DICK'S Sporting Goods Inc (DKS) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Dick's Sporting Goods, Inc., earnings conference call.

My name is Maria and I will be your audio coordinator for today. [OPERATOR INSTRUCTIONS] At this time, I will now turn the presentation over to Mr. Dennis Magulick, Director of Investor Relations.

Please proceed, sir.

Thank you.

And good morning to everyone participating in today's conference call to discuss the first quarter financial results for Dick's Sporting Goods.

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 with respect to future events and financial performance.

There's 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 first quarter financial and operating results and review the guidance contained in our press release.

Bill Colombo, President and Chief Operating Officer, and Mike Hines, Executive Vice President and Chief Financial Officer, also join us here.

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

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

Thank you, Dennis.

We're pleased to be able to report the results of our first quarter, a quarter in which we exceeded our guidance for both earnings per share and comparable store sales.

This quarter we are reporting net income of $11.4 million, or $0.21 per diluted share as compared to our guidance of $0.15 to $0.17 per share.

Earnings per diluted share increased 31% over last year's pro forma results, which exclude merger integration and store closing costs and our adjusted to include stock option expense.

Sales for the quarter increased 13% to $645 million, comparable store sales increased 6.5%.

The former Galyan stores will be included in the comp store base beginning next quarter, which is 13 months after the completion of the rebranding and remerchandising effort.

During the quarter, we saw favorable results across most of our businesses, including athletic apparel, baseball, and a number of the outdoor categories and outerwear.

Our license business also benefited from the Pittsburgh Steelers Super Bowl victory.

The outdoor business continues to produce positive comp store sales gains as a result of the remerchandising effort we started almost two years ago.

We're very pleased with these results, especially giving how competitive this category has been over the last several quarters.

Part of the label sales represented 12.5% of sales in the first quarter of 2006, versus 10.1% out of Dick's and Galyan's combined basis last year.

Our initiatives in these categories across both hard lines and soft lines have resulted in meaningful year-over-year increases in penetration.

I'd now like to provide an update on the performance of the former Galyan stores.

Approximately one year ago, we completed the conversion of the former Galyan stores to the Dick's Sporting Goods format in merchandise assortment, culminating with a regrand opening campaign in March of last year.

Since that time, we've also synchronized our marketing and advertising programs among the former Galyan stores and legacy Dick's stores and the former Galyan stores are fully integrated into our overall marketing strategy.

Our expectations continue to be that these stores will perform much like any new Dick's Sporting Goods stores which over time have historically produced increasing sales and returns as each new store matures.

Our guidance incorporates this expectation and I am pleased to report our first quarter results reflect the benefits of this conversion, not only from a gross margin and earnings perspective, but also from a topline standpoint.

In the first quarter, the sales performance in the former Galyan stores demonstrated a marked improvement from previous quarters as measured by comparable store sales.

This performance was delivered against the difficult comparison of the regrand opening campaign of last year.

For guidance, we are increasing our guidance for the full year 2006 and providing our initial guidance for the second quarter.

For the year, we are increasing our guidance from $1.77 to $1.81, up to the new range of $1.81 to $1.85 per diluted share, which includes $0.27 per share of stock option expense.

This represents an increase of approximately 22% versus 2005 after adjusting for the $0.25 impact of stock option expense in 2005 and excluding merger integration and store closing costs and gain on sale of investment.

We expect comp store sales to increase approximately 3% in 2006.

For the second quarter of 2006, we expect to earn in the range of $0.43 to $0.44 per diluted share which includes $0.07 of stock option expense per share.

This compares to earnings per share of $0.38 in the second quarter of 2005 after adjusting for the $0.07 impact of stock option expense and excluding merger integration and store closing costs and gain on sale of investment.

We are expecting comp store sales in the second quarter, which include the results of the former Galyan stores to increase approximately 3 to 4%.

We expect to open 40 new stores and relocate two in 2006.

In summary, the first quarter was an excellent one for Dick's Sporting Goods, as we exceeded our guidance for both earnings and comp store sales.

Business was strong against most categories and we once again delivered a meaningful increase in gross margin.

The former Galyan stores have passed their one year anniversary of the regrand opening, posting substantive sales resulting in indicating the conversion was successfully completed.

We are well-positioned for 2006 with plans in place to open 40 stores, initiatives to support our solid comp store sales gain.

Our blend of new markets and in-fill stores will ensure we continue to capture market share and our ongoing emphasis on execution is reflected in our results.

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

Thanks, Ed.

In the first quarter we opened eight new stores and relocated two stores.

We entered the new market of Augusta, Maine, with a single level store and also opened single level stores in our existing markets of Norfolk, Virginia Beach, Minneapolis, Cleveland, Long Island, Boston, and Chicago.

We opened a two-level store in Rockaway, New Jersey, and relocated both in Washington, D.C., and Orange, Connecticut, into brand new two-level prototype stores.

A the end of the first quarter, Dick's Sporting Goods operated 263 stores with over 15 million square feet in 34 states.

Our plans for five new stores in the second quarter include one two-level store.

Additionally, last week, we opened a completely remodeled two-level store at the Buckland Hills Mall in Hartford, Connecticut.

We continue to invest in our supply chain.

In April, we completed the conversion to a new warehouse management system at our Pittsburgh distribution center.

Now, both distribution centers are operating on the same warehouse management system.

The expansion of our Indianapolis distribution center is continuing on plan with a targeted completion of February 2007.

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

Thanks, Bill.

Beginning Q1 of 2006, we're expensing stock options as required.

In order to enhance the comparability of our results pro forma fiscal 2005 results have been adjusted to include stock option expense.

A reconciliation of this adjustment can be found in a schedule in our press release.

Sales for the quarter increased 13% to $645 million from $575 million last year with the comp store sales gain of 6.5%.

The impact of the Steeler's Super Bowl win accounted for 2% of the comp sales gain.

Gross profit was $178 million, increasing 90 basis points to 27.5% of sales.

This increase was due to expanded merchandising margins caused by better purchasing and the impact of more private label sales.

In stock positions were improved to the former Galyan stores as they were in a conversion mode in the first part of last year's first quarter.

This had a favorable impact on margin rates.

Margin gains were partially offset by a roughly 50 basis-point charge associated with the store relocation.

SG&A expenses of $152 million were 23.6% of sales and 48 basis points higher than last year's first quarter caused by increased advertising expense as the non-overlap Galyan's markets were put on the same tab frequency as legacy Dick's stores.

Last year's results were adjusted to include $5.6 million of pretax stock option expense.

Operating income increased 22% from $17.4 million last year to $21.3 million this year.

As a percent of sales, operating income increased 25 basis points.

Last year's results exclude $32.5 million of merger integration, and store closing costs and are adjusted to include stock option expense.

Net income for the quarter increased 30% to $11.4 million as compared to $8.8 million last year, which excludes merger integration and store closing costs and is adjusted to include stock option expense.

Moving to the balance sheet, we ended the quarter with $650 million of inventory as compared to $533 million last year.

Inventory per square foot was 9% higher than at the end of the first quarter last year.

Inventory increased as a result of increased emphasis of private label categories across a number of our businesses.

We also reseeded a higher percentage of inventories in certain seasonal businesses like baseball with the objective of driving sales, which was accomplished.

We are comfortable with the quality of the inventory at quarter end.

We ended the quarter with $48 million in outstanding borrowings under our $350 million line of credit, which is a $74 million decrease as compared to the end of last year's first quarter.

Lastly, a note on new store productivity and more accurately noncomp store productivity, which includes the former Galyan stores.

We saw measurable improvement.

New stores continue to meet our expectations, with the improvement in this metric being driven by the former Galyan stores.

As Ed noted, the former Galyan stores performed well as they lapped the one-year anniversary of their regrand opening.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Robby Ohmes with Banc of America Securities, please proceed.

Thanks.

A couple of quick questions.

The first question is if you could give a little more detail on your apparel and footwear trends, sort of which brand stood out performance versus non performance apparel, et cetera?

And then just a clarification.

I know you had mentioned a $0.04 charge for store relocations in the quarter.

Was it a full $0.04 that pressured your numbers and a little more detail on where that hit the income statement?

Thanks.

I'll answer the first question, Robby, on apparel and footwear.

Apparel and footwear continued driven by a number of the same brands and categories that have been in the past. .

Primarily, technical apparel, performance apparel has been driving that aspect of the business, driven by Under Armour and Nike, are the primary drivers of that business.

The footwear business has been very good in the running silhouettes and are driven by Nike, New Balance, and Asics.

The $0.04 was - there was a full $0.04 included in the earnings release, that if that had not been there then our earnings would have been an additional $0.04 above where they are.

And are there any more charges like that in the second and third quarter?

No.

And then just finally on the footwear side, are you still seeing increases in average price per pair in footwear?

Yes, it's continuing to -- on the men's side, it's continuing to move up, men's and the cleated side.

And women's side is slightly off from an average ticket price.

Okay, great.

Thank you very much.

Sure.

Your next question comes from the line of Mathew Fassler with Goldman Sachs.

Please proceed.

Thanks a lot.

Good morning. .

A couple questions I'd like to ask.

First of all, if you look at your gross margin performance, you're up, I guess, 90 basis points on a reported basis, you would have been even further than that if you back out the impact of the store relocation, which I think you said went to gross margin and then you're sort of then back at levels that we saw in early '04 prior to the Gaylan's acquisition.

What does this tell you about, kind of, capacity for gross margin improvement?

And if you could also just contrast or compare the early in the year with the compares as you move through the year?

Matt, we still feel that we've got some runway on the margin rate for a couple of reasons.

We think as we continue to make improvements systemically from an inventory standpoint, inventory management standpoint, we'll have some margin rate expansion due to mitigating markdowns on the back end.

We feel we still have upside from a buying capacity as we were able to leverage our size with a number of vendors.

And also, as we continue to increase private label as a percent of business.

Last year, private label for the whole year was 11.9%, we're at 12.5% for the most recent quarter, and we're very confident we can move this number to 15%.

And as you know the private label margin rates are higher than the branded margin rates.

Understood.

Second question, Mike, you talked a bit about the drivers of the inventory increase in Q1.

Do you expect, given the private label mix shift, that they will remain up significantly at the end of Q2, or is this essentially the peak inventory growth you anticipate.

I'm going to actually suggest Ed answer that.

Matt, I think that the inventory has been driven by a couple of things.

It's been driven by increase in private label.

It's also -- we've taken some receipts in early to set departments earlier than we had in the past.

And as you can see that the results from a sales standpoint and margin rates standpoint have been helpful, very helpful in the baseball business, it's been helpful in the outdoor business, or the lodge business.

So we expect this inventory level to be relatively at this level, maybe down a little bit at the end of the second quarter.

But it's -- we think it's going to be relatively similar to what it is now.

Understood.

And then finally, on the competitive front.

Your largest competitor, well, specialty competitor went private, you're seeing slower expansion from Gander in the lodge area where I know you've done well.

If you could comment on what you're seeing in terms of competitive cannibalization and also competitive pricing, that would be very helpful.

Sure.

The square footage growth seems to have slowed certainly in the general sporting goods area and to some extent the outdoor area.

Bass Pro and Cabela's are continuing to open up stores.

They add a lot of square footage, but they don't impact a lot of stores because a lot of square footage comes from one store.

So we're not seeing a lot of pressure from there.

And there's no one out there who's really kind of pushed anything from an irrational pricing standpoint with the exception of Golf Galaxy in some markets where they've gotten a little irrational and I think you see that in their margin rate deterioration.

understood.

And then finally, you hear about canalization when your comps are on the lighter side presumably you printed the good comps you did with some cannibalization.

So maybe without the spotlight on it you might just want to tell us kind of whether that is consistent were it's been or down a bit from where it had been?

It's pretty much consistent where it was at the fourth quarter.

We expect the canalization will run about a percentage point, and I know there's a lot of focus on where we are with the Gaylan stores and where they are in the comp in the second quarter.

You'll notice from the new stores we opened this first quarter, three of those were in Gaylan's markets.

We've been consistent with how we've characterized that transaction and how it's been an entry into a number of markets and logically expect to see more stores in Atlanta, Chicago,Minneapolis, Denver which will have continued cannibalization effect. .

Gotcha.

Thank you so much.

Yes

Your next question comes from the line of Dan Wewer with Raymond James, please proceed.

Hi, good morning.

I certainly understand the gross margin benefits from the private label growth.

At the same time, it looks like it had somewhat of a dilutive impact on the turns and accounts payable to inventory rate.

So curious if you could just discuss the overall economic benefit of the program, maybe focusing on GMROI and how it will impact the business going forward?

I think when you look at GMROI for the first quarter, that was essentially flat with the same period a year ago.

And I think one of the things that we're looking at -- a prior caller indicated a change in the competitive landscape -- one of the things that is difficult to know is when any business is optimized.

And as we have funded inventory, particular businesses on the premise that there is more upside, I think you saw that in the comp sales results.

I think our history has been we always continue to tweak the business based on data.

So as we've funded some of these businesses, we'll look at what the economic return is and make those decisions and adjustments as we go forward.

Dick, also, you had alluded to the Pittsburgh Steelers license apparel may have added two points to your comps in the quarter?

It definitely added two percentage points of 6.5.

As I recall, there's about 13 stores in the Pittsburgh area.

I was kind of curious as to how many stores in total did you have the big Steelers fans that boosted your comps that amount?

Well, Steeler fans are everywhere.

It was approximately -- that had a meaningful impact, about 20 stores.

About 20 stores got that big of a lift?

Yes.

And the last question I had, visiting a lot of your stores, it's just amazing how much more space has been devoted to Under Armour, and curious going forward where you can find additional space, grow that brand in your stores or does the algebra change to where it's not adding space to that brand, but rather trying to increase the sales per square foot?

Well, we've increased the space devoted to Under Armour.

There is capacity to increase additional space associated with Under Armour as it continues to grow.

We do feel and we've talked with Under Armour about fixturing packages and how to drive more sales out of relatively the same square footage.

And we've got a couple of tests going on where we're doing that and we're pretty optimistic about it.

Great.

Thanks and good luck.

Sure.

Your next question comes from the line of Jim Duffy with Thomas Weisel Partners, please proceed.

Thank you.

Hello, everyone.

Hi.

On the topic of the Steelers, hoping for a little more detail here.

That license stuff tends to be pretty high margin revenue.

Can you speak to the contribution to margin and EPS?

We haven't broken it down to that, but the comps were about 2%, the margin rates, on a license merchandise fully cleaned up are a little bit higher than the company margins as a whole.

Okay.

Jim, that's the one thing to keep in mind, that phrase cleaned up.

Because they are initially much higher and that zeal with championship goods, but they get stale.

Okay.

I'm just trying to get a baseline for comparison purposes as we model the out-year.

Okay.

So we should think of it as an overall positive contribution to margins?

It was definitely an overall positive contribution.

Okay.

You mentioned traffic versus ticket in the footwear category.

Can you speak to that for the store as a whole?

Average retail was up about 2% and traffic was up 4.5.

Oh, okay, great.

And Mike, as I look at SG&A per average store, or per average square foot, it's up, even when you're adjusting for the stock-based comp.

You mentioned some increased advertising frequency.

At what point does this normalize, and should we expect that to start to trend down at some point?

We got -- we synchronized the Gaylan's non-overlap stores by October.

So it begins to normalize toward the back end or anniversary toward the back end of Q3 and Q4 it's totally anniversaried.

So should we be able to see leverage on SG&A per store?

To be honest with you, Jim, we're going to be consistent relative to how we manage the company here with respect to discretionary investments.

We feel an obligation to provide meaningful earnings guidance and to the extent we meet or exceed that, we make take that opportunity to make discretionary investments in different forms of the business.

It could be in advertising, it could be in IT initiatives.

At the end of the day, we're primarily concerned about delivering the earnings.

Very good.

Nice job.

Thank you.

Thank you.

Your next question comes from the line of Peter Benedict with CIBC World Markets.

Please proceed.

Hi, guys.

Thanks for taking my call.

A couple of questions, first, can you talk a little bit about what you're seeing in the women's and youth's business in performance apparel.

We know the men's has been strong, but has it been anything to note on the women's and youth's side, and then I have a couple of follow ups.

Nothing unusual.

The women's business has continued to be an important business for us.

We feel that this will continue to grow, so there's been no significant change.

Okay.

And then on the golf business, could you comment maybe how the golf business and the store had done, and remind us what the strategy is here with the golf store tests, I think you have two out there on the market today?

Well, we haven't really guided much on that granular of a basis about our golf business.

Although, we are very pleased with our golf business, it continues to be an important part of our business.

As we take a look at the golf tests that we have going with a couple of these stores, it was to really try to understand better what the specialty retailers are doing and how to more effectively compete with that.

These stores have been opened up for a couple of months now.

We've learned an awful lot about the differences between somebody shopping in a Dick's Sporting Goods store and somebody shopping in a golf-only specialty retailer.

And we'll look to make modifications in the legacy Dick's stores to more effectively compete with that golf specialty retailer.

And we're pretty enthusiastic about some of the changes we're going to make.

Great.

Just a last question.

I think in past calls you've suggested that you thought the Gaylan's inclusion into comp base in the second quarter would be accretive overall at the comp store sales.

Is that still the thought heading into the second quarter?

Yes.

Thanks so much, guys.

Your next question comes from the line of Bob Simonson with William Blair, please proceed.

Good morning.

A question on the comp guidance.

If I've got these right, Mike, you started the year with guidance of about 3.5% for the year, and now you're saying about 3, but the first quarter was 6.5 and your guidance for the second quarter is 3 to 4.

Is that to assume it's a tougher second half comp comparison?

I think, Bob, that our guidance for the full year of approximately 3% has been unchanged.

As you know, when you do the comp sales calculation, if a store is not on a comp base at the beginning of the year, it's not in the full year comp number.

Oh, okay.

Therefore, the Gaylan, as Gaylans comes in the comp base in the second quarter, they will not be included in the full year comp statistic.

Okay.

So this is not a comment about second half comps?

No.

No.

Perfect.

Thank you.

Okay.

Your next question comes from the line of Sam Poser with Mosaic Research.

Please proceed.

Good morning.

I just wanted to find out more about the inventory levels and how it relates to your comp guidance, because it looks a little heavy, relative to that.

The inventory level looks heavy to you?

It's up 21% and if you run the numbers, it just seems like the guidance of 3 to 4 still leaves you pretty heavy at the end of the quarter, considering you're only opening five stores this quarter.

We have -- as we've indicated, what we've done is we've brought inventory in early, earlier receipts of seasonal merchandise than we have in the past.

We did this with the golf business, we did this with the baseball business, we did this with the tackle business this past spring and got very good results with the -- from a comp's standpoint, as you can see.

We're doing the same thing for the second quarter, bringing in earlier receipts for Father's Day and we expect to do that also for back to school.

So as we indicated a little earlier on the call, the inventory on a per square foot basis may be down a bit at the end of the second quarter, but we think it will be in a percentage basis, relatively the same.

And this is all by design.

And then, how -- relative to your comps, how was the golf, baseball, and tackle businesses?

Did those exceed the 6.5?

For competitive reasons, we won't talk about them individually, but I will tell you collectively, they were -- they comped very, very nicely.

We're very pleased with the comps in those categories.

And one other thing.

Can you talk about the team sports business overall in Q1?

Again, for competitive reasons, we don't talk at that granular a level, but we indicated that we saw very positive comps in most of our areas and the team sports would be one of those areas.

Okay.

Thank you.

Sure.

Your next question comes from the line of Jason West with Deutsche Bank, please proceed.

Thanks a lot.

Wondering if you could talk a little bit more about the expectations for Gaylans over the rest of the year?

I think you said you expect those to perform like a new Dick's store.

On your store model you put out there, the new stores comp around 8% or so in year two.

Can we think about that as maybe the way you guys are looking at this?

They comp more in the order magnitude of 5%.

Okay.

And that's based on your new store model for a Dick's store?

Correct, yes.

Okay.

And then wondering if you saw any mix shift in the quarter?

It sounded like the apparel and footwear was the strongest part of the business.

I mean, does that continue to mix up and helping to drive gross margin gains?

No, the margin rates associated with those lines of business are greater than the company average.

So as those grow quicker, then the margin rates move up.

Okay.

And that is what you saw in the most recent quarter?

For the most part, yes.

Okay.

And then, just a last thing.

You know, you guidance for second quarter seems to imply a little bit of a slowing in the earnings growth rate as well as a slower comp rate, even though you're on a much easier compare relative to last year at a 0.5 in the core stores, as well as rolling in the Gaylan stores, which sound like they're doing fairly well right now.

Just wondering if there's anything there, in terms of cannibalization or anything in the compare that maybe we're missing as why that seems conservative or lower than it was in the first quarter?

Not really.

As it relates to the earnings, there is a -- there was some items in the second quarter of '05 that we're not anniversarying, the most substantiative piece was vendor moneys associated with Gaylan's purchases, as we went back and renegotiated prices, that effort finished up in the second quarter and there was about $0.04 of non-recurring income generators in Q2 of '05.

So you normalize that that's about - comes out to about a 25% year-over-year.

But it's part of the business.

A lot of this is really going to just be a function of timing and when things hit in a particular quarter.

And really, I think the appropriate focus is on the full year, which is what we're doing.

Right, right.

And I'm assuming the Steelers is not going to have the same impact, either, in second quarter?

Definitely not.

That's a short-lived phenomenon in any championship.

We're on to being hopeful about the Pirates right now.

Exactly.

Thanks a lot, guys.

Your next question comes from the line of Sean McGowan with Harris Nesbitt, please proceed.

Thank you.

Two questions.

One, is there anything that you're not pleased with, is there any area of product that you're not pleased with at the current sales rate?

And second, kind of following on with the question before, your full-year guidance suggests on comps suggest maybe the second half not being as strong as the first half.

Anything in particular you're expected to see in the second half that would make that the case?

First of all, is there anything we're not pleased about, as I said earlier, we've seen a bit of a reduction in the average unit retail for women's footwear.

I think there's a bit of a transition going there from athletic shoes to flip-flops, sandals, Crocs, that product, which is at a lower retail than some of the athletic footwear than women were buying last year.

That would be the only only area of the business that we would say we're somewhat disappointed about.

As far as comps going forward, the fourth quarter comp last year was pretty strong --

4.1.

-- at over 4% and we'll take a conservative approach on how we look at the business.

And even the third quarter was 2.9.

So we have a little bit more of a difficult comparison in the back end of the year.

Right.

Okay, thank you.

Sure.

Yes.

Your next question comes from the line of Hardy Bowen with Arnold & Bleichroeder, please proceed.

Yes.

As you look at the two-level stores, do you see this as something you want to put into new markets to build the Dick's brand, or do you see this as something that's going to go everywhere and, what's your thinking on this for the future?

Hardy, the two story-the two-level store strategy hasn't changed.

We'll put that in markets whether it's a new market or an in-fill market based on a number of demographic information that we look at, including density of population, income of population and our strategy hasn't changed in the two-level store.

We expect the two-level store to be somewhere around 15% to 20% of the total development, our total development on a year-by-year basis, but we don't expect it to be anymore than that.

And when you put stores into the markets that we've entered, because of the guide in stores being there, do we increase the advertising at that point to try to make an impact, because we have very few stores in these markets.

I presume they're still at a much higher advertising rate than normal, but we want to get an impact in the market.

A lot of people don't know Dick's in a lot of these markets.

Well, what you're able to do with the most newspapers is zone the inserts that we put in the paper.

We can zone those to the trade area for the new store.

And sometimes, there's some overlap, sometimes there's not.

So sometimes we'll get leverage from that, sometimes we won't.

The electronic advertising that we do in any of those markets, we get leverage right off the bat.

So as we go forward, we would expect to see some leverage from an advertising standpoint and then determine what we want to do with that leverage.

Do we want to invest it in electronic advertising, do we want to invest it in direct mail, do we want to invest it in events that we'll be doing in different markets.

Okay.

Sounds good.

Thank you.

Your next question comes from the line of Rick Nelson with Stephens, Inc., please proceed.

Hi, everyone, this is Paul [Swinandexer] for Rick.

Congratulations, great quarter.

Thank you.

I just wanted to ask you on the distribution center's system conversion, usually once you turn that thing on, it's expensed.

Were there any one-time expenses with that that are hitting your gross margin this quarter?

And would you then not face them next year?

No, there were none.

All capitalized over seven years then?

Yes.

And then, a question on the cash flow statement.

You actually backed out the inventory increase.

I think the inventory increase was responsible for $39 million use of cash and your use of cash was slightly higher at $17 million this year.

You actually created X inventory you created some decent cash flow.

Payables up to $59, pretty good use of cash and receivables down to $6 from $16 for another less of a use of -- again over last year, a nice change.

Are those kind of -- can we think about those as continuing to run above the sales rate as we go forward, or...

The payables are generally going to run as in history, we're not experiencing any fundamental change in terms of vendors.

Receivables are going to flex based on the mix of new store development-type of deals that we're doing.

In some cases, we're actually funding up front the construction of some stores and then we're taking out at the back end, so there are landlord allowances, if you will, that are used to fund some of these stores or sale leaseback transactions.

So the receivable, in terms of projecting what that number is from a high level is difficult to do.

Because of the -- it's really made up of those different components.

So it's kind of lumpy.

And then just a tax of $16.5 million versus zero last year.

Is that kind of the same thing, just some lumpiness or there going to be...

We had -- on the tax site, there were NOL carrier forwards that the former Gaylan's entity brought to the table.

Got it, thank you very much.

Yes.

Your next question comes from the line of Nancy Hoch with J.P.

Morgan, please proceed.

Hi, it's Nancy Hoch, thanks.

Just a couple quick questions.

When you commented on marked improvement in the Gaylan stores in the quarter, does that imply they were positive in Q1 or an improved trend from what you've seen recently?

They were positive.

Oh, that's great to hear.

Also, just another quick question.

On preopening expense, looks like on a per new store basis, it jumped in the first quarter.

Is that just timing or is there something else going on?

It's only timing.

Okay.

Yes.

And then just the last one was a golf follow-up.

Listening to some of your comments on the golf shop test, it almost sounds like this is more of a learning lab for your core Dick's stores, just wondering if that's the case or if this is a viable stand alone concept you would consider rolling out longer term?

We are entering this as a test to see how -- we're entering this as a test.

We're doing much better in these shops than we had anticipated.

So as we get through the -- the next couple of quarters, we'll make a decision if this is something we wanted to entertain on a broader base, or if we'll just continue to run these stores with this test and continue to learn what we've been learning about specialty golf retailing and what modifications we can make in our core legacy stores to increase our golf business.

Okay.

And you mentioned some irrational, I guess expansion by Galaxy, and have you seen any impact in your current, in your core Dick stores and your golf business from their rollout?

The question was irrational -- did we see irrational pricing anywhere, not irrational expansion.

I did indicate that Golf Galaxy has been very aggressive with some pricing, which I thought you could see in the margin rate that -- in their most recent announcement.

We've been able to -- we were very competitively priced in that arena, where we need to be, and you can see that with our business being multidimensional, we were able to continue to increase margin rates and remain competitive with some of those aggressive prices caused by Golf Galaxy.

Great, thanks for clarifying.

That's all I had.

Sure.

Your next question comes from the line of John Cramer with Cohen, please proceed.

Good morning.

Morning.

Just a quick question on what you're seeing in terms of the consumer.

And what your outlook is.

We're pretty confident about what's happening with the consumer here.

We've always talked that we will move in a much narrower band than the economy or the consumer as a whole, if you will.

We're -- the products that we're selling are for men and women, kids, young and old playing their sports.

And as kids continue to grow and need a new pair of soccer cleats or a new baseball bat because the one they had last year is too small, they continue to buy that.

As you can see, the -- both our traffic was up and our average unit retail was up, so we're pretty pleased with how the consumer is responding, to at least our business right now.

Okay.

And how does -- from a macroperspective, how is fuel impacting your business?

We haven't seen an impact of that yet.

As I said, in the first quarter, our traffic was up and the average unit retail was up.

We're pretty pleased, I think like most retailers.

We're always concerned about what's happening with the fuel prices, but we have not seen a negative impact of our business to date.

How about on your distribution costs?

Yeah, there's been some, obviously, fuel surcharges are going up.

But we're working actively to better utilize cube on trailers to help mitigate those costs, so...

Okay.

Thank you.

Nothing extreme.

Your next question comes from the line of John Shanley with Susquehanna Financial Group.

Please proceed.

Thank you and good morning.

Bill, you mentioned you're getting significant strength in license and private label apparel and the outdoor product categories.

Do you foresee any anticipated shift in either the sales generation or the floor space allocation or your open to buy commitments to the footwear apparel or hardline categories overall in fiscal '06 versus what you had generated in allocation for those product lines in fiscal '05?

We don't.

We feel that some of the outdoor categories are from a result of an improved merchandising strategy in reassorting those businesses we started almost two years ago.

The footwear business, we are modifying our footwear presentation, but inside the footprint that we have today, as we've gotten very aggressive in some categories of footwear, whether it be the flip-flop category, sandals, I guess if there's one thing we've continued to scale back is the -- and we scaled that back a lot this year is the space devoted to inline skates.

And from an apparel category, we continue to see and expect strength in the apparel category driven by Nike, Under Armour, and to a greater extent in the third and fourth quarter, the North Face.

Great, that's helpful.

Ed, you had mentioned in your comments this morning that you anticipate in gaining some market share.

Can you give us an idea of where you think that market share is going to come from, since most of the product categories in sporting goods are fairly flat in terms of overall consumer consumption?

I think we continue to -- when you take a look at the comp store sales gains that we've experienced now in the fourth quarter and the first quarter, we're taking market share from some other people out there.

We feel that some of the specialty retailers out there, kind of from a golf standpoint, the groups that have two or three or four shops in a town, I think they're having a difficult time.

We're moving market share from them to us.

We expect to continue to move market share from some of the specialty retailers.

We're very aggressive in soccer right now, we think some of the smaller specialty soccer shops that again have two or three stores in a town, we've gotten very aggressive to that high school soccer player, which we're starting to see some real benefits from.

Are you taking share away, do you believe, from any other big box chains?

Well, we don't get visibility to Sports Authority any longer, but we take a look at where we compete directly with them and our comps and I believe that we are taking market share from other big box retailers also, yes.

Okay, super.

The last question I have is on product margins.

Are there substantial difference in your private label margins, product margins versus what you get for the branded products and also, are your margins in athletic apparel overall higher than your other product categories?

Well, the apparel margins overall are higher than the average margin in the Company, on a fully blended basis, so the answer to your second question is yes.

The answer to your first question, our margin rates and private label are in excess of 600 basis points higher than the products that they replace from the brands.

Okay.

And most of the private label that you're talking about, that is in apparel, is it not?

We've got, we've got a really -- I think, a blend of, a very balanced blend of hardlines and softlines.

We've got many of our fitness products weight plates, benches, racks, are private label under the Fitness Gear label.

We've got bikes under the Quest label, which is private label.

We've got tents, canopies, sleeping bags, under the Quest and Northeast Outfitters labels which are all private label.

But then we've got a strong apparel business, also, from golf apparel, Walter Haygan, the outdoor category from Quest and Northeast Outfitters and Fitness Gear also in the men's private label Athletic Apparel and Activa in womens.

So there's really a blend across apparel, footwear and hardlines for our private label business.

Super.

Thank you very much.

Sure.

Your next question comes from the line of Bill [Freebe] with Geneva Capital Management, please proceed.

Back to Sports Authority, Sport Mart, I guess they're combined.

Has there been any merchandising change that they've done that poses any kind of threat to you?

I have gone through many stores and the -- it's very obvious the higher quality of your product, upper end product lines.

And just the organization, the shopping experience, but my understanding was they were trying to, more or less, get back in the ball game.

What would you say about some of their efforts?

We don't give visibility to the results any longer --

Right.

-- but as I've been out in the store we haven't seen any meaningful change that causes us any alarm.

Although, I will tell you, we were out in their stores all the time taking a look and we're cognizant of what they've talked about and we're keeping a very close eye on what they're doing and make sure if we do see any changes, what modifications we're going to make in our business to mitigate their changes.

Quick follow up, just as an aside, Atlanta, I think, is the only Gaylan that was three stories.

That's probably one of a kind?

That is one of a kind.

And I can, with a great deal of certainty, say there will not be any additional three-level stores.

Thank you.

Sure.

Your next question is a follow-up from the line of Dan Wewer with Raymond James, please proceed.

Just a couple of follow up questions.

I want to make sure I understand the methodology on the same-store sales calculation, I think Bob Simonson was asking earlier.

On a quarterly basis, when a store is 13 months old, it goes into the compbase, and on an annual, it has to be in place at the beginning of the fiscal year, is that correct?

That's correct.

It actually needs to be comped at the beginning of the quarter.

So your comps get broken down into month, quarterly, and annual.

So it goes into the monthly comp, which we obviously don't report.

After the 13th month it's opened and it goes into the comp base for the quarter to the extent that the 13th, it's included in the monthly comp base as of the beginning of a quarter.

So, will any of the Gaylan stores be in the comp sales calculation for the fiscal year?

No.

So you're really understating the same store sales growth on an annual basis compared to what you show on a quarterly basis?

It has that affect.

We're accurately stating it, but it has the affect of -- as you describe, understating the full-year comp number.

Okay.

And a second question, on the golf shop, is Pink available in those stores?

Not yet.

Although, we've got -- we've had some very good conversations, the local rep has indicated that the store is probably the best specialty golf shop he's ever seen and bringing in their senior management and they are somewhat receptive to talking about putting Pink in there.

Do you think they'll be receptive to selling to a full-line store, or just the specialty store?

I would expect it will be just the specialty store.

The last question I had, last year, you talked about about improving the gross margin advantage on private label.

I guess a few minutes ago you talked about the margin advantage about 600 beepers higher than the national brands, how does that compare to a year ago?

It's relatively the same.

But what we've been able to do also is the relative change is -- the relative difference is relatively the same.

But our branded margin rates have gone up.

The margins on both brands and private label are increasing, so the difference is about the same?

Correct.

Thank you.

Your next question comes from the line of Jim [Startier] with [Mona Kresge Hart].

Please proceed.

Good morning.

Just on the vendor moneys from second quarter last year, is that in either third or fourth quarter of last year as well?

No.

Okay.

Thank you.

Yes.

At this time, there are no more questions.

I will now turn the call back over to Mr. Ed Stack.

Thank you.

I'd also like to thank everyone for joining us on our first quarter earnings call and look forward to speaking to everyone at our second quarter.

Thank you very much.

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

All parties may now disconnect.

Enjoy your day.