DICK'S Sporting Goods Inc (DKS) 2009 Q3 法說會逐字稿

Good day, and welcome to the third-quarter 2009 Dick's Sporting Goods, Inc.

earnings conference call.

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

We will facilitate a question-and-answer session towards the end of the conference.

(Operator Instructions).

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

Please proceed.

Thank you and good morning to everyone participating in today's conference call to discuss our third-quarter financial results.

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 risks and uncertainties.

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

For a summary of risk factors that 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 not intend to update these statements.

We have also included non-GAAP financial measures in our discussions today.

Our presentation of the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principles and our related reconciliations, can be found on in the investor relations portion of our website.

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

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

Also joining us this morning, 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 more detail of 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 third quarter we generated net income of $18.9 million, or $0.16 per diluted share, as compared to $0.07 in the third quarter of 2008, a 129% improvement.

The earnings growth was driven by higher sales levels and effective expense management.

Specifically, net sales for the third quarter of '09 increased by 7.1% to $989.8 million due primarily to a 1.9% increase in consolidated comparable-store sales, the opening of new stores, and the addition of eCommerce sales.

The 1.9% consolidated same-store sales increase consisted of a 2.2% increase in Dick's Sporting Goods stores and a 1.5% decline in the Golf Galaxy stores.

We leveraged operating expenses by 148-basis points, primarily from a reduction in advertising and payroll compared to last year.

Our associates successfully managed inventory, which declined 8.6% per square foot on a consolidated basis at the end of the third quarter in '09 as compared to the third-quarter '08.

As a result of an increase in sales and gross profit dollars, as well as better operating leverage, the Dick's Sporting Goods stores generated an increase of $0.08 per diluted share in the third quarter of this year compared to the same period last year.

Our Golf Galaxy business continues to improve.

Year-over-year sales, gross profit margins, and operating efficiencies improved in the third quarter compared to the year-over-year results in the first and second quarters of '09.

In the Dick's Sporting Goods stores, hard lines, apparel and footwear also comped positively in the quarter.

Our combined golf business from the Dick's Sporting Goods stores and Golf Galaxy stores generated positive comp store sales in the quarter, as well.

As we mentioned in our last earnings call, the closing of a former competitor in the Pacific Northwest created an opportunity for us to accelerate our growth in that region.

Our plan was to open six new stores in Oregon by the end of the quarter.

I'm pleased to report with the efficient execution of our associates, we've been able to meet that timeframe and have expanded our footprint from one to seven stores in Oregon.

While we were pleased with the third-quarter sales, we do believe that some of the benefit of the better-than-anticipated business was the result of the shift of cold weather product sales from the fourth quarter into the third quarter.

The earnings impact from this shift is expected to be $0.03 per diluted share.

Also, this month we initiated an aggressive advertising campaign in Southern California to support our stores during their first holiday season as Dick's Sporting Goods stores.

The expected earnings impact from this campaign and the related promotional activity is approximately $0.07 per diluted share.

We believe there is much uncertainty around the consumer's attitude towards spending this holiday season, driven in part by the potential impact of healthcare legislation, possible new tax legislation, and the recently-announced 10.2% unemployment rate.

In light of the shift of cold weather products from the fourth quarter, the California advertising campaign and the uncertainty around consumer spending, as well as anniversarying the higher guns and ammo sales, we are adjusting our fourth-quarter and full-year expectations.

For the full year we are increasing our previous estimated range of $1.02 to $1.07 per diluted share, excluding merger integration costs, and are now raising that to a per earnings diluted share of $1.04 to $1.09, excluding merger and integration costs.

For the full-year 2008 we reported earnings per diluted share of $1.15, excluding the noncash impairment charge and merger and integration costs.

On a GAAP basis, we currently anticipate reporting full-year earnings per diluted share of $0.99 to $1.04 in 2009 compared to a net loss of $0.36 per diluted share in 2008.

In 2009, we're expecting comp-store sales to decrease approximately negative 4% to negative 3% versus the decline of 4.8% in 2008.

In the fourth quarter, we're anticipating consolidated earnings per diluted share of approximately $0.41 to $0.46.

In the fourth quarter of '08, we reported non-GAAP consolidated EPS of $0.54.

On a GAAP basis, we reported a net loss of $0.94 per diluted share, which included a noncash impairment charge and merger and integration costs.

We're anticipated a comp-store sales decline of 6% to 4% in the fourth quarter versus 8.6% in the fourth quarter of last year.

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

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

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

In summary, we're very pleased with the performance of our Dick's Sporting Goods stores and Golf Galaxy stores in the third quarter.

Our balance sheet is very strong and we have completed our 2009 store program, which Joe will cover in more detail.

As we look to the rest of the year we remain cautious about the outlook, as the consumer struggles to make decisions on spending due to the developments in Washington and the increasing unemployment rate.

I'll now turn the call over to Joe.

Thanks, Ed.

In the third quarter we opened 11 new Dick's Sporting Goods stores, bringing our total new store count to 24 this year, and successfully completing our 2009 new store program for Dick's Sporting Goods.

At the end of the third quarter, we operated 420 Dick's Sporting Goods stores, with 23.4 million square feet, and 91 Golf Galaxy stores, with 1.5 million square feet.

New store productivity for the quarter was 68% and includes Dick's Sporting Goods stores only.

Our new stores in Oregon, which were open for only two days in the quarter, are included in this figure.

Excluding the new stores in Oregon, new store productivity would have been 73%.

In the third quarter of 2008, new store productivity was 76%.

In 2010, we expect to add at least 24 new Dick's Sporting Goods stores and five Golf Galaxy stores.

These new stores are expected to range in size from 35,000 to 55,000 square feet, depending on the market opportunity, as well as size and attractiveness of available real estate.

We expect our 2010 new stores to open in the first three quarters of the year.

We will continue to look for emerging real estate opportunities, similar to the retail consolidation that took place with Joe's in the northwest.

If opportunities develop, we will move to acquire any vacant buildings that are compatible with our growth strategy and incorporate them into our new store plan for the year, possibly increasing new store growth above 2009 levels.

I will now turn the call over to Tim to go through our financial performance and expectations in more detail.

Thanks, Joe.

Sales for the quarter increased by 7.1% to $990 million.

Consolidated same-store sales increased 1.9%.

Dick's Sporting Goods stores comp sales increased 2.2% and Golf Galaxy declined 1.5%.

The comp-store sales increase at the Dick's Sporting Goods stores was driven in part by a 2.5% increase in transactions and a decline in sales per transaction of 0.3%.

We estimate that cannibalization impacted comps by less than 1%.

Consolidated gross profit of $266.8 million was 26.96% of sales, or 43-basis points lower than the third quarter of 2008.

This decline was primarily driven by a decrease in the merchandise margin, slightly offset by the leverage of freight and distribution costs.

The merchandise margin decline of 63-basis points was driven by clearance activity at Golf Galaxy stores and promotions and clearance activity at Dick's Sporting Goods stores.

As a result of this clearance activity, our inventory is well positioned as we head into the holiday season.

Due to increased same-store sales and our continued expense control efforts, SG&A expenses of $230.4 million were 23.28% of sales, which was 148-basis points lower than last-year's third quarter.

These SG&A expenses include approximately $5 million from our eCommerce business.

Preopening expenses declined 35-basis points as a percentage of sales in the third quarter, due to fewer store openings scheduled this year compared to last year.

Let's move to the balance sheet.

Long-term debt declined by $292 million from the end of the third quarter of 2008 to the end of the third quarter of 2009, due to the repayment of $172.5 million for the Company's senior convertible notes in the first quarter of this year, and a $122 million decrease in revolving credit borrowings.

Our borrowing rate is LIBOR plus 75-basis points and averaged 1.39% in the third quarter.

Inventory per square foot was 8.6% less at the end of the third quarter of 2009, as compared to the end of the third quarter of 2008.

Net capital expenditures were $29 million in the third quarter of 2009, or $36 million on a gross basis.

This compares to a net capital spend of $41 million, or 40 -- or $51 million on a gross basis in the third quarter of last year.

As Ed mentioned earlier, the following factors were considered with our -- within our estimates for the fourth quarter and full year.

First, the shift of cold weather product sales from the fourth quarter into the third quarter due to the colder weather conditions in the third quarter is expected to impact the fourth quarter earnings by approximately $0.03 per diluted share.

Second, we are aggressively advertising and increasing promotional activity in Southern California to support our stores there as they head into the holiday season for the first time as Dick's Sporting Goods stores.

The earnings impact from this initiative is expected to be approximately $0.07 per diluted share in the fourth quarter.

Third, there continues to be uncertainty around consumers' attitude on spending, particularly in light of the healthcare bill and possible tax legislation and the current unemployment rate.

And finally, we're taking into consideration the anniversary of the higher guns and ammo sales seen last year.

In the fourth quarter, we are anticipating the gross profit margin rate to decline year over year, but not to the degree seen in the third quarter.

We are expecting to deleverage operating expenses due primarily to the anticipated increase in the advertising spend in the Southern California market and higher payroll incentives expected compared to last year.

For the full year we are anticipating the gross profit margin rate to decline year over year, while operating expenses are expected to slightly leverage compared to last year, even after the absorption of the eCommerce operating expenses this year.

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

For 2009, we are increasing our projected net capital expenditures by $30 million for the data center-related hardware in conjunction with the new corporate building opening.

We previously expected to incur the capital spend in 2010, but the construction is ahead of schedule and we now anticipate occupancy of the building beginning in January 2010.

Net capital expenditures for the full-year 2009 are now expected to be approximately $100 million, or approximately $150 million on a gross basis.

Looking to 2010, I would like to remind everyone about our current anticipated additional expenses, which were first described in our last earnings call.

First, we will have additional expenses due to the move to the new corporate building I just mentioned.

The consolidation of our corporate offices into a single new facility has been under development for approximately two years.

We will also be incurring technology-related expenses to support our business strategies, including establishing a redundant data center, continued investment to support out online business, and our direct-to-consumer marketing programs for both the Dick's Sporting Goods ScoreCard and the Golf Galaxy Advantage Club customers.

We'll 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 expenses were postponed in 2009 due to the severe global economic slowdown.

The P&L impact of the expenses associated with all of these programs in 2010 is expected to be between $30 million and $35 million.

This estimate includes the depreciation associated with the $30 million of additional capital spend related to the data center that we expect to incur in the fourth quarter of 2009.

Although we are not prepared to give detailed estimates for 2010, we do expect 2010 earnings to exceed our expected 2009 earnings of $1.04 to $1.09.

In summary, we are very pleased with our third-quarter results.

Our emphasis on execution and our dedication to financial discipline are at the core of everything we do.

This was reflected in our merchandising marketing efforts, our demonstrated expense control, inventory management, and the completion of our 2009 new store program in the third quarter.

We do remain cautious as we head into the fourth quarter and our expectations reflect this caution.

However, we are -- we currently believe that with our balance sheet strength, our leadership position, market share opportunities, we will generate profitable growth in 2010.

This concludes our prepared remarks.

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

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

You may proceed.

Hey, guys, this is actually [John Balcom] subbing in for Matt today.

You guys covered most of my questions and just a few follow ups.

I guess the first, if you wouldn't mind just discussing the sales trajectory throughout the quarter and, if possible, anything that you saw early November?

Obviously the comp guidance for fourth quarter is a little white and you discussed some other reasons.

Is there anything else there you're seeing in terms of trajectory?

Nothing different than what we've outlined in the call.

Got it.

And the ad spending in California, how should we think about that going forward?

You mentioned it may only -- relating to the holiday season.

Should that continue into next year, or is this more of a one-time thing?

Well, we're looking at this and we'll reevaluate it after the fourth quarter.

California, as we know, is one of the hardest hit areas in the country from the economic standpoint right now and we want to make sure that our stores get off to a great start in their first holiday season.

So we'll reevaluate after the holiday season.

Got it, thanks.

And then lastly, just a cleanup thing.

I think last quarter you mentioned eCommerce sales being a little less than 2% of overall, is that still basically how we should think about that business?

That's correct.

Got it.

Okay, I think that does it for us.

Thanks.

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

You may proceed.

Thanks.

Ed, in looking at the two-year same-store sales trend, essentially flat during the third quarter, but if we take the midpoint of the fourth quarter, it's implying that two years back comp drops about 13%, which seems pretty remarkable given that apparel is only 30% of your business -- I don't think you've ever broken out the firearms segment -- but just curious as to what kind of drop are you expecting in apparel because of the change in weather?

And then also curious as to how you were able to identify that you were actually transferring apparel sales into the third quarter.

Was this based on the run rate at the end of the period, or what you're seeing early in the fourth?

Well, it is -- it does certainly seem like a big drop based on what we saw going into the -- in the third quarter and the meaningful transfer of sales for what we think from the fourth quarter to the third quarter because of the very unseasonably cold weather that we got in October.

And we've quantified that and we think that those businesses have been transferred from the fourth to the third quarter.

Okay.

Are you able to look at some of your regions, perhaps in the south where perhaps the weather change wasn't as significant to confirm your thesis that you were transferring sales from one quarter to another?

We have looked at that and to be honest with you that sold spell moved pretty far south compared to the year before.

So it wasn't as cold in Atlanta as it was in Buffalo, New York for sure, but relatively speaking, there was quite a cold snap that went fairly deep into the southern part of the country.

Okay, and then one question on the accounting next year for the $30 million, $35 million of expenses.

Will you treat that as a non-GAAP number similar to the relocation of Golf Galaxy in FY '09, or is that included in this GAAP estimate you say that will exceed $1.09 next year?

Dan, this is Tim.

That will be included in normal operating expenses and will be part of GAAP earnings.

Okay.

And was there a reason why you would exclude Golf Galaxy, but include this expense?

Include gol -- exclude Golf Galaxy in what way?

Well, you carved out the relocation expenses in your discussion of earnings and wasn't sure why you would carve that out in '09, but include the new corporate office expenses in 2010?

Well, Dan, the M&I expenses that we include were all regarding integration costs and this year's M&I cost related more to the Chick's integration than to Golf Galaxy.

Okay, great.

Thank you.

Our next question comes from the line of Robert Samuel with Oppenheimer.

You may proceed.

Hi, good morning, guys.

How should we think about gross margins for next year?

Can you discuss a little bit some of the puts and takes there that we should be thinking about?

Well, we think that the gross margin rates will certainly -- the merchandise gross margin rates will certainly stabilize.

As we talked before, that in the first quarter, second quarter, and even a bit into the third quarter was a result of clearing excess inventory out of the Golf Galaxy stores.

We've done that.

We're very pleased with the inventory levels in Golf Galaxy and the quality of the inventory in Golf Galaxy, and we're enthusiastic about the golf business going forward.

We're going to open five Golf Galaxy stores next year and the golf business between Dick's and Golf Galaxy was comp positive in the quarter.

Great.

And then any more color on the strength within the athletic footwear business?

No more or less than it's been in the past.

It's been a good business for us, we're pleased with it, and we are -- as I've said before, we're different than some of the mall-based fashion athletic footwear retailers, where we're really focused on that core athlete, that football player, basketball player, and those businesses have been quite good for us.

Okay, thanks.

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

You may proceed.

Thanks, good morning.

I just wanted to confirm that P&L number of $30 million to $35 million, that was pretax number?

Yes, it is.

Okay.

And as far as the promotional advertising spending in Southern California, is this -- I assume this is all additive.

Is there any opportunity to shift dollars around from other parts of the country?

Based on the way the economy is and, what's out there right now, we don't think that that would be an appropriate course of action right now.

Okay.

And in looking at the SG&A numbers, which were relatively flattish over the last couple of quarters on a year-over-year basis, how should we look at the fourth quarter in terms of incentive-comp spending, or anything that might move that needle off of the current pace?

We mentioned it in the script that the incentive comp will be slightly higher and was part of the discussion in the third quarter.

You can expect, based on the current pace, that there will be some impact on SG&A from incentive-comp increase.

Okay.

And then finally, on the balance sheet, the accounts payable inventory ratio has moved higher throughout the year.

Where do you expect this to end at -- or come in at year end and going forward?

I would expect that based on our discussions with vendors and the terms that we have negotiated we'll be around that number for the end of the year and possibly going forward.

And Tim, how do you view your optimum capital structure.

Your debt ratio continues to come down and how do you view that on a longer-term basis?

I know you want to be opportunistic if something should come up on the M&A front, but how are you viewing your capital structure?

At this point we are very comfortable with having the strong balance sheet with very, very little debt of any kind.

We would like to be in a position to start accumulating cash and once we get to that point, we will have the appropriate discussions on how we're going to invest that cash.

Well, good luck on the holiday season.

Thanks.

Thank you.

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

You may proceed.

Thanks, and good morning.

Also want to dig in on the fourth-quarter comp guidance a little bit here.

Maybe you could help us by talking about how much the guns business contributed to your comps overall and then within the rest of the mix, you would have thought that apparel saur a big drop-off last year to have guns be positive and still pull off a -8.6% so it seems like you're really expecting a big drop-off on the apparel side.

You also mentioned in this quarter that golf, hard lines and footwear were all positive, so are you also anticipating that those categories slow dramatically on a sequential basis?

Well, we haven't provided category-by-category guidance on -- from a business standpoint, but the increase in the gun business last year was meaningful with the concern about stricter gun controls, so we've got to anniversary that.

And as we take a look at the -- that we had comps in the third quarter in all of these categories, we're really quite concerned about the moving of some of this business from the fourth quarter to the third quarter and I don't mean to be so repetitive on that, but it is important.

But then we're also very concerned about how the consumer is reacting to the legi -- the pending legislation in Washington, and the research that we've done nobody really believes that this legislation is not going to cost them more money out of their pockets and I think it has really frozen the consumer right now.

Well, amen to that last point for sure on my part, but -- okay.

So it -- but it doesn't sound like -- in response to Dan's question earlier -- it's necessarily something that you're seeing with a big slowdown now, it's just that it's the overall uncertainty in the environment.

Is that fair?

It is, but we're -- we see the trends that we're outlining here in our guidance and we're providing guidance today at a particular point in time with the best information we have at this particular point in time.

And at this point in time, we're seeing the guidance that we've laid out.

Okay, so could I just clarify that?

So at this point in time you're seeing negative mid single digit - or the trend would suggest negative mid-single digits in 4Q?

We're not going to get that specific and we've not talked about the quarter inside a quarter, but our -- from what we see today, we feel that this is the appropriate guidance we have to give based on the environment that is out there at this particular point in time.

Okay.

And just wanted to talk about that -- the $30 million to $35 million in spending next year.

Tim, have you been able to -- or have you thought about pulling some of that spending forward into this year?

Clearly third quarter was positive comps, maybe a little bit of room in the fourth quarter, is there an opportunity to mute some of that -- the overall impact on 2010?

On the expense side, Chris, there isn't a way to do that because those expenses will be incurred in 2010.

You notice, though, that we did pull the capital spend forward into the fourth quarter, basically because of the update on the move, but we were able to at least move that capital spend up into the 2009 fourth-quarter timeframe.

Got you, and one final question.

On the $0.07 regarding your Southern California efforts, my math's about almost $14 million of total spending.

How much of that is advertising relative to $150 million advertising budget historically and how much is that promotions, do you think?

Thank you.

It's a split of about 60/40 advertising versus promotional.

Thank you.

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

You may proceed.

Thank you and good morning.

I'd like to follow up on the cold weather issue as it affected apparel.

You broke out the $0.03 EPS impact, can you help us.

Was the top line -- or the comp, the plus 1.9%, what that contributed in the quarter and what you see that -- how you see that impacting comp in the holiday?

From a competitive standpoint, Rick, we'd prefer not to do that, but you can imply that if it had a -- it's going to have a $0.03 impact on EPS, it was a meaningful transfer of sales.

And the comp guide, I know you mentioned that the golf category was flat in the two [count] subs, how are you thinking about the holiday quarter in the golf category and maybe longer term how you're thinking about 2010 as you set your buying plans for golf?

Well, we're -- what we indicated is that the combined business between Dick's and Golf Galaxy in the golf business was actually positive, not flat, so we had a positive gain -- a positive comp between the two chains in golf.

And we're cautiously optimistic in golf as we go forward.

We're coming off very negative comps in the first quarter of last year, the fourth quarter of this year, so we're -- we think that there's some improvement in golf.

We don't expect to get back to the 2007 levels, but we expect that there'll be some improvement in the -- versus the 2008 level.

Thank you for that.

Also like to ask you about the apparel and footwear categories, what's working, what's not working, are you seeing evidence of trading down at all as we approach the holidays?

We see a little bit of that.

We outlined that there was about a 0.3% decline in our tickets, so we're seeing a little bit of that, but to date it hasn't been meaningful.

From an apparel standpoint, what's really driving our apparel business is -- has been the North Face product, which has been a great brand.

We've had success with some of the better Columbia product, so we haven't seen a big deterioration in those AURs.

Some, but nothing meaningful.

Any commentary, Ed, on the footwear category?

There's really nothing to say.

The footwear business is still just chugging along.

We've -- we're pleased with our footwear business and there's no real highs or lows in the footwear business, but we're happy with it.

Very good.

Thank you.

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

You may proceed.

Good morning, thanks a bunch for taking my question.

So if we do the math and we take $0.03, apply your net income margin for the quarter, that would suggest $200 million in sales that were pulled forward from the fourth to the third.

Even if we assume an incremental mar -- net income margin of twice that, that would be about $100 million in sales.

So, A, can you confirm that the math is on track?

And, B, are you seeing that across -- is that -- the magnitude of that across all cold weather product categories?

Is it more in the foot -- apparel-remitted front?

Is it somewhat on the hard goods side, as well?

I think your math is off, it's not that much but I'm not going to comment on that.

I'm not going to back into that number, but your math is off by a pretty sizable amount from a sales standpoint.

But as far as the -- I will talk about the categories.

It's been much less on the hard line side of the business and much more on the apparel side of the business, some on the boot side of the business or the footwear side of the business, but it's across all categories of cold weather products.

So it's across outerwear.

It's across the athlete compression component of that, from both Nike, their Pro Combat product and Under Armour's cold gear product.

So it's been across all categories; the athletic brands, the outdoor brands

Okay.

And is there some reason to believe that this is all more than just weather-related, not a retrenchment on behalf of the consumer?

It would suggest that there might be something more than that.

I think that what -- we've outlined that we think it is more than that.

And I think the group in Washington has a very difficult job to do, and I think they're probably trying to do the best they can, but some of the legislation coming out of Washington on healthcare and taxes I think has got the consumer rethinking what their economic position's going to be.

We also have this meaningful gun and ammunition business that we have to anniversary from last year and it was meaningful.

Okay, two more quick questions.

On the additional advertising expenditures in Southern California, is -- so that was not necessarily planned, so is it in response to something that you're seeing in the business more recently suggesting that that area is particularly weak?

Well, as we got into the third quarter and business was as good as it was in the third quarter and we were looking at parts of the country and we looked at this and said we need to make investments in this business for the long term and we really felt that to make sure that we got Southern California off to a great start in the fourth quarter, for the first holiday season in Southern California, we thought that was really very important.

And it was an audible, if you will.

We hadn't planned on doing this earlier in the year and even had -- it was half way through the third quarter that we decided that we really should take a look at Southern California and make sure we get this off to a great start, because it has been so adversely impacted in this economic slowdown.

Okay, and I think I just figured out where I fudged my math.

The $0.03 that you were talking about, that's not -- that's coming out of the fourth quarter.

That wasn't necessarily accretive to the third quarter, is that correct?

That's correct.

Okay, okay.

Last one, Golf Galaxy, so adding five stores next year, what does the long-term growth rate of the golf business have to be in order to have a return on invested capital for those incremental stores that would put them above and beyond your hurdle rate?

Well, I'm not sure that there has to be a meaningful change in the golf participation rate, or the growth of the game of golf, but there have -- it's a market share game and there've been a number of golf retailers that have closed; some larger, some smaller.

So if you take a look at Longitudes, which is a company that tracks the golf business, I think the last thing I read is this year they were over 200 golf retailers that closed, so that's a meaningful reduction in capacity in golf.

And we've got some competitors that have closed stores.

The Golf Warehouse in Connecticut has closed, PJ's Superstores has closed a store and reduced square footage in others.

So there's an opportunity with our strong balance sheet and the relationship that we have with the golf community out there that we can gain market share.

Sounds great, and let's just hope they don't start increasing the tax on playing golf either.

(LAUGHTER) Good luck.

Thank you.

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

You may proceed.

Just one question regarding brief comments you made on store openings for next year.

I think I heard you say that all of those stores would be in the range of 35,000 to 55,000 and could you comment on what that means for your -- you of how the larger two-level stores are doing, and is that not going to be part of your plan going forward?

That doesn't mean that the two-level stores are not part of our plan going forward, it's just a difficult environment from a development standpoint to get many new stores built.

The majority of our real estate -- a much bigger percent of our real estate going forward is going to be redeveloped real estate as opposed to new real estate because there's just not that -- there's not as much development going on now as there was in 2006 and 2007.

But the -- our two-level stores are still a part of our plan.

We've always indicated that they'd be somewheres between 10% and 20% of our development and long term, we still see that.

Okay, well, that makes sense.

Are you pleased with the performance of how they've done in the current environment?

We are pleased.

Okay.

Well, thank you very much for clarifying.

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

You may proceed.

[Hi, thanks.

Just a couple questions more longer term in nature and that's just a commentary, and at times isn't it always cold in Buffalo, Ed?] (LAUGHTER)

Gary, as we know cold in Buffalo is a relative term.

If you get six inches of snow in Buffalo it's a dusting and it doesn't make any difference to anybody, but get six inches of snow in the Carolinas and it's a big event.

And we also had a debate here as we're listening to the call, would the Phillies have helped November sales, or were the Yankees okay for you?

The Yankees were okay for us, but Philly would have been better from a business standpoint because the crux of the Yankee business, that core Yankee business, is in the five boroughs and we don't have any businesses in the five boroughs.

So if the Phillies get a closer then we should be raising our estimates for Q4 next year.

(LAUGHTER) The question, if we look at -- you're talking about a very conservative environment and that's fair and I think we're all getting the message, but I had two thoughts on that.

One is you've the best capitalized company (inaudible), so if it's tough for you and you've benefited from Joe's going away and Sportsman's Warehouse going away, doesn't that over time work even better?

Like yes, maybe next year's not as strong and you have some expenses, but doesn't that -- isn't that a rosier picture as we look past next year for your Company?

Gary, we've said -- we've always said that and that through these difficult economic times we think we'll come out the other end stronger because of the operational excellence that I think that we have in this business versus some other people, the strong balance sheet.

Even in this difficult time over the last year, we've reduced our debt by almost $300 million and that really has strengthened this business to be able to take advantage of a number of opportunities that'll be out there and I think the closing of Joe's is a great example of that.

Being that lean from a debt standpoint we're able to go in there, take those stores, build them out, and get those things opened up in a very short period of time.

So, yes, long term I think this is good for us.

And on that, you're spending $0.07 to build up the California base, but I assume you've done math that says that that payoff at one point is going to be worth it?

Possibly --?

We have done that, yes.

So it's really more of an investment is the way we should be thinking about for the future?

It is an investment.

It is an investment, yes.

And then lastly, we had a note on LeBron saying he may switch his number, is that still something that may happen by Christmas, or is that more next year?

You know what, that I don't know, but if LeBron switched his number, it would -- again, that would be good for our business.

Okay, thanks.

Thanks.

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

You may proceed.

Okay, thanks.

I wanted to ask a question on the inventories, is it possible that you're -- with this pull forward in sales that you're out of stock and so let's say it does -- the weather does snap back and get really cold, is that going to lessen your ability to sell into that, or how quickly can you get more cold weather product in, so if you could touch on that, please?

Sure.

We don't think this is an inventory issue.

We think we've got the appropriate amount of inventory and we've talked in the past.

We have partnership orders with a number of vendors that, as it gets cold, we can pull in that merchandise, so inventory is not the issue that we're concerned about.

We've got plenty of inventory.

Even with the reduction of inventory, 8.6%, what we've done is we've gone in and pulled out unproductive inventory and from a clearance standpoint at Golf Galaxy, some products at Dick's Sporting Goods, we've done a better job of clearing out unproductive inventory, which is where this has come from.

We have not reduced our core basic inventory at all.

So what are the lead times on, let's say, some cold weather gear if you needed it?

If we made a phone call to a number of vendors they've got product that's being held for us, if we needed it, we could have it in our distribution center in a matter of a couple of days.

Okay, thank you, two other questions.

So, one, spending all of this advertising dollars in California, why wouldn't we see a bigger impact to the costs?

And I guess -- and I think I know the answer, it's because Chick's isn't in the cost base now, is that right?

So I guess you wouldn't see the impact in the fourth quarter comp, but you presumably would see the impact in fourth quarter total sales.

Is that the right way to think about it?

That's correct.

Chick's is not in the comp sales.

Okay, so we just have to model that a little bit differently.

And then lastly related to Chick's in California and following up on a previous question, the decision here that you made midway through the third quarter, how much of it is -- is any of it a reaction to -- are things really bad in the California stores right now in the Chick's transition and you're reacting to that, or is this -- is there something else behind the decision?

I would not read into this that things are really bad in the -- in our California stores.

I'd read into this just exactly what we said.

And those of you that know us, we're very up front and I'd read exactly what we've indicated, in that we want to have Southern California, which we think is a great growth opportunity for us going forward, we want to make these investments now to get off on the right foot and have a great holiday season in Southern California, an area which has been, really, among the hardest hit with the economy over the last 18 months.

Okay, thanks.

Good answer, appreciate it.

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

You may proceed.

Hi, good morning.

A question on the third-quarter and also the fourth-quarter sales trend.

Excluding the weather benefit in the third quarter, would you still have exceeded your comp-store sales guidance?

And then I assume that the golf business is a business that you believe is weather sensitive and therefore benefited -- or actually it would've been detrimented by cold weather.

So looking into the fourth quarter, the current trend would suggest golf should be up double digits versus that comparison, so is there any reason why that wouldn't be the case?

Thanks.

Sure.

Yes, I would not get ahead of ourselves to say that golf is going to be up double digits.

We're -- as I said in the third quarter, golf comped positively between Dick's and Golf Galaxy.

The golf business was really -- was beat up pretty badly last year in the fourth quarter so we expect to have an increase in the golf business.

There are some areas of the country that have become extremely competitive from a price standpoint in the golf business.

So I think if you look at that, our golf business is outperforming others because there are a couple of areas in the country that it's gotten very price competitive, primarily Atlanta, Dallas, Phoenix, and Myrtle Beach.

And we haven't jumped into the fray from a pricing standpoint there, but as we see what's happening in those markets, we feel we need to do that.

So we think that the golf business could actually get a bit more price promotional because I think some other people aren't doing as well in the golf business as we are and we're seeing that in a number of markets today.

Okay, and then on the third quarter, the benefit from the weather, can you at all help us with the -- how that played out relative to your comp expectations going into the quarter?

Well, I will tell you that even without the weather we would have exceeded our comp guidance, but I'm going to stop short of saying that we would have been comp positive.

Okay, thank you.

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

You may proceed.

Thanks, good morning.

Just looking at the Golf Galaxy stores, been in there, it looks like more branded product, they look really good, is there going to be any more markdowns here in the fourth quarter, or have we principally worked through that at this point?

And then just how do you think about the margins as we go forward next year?

I know you pushed heavily in the private label and now we're going back to brandeds when you net it out.

Should we see better gross margins next year?

So let me take two of those.

The stores do look better.

There's more branded product.

The markdowns that you'll see in Golf Galaxy going forward, you'll still see markdowns there, but they would be normal markdowns in the normal course of business and in any retailer, you've got markdowns, so it would be in the normal course of business going forward.

The margin rates we see will be up next year in the golf business, and in particular Golf Galaxy, because of so much of the clearance that we did this year in the first, second and third quarter.

We do think that there's going to be certain pockets in the country that are going to be very aggressive and require reduced margin rate, primarily Myrtle Beach, Atlanta, Dallas and Phoenix.

And as I said, we haven't jumped into the fray there, but as we've taken a look at our business in those markets, and although our overall golf business has been very good, as we indicated in the third quarter, we can take a look at those markets and based on the market share that's happening there we need to go and be the price leader in these markets and not be left behind.

So we'll be very aggressive in those markets going forward.

Okay.

Thinking about the 24 stores next year, how many of those do you think'll be in Southern California?

We don't have any right now currently planned for Southern California.

Okay.

And then --

But we are -- but we continue to look for opportunities.

So, as we speak today we're -- we have none planned, but as these opportunities do develop we'll take a close look at those, so there could potentially be some additional stores.

Got you, okay.

Then just thin -- taking that and thinking about the roughly $14 million and applying that to the 14 stores, I was just wondering how that $14 million or $15 million was derived like that was the right amount to spend to really brand build in Southern California?

We took a look at a bottoms-up approach at what we would like to do from a direct mail piece, what we'd want to do from a promotional standpoint, what we'd want to do from an advertising standpoint and looked at this and felt that although we have no stores on the books in Southern California for 2010 right now, we expect -- we think that there could be -- we could end up with some stores in Southern California.

But In 2011, we would expect to have an investment in Southern California 2011 and 2012 and feel that's really the -- this is an appropriate investment in this first fourth quarter as Dick's Sporting Goods.

And 14 stores in Southern California, that would make Southern California among our largest districts in the Company.

Okay, so it is a brand building exercise, as well.

It gets a mind share in the market, as well.

Some mind share, and we expect we'll probably move some market share also.

Yes, okay.

Thanks, guys, good luck.

Thank you.

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

You may proceed.

Good morning.

Just a follow up on the guns and ammunition business in fourth quarter last year.

From what I understand, that business runs at a significantly lower margin than the balance of your business, so would that not be a significant margin help given the tough business last fourth quarter and so on looking at this fourth quarter?

Yes, it would.

The -- as the gun and ammunition business becomes a smaller percent of our business, it helps the mix and moves the margin rate up.

Okay.

And then for the past few quarters you've been talking about the taxes in Washington and the concerns of the various peop -- the concerns of the -- your concern of the concerns of your consum -- of the consumers as your business has continually improved.

What -- why does that stay so top of mind?

It seems to me that based on your performance versus other people in the marketplace that you seem to be taking share nicely.

Even if you're right about that, they seem to be going your direction.

Well, it -- we had positive comps in the third quarter because of the shift of business from the fourth quarter to the third quarter.

As I said, we may have beaten our guidance.

If we hadn't had that shift of cold weather product we still would've been negative.

And as we take a look at this, yes, we've had sequential improvement, which I always think is a -- is just a cute way of saying things are less bad.

And I think the difference between this year and last year that people are not panicked this year like they were last year, but they're still uneasy and they're not looking to return to normalized spending levels.

Okay.

And then it looked like, based on the non-comp comparison ex the Northwest, that your Northwest stores are off to a significantly better-than=expected start, would that -- or a significantly very good start.

Would that be a correct way to read into that?

Yes, the start in the Pacific Northwest would be among the best grand openings we've had in a couple of years.

And is that one of the areas where you're looking to -- we saw somewhere (inaudible) that you may have signed a deal in the state of Washington.

Are you looking to open stores -- more stores in the Pacific Northwest going into 2010?

We are.

We continue to look at the Northwest as an opportunity to add stores, so we'll stay pretty aggressive in that part of the country.

And then there's one last thing.

A lot of these issues you bring up and then when we have -- when everybody asks you some hard follow-up questions, it becomes competitive, or that's what you're saying.

We're all trying just to understand your business better and a lot of the color that we're trying to get many other companies do give a significant amount of color to the analysts without giving away the farm as far as competitive advantage.

And you lay a lot on the table, but then when we follow up, we don't get a whole lot out of it and I'm just saying that, hopefully for a lot of other people.

Because you guys operate very well, but when -- it gets very difficult to really capture the essence when we have these limited opportunities to speak with you on the earnings calls?

I appreciate your concerns, but we're -- from a competitive standpoint we're comfortable giving the -- providing the information that we provide to the analyst community and hopefully it's enough for you to make your appropriate decisions.

Thank you.

Our next question comes from the line of David Magee with SunTrust Robinson Humph.

You may proceed.

Yes.

Hi, good morning.

Just a couple of quick questions.

One, with regard to the consumer and the conservatism are you all more exposed at this time of year just given the gift giving, discretionary shopper out now?

And also, is your average transaction size larger at this time of year?

The average transaction size is larger this time of year and I think that we might be a bit more exposed this time of year because it is more of a gift-giving time, but I think a lot of retailers are also.

This isn't like the spring season when people are starting to play baseball or starting to play golf.

This is a discretionary purchase and they can -- they've got a number of -- we've had a number of different competitors for a share of wallet this time of year versus when we get into the baseball season and the golf season, the soccer season, we have a smaller amount of competitors that we're competing for that customer with.

Thank you.

And secondly, with regard to the spend for next year, the extra money, you called out this quarter and last quarter the desire to customize the merchandise better by region.

What will you be able to do that you can't do now that we might have seen in the stores, say, 18 months from now?

We'll do a better job of being focused on those particular SKUs in items that are relevant in a particular marketplace.

I think we do a better job than most people in our industry, but as we go out to the stores --- I spend a lot of time in the stores, I've spent -- in the last two months I've probably spent a day and a half or two days a week in the stores and talking with customers, talking with our associates, and we get in there and we still find -- as good as our business is relatively speaking, we still see a lot of opportunities out there and we think that there's an opportunity to be more focused on those particular regions.

For an example, in the Phoenix area, we -- our hydration component in our camping business we do a pretty good job with.

We need to really expand that out in Phoenix and in the desert, which is something that we haven't done as well as we should.

And I was just there a few weeks ago and I talked about that and where we have eight feet of hydration they really think we should have 16 feet or 20 feet of hydration products.

Those are some of the things that we aren't able to focus on today, but will be able to focus on going forward.

And this hydration business is a business that exceeds our Company's average margin rate.

Great.

Thanks, Ed.

Our next question comes from the line of Artie Bowman with Bowman Associates, You may proceed.

Artie Bowen.

Ed, was the $14 million for advertising in Southern California in addition to what you had already planned by the middle of the third quarter, or does that include what you already had planned?

Well, this is $14 million, Artie, of not only advertising, but then also promotional activity, which are markdowns, reduced sales.

So it is in addition to what we had already had planned, but we think it'll pay great dividends for us this first holiday season.

Okay.

The technology expenditure for next year, is that really two years expenditure in one, or one and a half years, or what -- how would you characterize it, the $30 million to $35 million?

Well, first of all, it's a split between IT spend and the additional costs related to the new building in terms of leasing costs.

But the IT spend will put us in a position where we will have less spending over the next three-year period.

I see, okay.

Ed, buying for next year, I'm presuming the cost of merchandise that you're seeing is down from what it was last year.

Would you plan on giving that all to the consumer, or keeping some for gross margin, giving some to the consumer, or what would a general characterization be?

I think it'd be a combination where appropriate, Artie.

There'll be some areas give that will be -- can be a bit more price competitive and give that value to the consumer, but some of our prices are coming down based on our size and we think that we'll -- we think we still have margin rate expansion as we've come out of this Golf Galaxy clearance activity and as we continue to move unproductive inventory out of our -- out of the Dick's Sporting Goods system.

Okay, sounds good.

Haven't seen you in the stores, you're out one and a half days a week?

Well, we're obviously not in the same stores, Artie.

I'll give you my schedule, I'll see you out there next week or the week after.

All right.

Okay.

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

You may proceed.

Good morning, everyone.

Ed, wondering if maybe you could just comment on the fitness business as you go into the holiday, just your thoughts.

I know it's been somewhat of a pressure point, but your thoughts in and around what's going on there?

Well, the fitness business, which we've talked about in the past a bit, has moved from some of the heavy gym units -- expensive gym units to product that's more concentrated on core development, stretching, flexibility, which is at a much lower average unit retail.

Our fitness business has been not bad under the circumstances, we're fairly pleased with it, and -- but those average unit retails in fitness have certainly come down.

The cardio component of the business still remains strong.

We launched the Lift Strong cardio product this third quarter and had really very good results then.

Okay.

Okay, that's helpful.

Then as -- I don't know how you can answer this question, but as you think about inventories and you're down a little bit over 8% per store at this point -- or per square foot, as you start to think about -- and your merchants start thinking about spring and initial thought process there, is it fair to say that the rule of thumb is continue to plan the business and even toward positions and commitments tightly, even as you go into next year?

I think this -- earlier this year you were planning inventories down and you were down, I think, in the first half of this year, so does that continue to be the trend?

How should we think about inventories?

Well, we wouldn't encourage you to think about inventories continuing to be reduced at this level.

We would look at those in going into next year as relatively flattish at the end of the fourth quarter this year to the fourth quarter of last year and then relatively flat going through the balance of the year.

We think that we can be more productive with the inventory.

We've worked with a number of our suppliers on flow issues to try to flow the product in at a more appropriate level, so -- but going forward I would look at these -- beginning in the fourth quarter I'd look at our inventory levels in the flattish, up a little bit, down a little bit, but nothing like the levels that you've seen reductions in over the last five quarters.

Okay.

And then the last question I have is when you -- this year, you were able to leverage your SG&A spend due to the initiatives you put in place earlier this year and certainly be more productive, as you think about -- as you move into next year and you're talking about some additional expenses that were deferred in future investment, do you conceptually need at this point a positive comp to leverage the business, or are you at a point where that might not be necessary?

Just your thoughts in and around that, given everything you've gone through this year?

Well, it would depend.

Comps certainly would make it a lot easier.

Okay.

If we felt that business was going to be difficult and if there was a double-dip recession, as the president indicated that there's a possibility of a few days ago, then we would have to take a look at what investments, what expenses we might want to relook at for 2010.

But as of right now, I can't give you guidance if we think we're going to leverage or deleverage those expenses, but we've got levers to pull if we want to go one way or the other and we think that's appropriate at a particular point in time.

Okay, all right.

Thank you.

Good luck on the holidays.

Thank you.

This concludes our question-and-answer session.

I will now turn the call back over to Ed Stack for any closing remarks.

I'd like to thank everyone for calling in and listening and talking with us on our third-quarter results.

I'd like to wish everybody a happy holiday and we'll talk to you as we release our fourth-quarter results.

Thank you.

This concludes today's presentation.

You may now disconnect.

Good day.