DICK'S Sporting Goods Inc (DKS) 2008 Q3 法說會逐字稿

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

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

(OPERATOR INSTRUCTIONS)

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

Anne-Marie Megela, please proceed ma'am.

Thank you and good morning to everyone participating in today's conference call.

To discuss the third quarter financial results for Dick's Sporting Goods.

Please note that a rebroadcast of today's call will be archived on the investor relations portion of our website located at www.Dick'sSportingGoods.com.

for approximately 30 days.

In addition, as detailed in our press release, a dial-in replay will also be available for 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 discussions 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 material from those projected in the forward-looking statements.

For summary of risk fractures 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 third 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, Finance Administration and Chief Financial Officer.

Joe will review our store development program, 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.

I'm pleased to report another quarter which we met our comp sales and earnings guidance.

We generated a net income of $9.2 million or $0.08 per diluted share, excluding the impact of cost related to the Golf Galaxy integration.

These results are in line with our previously issued guidance of $0.04 to $0.08 per diluted share.

Total sales for the quarter increased 10% to $924 million.

Comp sales declined by 2.8% as compared to our guidance of negative 5% to negative 2%.

Dick's Sporting Goods stores were negative 2.5% while Golf Galaxy stores were negative 7.4%.

Of the negative 2.5% comp from the Dick's Sporting Goods stores, approximately 40 basis points of the decline were attributable to the discontinuation of Heelys.

Golf equipment and exercise also negatively impacted store sales.

Athletic apparel, athletic footwear and outdoor business positively impacted sales in the quarter.

Once again, our inventory levels were under control down 4.4% per-square-foot at the end of the quarter compared to last year on a consolidated pro-forma basis and down 5.3% per-square-foot for Dick's Sporting Goods stores.

Because of the current business trends, the uncertainty in the overall economic environment and the unpredictability of the consumer this holiday season, we are lowering our 2008 guidance from consolidated earnings per diluted share of approximately $1.27 to $1.36 per share to approximately $1.13 to $1.20 per share.

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

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

We are now expecting comp store sales to decrease approximately 5% to negative 4% in 2008 versus a 2.4% gain in 2007.

For the fourth quarter we are anticipating consolidated earnings per diluted share of approximately $0.49 to $0.56 excluding expected merger integration costs related to Golf Galaxy.

Earnings per diluted share were $0.62 in the fourth quarter of 2007.

We are anticipating a comp store sales decrease of approximately negative 10% to negative 6% of the fourth quarter versus a 3.4% increase in the fourth quarter last year as adjusted for the shifted retail calendar.

Both Dick's Sporting Goods stores and Golf Galaxy stores are included in our comp sale stores comparison in the fourth quarter.

For the full year Dick's Sporting Goods stores are only included in the comp store sales base as neither Golf Galaxy nor the Chick's stores were in our comp base at the beginning of the 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.

I would like to commend our associates who have delivered in these very challenging times.

Even with the current economic challenges ahead, we continue to successfully manage our inventory and expenses and continue to look for sales opportunities to help mitigate the head winds in this retail environment today.

I will now turn the call over to Joe.

Thanks, Ed.

We opened 26 new Dick's Sporting Goods stores bringing our total new store count to 43 this year and successfully completing our 2008 new store program for Dick's Sporting Goods stores.

This quarter we entered the following eight new markets.

Orlando, Baton Rouge, Austin, Waco, Milwaukee, Tucson, Fort Myers and Utica.

Overall, approximately 35% of our new stores in 2008 were new markets.

We also added 18 Dick's Sporting Goods stores to existing markets this quarter.

In New Jersey, Chicago, Denver, Phoenix, Minneapolis, Dallas, Raleigh-Durham, Knoxville, Greenville Spartanburg, Memphis, Roanoke, Washington, D.C., and Scranton.

In the quarter, four of our new stores were two level stores and are located in Baton Rouge, Phoenix, Fort Myers and Dallas.

Also in the third quarter we opened one new Golf Galaxy store in Jacksonville and converted our El Segundo Chick's Sporting Goods store to a Dick's store.

New store productivity for the quarter was 76%, and includes Dick's Sporting Goods stores only.

At the end of the third quarter we operated 384 Dick's Sporting Goods stores with 21.4 million square feet, 85 Golf Galaxy stores with 1.4 million square feet, and 14 Chick's Sporting Goods stores with 700,000 square feet.

We expect to open four additional Golf Galaxy stores in the fourth quarter.

In 2009, we expect to add approximately 18 new Dick's Sporting Goods stores, relocate one Dick's Sporting Goods store and add one Golf Galaxy store.

Roughly 30% of the new Dick's Sporting Goods stores in 2009 are anticipated to be in new markets.

We expect that a little more than half of the new stores will open in the first quarter with remaining stores opening in the second and third quarters.

The Golf Galaxy store is expected to open in the first quarter.

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 10% to $924 million.

Comp store sales at Dick's stores decreased 2.5% driven by a 2.2% decline in transactions and the remaining coming from a decline in sales per transaction.

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

Gross profit of $253 million was 27.39% of sales.

106 basis points lower than the third quarter of 2007.

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

SG&A expenses of $229 million were 24.76% of sales.

And 19 basis points lower than last year's third quarter.

Operating income before merger and integration costs decreased to $16.7 million.

As a percent of sales the pro-forma operating income margin of 1.81% was 77 basis points lower than the third quarter of 2007.

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

Net income excluding merger and integration costs decreased to $9.2 million, and earnings per diluted share decreased to $0.08 compared to prior year net income of $12.2 million or $0.10 per diluted share.

Net income of the third quarter of 2008 includes a tax benefit equal to approximately $0.01per share.

This tax benefit resulted from the resolution of state income tax audits.

Let's move to the balance sheet.

At the end of the third quarter inventory per square foot was 4.4% less than in 2007 on a pro-forma consolidated basis and 5.3% less per square foot for Dick's Sporting Goods stores only.

We ended the quarter with $185 million in outstanding borrowings on our $350 million line of credit as compared to $140 million in outstanding borrowings last year.

Our borrowing rate is Libor plus 75 basis points averaging 4.29% in the third quarter.

Net capital expenditures were $41 million in the third quarter or $51 million on a gross basis, in line with our previous expectations.

We are expecting net capital expenditures of approximately $125 million in 2008 or approximately $200 million on a gross basis.

As we look to the remainder of 2008 and 2009, we are cautiously evaluating the economic environment including the tightening credit markets and the impact we believe it will have on our business.

For the remainder of 2008, we will keep focusing on our gross margin by effectively managing inventory, growing private brands and emphasizing value in order to partially mitigate the occupancy and distribution deleverage that we are expecting.

As we mentioned in the last earnings call, we have opened our third distribution center and expect to absorb a P&L impact of about $0.01 in the fourth quarter for operating costs for this DC.

We are also currently expecting that promotional activities and costs associated with the Consumer Products Safety Improvement Act will have a merchandise margin impact in the fourth quarter and estimates of those activities are incorporated in our guidance.

We will continue to aggressively manage operating expenses in the fourth quarter.

In addition to margin pressures, the continued downturn could result in potential asset impairments including goodwill.

We are currently expecting additional merger and integration costs pre-taxed of approximately $4 million in the fourth quarter, as a result of the Golf Galaxy integration.

The costs are one time in nature and relate to severance, retention, office closure and related taxes.

We are now anticipating that approximately $2 million worth of synergies as a result of this integration will be realized in fourth quarter of 2008 with the remaining $6 to $8 million expected in 2009.

This, too, is included in our guidance.

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

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

We have also amended our credit agreement to exercise the accordion feature and increase the aggregate revolving loan commitments by $90 million to a total of $440 million under the same terms and conditions.

Our action to create this increase to our borrowing capacity coupled with our strong balance sheet provides us with additional liquidity to manage our business despite the current volatility in the credit market.

We believe the tough macro-economic environment will continue through 2009.

As such, we will focus on merchandise margin opportunities, continue our expense management efforts and plan inventory levels down accordingly.

The real estate market is also facing challenges and while we continue to execute our growth strategy, it will be completed at a more modest pace as described earlier by Joe.

Accordingly, we were anticipating a lower CapEx spend in 2009 as compared to 2008.

Finally, I would like to clarify any confusion that may exist regarding our lease obligations.

Contrary to what has recently been implied by some commentators our leases do not have abnormal escalation clauses nor are they backend loaded.

Our leases are standard in that they typically have ten year terms with multiple five year renewal options.

These leases do have rent increases every five years averaging about $0.50 per square foot.

Additionally, in accordance with generally accepted accounting principles, our rent expense is smooth or straight lined over the lease term.

Our future minimum lease payments in total are expected to increase simply because we are a growing company.

The increase from 2007 to 2008 is because we have opened new stores, acquired 15 Chick's stores and opened a distribution center in July which we lease.

The total future minimum lease payments are expected to increase slightly from 2008 to 2009 due primarily to the fact we will have a full year of rent for the distribution center in 2009 versus half a year in 2008.

And secondly, in 2009 there is a full year of rent on stores that open in 2008.

We expect these investments to drive new sales and create distribution efficiencies that will positively impact earnings.

In summary, we have executed very well and in an already challenging environment as evidenced by our results.

However, we recognize that tougher times still lie ahead and we will manage through them with the same tenacity and discipline that has helped us to become the leading sporting goods retailer.

This concludes our prepared remarks.

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

Thank you.

(OPERATOR INSTRUCTIONS).

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

Please proceed.

Thanks a lot.

Good morning.

Two questions for you.

The first relates to store growth.

You had intimated earlier in the year that you would contemplate pulling back on your real estate plan and as of the end of the second quarter you had not done so here clearly.

It seems that you stopped the program in its tracks based on the number of openings and timing.

If you could talk to us about what your thought process was, what changed from last quarter to this quarter and to the extent that you were ultimately to choose to get this back on track.

How much will -- time would you need and then I have a quick follow-up.

The main reason for the slowdown was not so much us, although we were certainly taking a bit more of a conservative approach.

What's happened is in the real estate community there is not as much product being delivered.

There is not as many shopping centers being delivered and some of the leases that we had either LOI's out on, or that we had signed some of those had slipped into 2010 because of landlord issues.

Some other ones in our leases we have pretty strong co-tenancy language of who will be represented to be in the center with us and that a significant amount of the GLA is leased.

And a number of the projects we have been looking at can no longer meet that criteria.

As opposed to being there alone or not being there with the center we originally signed up on, we think it's prudent to slow it down.

But, if things get better and other people start opening stores and the developers can put everything in place that they had promised us or we had contractually obligated both of ourselves to, we can move this pretty quickly once things turn around.

Got it.

My second question relates to your convert.

If you could just explain to us what your potential obligations are vis-a-vis your convertible issue in 2009, whether that is something you might have put to you or you might choose to redeem and how you are thinking about your capital structure in that context.

Matt, this is Tim.

The way our convert works today, in February 2009 we have the option to call the convert and the convert holders have the opportunity to put the bonds back to us.

So there could be an event on our choosing or on the bond holder's choosing in February.

Is the credit lines -- is the execution of the accordion feature on the credit line perhaps to accommodate taking that back on to your balance sheet?

Actually, we were comfortable with our credit line as it stood.

We thought it was prudent to exercise the accordion provision in light of the expectation that 2009 isn't going to get much better than 2008.

We believe we had sufficient liquidity but the added insurance was going to make us more comfortable.

So then you could use cash on hand and then the line if necessary to take into convert come February?

That's correct.

Thanks so much.

Appreciate it.

Thanks, Matt.

Your next question comes from the line of Robbie Ohmes with Merrill Lynch.

Please proceed.

Thanks.

Good morning, everybody.

Ed, I was hoping you could talk a little bit more about what you have seen out there so the new comp guidance for the fourth quarter is a nice downward shift from what you guys did in the third quarter, can you speak to actually two things.

How much of this is what you are already seeing November to date versus what you expect could happen for the holiday season?

And then the second question is, if there has been a meaningful change in trend, has it been across the store or have categories that were holding up like I think you mentioned athletic footwear and apparel, have they had a meaningful change in momentum, say as we have gotten into November or in your revised comp guidance for the fourth quarter.

Thanks.

Robbie, what we've seen is the businesses that had been strong have continued to perform in a similar fashion.

Our guidance is really I think similar to some other retailers that we just don't know what the consumer is going to do this holiday season.

It is so -- we were very pleased with the performance that we were able to deliver in the third quarter and in a very difficult environment.

But as we get into the fourth quarter we just don't know and don't have a sense of how the consumer is going react to this holiday season.

Also in this holiday season is somewhat of the perfect storm that we have five or six less days to shop between Thanksgiving and Christmas this year.

And we think that could have a negative impact also.

We are trying to take all of these things into account and provide guidance that we are comfortable that we will be inside that range.

And just a quick clarification, the athletic footwear apparel and outdoor, were they generating positive comps in the third quarter?

Some of those -- yes, the outdoor category was really quite good.

Athletic footwear was good when you take out Heelys.

If we take out the Heelys piece it was good.

And the athletic apparel was slightly comp positive.

Okay, terrific.

Thanks very much, Ed.

Sure.

Your next question comes from the line of Rick Nelson with Stephen's.

Please proceed.

Good morning.

Good morning.

In regards to stores, I'm wondering where you stand with the conversion there and how you think about expansion in California now given the economic challenges there?

Well, the challenges in California are not terrific.

California market we've all read is difficult.

We are pleased with the conversion that we did of the one store in El Segundo.

So we are going to take a look as we learn and analyze this business through the -- what's been part of the third quarter into the fourth quarter and then we will decide how quickly we will go with these other conversions.

All in all, we were really very pleased so far with what we have done with El Segundo in this very difficult environment.

And a question on the comp guidance.

If you could provide some color on how you think about the Dick's stores and the Golf Galaxy stores and perhaps if you could talk about the golf category how it performed in the Dick's stores relative to the Golf Galaxy stores in the third quarter.

Not meaningfully different.

The Golf business is a challenging aspect of the business today.

We expect it to continue to be challenging in the fourth quarter.

We don't think there is going to be much of a change in the comp performance of the golf business in either of the Dick's Sporting Goods stores or in the Golf Galaxy stores.

If you could comment on the inventories specifically of the Golf Galaxy stores.

Yes, we are pleased with the quality of the content in both the Dick's Sporting Goods stores and the Golf Galaxy stores.

We will be making some changes to the apparel presentation and assortment going into the first and second quarter of next year.

But right now we are really quite pleased with the quality of the content.

We will be taking some markdowns as we look to remerchandise the apparel business, but that's all included in our guidance.

Thank you.

Good luck.

Thank you.

The next question comes from the line of Kate McShane with Citigroup.

Please proceed.

Hi, good morning.

Hi Kate.

Can you tell us if -- was there any impact from favorable weather in the third quarter that would make your outdoor or outerwear business -- do you see any outerwear sales pull forward in Q4 and Q3?

Kate, we do.

We think we did get some cold weather toward the end there.

And we do feel that some of that could have been moved from the fourth quarter into the third quarter.

As you know we try to keep weather conversations out of our commentary.

One of the things with our guidance in the fourth quarter is we feel some of that outerwear business may have been pulled into the third quarter.

Okay, great.

How are you viewing new product introductions in the light of this macro environment.

For example, you have a new product introduction with the Under Armour running shoe coming out next year.

Could something like that contribute positively to the quarter?

Or is the environment so tough that new product introductions won't be enough to pick up the consumer shopping?

I think new product introductions if they've got enough juice with them will spur the consumer to get out there.

I think the introduction of the Under Armour running shoes is one of those products.

We are very enthusiastic about that.

The cross training shoe that was introduced, we had a great success with that.

We've taken a pretty aggressive position with Under Armour around these shoes and we are pretty enthusiastic about it.

It will have very little impact on our fourth quarter because the shoe is introduced on the last day of the fourth quarter.

So it would have more of an impact on the first quarter of 2009.

Great.

And if I could ask one last question.

How would you characterize the promotional cadence of your stores during this quarter versus last quarter?

Are vendors paying more markdown money as a result of the environment quarter-over-quarter.

We think that it is going to be, obviously a bit more promotional this fourth quarter than it has been in the past.

We have received great support from our vendors on either support on markdown dollars or support on being able to purchase products off price that we can make our appropriate margin and give the value to the consumer.

Okay.

And then Q3 versus Q2 in terms of the promotional cadence, was it incrementally more than the second quarter?

I don't think a lot Kate.

Nothing meaningful.

But we think that the fourth quarter could get that way.

And we were planning it that way.

That's in our guidance.

Okay.

Thanks very much.

Sure.

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

Please proceed.

Thanks.

Ed, the new store productivity at 76% is lower than your run rate the last few years and past calls you note that the competitive environment in Texas is contributing to that weakness.

Could you discuss what you are doing in Texas to improve the sales performance in the stores and then also discuss what the competitive environment in California will look like and if you would expect those stores to ramp better than they are in Texas.

I think from a competitive standpoint, California is a much different competitive environment than Texas.

So I think in a normal time those stores would ramp -- we would think those stores would ramp better than in Texas, although I think the economic environment in California may mitigate that to some extent.

In Texas, we were really quite pleased with the traction we have gotten.

The marketing campaigns that we started to put out in the Texas area.

We've gotten more price competitive in Texas to compete with our largest competitors discount prices.

And we have seen some real traction there.

And this 76% that we showed a new store productivity is better than it was in the third quarter, up from 69%.

So we think as we move forward here our hope is to continue to improve that number.

Is that price competition you are alluding to, was that one of the reasons why margin rate is declining year-over-year?

No.

I don't think that has any meaningful impact with the number of stores we have in Texas.

Ten, eleven stores in Texas versus on top of almost 400 stores, it's having a very small impact on the margin rate.

And one other quick question.

On the golf category, several of your suppliers in the golf category are indicating their preorders for 2009 are better than they were in the last couple of years.

They claim they are seeing some benefit from new product launches.

Yet it doesn't sound like you're in agreement with that.

You aren't seeing any potential benefit from these new launches.

Would that be correct?

We think the golf business will continue to be difficult into 2009, yes.

Great.

Thank you.

The next question comes from the line of Brian Nagel with UBS.

Please proceed.

Hi, thanks.

Good morning.

In my first question, I wanted to talk further about the new store opening plans as you look into 2009.

The question there, how much flexibility do you have to change those -- to change your own store opening plans if the environment remains tough or gets tougher from here and perhaps what may be happening from some of the developers?

If we wanted to change that we have some flexibility to do that.

We are very comfortable right now with where we are at.

But we still have some flexibility into 2009.

Are you seeing -- as you discuss rent rates with developers, are they coming down yet?

We were seeing better rents, yes.

And next question, this is on the recent performance, have you seen much of a spread between the sales performances of your stores on and off at the mall?

Not really.

We have got stores in power strips.

We have stores in the mall.

We have stores in some free standing stores.

We don't see a real difference between any of those formats.

Then final question, and I apologize if someone asked this.

Did you comment about the trend in business throughout the quarter and should we take the fourth quarter comp guidance as an indication of what trends were like in the latter half of Q3?

We have never given guidance on a month-by-month or how things trended in the quarter.

But you could draw a conclusion that in the month of October when everyone thought the world might be coming to an end that impacted our sales like everyone else's.

Thanks a lot.

Sure.

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

Please proceed.

Thank you.

Can you elaborate on the Consumer Product Safety Improvement Act that Tim mentioned, what types of costs will you incur and can you quantify the costs and were those costs included in your prior guidance.

Actually, the CPSIA issue is relatively new.

The guidelines only came out in the matter of the last 60 to 90 days.

And this is more of an an issue on making the standards more difficult in terms of lead content and phthalates content in products that are being sold.

What we have done is included in our guidance a certain impact on our gross margin on dealing with that product.

But we aren't going to discuss the exact amount that we set aside.

Thanks.

My other question, did the Phillies winning the World Series have a meaningful impact on your results?

Well, we were happy that the Phillies won the World Series, but the Red Sox had won it the year before.

There wasn't much of a difference between the Red Sox and the Phillies.

Thank you.

We were glad they won.

The next question comes from the line of Michael [Lasso] with Barclays Capital.

Please proceed.

Thanks for taking my question.

As you think about your real estate development strategy and to the extent that the real estate development continues to remain difficult for the foreseeable future, would you consider moving more into existing malls and existing developments as a way to pursue future growth?

Sure.

We do some redevelopment today also.

Yes..

What's happening today is we all heard of a number of people who are closing stores via circuit city or linens.

And issue is those boxes are too small with our store being single level store being approximately 50,000 square feet, those stores are in that 20 to maybe 30,000 square feet.

So they are a little small.

We don't see any retailer going out that creates that space.

Now a couple of retailers go out together and the space can be assembled in a appropriate power center today or appropriate mall, yes, we would look at redevelopment projects.

Okay.

And then with flowing square footage going next year, how should we think about the SG&A cost savings besides preopening expense and should the order of magnitude with the preopening expense decrease be similar to the new store growth decrease, if that makes sense?

I think if you are asking if it will go down pro rata, the answer will be yes, pretty linear.

Beyond just the preopening expenses will there be an SG&A reduction or slowdown as well?

I think that the SG&A that we have to put in place to open up those stores, the incremental stores is minimal.

I wouldn't look for big increase or big leverage of SG&A because we will slow the store rate down.

Okay.

Last question, can you offer ticket versus traffic trends for the quarter?

Right.

Our traffic trend was down negative 2.2%.

And our ticket trend was down negative .3%.

Thank you.

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

Good morning everyone.

This is actually Christopher Svezia for John.

I have two questions.

First, how should we be looking at the private label brand business given your anniversarying some of the key initiatives and launches and the Adidas baseball and Reebok apparel, I think ACG was in Q3.

How are you still -- are you still seeing the level of margin improvement versus branded product and this environment?

Or has that deteriorated somewhat?

It hasn't deteriorated.

We still see that same differential.

And we feel that as we move forward with some costs coming down and us having a bit more buying power, we think that those margin rates will either stay equal or expand a bit.

That's good to hear.

Are you just to add to that, Ed, are you starting to see some improvement coming out of some of these countries in terms of wares, you are seeing lower commodity pricing and costs, obviously the labor piece continues to be some inflationary.

Is that incrementally starting to help you as you look at private label and private branded from a margin perspective?

Yes, especially on the hard line side of the business.

Okay.

And then the other -- On the fitness category, you made some changes with regard to your private brands.

I know you've improved some of the technical features, but obviously it continues to be a tough category for you guys.

How should we be looking at the relative performance of fitness here for Q4 and I guess, more specifically the inventory position that you have, and I assume you've incorporated your thoughts about fitness into your guidance that you've given from a comp perspective down ten to six?

We have.

We expect fitness to continue to be difficult.

We don't see any change there.

We feel very comfortable with our inventory levels with products that we have in stock today and products that we have coming in.

Our planning and our planning group and merchant group has done a terrific job making sure that we are not overinventoried and looking at significant markdowns on the backend here.

I think the group has done a terrific job managing this fitness business which is amongst the most difficult businesses we have.

Is it fair to say, Ed, that the inventory position on a per square foot basis in Dick's on the fitness pieces are lower than the down five and change that you indicated end of the third quarter.

I don't have that number, but we aren't going to guide to that number exactly.

Your assumption would not be wrong.

Thank you very much.

Thank you.

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

Please proceed.

Thank you.

Just a couple of questions.

One is, just using your math from this year when you look at the comps, it looks like there is a nickel impact from every negative point of comps.

As we think to next year with less stores opening and more attention to expenses, how should we be thinking about that?

Well, Gary, you might be a little high on your EPS impact on the -- for every 1% of comp.

But as you expect, if we are looking at 2009 to be somewhat more -- as difficult as we were experiencing in 2008, we don't intend today to give you guidance for 2009, but sales and comps could be difficult.

But that I recognize.

But whether the expense opportunities that you have beyond obviously less preopening and less cost associated with new stores and less cannibalization from that.

Well, there are a number of things.

We were looking at how we re-evaluate some things we do from an advertising standpoint.

We have taken a look at our insert program.

We have looked at what inserts are not as effective and do we want to cut some of the inserts that have been the least effective.

We also talked about do we take some inserts analyzing these inserts where the pages have been less effective.

If we ran a 16 page insert can we go to a 12 page insert.

We have taken a look at some other components of our marketing program and what can we cut there and Jeff Hennion, our Head of Marketing has presented some really well thought out opportunities to reduce expenses there.

We think that as we go forward from a distribution standpoint of actually running the distribution center we will have the Atlanta distribution center up and running and it will be more efficient this year than it has been last year which will certainly increase productivity.

We have taken a look at what we will do from a hiring standpoint and we will not let our hiring and our head count grow unless we feel that the business can support that.

So we don't feel that we have to have any meaningful addition and infrastructure that will impact our expenses.

We are also taking a look from a CapEx standpoint what we can do from a CapEx that can be postponed into 2010 or even 2011.

We will save the capital which certainly means we will save the interest expenses associated with that and the depreciation expenses associated with that.

So I can tell you from an expense standpoint, capital allocation standpoint we were looking at every single line item with a fine toothed comb.

That's helpful.

One last question.

When you look, you mentioned I think ticket was essentially flat based on an answer to a previous question.

Within categories are you seeing any trade down?

In other words in the fitness apparel trade down from Under Armour or other brands or something along those lines?

We haven't.

Whether it be Under Armour or whether it be Nike, those premium brands have continued to hold their price points.

We haven't seen a meaningful trend down in any of those brands.

Great.

Thank you.

Yes.

Your next question comes from the line of Sean McGowan with Needham, please proceed.

Thank you.

A couple of quick clarification questions and then some bigger ones.

Tim, what should we be looking for in the tax rate for fourth quarter and going forward, back to previous rates?

That's correct.

Thanks.

If you wouldn't mind repeating what the schedule and timing of new stores I didn't quite catch that, the new Dick's stores next year?

We said that half the stores would open up in the first quarter and the rest equally spread between the quarters two and three.

Thanks.

And some bigger questions, again, on the rent trends, you said you are seeing some reduction in new rents.

Are there any opportunities given your clout in a lot of these malls to revisit existing rents?

I don't think so.

I think that's -- I think that's pretty difficult, in real estate, a deal is a deal.

And I think it would be pretty difficult to go back to some developers and ask them for additional rent concessions.

As we take a look at options where we have some term, where there is not a lot of term left, we will go back and start to renegotiate some of those leases right now and we will attempt to look at some lower rents to sign up and extend the term.

But to go back and just unilaterally ask them to lower the rent, that won't happen.

Okay.

And then the last question, I know this has come up before in previous calls and the performance of fitness I think kind of leaves to asking again.

Are there any thoughts about changing the allocation of space to fitness given what is likely to be a lot of pressure going forward on that category?

Actually, there is.

We were having those conversations right now.

And we think there is a possibility that fitness is oversized based on the environment the performance of fitness today.

If that doesn't change and we don't expect it to, I suspect you will see different allocation of space come this spring and into 2009.

Any suggestion as to what might be a beneficiary of that?

We definitely have ideas, but I'm not ready to talk about it yet.

I would have been surprised if you did.

Thanks a lot.

Thanks.

Your next question comes from the line of David Magee with SunTrust Partners.

Please proceed.

Good morning.

Good morning.

A couple of questions, one is, on the consolidation front, do you think that's going to be a big part of the story next year?

Do you think that the trends in this sector are weak enough to call a significant consolidation?

I don't know for sure.

But you would certainly think as you see a number of other retail segments that are experiencing that consolidation, you would think that there could certainly be some consolidation in this industry.

Have there been any below the surface that we are not aware of so far?

In terms of Chapter 11s or worse?

I haven't heard of anybody who has filed.

But you would think that it's a difficult environment out there.

There are some players that traditionally have not been as strong as they might need to be.

To get through this environment could be even more difficult.

And secondly, are there any trends of interest with the loyalty card in this environment, does that help stabilize your business or is anything different about that performance in recent months?

I don't think there is anything different about that, although I do think that our loyalty program is an important component of our business and we will be talking to those -- our score card customers a bit more this holiday season than we have in the past.

Great.

Good luck.

Thank you.

The next question comes from the line of Michael Baker with Deutsche Bank.

Please proceed.

Thanks, guys.

Really two questions.

One is trying to get to some of the gross margin outlook going forward and I guess similar to a previous question.

If we assume the same level of negative comps next year, is it fair to say that you might see less pressure on your gross margin because you are opening fewer stores so you wouldn't impact the occupancy as much and the fuel cost might come down so you might see some relief there on the distribution?

Is that a fair statement?

Those are all fair statements.

Is that something that would be fair to models for 2009?

I think you could plug that in -- I'm not sure what assumptions you would use there.

Yes, to have a component of that in your model would be appropriate.

And I guess similarly, the third point is that a third thing that might benefit you, I think going off some of the commodity costs coming down in the world, does that help your initial markups on your merchandise?

I'm not sure it helps the initial markups.

Intuitively you think it would.

But, it also gives the opportunity to get prices back to where they may have been a year or 18 months ago that may spur some additional sales.

I'm not 100% sure -- I wouldn't necessarily put in your model there is going to be margin rate expansion because costs are coming down.

But we think it might help spur sales.

Okay.

I think that makes sense to you.

Perfect sense.

One other question is for Tim.

Tim, recently, I spoke to you and you mentioned a potential restatement coming, I think it was a couple million dollars in your interest expense that might restate some past numbers down.

Could you explain that again?

In 2009 there is new accounting coming out on the converts.

As we get into the 2009 reporting period in the first quarter, there will be some restatement of the years that are going to be comparative to the '09 quarter.

There will be an increase in interest expense because we have to account for the component of the convert that's debt versus equity.

That's going back but it's also would impact the interest in 2009 assuming you don't call the convert, is that true?

That is correct.

Okay, thank you.

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

Please proceed.

Thanks, good morning.

Good morning.

Ed, question for you, can you comment on the environment for opportunistic buys and maybe allude to what extent you were able to capitalize on that in the third quarter.

There are certainly some opportunities to -- I won't comment on specific items from specific vendors.

But there have been some opportunities that we have been able to purchase in the third quarter and into -- in the fourth quarter from other retailers that have canceled orders or on credit hold or whatever it might possibly be.

We had an opportunity to do that, yes.

We expect that will -- that may even increase toward the end of the fourth quarter and into the first quarter which is why one of the reasons we have been so diligent on this inventory to make sure that we've got open to buy and the ability to take advantage of these.

On a go-forward basis, do you expect those opportunities to continue into '09?

Or is that something that's created by severe dislocation that we've seen in the past couple of months?

I think that depends.

I think vendors are doing the exact same thing as retailers are trying to control their inventory.

As one of the previous questions talking about consolidation, if we do get some consolidation in this industry after the first of the year, then I think, yes, there will be some more opportunity buys that will continue into '09.

Okay.

And then I was surprised to hear that you don't think that you are seeing a trade down benefit.

Have you seen any improving sales trends in your private label program that suggests customers are maybe a bit price averse?

We have -- as we said, our ticket was down .3%.

And I don't have -- I probably should, but I don't have specifically what the golf component of that was.

I bet you a meaningful part of that .3% reduction in ticket had to do with the reduction in the golf business.

So we haven't seen a whole lot of that.

People are still trying to from a quality standpoint they want quality products which is what we got from our premium vendors such as Nike, Under Armour, Adidas and we haven't seen a big drop in the price associated with that.

Okay.

And do you have data on credit card versus cash purchases on a year-to-year basis in the quarter?

We do.

And that relationship hasn't changed much on the plastic side.

Up 76% of our business is plastic.

The rest being cash and check.

Okay.

And then final question, Tim, what would you characterize as maintenance CapEx for the business?

We typically do not disclose what the maintenance level of CapEx is.

Okay.

Thanks very much.

Good luck.

Thank you.

The next question comes from the line of John Zolidis with Buckingham Research.

Please proceed.

Good morning.

This is Jody Yen on behalf of John.

I have a question on occupancy.

Do you expect occupancy to grow more slowly in 2009?

We expect that it could.

We don't have everything from a new store standpoint locked down.

But with opening up fewer stores it would be safe to assume that occupancy would grow at a slower rate.

Okay.

Can you just break down how much of occupancy deleverage there was in the quarter versus the freight and merchandise margin?

Approximately 107 basis points of deleverage occurred on the occupancy line.

And what does occupancy include besides the rent?

It's rent, common area, expenses, real estate, taxes, utilities and depreciation for stores.

Okay.

And second question is on the growth of Golf Galaxy, have you considered stopping the growth of Golf Galaxy.

We have.

We will open one or two Golf Galaxy stores next year and that's it.

The stores that we are opening in the fourth quarter are leases that were signed by the last year or earlier this year with the previous management team.

And we are looking to sign possibly only one new Golf Galaxy lease next year and that will be it.

Do you think there is a chance you need to take impairment charge?

That hasn't been determined yet.

We are looking at that.

But, as the business continues, if it trends the same way, there is a possibility.

Thank you very much.

Your next question comes from the line of Reed Anderson with D.A.

Davidson.

Thank you.

Most of my questions have been answered.

Tim, on the CapEx, what of the 200 million of gross '08 CapEx is just for store development.

If you take a look at about 750,000 of CapEx per store by the number 43 stores that we have built, you can get there.

And then, Ed, on your comment on the outdoor business being good, I presume that applies to the hard goods side of that category, is that correct?

The hard good category was better than the soft goods category.

And a big part of that was attributable to the thought that we were going to have a democratic controlled congress and a democratic President.

And the issues around gun control, etcetera.

That certainly has helped spur that demand of that product.

And so would that have been a little drag on margins down in the quarter, thinking firearms would be below the gross margin?

We definitely -- the margin rates on firearms and ammunition are certainly lower than most other categories.

Good.

And then last one, I know it's a small piece of your business, I'm curious, are there any meaningful trends or anything to infer from what you are seeing in your on-line order activity?

Not really.

I mean, it really isn't a big difference this year versus last year what we are seeing from an on-line standpoint.

Great.

Thank you.

Your next question is from the line of Hardy Bowen with Arnold & Bleichroeder, please proceed.

Hi Ed, in late October and November, is it getting to be a more promotional environment, are we getting more requests for price matching in the stores with Sports Authority specifically and possibly also with North Face in the mall, that kind of thing?

North Face specifically, no.

Sports Authority has been a bit more aggressive from a couponing standpoint, but we are not getting a lot of requests.

I have just spent -- I have been out into the stores.

I'm out in the stores roughly two days a week in different stores talking to our people and we are not getting an awful lot of feedback from our customers coming in asking us to match prices with Sports Authority.

They seem to be a bit invisible.

You think Sports Authority is likely to survive this?

Hardy, I have no idea their capital structure.

We have no visibility to their performance.

I would suspect they will survive.

In a period where less stores are going to be opened, does it make sense to buy in shares and accumulate stores that way?

There are a number of things that we can use cash for.

Right now I think with what's going on out there in the banking industry, the credit industry that our strategy in tactic right now is to conserve cash.

Okay.

Sounds good.

Okay.

Your next question comes from the line of Robert Samuels with Oppenheimer.

Please proceed.

Thanks.

My question has been answered.

Thank you.

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

Please proceed.

Hey, guys.

How are you?

Joe.

As you think about next year's, I know you reduced the number of stores you are claiming to open, any changes or tweaks to the format?

Do you plan to open smaller stores?

Bigger stores?

Any changes in adjacencies in the layout of the store that you open next year?

Really, nothing significant other than the fact that we are looking at what happens with the space associated with the fitness business.

We do think based on the trend right now that we are going to need to take a look and make that space more productive by shrinking that down and putting something in there that we think will be more productive.

Thanks.

One more question.

Just as you are thinking about this holiday season, obviously we know there is not as much hiring going on, are you still planning to have incremental hiring for the holiday season?

I'm sure it's in your guidance, but how are you think about labor and managing labor with demand for the holiday period?

This is, Joe -- we are not seeing anything meaningfully different than we have in the past years from the labor point of view in the stores.

Everything seems to be pretty similar to year's past so we aren't seeing anything meaningfully different.

Got it.

Thanks, guys.

Good luck with the quarter.

Thank you.

Your next question comes from the line of Sam Poser with Sterne, Agee & Leach, please proceed.

Good morning.

A couple questions.

Number one, on the release today you had a sale of an asset for $2 million.

Can you discuss what that is, please?

Back in the first quarter we sold an aircraft.

Okay.

And accounts receivable were up fairly significantly.

Can you discuss what's driving the accounts receivable there, please?

Our accounts receivable balance is made up of several items.

One of them the major items has to do with tenant improvement allowances that we get from our developers.

And depending upon the timing of our agreements with those developers it can have a fluctuating impact on the balance.

And then the last question, hunt, camp, fish, was that included in the outdoor number that was doing well?

Or how is that part of your business doing?

The whole outdoor category is what we were discussing.

Thanks very much.

Thank you.

The next question comes from the line of [Cathy Schick] with KBC.

Please proceed.

Hi.

I just wanted to confirm when someone asked you before about paying the puts on the convertible bonds assuming those are put back to you that there is no issue with drawing down the bank line for that, you wouldn't be violating any covenants?

We have a specific carve out to allow us to take care of that.

Ok.

So you could draw down that whole $172.5 million if you needed to?

Absolutely.

And, we are comfortable, we have plenty of availability to do that.

And we felt that way even before we exercised the accordion provision.

We thought in this environment it would be best to exercise the accordion provision.

Thank you very much.

Your next question comes from the line of John Emerich with Iron Works Capital.

Please proceed.

Three unrelated questions.

First is can you just talk about the CapEx and not providing earnings guidance but CapEx outlook for this full year and possibly into next year?

CapEx for 2008 is 200,000 -- excuse me, $200 million gross and $125 million net.

And we haven't yet provided guidance for '09.

$200 gross.

Great.

Thank you.

Did you have another question?

Operator, I think that -- does that conclude the questions?

Yes, sir, it does.

Okay.

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

And we look forward to talking with everyone after the holiday season.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.