DICK'S Sporting Goods Inc (DKS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the third quarter 2006 Dick's Sporting Goods, Inc.

earnings conference call.

[OPERATOR INSTRUCTIONS] I would now like to turn our presentation over to our host for today's call Mr.

Dennis Magulick, Director of Investor Relations.

Please proceed, sir.

Thank you, and good afternoon to everyone participating in today's conference call to discuss the third 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 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 from the SEC.

Leading our call today will be Ed Stack, Chairman and CEO.

Ed will discuss our third quarter financial and operating results, our acquisition of Golf Galaxy and review the guidance contained in our press release.

Bill Colombo, President and Chief Operation 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're pleased to report the results of our third quarter, a quarter in which we exceeded our guidance for both earnings per share and comparable store sales.

This quarter we're reporting net income of $7.8 million or $0.14 per diluted share, as compared to our guidance of $0.03 to $0.04 per share and $0.02 last year, which is on a pro forma basis and is adjusted to include stock-option expense.

Sales for the quarter increased 22% to $708 million.

Comparable store sales, which include the former Galyan's store increased 8.9%.

During the quarter, we saw favorable results across many of our businesses including team sports, football, soccer, athletic apparel, golf apparel, outerwear and the outdoor categories.

Our football and soccer business, which were very strong in Q3, are largely done for the year.

Strength in the cleat component of these sports was driven by Under Armour and Nike in football, and Adidas and Nike in soccer.

We took full advantage of the relatively cold weather in this year's third quarter.

Comp store sales in the outwear business exceeded our expectations and outpaced the Company average.

Cold weather related businesses performed extremely well and there certainly is a shift from the fourth quarter into October.

Private label sales represented 14.1% of sales in third quarter of '06, versus 11% last year.

On a year to date, basis private label sales represented 14.6% of sales versus 11.9% last year.

We're increasing our guidance for the full year 2006 as a result of the third quarter performance, and we are providing our initial guidance for the fourth quarter.

For the year, we are increasing our guidance from approximately $1.84 to $1.88 up to the new range of approximately $1.95 to $1.98 per diluted share, which includes $0.26 per share of stock-option expense.

This represents an increase of approximately 30% 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 sales to increase approximately 6% in 2006.

For the fourth quarter of 2006, we expect to earn approximately $1.13 to $1.16 per diluted share, which includes $0.06 of stock option expense per share.

This represents an increase of approximately 22% as compared to pro forma earnings per share of $0.94 in the fourth quarter of 2005, after adjusting for the $0.06 impact of stock-option expense.

We're expecting comp sales in the fourth quarter to increase approximately 2% to 3%, which considers the 4.1% comp gain in last year's fourth quarter.

Our store opening program for the year was completed in the third quarter.

We opened 39 new stores and relocated two stores in 2006.

I'm excited to announce we have reached an agreement to acquire Golf Galaxy, whose differentiated retail concept, store growth potential and earnings growth opportunities complement our existing Dick's Sporting Goods business, further distinguishing us in the marketplace.

Golf Galaxy currently operates 61 stores in 24 states and generated $250 million in sales over the last 12 months ending August 2006.

The purchase price of $18.82 per share represents a premium of 19% over Golf Galaxy's closing price on Friday November 10.

The seasoned management team at Golf Galaxy lead by cofounder and [Best Buy] veterans Randy Zanatta and Greg Maanum, has built Golf Galaxy into a leader in the golf specialty retailing business.

We expect the Golf Galaxy name, brand and management team to remain in place following closure of the merger.

We expect the acquisition to be accretive next year and we'll provide guidance for 2007 in our year end earnings release in March.

The third quarter was a strong and exciting one for Dick's Sporting Goods.

We exceeded our own expectations in our guidance for both earnings per share and comp store sales.

We're very pleased with our results, as business was strong across most categories and we one again improved a number of important financial metrics, including gross margin rate, gross profit per square foot, SG&A expenses and operating margin rate.

Inventory is in good shape, and we are well positioned for the fourth quarter.

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

Thanks, Ed.

We opened 26 new stores in the third quarter, marking the largest single quarter store opening program to date.

Each of the 26 new stores were single-level stores.

We added the following 23 stores to existing markets.

Four stores in Chicago, three stores in Atlanta, two in Nashville, a market we entered earlier this year; and one store each in Birmingham, Alabama; Boston Massachusetts; Cleveland; Columbus; Denver; Detroit; Grand Rapids; Minneapolis; Philadelphia; Portland; Maine; Raleigh, North Carolina; Roanoke; Scranton, PA and Wilmington North Carolina.

During the quarter, we entered three markets; Altuna, PA; Salisbury, Maryland; and Pittsfield, Mass.

At the end of the third quarter, Dick's Sporting Goods operates 294 stores, with approximately 16.7 million square feet in 34 states.

With our 2006 store opening program now complete, we have significantly expanded the Dick's Sporting Goods presence in the number of key markets we entered, as a result of the Galyan's acquisition.

For example, we acquired three stores in Atlanta, and added four to that this year.

In Chicago, we acquired seven stores and have since expanded our presence to 12.

In Minneapolis, we have grown from three to five and we intend to expand our presence in many of these and other key markets in 2007.

I would like to congratulate and express my thanks to all of our associates who contributed to a successful new store opening program in 2006.

We opened 39 stores and relocated two.

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

Thanks, Bill.

We began expensing stock-options 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 in a schedule in our press release.

Sales for the quarter increased 22% to $708 million, with a comp store sales gain of 8.9%.

Gross profit was $191 million, increasing 67 basis points to 27% of sales.

This increase was due to expanded merchandise margins, leveraging store occupancy and distribution costs, partially offset by the effects of an in-store clearance event as we took advantage of foot traffic to drive down inventory levels.

SG&A expenses of $167 million were 23.6% of sales and 74 basis points lower than last year's second quarter when adjusted for $5.5 million of stock-option expense.

Store payroll and advertising expense leverage was partially offset by bonus expense.

As timing of recognition of bonus expense can very through the year, we recognize more in this year's third quarter that last year.

Operating income increased from $5.4 million last year to $15.6 million this year.

As a percent of sales, operating income increased 128 basis points.

Last year's pro forma results were adjusted to include stock-option expense of $5.5 million.

Net income for the quarter increased to $7.8 million as compared to $906,000 last year after adjusting to include stock-option expense.

Through the third quarter, year to date net income increased 48% to $45 million.

And EPS increased 46% to $0.82 a share as compared to prior year results, which are adjusted to exclude merger, integration and store-closing costs, gain on sales of investment, and includes stock-option expense.

On a GAAP basis, net income increased to $45 million and EPS increased to $0.82, as compared to $19 million, or $0.35 per share last year.

Which included $38 million pre-tax merger integration costs and $1.8 million of pre-tax gain on sale of investment and excludes stock-option expense.

Moving to the balance sheet, we ended the quarter with $787 million of inventory, as compared to $675 million last year.

Inventory per square foot was 2.2% higher than at the end of the third quarter last year.

Inventory per square foot increased 9% at the end of Q1 and 5.5% at the end of the second quarter showing a positive trend year to date.

We ended the quarter with $102 million in outstanding borrowings on our $350 million line of credit, a $100 million decrease as compared to the borrowing level at the end of last year's third quarter.

And I think the -- this quarter puts to rest the concern about new store productivity, with that metric again, in excess of 90% for the second quarter in a row.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Robby [Holmes] with Robert F.

Holmes.

Thanks, guys.

Congratulations on a great quarter.

Two questions.

First, can you -- I know it's early but could you give us some insights into sort of the strategy behind the Golf Galaxy acquisition?

How you think you might operate those stores differently?

Are you there easy fixes there?

Are you thinking about it as a growth vehicle going forward?

All of the detail you can on that.

And then second, just on the strength of the new store productivity levels, can you give us your view on how sustainable it would be to keep those levels above the 90% range as you move into next year?

And what would drive that?

Thanks.

Thanks, Robby.

From a Golf Galaxy strategy, point of view, we view Golf Galaxy as certainly best in class in that area.

We have always tried to partner with -- on the vendor side best of class people and Golf Galaxy has really done a terrific job.

And even though we've been competitors for a number of years, we always respected what they had done in the golf business We do see this as a growth vehicle.

It is important to our golf business as a whole and are obviously very excited about Randy and his team joining our team and wrapping up the golf business.

From a new store productivity standpoint, we're confident that we can be in that range of -- that we have been the last several quarters from a new store productivity and don't see any meaningful change to that.

I think, Robby too, if you look back at 2003, we were producing these kinds of new store productivity results.

And I think any question that surrounded new-store productivity was simply a function of the grayness that was introduced as a result of the Galyan's store base being included in there for as long as they were.

So this ask a pretty normal productivity level for us.

Terrific, guys.

Thanks a lot.

Your next question comes from the line of Mitch Kaiser, please proceed.

Good afternoon, guys.

Nice quarter.

I was wondering if you could maybe comment about the store growth at Golf Galaxy?

They have kind of guided mid-teens in terms of the number of stores next year.

Would you look to potentially accelerate that?

Would there by any constraints for you doing that?

I think Randy and I had talked a little bit about that and Randy I both comfortable with the guidance has been talked about to date and wouldn't see any meaningful change in the store rollout program next year.

Okay.

And then could you give just give us a little more color -- I jumped on the call a little late, but I was hoping maybe you could comment a little on specific product categories and things like that you saw sine nice strength in, obviously driving the tremendous comp?

We did talk that we really had comp sales gains across the vast majority of categories.

The football and soccer initiative we put in place did extremely well.

And then also we called out here the relatively cold weather this year in the third quarter certainly helped move some outerwear and cold weather products.

And we do think there's possibility, which is why guided our comps to where we did, we think there is a possibility that we shifted some of those sales from the fourth quarter into the third quarter.

Okay.

So hunt, fish, camp was a pretty good category this quarter?

Hunt, fish, camp was very good.

Outdoor was very good.

The footwear category was good.

You would have to dig pretty deep to find something that wasn't very good in our third quarter.

Yes.

Well, very good.

Thank you.

Your next question comes from the line of Matt Fassler, please proceed.

Hi, this is actually Robert [Hagenbof] in for Matt.

A couple of questions on Golf Galaxy.

Could you talk a bit about the brands in the store compared to the brands in your Dick's stores?

What's the overlap there?

Do they have brands that you don't have in the Dick's stores and is there any kind of private label opportunity maybe between the two?

Golf Galaxy does carry a couple of brands that we don't carry in the Dick's stores.

And they carry a bit -- in some areas they carry a slightly broader assortment of those brands.

And as far as private label, we do believe there is a private label opportunity in the Golf Galaxy stores for the brands that we have under the Slazenger, Walter Hagen name.

So we are enthusiastic, as is the Golf Galaxy team about those private label brands being in the Golf Galaxy stores.

Is the -- could you remind us what any cost of debt on your credit facility that t you are using is?

We're borrowing at 150 basis points over LIBOR.

So that today equates to about 6.5%.

Great.

One more question in regards to your opening.

In markets that you entered with the Galyan's acquisition, comparing those to other openings, did they meet your expectations for leverage of marketing distribution and other related areas?

Very much so.

As we take a look at these markets that we entered that have the formal Galyan's stores in the, The strategy we put in place is to -- why to buy Galyan's and to move into these markets it's met or exceeded our expectations.

We're very pleased with it.

Great.

Thank you.

Your next question comes from the line of Rick Nelson.

Please proceed.

That's Rick Nelson.

Thanks.

Ed, can you talk about the golf category?

How that performed during the quarter and sort of the outlook for the category overall as you see it?

The golf category was basically at our expectations.

The equipment business was a little softer than we would have liked it to be but we -- really in line with our expectations.

The apparel side of the golf business has exploded and has been terrific.

So, the golf business has been -- we have been pretty pleased with it.

We think that there's some real opportunities in the golf business going forward.

With the -- some of the new drivers that are coming out.

The square drivers that are coming out from Callaway and from Nike with the higher MOI's, we think is going to breathe some life into the golf business this spring.

Also Titleist is coming out with a new Pro V1x golf ball.

And whenever they do introduce that new and improved Pro V golf ball, we have seen a pretty good pop in sales.

So, all in all, we're fairly enthusiastic about the golf business.

And with the acquisition of Golf Galaxy, we get extremely excited about the golf business with what we can learn from -- what the two companies can learn from each other and the private label opportunities going into the Golf Galaxy stores.

And some of the pricing opportunities we can get from a private label standpoint by increasing our purchases on our private label product.

So should increase the margin rate.

So all in all we are extremely excited about the golf business.

Do you see any cannibalization of the Dick's stores or are you going to somewhat roll in the Golf Galaxy brand into the Dick's stores?

No.

This Golf Galaxy will continue to run as a separate storefront and Dick's will run its separate storefront with our golf business.

And we feel that with the leverage from a private label standpoint, we think there's some margin rate -- some pretty significant margin rate improvement that we can get through this.

And it won't cannibalize -- we wouldn't cannibalize each other anymore than we would cannibalize each other if we remained independent.

Great.

Thank you.

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

Please proceed.

Thanks a lot.

I wondered if you could talk a little bit about the Golf Galaxy footprint, how that compares to where you guys are today?

Golf Galaxy is in 24 states.

We overlap in a fair amount of those markets.

We have been able to coexist, both companies have obviously done extremely well as competitors.

And we don't see overlap as a real issue.

And it doesn't sound like you have any plans for any widespread store closings on either side related to this?

There will be no store closings related to this for either Company.

And then one other one, just on the very comps in the quarter.

I was wondering, is there any way you could talk about maybe the market share, how much that's driving your comp versus just strength in the sporting goods market overall?

Do you think that your comps are just reflective of what is happening in the category?

Or is a lot of it to do with you guys taking share from everyone else?

Well, I think to see our comps at 8.9% would infer a couple of things.

It would infer that our team, our merchants, our operators, marketing people are doing a very good job of executing the business on a day in day out base.

So, I think we're getting some operational leverage there.

And doing a better job from a merchandising standpoint than we've done in the past to drive business.

And I also believe that we are taking market share.

So we have kind of done some market checks ourselves, talked with people in the industry, walked other competitor's stores, we're -- although we can't quantify it, we're quite confident we are taking market share.

And just one last one, on the fourth quarter guidance, I'm assuming you're reflecting the view that some of the third quarter business was pulled forward and that's why there's a pretty sharp slowdown there?

Yes, we believe some of the business was out of the fourth quarter into the third quarter because of the cold weather.

The cold weather and outdoor categories did extremely well and they always do well when it gets cold early.

But from an earnings standpoint, it is important to note the fourth quarter guidance is a 22% increase year-over-year.

Right.

Okay.

Thanks, guys.

Your next question comes from the line of Jim Duffy with Thomas Weisel and Company.

Please proceed.

Thanks, hi, everyone.

Nice quarter.

Thank you.

I'm hoping you can highlight some of the key opportunities for synergies with the Golf Galaxy acquisition.

It seems you gave us a little more detail surrounding the Galyan's acquisition, for instance, the use of the distribution center, et cetera.

Any color you could provide there would be helpful.

Thanks.

I think these are two very different types of acquisitions.

The Galyan's acquisition was we were -- we bought Galyan's primarily for the real estate and we were going to completely change their merchandising assortment and integrate their stores into our stores.

And their -- the Galyan's stores became Dick's Sporting Goods stores.

The savings and synergies in this instance is somewhat different as Golf Galaxy is going to continue to operate their stores.

There's no integration in our stores.

And the primary savings and synergies will come from buying improvements and private label opportunities to increase margin rates through our private label.

So, that's the vast majority of the savings and synergies.

As I said, Golf Galaxy is going to continue to operate.

They will continue to be headquartered in Minneapolis.

Their staff will stay in place.

And with Galyan's, we were really buying real estate and the distribution center.

With Golf Galaxy, we're buying their ongoing business and we are happy to have their management team join us.

So, they are very different acquisitions.

I see.

And why is now the right time for this Golf Galaxy occasion?

Well, we think that there's going to be further consolidation in the golf business from a retail standpoint.

We feel that -- kind of in our life and Golf Galaxy's life this was absolutely the right time to put this together.

We feel that there is, as I said, great opportunities from a private label standpoint and margin rate expansion in really both companies as we grow that penetration and get better buying leverage from a private label standpoint.

Does this suggest that you believe the integration of Galyan's is sufficiently behind you and now you can allocate resources towards another effort?

Yes, Galyan's has been behind us for quite awhile.

And I think if you take a look at even the last four quarters that we've reported of what our comp store sales have been at 4.1%, 6.5%, 6.5%, and now 8.9% and the extremely large EPS growth that we have had, the Galyan's acquisition is clearly behind us.

And quite frankly internally in the Company, we never talk about Galyan's until we get on these earning calls.

We don't talk about Galyan's internally at all.

Very good.

One final question for you.

What type of skill set you be looking for in Mike's replacement?

Certainly, we're sad to see Mike go.

We also are sad to see Mike go.

And we'll be looking for a skill set very similar to Mike.

Mike has done a great job, and we're sorry to see him go but we understand the personal reasons as to why he's leaving.

And we are in the process of beginning a search.

And we're looking for -- we're certainly looking for a Mike look-alike.

Very good.

Nice quarter guys.

Your next question comes from the line of Michael Keara with Merrill Lynch.

Please proceed.

Ed, you talked about square footage growth plans at Golf Galaxy.

I think you mentioned that there's going to be no change to them.

But when I look at some of the competitors in that space, I'm not too familiar with Golf Galaxy's number, but one of their main competitors if you look at the their new store productivity trends over the last three quarters have been ranging down and they are actually down a lot.

So when you look at Golf Galaxy, in that sense, in terms of what are the new ASP numbers there?

What are they looking at right now or you don't want to share that right now?

Well, the growth rate that the Golf Galaxy team has put in place and we're comfortable with is what they have guided to to date.

Right.

Understand that although we have announced the transaction today, we have not closed the transaction.

Okay.

And the Golf Galaxy team will be continuing to run their business independently until we close the transaction.

So, no comment on their ASP trends.

Obviously, your trends have been great, I'm just curious on what the trends are looking over in the Golf Galaxy.

I think you yourself mentioned that golf has been pretty promotional over the last three quarters, so that's why I asked.

Yes.

Now, in terms of what you are going to do in terms of your golf reset.

I think you said you are going to have a golf reset in the spring.

Are there going to be any changes to that in terms of timing on that?

That will continue as originally planned.

And golf is an extremely important part of the core Dick's Sporting Goods business, and will continue to be and we'll try to grow that business.

And we will at the same time try to grow the Golf Galaxy business.

And I think at your Pittsburgh store, you were doing something at the University of Pittsburgh of Medical Center in terms of the tactical analysis with swing?

Is that something you're going to maybe see in the Golf Galaxy stores or they already have something like that?

They don't have anything like what we have done with the UPMC Fitness lab, but we'll assess that and see what the -- see if there's a possibility -- we'll probably test that in a couple of stores to see what the viability is in the Golf Galaxy store.

The Golf Galaxy stores are a bit smaller than the independent golf shop that we did in Washington DC and in Pittsburgh, so we'll have to take a look at see where that square footage could fit in.

My sense would be if we decided to do that it would be something in that would be in go-forward stores, as opposed to retrofit stores.

But that's something that we have to sit down and talk with Randy and his team about.

Okay.

And one more question, on new store productivity at your current stores, is TSA -- I know you have more competitive cross-over with them than versus anybody else.

Are they doing anything differently?

Are they becoming less promotional, or is there anything different going on in that than what is going on with TSA right now?

We really haven't seen any difference in TSA's competitive nature since they went private.

And one last question for Mike.

Mike, sad to see you go, good luck on whatever you are doing.

In terms of the your guidance, I think it's traditionally been, I think 30 bits of operating margin, 20% EPS growth.

And you said Golf Galaxy is going to be accretive next year, so we should be a little north of 20% for next year.

Is that correct?

Yes.

And we'll get more specific, Mike, as we come through the end of the year and to Ed's point when we actually close the transaction and get more detailed from a planning standpoint.

That's fair enough.

But it's fair enough to say that we're getting a lot integration issues with Galyan's.

Very much so.

Very different-- there's no integration in fact.

Great quarter.

Thank you.

Your next question comes from the line of David Magee, please proceed.

Good afternoon and terrific quarter.

Thank you.

A couple of questions.

The first on is theoretical.

Would it make sense to target other categories in the same way you have targeted golf here for acquisitions and -- or is there something special about golf that makes it unique in that regard?

Well, from a golf standpoint, it's the one -- it's the business that we think has got some growth opportunity.

And does it make sense for other categories?

I'm not sure.

We'll just kind of take wait and see.

But right now, we're extremely enthusiastic about the golf acquisition.

And secondly, what do you anticipate will be driving the trends in the fourth quarter?

And maybe more specifically, how do you feel about the exercise category and also performance footwear going into the fourth quarter?

Well, we still remain optimistic about performance footwear in the fourth quarter.

We have seen a lift in the Nike Plus shoes, so that's been very good.

Asics has been very good.

And other trends that we're looking at in the fourth quarter, we remain enthusiastic about the fitness business.

And the switch from treadmills to ellipticals is spurring additional sales.

So again, we're looking at the fourth quarter pretty optimistically.

And the comps that we have, don't be disappointed about that because we moved some of that business from the fourth quarter into the third quarter.

Great.

Good luck.

Your next question comes from the line of Gary Balter.

Please proceed.

First, Mike, I want to wish you good luck back in New England.

Thank you, Gary.

When you go there.

And Ed, this time, try to hire a hockey fan.

When I was out there in August we talked about the different categories, and you talked about golf and you mentioned that's a category that you felt didn't have the demographics that are as exciting as some of your other categories.

How do you fit that in with the purchase of Golf Galaxy?

What are your thoughts on that?

I don't remember talking specifically about demographics.

I remember we talked that the golf business has slowed and the USGA had limited some of the technology that the Company made.

Right.

Limiting technology.

Right.

So now what there is, is some engineers have gotten together and this is prior to seeing these new square drivers that are coming out from Callaway and Nike that significantly increase the MOI, which is moment of inertia in golf club speak, if you will.

And these larger headed square drivers, kind of the research that we've done -- and we have taken some of them out to some our stores and talked to consumers about them, we are pretty excited that this is going to breathe some life back into the business.

TaylorMade is coming out with its own MOI driver.

So, it's the first time in a few years that there's been something exciting to talk about in the golf business.

Okay.

Titleist is also coming out, as I said, with new Pro V golf balls, the Pro V1, the Pro V1x They'll get behind that, driving golf ball sales.

The new TaylorMade ball being released has done pretty well.

And Nike is coming out with new Nike 1 ball.

So there's some things going on in the golf business right now that is breathing a little bit of life into the business.

And we also think that there's market share gain to be had here, as some of the smaller independents continue to struggle.

The same is the smaller independent sporting goods dealers struggled five, six, seven years ago.

Do you think that there's one big brand, Ping, that you don't have.

Does this open up Ping to the Dick's stores?

Gary, I doubt it.

It's a our hope that Ping will continue to sell in the Golf Galaxy stores and I don't see any reason why they wouldn't.

But we don't believe that this will -- that this would influence Ping to sell us in the Dick's Sporting Goods stores.

And we're certainly not going to go try to pressure them.

Ping needs to make their own decision what they think is right for their business.

And we don't see any change in the -- of the relationship with Ping.

Everybody has been focused on golf and when you look at some of the apparel sides.

You mentioned that the weather made a difference, was very helpful.

Was that primarily Under Armour or was that across the board?

It was really across the board.

We've talked over the last couple of quarters that the two brands from an apparel standpoint that have driven the apparel business has been Under Armour and the North Face.

And as it got cold, the kids out playing football and soccer, we sold an awful lot of Under Armour cold gear compression product.

We did much better than expected with the similar cold gear product from Nike.

And then the North Face is a brand that just continues to gain traction.

And we did extremely well with the North Face in the third quarter.

Congratulations again on a great third quarter, and Mike I'll speak to you again at another point.

Thanks.

Next question comes from the line of Kate McShane with Citigroup.

Please proceed.

I just have a few quick questions.

With some of the innovation that you had mentioned coming out from Nike and Titleist, has it been determined if the USGA is okay with all of these new balls and clubs and the innovation that's in these products?

Yes, they have.

They have all been approved by the USGA.

Okay.

And then I think one of the benefits of Dick's Sporting Goods is that it serves many different consumers because of the different shop in shops you had in your stores.

Is there any concern that there's risk of owning a one-concept specialty retailer like Golf Galaxy?

Well, I think -- is a risk to that based on the size of this acquisition and the size of Dick's Sporting Goods?

No I don't think so.

The golf business will certainly ebb and flow like many businesses do, we think that golf has bottomed out.

We think there's certainly growth opportunities in the golf business.

But understand also that this acquisition represents less than 8% of our sales.

It's less than 8% of our market cap.

This is, in the grand scheme of things, although an important acquisition strategically, it's not a large acquisition compared to our size.

Okay.

And my last question is, do you see the states that Golf Galaxy is in that Dick's is not in as an opportunity to learn about those consumers in those states?

And will that help you when you open more Dick's stores as you get into Utah and Oregon and areas where Golf Galaxy is currently?

I don't think it's going be a significant learning opportunity there.

Golf Galaxy, as you said, is focused exclusively on golf.

We have so many other businesses that are geographically sensitive, whether it be the hunting business, the tackle business.

The hunting business, whether it's rifle country or shotgun country, whether -- what type -- if it's primarily bird hunting in the flyways or if it's deer hunting kind of in the southwestern Pennsylvania, upstate New York.

The soccer business is more important in some areas of the country than others.

Although, it's growing in all areas of the country the same as lacrosse.

So our business is so diverse, the opportunity to really learn anything meaningful from Golf Galaxy in the markets they're in and apply them to our hunting business or exercise business is pretty minute.

Okay.

Thank you very much.

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

Morgan, please proceed.

Great.

Thank you.

One of the head winds to Golf Galaxy private label development has been the lack of a true centralized DC.

Do you foresee leveraging your distribution assets to develop that program over time?

We have a terrific distribution network in place, and we'll find ways to be sure that our -- that the private label products with these specific brands that we have, which are terrific brands, whether it be the Slazenger brand or the Walter Hagen brand that we'll find a way to get into that in to the logistics cycle of Golf Galaxy and get those into the stores in a meaningful way.

Okay, Great.

And then back on the Q2 call you gave a little color on the Galyan's comps versus the non-Galyan's comp trend.

Will you -- have you done the same this quarter?

Well, we can say the same thing as we did in the third quarter, that the the overall Dick's comps were 8.9%, Galyan's was not quite as good of that but it was primarily because of cannibalization.

But with an overall comp of 8.9%, you can assume the Galyan's comps were really quite strong.

Sure.

And then any breakdown between traffic and ticket in the quarter?

Sure.

Traffic was up 6.4% and average unit retail was up 2.4%.

Great.

Thank you.

Your next question comes from the line of Hardy Bowen with Arnhold & Bleichroeder.

Please proceed.

Yes.

The fact that we have done a fair amount of clearance merchandise at the -- relatively early in this quarter, does that mean we're going to bring in more full-priced merchandise or does it just mean we're going to have less markdowns at the end of the fourth quarter, or what does it imply?

We're just going to have less markdowns Hardy.

We have taken -- the merchants have done a great job of cleaning up some inventory and clearancing that out.

And the inventory is in great shape, as you can see with the growth in inventory at just over 2%.

And the traction we have gotten from the first quarter to where we are today, puts us in a position to be able to chase more full-priced merchandise as necessary.

And I can say that our inventory is probably in as good of shape as it has been in a long time.

Yes, would we plan to keep the Golf Galaxy stores kind of separate in what they are doing from the Dick's stores?

Things like Golf Works, would we that put that in the Dick's store or choose not to put it in?

And fitting of golf clubs, would we keep it separate, keep a higher level of fitting in Golf Galaxy than at Dick's?

Well, I'll answer it.

The first question is on Golf Works.

We're not sure if what we would do with Golf Works.

If we would put Golf Works in the Dick's stores or not.

We think it's a great concept in the way that Golf Galaxy is executing it today.

We're still wait and see if we would put this in the Dick's stores.

As far as fitting goes, even before we had reached an agreement with Golf Galaxy to acquire them, we were putting a fitting system into the Dick's stores.

Our research that we gained from our own independent golf shops is how important this fitting component is.

And we have a fitting discipline going out to all of the stores.

We're in the process of rolling that out right now.

We'll be in in spring.

And we were doing that whether or not the Golf Galaxy acquisition was successful.

Mike, I just want to say, I'm also sorry to see you go.

Well, thank you, Hardy very kind.

I'll be in touch.

Your next question comes from the line of Jeff Sonic with Friedman Billings and Ramsey.

Please proceed.

Thank you.

Can you talk a little bit more about the athletic apparel business, particularly, Under Armour's entry into that business?

I had read somewhere that they took basically 20% of the share in that market, really from a standing start.

Did you see an acceleration in the unit velocity or was it really a price point issue?

Are you talking apparel or footwear?

Footwear, I'm sorry.

You are talking about the football cleats?

Yes.

Yes.

The Under Armour performed extremely well in football cleats.

For competitive reasons, we're not going to lay out what their market share was, but they did a terrific job marketing those cleats.

They -- marketing the cleats, getting those to the kids.

The cleats looked terrific.

And we did a survey on -- from all of the kids that -- a large number of kids who bought those cleats last year and asked them how likely they were to purchase Under Armour cleats again and it was a very favorable response.

So, we think there's still a lot of runway with Under Armour.

With the excitement around the Under Armour cleats, what has happened is the Nike cleats did extremely well also.

And the market share is really being shared between Nike and Under Armour and both companies have done a very good job.

We have looked at the Nike football cleats for next year, and they are by far and away the best line that Nike has come out with in a number of years.

And we're excited about the football business going forward.

And then in the lodge business, I think last quarter you commented that that business has kind of accelerated on a comp store basis to like flattish, is your positive commentary indicative of a positive comp in that category in the 3Q?

In our last several conference calls, we indicated that that outdoor category had actually comped positively.

And it comped positively again this quarter also.

So I think this is the fourth or fifth quarter in a row where we have had positive comps in the outdoor category.

And then is there anything else you are highlight for us just from a category basis, other areas you're testing outside of the golf business, other things you are seeing, impact the business from a merchandising standpoint?

Really, anything out there?

The brand that we have talked about that we think is -- continues to get great traction is the North Face.

North Face has done extremely well.

They have broad ended out their product line and anything with the North Face has done extremely well for us.

Great.

Thank you.

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

Please proceed.

My impression was that Golf Galaxy's expansion rate in stores would be 50% to 100% faster than Dick's.

Their margins are a 200 basis points below yours.

If you were to sustain that kind of growth, Mike would this -- or Ed, does this acquisition potentially change the formula for how you look at growth not just in '07 but for maybe three to four years?

No, Bob, it doesn't change it a bit.

Does that mean the Dick's part grows not quite as fast?

No, absolutely not.

No, Dick's is going to continue to grow at the 15% unit growth that we've continued to talk about and execute against.

It's not going to change a bit.

And when we get our fourth quarter -- after our fourth quarter call, we'll provide some more guidance to this.

But we don't see this changing the Dick's business one bit.

We expect Golf Galaxy to grow at the rate they have guided the Street to and Randy and I have talked about that.

But we don't see any slowing of our growth at all.

And you can see based on the performance that we have had, there's really no reason to slow that growth.

Great.

Is it too soon to ask you if -- how you think about your two e-commerce sites, whether there's any integration there?

And member affinity programs, they've got a good sized one and you've got a very big one.

It's a little early to talk about that yet, Bob, but we can bring some more color to that at the end of the fourth quarter.

Okay.

And then there was an announcement or a story in the Journal last week from Callaway about some program they were going to start with selling through retailers direct to the customers.

Can you shed any light on that?

What it is it they can go to callaway.com, the buy a product.

It can be shipped to them and a retailer in their area will get credit for it.

It's an interesting program.

One that we would love some more of vendors to participate in, so that we get credit for the sale.

But it's a little early to discuss the effectiveness of it.

I think it's a terrific idea, though.

Okay.

Thank you very much.

Your next question comes from the line of Mitch Kaiser with Piper Jaffray.

Please proceed.

I'm sorry.

All of my questions have been answered.

Thank you.

Your next question comes from the line of Jim [Castel] with [Kaihagen] Please proceed.

Hi, it's Jim Castel with Kaihagen.

I still find the acquisition perplexing.

Why not take the capital and just increase the rate at which you are opening Dick's stores?

I understand the though process that there's technological innovation here that ought to sell more golf clubs.

However, the last time we had substantial technological innovation, we also had the number of rounds of golf being played growing rapidly.

That's not the case currently.

As a matter of fact, the number of rounds are going down.

At least that's what Golf Galaxy says.

Can you help me understand the thought process on allocating the capital?

Yes, we think that this acquisition makes all the sense in the world, based on the consolidation in the golf business.

We think that there's a significant market share to be able to come to each of the two companies.

We there's leveraging on the procurement side.

And we think there's a big leverage on the private label side.

Understand that this does not change the growth rate of Dick's Sporting Goods.

If we wanted to accelerate the growth of Dick's Sporting Goods we could still do that.

We're not constrained by capital.

We think that our growth rate is one that is quite manageable now and one that we want to continue with at roughly that 15%.

Well, why 15% for Dick's?

Why not ramp that higher to 25%?

Because we think 15% is the appropriate growth rate today for this Company, and we really don't want to kind of get ahead of our skis and we're going to continue at 15%.

Are the gating factors then that want you to maintain at a 15?

It's continuing to grow in these geographic circles, making sure that we have the appropriate real estate.

Looking to open a third distribution center, which we are in the process of doing right now.

There are a number of things that we feel that is appropriate for us to maintain this 15% growth rate.

And quite frankly, there's not a competitor out there who is pushing us to make irrational decisions.

And we think this is a rational growth rate and one that we plan to continue with.

But looking at it from running the business from a complexity standpoint, what will be the areas, the things that concern you the most regarding adding a second concept like this?

We don't really think that it's a going to be terribly complex.

We have spent quite a bit of time with Randy Zanatta and his team.

We're extremely impressed with his team and feel that his -- that team is going to continue to run the Golf Galaxy business.

As I said before, with the golf -- with the Galyan's acquisition we primarily bought real estate.

In this acquisition we bought an ongoing concept and we think we invested in a terrific management team.

So the buyers and the strategies that you have commented about the synergies there, is that going to be run out of Minneapolis?

Or is that going to be run out of your headquarters?

Golf Galaxy will continue to be run out of Minneapolis.

We will have meaningful conversations from a buying standpoint and negotiate terms and conditions of sale to -- with the vendors together.

Okay.

So in other words, it's probable that their buyers are going to take over handling the golf buying for the Dick's?

No, that's not what I said.

What I said is that we will negotiate terms and conditions of sales.

so, whether we're dealing with Nike or Wilson or Callaway, the conditions of sales to Golf Galaxy and Dick's will be consistent.

But the buyers for golf products in Dick's Sporting Goods will make the appropriate assortment decisions for the Dick's stores, and the buyers in Golf Galaxy's group will make the appropriate buying decisions for the assortment in the Golf Galaxy stores.

Thanks.

Your next question comes from the line of Jim Chartier with Moness, Crespi, Hardt.

Please proceed.

Thanks, good afternoon.

On the last couple of calls you've talked about increasing your inventory investment in certain categories to drive sales and take share.

Are there any opportunities there in fourth quarter that are available for you?

In the fourth quarter, there really hasn't been.

And you can see that the inventory is down to the -- only a 2.5% increase.

If there's an area that we are -- have built some inventory in, it's the exercise business.

And the reason we have done that with the exercise business, is the exercise business does not end at Christmas.

The exercise -- one of the biggest month we have is the month of January, with everybody making, myself included, New Year's resolutions to -- making those new year's resolutions.

So the exercise is the primary area that that we've invested in.

We will take some stores down in the southern part of the country that we will accelerate some receipts toward the end of the fourth quarter to get a jump on the golf business, the baseball business, the lacrosse business, some of those other outdoor spring businesses that we'll get a jump on in the southern part of the country.

But what we did in the first, second and third quarter has really been done.

There's not a big opportunity in the fourth quarter.

And we have got inventory levels of year -- we're very comfortable with the inventory levels of last year and might be able to bring those down just a tad.

And then in fitness, is there anything other than the swith to ellipticals that's really driving sales there?

It's really primarily the elliptical business.

The free-weight business is okay.

The infomercial business is not as robust as it was last year, but the elliptical business is on fire.

And then what impact, if any will the actual week of sales have on fourth quarter earnings?

Nothing meaningfully.

Okay.

Thanks a lot.

Next question comes from the line of Jonathan Cramer with Cowen, please proceed.

Two quick questions.

First, can you give us a little more color on your gross margins?

And two, where do you think you have opportunity to continue to grow your product margins from here?

We continue to grow product margins in the buckets that we have talked about in the past.

We continue -- as you can see we -- our private label become a greater percent of business.

Private label margins are higher than traditional margins.

We feel that, on a go-forward basis, we are implementing tiger inventory controls that will continue to help mitigate markdown pressure on the back end to help increase the margins.

And we feel we'll be able to continue to leverage buying volume with our vendors to increase margin rates.

That's -- it's that simple.

Could you give us a little more color on this quarter's gross margin?

With respect to?

Product margins, leveraging of occupancy costs?

Well, we did leverage occupancy, with the strong comp that we had.

We also leveraged distribution.

We went through implementation of a new WMOS system at the Pittsburgh distribution center at the beginning of this year.

And folks in that facility have come down a learning curve very sharply.

And we're seeing productivity gains there that added to the leveraging of that line.

And to Ed's point, we continue to leverage on the merchandise margin line.

Okay.

Thank you.

Next question comes from the line of Dan [Poser] with FTN Midwest.

Please proceed.

Good afternoon, congratulations.

Just a couple of last things.

What -- with a 14% gross margin -- excuse me, penetration that you are running at overall private label, how did that reflect in the golf business within the Dick's stores?

We don't comment -- for competitive reasons, we don't comment business by business.

But we're extremely pleased with the penetration of private label golf products.

And by going into the Golf Galaxy stores with the private label, are you also creating a potential wholesale business with your Walter Hagen line and so on?

No, we're looking at this strongly as our private label and we're not looking to wholesale that out to anybody else.

And then can you walk through the footwear business by category?

You discussed a few of them but how that was during the third quarter?

I can give you some color at a fairly top line.

The athletic footwear was kind of right on target.

The women's business still remains soft, the men's business was okay.

And the cleat business was very good and was the sandal and slide business.

And any comments on like running basketball, so on and so forth?

Not to that level of granularity.

Okay.

And then you talked about the outerwear business.

I was just wondering about -- you mentioned the North Face, I was just wondering if Columbia is getting caught up in this acceleration as well?

No, Columbia -- in the third quarter Columbia did great.

Columbia out-sold our projections, we were very pleased with the performance that Columbia turned in.

Obviously, the North Face turned in a very good performance also.

But we also do know that part of this acceleration -- our merchants have done a great job making sure we have got the right assortment.

Our marketing group did a terrific job marketing the business.

But we do know that the weather had an impact on it and helped it.

But even with the weather, all of our groups from our -- the store operations, marketing, merchandising, planning, allocation, distribution, everybody worked very hard to get product through the pipeline and take full advantage of the weather we were given.

Great.

Well, congratulations again and continued success.

Thanks.

Thank you.

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

Please proceed.

Thank you and good afternoon guys.

Ed or Mike, just a quick question on the merchandise categories that drove your 70 basis points improvement in the margin.

Was there any major difference between apparel, footwear and hard lines in the quarter that really allowed you to have that kind of a margin increase?

We were certainly helped by the mix of product, with the apparel business being a greater percent of the business than it was last year.

Again, driven by the cold weather.

I don't mean to be a broken record but the weather certainly helped and as we got that acceleration in apparel, which is certainly higher margins than the Company average, that helped drive the business.

Are the margins on the other two categories on plan?

Yes.

We are very pleased with margin across the board.

Okay.

And athletic footwear, you mentioned in the second quarter conference call that in addition to women's products, you had seen a slow down in the high-end or marquis footwear.

Did that situation continue in the third quarter or did it abate?

The slowdown we saw in the higher end product was in Nike shocks.

Nike has come out with new products that have done extremely well.

The 180, the 360, in the third quarter -- end of second quarter, beginning of the third quarter, the 180 came in which is a plus-enabled shoe, and has done extremely well.

So we've -- the issues that were caused by the somewhat slow 46 down of Shox has been abated by the 180.

The women's business still remains soft.

Sure.

And also in the 61 stores that you're operating now or will operate this Golf Galaxy.

How many of those stores have a Dick's in the same trading area?

About 60% of them.

I don't have that exact number, but probably between 35 and 40 of them.

And will you roll out Golf Galaxy in Dick's markets, regardless of the presence of a Dick's store?

Is that part of the strategy just to go into the markets because of the Golf Galaxy opportunity?

Or are you looking at it in terms of what the overall golf opportunity is for a trading area?

We see -- there will be an independent golf operator in all of our markets some day.

Whether it's Golf Smith, whether its' Edwin Watts, whether it's Golf Galaxy.

And if it's Golf Galaxy then it's Golf Galaxy.

But the independent golf retailer is here to stay, at least these three -- the big three in independent golf retailing.

Adding Golf Galaxy to what you are doing currently in golf products for at the Dick's stores, can you give us a sense of what you think is your overall market share of golf products in the U.S.?

No, I couldn't really tell you what that, is and it's pretty substantial.

With the Golf Galaxy acquisition, it gets bigger.

We haven't really looked at it.

But we think that there's a lot of market share in the golf business to be had.

And what that is that we have, I'm not sure, but we think we can grow that market share.

And we have calculated it's roughly between 12% and 15%.

And would that be a fair approximation in your mind?

I would actually think it's slightly smaller than that.

Okay.

Fair enough.

Thanks a lot guys, appreciate it.

Your next question comes from the line of Sean McGowan with Wedbush and Morgan.

Please proceed.

Thank you.

A question about the experience in your own stand-alone golf store.

Was there anything that came out of that that made you particularly more excited or particularly less excited about doing it on your own?

Well, what we learned from the independent golf shops is that there is somewhat somewhat of a different golfer shopping at Dick's than shopping at Golf Galaxy.

The Golf Galaxy has a bit of a higher end products are -- more higher end were being sold in our independent golf shops than in the traditional Dick's store.

We've found that the level of service required in the independent shop is greater.

People coming into the independent shop absolutely appoint a differentiation as wanting to be fitted.

Whether it be fitted for a driver, looking at club head speed, ball speed, launch angle, spin rate, et cetera.

Or looking at being fitted for a set of irons for the appropriate lie, whether you need a half degree flat, half degree upright, et cetera.

So as we looked at this, we got really very enthusiastic about the golf business.

And felt that with an independent operation, we could continue to roll out an independent operation, roll out the Dick's business and have much less cannibalization between the two than we would have thought.

But was there anything about the experience that made you say, "We could either this alone or do it through acquisition.

We better go do this through acquisition."

Well, we certainly looked at that.

Whether we would do this independently and roll it out or we would make an acquisition.

And as we looked at it, we -- and talked with the group at Golf Galaxy and looked at their stores and the way they approach the business, we were very enthusiastic about what we saw.

And we would be able to move much quicker and probably less expensively by acquiring Golf Galaxy, as opposed to rolling it out ourselves.

The final question is probably for Mike.

Can you quantify in anyway quantify what the impact was of those in-store clearance activities?

It t had favorable impact on comp sales of shy of 1 point.

And had a detrimental effect on margin, although it wasn't terribly significant because of the foot traffic we had going through the store.

And I know quantity on that, like a percentage or basis --?

No, we're just not going to get into that specificity.

I hear you.

Well, thank you very much.

Your next question comes from the line of Sujata Shekar with CIBC.

Please proceed.

Yes, thank you.

With regard to Golf Galaxy, I know you touched upon distribution possibly continuing to be separate.

I was wondering what is the -- is there an opportunity in advertising?

I -- obviously, a lot of the stores overlap and Golf Galaxy has this advantage club program.

Do you think that there could be some cross-selling possible?

.

It's possible.

Some of the things from an advertising standpoint that we think we'll be able to leverage is the two companies advertising from an electronic standpoint.

We both have a relationship with the Golf Channel.

We think there's an opportunity to leverage that.

We'll take a look at opportunities to leverage their Golf Galaxy loyalty program and the Dick's Sporting Goods loyalty program and how we can best leverage those two.

Okay.

And then also on your test stores -- in the specialty test stores that you are running, I know you were testing tennis merchandise.

Do you see an opportunity to put those -- the tennis merchandise into the Golf Galaxy stores at some point?

No, we don't.

We did test tennis in the stores.

And if we had decided to roll it out as an independent concept, tennis would not have been in the assortment going forward.

I see.

And just strategically, the golf specialty retail business now is -- you could compare it to the outdoor specialty boom a few years ago.

And you had reacted to the outdoor specialty boom by revamping your -- the in-house outdoor departments quite successfully.

How is golf different?

Golf is very similar to that, and we have put together a program to modify the assortment, the experience in our shops.

We opened a store in Alpharetta, Georgia outside Atlanta not long ago with a newly developed golf concept, which has been extremely well received with golf.

With a golf simulator, hitting net, launch monitor.

The ability to go in there and adjust loft and lie of irons and be able to completely fit an individual.

And as I say, it's gotten great results.

And that's the concept that we will be going forward with in all new stores.

Regardless of what we did with the Golf Galaxy acquisition.

Okay.

So you do see enough opportunity to grow the golf business within the Dick's store, as well as a separate set of customers with the Golf Galaxy stores.

Is that right?

Absolutely, one of the things that we learned in our -- in the tests that we did here with our independent golf shops, two them, one here in Pittsburgh and outside of Washington D.C.

and the Dick's store; is that there is a smaller degree of overlap of customers than we would have thought.

So we feel that is still a significant opportunity to grow the golf business inside Dick's and to help Golf Galaxy build this independent golf specialty retailer.

Okay.

Great.

And then on a separate note, I wanted to know two things on the footwear front.

First is, are the Heelies shoes continuing to do well?

And second, what is the outlook for Under Armour baseball cleats in your stores?

When do you expect them and how many pairs, etc.?

From a Heelies, yes, Heelies continues to do extremely well.

We're enthusiastic about Heelies into -- in the fourth quarter and the holiday season.

From an Under Armour baseball cleat standpoint, we think based on the success that Under Armour had on football cleats, we think they are going to have great success with baseball cleats also and they'll be coming into the store in the fourth quarter.

Okay.

Congratulations.

Thank you.

Your next question is a follow-up question from Bob Simonson with William Blair.

Please proceed.

Just so I have got this straight, I think, Ed, you mentioned there's some opportunity to take your private label into Golf Galaxy.

Did you say or are you just thinking about taking Golf Works into a Dick's store?

We said, Bob, we're going to take a look at it.

But we don't have enough information yet as to whether Golf Works would come into the Dick's Sporting Goods stores or not.

Certainly, the private label products that we have, a number of them will find their way into the Golf Galaxy stores.

And then on the distribution, they do direct on the equipment, might you change that a little bit since you do have a very efficient distribution system?

Again, too early to same the Golf Galaxy model is working extremely well.

They've got a system in place to operate that and their processes are working quite well.

So we're not looking to modify the Golf Galaxy operation, other than -- and Randy and I talked about this, other than private label product coming into Golf Galaxy.

Okay.

And final question, can -- would you comment on, how did the transaction get initiated?

Was it you to them or them to you or --?

It was -- I called Randy.

Okay.

Very good.

Best of luck.

We will now turn the call over to Mr.

Stack for closing.

I would like to thank everyone for joining us on our third quarter conference call.

And we'll look forward to talking to everyone in our fourth quarter call.

Everybody have a great holiday.

Thank you.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

Have a good day.