DICK'S Sporting Goods Inc (DKS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Dick's Sporting Goods Incorporated conference call.

I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Anne-Marie Megela, Director of Investor Relations.

Please proceed, ma'am.

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

Please note that a rebroadcast of today's call will 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 that we have included in today's discussion some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements relate to future events and expectations and involve known and unknown risks and uncertainties.

Our actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to our periodic reports filed with the SEC.

We have also included some non-GAAP financial measures in our discussion today.

Our presentation of the most directly comparable GAAP financial measures calculated in accordance with generally accepted accounting principles and our related reconciliation can be found on our website.

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

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

Also joining us this morning are Joe Schmidt, Executive Vice President and Chief Operating Officer and Tim Kullman, Executive Vice President of Finance and Administration and Chief Financial Officer.

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

Tim will then discuss in more detail our financial results.

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

Thank you, Ann Marie.

Considering the challenging and uncertain economic environment we are operating in today, we are very pleased to report earnings for Q1 of $0.18 per diluted share.

This quarter we generated net income of $20.8 million or $0.18 per diluted share including $0.01 per share gain from the sale of a corporate aircraft.

These results are in line with our previous guidance.

Total sales for the quarter were up 11% to $912 million.

At Dick's Sporting Goods comp sales were at the low end of our expectations, declining by 3.8%.

Golf Galaxy stores pro forma sales declined 7.4%.

We believe the consumer is very cautious and will continue to be so at least through the balance of this year.

Gas and food prices, along with the general concern about the future, has impacted our customers.

That being said, we feel this is a great time to gain market share.

We will continue to focus our primary customer -- we will continue to focus on our primary customer, the core athlete and outdoor enthusiast.

We will continue to work with our vendors to provide unique and exclusive products such as the David Ortiz baseball shoe from Reebok and the A-Rod cleat from Nike, both of which were very successful this spring.

We worked very closely with Under Armour and to our knowledge had the most successful launch of the UA cross trainers of any retailer.

We will continue to build our private label program, which helps us expand our margin rates, with our merchandise margin rates up 24 basis points this past quarter.

Our store development program is on track to add 44 new Dick's stores in 2008 and we are looking at expenses to be scaled back without negatively impacting the business as we bring expenses in line with our new sales expectations.

We have seen some irrational pricing in specific markets and have selectively lowered prices.

In light of the macroeconomic conditions, we are revising our 2008 guidance.

For the year, we expect earnings per diluted share of approximately $1.22 to $1.36, as compared to earnings per diluted share for the full year 2007 of $1.33.

We are expecting comp store sales to decrease approximately 3 to 5% in 2008.

For the second quarter 2008, we expect to earn approximately $0.34 to $0.38 per diluted share as compared to the second quarter of 2007 earnings per diluted share of $0.41.

We are anticipating comp store sales to be approximately negative 7 to negative 4 in the second quarter.

Our expectations include about $0.01 worth of expenses in each quarter associated with the start-up of our Atlanta distribution center.

Both Dick's Sporting Goods and Golf Galaxy stores are included in our comp store sales comparison for the second quarter but not for the full year.

The Chick's Sporting Goods stores will be included in the comp store sales comparison one year after the conversion to Dick's Sporting Goods stores.

Our team of associates from the store group, the distribution centers and the corporate office have managed this business to industry leading performance since the Company became public in 2002.

Dick's Sporting Goods has been the last in our industry to feel the effects of the economic slowdown and cautious consumer.

With that, we believe, based on our culture of strict financial discipline and focus on execution, we will be the first to lead our sector out of the slowdown once we are behind the country.

At this time I will turn the call over to Joe Schmidt.

Thanks, Ed.

In the first quarter, we opened eight new Dick's Sporting Goods stores and entered two new states, Oregon and Mississippi.

These new stores were opened in: Tempe, Arizona; Portland, Oregon; Dayton, Ohio; Williamsburg, Virginia; Ocala, Florida; Montgomery Alabama; Tupelo, Mississippi; and Indianapolis, Indiana.

Also in the first quarter, we opened four new Golf Galaxy stores and these stores were opened in: Miami, Florida; St.

Louis, Missouri; Baltimore, Maryland and Philadelphia, Pennsylvania.

At the end the first quarter, we operated 348 Dick's Sporting Goods stores with 19.5 million square feet, 83 Golf Galaxy stores with 1.3 million square feet and 15 Chick's stores with approximately 800,000 square feet.

New store productivity for the Dick's stores was 84%.

In total, we are planning to open approximately 44 Dick's and 10 Golf Galaxy stores in 2008.

Much like 2007, we expect our 2008 new store program to include a mix of new and existing markets.

Of the remaining Dick's stores to open, nearly one third will be in the second quarter with the remaining in the third quarter.

Of the remaining Golf Galaxy stores, they will be opened in the second, third and fourth quarters with approximately half being opened in the third quarter.

Finally, our third distribution center in Atlanta, Georgia is on track and is expected to be operational in the third quarter, at which point our total network capacity will be 670 stores.

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

Thanks, Joe.

Sales for the quarter increased 11% to $912 million.

Comp store sales at Dick's stores decreased 3.8%, driven by fewer transactions and partially offset by higher sales per transaction.

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

Gross profit of $259 million was 28.41% of sales, 127 basis points lower than the first quarter of 2007.

Expanded merchandise margins and lower freight costs were offset by deleverage on the occupancy line.

SG&A expenses of $220 million or 24.12% of sales and 8 basis points higher than last year's first quarter.

Advertising and admin expense leverage were slightly more than offset by store payroll expenses.

Operating income decreased $5.1 million or 12.9% to $34.2 million.

As a percent of sales, operating income margin of 3.75% was 102 basis points lower than the first quarter of 2007.

Merchandise margin gains, freight savings and advertising leverage were more than offset by the impact of occupancy and payroll expense deleverage.

We exercised our early buyout rights on an aircraft leased during the quarter and recognized a $2.4 million gain on the subsequent sale of the aircraft.

Net income decreased 4% to $20.8 million and earnings per diluted share decreased 5% to $0.18, compared to prior year net income of $21.7 million or $0.19 per diluted share.

First quarter 2008 results included pretax gain on the sale of a corporate aircraft totaling $2.4 million or $0.01 per diluted share.

Lets move to the balance sheet.

At the end of the first quarter, inventory per square foot was approximately 2% higher than in 2007 when including the Chick's Sporting Goods on inventory results in the first quarter 2007 number.

We ended the quarter with $121 million in outstanding borrowings on our $350 million line of credit, as compared to $159 million in outstanding borrowing last year.

Our borrowing rate is LIBOR plus 75 basis points, which averaged 3.73% in the first quarter.

Net capital expenditures were $35 million in the first quarter or $49 million on a gross basis, in line with our previous expectations.

We are now expecting net capital expenditures of $125 million in 2008 or approximately $205 million on a gross basis.

I would like to make a few remarks about our expectations for 2008.

Merchandise margin expansion has benefited from better buying, expansion of our private label and, more recently, private brand program, and improvement in inventory and markdown management.

We expect each of these factors to continue to contribute to merchandise margins for the full year 2008 and beyond.

As Joe outlined earlier, we are planning to open our third distribution center this year.

As a result of preopening and other costs associated with the owning and operating a new D.C., we expect to if absorb a P&L impact of about $0.01 in each quarter in 2008.

The impact will be seen in our cost of goods sold and incorporated in our guidance.

We have reduced the cost associated with the freight and distribution in the first quarters, even with the consideration of the new D.C., we are expecting freight and distribution to be slightly deleveraged for the full year 2008, primarily due to increasing fuel costs.

As we stated in our last call, we are expecting a relative increase on the occupancy line in 2008, due to declining same-store comps and real estate costs associated with some of our new stores.

This impact is most influential in the first and third quarters and in in our guidance.

For the full year, merchandise from margin expansion is expected to be more than offset by the occupancy and freight and distribution deleverage.

Moving to the balance sheet.

We expect to have seasonal borrowing needs consistent with our business as it has operated historically.

Our expectation is to end 2008 with no outstanding borrowings.

Thank you.

This concludes our prepared remarks.

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

(OPERATOR INSTRUCTIONS) Please stand by for the first question.

The first question comes from the line of Matthew Fassler of Goldman Sachs.

Please proceed.

Thanks a lot.

Good morning to you.

Couple of questions.

I would like to begin with what kind of assumptions you have about the macro backdrop and any other factors driving sales as you think of the expectations for the remainder of the year.

And obviously, I know you never use weather as an excuse of any sort.

Obviously parts of the first quarter were difficult, perhaps May is difficult from that perspective.

If you could give us any color on how you think the weather has impacted the flow of business, that would be helpful.

I think the weather has had some impact, although I believe the majority of what the issue is today centers around the whole outlook of the economy and consumer sentiment and those concerns.

And I think that's something we are fighting right now.

And I can outline some of the things that we are planning to do because of this, whether it be continuing to work with our vendors to provide exclusive and unique products for our consumers to looking at expenses that are not going to negatively impact our -- we don't feel will negatively impact our business as we bring those expenses in line with sales expectations.

So right now, we think this is more the economic state of affairs that we're in versus the weather.

Can you give us some color on the product mix and how the cycle or other factors might have impacted that?

What exactly do you mean, Matt?

I guess sources of relative strength and weakness within the top line.

Our -- there was some strengths in some areas and weaknesses in others.

The golf business was particularly weak.

The baseball business has been -- was pretty good, the cleat business was really very good and we had a number of products that were exclusive and unique to us, whether it was the Ortiz shoe that we put a marketing campaign around with -- using Ortiz in the commercial or the A-Rod shoe and what we did with Adidas around Ryan Howard.

So where we have been able to do promotions and marketing events such as that, it's been better.

The fitness business has gotten a little bit better.

We were really very pleased about that.

The tackle business has been very difficult and that's probably one area that I would say has been weather driven because of all the rain.

A lot of the streams and rivers are high.

They're running pretty fast, tough to fish.

But again, the majority of the issue is around the economic environment.

And then a last very quick question for Tim.

In terms of understanding the occupancy cost pressures, because clearly the deleverage there seems to be the culprit on the gross margin hit.

Can you talk about the underlying rent trends that are built into your leases?

Are there step ups that come with time, with sales, et cetera, and how should we think of modeling that?

I think we have said this different several occasions, Matt.

There are no step ups in the rent base for financial reporting purposes.

Rent is smooth according to the total amount of rent that will be paid in the lease stream for each individual lease.

So what we are seeing is the fact that at a negative 8.3% comp, you just cannot leverage occupancy expense.

And we've said before we need a much higher positive comp in order to leverage occupancy expense and a slightly lower positive comp to leverage SG&A.

Got you.

Thanks so much.

Your next question comes from the line of Gary Balter of Credit Suisse.

Please proceed.

Thank you.

Just a couple of questions.

One a follow-up to Matt's, just on the guidance.

Effectively the way we should think about it, is it all comp related and just a carry through or were there thoughts about either gross margin or expenses that changed as well?

This is primarily comp driven, Gary.

Okay.

You made a comment about irrational pricing in certain markets.

Could you expand on that a little bit?

Yes, there's been a couple of competitors who have gotten very aggressive from pricing standpoint, primarily in Texas and to a bit lesser extent in Georgia.

Okay.

But it has been on selected items.

It has been more selected item it is but it has been -- there has been more irrational pricing out there in Q1 and into Q2 than we've seen in the past.

We think from a margin rate standpoint -- a merchandise margin rate we'll still be fine and based on the penetration of our private label and private brand products, which help drive that up.

But, there is some pricing pressure.

In an environment where you change your comp guidance and given the amount of business you're now doing in private label and private brands and controlled brands, what is the risk in terms of -- on an inventory point of view, like stuff that you've ordered already that's coming in, that now those sales levels may not be there.

How do we think about the risk?

We will feel there is very little risk.

Our merchandising group has done -- merchandising and planning group have done a great job of keeping our inventories in line.

And we are very comfortable with not only the inventory that we have in stock today but also the products that are coming -- that we have coming in through the pipeline.

And we are not concerned about having a glut of inventory which are going to cause us to take significant markdowns.

So we see no markdown pressure coming at us, other than competitive markdown pressure.

Okay.

And then one last question.

Just -- if I -- obviously I see (inaudible) -- any thoughts on what is going on in the real estate community.

As I was asking people, who is going to replace Sears at one point, everybody would say Barnes & Noble or Dick's as their new anchor.

So you must have had a lot of attention.

Anything you're seeing from either costs that you're going to have in the future for real estate or opportunities, et cetera.

Have you pulled away from the show?

We think that the amount of product being delivered into the marketplace from a shopping center standpoint is going to be less than it has in the past and I think everybody has already started to see that.

A number of retailers have pulled back their development program, so -- and we are not.

So we think we are in a very good position to continue to take a look at any center that is being delivered.

We are still developing stores.

So we think that's give us you an opportunity to be on the front end to help drive some centers, which will give us some occupancy cost leverage going forward.

So you may actually end up with lower rents in the future.

We think that's a possibility.

That's great.

Thank you very much.

Your next question comes from the line of David McGee.

Hello.

This is Chris Rapalje on the phone for David this morning.

I had a question about the new store productivity.

I was wondering if you could talk a little bit about that rate relative to plan.

We are pretty pleased with our new store -- the new store productivity in light of the economic environment.

At 84%, it is a little bit lower than it has traditionally been.

But not only were comps affected but new stores are affected the same way as comps are.

But we plan our new stores pretty conservatively coming out the block, so actually our new stores are very close to what our -- or slightly ahead of what we planned them to be through the first quarter and into the second quarter but they are slightly below the traditional performance.

And related to that, any change in your long term target for 800 stores, et cetera.

No, we still feel 800 stores is our target and we see no difference there.

And then finally, with regard to scaling back expenses, I was wondering if you could give detail on particular areas of opportunity there.

Well, we are looking at all areas in the business from an expense standpoint.

But I will just give you a couple of examples.

We were going to remodel three stores this year, which would have been fairly sizeable from a capital standpoint.

We have since decided we are going to postpone the remodeling of those stores.

They are good stores, very profitable stores.

So we are going to postpone the remodeling of those three stores, so that has an impact on our CapEx number.

Of course it has a positive impact from a depreciation standpoint and a positive impact from an interest rate standpoint.

We are also looking at new hires that we had planned to make in the business and are looking at where we can postpone those hires or eliminate those hires until next year.

So there is really nothing that's -- there are no sacred cows here.

We are looking at everything as we bring these expenses in line with the new sales expectations.

Thanks very much.

Your next question comes from the line of Brian Nagel of UBS.

Please proceed.

Hi.

Good morning.

First question I have, I do want to touch about the weather.

In the last conference call, you talked a lot about the impact weather is having in your business, particularly the snow on the fields in some areas.

So, just real quick, as Q1 progressed and presumably weather did get better and these field were cleared off, did you see sales pick up in those categories it is at all?

We did and we felt that Q1 was impacted by some of the conditions that kids weren't able to get out and baseball seasons were somewhat delayed.

Soccer seasons were somewhat delayed along with some Lacrosse.

As we got into the second quarter, taking a look at the second quarter and going forward, we really feel that the economy is more the issue than the weather.

But we did see a pick up in those categories towards the end of the first quarter.

Okay, then the second question I have is with regard to real estate.

I understand there is a long lead time to open your stores, but given the cyclical pressures you are seeing now, does that cause you to maybe rethink moving aggressively into some of the areas of the country which have been more depressed, the west coast or maybe the Florida type markets.

Does it cause you to rethink to move into those as quickly as you had planned before.

Really no.

And especially Florida.

Florida has been hard hit by the housing downturn for sure but our stores in Florida are performing extremely well and we couldn't be happier with what is going on in Florida and we will continue this -- our expansion into the Florida market.

Thank you very much.

Your next question comes from the line of Sean McGowan of Needham.

Please proceed.

I was wondering if you could repeat what you said about inventory vis-a-vis the Chick's acquisition and maybe give us an idea of how much an inventory increase was due to that and how much might be due to the increases in private brand and private label?

From a standpoint of inventory, there was -- the Chick's stores have a bit more inventory than last year so that our inventory would be down a but more if -- would not be up quite as much if we didn't include the Chick's stores.

So if we included those, that inventory level of 2% would be somewhat less than that.

But again, I would say that we are very pleased with the level of inventory we have in light of the economic environment.

We are very pleased with the quality of the inventory and our merchandising and planning group did an outstanding job working with our vendors.

And our vendors were very cooperative as we looked at products that had slowed down and looking to modify some products coming in.

So, we are very pleased with the products we have in stock.

We are very pleased with the pipeline of products.

And I can't stress enough that we do not see a significant markdown issue facing us from an inventory standpoint.

Were you able to increase the percentage of the business done in the private label and private brand?

It was -- just slightly.

We did increase it slightly and certain areas of the private label or private brand program did extremely well.

The launch of the Adidas baseball product was very, very successful.

Thanks and then shifting gears.

Can you comment on how you feel the Golf Galaxy stores are doing relative to the rest of the golf market, given some shifts and competitive strengths and weaknesses and the overall market there.

Do you still feel like you are gaining share?

We do.

We feel that the golf market is quite difficult out there right now.

But I think the Golf Galaxy is doing a very good job of running this business in a difficult environment and is certainly outperforming the rest of the golf industry.

Anything from a product standpoint that we should be looking at that's on the horizon, interesting new products coming up, in golf, that is?

No, not really.

The high MO drivers -- high MOI drivers, square drivers are still being talked about and looked at, but the golf business is a little soft right now in new products.

Okay.

Thank you.

Your next question comes from the line of Kate McShane of Citi Investment Research.

Hi.

Thanks very much.

Can you give a little bit more detail behind the gross margin contraction?

Is there any way you can break down how much was driven by the deleveraging of cost and higher promotions during the quarter?

I will probably fall a little bit short of everything you want, but let me give you a couple of the details.

Overall deleverage from occupancy was about 170 basis points.

We picked up 24 basis points in merch margin and we picked up another 24 basis points on the supply chain side.

Okay.

And are there any products being introduced in the second quarter that could drive some incremental traffic?

The launch of the Under Armour shoes in the second quarter has helped that business.

But other than the UA shoe, there is no blockbuster product out there that we are terribly excited about, that can have a meaningful difference.

Okay.

And then my final question is can you talk a little bit about some of the private label that is now in Golf Galaxy and how sales for that type of product has been trending in the Golf Galaxy stores?

Sure.

The Golf Galaxy penetration of private label products has moved up significantly through the first quarter and now into the second quarter from the Slazenger golf ball standpoint, they are doing extremely well.

The Max Flight golf balls that we have in there, they are doing very well along with some other Slazenger accessories, golf bags, golf gloves and some clubs from both Slazenger and Max Flight.

So the Golf Galaxy group has embraced the private brand program and the Golf Galaxy consumers have embraced it and it is doing very well.

And like Dick's Sporting Goods had a merchandise margin rate increase, Golf Galaxy had a merchandise margin rate increase also.

Okay, thanks very much.

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

Please proceed.

Thanks, guys.

Quick question.

I think you alluded to it, but we've had a couple of years here of good product innovation.

Could you just comment on where you see that playing out and maybe if you look out a little farther, how do you see that playing it out?

I think that there's a number of people out there continuing to work on product innovations.

Under Armour group is -- the launch of the cross training shoe was very successful.

We were very pleased with it.

I know that Nike has got some new products from the footwear standpoint and new technology in apparel for this fall that we are really quite excited about.

The new TaylorMade tour burner driver that we are marketing with now with Justin Rose on the golf channel, we are really quite excited about.

So there continues to be product innovation.

It is just not today broad enough across enough vendors to really -- for us to get terribly excited and move the needle.

But there are pockets, as I said, Under Armour, Nike and TaylorMade.

Okay.

And in the past, you have talked about trading within the narrow bands of the economy.

Is it some of the bigger ticket items that you are feeling pressure on, basketball systems and some of the table sports and things like that.

Could you talk a little bit about how that has performed?

It is kind of -- it's somewhat inconclusive, if you will.

There is some areas that the high ticket items are doing extremely well.

We have done really quite well in -- the fitness business is doing much better.

Some areas in our hunting business with the higher priced firearms are doing quite well.

The basketball systems have been soft and, as we said, the golf business has been a bit soft.

But inside the golf business, there has been softness in some high ticket categories such as the driver category but the iron category has better, which is also high ticket items.

So it's -- we can't say it is across the board high ticket items are the issues.

There is pockets of strength and pockets of weakness.

Okay.

And I guess given the comp on the SG&A line, it looks like you did a pretty good job of managing expenses.

Is there opportunities at the store level to manage payroll a little more aggressively in a weak comp environment.

We are looking at expenses all across the company, as I indicated, including the store payroll line as we try to move the expenses in line with the sales expectations.

So, with that, yes, we are looking at store payroll as to what we should -- what the store payroll number should be and we feel that there's some savings there going into the third quarter and the rest of the year.

Okay.

Thanks.

Good luck.

Your next question come comes from the line of Dan Wewer of Raymond James.

Please proceed.

It's Dan Wewer.

In the last couple of conference calls, you noted that the absent flows in Dick's' business would be narrower than the sporting goods industry as a whole, due to your diversified merchandise mix and the fact that you focus on the athlete and not fashion.

But today's guidance honestly doesn't look a lot better than anyone else in the sector.

Kind of curious as to what may have changed on the perception of your company being less economically sensitive than the industry.

Well, I think it has shown that we have been.

When you take a look at our performance versus others in the industry over this last year when the economy started to struggle and the housing crisis and the credit crisis, we have traveled in a much narrower band than the industry as a whole.

We expect to be able to continue to do that.

And as I said, if you look at the performance over this last year versus the rest of the industry, we have outperformed it pretty significantly.

We are just now feeling the effects of that and I believe that based on our discipline, our merchandise philosophy, our execution, we will be the first one to come out of this.

So I suspect once we get through all of this and it's behind us, and if we chart our performance versus the industry performance to this -- what will be, from when it began to when it ends, a 24- to 36-month period, I think you'll see that we traveled in a much narrower band than the competition.

Okay.

Of the irrational pricing in Texas and Georgia, is that in the outdoor category?

Actually no, it has really been more in the golf category and in the general sporting goods category.

And in the golf category, you had noted that sales in drivers are weak but irons are good.

Is that reflecting some of your key brands, like Calloway, now in the second year of their premium product lines.

I think they have something to do with it.

There was a lot of innovation last year with the square drivers from Nike and from Calloway.

We saw the market push around all high MOI drivers from TaylorMade who was our number one performer, our number one brand and also, with Cleveland.

So, as this pipeline got filled and customers, early adopters bought them, the growth associated with that is a bit less this year.

And then the last question.

What are you instructing your buyers to do with purchase orders that may have been placed three or four months ago.

Are they able to cancel these orders or delay shipments?

We've taken a look at a number of things.

So there is not one pat answer for it, but there's been some products that we have pushed out, whether it be 30, 60, 90 days.

Some orders have been canceled based on -- both of those based on our sales projections.

And there's been some products that we have moved up delivery because they have done extremely well.

Okay.

Great.

Thanks.

And good luck.

Thank you.

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

Good morning.

I wonder if you could comment on the negative comps that you had in the first quarter and the expected negative comps in the second and for the full fiscal year?

Are there certain merchandise categories like footwear, apparel or hard lines that are basically underperforming your business plan expectations moreso than the overall merchandise mix?

Yes, as you could imagine.

The tackle business has been particularly difficult.

We think that that could have some impact -- be impacted somewhat by the economy and people driving to fish and we think that has some impact on it.

But, in tackle, we really do believe that the rivers and streams being as high as they are right now and running as fast as they are, they are difficult to fish.

So that's an issue.

The kids footwear business has been particularly difficult as we were selling a lot of Heli shoes last year and the Heli business is basically done.

And if we took a look at Helis and backed that out, of the 3.8% comp decline in the first quarter, 80 basis points of that decline is specifically attributable to Helis.

Looking at overall major merchandise categories, like footwear, is that on plan versus apparel versus the balance of your hard line product?

Is there one major product category that is weaker than the other major product categories?

I think the two that I just spoke of were the tackle business, and you can broaden that out to somewhat of the camping business also, where anybody has to usually drive a fairly long distance to participate in that.

And then the Heli category.

I talked about the youth athletic shoe business.

So those would be the two that are really underperforming the rest of the market.

All right.

And the rest of the categories are basically on plan?

The question was, I thought the question was, are there ones that are performing significantly below other categories.

So those would be the ones that are really very negative.

Okay.

I understand.

Can you comment on the store traffic levels, are they basically -- is that a major component of the weakness in the sales volume or is it -- and is that localized to certain geographic markets moreso than others?

In other words, is your business less weaker than your business in the east or the Midwest or so on Is it traffic levels in those areas are down from the previous experiences in those markets.

For competitive reasons, we are not going to comment on specific areas of the country, but the majority of this is traffic related.

As traffic was down in the first quarter about 4.5%, the ticket was up 70 basis points and that is how we got the negative count of 3/8.

But it is primarily traffic.

If you walk into the stores and I spend a lot of time in our stores and talking with our sales associates and talking with customer, we are not missing product.

We have got the right product.

We don't have customers saying -- asking us why we don't have a particular brand or a particular SKU.

Our stores are well inventoried.

We've made sure that we are in stock in those key items and we are very please with our inventory level.

And this is all traffic generated.

I see.

Last question I have is on Golf Galaxy.

Is the 7.4 negative comp in Golf Galaxy, that you had in the first quarter comparable to the performance of the golf business in the Dick's store or did Dick's do getter than Golf Galaxy?

Dick's did better than Golf Galaxy but only slightly.

We did better than Golf Galaxy by less than 100 basis points.

Is there -- do you think it is primarily product related (inaudible) weakness in the golf business, because of the lack of either new product innovation or is there something else that is going on in terms of participation or golf as a hobby being perhaps less vigorous than it may have been in the past?

It does not have to do with anything meaningfully to do with participation or rounds.

I think this has to do with the economy and if somebody is looking at a $200 or $300 or $400 driver, the driver that they are using is still viable, they are just postponing these purchases based on what is going on with the economy and gas prices and just being uncertain about the future.

So I don't think this is not a fundamental issue with the game of golf, although we do have to try to grow the game, get more rounds played.

But this isn't the issue we're facing right now.

I believe that this is primarily about the economy.

I understand.

Thanks a lot, I appreciate it.

Irk your next question comes from the line of John Zolidis of Buckingham Research.

Please proceed.

Good morning.

This is [Jody Lin] on behalf of John Zolidis.

I have a question on your product cost.

Are you saying any inflationary pressure on product cost?

We are starting to see some which would be in the back half of the year.

But nothing that concerns us significantly at this point.

Okay.

And are you seeing any differences between your regular merchandise versus your private label.

From a cost standpoint?

Yes.

No.

They are both -- we see some pressure on both of those on the sides of the business.

We are seeing the little bit less pressure from the private label, as we gain scale from the private label standpoint, we still have some -- we still think we can do a better job of buying from a private label standpoint and we're seeing those benefits.

So they are increasing at a slower rate than the branded product.

Okay.

Thank you very much.

Sure.

Your next question comes from the line of David Cumberland of Robert Baird.

Please proceed.

Thank you.

A couple questions on your advertising.

How were you able to leverage that in Q1, was there timing issue or has vendor support increased?

There has been some support -- increased support from the vendor side.

We have been able to, with the increase in our store count and the sales did go up by 11% to $912 million this year -- and moving our advertising program to be more national based across ESPN, the Golf Channel, some of our direct marketing components, we've been able to be just more efficient and leveraged some of the national campaigns on TV across a broader base.

So we are able to leverage the advertising expense.

We think there is more leverage that can be gotten from advertising as we go forward also.

That helps.

And then my other question, are you making any real changes to your marketing tactics and promotional approach to cope with the difficult environment?

Yes.

I mean, it is a dynamic environment out there and you need to move with that environment.

As I said, we have selectively lowered some prices.

Some of the inserts that we put in the paper on Sundays, we are going to continue to be aggressive in the categories in areas of the country that we need to be from a pricing standpoint.

So yes, and we constantly reevaluate what we need to do from a marketing standpoint to remain competitive and top of mind with the consumer.

Thank you.

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

Please proceed.

Good morning, two questions.

Tim, so I got this right, did you say the gross will be down this year, SG&A ratio will be down, the gross will be down more than the SG&A ratio?

No, we didn't say that.

We said that the gross would be down slightly but the SG&A based on where the comp base is, will be slightly deleveraged.

So that might be up a bit?

Yes.

The ratio.

And Ed, a number of economists have talked about some hope for the consumer because of the rebates going out, which I guess $40 billion or $50 billion have been deposited so far.

But your comp estimate is more difficult to set in the first quarter, is that your way of saying that the rebates aren't getting spent at least in your category?

We are up against a much more difficult comp from the second quarter of last year.

And I think the rebates, Bob, I feel that the rebates, at oil at $133 a barrel whatever it is at today, I think people are just cautious and I think that that rebate is going into gas tanks.

Very good.

Thanks a lot.

Your next question comes from the line of Rick Nelson of Stephens.

Please proceed.

Thank you and good morning.

Ed, could you talk about the progress you are making transitioning the Chick's stores to Dick's stores and have you made any decisions on ski and snowboard in those stores and other lifestyle categories.

Sure.

The transition's progressing quite well.

We are in the process of converting one store to a Dick's Sporting Goods store and just test how this conversion is going to work, how the customer will respond.

So we are very please with that.

Joe has got that working and we will be converting that sometime in -- this October.

So we will have a good test through holiday and next spring.

As far as snowboard and -- ski and snowboard, we will continue to keep ski and snowboard in those southern California stores.

And the lifestyle apparel of the beach brands, we will continue with those beach brands in southern California also.

Where that square footage is going to come from, is we're going to enter southern California and the conversion of the Chick's Sporting Goods stores to our stores.

We will be entering those markets with no firearms.

So the hunting side of the the business, which there is not a tremendous amount of hunting in southern California, we are going to be taking that square footage and reallocating that to the beach, ski, and snowboard aspect of the Chick's business.

Thank you.

My other questions have been asked.

Good luck.

Thanks.

Your next question comes from the line of Ralph Jean of Wachovia.

Please proceed.

Great.

Thanks.

Just wanted to get a little more detail on the Under Armour launch.

You said you felt it was very successful.

You've had about two or two-and-a-half weeks of sales.

What percentage of your total purchases have you sold so far?

For competitive reasons we are not going to guide to that.

But we were quite successful and quite pleased with the Under Armour launch of product.

Do you see that product sales accelerating or was the first week the strongest or what do you think it is going to play out as?

We think that Under Armour has the opportunity to be a meaningful player in this category.

And I think that we have seen a solid business in Nike shoes, a solid business in the Under Armour shoes and we think that those two brands are going to continue to get stronger in this category.

And then on the irrational pricing comment.

Are you able to say who it was in Texas, is it Academy or Sports Authority and in Georgia, is it Sports Authority or (inaudible).

I could say.

But we are not going to get into that.

But, let's just say there are some people -- there are some competitors on the golf side and on the general sporting good side that have some irrational pricing out there.

And selectively, in the products that we think are appropriate, we have lowered some prices.

Okay.

Thank you.

Your next question comes from the line of Joe Feldman of Telsey Advisory Group.

Please proceed.

Hi, guys.

Just as you are thinking about it, a lot of the questions have really brought to light a lot about the macro.

What change in the past two months that -- to cause you to so dramatically change your outlook for the balance of the year?

Just because it seems like two months ago, we were at 25 to 30% higher in EPS and now we are where we are today.

So what changed?

Has it gotten worse in the past couple of months?

What has changed is doors.

Gas prices continue to escalate.

Food prices continue to escalate.

Uncertainty around the election and what is going to happen.

I just -- there is a tremendous amount of uncertainty out there and people are becoming more and more cautious and that's what happened.

It's nothing more than that.

And so then, would the categories you are selling -- you had highlighted a few of the strengths and weaknesses, but are you finding that it is more like the less discussion -- just things for kids or things for high school team sports or things like that that are selling as opposed to, I don't know, discretionary apparel and new running gear, let's say, for an adult.

Well, it's -- the high school products have continued to do quite well.

We are quite pleased with those.

As we said, the tackle business has difficult.

The camping has been difficulty.

The golf business has been difficult.

We have seen strength in Under Armour, which is primarily for the high school, the high school athlete.

We have seen strength in Nike shoes.

We have moved up orders on Nike shoes.

Again, many of those for the high school athlete.

Also, that core runner which he or she is going to continue in the product.

We have moved, requested moving up men's and women's Nike apparel also, so a lot of this product that is for that true athlete who is competing has done quite well.

Some of the discretionary purchases for the weekend warrior, whether he be a golfer, some other categories, tennis has been a bit more difficult.

And we don't expect that to change between now and the end of the year.

Thanks.

And then just one more follow up.

With regard to market share trends, have you -- you look the at your studies, are you picking up in any specific areas or regions of the country or -- ?

If you could just discuss market share a little

Well, we think overall we have traditionally in the past outperformed the market.

So if you take a look at some other publicly held sporting goods companies, our comp guidance -- our comps have usually been higher than what theirs are, so we picked up market share.

I think as we take a look at this and we see what is going on in the market place, we talk to vendors, we have had the opportunity to buy some off-price product from some other people who have canceled product.

And it is not quite as clear what is happening out there, because our largest direct competitor Sports Authority is no longer public, but we still feel that we are in a number of categories picking up market share.

The UA launch of shoes we were indicated that our launch was the most successful out there.

A number of the Nike products that we have out there from both an apparel standpoint and a footwear standpoint have done very well.

We have had to go and reorder those and some of the comments we've gotten back is there is not many people out there reordering.

So we feel we are picking up market share.

Thank you and good luck managing through this.

Your next question comes from the line of Sam Poser of Sterne Agee.

Please proceed.

Good morning.

Question, you have the Croc shop set up in a whole -- in a large number of stores, which you did last -- I think you did at the end of last year.

Is that still working out well for you or how has that business changed?

We are still pleased with what is going on with Crocs.

And we did very well in the first quarter with Crocs, especially around the Mammoth shoe.

The Croc shops, we are continuing to go forward with the ones that we've got.

We won't be investing heavily in many new ones.

But the Crocs business is -- although not as strong as it had been, is still -- we are still selling an awful lot of shoes.

Okay.

And then I just wanted to pick on -- follow on one of the questions, to give us, even if you break it up into quarters, could we get some ideas of the regional differences.

I mean, you've chosen to go with a new store up in the Northwest, your first entry there.

I mean, could you give us some idea of just some regional differences in perform performance.

For competitive reasons, we really -- we're not going to do that.

I will tell you the new store that we opened in the Pacific Northwest in Portland, Oregon has gotten off to a great start.

We are very, very pleased.

We have commented in the past that our Florida program has very successful.

We are really quite pleased with that.

And we indicated that Texas was going to be more difficult and in the last call we said Texas was a bit more difficult, but we are getting traction in Texas and we expect Texas to improve.

And just one other thing.

As you are looking forward, you said you are going to be the last one to feel the effects of all of this and you believe you're going to be the first ones out.

And how good -- I mean, if you are looking out right now from what you are seeing from vendors and what you're seeing from the economy.

Are you seeing light at the end of the tunnel here at the moment?

As you plan your business, are you looking for improvement into next year or how long do you think this is going to last?

As we said in the script, we think that this is going to last through the balance of this year.

With our comp guidance at negative 3 to negative 5 for the balance of the year, we don't -- we are not anticipating it to get any better, but we are in a position to react if it does.

With our inventory levels with the way they are at, we are very liquid.

We are -- can be in the market to buy product at a moment's notice.

We don't have an inventory issue.

We don't expect it to get better, but we are in a position to react to it if it does.

And then in the guidance, you guided down 4 to 7 for Q2, which the -- which includes Golf Galaxy entering the comp.

And does your 3 to 5 include Golf Galaxy in the full year or did you say no to that?

It does not, because Golf Galaxy wasn't comp in the beginning of the year.

They don't come into the comp base until the second quarter.

So, since they weren't in the comp base for the beginning of the year, what -- if you are asking me do I think it is going to get better at Golf Galaxy from the comps that we've provided their performance in the first quarter.

No, I don't expect that to get significantly better either.

So a lot of that raise of 4 to 7 for Q2, much of that is reflective of continued poor performance or even worsening performance of Golf Galaxy, not of the Q2 guidance is different from the full year guidance, because it is inclusive of Golf Galaxy, while the full year is not.

You are right, it's not -- full year guidance does not include Golf Galaxy.

And remember, Golf Galaxy is roughly 10% of our business.

So although important, it is not significant.

We do see things at Dick's Sporting Goods, we see that consumer softening and being more cautious.

And we don't see this changing until after the -- at least until the beginning of next year.

But if we are wrong -- we are planning our business as if it doesn't get better but if it does, we are in position to react to that very quickly if it does get better.

Similarly to what we've talked about in previous calls, where we had a colder harsher winter that we were able to go into the marketplace and chase product and react to it and we are in the same position right now.

Okay.

Thank you very much.

Good luck with getting this moving.

Thank you.

Your next question comes from the line of Thomas Paulson of Cornerstone.

Please proceed.

Thank you so much for taking my call.

Just a few quick questions.

One, if I understood, the inventories, what you are saying is that on a comp store basis, the inventories are up a little bit less than 2%?

Yes.

And what would would your expectation be for the end of this quarter?

We would expect them to be up no more than what they are today.

Okay.

And then just following on the prior question, if you look at the comps, just the comparisons obviously are -- shift around quite a bit relative to last year.

So, is that also part of a pick-up in the comp in the second half relative to Q2 is one is Golf Galaxy but also the comparison.

Yes.

The comps in the second half of the year are much easier than the first half.

With our comps in the -- they are much easier in the second half of the year than they are in the -- in Q2.

If you look on a shifted basis, for Q3 we are at about a negative 1 last year and then Q4, about 3.4.

Last year was positive 5.8.

So if you look at the underlying momentum in the business per se, you are not really expecting that to change?

It is just really comparisons and the Golf Galaxy impact?

I wouldn't put a lot of impact on Golf Galaxy.

As I said, they are an important part of the business but at 10% that's not moving the needle significantly.

Okay.

And then last one is, I guess, you had noted that you were moving up apparel orders from Nike and that Under Armour had done well so the overall apparel didn't it do quite well and much better than the average reported number?

I would say that you would look that there is a market share shift that Nike and Under Armour continue to take market share from other vendors out there.

And the Reebok performance apparel that you did?

We're very pleased.

We launched Reebok apparel.

We were really quite please with that, which took the place of our private label brands from last year, which were Fitness Gear and [Ateva] and we are really quite pleased with how Reebok did.

Thank you so much.

Your final question comes from the line of John Barrett of Columbia Management.

Please proceed.

Thanks for taking my question.

Quick question.

Just a quick question, as you talked about gas prices and food and the difficult economic time, I've heard from other executives in the sporting goods industry that this is the worse they have ever seen it.

Guys who have been around for 25, 30 years.

What about Dick's pulling back on store growth in '09, because if I look at your model, you're running -- looks like to be like you're running free cash flow negative this year, opening up I think you said 40, 45 or 44 Dick's stores and 10 Golf Galaxies, how about the ability to pull back on real estate in '09?

Because we've seen that from a number of retailers, given the macro.

If we needed to pull back, we would pull back.

We are not -- we are looking at our store development program right now.

Our biggest concern is not our performance as much as it is, is there enough product out there in the development cycles from the shopping center developers to meet our needs.

And as some projects -- there's less projects out there, we need to make sure that we are very discriminating in the products that we go into -- the projects that we go into.

And we need to make sure that we are not concerned with hitting a number of store openings and be some target in having the wrong stores open up.

So we'll -- there is a possibility that the number of stores that we open in '09 and '10 may be less than traditional levels.

We haven't seen that yet, there is a possibility, but it is more based on the shopping center developmental cycle than it is really what we believe our performance to be.

But you are not locked into these agreements in '09 already?

We are not locked into any significant amount of deals.

We have got deals done in '09.

But, it is -- we have got flexibility in some deals we haven't inked yet and we've got some flexibility in some '09 deals to move them to '10 if we have to, so we don't feel that we're painted in a corner from a real estate development cycle by any means.

Okay.

Just secondly, Tim, just on the occupancy deleverage on a minus 3.7 comp.

It looks like a deleverage of 170 bps, is that the -- is that 40, 45 bps of deleverage on occupancy for every negative 1% comp.

Is that what we should use?

I haven't done that math, but if that's the way it worked out in your calculation, that's in the ballpark.

Okay.

Thanks.

It appears there are no further questions at this time.

I will now turn the call back over to Management for closing remarks.

I would like to thank everyone for joining us on our Q1 call and we look forward to talking to you for the next call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.