DICK'S Sporting Goods Inc (DKS) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2004 Dick's Sporting Goods earnings conference call.

My name is Bill, and I will be your conference coordinator for today. (OPERATOR INSTRUCTIONS).

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

Please proceed, sir.

Thank you.

Good afternoon to everyone participating in today's conference call to discuss the fourth-quarter financial results for Dick's Sporting Goods.

We are pleased that you could join us today.

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

In addition, as detailed in our press release, a dial-in replay will be available for approximately 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 fourth-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;

Bill Newlin, EVP and CAO; and Mike Hines, EVP and CFO, also join us here.

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

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

We are pleased to be able to report the results of our fourth quarter, which is the second full quarter Galyan's has been a part of our Company.

This quarter, excluding merger, integration and store closing costs, a gain on the sale of shares of our third-party Internet commerce provider and a lease accounting charge, we're reporting net income of 43.4 million or 81 cents per diluted share as compared to our guidance of 77 to 78 cents per share.

Including merger, integration and store closing costs, the gain on the investment sale and the lease accounting charge we were reporting net income of 39.9 million or 75 cents per diluted share.

Total sales for the quarter increased 66 percent to $788 million.

Comp store sales increased 1.1 percent within the range of our guidance and is on top of a 4.6 percent comp sales gain in last year's fourth quarter.

As a reminder, Galyan's stores will not be included in the comparable store base until 13 months after the completion of the rebranding and remerchandising effort expected to occur by the end of the second quarter of 2005.

During the quarter, we saw favorable results through much of our business, including golf, exercise, athletic footwear and athletic apparel.

We also saw favorable results in licensed product, primarily due to the sales of NFL merchandise.

Those favorable results were somewhat offset by a few businesses, including winter outerwear, snow sports, boots and in-line skates.

As we progress through the reassortment of the Galyan's stores, we have begun to rollout our private-label program into these stores, and beginning this quarter, we are reporting private-label sales on the full chain.

In the fourth quarter, our private-label sales, excluding Galyan's private-label brands, represented 9.2 percent of sales.

This compares to 8.9 percent of pro forma sales in last year's fourth quarter.

For the year, in total private-label sales, again excluding Galyan's brands, was 7.9 percent of sales versus last year's 7.1 percent of pro forma sales.

Net income, excluding merger, integration and store closing costs and gains on the sale of shares of our third-party Internet commerce provider and a lease accounting charge, increased 48 percent over last year's net income of 50.7 million to 75.1 million.

Comp store sales for the year increased 2.6 percent on top of a 2.1 percent gain last year.

This year's operating results include Dick's only for the first two quarters and the combined company for the third and fourth quarters.

I would now like to provide an update on our progress with the conversion of Galyan's.

We have already achieved a number of key milestones in the conversion process.

First, we have completed the systems conversion, and since the beginning of February, all of our stores are now running on the same systems.

From merchandising to allocations, to the point-of-sale, to our warehouse management, we have eliminated duplicate systems and are now operating on a common platform.

Secondly, all of the stores have been re-signed as all stores are not operating as Dick's Sporting Goods.

Thirdly, we have reset the interior of the prior Galyan's stores to optimize the space allocation, adjacencies and traffic flow to best accommodate the Dick's merchandise assortment.

The merchandise reassortment initiative is well underway and is being done in conjunction with the arrival of spring receipts.

We are now in a position to launch a re-grand opening of these stores as Dick's Sporting Goods stores.

This event has been marketed through a combination of print and electronic media with a primary focus on the larger Metropolitan markets in which Dick's did not operate prior to the acquisition.

These cities include Atlanta, Chicago, Denver, Minneapolis and Columbus.

This campaign culminates with a re-grand opening event for these stores, which is happening this weekend.

Finally, all administrative functions and processes are now being run solely out of the Dick's office in Pittsburgh as the Galyan's corporate office was closed at the end of February.

Overall our plan is on track to complete the conversion by the end of the second quarter this year with the merchandise reassortment being the primary open item.

Between now and then, we will continue to refine the interior of the stores.

When this initiative is complete, we expect to be operating these stores not only under the Dick's name, but also under the same merchandise assortments, financial discipline and customer service expectation as we have for the rest of our stores.

On the third-quarter call, we announced our plans to close nine stores as a result of the acquisition, which consisted of three Galyan's stores and six Dick's stores.

As a result of further analysis of the overlap markets, we have decided to close an additional Galyan's store raising the total to 10.

Four of these stores were closed in the fourth quarter, five more are expected to close in the first quarter, and the last one will close in the second quarter of this year.

Three of the stores that closed in the fourth quarter were Galyan's stores in Indianapolis and one was a Dick's store in Cleveland.

One of the Galyan's stores in the Dick's stores were both replaced with new stores that had been scheduled to open as Galyan's but instead opened as Dick's.

Our expectations for merger, integration and store closing costs are unchanged.

We continue to expect merger integration and Dick's store closing costs of approximately $70 million pretax of which 7.7 million was incurred in the third quarter and 12.5 million in the fourth quarter.

These costs include the expense of closing stores, advertising the rebranding of Galyan's stores, duplicative costs, recruiting and system conversion costs.

We have reaffirmed our earlier guidance for the full year of 2005, and we have provided guidance for the first time as to the first quarter of 2005.

For the full-year 2005 on a fully diluted share base of 55 million shares outstanding, we are still expecting earnings per share of a $1.79 cents to $1.84, excluding merger, integration and store closing costs.

This represents a 26 percent to 30 percent increase over 2004 GAAP EPS of $1.42 adjusted for the non-recurring items.

We expect comp sales to be approximately 1 to 2 percent.

As discussed in the press release, this guidance excludes the impact of expensing stock options beginning in the third quarter.

Based on our current information, the Company expects the cost in the second half of the year to be approximately 12 to 14 cents per share.

For the first quarter of 2005 on a fully diluted share base of 54 million shares outstanding, we expect to report earnings per diluted share of 18 to 20 cents versus 21 cents in the first quarter of 2004, which includes only the results of Dick's and not Galyan's and excludes merger, integration and store closing costs.

Pro forma combined company EPS for the first quarter of 2004 was 10 cents.

We are expecting comp sales in the first quarter to be approximately 1 to 2 percent.

Beginning in 2005, our earnings guidance includes $20 million of estimated annual cost savings and merchandise buying improvements associated with the Galyan's purchase.

We now expect to open at least 25 new stores in 2005.

This was a very busy quarter for us and a very important one as we not only opened five new stores and delivered strong operating results in a difficult environment, but we demonstrated our ability to do so while gaining significant traction in the conversion of the Galyan's stores and operations.

For this I commend our associates, and I now look forward to what we can achieve together in 2005.

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

Thanks, Ed.

During the fourth quarter, we opened a total of five new stores all of which were single level Dick's stores.

One of the stores was in a new market, Portsmouth, New Hampshire; the others are located in existing markets -- Easton, PA, our second store in Allentown;

Trader's Point and Indianapolis, Indiana, our sixth and seventh stores in Indianapolis, and West Mifflin, Pennsylvania, our ninth store in Pittsburgh.

As I mentioned earlier, we closed four overlapping stores during the quarter as a result of this acquisition.

Total square footage for the combined companies at the end of the fourth quarter was 13.5 million square feet versus 13.4 million at the end of the third quarter.

For the year in total, we opened 29 stores, relocated three others, acquired 48 Galyan's stores, closed three Dick's stores and closed three Galyan's stores, resulting in an ending store count of 234 stores in 33 states.

Looking to the first quarter of 2005, we expect to open seven stores, of which five are single level Dick's stores and two are the two-level Dick's prototype.

Three of the stores are in new markets.

They are Hadley, Massachusetts;

Jacksonville, Florida, and Bloomington, Indiana.

The remaining stores are in Hamilton, Ohio, our eighth store in Cincinnati;

Seekonk, Mass, our fourth store in the Providence/Rhode Island market;

Canton, Connecticut, our sixth store in Hartford; and Greensburg, PA, our tenth store in Pittsburgh.

The two-level stores are in Jacksonville and Canton.

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

Our earnings release included a statement of operations prepared in accordance with GAAP which compares the fourth-quarter combined results of Dick's and Galyan's against last year's Dick's only results.

In order to enhance the comparability of our results, we also compared this year's GAAP results against pro forma results of last year as if Galyan's transaction had occurred as of the beginning of all periods presented.

Adjustments have been made to the pro forma results to include the reclassification of discounts on Galyan's associates' purchases as a reduction of sales rather than an operating expense, an increase in interest expense to reflect the increase in borrowings required to fund the transaction, and other insignificant reclassifications to bring these statements into conformity with Dick's classifications as described in the footnotes for those statements.

I will begin by giving an overview of the fourth-quarter GAAP results.

Again, for GAAP purposes, the fourth quarter includes both Dick's and Galyan's operations, whereas last year the results do not include Galyan's.

This quarter sales increased 66 percent from last year's $474 million to $788 million.

Gross profit increased from $140 million to $228 million this year.

This represents gross profit of 28.93 percent of sales versus 29.4 percent last year.

This change was driven by higher occupancy costs in clearance activity in the Galyan's stores.

SG&A increased from 96 million to $151 million.

As a percent of sales, SG&A declined from last year's 20.15 percent to 19.15 percent this year, representing leverage of 100 basis points.

Preopening expenses of 6 million were due to the lease accounting charge which I will speak to in a second.

Merger, integration, store closing costs were 12.5 million this year.

On a GAAP basis, including merger integration costs, we're reporting net income of 39.9 million or 75 cents per share this year as compared to net income of 26 million or 50 cents per share last year.

The fourth quarter includes an after-tax cumulative lease accounting charge of $2.6 million or 5 cents per diluted share, of which 471,000 or 1 cent per share relates to the current year.

In connection with the recent attention placed on lease accounting, the Company reviewed and discussed with its independent auditors and concluded our lease accounting policy was not consistent with accounting standards.

The Company has changed this policy such that the commencement date of the lease term will be the earlier of the date rent payments begin, or the date the Company takes possession of the property for the initial setup of fixtures and merchandise.

On a pretax basis, cost of goods sold was reduced by $1.7 million through the amortization of a deferred rent credit, and preopening expenses were increased by $6 million, of which 1.1 million relates to the current year.

Excluding merger costs, the gain on the investment sale and the lease accounting charge earnings were 81 cents per share.

The pro forma operating statement compares this year's fourth quarter to last year's fourth quarter pro forma, which includes the results for both Dick's and Galyan's and provides what management believes to be a more meaningful comparison.

This pro forma information is in a supporting schedule to the earnings release.

Sales for the quarter increased 9 percent to 788 million from 723 million last year with a comp store sales gain for Dick's stores of 1.1 percent.

Gross profit excluding the lease accounting charge was 226 million, decreasing 40 basis points from 29.11 to 28.71 percent of sales.

This change was due primarily to higher occupancy costs and clearance activity in the Galyan's stores.

Our SG&A expenses of 151 million were 19.15 percent of sales and 125 basis points lower than last year's pro forma fourth quarter.

Some synergies were obtained with lower corporate payroll and benefits at Galyan's, as well as lower advertising.

Operating income, excluding merger, integration and store closing costs and lease accounting charge, increased from 62.4 million pro forma last year to 75.3 million this year.

Merger, integration, store closing costs of 12.5 million this year include Dick's store closing costs of 5.4 million, duplicative Galyan's corporate payroll and occupancy costs of 1.9 million, and 5.2 million of other costs such as Galyan's store and system conversion costs, recruiting and temporary services.

Net income for the quarter, excluding merger, integration, store closing costs, the gain on the sale of investment and the lease accounting charge, increased from 35.6 million last year to 43.4 million this year.

For the full year, GAAP results include only Dick's for the first two quarters, and Dick's plus Galyan's for the third and fourth quarter this year, while last year includes Dick's on a stand-alone basis.

Earnings per share of $1.26 this year compared with earnings per share of 1.05 last year, excluding the impact of merger costs, the gain on the investment in both years and a lease accounting charge in 2004, earnings per share this year were $1.42 versus $1.01 last year.

Again, in the interest of enhancing the meaningfulness and comparability of our reporting results, our pro forma operating statement is prepared as if the Galyan's transaction had occurred at the beginning of each period presented as described in Footnote One at the bottom of these statements.

Pro forma earnings per diluted share before merger, integration and store closing costs, the gain on sale of investment and the lease change of $1.18 compares to $1.00 from last year.

Moving to the balance sheet.

We ended this year with $458 million worth of inventory as compared to $254 million of inventory last year when we did not own Galyan's.

On a pro forma combined company basis and excluding the purchase accounting reserve, inventory per square foot is down 2 percent compared to last year, which was primarily caused by Galyan's.

The inventory reserve recorded in conjunction with the purchase accounting initially totaled $22 million, of which $2 million and $14 million were utilized in the third and fourth quarters respectively, leaving a balance at the end of the year of $6 million.

We continue to liquidate non go-forward items from the Galyan's assortment, and we believe this reserve to be reasonable at this time.

Goodwill associated with the Galyan's acquisition decreased by $24 million from the end of the third quarter due primarily to changes in deferred taxes.

We ended the fourth quarter with $76 million of outstanding borrowings on our 350 margin dollar line of credit.

Excess borrowing availability totaled 184 million at year-end.

One note on the cash flow.

Our capital expenditures for the year were $53 million net of sale leasebacks. 11.5 million of that is associated with the conversion of the Galyan's stores, operations and distribution center.

Finally, I would like to speak to new store productivity.

Including the Galyan's stores, which are now part of our non-comp base, our new store productivity for the fourth quarter was a bit over 92 percent, an increase over the third-quarter productivity of 81 percent and returning to a range we have experienced in the past.

The third-quarter productivity rate was artificially low due to store openings late in the quarter as we mentioned during the third-quarter call.

Excluding the impact of the late quarter openings, new store productivity was approximately 84 percent as you recall for the third quarter.

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

(OPERATOR INSTRUCTIONS).

Bob Simonson, William Blair.

Could you talk a little bit about the expansion position?

I know you have said a minimum of 25.

If I did the math right, that is a low double-digit gain this year.

On a Dick's alone basis last year, I think it was closer to 17.

Obviously you have said what you wanted to say about the actual number, but are you thinking about growing your store base slower than you have in the last couple of years on a rated change basis?

On a go-forward basis, Bob, nothing significant.

This year we said that it would be a minimum of 25 stores, and with the acquisition of Galyan's and being sure that we digest that, that is what we believe we need to do.

But on a go-forward basis, we will move back to approximately a 15 percent store growth change.

As you remember, Bob, back in the second quarter when we announced earnings in the Galyan's transaction, at that point in time we were thinking and spoke about opening 15 stores.

So we are actually taking that up a bit from that point in time.

A quickie.

Is there any GSI stock left?

Yes, there is about 400,000 shares.

Okay.

Last question is, could you give an update on your category/product additions or deletions as you are looking at it now on a going forward basis?

And even if you don't say specifically what some of them are, could you just give some discussion to what are the points that you go through to decide whether you want to continue in a certain line or discontinue it?

Well, as we take a look -- we take a look at a number of factors as we look at what lines we want to expand, contract, eliminate or add.

To give an example of a category of business that has continued to trend down fairly significantly and we have continued to invest less and less in that, is in-line skates.

We know that in-line skates is a fraction of what it used to be.

We have not seen the bottom in in-line skates yet, and we continue to monitor that.

We have eliminated that category in a number of our stores, and look at a number of factors associated with that.

But in-line skates has been eliminated from a number of stores.

As we take a look at categories of business that we want to continue to expand, the women's apparel business has continued to be extremely strong in both the athletic side, and we have now started to move into more of the rugged outdoor women's apparel, which has performed extremely well in a number of test markets that we had it in, and we expect to roll that out to the vast majority of the chain this next year.

Have you had any issues of getting vendor cooperation at any particular price point?

Is that something that perhaps you did not do but Galyan's did?

No.

If we had taken a look -- we would like to have continued with Patagonia.

Although very much an insignificant amount of business that Galyan's did with Patagonia, we would love to have been able to continue to sell Patagonia.

Based on where Patagonia was going and the way that we are approaching our business, we're not going to go forward with Patagonia.

But that is only the one I can really that is of a high-profile brand to date.

(OPERATOR INSTRUCTIONS).

Matt Fassler, Goldman Sachs.

I've got a couple of questions.

First of all, on the charges I believe that the charges that you broke out, particularly if you exclude the drawdown of the inventory reserve, were significantly lower than the charges you originally indicated that you might book in the fourth quarter.

I believe in your last press release you spoke about merger and store closing costs of $35 million.

I guess it was 12 and change.

Can you talk about whether I am reading that right in terms of the lesser than expected charges, and what might have been behind that?

No, you're reading it absolutely correctly.

Essentially what happened, as we got into this further, we are trying to optimize the cash flow from the liquidating Galyan's stores, and we actually got a little bit more comfortable with delaying the re-grand opening of the Galyan's stores back into the time period that we just spoke about -- this upcoming weekend, in fact -- as opposed to trying to get that done in January.

So we wanted to get through that process in a much more orderly way.

We were trying to be a little aggressive with this timeline, but we don't want to do that at the expense of harming cash flow.

As a result, in the first quarter there is really just a shift.

As we noted, the merger integration costs in aggregate associated with this conversion are unchanged at 70 million.

The first quarter now we've provided the earnings guidance you can back into the number, but it is about 35 million in the first quarter.

Got you.

The second question that I want to ask relates to inventory.

The increase in inventory did exceed the increase in sales by a decent margin, and that is despite the fact that you did draw down on the inventory reserve to clear out presumably a lot of the Galyan's inventory that you want to get rid of.

So if you could just give us some color as to the drivers of the inventory increase?

I heard you on a square foot basis pro forma, but nonetheless the optics for the number are pretty high.

If you can tell us about what drove it, and also just give us a sense as for the quality and currency of the inventory?

Well, two things.

I think that the inventory per square foot for us is a meaningful measurement and a measurement that we use in managing the business.

It is also true, which we have not spoken about in the context of any earnings release, winter, it was fair to say, late in arriving.

That took off some pressure of liquidating everything by end of year, and therefore, as a result, we were comfortable with the inventory position as of the end of the year, especially with the kind of weather that we were experiencing.

But we are completely comfortable with where we stand with inventory on a per square foot basis.

The inventory on a per square foot basis and also the quality of inventory.

As we take a look at the percent of clearance inventory in the Galyan's stores, the former Galyan's stores, and the percent of clearance inventory in the Dick's stores, we don't see a meaningful difference.

So we're very comfortable with the quality of the inventory in both the former Galyan's stores and the Dick's stores.

And I think if you walk in the stores, you will see that.

And just by way of comparison, our square footage numbers given the deal, might not be right up to snuff.

What did sales per square foot do pro forma, if you would, Q4 versus Q4 for the aggregate business?

They would be pro forma last year $62 versus $58 this year per quarter.

Got you.

So the decline in sales per foot was close to the decline in inventory per square foot if you will?

Which you do raise a good point, too.

There are a number of pieces of information attached to the earnings release to help with some of this analysis, including square footage amounts.

Got you.

Final question.

On the options front, you gave us I guess second-half options ultimately we are going to try to annualize the number.

And so I guess a), should we just double that and think about that as your annual options expense, and b), do you expect to alter your incentive compensation structure or your use of options as you move forward and roll this in for a full year?

It is straight line, so it is as simple as doubling it for the year.

I think we have not talked obviously about anything on a go-forward basis as it relates to the expense associated with that.

But it is directly tied to options that were granted, many of them prior to or in conjunction with the IPO.

And as we go forward, the answer to the second part of your question, as we go forward, we are looking at alternatives and other options from an incentive standpoint going forward.

I think also lastly because I think that question was going to be asked by perhaps some other number of people, if you do look at the options outstanding as a percentage of fully diluted shares outstanding, that number has continued to come down.

Got you.

Okay.

Thank you very much.

Rob Ohmes, Banc of America.

A couple of questions.

The first question when I looked at the categories that did not do so great in the fourth quarter, they were pretty seasonal categories that held you back.

So as we are moving into spring here, has there been any sign of an improvement in your comp trends from the fourth quarter?

Also, when you were talking about the categories, I think you left -- I might be wrong -- but I think you left out hunt/fish/camp.

Could you comment on how that did in the fourth quarter, and how you are looking at that for the first-half as well?

Thanks.

Sure.

To comment first, the trends in the first quarter, we have never commented on trends in a quarter that we are in.

So I won't comment specifically on those other than the fact that we are comfortable with the guidance we just gave for our comp store trends.

The businesses that did not do very well were very weather sensitive -- outerwear, snow sports and boots.

So the unseasonably warm winter certainly affected those businesses.

But even with that in being able to bring the comp store results into the -- within our guidance, our group did a great job in focusing on some of these other categories that were selling very well, including golf, exercise equipment, athletic footwear, athletic apparel and such.

Our group also did a great job chasing the NFL products as it was a terrific NFL season for Dick's Sporting Goods, and as the playoff picture unfolded, I give our group an awful lot of credit for chasing down that product.

I believe our group was actually awarded with an award from the licensed products groups as being the best retailer chasing this product and staying current with the playoffs, etc.

The second part is you asked about hunt/fish/camp.

Those were right within our planned sales numbers, so we did not call them out.

So they comped positive?

We have not commented to talk about specific areas and what they have comped, but they were above our plan.

Dave Magee, SunTrust Robinson-Humphrey.

It is actually Jennifer Neal, calling in for David Magee.

Congratulations on a good quarter and congratulations on the integration.

Thank you.

First off, I just wanted to know if you would not mind shedding some color on brands, particularly what might be doing well, what might be hot in the footwear and the apparel sector.

And then secondly, I have a question on the winter equipment.

Okay.

From a footwear standpoint, the athletic footwear business has been doing really quite well across most brands.

So I cannot speak that there is a specific brand that is really driving this business.

There are several brands doing extremely well.

From an apparel standpoint, we continue to do and we talked about this over more than a few quarters now.

I think it is actually a couple of years.

Under Armour is still very hot in the apparel category and helping drive a significant amount of sales at a higher average unit retail than in the past.

Great.

Thank you on that.

And then secondly, I just wanted to know if you had made any decisions -- I know you spoke briefly on the third-quarter call about bringing winter equipment, skis and boots, that kind of thing into the stores and was wondering if you had made any decisions on that?

We have taken a look at this, and although final decisions have not been made, it looks pretty positive that we will continue this in approximately 40 stores, the vast majority of them being the former Galyan's stores with the primary emphasis being on snow board as opposed to Alpine.

Hardy Bowen (ph), Arnhold & Bleichroeder.

That was pretty good.

I wondered -- the former Galyan's stores were selling some upper end merchandise, and I think you have experimented with some of them, but would you have any comments?

I think you have tried some things out in a Legacy Village store and so forth.

I was just interested if you had any thoughts on the potential there, if any?

We do believe there is potential.

We have got a number of categories and SKUs called out that we are focused on from a higher end product than had been sold in the Legacy Dick’s stores, that the former Galyan's stores did very well with.

So we are very focused on -- some of those categories in the boat category, kayak category, in the long gun, hunting rifles and shotguns are a couple of the categories that have been -- we have seen some real success in.

And also in the exercise category.

Okay.

And would you have any thoughts on where you would expect your inventories per square foot to be at the end of 2005 roughly?

I would not think they would change significantly from what they have been in the past.

Okay.

Pretty much what Dick's has been in the past?

Pretty much from this year right now what they are, I would not expect them to change significantly going forward.

Jim Duffy, Thomas Weisel Partners.

Mike, can I back you up to the inventory for just a second.

You went through that pretty quickly, and I was writing --

I'm sorry.

Sure.

Yes.

If you could go through that again, that would be helpful.

Which piece of it?

You somehow got the inventory down 2 percent, I think it was, excluding the inventory reserves per square foot basis.

And then if you can help us through some reconciliation with what was going on in the Galyan's stores last year?

I think they were doing a lot of clearance activity coming out of Q4 to position the inventory into Q1, and I think it was down.

It was down at the end of the year.

I will confess to being more conversant in our business than what Galyan's was doing in the fourth quarter.

If I can walk through first on your inventory question?

Yes, that would be great.

Sure.

If you look at our balance sheet, we are reporting 457 million in inventory at the end of the year.

That is net of the $6 million purchase accounting adjustment of 6 million.

So you should increase the 457 by 6 million.

And then total square footage at the end of the year was 13.5, and that is a consolidated square footage number.

There is a table as an attachment to the earnings release that has quarterly square footage amounts by company and in the aggregate.

And then if you look at the end of 2003, that is a Dick's only -- that is a Dick's only number.

We have not included anything here relative to the Galyan's inventory balance at the end of last year, which I would ask you to refer to their 10-K filings.

But we have included their square footage of 3.8 million at the end of last year.

So all that data will allow you to get to that 2 percent change year-over-year.

Okay, thanks for that, and thanks for the helpful exhibits in the release here.

One other question, the split of store openings, single level stores versus double level stores for 2005.

Is that (multiple speakers) in here someplace and I missed it?

It is not in there, and traditionally we have not provided guidance out beyond on a quarterly basis or store type, frankly, for competitive reasons and would like to keep it that way.

But I would note that the single store will be our primary growth vehicle.

Okay.

Thank you very much.

Mitch Kaiser, Piper Jaffray.

I was just curious if you could talk about the remerchandising for the Galyan's stores in some of the Minneapolis stores.

They look pretty good.

Are they complete on the remerchandising now?

They are not 100 percent complete, but we are well on the way.

We are still waiting for -- there is still some apparel to come in men's and women's athletic, we have got some cycles, bicycles that are yet to come in.

But for the vast majority of it, I would say it is probably 85 to 90 percent right now.

Okay and then I noticed at least here locally, is the grand reopening going to be this weekend in the markets?

You talked about Atlanta, Minneapolis, Chicago, etc.?

That is correct.

Anything that you can share just in terms of how the stores have been doing relative to the remodels or the remerchandising?

We're pleased with the results to date.

If you're living in Minneapolis, you know the add campaign has been going on for a couple of weeks now, encouraging people to come to the grand opening.

So we will be a lot smarter on Monday than we are today, but we are pretty enthusiastic about it.

Feel free to stop by.

I definitely will.

I think somebody is probably going to ask it, but if your new store productivity for the Legacy -- or for the Dick’s stores is like 92 percent, does that imply that the Galyan's stores probably did like a negative mid single digit, I guess, comp then?

Are we kind of thinking along the right way there?

I don't know mathematically if it works that way, and frankly we are just not getting into separating the two because it is really difficult to look at these companies as separate and apart because they have really gotten so closely woven together with some of them in stand-alone markets without a Dick's presence and some of them within existing Dick's markets, it is really difficult to cite any pure number anyway.

We actually don't look at it that way ourselves.

Okay.

But it's fair to say that the remerchandising would not have had much effect on the fourth-quarter numbers, though?

Correct?

Yes.

Absolutely not.

Yes.

Rick Nelson, Stephens Inc.

Congratulations on a great quarter.

This is Paul Surnam (ph).

Rick is traveling.

My first question is I understand you guys don't hide behind the weather and I appreciate that.

But if you had a "normal" weather pattern, I know you said outerwear and some of the winter categories were down.

How much different or better would that have flowed to your bottom line?

And then next year are you planning for "average" year which would be supposedly up from this year?

If the weather had been -- the past two winters we have had were terrific winters for our business.

So if it had been more like one of the last two winters, would it have been better for our bottom line?

Absolutely.

From our plan going next year, our plan is to look at a more normal weather pattern, which would be -- it would be slightly more favorable to what we just encountered.

But our plan is not looking at anything significantly different than what happened in the fourth quarter this year from a weather standpoint.

Okay.

Got you.

On the call last quarter, you said that the Galyan's DC would be converted over the first half, and now it seems like from this release, if I have understood correctly, at least the systems are done.

Is that DC fully converted right now?

And are all the DCs shipping their perspective geographic stores with Dick's merchandise?

It is in process right now.

All systems are converted, and the methodologies that we use to process straight are being adopted in the Indy distribution center right now.

We have not fully maximized the supply chain yet.

We don't expect that until the end of the first half.

Okay, and were you able to ship any merchandise that was Galyan's merchandise to Dick's stores during the fourth quarter?

And if you were, would that have affected the comp number, and can you give us an idea of what the value of that was?

We didn't -- I won't say we did not ship or transfer any merchandise in the fourth quarter, but it was immaterial.

The merchandise that came through the Plainfield field distribution center for Galyan's stores went to Galyan's stores, and the Dick’s stores were serviced by the distribution center here in Pittsburgh.

So there were virtually no orders from Galyan's stores that were shipped into Dick's stores.

Mechanically very difficult to do.

Both DCs were set up under different systems to supply specific stores.

So it was logistically even if we had wanted to, it was a lot of brain damage.

Ryan Renteria (ph), Balni Asset Management (ph).

Thanks a lot.

Congratulations on a great quarter.

My first question is, the preopening expenses were a lot lower in the fourth quarter, and you talked about shifting the grand reopenings out of the fourth quarter and into this month.

So is it fair to say that some costs you thought you would incur in the fourth quarter are now weighing on the first quarter?

Well, yes, and that is why when you look at -- I think Matt Fassler pointed out the guidance we had provided for merger costs in the fourth quarter and how favorable that came in in the fourth quarter.

We have not changed our expectations in the aggregate.

It is simply a timing difference, and that results in a shift in that.

The first quarter is about 34 million of merger cost.

But also in the preopening costs, it runs through the P&L?

The preopening costs were essentially flat for the fourth quarter when you take into consideration the lease accounting charge.

So if you look at essentially you have reiterated your guidance for all of 2005, and this is the first time you have provided guidance for the first quarter.

So is it fair to say that you are essentially feeling just as favorable about the year as you had been going into the last several months? (multiple speakers) timing shift?

Absolutely.

I think that is illustrated as well by the fact that we are reaffirming our guidance for '05 versus the expectations that we established the last time we spoke about the full year.

Right.

How would you sort of rate the macroeconomic health of your consumer right now?

We think the consumer is doing fine.

We have been very pleased with the performance.

The fourth quarter came in in the range of what we had guided, and we are very comfortable with our guidance for the first quarter.

Sam Poser (ph), Mosaic Research.

Just a follow-up on the inventory.

The inventory -- have the inventories gotten better or the inventory positions improved since the end of the quarter?

And has the -- let me just ask them that way.

If I can interpret your question, you are asking if the quality of the inventory has gotten better since the end of the fourth quarter?

Correct.

The answer to that is yes, significantly better.

And I'm not sure if you have, but if you had walked through the store in the month of January and walked through the store today, you would see a very different store in the quality of the inventory, the type of inventory.

The store is virtually set for spring with a full baseball assortment, a full golf assortment including golf apparel, a full athletic apparel assortment.

All the new athletic shoes are in there.

The new Joe Kiano (ph), the new 2100, the new ASICs 1100, the new Nike Shox programs.

We have got in there the new inflatable assortment basketball equipment.

So you will see a very different assortment of product in the store today than you would have seen toward the end of January.

Great.

Can you -- do you guide -- can you give us an indication of what kind of improvement you expect to see in gross margins?

And can you be more specific on the preopening costs that you foresee at least going into next year?

We haven't gotten -- and we don't see yet specific guidance on a line item basis.

I think probably the thing to focus on is our longer-term objective of growing the operating income margin by 30 basis points.

Okay.

Thank you.

Jason West, Deutsche Bank.

Just a few questions on the lease accounting just so I am clear.

The 6 million you guys pulled out of preopening, 100 percent of that is due to the lease change.

Is that what that is because on an after-tax basis, it was only like 2.6 million.

I am just trying to make sure that --?

Yes.

There is two pieces to it, Jason.

If you look, there is actually a schedule attached to the press release that walks through the GAAP results, backs out the non-recurring charges to come up with something that is a little bit more pure.

There is two pieces to it.

One, the 6 million on the preopening expense line.

Secondly, a related piece up above in cost of goods sold was reduced by 1 million 7.

So you need to take the net of those two numbers and then tax effect it.

Okay, got you.

I guess we had modeled a little more preopening I guess in the fourth quarter, but I guess with the holiday and all, you guys just don't do a lot of preopening in that quarter.

Is that sort of what --?

It is a function of timing of store openings, and that is really to the extent that they open earlier in the year in the fourth quarter, there is not as a direct correlation to store count and preopening in the fourth quarter.

Because we do try to get them open up earlier just because it is holiday time.

Right and a note on the lease stuff.

You guys pointed to about a penny I guess in '04 from the accounting change.

Could we assume is there a penny in '05 from that change that maybe is now in the guidance, or was it immaterial for '05?

The guidance comprehends the lease accounting change.

We do note that the company is continuing to review this with the auditors as it relates to tenant allowances, which we point out in the press release.

But what we have baked into '04 has been comprehended in '05.

Okay and on the review I mean -- I guess you cannot really say now, but I was wondering if you would expect to see some more impact that may bring down the guidance as you change that accounting, or is it likely to be immaterial --?

We don't see -- we don't have any expectations one way or the other frankly.

I don't know how close and familiar you are with this issue, but the SEC is I think with the conversations that they have had with a number of retailers and if you look at the number of retailers that are coming out with press releases with different words surrounding where they are in this process, it seems like the accounting profession is struggling with the interpretation.

Right.

Right.

That is definitely true.

Then one other thing just on the comp outlook for '05, you guys are talking about 1 to 2 percent comps in the first quarter and for the full year, although the comparisons get quite a bit easier in the back half of the year.

I was just wondering what the thinking is there?

Is that being conservative on the back half, or is there something underlying the comp numbers maybe in '04 that you are running up against that may be a difficult hurdle?

I think if you look a -- if you look at a two-year comp for the year just ended would be at 4.7 if you look at 2003 plus 2004 for the full year.

And if you look at, therefore, 2004 plus our guidance for the full year, we are 4.1.

So I would say we're kind of in the zone.

Also, from a guidance standpoint, we -- there are stores, the Galyan's stores that we have in some of these markets will be cannibalizing some of the comp store basis, which although much more profitable, is certainly putting some pressure on the comp store performance.

Right and in terms of being able to leverage expenses on that kind of comp, I guess the synergies will sort of flow through there one way or another.

So that would be where we see most of the leverage?

Yes.

Yes, the rent is fixed.

We don't have any percentage rent deals, so the profitability is not affected by -- there is not a leverage point as it relates to comp sales.

Okay.

Great.

Thanks a lot.

Anthony Lebiedzinski, Sidoti & Co.

A couple of questions.

As you prepare for your grand reopenings this weekend, are you seeing anything from competitors, perhaps stepping up their advertising campaigns?

We have not seen anything yet, but I would expect that -- I expect they know that we are re-grand opening stores this weekend, and I expect that they will be -- they will be visible also.

I just wanted to clarify an earlier question.

Someone asked about the Minneapolis stores, and I think your answer was 85 to 90 percent of those stores.

I wanted to clarify whether or not 85 to 90 percent of the existing Minneapolis stores have been remerchandised or all Galyan's stores?

All the Galyan's stores.

Okay, got you.

In terms of CapEx expectations for '05, do you know what that might be?

It will be in the order of magnitude of 75 million.

Is that net of sale leasebacks?

Yes.

Okay.

Any thoughts about the debt reduction where that might be for '05?

Not at this time.

That is a line historically we have not given guidance to.

But as you can look at our cash flow and what our stated position has been back in 2004 earlier after we did this deal and our track record frankly, it is our intention obviously from the free cash flow that the business generates to be paying down debt.

Virginia Genereux, Merrill Lynch.

Thanks for your quick comments, so everybody can ask questions.

Maybe, Ed, can you -- somebody sort of asked this -- but in terms of your productivity and sort of launch expectations for these Galyan's stores that you are converting, how are you all thinking about that?

You have remerchandised the stores it sounds like.

I mean are you -- should we be thinking about sort of the 90 percent productivity after you re-grand open them, or can you give us any outlook there?

Well, this productivity number, Virginia, is something that analysts use and I can understand why.

We actually -- it's not -- the only reason we start tracking it is because we became public and people started asking us about it.

We've got all the individual store detail.

So we don't need to do that high-level work.

So from a productivity, that is not a number we're trying to manage.

We are just trying to make a lot of money.

Okay.

So, Mike, how about this -- have you guys seen anything anecdotally as you have transitioned -- and I know it is early and you have not done the big re-grand opens.

But as you have transitioned these Galyan's stores to Dick's, is it like a new store opening, or are you getting a halo effect because it was a Galyan's?

Do you know what I mean?

That is what I'm --

We have not grand opened anything yet, Virginia, so we -- it is difficult to comment.

From the soft opening process, we are seeing performance better than what would happen when we were soft opening a new Dick's store with the same type of marketing campaign.

So we are pretty optimistic about the performance of these stores meeting the plans and the performance objectives that we set for these when we did the acquisition.

And as Ed said, I think we are going to be a lot smarter come next week because what these stores have gone through live to date has really been one of liquidating non go-forward merchandise.

We're trying to do that responsibly to maximize the cash flow.

Those stores have been disrupted as we have closed them for three days to take physical inventories, go through resetting of stores.

The associates have been working hard.

The stores have been a work in process, and they kind of – they’ve just got a coming out party this weekend.

So it is really, really early.

That is helpful.

That is helpful.

That is what I wanted.

Then maybe, Mike, on the CapEx for next year, you said 75 million.

Can you tell us how much is associated with converting the Galyan's stores?

We are still working through that Virginia, to be honest, because the fact is as we have gone in and reset, we have tried to keep the CapEx number to a minimum.

The stores -- the Galyan's stores look good before hand.

We have gone through some resets.

All of the stores have been reset, and until we see how those stores perform, we may or may not leave the resets as they were initially laid out, in part because when we laid them out, we wanted to minimize the capital expenditure.

But to the extent that we find that in certain stores, it makes sense to be moving departments around, we're going to go in and incur those expenses.

There is not going to be any significant -- therefore, in some there's not going to be any significant outlay that we plan at this time.

The CapEx is up year-over-year, but we continue to make investments in systems.

This transaction took the capacity that the existing systems need to address up a notch.

We continue to take supply chain to a different level both with respect to systems, as well as overall capacity.

Maybe that helps give a flavor for what we're doing with the money.

It does.

That is great.

Thank you.

And then lastly, I feel like somebody was probing this a little bit.

In terms of the '05, the calendar '05, this year's outlook, it is always, you know, you guys have always done a great job consistently here.

You beat January.

You are opening a few more stores.

You maintain the outlook, and you are also closing another store.

You have got the lease accounting stuff.

Is there anything you are seeing that is making -- you know, that seems a little bit more challenging, or I know it's obviously a very holiday driven business.

Anything like that -- any reason that you did not raise the outlook?

Well, I will comment on a couple of these.

The holiday is an important aspect of the business, but we have worked very hard in this business to -- more than some others maybe -- flatten out the quarters, that we've got -- the other quarters are important to us, also, and we think that is a benefit to the business.

As we take a look at anything from a macro standpoint, we don't see anything that is concerning us from a comp store standpoint.

We talked about the cannibalization of the Galyan's converted stores in markets that we already do business in.

They will certainly put some -- we feel that they are going to put a bit of pressure on our comp store sales performance, although they will be much more profitable.

And our guidance -- we kind of baked in this guidance as we looked previously, and we want to make sure that we set and guide to accomplishable objectives.

Well, you guys are great at what you do.

Thanks a lot.

Good release.

Charles Grom, J.P. Morgan.

This is Paul Trussle (ph) on behalf of Chuck.

Good afternoon.

Most of my questions have been answered, but just two quick follow-ons.

Just in terms of competitors, have you seen any impact in your store productivity from the store remodels of Sports Authority in those markets that you share?

We have not seen any impact, No.

And how then have you all just been able to continue to differentiate your stores from your competitors?

I think we continue to focus on these operating metrics, and what is extremely important to us is controlling this inventory, and we do that through our merchandising tactics that we employ and continue to upgrade our systems to help us manage this inventory systemically.

And inventory control, and I have said this since we were on the roadshow for the IPO, inventory control is something in this business that is extremely important and is really our key differentiating factor in the marketplace.

Right.

And could you just provide some updated comments on what you expect in terms of synergy targets for '05 and beyond, just kind of what the timeframe and the components of those synergies?

The synergy expectations remain at approximately 20 million equally divided between margin as it results a better purchasing leverage and with SG&A synergies.

So we have not changed that view at all.

Edward Weller, ThinkEquity.

My question I guess has been asked.

I was just wondering what the comment about TI meant?

Does that mean that you will be accruing a credit over the course of the initial impairment release or something like that?

No.

At this point, it simply means that it appears that the accounting profession is still trying to interpret the SEC's interpretation, and the conversation continues, as you can see by the releases of other companies' press releases as they continue to revisit the matter.

There is not something that we know that we are not saying.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Just a couple of quick follow-ups.

Looking again at the first quarter, you know you are guiding against I guess pro forma numbers a year ago on the dime, and on that basis, the guidance looks like you're tracking for a big increase.

I guess the flipside of that is perhaps because of the seasonality of the Galyan's business, the big fixed costs not, you know that the deal is not accretive, if you will, in the first quarter, just in that quarter and that the synergies don't quite offset that yet.

Can you talk about the progression that you see in terms of margin expansion, if you will, from the Dick's business, and also the progress you expect to see from the Galyan's business?

In other words, do the synergies gain momentum as we go through the year such that over time the Galyan's deal becomes more and more accretive to you?

I think to be honest at this point it would be uncomfortable trying to break down anything in a more refined way.

I think to the extent, speaking specifically to the first quarter, keep in mind that we are sitting here in March.

We're just re-grand opening these stores.

Customers are just now beginning to see a Dick's assortment, a Dick's way of operating those stores.

It is logical that there would be some perhaps lesser effect in Q1 than in subsequent quarters.

Bob Simonson, William Blair.

On the CapEx, Mike, are you willing to say -- you made an estimate of 75 million for this year.

That is just about what it was for last year.

Of those two $75 million numbers, what dollar amount went for new stores last year, and what do you think that element will be this year?

Just to clarify, the CapEx for the year just ended after leasehold improvements, after sale leasebacks, was 53 million.

Okay.

And you are -- (multiple speakers)

Just go to cash flow and do the math, and also on the bottom of the cash flow, there is a footnote.

There is a $13 million construction and progress accrual.

That is noted at the bottom of the -- because it's a non-cash item, it is not included in that CapEx line.

Okay.

And the 75, how much of that is for stores?

Are you willing to say?

You know, Bob, we are still actually finalizing some budgets here.

We've got a lot of competition for CapEx dollars and have not yet finalized that.

Okay.

Do you think that there is as much or more that you will spend on systems this year than in '04?

I would characterize it as much.

We had a big systems year this year; however, just with the Galyan's transaction, we kind of took a quantum leap from a volume standpoint, so we want to stay on top of that.

Like the date systems, that has been important to us, and funding it adequately is important.

And the last one is for Bill.

I see where you are going to do your first store in Florida.

Was that an old Galyan's plant, or was that your own initiation?

And when you were a smaller company, you talked about doing one and testing it and see if you got it right, and then you would open some more around it, the North Carolina and Georgia experiences.

Can you talk a little bit about the Florida market?

Yes, that was not a Galyan's.

It's a new development that we are going into.

We are actually -- we did talk about going and putting our toe in the water, if you will, and we have done that in Macon and some other Southern markets.

So this is just the first step of going a little bit deeper in the South, and as history has shown, we are going to learn as we go.

Ralph Jean, Wachovia.

I just wanted to get back to the hunt/fish/camp part of it.

You guys are well positioned as a traditional sporting goods retailer.

You have had Cabela's and Bass Pro open up in Pennsylvania and New York, West Virginia.

And you talked about in prior conference calls reemphasizing your commitment to the category or trying to improve your offerings there.

Going forward do you think this is something you're going to edit down, or will you defend your share in the hunt/fish/camp categories vigorously?

We will defend our share there very vigorously.

As we indicated in our call, I think in the second-quarter call that we had instituted a strategy in this category that had worked very well.

We were optimistic about its performance in the third and fourth quarter, and it met our plan.

So we are really enthusiastic about being able to defend share in this market.

I think we are certainly in a camping category, the tackle category and aspects of the hunting business, we think we are very well positioned.

(OPERATOR INSTRUCTIONS).

Ryan Renteria, Balni Asset Management (ph).

I just wanted to double-check that I have this right.

The pro forma number in the first quarter last year was a dime, so you are guiding to very strong 80 to 100 percent earnings growth.

Is that correct?

That is the way we would look at it, yes.

Super.

Thanks very much.

(OPERATOR INSTRUCTIONS).

Jason West, Deutsche Bank.

Just a couple of quick follow-ups.

I know this will be in the K, but I am wondering if you guys had like an '05 operating lease expense per square foot just so we can get a look at what it will look like as a new company?

Sorry.

I do not have that.

I do not have that.

We will be filing -- you're right.

It will be in the K. I'm sorry.

I just don't have the number handy.

Okay.

And then the other one is, on a category sale, you know hard goods versus apparel and footwear, any change there sort of at year-end '04 on those breakdowns versus the prior year?

Nothing meaningful.

Thanks very much, sir.

Ladies and gentlemen, that concludes our Q&A session for today.

I would like to turn the call back over to Mr. Ed Stack for any closing remarks he may have.

Please proceed, sir.

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

Again, we are very pleased to be able to turn in this type of performance in a fairly difficult environment with a lot going on with the conversion of the Galyan's stores.

Our associates have continued to work very hard and very smart through this timeframe.

We look forward to talking to everyone again for our first-quarter call.

Thank you very much.

Good-bye.

Thank you very much, ladies and gentlemen, for your participation in today's conference call.

This concludes the presentation, and you may now disconnect.

Have a good day.