DICK'S Sporting Goods Inc (DKS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Second Quarter 2010 Dick's Sporting Goods, Inc.

Earnings Conference Call.

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

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

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

Good morning to everyone participating in today's conference call to discuss our second quarter 2010 financial results.

Please note that re-broadcast 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 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 30, 2010.

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 principals and our related reconciliation can be found on the investor relations portion of our website at dickssportinggoods.com.

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

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

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

Joe will review our store development program.

Tim will then discuss in more detail our financial results.

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

Thank you, Anne-Marie.

In the second quarter we generated consolidated earnings per diluted share of $0.43 which is our highest EPS earned in any quarter -- in any second quarter and a 19% increase from the non-GAAP consolidated earnings per diluted share of $0.36 reported in the second quarter of '09.

Our original expectation as disclosed in our last quarterly call was $0.37 to $0.39.

Net sales for the second quarter of 2010 increased by 8.8% to $1.2 billion from the second quarter of '09, primarily due to a 5.7% increase in consolidated same store sales and the opening of new stores.

The 5.7% consolidated same store sales increase consisted of a 5.6% increase in Dick's Sporting Goods stores, 2.9% increase in Golf Galaxy stores, and a 28% increase in our eCommerce business.

Our inventory increased 0.5% on a per-square-foot basis at the end of the second quarter of 2010 compared to the second quarter of '09.

Our cash position increased by $227 million to $278 million at the end of the second quarter of 2010 from $51 million at the end of the second quarter of '09.

In the Dick's Sporting Goods stores, improving same store sales were broad-based with hard lines, apparel, and footwear all comping positively.

Looking at our Golf Galaxy business, same store sales increased 2.9% in the second quarter of 2010; also gross profit margin improved year-over-year primarily due to a reduction in promotional activity and a change in merchandising mix.

We are pleased with the improving trend at Golf Galaxy.

Although we're pleased with the improving trend at Golf Galaxy, we recognize that there is still work to be done.

As you may recall, it was only just the beginning of last year when the Dick's management team began actively running the Golf Galaxy business.

In 2009, we focused primarily on getting the right level and right mix of inventory in the stores.

This year, after evaluating individual store contributions, we've decided to close 12 underperforming stores in the third quarter.

The poor performance of these stores was primarily a function of poor real estate decisions by prior management, resulting in inadequate locations, sites that were too expensive or a combination of both.

By rationalizing the store base, we expect to significantly increase earnings from Golf Galaxy by more than 50%.

We also continue to evaluate and refine the preferred location, size, and format of the Golf Galaxy stores.

Through this evaluation process, we have made the decision to open two Golf Galaxy stores this year, as opposed to the five that were originally planned.

We continue to believe there is long term growth potential in the golf business.

Our Golf Galaxy acquisition has provided us significant leverage with our vendor partners and provides us the opportunity to capture market share in the premium golf business as this niche of the market continues to consolidate.

For the full year 2010, we are raising our guidance and are now expecting to generate earnings growth of 22% to 24% or $1.46 to $1.49 of EPS excluding store closure costs, compared to '09 EPS of $1.20, excluding merger and integration costs.

In 2010, we are expecting consolidated same store sales to increase 4% to 5% versus a decline of 1.4% in '09.

In the third quarter of this year, we are anticipating reporting consolidated earnings per diluted share of approximately $0.15 to $0.16, excluding store closure costs.

For the same period of '09, we reported earnings per diluted share of $0.16.

In the third quarter of last year, we experienced unusually early cold weather.

As reported in last year's third quarter call, we believe the increase in cold weather product sales pulled forward approximately $0.03 of EPS from the fourth quarter of '09 to the third quarter of '09.

For the third quarter of this year, we are anticipating a consolidated same store sales increase of approximately 1% to 2% as compared to a 1.9% increase in the third quarter of last year.

The second quarter of 2010 marks our fourth straight quarter of consolidated same store sales gains.

Our merchandise margin continues to be strong and we leveraged our occupancy, freight and distribution costs.

The relative strength of our golf business places us in a position to make important strategic decisions on Golf Galaxy and to rationalize the store base.

We generated record second quarter earnings and exceeded our guidance as well as consensus estimates.

When we look at the first half of 2010, we produced year-to-date consolidated earnings per diluted share of $0.64 as compared to consolidated EPS of $0.47 in '09, excluding merger and integration costs, or increase of 36%.

The consolidated earnings per diluted share generated in the first half of this year exceeded the pre-recession results in the first half of '07.

Once again, this performance is directly related to the hard work and dedication of our more than 25,000 associates.

I will now turn the call over to Joe.

Thank you, Ed

In the second quarter, we open one new Dick's Sporting Goods store and remodeled three Dick's Sporting Goods stores.

At the end of the second quarter, we operated 425 Dick's Sporting Goods stores with 23.7 million square feet and 91 Golf Galaxy stores with 1.5 million square feet.

New store productivity for the second quarter was 67.4% and includes Dick's Sporting Goods stores only.

In the same quarter of 2009, new store productivity was 72.5%.

The detailed calculation of the new store productivity can be found in the table section of the press release we issued this morning.

In the third quarter we plan to open approximately 12 new Dick's Sporting Goods stores, remodel seven Dick's Sporting Goods stores, relocate one Dick's Sporting Goods store and close 12 underperforming Golf Galaxy stores.

The store closures are expected to result in a charge related to our lease exposure, severance, and inventory liquidation costs.

We expect to open the remaining new Dick's Sporting Goods stores and Golf Galaxy stores in the fourth quarter.

For the full year of 2010, we now expect to add approximately 26 new Dick's Sporting Goods stores, relocate two Dick's Sporting Goods stores, remodel 11 Dick's Sporting Goods stores, open two new Golf Galaxy stores, and close 12 underperforming Golf Galaxy stores.

The new Dick's Sporting Goods stores are expected to range in size from approximately 35,000 to 65,000 square feet.

Approximately 60% of the new stores are expected to open in existing markets and 40% in new markets.

We currently expect to increase the number of new stores open in 2011 by approximately 30% over the expected 26 new stores planned to be open in 2010, or 34 new stores, which would result in a unit growth rate of approximately 8% for the Dick's Sporting Goods chain in 2011.

We are also in the process of rolling out a new program with Nike called the Nike Fieldhouse at Dick's Sporting Goods.

These concept shops will range in size from approximately 4,700 to 6,000 square feet.

We have five of these up and running right now.

Over the next 24 months we expect to have these in about 20 stores.

As part of this program, we are also launching Nike Evolution Plus shops in about 55 stores over the next two years.

These shops will be approximately 3,000 square feet.

We are excited about our participation with Nike in these concept shops.

Nike recently said that one of the best presentations of the Nike brand anywhere in the world is at Dick's Sporting Goods and that the Nike category experience at Dick's Sporting Goods is in its most complete form.

Finally, we have completed an updated and in-depth review of the new store opportunity in the US.

Based on this study, we believe that there is the potential for at least 900 domestic Dick's Sporting Goods stores.

This is a significant increase from the at least 800 stores identified in our previous study.

The increase is primarily due to the development of smaller stores less than 50,000 square feet, many of which are in smaller trade areas.

For 2010 and 2011, we still anticipate the new store growth of Dick's Sporting Goods stores to be approximately 6% and 8%, respectively.

We have the financial capacity and the people, process, and systems capabilities in place to grow stores at a faster rate, and we expect to pick up the pace as the real estate market improves.

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

Thank you, Joe.

Net sales for the quarter increased by 8.8% to $1.2 billion.

Consolidated same store sales increased 5.7%, Dick's Sporting Goods same store sales increased 5.6%, Golf Galaxy increased 2.9%, and eCommerce increased 28%.

The increase at Dick's Sporting Goods stores was driven in part by a 5.1% increase in transactions and a 0.5% increase in sales per transaction.

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

Consolidated gross profit of $360 million was 29.37% of sales, 187 basis points higher than the second quarter of 2009.

This increase was driven primarily by an increase in merchandise margin of 143 basis points.

The rest of the margin improvement was driven by occupancy and freight and distribution leverage.

Merchandise margin increased as a percent of sales primarily due to a change in mix at our Dick's Sporting Goods stores and the reduction in clearance activity at our Golf Galaxy stores in the second quarter of 2010 as compared to the second quarter of 2009.

SG&A expenses of $271 million were 22.13% of sales compared to 21.19% of sales in last year's second quarter.

This increase is due primarily to the anticipated additional recurring expenses we have discussed in previous calls related to infrastructure, regionalization, and eCommerce costs, a higher level of incentive pay due to our current year performance relative to last year's performance and additional marketing spend on the promotion of our [Otti] Zero shoe this year that did not occur last year.

As expected, the recurring expenses, related primarily to the infrastructure and regionalization costs, impacted the P&L by approximately $8 million or $0.04 per diluted share in the second quarter.

Additionally, we had a tax benefit for the quarter that added $0.01 to our consolidated earnings per diluted share.

On the balance sheet we ended the second quarter of 2010 with $278 million in cash and cash equivalents and we did not have any outstanding borrowings under the $440 million revolving credit facility.

Last year, we ended the second quarter with $51 million in cash and cash equivalents and $20 million in outstanding borrowings under the facility.

Inventory per-square-foot increased 0.5% at the end of the second quarter of 2010, as compared to the end of the second quarter of 2009.

Net capital expenditures were $27 million in the second quarter or $37 million on a gross basis, compared to a net capital spend of $12 million or $23 million on a gross basis in the second quarter of last year.

As Joe mentioned, the new store productivity for Dick's Sporting Goods stores in the second quarter was 67.4%.

Our converted Chick's Sporting Goods stores, which represent 33% of the new store base, are located in southern California market, which has been one of the hardest hit regions in the recession.

In addition, during the second quarter we began to remodel five of these stores, which creates a short term negative impact on sales, but we expect we will provide long term sales benefit as these stores will look much more like the Dick's Sporting Goods prototype.

The Dick's Sporting Goods only new store productivity, without the converted Chick's Sporting Goods stores would have been 92% in the second quarter of 2010.

As presented in the new store productivity table in our press release issued this morning, the consolidated new store productivity is greater than the Dick's Sporting Goods only new store productivity, primarily due to the difference in square footage growth in the second quarter of 2009.

The square footage for the Chick's Sporting Goods stores was included in the square footage amount for the consolidated new store productivity calculation.

The beginning Chick's Sporting Goods square footage was not in the Dick's Sporting Goods stores calculation as these stores were not converted to Dick's Sporting Goods stores until May 15, 2009.

As a result, the square footage increase from the second quarter of 2009 to the second quarter of 2010 for the Dick's Sporting Goods stand alone calculation is greater than the consolidated calculation.

Our expectations for the third quarter and full year 2010 exclude the anticipated $0.10 per diluted share impact from the store closures.

These expenses are comprised of anticipated charges related to the Company's lease exposure, severance, and inventory liquidation costs.

These expenses are expected to total $19 million on a pre-tax basis.

All expenses related to the store closures are expected to be incurred in the third quarter.

For the third quarter of 2010 we are anticipating our gross margin rate to increase year-over-year, primarily as result of merchandise margin improvements.

Merchandise margin expansion is expected primarily from less promotional activity at our Dick's Sporting Goods stores and as a result of the Golf Galaxy clearance activity that occurred in the third quarter of last year, but which is not expected this year.

SG&A is expected to increase as percentage of sales in the third quarter of 2010, as compared to the third quarter of 2009, primarily due to the anticipated additional recurring expenses we have discussed in previous calls related to infrastructure, regionalization, and eCommerce costs.

As Ed mentioned earlier, in the third quarter of 2009 we experienced early cold weather that pulled forward approximately $0.03 consolidated earnings per diluted share from the fourth quarter of 2009.

This benefited our third quarter 2009 consolidated earnings per diluted share by increasing our performance from $0.13 to $0.16.

For the full year 2010, we are anticipating our gross margin rate to increase year-over-year primarily as a result of improving merchandise margins, and we are expecting SG&A as a percentage of sales to deleverage.

The full year gross margin improvement and the SG&A dynamics are expected to net to an increase in operating margins in 2010, compared to 2009, resulting in consolidated non-GAAP earnings per diluted share growth of approximately 22% to 24%.

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

Net capital expenditures for 2009 were $93 million or $140 million on a gross basis.

In summary, we continue to profitably grow our business and have significant growth opportunity in front of us.

This year we expect to grow our store base and expand margins to generate an approximate 22% to 24% increase in consolidated earnings per diluted share.

We expect to build on an already strong balance sheet while generating positive free cash flow.

We are very pleased with our current inventory levels and we do not have any outstanding borrowings under our credit facility.

We believe the long term store growth opportunity in front of us is tremendous with at least 900 total possible sites identified for Dick's Sporting Goods stores, which means we have room to more than double the size of our current store base in the United States alone.

This concludes our prepared remarks.

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

Thank you.

(Operator Instructions).

Our first question will come from the line of Robby Ohmes with Banc of America, Merrill Lynch.

Please proceed.

Good morning.

Thanks, and actually a couple of quick questions.

First, you probably won't comment on it, but I know everybody wants to know if you can give us any read on early back-to-school results so far.

And second, I was hoping, Tim, maybe you could give us some-- as you look at the guidance you gave for the third quarter, and you think about comps for the back half, should we expect the Chick's stores comp trends to be accretive to the overall same store numbers, or are they a drag on the overall Dick's same store numbers?

And then a third question would be, what would guidance have looked like if you weren't closing the 12 Golf Galaxy stores?

Maybe a little more help on how that helps the earnings in the back half.

And I've got some more, but I'll stop with those three at the moment.

Thanks.

Okay, Robby, this is Tim, I will take the last two and then maybe you can refresh us on the first one after I get done with the last two.

The Q3 comps at 1% to 2%, if we take a look at the two year comp basis, we did 1.9% last year which was the first positive comp we had in 2009.

So if you go to the midpoint of our guidance range at 1.5%, that means on a two year basis we are actually at 3.5%, so it's an acceleration on a two year basis of our comp.

If we go to the question on the Golf Galaxy stores, the impact of closing those stores for the second half of the year is not as significant as the annualized number that we gave you on the percentage increase in overall income, so a very small impact on the rest of this year.

Got you.

And then just in terms of the -- so the Chicks, the converted Chicks stores rolling into the same store sales base, are they comping above the core Dick's stores or below?

I'm just curious if they are comping better or worse now that they are coming into the comp base.

Robby, remember that we have five of those stores torn apart all second quarter, and they won't be completed on the remodel until October, so they are not comping at the chain rate because we have those stores torn up.

Got you.

And then just my first question was actually on back-to-school trends, and then maybe Ed, if you could give us any color or commentary on relative momentum?

I know everything was positive in the quarter, but relative momentum of footwear versus apparel versus anything that stood out in the categories or hard lines?

Thanks.

Robby, you are right.

We never talk about what's going on in a quarter.

So, we won't comment on the trends, which is consistent with our practice in the past.

From a momentum standpoint, as we called out in the script, all of the apparel, footwear and hard lines were all positive.

Were there some areas that were better than others?

Yes.

There was the footwear business continued to be really very good.

The apparel business continued to be very good, and there were pockets in hard lines that were very good and some of them that were relatively flat.

So all in all, we were very pleased with the balance that our business has right now, and we don't have any particular part of the portfolio that is really carrying all the weight.

It's pretty well distributed, which is a great place to be.

Terrific.

Thank you very much.

And our next question will come from the line of Rick Nelson with Stephens.

Please proceed.

Thank you.

Good morning.

Good morning.

Can you quantify what a 50% improvement in profits at Golf Galaxy, what that means in terms of EPS?

In terms of EPS on an annualized basis, it's approximately $0.02.

Thank you for that.

I'd also like to ask about SG&A.

If we pull out the $8 million in expense, with the investment expense and the regionalization, we still see a widening in the expense ratio.

What sort of comp do you need to lever SG&A ex the investments?

If we say, ex the investments, and look at next year as we anniversary those investments, a 2% to 3% comp.

Thank you for that.

Also like to ask you about the store remodels that you are doing in the footwear department moving more to self-serve and away from the chase system, how that is affecting comp and where you are with the rollout?

We -- Rick, this is Joe.

We remodeled 20 stores this year.

We just completed the remodel for those 20 doors.

Early results are pretty good, and we think it is going to be additive to our footwear business.

And how many stores are you planning for the year?

We are all done for this year as far as remodels are concerned.

By the end of this year, we will have approximately 79 stores that will be shared service footwear.

Thank you for that.

Also like to ask you about the toner shoe.

Your observations, if you think that's a fad or do you think that category has legs?

I think the category has legs.

Whether they are going to continue to be as strong as they have been, out of the box, we are waiting to see.

Reebok is coming out with a new marketing campaign, and we think that will probably re-energize this.

But we continue to be enthusiastic about the toning category.

Thank you.

Good luck.

Thanks.

And our next question will come from the line of Christopher Horvers with JPMorgan.

Please proceed.

Hi, it's Aaron Goldstein for Chris.

Could you maybe talk about the competitive landscape, and anything you are seeing from Sports Authority and Walmart?

And just as a housekeeping, do you still need, roughly I think you said before, 4% comp to leverage your occupancy and distribution?

As far as the competitive landscape, we haven't seen any meaningful change in the competitive landscape across a number of retailers, whether that's in the specific category of sporting goods or if it's in the mass merchant.

And the sales number on occupancy remains relatively the same.

At 4%?

Yes.

Thank you.

And our next question will come from the line of Michael Lasser with Barclays Capital.

Please proceed.

Good morning.

Thanks a lot for taking my question.

I think the Chick stores fall under the comp base next quarter.

So how should we think about the impact from that happening, especially with some of the stores being closed?

Well -- .

They aren't closed with this renovation.

They are torn up, and it's not easy to shop.

But we haven't closed them through the renovation process.

And as we take a look at this, the impact of the 12 Chicks stores on a base of 400 and some stores is very insignificant.

Okay.

And how did the $8 million break down between SG&A and then interest expense?

And did you choose to reinvest some of the sales outperformance in the quarter in additional marketing activities?

And do you anticipate that will drive improvement later on in the year?

The split in the expenses that we mentioned was the same as last quarter.

That's $5 million in admin and $3 million in interest.

And was there any reinvestment of the sales outperformance for the quarter in additional promotional activities?

Yes, we invested in some more advertising with the Audi Zero launch.

And also -- we did some additional marketing around our score card customers and score card events.

Our loyalty.

Could you quantify that amount?

We -- no.

We could, but we aren't going to break that out for competitive reasons.

But we were very pleased with the results, and we do think that that investment in marketing with the score card component will be -- will pay dividends as we continue into the fourth quarter.

Sounds great.

Good luck.

Thank you.

And our next question will come from the line of David Schick with Stifel Nicolaus.

Please proceed.

Good morning.

Wondering if you could give a little more detail about the differences in those Nike concepts that you are working on?

Is it SKU number or the average price point, and how are you thinking about those?

We are pretty excited about the Fieldhouse concepts and the Evo Plus concepts, which is a subset of this Fieldhouse concept.

The larger concept is going to be primarily in two level stores.

The other concept will be primarily in single level stores.

There will be a difference in merchandise assortment that we will be having some products that will be exclusive to us in those stores.

And the presentation and marketing effort to our loyalty program will be different in those stores than in other stores.

Is it fair to say it's generally moved higher in price point and breadth at the higher end?

It is.

It's a move to more premium product, and the early results of this have been very encouraging.

Great.

And then just one little sort of housekeeping question, and I know it's tiny, but the Golf Galaxy when you break out the on-line, is Golf Galaxy online in the overall online or is any golf online going into the Galaxy number that you are reporting?

It's in the Galaxy number, and it's immaterial.

Right, no, I know it is.

I just want to know where it's going.

Okay, thank you.

Our next question will come from the line from Kate McShane with Citigroup.

Please proceed.

Hi, good morning.

I wondered how many of the stores that you are going to open this year is at the 35,000 square-foot size, and do you have any stores at this size right now?

We do.

We have a number of stores in that 35,000 square foot range that we did a number of years ago.

We have done a couple of these stores over the last couple of years where we've taken some former Circuit boxes or Linen's boxes, and of the stores we are going to open up this year, roughly 25% to 30% are in that range.

And are there certain categories that are not being emphasized in that smaller box size that are in your average box size?

There are some categories that we do modify, and that depends on the area of the country that we are in.

So some areas may be less lodge.

Some other areas may be less some other category.

But it depends on the market that we are in.

Okay.

And kind of in the same vein, of the 100 incremental stores that you announced today for your total store count, what is going to be the breakdown of some of those smaller doors of that 100 doors?

Nothing meaningfully different than we just laid out, so those smaller doors, I would say it would be in that 25% range.

And these smaller doors will be more in city locations rather than suburban locations, or just less lower population areas?

Lower population, and I would look at those as in more rural locations, as opposed to urban locations.

Okay.

Thanks very much.

And our next question will come from the line of Eric Tracy with FBR Capital Markets.

Please proceed.

Yes, thanks.

Actually, if we could talk a little bit just about the product as we head into back-to-school and the Fall, in particular on the outdoor.

I know there are some launches coming up, Columbia, with their Omni Heat in particular, and then if you can speak specifically to that or other areas of focus that you see out there?

Well, we can speak to the fact that we think that the Columbia Omni Heat technology is something that will be exciting in the marketplace.

We don't have a read on that yet, but as that product starts to come into the stores, we are enthusiastic about it, and we are going to support it pretty aggressively.

Okay.

And then within the footwear component, be it with a continuation of toning or running or potentially something on the basketball front, I know that category has been somewhat weak?

We will be -- in our footwear category, all the platforms in footwear have been really pretty good.

We are enthusiastic about the basketball category.

But remember, we aren't in the fashion basketball business, as much as we are in the actual authentic team basketball business, so we aren't kind of subject to as many of the ups and downs as some of the other people that are more in the fashion basketball business.

Okay.

And then just lastly, a point of clarification on the various Nike concepts, the Fieldhouse versus the Evolution, that's just based on the different store sizes, but will be carrying a similar mix?

Or will there actually be differentiated between those two concepts?

There will be meaningful overlap in the mix of product, but there will be a broader array of premium product in the larger Fieldhouse concepts.

Okay.

Good.

Thank you, guys.

And our next question will come from the line of Jack Murphy with William Blair.

Please proceed.

Good morning.

Good morning.

I just wanted to ask a few questions on the gross margin.

Wonder if you could drill in a little bit more on the increase in the merchandising margin in the quarter?

You talked about mix helping.

Could you just give us a little more color on what specifically you are talking about there?

Is there any increased vendor participation included in that?

And could you talk about, to the extent that mix might help in 3Q?

And then finally, just when you look at the gross margin longer term, how far along are you on the benefits from assortment planning, price optimization and the like?

Thanks.

We are in the early stages on price optimization in that.

But as far as mix goes, there has been a definite help in the mix.

The apparel and footwear business has been really very good, which we called out, and we've also called out, consistent in the last couple of calls, that that gun and ammunition business which has been anniversaried has been a smaller percent of our business.

Those are among the lowest margin areas in the store.

So as we do less business in guns and ammunition, the mix of our margin rate goes up.

Another aspect that's helped the margin rates, and we've talked about this before of inventory control, is that we have been able to -- our mark down management has been really very good.

We still have a ways to go with that, but the group has done a great job with mark down management, cleaning the inventory out.

And if you take a look at our inventory levels now, versus the last couple of years, and apply our comp store sales, we've had meaningful comp store sales increases with less inventory than we had two years ago.

And when you do that, as long as you have the right product, which we do -- our group has done a great job of having that product -- your margin rate is going to go up as you are going to mitigate that mark down exposure on the back end.

Great.

Let me just follow up quickly on the guns and ammo category.

Now that you have anniversaried it, or I think there is still a bit of strength in the third quarter of last year if I remember, but getting out beyond the third quarter, what is your view in terms of the recovery in that business or strength in that business, and then outdoor in general?

The outdoor in general, ex the gun and ammunition business has been pretty good.

We are pretty happy with that overall business.

The gun and ammunition business, I think it is going to kind of just be flat, maybe up a little bit.

But we don't see any meaningful change in the gun and ammunition business from the levels we have today.

Okay.

Not positive or negative.

Great.

And our next question will come from the line of Dan Wewer with Raymond James.

Please proceed.

Thanks, and good morning.

First, thanks for reminding us about the benefit of the cold weather last year.

Was the benefit primarily on performance apparel category in the second half of last year, or were there other categories that had a benefit?

There was a big part of it in the performance apparel categories around Under Armour and in the Nike components with the kids who were playing football and soccer.

So there was a big benefit there.

But then there was also a benefit in your traditional cold weather product from the North Face, Columbia, and other brands.

And we called that out last year that there was about $0.03 of EPS that we thought moved out of the fourth quarter into the third quarter because of that very cold weather for those approximately three weeks last year in this quarter.

So your buyers will be a bit more conservative on those categories, I guess?

Well, wouldn't necessarily say we are more conservative.

We just think the sales will come in a different time.

We think those sales will be in the fourth quarter this year versus the third quarter last year.

But if the cold weather comes again, we have the inventory available to have those sales.

But we just think that they will end up in the fourth quarter this year versus the third quarter last year, if it's a more normalized weather pattern.

Okay.

Second question I have records the Golf Galaxy closures.

In the release you noted that the real estate was not ideal, that it was expensive, the real estate that was secured by the prior management team.

I was curious, when you were doing your due diligence on that acquisition, were you concerned about the real estate portfolio at that time, or has the market changed since the period that you acquired Golf Galaxy?

I think there is a combination of that.

There were these 12 stores -- actually, a couple more that we looked at and said, we aren't sure what's going to happen with these stores, but we don't want to close them right off the first tee, so to speak, no pun intended, to give these stores a chance to mature.

Then with what happened in the, kind of the economy cratered, so to speak, and the golf business was hard hit, and these stores, based on the anticipated growth in the housing around where some of these locations were never materialized, the rents were paid probably higher than they should have been in locations that the growth never materialized.

And we just felt that we couldn't see the finish line in these 12 stores, and decided the best thing to do is to close these stores.

It meaningfully increases the profitability of Golf Galaxy, and we'll continue to move on.

We still remain committed to the golf business.

We think that the Golf Galaxy acquisition was, although as we've said, may have been ill timed with the benefit of hindsight, but the Golf Galaxy acquisition strategically was the right thing to do with the leverage we have with our vendor partners, and how it will give us the opportunity to pick up meaningful market share in a consolidating industry.

And is my memory correct that, in 2008 we took $180 million impairment charge approximately for Golf Galaxy?

That's right.

Yes.

As I say, the timing of the acquisition may have been ill timed, but the strategy and the thought process behind it was certainly appropriate, and it is showing us that it was the appropriate thing to do.

Dan, I'd also like to add, if you go back to that 2008 timeframe, many retailers at that point that had done any acquisitions in 2006 or 2007 took that same charge.

I was just trying to square it.

It looks like it was about a $1.6 million charge for each store that you are closing next quarter, and just trying to figure out how much remaining book value was left to write off.

Okay, thank you.

And our next question will come from the line of Sean McGowan with Needham & Company.

Please proceed.

Hi, thank you, two questions, one on the Golf Galaxy improvement.

What would be the timeframe for realizing that 50% improvement?

Is that immediate or over the course of --?

We will see an immediate benefit, whether we get to the 50% in the third and fourth quarter, which are relatively smaller quarters, then over the next year we will see that, but this will be accretive right from the beginning.

Okay.

And second question, regarding the expansion of the Ultimate footprint, how small can you go, in terms of new markets?

As you expand in the space, how small do you figure some of those markets can be?

We are still looking at that.

We are going to test some different stores, but we are really confident that we can move this to 900 stores from the previous 800.

Okay.

Thank you.

And our next question will come from the line of John Zolidis with Buckingham Research.

Please proceed.

Hi.

Good morning.

Hi, John.

Question on the new store productivity, you gave a lot of data out.

And I wanted to get clarification that the Chicks stores, excluding the stores that are being remodeled, obviously they're being disrupted, what kind of productivity are we seeing in those stores?

And then presumably the expenses in that market are significantly higher than the rest of the chain.

So how much gap is there in ROI between those acquired stores and the rest of the chain?

Thank you.

We don't selectively comment on regions of the country in terms of that kind of performance.

But what you want to realize is, when you have stores in a region that is recovering more slowly than other regions in the country, and you are adding to that some self-imposed issues with store remodels, that those stores will be performing below average store levels.

And that will continue into the third quarter.

Well, it looks like it's going to continue not just in the third quarter but several years into the future.

Is that a fair characterization?

I think once we have the opportunity to remodel all stores in the California market, and we have those stores looking like the Dick's prototype store, that we'll be in much better shape and have a much better result.

So that's going to take more of a 24 month period than a shorter term look.

Okay.

Thank you, and good luck.

And our next question will come from the line of Peter Benedict with Robert Baird.

Please proceed.

Hi, good morning, guys.

It's actually Justin Kleber on for Pete.

Just a couple of questions on Golf Galaxy.

What would the comps have been in the second quarter if you had excluded those 12 stores that you will be closing?

I -- we just aren't going to share that information.

The comps were very -- were pretty good as far as we are concerned at the 2.9% for Galaxy.

Those 12 stores would have impacted it slightly, but not in a material way.

Okay.

Thanks.

Just again, going back to Golf Galaxy, you said last year that it earned about $0.04 a share, and then $0.08 in 2008.

Assuming that 2008 was a more representative quarter of the earnings power of the Company, why should we not be thinking about an incremental $0.04 in EPS like in the second quarter next year, or has the earnings profile changed that dramatically over the past few years?

Well, the earnings aren't flat quarter-over-quarter.

We didn't say that you wouldn't look at that in the second quarter.

We just gave it over an annualized basis, but the golf business is seasonal.

The earnings don't come 25% a quarter.

Does the Golf Galaxy still lose money in the second half of the year, as it historically did as a public company?

It's probably going to be, yes, even with the store closure.

But that's not -- we don't think that's an issue.

That's just kind of the way the seasonality of the business goes.

And this will, closing these stores, these 12 stores will help, but it will increase the overall business of the chain by over 50%.

And just to confirm that, Tim, you said that 50% is about $0.2 per share?

That's correct.

Thanks, guys.

And your next question will come from the line of Paul [Fenad] with Morningstar, Inc.

Please proceed.

Good morning.

Morning.

I had a few questions about the real estate environment.

With the current retail real estate environment, and as you open new stores and roll some leases, will you be able to meaningfully lower rent per square foot over the next few years?

We will be able to lower it from the rates that we have been paying, yes.

But as we open up 25, 30, 35 stores, the base is going to be relatively small compared to the entire chain, so is it going to change our total occupancy costs?

Not a lot.

But the new stores that we are opening and negotiating are at meaningfully lower rents than we were paying in 2006 and 2007.

Do you usually roll leases about every 10 years, is that right?

We are looking at -- we have terms of primarily 10 years.

And then, do you usually negotiate a kick-out option?

I know, for example, you took the charge to exit these 12 stores at Golf Galaxy.

I'm assuming that's mostly lease exit charges.

But on the Dick's chain, do you have any kick-out options, and what are those usually negotiated as?

In some stores we are able to negotiate a kick-out, and in other stores we are not.

So, it's on a lease by lease basis.

Okay, and then finally just a question about your earlier comment where you said growth could pick up when the real estate environment improves.

Is that because landlords are waiting to sign deals because they are too aggressive on the lessee side?

Or is it because you are waiting for new space and new developments to be built?

New development to be built.

There is not an awful lot of development out there right now.

So it's just availability of boxes that fit your criteria?

Correct.

Okay, thank you very much.

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

Please proceed.

Good morning, thank you for taking my call.

Can you hear me?

Yes.

When you look at -- in the guidance of the 1% to 2% comp for the third quarter, and then for the full year number, and looking at it on a two year stack basis, as you said, you expect acceleration into 3Q, you're also expecting significant acceleration again into 4Q just implied by the total.

Is that all seasonality, just the cold weather shift?

Or are there some other things going on in the fourth quarter that we should think about there?

Traditionally our fourth quarter is our strongest quarter, and as Ed mentioned earlier, the thought process on the shipped last year, we are looking at a more normalized process this year and seeing those additional outer wear sales in the fourth quarter.

So that is what we are banking on as we look at the accelerated two year comp.

And then when you look at the overall mix, apparel, footwear and hard lines, are you -- how much narrower in an average store have you gotten?

Have you gone narrower and deeper and more focused?

To what degree are you thinking about that from like out-of-stock perspectives and so on and so forth?

We have not gone meaningfully narrower.

We have done a better job of cleaning product out earlier, and reducing that aged inventory has been the primary aspect of our reduced inventory, and a big part of the merchandising mix that's driven margin rates higher.

And do you expect improved gross margin rates for the balance of the year, or really, is it going to equalize by the fourth quarter?

No, we expect to continue to expand margin rates through the fourth quarter.

Thank you very much.

Sure.

And our next question will come from the line of Mark Mandel with ThinkEquity.

Please proceed.

Thanks, and congratulations on a good quarter.

Thank you.

You talked about the -- you articulated the shift in the third quarter to the fourth quarter.

Are you seeing any change in consumer behavior, consumer reticence to purchase bigger ticket discretionary items, for example?

We have not seen that -- we have not seen that, no.

Regarding your private label and exclusive brands, can you share with us the mix and the performance on a year-over-year basis?

We haven't, but it would be relatively the same as it was over the last couple of years.

It hasn't changed in any meaningful way.

Okay.

And what tax rate would you recommend we use for the balance of this year?

For the balance of the year, 39.5%.

Thanks.

Good luck.

Thank you.

And our next question will come from the line of Mike Baker with Deutsche Bank.

Please proceed.

Thank you.

So, two questions.

One, just wondering if you are seeing anything on import costs or costs from China, both in terms of products and shipping, and how that plays into your second half guidance?

We have that all baked in to our second half guidance, but we have seen some pricing pressure on the product side coming out of Asia, and on the transportation side as containers are relatively scarce coming out of the Orient right now.

Okay, so costs are going -- .

It's all baked into our guidance.

So, evidently you're offsetting it elsewhere.

Okay, second question, I know we've gone over it a couple times, but I just want to be clear.

On the Golf Galaxy, closing those stores -- you said two things.

You said, one, it is accretive right away, but then you also said it's not material.

Couple questions I have is-- how does this impact your second half guidance?

Essentially, you beat the second quarter by $0.05, you raised your full year guidance by $0.05, but would the guidance not have been raised as much if you weren't going to close the Golf Galaxy stores?

In other words, the second half guidance, is there any benefit baked in there from closing these stores that wasn't there previously, even though it's accretive right away?

It's not material in the -- so the answer to your question is no, it wouldn't have made a whole lot of difference in our guidance.

Please remember that these are 12 stores that are under-performing, but it's 12 stores on a base of over 500 stores.

And the 12 stores -- these are smaller stores that are roughly 12,000 to 15,000 square feet.

In the total amount of our square footage, this is insignificant.

It's just the right thing to do for the Golf Galaxy business, as we rationalize that, and make that chain as profitable as possible.

But in the grand scheme of things as it relates to Dick's, 12 12,000-square-foot stores on a base of 500 stores that average roughly 50,000 square feet, it's immaterial and meaningless.

Okay.

Thanks.

I just wanted to square the comments of accretive, but immaterial.

So it's just very, very slightly accretive, I guess.

Yes.

Thank you very much.

And our next question comes from the line of Reed Anderson with DA Davidson.

Please proceed.

Good morning.

Couple questions.

Ed, the football category, at least in a couple stores I've seen, it seems like you've put more product in there, maybe it's expanded a little bit, and I know it overlaps Q2 and Q3, but just some color on that perhaps?

Is that an area where you are seeing some strength, and expect to see ticket growth that is driving comps?

Specifically to football, yes.

But also as we've said, our entire hard lines category is comped positively.

So it's not just football that's been driving it, but the whole hard lines category has been really very good for us, along with apparel and footwear.

And as we've said, we are really pleased to have such a balanced portfolio of business right now.

Okay, and then back to the Golf Galaxy piece, the question I had on the 12 closures, are these stores that you have, they would be in a location where you might have another either Golf Galaxy or Dick's location within two or three miles to pick up what was there for sales?

Or would these be more one-off type of locations?

There are stores that are both near Dick's stores and some that are one-off.

Another Golf Galaxy store may pick up, a Dick's store may pick up, or in Houston you take some of these markets that we don't have any presence there at all.

We have two of them in Houston that are one-off that we're just closing.

Okay, and then last question was just on the idea or the notion that you revisited your expansion potential, and that number has gone up substantially.

Does that also bake in there the idea that there might be more opportunities than historically you've looked at, relative to mall-related real estate, not necessarily in a mall, but really adjacent to a mall, like we have seen with some of your stores?

I wouldn't say that this is based on any particular real estate opportunity.

It's just as we've taken a look at the trade areas and what we are doing, we feel that we can get to 900 stores, but it's not real estate strategy based.

Okay, perfect.

Thank you.

Sure.

And our next question will come from the line of Chris Svezia with Susquehanna Financial Group.

Please proceed.

Good morning, everyone.

A couple of questions.

Tim, for you first.

I was wondering, of the $0.10 charge for the third quarter, how much of that is related to the clearance of the Golf Galaxy inventory?

Can you just maybe quantify how much that is?

I'm trying to figure out how much is lease termination, how much is severance, and how much is the inventory clearance.

The lease exposure is the primary total for the $19 million.

The liquidation of inventory and the severance is very, very small.

Okay.

Helpful.

And then I guess Ed, for you, just wondering if you could just comment on the markets, particularly in and around Texas, southern California, you had talked a little bit about what you are doing in terms of the remodels for the Chicks stores.

But I was just wondering if you could give us an update what's going on in the markets, and as you think about growth and expansion in southern California, are you waiting to get these remodels done?

I know you've invested a lot of money into the Chicks stores, but where is the inflection point where you can really start to say we've got the box right, we can really start to grow in southern California?

We think we know what the box needs to look like.

So we are in the process of making those former Chicks boxes look like what we need to have in southern California.

So we aren't slowing down in southern California.

We've got some other stores.

We've signed leases in southern California, and are looking to expand in California.

The same in Texas.

We've always indicated that Texas would always be the most difficult market we were going to compete in, even before we opened in Texas.

We've indicated that it has been, but we've also indicated over the last couple of quarters, we've gotten some pretty good traction in Texas, and we've very pleased with our performance in Texas at the present time.

Okay.

And then last question I have here, is just on the Evolution and the Fieldhouse concepts, what do those -- obviously you're pleased with what you are seeing so far, but what do they replace in existing Dick's stores?

Do they replace existing Nike inventory?

Are they taking square footage from other areas within the store, or brands?

Just curious what they replaced in existing Dick's stores?

They are replacing existing Nike space.

They are taking some additional space.

We are in the process of planning-- the stores that we have done, we have re-worked some aisle-ways.

We've re-worked some allocation of space, and I can't say that this space is taking away from any particular vendor, or any particular category of merchandise.

We've reallocated space across the store to do these shops.

And we are very pleased, and I think Nike is very pleased with what they have seen so far.

Okay, thank you very much, and good luck.

Thank you.

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

Please proceed.

Thanks, guys.

Good morning.

Could you talk a little bit about what you are just seeing with the overall Golf Galaxy portfolio?

Do you feel pretty good about the remaining stores in place at this point?

Or should we look for more closures there on a go-forward basis?

Thanks.

I will start with your last comment on closures.

You can -- we are pretty pleased with our portfolio of stores, the remaining 79 stores that we have.

You can expect no closures, no additional closures, any time soon.

We are very pleased with our 79 doors.

And as we mentioned, we are going to add to that by opening two stores in the fourth quarter of this year.

So we are very pleased with our store base at Golf Galaxy.

Okay.

And just the thought behind those, was it principally the rent that was concerning?

Understanding everything is relative to sales levels, but just as you are seeing that, is it the rent that's the big issue with those?

It's a combination of a couple things.

It's rent and it's location, a combination of those two.

One or the other or both, quite frankly.

Okay, thanks, guys.

Good luck.

And our next question will come from the line of Jonathon Grassi with Longbow Research.

Please proceed.

Good morning.

Thank you for taking my questions.

I apologize if I missed this, but could you guys speak to the change in the number of units moving through the door versus the average unit price during the quarter, and how they contributed to the comp?

And was there any notable variation among those metrics for the major product categories at Dick's Sporting Goods?

Well, as you know, we quote that metric on total comp, so we were at 5.1% on traffic, and 0.5% on ticket.

Okay, and then you mentioned you managed to keep inventory well-controlled, even with a strong comp performance.

Where did inventory finish for the stores in a comp basis, and excluding the inventory tab for eCommerce?

We typically don't break out inventory information by component of the Company, but we indicated that on a square footage basis, our inventory was 0.5% above last year.

Okay.

And then just finally, for the 35,000 square foot stores that are going to account for about 25% to 30% of the stores this year, how much do you expect they will account for the store growth in 2011.

Probably around the same.

Okay.

Thank you.

And our final question will come from the line of Sam Poser with Sterne Agee.

Please proceed.

Thanks for taking my follow-up.

Historically you've opened, you've done your store openings, the big bunch of stores in Q3.

This year you moved it to Q4.

Is there any particular event that changed the historical pattern?

No, not really.

Just kind of the timing of it all, and it's very early in the fourth quarter that these stores are opening in.

And then in that case, I would expect that we would see fairly increased inventory at the end of Q3 to support those new stores?

I wouldn't say it's going to be meaningful.

No.

When, just one follow -- one last question.

When you open stores in general, you add -- how do you go about thinking about that from an inventory perspective?

Because if you add 10% new store growth, you don't add necessarily 10% inventory.

How does that work as far as the planning process there?

It really depends on the store that we are opening, and we plan the inventory on a store-by-store basis, so it depends on the sales volume that is projected for that particular store.

Thank you very much.

Good luck.

Thank you.

Ladies and gentlemen, this concludes our question and answer portion of today's call.

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

Ed Stack for any closing remarks.

I would like to thank everyone for joining us on this call as we discussed our second quarter, and we look forward to talking to everyone as we report our third quarter.

Thank you very much.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day, everyone.