DICK'S Sporting Goods Inc (DKS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Dick's Sporting Goods, Incorporated Earnings Conference Call.

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

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

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

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms.

Anne-Marie Megela, Director, Investor Relations.

Please proceed, ma'am.

Thank you and good morning to everyone participating in today's conference call to discuss our third quarter 2010 financial results.

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

In addition, as detailed in our press release, a dial-in replay will also be available for approximately 30 days.

In order for to us take advantage of Safe Harbor rules, I would like to remind you that we will include 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 Principles, 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 third quarter financial and operating results, the guidance contained in our press release, and our growth and margin expansion opportunities.

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

Thank you, Anne-Marie.

I'm pleased to report that in the third quarter we generated consolidated non-GAAP earnings per diluted share of $0.22, which is the highest EPS we have earned in any third quarter and a 38% increase from the consolidated earnings per diluted share of $0.16 we reported in the third quarter of 2009.

Our original expectation, as disclosed in our last quarterly call, was $0.15 to $0.16.

Our net sales for the third quarter of 2010 increased by 9% to $1.1 billion from the third quarter of 2009, primarily due to a 5.1% increase in consolidated same-store sales and the opening of new stores.

The 5.1% same-store sales increase consisted of a 3.8% increase at Dick's Sporting Goods, a 2.4% increase at Golf Galaxy, and an 82.4% increase in our e-commerce business.

Our inventory increased 2.5% per square foot at the end of the third quarter of 2010, as compared to the end of the third quarter of 2009.

Our cash position increased by $119.7 million to $159.4 million at the end of the third quarter 2010, up from $39.7 million at the end of the third quarter in '09.

At our Dick's Sporting Goods stores, our improved same-store sales were again broad-based with hard lines, apparel, and footwear all comping positively.

Golf within our Dick's Sporting Goods stores was also positive and comparable to the same-store sales generated by Golf Galaxy.

Our e-commerce business, all categories contributed to the 82.4% increase in same-store sales with footwear, golf, and outdoor leading the growth.

We are also pleased to see that our introduction of in-store ordering is paying off, as it was a visible driver of increased traffic and conversion.

Within our Golf Galaxy business, same-store sales increased 2.4% in the third quarter of 2010.

As expected, we saw improving profitability, particularly at the gross margin level, due to the closure of the 12 underperforming stores during the quarter.

We're encouraged by our third quarter and year-to-date performance and are optimistic in our business outlook.

As a result, we are raising our full-year 2010 guidance.

We now expect to generate earnings growth of 30% to 32%, or consolidated non-GAAP earnings per diluted share of $1.56 to $1.58 per share, excluding Golf Galaxy store closures.

This compares to our previous guidance of 22% to 24% earnings growth or $1.46 to $1.49 a share, consolidated non-GAAP earnings per diluted share.

In 2009, we reported consolidated non-GAAP earnings per diluted share of $1.20, excluding merger and integration costs.

For the full year 2010, we are expecting consolidated same-store sales to increase approximately 4.5% to 5.5%, up from our previous guidance of 4% to 5% and comparable to a decline of 1.4% in 2009.

In the fourth quarter of this year, we're anticipating reporting consolidated earnings per diluted share of approximately $0.69 to $0.71.

For the same period of '09, we reported earnings per diluted share of $0.56.

For the fourth quarter of this year, we're anticipating a consolidated same-store sales increase of approximately 3% to 4% as compared to a 2.5% increase in the fourth quarter of last year.

We are very confident we can continue to grow both top line sales and earnings per share.

We have identified three main areas that will drive our growth.

We will continue to open stores, all of which are expected to be profitable after pre-opening expenses.

Our new store productivity in Q3 was 102.3%.

As you would expect, we've been able to sign new leases on more favorable terms and conditions in the past few years.

We expect to open approximately 34 new Dick's Sporting Goods stores in 2011 and will continue our practice of remodeling key stores.

We also expect our top line growth to be enhanced by our e-commerce business, which has increased this year by 39.6%, off an arguably low base.

Our e-commerce business is expected to continue to grow significantly faster than our traditional business, and as we refine our in-store associate ordering system, and launch our order online pickup and store service.

While this business is profitable, it does not have a meaningful impact on earnings today.

Over time with scale, more efficient fulfillment, and further integration with our stores, we expect to gain leverage.

We also expect future earnings to be driven by continued margin rate expansion.

Our margin rate growth will come through better terms and conditions of sales with our vendor partners and a more profitable mix as we continue to grow both our apparel and footwear business as a percent of our sales.

We also expect to see margin expansion as we begin to again grow our private brand and private label business.

This represents approximately 15% of our business today.

We expect it can increase to approximately 20% over the next five years.

We are beginning to see the benefits of our systemic improvements as a source of margin rate improvement, as we have been able to improve our inventory productivity significantly over the past two years with an improved allocation process, along with a disciplined markdown process.

As a result, we've been able to mitigate markdowns at the end of the season and reduce our clearance inventory which is down 19% to last year.

Our merchandise margin rates increased 154 basis points year-to-date in 2010.

As many of you know, we have tested extensively a shared service footwear model.

We are very pleased with both the sales results and the consumer's reaction to our new footwear concept.

These results have outpaced our footwear chain results by approximately 500 basis points in comp sales.

We have found the average ticket in these renovated new footwear areas are up $3.44 per store compared to the chain average.

Our research has also told us customers have given us higher service marks as they no longer have to wait for a sales associate to go behind the wall.

They feel we've increased our assortment, which we have not.

And in the past two years we have converted 32 stores.

We have opened up 46 new stores with this presentation.

Next year, we will renovate approximately 20 footwear departments to this new concept and open all new stores going forward with our shared service concept.

We are also pleased again to indicate the third quarter that comps in our Texas stores have outperformed the Company average by a wide margin.

In summary, we will continue to grow our business from both a sales and earnings perspective.

This growth will continue through the addition of productive, profitable stores, our e-commerce business, as we continue to provide our customers with alternative ways to shop at Dick's Sporting Goods and Golf Galaxy.

And we will continue to expand our overall margin rates.

I would like to thank all of our associates for making this performance possible as we continue to turn in industry-leading results.

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

Thank you, Ed.

In the third quarter, we opened 12 new Dick's Sporting Goods stores, remodeled eight Dick's Sporting Goods stores, relocated one Dick's Sporting Goods store, and closed 12 underperforming Golf Galaxy stores.

At the end of the third quarter, we operated 437 Dick's Sporting Goods stores with 24.3 million square feet.

We have identified our total Dick's Sporting Goods store opportunity to be at least 900 in the US, and therefore, are less than halfway to our expected domestic base.

At the end of the third quarter, we operated 79 Golf Galaxy stores with 1.3 million square feet.

New store productivity for the third quarter was 102.3%.

In the same quarter of 2009, new store productivity was 67.9%.

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

To date in the fourth quarter, we have opened eight new Dick's Sporting Goods stores and two new Golf Galaxy stores.

We remodeled one Dick's Sporting Goods store and we plan to complete the relocation of a second Dick's Sporting Goods store this week.

For the full year 2010, we have added 26 new Dick's Sporting Goods stores, remodeled 12 Dick's Sporting Goods stores, opened two new Golf Galaxy stores, and closed 12 underperforming Golf Galaxy stores.

We plan to relocate two Dick's Sporting Goods stores with one completed and the other expected to be completed this week, as I mentioned.

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

Approximately 60% of the new stores this year were opened in existing markets and 40% in new markets.

In 2011, we expect to increase the number of new Dick's Sporting Goods stores opened by approximately 30% over the 26 new stores opened in 2010, or approximately 34 new stores.

This pace would result in a unit growth rate of approximately 8% for our Dick's Sporting Goods chain in 2011.

I'll 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 9% to $1.1 billion.

Consolidated same-store sales increased 5.1%.

Dick's Sporting Goods stores, same-store sales increased 3.8%, Golf Galaxy increased 2.4%, and our e-commerce business increased 82.4%.

The increase at the Dick's Sporting Goods stores was driven in part by a 5.2% increase in transactions and a 1.4% decrease in sales per transaction.

Consolidated gross profit of $307 million was 28.46% of sales, 150 basis points higher than the third quarter of 2009.

This increase was driven primarily by an increase in merchandise margin of 128 basis points and secondarily through occupancy leverage.

Merchandise margin increased as a percentage of sales, primarily due to a change in mix at our Dick's Sporting Goods stores, partially offset by the liquidation of Golf Galaxy inventory due to the store closures.

Excluding the impact from the closure of the 12 underperforming Golf Galaxy stores, SG&A expenses were $256 million, representing 23.73% of sales, compared to 23.28% of sales in last year's third quarter.

This increase is due primarily to the anticipated $8 million, or $0.04 per diluted share, in recurring expenses that we've discussed in previous calls related to infrastructure, regionalization, and e-commerce investments.

The expenses related to the closure of the 12 Golf Galaxy stores impacted the P&L by $0.08, which is slightly less than the original anticipated.

The expense consisted of charges related to the Company's lease exposure.

They were included in SG&A, totaled approximately $16 million pretax, and were all taken in the third quarter.

As anticipated, the closure of these stores is improving the overall profitability of the Golf Galaxy business.

For additional details, you can refer to the GAAP to non-GAAP reconciliation in the table section of the press release issued this morning.

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

Our balance sheet increased in the third quarter of 2010 with $159 million in cash and cash equivalents and we did not have any outstanding borrowings under our $440 million revolving credit facility.

Last year, we ended the third quarter with $40 million in cash and cash equivalents and $63 million in outstanding borrowings under the facility.

Inventory per square foot increased 2.5% at the end of the third quarter of 2010, as compared to the end of the third quarter of 2009.

Net capital expenditures were $50 million in the third quarter of 2010, or $56 million on a gross basis, compared to a net capital spend of $29 million, or $36 million on a gross basis, in the third quarter of last year.

Our expectations for the full-year 2010 exclude the $0.08 per diluted share impact from the Golf Galaxy store closures.

These expenses consisted of charges related to the Company's lease exposure.

For the fourth quarter of 2010, we anticipate our gross margin rate to increase year-over-year, primarily as a result of merchandise margin improvements and occupancy leverage.

Merchandise margin expansion is expected to be driven primarily from less promotional activity at our Dick's Sporting Goods stores, particularly in the Southern California market.

SG&A is expected to decline as a percentage of sales in the fourth quarter of 2010, as compared to the fourth quarter of 2009, even with the anticipated additional recurring expenses we have discussed in previous calls related to infrastructure, regionalization, and e-commerce investments.

For the full year 2010, we are optimistic that recent trends will continue.

We anticipate that our gross margin rate will increase year-over-year, primarily as a result of improving merchandise margins and occupancy leverage, and we expect that SG&A as a percentage of sales, will deleverage.

The full-year gross margin improvement, and the SG&A deleverage, 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 30% to 32%.

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, in the third quarter of 2010, we continued to deliver profitable business growth, highlighted by notable increases in same-store sales and margins.

We expect our financial results for the full year 2010 to exceed our previous expectations, and we have revised our guidance to reflect these expectations.

Moreover, we have identified several drivers of our business and margin growth that are fueling our progress, and we are increasingly optimistic about our prospects for leveraging these drivers to realize continued profitable growth.

This concludes our prepared remarks.

At this time, Operator, I would like to open it up for questions and answers.

Yes, sir.

(Operator Instructions).

Your first question comes from the line of Christopher Horvers representing JPMorgan.

Please proceed.

Thanks and good morning.

I want to talk a little bit about the mix change and how that played out in the sales and on the gross margin side year to year.

Apparel versus footwear and then within the hardlines categories maybe presumably that's what's pulling back and taking the mix up on the other side?

Well, the thing that's kind of moving the mix to be more softlines-related due to a hardlines decrease continues to be in the gun and ammunition business.

That business is still a bit difficult.

We anticipate, as we come into the fourth quarter, that will get a little bit better.

But in the third quarter that was what was driving it was we were still up against some pretty difficult comparisons.

The other aspect that's driving the apparel and footwear business kind of on its own, as that's growing at a faster rate, is what's going on with Nike and Under Armour.

And as we start to -- we've seen great results from the Nike Fieldhouse concepts that we've put in the stores.

And so the toning business, which showed there was some concern about overall in the group, that really, while it slowed down hasn't really -- has been a blip overall?

Yes.

It's not a big driver of this.

Our footwear businesses still continued to be really quite good.

Okay.

And then, in terms of use of cash and how you're thinking about that into year-end and into next year, it sounds like you'd like to be able to open more stores than the 34, but probably constricted in terms of real estate development.

So how are you thinking about deploying that extra capital?

We're not looking to do anything significantly different with the capital.

We've indicated that right now we will, although we're looking that we will generate a fair amount of cash, we feel right now the appropriate course of action is to let that cash balance build a bit and we'll take a look at it as the real estate development area hopefully improves.

And we'll take a look at how we want to allocate that from growing stores even faster.

And then one final one.

On the Golf Galaxy liquidation, how much -- that's in operating earnings, and so how much did that impact your merchandise margins?

Thank you.

The impact on merchandise margins was not material at all and it was absorbed in the 128 basis point increase.

Thank you.

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

Please proceed.

Hi.

Thank you.

Good morning.

Good morning.

Can you talk to us a little bit about inflation and what you expect for prices in 2011?

How your conversations are going on with vendors and what you think the customer response will be?

There's been a lot of talk about what that might be, but we're not seeing anything significant from an inflation standpoint on prices yet.

And we're now in the process of starting to buy into the third and fourth quarter of next year and we haven't seen any pressure that makes us uncomfortable.

Okay.

Great.

That's great.

And I think you highlighted in your comments, Ed, that you're achieving better terms and conditions with your vendor partners.

Has something changed here?

We've just continued to get larger, and we've been able to negotiate different terms and conditions of sale.

It's really, as we continue to gain scale, we've become more and more important to those vendors.

Okay.

Great.

And then, in terms of the acceleration of e-commerce, can you quantify at all how much of the gross margin improvement was due to that?

And what is driving the growth of that segment?

And how should we think of the growth of e-commerce once you start lapping when you took control of the e-commerce business from GSI?

Well, we control that business now, as you know, and the e-commerce business we think is going to grow at a faster rate than the Company as a whole.

But as I said in my remarks, it's often arguably low based.

So although the percentage increase is going to be large, it's not going to have a huge impact on our total sales or earnings over the next couple of years as we continue to grow this business.

Okay.

Thank you very much.

Sure.

Your next question comes from the line of Robby Ohmes representing Bank of America.

Please proceed.

Oh.

Thank you.

Good morning.

A couple of quick questions.

I guess for you, Ed, the first question is, can you give us any insight into how the quarter went in terms of maybe characterizing back-to-school versus post back-to-school?

And related to that, I think October was expected to be a real tough comparison for you guys.

Did it turn out to be as bad as you thought?

And is outerwear shifting from the third into the fourth quarter?

And then maybe the second question would be golf coming in solid, the comparison gets a little tougher in the fourth quarter.

Can you remind us if there's anything specific product-wise going on to keep the momentum going in your golf business?

Thanks.

Sure.

Back-to-school was -- our quarter was really very good across the board.

There were certainly areas that were better than other areas and back-to-school we were very pleased with.

October, we knew that we would -- depending on how the weather was, we would probably move some business from the third quarter to the fourth quarter this year as we felt we moved it from the fourth quarter to the third quarter last year.

That's pretty much played out the way that we had anticipated it would.

But all in all, we're really quite pleased with our outerwear business and everything is right on plan.

We're pleased with that.

From a golf standpoint, we did have a good golf season, or quarter, in both Dick's and Golf Galaxy.

We expect that we'll continue to be pleased with the golf business.

We are coming up against a bit tougher comparisons.

But there are some products that are coming out that we think is going to help drive that.

We've got the Callaway Octane product that's out there right now that early indications has been pretty successful.

TaylorMade has got a couple of new drivers coming out.

Titleist has a new driver that's coming out.

So, we're pleased that there is a product cycle that can help continue to have us pleased with what's going on in the golf business.

Terrific.

Thanks very much.

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

Please proceed.

Thanks a lot.

Good morning.

Congratulations on a terrific quarter here.

I'd like to dig a little bit deeper into the economics of the e-commerce business.

If you could talk about the investments that you've had to make either in capital or in terms of ongoing expense to generate this revenue and how those play out over the next couple of years?

And also, as we think about the e-commerce numbers, obviously the growth rates are huge, and I guess a little bit tough to grow 80% every quarter, but the dollars are quite small even though they're impacting your comp to some degree.

Where are we in the top line evolution of that business?

Matt, I think in the top line and the bottom line evolution of this business, we're really at the very early stages.

We really took control for the sales function and the merchandising function of this from GSI 18 months ago.

And GSI has been a great partner to work with through this transition, and we're very pleased with that.

But we're very much in the early stages of this, and we'll continue to work with GSI to drive this business.

And we think over the next three, four, five years, we cannot only grow the sales number, but we can also grow the profitability of this.

This has had, although as you said, an 80% some increase, it's off a very low base, and the profitability is a blip on the radar screen right now.

Do these revenues come in at a higher marginal contribution than retail revenue would today?

Actually right now, as we're trying to grow this business, they're not.

And just one other question.

What changed this quarter that led to the acceleration in growth?

Was it a marketing effort?

Were there capabilities that you developed in store where you flipped the switch such that you were able to unleash this?

Sure.

It was primarily through our associate ordering system where we've worked most of the bugs out of that system and were able to execute that at a pretty high level in the stores.

If a customer comes in and we didn't have an item in stock, they can go to a terminal in the store and order it for the customer and have it shipped either to the store or to their home, whichever the customer prefers.

But that was the biggest driver of this increase.

So was a lot of that volume actually originated in store as opposed to conventional dot-com by the consumer?

I think a lot of that volume is incremental, because it was product that we didn't have.

And although I can't get my hands on exactly how much of that customer walked out and went to shop at a competitor, there was some of that that happened.

So we think at least half of this was incremental volume that we wouldn't have gotten.

Great.

Thanks so much.

And your next question comes from the line of Jack Murphy representing William Blair.

Please proceed.

Good morning.

You mentioned about last year's fourth quarter advertising and promotion in California, could you talk about how much of that will be repeated?

I know that a lot of it was one-time in nature.

But if you could give us a sense of year-over-year how much is -- won't be repeated and how much benefit you expect?

What we spent last year for that program in Southern California was approximately $14 million, split equally between gross margin reduction and advertising expense.

So as we go into the fourth quarter, the Southern California sales comparisons are going to be a little bit more difficult for us because of that promotion.

But we're not anniversarying the expenses associated with it.

So virtually none of that -- none of those expenses on either the advertising side or the margin side will be -- is going forward here in the fourth quarter.

Okay.

Thanks for clearing that up.

And then also, was there any reinvestment of the sales outperformance in the quarter in terms of additional promotional activities, additional opportunistic marketing expenditures that you might detail?

Nothing meaningful, no.

Thank you.

And your next question comes from the line of Mitch Kaiser representing Piper Jaffray.

Please proceed.

Thanks, guys.

Good morning.

Ed, could you talk -- you seem to be talking a little more optimistically about the private label business -- or the private brand business, I'm sorry, and quantified that and where that might go.

Is there any change in your thinking associated with that?

And then I have one follow-up question.

Well, we've talked about that we have both a private label and a private brand business.

We had indicated a few years ago that we wanted to get that to 15%.

We did that.

As the economy cratered the way that it did a couple of years ago, and there was some cascading of products, price points down that impeded upon some of our private brands, that business slowed.

We now see with the economy improving what's going on.

We feel that we can start to grow that private brand and private label business and we hope that we can get that to 20%.

We had always indicated that when we got to 15% that was going to be the stopping point where we would take a look, reevaluate and see where we wanted to go.

And as we look at this, we're -- we feel we can get to 20% without taking share from our premium vendor partners.

We're going to be taking that into areas of the business that are occupied by tertiary vendors or occupied by categories or brands that are not household brand names, if you will.

A great example of that is in the fitness category.

If you go into it, our fitness stores -- into the fitness area of our stores and go to the back wall, you'll see a brand called Fitness Gear which we've transformed all of our products that are bands, foam rollers, medicine balls, that type of product.

We've transformed all of that to Fitness Gear from a group of different brands that occupied portions of that business.

And it had no impact on our premium vendor partners, but it gave us a great bump in our private brand business and at margin rates that were even higher than the 500 to 600, 700 basis points higher than what we've traditionally gotten.

So, it's been a great opportunity for us.

We see some other opportunities in categories like that.

Okay.

Great.

Thanks for the detail.

And then, could you talk a little bit about the Fieldhouse rollout that you're doing?

Just kind of the results there?

I think you alluded to it.

And then what should we expect for next year?

Thanks.

Well, we're going to continue to open the Fieldhouse concepts with Nike which has been very successful for both us and Nike.

We've got a couple levels of that -- a Pinnacle shop and then what we call an Evo Plus shop, which is a bit smaller of a shop.

But they have meaningfully outperformed the Company average in both sales and in margin rate.

So we're going to be rolling these out at a pretty rapid rate going forward.

Okay.

Thanks.

Good luck.

Thank you.

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

Please proceed.

Good morning.

I just wanted to follow up on, just looking at your new store openings, can you talk a little bit about where you're targeting?

It looks like from the stores you opened and from some of the stores that have opened recently, that you're really targeting across the South.

Am I correct there?

We really haven't targeted a part of the country per se.

We continue to look at all areas and opportunities across the country, Sam.

As we see some viable real estate opportunities, we're going to pursue them regardless of the location.

And of the stores you're opening, this -- as you see the stores opening next year, can you talk about any -- give us any idea of region right now with your leases that you have set up?

We typically aren't going to comment on any stores that we haven't opened yet.

But the leases are not concentrated in any one area.

There'll be stores opening up in the Northeast, the Pacific Northwest, the Midwest, and the South.

Okay.

Very good.

And then, were there regional -- can you just talk about any regional strengths or where your comps were driven the best?

And how by geography, business was in the past quarter?

Our business was really good across all the geographies and so we haven't called them up specifically.

But I know people have been interested in what's going on in Texas, and we called out that Texas outperformed the Company average by a pretty wide margin.

We're pretty pleased with what's going on in Texas.

And was that true for the rest of the South as well, would you say?

Could that be -- or Southeast, let's say?

As I said, we're not going to comment on particular regions for competitive purposes.

But we know that Texas has been something that we've talked about even before we opened up in Texas, that that was going to be a difficult market, and indicated that we'd keep you up to date on our progress in Texas.

You had commented -- I'm sorry, one last thing.

You had commented that I think you wanted to get up to about 70 stores in Texas, if I'm not mistaken.

Is that something that you feel within that market you can do organically?

Absolutely.

Thank you.

Good luck.

Thanks.

Your next question comes from the line of Brian Nagel representing Oppenheimer.

Please proceed.

Good morning.

Thank you.

Congratulations on a nice quarter.

Thank you.

The question I had is longer term in nature, but focusing on the success you've had and in the e-commerce side and particularly this quarter the acceleration in that business.

And recognizing, I know Ed, you've mentioned several times in the call that it's off of a small base, but as you look at that and the growing sales online, does that at all cause you to rethink unit store unit growth as we have been re-accelerating growth now?

And you continue to reiterate your longer term plans, but the success online, does that ultimately change what you view as how many stores Dick's will operate across the country?

We don't think so, no.

We think that a multi-channel strategy is the appropriate strategy.

If we give people alternate ways to shop, we think that that's important and we'll be successful.

But it has not altered our thought of how many stores we can do across the country, as we've identified each of these trade areas, these 900 trade areas throughout the country.

Okay.

Then one follow-up, if I could, just regarding your outlook for the fourth quarter.

Listening to you guys today, as well as many other retailers have reported recently, I think I characterize the tone towards the holiday across retail as really getting more constructive.

Clearly you had a very nice acceleration in your sales Q2 to Q3.

As you look at your business from a more granular perspective, what gives you the most confidence here as we head into the holiday that the momentum with the consumer could continue?

Well, I think what gives me confidence in our business is when I take a look at the content that our merchants have put together, our marketing plans that we've put together, and I think we've got a terrific agenda of how we want to approach the fourth quarter.

And we're pretty confident the businesses that drive our fourth quarter business were pretty good in the third quarter, and we don't see a reason that that would change.

Kind of the ball is in our court.

We have to execute.

If we execute, we'll do well.

Historically, have there been certain categories or even the back-to-school season that has served as a harbinger in the third quarter of a strong fourth quarter that you've seen?

Not really.

I can't say that you can draw that correlation that if a portion of the back-to-school business is not good, then the fourth quarter will follow suit.

We haven't really seen that.

But we had, as I said, we had a very good back-to-school.

The businesses that drive our fourth quarter business in the third quarter we were very pleased with.

So as I said, I think our merchants, our marketers, our store operations people, the stores look good.

We've got the right content.

We think we've got a great marketing program put in place, and if we execute, we'll do well.

Congrats again.

Thanks.

Thank you.

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

Please proceed.

Thanks.

Any particular callout on the decline in average ticket?

Was that guns and ammo-related or something else there that we should think about?

That was primarily guns and ammo.

That's the big issue.

And some of our fitness business moved to the online business, which is another big ticket item.

So those are the two components that drove that reduction in ticket.

Okay.

And so, the SG&A, you keep talking about the recurring costs that you spoke about in the past of about $8 million a year.

So when you say recurring, how do we think about that for next year?

That those costs don't necessarily go away, if I'm right, but they don't necessarily get bigger either.

So there's not an incremental increase to those infrastructure investments next year?

Is that the way you've articulated it in the past at least?

Right.

And it's $32 million for the year.

$8 million a quarter, right.

Sorry.

Right.

Okay.

Thanks.

One more.

The shared service for the footwear seemed to be a good driver.

I'm wondering why you don't roll that out faster than just another 20 remodels next year.

We feel that that's the appropriate amount that we, as the Company, can get done and we'll continue to do that in the following year also.

So there's nothing specific in certain stores that don't allow that to be put in place, it's just more the sort of human capital and amount you want to spend, et cetera?

There are some issues that are driving that, and that is time left on the lease.

Do we think we want to renew that store we're in?

Are we going to look for a different location when the lease expires?

So there's a number of different things that go into that.

Okay.

Fair enough.

Thank you.

Okay.

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

Please proceed.

Thanks a lot for taking my question.

How did the sales on the e-commerce platform trend in markets where you don't have a store?

Just -- if you can give us a sense for the runway there?

I don't have that off the top of my head, but my sense would be that if we didn't have a store, we don't have a presence there yet.

Our sales would be lower than where we have a store, but that's only intuitive.

There's no facts to back that up.

Okay.

And ultimately, do you think that the margin on the -- or where do you think the margin on that business can go if you look long-term?

The overall operating margin, not just the merchandise margin.

We're not going to get to guiding to that right now.

This is still a relatively new business that we're running, and we're still trying to fine tune it.

Okay.

Thanks a lot.

Good luck.

Thank you.

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

Please proceed.

Thank you.

Good morning.

Congratulations as well.

I'd like to ask you about the comp guidance of three to four.

It's a deceleration from what you put up in the third quarter.

I realize the compares are tougher.

Is that the reason for the more tepid comps or is there something that you're seeing in the business?

Primarily, Rick, it is the tougher comparisons.

And we did talk about that last year, although it was a 2.5% gain, we had the perfect weather from a winter standpoint that helped drive those winter businesses, and we're not planning on the same type of a perfect cold winter that we had last year.

Got you.

I also wanted to ask you about the Golf Galaxy closings.

If we look at that, ex the charges, what sort of EPS benefit did we see in the third quarter?

And what do you see as the fourth quarter impact?

This is Tim.

For the third quarter, we were breakeven without those charges for Golf Galaxy, and Golf Galaxy will be profitable for the year.

And the lift from the closings to contribute to those numbers?

I don't think we're going to get into that kind of specific detail.

Thanks.

Any comment on inventory levels were tracking well below the sales growth rate and that --?

Well, we have said that systemically we've really been working on that inventory to drive the inventory lower and be more productive.

And the 2.5% increase that we have is -- a big portion of that 2.5% increase is driven by stores that had not opened at the end of the third quarter that are opening in the beginning of the fourth quarter.

So if we kind of neutralize that to a more normalized level, those inventory levels would have been down even lower than the 2.5%.

As we indicated, our clearance inventory's down 19% versus what it was the year before.

And with the systemic processes we put in place, the very disciplined markdown process that our planning and allocation group has put in place is really -- we're really starting to see the benefits of that on the margin line.

Thanks.

If I could ask one final one on the tax rate, 36.8% below prior year, what sort of tax rate should we be modeling?

Our guidance anticipates 39.5% in Q4 and about a 38.9% for the year.

Thank you.

Good luck.

Thanks.

Your next question comes from the line of Peter Benedict representing Robert Baird.

Please proceed.

Hey, guys, just a couple here.

Just back to the private label and the private brand discussion, can you remind us what the margin benefit is that you see when you shift over to the private label, private brand versus branded?

About 600 to 800 basis points higher than the products that they replace.

Okay.

Thanks, Ed.

Tim, just quickly, on the inventory, just following up on the last question there, it obviously has been growing slower than sales.

It sounds like you think that's sustainable for quite some time.

Is that accurate or should we be thinking next year inventory grows more in line with sales?

I think our inventory will typically grow less than our comp.

But the last two years have been fairly well-managed and we have done some extraordinary things with the inventory levels.

We expect to continue that management.

But I don't think we can expect to see the reductions that we've seen in the past, so I think the best way to think about it is our inventory will increase less than our comp.

Okay.

Thanks.

And one last one.

What was the occupancy leverage in the third quarter?

I know you said it was favorable.

Do you have the basis point move?

55 basis points.

55.

Terrific.

Thank you.

And your next question comes from the line of Sean McGowan representing Needham & Company.

Please proceed.

Hi.

Good morning.

Thank you.

A couple of housekeeping things.

Regarding the opening plan for next year, 34 new stores, do I assume that's -- that we would not be looking at any closings of Dick's Sporting Goods stores?

We've got no closings planned other than if a lease may terminate and we look to relocate the store.

But we have no store closings due to performance.

Right.

Okay.

Ed, any further comment on why Texas is so strong?

There was some concern given the competitive environment there.

Why is it outperforming by such a wide margin?

I think Academy is a very good competitor.

It was -- and we knew that going in.

We knew that it would take us some time to help change those shopping patterns, and it's been a long road, and I think we're making that progress now.

We've got the right product in the stores at the right time, the right marketing programs in there, and the business is doing quite well.

We're very pleased with it.

Okay.

Anything that indicates you're actually gaining share in the market or is the whole market strong?

I don't know what other people are doing, but we're outpacing our chain comps by a very wide margin.

So I would anticipate that we are taking market share.

I'm not saying that -- who that's coming from.

Right.

If that's coming from Academy or if it's coming from Sports Authority or somebody else.

But we would anticipate we're taking market share.

Okay.

Any comment on how the quarter progressed month to month as it went along?

We don't talk about that, that specific of detail.

I did indicate a bit earlier that our back-to-school season was very good.

We did as anticipated and as guided.

We thought that some of the outerwear business would move from the third quarter to the fourth quarter this year.

As we indicated last year, it moved from the fourth quarter to the third quarter.

Right.

That's played out pretty close to what we had anticipated.

Okay.

That was kind of where I was going with that question.

And then the final question, is -- Walmart seems to be stepping up with free shipping on its online sales.

Do you expect that to have any meaningful impact either on your online business or in the store business?

Well, we've done something similar.

GSI has what we consider to be a great program called Shop Runner.

We've -- are participating in the Shop Runner program that will kind of keep us competitive with what's going on out there with not only Walmart, but also with Amazon.

Okay.

Thank you.

Sure.

And your next question comes from the line of David Magee representing SunTrust Robinson Humphrey.

Please proceed.

Yes.

Thanks.

Good quarter.

Thank you.

A couple of questions.

One is, can you remind us what the -- how many of the smaller format stores you plan to open next year?

Last time, I think you said maybe a third going forward would be --?

I think we indicated that we would open about 25% to 30% of our stores in that smaller format.

So you can think of that from square footage of 40,000 or below 25% to 30%.

Okay.

And then secondly, when you talk about -- I guess today the e-commerce margins being not better than retail necessarily.

Is it a function of price or the returns, maybe the efficiency in the business right now that could get better over time, do you think?

We think it'll get better over time.

The biggest thing that's driving those margin rates is the mix of business.

The fitness business is a much bigger portion of our online business than it is our in-store business.

And when you take into account the freight costs associated with shipping some of those big ticket items, that's impacted our margins.

We think as we continue to grow the apparel business, the footwear business, other areas of the e-commerce business will get much closer to normalized margin rates.

Are you doing that to prospecting with regard to paid search or stuff like that?

We're doing that, but we're not as sophisticated there as we need to be.

Great.

Thanks and good luck.

Thank you.

(Operator Instructions) And the next -- your next question comes from the line of Mark Mandel representing ThinkEquity.

Please proceed.

Thanks and congratulations, also.

Thank you.

I was just wondering if you could shed additional light as to what real estate opportunities you see from leases expiring over the next couple of years?

We continue to work with our landlords on lease expirations and continue to try to renegotiate in those locations where we want to continue to be.

We are also looking at this opportunity to potentially relocate some stores from existing real estate to maybe some better -- a better location in the marketplace.

We continue to find some opportunities to lower our rents as we work through this.

Do you see a significant increase in leases expiring over the next year or two?

It's probably not -- nothing significant, nothing different than we're seeing today.

I think you're going to see that more significantly play out in about three to four years.

Okay.

And are you planning any new Golf Galaxy units next year?

We are.

We'll be looking to open probably around five Golf Galaxy locations.

Okay.

What was the nature of that tax benefit that you talked about?

We're going through some tax planning, and that was both in the third quarter and the second quarter as well and it will continue through the fourth quarter for us.

But the details I prefer not to get into.

Okay.

And pre-opening expenses, should we be looking about $3 million for the fourth quarter or will it be something higher than that?

That's a little bit high.

$3 million is a little high.

Okay.

And then, finally, the accounts payable ratio, you're anticipating continued small increases on a going-forward basis?

Yes.

Okay.

Congratulations again.

Thanks.

Thank you.

And your next question comes from the line of Chris Svezia representing Susquehanna Financial Group.

Please proceed.

Good morning.

I just had a question on the leverage point in the business.

I'm just curious because I think in the past you had mentioned you needed, I think, somewhere in the neighborhood of around a 4% comp to leverage occupancy.

You guided 3% to 4% for the fourth quarter.

Is it now coming in a little bit in terms of leverage point?

I'm just kind of curious about your thoughts there on a go-forward basis?

For this year, the answer to your question is it's coming in below 4% for us to leverage on the occupancy line.

One thing to keep in mind, though, as we continue to remodel our stores going forward, the depreciation associated with those new stores is going to end up in the occupancy line.

So, we're still going to be looking in that 3% to 4% range to leverage.

Okay.

And then on the SG&A side, is that still somewhere around 2%, I think as we go forward past all the initial investments you're making this year, kind of go-forward it's about 2% to leverage on that basis?

About 2% or just marginally higher.

And then, Ed, for you, just on the Fieldhouse and Evolution store, how many of those do you have right now?

The shops in your stores right now?

We have 8 of the Fieldhouse and 28 of the Evo Plus.

Okay.

And you're not talking about what that might grow to next year or how many you're going to roll out next year at this point?

No, but we'll roll out -- we'll have more than double by the end of next year what we have this year.

Okay.

Okay.

And the last thing I just want to ask, anything -- anything from a new product perspective or anything you feel comfortable enough calling out?

Under Armour has their basketball shoe, which is pretty small, but that's out in the marketplace.

Any thoughts about that?

Or Columbia and some of their Omni-Heat products and the new technology there?

Or what Reebok is trying to do in their toning apparel business.

Any initial thoughts about any -- some of the new technology or any callouts for the fourth quarter from a product perspective?

We think some of these things are going to be pretty good.

The Under Armour basketball shoe we think has got some legs.

Columbia Omni-Heat has gotten off to what we think is a pretty good start.

We're pretty excited about that.

And we think golf has got some interesting products coming down the pipeline.

The Callaway Octane has been pretty good from the launch.

And we see a few other products coming out that may launch at the very end of the fourth quarter, the beginning of the first quarter of next year that we're pretty enthusiastic about.

Okay.

Okay.

Best of luck.

Thank you.

Thank you.

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

Please proceed.

Hi.

Thanks.

And congrats as well.

Back to the share gain question and comments.

Both broadly in markets you've been in a long time and then especially in the newer markets as you come in and the share gains are really ramping, what are the categories that you would say are the biggest ones your -- those share gains are coming in?

So where is that inordinately high?

Well, I am not sure we're going to get to that level of specificity that -- to talk about those categories.

We indicated that all of the categories in our business, apparel, footwear and hardlines all comped in the third quarter.

We indicated that that was the same in the second quarter.

But we're not going to give a -- we're not going to prioritize where they're the best for competitive reasons.

Okay.

So to ask -- what I'm trying to get at is, are you breaking into the team businesses in a big way and so it's more sustainable?

Or that's still going on the come in the newer markets?

That's one of the things I am trying to get at.

Well, if you're talking about the team uniform business --?

Yes, and what you would characterize as sales to local teams, things like that, yes.

Yes.

We don't do a lot of sales to local teams from a uniform standpoint.

We go out and market to those teams and to those individual kids through our field representatives, but we're not out soliciting teams.

So we're still working through that.

How we might want to roll that out after our acquisition in California, but we have not ruled that out in any meaningful way.

Okay.

Great.

Thank you.

Due to time restraints, we have time for one further question.

And that question will come from the line of Joe Feldman representing Telsey Advisory Group.

Please proceed.

Hi, guys.

Thanks for taking my question.

Just wanted to follow up on the store productivity that you talked about.

It was a pretty significant increase.

Just -- can you give us a little more color?

Is there something different you were doing in this year's round of stores?

Or maybe the size, the product mix, the way you're approaching the market that you could share with us to drive that big increase?

Joe, I think if you go back to some of Joe's comments on our new stores and store sizes, we have that 20% to 30% of those stores being smaller store sizes.

And what the sales -- where they have been we have been very favorably impressed with where those sales have come out, particularly in the third quarter.

So we are getting great benefit from those new stores, and the size, the average store size is contributing greatly to that new store productivity level.

Got it.

Thanks.

And then if I could ask one quick follow-up.

I know that for the past several months, the discounters, and somebody had sort of touched on this earlier, continued to talk about better trends in sporting goods.

I wanted to ask you guys if you're seeing more pressure from them, if you're seeing them step up their assortments?

Maybe it's not pressure, but just getting more involved in the business?

Or do you think it's just general trends in the industry are just a little better than average in sporting goods?

I think it's just general trends.

We don't see a lot of difference from those -- that distribution that you talked about.

We're not seeing a whole -- anything meaningfully different.

Got it.

That's helpful.

Thanks, guys.

Good luck with the quarter.

Thanks.

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

Ed Stack for closing remarks.

I'd like to thank everyone for joining us for our third quarter call and look forward to talking to everyone at the end of our fourth quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.