DICK'S Sporting Goods Inc (DKS) 2006 Q2 法說會逐字稿

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

My name is Michelle and I'll be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's presentation. (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.

Please proceed, sir.

Thank you, and good morning to everyone participating in today's conference call to discuss the second-quarter financial results for Dick's Sporting Goods.

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 is no assurance that such events will occur or that any projections will be achieve.

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

Thank you, Dennis.

We are pleased to be able to report the results of our second 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 $25.7 million, or $0.47 per diluted share, as compared to our guidance of $0.43 to $0.44 per share.

Earnings per diluted share increased 24% versus last year's pro forma results, which exclude merger, integration, and store closing costs, gain on sale of investment and are adjusted to include stock option expense.

Sales for the quarter increased 18% to $734 million.

Comparable store sales, which include the former Galyan's stores, increased 6.5%.

The former Galyan's stores performed at improving levels from a top-line standpoint again this quarter.

During the quarter, we saw favorable results across many of our businesses, including baseball, men's athletic apparel, golf apparel, and the outdoor categories.

I am pleased to report that our outdoor business produced positive comp store sales again as a result of our remerchandising efforts started approximately two years ago.

These businesses were partially offset by in-line skates and athletic footwear.

Private-label sales represented 17% of sales in the second quarter of 2006 versus 14.5% last year.

Seasonally, our second quarter is typically the highest penetration level for private-label, and is the result of higher penetration in some seasonal businesses, such as golf, in the outdoor categories.

On a year-to-date basis, private-label sales represented 14.9% of sales versus 12.4% last year.

We are still comfortable with our 15% annual target over the next couple of years and will revisit it as we approach that level.

We are increasing our earnings guidance for the full year 2006 by the amount by which we exceeded our second-quarter guidance, and we are providing initial guidance for the third quarter.

For the year, we are increasing our guidance from approximately $1.81 to $1.85 up to the new range of approximately $1.84 to $1.88 per diluted share, which includes $0.27 per share of stock option expense.

This represents an increase of approximately 24% 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 4% in 2006.

For the third quarter of 2006, we expect to earn approximately $0.03 to $0.04 per diluted share, which includes $0.07 of stock option expense per share.

This represents an increase as compared to earnings per share of $0.02 in the third quarter of 2005, after adjusting for the impact of $0.06 in stock option expense.

We are expecting comp store sales in the third quarter to increase approximately 3% to 4%.

We expect to open approximately 39 stores in 2006 and 2 stores were relocated in the first quarter.

The second quarter was a very strong quarter for Dick's Sporting Goods, as we exceeded our guidance for both earnings per share and comp store sales.

Business was strong across most categories and we once again improved a number of important financial metrics, including gross margin rate, gross profit per square foot, operating margin rate, and operating margin per square foot.

The former Galyan's stores have entered the comp store base, posting positive results, as expected.

We are well-positioned to deliver an earnings increase of more than 20% in 2006.

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

Thanks, Ed.

We opened 5 stores in the second quarter.

Three of the stores were in new markets and one was a two-level store.

We entered Cedar Rapids, Nashville, Tennessee, and Melbourne, Florida markets with single-level stores.

With our store in Melbourne, we now have two stores in Florida.

We also opened a single-level store in Atlanta, marking the beginning of our plan to fill in that market.

Lastly, we opened a new two-level store in Winston-Salem, North Carolina, and a completely remodeled two-level store in Buckland Hills Mall in Connecticut.

At the end of the second quarter, Dick's Sporting Goods operated 268 stores with over 15 million square feet in 34 states.

We are well-positioned for our third-quarter store opening program, which at approximately 27 stores will represent the largest single quarter store opening program for us to date.

Nearly all of our new stores in 2006 will be opened with existing Dick's Sporting Goods store managers, continuing a practice we started several years ago.

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

Thanks, Bill.

We began expensing stock options in the first quarter of this year 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 on a schedule in our press release.

Sales for the quarter increased 18% to $734 million from $622 million, with a comp store sales gain of 6.5%.

The former Galyan's stores are included in the comp store base.

Cannibalization had a 1% negative effect on comps.

Gross profit was $207 million, increasing 21 basis points to 28.25% of sales.

This increase was due to expanded merchandise margins caused by better purchasing and the impact of more private-label sales, partially offset by last year's receipt of nonrecurring vendor funds associated with renegotiated prices following the Galyan's acquisition.

To date, we been able to offset rising transportation costs by emphasizing better cubing of loads and managing frequency of deliveries.

SG&A expenses of $159 million were 21.7% of sales and 7 basis points lower than last year's second quarter when adjusted for $5.9 million of stock option expense.

Corporate and administrative expense leverage was partially offset by increased advertising expense as the non-overlap Galyan's markets were put on the same tab frequency as legacy Dick's stores.

Operating income increased 22%, from $37.5 million last year to $45.7 million this year.

As a percent of sales, operating income increased 21 basis points after adjusting last year's results to exclude $5.3 million of merger integration and store closing costs and adjusting to include stock option expense.

Net income for the quarter increased 25%, to $25.7 million as compared to $20.6 million last year, after excluding merger integration, store closing costs, gain on sale of investment and adjusting to include stock option expense.

Through the second quarter, net income increased 26% to $37.1 million and EPS increased 24% to $0.68 as compared to prior-year results, which were adjusted to exclude merger integration store closing costs, gain on sale of investment and include stock option expense.

On a GAAP basis, net income increased to $37.1 million and EPS increased to $0.68 as compared to $14.8 million, or $0.27 per share, last year, which included $37.8 million pretax of merger integration costs and $1.8 million pretax gain on sale of investment.

Moving to the balance sheet, we ended the quarter with $637 million of inventory as compared to $537 million last year.

Inventory per square foot was 5.5% higher than at the end of the second quarter last year as compared to 9% year-over-year increase in the first quarter.

We've made investments in certain businesses in an effort to gain market share, which has had a positive impact on comp store sales.

We ended the quarter with $41 million in outstanding borrowings on our $350 million line of credit, an $80 million decrease as compared to the $121 million at the end of the second quarter last year.

Lastly, a note on new store productivity, which saw meaningful improvement again this quarter.

This metric now includes only new Dick's stores, as the former Galyan's stores are included in our comp store base.

New stores continue to at least meet our expectations.

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

(OPERATOR INSTRUCTIONS) Robbie Ohmes of Banc of America.

Thank you, a couple of quick questions.

First, just a clarification on the third-quarter EPS guidance.

Can you just help us out with the preopening expenses that you -- is it sort of in the $8 million to $10 million range you'd be looking to book, given you're opening so many stores?

That was sort of my first accounting question.

And then just in terms of the quarter, Ed, I think you mentioned weakness in athletic footwear.

Can you give us your perspective on what you think is going on out there, since a lot of people are paying attention to that right now?

Thanks.

Robbie, I'll answer the first question on athletic footwear.

The athletic footwear business has been a bit softer than it has been, primarily driven by the women's athletic footwear.

We talked about it on the last call that women's athletic footwear had been a bit difficult, as people had moved away -- women had moved away from some of the athletic shoes into flip-flops, Crocs, and that type of footwear.

Our overall footwear business, we are pleased with.

But the athletic portion of it has been softer than it has been in the past.

And on the preopening side, Robbie, we don't guide to anything that granular from a preopening standpoint.

Let me just note that the model for preopening would be approximately $280,000 a store.

You do get into some timing differences in terms of when those expenses begin to get recognized.

So some of the openings in Q3 would have preopening expense included in Q2, because we really start to incur those about 60 days in advance of the store opening.

And then just one quick follow-up.

You mentioned men's apparel as being strong.

Could you help us understand the drivers to that?

Thanks.

The drivers to that continue to be technical athletic apparel, driven primarily by Under Armour and Nike.

Terrific.

Thanks a lot, guys.

Sean McGowen of BMO Capital Markets.

Thank you.

Two questions.

One, any commentary on -- when you talk about outdoor being up, any specific commentary on the hunting, fishing, camping arena?

And second, are you seeing anything in the performance apparel that signals any kind of an acceleration or deceleration or shift in style or anything that you could comment on?

Thank you.

As far as athletic apparel, we're not seeing any change in what's happening there; it has been pretty consistent, been growing at a fairly consistent rate.

And as far as the outdoor categories, we actually were pleased with the results in the outdoor category across all businesses.

And again, we strongly believe it is a direct result of the remerchandising effort we started two years ago, and it really ramped up over the last year.

Thank you very much.

Dan Wewer of Raymond James & Associates.

On the athletic footwear sales, could you see any impact of the tax-exempt shopping holidays in August weighing against your business in July?

And then also, we have been seeing a lot more of the special running departments that you are adding to existing stores, and if that is having any benefit on the athletic footwear.

And then finally, were some of the slow sales in that category impacting the inventory growth?

First of all, the tax-free, we didn't really see anything meaningful in tax-free.

There were some changes, but nothing that had a meaningful impact.

As far as the running shops go, we've got a number of the running shops that we've added to the stores.

We think running is one of our core competencies, as we've really focused our athletic footwear business on that core athlete, so certainly that core runner.

And that has been a successful program.

And the third question, you kind of cut out there;

I didn't hear the whole third --.

On the inventory growth that you had alluded to, 5% per store, was some of that coming from the softer-than-planned sales in footwear?

No, the sales we indicated were below i last year's; we didn't say that they were below plan.

And we do not have a buildup of inventory in the athletic footwear based on soft sales.

As a matter of fact, I would say that our inventory in athletic footwear is probably as clean as it has ever been.

We're pretty quick to move on slow-moving categories and rationalize SKUs in order to make sure that we don't get a buildup of inventory.

Ed, just one other item.

In the past, you had noted an objective of increasing the gross margin advantage on private-label.

If you could give us an update as to how that spread compared to national brand is evolving.

We are still in the same range, roughly 500, 600 basis points versus the brands that they replace.

Some of the -- that has been fairly constant, and even though we've increased our gross margin rate in private-label, we've also increased our gross margin rate with the brands, as we have been able to get some buying leverage from the brand.

So both private-label and branded products have been increasing from a gross margin standpoint.

Great.

Thanks and good luck.

Jason West of Deutsche Bank.

Thanks a lot.

Congratulations on a good quarter.

Just want to clarify, Ed, did you say that the total footwear business was up in the quarter, even despite some of the weakness in athletic?

I didn't specifically say that, but yes it is.

Okay.

And then can you run through again the sections or the pieces of the business that were favorable that you mentioned at the start of the call?

I just missed some of those.

And can you talk about what sort of surprised you with the comp coming in at 6.5 versus the guidance?

Was it more one area versus another?

We said that our businesses were positive in baseball, men's athletic apparel, golf apparel and the outdoor categories, were the categories that we indicated that we were extremely pleased with the comp results.

We indicated that the entire Lodge business across all categories was up, and we also indicated that the Galyan's stores comped positively also.

Can you say if those are better than the chain average?

The Galyan's comps were strong.

The legacy Dick's Stores were stronger.

Okay.

That is helpful.

And then one other one, on the real estate outlook, can you update us on where you guys are on your real estate pipeline, how are you looking for '07 and then maybe into '08?

We are fine in '07, we're fine in '08.

We really have -- and we've talked about this a bit, that from a real estate standpoint, we have more opportunities than we can react to.

We don't have an issue with real estate opportunities.

I think it is clear that Dick's Sporting Goods has positioned itself as best-of-class retailer certainly in sporting goods.

And as developers are looking to build centers or redo centers, they are looking for the best retailer to take that space.

And certainly in sporting goods I think we fit that bill.

So we get a peek at everything first.

Okay.

So no problem with the 15% unit growth then?

None whatsoever.

We've got visibility into -- most of '07 is done.

We've already started at '08 business and we've actually got a little '09 business done.

Okay.

And one last one if I could.

The cash usage, it looks like on our model anyway you guys, by the end of this year, will pretty much have paid down the revolver.

And then going forward, [except that] for the third quarter, you shouldn't have any problem covering that with some excess cash, it looks like.

Just wondering what the plans are for that excess cash, once you've paid down the revolver in various quarters.

We continue to look at alternatives for cash, which include investing in real estate because cost of capital is lower than it is for a developer.

We will go through the drill as well with respect to potential stock buybacks.

But at this point, we're just -- especially in the economic environment that we are in, we think there is some value in being debt free.

Okay.

Thanks a lot, guys.

Kate McShane of Citigroup.

Good morning.

Can you please discuss what you are seeing so far this quarter in terms of back to school and what items or categories seem to be strong with customers?

Kate, we have had a practice of not commenting about quarters that we are in; we talk about them after -- post the quarter.

So we really -- we don't comment on what is happening in a particular quarter.

Okay.

And can you comment a little bit more on your golf business.

You've already indicated that the men's apparel in golf has been strong.

What other kind of trends do you see during the quarter in golf?

The apparel business was very strong.

The equipment business was a bit weaker versus last year.

I think that can be seen through some of the promotions that have been run by some of the major original equipment manufacturers.

But the golf business, I think, is going to be a bit difficult over the next 12 to maybe 24 months.

I think part of that is kind of the technology advancements -- and I've talked about this in the past, that the technology advancements being brought to the game are going to be limited by the USGA, who is somewhat concerned by the integrity of the game.

So I think the technology advancements that have driven the golf business over the last five years is going to slow a bit.

And everybody's going to take a breather from the technology advancements.

Okay, thank you.

David Magee of SunTrust Robinson Humphrey.

Hi.

Good morning and good quarter.

Just a couple of questions.

One is, it sounds like, given your real estate plans near-term and what you see in the pipeline that you're not seeing the same kind of pressure or at least to the same degree that others are, with regard to the cost of real estate and cost of construction and things like that.

Is that fair to assume, that you are negotiating as effectively as you had in the past?

I think we are, but there has been some pressure from a cost to build a store.

I mean, the price of concrete is up, the price of steel is up.

So there has been some pressure there.

We don't feel that it is meaningful, that it is going to change our performance, but there has been some cost pressures on store buildout.

And then secondly, with regard to your comments about the women's business and maybe some of that going to flip-flops and Crocs.

Is it fair to assume that that might improve a little bit then sequentially as we get into the fall or cooler temperatures?

You know, I think the footwear business could continue to be difficult.

There is a couple of bright spots in footwear, but I think the footwear business could continue to be difficult.

As I was on a college campus waiting for my son last year in the end of October, all these kids were wearing flip-flops.

And it was the end of October.

So I don't really see a significant change there.

I do think there is some upside in some athletic footwear with what Nike has done partnering with Apple on the iPod, with the whole "tune your run" concept, which we've had terrific success with to date.

So we think that will help -- some people who are those core runners may update their shoes quicker than they may have in order to take advantage of the Nike-iPod partnership.

And you are relatively happy with the other technical products and your basketball shoes as well?

Yes, we still think that there is -- we're excited about basketball.

Our business -- although the women's footwear business has been a bit more difficult, our business -- and we've talked about this at great length -- is we are really focused on that core athlete.

And that young man and young woman is still going to play basketball, they are still going to play baseball, softball; they are still going to participate in their sports.

That core runner is still going to be running.

And our business just isn't as based on fashion as the mall-based retailers are.

Thank you, Ed.

Matthew Fassler of Goldman Sachs.

Good morning.

If we take a look at your business, you know, you've now put up the best sequence of comp store sales growth that you have put up in a number of years.

And if you exclude the first quarter because of the Super Bowl, this quarter was the best that you've shown since the fourth quarter of 2000.

If you think real big picture about the combination of factors that you think are driving it, be it competitive dynamics, new product development, just give us your sense as to what you think is propelling the momentum.

And if you could talk to the sustainability of those factors, that would be very helpful.

Matt, I think there is a couple of things.

I think there is -- some of the things that are going on the marketplace we've taken full advantage of, some transitions in the marketplace -- the transition to technical apparel, the transition to flip-flops and crocs from a footwear standpoint.

The strategy we put in place for the outdoor category.

Staying focused on the fitness business.

Focusing on that core athlete, that young man and woman from a baseball standpoint we've talked about.

So we've really stayed focus on those businesses over the last 12 months or so.

There's also been some changes that we made internally from a merchandising standpoint that have been very positive, with some new people that we brought into the business who are very smart, very aggressive.

So I think the management in that whole category of business has been better.

Our marketing effort has been better than it has in the past.

So we've done a number of things -- we have improved a number of aspects of our business which I think has really resulted in our performance.

Also the cannibalization effect that we had in the past has lessened, which we indicated what the cannibalization was over the last couple of years, and we indicated earlier this year that the cannibalization impact would be less than it had been in the past.

So there has been a number of things that we've done in our business that we've stayed very focused on and improved on.

If you think about the competitive transitions, if you will, understanding that I know you guys will never rest on your laurels, do you see those factors remaining in place for the near-term?

I don't see the competitive landscape -- I don't see the competitive landscape becoming more difficult right now.

I think some of the people that -- Sports Authority has taken the company private, which we know.

There has been -- so they've had some things that they needed to change.

The golf group -- the golf business has been a bit more difficult.

I think that growth could slow, and we saw what happened in outdoor retailing.

So I think that the competitive landscape is not as difficult as it was three years ago.

And I think we are very well-positioned -- we've come to through this as strong as anybody out there, and we're in a very good position to continue to grow our business pretty robustly.

Understood.

Thanks so much.

Nancy Hoch of JPMorgan.

Thanks.

Can you give us an update on your golf standalone concept?

And are there any plans to expand that test at this stage?

There are no plans to expand that right now.

As we indicated, it was a test to understand the golf business from a specialty perspective.

We are gaining that insight every day and putting a number of the things that we have learned to work in our golf business, in the core business,

I think what you will find is as we relaunch a golf strategy in the spring, that we expect to get the same kind of results as we have in the outdoor category when we relaunched that against the specialty outdoor retailers, which we've had great success with and we expect that we will have the same type of the success with our golf business.

Any color at this stage as to what that is going to entail?

None that I would like to talk about right now.

I had to ask.

I know.

You mentioned earlier some success with the new Nike+ shoes.

Are there any other new products on the horizon for the fall or heading into the winter that get you excited that you think will be needle movers?

We think that the Nike+ concept is the biggest opportunity to move the needle in athletic footwear.

New Balance just launched their new ZIP technology, which has done quite well.

But Nike -- we think Nike has the ability to really move the needle in the athletic footwear concept with this Plus technology.

Okay.

And then Mike, any thoughts yet on options expense for next year?

Not beyond what we've said to date, which is we expect that number to come down in absolute terms and even at a greater rate as a percentage of EPS before option expense.

Great.

Thank you very much.

[Ryan Renteria] of (indiscernible).

Congratulations on another great quarter.

Two questions.

The first one is the new store productivity looked to shake out around the mid-90s, which is very impressive.

And I guess my question is do you attribute that to more effective marketing or filling in around these Galyan's locations that you've bought?

I mean, maybe you could provide some color there.

The marketing component of this really hasn't changed.

I think what we have done is we have done a better job merchandising the stores.

The merchandising -- opening stores around the Galyan's stores has been helpful; we've opened stores in Chicago, Minneapolis, Denver, Atlanta, Columbus, Ohio.

All of these are markets that were exclusively Galyan's markets in the past, and we're aggressively going to store those markets.

And we feel that the stores have performed quite well and we expect them to continue.

I think is also important to note that that productivity rate is at the same level it was prior to the Galyan's acquisition.

I think when the Galyan's boxes were added into that computation, it added some lack of clarity.

So these 90s -- mid-90s numbers we've seen before in '03 and '04.

And I guess my second question is, you talked about the footwear business was still up despite the weakness in athletic.

I know you haven't talked about this in this granularity in the past, but if you can just help me understand.

Is it fair to say that the athletic piece of the footwear business is less than 50% of the overall footwear business?

No, I wouldn't say -- I wouldn't say that, but you are right -- we're not going to talk about it in that level of granularity.

But I wouldn't characterize it that way.

We've just done a very -- our merchants have done a very good job moving into and taking advantage, filling back in, chasing the whole flip-flop, crocs, sandals category, which has certainly helped offset the softness in traditional athletic footwear.

Okay.

Thanks very much.

Rick Nelson of Stevens.

Good morning.

Ed, you had four consecutive quarters of gross margin expansion.

I'm wondering if you can think that is sustainable.

And any comment on the promotional environment.

We have been hearing things are pretty rational out there today.

I think the market is fairly rational out there today, with the exception of a little bit from some of the specialty guys continue to be, I think, a bit irrational on a market-by-market basis.

As far as our gross margin increases, we do feel that we have been able to continue to grow the margin rate, and we've talked about being able to grow 30 basis points a year from an operating margin rate standpoint.

A portion of the 30 basis points will come from margin rate expansion.

And we still feel that there is still some more room in each of the three buckets we've talked about -- increasing private-label as a percent of our business; leveraging our branded business to higher margin rates through better buying; and also better inventory controls on a go-forward basis, which will mitigate markdowns on the back end.

And the private-label proportion, was that 14.9% year-to-date?

Yes.

And 15 is the goal?

15 is the goal, but the second quarter is the highest level.

As we get into the third quarter, it will come down pretty significantly.

And it will come down from that level in the fourth quarter.

Still think that they can be higher than what they were last year, but in absolute levels, they will be less than in the third quarter and fourth quarter than they were in the first two quarters.

Seasonality.

Going back a year, I know you were saying that the Galyan's stores were performing like a Dick's store in a new market.

A year down the road now, are they performing like a second-year Dick's store or better?

We're pleased with the performance of the Galyan's stores.

There's cannibalization effect in there, there is still a couple of Galyan's stores that we -- and we talked about this -- that we have not gone into fill in from a -- build out the markets, a couple of the outlier markets.

But the Galyan's stores performed extremely well in the second quarter, which is the first quarter they entered the comp store base.

And the legacy Dick's stores just performed even better than the Galyan's stores did.

Very good.

Thank you.

Mitch Kaiser of Piper Jaffray.

Good morning, guys.

I was just curious if you could comment -- you made some comments about the golf equipment side, that you might see some weakness there over the next 12 to 24 months.

And I recognize the limitations on the size of the driver.

So is it your perspective that we might see some slowdown on the innovation from the vendor side or do you think it is more of a demand issue from the customer side?

I think it is a combination of both.

I think the brands who can innovate and differentiate themselves in the marketplace today I think will do quite well.

The ones that can't, I think will struggle a bit.

Okay.

And then I guess with the real estate environment, with Sports Authority going private and having fairly modest square footage growth over the next couple of years, are you seeing better real estate opportunities or a less competitive real estate market at this point?

It's a less competitive real estate market for two reasons.

One, that Sports Authority has slowed their growth; and also number two, that we bought Galyan's.

And so (indiscernible) in the sporting goods category, and developers really want you have a mixed use in their centers to drive more traffic into their centers.

And from a sporting goods standpoint, Dick's Sporting Goods is the primary choice.

And Sports Authority is really not competing for a lot of real estate and we bought Galyan's.

So the competitive nature of our real estate has been mitigated significantly over the last couple of years.

Okay.

Thank you.

Jim Duffy of Thomas Weisel Partners.

Thanks.

Hello, everyone.

Mike, the Q3 guidance seems to an imply year-to-year operating margin compression.

Aside from the stock-based comp component, are there other aspects of expenses that seem to be holding back the margins in Q3?

No, I think you need to make sure that you've got the stock option expense in Q3 of last year.

I don't think that you'd see operating margin compression.

So you've got about $0.06 a share in there for stock option expense in '05.

Got you.

And relative to the Galyan's stores, any clarity on the improvement in those Galyan's stores would be helpful.

Is the year-to-year improvement that you saw in Q2 purely a function of increased advertising frequency or do you believe you are seeing organic store traffic growth, and what are your expectations for those stores going forward?

Our expectations for those stores going forward are no different than they would be for a normal Dick's store.

We're seeing increase in traffic.

We're seeing these stores perform better than they have in the past.

And also, I think it's important to understand that Galyan's continues to be increasingly a decreasing portion of our business.

This was a real estate play; it allowed us to enter these markets of Chicago, Minneapolis, Denver, Atlanta, which we are doing right now pretty aggressively.

The ability to enter these markets is much easier than it would have been if Galyan's was still there.

And the Galyan's stores are performing extremely well; we are very pleased with them.

And I still think that everybody is making too big a deal about what is going on in Galyan's or what is not going on in the former Galyan's stores.

Okay.

Ed, you had previously expected gross profit dollar per square foot metrics in those Galyan's stores to be comparable to the Dick's stores.

Is that still your expectation?

We feel that we will certainly get there.

Some of those stores are larger -- are much larger than what a traditional Dick's store is or a two-level Dick's store.

But we are making improvements in those former Galyan's stores at a pretty rapid rate, which is evidenced by the fact of how strong this second quarter was.

Is it fair to say that those Galyan's stores are seeing a disproportionate amount of the cannibalization, as you expand in clusters around them?

We expect that to happen on a go-forward basis, yes.

Okay, thanks.

Nice quarter.

Sam Poser of Mosaic Research.

Good morning.

Again, very nice quarter.

Two questions.

One, in the 26 or so stores you are going to open in Q3, are you looking at new markets or is it all back-fill?

A combination of the two.

A continued combination of the two.

How many stores would be opening in new markets?

Just a second.

We will give you that exact number.

21 will be fill-in and five will be new.

And when you look at Florida, are you looking at that that as one big market or is that now regarded as fill-in market even though you only have two stores there?

No, it's on a by-market versus by-state basis.

Got you.

Okay.

And then as far as the -- going back to the footwear business.

In the softness of athletic, are you seeing the men's business at all following the women's business in softening?

And how much of your athletic business right now is sort of that core performance athletic product versus less performance athletic product, for lack of a better term?

The men's business has been a bit soft also, not nearly to the degree that women's is.

But the majority of our business is really focused on that core athlete, so we don't play a big portion of our business in the fashion business.

And even to that point, our group has done a great job transitioning and following the market to the flip-flops, crocs, sandals on where the market has moved to, and we've done a great job moving in that direction.

And I think that is part of the reason why you saw our comps be 6.5% in the second quarter with terrific earnings growth.

Right.

Just one last follow-up.

In the outdoor portion of your business, outside of the very strong sandal business, can you discuss any other highlights that are there?

In outdoor footwear.

The outdoor football -- the hiking category has been strong.

I mean, our business in that brown shoe category is pretty strong across the board.

And you see that momentum growing?

We see the ability to sustain that and continue to move where the consumer moves.

And when the consumer starts to move back the other way to white shoes, we've got a portfolio of businesses that allow us to move directionally with the consumer.

Okay, great.

Good job.

Thank you.

Bob Simonson of William Blair.

Good morning.

Two questions.

Mike, can you update any guidance you might have on CapEx and depreciation for this year?

And if you have any preliminary numbers for next year.

We're not providing that level of detail.

I mean, nothing has changed, Bob, relative to the roughly $100 million in CapEx that we talked about at the beginning of the year.

Okay.

No changes there.

And, Ed, you eluded -- and Rick asked a question in this area.

On the private-label, you said once you get to that goal of 15% on private-label you will review it.

That review, do you think about perhaps hard goods categories that you would go more heavily into?

Would you go into more higher priced units or inventory?

What is kind of the thought process in what direction it goes if it moves above 15?

Well, we have to take a look at that on a category by category basis, Bob.

We are already in an awful lot of hard-line businesses from a private-label standpoint.

And I think that is one of the great things about our private-label business, is that we have a blend of private-label apparel, private-label hard lines and private-label footwear.

As we continue to do this, get to the 15%, we will assess the business by business and see where we can move.

We're also doing a number of things with vendors where they will do exclusive products for us under their label, which is not included in the 15% goal.

So by the time we get done, there will be some number greater than 15% which will be exclusive products of Dick's Sporting Goods.

Would it be -- if you decide to go in that direction, is it a little bit more in every category that you are doing or are there some categories that you could go into that you are not now particularly focused on?

I think it would be more broadening the categories we are in as opposed to going into new categories.

Okay, thank you.

Jeff Sonnek of FBR.

Thank you.

Can you give us what the traffic ticket breakdown was for the quarter?

Traffic was up approximately a little more than 4%, and the ticket was up a little more than 2.

And can you also -- last quarter you commented on the payables leverage being kind of consistent with last year's results.

It looks like that came down a little bit.

Is that just timing differences or is there any drivers behind that?

There's timing differences, no change in vendor terms or the way we approach them.

And just relative to the prior question on exclusive product runs, that is an opportunity or something that you are presently doing?

We are presently doing that; we think it is an opportunity to grow it larger.

Thank you.

John Shanley of Susquehanna International.

Thank you and good morning.

Ed, were the ASPs in footwear on plan in 2Q, based on your comments about the growth of products like crocs?

Did that inhibit the ability to be able to sell some of the ASP productline that you had originally anticipated?

You're talking about -- you said ASP?

ASPs, your average selling price, were they on plan or below plan for the quarter?

They were pretty much on plan.

We knew that this transition was taking place with the flip-flops and crocs and some of these lower-priced shoes, transitioning out of some of the more expensive athletic shoes.

So it is pretty much on plan.

Okay, great.

And do you see a trend along the same direction happening in the back half of the year?

Do you think marquee footwear is going to remain a little bit weaker than it had been in the past?

I do believe that, yes.

And we have planned for that and guided to that.

We think that the -- the students out there today, they have a uniform, and that uniform includes flip-flops -- flip-flops and sandals.

And you see that on college campuses across the country and less athletic shoes at the present time.

That will transition back at some point, but we are in a great position right now to take advantage of what is happening in the marketplace.

Okay.

In terms of the margins on those types of products -- product margins you're talking about, are they richer than what you get from athletic footwear, generally speaking?

Actually the unit retail is a little lower, but the margin rate is slightly higher.

Okay.

And looking at some of the back half of the figure in terms of hard lines, are there any particular product categories or new products that you are thinking about in terms of particularly fourth-quarter introduction that you are particularly excited about that could help your hard lines, which is an important component of your fourth-quarter earnings capacity?

We are extremely excited about what is going on what the Nike+ technology and the Plus technology device, which is just under a $30 device, which we think is going to be great.

It's a $30 device, and then an armband that goes with it, which is approximately the same price.

So it is roughly a $60 ticket.

And we've done a great job of selling armbands with this device.

So we think that is a great item; we think it's going to be a terrific holiday item.

We think that there is some change happening in the fitness business, which we've talked about, I think in the last quarter we called that -- a move from treadmills into elliptical machines.

And a number of people who ran on treadmills are starting to transition into these elliptical machines.

And we've got great expectations for ellipticals going into the fall.

Okay, great.

And the guidance you just gave us, it seems to indicate that your operating margins will decline somewhat in the third quarter but be stronger and the fourth quarter.

I wonder if you can kind of kind of give us some guidance in terms of what is driving that.

This is Mike Hines.

I don't see operating margins declining in the third quarter.

I think you just need to be careful of how you are dealing with stock option expense, and there should be $0.06 in Q3 (multiple speakers).

So it's all options related, Mike?

I am not sure what you are looking at.

I don't expect operating margins to decline in the third quarter.

Okay.

And last question I have is on real estate.

Ed, are there new markets other than what you just commented on in the third quarter that you are thinking of entering in either the fourth quarter or sometime in fiscal '07?

We are looking in a number of markets.

For competitive reasons, we don't want to tip our hand as to where we are going.

But it is safe to assume that we have two stores in the state of Florida and we've indicated we are pretty happy with what is going on in Florida.

Is a key component of your sales growth expectations going to come from backfilling existing markets with new stores or do you think there is more opportunity in terms of going into new locations where you are not currently represented?

Well, as it has been in the past, it will be a combination of new markets and fill-in markets.

As I said, we are pretty enthusiastic about Florida, but we also have a lot of work yet to do and a lot of plans in Atlanta, Chicago, Minneapolis, a number of these former Galyan's markets that Galyan's hadn't fully stored those markets, that we are aggressively going back to store.

Thanks a lot.

I appreciate it.

Ralph Jean, Wachovia.

Great, thank you.

Just wanted to focus in on Under Armour a little bit.

When I go through your stores and a lot of your competitors, I just see an SKU proliferation of Under Armour product.

And I see the cleats, the chin straps, the mouth guards, the backpacks and other apparel.

Do you see this brand gaining momentum with this SKU proliferation?

And am I right -- do you see significantly greater SKUs this year than last year?

Well, I think that the SKU growth that has been brought to market from Under Armour has been well thought out, has hit the marketplace with the right product at the right price and it has been really quite successful.

Do I think that Under Armour will continue to expand SKUs and broaden into other markets?

Yes, I do.

All right.

And in the footwear, you said a couple of bright spots.

Do you offer the Heelys shoes, and if so, is that helping in-line skates at all?

Have you seen any change in -- I know it was weak in Q2 or down in Q2 -- but have you seen any change in momentum there?

Heelys has been a terrific brand and it has been very helpful to our business.

Heelys is actually -- I mean we take a look at in-line skates and the whole athletic footwear category all kind wrapped up into one.

But Heelys has been an important contributor to our footwear business.

Okay.

And lastly, regarding Sports Authority, I know we're hearing they are slowing their growth.

But have you heard of them either closing stores or pulling out of any markets?

We've heard some rumors, but we haven't seen anything significant yet.

I know they closed -- they've closed a couple of stores, but nothing terribly meaningful yet.

Okay, thank you.

Jonathan Cramer of Cowen & Company.

Ed, just a quick question on what you are seeing in the competitive environment in the golf category.

Is that a specific question or just the competitive environment?

The competitive environment in general.

I think golf continues to be -- I view golf as very analogous to the outdoor category from three years ago, three or four years ago -- proliferation of some pretty significant growth in golf retailing.

I think that's at an inopportune time right now, as the golf business I believe has slowed, we've seen that growth slow, and believe it will continue.

Based on the fact that technology advancements are going to stall out here over the next over the next couple of years, unless some vendors can bring to the market some products that are very unique.

But I look at the golf category very similarly as the outdoor category.

And as I said, we will be launching a new strategy in the beginning of the year from a golf standpoint.

And I think we will have similar results to our outdoor strategy that we put in place two years ago.

Jim (indiscernible).

Thanks.

First question is for Mike.

On the last call, you mentioned that if your earnings exceeded your expectations, you might take the opportunity to make discretionary investments in certain areas.

Obviously, the first half of the year you've exceeded the expectations.

And I'm wondering where you've invested in the business in the first half, if you have, and where you might invest in the second half of the year.

Actually, any amount by which we exceeded our earnings guidance, we have actually increased our guidance for the full year this year.

Okay.

And then maybe for Ed.

Could you talk about your deal with Umbro and what that is going to entail?

Umbro is just another brand that we've acquired as we continue to grow our private-label brand.

This brand will be primarily focused around soccer and kind of the opening price point to mid price point soccer footwear and apparel.

Is that going to be an exclusive to Dick's in those categories?

Yes, it is.

Thank you.

Sean McGowen of BMO Capital Markets.

Two quickies.

Could you comment on how the launch of Click-Clacks went?

And second, Ed, you said in your opening remarks, I believe, that there will be approximately 39 stores this year, and yet the press release says 40.

Is there anything to read into that one store difference?

Thank you.

No, we said approximately 40; it's going to be probably 39.

We've got one store that we think is going to slip into the first quarter -- or into the next quarter.

As far as Click Clack goes, the football launch was really very good.

Under Armour did a terrific job.

They actually helped, I think, raise the level of the river across the entire football category.

The Under Armour cleats did extremely well.

Nike cleats did extremely well.

So our football business in general was terrific.

Very good.

Thank you.

Dan Wewer.

We noticed that your website has become a lot more robust.

Could you remind us how important that is to your retail sales, either in terms of stand-alone revenue generation or do you find customers researching the website before shopping your stores?

Our website is outsourced to GSI Global Sports out of Philadelphia.

We worked with them, we wanted a different website.

I think GSI did a great job developing this new website, working with our people.

And as you see, our website is much more robust, very differentiated than anything else out there in the sporting goods business.

So, as I said, GSI did a great job.

At the present time, we don't have -- the sales from the website are not included in our results, as instead of doing a rev share with Global several years ago, we took an equity position in Global.

And through the years, we have liquidated our position of stock in Global and still have some stock left, but have made somewhere around $16 or $17 million.

So it has been a great deal for us.

I think it has been terrific for Global.

And our website is extremely important to us from a research standpoint, as the number of customers go on the side to research product, look at what we have, try to understand product, compare product, before coming into the store and buying, or they'll click through and buy online.

But it is seamless to the customer, which is exactly what we wanted to have, with no economic downside to Dick's Sporting Goods.

And second question, on the potential expansion to Florida and the second store located in Melbourne.

What do you need to see before you begin a more aggressive expansion into that state, I guess similar to what you are doing in Atlanta now?

And if that will require some type of distribution investment to support the Southeast?

We do expect to have a third distribution center in the Southeast to support that expansion, through Georgia, Florida and some other states.

But I think we've been fairly clear that we were pleased with the results we've seen in Florida and you would expect to see a more robust Florida real estate program.

And then the last question I have.

As you become more and more important to these key vendors, are you finding that you are able to return more merchandise to those vendors, rather than having to take the clearance markdowns yourself?

That is really a one-on-one basis.

And we've always had a terrific relationship with our vendors.

And when a product clearly doesn't work, we've worked with them to find a way to clear it off the floor -- whether it is returning it, whether it is marking it down.

Our vendors truly don't want to have old, stale product on the floor because it inhibits their sales on a go-forward basis also.

So the vast majority of them have been very helpful working with us to clear inventory.

Great.

Thanks.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's conference call.

I'd like to turn the presentation back over to Mr. Stack for any closing remarks.

I'd like to thank everyone for joining us on our second-quarter call.

And we're very happy that we are able to post the results that we did, and look forward to talking to everyone for our third-quarter call.

Thank you.

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

This does conclude your presentation and you may now disconnect.