DICK'S Sporting Goods Inc (DKS) 2008 Q4 法說會逐字稿

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

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

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

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Anne-Marie Megela, Director of Investor Relations.

Please proceed.

Thank you very much, Dan.

Thank you and good morning to everyone participating in today's conference call to discuss the fourth quarter and full year 2008 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 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 you we have included in today's discussion some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

For a summary of risk factors that can cause results to differ materially from those expressed in 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 the Generally Accepted Accounting Principles and our related reconciliation, can be found on our website.

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

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

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

Joe will review our store development program and Tim will then discuss in more detail our financial results.

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

Thank you, Ann Marie.

I am pleased to report another quarter in which we delivered comp store sales and earnings results in line with our expectations.

We generated net income of $63.4 million or $0.55 per diluted share excluding the non-cash impairment charge and costs associated with the Golf Galaxy and Chick's Sporting Goods integration.

These results are in line with our previously issued fourth quarter guidance that we would obtain at least the mid-point of our original earnings estimate of $0.49 to $0.56 per share.

Total sales for the quarter declined 0.4% to $1.2 billion.

Comp sales declined by 8.6% as compared to our guidance of negative 10% to negative 6%.

Dick's Sporting Goods stores sales were negative 8.1%, and comp sales for Golf Galaxy stores were a negative 20.7%.

In the Dick's Sporting Goods stores golf equipment and exercise negatively impacted same-store sales while hunting and outerwear positively impacted same-store sales in the quarter.

Once again our inventory levels were under tight controls, down 13.9% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007 on a consolidated basis.

For Dick's Sporting Goods stores only, inventory was down 12.7% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007.

Due to the lack of visibility created by the current economic environment, particularly in the back half of the year, we believe it is appropriate to provide estimates based on the continuation of trends from the fourth quarter of 2008 into fiscal 2009.

We are currently anticipating consolidated earnings per diluted share of approximately $0.80 to $1.00, excluding merger and integration costs.

For the full year 2008 we reported $1.19 excluding the non-cash impairment charge and merger and integration costs.

On a GAAP basis we're anticipating earnings per share of $0.77 to $0.97 in 2009 compared to a net loss of $0.31 per diluted share in 2008.

In 2009, we're expecting comp store sales to decrease approximately 12% to 8% versus a decline of 4.8% in 2008.

We're anticipating reporting consolidated earnings per diluted share of approximately $0.03 to $0.08 in the first quarter of 2009 excluding merger and integration costs.

In the first quarter of 2008 we reported earnings per diluted share of $0.18.

On a GAAP basis we anticipate reporting earnings per diluted share of $0.01 to $0.06 in the first quarter of 2009 compared to earnings per share of $0.18 per diluted share in the first quarter of 2008.

We're anticipating comp store sales decline of approximately 12% to 9% in the first quarter versus a 3.8% decline in the first quarter of last year.

The comparable store sales calculations for the first quarter and full year 2009 include Dick's Sporting Goods stores and Golf Galaxy stores.

The comparable store sales calculation for the first quarter and full year of 2008 included only Dick's Sporting Goods stores.

The Chick's sporting goods stores will be included in the comp store sales comparison 13 months after the conversion to Dick's Sporting Goods.

Our associates have done an excellent job running the business in such a difficult economic environment.

We've successfully managed expenses and more importantly inventory and end of the year with no borrowings on our credit facility.

In 2009 we will continue to remain focused on servicing the core athlete and outdoor enthusiasts, carefully managing our inventory levels, tightly controlling expenses and modestly growing our store base.

I will now turn the call over to Joe.

Thanks, Ed.

In the fourth quarter we opened a total of four new Golf Galaxy stores in Seattle, Washington; Houston, Texas; and Naples and Orlando, Florida.

At the end of the fourth quarter we operated 384 Dick's Sporting Goods stores with 21.4 million square feet, 89 Golf Galaxy stores with 1.5 million square feet, and 14 Chick's Sporting Goods stores with 700,000 square feet.

New store productivity for the fourth quarter was 66% and includes Dick's Sporting Goods stores only.

This is lower than what we have historically generated.

The decline is primarily driven by the overall decrease in consumer spending as evidenced by a 5.8% decline in transactions and a 2.3% decline in sales per transaction in the fourth quarter.

In 2009 we expect to add approximately 19 new Dick's Sporting Goods stores, relocate one Dick's Sporting Goods store, add one Golf Galaxy store, close 2 Chick's Sporting Good stores and convert the 12 remaining Chick's Sporting Goods stores to Dick's Sporting Goods.

Roughly 25% of the new Dick's Sporting Goods stores in 2009 are anticipated to be in new markets.

We expect that approximately nine of the new stores will open in the first quarter, four in the second quarter, and six in the third quarter.

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

The Chick's Sporting Goods stores are anticipated to be converted in the second 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 decreased 0.4% to $1.2 billion.

Comp store sales at Dick's stores decreased 8.1% driven by a 5.8% decline in transactions and the remaining coming from a decline in sales per transaction of 2.3%.

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

Gross profit of $352 million was 29.17% of sales, 186 basis points lower than the fourth quarter of 2007.

Merchandise margin improvement from Dick's Sporting Goods stores of 29 basis points, was more than offset by the decline in merchandise margin generated by Chick's Sporting Goods and Golf Galaxy stores.

The consolidated merch margin contraction of 23 basis points was compounded by the fixed cost deleverage of 143 basis points.

The remaining deleverage of gross margin was primarily driven by distribution.

As a result of our expense control efforts, SG&A expenses of $242 million were 20.01% of sales which was 64 basis points lower than last year's fourth quarter.

Operating income before the non-cash impairment charge and integration costs, decreased to $110.4 million and as a percent of sales the non-GAAP operating income margin of 9.14% was 114 basis points lower than the fourth quarter of 2007.

Pro forma net income decreased to $63.4 million and earnings per diluted share decreased to $0.55 compared to the fourth quarter prior year net income of $73.2 million or $0.62 per diluted share.

In the quarter we recorded a pre-tax non-cash impairment charge of $193.4 million.

That decreased net income by $161.7 million or $1.44 per diluted share.

The deterioration of the economy, combined with projections of a continuing trend, created a shortfall in the fair value estimations for certain assets such as goodwill, property and equipment, and other intangible assets below their current book value.

The pretax non-cash impairment charge consisted of approximately $164.3 million for goodwill and other intangible assets acquired as part of the Golf Galaxy acquisition in February 2007 and $29.1 million for the write-down of Golf Galaxy, Dick's Sporting Goods, and Chick's Sporting Goods store assets.

As a result of this write-down, related depreciation of approximately $2 million will be eliminated in 2009.

Let's move to the balance sheet.

At the end of fiscal 2008 inventory per square foot was 13.9% less than the end of fiscal 2007 on a consolidated basis.

For Dick's Sporting Goods stores only, inventory was down 12.7% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007.

We ended the quarter without any borrowings on our $440 million line of credit, our borrowing rate is LIBOR plus 75 basis points and averaged 3.16% in the fourth quarter.

Net capital expenditures were $8 million in the fourth quarter or $32 million on a gross basis.

For the full year net capital expenditures were $115 million or $191 million on a gross basis as we pro actively reduced our capital spend in the fourth quarter.

We expect that the current difficult economic environment will continue at least through 2009.

However, even with lower comp store sales, and providing more promotional activity in 2009, we are anticipating improved merchandise margins driven by Dick's Sporting Goods merchandise margins partially offset by Golf Galaxy and e-commerce merchandise margins.

We will continue to maintain our focus on expense management in 2009.

Specifically, over the course of this year we expect to reduce operating costs by approximately $50 million, these savings are expected to come primarily from payroll, advertising, and preopening expenses.

We also recognize that it is important to continue to build for the future.

On that front we have recently changed the way we go to market with our e-commerce business.

The change in our approach means a change in the accounting for this business as well.

Under the previous contract GSI was the seller of the merchandise and managed the on-line inventory.

Therefore we only recorded a royalty fee and revenue share.

Under the new agreement we will now record all sales, inventory costs, and fees incurred for GSI services.

In 2009 we expect GSI to be P&L neutral, specifically we expect to recognize approximately $124 million in revenue and incur an additional approximately $30 million in SG&A expenses as well as capital expenditures related to the e-commerce investments in 2009.

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

As previously announced, $172.4 million was paid on February 18th to bond holders who put the majority of their senior convertible notes to us.

This payment was financed with cash on hand and our credit facility.

Our credit facility provides us with $440 million of availability for borrowing and for letters of credit.

We believe we have a strong liquidity position and expect to generate positive cash flow in 2009.

In 2009 we are expecting net capital expenditures to decline to approximately $60 million or to approximately $100 million on a gross basis.

This decline is driven by the opening of fewer stores in 2009 as compared to 2008, the completion of the new distribution center in 2008, and by simply managing the capital spend more tightly in this tough economic environment.

We do have one housekeeping item to inform you about.

In May 2008 the FASB issued FSP APB 14-1 which impacts the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements.

FSP APB 14-1 will impact the accounting associated with our senior convertible notes.

This FSP will require us to recognize additional non-cash interest based on the market rate for similar debt instruments without the conversion feature.

FSP APB 14-1 is effective for fiscal periods beginning in 2009 and will require retrospective application beginning in the first quarter of 2009.

We expect the adoption of this standard will reduce historical earnings per diluted share by approximately $0.04 for the full year 2008 and by approximately $0.01 for the first quarter of 2008.

Since FSP APB 14-1 is not yet effective for the fiscal 2008 results reported this morning, it is not reflected in those results.

As described in our Form 8K filing dated February 19, 2009, we repaid over 99% of the senior convertible notes on February 18, 2009, and thus the effect of the adoption of FSP APB 14-1 is not expected to be material for fiscal 2009 but is considered in our 2009 outlook.

In summary, we expect 2009 to be another difficult year.

However, through effective merchandising, inventory management, and a disciplined expense control environment, we expect to be cash flow positive in 2009.

Our financial discipline, coupled with a tireless emphasis on operational execution, will provide us with the ability to continue to weather the economic storm and most importantly will position us to excel as the environment improves.

This concludes our prepared remarks, at this point operator, I would like to open it up for questions and answers.

(Operator Instructions) Your first question is from the line of Robbie Holmes Bank of America Merrill Lynch.

Please proceed.

Thank you.

Guys, a couple of quick questions, the first question I think for you, Ed, is when you think about the inventory reductions you achieved in the fourth quarter and then also looking at I guess further inventory reductions for '09, can you give us more detail on how you're managing that from a couple of perspectives?

One would be sort of hard lines versus apparel and footwear, also maybe from the price point perspective, are you doing more at lower price points?

You mentioned this value approach in your release this morning, and then maybe put that in the context of brands, in terms of focusing on the more expensive brands like Nike I versus bringing in lower cost brands?

And then also related to that inventory question is how are you thinking about out of stock levels in this environment?

I know that historically in better economic environments you guys always did a great job of being in stock, so why don't I just leave it at that.

I know its a lot of questions, but all revolving around inventory management.

Thanks.

Robby, so, much for easing into this call.

That's a lot of questions.

First of all on the inventory level, we really looked at inventory across the board as to where we could rationalize our inventory and our SKUs.

So, our merchandising group, our planning group, they all did a great job of identifying where inventory wasn't needed, SKUs that could be taken out of the mix, and they really did a terrific job.

But, it was across all categories of merchandise.

A couple categories that I would say would be an exception to that would be the firearms and ammunition business as that business has been really very, very good.

We're actually struggling to keep up with inventory in those categories because of the business being as robust as it has been.

As far as brands go, we didn't do anything to reduce in any meaningful way our primary brands of Nike, Under Armor, Titlist, Callaway, those types of brands, and those brands are still very effective in the store and we're very pleased with those.

It was some of the tertiary brands that just didn't have the traction that we scaled back.

As far as out of stocks go, our merchandising group and our planning and allocation group have done a terrific job of making sure that we're in stock in those key items, and have there have been a few mistakes here and there, yes.

And when you cut the inventory to this level there can be a few out of stocks, but we've gotten that -- there were fewer than we would have anticipated with inventory coming down this level, and we're really in very, very good shape on those key items, and we don't see any issues there.

As far as the value message we gave, we don't want people to miss interpret that our value message means that we're cutting our prices on premium products.

We're not.

Some of those premium products have still continued to do very well.

The new Titlist ProV1golf ball has done extremely well.

The Under Armor running shoes have done quite well, and when we talk about the value message, we've been able to go out into the marketplace and buy products from our partners and our suppliers at reduced prices that we'll be able to pass that value and those price concessions onto the consumer therefore giving a value message out in our tabs of -- a call to action that we think is going to be really very good, and as we've started to do this, we're starting to see a little bit more traction, and we're cautiously optimistic.

Terrific.

And just one quick follow-up question.

Foot locker reported last week, and they did sort of a negative seven-ish comp for the quarter, but they indicated that their February comps in the US had picked up very nicely supported by a Kobe Bryant basketball sneaker.

I was wondering if you could comment on February trends or if you saw a similar lift in your footwear category?

Well we're pleased with our footwear category and although we didn't call it out in the release, the footwear category was pretty good.

The athletic footwear category was pretty good, but we're any little bit of improvement, it's been kind of up and down, so the business has been -- gotten a little better then it kind of drops down a little bit, so we really don't have visibility, and we think from a guidance standpoint our most conservative and appropriate guidance that we can give to the marketplace is that we anticipate 2009 being maybe a bit worse than 2008.

Got it.

Thank you very much, Ed.

Sure, Robbie.

Your next question is from the line of Matthew Fassler from Goldman Sachs.

Please proceed.

Thanks a lot and good morning to you.

The first question I have relates to -- I guess both of my questions relate to gross margin.

The first relates to the fourth quarter.

It looks like just kind of rough and tough if you look at Chick's and Golf Galaxy combined their merchandise margins within those businesses were down a combined 400 basis points or so to the extent they took the total company's margins down by 40 or 50 bips.

Can you comment on whats transpiring in those businesses?

I know they're smaller -- we don't usually focus on them, but they seem to have a material impact on profits here.

Did they have one time clearance activity or would you say that the margin pressure in those businesses should be recurring?

From a Golf Galaxy standpoint that margin rate pressure is really based on the negative comps, and how we calculate margin, and we anticipate the golf business to continue to be -- at Golf Galaxy's continue to be difficult.

And I think you saw with Golf Smith's release the golf business is difficult.

Its a little bit better inside the Dick's Sporting Goods stores than it is at the Golf Galaxy stores, but we expect that to continue to be difficult.

From a Chick's standpoint, that was a combination of clearance activity that we don't expect to be recurring once we get through this conversion.

So, we wouldn't expect the Chick's -- and that's only 15 stores, so we don't expect that to be meaningful going forward.

So, of the two Golf Galaxy it was probably the bigger drag on a companywide basis?

Yes.

The follow-up question, you alluded in your press release to the need to emphasize value and that that would impact your margins in 2009.

Are you thinking about where you expect mix to naturally evolve as consumers refocus on value oriented brands or price points or are you focused on your relative pricing kind of on a (inaudible) basis?

Well, I think there's -- as we started to read some of the reports this morning, I think maybe we weren't as clear as we could have been.

We don't expect our merchandise margin to fall.

We expect to have a modest increase in our merchandise margin, more at Dick's Sporting Goods and then slightly offset by the merchandise margin at Golf Galaxy and to some extent with what we do with the internet.

The internet margins are slightly lower than our store margins, but our overall merchandise margin we expect to be positive.

That will be driven by our ability to give value to the consumer based on our ability to buy product off price from many of our suppliers.

There is some suppliers that have offered us some terrific buys at off price that we're able to pass that those prices onto the consumer, and as they look on the our inserts they walk into our stores, they'll be able to see great value as compared to what it was six months ago or a year ago, but it will not -- those value messages we give out will not negatively impact our gross merchandise margins.

Our gross margins may be under pressure because of negative comps, and we'll deleverage those fixed costs, some of those fixed costs are in our margin calculation.

And you expect those special buy opportunities to be enduring or would you say they're more of intransient fact of life in the current macro back drop?

Well, I don't know how long they will last, Matt, but we've placed a number of those buys to date for the Spring, and we've actually placed some of those buys for next Fall, and one of two things have happened.

We've either taken delivery of that merchandise and its sitting in our warehouse that will be for next fall or we've made the commitment to the vendor to buy that merchandise and they're sitting in their warehouse waiting to be shipped next August, September or October.

Got it.

Thank you so much.

Sure.

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

Please proceed.

Hello.

I guess I will be following up a little bit on what Matt and Robbie just asked in this whole value thing.

The question which is a little wider than just buying inventory is as you look at your box, the 50,000 square foot or so box, has there been a thought about going to lower opening price points or other changes in the merchandising mix because of the fact that the consumer may not feel as wealthy going forward as they used to be?

How do you reckon -- how do you think about that and reconcile that?

We have brought in some lower priced product, so you'll see in our inserts you'll see some value messages of athletic shoes at 29 and $39 that if you rewind the film twelve months ago you might not see quite as much of that.

You'll see, in the golf business -- you will see some golf ball prices that are a bit more aggressive.

We've brought in some apparel and from Russell and a couple of brands more opening price point have gotten some terrific incentives to buy that product that we can pass onto the consumer that will be lower price points and create that value message.

All of -- I should add all of which does not negatively impact our merchandising margin at Dick's Sporting Goods.

Our merchandising margin at Dick's Sporting Goods we expect to expand in 2009 versus 2008.

Right.

That message I think we have gotten relatively clearly.

Could you talk about the controlled brands and what's the exposure you have on inventory for some of those brands?

You no longer obviously break out the percent you do for private label and control brands, but how does the inventory exposure work?

Well, the inventory exposure is we place the order, we own the inventory, but we've been very careful in placing our private label brands.

We've been -- our inventory in that category is in line with the total company inventory as we look at this, and we don't feel that we have any markdown exposure or any issues associated with our private brands, any greater than we do with other brands.

We feel very comfortable the shape our inventory is in from a private label standpoint.

The -- one of the our competitors in fitness is Sears, obviously in some of the fitness equipment.

In other areas like appliances they got very aggressive at Christmas time, did you see anything in price points and I recognize their price points are lower than yours, but in some of the fitness areas where they got aggressive to push some product or did you not see that?

We didn't.

I mean we -- our fitness business was -- average unit retail was down a bit, but that was primarily driven by the strength category, the home gym units are just -- the home gym units, the strength category has been difficult.

The cardio business has been -- has continued to kind of hold its own.

And then could you talk about acquisitions going forward?

Like we were surprised to see you closing, already, two of the Chick's stores and what is that -- ?

You know, could you talk a little bit about how that acquisition is measured up between that and Golf Galaxy?

Are we -- should we assume that we're not going to see as many acquisitions going forward given the success you do in opening your own stores and some of the challenges it seems you faced and some of the acquisitions you have

Yes, I would not anticipate us doing any acquisitions in the near future.

As far as the Chick's acquisition goes, that's really going quite well.

We're quite pleased with that right now.

In the two stores that we're looking to close, one of them we never liked the location and had anticipated probably closing that from the beginning and another on is a store that we're going to close because we have a better location when we were -- before we bought Chick's we were working on a location that would compete with the location we're closing and we like the location that we looked at and had negotiated much better than the Chick's location.

Thank you very much.

Sure.

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

Please proceed.

Yes, hello, good morning.

Can you discuss the current promotional environment, just what you're seeing with regards to the competition, as we have begun to see one or two Chapter 11s in the space?

Could you just repeat that question?

You broke up for a second.

Yes, just if you can just talk about the current promotional environment and what you're seeing with regards to your competitors?

You know, we have seen either the Chapter 11 last week in the space or just sort of your thoughts around that?

The Chapter 11 filing last week of Joe's, we only have one store that competes directly with them.

As we've heard rumors of some other people filing or having difficult time, we have not seen aggressive promotional activity yet although we expect if there is some filings of some other companies and liquidation, that could have an impact.

And then just second, you know, with regards to the comp guidance can you talk about how you think about the Dick's stores and the Golf Galaxy stores and just maybe give a little more color on the golf category and both of those locations?

The Golf Galaxy, you should anticipate the comps and our plan similar to what they were in the fourth quarter, so as we anticipate it, as we indicated in the press release and in the call here, we don't -- we think the best course of action is to anticipate that the results of the fourth quarter continue into next year.

So, you can kind of take a look at both of those kind of data points and continue those into 2009.

The golf business at Dick's Sporting Goods is -- right now this year, a fair amount better than the Golf Galaxy business to date.

Great.

Thank you.

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

Please proceed.

Hello, good morning.

Thank you.

Following up on a question for the private brands, how should we think about private brands in 2009?

Are you going to continue expanding the brands that you have into new products or will there be more brands that you'll be introducing in 2009?

In 2009 there will really be no new brands that we will be adding.

You will see additional product categories being broader in some of the brands that we have today.

There will be some additional field and stream hunting clothing, some more boots, but it will be more category expansion.

There will be no additional meaningful brands added this year.

Okay.

And in an unrelated question, how do we think about your business over the long-term?

As a result of the change environment, do you continue to believe Dick's can be an 800 store chain in its current store format?

And if so what are you seeing in the environment that gives that you encouragement?

I think we absolutely can continue to view ourselves as an 800 store chain.

Some of the things that give us the confidence that this is still attainable is that our business has held up relatively well in this environment, and I understand that that's the new definition of relatively well, but the company has done relatively well.

Sales are down, yes, we've been able to control our inventory.

We've been able to control our merchandise margin rates, and we feel that there is going to be consolidation in this industry.

And we've seen the filing in the Pacific Northwest that give a -- they were well entrenched chain in the Pacific Northwest, gives us an opportunity to move into that area of the country with much less competition than there was in the past.

We understand that there's another retailer that we got some information on that is having a very difficult time in the outdoor category that something may happen there.

So, we think from a consolidation standpoint there is going to be less competition out there which gives us the opportunity to move in and capture that market share.

Okay.

Great.

Thank you so much.

Sure.

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

Please proceed.

Thanks, guys.

So, the -- if -- on your SG&A down $50 million, so that's leverage of I think about 25 basis points.

Is that right?

You're going to be able to leverage your SG&A on a minus roughly 10 comp?

No.

The way you have 20 look at the business is when we consolidate Golf Galaxy, Chick's, and Dick's Sporting Goods, there is a $50 million cost savings.

As we then consolidate the e-commerce business on the sales that we indicated there are certain fees associated that are going to have to be paid to GSI, so there's $30 million of SG&A that will be added with the GSI.

So, at the end of the day it would be net 20 with the addition of GSI.

Okay.

And then I guess that was going to be my second question, but I will jump to it.

The 100 -- I think you said what?

About $124 million revenues, does that -- is that -- does that go in the comp number or is that outside the comp number?

It is outside the comp number.

Okay.

Thanks.

And then, so I guess I would have to redo my math.

It is probably then if I do it quickly here gross margins down about 150 basis points next year at the mid-point of your guidance, merchandise margins are you said slightly up, so I imagine the rest is coming from occupancy deleverage.

And if that's the case is there any opportunity to start to reduce some of that occupancy deleverage either, first of all, because you're opening fewer stores or just by going back and renegotiating some rents?

Thanks.

Sure.

The rest of that deleverage is across all of our fixed costs, and occupancy in particular we are in the process of renegotiating some leases that are coming up for renewal at both Dick's and Golf Galaxy, so we do see that there is the opportunity to, at least this year, modestly modify some of the occupancy costs, but we think that there's more potential in the out years of, that we'd see the benefits of this in the out years of ten and 11.

Okay, fair enough.

If I could slide in one more, you said your balance against your revolving line of credit was zero at the end of the fourth quarter.

I imagine it's up now because you use some of that to pay down your convertible.

Can you tell us where you stand currently on that line of credit?

Well, we -- as we said we use cash and the credit revolving credit facility.

We stand today at about $150 million borrowed.

Okay, thank you.

Your next question comes from the line of Michael Lasser from Barclays Capital.

Please proceed.

Good morning.

Thanks for taking my question.

With Golf Galaxy comping down 20% in the fourth quarter and the expectation that's going to continue, at what point do you have to change the footprint of that chain?

Maybe close down some stores to improve the economics, the overall organization?

Well, we think that that's premature right now.

I think we're going through one of the worst economic cycles that we have since -- some argue since the 1929.

We think that there will be consolidation in the golf business also, and if this continued for 24 months, 30 months, then I think we would probably have to make some decisions, but at the present time we think that we've got a plan in place to better the sales to improve these sales.

We have a new merchandising team in place comprised primarily of people from Dick's Sporting Goods.

We've got a new marketing plan in place that will begin to be employed at the end of March.

So, we've got a number of things in place that are very different than the previous Golf Galaxy management team that we think will have significant improvement, but from a guidance standpoint we don't think it's appropriate to put that in place from a guidance standpoint until we actually have seen that it works.

Okay.

And then, on the breakdown between ticket and traffic, the ticket decline was the most that we've seen in a long time.

Can you offer a little more insight into what was propelling that downward particularly since firearms sales performed quite well, and I imagine that's a higher ticket item?

Yes.

I mean, as we called out in the prepared announcement, the golf and fitness business were very difficult and obviously with the high retails of those items that have the significant impact on our average ticket.

Okay.

And a final question, trying to balance the opportunity -- the market share opportunity you're seeing with some of the less well capitalized competitors going out of business.

At some point might you accelerate your square footage growth even if the difficult trends continue because you'll have such a wide -- more wide open playing field than you're having at this point?

I think at the present time I would say no.

I think there's some headwinds to doing that.

One of the headwinds is that the developers are just bringing less product onto the market, so that's an issue.

There is less centers being developed.

There is also -- we have -- when we open a store we have usually some pretty strict co-tenancy requirements, and with other people scaling back, its difficult for the developer to meet those co-tenancy requirements.

I also think that based on the environment that we're in today, its -- the square footage growth that we've laid out is appropriate and we won't probably revisit that for another twelve months to eighteen months before we start to really accelerate back to where we had been in the past.

We need to see the economy turn around before we do that.

Let's hope that's soon.

Thanks.

Best of luck.

Your next question is from the line of Chris Walbridge from JP Morgan.

Please proceed.

Thanks.

Good morning.

Just, first, a clarification question.

Did the outerwear category and athletic footwear comp positively in the fourth quarter?

We have -- for competitive reasons we don't talk specifically about those -- about category specific like that, but both of those categories certainly did better than the company average.

Okay.

That's very helpful.

As you think about the innovation that you see in the pipeline and the different categories that are in your store, are there any particular categories that you're excited about in 2009 and perhaps not as excited about as what you were in 2008?

Well, I think the launch of the Under Armor running shoes is -- will -- has breathed life into the athletic footwear category, so we're enthusiastic about that.

In an odd way, some of the things in the golf business we think can improve the golf business.

Some of the technology innovations that -- Titlist is out with a new golf ball which has been -- early results have been really very good.

Callaway has got some new clubs out there that from a driver standpoint that we think have some potential in, and the new Nike technology which is -- we think has got some legs also.

So, there's a few things out there that we think can be helpful to the business.

We think that there is some other categories that we feel can help drive the business, the kids sports, whether -- that high school athlete has continued to be very good for us, and with Nike we're launching the Jordan shops from an apparel and footwear standpoint which is product that we haven't had before in the early results that we've gotten out of Jordan in the stores that we've tested this in have been really very positive at terrific margins also.

So, excuse me -- then is it fair to say that as you think about '09 and your comp guidance, it's really a continuation of trend in what you saw in 2008 with the exception of maybe guns, which has some really tough compares in the back half of the year?

Firearms and ammunition will have some very difficult comparisons in the back half of the year, and right now based on this environment and -- you know, we're all watching what's going on.

You don't know what's going to happen one day on the next.

We just don't feel it's appropriate to provide guidance any different than what's happened in the fourth quarter until we see something different happening than what happened in the fourth quarter if that makes sense.

No, that's perfect.

Thank you very much.

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

Please proceed.

Hello, good morning.

Good morning.

The topic of occupancy has been addressed a little bit so far, but just based on your comments I estimate that the full year occupancy per square foot was up about 7% in 2008, and that's on top of a 7% increase in '07.

In '07 part of it was due to Golf Galaxy which simultaneously had much higher sales productivity at the new stores and you could see that.

However, this year it appears that the sales productivity in the new stores was down double-digits versus the previous year, so I guess my question is that's not a particularly favorable dynamic of metrics.

Looking into '09 how should we think about the new stores and their contribution relative to the pressure on occupancies?

Thank you.

Well, let me get to the increase in occupancy based on -- I'm not sure how your calculation went.

But keep in mind that in 2008 we had twelve months of Chick's Sporting Goods rent versus two months of Chick's Sporting Goods rent in 2007.

So, that is part of an occupancy increase.

So, you know we touched on some of the things that we're doing from an occupancy standpoint for future, but overall with the low comps that we're experiencing, these fixed costs will continue to deleverage.

We've been through this a few times.

There is nothing inherently unique about how our occupancy costs are calculated or what our leases are.

Our leases are primarily a ten-year lease with a rent bump of $0.50 in the fifth year -- at the end of the fifth year, so there is no back end loaded occupancy costs that seems to have been -- that was inaccurately portrayed.

When you take a look in comps go down negative 9%, 10%, occupancy costs is a fixed cost, and it will deleverage by definition.

Thanks for that clarification.

Just follow up on -- the -- the follow-up, the -- I understand that you've now anniversaried the, I guess the bump-up, from the Chick's.

Is that also what explains the lower sales productivity at new stores in '08?

No, I think we touched on that in Joe's comments.

We indicated that if you take a look at the components of our comp which was a 5.8% reduction in transactions and 2.3% reduction in ticket, its indicating some consumer sentiment I think overall, so I mean thats the driving force behind that.

Okay.

Thanks and good luck.

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

Please proceed.

Thank you.

I have a follow-up question about the golf category.

Why do you think Golf Galaxy comps are lagging Dick's golf comps and if you could provide any data on traffic and ticket within the Golf Galaxy stores, that would be helpful.

Thanks.

I think part of the reason -- we're not going to talk specifically about ticket in Dick's compared to Golf Galaxy for competitive reasons.

But one of the reasons we think that's -- the difference between the Dick's performance and the Golf Galaxy performance is going through this integration and this transition from one management team to another is always difficult, and there was a big change that's happened with Golf Galaxy.

The senior management team has been replaced, the buyers have been replaced and we've gone through an integration and a big change in that business, and when you do that, things get -- usually sales come down a little bit.

We anticipate some of the things that we're going to be doing with Golf Galaxy in the future beginning in March when we launch this new marketing campaign that our hope is that things will improve.

We'll be taking the same type of approach with Golf Galaxy as we have with the Dick's Sporting Goods business overall.

We've been able to buy product from some of our suppliers at reduced prices that we'll be able to provide a more value message to the consumer and Golf Galaxy than had been the marketing plan from the previous management team, and we think that that's going to have an improvement with Golf Galaxy.

Thanks.

You also cited footwear as being a relatively healthy category.

I am wondering within that business where is the strength and also performance apparel, are you seeing resistance to the high price points?

The apparel business has not been as good as the athletic footwear business, but the athletic footwear business, specifically to your question, has been pretty strong across a number of categories.

The running business continues to be good with the launch of the under armor shoes.

The -- we feel that we have seen since President Obama has come into office and kind of the focus around the President and his love of basketball, our basketball business has actually gone up pretty dramatically, so we're pretty enthusiastic about the footwear business, the athletic footwear business right now.

And on the performance apparel area, any comments on trading down occurring in that category?

We haven't seen anything of any significance yet.

Great.

Thank you.

Sure.

Your next question comes from the line of Chris Fazio from Susquehanna Financial.

Please proceed.

Good morning, everyone, just a couple quick questions here, I guess.

Ed, first just, what are your plans for addressing the square footage that you have dedicated to the fitness segment as you look to fiscal year '09?

I guess, possibly golf as well in your Dick's Sporting Goods stores.

Does it -- does I guess, footwear and apparel or outdoor have room to increase in comp stores as a percentage of floor space or is it potentially evenly distributed among other categories as well?

Well, we're taking a look at the fitness category and looking to reallocate some space out of fitness into other categories, and if we're to take a look at where that would probably be, it would be in the apparel area and in the team sports area.

Okay.

And is that -- do those changes take effect as we go into 2009?

They will be -- we're looking at those, and they would be kind of toward the end of the second quarter of 2009.

Okay.

That's helpful.

And then as we look to, you mentioned getting vendor support and just kind of adjusting the pricing that you're getting, kind of stressing the value message at Dick's.

Is it across pretty much all the vendors or is it I guess, more skewed towards those categories that are more challenging from a pricing or from a sell through perspective versus those vendors in those categories that are actually performing reasonably well?

Well, I think there's been -- it's across all categories, all vendors have been really supportive of this strategy, and we think we've got the ability to move a needle in all the categories of the business.

Understanding moving the needle does not necessarily mean making those categories positive -- account positive, but we think we can improve on the results that we've been having.

Okay, and then just two quick follow-ups, the Jordan shop-in-shops that you're doing in apparel and footwear, can you tell me how many stores you have that in right now?

Or what's the plan for '09?

We've got -- by the end of the first quarter we'll have about 60 and we'll read these and then we'll decide where we're going to go after that.

Okay, and the last thing here just on the apparel side where you said that potentially could be an opportunity to increase to take some of that fitness business and put it towards apparel, is it just broad apparel?

Is it more technical?

Is it outdoor?

I'm just trying to get a sense of what that might mean.

Well, there's some things that we're already starting to do is the Jordan apparel shops we think are going to be very helpful.

We think as part of the fitness business we haven't had a meaningful presence from a yoga apparel standpoint, so we think yoga is an area that we can have a meaningful acceleration to our apparel business at margins higher than the company average.

Okay, alright, that's very helpful.

Thank you very much, gentlemen.

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

Please proceed.

Hello.

Thanks for taking my question.

I wanted to talk a little bit about the $50 million in SG&A savings and some of the components of that with regards to the payroll savings you're expecting, some of thats corporate.

Are you also planning savings on in-store payroll?

What would the split there be?

And then with regards to advertising would you expect to keep it consistent as a percent of revenue or will we see declines as a percent of revenue?

Hello, Jim, this is Joe Schmidt.

I'll address the in-store payroll piece.

As we do with any sales, either positive or negative, we react to payroll according to the business, so in down times as we plan the business this year, of course we've looked at payroll in store and addressed that accordingly.

In terms of the advertising question, we will see advertising leverage as a percent to sales year-over-year and I think the larger impact on advertising in terms of a reduction will be third quarter oriented.

Joe, can you speak a little bit to, where the places within the advertising budget, where you'll see cuts?

Will it be less frequent?

You know, presence in circulars, less national advertising, less sponsorship, what have you?

The answer is yes.

To pretty much all of those.

There will be a bit less national advertising.

Our circulars we've cut a couple of circulars that we've analyzed that are less productive, certain circulars will be -- will have a few less pages associated with those.

Some of the sponsorships that we have done we are modifying those sponsorships, so there is a little bit of everything.

There's not one silver bullet.

We took at look at this and said that there is really nothing sacred here and we needed to take a look at everything that we do and analyze that and reconstruct our advertising in this advertising and marketing in this difficult time and we've done that, and I think the marketing group has done a terrific job putting forth these cuts and to be able to execute those and keep the business in tact.

And with regards to the in-store payroll, how much more opportunity is there?

It seems like anecdotally from being in the stores in the fourth quarter you're already operating pretty lean?

Well, again Jim, its going to be based on sales.

If sales decline any more than planned, then we'll adjust accordingly.

We take a look at the service components in our stores, in footwear and in golf, and we make sure that we maintained the hours in those service intensive areas.

The other thing we've done, Jim, is we have reduced store hours.

Typically a year ago we opened the stores at 9:00 in the morning and closed at 9:30 six days a week, and we've actually adjusted our store hours Monday through Thursday, where we open a half-hour later and close a half-hour earlier, so that helped a little bit as well.

Got you.

And then, Ed, follow up on something you spoke to earlier about real estate availability.

Given the moderation of new developments, if you so chose would it be possible to take square footage growth back to a double-digit level or is that really dependent on the pace of new development?

Well, if we could find the right real estate we could do that.

I think it is difficult to find the right real estate in order to do that.

There is not as much new product coming out, and we're actually looking at more redeveloped product than we have in the past.

With redeveloped product, the -- some of the issue is you can't get the right prototype, exactly the right square footage, so we're wrestling with a few of those thoughts right now, but moving this back to double-digit square footage growth in 2009 or the front half of 2010, I don't believe that's going to happen.

I don't think that's the prudent thing to do in this environment.

Got you.

And then with repurposed real estate, what type of tentative improve.

Allowances are generally available there?

Is it equally as favorable as new development terms or economically more challenging?

Every one is different.

But -- so -- the redeveloped real estate from a Circuit City, there may be -- landlords are challenged to get capital also, and we've traditionally had our buildings turnkey for us.

We're not looking to make any meaningful changes to that from a capital standpoint, so we think that its -- we think that the real estate business is going to continue to be challenging out there, and we're not going to force anything.

Okay.

That's very helpful.

Thanks and good luck.

Thank you.

Your next question comes from the line of Jeff Mintz from Wedbush.

Please proceed.

Thanks very much.

Just a quick follow-up question I guess on the questions regarding to new stores and kind of looking at it the opposite way, are there stores that you're looking at potentially to close given the tougher environment and do you think that might accelerate as we head through '09?

We don't.

There's -- we have less than a handful, and I mean that literally, less than a handful of stores that are not profitable within the four walls and a couple of those we feel that we will get to be profitable within the four walls, so we don't have any from a cash flow standpoint, we don't have any -- there is no store closing coming at us.

Okay, great.

And then on the e-commerce business, can you just talk a little bit about kind of what the advantages of the business shift is and it looks like you're talking about e-commerce being about 3% of revenues in 2009 roughly and can you talk a little bit about how big you think that business can get longer term?

Well, I think that we hope to grow that business.

We think that business is going to continue to grow.

One of the reasons we did this is the arrangement we had with GSI and -- was very good at the time, but it did not provide us the opportunity to be ambivalent as to where the sales came from.

It was a great -- it was a terrific opportunity for GSI and for Dick's Sporting Goods when we first put the deal together, and as we looked at this, we felt that the best course of action for both GSI and for Dick's was to take control of this.

It gave Michael Ruben and his group the ability to shed inventory investment, gave us the ability to better control and more thoroughly control the customer experience with -- from an on line standpoint, so we've redid the arrangement with GSI.

I think both companies are really very happy with that, and we think long-term it will be more profitable for both of us.

Okay.

Great.

And then finally on the private label, private brands in your stores, obviously you're not giving the actual percentage anymore, but have you seen any kind of a shift in that percentage as the economy has gotten tougher?

Have your customers moved more toward that business given the more difficult environment or is it stayed steadier?

It's really been steadier, and there is some categories that have increased and some other categories that have been a bit more difficult.

But, overall it's been relatively instead.

Okay.

Great.

Thanks very much.

Your next question comes from the line of Jack Murphy from William Blair.

Please proceed.

Okay, good morning, just a couple of questions.

I'm not sure if I heard this earlier, but could you gives us what you anticipate D&A would be and then in looking at the free cash flow for this year what you might expect from working capital?

And I guess in particular -- a big improvement in inventory and how you're looking at that for 2009?

Well typically don't disclose the depreciation number for the year, so I won't be doing that today.

From a working capital perspective you can assume that we're going to continue to look at inventory declines in 2009.

Okay.

Just an unrelated question, again, I am not sure if you addressed this, but regionally, can you talk about what you're seeing?

I think in the past you may have mentioned Texas in particular.

Could you talk about the competitive level of that market, what you've learned there, and if there'd be any change in approach regarding more competitive markets?

Texas has been and continues to be the most competitive market that we compete in.

We've indicated that we've put together a different marketing plan in Texas, we've modified some of our content, and we've kind of talked over the last couple of quarter that we've had pretty positive traction in Texas, that's continued, so we're really quite pleased with Texas and continue to open stores in Texas.

Thank you.

Your next question is from Reed Anderson from DA Davidson.

Please proceed.

Thank you, just a couple quick follow-ups.

Back to the web -- or the e-commerce business, how does the 124 million expected this year compare to what that business might have done last year.

Slightly higher.

And then in terms of the inventory question just asked, I mean, Tim, my assumption would be that unless business got a lot worse in the forecast you've laid out today, the inventory decline (inaudible) what would be less, at the end of '09 than it is at the end of 08'.

Is that a fair assumption?

Thats a fair assumption.

Okay, thats it from me thank you.

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

Please proceed.

Hello, guys, thanks, just one or two little follow-ups here.

Just back to real estate for a minute, given the availability of space that's out there and like you said taking prior used facilities, our understanding in talking to a lot of real estate developers is that there is space available and they actually really are looking to you guys as one of their desired tenants for the future, so are you seeing good deal opportunities out there, and I guess again just to ask it how quickly could you accelerate some of the growth if you wanted to?

Well, as Ed mentioned, we do see some availability out in the marketplace, but much of that is existing empty boxes.

We anticipate with the consolidation of retail in the coming months and what we've seen and what we've heard about that we will see some more empty boxes to look at.

As Ed mentioned some of those boxes are a little bit more difficult from a configuration point, and do they match our prototype, so we have a little bit -- it's a little bit more work when you're looking at existing boxes.

New development, you know, we have seen a significant slowdown in new development.

Developers are certainly having a difficulty with liquidity, and their ability to get financing, so we'll continue to keep an eye on it.

We'll continue to look at the available real estate.

We are typically one of the first retailers called to look at available real estate and we expect that that will continue.

Got it, and then you know, do you guys notice a big variance between your mall stores versus your power center stores?

You know and obviously I know the size of the box can be different.

But I guess on a per foot basis,or just any type of big productivity differences that you prefer one over the other?

We don't see anything meaningful -- meaningfully different between a mall store and a power center store.

Got it.

And then the one last question, just separately, on Under Armor, who do you think, like, they're taking some share from?

Like you mentioned in the sneaker category their new running shoe has been doing well.

Is it just -- is it taking share from somebody else or is it incremental?

I would assume its just taking share but -- ?

I think Under Armor has helped drive the total running shoe business and I think some of those sales have been incremental.

That's great.

Well good luck with the next quarter guys, thank you.

Your next question comes from the line of James Lou Ellis from Needham and Company.

Good morning, this is Jim Lou Ellis for Sean McAllen.

I just have a quick house keeping question for Tim.

What's your anticipated tax rate for fiscal '09?

We're still looking at 40% for 2009.

Okay, great, thats all I have.

This concludes the question and answer session for today's call.

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

Ed Stack, for closing remarks.

I'd like to thank everyone for joining us on our fourth quarter conference call and we'll look forward to seeing everybody for out first quarter call.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation, you may now disconnect.

Good day.