DICK'S Sporting Goods Inc (DKS) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2008 Dick's Sporting Goods Inc.

earnings conference call.

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

(OPERATOR INSTRUCTIONS).

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

I would now like to turn the presentation over to our host for today's call, Ms.

Anne-Marie Megela, Director of Investor Relations.

Please proceed.

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

Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website located at, dickssportinggoods.com for approximately 30 days.

In addition as detailed in our press release a dial-in 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 segments.

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 to be found on our web site.

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

Ed will discuss our second 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, Administration and Chief Financial Officer.

Joe will review our store development program and provide an update on our third distribution center and Tim will then discuss in more detail our financial results.

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

Thank you, Anne-Marie.

Considering the challenging and uncertain macroeconomic environment we're pleased to report income of $45.5 million or $0.39 per diluted share excluding the impact of the costs related to the Golf Galaxy integration.

These results exceeded our previously issued guidance of $0.34 to $0.38 per diluted share.

Total sales for the quarter increased 7% to $1.086 billion, comp sales exceeded our guidance declining by 3.7% compared to our guidance of negative 7% to negative 4%, and compared to a 5.8% increase in the second quarter of 2007.

Comps for Dick's Sporting Goods stores were negative 3.7% and for Golf Galaxy stores were negative 4.5%.

Of the negative 3.7% comp from the Dick's Sporting Goods stores, 50 basis points were from the discontinuation of Heely's.

Golf and categories that are more dependent on gasoline usage, such as tackle, camping and water sports were also negatively impacted.

Athletic footwear excluding Heely's and athletic apparel performed well in addition to our team licensed sports area.

Our inventory levels were down approximately 2% per square foot at the end of the quarter compared to last year.

Throughout the remainder of the year we expect inventory per square foot to be below last year's levels.

Given the difficult macroeconomic environment we're pleased with the second quarter results but we still believe the consumer is very cautious and will continue to be so into 2009.

However we continue to recognize that this is a great opportunity to gain market share and we'll continue to focus on our primary customer, the core athlete and outdoor enthusiast, while working with our vendors to provide unique and exclusive products.

We continue to be excited about our private brand program with the launch of Reebok performance apparel, the Field & Stream brand, along with the continued success of Adidas baseball.

Private brand growth is a key driver of our merchandise margin expansion which increased 46 basis points in the second quarter compared to the same period last year.

We are effectively managing inventory, our store development program is on track and we are aligning our expenses to our current sales expectations without negatively impacting our growth strategy.

Considering all these factors, we're updating a guidance for 2008.

We're raising the low end of our guidance and anticipate consolidated earnings per diluted share of approximately $1.27 to $1.36.

This guidance excludes expected merger and integration costs related to Golf Galaxy.

Earnings per diluted share for the full year of 2007 was $1.33.

We're expecting comp store sales to decrease approximately 5% to 3% in 2008, consistent with previously issued guidance, versus a 2.4% gain in 2007.

For the third quarter we're anticipating consolidated earnings per diluted share of approximately $0.04 to $0.08 excluding the expected merger and integration costs related to Golf Galaxy.

Earnings per diluted share was $0.10 in the third quarter of 2007.

We're anticipating a comp store sales decrease of approximately negative 5% to negative 2% in the third quarter.

Our expectations include approximately $0.01 worth of expenses in each quarter associated with the startup of our Atlanta distribution center.

Both Dick's Sporting Goods and Golf Galaxy stores are included in our comp store sales comparison for the third quarter, but Golf Galaxy is not included in the full year guidance as they didn't enter the comp base until the second quarter of this year.

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

Once again I would like to commend our associates who have been able to deliver solid results in a difficult macroeconomic environment.

With our culture of strict financial discipline and emphasis on execution, we have proven our ability to execute in the good times and are now demonstrating the same in tough times.

We're growing the business and we will have opened 43 Dick's Sporting Goods stores by the end of the year.

We are effectively managing inventory and on a square foot basis expect it to be below last year's levels at the end of Q3 and Q4.

We continue to control our expenses and expect to moderately leverage SG&A in the back half of the year.

I will now turn a call over to Joe.

Thanks, Ed.

In the second quarter, we opened nine new Dick's Sporting Goods stores.

These stores were opened in South Fredericksburg, Virginia; Garland, Texas; Montgomeryville, Pennsylvania; St.

Peter's, Missouri; Gilbert, Arizona; Brighton, Colorado; Cedar Hill, Texas; and two stores in San Antonio, Texas.

Also in the second quarter we opened one new Golf Galaxy store.

This store was opened in Encinitas, California.

At the end of the second quarter, we operated 357 Dick's Sporting Goods stores with 20 million square feet, 84 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 81% adjusted for timing of openings.

In total we're planning to open approximately 43 Dick's stores 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.

The remaining Dick's stores are anticipated to open in the third quarter, the remaining Golf Galaxy stores are expected to be opened in the fourth quarter.

In the third quarter, we will also convert one Chick's store to a Dick's store with the remaining Chick's stores to be converted in the second half of 2009.

Finally our third distribution center in Atlanta opened on July 7th.

It is already supporting about 60 stores and we believe it will eventually bring our total network capacity up to 670 stores.

We expect to see savings as a result of this new DC in 2009.

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 7% to $1.086 billion.

Comp store sales at Dick's stores decreased 3.7% driven by fewer transactions, partially offset by higher sales per transaction.

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

Gross profit of $319.7 million was 29.43% of sales, 4 basis points lower than the second quarter of 2007.

Expanded merchandise margins and lower freight costs were offset by deleverage of distribution and occupancy.

SG&A expenses of $237.7 million were 21.88% of sales and 89 basis points higher than last year's second quarter.

As planned, our advertising spend was relatively higher in the second quarter compared to expectations for the rest of the year due to timing of selected initiatives.

For the full year we expect to leverage advertising.

Operating income before merger and integration costs decreased $4.9 million or 6% to $78.3 million.

As a percent of sales, the pro forma operating income margin of 7.21% was 100 basis points lower than the second quarter of 2007.

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

Net income excluding merger and integration costs and the tax impact of nondeductible executive separation costs decreased 5% to $45.5 million and earnings per diluted share decreased 5% to $0.39, compared to prior year net income of $47.9 million or $0.41 per diluted share.

Let's move to the balance sheet.

At the end of the second quarter inventory per square foot was approximately 2% less than in 2007 for Dick's stores and on a pro forma basis.

We ended the quarter with $10 million in outstanding borrowings on our $350 million line of credit as compared to $52 million in outstanding borrowings last year.

Our borrowing rate is LIBOR plus 75 basis points averaging 3.4% in the second quarter.

Net capital expenditures were $32.1 million in the second quarter or $59.4 million on a gross basis in line with our previous expectations.

We're expecting net capital expenditures of approximately $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/private brand program and improvements in inventory and markdown management.

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

As Joe outlined earlier, we have opened our third distribution center.

As a result of preopening and other costs associate with opening and operating a new DC, we expect to 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 is incorporated in our guidance.

We're expecting a relative increase in the occupancy line in 2008 from declining same-store sales comps.

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

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

As we look at SG&A as we have mentioned we went through a comprehensive re-budget process in the second quarter.

As a result we expect to modestly leverage our expenses in the second half of the year, most notably in the fourth quarter.

Primary drivers of expected savings include lower relative advertising spend and a reduction in payroll and incentive payments as compared to last year.

We are in the process of integrating Golf Galaxy's front and back offices into the Pittsburgh headquarters and expect to be completed by the end of the fiscal year.

As a result, there were $5.5 million of costs incurred in the second quarter.

We are currently expecting merger and integration costs pretax of approximately $2.5 million in the third quarter and $3.3 million in the fourth quarter.

The cost expected in 2008 are onetime in nature and relate to severance, retention, office closure and related taxes.

Our initial estimated cost savings in 2009 from this integration is approximately $9 million to $10 million pretax.

For the full year, the comp guidance is negative 5% to negative 3%.

Our comp guidance for the third quarter is negative 5% to negative 2%, and includes expected negative comps from Heely's of approximately 40 basis points.

We have not included any potential opportunity to benefit from the World Series.

Moving to the balance sheet, we do expect to have seasonal borrowing needs consistent with how our business has historically operated.

Our current expectations is that we will end 2008 with no outstanding borrowings on our revolving credit facility.

Thank you.

This concludes our prepared remarks.

At this point, operator, I would like to open the line for questions and answers.

(OPERATOR INSTRUCTIONS).

Robbie Ohmes, Merrill Lynch.

Nice quarter guys.

A couple of questions.

First, can you give us actually a little more detail on the strength of your merchandise margins and what exactly you're doing there?

Is it private-label sourcing?

Is it mix shift towards private-label and private brand?

Because the gross margin looked very healthy given that you had almost a 4% comp decline.

So I would love a little more detail there.

The other question I had was on just if you could tell us a little more how Chick's is performing.

I know you won't give the comps, but sort of how it's performing versus your expectations as you're waiting to do the conversions into next year.

Then I will stop there for now.

The increase in margins came from a couple of different sources.

One was better markdown management.

We have done very well controlling the inventory, and you can see with inventory down 2% on a per-square foot basis, the group has done a very good job.

And our clearance inventory is down 8.7% versus last year.

So the group has just done a much better job with inventory management.

We have been able to make some advantageous buys out in the marketplace which have helped increase the margins.

And we expect to -- it's our anticipation that we are able to do that again going forward into the back half of the year.

As far as Chick's goes, Chick's are in the zone of our expectations.

Whenever you do a conversion like this, it's always difficult.

But Chick's are performing kind of in the zone of what we had anticipated.

Matthew Fassler, Goldman Sachs.

I guess the first question relates to the composition of the charges, particularly this quarter.

I know that you had a separation plan that we had a filing for the former CEO of Golf Galaxy.

I'm curious if that was a significant part of the charge that we saw?

As you might expect, we had charges relating to two executive officers at Golf Galaxy.

So the amount of the charge is about a 50-50 split in that $2.9 million pretax on the M&I side.

And then also related to the $2.6 million nondeductible portion on the tax expense side.

Got you.

A second question just relates to the tone of business and fiscal stimulus.

As we have been through earnings in the past couple of weeks, particularly for companies that haven't reported monthly, there are some companies that probably didn't expect to benefit, that in retrospect thought they might have and were able to discern that through, for example, method of payment by consumers, more of a swing towards cash or debit cards as opposed to credit.

I'm curious, as you looked at the tone of business through the quarter, as you looked at ticket trends and means of payment, whether you think that played any kind of a role in the better comps?

We don't think it did.

We don't think we've benefited very much at all from the stimulus package.

I guess the long and short answer is, no, we didn't think we benefited a lot.

Okay.

And finally on new space productivity, 81% is a very good number.

It's probably not quite what you had been showing.

So if you could give us some color, whether you think it's the environment and its impact on your stores, whether there is a geographic tilt to that, and what your expectations are going forward here?

I think there's a couple of things.

There's a geographic tilt to it into those Texas markets that we had talked about and were going to be our most competitive markets that we would do.

And Arizona is a bit more competitive, not like Texas, but that's where a number of these stores were.

So we are pleased with the traction we have gotten there.

We continue to be excited about our move into Texas into the Southwest.

And we will continue to do that in a pretty aggressive fashion.

And does showing 80% versus a 90% or 95% materially impact the ROI hurdles at all or make you think differently about your investment approach going forward?

It doesn't, Matt.

We just think it's a timing difference.

It's just going to be a bit more difficult, which is what we had always indicated, that it would be a bit more difficult in a few of those markets to start out.

But over a reasonable period of time, we don't think it has any impact.

Thanks so much, and congratulations on the quarter.

Kate McShane, Citi Investment Research.

Your comp store sales guidance number for the third quarter is a little bit lower than we expected since you're going up against easier comps than last year.

I was just wondering if there was any timing shift in that number?

Did the second quarter benefit, or will there be stronger comps for the fourth quarter?

We don't -- we just think that it continues to be a difficult environment.

We think that it's going to continue to be difficult out there.

We have no idea what's going to happen with gas prices, energy prices, food prices, and we are taking a conservative approach.

Our comps last year were -- seems like an easy comparison, but they were against the very difficult comparison the year before.

So we're looking at this as a more -- last year and this year as a more normalized weather pattern in the third quarter.

And looking at the economic environment out there, we think that this is the appropriate guidance to provide.

Okay.

And then my second question has to do with store openings.

As you pointed out, four of the store openings this quarter were in Texas.

I was wondering if you could talk a little bit about what you're seeing in terms of the competitive environment in Texas.

And also, I was under the impression that you would be opening more stores in Florida, which we didn't see during the second quarter.

Has that strategy changed just because of the continued weakness in that market?

Speaking to Florida, we don't anticipate any change in our cycle of growth down in Florida.

We are going to continue to be aggressive down in Florida.

It just happened to be where the stores fell for the quarter.

So we're not going to back off of Florida at all.

We are going to continue to move into Florida.

As far as Texas goes, we think that's still a competitive environment as we had always anticipated it would be.

And as I said on the last call, we have seen some traction in Texas and are encouraged by our performance in Texas.

David Cumberland, Robert Baird.

On the Golf Galaxy integration, did your plans change for the timing or nature of integration steps in recent months as you did a re-budget?

Yes, the timing did change.

The previous management came to us and discussed their view of the business and felt that it was in the best interest of the Company as a whole to consolidate the Minneapolis office into Pittsburgh.

So we had not anticipated doing that, but when the management team came and indicated that they thought it was in the best interest based on the competitive environment out there, we talked with them and ultimately agreed with them and have taken the course of action that we have.

We think that, long-term, this is really going to be a better model for the Company with everything being bought here in Pittsburgh.

And as Tim guided, we see that the cost savings are in approximately the $8 million to $10 million range in savings and synergies from a cost standpoint going into next year.

And related to cost savings, could you achieve some in the fourth quarter?

Probably not.

The office will continue to operate in Minneapolis through the fourth quarter.

If there are any cost savings, it will be minimal.

And then, Tim talked about lower advertising in the second half.

The first question relates to that.

Would that be a lower spend ratio, or lower in dollars spend?

And if you could comment why it might be lower and just generally your advertising plans for the second half.

It will be lower in the terms as a percent to sales.

As we have opened stores, you need to advertise with those stores, so the pure number will be higher.

But it will be lower as a percent to sales.

And, as we have gone back and taken a look at some of the advertising and marketing that we have done, we have looked at some opportunities, pulled that back.

Whether that's from eliminating an insert in the newspaper or reducing some pages on some of the inserts, re-looking at some of the TV advertising that we have done.

There is a combination of a number of components that we have looked at and our marketing group has done a great job taking a look at areas to cut back and we'll see that leverage in the back half of the year.

One other question.

Does the $1.27 to $1.36 guidance exclude the $0.01 gain from Q1?

It does not.

Gary Balter, Credit Suisse.

Congratulations, first of all, on a good quarter, another good quarter.

A strange question, but with the Olympics going on, are you selling, first of all, more Speedo swimsuits, but are you in general seeing an impact, or do you normally see an impact from the Olympics?

First of all, we have seen no significant change in the sale of our Speedo's.

The second half of the question, we have really never felt that the Olympics has provided any direct sales increase.

We don't see a direct correlation between sales and the Olympics.

I think there may be some indirect component on a go forward basis, and I think these games have been really exciting for people to watch and have gotten people maybe more interested in sports, at least for this period of time.

But we don't think -- it has not had an impact on our business, and the Olympics never really has.

Okay.

Could you talk -- you had mentioned the competitive landscape, and there has been some questions already on the call.

One of the things that we noticed in the last few weeks is, Sports Authority announced they're doing 37 stores this year, which to us was a surprise.

How many -- do you know where those are going?

Like, are those going -- they're obviously going into your market because they're in those sort of markets, but does that -- are there now two growth companies in this?

Well, I'm not sure.

Sports Authority has continued to open stores.

They have never really stopped opening stores, like some of our other competitors in some of the outdoor categories have significantly reduce their store count.

But Sports Authority is looking into California.

We have seen some activity in Chicago.

But we have competed with Sports Authority for a very long time.

They have continued to open stores and we really don't see it having a big impact on us.

We have an '08 guidance and now you're going to not want to give an '09 guidance, but if you kind of look out to the future, is there some preliminary thoughts you could give us on how you envision margin opportunities or other things for going past the current economic slowdown?

Well, we think that there will continue to be margin rate expansion driven by an increase in private label and private brand products that have been quite successful for us, especially in the help with some of our vendors, such as the Adidas baseball component, Nike ACG.

So we're really enthusiastic about that and feel that that can help drive continued margin rate expansion.

We think that the costs that we have gone back through from this re-budgeting process and looking at costs associated in the business and how we are organized in the business, we feel will continue to pay dividends going forward.

Some of these cost savings that we have put in place, we feel that they are going to be permanent in nature and not a onetime cut the cost and we'll go back and catch up at a later date.

These are fundamental aspects of our business that we have gone back and said how we are organized, where we're making investments, what can we change.

And the vast majority of these are changes that will be permanent in nature going into '09 and beyond.

So on that tone, what comp should we be thinking you need to leverage expenses going forward?

I will -- we're not going to comment on that right now, Gary, for competitive reasons, and we have more work to do.

So I cannot make any comment on that, other than to say that we think that margin rate will continue to expand if the environment does not change.

And we feel that the cost cuts that we have put in place are permanent -- most of the cost cuts that we have put in place are permanent in nature.

Brian Nagel, UBS.

This is Rupesh Parikh for Brian Nagel.

We saw the inventory was up 15% this quarter.

How much of that reflects the Chick's acquisition, and do you see any markdown risk?

We do not see any markdown risk.

We're not going to comment for competitive reasons on inventory in any of these particular banners that we're doing business with.

But I think the number you should be focused on is the fact that our inventory on a per-square foot basis is down 2% versus last year, which is one of the key components that has helped us with a margin rate expansion of 46 basis points in this quarter and the fact that our clearance inventory is down 8.7% which we talked about a few minutes ago, down 8.7% versus last year, which again has helped the margin rate expansion.

We don't see any markdown issues, we don't have an inventory quality issue.

And as I had said at the end of the first quarter call, we see no markdowns outside our normal markdown cadence or anything that would cause us any trouble going forward.

Mitch Kaiser, Piper Jaffray.

Good morning and nice quarter.

I was hoping you could talk a little bit about the promotional environment.

In the first quarter you talked about golf being particularly competitive I think in Atlanta and maybe even the Texas market, and then kind of what you have seen back to school so far.

I noticed you ran 15-off $60 or more on the purchase of footwear.

Yes, we don't see -- the competitive nature of the promotional nature of the primarily golf business seems to have subsided.

We were very aggressive in a couple of those markets and gained significant market share.

We were pleased with that.

And that pricing has continued, but we don't see it escalating promotional activity.

As far as the advertising, that's just normal course of advertising that we did.

Every once in awhile we run a coupon and it was just normal course of advertising.

I wouldn't read anything else into that.

Okay, and then on the Golf Galaxy side, I guess now that it's going to be integrated into Pittsburgh, do you see any change in philosophy in running the business, or should we look for any changes there?

I wouldn't look for any changes.

The management team and the team that had run that had instilled a culture of service in that business that we intend to continue and would see no difference in how that business is run, other than we would like to get to comps moving in a positive direction.

Sure.

Good luck with that.

John Shanley, Susquehanna.

Ed, you mentioned in your prepared remarks that merchandise margins were up 50 basis points, which is great.

Can you tell us if that was primarily generated by the footwear and apparel component of your business?

And, conversely, has there been a slowdown in terms of consumer purchase interest for this bigger ticket hardline items, whether it's golf equipment or exercise equipment and so on?

Well, the margin rate expansion as indicated has really come from a number of different areas across the board in the Company.

So not one particular area, but more of a philosophy of how we're running the business.

So better markdown management, better inventory control, all contributed to the margin rate expansion, along with what we have been able to do with private brands.

And then also, leverage we have had with obtaining better pricing.

So all those things are what drove the margin rate.

What about the bigger ticket items?

The bigger ticket items have been a bit more of a struggle, primarily on the exercise business.

But the golf business has been kind of what we had planned it to be.

We haven't seen a big drop-off in those high-ticket items outside of exercise.

Okay.

As you look in terms of the back half of the current fiscal year, is there a period where you're going to be anniversarying the introduction of a lot of the private-label merchandise that you basically have been getting an extra kick in terms of your merchandise margins?

Was there a period last year where there was a large influx of that type of product that you're going to be anniversarying this year?

Yes, we launched ACG last year in the third quarter.

We had an early launch of Adidas baseball toward the end of the fourth quarter and we had a launch of some of the Reebok performance apparel at the end of the fourth quarter.

Although we were up against those launches we actually feel that the product that we're bringing to market this year is better than the product last year.

We learned we're a lot smarter this year than we were last year about these products and feel that these will actually help enhance sales and margin rate and not put us at a disadvantage of having to anniversary anything.

So we're looking at it as a positive.

Okay, that is great to hear.

The last question I have is on -- you mentioned about the promotional environment within Dick's stores.

Can you give us an indication of whether you are seeing a higher level of competitive promotional activity in the marketplace, either during the current back to school selling season or what you're anticipating would likely be up against as you get further into the fall selling season?

We haven't seen -- the back to school selling season has not been anymore promotional than we had anticipated and really no more promotional than it was last year.

So we have not seen any retailers panicking and dropping prices and being irrational.

That is great to hear.

Thank you very much.

Rick Nelson, Stephens, Inc.

A question about performance apparel.

Are you seeing any resistance at the higher price points within the various lines?

Not really.

The performance apparel business has still continued to be positive, a positive influence on our business and we really have not seen any change.

Okay.

Also a question about Golf Galaxy.

As I visit the stores, I see they just had a 25% more trade-in offer that you're offering on the trade-ins.

How does the accounting for that work?

Does that reduce the margin at the time of the new product sale, or does that work into higher cost of goods sold on the used side?

It's for the most part neutral, because that product if we turn around and sell it, we sell it for what we have into it, or a slight profit.

We also have in the Dick's business, and we can put it to some of the Golf Galaxy products also, a third-party that we have -- it would take in a trade, we turn around and sell it to them and we get our money back out of it.

And there is -- similar to cars, there is a golf bluebook, if you will, that gives the values of these clubs.

And we take those trade-ins based on those values and then turn around and flip them to a third-party.

Thank you for that.

Heely's, you mentioned, was a drag and the quarter and would be, I think you mentioned 40 basis points in the third quarter.

When do you anniversary the Heely's impact?

It gets a lot better in the fourth quarter.

We cleaned out most of our Heely's in the fourth quarter the day after Thanksgiving, but there will still be some impact in the fourth quarter and we'll be completely done with this in the first quarter of next year.

Okay, thank you and good luck.

Bob Simonson, William Blair.

Tim, in the first quarter report you had guidance of $1.22 to $1.36.

In this quarter's, it's $1.27 to $1.36, but it also includes an estimate for the Golf Galaxy cost of $1.20 to $1.29.

That wasn't in the first quarter one.

What was your expectation at that -- in the first quarter, for what these costs would be?

Will, since we went through the re-budget process in the second quarter, those costs were not anticipated when we gave guidance in the first quarter for the second quarter, or for the year.

And Bob, when we had done the first quarter call, we didn't anticipate having the Golf Galaxy office consolidated to Pittsburgh.

It was only after their CEO came down and talked with us and said, based on the way the business is, we feel it's best to consolidate this into Pittsburgh and close the Minneapolis office.

And until that point we had -- we had not anticipated doing that.

That's why there was no guidance associated with it.

Okay.

And Ed, you were asked about some preliminary thoughts on '09 and you were -- those comments, you didn't get direct in terms of margins.

But is your thought process -- you did say earlier that you thought the difficult environment would last into next year.

Your planning, does it assume your comps will be down next year?

We haven't worked through that.

I think we have got to wait and see what happens in the back half of this year.

So I know you're going to try to get me to make some comments on comps, Bob, but I just cannot do it right now for '09.

And we have never done it.

We have never guided comps more than one quarter in advance and give an annual thought at the beginning of the year.

But we haven't done that, and I don't think this is -- under this environment, this isn't the time to start.

Okay, and could you give a couple of examples?

You said many of the cost savings you put in place are permanent.

Could you give us some examples of those?

Sure.

I think some of the advertising that we have modified is permanent in nature.

I think some of the organization and headcount aspects of the business that we've put in place are permanent in nature.

Some of the productivity improvements that we have made through our distribution component are permanent in nature.

So we feel there is a lot of these cost savings and these organizational changes that are permanent in nature going into '09 and beyond.

Final one, I believe you have mentioned that you're going to get into apparel for yoga.

Is that still on track?

Have you got a vendor yet, or some thoughts on the timing of that?

We're looking at yoga.

We will be testing some things with yoga this quarter.

But yoga will be part of our athletic presentation and you should not view it as a game-changing aspect of the business.

It will be an important component going forward, but don't -- we cannot let anybody get ahead of themselves.

We're not going to be looking to be a direct competitor to [Lulu].

It will be a component of our business.

We hope it will be an important component of our business, but it's not going to be game-changing.

David Magee, SunTrust Robinson-Humphrey.

Congratulations on the quarter.

A couple of questions.

One is, on the Golf Galaxy, when you say that the restructuring is appropriate given the business conditions, I'm wondering, everybody knows that golf is in a slump right now.

Presumably it will recover over the next year or so.

Is this the right decision for the next several years?

Are we saying in effect that maybe the benefits from this acquisition will be looked at differently now?

I'm sorry, you cut off the last part of the question (multiple speakers)

(multiple speakers) benefits from the acquisition might be different than we had thought last year?

I think they will be even greater than what we had thought last year.

When we had originally bought the business, we had -- our thought process was, it would be continue to be run out of Minneapolis.

The management team in Minneapolis deemed that that was probably not appropriate, that -- they strongly suggested that we move it to Pittsburgh for cost savings opportunities.

So we think that all the benefits that we put -- that we thought we would get out of this acquisition from a leverage standpoint on the cost side and the margin rate side from leverage with the vendors and stronger partnerships with the vendors and the ability to drive our private brand business into Golf Galaxy, those are all still valid.

The added benefit is that, now based on the request of the former management team that we will have a significant cost savings associated by moving this operation to Pittsburgh.

And secondly, do you go to market any differently with your private label/private brand during times like this when traffic is down year-to-year?

Do you price it any differently, or do you adjust the mix?

(multiple speakers)

We don't make any other adjustments to that than you would think in a normal course of running the business in a dynamic environment, nothing different than what other brands would do.

These private brands that we have in place today, whether it be our partnership with Nike on the ACG brand, our partnership with Adidas on baseball, the brands that we have UMBRO, Slazenger -- these are all brands we're looking to build well into the future in this difficult economic environment that we are experiencing here in '08, and probably into '09 we're not going to shortchange those brands and make short-term decisions that will have long-term consequences with these brands.

Thank you.

And just lastly, are you anticipating any of the equipment lines to be performing better at the holidays?

Are you seeing any ASP compression on the equipment side?

Other than the fitness business, we're not seeing any price compression.

And we think that kids are going to continue to play sports and we think that it continues to be an important part of our business and think it will continue to perform the way it has in the first and second quarters.

Thank you, good luck.

Mike Baker, Deutsche Bank.

A couple of questions.

So your Golf Galaxy golf business was better on the comp line by about 3 percentage points, but you don't think it was rebate-driven.

So was that just promotional something you talk about, and is that reflective of the golf business within the Dick's stores?

That is my first question.

The golf business in the Dick's stores was somewhat better than the Golf Galaxy business.

We expect that -- that's the way it has been, that will probably continue.

As far as the rebate checks, I don't think anybody took the rebate checks, and those who qualified for the rebate checks, I doubt that they did anything in the golf business.

I believe that rebate checks -- unencumbered by any scientific research, I think that the rebate checks went into gas tanks and food on the table.

So then how would you explain the improvement in the Golf Galaxy?

It's still negative, but less negative and arguably a deteriorating environment.

Is it just that, that you think you got a little bit more promotional there?

No, we did not get more promotional.

If you're talking about the difference between the first quarter and the second quarter?

Yes, exactly.

The difference there is, if you remember on the first quarter call we talked about that people, especially in the Midwest and the Northeast, they couldn't play golf in the first quarter.

It was a very late start to the season, and that is what drove the significant negative comps at both Golf Galaxy and at Dick's Sporting Goods.

Both companies, Golf Galaxy and Dick's Sporting Goods, got significantly better in the second quarter.

And as I said, Dick's was slightly better than Golf Galaxy's performance.

That makes sense.

Second question, so I think Tim had said that the ticket was up, yet you had said that some of the big ticket items, it's a little bit more of a struggle.

So is that more items per basket?

And then my last question would be, I think Tim also said that you leveraged fuel cost, so I'm wondering how you accomplished that, given where gas prices are?

I will take the fuel cost question.

We said that the freight was a positive for us in the distribution line.

But we had some offsetting positives in the way we process the business as well.

But keep in mind, we opened up the third distribution center in Atlanta this quarter.

That helps us with less legs in our trips to our stores, and therefore we do save on fuel based on the less amount of travel.

Okay, that makes sense.

And the average ticket being [obviously driven] by more items per basket?

To some degree, but it was kind of a mix shift.

Our bicycle business was very good.

Parts of the -- our kayaks/paddling business was really very good.

Part of that was driven by the mix of product.

I see.

So I guess that makes sense relative to what you said about big ticket.

The exercise equipment is down, but some of the other categories held up reasonably well?

Correct, correct.

Jim Duffy, Thomas Weisel Partners.

A couple of questions on consumer behavior that you're seeing.

Other retailers are talking about a trade-down effect.

Are you guys seeing this?

And if so, do you think that's something that could benefit your private-label and private branded program?

We're not seeing anything meaningful.

I think that is evident in the fact that the average ticket has gone up.

So we're not seeing a meaningful trade-down yet in the business.

Whether that happens going forward or not, I don't know, but -- into the fourth quarter -- but in the second quarter, we did not see that.

So AUR is up.

Is that -- in the athletic footwear category, is that consistent with what you're seeing there?

We're not -- for competitive reasons we're not going to guide by category, but the company as a whole we have not seen a reduction in average ticket.

Okay, thanks, that's helpful.

And then Tim, when I do the new store productivity calculation, I come up with a lower number than 81%

Yes, you would.

We have adjusted the calculation as if the stores were opened the entire quarter because of the impact of having the square footage in the calculation for the full quarter.

Okay, so that's not a Chick's Sporting Goods influence?

Not at all.

Okay.

And then, aside from the newer markets that you mentioned, are you guys seeing big regional disparity in sales trends?

And if so, are you merchandising differently on a regional basis to address this?

We're not seeing a whole -- the only pocket that we are seeing some meaningful weakness, and we're not going to get into it terribly specifically, but is in -- the Carolinas has been a bit more difficult and we think that has to do with some of the financial institutions there that have had a difficult time.

A little bit in Florida, but not enough in Florida to make us rethink our development program.

Okay, and then final question.

Ed, I know you guys have stopped talking about private-label as a percent of revenue.

It seems the private-label and private branded programs have good momentum.

Where would you be comfortable taking that, as a percent of revenue?

Kind of a longer-term philosophical question.

We think that it has the ability to go higher.

We're not going to guide as to what we think that will be.

Our hope is to continue to work with some of our brand partners that -- on these programs such as what we did with Nike, what we did with Adidas.

But we think that there's still some legs there.

But from a guidance standpoint, we're not going to talk about what that might be.

So would you take it as high as it could go, or do you kind of have in your mind a ceiling as to what's the appropriate level?

We have in our mind what we think a ceiling is.

I'm not going to discuss what that ceiling is, but we do have an idea in mind of where we think that ceiling is.

Understanding that it's important to continue to be viewed as a brand house, which is why some of the products that we're trying to develop here are branded in nature, whether it be Slazenger on the golf side or the Maxfli acquisition that we did from TaylorMade, or what we're doing with Nike on the ACG side.

We think that brands are extremely important.

We feel that we have the ability to have the best of both worlds, continue to partner with brands we do business with and have private brands and/or exclusive products to offer our customer.

Very good.

Thanks so much for taking my question.

Hardy Bowen, Arnhold & Bleichroeder.

Ed, in retrospect, do you think that weather has shifted business out of the first quarter to the second quarter about the same as it did last year, or more than last year?

No, that is a really good question.

I really cannot offer you any answer on that.

I think that it was difficult -- the first quarter from a weather pattern was difficult in both years.

So it was probably about the same in both years.

We had a difficult start to the golf season in both '07 and in '08, a difficult start to the baseball season.

Our baseball business went longer this year than it did last year.

When you kind of take relative peak weeks, it all moved, and I think that happened to -- based on the weather.

So I think the weather certainly impacted the second quarter both this year and last year.

So you are looking forward to a little better weather next year, maybe?

You know what?

The one thing -- I try to really focus on things I can control, and I cannot control the weather at all.

So I'm not going to -- we will continue to look at it as kind of the weather patterns as we have had the last couple of years and we will react to kind of whatever the weather gives us.

The guidance for comps in the second half of the year is about the same as what we had in the first half of the year.

The comparisons look a little easier, I would say.

Does that imply that you think the economy is going to be a little worse in the second half of the year, or you are just trying to be conservative?

You don't know what's going to happen.

Hardy, we're not smart enough to know what's going to happen.

I mean there's so many things out there about what is going to happen with the price of oil.

The last I looked today before we jumped on the call, it was back up $4 today.

What is going on with the election?

There's just so many uncertainties out there right now that we just feel that if things don't change in the world, this is what we think it will be.

And, if things get a little better, than maybe we have some upside, but we're certainly not counting on that.

With Golf Galaxy as we integrate is, are we using the same buying teams to buy for Dick's and Golf Galaxy, or do we keep them totally separate or more integrated than they would have been?

They will be more integrated than they would have been, but there will still -- what we don't want to do is, we don't want to have a homogenized assortment between both Golf Galaxy and Dick's Sporting Goods.

We think that needs to be, Golf Galaxy has its own personality.

It has got its own customer base which is a bit more of an enthusiastic golfer than what we have at Dick's Sporting Goods and we need to make sure that we continue to talk to that customer.

So there will be some components of the business that will have shared services, and then there will be other components that will be independent, if you will.

Obviously reporting into the same management team, but there will be a separate equipment buyer, ball buyer, shoe buyer, apparel buyer, to make sure that Golf Galaxy does not lose that -- the personality that Golf Galaxy has developed.

But on the planning side, the allocation side, that will all be -- they will all have shared services there and we'll get that savings and synergies.

Do you plan to have less direct store delivery to Golf Galaxy from vendors than they have had historically?

As we go forward, there will probably be less direct to stores, yes.

Okay, good quarter.

Dan Wewer, Raymond James.

A couple of questions.

First, several of your suppliers are increasing their retail effort.

Particularly noteworthy is Under Armour's comments that it's expecting very strong growth in its direct-to-consumer channel during the holiday season, both for their full-price stores as well as their website.

What is your thought or what kind of discussions do you have with the suppliers who are now becoming competitors as well?

We have had some very direct conversations.

I won't get into what the nature of those conversations were, but we have had some very direct conversations with those brands.

And it's not to wish them good luck?

It's to make sure that we understand exactly what their plan is and what they're doing.

Okay.

And just a separate question.

The golf category appears to be softer now in the US than it has been in 10 years.

Callaway is indicating they are going to increase the number of new products before the holiday season compared to a year ago to help rejuvenate sales.

I think Titleist has been introducing some new lines as well.

I understand that you guys have had a chance to look at the new Callaway product line.

Do you think this will be sufficient to help rejuvenate the golf category by year end?

I think it will be helpful.

We have thought that the fourth quarter was kind of a lost quarter in the golf business, where it's really the best retail quarter.

We have talked to the brands about this and a way to invigorate the fourth quarter.

I think the golf business is difficult.

We think that there's a real market share gain opportunity for us between both the Dick's Sporting Goods stores and the Golf Galaxy stores.

But we anticipate the golf business is going to be a little bit difficult through '09.

And then the last question, you had noted in your prepared comments about an increased number of opportunistic purchases.

What would be a few examples of that, that we would see in your stores today?

It could be -- I won't get specific, but it could be some athletic shoes that we bought off-price.

It could be some athletic apparel we bought off-price.

We bought some golf products off-price as products are being transitioned out and new lines are coming in.

So the group has done a great job making sure that our inventory was in line and that we had the ability from a financial standpoint to take advantage of these opportunities when they presented themselves.

So (inaudible) for example when TaylorMade takes the Burner driver down to $299, that would be an example where you would get protected on that type of item?

You know, if TaylorMade wanted to -- I won't say it was that particular item, but as brands transition out of old product into new product, they can make one phone call and quickly move if not all of their merchandise, the vast majority of their merchandise because of the number of stores we have and the volume we do.

We have a big appetite for this product.

We have kept our inventory in line so that we've got the ability to take advantage of that, and they can make one phone call and get rid of a lot of product.

Sean McGowan, Needham & Co.

Most of my questions have been asked.

I just wanted to know if you could comment on sort of the pace of business throughout the quarter and whether there were any meaningful spikes up or down relative to your expectations?

They were pretty much kind of within our expectations, other than -- the camping business was a little softer in the quarter at the beginning than we had anticipated.

But other than that, it kind of played out the way we thought it would in our guidance.

Was July better than the rest of the quarter?

We have never commented on a month by month basis, and for competitive reasons we're not going to do that.

But the month -- the quarter laid out pretty much as we had anticipated.

Thank you.

[Joe Gagnon], Atlantic Equity Research.

I have a couple of questions around pricing inventory for the golf business.

One of your competitors mentioned that some of the vendors were offering lower prices in the second half.

Are you seeing the same thing?

Are they helping you out in that regard?

Well it depends on what they talked about with lower prices.

Meaning, the prices they charge you.

I understand, but I'm not sure if you mean -- if -- I'm not familiar with what conversation you're talking about.

But, if they're talking about lowering prices on some products that they are discontinuing, yes.

Talking about lowering product on go-forward merchandise that is going to continue into the fourth quarter and continue into the first and second quarter of next year, we have not seen that.

Okay.

And then as far as the inventory for the golf business, I think you said it was down -- for your total business, it was down 2.5% per square foot, right?

And so I know the golf business obviously has performed worse than your other product lines, right?

So I'm wondering, is the golf -- the inventory you're taking in for golf more aggressively down than the rest of your business?

We're not going to comment on a particular category like that.

But, we did not comment that our inventory in golf was down any -- we did not comment specifically what our inventory in golf was down.

We indicated that the comps in Golf Galaxy were down 4.5% and indicated that the comps at Dick's were somewhat better than that.

We're very pleased with our golf inventory right now.

We actually have some open-to-buy to go back out and buy some golf products, which we're able to do at some very advantageous prices.

So our golf business is -- if you take a look at Golf Galaxy down 4.5%, the Dick's golf business being somewhat better than that, you could make the assumption that the golf business at Dick's performed within a pretty narrow tolerance range of what the Dick's Sporting Goods business performed as a whole.

Okay.

And then, I had read somewhere else that a number of like smaller golf retailers went out of business the last year or so, right?

I mean, have you seen that same thing, and has that helped your business as far as giving you better buying power with the vendors and allow you to pick up more market share because all these smaller retailers went out of business?

Yes, we are seeing a number of the smaller retailers who have one, two or three shops in a town having a very difficult time and have seen a number of them go out of business, which is a benefit to our business.

Jeff Mintz, Wedbush Morgan.

A couple of questions.

First of all on real estate, given the bankruptcies that we are seeing in the retail market, have you seen some real estate opportunities come up, or better real estate than in the past six months?

There has been some bankruptcies, but what's going to happen to those retailers and what's going to happen to that real estate is still up in the air.

So to that point, really no.

With the Mervyn's bankruptcy, with the Steve & Barry's bankruptcy and with what Boscov's has filed, Steve & Barry's was just acquired.

Mervyn's, they're looking to reorganize, Boscov's is looking to reorganize.

And some of the -- what is happening to that real estate is going back to the landlord.

We will get a look at that real estate, but we have not made any deals on that real estate yet.

We expect that we're going to get a peek at it.

We'll probably take advantage of some of it.

Some other ones, we may not.

But we'll certainly get a look.

Okay.

And then on sourcing costs, obviously we're hearing a lot about increased costs coming out of China and other places.

I'm wondering what you're hearing from your vendors as well as in your private-label?

Are you starting to see the increases?

And if you are starting to increase prices in stores, kind of what the consumer reaction has been to higher prices?

We have seen some increase.

The increases that we have seen to date we have been either able to absorb or to pass on.

Where we see the biggest increase is coming out of the ammunition category, ammunition in guns.

And there has been -- we expect -- we don't know, but we think that this consumer is the most price-sensitive, so we expect to see some resistance to the price increases with that hunting customer.

Okay, great.

And then finally, on the new store productivity, do you do any analysis or have you looked at the new store productivity when you put a store in a new market versus an existing market and how that kind of breaks out?

We have.

We're not going to discuss it for competitive reasons, we have.

What you get, though, is a blended rate between both new market stores and existing market stores.

Okay, thanks very much and good luck.

Joe Feldman, Telsey Advisory Group.

Question about the advertising.

I know that you increased the ad spending in the quarter as you had planned.

We're just wondering if you got the effectiveness of the response rate that you had projected that would be associated with that in the quarter?

We did.

We were very pleased with the response on the promotions that we put in place.

And so, the answer is yes.

Great, that's great.

You also mentioned earlier in the call when you first were discussing the comps that obviously the Heely's was a drag.

And then, you just said that camping and outdoor in general was a drag on the business.

But you didn't really quantify.

And I guess I was just wondering if you could give us any kind of understanding as to quantification of that, how much of a drag in basis points or what percentage of the business that it is and maybe relative to a year ago?

For competitive reasons, we don't comment to that level.

We think that we wanted to provide color on the Heely's component and a number of other retailers have commented on Heely's and it's a business that we have discontinued and thought that it would be appropriate to give you some color.

But on ongoing businesses, for competitive reasons we're not going to get that deep and that granular.

Okay, and just one other.

With the golf -- I know it has come up quite a bit -- we were just wondering, we understand that it was a little bit better for you at Dick's versus at Golf Galaxy.

We were just curious as to what you think drove that.

I think that, at Dick's, we were very focused around the golf business.

I think we had some opportunities from the year before, and we added an additional golf promotion which was very successful for us that Golf Galaxy did not add.

Got it.

That is helpful.

Thanks, and good luck with the next quarter.

John Curti, Principal Global Investors.

Given your guidance with respect to the level of comps, would you expect -- for the balance of the year, would you expect your inventory levels to be down approximately 2% per square foot at year-end?

And then, if the environment stays relatively difficult into '09 and maybe improves a little bit from where we are at currently, do you expect that there would be further opportunities to reduce that inventory?

We believe -- we didn't guide to what the inventory would be.

At the end of the second quarter, it was down 2%.

We expect it to be below last year's levels in the third and fourth quarter.

And we will take a look at that inventory level on a going forward basis.

But if the environment continues to be difficult, it's in our best interest and it would be our intention to continue to monitor those inventory levels and make reductions, where appropriate.

There are no further questions in the queue at this time.

I would now like to turn the call back to Mr.

Ed Stack for closing remarks.

I would like to think everyone for joining us for our second quarter call.

We were pleased to be able to report earnings in excess of what our guidance was and we'll look forward to talking to everyone at our third quarter call.

Thank you very much.

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

This concludes your presentation.

You may now disconnect.

Good day.