and our fourth store in Albany, NY.

We also relocated three Dick's stores in the second quarter, in Kansas City, MO and Raleigh, NC -- both of which were two-level stores -- and Harrisburg, PA.

These relocations emphasized our desire to ensure our stores are fresh and in the best retail nodes.

As of July 31st, we operated 221 stores in 32 states, including 173 Dick's stores and 148 Galyan's stores.

Looking to the third quarter, we expect to open 12 stores.

One -- Enfield, CT -- has already opened.

This was our fourth store in the Hartford, CT market.

The remaining stores will be located in Pottstown, PA, our 13th store in Philadelphia's Southern New Jersey market;

Fort Wayne, IN, our second store in Fort Wayne;

Meriden, CT, our fifth store in the Hartford market;

Carmel, IN, our fourth store in Indianapolis, in addition to the five Galyan's stores; two new stores in Madison, WI, our first two stores in the Madison market in addition to the Galyan's store that opened earlier this year;

Westlake, OH, our eighth store in Cleveland; and Bangor, ME;

Lafayette, IN;

Hadley, MA; and Muskegon, MI.

Of the 12 new stores expected to open this quarter, four will be the larger two-level format, and the remainder will be the single-level store.

We continue to execute our strategy of filling in existing markets and opening up new stores within our geographic footprint.

For the year in total, we now expect to open 28 new stores this year, as our prior guidance has increased to include the three stores that we planned to open that were expected to be opened as Galyan's stores.

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

Thanks, Bill.

Sales for the quarter increased 18 percent to 416 million, with a comp-store sales gain of 2.9 percent.

Gross profit increased 130 basis points to 28.6 percent.

This increase was due largely to expansion of our merchandise margin and the reclassification of cooperative advertising funds, partially offset by 1.2 million of expense associated with the relocation of three stores during the quarter.

Our SG&A expenses increased by 15.6 million to 85.9 million, or 20.6 percent of sales, 70 basis points higher than last year's second quarter.

Leverage on store payroll expenses was offset by higher incentive compensation accruals and the reclassification of cooperative advertising funds.

Preopening expenses of 2.4 million were 1.2 million higher than last year.

We opened four new stores and relocated three stores this year, compared to two new stores in last year's second quarter.

The difference in preopening expenses relates more to timing than to a change in average preopening cost per store.

Operating income increased 23 percent to 30.8 million, or 7.4 percent of sales versus 7.1 percent of sales last year.

Interest expense of 959,000 was $424,000 higher than last year, due to the interest expense net of interest income associated with the $145 million of net proceeds from the convertible note offering completed in February of this year.

Net income of 17.9 million this quarter was a 16 percent improvement over the 15.5 million net income of last year.

This equates to 34 cents per share or 10 percent increase, versus 31 cents per share last year.

Year to date, sales have increased 19 percent to 780 million, with a comp-store sales gain of 3.8 percent.

We opened 10 stores through the end of the second quarter this year.

Gross profit increased 110 basis points to 28.4 percent.

Again, this increase was due largely to the expansion of our merchandise margin and the reclassification of cooperative advertising funds, partially offset by the 1.2 million of expense associated with the relocation of the three stores this past quarter.

Our SG&A expense increased by 28.9 million to $168 million or 21.5 percent of sales, 40 basis points higher than last year.

Leverage on store payroll expenses were offset again by higher incentive compensation accruals, the reclassification of corporate advertising funds, and increased advertising expenditures.

Preopening expenses of 5.1 million were 1.5 million higher than last year.

We opened a total of 10 new stores, relocated three stores through the second quarter of this year, compared to 10 new stores and one relocation through the second quarter of last year.

The difference in preopening expenses again relates more to timing than to a change in average preopening cost per store.

Operating income increased 32 percent to 48.6 million or 6.2 percent of sales versus 5.6 percent of sales last year.

Interest expense of 1.6 million was $560,000 higher than last year, due to interest expense net of interest income associated with the $145 million of net proceeds from the convertible note offering.

Net income of 28.8 million was a 30 percent improvement over the 22.1 million net income of last year.

This equates to 55 cents per share, or a 22 percent increase versus the 45 cents per share last year.

As to the balance sheet, our inventory position continues to be in good shape.

Inventory turn for Dick's stores increased slightly, and the inventory per square foot for Dick's stores was down 5 percent versus last year.

We ended the second quarter with 160 million of outstanding borrowings on our line of credit, due to using the line to fund a portion of the acquisition of Galyan's.

We closed on the Galyan's transaction on July 29th.

Source and use of funds from this acquisition are as follows.

We purchased shares including options for $305 million, paid off the Galyan's revolver of $57 million, for total funds requirement of $362 million, less cash on the balance sheet of Galyan's at $18 million results in the $344 million shown on our cash flow statement.

The $362 million was funded by 192 million in investments on our balance sheet prior to the closing, and $170 million from the revolving credit facility.

In July, the revolving credit facility was increased from $180 million to $350 million, and extended to July 2006.

Excess borrowing availability totaled $157 million at the end of the quarter.

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

(OPERATOR INSTRUCTIONS).

Rick Nelson, Stephens.

Congratulations.

As you get into Galyan's a little deeper, Ed, what do you see as the major opportunities in terms of merchandising, marketing, operations or expense takeout?

Anything new that you're picking up?

We see a number of opportunities in the Galyan's stores and operations.

We see a pretty significant opportunity in the -- from a merchandising standpoint, certain categories of business that are underdeveloped in Galyan's that we have developed at a pretty high level, including the golf business.

We think that there is a very big upside from a golf standpoint in Galyan's.

We also feel from a merchandising standpoint that inventory control is going to be very important.

We feel that we can move these inventory turns inside the Galyan's store fairly quickly, to mirror the inventory turns that we have been able to achieve, which will help raise that gross margin rate by mitigating markdown pressure on the back end, which we've done.

We have taken a look also on the expense side, and have been pleased with what we see to be able to takeout from a synergy standpoint, from duplicative costs not only in the corporate office area, but also from an advertising standpoint.

So the more we get into this, we're very pleased with how this is playing out right now.

And can you break down the 20 million in synergies, how that divides up between expense savings and gross margin and benefits and redundant advertising?

Rick, we're going to be consistent with what we said today until we get further into this, and at this point, our estimates are they're pretty equally divided between merchandise margin and cost synergies.

And how about store openings for 2005?

We haven't provided guidance in 2005 for store openings.

We've said in the past we will open up at least 15 new stores in 2005.

Virginia Genereux, Merrill Lynch.

Two questions, if I may?

Maybe Mike, can you talk if I add back the relo expenses in the gross margin, gross margins were up 160 bits.

If you could talk a little bit about maybe quantify specifically the merchandise shift, and the merchandise improvement in the EITF shift there, and SG&A as well, please?

The EITF shift accounted for about 35 basis points, which is the most -- and then the balance of that is primarily merchandise margin.

And last quarter, you said that you expected to maybe drive some SG&A leverage this year.

Gross margins are coming in so strong, you don't need to.

And as you look out, do you think that -- do you need SG&A leverage at all, or can you continue to drive operating margins with just --?

Certainly, Virginia, our expectation is to leverage the SG&A line, and I think to get out (ph) with the guidance which we were committed to at the beginning of the year.

As we go through this Galyan's acquisition, I think this is a variable that was not anticipated in connection with that earlier assessment.

So I think again, at the end of the day, we're earnings focused, and the year-over-year improvements I think we're pretty comfortable with.

And then, secondly, if I -- I know you opened -- I know most of your new store openings -- well, all the new store openings were in the last week of the quarter, Bill said.

Even if I adjust for that, it looks like sales per square foot grew about the same as comp.

In the last couple of quarters, they have been beating the comp.

Were your new stores --maybe just overthinking it here, but were your new stores -- did you see any slowdown in the sort of productivity of your new stores this quarter?

Did not.

I think if you go through that new store productivity exercise, and adjust for the late opening -- or the early opening stores, I think you look at a new store productivity that's approximately 90 percent.

Matthew Fassler, Goldman Sachs.

A couple of questions, if I could.

Could you refresh our memory on how you plan to handle distribution for the Galyan's stores?

Distribution for the Galyan's stores will be out of the Indianapolis distribution center.

And is there opportunity, would you say, in terms of efficiency in that facility?

We think that they have been a very good job running that facility today.

Efficiencies will come as we move forward into the remerchandising and rebranding effort.

We will then take a look from a freight savings to see which distribution center should service what stores, and there will be some modifications at that point, but at least through the balance of this year, all of the present Galyan's stores will be serviced out of the Indianapolis distribution center.

A second question on Galyan's, if I could.

Could you talk about quality of the inventory that you now own in those stores, and to the extent that you need to clear some of it because it doesn't match your assortments, or some of it is aided -- how would you account for that?

I think that the group has done a really very good job of taking a look and anticipating classifications of merchandise that we would not be going forward with.

Their quality of inventories is really in very good shape, although a bit lower than we would like it to be right now.

We are in the process of moving those inventory levels back up to appropriate levels, but the quality of the inventory there is really very good.

We've taken a look at some of the categories that we will probably exit, which is more of the fashion, junior, young men's businesses that Galyan's was in, that Galyan's was actually in the process of scaling back.

They've done a very good job of cutting off receipts of private-label Galyan's branded merchandise, where there is virtually none of that product coming in after October, and a little bit sprinkling into November, but for the most part, at the end of October, the branded Galyan's private-label product is -- that spigot's been shut off.

So the group has done really a very good job.

We have gotten into this quickly, and the group that was here at Galyan's did a great job anticipating some of these moves, and were very helpful.

And just a final question on the deal.

Clearly, there is a tremendous amount of opportunity, and you took your guidance up I guess to reflect that.

If I'm not mistaken, the $28 million synergy number per se is a number that I think has been consistent from the time of the deal.

So to the extent that the guidance reflects Galyan's performance, is it elsewhere beyond those 20 million of synergies, or am I misunderstanding how the numbers are laid out?

I think you've got it, Matt.

I think it's frankly our assessment of the core business, and our expectations as we came into this, as we've gotten into this -- as we've talked about, gotten into a little bit more of the granular information.

We're comfortable with the base business to a greater degree, and hence that will be increasing (ph).

Bob Simonson, William Blair.

Mike, in an attempt to try to get at how fast your credit line will start coming down with cash flow, you've kind of given us the top line to net income.

Can you offer any guidance on depreciation expense for this year and next, as well as some range of CapEx for this year and next?

Bob, the CapEx line frankly, we're still looking at the Galyan's stores again, because of the newness of this, so I would like to ask you to hold off on the CapEx and how it would actually impact the depreciation line, as well.

You are correct, though, in saying that we are intending to be paying down these borrowings as quickly as we prudently can.

As to Ed's point about changing inventory in the stores, is there -- if it was a little bit lower, then I assume that getting out of what you are not going to be in, plus putting in what you would like them to have more of -- there's no, in the short term, necessarily any above-average working capital needs at the Galyan's stores from an inventory standpoint?

That's correct.

George Lusch, Fulcrum.

I was wondering, could you guys comment on your sales trends through the quarter, and maybe give a little detail on the camping category, what may be going on there.

And then, I guess as you look out at the second half of the year, in terms of your comp guidance, does the reduction in the fourth quarter just really reflect the comparisons getting more difficult?

Let me just quickly speak to trends, in that in the past, we really haven't gone through trends during the course of the quarter.

Ed, you probably want to handle the capping side and --

On the camping, we haven't talked specifically in the camping business what some of the issues are.

But what's happened in a camping business is there has been -- this quarter continued some price compression on the furniture side of the business, which was a pretty significant portion of the reduction in the camping business, and the capping business ended up to be on plan of what we had anticipated, but was slightly off from last year.

From the comp guidance of the fourth quarter, we're up against a pretty difficult comparison of 4.6 percent in the fourth quarter last year, and certainly as you take a look at that versus others in this industry, that was a very strong performance.

We're trying to be conservative in our projections, the way that we build the business, but if you take a look at the two-year comp total across the quarters -- first, second, third and fourth quarter -- our comp two-year guidance for this would be Q1 was actually 3.7 percent.

Q2, the last two years was 4.4 percent.

Our guidance in Q3 is 5 percent, and our guidance into Q4 for the last two years would be 6.1 percent.

So the two-year cumulative number has actually accelerated.

Charles Grom, J.P. Morgan.

As you resort the new stores, have you thought about increasing or decreasing the dedicated floor space to certain product categories, or will the stores essentially resemble the existing fixed-store layout?

The stores will very similarly be represented by what you say in a Dick's two-level store today.

A couple of the areas that will have some additional space versus what Galyan's provides today is the golf area will have more square footage, by probably 3,000 square feet more than what Galyan's has today.

The team sports area will have more square footage than Galyan's does today, and the majority of that square footage will come out of the -- as we characterize the fashion apparel side of the business that we've not been into, and that Galyan's was actually scaling down or in some cases exiting.

Second question -- when you look at your SG&A ratio versus Galyan's there's a pretty wide gap there.

I was wondering if you could comment on how low you think you can get Galyan's SG&A ratio and the timeline for that closing the gap?

It's still a little bit too early.

We've owned this for two and a half weeks.

You take a look at all of the savings and synergies we talked about, of $20 million into next year, we're quite comfortable we will be able to achieve those.

Last question -- can you just clarify, is it just camping that's weak and hunting and fishing is doing okay, or is it the three weak across the board?

As we indicated in our previous call, we had a strategy in place for the lodge business, as we characterize it -- the hunting, camping and fishing area -- and that we thought we would see pretty significant improvement in the first and second quarter, and we did see that improvement.

We are very pleased with the traction we have in these categories, and are pretty enthusiastic about these categories, especially the hunting category going into the third and fourth quarter.

Jim Duffy, Thomas Weisel Partners.

Just a question on what happened to the Galyan's merchandise categories that you were hoping to get out of?

Are you liquidating these aggressively?

If so, when does that happen?

We don't feel that we need to liquidate them aggressively.

As I said, the group we've been talking -- once we announced the deal, and everybody got comfortable, we had been talking with Galyan's management at that time, and their merchandising groups, and they really did a very good job, and we appreciate their help and commend their efforts to reduce incoming receipts of this product that we would not be going forward with.

They were also already in the process of doing that, trying to scale back some of this fashion product, so if you walk into a Galyan's store today, you'll see quite a bit less of that product than you would have seen last year.

But the prior management of Galyan's was certainly helpful to mitigate this process for us.

So we're pretty comfortable we can liquidate this product, and not have to have a significant impact on margins.

Presumably, you have the option to cancel some orders that were made by Galyan's that you are not interested in, for merchandise you are not interested in?

Yes, we've talked with a number of our vendors, and even before we closed, our merchants were talking and talking with the people here at Galyan's and have already made some of those modifications, not only on the side to cancel merchandise that we don't want, but also on the side to drive additional merchandise into the stores that we think is appropriate and certainly timely.

I know we just placed a pretty significant order of Under Armour last week to come in for the back-to-school season and the football season, and this was a pretty sizable order.

We talked with Under Armour, worked that through with them, and the merchandise is actually shipping this week and should be in the stores by next weekend.

Originally, your goal was to have merchandise assortment in line with the Dick's stores by the first half of '05.

Are we going to see that a little bit sooner, maybe even in Q4 timeframe?

I guess part of that question would be will you be able to get enough inventory in the categories that you want?

We don't anticipate this process being completed in Q4.

We have indicated that we think it will -- we've continued to guide that it will be completed by the first half of next year, and it will be a phased-in approach, and we are we are very pleased with the results we've made to date.

And the inventory that you're asking for, incremental total orders to the Dick's stores would be -- are you able to get the same pricing on that, as you're expediting orders forward?

We are actually able to get the same pricing.

Nobody has attempted to raise prices.

You have to remember, we are now (multiple speakers) significantly larger than we were before.

In the fourth quarter, we will probably be the largest full-line sporting goods retailer in the country, from a sales standpoint.

So the vendors are very helpful to commit to this process, to make sure that we have inventory in the stores.

They are not looking to make a couple of extra points on products today, knowing that we are going to come back with significant orders going into next year.

So the vendor community has been extremely helpful.

Sean McGowan, Harris Nesbitt.

I also have a couple of questions, if I can.

One's just to clarify -- so, if the Galyan's stores will not be in the comp base until the rebranding is completed, that is to say that they won't be in the base until sometime in 2006?

Correct.

Regarding new stores being opened, you mentioned that of the 12 planned in the third quarter, four will be the larger two-level format.

Is that the same basic size, the roughly 75,000 square feet that you have been talking about before?

It's roughly the same size, yes.

Last question -- have you indicated at all timing and the total amount of merger and integration costs you expect for the total project?

We haven't done that yet.

As we said, we've owned it for about two and a half weeks, and going through that, and we're going through a number of assessments, and are not ready to guide on that yet.

Anthony Lebiedzinski, Sidoti & Co.

A couple questions -- could you comment at all how the performance of Galyan's stores was in the second quarter?

We are not ready to provide information on Galyan's performance.

These stores came in -- they closed their own books.

We were more concerned with the beginning balance sheet, so that we accounted for that correctly.

So we're really not in a position to comment on their results for the second quarter.

Looking at the guidance that you provided, you said that you expect Galyan's to contribute to net income of 3.5 million.

I was just wondering -- it seems rather somewhat low, actually.

If you look at actually Galyan's on a stand-alone basis last year, their net income in the second half of fiscal '03 was around roughly 6.4 million.

Could you comment on that?

I think we're trying to get our hands around this thing, and we want to guide to numbers that we're comfortable in.

There's a number of changes going on here, including on the personnel side.

So you can understand our wanting to provide a reasonable achievable earnings guidance number.

Lastly, the guidance that you gave for the third quarter and fourth quarter -- what are you assuming for total sales for both quarters, please?

We haven't provided guidance for the sales line.

Sam Poser, Mosaic Research.

Can you talk about -- you're getting good growth out of your private label businesses.

Can you talk about the branded, and what's going on with the average selling prices across the categories?

Average selling price has not changed an awful lot.

It's stayed relatively flat.

One of the things that we've done with our private label and our product development group is that we didn't really want this product to be at the low end in opening price points.

This product that we've brought in is kind of in that second-tier price point.

Walter Hagan driver that we've launched is $200 to $249.

Walter Hagan irons are $400 for the cast set, roughly $600 for the players, the blade.

So we've really launched these products kind of in that mid-tier price zone, and as our private label grows, we don't expect it to reduce our average ticket.

And outside of private label, things have stayed about the same?

Yes, I mean, if there's anything that the average ticket from footwear, you could conclude has gone up slightly, with Nike Shox and the Nike Miler that's out moving those shoes into that $100 price point that had been so popular that it's been pretty well chronicled.

So you can make the assumption that the average footwear ticket has gone up slightly.

While you are in footwear, in the outdoor part of the footwear business, are you seeing that business start to gain more traction recently?

We have been pretty pleased with our footwear business across all categories.

Jason West, Deutsche Bank.

Just a question on the fitness category.

There are some other players in the industry talking about weakness in the fitness, and just wondering what your comments are there?

Well, I think the fitness business can be somewhat difficult right now.

There's been some price increases, from a steel standpoint, so metal plates, weight benches, some prices have gone up.

But we've found ways to mitigate some of that pressure that it's been putting on sales, because of the increase in prices, focusing on hot product infomercial items.

So we've -- for competitive reasons, I don't want to lay out why we're doing pretty well, but we're really quite pleased with what's going on in the fitness area right now.

And then, a separate question -- I guess as you guys moved the mix around a little bit at the Galyan's stores, to what I assume are maybe lower-margin products out of some apparel items, is that going to affect what their margins are in that business materially?

I'm sorry -- what lower-margin products were you talking about?

If you move to more equipment from some of the apparel items they were selling before.

I think the margins in Galyan's will actually go up, because although possibly the IMUs are higher than what they are on hard lines (ph), their margins cleaned up.

After they get through all the clearance aspect of this fashion, the fashion product was down somewhat substantially.

And to have a more predictable margin rate, we think is important and we don't really think that there's going to be margin erosion inside the Galyan's stores.

We actually think we'll be able to take the margin rates up.

Stephen Chang, Kingsford Capital.

My questions actually have been answered already.

Suri Nadessant (ph), Wachovia Securities.

Regarding your bank debt, what is the current size of the debt and maturity, and what is the total all-in cost that you paid in the last quarter, as you ended the quarter?

I'm sorry, could you repeat the question, please?

Regarding your bank debt, what is the current size of the debt, as well as the latest maturity, and also the cost -- as you were exiting the quarter, what is the all-in cost, the interest cost of the debt?

We are borrowing at 125 basis points over LIBOR.

The facility balance at the end of the quarter was 160 million, and that's of a total facility size of 350 million.

And the maturities are still May of 2006?

Yes.

Now, earlier on in the call, you said that you hope to pay down that debt with cash flow from operations.

Is that the goal over the next couple of years, or are you likely to think about increasing the maturity of that debt, maybe even (ph) public debt?

We'd look at financing alternatives repeatedly and continuously, as we go forward.

At this point, the Company throws up (ph) a healthy free cash flow, and that cash flow will be used to pay down debt.

But we will revisit the financial structure of the balance sheet periodically, as we have done in the past.

A question regarding your convertible debt.

That debt is contingent convertible debt.

Now, if the new rules about that type of debt takes effect, and the consequent effect on EPS -- now is your debt -- can you switch to a treasury stock method of accounting for that, or would you have to fully account for the shares in that convertible debt in your diluted EPS?

Given that we've got the ability to settle with cash, the effect we believe on the diluted shares outstanding will be minimal, but I'd actually also like to hold off until they finalize the regulations, to the extent that those rules even get issued in their current form.

I think the key observation is that we have a cash settlement option which substantially reduces any potential dilution.

Last question is regarding the merger and integration costs.

I know you haven't given a dollar amount or range of dollars for that, but do you plan to take an upfront merger result for these cost, or do you plan to book them as you go along?

Actually, it is some of both.

Purchase accounting requires you to book the assets at the fair market value on the date of acquisition, so we have made an estimate of that.

The accounting literature also allows -- and frankly it is customary to make periodic adjustments to that purchase price allocations up to one year after the date of the acquisition.

Dan Mendoza, OMT Capital.

I had a few questions.

Could you give us some guidance on when you might be able to give guidance on what the integration costs are likely to be?

I expect we'll be in a much better position in connection with the next quarterly earnings release.

So that's like six months after the acquisition.

Can you -- there's no expectation or no possibility of giving us some guidance during the quarter at some sort public event?

Our thinking at this point is that it would be most logical to be doing that in conjunction with our next earnings release.

That would be (ph) the third quarter.

I may have missed this during the call, but can you just help us identify some kind of the key hurdles, in terms of getting past integration risks?

What are the key things on the checklist, and what is the timing?

The main aspect of this is to synchronize the merchandising assortments.

And as I said, we are well on our way of moving as quickly as we possibly can.

Our golf business, for instance, is being run right now almost exclusively out of Pittsburgh, and we are moving that along very quickly.

Certain aspects of the apparel business are being run out of Pittsburgh that we've been able to, as I said, work with a group that is here in Indianapolis, with our apparel group, to make sure that one of the key items for back-to-school and into the fall selling seasons is Under Armour, and make sure that the Galyan's stores are fully inventoried from -- with Under Armour, which is obviously an extremely important category of product and a very high margin product for us.

So there are those merchandise synchronization aspects that are certainly key, and we are well on our way to getting those accomplished.

Okay, so will it -- is this quarter the critical time period where something -- if something was going to go wrong, it would be this quarter, or when can you kind of declare victory on that front?

We have indicated that we don't expect to have these merchandise -- fully assorted with our merchandise until the first half of 2005.

Michael McTighe, First Albany Capital.

Can you possibly discuss the private-label opportunity that you see at Galyan's?

We see the private label opportunity in Galyan's to have the same impact that we have inside the Dick's stores.

The Galyan's transaction, as we have indicated in the past, was primarily a real estate transaction, and we anticipate assorting these stores as quickly as we can, with the assortment in the Dick's Sporting Goods stores.

So the private label assortment will be pretty similar in the Galyan's stores, as they are in the two-level Dick's stores.

Kind of another question -- (technical difficulty) any pressure in the -- particularly in the outdoor category, given the growth of both Gander and (indiscernible) recently?

We had indicated that in the past, what we have seen is a reduction in that area for the first year that a new competitor opens, and then the business snaps back after that.

Where we have competed with Gander Mountain, with their new large-format store, and have anniversaried a couple of those stores, we have seen that same result.

So we are starting to comp in those stores.

We also indicated that we've put together an outdoor strategy for this year, and we have had that in place, and our first quarter and especially our second quarter, we are very pleased with those results, and are certainly (ph) optimistic about that business going into the third and fourth quarter.

Kind of following on that, any impact from the TSA -- the Sports Authority and remodels (ph) in the markets where they've remodeled those stores?

None whatsoever.

And just one kind of last one.

Have you guys provided a comp assumption for 2005?

A comp assumption for what?

For 2005?

No, we have not.

Bob Simonson, William Blair.

(technical difficulty) to a prior question when you were talking about the Galyan's stores and the expense ratios -- after they've been reformatted and up and running for a while, is there any structural reason why the expense ratio would be any different than a big store?

The only difference would be, Bob, from the standpoint that some of the stores are slightly larger than our stores, from a square footage standpoint.

Other than that --

Meaning that they would have more labor in them, or --?

No, that they would have more rent -- just the cost per square foot from a rental standpoint.

So you're throwing in occupancy, as well, when you talk to that issue, as opposed to just the straight store operating expense x-rent.

Correct.

It's part of our store contribution rate, is the way we would look at it.

And at the time you announced the deal, and there was some discussion, I think you mentioned some categories skiing.

Have you made any decisions on whether you're going to keep or get out of that category?

We are still looking at that.

We will be in that category in the Galyan's stores this fall and winter, as that merchandise has been bought.

And we will take a look at this, and we'll probably make that decision sometime in the middle of December to the middle of January if we're going to go forward with it next year.

And the last one -- what was the percentage of private label at Galyan's?

I don't have that number off the top of my head, but my sense is it's going to be somewhere around 7 percent.

So there's some real room there?

Yes.

Brad Leonard (ph), (technical difficulty).

Once you guys get the inventory straightened out there at Galyan's is there any reason to expect you're not going to be able to get these stores operating at Dick's standards?

No reason at all.

That's what we expect to do.

Okay.

So you are thinking sometime in the middle of '05?

Yes.

Charles Hobbs (ph), Conecos (ph).

Just a couple of follow-ups on the beginning balance sheet for Galyan's.

I know you haven't given a lot of detail, as far as what that looked like and what your integration charges are going to be, but since you only owned it for three days, you can get a pretty good sense, I think, by backing out what your balance sheet should looked like from a cash-flow statement.

It looks like inventory for Galyan's was down about $25 million, $24 million sequentially.

You mentioned that earlier in the call, so just as a follow-up, were they doing something there at the store?

Is that part of the remerchandising?

Because sequentially it usually has gone up in the July quarter, so can you just give a little color as to what was going on sort before you acquired this thing to make that number down?

The group at Galyan's was trying to -- they were focused on trying to increase their inventory turns.

They drove the inventory down, and it is very difficult when you try to take that much inventory out of a store, or out of a Company, that it is tough to calibrate it.

Their Q1 inventory was down, also, and it was just -- it was the strategy that they had put in place, which I think was appropriate, trying to get that inventory in line and be more efficient with their working capital.

So that was not a valuation decline on your side, taking on the inventory and revaluing it down; that was just what their process was happening before you took it over?

Correct.

There would have been some valuation reserve in there, in connection with merchandise that we did not expect to be going forward with.

But to Ed's point, directionally, the folks at Galyan's had recognized they needed to do a better job with inventory turn.

They were synchronizing their assortment to give more weight to sporting goods, and prior to obviously any of these conversations even beginning, and at the end of the first quarter, when Galyan's announced their own stand-alone operating results, inventory was down pretty meaningfully.

Okay, and then the second follow-up, and I know we can't get into the specifics here until next quarter, but if I do the same analysis on accounts payable and accrued expenses, now accounts payable should also come down if they're working down inventory a little bit.

Just accounts payable were up almost $30 million, so actually if it should have declined, would inventories would have been up even more than that, sequentially.

And accrued expenses were up $27 million, so I'm getting probably somewhere in the $60 to $70 million range of increase.

Is that a general idea of what you guys put up for reserves, for integration costs and other stuff?

No, we're not providing any guidance as to what we've done on the reserve standpoint, because it is so frankly speculative at this point, and that's why I made reference earlier to the accounting literature, which allows and frankly which you customarily see as a periodic adjustment of the opening balance sheet, up to one year after the date of the acquisition.

Well, I guess I'm not trying to get at what you think it will be at the end of the day, because I agreed there is a year adjustment period, but is that in the general range?

I mean, clearly those numbers went up sequentially, so when you brought on the beginning balance sheet, you must have marked them at those levels, so they were both up significantly sequentially.

Accrued expenses had always been flat.

In this quarter to quarter at Galyan's when you look at it historically, it was actually down last year, so that's about 30 million above what it normally runs, and then the payables should have been down, as well, in line with inventories.

So that's about another 30 to 35.

I'm easily getting 60 to 65.

I'm not really trying to get at is that what you think the final number will be.

I'm just trying to get some order of magnitude of what brought this on on a beginning balance sheet basis?

I think, without looking at the analysis that you are looking at, it gets a little bit difficult for me to respond to that directly.

The balances of inventory of accounts payable year over year, I don't know how those -- I haven't done that comparison, because I was more concerned about the opening balance sheet than the comparison of their balance sheet versus prior periods.

Okay.

So you won't even give a general number here?

Okay.

All right.

Thank you, sirs.

Scott Krasik, C. L. King.

Good quarter.

I know you don't like to talk about interquarterly comps or sales trends, but with the general acknowledgment of the consumer slowdown in June, by both your competitors and across retailing, were your underperforming categories on plan up until that point, or had they been underperforming the entire quarter?

We indicated that -- we talked about inline skates and camping are the two largest categories.

The camping business has been under some pressure, and hasn't performed well, and the inline skate business is just a business that just continues to deteriorate, and we planned it down pretty significantly.

So we are just calling out on a comp basis what happened here, but inline skates -- it's just continued to deteriorate, and we certainly haven't seen bottom yet on the state business, which we have indicated in prior calls.

Right.

And then, any magic explanation for why you guys had such strong performance in some of the categories that your competitors noted a special weakness, like fitness and license?

I really can't comment on what our competitors do.

All I know is we continue to work from an inventory standpoint.

Inventory control is an important key to this business, and being able to react to the consumer quickly with key product, and stay in stock in that key product, and be able to sell that at appropriate margins is one of the cornerstones of our business.

So I think it's just we continue to execute our business very well.

And then just lastly, if you could give some indication of what you're seeing from your consumer, in terms of their approach to back-to-school, and maybe what is going to drive that?

Well, back-to-school will be driven, as it is most years in our business, by the footwear business, both in the athletic footwear business and in the sports-related businesses, from a cleat (ph) standpoint.

We've provided our guidance for the third quarter.

We're very comfortable with that comp gain of 2 to 3 percent.

Adam Comora, EnTrust Capital.

I just want to understand a little bit of the guidance on Galyan's.

If I'm doing my math correctly, it looks like then Galyan's EBIT for this year is probably breakeven.

Should I assume that next year's EBIT contribution from Galyan's is just the 20 million in synergies?

Or do we expect some sort of margin improvement as we go through the whole year?

We are going to expect some margin improvement, but our objective this quarter was -- given, obviously, the newness of this acquisition -- was to provide people enough information to understand our operating results, and how we're coming up with the guidance for the remainder of this year.

We do not expect -- I mean, this chain is going to be Dick's Sporting Goods, and therefore we will not be breaking out operating results between the two banners, if you will, since they will be all converted to Dick's stores in '05.

Okay, fine.

So I'm also just trying to understand also a little bit better the purchase price here.

How did we get to 350 million for something that looks like was sort of breakeven operating income this year, and 20 to 30 million next year?

Based on our economic analysis, we actually are comparable with the price that we paid for this, on the premise that we are going to effect the changes to their boxes that result in the economic performance that we've been able to deliver on our two-level store format.

And when should we expect to see you guys give us a little bit more color around what the expenses could be associated with it?

Another three months, in connection with our third-quarter earnings release.

Because it just seems strange that we can see the synergies, or get a ballpark of the synergies but not the costs.

We got a better sense of the synergies than we do in the costs, and our history has been that we do what we say we do, with respect the guidance, and we are going to provide some guidance when we have a comfort level as to those numbers.

(OPERATOR INSTRUCTIONS).

Virginia Genereux, Merrill Lynch.

A follow-up, if I may.

You mentioned that this Galyan's was a real estate deal.

Mike, if I looked at -- maybe I'm doing something wrong here -- if I look at their rent, as they disclosed in their filings, their rent per square foot was a fair amount below yours, and that seems to make sense that they were doing bigger stores, and maybe some anchors and getting some better incentives.

Is that fair?

I mean, it's lower than yours, and it's gone down the last couple of years.

So as I look at the model -- I mean, one, is that right?

Well, the pure rent number, Virginia, is directionally correct.

What Galyan's did -- either because they wanted to or because they had to, from the landlord's standpoint, not wanting to build for them -- is that they put significantly more cash into the building than we do.

So although the rent number was lower, the amount of cash or leasehold improvements that they put in the building, and therefore the depreciation expense, is going to be greater then ours.

What I suggest is that you go take a look at the balance sheet and looked at the leasehold improvements in the square footage, and that will give you some directional sense confirming that point.

We did a sort of similar exercise, and their -- shaking all that out, I mean, their D&A was 200 bips or so higher than yours.

It looks like rent was in the -- if you sort of account for all that, it's in sort of a similar neighborhood --

We did analysis prior to this, and made an assumption -- went through and made an assumption of occupancy costs of each and every Galyan's location, and built a model just as it this was a new store in a real estate transaction, and we took a look at this and built a model as to what we thought would be the occupancy cost.

And when we got done with this and got the information as how it really shook out, we were higher on our rent expense and lower on depreciation, which is exactly what we were just talking about.

The rent number is lower, but their depreciation expense is higher.

And when you take a look at everything combined, we were pretty much right on target.

So you are about the same if you -- by your all's math, Ed, you're about the same if you sum those two.

That's correct, and the question from I think it was Bob Simonson -- the only difference in cost would be the fact that if our store is 80,000 square feet, their store is 84,000 square feet.

The rent number would be more only because of the difference of the 4,000 square feet.

But back to, then, the margin targets for the businesses -- they should -- operating margins should presumably be in the same neighborhood if you can -- if you cover that sales -- if you cover that square footage on incremental sales, right?

That's absolutely correct.

And then, maybe, Ed, if you -- can you give us a sense if these guys have 48 Galyan's stores, we know something of the market overlap -- of a neighborhood of how many you might close?

I mean, is it fewer than 10 percent?

We haven't guided to what that is, but your 10 percent number, it's going to the meaningfully below 10 percent.

And then, lastly, were there -- have you -- were some of their stores dramatically underperforming?

Was there a variety of -- sort of has the performance been pretty broad?

I think it's any different than any retailer.

Every retailer has stores that perform at the high level of the spectrum and a lower level of the spectrum.

So we didn't find anything that surprised us.

Jim Duffy, Thomas Weisel Partners.

Quick one -- the footwear and apparel business has been strong for a number of quarters now.

Ed, you have been around this business for a long time.

Do you see this being driven by fashion, or is this sustainable?

Is this part of a cycle we're in?

Well, I think the footwear business has been fairly good for a while now, and what's happened is the footwear business over the last number of years was driven more from a fashion standpoint, more of the retro look, more of a fashion component.

And right now, what's driving the footwear business is more of the performance type shoes, whether it be Shox, Asics, Gel-Kayanos, 2090s, the new Miler -- and as we didn't play in that fashion end of the business as much, and now as this is transitioning to more of a performance-oriented --

So the cycle is from your direction a little bit (ph)?

The cycle has definitely swung our direction, to really -- we are very well-positioned to take advantage of the change of footwear to a performance standpoint.

As far as from an apparel standpoint, a big part of what is driving the apparel business is two things -- the women's aspect of the business, which we have been focused on for a number of years, and over the last couple of years, we still see significant legs in this, is the performance apparel driven primarily by Under Armour, and we still see a lot of legs in this for some foreseeable future.

Brett Hedrickson (ph), (inaudible) Capital.

Great quarter, guys.

Just really quick -- I know you're leery, and understandably so, for getting into kind of why certain categories were stronger than others, but the licensed products you guys called out as being stronger -- was there a change in the square footage that you guys are devoting to that?

And secondly, I know you do carry at least a little bit of urban brands in some of your stores.

Do the urban brands get thrown into the license" category?

No, the urban brands don't get thrown into the license category, and when -- our license business was more of a fan-based business, has always been more of fan-based business, as opposed to the fashion aspect of licensed apparel that drove the business last year.

I think the fashion aspect of the licensed business is going to be difficult to anniversary.

Fortunately, we were not in that very much, and it is primarily fan-based.

And that is where we've always been, and will continue to be.

And the Detroit market certainly helped with the Championship merchandise there in Detroit, in that (multiple speakers).

I was trying to think of one of your key markets that had a change, and I forgot about the Pistons.

Okay, that's a good point.

And then, just really quickly --

You're not from Detroit, are you?

No, I'm not a Pistons fan, but I'm glad the Lakers didn't win.

You guys have been getting more marquee products from Nike, especially -- counting Shox as marquee -- over the last 24 months probably.

All things equal, is there any change in that progression of more marquee product, now that Footlocker and Nike have sort of kissed and made up?

We're still pleased with the allocation of product that we have.

We've got a great relationship with Nike.

We are able to provide this partnership with Nike on the footwear side.

We are able to showcase the entire Nike brand, from their athletic footwear to their apparel to their performance apparel -- Nike Pro Compression -- to their baseball business, their soccer business.

So we've got the opportunity to showcase the entire Nike brand, where many of the mall specialty retailers, although they do a great job in footwear, and do a fine job from an apparel standpoint, they are not able to showcase the entire Nike brand.

So we have access to this Nike product, and Nike and Footlocker kissing and making up really hasn't impacted our allocation of that marquee product at all.

So that could keep going for another 12 to 18 months, in terms of your growth there, materially?

We believe that the performance aspect of footwear is kind of right in our wheelhouse, and we are pretty excited about it over the next 12 to 24 months.

Thank.

Good job, guys.

Sir, we have no further questions.

I would like to turn it back cover to Mr. Stack, Chairman and CEO, for any closing remarks.

I would like to thank everyone for joining us today on our second-quarter earnings call.

We are pleased to be able to provide the results that we have, and look forward to talking to everybody on our third-quarter call.

Thank you very much.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.