DICK'S Sporting Goods Inc (DKS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2007 Dick's Sporting Goods Inc.

earnings conference call.

My name is Michele, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today, Mr.

Dennis Magulick, Director of Investor Relations.

Please proceed.

Thank you and good morning to everyone participating in today's conference call to discuss the third-quarter finance 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 achieved.

Our actual results could differ materially from any projections due to various risk factors which are described from time to time in our periodic reports with the SEC.

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

Ed will discuss our third-quarter financial and operating results and review the guidance contained in our press release.

Also joining us this morning are Bill Colombo, President and Chief Operating Officer, and Tim Kullman, Senior Vice President and Chief Financial Officer.

Bill will highlight our store opening program and provide an update on our plans for a third distribution center.

Tim will then review in more detail our financial results.

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

Thank you, Dennis.

I'm pleased to report the results of our third quarter, a quarter in which we achieved our comps sales guidance and exceeded our earnings guidance.

Our performance for this quarter demonstrates once again our emphasis on execution, combined with the strength of our business model, delivers consistent financial performance.

This quarter we generated net income of $12.2 million or $0.10 per diluted share, which is $0.04 above the high-end of our guidance on a split adjusted basis and is $0.03 over last year.

Higher margins, continued deficiencies in freight and distribution, strong cash flow and the performance at Golf Galaxy all contributed to earnings greater than guidance.

Total sales for the quarter increased 18% to $839 million.

At Dick's Sporting Goods stores, comp sales decreased 2.5%, which is in line with our guidance.

Adjusting for the shift in the retail calendar, comp sales at Dick's stores declined 1%, also in line with our guidance on top of a 8.9% gain over last year.

As a reminder, this quarter's results were affected by the shift in the 2007 retail calendar, which positively impacted quarters one and two and is offset in the third and fourth quarters.

In addition, last year's third quarter benefited from some very favorable cold weather that we did not expect to repeat.

During the quarter we saw increases in our golf, license and footwear businesses.

These gains were offset by declines in cold weather and hunting apparel.

At Golf Galaxy stores pro forma comp sales decreased 2.7%.

Comp sales at Golf Galaxy stores increased 4.7% on a pro forma shifted basis.

Our private-label and private brand program continues to be an important element of our assortment, and we are on track for these products to represent approximately 15% of sales this year compared to 14.1% in 2006.

For competitive reasons we are no longer planning to disclose penetration levels on a go-forward basis.

Our private brand partnerships have established an important presence in our stores.

For example, exclusive products under the Slazenger name in golf and tennis and Umbro in soccer further distinguished Dick's in the marketplace during the spring and summer sports seasons.

In partnership with Nike, this fall we introduced our exclusive line of ACG active and outdoor apparel.

We're enthusiastic about the prospects of these and other private brand agreements.

We introduced several of our Slazenger products into the Golf Galaxy stores this year.

We're very pleased with the results and with the opportunity to expand our private brand assortment in these stores in 2008 and beyond.

We are increasing our earnings guidance for the total year 2007 and providing our initial guidance for the fourth quarter.

For the year we now expect to earn per diluted share approximately $1.29, a 26% increase over 2006.

We expect comps sales at Dick's stores for the year to increase approximately 2% in 2007 on top of a 6% gain in 2006.

For the fourth quarter 2007, we expect to earn $0.59 per diluted share as compared to $0.60 in the fourth quarter of 2006.

We're anticipating comp sales at Dick's stores to increase approximately 2% in the fourth quarter.

On a shifted basis, we're expecting comps sales at Dick's stores to increase approximately 2.5%.

The fourth-quarter comparison is impacted by several factors as we have outlined in previous earnings calls this year.

On the top line, the shift in the 2007 retail calendar, which positively impacted quarters one and two, this year is offset in the third and fourth quarters.

Further, in this year's fourth quarter, there is one fewer week, and we are up against the favorable impact of the Chicago Bears and the Indianapolis Colts Super Bowl runs of the 2006 season.

We estimate the combination of these two factors contributed approximately $0.05 to our 2006 earnings.

Finally, the inclusion of Golf Galaxy this year is approximately 4% -- $0.04 dilutive in the fourth quarter.

We're pleased to have delivered third-quarter earnings in excess of our guidance.

Improved margins, greater efficiencies, the strength of our golf business and strong cash flow continued to fuel our financial performance.

As we head into the fourth quarter, our inventory is clean, and our stores are well positioned to deliver another solid quarter.

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

Thanks, Ed.

We opened 25 new Dick's stores in the third quarter, representing our Company's second-largest quarterly new store opening campaign.

For Dick's stores this completes a very successful 2007 new store program.

Our stores consistently produce new store productivity at or above 90%, and this quarter was no exception.

I would like to congratulate all of our associates across the Company who together collaborated to make these openings so successful each and every quarter.

Congratulations on a job well done.

This quarter we entered the following 13 new markets -- Auburn and Oxford, Alabama; Augusta, Georgia; Carbondale, Illinois; Jackson, Johnson City, Kingsport and Memphis, Tennessee; Phoenix, Arizona; Rochester, Minnesota; Sandusky, Ohio; Shreveport, Louisiana; and Tampa, Florida.

Overall approximately 40% of our new stores in 2007 were in new markets.

We also added 12 Dick's stores to existing markets this quarter in Atlanta, Georgia; Columbus, Ohio; three stores in Dallas, Texas; Denver, Colorado; Detroit, Michigan; two stores in Harrisburg, Pennsylvania; Omaha, Nebraska; Pittsburgh, Pennsylvania; and Syracuse, New York.

One of our new stores in Dallas was a two-level store.

At the end of the third quarter, we operated 340 Dick's Sporting Goods stores with 19 million square feet and 77 Golf Galaxy stores with 1.2 million square feet.

In 2008 we expect to continue our 15% new store growth.

Roughly 40% of the new stores in 2008 will be in new markets, and much like 2007 we expect about half the stores will open in the third quarter with the other half split among quarters one and two.

Lastly, I would like to provide an update for a third distribution center, which as we outlined in the second quarter earnings calls will be located in Atlanta, Georgia.

Our DC remains on track to be operational in mid to late 2008, at which point our total network capacity will be 670 stores.

Much of the buildout costs associated with this distribution center will be financed through leases, thereby minimizing our net capital expenditures.

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

Thanks, Bill.

Sales for the quarter increased 18% to $839 million with comp sales decline at Dick's stores of 2.5% or 1% on a shifted basis.

Higher price points were offset by a decrease in transactions.

As Ed outlined earlier, this year's results were affected by the retail calendar shift and a difficult comparison against some very favorable cold weather last year.

Cannibalization impacted comps by approximately 1%, similar to recent levels.

Gross profit was $239 million, increasing 144 basis points to 28.45% of sales.

This increase was driven by expanded merchandise margins and lower freight costs, the result of continued efforts to become more efficient in this area.

These gains were partially offset by deleverage on the occupancy line due to negative comps sales this quarter.

Our merchandise margin gains continue to benefit from better buying, our private-label program and improvements in inventory and markdown management.

For example, we began and ended the quarter with clearance inventory below prior year levels on a per square foot basis and did not anniversary a clearance event that we ran last year.

SG&A expenses of $209 million were 24.95% of sales or 132 basis points higher than last year's third quarter, driven by a deleverage of payroll and admin expenses resulting from the negative comp sales this quarter.

Operating income increased $6.1 million or 39% to $21.7 million.

And net income for the quarter increased 57% to $12.2 million.

Let's move to the balance sheet.

Inventory per square foot is roughly flat with prior year levels after adjusting for Golf Galaxy and the retail calendar shift with Black Friday occurring one week earlier this year.

We ended the quarter with $140 million in outstanding borrowings on our line of credit as compared to $102 million in outstanding borrowings last year.

The strength of our business has enabled us to repay much of the $148 million in borrowings, resulting from our acquisition of Golf Galaxy in February.

Our average borrowing for the quarter was 6%, reflecting LIBOR plus 75 basis points, representing a decrease from last quarter.

Our recently renewed credit facility, in addition to reducing the borrowing rate, provides for an additional $100 million in borrowing capacity up to $450 million.

The new facility expires in 2012.

Our expectation continues to be that we will end the year with no outstanding borrowings.

Net capital expenditures are expected to be approximately $115 million in 2007 or approximately $175 million on a gross basis consistent with our previous expectations.

As Bill mentioned earlier, we're planning to open our third distribution center in 2008.

As a result of preopening and other costs associated with opening and operating in DC, we expect to absorb a P&L impact in 2008, the magnitude of which will be incorporated in our guidance.

Earnings guidance for fiscal 2008 will be provided with our year-end earnings release in March 2008 consistent with Dick's standard practice.

Thank you.

This concludes our prepared remarks.

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

(OPERATOR INSTRUCTIONS).

Gary Balter, Credit Suisse.

Thank you and congratulations on a great quarter.

Could you just talk -- a few people have called this on the inventory being up 30% with the delta up 18, and you put in the press release that it is in line with your expectations.

Could you talk about where that inventory is in terms of which categories?

Well, it is really across the board, Gary, because one of the biggest issues on a shifted basis, it's relatively flat when you include Golf Galaxy also.

But with Thanksgiving a week earlier this year than last year, we brought inventory in earlier to accommodate that.

And if you back that out, it is relatively flat with last year.

So there is really no inventory issue.

There is no markdown pressure coming.

The inventory is really in terrific shape.

Yes, I visited I was actually in Ithaca yesterday and visited your store there, and clearance looked real minimal.

So -- (multiple speakers)

Yes, on a per square foot basis, our clearance is roughly 4% less than it was last year at the same time.

That is great.

Just out of curiosity, you have rights to the Umbro name, and obviously Nike bought out Umbro.

How does that -- that's a great position for you to be in.

What does that allow you to do now in terms of furthering your relationship with Nike and building up Umbro?

Well, we have got -- we have and continue to have a great relationship with Nike.

They are terrific partners.

The fact that they bought Umbro, what they have indicated is it is going to be run as a separate business out of England, and we do not see any real change.

I think that Nike buying Umbro is only positive, but we do not see any real change in this right now.

Then last and I will let somebody else ask, you are in great shape, and you mentioned your inventory is in great shape.

When you look around your industry at Sports Authority or anybody else you are competing with, or they -- are you seeing clearance sales coming from them or anything that implies the potential price pressures or not?

We have not.

I think that we have not seen anything like that.

We have not seen any pricing pressure nor irrational pricing out there in the marketplace.

That is great.

Congratulations again and good luck in the fourth quarter.

Robbie Ohmes, Banc of America Securities.

Just two quick questions.

The first question is, Ed, you said no markdown pressure based on how you are viewing the fourth quarter right now.

Can you just remind us what the marketing program changes are for the fourth quarter this year versus what you were doing last year?

And then also in terms of the 2% comp guidance, the impact that may or may not have on whether that is going to be a traffic-driven comp or an average ticket-driven comp as it was in the third quarter?

Thanks.

Our marketing calendar is not significantly different than it was last year.

We had started the transition from reducing the dependency on newspaper inserts, and it moved to the more of a multimedia platform with direct-mail, TV playing a more important role.

We will continue that again this year.

So the marketing program is not significantly different than last year.

And the comp will come from a combination of ticket, and we expect that -- we are feeling pretty confident about our business on a go forward basis from a traffic standpoint with what we have got from a content standpoint and some of the products that we expect to offer in the fourth quarter.

And is there a category of your business that you expect to pick up?

I mean do you expect the cold weather to perform a lot better than it did in the third quarter?

We do expect that to perform better than the third quarter.

I think our content is much -- is better than it was last year.

In partnership with Nike, we launched the ACG brand, which has gotten some terrific traction going forward.

So we're very pleased with what is going on in the market.

As the weather has gotten a little bit colder here in the beginning of the fourth quarter versus where it was in the third quarter, we do expect an uptick in that category of merchandise.

And then just my last question, I think you had mentioned that product footwear is a standout in the third quarter.

Can you be a little more specific what areas in footwear outperformed?

It was really across the board.

Our footwear business as a whole did very well.

It did well from an athletic standpoint.

It did well from a brown shoe category.

The hiking aspect of our business has been very good.

So the footwear business as a whole has been really quite good for us.

Brian Nagel, UBS.

Nice job on a really good quarter.

The first question, I wanted us to dive a little deeper into the gross margin.

You guys once again showed very good -- nice gross margin gains like you had in the past few quarters.

As we look longer term, I guess how should we think about the drivers we have seen in this quarter and then Q1 and Q2 and the sustainability of those drivers?

I know you are not going to be breaking out the private-label initiative as explicitly anymore, but is that something we should think about as a continued driver of other factors here?

It is.

I think it is still going to continue to come from the three buckets we've talked about in the past, which is going to be increased penetration of private-label and, as we characterize it moving to private brands, again in conjunction with the partnership we have with Nike in launching the ACG brand.

The partnership we have with Adidas launching Adidas baseball product.

We have got a number of these partnerships that we expect will increase that private-label, private brand component of our business.

So those margin rates are roughly 6 to 800 basis points higher than the products that they replace.

So that is one bucket it will continue to come from.

We feel that we can continue to leverage our buying opportunities with our suppliers.

We also feel that systemically we continue to make improvements in our planning and allocation area, which allows us to mitigate markdown pressure on the back end.

And we feel that all of these things we still have more run-rate from a margin rate expansion aspect.

The second question I wanted to ask, on the competitive front, you have been expanding your footprint in the United States to new geographies.

What have you seen, if anything, as the competitive response sort of saying some of these newer market from some of the more entrenched sporting goods retailers?

We have -- in Texas is where we have seen the biggest response.

I think the group in Texas Academy runs a very good operation.

They are -- and I have said this before -- they will be the toughest competition we have faced to date.

But other than Academy, all the competition we face is competition we have continued to face throughout the rest of the United States, and there has not been a big difference.

And then the final question.

Just we have gotten -- there has been a lot of reports lately from a lot of different retailers that speak to weakness out there in the consumer.

You guys are performing very well.

As you look at your business maybe even more granularly, have you seen any impact as far as buying patterns from your consumers to suggest that your core customer is more pinched?

No, we have not.

And I had said this for a number of years, that our business really travels in a narrower band than the economy as a whole.

Based on keeping our business focused on that core athlete and outdoor enthusiast, we're not going to see the lows when the economy is a bit more difficult, but then on the other hand, and I am sure everyone will forget this when the time comes, when the economy turns around, we do not expect to see the big spike in our business either.

That is helpful.

Thank you and good luck for the holidays.

Michael Baker, Deutsche Bank.

Two quick questions.

One, so some of the categories that were not as good in the third quarter, the cold weather and then the hunting, is it as simple as the fact that it was warm in I guess it was September and October?

And then so -- I'm assuming in November that though you said you expect them to pick up, and my assumption is they have picked up as it has gotten colder.

Is that just too simple?

That as it has gotten colder, these businesses have gotten better?

And then my second question would be if you can update us on the Under Armour store-within-a-store program?

Where are you in that rollout?

Has that had a positive impact on business?

Sure.

Well, we indicated that the gains were offset in declines in cold weather and hunting apparel, not hunting in general.

So it was hunting apparel, which is primarily driven by cold weather.

So similar to the first quarter when we said that some of the seasons had been impacted from a start standpoint, we feel the same thing has happened because of the cold weather.

We have indicated on a number of our conference calls that last year the third quarter was unseasonably cold, and we took full advantage of that.

And you can see that in the third quarter of '06 with our comps increasing 8.9% that was a big driver of that.

We do expect as the cold weather gets better that -- that the cold weather gets here, that our cold weather merchandise will continue to pick up.

As far as the UA shops go, we continue to roll out the Under Armour shops.

As we continue to also roll out additional Nike shops, we continue to roll out some Adidas shops.

But all of these shop-within-a-shops across all the brands we do business with have done quite well.

Okay.

If I could ask a follow-up then.

So correct me if I'm wrong, but it sounds like then you are saying maybe you are going to see a shift from the third quarter into the fourth quarter for some of the warmer -- sorry, colder weather product, yet it seems to me that your fourth-quarter comp guidance is exactly where it had been backing into -- I think you had always been looking for a 2% comp.

So is that pickup in that number, or is it just being conservative?

Just trying to reconcile those two ideas.

Well, if you remember when we planned this, and we have talked about this really from our fourth-quarter call of last year when we gave guidance for the full year, that we did not expect that the third quarter would have the same weather pattern in '07 as it did in '06, and we thought that the '07 winter we would be planning for a more normalized winter.

So the colder weather in the fourth quarter was always planned into our guidance right from the beginning.

Great.

That makes perfect sense.

Thanks.

Hardy Bowen, Arnhold & Bleichroeder.

The Nike all-climate gear, will that continue in the spring, or is that fall only, fall/winter only?

That is Nike All Conditions Gear, and it is a 12-month business.

There will be spring products also.

Okay.

And I guess as we look at Adidas, RBK, and the Nike and Field & Stream and so forth, it seems like our private brands are going to increase, are going to be probably more than half of the combination of what used to be private-label as we go into next year?

Over a period of time, I would say that that is an appropriate assumption.

Yes.

Okay.

And as far as the promotion program, TV and so forth, is it -- can we measure whether we get a benefit out of TV, out of direct-mail relative to what we're doing in the newspapers?

Or this is more an assumption that this is the way the market is going and we better go that direction too?

Well, I'm not sure that this is the way that the market is going, but we think that that is the way that is best for our business.

As the research we have done on newspapers, newspaper readership, the products that we have tested and the categories that we have tested on TV with the Nike spot we did with A Rod, the Nike football spot we did with Troy Polamalu, the TaylorMade burner driver spot we did with Justin Rose, we can certainly measure the increase in those products, in those brands and market share.

So yes, I think we can measure that.

The direct-mail pieces, every direct-mail piece is barcoded.

So we can -- if Hardy Bowen gets a direct-mail piece and comes in and uses it, we can tell exactly what you bought when you came in that you used that, so we have a very good tracking system in place and can identify the performance of each of these direct-mail pieces that go out.

Excellent.

And in regard to golf, I guess this is the first time we are buying for Golf Galaxy and Dick's combined going into next spring.

Are the vendors responsive to this?

I mean we are now the biggest buyer of golf by far.

I would expect that we are getting -- we would get substantial benefits.

We continue to leverage our ability for special makeups from a number of the people from a golf standpoint.

As we take a look at Golf Galaxy's business on a go-forward basis, our ability to put in our private-label programs in Golf Galaxy with the Slazenger products across golf balls, golf clubs apparel, the Walter Hagan apparel.

All of this is really accretive and is really going to be beneficial to both Golf Galaxy's business and Dick's Sporting Goods golf business.

Okay.

Excellent.

Congratulations.

Dan Wewer, Raymond James.

Ed, the Golf Galaxy segment did not appear to dilute the third-quarter earnings as much as initially anticipated.

Was that primarily a auction of the warm weather benefiting that category?

Well, I think it was a combination of the warm weather benefiting the category and the Golf Galaxy management team taking advantage of that weather and doing an excellent job of running the business.

When they saw the weather the way that it was, they continued to move in -- to get products into the store, continued to service the customer, and I think they took full advantage of the weather that was given to us, very similarly to in the third quarter of last year the Dick's Sporting Goods team did a great job of taking full advantage of the cold weather that impacted -- that we were given in the third quarter.

We are estimating a $0.04 loss from Golf Galaxy during the fourth quarter.

It is difficult to measure the seasonality at Golf Galaxy given the fiscal year has changed, but I would have assumed the gift-giving component of that category would have resulted in earnings closer to what you saw in the third quarter.

Well, I think intellectually you could come to that conclusion, but as you get into the reality of it, the gift-giving portion of core golf business is really the month of December.

So you take the month of November and the month of January and when combined into the quarter makes it dilutive.

One of the strategies that Randy Zanatta and I have talked about is the development program for Golf Galaxy on a go-forward basis is going to be heavily skewed into California, the Southwest and into the Southern part of the United States to help with this issue, to try to be in more places that they are playing golf roughly 12 months out of the year.

Golf Galaxy was started in Minnesota and the Company built from there.

They did a great job, but now we've got the ability with the development program to move it more south.

That will certainly help with the seasonality issues in the business today.

And that was just the last question that I had on Golf Galaxy.

Given that its brand awareness out West and the Southwest and the Southeast is minimal, what is the strategy for changing that given your national ads are only for the Dick's brand?

I guess the one exception would be on the Slazenger commercials.

And then kind of related to that, have you considered opening a Golf Galaxy concept store inside of Dick's?

Yes, no, we're not going to do that.

Golf Galaxy is a stand-alone entity.

We feel that keeping it separate in the customer's mind will help us increase market share in the golf business as a whole.

And Golf Galaxy is not that well-known in California or some of these markets yet, but they started in Minnesota, and when they went to Chicago or they went to upstate New York or they went to the Carolinas, they were not very well-known either when they first got there.

And that team has done a great job of creating the brand awareness with the golf enthusiasts, and obviously they run a terrific business.

And I suspect that they will be able to do the same thing in California and in the Southwest.

I'm sure they will.

Great.

Thanks.

Jim Duffy, Thomas Weisel Partners.

Congratulations on a nice quarter.

Can you speak to some of the things that you have done that have helped you manage your inventory levels?

Are you working differently with your vendors, or are there some different initiatives in the works that have really contributed there?

I think there are a couple of things.

We have worked with our vendors, and our vendors have been very supportive of inventory controls and flowing of product.

Internally we have done a great job from a planning standpoint.

Our Chief Merchant, Gwen Manto, has really done a great job of keeping our merchants focused to stay in stock on the key items, which has certainly helped our inventory.

So we have done a number of different things with vendors and internally that have helped us.

Our logistics group, the supply chain, has really done a great job of flowing product to the stores at a quicker rate and getting them to the right stores at the right time.

So are you doing more on a replenishment basis with the vendors?

Does that lead you to deal more with vendors whose supply chain is sophisticated enough to support that?

We are doing more with automatic replenished product.

A number of our vendors have really supported that.

Nike came out with a new program in athletic basics this year and really has done a great job.

And that certainly helped the inventory control.

So a number of our vendors have really stepped to the plate to help with the supply chain.

With regard to the cold weather merchandise, was there any order cancellations there, or have the product flows been consistent with your plan?

We have not canceled any orders.

We have not canceled any orders as of yet.

We have got all of that backed into our plan, our inventory levels, and I cannot stress enough how good I feel about our inventory levels and the content of the inventory as we walk into the stores.

So we are as optimistic as we ever get about a quarter.

Yes, the stores certainly look clean.

I wanted to dig into the lower freight expense some.

What are some of the things you have done to help you reduce freight expense?

And, as we look into next year with the new distribution center, should we expect further progress there?

I guess you spoke to a P&L impact.

Obviously some additional expense, but will the benefit from reducing freight expense offset that?

Well, the initiatives that Lee Belitsky and the folks in supply chain have worked on are the same we talked about in earlier conference calls, which is cubing out our trailers on an outbound basis to our stores.

We are using floor load initiatives wherever we possibly can, and we work a lot on import and container programs in reducing freight.

Now obviously we have to combat like everybody else does the fuel cost, and we anticipate going into '08 to continue to work our savings programs and see where that gets us.

Jim Cartier, Monness, Crespi & Hardt.

I just wanted to talk a little bit more about advertising.

Is there still an opportunity to drive more traffic through the shift to TV advertising, as well as direct mailing and email campaigns?

We absolutely do believe that, and as we move into '08, we will further reduce our percent of sales spend on newspaper inserts and move that into more TV advertising and direct communication with our scorecard customers.

So would you say you are halfway to where you think you could be, our could you give us an idea along those lines?

Actually we are -- I can tell you exactly where we are.

We are just about a third of the way.

Sean McGowan, Needham & Co.

A couple of questions on capital expenditures.

Could you remind us of what you are expecting for the full-year '07?

Will there be any portion of cash out from Dick's on the new DC in '07, and kind of ballpark what you think the incremental piece above normal business in '08 might be?

Will, we will not comment on individual components of the DC.

But for the full-year 2007 on a gross CapEx basis, we are looking for $175 million, and that has been our callout for each of the last three quarters.

Rick Nelson, Stephens Inc.

My congratulations as well.

As I look at your third-quarter store openings, it looks like kind of Dick's is making inroads into some smaller markets with smaller populations.

I'm wondering if you can elaborate on that strategy, and are you doing it at all with a smaller store footprint?

We are not doing it with a smaller store footprint.

Our footprint continues to be 50,000 square feet at a single level store or the two-level program at 80,000 square feet.

And there might be a few smaller stores in there like smaller markets like Augusta, Georgia and Johnson City, Tennessee.

But that is really no different than what we have done in a percent basis in other years.

So there is really no different real estate strategy that we are employing from a development program.

Thank you for that.

Private-label, you mentioned the target of 15% for this year.

I am wondering over the longer haul, do you see any limits as to how big that might become because of some of your new strategies?

(multiple speakers)

Well, we feel they can exceed 15%.

As we continue to partner with a number of our main -- our better partners such as Nike, what we have done with ACG, what we have done with Adidas from a baseball standpoint.

So we do think it can go above 15% for a combination of both private-label and private brand programs.

But we're not going to call out that penetration on a go-forward standpoint any longer for competitive reasons.

Got you.

Final question on Golf Galaxy.

The $0.04 dilution that you are forecasting for the fourth quarter, how does that compare to those same three months in the prior year period had you owned it?

Roughly the same.

Not materially different.

David Magee, SunTrust Robinson.

Good quarter.

A couple of questions.

One is on the private brand initiative, I just wanted to touch on the economics again.

The margin benefit that you get, that is comparable to what you get with private-label, but your price points are higher.

I would also surmise that the turn would be faster under the private brand program?

I'm not sure that I would agree with that.

I would look at the turns as relatively the same because we take -- we have to take possession of that product overseas.

As opposed to from a traditional vendor relationship, we take delivery of it when we receive it.

So you are right.

The margin rates are about the same as private-label.

The AURs are higher.

The brands do command a higher price.

But the turn number I would not bake too much of a turn difference into your model.

And that margin being roughly the same, is that inclusive of the license fee that you pay as well?

That is.

That is inclusive of the license fee.

And then secondly, with regard to Academy, my perception is that you are at a higher end of the marketplace than where they are.

Is it just because they are being aggressive on prices is why they may be providing a little stiffer competition?

Well, they do -- we do cater to a higher end customer to better products than Academy does.

But there is an overlap there.

Academy is a very well-run operation, and they will be the toughest competition we have had to face.

David Cumberland, Robert W.

Baird.

Gross margin was cited as contributing to EPS overage.

What caused the positive variance versus your plan on gross margin given that comps were within plan?

A couple of things that helped the gross margin rate was the penetration of private-label and also the elimination of a clearance event that we did not anniversary this year based on how well our the Company, our merchandising group, the planning group, the store group, have done controlling inventory.

And, as I said a little earlier, our clearance inventory is actually 4% less on a square foot basis that it was last year.

So those are a couple of the things that help the margin rate.

And the preopening expense per store was down significantly.

What was the reason for that?

Our preopening expense is determined all in the timing of the stores.

As the stores open closer to the end of the quarter, you have less of an impact in the quarter itself.

Reed Anderson, D.A.

Davidson.

Ed, fitness is an area that if you visit your stores, it looks like you have been doing some work there to remerchandise and reassort.

The category looks better there.

If you could just comment qualitatively on what you have done and how you -- what your expectations for that might be the next three to six months because that is going to become more important here?

Yes, we have done some things that -- you are right.

We have worked very hard on the fitness side of the business.

I mean we have got some additional products in there.

We relayed out how the people shop for treadmills, the signing package associated, their information associated with treadmills and ellipticals.

We still see a continued shift from treadmills into ellipticals.

We have looked at ways to take other categories of the fitness business whether it is core training, boxing, and making those areas of the fitness business more important.

We had indicated that we thought that the fitness business would continue to be soft through the third quarter with hopefully it getting a little bit better in the fourth quarter, and we are still optimistic that we will be able to live up to those expectations based on some of the changes that the group has made.

And any -- the early results there from your changes, I mean has it meet your expectation, exceeded, underperformed?

It is around our expectations.

You know, the fitness category continues to be a difficult category, which we have talked about.

We expect it to continue to be difficult, but we expect to see some improvement in the fourth quarter.

And from a pricing standpoint, are you pricing product a little more aggressively there now, or are you about where you were a year ago, just overall in that category?

We're not being anymore promotional.

We're not putting any pressure on our margin rates.

But the group developed some of the private brand products that we have in fitness and worked with our -- some of our suppliers on exclusive products to try to bring more features and benefits into the product at the same price.

So we're not promotionally priced.

We're not taking average unit retails down, but we're trying to pack a little bit more of a punch in the product than in years past.

Okay.

Good.

Then one final question.

The comment about I think it was in Tim's remarks about pricing being a positive factor on comps, is it fair to assume that that is more related to the ramp-up you saw on the private brand initiatives as opposed to broader pricing rise across your other merchandise categories?

I think it is a couple of things.

It is private brands, and then it is also at least in this last quarter it was the elimination of that clearance event that we would did not have to anniversary because, as I said, our merchants have done a very good job of keeping our inventory in control.

And we have 4% less clearance this year than we did last year.

Sam Poser, Sterne Agee.

Very, very good quarter.

A quick question on the timing of merchandise.

How much have you changed the timing of the seasonal goods that you bring in as did a lot of people used to take their markdowns of outerwear, let's say, around Christmas, but it is staying cold through February in a lot of places.

How are you looking at that?

Because it looks to me like you brought in your outerwear a little later than you did a year ago?

We did not bring it in a whole lot later than we did a year ago.

It was roughly the same timing.

We take our markdowns based on rates of sale as opposed to seasonally.

So we do not have a calendar that says on December 15, we are going to take markdowns in these particular areas.

We have the systemic ability to go in and take a look at how products are selling, what the rate of sale is, what we expect will be left at the end of the year, and take our markdowns or not based on rate of sale.

And if you remember last year in the fourth quarter, that was one of the big benefits to our margin rate improvement last year in the fourth quarter, is that we did not rush to take these markdowns when the weather got cold, and we were able to move our margin rates up pretty substantially in the fourth quarter last year.

Right.

And then also on the private-label -- as you -- on the special makeup branded goods that you are bringing in, when you look at, let's say, outerwear or some of the other areas, how are you deciding -- because it is not all incremental -- how are you deciding how -- who to take away from and how do you create room for those opportunities?

Because it looks to me like you are really working on getting -- developing a lot of really better exclusive product within your mix in general.

We are.

It is not as difficult as you might think to decide who should go and who should stay.

The consumer really tells us that.

The analytical tools that we have inside the business with what our planning group does, we can very quickly see products that are performing that the customer is voting for and what the customer is passing on.

So we can make those moves quickly from a seasonal standpoint as we don't bring all orders in at once.

So we have got orders flowing in through the quarter and through the third and fourth quarter.

And if products are slowing down or products -- if we made a mistake, we will cancel those orders, move the product into something else, and we have got the ability to move pretty quickly like that.

Okay.

A quick follow-up there.

What systems do you use that are helping the planners, number one?

And number two, why don't you answer that one, and I will move on to the next one?

Well, our merchandise system we use is JDA, and we have -- the system has been great for us from a standpoint of a merchandising standpoint.

Okay.

And then are you looking at most of the brands that you end up -- that get chosen to be put out.

I mean are you getting less response in general to brands that have much broader assortments that you are ending up having more narrow -- more brands that have less distribution around in general?

Would that be a fair general statement?

Was it brands that sort of stay versus the ones that go as you bring in your special makeups?

I'm sorry.

I do not quite understand the question.

Well, do you find that the brands that are getting removed for, let's say, for Slazenger golf balls for argument sake, are the brands that that would take its place, are those ones that have much broader distribution versus ones that are much narrower?

So more likely -- I do not want to pick on anybody.

I mean Titleist would generally stay.

It's not as distributed as some of the others.

Titleist is definitely going to stay.

I understand what you are saying Where the private brands and private-label products are taking the place of are really second tier vendors.

We have made a very concentrated effort not to impede on the market share of our main partner.

So we are not impeding on the market share of Nike.

We are not impeding on the market share of Titleist or TaylorMade or the North Face.

We are really trying to grow those businesses, and we have identified a number of brands that we want to grow their business with, and we make sure that from a private-label standpoint we do not impede upon those brands.

Okay.

Thank you very much.

Bob Simonson, William Blair.

Tim, you have mentioned a CapEx number for this year.

Is it possible to get a very preliminary number for next year?

We have not solidified those plans yet, and we will have a better opportunity to explore that in the fourth-quarter call.

Okay.

In the golf business, Ed, the new drivers this year, did they have a measurable impact on the comps this year?

And to follow-on to that, does that make a somewhat more difficult comparison for next year, or are there other new products coming down the line that could be of that magnitude?

The drivers were certainly helpful to this year, and so they definitely did have an impact.

They helped to move the needle.

On the flip side, we think there are new products coming out for next year that will help continue to drive that.

One of the things that I think helped our golf business at Dick's Sporting Goods was that we made a pretty significant investment from a training standpoint and physical plant standpoint to be able to fit drivers in irons this year.

And we think that that had a very significant impact on our market share and helped our golf business immensely.

Is that both you as well as the Golf Galaxy stores?

Well, Golf Galaxy had been doing that.

They were really ahead of the curve as it relates to us at Dick's Sporting Goods on fitting golf clubs.

That had been a part of their standard operating procedure for awhile, and we had not kept pace with that, and putting that in place last year or earlier this year really helped our business.

Robert Samuels, JPMorgan.

Most of my questions have been answered, but can you just give the breakdown between traffic and ticket with respect to the comp?

Sure.

On a shifted basis, ticket was 2.7%, and traffic was a negative 3.7%.

On an unshifted basis, ticket was 3.4%, and traffic was negative 5.8%.

John Shanley, Susquehanna Financial.

Ed, with the increase in the shop-within-shops and the private-label products that have been particularly noticeable in the apparel category, has there been a reallocation of the floorspace between footwear, apparel and hardlines?

And do you expect that that shift if it is occurring will likely accelerate one way or the other?

There really has not been much of a shift.

The products that we brought in have replaced other products in the store.

So the apparel square footage and footwear square footage has remained fairly constant.

And the one great thing we think about both our private-label and our private brand program is that they are not just apparel based.

They are inclusive of apparel, footwear more on the brown shoe side and then also on the equipment side in baseball, in fitness products, in bikes and in golf.

And we have got -- and fishing tackle, camping, that we really have a broad-based equipment side of our private-label and private brand program also.

Would it be a fair assessment that because of the higher product margin that you generally achieve from your private-label or your labels that you basically control, that you are likely to give floorspace to those items and less to some of the branded items that may be replaced?

Well, in theory, yes.

But just to qualify, the square footage will come from second tier brands not from our primary brands.

So Nike is not going to be losing any floorspace.

Under Armour is not going to be losing floorspace.

Adidas is not going to be losing floorspace.

So it is not coming from our primary vendors.

It is coming from second tier vendors.

I understand.

Staying on real estate for a second, in terms of your store growth, you are opening your first store on the West Coast shortly in Portland.

Do anticipate any difficulty as you move down the coast in terms of entering a market such as California, which has more restrictions in terms of big box construction than you might find in other parts of the country?

We're not seeing anything now.

We are doing a complete assessment of California.

We are not seeing any -- we're not seeing any obstacles to our entry into California as a whole.

Great.

Just a quick merchandising question.

In athletic apparel you have basically been growing your business with some of the brands and some of the private-label.

In the athletic footwear side of the business, do you see adding any new product categories?

Are you going to continue to stay away from, for example, the marquee of the high-end fashion end of the business or anything like -- or would that be something that you could add at a later date if you see an opportunity?

Our mission statement and our business philosophy and strategy has always been to stay focused on that core athlete and outdoor enthusiast.

And the athletic shoes that are more fashion-based, we're not really looking to play in.

I think the fashion side of the business is difficult to sustain and difficult to scale, and we're going to stay focused on that core athlete and outdoor enthusiast.

Okay.

Fair enough.

The last question I have is, has there been a noticeable increase in the golf product margins now that you are able to buy for two separate chains in terms of the kind of deals you can work out with the big suppliers like Titleist or Callaway or TaylorMade?

Well, I will not mention any brands in particular, but as a whole, yes, our margin rates in golf have expanded.

We have seen the synergies that we expected with the purchase of Golf Galaxy, and we expect to see even more margin expansion into next year.

Are the golf brands willing to do the same type of programs that you have with some of the softline or footwear companies like what you do with Nike or what you do with Under Armour?

Are they willing to work with you in terms of shops-within-shops or things that may make it more of a destination location within your stores or within Golf Galaxy?

They are.

We're working with the brands on how we -- we're not sure golf -- the brands would love to do this.

We're not sure that a shop-within-a-shop on a branded standpoint is the right approach to golf.

So when somebody comes in, we want to have all the drivers in one area.

So we want all the Nike drivers, Callaway drivers, TaylorMade drivers kind of in the same general area for customers to shop.

What the brands work with us on and we work with them, is how that signage fixturing program works to differentiate one brand from another.

And the brands have been very helpful and responsive to accommodating that.

Mitch Kaiser, Piper Jaffray.

You mentioned the Texas markets and your pleasure with those stores there.

Could you talk a little bit about Florida, specifically Tampa, what you are seeing out of those stores?

Well, we have never talked about markets in general.

We said in Texas it is going to be the -- that Academy will provide us with the toughest competition we have faced.

In Florida the competition there is very similar to what we've faced in other areas of the country.

We're very pleased with our Florida performance and are looking to ramp out a development program for both Golf Galaxy and Dick's at a pretty rapid rate.

Okay.

As you look at the relative performance between the two states, where do you think the biggest opportunity is?

Florida will perform better in the early years than Texas will.

Okay.

And then lastly, could you remind us, is there -- you mentioned anniversarying a clearance in the third quarter last year.

Was there anything related similar in the fourth quarter last year or no?

No.

Okay.

Thanks, guys.

Nice quarter.

Jeff Sonnek, FBR.

Going back to the golf category, initially you guys thought I think the Golf Galaxy business would be accretive to the tune of I guess $0.02 pre-split, $0.01 or so thereafter.

But the kind of incremental data points you guys have been giving are somewhat inconsistent.

I'm just wondering if you can kind of reconcile for us year-to-date where are we relative to that initial plan you had laid out?

And can you maybe better quantify exactly what the influence was in the third quarter?

Are you talking specifically about Golf Galaxy's influence?

Yes.

I'm not sure where the inconsistency has come from.

We have been pretty consistent on what our guidance has been that it would be accretive.

If anything and we are not going to talk about Golf Galaxy's specific financial performance, but if anything the Golf Galaxy performance has been better than we had anticipated.

That is all I wanted to hear.

Thank you.

Ralph Jean, Wachovia.

Just curious, Cabela's opened a store in East Hartford, Connecticut about a month ago.

I am wondering if you are seeing any impact in your stores around those -- around that market?

Well, I do not want to talk about that particular store.

But, as we have said in the past, any time that a competitor like Bass Pro or Cabela's opens up -- I think Cabela's is a terrific retailer.

They do a great job.

And when they do open up, we do to feel an impact in the categories that Cabela's handles.

But I have also indicated, and it has been very consistent, that we get that impact the first year.

And then as we come around the horn and anniversary that, our comps start to move back positively.

So you could suspect -- you could expect that the same thing is happening in Connecticut.

Michael Baker.

One quick follow-up.

The online business, do you expect that to be a big factor this holiday season?

And remind me, I think you guys you outsource that.

So if that does ramp up, where do you see the benefit from that?

Well, we think that the online business will continue to grow.

I think our business will grow at least what the online business grows.

Yes, we do outsource that to GSI.

We think GSI, Michael Rubin and his group have just done a great job with our online business and expect to continue doing that in the foreseeable future.

If the more business we do online, the more we benefit financially as we are on a revenue share program with GSI, which we converted to I think it was from toward the end of last year as we had originally taken an equity position in GSI as opposed to a rev share.

And we have seen a pretty sizable gain in our equity position as we liquidated some of that position over a number of years.

So it has been a great partnership for us.

We think it has been great for GSI.

As the online business ramps up this fall, we will certainly benefit from it.

John Zolidis, Buckingham Research.

Good quarter, guys.

A question on the traffic versus tickets data.

I was curious if you could share a little bit more information about the ticket increases that you are seeing?

Are those primarily average price going up, or is there also an increase in units per transaction?

And then on the ticket or on the traffic rather, do you think that the decline in traffic in the quarter was primarily weather-related, or is the cannibalization and there are other issues at play there that you can call out for us?

It was really a combination of both on your first question.

And then the decrease in traffic, we had planned for that.

We believe that it had to do with the change in the weather pattern where a number of these kids that needed cold weather product for soccer, football in the fall last year did not need to buy that product this year.

So we think that it was really a function of weather.

And we have got that all planned and had that all planned into the third quarter, and we have got that planned into the guidance for the fourth quarter.

And the last part of this is, you cannot underestimate the traffic, that the clearance event that we did not anniversary had an impact on this quarter.

The clearance event that we did last year was pretty deep to clean up some of that inventory, and not doing that this year certainly had an impact on traffic.

Okay.

And then just related to that, how much -- what do you see as the potential to continue to increase the ticket size going forward?

We think there's still an opportunity to do that, especially as we move to these partnerships with some of these very important brands to us, such as what we did with Nike, with ACG, or Adidas.

We feel that as we move into the private brand aspect, we can move the AUR up replacing some of those other brands that we -- other national brands for our private-label products will be replaced by the private branded product.

Great.

Thanks a lot, and good luck for the holiday season.

That does conclude your question-and-answer session.

I will now turn it back to Mr.

Stack for closing remarks.

I would like to thank everyone for joining us on our third-quarter earnings call and look forward to talking to everyone about our fourth-quarter results.

Thank you.

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

This concludes the presentation.

You may now disconnect.

Have a great day.