DICK'S Sporting Goods Inc (DKS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Dick's Sporting Goods earnings conference call.

My name is Larry and I will be your operator for today.

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

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

(Operator Instructions).

I would now like to turn the conference over to your host for today, Miss Anne-Marie Megala of Investor Relations.

Please proceed.

Good morning and thank you for joining us to discuss our second-quarter 2011 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 outlined in our press release, the dial-in replay will be available for approximately 30 days.

In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today's discussion includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which include but are not limited to our views and expectations concerning our future results.

Such statements relate to future events and expectations and involve known and unknown risk and uncertainty.

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 29, 2011.

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 related reconciliations can be found on the Investor Relations portion of our website at DicksSportingGoods.com.

Leading our call today will be Ed Stack, Chairman and Chief Executive Officer.

Ed will review our second-quarter financial and operating results and discuss our growth strategy.

Following this Joe Schmidt, our President and Chief Operating Officer, will outline our store development program.

After Joe's comments Tim Kullman, our Executive Vice President of Finance and Administration and Chief Financial Officer, will provide greater detail regarding our financial results.

I'll turn over the call to Ed Stack.

Thank you, Anne-Marie.

This morning we announced strong results for the second quarter of 2011 highlighted by the steady increase in both sales and earnings.

Our performance during the quarter reflects the continued growth of our store network as well as the development of our e-commerce businesses and the healthy expansion of our overall margin rates which were driven by margin growth of approximately 120 basis points compared to the second quarter of last year.

Our consolidated non-GAAP earnings per diluted share for the second quarter of 2011 were $0.52 which represents an increase of 21% compared to the second quarter of 2010 and exceeds our original expectation of between $0.47 and $0.49.

Sales for the quarter increased 6.6% compared to the same period last year driven by the growth of our store network and by a 2.5% increase in consolidated same-store sales.

Consolidated same-store sales reflects increases across all of our channels with Dick's Sporting Goods sales up 1.7%, Golf Galaxy up 4%, and e-commerce up 31.9%.

Athletic apparel, footwear and golf were performance leaders while the outdoor business declined year over year.

The results were fueled by our continued success in driving margins, particularly through prudent inventory management, merchandise mix and select store enhancements.

We also significantly improved our balance sheet by building our cash position to $626 million at the end of the second quarter, up $348 million from the $278 million balance at the end of Q2 last year.

It's important to mention we delivered this performance despite some notable business challenges.

These included a shorter sports season in the Northeast, Midwest and mid-Atlantic regions which were blanketed by extreme cold and wet weather this spring contributing to weaker than expected sales that affected our May business.

In June and July, however, we showed acceleration with both months comping above 3%.

Also in the quarter we tested reallocating a portion of our marketing dollars dedicated to the outdoor area by transferring them to our footwear and apparel businesses.

This definitely improved the footwear and apparel business which helped our overall margin mix.

However, it had a bigger than anticipated effect on the outdoor business.

For the third and fourth quarters we have specific plans to renew the emphasis on our outdoor marketing and expect to regain the marketshare we lost during the second-quarter test.

Our ability to manage these challenges and still deliver both sales growth and higher margins during the quarter is a result of our success in developing and leveraging our three growth drivers -- namely expanding our store network, building and strengthening our e-commerce business and continuing to focus on margin enhancement opportunities.

These three growth drivers are central to our business strategy and I'd like to review our progress and each of them.

On the store network front we have always taken a research and testing approach, regularly conducting in-depth studies on our industry, consumer demands and regional demographics to identify our growth potential.

Our research indicates that we can organically double the size of our Dick's Sporting Goods store network to at least 900 stores nationwide over time without the need for an acquisition.

In 2011 we expect to open approximately 36 new Dick's Sporting Goods stores representing an 8% growth rate.

In 2012 and 2013 we expect to open stores at a slightly higher growth rate.

The strength of our balance sheet provides us the financial flexibility to continue to meaningfully grow our store base at the same time we continue to focus on new store productivity and profitability.

Our success in this area is reflected in our new store productivity of 95% in the second quarter of 2011.

Moving to our e-commerce business, we view this as an excellent growth vehicle.

We have historically maintained a measured approach to growing our e-commerce channel, carefully researching the best way to develop it over the long term.

In 2009 we began shifting gears by restructuring our relationship with GSI.

Since then we have developed an e-commerce strategy designed to offer visitors the same authentic shopping experience they enjoy in our stores.

We are executing the build-out phase of this strategy by working to develop new content and capabilities that will help us compete more effectively with online only competitors as well as taking measures to drive both our profitability and our sales.

As a result we expect our e-commerce business to make a more meaningful contribution to earnings by 2013.

Joe will provide you with more detail on our e-commerce initiatives.

Looking now to our third growth driver, we're expecting to expand our margin rates by focusing on three margin accelerators; these include inventory management, product mix and private brands.

These margin accelerators are fundamental to our profitability and we believe our continued focus on them will enable us to reach double-digit operating margins within the next three to five years.

Our first margin accelerator is prudent inventory management.

Over the past two years we have realized dramatic improvements in inventory productivity by developing a better pre-planning model, a more efficient allocation protocol 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 20% compared to last year.

During the second quarter of 2011 we continued these efforts as inventory per square foot declined by 9/10 of a percent compared to the end of the second quarter of 2010.

We're supporting further progress in our inventory management strategies through several long-term IT and operational initiatives that we expect to generate measurable benefits beginning in 2013.

Our second margin accelerator is product mix.

We continue to develop our apparel and footwear businesses -- which carries higher margins than most other businesses.

We're doing this through the continued build-out of the Nike Field Houses at Dick's Sporting Goods, the new Under Armour Blue Chip and All-American shops, and a newly developed North Face concept store within our store.

We expect to have approximately 100 Nike Field Houses in place by the end of the year and will aggressively build out the Under Armour shops including two recently opened Blue Chip shops in the Chicago and New York markets.

We also continue to develop a shared service footwear concept which has performed extremely well as both comps and average ticket prices have exceeded the performance of the balance of the chain.

To date we operate 92 stores with a shared service model and will continue to open all new stores in this proven format.

The third margin accelerator is our private brand business which today contributes approximately 15% of our total sales volume.

We expect to grow our private brand business to approximately 20% over the next five years.

Our margin rates are approximately 600 to 800 basis points higher than the products they replace.

This year we launched three new brands, KOPPEN in the outdoor area, Nickent golf, and Nishiki bikes, accessories and apparel.

All three of these brands have performed very well.

These brands along with other private brands of Umbro, Slazenger, Max Flite, Field & Stream, Quest and others are an important component to helping us expand our operating margins to double digits in the next three to five years.

As we look at the balance of the year we're taking a cautious approach.

The uncertain economic environment that has been exacerbated by the political gamesmanship in Washington makes it difficult to predict the future of consumer spending.

Understanding and recognizing these challenges, we will concentrate on those elements of our business that we have demonstrated we can control to deliver steady earnings growth for the third and fourth quarters of 2011.

Specifically for the third quarter of 2011 we expect consolidated earnings per diluted share to increase between $0.24 and $0.26 compared with non-GAAP consolidated earnings per diluted share of $0.22 for the same period in 2010.

We expect consolidated same-store sales to be in the range of 1% to 2% for the third quarter of 2011.

Looking to the full year 2011, we are raising our EPS guidance from between $1.91 and $1.93 to be between $1.94 and $1.96.

We expect our consolidated same-store sales to increase 1% to 2% compared with 2010.

On the earnings side we continue to refine our engine, create new opportunities through our focus on growth and margin drivers and execute well.

As a result we've maintained our earnings expectations for the second half of the year despite an uncertain political and macroeconomic environment.

We are very pleased with our second quarter 2011.

We have probably the best quality inventory in our history along with a strong balance sheet with no debt and over $600 million in cash and several multi-year growth drivers which combined put us in a solid position to continue to deliver double-digit earnings growth in 2011 and behind (sic).

I'd like to thank all of our associates for their hard work and dedication that are fueling the progress of our Company today.

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

Thanks, Ed.

At the end of the second quarter of 2011 we operated 455 Dick's Sporting Goods stores with 25.1 million square feet.

As Ed mentioned, we continue to be pleased with the performance of the new Dick's Sporting Goods stores, posting new store productivity of 95% in the second quarter.

This compares with 67.4% in the second quarter of 2010.

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

For the full year 2011 we now expect to open approximately 36 new stores resulting in a unit growth rate of approximately 8% for our Dick's Sporting Goods chain in 2011 compared with a 6% growth rate in 2010.

We anticipate opening 18 of these stores in the third quarter.

We also plan to remodel a total of 14 stores this year.

To support our anticipated store growth and better leverage our infrastructure, particularly on the West Coast, we plan to open a new 600,000 square foot distribution center in 2013.

When this new DC is up and running our network is anticipated to be able to support 750 stores.

In addition to the growth opportunity of our overall store base we have much opportunity in our e-commerce business as well.

We are concentrating our attention on three core areas -- content, profitability and sales.

As far as content goes, we are working on website design and technologies to enrich content and functionality of our website.

Homepage and category pages continue to be refreshed with a focus on a cleaner look and marketing alignment.

We are fueling our e-commerce profitability through several measures, such as refining our fulfillment capabilities, upgrading our technology and a continued shift of mix toward the higher-margin categories.

Finally, for the remainder of this year and into 2012 we plan to accelerate our focus on driving e-commerce sales through a more robust marketing strategy.

We will utilize all traditional marketing channels to emphasize our website more prominently as well as increasing our spend for digital, social and mobile marketing.

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

Thanks, Joe.

Sales for the second quarter of 2011 increased by 6.6% to $1.3 billion compared with the same period a year ago.

Consolidated same-store sales increased 2.5%.

Dick's Sporting Goods same-store sales increased 1.7%; Golf Galaxy increased 4%; and e-commerce business increased 31.9%.

The increase in Dick's Sporting Goods stores was driven in part by a 2.5% increase in sales per transaction partially offset by a 0.8% decline in traffic.

Consolidated gross profit of $401 million was 30.69% of sales or 132 basis points higher than the second quarter of 2010.

This increase was driven primarily by an increase in merchandise margin.

Merchandise margin increased as a percentage of sales primarily due to continued effective inventory management as seen through less clearance activity compared to last year and a change in product mix with relative increases in athletic apparel, footwear and accessories and a decrease in the outdoor category.

SG&A expenses were $285.7 million representing 21.87% of sales compared with 22.13% of sales in last year's second quarter.

This leverage of 26 basis points was primarily due to a decline in stores payroll and advertising partially offset by an increase in administrative expenses.

Also in the second quarter we recognized a $13.9 million gain when our shares in GSI were liquidated in connection with eBay's acquisition of GSI.

On the balance sheet we ended the second quarter of 2011 with $626 million in cash and cash equivalents and we do not have any outstanding borrowings under our $440 million revolving credit facility.

Last year we ended the second quarter with $278 million in cash and cash equivalents and no outstanding borrowings under the facility.

Inventory per square foot decreased by 0.9% at the end of the second quarter of 2011 as compared with the end of the second quarter of 2010.

Net capital expenditures were $44 million in the second quarter of 2011 or $53 million on a gross basis, compared with the net capital expense of $27 million or $37 million on a gross basis in the second quarter of last year.

For the third quarter of 2011 we anticipate our gross profit rate to increase year over year primarily as a result of merchandise margin improvements as our margin accelerators gain traction, partially offset by occupancy cost deleverage.

We expect SG&A to deleverage slightly as a percentage of sales in the third quarter of 2011 as compared with the third quarter of 2010.

As a result of the gross profit rate expansion and expense dynamics, we anticipate that operating margins will increase in the third quarter of 2011 compared with the third quarter of 2010.

Diluted shares outstanding are expected to be approximately 126 million compared with 121 million in the third quarter of last year.

Earnings per diluted share are expected to increase $0.24 to $0.26 from $0.22 last year.

For the full year 2011 we are increasing anticipated earnings per diluted share from a range of $1.91 to $1.93 to a range of $1.94 to $1.96.

Specifically we anticipate that our gross profit rate will increase year over year primarily as a result of improving merchandise margins driven by our margin accelerators.

We expect that our occupancy cost as a percentage of sales will remain relatively flat in 2011 compared to 2010 and we anticipate SG&A expenses to leverage in 2011.

For the full year diluted shares outstanding are expected to be approximately 126 million compared to 122 million last year.

Net capital expenditures for the full year are expected to be approximately $197 million or $252 million on a gross basis.

Net capital expenditures for 2010 were $128 million or $159 million on a gross basis.

The increase in capital expenditures between 2010 and 2011 is a result of our efforts to support our growth drivers including opening a greater number of new stores, completing store remodels and implementing systems, as we discussed earlier.

To sum up, we are very pleased with our performance for the second quarter of 2011.

We posted increases in sales and we delivered profitable growth that exceeded the EPS guidance.

We also made marked progress in developing all of our growth drivers by adding productive profitable stores, building our e-commerce business and expanding our overall margin rates.

As a result we are well positioned to continue to grow our business.

This concludes our prepared remarks.

We'd be happy to answer any questions you may have.

(Operator Instructions).

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning.

I'd like to start out by addressing the different -- in the outdoor category, difference in sales performance, that is, between the outdoor category and the other categories of the business.

Can you give us some directional sense of how big the spread was between those two big pieces of business?

Between the Company as a whole and the outdoor category?

That's a fair way to look at it, sure.

It was pretty meaningful, Matt.

Sure, I mean as you saw, what we disclosed in terms of our overall comp for the Company at 2.5%, we were looking at numbers about twice that to three times that on the outdoor categories including hunting and lodge outdoors and outdoor accessories and apparel.

When you say numbers two to three times that, do you mean declines?

Declines, yes.

So, I'm not sure how big a piece of the business that is.

If you could either kind of size that for us or then maybe just [solve] for what the rest of the business did?

And then I have a follow up related to that.

Matt, directionally you can say that if those areas were flat we would have -- I don't have this exactly, but it would have been very close to, if not exceeded, our comp guidance that we laid out there.

So, let me then move on to kind of a second part to the question.

I guess if we move past the macro issues, if there's any high-level concern that we've heard feedback on, some of your vendors -- some of your most important vendors like Nike and Under Armour have delivered very strong numbers.

And your comp performance for the past couple quarters hasn't really been consistent with what one would expect from the category.

So I guess as we talk about what you did in outdoor versus the rest of the business, the rest of the business being where those vendors are concentrated, would that business be closer to something like mid-singles and perhaps a bit more consistent with the numbers that your vendors are showing?

Yes, the apparel and footwear portion of our business has significantly out-performed the comp guidance as a whole -- or the comp performance as a whole.

And what's your sense from your own data and from talking to your vendors about market share, thinking about both other retail competitors and also as you think about competing channels such as vendor direct?

We feel that we're -- in those areas we are probably maintaining market share.

Some of the vendor direct issues may be -- with other retailers I don't think we're losing market share.

From a vendor direct standpoint with what Nike is doing vendor direct, Under Armour indicated that their vendor direct business was up approximately 80%.

That's certainly a concern of ours and one that we're not pleased with what's going on from the vendor community.

Understood.

Thanks so much.

Sure.

Robby Ohmes, Bank of America-Merrill Lynch.

Oh, thanks.

Good morning, guys.

Robby.

Ed, could you talk a little bit more about just the -- how you're feeling about back-to-school?

And I understand the macro point of view, but is there a merchandising aspect as you look to the balance of this year, the fall season and holiday season that makes you concerned that the comparisons are tough to lap or that will restrain the comp momentum?

So, maybe some more flavor outside the macro on why the comp momentum might not stay above 3%, which is I guess what you were seeing the last couple months?

There's nothing that really makes us concerned of what's happening that we've seen today.

We're just -- we're concerned about what's going on in this political environment of the -- as I talked with some other people a while back, the food fight that we see on cable TV every night.

And exasperated by this political gamesmanship in Washington I think it's made the consumer kind of cautious.

And they're going to wake up and they're going to see what's happened to the stock market, they're going to see their 401(k)s have taken a pretty big hit in the last month and I'm not sure how they're going to react to that.

So you could say we're being cautious, but I think in this environment we live in today, both the global macro markets and kind of some of the things happening here at home, it's not a bad time to be cautious.

And just a follow-up question.

Is there any update to the price increases you're seeing people like Nike push through and the timing of when we would start to see that hit in footwear and apparel in your stores from the big vendors?

Nothing different than what we've talked about in the past.

Got it, thanks.

Michael Baker, Deutsche Bank.

Thanks.

A couple from me.

Just I guess more specific, and I hate to keep talking about August, but is that 1% to 2% comp -- is at that because you think consumers might wake up and be concerned about the 401(k) and see slowing sales?

Or is that actually what you're seeing in the first half of August?

I think it's an important distinction.

Well, we don't talk about -- we have never commented about what's happening within a quarter.

But as -- how I just answered Robby's question, that we think based on what's happening in the geopolitical environment globally right now and what's happening at home with the political issues we've got coming out of Washington right now, I think it's a good time to be conservative.

Okay.

Thanks, that helps a little bit.

And then two more for me.

One, this reallocating of the advertising.

So I guess it hurt the outdoor, presumably it helped the footwear.

Was it a net negative, however?

And then I guess related to that, as you shift it back the other way do you think -- I guess presumably you expect it to help the outdoor; will it hurt the footwear business in the third quarter?

Well, it was not a net positive, so it definitely had, as I said, a greater than expected impact on the outdoor category.

We think that we can fine-tune this, that we don't see a negative on the apparel and footwear business.

But as we reallocate this we think that we can do a better job in the outdoor category and get back some of that market share we unfortunately lost in the second quarter.

I see, okay.

And if I could ask -- slide in one more quick one.

How was your NHL licensed apparel business in the Northeast in the quarter?

At the end of the second quarter?

Yes.

Specifically May and early June.

Yes, (multiple speakers).

Around the Bruins championship.

It did a lot better than if Vancouver won.

(Multiple speakers).

Well, we appreciate that, thank you.

Michael Lasser, UBS.

Good morning, thanks a lot for taking my questions.

Is it safe to infer that the traffic decline in the second quarter was all due to the softness in the outdoor categories?

And the traffic numbers are marking a stark contrast to what we saw from you last year, so when should we expect to see that reverse?

I'm not -- can you repeat the first part of that question, please?

Sure.

I think it was an 80 basis point decline in traffic transactions and was that all due to the weakness in the outdoor categories?

There was a -- that's a big -- the outdoor categories is an important traffic driver of the business.

And based on what we -- we don't keep traffic by category, you can't do that.

But we would expect that that was a big part of that as we reduced that marketing in the outdoor category.

And then more broadly speaking, so you anticipate that will reverse as the outdoor categories will improve?

Because last (multiple speakers).

Yes, you'll see much different marketing from us in the third quarter this year from an outdoor standpoint than we did in the second quarter.

Okay.

And then back to the margin question.

Can you quantify how each of the three margin accelerated strategies performed and contributed to the overall margin result in the second quarter?

We're not going to talk about those specifically in that level of detail.

But the private brand had some acceleration this year, not meaningfully, but it would be -- the private brand aspect would be the least impactful as of right now.

But we expect that to become more impactful over the next three to five years.

Okay, last one for me is on the inventories, it's managed pretty well.

Do you think that there was any negative impact to the sales result from being out of stock in any particular area?

We don't think -- we think that there may have been some impact, but we don't think it was terribly meaningful.

Okay, thanks for the insight.

Good luck.

Thank you.

Chris Horvers, JPMorgan.

Thanks and good morning.

As you think about the monthly comp trend that you alluded to during the quarter, did outdoor end up turning positive as you proceeded through the quarter?

So just trying to bear out really the weather impact to the other categories versus the outdoor.

And then I'll have a follow-up on gross margin.

It got slightly better but it didn't get positive.

Okay.

And then on the margin side, it sounds like you didn't -- all that 120 basis points was merchandise margin expansion and not really a leverage on occupancy or fixed costs.

I know you mentioned outdoor seemed like a onetime boost to that, so maybe of that 120, to try to get a sense of what would persistent to the back half from a mix perspective, how much was that outdoor portion?

Well, first -- this is Tim, Chris.

First the merch margin improvement was the majority of the increase, but we did leverage occupancy for the quarter.

And then how much of that was simply that this underperformance in outdoor that you don't expect to persist?

If you think about the outdoor categories, particularly in the hunt and outdoor categories for lodge, they have lower margins than certainly the apparel and footwear business have.

So that certainly helped a great deal, that product mix helped a great deal on the increase of merch margin for this quarter.

Okay, fair enough.

And then finally, it seems like -- correct me if I'm wrong.

It seems like you're sort of implying flattish comps in the fourth quarter.

Granted it is an uncertain environment, but is there -- are there certain products that you see coming down the pipeline or certain may be marketing and merchandising plans that you could point to that allow you to overcome that steep comp acceleration into 4Q?

It's a big number last year that we've got to comp.

We think that this political environment, we're just uncertain as to how this is going to play out.

I think there's going to be more rhetoric coming out of Washington than less.

So we just think it's a good time to be cautious right now.

Right.

And that's just more of an -- it's an anticipation of what could happen, is that fair?

Well, it's an anticipation of what could happen based on a kind of what we're seeing coming out of there in the past.

I mean I think that it's -- I believe it's going to get worse before it gets better coming out of Washington and how that affects the consumer I don't know.

But I don't think it's necessarily going to be positive.

Fair enough, thank you.

Kate McShane, Citi Investment Research.

Thank you, good morning.

Ed, we've heard your comments on the vendor direct business before.

But I wondered, just based on what you said today, if things have gotten incrementally tougher in regards to that conversation.

And aside from the shop-in-shops that Nike and Under Armour and I guess The North Face now are building out in your stores, how do you see this playing out?

Well, I don't -- I think I was just trying to answer that question of what's happening with vendor direct and how we feel about it.

Our position hasn't changed.

It's something we try to work through with the vendors.

They're going to -- that's something that's in the environment today, it's not going to go away and we need to manage through that and we're doing that.

Do I wish that they weren't selling direct to the consumer?

Yes, I wish they weren't selling direct to the consumer.

Do they wish we didn't have any private brand business?

Yes, they wish we didn't have any private brand business.

So it's kind of a quid pro quo that we -- it's usually on every agenda that we have with our major partners.

Okay, and I think it was Under Armour that highlighted on its second-quarter call that it had left some sales on the table by not getting retailers product in time.

Did this impact your comp at all in the second quarter?

No, no, we were fine with Under Armour.

Okay.

And then my very last kind of bigger picture question.

If there is the potential for a double dip over the next couple of quarters, I would argue that you're a little bit better positioned than the last time because you don't have as many high ticket treadmills and elliptical machines and things like that.

Is that a good characterization?

And how would you describe Dick's for the next couple of quarters and what you're selling versus the last downturn?

Well, I think you're right.

So some of those higher ticket items of the fitness category is not as important to us as it was a couple years ago when the world was coming to an end.

If we do go into a double dip I do think we're much better positioned than we were a number -- a few years ago in that fact that our inventory is in much better shape, we've got much leaner inventory, the quality of the inventory is much higher.

As I said, our clearance inventory is down 20% versus what it was last year, which was down pretty meaningful from what it was the year before.

So our inventory is in great shape and we've got an extremely strong balance sheet with no debt and over $600 million sitting in cash.

So I think we're in great shape to weather a double dip if it does come.

And it certainly seems to be getting more and more pressed each day, the possibility of that.

Thank you.

Gary Balter, Credit Suisse.

Hey, guys, good morning, this is Seth.

I just wanted to clarify on the marketing expenses, the higher expected spending in the second half in the outdoor category, are you just shifting the mix of spending back to this category away from footwear and apparel, or should we be thinking about higher marketing expenses overall for the remainder of the year?

We're not looking at meaningfully higher marketing spend.

And we're not shifting it away from apparel and footwear, we're just going back to a bit more of a traditional mix of our outdoor category where the third quarter -- the third and fourth quarter are our two largest quarters for the outdoor business.

Got it, thanks.

And just a follow-up -- in the golf business, how did you feel about the performance of that business?

It looked like it was pretty good given the weather and declining rounds played.

Can you just discuss some of the drivers of that business at this stage?

Well, we're relatively happy with our golf business.

The TaylorMade R11 driver continued to perform very well, golf apparel continued to perform very well.

So overall at both Dick's and Golf Galaxy we were relatively pleased with our golf business.

Great, thanks.

Sure.

Brian Nagel, Oppenheimer.

Hi, good morning.

Good morning.

Good morning.

Just a quick question.

You -- in your prepared remarks you commented on the uptick in new store productivity which is pretty remarkable in the quarter.

As you look at that data more granularly, was there something sort of say quirky in those numbers, or was that truly an underlying improvement in the performance of the stores that you're opening most recently.

There's nothing quirky about it.

And if you take a look at our new store performance over the last several quarters you'll see it's improved quite a bit over four or five quarters prior to that.

And then a follow-up to that and along with your real estate strategy, I mean kind of a longer-term in nature question.

But we hear, obviously, there is still a lot of dislocations out there in retail real estate.

Are you saying any cases of some better real estate deals as you are looking out to your new store openings next year or the year after that, so on and so forth?

We continue to see the market improve slowly.

Vacant boxes continue to be our area of focus and growth.

We continue to look at the opportunities such as ultimate electronics.

And obviously, with the most recent announcement with Borders, there is more boxes to take a look at.

We are more optimistic around spending with these landlords as we are seeing more scrape and build opportunities within existing power centers.

Roughly 45% of our stores this year are new builds compared to about 15% last year.

So we are fairly optimistic around the growth opportunities with these existing boxes, and landlords are -- the market is starting to improve.

Well, thank you very much.

Christina Cheng, Susquehanna.

Hi, everybody.

Can you all give us some color as to regionally how your stores have performed, maybe California versus Texas versus the other regions?

We have not talked about that for competitive reasons.

We continue to be pleased with our performance in Texas, which has been pretty consistent over the last several quarters.

But that is as granular for competitive reasons as we would like to get.

Fair enough.

And as far as your -- for some of the markets that have started back-to-school, do you see any meaningful difference between how they're comping versus markets which haven't entered back-to-school yet?

Again, we've indicated on this call and prior calls that we just don't talk about what's going on inside a particular quarter.

Okay.

Just looking forward to the second half, I mean you had a really strong fourth quarter last year.

How should we kind of look at how you're planning to drive comps?

Because I know you had increased your advertising spend meaningfully during fourth quarter last year.

Is that still sort of the game plan this year?

Well, we'll be relatively comparative to this year to last year.

The comps at north of 8% last year are going to be -- are difficult comps to go up against.

And as we've indicated in the past, we took full advantage of the weather that we had last winter and we're hoping it's another -- we're hoping it's another cold winter (laughter).

How do you feel about the winter categories from what you've seen in your buying meetings?

Are they any -- are they better, is it broader in terms of different brands?

We have broadened some of the better brands that we carry such as Marmot, Mountain Hardwear, Patagonia, Spyder.

We just went through a walk-through of the outdoor set in -- at our office here yesterday and I will tell you I think it looks great.

I think it looks better than last year.

But with that being said, we still need the weather to cooperate and be cold in order to kind of get the kind of sell-through at the margin rates that we want out of this.

So that's an important -- an important variable that we don't control.

Right.

And then finally, as far as SG&A is concerned, 3Q and 4Q you start to anniversary some of these higher spending for the infrastructure and the rationalization, all that.

Do you expect to see some kind of benefit from that going into the second half of this year?

We expect to see deleverage in Q3 and leverage in Q4 and leverage for the entire year.

Thanks a lot.

Sean Naughton, Piper Jaffray.

Hi, thanks for taking my question.

In terms of the back-to-school, is there anything you're doing differently in terms of the merchandise presentation in order to capitalize on those students?

And then secondly, is there any way you can comment on what's happening inside of the basket in terms of AUR versus units?

We're not doing anything meaningfully different this year versus last year from a merchandising standpoint.

We are from a promotion standpoint or community involvement standpoint where we've instituted PACE, which is Protecting Young Athletes through Concussion Education, which has gotten great success.

We've got Jerome Bettis working with us.

Our intent is to donate $1 for every pair of shoes that we sell to ImPACT, which is the concussion baseline testing company headquartered here in Pittsburgh.

Our goal is to test 1 million student athletes on this baseline concussion testing and it has been -- it's gotten great reviews, we've gotten great feedback from consumers, from coaches, from everybody involved in this program.

So that's one thing we're doing meaningfully different.

And we are also increasing the number of Nike shops that we're putting in our stores which is extremely helpful.

And then any comment on the basket, what's happening in terms of pricing versus units?

I know traffic was down a little bit.

But anything on that 2.5% increase that you saw at Dick's Sporting Goods?

Well, we mentioned that the ticket is up to 2.5% as a component of our comp and we've got a slight increase in overall AUR.

Okay.

And then lastly, the topic of inflation obviously seems to have dissipated a little bit.

Can you comment on anything that you're seeing as you're looking out for the fourth quarter and the first quarter of next year in terms of those negotiations with vendors?

What does in the inflationary environment look like on those goods right now?

As I said earlier, it's no different than what we had talked about in the previous couple quarters.

We don't really see any inflationary -- we don't see any meaningful inflationary pressures until Q1 of next year.

Okay.

And then I guess one last question.

Just on the cash, is there any plans for the usage on that cash other than remodels and reinvesting in the business right now?

As of right now, no.

With the political and economic environment out there I think it's a good time to sit with cash on the balance sheet and see what happens in the world.

Fair enough.

Thanks and best of luck in the second half.

Thank you.

Mark Miller, William Blair.

Good morning.

One of your mass merchant large box competitors that reported earnings today commented that the expansion of assortment has helped them in sporting goods and I think outdoor being one of the better categories for them.

Is this something that's contributing to the marketshare change at Dick's and do you view this as a material competitive change?

I really don't.

I think the issues that we had at Dick's Sporting Goods in our outdoor category are self-inflicted.

Okay and then clarity on the second half in maintaining the EPS outlook on a lower comp, can you just give us a sense I guess for what has changed then below sales?

Are you adjusting the overall outlook for operating expenses or are you more optimistic on gross margin?

Well, I think it's a combination of the two.

So I think, as Tim said, we can leverage the SG&A number for the entire year and in the fourth quarter.

And we do feel that based on some of the -- the three margin drivers we've talked about that we still have margin rate expansion.

And a big part of that is driven by the quality of the inventory and we also feel that the mix, we're in a very good environment right now for apparel and footwear.

And we think that we're in a good environment from an apparel standpoint in the winter categories as we go into the fourth quarter.

Thanks, Ed.

Thank you.

Rick Nelson, Stephens.

Thank you and good morning.

I'd like to follow up on the golf category.

If you could tell us how the Dick's stores performed in relation to Golf Galaxy?

The Dick's stores were slightly below Golf Galaxy, but not meaningfully so.

Kind of similar to what it's been over the last couple quarters.

Okay.

And as I noted, Golf Galaxy, you're not planning store openings.

I think previously you had guided to three.

I'd like to get your thoughts about that.

Yes, we had had some sites that we had looked at that we thought we were going to get done.

Quite frankly we weren't able to come to terms with the landlords on the terms of the lease -- terms and conditions of the lease.

So we've got a very disciplined real estate strategy and we felt that it was appropriate to walk away right now and we'll continue to look at Golf Galaxy opportunities.

And how do you think about Golf Galaxy?

I note you mentioned at Dick's you plan to accelerate the store openings next year.

How are you thinking about Golf Galaxy?

Can you ask that again, please?

You had mentioned an acceleration in the growth rate in the Dick's stores next year; how are you thinking about Golf Galaxy store growth?

I think we'll continue to look at opportunities for Galaxy.

I think you can expect it to be much more conservative comparative to our Dick's store growth.

Okay.

Thanks a lot and good luck.

Thank you.

David Magee, SunTrust Robinson Humphrey.

Yes, hi, good morning.

Just a couple of questions.

First, on the online strategy, how much traction do you think the category is getting now online and how impactful has it been to direct in that regard?

And then lastly as a piece of that, how happy are you all with the ShopRunner partnership?

We think that this is going to gain more traction as we continue to grow this business.

As we had indicated, we wanted to really make sure that we had the right content and understand how to drive sales and be profitable.

And we're kind of moving in that direction so we think this is getting more traction.

And we're still evaluating ShopRunner, so I think it's too early to comment on.

Are the vendors a big piece of that e-commerce activity today?

Not sure what you mean by that.

In terms of selling direct, are they using their websites and have a big part of that share?

As you can see based on -- yes, the vendors continue to sell on a direct basis and you saw Under Armour's comment that their direct-to-consumer business was [off] by approximately 80%.

So yes, they continue to participate in the marketshare.

Thank you, Ed.

And then secondly, what are you assuming with regard to having to be promotional in the second half of the year?

You're showing good gross margin numbers now.

But given your outlook as being somewhat downbeat with the macro are you -- do you have much built in in terms of becoming more promotional possibly in the second half of the year?

We don't think we need to be any more promotional or not meaningfully more promotional than we've been in the past.

And one of the reasons why we don't think we need to do is the high quality of our inventory.

As I said, our clearance inventory is down 20%, our inventory only rose less than a percentage on comps up 2.5%, and the inventory has been down in each of the last couple of years.

So our quality of inventory is very, very good and we don't think the products that we have in stock are going to require any meaningful promotional activity.

Thank you.

Joe Feldman, Telsey Advisory Group.

Hi, guys, good morning.

Wanted to ask about the in-store shops a little bit more.

We have the Nike Field House and now Under Armour.

I guess a quick question is more about how much -- are you taking more space from other parts of the store?

I mean, or is it just more like a better version of what you're doing on the current pads within stores?

And then what kind of lift you might be seeing to sales and some of those kinds of operating metrics?

Are you seeing more people shop the rest of the store or are they just shopping that one component of the store when they're coming in?

Under Armour and Nike and North Face have gotten a bit larger space kind of within our apparel area.

We haven't meaningfully taken space away from other areas of the store.

So they've kind of gained some market share space in the store of our apparel area, if you will.

As far as guiding and talking about, for competitive reasons, what the change has been, we haven't done that.

But it continues to be meaningful both in a sales and a margin rate standpoint because of the better quality of inventory that we have there.

It's been very good for both us and Nike and we expect it to be for Under Armour also.

That's helpful.

I guess have you -- with the build-out of some of these shops are you seeing an incremental customer or is it -- or even more penetration with that guy that used to come in and buy Nike product anyway?

I think they're buying more product.

I think some market share has shifted to Nike and Under Armour from some other vendors because of the shop.

Got you, got you.

And then also, if I can ask with e-commerce, I mean I understand -- obviously for a big part of the strategy and bringing it in house makes a lot of sense, better alignment.

I guess I wanted to better understand, are you seeing again kind of that core customer cross shopping or spending more?

Or are you attracting a new customer?

And also I kind of wanted to lay in a social media component.

Because I would think your customer, that younger more fit person, might be a pretty good target for social media and how you're trying to leverage that?

I think you're seeing a little bit of both.

I think you're seeing some new customers looking at our website and then navigating to our store.

And I think you're seeing a lot of our existing customers check our website as well.

I think it's -- I think depending upon what you read, more and more customers are spending time online doing their research before they go to stores to understand the product and certainly you're seeing that with ours.

As far as the younger customers, as I mentioned in our prepared remarks, we're going to continue to up that marketing spend around some of the social media aspects of our business and we think that's certainly an opportunity to grow the business as well.

That's helpful, thanks.

And if I could just follow up with one other -- just are you seeing from a competitive standpoint any change in the environment?

I know we've kind of danced around it a lot of different ways.

But just anything new promotionally or from the competition, some of the big-box guys or even just the core sporting goods retailers?

We're really not, we watch that pretty closely and we're not seeing anything abnormal.

We'll continue to watch it as we proceed in the third and fourth quarter.

But we're not saying anything meaningfully different.

Great, thanks, guys.

Good luck with the quarter.

Thank you.

Sam Poser, Sterne, Agee.

Good morning, thanks for taking my question.

I've got three questions.

On the Q1 call, when asked about current trends you said that after the spring season was a return to expected sales performance.

And that made it sound like May was probably comping up 3 based on what the guidance was.

So could you clarify what that meant relative to how the quarter turned out?

Well, if you remember what happened in May is we had indicated in that call, I believe, that the most recent few weeks had gotten much better and then the weather turned back again.

And May was not a very good month.

If you go back and take a look at rounds played, you look at what happened with baseball games, and that changed -- the weather changed again and May was a relatively difficult month.

As we said, June and July comped at North of 3%.

Okay, thank you.

And then with your accelerating store opening in the next couple of years, are you -- is that more real estate becoming available?

Are you altering where you're looking to open stores or can you talk about the size of the stores you're planning on opening and so on?

The stores will be relatively the same size as we have been opening.

From an accelerated standpoint I said in the remarks that we would open slightly more stores than we have in the past.

But we're not modifying our real estate strategy, our discipline around real estate.

Our real estate group has just done a very good job of getting out there on the ground and fleshing out these pieces of real estate that we can open successful stores in.

So we don't expect it to be any different than the group of stores that we just opened up that opened up at a 95% new store productivity rate.

Thank you.

And then lastly, in the shop in shops, the Nike shops or the -- I guess the pending North Face shops and Under Armour and so on, are you getting vendor supported staffing?

Are they working with you sort of like a department store cosmetics department kind of staffing situation?

I mean to add -- are they providing or co-oping personnel with you in those departments?

In some of the brands that we've done this with we've had some help from a staffing standpoint or a merchandising standpoint and we expect that will continue.

Can you talk a little bit about how that's set up?

For competitive reasons I don't think we want to do that and probably the brands would prefer we not do that also.

All right, thank you very much for the time.

Sure.

John Zolidis, Buckingham Research.

Hi, a number of my questions have been asked already.

Can you just comment on the NBA strike?

If the NBA does not have a season, do you anticipate that that will have much of an impact on your business?

And then second, can you just update us on the shared service with the footwear?

Has that been rolled out to the whole chain at this point?

Thanks.

If there's an NBA strike we'll be very disappointed from a fan standpoint but it won't have any meaningful impact on our business.

From a shared service footwear standpoint and in the prepared remarks we indicated that we had that -- there's 92 of those in our stores today and we expect to open all new stores under that format.

And then can you just comment on the performance of the footwear category in the 92 stores where you have that format set up?

How does it compare to the rest of the chain?

We won't -- as I said in the prepared remarks, we're not commenting specifically, but it has comped higher and it's had an average unit retail higher than the balance of the chain.

Thanks very much.

Paul Swinand, Morningstar Inc.

Good morning and thanks for taking my call.

I wanted to ask a little bit of a question about the private label/private brands.

I noticed you mentioned you've got a few new ones like Nishiki.

When you roll that out, is that something where you've done a lot of the merchandising and sourcing or is it something that you just license from an existing vendor and they're substantially responsible for the product development and the merchandising?

No, all of these -- there's a difference between exclusives that the brands provide us that they do the product -- they design the product with our input, but they're primarily responsible for the design and the manufacture of the product.

Nishiki, KOPPEN that we talked about, Nickent, the Field & Stream, Umbro, all of those, those are all products that we design and source ourself.

And you're exclusives with them, right?

We are exclusive with the vast majority of those.

Umbro still has a brand in the United States that is slightly different than what we're doing, but there is some Umbro product in other stores.

As far as Field & Stream in the outdoor categories, that's exclusive to us.

Nishiki is exclusive to us.

Max Flite is exclusive to us.

Okay, great.

And then just trying to think a little longer term about the running category.

I mean we keep hearing running is good, running is strong, things are driving through running.

What -- can you tell us a little bit more about who the customer is or what you think is driving running and how sustainable it is?

Well, I think there's two components to running.

There's that core enthusiast runner who is running for fitness, if you will, and for wellness.

Then there's also the running silhouette that we characterize as a fashion performance business which would be Nike Free, Reebok Flex, which people are running in those shoes, but the vast majority of those shoes are being worn by people who like the look of the running silhouette.

We feel that's going to continue, we feel that is very strong, you're right, and we expect it to continue for some time into the future.

Is that segment that likes the running silhouette, is that a younger customer or an older customer or a little bit across the board depending on the (multiple speakers)?

It crosses generations today.

I mean it's the most popular silhouette out there today.

All right, great.

Thank you very much.

Dan Wewer, Raymond James.

Thanks.

So, Ed, in the golf category which is one of your stronger categories during the quarter, it's also at its seasonal peak in terms of sales contribution.

During the second quarter -- the next two quarters there's really not a lot going on within that category.

On the other hand, you disclosed that your outdoor business dropped about 7%, but it becomes seasonally a lot more important to Dick's during the next six months.

Do those changes in the seasonality of those two categories also impact the more cautious sales guidance for the back half of the year?

No, I think -- as I said, I think that the issues we had on the outdoor category are really self-inflicted.

We've pulled back some marketing expense there, reallocated it someplace else and we're not going to do that in the third and fourth quarter.

You're right, the third and fourth quarter are an important part of our outdoor category and we will be spending marketing dollars in the third and fourth quarter consistent with what we've done in the past.

So we expect to get that market share back.

So you believe that outdoor category can grow for you in the second half of the year just like golf did during the second quarter?

We think we've got the ability to take back that market share that we lost, yes.

And then the other question I had, you reiterated that the price increases Nike and Under Armour had announced a quarter ago remain intact and I guess it will be fully in place by the second quarter or the spring of 2012.

You had also indicated that consumer demand probably weakens given all the shenanigans in Washington.

So it's a very precarious situation for the industry, isn't it?

If we're going to have weakening demand in the face of higher price increases, who wins that tug-of-war?

Who wins that tug-of-war?

Yes.

I don't think anybody does, that's why we've given relatively cautious guidance.

Right.

Okay, great.

Thank you.

Great, thanks.

With no further questions I would like to turn the call back over to Mr.

Ed Stack.

I'd like to thank everyone for joining us on our second-quarter call and we look forward to talking to everyone when we report our third-quarter results.

Thank you.

Thank you.

This concludes today's conference.

Thank you for your participation, you may disconnect at this time.

Have a great day.