DICK'S Sporting Goods Inc (DKS) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2005 Dick's Sporting Goods Inc. earnings conference call.

My name is Michelle, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Dennis Magulick, Director of Investor Relations.

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're 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 also 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 of prospective 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, Bill Newlin, Executive Vice President and Chief Administrative Officer, and Mike Hines, Executive Vice President and Chief Financial Officer, also join us here.

Bill Colombo will be discussing our store openings and Mike will review in more detail (technical difficulty) I would now like to turn the call over to Ed Stack.

We're pleased to be able to report the results of our second quarter, which is the first full quarter the former Galyan's stores have operated as Dick's stores.

This quarter, excluding merger, integration and store closing costs and the gain on sale of investments, we're reporting net income of 24.2 million, or $0.45 per diluted share, as compared to our guidance of $0.43 to $0.45 per share.

Net income increased 35% and earnings per diluted share increased 32% versus last year on a GAAP basis of comparison, which primarily includes only the Dick's stores in last year's second quarter.

Including merger, integration and store closing costs and the gain on sale of investments, we are reporting net income of 22.1 million, or $0.41 per share.

On a pro forma basis, which includes the results of Galyan's for the entire quarter last year, net income and earnings per share more than doubled.

Once again, these results exclude merger, integration and store closing costs and the gain on sale of investments.

Total sales for the quarter increased 50% to $622 million.

Comparable store sales increased 0.5%, which is on top of a 2.9% comp sales gain in last year's second quarter.

As a reminder, the former Galyan's stores will be included in the comp store base beginning in the second quarter of 2006, which is 13 months after the completion of the rebranding and remerchandising effort.

As we assorted the Galyan's stores, we rolled out our private-label program into these stores.

In overlap markets where there were already Dick's stores, customers familiar with our private-label brands -- customers who have been familiar with our private-label brands.

Many customers in new markets are seeing these brands for the first time.

Our initial experience is that these markets are behaving in a manner very similar to any other new market.

In the second quarter, which is the first full quarter following the conversion of the former Galyan's stores to Dick's stores, private-label sales represented 14.5% of sales versus 13.7% for Dick's-only stores last year in the second quarter.

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

We have experienced a sales shortfall to our plan in the former Galyan's stores.

These stores are behaving more similar to a new Dick's store in a new market when we had anticipated they would outperform a new Dick's store.

Key business categories such as golf and athletic footwear have increased substantially over historic Galyan's levels, but they have performed below our plan.

Our ad support for the former Galyan's stores has not been as aggressive as in our Dick's stores, which contributed to the sales shortfall, while providing expense savings.

The advertising frequency has been less than the traditional Dick's program which will change in the third quarter and will be identical to the standard Dick's program in the fourth quarter.

We have reduced our estimates for merger, integration and store closing costs from 70 million to $65 million.

These costs include the expense of closing Dick's stores, advertising the rebranding of the Galyan's stores, duplicative costs, recruiting and system conversion costs. 20.3 million was incurred in 2004, 32.5 million was incurred in the first quarter of 2005, and 5.3 million in the second quarter.

The remainder of these costs relate to the runout of leases, and these costs will be incurred in 2006 and beyond with no meaningful impact in any one year.

Full-year guidance is being revised to $1.70 to $1.75 per share, which is the original guidance provided in the June 21, 2004 press release announcing the Galyan's acquisition, versus our most recent guidance of $1.82 to $1.87 per share.

This represents an approximate 48% increase over pro forma combined Company EPS for the full-year 2004 of $1.17 a share, excluding merger, integration and store closing costs and a gain on sale of investments.

Including merger, integration and store closing costs, earnings guidance is $1.27 to $1.32 per share.

We expect comp store sales to increase approximately 2%.

Guidance is based on an estimated 55 million shares outstanding.

For the third quarter of 2005 on a fully diluted share base of 55 million shares outstanding, we expect to report earnings per diluted share of $0.06 to $0.08, excluding merger, integration and store closing costs versus $0.05 in the third quarter of 2004 which was the first full quarter the Galyan's stores are in the full-period results and excludes merger, integration and store closing costs.

We are expecting comp sales in the third quarter to be approximately 1 to 2%.

Lastly, we now expect to open 26 new stores in 2005, 1 more than our earlier guidance.

At this time I will turn the call over to Bill.

During the second quarter we opened three new stores, two of which were single-level stores and one was a two-level store.

All three stores were opened in existing markets -- Greenville, South Carolina, our second store in the Greenville/Spartansburg market.

We opened our 11th store in Pittsburgh and a two-level store in Toledo, Ohio.

That was our third store there.

We also closed a store in Dayton, Ohio, the final overlapping store resulting from the acquisition.

At the end of the second quarter we operated 239 stores with approximately 13.8 million square feet in 34 states.

In the third quarter of 2005 we expect to open 16 new stores and to maintain our strategy of opening primarily single-level stores.

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 2005 second-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 compare this year's GAAP second-quarter results against pro forma results of last year as if the Galyan's transaction had occurred as of the beginning of all periods presented.

The press release includes schedules that reconcile these amounts to facilitate your understanding.

I'll begin by giving an overview of the pro forma numbers.

Sales for the quarter increased 4% to $622 million from $598 million with a comp store sales gain for the Dick's stores of 0.5%.

Gross profit was 174 million, increasing 103 basis points to 28% of sales.

This change was due to expanded merchandising margins, partially offset by higher freight costs.

SG&A expenses of 129 million were 20.8% of sales and 198 basis points lower than last year's pro forma second quarter.

Synergies were obtained with lower corporate administrative costs and lower advertising expense.

Operating income, excluding merger, integration, store closing costs, increased 95% from 22.3 million pro forma last year to 43.4 million this year.

Net income for the quarter, excluding merger, integration, store closing costs and gain on sale of investment, more than doubled from $11 million last year to 24.2 million this year.

Earnings before interest, taxes, depreciation and amortization increased 61%.

EBITDA excludes merger, integration costs and the gain on the sale of the investment.

And for GAAP purposes, the 2005 second quarter includes both Dick's and Galyan's operations, whereas last year's results include Galyan's for only the last three days of the quarter following the acquisition.

This quarter sales increased 50% from last year's $416 million to $622 million.

Gross profit increased 46% to $174 million this quarter.

This represents a gross profit rate of 28% of sales this year versus 28.6% last year.

This change was driven by an increase in the merchandise margin, offset by the higher occupancy costs as a percentage of sales in the former of Galyan's stores and higher freight costs.

SG&A increased from $86 million to $129 million.

As a percent of sale, SG&A increased 18 basis points from last year's 20.6% to 20.8% this year.

Synergies obtained with lower corporate administrative costs were offset by higher store payroll, driven by inclusion of the former Galyan's stores.

Merger, integration and store closing costs were $5.3 million this quarter, most of which were attributable to the Dayton store closing.

As Ed noted, merger costs are essentially done as there is no meaningful impact in any year going forward.

Interest expense of $3.1 million increased from 959,000 last year due to the higher borrowings resulted from the purchase of Galyan's.

On a GAAP basis, including merger integration costs and gain on sale of investment, we are reporting net income of 22.1 million or $0.41 per diluted share this year as compared to net income of 17.9 million or $0.34 last year.

Year-to-date GAAP results include Dick's and Galyan's for the entire period and 2005.

In 2004, Galyan's was a part of the Company for only the final three days of this period.

Our pro forma operating statement has been prepared as if the Galyan's transaction had occurred at the beginning of each period presented, as described in Footnote 1 at the bottom of these statements.

Through the second quarter net income of 36.3 million and earnings per share of $0.67 more than doubled on a pro forma combined company basis excluding merger, integration, store closing costs and gain on sale of investment.

Comp store sales through the second quarter of the year increased 1.7%.

On a GAAP basis earnings per share of $0.27 this year compare with $0.54 last year.

Excluding merger, integration and store closing costs and gain on sale of investment, earnings per share increased 24% to $0.67.

Moving to the balance sheet, we ended the quarter with $537 million of inventory as compared to 489 million last year.

On a combined company basis, and excluding the impact of purchase accounting reserves, inventory per square foot is down 3% compared to last year.

There was $1 million remaining of the inventory reserve recorded in conjunction with the acquisition which was used during the quarter in connection with the liquidation of non-go-forward Galyan's merchandise.

We ended the quarter with $121 million of outstanding borrowings on our $350 million line of credit versus $160 million at the end of last year's second quarter.

Excess borrowing availability totaled 165 million.

Now, Operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS) Robbie Ohmes, Banc of America Securities.

A couple of questions.

I guess the first one is can you talk a little bit more about comps and why in the core Dick's stores they were sort of at the lower end of that -- really below the 1 to 2 I think you guys would have been looking for, and also on in new guidance why you expect comps to accelerate back up to that 2% for the second half of '05?

And then my follow-up question is can we also -- can we just get a little more help on sort of the breakdown of your adjustment to guidance for the back half and sort of what happened?

I know you're talking about the Galyan's stores not doing what you hoped they would be doing from a revenue basis, but can you talk more specifically what you are going to do on advertising side with those stores?

Is it across all converted Galyan's stores or are there some specific markets being targeted?

Thanks.

The comps did 0.5 versus the 1 to 2 that we had talked about is -- still has to do with primarily the cannibalization.

And we're comfortable going into Q3 with the 1 to 2 as the cannibalization effect will be somewhat less in the third quarter than it was in the second quarter.

We anniversary some of the stores that we had opened up last year.

Our breakdown of the cause for the revision of the guidance is, as I said, it's a shortfall in sales primarily in the Galyan's stores that they just haven't made our plan.

We've got our key businesses that are very important to us have comped up significantly over what Galyan's was doing in the past, but have not made our plan.

We took a look at what the sales projections would be with these stores, and from a planning standpoint actually bumped those a little bit thinking that since they were established businesses they would come out and perform better than a new Dick's store in a new market, and they're behaving very similarly to a new Dick's store in a new market.

As far as the advertising goes, in the past Galyan's have -- we've run our tabs -- our key tabs in those Galyan's markets, but some other tabs that we have run in traditional Dick's stores over the years we did not put into the Galyan's markets as a cost saving move.

And in retrospect, we wish we have not done that.

We're changing that in the third quarter, and it will be identical in the fourth quarter and going forward from there on in.

So the advertising will be ramped up in the former Galyan's stores, and that is the across the board.

That is not just in certain markets.

Just to understand that, you guys are -- in your new guidance you're taking your ad spending in Galyan's converted markets up, but you're assuming that the sales of those stores are not going to improve?

We're taking the -- we basically have the guidance based on the trend of where we see business today.

There are things that we're putting in place that we hope are going to modify that.

And we've -- we're basing this guidance on the trends that we're seeing today.

It's really like a trajectory.

We expect that they're going to trend up because we are seeing signs of that, and it's just where they are on that trajectory curve.

And net-net there is going to be an increase in advertising, but it's not going to be offset by the increase in sales, although we've seen the trend increasing.

Okay.

Thanks a lot, guys.

Matthew Fassler, Goldman Sachs.

A couple of questions.

On the Galyan's numbers, as we've been watching sales per store and sales per square foot versus comp I guess it's been clear for a couple or three quarters that the Galyan's sales have certainly been under some pressure on a year-to-year basis.

I guess at what point did you come to the realization that there was probably some linkage between your marketing plan and that sales performance?

And just to get a little more color on the sales showing, is it in the private-label businesses and in the businesses where you've made a bigger commitment than Galyan's previously had that you're seeing a shortfall, or is it more broadly than that across the mix?

It's not in the private-label component of our businesses.

Those are performing similarly to a new Dick's store in a new market, as we said.

So we're pleased with the private-label performance.

What's really happened is the key businesses that we're in that Galyan's somewhat was not in to the same extent that we are, have ramped up significantly.

Like I said, golf and athletic footwear are two of those key business, and they've ramped up significantly.

We just thought we would get them little higher a little faster than what is happening right now.

The trajectory is certainly moving in that direction, but it didn't make it as fast as we had hoped.

We went back, took a look at this advertising, are going to make changes to this advertising schedule in the former Galyan's stores, which we think will help.

But our guidance is based on the trend that we see today, and hopefully we can improve that.

Understood.

And thinking about the Galyan's model, Bill made a point of saying that the openings that you plan to pursue in 2005 and beyond are primarily single store units.

Does your experience here make you think any differently about the viability or the appeal of the double-decker store in the 80,000 square feet of space?

Absolutely not.

Our view has not changed.

We had always indicated that our -- the primary growth vehicle we would have would be the single-level store.

There are certainly markets around the country that the two-level stores is the format to put in, and we will continue to do that.

But we have not changed our mind about the two-level store.

We've not changed our mind about the Galyan's acquisition.

This is just a -- we anticipated the stores would open up faster on a slightly different ramp level than a new Dick's store in a new market, and they're opening up very similarly to a Dick's store.

As you see, our guidance is at the original guidance that we provided when we made the acquisition of Galyan's.

I think the other thing to keep in mind is that we've talked from the beginning that the sales at Galyan's don't need to be at the same level that they've had in their past.

If you look at gross profit per square foot for the quarter just ended, that number is flat year-over-year.

So despite the fact that there was a sales shortfall, we're making in seeing the improvements on the gross margin line.

To tie back into your question about whether that two-level format is viable, it most certainly isn't.

We talked about inventory management techniques employed to date and our expectations of improvement on the gross profit line.

That gross profit on a basis point is up 104 basis points over the pro forma last year.

So we're seeing what we expected to see there.

That 104 basis points is you're saying in those stores?

Chain total.

And just one final follow to the sales question.

You talked about sales increase in golf and footwear and intimated the private-label is doing well.

Obviously there's businesses where Dick's has less of a focus than Galyan's did.

If you can talk about to the extent that those stores are still seeing sales decline overall, where those declines are coming from versus the year-ago level?

There is businesses that we exited, such as the handgun business and certain accessory items associated with handguns.

We exited a big part of the fashion business that Galyan's was in, that they did some business but it was all at markdowns at the end of the season.

We exited a big part of their fashion brown shoe business that went with their fashion apparel business, which again was not terribly profitable.

So we've exited a number of those businesses and that certainly has a difference in the sales volume that is coming out of a former Galyan's stores to a new Dick's store.

But again, as we said, the key businesses that we're in have ramped up substantially over what Galyan's had done.

We increased the plan in the Galyan's stores based on that being an operating business versus opening up a brand-new store.

And that's where the shortfall is coming from, plain and simple.

It's no more complicated than that.

The store is very viable.

This is still a big increase over earnings versus last year, and we mis-stepped when we thought that when we took a bump to our plan and thought they would open up faster than a new Dick's store in a new market.

Got you.

Thanks so much.

Gary Balter, Credit Suisse First Boston.

Just following up a little bit on that, it sounds like when you talked about the new stores are starting at levels that Dick's would have started at in a new markets, it raises the whole question about the cost of the acquisition and was it the right move to buy them versus just opening stores.

Could you discuss that?

We still think it was the right move to buy them as it allowed us to get into a number of markets that would have been extremely difficult and expensive to get into, or we wouldn't have gotten into them at all.

As we took a look at our financial analysis, sales analysis, probability, (indiscernible) of returns, etc., that we go in when we look at a new store, you take markets like Chicago, Minneapolis, Denver, Dallas, Atlanta, the numbers just didn't work.

And if we hadn't bought Galyan's going in there with Galyan's as a competitor, along with the other competitors in those marketplaces, we wouldn't have been able to make the historic returns that we have.

We think that it was the right thing to do to go into these markets, and this is a temporary blip from a planning standpoint.

And we felt that it was a -- we felt that it was the right thing to do being accretive to earnings, bringing our earnings up to $1.70 to $1.75, which is what we originally guided to when we bought them, and that's what we're getting to today, is exactly that $1.70 to $1.75 when we made the original decision to buy them.

I think that validates the decision to buy them and has allowed us to get into these key markets that would have been very slow-moving and very expensive to penetrate over a fairly long period of time.

I think it's also relevant to note that although we bought this company a year ago they really just received the full merchandise assortment midway through the first quarter and the rebranding occurred middle to the end of March.

So it's only been four months since these stores have been operating as Dick's stores.

So it is early on in the process.

Mike, if you could -- in terms of the adjustment to the estimates, it looks like just from our model most of it is coming out in the third quarter.

Why -- are you assuming that things will be fine in the fourth?

How did you -- why is more of it in the third?

Is it the advertising costs that hits the third?

There's two things.

One is the advertising and the other is, as Ed spoke to, by the fourth quarter the Galyan's markets will be synchronized to a standard Dick's program.

We expect that based on what we've seen life (ph) to date and how other Dick's stores have opened up in new markets that there will be a pickup in the sales trajectory.

And we've also got some evidence relevant to synergies and the timing of when those synergies are being obtained that the third quarter is more of a challenge.

But again, it comes back to the sales line and the changes that are being incorporated.

I think both Robbie and Matt asked this, but I will follow up because I wasn't clear.

On the sales weakness at Dick's itself, or the 0.5, which is mostly cannibalization, could you just go through which categories were stronger or weaker?

Some of the categories that have been stronger have been -- have continued to be athletic footwear.

The golf business from a comp standpoint has been okay.

Athletic apparel -- the whole apparel area of men's, women's has been pretty good.

The softer areas continue to be some businesses that have just continued to trend down -- in-line skates.

We're rode the paintball wave when it was pretty high, and that wave has definitely crested.

We continue to take some shots in the -- from the paintball area.

And the outdoor area has been okay.

It just hasn't been great.

But it hasn't been awful.

Those are some of the key categories and kind of directionally how they've performed.

Thank you very much, and good luck.

Bob Simonson, William Blair.

Have you already increased the tabs and the advertising in those Galyan's locations (multiple speakers) is that something to happen in the next weeks, or --?

These things are planned out and have a fairly long leadtime.

So we will get some of those completed in the third quarter, and then it will be fully synchronized in the fourth quarter.

But to the other question, most of the expense will come through in the third quarter?

There's expense between the third and the fourth quarter.

The third quarter sales are lower than the fourth quarter.

Maybe you don't want to comment on this, but did the July sales soften like they did at other retailers?

Is this part of an issue?

We don't commentate on a quarter-by-quarter basis, as we haven't done in the past.

There were some items that you took from what Galyan's was selling and you put them into your stores.

How is that working out?

It's done pretty well.

The boat business, kayaks, canoes, some of that businesses that we took into some key Dick's stores did very well.

We learned a lot from that.

Some of the higher priced firearms have done extremely well also.

And we're taking some of those products in the third and fourth quarter from an outerwear standpoint and roll those into some of the other Dick's stores, a more aggressive approach in the North Face Denali jacket and some of that higher priced product.

And we're also rolled the ski program into a few Dick's stores.

We will be in about 35 stores between former Galyan's stores and some better Dick's stores.

Is that all snowboards or is any of that downhill?

There's some downhill, but the primary focus is going to be snowboards.

Is there anything you brought over in terms of testing merchandise in Dick's stores that you -- that Galyan's was selling that you just to no, we shouldn't be selling that?

Some of the -- the biggest thing that we've talked about is the North Face bikes.

Galyan's wasn't selling them that well either, but we thought that we would -- with our expertise in the cycling business, we thought that we would be able to do that and the North Face bikes didn't work very well.

Thanks very much.

Rick Nelson, Stephens.

Just kind of to follow up on the advertising issue, I'm wondering did you pull back on overall advertising, or was it a reallocation of advertising spend from Galyan's to Dick's in the second quarter?

I'm not sure what your --

It was not a reallocation.

We just spent less in the Galyan's markets, frankly trying to save money and trying to strike the right balance between frequency and -- I think most retailers deal with it similarly in terms of how much is enough advertising.

And we felt that we were advertising enough, so it wasn't really a shift from Galyan's into Dick's markets.

It was really just a lack of spend in the Galyan's markets.

So the Dick's spend was similar to the prior year?

Yes, absolutely.

Third quarter are you anticipating you're going to beef up overall spend or reallocate from Dick's to Galyan's versus your original plan?

We will do some -- it will be up slightly, but we will be reallocating some buckets into a tab insert program.

In terms of inventory levels in Galyan's and Dick's stores, what we might look for in terms of markdown --?

Our inventory is in terrific shape.

As Mike said, on a per square faces we're down slightly versus last year.

I give our merchandising group and our supply chain group planning allocation replenishment very high marks for keeping this inventory in line.

You don't need to expect any markdown pressure from us going forward based on the sales shortfall.

The group has done just a fabulous job keeping this inventory in line.

Very good.

Thank you.

David McGee, SunTrust Robinson Humphrey.

Can you remind us on how many stores of the Dick's core chain were impacted by re-grand opening advertising or cannibalization of new stores?

They are about -- I'm adding them up in my head here.

You have got new stores -- the question is new stores and Galyan's stores.

The Galyan's stores was (multiple speakers)

(multiple speakers) Dick's stores.

We will get you that number.

We don't have that right off the top of our head's here.

I guess one way of looking at it was that there was about 20 stores that were impacted by Galyan's.

And in the comp base in-fill stores in the non comp stores were about 70% of the non comp stores versus about 40% a year ago.

Directionally I think that's where you're going.

It's a pretty substantial step up from (multiple speakers)

My second question has to do with just the advertising at the former Galyan's stores.

Being in Atlanta here, I think I see a tab almost every week in the Sunday paper.

And I'm just not quite sure where I would have seen less advertising.

Well, you're in Atlanta; you would not have seen it every week.

You may have thought that you had seen it every week, but you would not have seen it every week.

And in the Dick's stores through the quarter, it is in virtually every week.

So there was probably -- there was a number of tabs that did not go to the former Galyan's stores.

Going into the third quarter, there will be a couple of tabs that won't get into the Galyan's store, trying to sink those up through the third quarter, and you'll see it identical to the Dick's promotional calendar in the fourth quarter.

Was it because the trends were favorable three months ago and you thought -- and that was the reason why you pulled back a little bit?

We took a look at tabs and felt that these stores coming out of the block as operating business units, if you will, that we would be able to cut back that advertising a bit, save on the expense side, and they would come out of the blocks a bit faster than they did.

They're acting identical to a -- very similar to a new Dick's store in a new market, and that quite frankly was a surprise, and we're moving to fix that very quickly.

Any commentary on the overall marketplace itself?

There's been some concern about footwear trends in the second half of the year.

And any slowing of whatever tailwinds you were seeing in the first half?

Our footwear business still continues to be pretty solid.

The athletic apparel business still continues to be pretty solid.

We haven't seen a slowdown in that.

As we've talked a bit, though, the trend in athletic footwear is to performance-based shoes.

And we're very -- we're in a great position to continue to take advantage of that trend.

Where you may see some of the slowdown that's coming out of the fashion side of the athletic footwear business.

But in the performance area where we play, that business has been very good.

Thanks a lot.

Sean McGowan, Harris Nesbitt.

I have a question regarding the comment that the stores, the remodeled stores or rebrand stores, are performing in line with new Dick's stores.

Could you be more specific on that?

Do you mean that their overall sales are performing in line with the overall sales of a new Dick's store, or on a per square foot faces, or --?

Adjusting for the differences in the size of the stores here could you be more specific?

We look at these stores and they are performing close to what we would have anticipated a new Dick's store to come out of the blocks at based on a number of factors -- demographics and trade area size, etc.

And we thought that based on being an existing business that they would come out and perform at a higher levels than that.

They're not.

They are performing at what we would expect coming right out of the blocks as a new store, which is what we had originally anticipated when we bought them.

And that provided the guidance of $1.70 to $1.75 when we originally bought them, and we have revised guidance to exactly that.

Right, but are you comparing a two-level Galyan's store with a single-level Dick's store when you say that?

No.

We're comparing a two-level Galyan's store with what we would anticipate a two-level Dick's store to open at.

Thank you.

Second question is can you give us some idea of what the sales would be on a pro forma basis?

The same-store sales that is.

We have not provided sales information on a pro forma basis in the past.

I had to ask.

Thanks.

Mitch Kaiser, Piper Jaffray.

Just a couple points of clarification.

I was wondered what is the opening cost of a typical two-level Dick's store?

When you say opening --

If you were to just built a typical two-level double-decker Dick's store, how much is that again?

From an investment in inventory, it's about 1.3 million, which is net of payables; fixtures and equipment about 800,000; leasehold improvements, 400; and preopening about 400.

Okay.

Sounds good.

And then just a point of clarification on the comps in the Dick's stores in the quarter.

So coming in just a little bit below the lower end of what your expectations were, are you saying that there was more cannibalization then than you had anticipated?

Is that the reason for I guess the shortfall relative to your expectations?

Cannibalization effect has continued to be fairly substantial based on the markets that we've gone into.

That will slow over the next couple of quarters.

Okay.

And then I guess lastly, you talked about footwear and golf being pretty strong in the Dick's stores, but maybe not -- below your expectations in the Galyan's stores.

Is there anything kind of indicative of those markets, or is it just traffic going into the stores, or what's your perception on that because it doesn't seem like it's a category issue?

In the Galyan's stores, as we said, footwear and golf comped up pretty significantly.

I think it's just -- we thought we would be able to move those customers quicker because it would be -- those stores are a going business, if you will, and not a brand-new business.

And we missed that, and it's just taking a little bit longer to get that golf customer to say -- although it comped up significantly -- when I say significantly, I'm talking the comps versus what Galyan's had done.

These stores -- Galyan's stores have comped up north of 50% what they did last year, but they just haven't gotten to the plan that we put out there for them, which was in effect just a bit too aggressive.

I guess would you say on a per square foot faces that they're up as well?

Yes.

Because you did blow out quite a bit of space there.

Yes.

All right, thank you.

Jim Duffy, Thomas Weisel Partners.

I'm hoping you can speak to any geographic differences that you saw in the performance of the guidance Galyan's stores.

What I'm driving at here was in those markets where Dick's did not have a brand presence, was the performance any worse?

Where the Dick's stores had a presence, we've seen those stores performing at a higher level than where we did not have a presence.

We expect that -- as I said, that's where we come -- that's where the issue is, that the stores in markets where we did not have a presence are behaving more similarly to a new Dick's store, and we had anticipated them to perform at a higher level.

It also had an impact on the cannibalization rate, because where we had a presence we did early conversions back in October.

So where there were Galyan's stores in existing Dick's markets, we renamed the store, although we didn't reassort the store, back in October yet.

With the markets where Dick's did not have a presence, we went through that rebranding effort in mid-March so that the second quarter was -- it was later in the process.

It was a two-step process.

One of the things you guys have done very well in the past is merchandising specific to certain geographies.

Do you think there could be a learning curve in some of these new geographies with these Galyan's stores?

Yes there is.

That is similar to any new market that we enter, and there are some of those -- that learning curve which we're moving up at a pretty rapid pace.

Can you be a little more specific on the types of advertising that you plan to use going forward?

Is it basically the Sunday circulars or is there going to be other medium that will be put to use?

It will primarily be -- the vast majority of it will be the circulars, although there will be also more direct-mail pieces going to customers than those markets saw in the second quarter.

In the past have you seen kind of the increased frequency with that advertising to be a catalyst for sales?

Yes we have.

So you can quantify that I suppose.

And then let's see, I guess a question I have, why would you step back from the advertising in those Galyan's stores?

Did you expect the momentum from the re-grand openings to carry you through Q2?

That's part of it.

As we looked at the business and the trajectory of the former Galyan's stores, we felt that there were certain events that we didn't need to put into those Galyan's stores because we thought they were going to be -- they would open up at a higher rate based on being an existing business, and they didn't.

We're going to make sure that that doesn't happen going forward.

Like I said, by the fourth quarter we will have this promotional calendar synced up between the legacy Dick's stores and the former Galyan's stores.

And then final question.

Updated thoughts with what you know now, do you expect to be able to get the performance in those Galyan's stores, I guess, do you think, in terms of gross profit per square foot, kind of on par with what you see in the Dick's stores?

Yes, we think we can.

Again, I go back to the -- we've revised our guidance to be the precise guidance that we talked about when we originally bought those Galyan's stores.

So we're still extremely enthusiastic about this acquisition.

We're enthusiastic about what we've got ahead of us, and we feel we can get these to the same operating metrics as a Dick's store.

Very good.

Thanks.

Best of luck.

Charles Grom, JPMorgan.

Could you add some color on your comps in your non-Galyan's markets for us so we can get a better understanding of this cannibalization issue?

The cannibalization is -- we've talked about cannibalization for several quarters right now.

It's grown to be more significant than in the past.

And I think Mike cited that the 40%, 70% numbers a few minutes ago.

We expect that to start to be less impactful going forward beginning in the third quarter and into the fourth quarter.

So it's safe to say that in your non-Galyan's markets you're probably comping closer to what your original guidance was, 1 or 2%?

In the -- I'm sorry.

I don't understand the question.

Just in markets where you don't have a Galyan's overlap, and there's no cannibalization, are your stores doing better than that (multiple speakers)

There's actually two forms of cannibalization.

One of the forms of cannibalization is a Galyan's store and another form of cannibalization is a Dick's store.

So when I made reference to in the non comp store base, which I will exclude the Galyan's stores, 70% of those non comp stores were in in-fill stores versus 40% a year ago.

So the self-cannibalization is at higher level in addition to the cannibalization effect of the Galyan's stores.

But to answer your question, it would be safe to assume that where we -- in markets where we do not have a Galyan's overlap the comp number is directionally higher.

Thanks for clarifying.

Just on your new Q3 guidance, it implies roughly flatly EBIT margins but your fourth-quarter guidance implies a nice pick up.

Can you walk us through the factors that give you comfort in this forecast, and that some of the factors that maybe impacting the fourth quarter may not go into the fourth?

I still think the message here has been consistent with respect to the sales and advertising, and that's going to persist on a go-forward basis.

There are no other material changes as it relates to margin, for example.

Our expectations are pretty consistent in terms of our expectations going forward in terms of improvements.

Last question here on the Galyan's stores.

How confident are you that the less frequent advertising was the main culprit for the sales shortfall and not necessarily increased competition or maybe less brand recognition in those new markets?

I guess in general I'm trying to say something that may persist beyond just the second half of this year and you may not get the benefit from an increase in ad spent.

We think it has resulted from the lack of ad spend, number one.

I think it has been a lack of brand recognition which the advertising will help alleviate.

Our guidance at $1.70 to $1.75, again, is what we had originally talked about when we bought Galyan's, and we have not taken a big -- we're still looking at this as kind of on this trend line and expect it to take the third and fourth quarter and move this trend line along.

We're not saying that in the third and fourth quarter we're going to add this advertising and everything is going to be what we had originally planned.

We still think that we planned these a little bit higher than probably what we should because they were -- we gave them a pop because of being an existing business, and they're acting just like a new Dick's store, which is what we have in our guidance, that they will continue to act like a new Dick's store.

Great.

Thanks.

Good luck.

Anthony Borduski (ph), Fidelity & Co.

A couple of questions.

You mentioned that golf and athletic footwear were below your plan at the Galyan's stores.

Can you speak about any other categories by merchandise that you saw either below plan or above plan in Galyan's stores?

For competitive reasons we don't want to talk too narrowly about this.

But we wanted to give you some key categories that -- kind of bellwether businesses associated with Dick's Sporting Goods, which is certainly athletic footwear and the golf business, and try to provide some color that although these categories performed significantly better than what they did under the Galyan's brand, they didn't make our plan.

We'd like to keep it to those two categories that, as I said, we think are bellwether categories for us.

Looking at '06 and beyond sort of more longer term, as you deal with this issue of cannibalization and then once you include the Galyan's stores in the comp base starting next year, what do you think are the long-term same-store sales goals that you can achieve?

We've never provided guidance past a quarter or past the year that we're operating in today, and we won't to do that.

But I think in the past you have stated that you expect earnings to grow at about 20%, right?

Yes we have.

But that's only -- you have never really gone more (ph) with that as far as margin improvements or (multiple speakers)

We've not provided any guidance other than we've said in the past that we thought we could continue with operating margins increasing roughly 30 basis points a year.

But we haven't provided any more detail other than we continue to feel that EPS growth can be in the 20% range.

Thank you.

Bob Simonson, William Blair.

Sorry to beat the same question to death, but just so I'm thinking this through correctly, most of the estimate reduction that you're offering is going to fall in the third quarter; not very much, perhaps non, in the fourth quarter.

But you didn't change the comps.

Does that mean that what you're assuming is as this advertising changes it will enhance not only the revenues but the gross profit dollars at the Galyan's stores in the fourth quarter?

And since they're not in the comp, that's why it doesn't show up in any accelerated comp expectation?

I think part of the issues is there is a view out there of what a group thought our third quarter should be, but we never provided any guidance for the third quarter.

And if you take a look at what we did last year in the third quarter and the bump up that we're anticipating in the third quarter this year, it's still pretty substantial.

So I think --

(multiple speakers) 40% increase in earnings versus last year in the third quarter.

So to Ed's point, we never provided a benchmark and we can't reconcile where First Call -- how folks came up with that number.

I think that will obviously get a lot easier as we get through this and we've got actual results as opposed to pro forma results that capture the synergies, which will happen as we get through the balance of this year.

But we still have a pretty sizable 40% increase in EPS over '04 on a pro forma basis.

Let's ignore what outsiders thought.

You reduced your own expectations for the second half by about $0.12.

Is that in your planning more evenly spread than what the outsiders thought?

It was a little bit more heavy in the third quarter for the reasons that we spoke about relative to the sales traction we expect to generate as we get this advertising back synchronized with the standard Dick's program.

So whereas from a First Call perspective it would appear that if you succeed in what you're talking about today, that you would essentially have a one-quarter hiccup.

However, what you just said suggests that it's not just the third quarter; in your own planning it takes you six months to get to where you want to be.

Is that correct?

We think that there's a more significant effect in the third quarter relative -- as compared to our expectations than in the fourth quarter, yes.

Thank you.

Rick Leggat (ph), Arbor Capital.

A question I have for you is what kind of personnel turnover have you experienced at your Galyan's stores, and if you would compare that, of course, to your non-Galyan's?

And then have you done anything to measure customer service level to Galyan's purchase versus non?

Our turnover in both Galyan's and Dick's have been fairly consistent.

It's no more pronounced at a Galyan's store than it was at a Dick's store.

And we measure customer service in every store in the Company.

We do mystery shops every month.

We have customer comment cards and the website ability to measure service.

And we do that, and we grade it and evaluate our stores based on that.

So if I had the numbers I wouldn't see any material difference in sales personnel on the floor in terms of the turnover in the Galyan's versus non?

No.

And then a different question.

You said in looking back on whether or not you feel good about the decisions to buy Galyan's to enter all these markets as opposed to de novo, you said you couldn't make it work economically doing it de novo.

Can you give more color on that, and preferably maybe tell us about what your expected returns on invested capital were under the Galyan's purchase versus just doing it the traditional organic growth way?

We said that it would be very difficult to do, to go in organically and enter those markets.

We said it would be very difficult.

It would take a very long time --

So is it time?

I guess that's what I don't understand.

What makes it so much more difficult?

You're doing it successfully in lots of other markets.

But not in those key markets where it's as competitive as Chicago, Minneapolis, Denver, Atlanta.

We're doing it in a number of other markets, but not markets like that.

I think there's a big difference taking a look at trying to go in and store the greater Chicago market, going in there with a base of seven or eight stores, as we were able to do with the Galyan's stores, or going into Chicago trying to carve out the space, trying to get a market entry that works with Galyan's as a competitor.

And we've an extremely disciplined as we looked at our new store models to go try to hit those markets.

The numbers just didn't meet the rona (ph) numbers that we provided.

The other key point is that Galyan's was one of the toughest competitors we faced.

So as you look at where you're going to put stores, if you're facing a tough competitor who has got grade A real estate, it becomes a very different equation than if you are looking to come into a trade area and you've got a higher confidence level that you could open up across the street from them and perform successfully.

Galyan's took their assortment up higher than other competitors, other full line sporting goods retailers that we compete with.

As a result, they were a much tougher competitor than other folks out there.

Okay, thanks.

Sean McGowan, Harris Nesbitt.

A quick follow-up.

As you lower the expectation for merger and integration costs, there weren't any reversals of reserves or anything in this quarter, where there?

No.

The one that I did make reference to was the completion of the inventory reserve.

That's done.

Frankly, we had estimates of -- you go through something of this nature, there's a lot of estimates that go on and, we were conservative in some of them.

We just took the number down because we're essentially done.

Thank you.

Jason West, Deutsche Bank.

Can you guys remind us what typical new store productivity has been on your two-level Dick's stores?

We haven't broken out store productivity.

That's a measurement that you folks do because you need to given a lack of information.

So I don't --

So you don't have like an historical average or anything like that?

No.

I think if you look at the chain total it's about 80%.

Okay.

And I guess could you also talk broadly about what you're seeing from a competitive standpoint with some store growth going on in the industry, some competitors doing major remodel programs and things like that?

Anything you could talk about there?

The store development program has an impact from the outdoor retailers, which we've talked about in the past.

But the store remodeling programs that's going on with TSA, we haven't seen any impact on our business from a TSA remodeling program.

So there would be a little more impact on the outdoor side the way those guys are growing?

Yes, and we've talked about that in the past when the outdoor retailer opens up we take a hit in that area for the first 12 months, and as we cycle back around the business changes pretty significantly.

And then looking out to '06, are you guys still thinking about somewhere in 15% store growth?

And can you talk about the plans for new markets versus existing markets on that?

We won't lay out existing markets versus new markets, but we're still planning a 15% unit growth on a go-forward basis.

And again, our business is very solid.

You can see the year-over-year increase from an earnings standpoint that we're guiding to, and we're still very bullish about this business.

We planned the Galyan's stores to come out of the blocks at a faster rate than they did.

They're coming out at what a new Dick's store would do.

And at the end of the day that's really not a bad thing.

We just planned them a little bit higher, and we revised the guidance back to our original guidance.

Last thing.

Can you talk generally about -- looking at third quarter last year versus fourth quarter of last year of which quarter would be a bit of an easier compare from some of the bigger picture issues such as weather and sort of the way things played out over the holidays?

If you take a look at the -- third quarter last year comps were 1.5%, fourth quarter was 1.1, so they're both relatively similar.

Some weather in fourth quarter from a cold, snowy standpoint would certainly help.

But we haven't planned our business planning for a winter like that.

We're planning our business for the winter would be the same as last year, which was certainly warmer than it was in 2003 and 2002.

Thanks a lot.

Sam Poser, Mosaic Research.

Just a follow-up.

Looking at your inventory levels, did you under-plan your levels to support the necessary sales?

You had a very large increase in total sales and your inventory was only up a fraction relative to that.

No, I don't think they were under-planned.

I think that as you look at some of the inventory levels at Galyan's, the numbers I cited were on a pro forma basis.

There was opportunity to squeeze some inventory out of those stores.

Our inventory management has actually been one of our stronger muscles over the years.

That's continued, so I don't think that that reduction should come as too much of a surprise.

It just looked very -- more than I had expected to see.

Also, you had talked about the performance of -- the strong performance of more technical footwear products.

Where do some of the more fashionable technical products like the Shox fall into that as far as performance?

We would view Shox as a performance-based shoe.

And then just one last question.

How's your -- what is going on with your exercise equipment business, fitness equipment?

We're pleased with the exercise business.

The certified fitness trainers that we have in the store have certainly paid off.

And we're really quite pleased with the fitness business.

Again, as we talked about, I think it was at the last call, we talked from the fitness standpoint the cardio aspect of it is performing better than the strength aspect of the fitness business.

But all in all, we're pretty happy with it.

Great.

Thank you.

Jim Duffy, Thomas Weisel Partners.

A quick follow-up.

Have you guys done any additional thinking about stock options expensing in '06?

Have you investigated accelerating the vesting of options anything of that nature?

We're in the process of the looking at a number of alternatives, but we have not -- we've not decided our final course of action.

But we've got a number of options that we're looking at.

Thank you.

Bob Simonson.

You reiterated, Ed, a longer-term normalized expectation of 15% growth in stores, 30 basis points in operating margin improvement if you are successful in your planning, and that comes out about 20% earnings growth.

Do you look at this year and the new estimate as a shift down, and then you go back to that normalized growth?

Or is this a process of something needs fixing and you ought to be able to get closer to where it would have been had you not had this interruption?

First of all, Bob, we're looking at the $1.70 to $1.75 as the base going forward.

Interruption, a hiccup, however you want to characterize this, this is not hiccup in the core business.

Again, this is an extremely profitable Company.

The growth rate of profitability is significant from last year to this year, even with the revised guidance.

Again, we've only revised guidance to what we originally guided to with the acquisition of the Galyan's -- Galyan's acquisition.

Comps are still positive, although slightly positive.

They are positive with pretty significant cannibalization.

There's been margin rate improvements.

And this is a business that continues to do very well, continues to increase profitability, and one that we're really still very excited about our prospects going forward.

Thank you.

As there are no more questions, I'll turn it back over to Mr. Stack for closing remarks.

I'd like to thank everyone in for tuning in to our call today and look forward to seeing you for our next quarterly call.

Thank you.

Ladies and gentlemen, that does conclude the conference for today.

Please disconnect.

Have a good day.