DICK'S Sporting Goods Inc (DKS) 2009 Q4 法說會逐字稿

Welcome to the fourth quarter 2009 Dick's Sporting Goods Incorporated 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 will 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 fourth quarter and full-year 2009 financial results.

Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website, located at www.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 31st, 2009.

We disclaim any obligation and do not 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 the Investor Relations page of our website at www.dickssportinggoods.com.

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

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

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

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

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

Thank you, Anne-Marie.

I'm pleased to report that in the fourth quarter we generated net income of $67.4 million, or $0.56 per diluted share as compared to non-GAAP earnings per share of $0.54 in the fourth quarter or 2008.

Net sales for the fourth quarter of 2009 increased by 11% to $1.3 billion due primarily to a 2.5% increase in consolidated comparable store sales, the opening of new stores, and the addition of e-commerce sales.

The 2.5% consolidated same-store sales increase consisted of a 2.4% increase in the Dick's sporting goods stores and a 5.9% in the Golf Galaxy stores.

Our inventory declined 0.8 of a percent per square foot, excluding our e-commerce at the end of the fourth quarter 2009 compared to the end of the fourth quarter 2008.

Our Golf Galaxy business continues to improve.

In addition to the same-store sales increase or 5.9%, gross profit margin improved year-over-year due to a reduction in promotional activity.

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

The golf business in our Dick's Sporting Goods stores generated an increase in same-store sales to an even greater degree than our Golf Galaxy stores.

We're also pleased with athletic apparel and footwear and team sports.

As expected, guns and ammo were behind last year as we anniversaried the elections.

For the full year, we are expecting to generate earnings growth of 10% to 13%, or $1.32 to $1.35 in earnings per diluted share compared to 2009 reported earnings per diluted share of $1.20 excluding merger and integration costs.

In 2010, we're expecting consolidated comp store sales to increase approximately 2% to 3% versus a decline of 1.4% in 2009.

In the first quarter of this year, we're anticipating reporting consolidated earnings per diluted share of approximately $0.12 to $0.13.

In the first quarter of 2009, we reported diluted -- earnings per diluted share of $0.11 excluding merger and integration costs.

We're anticipating a comp store sales increase of approximately 2% to 3% in the first quarter versus a 6% decline in the first quarter of last year.

Our guidance includes the expected impact of approximately $0.04 per diluted share in each quarter of 2010, or $0.16 for the full year, as a result of the approximately $32 million in additional recurring expenses that we discussed in previous earnings calls and which Tim will address in further comments.

The comparable store sales calculation for the first quarter and full year 2010 include Dick's Sporting Goods stores, Golf Galaxy stores and the e-commerce business.

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

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

Despite being faced with the most severe financial crisis since The Great Depression and the negative same-store sales that resulted from it, we still continued to grow our business in 2009.

We generated higher profits, leveraged expenses, strengthened our balance sheet through inventory management and the repayment of $172 million in convertible notes and we believe we gained market share.

In 2010 we're expecting to generate higher operating margins, double-digit earnings growth while continuing to invest and grow our business, as we generate long-term value for our shareholders.

At this time, I would like to turn it over to Joe.

Thanks, Ed.

In 2009, we opened 24 new Dick's Sporting Goods stores, relocated one Dick's Sporting Goods store, closed one Dick's Sporting Goods store, opened one new Golf Galaxy store, converted a Golf Shop to a Golf Galaxy store, closed two Chick's Sporting Goods stores and converted the remaining Chick's Sporting Goods stores to Dick's Sporting Goods stores.

At the end of the fourth quarter, we operated 419 Dick's Sporting Goods stores with 23.3 million square feet and 91 Golf Galaxy stores with 1.5 million square feet.

New store productivity for the quarter was 84% and includes Dick's Sporting Goods stores only.

In the fourth quarter of 2008, new store productivity was 66%.

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

These new stores are expected to range in size from 35,000 to 65,000 square feet, depending upon the market opportunity as well as the size and attractiveness of the available real estate.

We expect that the 2010 new stores will open in the first three-quarters of the year with approximately 60% in existing markets and 40% in new markets.

Additionally, we will consider increasing new store growth if appealing real estate opportunities develop within the year like it did in 2009 with the Joe's Sporting Goods stores in the Pacific Northwest.

We also expect to remodel approximately 10 stores in 2010, including some of the Dick's Sporting Goods stores in southern California that have been converted from a Chick's Sporting Goods stores.

Looking at future growth opportunities, we have identified a potential of at least 800 Dick's Sporting Goods stores domestically.

At our current size, that means we are only slightly more than halfway there with substantial unit growth potential ahead of us.

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 11% to $1.3 billion.

Consolidated same-store sales increased 2.5%.

Dick's Sporting Goods store comps increased 2.4% and Golf Galaxy increased 5.9%.

The increase at the Dick's Sporting Goods stores was driven in part by a 3% increase in transactions and a decline in sales per transaction of 0.6%.

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

Consolidated gross profit of $390 million was 29.16% of sales, one basis point lower than the fourth quarter of 2008.

This slight decline was primarily driven by a deleverage of e-commerce, freight, and distribution costs, mostly offset by a 31 basis point increase in consolidated merchandise margin.

Merchandise margin increased as a percent of sales primarily due to the reduction in promotional activity at our Golf Galaxy stores.

SG&A expenses of $277 million were 20.7% of sales compared to 20.01% of sales in last year's fourth quarter.

This increase is due primarily to the advertising campaign in southern California which supported our stores during our first holiday season as Dick's Sporting Goods stores.

Approximately $11 million of the $277 million in SG&A expenses is from the e-commerce business.

Let's move to the balance sheet which again is very strong.

We ended 2009 with $226 million in cash and cash equivalents compared to $75 million at the end of 2008, even after paying down $172.5 million in senior convertible notes in the first quarter 2009.

At the end 2009, we did not have any outstanding borrowings under our $440 million credit agreement and we improved our net cash position by $324 million.

Our borrowing rate is LIBOR plus 75 basis points and averaged 1.23% in the fourth quarter.

Excluding e-commerce inventory, inventory per square foot was 0.8% less at the end of the fourth quarter of 2009 as compared to the end of the fourth quarter of 2008.

Net capital expenditures were $44 million in the fourth quarter of 2009, or $52 million on a gross basis compared to net capital spend of $8 million or $32 million on a gross basis in the fourth quarter of last year.

The year-over-year increase in capital expenditures in the fourth quarter is primarily due to the data center related hardware purchased in conjunction with the opening of our new store support center.

For the full year of 2009, net capital expenditures were $93 million, or $140 million on a gross basis compared to a net capital spend of $115 million or $191 million on a gross basis in 2008.

Looking to the first quarter of 2010, we're anticipating our gross margin rate to increase year-over-year primarily as a result of merchandise margin improvements.

These improvements are expected as a result of the Golf Galaxy clearance activity that occurred in the first quarter of last year, but which is not expected this year and the Chick's Sporting Goods liquidation event which occurred in the first quarter of 2009 as we prepared for the conversion of the Chicks sporting goods stores to Dick's Sporting Goods stores.

SG&A is expected to increase as a percentage of sales in the first quarter of 2010 as compared to the first quarter of 2009.

As we've discussed in previous earnings calls, these additional recurring expenses include technology-related costs to support our business strategies including establishing a redundant data center, our new headquarters now referred to as our store support center, continued investment to support our on-line business, and our direct-to-consumer marking programs for both the Dick's Sporting Goods score card 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 expenses were postponed in 2009.

The P&L impact of these expenses associated with these programs is approximately $0.04 per share per quarter or approximately $0.16 over the course of the year.

For the full year, we are anticipating our gross margin rate to increase year-over-year, primarily as a result of improving merchandise margins.

SG&A as a percent of sales is expected to be flat to slightly deleveraged, primarily as a result of the additional expenses I just described.

These expenses, along with our other planned initiatives will result in deleverage of SG&A in the first half of the year with leverage expected in the second half of the year.

The full-year gross margin improvement in SG&A dynamics are expected to net to an increase in operating margins in 2010 compared with 2009, resulting in approximately 10% to 13% earnings growth.

Regarding our balance sheet, we expect to have limited seasonal borrowing needs in 2010.

Net capital expenditures for the full year are expected to be approximately $145 million or $175 million on a gross basis.

On the balance sheet we'll notice that we now have a leasing obligation recorded.

This represents the accounting treatment for our new store support center.

In 2010, the expenses related to the leasing of this facility will be included in depreciation and interest expense.

In summary, we expect to build upon 2009 and 2010 as we continue to invest in and profitably grow our business.

While we enter this year in a position of strength, both financially and competitively and we believe the worst of the financial crisis is behind us, we remain cautiously optimistic of near-term consumer sentiment.

This concludes our prepared remarks.

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

Thank you.

(Operator Instructions).

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

Please proceed.

Thanks a lot and good morning.

Two questions this morning.

First of all, if you could update us on the results of your investments in California, at least from a market share perspective and the degree to which you think those will need to be sustained.

And secondly, to get the other question out there, your accounts payable increased nicely and contributed to your free cash flow in 2009.

If you could talk about your view of the sustainability of these levels of payables ratio and where you expect that line item to move going forward.

Thank you.

Thanks, Matt.

We'll answer in that two parts.

I'll answer the first part and Tim will answer the second part.

We're very pleased with the promotion we did in California.

We feel that it moved significant market share.

We had a meaningful comp gain in those stores over what had happened the year before, so we're very pleased.

To put it in sports terms, if we had a mulligan and could do it all over again, we'd do it all over again exactly the same way.

Great.

To answer question on the AP percent, yes, it was noticeably up at 48% for this year at the end of the fourth quarter.

We went through a fairly lengthy negotiation process at the beginning of 2009 and somewhat at the end of 2008.

We've told everyone in the past we have exceptionally good relationships with our vendors.

We went through a negotiation process for terms and conditions that were favorable to the Company, and that is primarily the reason why the AP in-store is as high as it is.

Keep in mind, too, that the inventory balance over the year has continued to decline on a square foot basis by quarter.

Has that adjustment happened to this point?

In other words, do you feel like you're at levels that expect to be sustained or is there more to go on this front?

I think there is little left to go.

We are at -- in the Company's history, we were in a 50% range at one time, but 48% to 50% is very high for our industry, and that's about where we expect to stay.

Got it.

Thank you very much.

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

Please proceed.

Thanks and good morning.

A follow-up on the margin side.

Can you talk about how -- what your merchandise margins looked at in the core Dick's stores and how much was the promotional impact from the southern California market effort?

We haven't guided to what those merchandise margins are specifically, but the promotion we did California did have a negative impact on the margin rate.

Although we felt it drove significant sales and market share.

The balance of our margin, we're really very pleased with.

Our inventory is as clean as it's ever been with our clearance inventory significantly below what it has been in the past, about -- a little less than 20% better than it had been in the past.

We're very pleased with the quality of our margin rate.

We're very pleased with the quality of our -- the inventory we have going forward.

We see no markdowns that are staring us in the face that we have to address.

The California promotions certainly had a negative impact on the margin, but a very positive impact on the sales.

Then is it fair to say that your merchandise margins in the core Dick's stores were up in the fourth quarter?

They were in the same zone as they were last year.

Okay.

That's fair.

And can you talk about just promotions generally in the space here, in the fourth quarter, and how you're thinking about 2010?

Are you worried that you had a perfect storm of weather here in the fourth quarter that allowed you to have nice sell-through on the apparel side, and maybe low inventories out there on the market?

Does that -- could that come back and hurt you next year?

Is that something that you I've thought about in your guidance?

We think about this every winter, yes.

And we did have a great winter from a weather standpoint.

We're a little concerned about that when we gave our fourth quarter guidance because it had had been relatively warm and our sales were significantly negative when we had our quarterly call, which we put in our pre release.

But, yes, it turned out to be the perfect storm from a weather standpoint.

Our group from merchandising, marketing, store operations, distributions, everybody did a great job of taking full advantage of that weather.

And I think it it will be difficult comparisons next year to go up against if the weather is different.

And then one follow-up on that one.

Do you think that the cold weather here at the start of spring has maybe hurt sales so far in January and February at all?

I don't think it's helped it, but February is such a small month that we don't think that had a big impact.

It's starting to warm-up now, so we're -- we've got all of that baked into our guidance of 2% to 3%.

If the weather gets better for us, there might be a little up side there.

Thank you very much.

Our next question comes from the line of [Camille O'Ryan] with Wedbush.

Please proceed.

This is [Alicia Gleason] for Camille O'Ryan.

You've answered most of my questions already, but I have one more.

What's your take on the golf business heading into 2010?

Are there any products that you're excited about that can drive business into the Dick's Sporting Goods stores or the Golf Galaxy stores?

The golf business in the fourth quarter, as we said, Galaxy was up 5.9%.

And we indicated that the Dick's golf business was even better than that.

We're relatively enthusiastic about golf business right now compared to last year, but understand it's been a tough couple of years.

Some of the new products that we're pleased about, the new Taylor made drivers, both the speed driver and the new R-9 driver, we're excited about that.

The Calloway Diablo has been a big surprise and has done very well.

We're very pleased with what Nike has come out with, with their Mach Speed and the new drivers and irons there, along with the apparel business, the content we see from Nike and a few others.

We're relatively optimistic about the golf business right now.

Although, remember, it's from a low base over the last two years.

Thank you very much.

I appreciate it.

Our next question comes from the line of Peter Benedict with Robert W.

Baird.

Please proceed.

Hey, guys.

First quick question on the footwear business.

I was wondering, maybe Joe, if you can you comment on what you guys are seeing within footwear, has that category has been going?

It sounds like it's pretty good.

But any more color on that?

The footwear business has been really pretty good.

It's been driven more by the women's business than the men's business.

Reebok has a very hot product in this whole toning category and that's really been helping drive that business.

Also, the it footwear business was driven pretty significantly by the cold weather business.

We had had a great winter with boots.

But going forward, Reebok is really the driver, and it's been -- it's great to see Reebok with a great product out there right now.

Thanks.

One follow-up.

How are you guys thinking the about flow of the comp game starting 2010?

I know your first quarter guidance is 2% to 3% -- your full year is 2% to 3%.

Comparisons firm up in the back half of the year.

Are you thinking consistent across the year, and if so why, or what can you help us out with on that?

We're thinking pretty consistent throughout each of the quarters.

We think we've got some upside in the golf business, some other areas of the business in the first half of the year.

We think that in the second half of the year we won't -- we will anniversary the elections that started the concerns around gun control, and we won't be up against those numbers in the fourth quarter of next year.

Thanks.

Good luck.

Thank you.

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

Good morning.

Thanks for taking my questions.

On the $30 million to $35 million investment initiatives for this year, how is that going to break down between the gross margin and the SG&A?

The reason why is ask is I would have expected maybe a little bit more gross margin leverage because it's perhaps on a 2% to 3% comp, you would see some fixed cost leverage at this point.

The impact of the approximately $32 million in expenses do not impact gross margin in 2010.

The lion's share of the expense runs through SG&A with about $11 million running through interest expense.

Okay.

Maybe you can explain or offer some commentary, why might not you see as much fixed cost leverage on a 2% to 3% comp, and where -- at what point might you need to comp to see leverage on that line item?

Are you most concerned about the occupancy line?

Within the gross margin, yes.

Through 2010, we expect that we will be slightly deleveraged on the occupancy line.

At what comp number will you need to be able to leverage?

About 4%.

Okay.

What rent rates are you seeing on the stores that you're putting in right now?

We know that the commercial real estate market is not in great shape, so are you getting a lot of benefit on those locations?

What we're seeing is we're seeing rents coming down on existing real estate, so we're doing -- we're entering into more leases for recycled real estate.

Where a building is built, we're able to negotiate a lower rent.

If we're still trying to bring something up out of the ground, those rents haven't come down nearly as much as we can renegotiate an existing box for.

Great.

Thanks so much.

Good luck.

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

Please proceed.

Thanks.

Can you get a little bit more specific on the magnitude of the Internet business?

Was that running about 3% of total sales?

It's actually a little less than 2% of total sales.

Going back to comments you made about longer term potential for stores, would you expect in 2011 to step up the openings considerably more than mid-20s?

That's really going to be dependent upon the real estate cycle that's out there right now.

The biggest issue with that is finding available real estate to grow at a higher rate.

Certainly we continue to look at the opportunities.

There's not a lot of new development going on.

As Ed mentioned, we're looking at primarily existing real estate opportunities.

To the extent that those opportunities increase, that's our biggest challenge with ramping this up to higher levels.

Okay.

Thanks.

And then finally, is it your expectation that the Golf Galaxy stores will outperform or underperform the golf section of Dick's?

Do you expect them to grow faster than the overall number that you gave of 2% to 3%?

I think that we expect the Golf Galaxy business to, overall, grow faster than the Dick's Sporting Goods overall business.

Although the Dick's Sporting Goods golf business will probably keep -- will be in the same zone as the Golf Galaxy golf business.

Perfect.

Okay.

Thank you.

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

Davidson.

Please proceed.

Good morning.

A few follow-ups from earlier questions.

In terms of your comments on California stores, et cetera I know they won't be in the comp base.

But if you look at those stores this year, would you expect them to outperform the overall comp guidance that you've given for the Dick's stores?

I'm not sure we're going to make that comment.

But we expect to be very pleased with where we go with California.

We think that the promotion that we did through the holiday got us a lot more customers.

A lot of people visited the stores that had never visited the stores in the past, and we or very pleased with that investment so we think it will pay dividends going forward.

Then on the -- sounded like you're going to remodel some of those stores as well.

I was just curious, was it just that they didn't get touched enough when did you the conversion?

Are there specific areas you want to update?

Just some color on what you will be remodeling in those stores.

We're actually going to complete a full remodel with those stores.

When we are complete with the remodel which should be sometime this fall, those stores will look like a typical Dick's store 100%.

You'll be touching all the stores, not just a few of them?

We're going to touch about five or six stores.

Then on the golf, your comments on the golf business.

There's been a lot of stores in the independent channel that have essentially gone away in the golf business.

I'm curious if you think your comps are more benefiting from -- gaining market share because there's no longer certain competitors there?

Or if you're really seeing a demand pickup?

Any color you might have on that would be helpful.

In the color that I can give you is only subjective.

Sure.

But the sense that we have is it's the combination of both.

There's certainly some markets where some stores have closed and we've picked up market share where the market share has to go somewhere.

There's one -- that's one component of it.

Another component, I think there's been a fair amount of built-up demand in the golf business over the last couple of years that we're starting to see come back into the market in the last couple of quarters.

As we've said, the last couple quarters our golf business comped positively.

And in the fourth quarter, we were up in Golf Galaxy 5.9% and the Dick's stores exceeded the Golf Galaxy performance.

I think it's combination of both.

Last one, just on the e-commerce piece, I know that was more or less breakeven, maybe a little bit of a negative profit.

But would we expect your e-commerce business -- would that be a positive earnings impact this year or is it still more investment mode in 2010?

I would characterize it as really still more of an investment mode, although it will be -- we expect it to be accretive to earnings, but not in any meaningful way.

Perfect.

Great.

Thank you very much.

Good luck.

Thanks.

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

Please proceed.

Hi, guys.

Good morning.

Couple questions for you.

On the real estate side, it sounds like you are seeing better rents and there is more availability.

It seems like you're going to also open some smaller stores than that traditional 50K.

What percentage of the stores do you think will be at that smaller size?

Is that something we should expect to see a higher percentage of those smaller stores going forward?

And what would you need to see to really start ramping up store growth again to get back to that more normal run rate where you guys were growing low double digits square footage growth?

Joe, we think that the amount of stores that will be below 50 this year will be somewhere in the 35%, 40% range.

As we alluded to in previous calls, we've had some pretty good success in some of the smaller market, markets like Bend, Oregon, Hot Springs, Arkansas, Martinsburg, West Virginia, some of the smaller prototypes somewhere in the range of 35,000, 40,000, 45,000 square foot.

We've had some pretty good success in those markets with smaller stores.

And we think there's an opportunity for growth in some of the smaller towns around the country.

35% to 40% we should be that in range for this year.

As far as ramping up growth, as we alluded to earlier, really it's a product of available real estate at this point.

Got it.

We are not limited by our balance sheet but really, by really by what's available in the marketplace.

Okay.

That's helpful.

Thanks.

If I could ask one more on the -- just to shift gears to the Internet for a minute.

It looks like -- well, it's pretty clear, you are going to be including it in comps this year.

What drove that decision and what percentage of sales, I know it had had been rung although below 2%, do you expect it to be a few years out, in say 3 to 5 years from now?

I think it's common practice to include your Internet sales in the comp sales after you've been up and running for 13 months there.

As we go forward, we're it not going to guide to what we think those Internet sales should be, but we would think they would be meaningfully more than 2% over the next three to five years.

Got it.

And is it fair to say it's growing about in line with the rate of inventory increase that you guys made in the Internet this year?

Actually, we may have over invested in inventory a little bit, and we may over invest in inventory a little bit this year as we calibrate that -- those sales.

That's great.

Very helpful.

Thanks very much, guys.

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

Please proceed.

Thanks.

My questions are expense related.

First, as we think about 4Q, 2010, and lapping those -- the promotions and markdowns that you did in 4Q '09, how do we think about that?

Do you spend the same amount in 2009 or does the costs go down because that was a one-time investment in 4Q '09?

Then a similar type question for the total $32 million expenditures that you're talking about in 2010.

How do we think about that in 2011?

Does it just repeat?

It's a recurring cost?

Or was it step up in costs in 2010 and then goes away in 2011?

Thanks.

To the first question, we do not expect to repeat the level of expenditure in the fourth quarter of 2010 in the support in the southern California program, like we did in the fourth quarter 2009.

There will be expense leverage based on that reduction and overall program costs.

As we look to 2011 on the expenses that you've alluded to, these are recurring expenses at about the same level for the next couple of years.

And that's both in the SG&A part and the interest expense part?

That is correct.

As long as we have the capital lease on the books, we will after a higher portion of interest expense than we have had in the past.

When you say -- we think about it as being equivalent in dollars.

If your sales grow, then you leverage that.

That's absolutely correct.

Thank you.

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

Please proceed.

Good morning.

This is [Jody Anne], calling on behalf of John.

How do you see sourcing costs going this year?

Do you expect these to rise in the second half, and if so, by how much?

Can you repeat that?

What costs?

Sourcing.

Thank you.

We think that, especially products coming out of Asia, in the back half of the year, we're expecting to see some upward pressure from the sourcing costs.

We don't -- I don't know exactly how much yet.

We haven't quantified that, but we are expecting to see some upward pressure from costs.

Okay.

And will you be passing through these costs?

We don't expect to take a margin rate reduction going into the back half of the year.

No.

Thank you.

Our next question comes from the line of Hardy Bowen with Bowen Associates.

Please proceed.

Hello, Ed.

The labor hours in the shoe department and golf seem to be somewhat restricted.

Do you think we're at a point where this may be restricting sales in these departments, or not really?

Hardy, I'm not sure I agree that the costs have been restricted.

We've moved some costs around.

We've moved into a shared service program in our footwear area, but we're not -- we have made no meaningful cut in service costs in either of those two areas.

Okay.

I noticed in the fourth quarter that there were some stock-outs on items that I was asking for, anyway.

What do you think about that as you look back at that time quarter?

Could we have sold more if we had a bit more inventory, or what do you think?

It would depend on what types of merchandise you were looking for.

The one thing that we've put a concerted effort on is to clean out of seasonal merchandise quicker and more efficiently than we have in the past.

If it was seasonal merchandise, then I would say no, I think we did a good job there.

We're trying to clean out of some inventory that we're not going forward with.

If we didn't have core items, like Pro V-1 or Pegasus running shoes, then that's a very different issue.

I've spent a lot of time out in the stores.

I spend, for the most part, a day, day and a half out in the stores two to three weeks a month.

And the one thing that the stores did not complain about, and they're a vocal group as they should be, but they were not complaining about stock-outs out in the stores at all.

Okay.

Sounds good.

Thanks.

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

Please proceed.

Hi this is Christina for Chris.

How are you?

Yes, would you mind getting closer to the phone, please?

Can you hear me?

Yes, thank you.

This is Christina from Susquehanna.

My question was, how were traffic trends in your stores?

Looking forward, what are you counting on to drive traffic in the stores for the first half of the year?

As we mentioned, if you take a look at our comp for the quarter, we had a 3% increase in transactions and about a 0.6% reduction in sales per transaction.

So traffic is up.

Traffic is up?

Okay.

And in your fitness business, I know you were right-sizing the fitness business in your stores.

Is it where you would like it to be?

Or should we expect more actions as far as reducing the inventory and -- dedicated -- and floor space dedicated to fitness?

We continue to look at fitness business, and the fitness business is evolving into different categories than in the past.

We've talked that the strength category continues to down trend and we'll continue to right size that area.

The cardio business, we've made some changes in the cardio business.

To Hardy's previous point, there may have been some stock-outs as we think about it around some of the fitness areas as we look to right size that business, but it's pretty close to being where we want it to be right now.

What is the percentage mix, if you don't mind breaking it out?

Is got like 15% to 20% right now?

We've not broken that out category by category, and won't do that.

All right.

That's all I have.

Thank you.

Thank you.

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

Please proceed.

Just to follow up on the last question, can you just give us a little more color on some of your merchandise initiatives for this year?

And in particular, Reebok?

Do you plan to expand the assortment of Reebok?

Also, can you update us on your private label program, where you stand?

Sure.

On some of the categories that we're enthusiastic about, as we said, we're enthusiastic about the golf business in both companies, Dick's Sporting Goods and Golf Galaxy.

We do expect Reebok to continue to take a larger market share as the toning product has really caught hold.

We've got Run Tone, the regular toning product, and we've seen great success with that and expect that to continue.

As far as product development goes, we've been very pleased with what we have done with our private brands and private development area around the Schlesinger golf balls.

We're launching Max Flight golf balls in a big way right now.

The Umbro category has been great for us.

We're very pleased with our private label business right now and expect to be able to grow that business somewhat modestly over next year or two.

Thank you.

Our next question comes from the line of [Chris Arpajae] with SunTrust Robinson Humphrey.

Please proceed.

Good morning.

My questions about promotional environment.

Any color on trends you've been seeing there?

And in particular, if there's any variations by region that suggest you may have to have different strategies by region in the year ahead.

The two areas where it's more promotional is Atlanta, Dallas, and Phoenix, from a golf standpoint.

That's been the most promotional.

And then Texas, on the sporting goods side, as we continue to compete with Academy.

That's a bit more promotional.

Outside of that, we don't see any irrational or difficult promotional environment.

Thanks very much.

Next we have a follow-up from the line of Sean McGowan from Needham.

Please proceed.

Thanks.

Just want to clarify, were the Internet sales in the fourth quarter of '09 included in the same-store sales numbers?

Or is that just starting in 2010?

No, they starring in 2010.

Thank you.

Our next question comes from the line of [Ken Brokaheiser] with Sterne Agee.

Please proceed.

Thank you for taking my question.

Briefly, you guys have built a significant amount of cash on the balance sheet over the preceding year.

What do you regard as the optimum capital structure right now?

We're pleased with the cash that we've built.

In the grand scheme of things, we don't think that we have too much cash at all.

As we continue to build cash over the next several years, we'll decide where we think the best use of that capital is.

But for right now, to continue to accumulate cash in this environment until we're sure the whole economic issues are behind the country and the rest of the world, we're going to continue to build some cash.

In this environment, $150 million to $250 million is of the -- what you regard as being the minimum necessary just to -- for strategic flexibility?

We're pleased with where we're at right now.

We're not going to get into defining the minimum amount of cash that we need to have, but we're pleased with the cash that we have.

As we continue to run the business, we'll build some additional cash.

If we feel that there's a place where we should invest our cash because we think we'll get an appropriate return for our shareholders, we'll look to make those investments.

Secondly, on SG&A, as far as advertising or any other areas within SG&A that you feel that maybe were restrained a little bit in 2009 and might have to be restored or replenished in 2010.

Nothing other than what we've already guided to.

We had some infrastructure issues here from a headcount, people count that we needed to make investments in.

And we needed to make some investments in our technology that we had postponed in the end of 2008 and into 2009, as we and the rest of the world was going through the financial crisis that transpired.

Thank you.

Good luck.

Thank you.

We have a follow-up from the line of Matthew Fassler with Goldman Sachs.

Please proceed.

Thanks a lot.

Thanks for taking my follow-up question.

Couple quick ones here.

The SG&A dollars were up about 15% year-on-year in the fourth quarter, which presumably is a higher rate of growth than would you expect to see at any point in time in 2010.

Can you talk about at would point the e-commerce, incremental e-commerce expenses that you discussed get anniversaried?

And also, whether there's incentive compensation component, as we've seen from many retailers given your performance over the course of the year that might have contributed to that SG&A growth rate?

Sure, Matt.

This is Tim.

On the SG&A side, many of the things that you just mentioned.

First of all, we had the additional advertising costs associated with the southern California initiative that we've already spoken.

We also, based on performance this year, had additional incentive compensation accrued at the end of the fourth quarter.

It ended up being a good year for us in that regard.

From -- our pre-opening costs continue to be lower because we opened less stores and none in the fourth quarter.

Overall, our store payroll actually leveraged for the fourth quarter as well.

Got it.

My next question, the 4% that it will take to leverage occupancy in 2010, is that a function of the fact that you're layering on the additional headquarters costs and that increases occupancy for a year?

If that's the case, would your leverage point be lower in the out year?

The costs related to the new support center are down in SG&A, not up in the occupancy line.

Got it.

Finally, just to clarify in e-commerce, is e-commerce in the same-store sales base for 2009 as we calculate the comp growth rate in 2010?

Say that again.

In other words, you're saying e-commerce would be included in comps for 2010.

Presumably the business that you generated from e-commerce last year will also be in the '09 base that you calculate growth from?

Of course.

Yes.

Great.

Just checking.

Thank you so much.

Thanks, Matt.

Our last question is a follow-up from the line of Chris Horvers from JP Morgan.

Please proceed.

Chris Horvers, that's pretty funny.

I just had one follow-up.

On the guns and ammo category, can you quantify how much that category was down on a comp basis and speak to any differences you're seeing between guns and ammo within that?

Thank you.

Sure.

We won't comment on specific categories, but we're seeing that trend continue into the first quarter and we expect it into the second quarter.

We expect the gun business to be less negative than the ammunition business.

Guns doing better than ammo, you're saying.

Correct.

Less negative.

Okay.

Thank you.

Thank you.

This concludes our Q&A session for today.

I will now turn the call back to management for closing remarks.

I would like to thank everyone for joining us on our fourth quarter call, and as we provided guidance for the first quarter and for the full year 2010, and look forward to talking to everyone when we announce our first quarter results.

Thank you.

This concludes the presentation.

You may now disconnect.

Good day.