DICK'S Sporting Goods Inc (DKS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Dick's Sporting Goods Incorporated earnings conference call.

My name is Lauren and I'll be your operator for today.

(Operator Instructions) 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'd now like to turn the presentation over to your host for today's call, Anne-Marie Megela, Director of Investor Relations.

Thank you, Lauren.

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

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

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

Including but not limited to our views and expectations concerning our future results.

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 reports filed with the SEC, including the Company's annual report on Form 10-K for the year ended January 31, 2009.

We disclaim any obligation and do intend to update these statements.

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 second 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'd now like to turn the call over to Ed Stack.

Thank you, Anne-Marie.

I'm pleased to report that in the second quarter, we delivered top sales and earnings results that exceeded our expectations.

We generated net income of $42.4 million or $0.36 per diluted share, excluding integration costs.

As compared to our previous estimate of $0.28 to $0.31 per diluted share.

Net sales for the second quarter of '09 increased by 3.7% to $1.13 billion, due primarily to the opening of new stores and the addition of ecommerce sales, partially offset by a 4.1% decrease in comparable store sales.

The 4.1% consolidated same store decline consisted of a 3.2% decrease in Dick's Sporting Goods stores and an 11.1% decline in the Golf Galaxy stores.

As a result of an increase in sales and gross profit dollars, as well as better operating leverage, our Dick's Sporting Goods stores generated a $0.02 improvement in earnings in the second quarter this year, compared to the second quarter of last year or approximately a 6% increase.

This performance, which was better than our previous expectations, was driven by our effective traffic-driving marketing and merchandising strategy, inventory management and expense controls.

Golf Galaxy's performance was also better than anticipated, generating earnings greater than our original expectation of $0.02 per share.

This was driven by higher than anticipated sales and improved operating leverage.

Once again, our inventory levels were under tight control, down 5.5% per-square-foot at the end of the second quarter of 2009, as compared to the end of the second quarter of '08 on a consolidated base.

Looking to the rest of 2009.

We are increasing the expected number of new stores, as well as raising our earnings guidance in expected same-store sales.

Many of you have heard us say that the difficulties of the current challenging economic environment can also bring opportunities.

The closing of a competitor in the Pacific Northwest is one of those opportunities.

We have identified attractive real estate in this underpenetrated area and are accelerating our new growth store program in this region, bringing our '09 total new stores to approximately 24.

We are currently anticipating reporting consolidated earnings per diluted share of approximately $1.02 to $1.07, excluding merger and integration costs.

For the full year '08, we reported earnings per diluted share of $1.15, excluding the non-cash impairment charge and merger and integration costs.

On a GAAP basis, we currently anticipate reporting full-year earnings per diluted share of $0.97 to $1.02 in 2009, compared to a net loss of $0.36 per diluted share in '08.

In 2009, we're expecting comp store sales to decrease approximately negative 5% to negative 4% versus a decline of negative 4.8% in 2008.

In the third quarter, we're anticipating reporting consolidated earnings per diluted share of approximately $0.04 to $0.07.

In the third quarter of '08, we reported consolidated earnings per diluted share of $0.07, excluding merger and integration costs.

We're anticipating a comp store sales decline of approximately 6% to negative 4% in the third quarter versus a 2.8% decline in the third quarter of last year.

The comparable store sales calculation for the third quarter of '08 and '09 and full-year 2009, include Dick's Sporting Goods and Golf Galaxy stores.

The comparable stores calculation for the full-year '08 includes Dick's Sporting Goods only.

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

We at Dick's Sporting Goods are cautiously optimistic about our business.

As I indicated earlier, Golf Galaxy exceeded our Q2 expectations and our Dick's stores delivered earnings $0.02 above last year's earnings level.

Going into 2010, we expect to open at least 24 Dick's Sporting Goods stores and approximately five new Golf Galaxy stores.

We will also be consolidating our corporate offices into a single new facility, that has been under development for approximately two years.

We will also be making investments in technology to support our business strategies.

Including establishing a redundant data center, continued investment to support our online business, and our direct to consumer marketing programs for both the Dick's Sporting Goods ScoreCard customers and the Golf Galaxy Advantage Club customers.

We will also be making changes in our merchandising and marketing infrastructure, which will allow us to provide our customers better regional product assortments and marketing programs.

Some of these investments were postponed in 2009 due to the severe global economic slowdown that has affected all of us.

The expected expense associated with all of these programs in 2010 will be between $30 million and $35 million.

Although we are not prepared to give guidance for 2010, even in light of raising our full-year guidance for 2009 from $0.88 to $1, now up to $1.02 to $1.07, we expect 2010 earnings to exceed our expected 2009 earnings.

To summarize, we generated higher than anticipated sales and earnings in the second quarter of this year.

We remained disciplined in our inventory and expense management.

We are progressing in the improvement of our Golf Galaxy business.

Our associates have worked diligently to achieve these results and considering the difficult macro environment in which we are operating, we're pleased with our performance.

Looking to the rest of 2009, we are now anticipating better earnings and same-store sales than originally planned.

And we're accelerating our new store development plan and other infrastructure investments as we grow the business and capture market share.

I'd now like to turn the call over to Joe.

Thanks, Ed.

In total for 2009, we now expect to add approximately 24 new Dick's Sporting Goods stores, compared to our previous expectation of 20 new stores.

As Ed mentioned, we have increased our new store expectations due to our decision to accelerate our growth in the Pacific Northwest.

We plan to open a total of six new stores in the Pacific Northwest in the third quarter.

Of which, one store was already included in our previous expectation of 20 new stores.

Also, we have moved one new store that was originally scheduled for the third quarter of '09 to be included in our 2010 new store plan.

In the second quarter of 2009, we opened a total of four new Dick's Sporting Goods stores and converted our Chick's Sporting Goods stores to Dick's Sporting Goods stores.

In the first half of the year, we have opened 13 new Dick's Sporting Goods stores, added one Golf Galaxy store, converted The Golf Shop to a Golf Galaxy store, closed two Chick's Sporting Goods sports and converted the remaining Chick's Sporting Goods stores to Dick's Sporting Goods stores.

At the end of the second quarter, we operated 409 Dick's Sporting Goods stores, with 22.7 million-square-feet; and 91 Golf Galaxy stores, with 1.5 million-square-feet.

New store productivity for the second quarter was 72.5% and includes Dick's Sporting Goods stores only.

This is an improvement from the second quarter of last year, in which new store productivity was 69.4%.

In the third quarter, we anticipate opening 11 new stores.

At this time, we expect all 2009 new store openings to be completed by the end of the third quarter.

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

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 3.7% to $1.1 billion.

Consolidated same-store sales were negative 4.1%.

Dick's Sporting Goods stores comps declined 3.2% and Gold Galaxy's business declined 11.1%.

The comp store sales decline at Dick's Sporting Goods stores was driven in part a 1.3% decline in transaction and decline in sales per transactions of 1.9%.

Cannibalization impacted comps by less than 1%.

Consolidated gross profit of $309.9 million was 27.5% of sales or 193 basis points lower than the second quarter of 2008.

This decline was primarily driven by a decrease in the merchandise margin and the deleverage of fixed costs.

The merchandise margin decline of 121 basis points was primarily driven by clearance activity at the Golf Galaxy stores and promotions at Dick's Sporting Goods stores.

Dick's costs deleveraged 67 basis points.

As a result of our expense control efforts, SG&A expenses of $238.7 million were 21.19% of sales, which was 69 basis points lower than the last year's second quarter.

The $238.7 million in SG&A expenses includes approximately $5 million from the ecommerce business.

Preopening expenses declined 20 basis points, as a percent to sales in the second quarter due to fewer store openings scheduled this year compared to last year.

Non-GAAP operating income, before integration costs, decreased to $69.6 million.

As a percent of sales, the non-GAAP operating income margin of 6.18% was 103 basis points lower than the second quarter of 2008.

Let's move to the balance sheet.

We ended the quarter with $19.5 million in outstanding borrowings on our $440 million line of credit, even after repayment of $172.5 million from our senior convertible notes in the first quarter of this year.

Our borrowing is LIBOR plus 75 basis points and averaged 1.32% in the second quarter.

Inventory per-square-foot was 5.5% less at the end of the second quarter of 2009, as compared to the end of the second quarter of last year.

Net capital expenditures were $12 million in the second quarter or $23 million on a gross basis, compared to a net capital spend of $32 million or $59 million on a gross basis in the second quarter of 2008.

Looking to the rest of the year, we are anticipating gross profit margin for the third quarter to deleverage at approximately the same rate as we saw in the second quarter year-over-year.

In the fourth quarter, we anticipate sequential improvement, as we will be finished with the clearance activity in our Golf Galaxy stores.

For the year, we are expecting to leverage operating expenses, while absolute dollars are expected to be slightly lower as compared to 2008.

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

In 2009, we are expecting net capital expenditures to decline to approximately $70 million or approximately $110 million on a gross basis.

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

Our current estimate is higher than previous expectations due to the additional CapEx required for the opening of the new stores in the Pacific Northwest, which were not previously planned.

In summary, we continue to execute well in a tough environment.

We are implementing effective marketing and merchandising strategies, while maintaining our disciplined approach to inventory and expense management.

Our balance sheet is healthy and provides a good foundation not only to grow our business but now to accelerate that growth and capture future market share.

This concludes our prepared remarks.

At this point, operator, I'd like to open it up for question and answers.

(Operator Instructions) And your first question comes from the line of Matthew Fassler with Goldman Sachs.

Thanks a lot and good morning to you.

Two questions, if I could.

The first relates to the promotional tenor of the business.

It sound likes you continued to promote to drive business.

If you could talk about the consumer's need for promotions in order to buy and how you would consider the promotional tenor in the second quarter compared to the prior quarter?

Matt, I think the consumer is still looking for a value out there.

We've tried to provide the customer with what they're looking for.

But a big part of the margin rate deterioration was the clearance activity at Golf Galaxy.

As we're getting rid of a significant amount of old, stale inventory from the previous team that was running Golf Galaxy.

How did the margin decline at the core Dick's stores, the merchandise margin decline, compare in the second quarter from the first?

Relatively the same.

Got it.

And my second question relates to real estate.

It sounds like the incremental expansion is taking out existing competitive capacity that's come on the market.

As you think about conventional growth, how are you contemplating traditional store openings, now that development in new power centers has moderated?

And can you also comment on what you're seeing in terms of the economic equation as you look at rents versus landlord subsidies for your new stores?

Well, what's happening out there right now is we've got a blend of new development and existing real estate.

We think the new development piece is going to continue to be difficult.

And as far as rents, we're finding that rents are coming down but then on the flipside of that, we've got rents coming down, but there's also, landlords seem to be having a bit less capital to invest.

And we're being very judicious on how we approach this.

Is that leading to more upfront investment in new stores and less on the back-end from rent or are your simply -- are you changing store design in any way to accommodate the smaller subsidies that are available?

We're not changing the store design and we think that there could be some difficulty getting landlord allowances.

But as we take a look at this, the rent -- we're getting meaningfully lower rent numbers with us putting some investment in.

So there is no difference on the back-end.

We're putting money in and we may have to put a little more money in upfront than we have in the past but the rent savings, if you will, will be immediate.

Got it.

Thank you so much.

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

Thanks, guys and congratulations on a very, very great quarter in a really tough environment.

Ed, I was hoping that you could give us sort of more color on the categories that did well.

I'm especially curious about how guns and ammo performed during the quarter, as well as the branded apparel stuff, the Nike and Under Armour, in particular, and footwear?

But anything else to call out that helped you achieve those much better than expected some store sales?

And then, if you would be generous and maybe give us some help on how maybe August is going, and back-to-school, that would be great as well.

Thanks.

Sure.

The gun and ammunition business continues to be positive.

We're very pleased about the whole outdoor category.

So, whether it's guns, ammunition, water sports, the whole outdoor category has been positive.

Some other categories, the footwear business has been better than anticipated but still is slightly negative.

And the apparel piece has been slightly negative but better than we had anticipated.

So, even though we indicated that the comps were better than we anticipated, they were still negative 3.2.

So, there wasn't a lot that was in the positive column but we see -- as you can see from the performance, we see improvement.

And as far as August goes, we don't ever comment on a quarter in progress but we're confident in the guidance that we just laid here out for the third quarter.

And Ed, within apparel and footwear, are the customers responding more to promoted product or are the highest price points, Under Armour and Nike, apparel and footwear items, still performing well?

Any color there you can give us?

I think it's been a bit bifurcated, where you have got some of those enthusiast athletes are still buying some of the higher end product.

But then there's been some lower end opening price point business has picked up a little bit, based on what's happening in the economy.

And we're providing our customers with the option to do -- for either one of those, on either end of the spectrum.

Great, thanks a lot, Ed.

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

Thanks and good morning.

Could you talk about on the category side, has your thinking on apparel and footwear changed as you think about the next six to 12 months with footwear?

It's showing some increased volatility.

You did talk about it's better than you expected but do you think directionally -- do you worry about those comparisons in the back half of the year?

Actually, we don't.

We think that it's been stable and again, we're not in the real fashion end of the footwear business.

Our footwear business is primarily driven by that core athlete.

So, the kid who's playing basketball and that core runner.

And so, our business has probably been a bit more stable on the footwear side than some other people's.

That's very helpful.

And can you -- in thinking about Golf Galaxy, a nice sequential improvement in comps, Q2 versus Q1.

What drives that and is that something -- do you think that once the promotional posture and you clear the inventory out, do you think that that could revert to lower levels, as you think about the six to 12 months?

Actually, we don't.

We're pretty confident that the Golf Galaxy business will continue to show improvement.

The Dick's business showed meaningfully improvement -- the Dick's Sporting Goods business was meaningfully better than at Golf Galaxy business.

And the Gold Galaxy business was better in Q2 than it was in Q1.

So what we've got planned from assortments and what we're doing on the promotion side and communication to our customers, we think that we'll see continued improvement in the Golf Galaxy business.

Great.

And then, just finally, as you think about the fourth quarter, within your guidance, it does seem to imply a bit of a two-year slowdown.

Is there something there from the promotional side?

Is it the guns or is it just being conservative as you think about the holidays?

Well, I think it's a combination of things.

We will be cycling through the gun and ammunition piece, which we think will be -- those are going to be difficult comparisons.

And then, the consumer out there is still -- there's still some uncertainty out there, based on what's going on in Washington today.

Whether it's through the healthcare reform, taxes, I just think there's still a fair amount of uncertainty of how the consumer is going to react when some of these things happen or don't happen.

Thank you.

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

Good morning.

Thanks a lot for taking my question.

It's Michael Lasser.

Ed, you kind of opened the door to 2010 saying that you expect earnings for next year to be better than this year.

Maybe you can discuss a little more what's inherent in that expectation?

Is that that comps continue to improve and turn positive at some point?

And will that also -- does that also imply that the promotional environment becomes a little easier since that there's less pressure on the merchandise margin?

Well, as I said, we're not prepared to give guidance for 2010.

All we said was we wanted you to see some of the investments that we're going to make and that we anticipate that, even with the revised guidance for this year, we expect 2010 to be better than 2009.

Now, there's still a number of uncertainties out there on how the consumer is going to react to some of the programs that are coming out of Washington, whether they'll be positive or negative.

But we do feel that there continues to be some improvement in our business and we're going to be going up against easier comparisons as we get into next year.

So we just wanted to give a little color to what we have planned but we're not prepared to go into any meaningful guidance for 2010.

Okay.

And then, there's some changes in the underlying margin for the business, where lease rates are coming down but there's maybe some more capital investment needed.

At the same time, there's been some pressure on the merchandise margin due to the promotional activity but at some point, that should ease and perhaps these investments will bring -- make customers sticky.

What I'm getting at, do you see some sort of change in the long-term margin outlook in the business, given some of these underlying dynamics?

We don't see anything meaningfully negative.

And I'll leave it -- we don't see anything meaningfully negative in our margin outlook going for the balance of this year and into next year, assuming that the economic environment remains as stable as it is right now.

Okay.

And one last one.

Given the change in competitive landscape, some folks are abandoning the business.

Does that change your thinking on how the long-term market opportunity for the number of Dick stores?

I think, historically, you've talked about 800.

So, could that number be higher?

And then just lastly, are the Steelers going to win the Super Bowl this year?

(Laughter)

Well, let me go to the store count first.

We're not changing our store count right now but as things continue to consolidate, there certainly is some upside in the store count.

And as far as the Steelers winning the Super Bowl, we're hoping that they do.

We're all Steeler fans here.

Thanks very much.

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

Hi, good morning.

Could you talk a little bit about what the competitive environment is like in the Pacific Northwest now that Joe's is gone?

It's -- there's not a tremendous amount.

The only other big box retailer out there is TSA.

So it was TSA and Joe's and Joe's has vacated the business.

So, we think it gives us a great opportunity to go in there and penetrate the Pacific Northwest and we're doing it at a pretty rapid rate.

And by the time you enter the region, the liquidation of Joe's will be over?

Joe's is closed now.

That's all over.

We're actually -- a number of the stores that we're opening there are in former Joe's locations.

Okay.

Great.

And then you had mentioned on your last call that during the third quarter we would see some floor space changes that you made at the expense of the fitness space.

Can you update us on what -- how the fitness space may have changed in some of your stores?

It's -- some of the -- we've reallocated some of the space to the bike business and we've taken some space out of fitness and moved our tennis area over there, giving more space for our team sports area.

And that's been the biggest piece.

And we've done that in over 200 stores so far.

With plans to do it in all 409 stores?

We're looking at that, yes.

And this has been pretty positively received, so we anticipate rolling it out further.

Okay.

Great.

And then my last question is that it looks like there was a meaningful decline in accounts receivables year-over-year.

Can you help us understand that decline?

Sure.

This is Tim.

When we open up less stores, we also have less receivables for tenant improvement allowances and construction allowances.

So, that is the primary reduction in the accounts receivable.

Okay.

Thank you.

Your next question comes from the line of David Schick with Stifel Nicolaus.

Good morning and congratulations as well.

The Parks Service has been talking a pretty meaningful jump in visits and your business is getting better.

Can you take out businesses that -- parts of your business that might be affected by that sort of phenomenon, if you want to call it, sporting goods has part of cocooning?

Or what the Parks Service is talking about, can we link anything together there or do you think it's -- we can't pull that out of what's going on at your stores?

I don't know that I would draw a meaningful comparison, although the camp -- as I said, the outdoor business, the camping business, the boat business, all of that was very positive.

And I suspect that there's a lot of people who are using that equipment in the parks, the National Parks and the State Parks.

And in the footwear related to -- the hiking footwear and all of that?

I don't think there's any meaningful comparison.

I wouldn't draw too much from that.

Okay.

Thank you.

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

Thanks and thanks for taking my question.

Nice job in the quarter.

Can you speak to the ticket versus traffic trends in the quarter?

This is Tim again.

On our comp of negative 4.1%, the transaction decline was 1.3% and the ticket decline was 1.9%.

Okay.

And then private-label trends, did they remain favorable on a year to year basis?

Is the trade down effect benefiting your private label programs at all?

We indicated several quarters ago, due to competitive reasons, we weren't going to lay out our private label penetration but you would look at it as being relatively similar to what it was in the past.

Okay.

Great.

And then, speaking with regards to the store expansion opportunity, I think you mentioned 24 new stores in 2010.

If you wanted to accelerate that pace, could that happen or is retail development a gating factor at this juncture?

It's possible that we could accelerate that but right now, based on the balance between tenant improvements and the capital that we would want to put in, we're comfortable at relatively 24 right now.

Okay.

And then, within that 24, what's the mix of new development versus repurposed real estate?

Right now, it looks like it would trend a little more on redevelopment product, as opposed to new product but there is some new product in there.

We had a real estate committee meeting yesterday and we had a number of sites that came into the real estate committee that was new development and complete with tenant/landlord allowances and our traditional real estate.

Could I ask you to characterize some of the existing real estate where you're seeing opportunities?

Is it closed department stores, old Circuit City stores, what are you finding that fits with you format?

It's a combination of all of those.

It's old department store.

It can be -- so, we've got Mervyn's, we've looked at Gottschalk's.

We've got Linens.

We've got some larger Circuit City's that were next to a Linens that we were able to put the two sites together.

So, it's really a combination out there and it takes a fair amount of work to get out there and get these deals put together right now.

And then final question.

Is there a way that you can use your ever strengthening balance sheet here to change the new store model and accelerate the growth?

We could but right now, we're -- with the environment and we're probably a little more cautious than some.

We're right now, at this date, comfortable saying 24.

And if things change, we could move it up.

If something comes up opportunistic, we could move it up.

Similar to what we did this year, when we had the opportunity for the Joe's stores in the Pacific Northwest.

That's great.

Thanks very much and good luck to you.

Thank you.

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

Thanks, guys.

So, a couple of questions.

One, the inventory per foot is down but the rate of the decline is sort of leveling off.

What should we expect in the third and fourth quarters, do you start to rebuild some of the inventory?

We look at the third quarter being down nominally over the third quarter of last year and we would look at next year -- at the end of the fourth quarter being relatively flat, minus whatever investments we would be making in our ecommerce business.

Okay.

Thanks, that's helpful.

And then, a couple of golf questions.

One, the Golf Galaxy clearance, was that as impactful in the second quarter as it was in the first quarter?

And more importantly, in the third quarter, I think you had said in the past it should be done by September, maybe halfway through the quarter.

So, should the margin impact be less intense in the third quarter than it was in the second quarter?

I think in Golf Galaxy, it will be relatively similar in the third quarter as it was in the second quarter.

And the reason being that as you get further into the third quarter, the business drops off.

So the first part -- the first 2/3 of the third quarter are much higher than the last 1/3 of the third quarter.

If that makes sense.

So the promotional activity as a percent of the total business will be greater in August and September, than when you include October.

Okay.

That does make sense.

And then, finally, on the golf business, the golf business within the Dick's stores, was that better or worse than the Dick's average comp?

Better.

Better?

Okay, thanks.

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

Good morning.

This is Jody Ben speaking on speaking on behalf of John.

Just wanted to know, how are you planning your promotional activity in the third and fourth quarter?

Similar to what we did in the first and second quarter, we still think it's going to be somewhat promotional out there.

We've bought a number of products for that promotional activity.

So we don't see a meaningful change in the third and fourth quarter versus what we saw in the first and second.

And are you going to be aligning your promotional strategy for Dick's and Golf Galaxy going forward?

No, Golf Galaxy will have a different strategy than Dick's.

Thank you very much.

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

Good morning.

I wonder if you just could provide a little bit more color on the expense control, the expense per-square-foot growing more slowly in the second and the first?

And could you talk a little bit about the drivers around?

And then, also your ability to manage that expense control as you reaccelerate the square footage?

If we take a look at the second and what we anticipate in the third and fourth quarters, in the second quarter, most of the expense leverage, that 69 basis points of SG&A actually came from store payroll leverage and to a lesser degree, from advertising expense.

And as we had indicated in the past, where we were expecting to gain most of our leverage was those two categories, as well as pre-opening expenses.

Great.

That's very helpful.

And then, just one housekeeping question.

I don't know if you mentioned what you expect your full year tax rate to be?

Full-year tax rate will be slightly less than 40%.

Thank you.

Your next question comes from the line of Eric Tracy with BB&T Capital Markets.

Good morning.

Thanks for taking my questions.

Just a follow-up on the sort of recycling of the Joe's doors.

I believe there are roughly 30 in total.

I'm not sure if you've disclosed sort of how many of those you feel like you can take over and sort of the timing around that as we get into '10.

Well, we've announced that we will open a number of those stores this fall.

So, we'll open a grand total of six.

We are looking at other opportunities for 2010.

We do have a couple of deals that are pretty close and we're going to continue to look at the other opportunities up in the Northwest, be it Joe's and/or any other opportunities.

Okay.

So there is still incremental on top of that six that will be done in Q3 that could flow through?

There will be some.

Okay.

I'm sorry?

Not until spring though.

Not until spring or the calendar 2010 year.

Okay.

And then, I know you probably don't want to get too specific but in regards to the incremental sort of investment around some of the regional infrastructure moves you're going to make next year, that $30 million to $35 million, sort of the cadence of that, how we should think about that?

I'm sorry.

Can you repeat that?

I think you talked about, in the prepared remarks, sort of the incremental $30 million to $35 million that was delayed this year, sort of restarting that next year.

Sort of the cadence and timing of when we should think about that happening or manifesting in '10?

It will start -- you'd look at that as pretty well flatlined throughout the entire year.

So, we'll be ready to go with this.

We may even get some of this started in this fiscal year but you'd look at it as pretty evenly spaced throughout the year.

Okay, great.

Thank you all.

And your next question comes from the line of Kristine Koerber with JMP Securities.

Yes, hi, a couple of questions.

First, on the Golf Galaxy, the five or so new stores planned for next year, are those all in new markets?

There will be a couple of new markets and a couple of fill-in markets.

Okay.

And then, the merchandise adjustments that you're making over at Golf Galaxy, are you still anticipating completion by end of the third quarter?

Yes.

Okay.

And then just lastly, geographically, were there any notable trends to the upside or downside across the Dick's stores?

Nothing worth talking about.

It was all pretty similar in the second quarter to what we saw in the first quarter.

Thank you.

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

Thank you and great quarter.

Can you quantify the profit impact of Golf Galaxy?

I believe your guidance was $0.02 in the quarter, compared to $0.08 a year-ago and I know you mentioned you beat that expectation.

We indicated in the first quarter that we expected to make about $0.02 on Galaxy in the second quarter this year.

We actually made approximately $0.04 and that compares to approximately $0.08 in the prior year quarter last year.

Got it.

Thank you.

Do you think that the industry is actually reviving or is it more specific to Golf Galaxy and the strategies that you're deploying?

I think there's a couple of things going on out there.

We're coming up against a little bit easier comparisons to last year and there has also been a number of the smaller stores that have closed.

I think on the Golfsmith call, they quantified it.

I can't remember exactly what they said.

But there's been a number of smaller, independent golf shops that have gone out of business and there's more that will continue to go out of business.

Thank you.

And can you also speak to the sales trends since you reassorted the stores?

We're in the process -- you're talking about the Golf Galaxy stores?

Yes.

Rick, we're still in the process of doing that, so it hasn't been completed yet.

It will be -- we expect that to be done by the end of the third quarter.

Okay.

Thank you and good luck.

Thank you.

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

Thanks, good morning.

Just looking at the balance sheet, your accounts payable ratio has increased for two consecutive quarters on a year-over-year basis.

What can we expect by the end of year, for example?

Well, I think you can still expect that metric to improve.

At the end of the year, if the inventory, as Ed has already mentioned, is flattish, it might be slightly less.

Keep in mind that we're going to be adding ecommerce inventory into the end of the year for spring orders.

So, it's going to be flat at the end of the year, probably, to a little less.

Okay.

Can you quantify those ecommerce sales?

Ecommerce sales are less than 2% of the business.

Okay.

Did you see -- recognizing your geographic orientation, have you seen any impact from the shift in the tax-free holidays in the southern states?

There was a little but nothing meaningful.

Okay.

And finally, as far as sale leaseback activity, can you give us any detail and given the situation that the landlords are in, how is that playing out in that effort?

For us, sale and leaseback activity is restricted to furniture and fixtures.

We're not in the process today of self-development and then doing a sale-leaseback for our real estate.

Okay, great.

Good luck.

Thanks.

Thank you.

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

A couple of quick questions, if I can.

The costs that were taken related to merger and acquisition costs in the quarter, is that in line with what you had expected at the beginning of the quarter?

And is there any change in your outlook for the full-year?

And then, second, given the reduction in debt, can you give us help some on what the outlook would be for the year on year comparisons and interest expense for the balance of the year?

In terms of the interest expense for the year, you can see where it ended up in the quarter.

It's going to be much less than the prior year.

We were looking at about $14 million last year and it's going to be meaningfully less than that, in the $4.5 million to $5 million range.

Thanks.

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

Good morning.

I've got a few here.

In the Pacific Northwest, the new -- are those rents -- are those deals there significantly better rents than what you were getting in the other stores that you opened during the year, given the vacating of those properties?

They're less than what we've been experiencing, yes.

Okay.

And then can you -- with the merchandise mix change, given the adjustment of the fitness areas and so on, will that help over time and the other changes you're making help the margin mix of the Company, given those?

I would think those are a little lower margin goods that are being replaced by better margin goods?

Actually, the fitness business margins are really very good.

Where we think that we'll start to see some margin rate improvement is as the gun and ammunition business becomes a smaller percent of our business.

As we said, we're going to be coming around and cycling that.

We think those are going to be fairly difficult comparisons.

And those are among the lowest margin rates that we have in guns and ammunition.

Got you.

And then, the -- you have a line item of cost of construction in progress on your balance sheet.

Can you give us some details as to -- can you break that out for us and give us some details what that is?

Most of that is related to some of the construction going on at our new headquarters.

And as we go through the end of year, what you will see is, depending upon when we open, which is either going to be January or February of 2010, we will end up with a capital lease on our books, which that construction allowance will be part of.

Got you.

And lastly, can you discuss any -- given the changes and the improvement in the accounts payables, can you discuss any differences, given the promotional environment, any changes in the kind of vendor support you're seeing, maybe on a year-over-year basis and your expectations of vendor support in a general sense?

Well, we see no change in vendor support.

As we take a look at this and we bring meaningful programs to a number of our vendors, they've been enthusiastically supporting them.

So, we don't see any change there.

Okay.

Thank you, good luck.

Thank you.

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

Thanks.

Ed, I recognize the 4% drop in same-store sales was better than anticipated but it looks like that demand is still somewhat tepid.

From your perspective, are you actually seeing a pick-up in demand for sporting goods or do you think that your original forecast was just perhaps overly conservative?

Well, I think there's -- I think the consumer is feeling a little bit better.

I won't say they're feeling great but I think the consumer is feeling a little bit better.

I think we've done a good job with our marketing programs and the merchandising assortments that we've brought into the stores and I think we've taken some market share.

So I think our team, merchandising team, stores, marking team, et cetera have just done a very good job of gaining market share.

Second question, you noted a significant improvement in golf sales inside the Dick's stores.

How much of that is benefiting from the promotions from TaylorMade and Callaway and if they're subsidizing those promotions for you?

In other words, are you able to maintain your original margin goals?

We're able to retain the vast major of our original margin goals.

And certainly, the promotional activity and the support that we've gotten from and we've given the brands that we do business with, it's really a mutual partnership between the brands that we do business with and us.

These promotions have certainly helped the golf business.

And then, I think the last question I have, also related to Golf Galaxy and the repositioning, will your private bands, Maxfli, Slazenger and Walter Hagen, are they going to have a bigger role in the remerchandised stores than they had in the past when it was primarily focusing on brands?

Golf Galaxy will still be focusing primarily on the key brands.

The Golf Galaxy format is really for that enthusiast golfer.

We think that the brands play a very important role in that business.

Our private-label brands will augment some of the aspects of the Golf Galaxy business but Golf Galaxy will still be primarily a branded shop.

So the brands like MacGregor, that have gone away, that's what's going to be replaced with your private brands?

Yes.

Okay, thank you.

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

Good morning, everyone.

Ed, I was just had a question first on the Chick's conversion.

Can you just give an update in terms of what you're seeing, what's working, et cetera, in those stores that have been converted, obviously, to the Dick's concept?

Yes, we're very pleased with the performance of the conversions we've done in California.

Our footwear business has been pretty good.

The team sports business has been good.

Overall, we're really quite pleased.

We have scaled back some other aspects of the concept.

So, the beach business isn't nearly what it was under the Chick's management team but we had all of that planned.

And right now, we're really very pleased and we'll continue to invest in new stores in Southern California.

Okay.

And when you think about Southern California and when you think about store openings for next year, we talked a lot about the Pacific Northwest, is Southern California also a piece of that, as well, when you think about growth and the opportunity?

Obviously, our investment into Southern California with the acquisition of Chick's, we are going to continue to look at Southern California.

We've opened two of our own stores there this year.

So, we have two brand new Dick's stores that opened in the second quarter.

And we'll continue to look at opportunities in how we can continue to invest in the market of Southern California.

Okay.

Helpful, thank you.

And Tim, just two quick questions for you?

First, on your comments about gross margin trend, are you expecting -- you said third quarter would be relatively similar to second quarter.

But did you make a comment that fourth quarter would be up?

Was that what I heard?

We said sequentially improved.

Okay.

The fourth quarter will be sequentially improved from the third quarter?

Correct.

Okay.

But likely still down?

That's correct.

And on the SG&A side, when you talk about, I think you said down in dollars, does that include the pre-opening costs associated or is it just strict SG&A?

Both.

So it includes both?

Yes.

Okay, all right, thank you very much.

I appreciate it.

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

Davidson.

Good morning.

On the ecommerce business, Ed, is the -- should we think about that as from a P&L standpoint, is that essentially profit neutral this year or is it -- would it be actually running at a little bit of a loss this year?

It could run at a bit a loss this year as we get it up and running but nothing meaningful.

Nothing meaningful, okay, that's helpful.

And then, you talked about some of the CapEx for next year that you highlighted.

That would be, some of that, oriented towards ramping that up.

Is that just simply getting people infrastructure in place to carry to the next level or is there something beyond that?

Well, there's people infrastructure.

There's also technology that will be ramping up here for the ecommerce business also.

Okay.

Good.

Then, on the question earlier on payroll and Tim you had commented a lot of that was just -- or the savings there was store payroll.

I was curious, is that more a reflection of you really just flexing that payroll as much you can right now in this environment or are there actually some opportunities that are sustainable?

That you've found some ways to run these stores with less people or whatever?

It's more of the fact that we've been able to flex in this current environment are looking at -- you can see how the sales have increased.

So even though we have flexed the percent to sales lower, we have adjusted the payroll so that it will support the sales that we are generating.

And because of that, we are still leveraging.

Okay, good.

And then lastly, could you just give us update on -- the Jordan shops-in-shops, I think you've been pleased with where that was so far.

Just where are we in terms of number?

And just any commentary would be great.

Thank you.

The Jordan shops, we've been pleased with.

We've been pleased with all of the Nike shops and in the Jordan stores, we've got about 60 stores there right now.

And is it conceivable you would add more or is that kind of where you want to be right now?

It would be conceivable we would add more.

This year or are we looking at next year?

It would be next year.

Okay, very good.

Thank you.

Good luck.

Thank you.

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

Hi, guys, thanks.

Also, good quarter.

I had a couple of quick questions for you.

In terms of the store productivity, it was great to hear that it was up a little bit.

Just curious what you guys think was driving that?

Was it -- did you do anything different with pre-opening or with the promotional environment or anything that just saw to drive the uptick?

We did get a bit more aggressive in our pre-advertising campaigns.

Being closer to what we used to do two and three years ago, as opposed to the way we've been -- we had cut back some of that pre-opening advertising.

And we layered that back in and it's certainly been helpful.

And then, on the golf business, as we've tracked, we like to look at the rounds played and it seemed like it was holding up fairly well year-to-date.

Although, it recently, it downticked a little.

And we were interested to hear how you think about golf and the trends and are the improving trends you're seeing truly sustainable or is it -- do you think it's just a bit of an aberration?

Well, we think that the trends that we're seeing are sustainable.

And we think that there's a market share shift coming to us in both Dick's and Golf Galaxy, as we take market share from some competitors.

And then, also, as some other smaller, independent competitors are going out of business.

Got it.

And then, the last question, a little more kind of longer term in nature, just thinking about the store potential, at some point, I would think you guys would start want to opening smaller boxes.

And I was just wondering if you've thought about that yet?

And at what point you think you do need to start opening smaller boxes, if at all?

I would think that at some point, productivity would be more enhanced.

Maybe you can squeeze out a certain category or it would help you get into certain markets that you otherwise wouldn't be in.

Just any thoughts about that?

And having -- I know you have a larger box but maybe even having a smaller box going forward?

At the present time, we're not looking to opening up any smaller box stores as a matter of strategy.

We feel that the box that we have today -- now we're continuing to look at optimizing space requirements for these particular sports and categories but we're not talking about opening any smaller boxes right now.

Okay, thanks.

Good luck with the quarter, guys.

Thank you.

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

Good morning.

On the merchandise margins, could you help me with Q2, just what it was in terms of clearance and how that should look going forward as well?

And I apologize if you mentioned that earlier.

That's okay.

We haven't commented and for competitive reasons, we're not going do that.

But our clearance inventory is actually down about 7% versus last year.

And we expect it to be able to remain in that zone.

And we don't expect to have the clearance activity become any more meaningful than it has been in the past couple of quarters.

Okay.

So then, Tim's comment on the margins down similar rate Q2 to Q3, was that the merchandise margin you were talking about or the aggregate gross margin?

The question was the gross margin.

That's what I was speaking to.

Okay.

It sounds good.

And then, you mentioned the investment in CapEx for 2010, would you be willing to share a number, what the gross and net number might look like then?

Not at this point.

We wanted to give everybody a look at what those expenses would be associated with these initiatives we're putting in place.

But from a CapEx number, we're not going to provide 2010 guidance.

But we thought it would be appropriate to give you guys that look at some of the things that we're going to doing in 2010 and how confident we feel about our business.

Okay.

So then, looking at 2009, certainly, the new stores with 24, was there anything in terms of kind of one-time investments that you made?

In 2009?

Yes, in this year.

Nothing, no.

Okay, sounds good.

Thanks, guys and good luck.

Thanks.

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

Thanks a lot.

Just a couple of follow-ups here.

Can you give us some sense as to what you say by market from a geographical perspective, whether there were particularly strong or softer parts of the country for you?

Matt, to kind of get into this, for competitive reasons, we've never done that.

But similar to what we talked about before, some of the areas of the country that have been harder hit by either the automotive industry or by the housing industry, you could draw a correlation that those are the markets that have been a bit more difficult from a performance standpoint.

Got it.

Now, also, that your performance in California, it sounds like you were happy with how you did there.

As we try to quantify that, are the -- when you talk about a new space productivity number for the Dick's business, since you've transitioned Chick's into the core store group, was that included in the new space productivity or are those truly new ground-up stores that you consider in those numbers?

No, since we've converted, they are included in the 72.5%.

And has that helped those numbers, given their level of productivity?

It hasn't hurt the numbers.

Got it.

And then, the Internet business, just to get a sense, is that number included in the comps or is that out of the comps still?

It is not included in the comps.

What about next year?

After 13 months of us having the sales being recorded by Dick's Sporting Goods, 13 months after that, they'll go into the comps, just like a new store would.

Got it.

And is that business growing at a faster rate than the overall Company, a slower rate?

Any color on its progress?

As of right now, there's -- it's a bit slower and a big issue with that, we believe, is because we believe is because of nexus, Matt.

There's a number of states where last year we did not have to charge sales tax or GSI did not have to charge sales tax.

But since we have operations in those state states, we have to charge sales tax now.

And so that's had some negative impact in the business, which was planned for and is certainly in our guidance.

Got it.

Thank you so much.

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

Thanks, just also a couple more real quick follow-ups.

One, the $30 million to $35 million in expenses, as you said on the call, that you're talking about, you did say expense in the prepared remarks.

Is that expense that goes through the income state or CapEx?

It goes through the income statement.

Okay.

Thank you.

Mix, I think, impacted your gross margin a little bit last quarter.

You didn't highlight that this quarter.

Is that -- so, can we assume that mix had no impact?

Very little.

Meaningless.

Good enough.

And then, lastly, can you, as you did last quarter, disaggregate the deleverage in the fixed costs between rent and occupancy and then distribution?

And I think last time, you said they were about even in terms of their deleverage.

Is that different this quarter?

We said this quarter that the fixed costs, primarily occupancy, were 67 basis points deleveraged.

Okay.

So primarily occupancy.

Okay, thank you.

And your next question comes from the line of Sam Poser with Sterne Agee.

Hi, just a follow-up on the Pacific Northwest.

How many stores do you see -- of the 31 G.I.

Joe's stores that went out, how many stores do you foresee in the neighborhood?

And could there -- how many in that neighborhood are within the guidance of next year?

It's too early to tell.

We have got these that we've done right now.

We're working on several more but of the 31, we may have close to that many in that area but there's a number of the G.I.

Joe's stores that we would not want the real estate that they were operating in.

All right.

So you see the Pacific Northwest, you see lots of opportunity up there?

We see a lot of opportunity up in the Pacific Northwest, yes.

And then, are you -- how many stores -- you had mentioned on a previous call, you wanted to have about 70 stores in Texas.

And when do you see that growth reaccelerating or are you waiting on anything specific to happen there?

Well, we've still continued to invest in California -- I mean in Texas.

And so, it's just a matter of real estate.

We're not staying away from Texas for any reason, other than just making sure that we can find the appropriate real estate.

Okay.

Thank you very much.

And there are no further questions in queue.

I'll now turn the call back over to Mr.

Ed Stack for closing remarks.

I'd like to thank everyone for joining us on our Q2 conference call and we'll look forward to seeing everyone when we release our Q3 earnings.

And thank for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.