DICK'S Sporting Goods Inc (DKS) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2009 earnings conference call.

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

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

We will open up the question-and-answer towards the end of this conference.

(Operator Instructions).

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

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

Thank you Lauren.

And good morning to everyone participating in today's conference call to discuss the first quarter financial results for Dick's Sporting Goods.

Please note that a rebroadcast of today's call will 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 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 risk and uncertainties.

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

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

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

Also joining us this morning, are Joe Schmidt, 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.

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 that in the first quarter we delivered comp store sales and earnings results that exceeded our guidance.

The better-than-expected results were primarily driven by higher gross profit dollars at our Dick's Sporting Goods stores and a more successful liquidation event at our Chick's Sporting Goods stores prior to the conversion to our format.

We generated net income of $12.8 million or $0.11 per diluted share, excluding the costs related to the Chick's Sporting Goods integration.

These results are better than our previously-issued estimate of $0.03 to $0.08 per diluted share earnings.

Net sales for the quarter increased by 5.2% to $959.7 million.

Comp sales declined by 6%, as compared to our estimate of negative 12% to negative 9%.

Dick's Sporting Goods stores' comp sales were negative 4.6%, while comps at Golf Galaxy were negative 19.7%.

Once again, our inventory levels were under tight control, down 9.7% per square foot at the end of the first quarter of 2009, as compared to the end of the first quarter 2008 on a consolidated basis.

In the Dick's Sporting Goods stores, the outdoor area, athletic footwear and golf trended better than the Company average, while apparel and team sports trended below the Company average.

The meaningfully improved golf business in our Dick's Sporting Goods stores was driven primarily by effective promotions and marketing support.

However, same store sales at Golf Galaxy continued to decline in the first quarter.

We have just finished the back office integration of Golf Galaxy, and are now in the process of assessing our assortment and marketing strategies for the chain.

We do expect Golf Galaxy to be slightly accretive in the second quarter, generating approximately $0.02 per share, compared to earning $0.08 last year.

Looking to the rest of 2009, we believe that the remainder of the year will continue to be challenging.

However, based on the first quarter results and our expectations for the second quarter, we are raising the low end of annual guidance and increasing the expected same-store sales for 2009.

In 2009, we are currently anticipating reporting consolidated earnings per diluted share of approximately $0.88 to $1, excluding merger and integration costs, versus our original guidance of $0.80 to $1.

On a GAAP basis, we currently anticipate reporting full-year earnings per diluted share of $0.85 to $0.97 in 2009.

In 2009, we are expecting comp store sales to decrease approximately negative 9% to negative 6%, versus a decline of 4.8% in 2008.

We are anticipating reporting consolidated earnings per diluted share of approximately $0.28 to $0.31 in the second quarter of 2009, excluding merger and integration costs.

In the second quarter of 2008, we reported consolidated earnings per diluted share of $0.38, excluding merger and integration costs.

On a GAAP basis, we currently anticipate reporting earnings per diluted share of $0.27 to $0.30 in the second quarter of 2009, compared to earnings per diluted share of $0.34 in the second quarter of 2008.

We anticipate a comp store sales decline of approximately 9% to negative 6% in the second quarter, versus a negative 3.7% decline in the second quarter of last year.

The comparable store sales calculation for the second quarter of 2008 and 2009, along with the full-year 2009, include Dick's Sporting Goods stores and Golf Galaxy stores.

The comparable store sales calculation for the full year 2008, includes Dick's Sporting Goods stores only.

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

We are very pleased with our first quarter results in light of the tough economic environment.

In addition to growing sales, we have leveraged our expenses, reduced inventory levels and further strengthened our balance sheet.

We will continue to use this financial strength along with the demonstrated talent of our associates, as we serve the core athlete and outdoor enthusiast.

I will now turn the call over to Joe.

Thanks, Ed.

In 2009, we expect to add approximately 20 new Dick's Sporting Goods stores, relocate one Dick's Sporting Goods store, add one Golf Galaxy store, convert the Golf Shop to a Golf Galaxy store, close two Chick's stores and convert the remaining Chick's stores to Dick's Sporting Goods stores.

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

We expect that approximately four new stores will open in the second quarter, and seven in the third quarter.

In the first quarter, we opened a total of nine new Dick's Sporting Goods stores and one new Golf Galaxy store, converted the Golf Shop to a Golf Galaxy store and converted our Murrieta, California Chick's Sporting Goods store to a Dick's store.

At the end of the first quarter, we operated 394 Dick's Sporting Goods stores with 22 million square feet; 91 Golf Galaxy stores with [1.5] million square feet and 13 Chick's Sporting Goods stores with 600,000 square feet.

I am also pleased to report that already in the current quarter, we have converted the remaining Chick's Sporting Goods stores to Dick's stores.

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

This is lower than what we generated in the same quarter of last year, of 77.4%.

The decline is primarily driven by the overall decrease in consumer spending, as is evidenced by the 2.5% decline in transactions, and 2.1% decline in sales per transaction in the first quarter.

The rate of decline in transactions in the first quarter of 2009 is meaningfully better than the fourth quarter of 2008 decline of 5.8%.

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 by 5.2%, $959.7 million.

Consolidated same-store sales was a negative 6%.

Dick's Sporting Goods comp sales declined 4.6%, and Golf Galaxy comps declined 19.7%.

The comp store sales decline at Dick's stores was driven in part by a 2.5% decline in transactions, as well as a decline in sales per transaction of 2.1%.

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

Consolidated gross profit of $250.4 million, was 26.09% of sales, 232 basis points lower than the first quarter of 2008.

A merchandise margin decline of 160 basis points was primarily driven by the clearance activity at the Golf Galaxy stores, an increase in promotions at the Dick's Sporting Goods stores, which resulted in better-than-anticipated gross margin dollars, and the planned inventory liquidation at our Chick's Sporting Goods stores prior to the conversion to the Dick's stores.

The consolidated merchandise margin contraction was compounded by a fixed cost deleverage of 36 basis points.

The remaining deleverage of gross margin was driven by freight and distribution.

As a result of our expense control efforts, SG&A expense is up $226.1 million, or 23.56% of sales, which was 56 basis points lower than last year's first quarter.

The $6.2 million increase in SG&A from the first quarter of 2008 to the first quarter of 2009, was primarily from the e-commerce business.

Pre-opening expenses declined 22 basis points as a percent of sales in the first quarter, due to fewer store openings scheduled in the first and second quarter compared to the same period last year.

Operating income before integration costs decreased to $21.3 million as a percent of sales.

The non-GAAP operating income margin of 2.2%, was 153 basis points lower than the first quarter of 2008.

Non-GAAP net income decreased to $12.8 million, and earnings per diluted share decreased to $0.11, compared to the first quarter prior year net income of $19.6 million, or $0.17 per diluted share.

The earnings for the first quarter of 2009 include a $1.1 million successful resolution of a tax audit of a prior year -- of a prior fiscal year.

For the quarter, Golf Galaxy was slightly dilutive to earnings, driven by the 19.7% decline in same store sales and the merchandise margin decline previously noted.

Let's move to the balance sheet.

We ended the first quarter with $116.3 million in outstanding borrowings on our $440 million line of credit, even after the repayment of the $172.5 million for our senior convertible notes in the first quarter of this year.

Our borrowing rate is LIBOR plus 75 basis points, and averaged 1.43% in the first quarter.

Taking a look at inventory management, the inventory per square foot was 9.7% less at the end of the first quarter of 2009 as compared to the end of the first quarter 2008.

Our accounts payable as a percent of inventory increased to 45% in the first quarter of 2009, compared to 41% in the first quarter of last year.

As planned, we have also managed our capital spend.

Net capital expenditures were $7.2 million in the first quarter of 2009, or $29.4 million on a gross basis, compared to a net capital spend of $34.6 million or $49.4 million on a gross basis in the first quarter of last year.

Looking to the rest of the year we are anticipating lower consolidated gross margin levels than we generated last year.

With the slightly improving sales trends we saw in the first quarter, we anticipate lower advertising savings than originally planned in order to take advantage of potential opportunities.

As a result, we anticipate reducing operating costs by approximately $40 million to $50 million in 2009 compared to 2008.

The savings are expected to come primarily from payroll, advertising and pre-opening expenses in the second and third quarters of 2009.

We are also anticipating approximately $30 million in expenses related to the GSI e-commerce business, as we mentioned in our last call.

Both of these items are reflected in our 2009 expectations.

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

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

The 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 managing the capital spend more tightly if this tough economic environment.

In summary expect 2009 to continue to be a difficult year.

However, through effective merchandising and marketing, inventory management, relentless expense control and reduced capital spend, we will weather this economic storm well.

Our financial discipline and our emphasis in operational execution, supported by our strong balance sheet which is a real competitive advantage, position us well to emerge from the current economic environment even stronger.

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.

Thanks a lot.

Good morning and congratulations on a great quarter in a tough environment.

I'd like to just get a little more color on gross margin in relation to the detail that Tim disclosed.

On the merchandise margin side, if you could just help us quantify the impact of Golf Galaxy, and what that means to the margin hit that you saw at Golf Galaxy, where sort of the magnitude of the Chick's liquidation and just confirmed that that was in fact included in the non-GAAP numbers that you gave us.

And then I think you said that you saw increased promotions at Dick's, but I'm not sure that's what I heard.

So I would love to get more color on that, please.

If we look at the breakout, Matt, on the individual components on gross margin from our Companies, the largest impact was from Golf Galaxy.

The second largest impact was from the promotional activity at Dick's Sporting Goods and third in line was the Chick's Sporting Goods liquidation impact.

That is all included in the non-GAAP number.

Can you give us a little more color on the nature of the promotional activity in the Dick's stores, please?

Matt, it was -- there was a fair amount of it around the golf business.

As we know, the golf business has been difficult.

We got a bit more promotional on the golf business, and had terrific results in golf.

But it did impact our margin rate.

Go ahead, Matt.

Go ahead, I'm sorry.

And then we also had some activity around continuing to reduce inventory.

So we've taken unproductive inventory and have reduced that.

And that's how we got to the meaningful reduction of 9.7% over last year.

And from a gross profit dollar perspective, as you survey the golf results from core Dick's stores in Q1, are these decisions you would make again?

Absolutely, yes.

Got it.

Okay.

Then finally Tim, just closing on the gross margin question, was it 36 basis points of occupancy deleverage that you saw?

That is correct.

And then the remainder is, [just a little bit], I guess, on freight and distribution.

That sounds like --

Remember, Matt, we did not have the Atlanta distribution center in full operation until middle of the summer last year.

So in this first quarter, we have a first full quarter of operation.

And given -- last question -- given that your business gets seasonally stronger, obviously, in the second quarter, would the 36 basis point hit -- let's say you ran the same comp in Q2, would the 36 basis point hit diminish a bit on the bigger sales base?

Slightly.

Okay.

Thank you so much.

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

Hi.

Good morning.

Hi.

I was wondering if you could give us some more color on what is going on with apparel.

Are you seeing down-trading in that category or are people just reducing their overall spend on a, quite frankly, highly discretionary category?

I think it's a little bit of both, but I think it's more that people are just -- the trend is off a bit right now.

The trend is off a bit in apparel.

Okay.

And can you highlight what you've seen from some of your other competitors in the market?

Has price competition increased, and was your decision to be more promotional on golf as a result of what others were doing in the market, or was it more just Dick's decision to move inventory?

It's -- the golf business has gotten a bit more promotional and, as opposed to sitting back and not participating, we felt it was appropriate for us to participate in this promotional activity.

And I think that -- with what we did from a marketing standpoint in conjunction with the pricing, our golf business at the Dick's stores was significantly better than what it was at Golf Galaxy.

Okay.

Then my last question, is you mentioned a few quarters ago that you were reducing some of the floor space, I think from the fitness category and converting it to something else.

Has this decision been made, and when can we expect to see changes on the floor?

We haven't -- with some inventory we had coming in, we haven't put that in place right now.

You will start to see a bit more of that in the third quarter, as we get into the back-to-school season.

Okay.

Thanks very much.

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

Thank you, and good morning.

Hi, Rick.

Just a question about merchandising.

Can you speak to the areas of strength and weakness?

I know you mentioned golf and apparel being soft, and the hunting equipment area, I suppose, was strong.

The hunting equipment was strong.

We indicated that golf in the Dick's Sporting Goods stores was really -- was strong.

We did very well from a golf standpoint.

The outdoor category, the hunting category, has been very strong for us, as it has been for others in that category also.

Any other areas have strength that you would like to [highlight]?

The footwear area, I'm curious how that performed.

Footwear was okay.

If you take out some of the products that are not nearly as important as they were the year before, kind of in that footwear category outside athletic footwear, the athletic footwear category performed reasonably well.

Thank you for that.

Can you also speak to the mall-based stores versus the strip center stores that (recording skips here) performance -- ?

We don't see a significant difference in performance between mall-based stores and our strip center stores.

All right, thank you.

And then the comp guidance for the second quarter and the year, can you give us some color as to how you think about the Dick's stores and the Golf Galaxy stores?

We think the Dick's stores will perform better than the Golf Galaxy stores.

Okay.

And is golf, is it soft in the Golf Galaxy stores sort of across the board, more traffic driven?

Or is there differences between apparel and equipment?

It's really across the board.

We are in the process of liquidating a lot of the apparel from the previous management team.

Again, although the golf business at Golf Galaxy was down 19.7%, and the golf business at Dick's, as I said, was meaningfully better than that, we've really only had -- running this business completely for one quarter.

So we are in the process of liquidating some old inventory out of there on both the apparel side and hard line side, although it's more -- there is more of it to liquidate as a percent of the total inventory on the apparel side.

That's what really caused some of the margin erosion.

And we'll look to reassort this business, and we think we can improve the results, although it's still going to take a little while.

But we want everybody to remember we've only been running this for one quarter.

What sort of timeline do you think at of in terms of re-assorting -- ?

We think that we will have it completely re-assorted by no later than the middle of the third quarter.

Very good.

Thanks a lot.

Good luck.

Thank you.

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

Ed, following up on Golf Galaxy, I know among some of the golf manufacturers, they are concerned that after Randy Zanatta left and the organization was moved to Pittsburgh, that the Golf Galaxy stores were beginning to look like a Dick's golf department with a big private label assortment, perhaps diluting the focus on the some of the brands like Taylor-Made, Titleist and Ping, Callaway et cetera.

Is that a concern on your part that perhaps there is not as much separation between the two concepts as in the past?

I think we have not reduced the dependency on those primary brands of Taylor-Made, Callaway, Titleist, Ping.

That hasn't -- the private label brands have not replaced those.

Private brands have replaced the secondary vendors of Wilson, Spalding, some of those brands.

As we take a look at this, though, we feel that there is probably -- we are going to make a bit of a move to more branded product and a bit less private label product.

But we haven't reduced some of those primary brands in favor of the private label brands.

Also, you had noted that in the upcoming quarter, you're expecting Golf Galaxy to generate a $0.02 profit, down from $0.08 a year ago.

Can you remind us what those numbers are for your forecast for all of FY 2009?

We haven't provided that guidance.

Okay.

And then I guess the last question I had, when you were talking abut the promotional activity within that category, were you specifically alluding to the [Buy a Driver and Get a Fairway Wood for $1] as being the successful promotion?

Or were there some other things that you were doing besides that?

it was a number of different things.

It was the Driver and Fairway promotions, it was the cascading of some of the products from a promotional standpoint.

And then there were also some very successful launches of new product.

In particular, the Taylor-Made R9 driver has been very successful for us at both the Dick's Sporting Goods stores and Golf Galaxy stores.

And that's a $399 driver, and I think both us at Dick's Sporting Goods and the Golf Galaxy team along with the Taylor-Made team, are very, very pleased with the results of that driver.

Great.

Thanks and good luck.

Thank you.

Thank you.

Your next question comes from the line of Christopher Horvers with JPMorgan.

Thanks and good morning.

On your outlook, it seems that you're implying a decelerating two-year trend on a comp basis.

I was just curious what exactly is driving that outlook.

Is it the running shoe launch at the end of this past year?

Is it the gun category?

Just curious what the merchandise puts and takes are there.

We had a hard time hearing you.

Was that the two-year comp number, what's causing that?

Chris?

We've lost him.

We will now go to the next question, which is from Mitch Kaiser from Piper Jaffray.

Let me -- if I may first.

May I try to answer the question I thought I heard?

The question that I thought I heard was what is causing the two-year comp decline.

And I think that's not unusual in retail today.

It's a difficult environment out there.

And we think that it's going to continue to be a difficult environment through the balance of this year.

We will move onto the next question.

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

Hi guys, good morning.

Could you talk a little bit about just the discrepancy between the golf category at Dicks and Golf Galaxy?

Is that a function of more of the premium markets and the value markets?

And then -- so how much of it is market-driven versus kind of self-inflicted?

And then you mentioned some of the things on the assortment side.

Could you talk a little more specifically about what you are going to do on the assortment side of Golf Galaxy?

Thanks.

The difference between Dick's and Golf Galaxy, is Dick's was a bit more promotional.

We had the marketing plans in place and executed them very well on the Dick's side.

The Golf Galaxy side, we are still in the process of trying to reassort the store, get in the right product, get in the right apparel product and get the marketing plan in place.

So we've got some clean-up to do from what happened with the previous management team there.

We expect that that's going to improve, but we are much further ahead of the curve with Dick's than with Golf Galaxy.

And it's not really focused on the premium product being difficult, although we are seeing kind of a similar sales trend from an AUR in both chains.

But it's really not because of the premium side it's because Golf Galaxy -- we've really only had them for one quarter, and trying as quickly to get these programs in place.

It's just going to take a little bit of time.

Okay.

And I noticed you were doing some Sunday [tabs] for Golf Galaxy.

Is that something we should see more of, and maybe could you talk a little bit about for the performance of those?

And then also I noticed -- just on the [Buy a Driver Get a Fairway Wood] the BOGO, was a lot of that vendor supported, Ed?

It was all vendor supported, yes.

The vendors supported those promotions, and I think it's been both good for us and for the vendors.

And as far as the tabs go, yes, we are -- you will see a bit more of the inserts for Golf Galaxy than in the past, as part of our marketing program is trying to bring new customers into Golf Galaxy where, previously, the primary aspect of the marketing program was continuing to talk to the same Advantage Club customers.

We need to continue to talk to those Advantage Club customers, but we need to have a marketing vehicle out there by which it brings in new customers.

And new customers weren't coming into the store at a fast enough rate.

So we think the tabs, plus the exposure that we have on the Golf Channel now will help us do that.

Okay.

Well the tabs look good.

Good luck going forward.

Thanks.

Thank you.

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

Thanks, guys.

So couple of questions.

One, I just wanted to discuss what we are seeing in rents on new stores and/or older stores that come up for renewal on -- if you look at your 10K, I think rent per foot was up about 2%, which is better than it's been in previous years.

There's probably some noise because of Golf Galaxy.

But wondering if you can tell us what you're seeing there?

Sure.

Michael, this is Joe.

We are seeing rents in a little bit more favorable light as we are out looking at real estate today.

As you're probably aware, there is not a lot of new development out there.

So we are looking at some existing real estate, and we are finding favorable rent conditions.

As far as renegotiation, any rents that we have there, we don't have a lot of leases up for renegotiation this year.

But what we do have, we are seeing some favorable negotiations for improved rent.

So what kind of occupancy estimate do you have in your guidance?

It was about 35 basis points negative this quarter.

Sounds like it's going to be about that in the second quarter.

Is that what we should think about for the full year?

It will all depend upon the comp.

If the comps are where they were in the first quarter and the second quarter going forward, then your answer is correct.

Okay, and thanks.

And then one follow-up, just to clarify while we're talking expenses.

The $40 million to $50 million savings, that includes the $30 million cost for the internet or excludes the $30 million?

That includes that additional cost.

So the net savings of what, $10 million to $20 million?

That's correct.

Okay, thank you.

Your next question comes from the line of Christopher Horvers with JPMorgan.

Sorry about that.

Can you hear me now?

Yes.

Somehow I got dropped.

So the question was, and I apologize because I didn't hear the answer, it seems like you have a decelerating two-year comp trend as you look into the back half of the year.

Is that just concern about the environment and uncertainty?

Or is it is something on the merchandising side that you are seeing, maybe something you [anniversary] as you look forward that makes you more concerned?

The environment and uncertainty.

We really -- it's still difficult to have great visibility to what is going to happen in the back half of the year.

Okay.

I see.

And as you think about it, it seems like you are opening up to, perhaps looking at second used sites.

It seems like on the West Coast, there are a lot of good sites opening up to you.

How does that change your square footage growth outlook as you think into second, third, fourth quarters of 2010 and beyond?

Does it take it up to a higher single-digit growth rate in the absence of further commercial real estate development?

I think that there is going to be more of -- our real estate is going to be recycled real estate than new development.

But the environment will determine what our growth rate is, so how we feel the environment is as we get further in to this year, what real estate is available.

Because if there is a lot of secondary real estate but it's not real estate that we think is Main and Main, we are not going to be doing that.

So there is still a lot of variables out there.

We are in the process of looking at, with Joe's up in the Pacific Northwest, the liquidation of that chain.

We are looking at a number of those sites right now also.

So maybe any sense on how many sites that are out there on second use that you see as appealing at this point?

Ballpark?

Not that I'd want to comment on right now.

But we are aggressively looking at those, and I would say that in 2010, we would not open up less stores than we are opening in 2009.

Thank you very much.

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

Thanks.

Just a little more on the gross margin.

I wonder if you could address vendor leverage that you might be seeing, given the pressure among other players in your channel?

And also, I think in the last quarter, you talked a little bit about the benefit of opportunistic buying and the ability to use that to stretch value.

Is that a meaningful trend that you saw in the past quarter as well?

As far as vendor leverage goes, we are working with our vendors, we've renegotiated terms and conditions of sales with a number of our vendors.

In as far as opportunity buys go, we've had a number of opportunity buys that we have taken advantage of.

In the first quarter, we've got more that we've taken advantage of in the second quarter and third quarter.

So we think that they will continue, especially if some of the consolidation continues to happen, such as what's happened in the Pacific Northwest with Joe's, with them closing stores, with Sportsmen's Warehouse closing stores, there's product out in the marketplace.

We've got -- keeping our inventory under very tight controls as we have, with inventory down again in the first quarter, down 9.7%, we are in a very liquid position.

We have an appetite for these off-price products.

And as far as terms go, do you see the current payables levers that you mentioned being sort of a good go-forward rate?

Or do you think there could be room for improvement there as well?

Right now, I'd say that this is a pretty good go-forward rate.

As we get to the latter half of the year, you could actually have some slight improvement from that number.

Thank you.

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

Thanks.

A couple of questions.

First quickly, Tim, is the tax rate we see in the first quarter, is that an anomaly then?

We should go back to kind of a more normal rate going forward?

Right.

As I mentioned, we had a $1.1 million advantage from an audit of a prior year tax return.

You should be looking more like 39.7%, 39.8%.

Okay.

Thanks.

Regarding the impact in the first quarter of the liquidation at Chick's, was that limited to the one store that was converted?

Or should we expect to see similar effects of liquidations at the other conversions that are underway now?

For the second quarter?

Well, what we did in the first quarter was, we went through the liquidation process for all of the Chick's locations, except for the El Segundo store, which had already been converted.

So this was to get the stores ready to be converted over to the Dick's stores which just took place last week.

So there really shouldn't be any lingering impact then of that?

Is that the implication?

That's correct.

Okay.

And then a final question, also kind of touching on margins.

Are you seeing much trade-up or trade -- given that your private label/private brand strategy typically targets a higher quality than most of the retailers, would you say you are seeing greater- or lesser-than-expected trading to your private label relative to the top end of the brand spectrum?

Overall, it's pretty flat.

There's some places that it's trading one way, and others it's trading another way.

But overall, it's still relatively flat to what it has been traditionally.

Okay, not a big shift then.

Okay

Not a big shift.

Thank you very much.

Yes, sure.

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

Good morning.

Thanks a lot for taking my question.

I actually have a couple.

Number one, is the fixed charge coverage ratio covenant in your credit facility -- is that going to be a negating factor over the long term and influence how you think about square footage growth?

Secondly, are you seeing any more positive trends in your stores that are surrounding areas that have more of your competitor closings, such that you can get a sense for how much market share you are gaining?

And I will take a breath and give you those two real quick.

Okay, on our fixed charge ratio in our facility covenant, first it's not a covenant unless there is a measurement event in any quarter.

Meaning that our borrowing is less than -- the only borrowing we have left is approximately $50 million.

So the covenant is inactive until that point happens.

Michael, ass far as positive trends regarding competitor closings, we've had some small regional closings and we have seen some marginal increases in those stores.

It's nothing meaningfully to the entire chain.

Where we have some closures around Sportsmen's Warehouse, they just closed at the end of April, so we didn't realize much of that in the first quarter.

And as far as Joe's goes, we have one competitor and same issue -- we have not seen anything meaningfully there due to -- there is still a lot of liquidating.

Okay, and then last question on the Golf Galaxy.

The diversions and performance between that chain and then the golf results in Dick's suggest that perhaps some of the natural traffic flow that you get in a Dick's store is meandering into the golf section and finding what he or she likes.

With that being said, would you ever consider expanding the potential assortment in the Golf Galaxy stores to include other types of sporting goods and get better utilization of that space?

At the present time, I would say no.

We feel that one of the benefits of Golf Galaxy is that it is a specialty golf retailer focusing on golf products for that golf enthusiast.

And we wouldn't want to dilute the brand image.

Quick last one, I'm sorry.

Ed, you mentioned apparel and team sports were below the Company's average.

Any explanation for the softer performance in those categories?

I think it's just the environment as a whole right now.

Thank you very much.

Sure.

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

Thank.

Following up on the question on apparel.

Ed, I think you said that you felt that the trend was off on apparel.

Is that more a comment on the product that is being offered by vendors?

Or is it what you are buying?

Or is it just kind of more of apparel in the macro environment?

It's just the macro apparel environment right now.

It wasn't meaningfully off our trend, but it was a little bit off the trend.

It's just the environment out there.

I think that the brands continue to bring new and innovative products to the market, and I think the content and assortment that we've put into the stores is really very good.

We've gotten very good positive feedback from our customers on it.

I just think the environment people are just a bit more cautious, and they're not replacing it as often right now.

Okay.

Thanks.

And then on athletic footwear, which I guess was a little above or was above the overall trend, was that still negative in terms of comp?

And then can you just provide a little bit of color on whether a particular area of athletic was driving that, or did you see pretty decent performance across the board in that category?

In the athletic footwear category, that was actually positive, and a couple of things that helped drive that was the Under Armour running shoe launch was certainly helpful, and helped raise the athletic footwear business, along with a strong offering from Nike and Asics and a couple of other brands.

So the overall athletic footwear business was really pretty good.

Okay, great.

Thanks very much.

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

Yes, hi guys.

Thanks for taking the question.

Another kind of trend -- product question.

It seems like -- I thought last quarter team sports was a better quarter for you guys, and you said earlier in the year there was more participation and you saw some trend there.

But it seems like that has fallen off.

Any sense as to what is going on there, or do I have the trends off?

You're right.

I think that part of the issue is people have just decided to -- in this environment, they've held off or postponed a purchase a bit more than we may have anticipated.

So overall the business is still a very good business, but it's just trended a little bit below the chain average in the first quarter.

Okay, and then just a separate follow-up.

With regard to the stores and potential weaker competitors out there, it seems, obviously that to me anyway, that you guys can be a consolidator in the space.

I guess, what are you seeing out there from some of the larger competitors?

I hear that some of them are as weak as they've ever been.

I'm curious to see if you are hearing or seeing anything different from a competitive standpoint?

We see and we hear probably a lot of the same things that you do about some of our competitors.

I'm not going to comment on any one in particular.

But from a consolidation standpoint, I don't see us acquiring anyone in this environment.

I think that our growth will continue to be organic, and the consolidation will come from people not making it or reducing store count, pulling back similar to what Joe's is doing, liquidating the entire chain, or Sportsmen's Warehouse, which is closing stores and trying to develop a business that's viable in a smaller footprint.

Got it.

And just one more, if I could.

How quickly can you guys ramp up store growth again as the environment starts to improve?

I guess, essentially how long does it take to open a store?

My understanding is there's, like you just described, a lot of available space, so it wouldn't take too long.

But what's your thought there?

It wouldn't take long.

We haven't dismantled our real estate or construction group, we've kept that infrastructure in place so that we can ramp it up when we need to.

And it is just a matter of available real estate and, take that one step further, availability of the right real estate.

Because we are not going to -- we just won't take second tier real estate.

We just think that long term, that's the wrong play.

So if we get the right real estate and the right things come available to us, we can ramp this up very quickly.

In a matter of six months, we could we could be ramped up to a lot more stores than we are right now, if we've made that decision.

Got it.

That's great.

Thank you and good luck with the next quarter.

Thank you.

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

Good morning, this is Jody Ben calling on behalf of John.

I have a question on your promotional activity.

Do you expect to drive sales or promotions for the balance of the year?

And do you think that this will continue to offset the penetration of private label merchandise margins?

We do expect the environment to continue to be more promotional.

As I said, we were successful with the promotions, so we do anticipate that to be more promotional through the balance of this year than last year.

Part of those promotions will be an effort to drive some of our private label that has been very well accepted by the consumer.

So we would hope that we could help increase the penetration in some areas with our private label and private brands.

Thank you.

Sure.

Your next question comes from Chris Svezia with Susquehanna Financial Group.

Good morning, everyone.

Just a couple questions here.

I guess just first, how should we be looking at inventory levels, now that you're down almost 10% on a per-square-foot basis?

Just kind of how we should look as we kind of progress further.

And any thoughts on how you are looking at buys in the second half.

Do you still get a sense that you are holding back a little bit?

Or are you feeling you are short some products in some categories.

A little color on that would be helpful.

I don't think in this environment, we are short product.

We feel that we've got the vast majority of product -- [in fact] our inventory levels are in good shape.

If there is one area that we do think we are short and we just can't -- the suppliers can't fill the pipeline fast enough, is in the firearms business and the ammunition business.

But other than that, we think we've got the right amount of inventory and we're in pretty good shape.

We would expect the inventory to -- as we started to move this inventory down in the back half of last year, I would not in your models continue to think that we are going to be down 7%, 8%, 9% in each of the next several quarters.

It will be -- it will still be down in the end of the second quarter and the third quarter.

But as we get into the end of the fourth quarter, I would not be looking for meaningful changes in the inventory level on a downward standpoint as we were down in the Dick's stores, almost 13% last year at the end of the fourth quarter.

Okay.

That's helpful.

And just on the hunting/outdoor category, firearms, that kind of my other question.

When do you guys start to cycle through I guess the pop in that business that you saw?

Is that the third quarter of last year that started to happen?

We will start to cycle through that the day after the -- we anniversary the election.

And then just on -- I think on the last call, you guys had mentioned that you had thought that you could possibly see merchandise margins improve for the current fiscal year.

Is that still a possibility given how the first quarter has unfolded?

I don't think that's a possibility now.

We thought we would be able to do that.

Pricing got a bit more competitive in promotional.

We became a bit more promotional and saw a meaningful change in our sales.

So we anticipate that that promotional activity will continue and to be able to have a -- and we had said that we thought we might be able to have a modest improvement in gross margin rates.

I don't think that's possible now.

But we don't see them deteriorating any more than they already have either.

Okay and last thing, if I could quickly.

And on the [Jordan Shop-in-Shops], I think you had 60 or so of those by the end of the first quarter.

How are those progressing for you?

How are those performing?

We're very pleased with the apparel side of it, which is -- primarily the Shop-in-Shop was from an apparel standpoint, and we're really quite pleased with that and appreciate the support Nike has given us on these shops.

Okay.

Thank you.

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

Good morning.

A couple of questions.

Number one, with your slower store openings, are you looking, when you look into 2010, to more go into areas that are vacated, as the Pacific Northwest is vacated by Joe's, looking for more closures and taking second-use sites or new sites within markets of others, rather than trying to take share in existing -- going straight up against somebody?

We think the Pacific Northwest is -- has got great opportunity for us up there.

So we're looking at that very aggressively.

So, yes, we will be trying to increase that penetration at a pretty rapid rate up in the Pacific Northwest.

We will look for great real estate that long-term is where we want to be.

And if there is no competitor there, all the better.

But if we think there is a competitor there who we think is a weak competitor, and we can out-position them from a real estate standpoint and can make the right real estate deal, we will do that also.

Are you seeing -- compared to last year, just in general sense or over the last few years, are you seeing some competitors -- more competitors you would regard as becoming weaker or more at-risk, just given the economy right now?

We see competitors becoming weaker and more at-risk, yes.

And I think a number of it has been pretty well chronicled in the press and in the analyst reports.

Two more questions.

Number one, could merchandise margin -- the merchandise margins at Dick's, could they be flat for the balance of the year ex-Golf Galaxy?

Is that something we could see based on the inventory controls and so on, so forth?

I think because of the -- if it was only because of inventory controls, yes.

But because of the promotional activity out there from a competitive standpoint, I think that it will be difficult to keep the margin rate flat for the balance of the year.

But this is -- in Dick's, this is not a meaningful margin rate reduction.

I mean it's meaningfully less than 100 basis points.

But I don't think we will get it to flat for this year.

To be honest with you, I don't think we're even going to try because we do want to try to grab that market share with the promotional activity that's been so successful.

That's mostly in your hard lines areas, I would assume, as you talked about, in golf and so on.

There will be some promotional activity in footwear and possibly some soft lines areas also.

And then lastly, could you tell us about what the e-commerce sales were or what kind of increase or decrease you saw in the e-commerce sales in the quarter?

Well, we won't give specific results there, but I will tell you that the e-commerce business was slightly off what we had anticipated -- a little bit more off than what we had anticipated, as we under-estimated what would happen with Nexus.

So we've got a number of states now that we didn't have to charge sales tax in, but since we've taken over control of the site, we have to charge sales tax.

And we see a significant increase in abandoned shopping carts at the end of the transaction because of the tax consequence.

So we are working through that.

Our internet business will be a bit off this year, primarily because of Nexus, and we think we will build it beginning next year.

Thank you very much.

Good luck.

Your next question comes from line of Mark Mandell with FTN Equity Capital Markets.

Thanks.

Good morning.

Do you anticipate any additional merger and integration costs in the second quarter, or was all of that absorbed in the first quarter?

A very, very minor amount in the second quarter.

Okay.

And are you -- I didn't see this in the 8K, but are you going to give us the interest expense adjustments for Q2 through Q4 for this change in accounting treatment for the convertibles?

It looks like it's about $2 million pre-tax a quarter?

Is that the best way to look at this?

That's exactly right, about $2 million per quarter.

Okay.

It would be about $0.01 per quarter, and $0.04 for the year.

Okay.

And then -- and finally, can you shed any additional color on the -- on your cost-cutting initiatives that you alluded to earlier in the call?

I think what we've said on the previous call and on presentations that we have done, that the cost-cutting are coming from payroll, from advertising and from our pre-opening cost.

And that is the same pool that we are going after.

Okay, great.

Thanks a lot.

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

Hi, this is actually Sam in for Jim.

I was just wondering whether you think 2Q comps will be meaningfully affected by a shift of tax-free holidays from 2Q into 3Q this year.

Thanks.

We don't think that will have a meaningful impact at all.

Okay.

Thanks.

Sure.

There are currently no further questions.

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

I'd like to thank everyone for listening to our first quarter results.

We are pleased to have beat guidance, and we'll look forward to talking to everyone as we release our second quarter results.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Good day.