DICK'S Sporting Goods Inc (DKS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Dick's Sporting Goods, Inc. earnings conference call. My name is Lacey and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Good morning and thank you for joining us to discuss our third-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 (technical difficulty) today's discussion includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes 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, except as required by the securities laws.

We've also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly-comparable financial measures, calculated in accordance with generally accepted accounting principles and a related reconciliation, can be found on the investor relations portion of our website at DicksSportingGoods.com\investors.

Leading our call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our third-quarter financial and operating results, guidance, 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 now turn it over to Ed Stack.

Thank you, Anne-Marie, and thanks to all of you for joining us today.

We're very pleased with our third-quarter results, which included sales meaningfully above our expectations, record earnings, and an exceptionally strong balance sheet. Our consolidated non-GAAP earnings per diluted share for the third quarter of 2011 was $0.32, which represents an increase of 45% compared with the third quarter of 2010 and exceeds our original expectations of between $0.24 and $0.26.

Sales for the quarter increased 9.3% compared with the same period last year, driven by the growth of our store network and by a 4.1% increase in consolidated same-store sales. This growth in consolidated same-store sales reflects increases across all of our channels, with Dick's Sporting Goods sales up 3.8%, Golf Galaxy up 2.4%, and e-commerce up 16.8%.

Virtually all of our categories contributed to the sales increase, including our Lodge hunting business, which produced slightly comp positive results following the modifications to our ad strategy we discussed at the end of Q2.

We continue to strengthen our balance sheet, building our cash position to $483 million at the end of the third quarter, up $324 million from the $159 million balance at the end of Q3 last year.

We also continued to make marked progress in advancing our three growth drivers, which are to expand our store base, strengthen our e-commerce business, and to continue to develop our margin accelerators. I'd like to run through our progress in each of these areas.

On the store-expansion front, we've opened new Dick's Sporting Goods stores at a rate of 8% this year. We expect this base to increase slightly next year. Looking at the longer term, we believe we have the potential to open more than 400 additional stores over the next several years, giving us a total of at least 900 stores in the United States.

Turning to our e-commerce business, this remains a focal point for us as we continue to develop and enhance content, invest in capabilities to improve profitability and accelerate sales. It's important to keep in mind that e-commerce is currently only a small piece of our business and that we are in a buildout stage. We are making steady progress in this effort, and by 2013 we expect our e-commerce business to start making a more meaningful contribution to our results.

Moving to our margin accelerators, our continued success in the areas of inventory management and product mix contributed to notable margin-rate expansion of 47 basis points during the quarter. Meanwhile, inventory per square foot increased only 0.1%. On a consolidated same-store basis, our sales increased 4.1%.

Looking ahead, we believe there is an opportunity for us to realize additional margin expansion, as well as market differentiation, by increasing our penetration of private-label and private-brand products. As I mentioned in our last earnings call, we have introduced new lines this year including KOPPEN in the outdoor area, Nickent golf, and Nishiki bikes, accessories, and apparel. We anticipate the private-label, private-brand penetration to have a more meaningful impact starting in 2012, and we expect that by 2016 it could represent approximately 20% of our business, up from approximately 15% this year.

For the fourth quarter of 2011, we expect consolidated earnings per diluted share to increase between $0.87 and $0.89, compared with non-GAAP consolidated earnings per diluted share of $0.76 for the same period in 2010.

We expect consolidated same-store sales to be flat to 1% for the fourth quarter, which represents an acceleration on a two-year stacked basis in Q4 as compared with the two-year stacked comps generated in Q3.

For the full-year 2011, we are raising our non-GAAP EPS expectations from between $1.94 and $1.96 to be between $2.01 and $2.03. We now expect our consolidated same-store sales to increase approximately 2%, which is the high end of our previous expectations of between 1% and 2%.

This morning, we also announced that our Board has declared an annual cash dividend for 2011 of $0.50 per share. The dividend will be payable on December 28 to shareholders of record as of December 7. Our current expectation is to pay quarterly dividends going forward, subject to Board approval in each case. We believe we can return value to the shareholders through a dividend while still investing in profitable growth opportunities.

In summary, we had a strong quarter during which we delivered solid financial performance and further strengthened our balance sheet. We also expanded our store network, developed our e-commerce business, and increased margins.

The credit for these accomplishments belong to our Associates, who represent the first line in executing our strategic initiatives and -- interacting with our customers every day. I want to thank each member of our team for their many contributions to our continued progress.

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

Thanks, Ed.

We continued to execute our store-development strategy in the third quarter, completing numerous store openings and remodels, delivering strong new-store productivity metrics, and rolling out shared-service footwear decks and enhanced specialty shops to more locations, all while paving the way for continued expansion.

In the third quarter of 2011, we opened 19 new stores and remodeled 13 stores, and at the end of the quarter, we operated 474 Dick's Sporting Goods stores with 26 million square feet and 81 Golf Galaxy stores with 1.3 million square feet.

Within the first two weeks in the fourth quarter, we completed our new store plan for 2011 by opening an additional six stores. For the full-year 2011, we opened a total of 36 new stores and remodeled 14 stores. Our new store openings for the year represent an 8% growth rate, and in 2012, as Ed mentioned, we anticipate opening new stores at a slightly higher rate.

We continue to be pleased with the performance of new Dick's Sporting Goods stores, posting new-store productivity of 101.9% in the third quarter. This compares with 102.3% in the third 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.

Within our stores, we continue to grow the number of shared-service footwear decks and vendor shops. At the end of the third quarter, we had 124 shared-service footwear decks, 103 Nike Field House concept shops, 45 Under Armour All-American shops, and three Under Armour Blue Chip shops.

As I mentioned in the last earnings call, we plan to open a new 600,000-square-foot distribution center in 2013. This DC will be in Arizona and is expected to support 750 stores. We will be building this DC with the construction starting in December of this year.

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

Thanks, Joe.

Sales for the third quarter of 2011 increased by 9.3% to $1.2 billion, compared with the same period a year ago. Consolidated same-store sales increased 4.1%. Dick's Sporting Goods' same-store sales increased 3.8%, Golf Galaxy increased 2.4%, and the e-commerce business increased 16.8%. The growth in same-store sales in Dick's Sporting Goods stores was driven by a 4.8% increase in sales per transaction, partially offset by a 1% decline in traffic.

Consolidated gross profit of $350.6 million was 29.72% of sales, or 126 basis points higher than the third quarter of 2010. This increase was driven primarily by an increase in merchandise margin of 47 basis points and occupancy leverage of approximately 79 basis points. Merchandise margin increased as a percentage of sales, primarily due to the continued effective inventory management, as evidenced by less clearance activity compared with last year and a shift in product mix.

Non-GAAP SG&A expenses were $274.4 million, representing 23.26% of sales, compared with 23.73% of sales in last year's third quarter. This leverage of 47 basis points was primarily due to a decline in store payroll that was partially offset by an increase in advertising. Non-GAAP amounts exclude the favorable impact of lower litigation settlement costs and the impact from Golf Galaxy store closure costs in 2011 and 2010, respectively

As we noted in the press release this morning, the final settlement of previously-disclosed litigation favorably contributed $0.01 to GAAP earnings per diluted share as we partially reversed a charge we took in the fourth quarter of 2010 when the settlement agreement was initially executed.

Moving to the balance sheet, we ended the third-quarter 2011 with $483 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 third quarter with $159 million in cash and cash equivalents and no outstanding borrowings under the facility.

Inventory per square foot increased by 0.1% at the end of the third quarter of 2011 as compared with the end of the third quarter of 2010. Net capital expenditures were $48 million in the third quarter of 2011, or $62 million on a gross basis, compared with the net capital expenditures of $50 million, or $56 million on a gross basis, in the third quarter of last year.

For the fourth quarter of 2011, we anticipate our gross profit rate to increase year over year, primarily as a result of our success in developing our margin accelerators. Year over year, our merchandise margin expansion in the fourth quarter is expected to be similar to what was generated year over year in the third quarter. We are not anticipating a meaningful impact from inflationary pressures in the fourth quarter of 2011.

In 2012, we anticipate seeing more of an influence from inflation, but expect to offset margin pressures by continuing to prudently manage our inventory, continuing a shift in product assortment mix, while judiciously passing on price increases. We expect SG&A as a percentage of sales to decline in the fourth quarter of 2011, as compared to the fourth quarter of 2010.

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

Diluted shares outstanding are expected to be approximately 127 million, compared to 124 million in the fourth quarter of last year.

Non-GAAP earnings per diluted share are expected to increase in the range of $0.87 to $0.89 from $0.76 last year.

For the full-year 2011, we anticipate that non-GAAP earnings per diluted share will be in the range of $2.01 to $2.03. Specifically, we anticipate that our gross profit rate will increase year over year, primarily as a result of higher merchandise margins and some occupancy leverage. We also anticipate SG&A expenses to leverage in 2011.

For the full year, diluted shares outstanding are expected to be approximately 126 million, compared with 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 from 2010 to 2011 is a result of our efforts to support our growth drivers. These include opening a greater number of new stores, completing store remodels, and implementing system enhancements.

We are very pleased with our performance for the third quarter of 2011. We generated accelerating sales and we delivered profitable growth that far exceeded our original expectations. We also continued to expand and strengthen our business by focusing on the three growth drivers we have identified as central to our progress, including adding profitable stores, developing our e-commerce business, and increasing our margins. As a result, we are solidly positioned to achieve continued growth and improving financial results.

This concludes our prepared remarks. We'd be happy to answer any questions you may have at this time.

(Operator Instructions). Brian Nagel, Oppenheimer.

Hi, good morning. Congratulations on a nice quarter.

Thank you.

So looking at the sales progression, obviously you had a -- the comp sales beat your guidance and, I think, Street expectations in the quarter here. As we talked over the last couple quarters, the outdoor category seemed to be one of the laggards in the business. Did that dynamic shift here in Q3? And then, the second question to that was as a result of -- I know you were going to put more advertising -- or more -- shift the advertising dollars more towards the outdoor category, so I was wondering if that had an effect as well?

So the outdoor category that is of most importance to us in the third quarter did, so that would be the Lodge hunting business, was, as I said, moved to be slightly positive to when we modified our advertising strategy.

And then, going -- as we look into the fourth quarter, do you expect this same type of trend to sort of, say, continue as far as the dynamic between the categories and sales?

Again, we don't see any real meaningful change here. We do know and we've talked about it, when the weather has helped us, we've indicated it, and the fourth quarter is -- the weather is helpful in the fourth quarter for us here, and we had a great fourth-quarter weather last year.

Okay, great. And just one follow-up, if I could, obviously in light of the good results you reported. But is the NBA strike or the prospects for a continued strike there have any impact in your business that you can see?

None whatsoever. Now if it was the NFL, yes, it would, but the NBA, virtually nothing.

Kate McShane, Citi Investment.

Thank you. Good morning. So I know the fourth quarter, you had just mentioned, is a very tough comp from the colder weather, but we also know that you had expanded your outerwear offering into some of the more premium brands and I know that is a bigger effort by Dick's this upcoming winter. So I was wondering if there was any way you could help us quantify or understand how big of the comp lift from last year was from new initiatives within outerwear and how much we can expect as you continue to focus on this category in Q4?

For competitive reasons, we're not going to break it out at that granular level. But we did have very good success with the premium outerwear last year. The content that our merchandising groups have put together this year, I think, is better than last year, and some of that product is in a broader array of stores this year than last year.

So we're -- if we get the cold weather, which we hopefully will, the content we have in the stores is great, and when we did get a little bit of cold weather in the third quarter, the customer voted and liked the content. We did very well in that category when we had those couple weeks of very cold weather.

Okay, great. And then, my follow-up to that is I know on previous calls there was some mention of Northbay shop in shops. Are there any further details on this initiative and any timing?

Well, we're in the process -- we did several of those this year. We expect that we'll do some more of them next year, but to lay out a specific plan of how many of them for next year, it's a little too early to do that yet.

Okay, great. Thank you.

Christopher Horvers, JPMorgan.

Thanks and good morning. A similar question about the golf category. Obviously, golf goes down to a seasonal low here in Q3, but then it picks up into the fourth quarter. Can you talk about how you view the momentum in that category as we enter the Christmas gift-giving season, and maybe dimensionalize what kind of the average driver price point is this year versus last year?

Well, into the fourth quarter, I would expect the driver AUR to be slightly higher this year than last year -- because of the technology that's out there, the TaylorMade R11 driver in particular. So we don't see a whole lot of difference going into the fourth quarter than we've seen in previous quarters.

And then, similarly on the innovation side in the apparel category, is the wicking -- you know, the cold-weather cotton wicking material as successful as perhaps what the wicking materials you saw in the past?

If you're talking about Storm Cotton, that's done very well, but all the technology apparel products have done very well, whether it be from Nike, Under Armour, North Face, Spyder. Columbia, we're extremely enthusiastic about what's going on with Columbia with their Omni-Heat technology, which is not only in the outerwear pieces but in base layer pieces and accessory pieces. So, technology is -- continues to drive the apparel business.

And then, finally, Tim, on the merchandise margins, another strong quarter, sequentially a little bit slower. Is that simply a function of compares where -- or perhaps the clearance of inventory is getting down to such a level that it's harder to get better?

Chris, that's exactly the point. Our clearance inventory per square foot was down another 20% on the quarter. And we indicated even in the last quarterly call that the third- and fourth-quarter margin improvements wouldn't be as sizable as they were in Q1 and Q2.

Dan Wewer, Raymond James.

Thanks. Ed, in your prepared comments, or actually, it was probably Tim, you talked about some inflationary pressures on cost of goods sold in 2012. This would probably be a good time to kind of give us an update as to what's happening with your key vendors and the magnitude of the price increases you expect for next spring, and we're hearing that perhaps the amount of the increase may be less than was contemplated, say, six or nine months ago.

It is a bit less than what we had anticipated. I think our vendors have done a great job outsourcing their product. Our merchants have done a great job of trying to work the mix of products, if you will, as we build our assortments. So, there's certainly some inflationary pressures going into 2012. We're very confident that going into 2012 we can continue to have margin-rate expansion in 2012.

And then, just a follow-up question, also on the golf category. The TaylorMade R11 driver was just a huge catalyst for that entire industry, and I'm assuming that was true for Dick's and Golf Galaxy as well. People I'm talking to in the industry are scratching their heads and trying to figure out what is going to replace that R11 business in 2012. I don't think it's going to be a purple driver, but curious as to what's left in that sector that could keep the momentum going?

Well, I think that there's -- you can -- we feel that we can keep that momentum going, and TaylorMade is coming out with the -- another new driver that performance characteristics are slightly better than the R11 that came out this year, again in a white driver, but there are other brands that have introduced products that we think will help that -- the category, also, whether it be what Cobra is coming out with, Adams. A number of other companies have come out with products. TaylorMade has come out with another subset of products to help drive this business. So, there still continues to be quite a bit of innovation in the golf driver category.

Camilo Lyon, Canaccord Genuity.

Thanks very much. Good morning, everyone. I wanted to ask about your inventory. Your inventory position here has been quite impressive. Do you feel that you're running the risk of perhaps leaving some sales on the table by running a bit too lean?

So, we've talked about that, and is there the possibility that we have done that in some lower-tiered stores? There is the possibility. We're looking at that, although we're still very pleased with the quarter we had with comps up 4%, certainly above our guidance.

But we do keep an eye on that, and I won't say that we have everything perfect, but we feel that we're really in very good shape, but we do have some lower-tiered or lower-volume stores that may have been slightly underassorted.

Okay, and what's your confidence interval with respect to reordering inter-quarter, should demand outstrip your plan?

With a number of brands we've got, what we characterize as partnership orders, which is product that is held for us, so I'm pretty confident that most products in categories, if we have to go chase, we can. There'll be certain categories or certain products that if demand outstrips supply, we won't be able to go back and get, but we're pretty confident and have always been able to chase product when needed.

Great. Then my final question relates to the shop in shops. How should we think about the potential buildout of shop in shops, whether it's the Nike Field House or the Under Armour All Americans for next year as I think that those have been fairly incremental to your comp performance this year?

Yes, we're looking at that right now with both of those vendors, Nike and Under Armour, along with North Face and a couple of other vendors that we think we can continue to build out these shop in shops. They've been very successful, and we're looking at what the next step is on some of these shops with Nike, so do we continue to open up shops in additional doors? Is there some different categories of product that we can apply that same strategy to? Nike takes over the NFL jerseys for next year, so we're looking at how we can incorporate and really launch that jersey initiative in the NFL with Nike in a shop-type concept.

Would it be fair to say that the number of shop in shops have increased 50%, 100%? What kind of ballpark can we start to play with?

It would be less than 100%. And I would say probably less than 50%, but more than -- probably more than 25% or 30%.

Okay, that's helpful. Thanks so much and continued success.

Thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good morning. My first question relates to the gross-margin math this quarter. Your gross-margin increase was similar to that that you registered in the second quarter. Your merchandise-margin increase was about 60 basis points less. Was the entire remainder a reflection of occupancy, and did you leverage occupancy and distribution at a greater rate than we would've seen earlier in the year in order to get there?

We leveraged occupancy at 79 basis points, Matt, so that made up the sum total of the difference.

Got it. And any movement in rents contributing to that or is it solely on the sales?

No, there's -- several things happen in individual quarters. There are things like co-tenancy violations, real estate assessments that come in favorably, as well as some cam audits that also help. So all three of those contribute to the occupancy line.

Got it. Secondly, on the composition of the comp, and particularly with regard to the ticket, so the ticket increase was quite strong. If you could comment on whether that relates to AUR or units per transaction, and then, it sounds like you're getting some inflation benefit, if you will, to sales already and perhaps not yet experiencing it in cost of goods, so if you could just talk about the relationship between the timing of those dynamics.

Matt, we're not -- there's not much inflationary benefit, which we've been pretty consistent with all year that we didn't see much of a increase in costs this year, but it would show up in the first quarter of next year. So, the vast majority of products that we're selling are relatively the same price as last year, so the North Face Denali, the North Face Khumbu, the Spyder sweater jacket, all of those products are relatively the same -- are exactly the same prices they were -- as they were last year.

We did see a little bit of AUR increase based on some of the products that we sold with -- we had a great third quarter with footwear that moved up some AUR as we moved into some better technical running shoes and technical football and soccer cleats.

The same with some outerwear. We had a very good month of October from an outerwear standpoint, which certainly raised the AUR this year versus last year of our outerwear business.

Got it, and then I have got to ask, you know. You guided to flat to plus-1 cops against a tough compare. It has been warm out, at least here, and I wonder how you're putting that in context of the weather that we're seeing in the third quarter to date and sort of what has to happen in order for this comp guidance to be reasonable, which, given your track record, we presume it is.

Well, we -- it's warm here, too, Matt. New York is not that far from Pittsburgh. It's warm here, too, and our hope is that it will get colder. And we've always said that we are somewhat a bit weather dependent in the fourth quarter.

But this is based on sort of a normal winter, if you will?

Yes, so this is a relatively normal winter. We're not -- we don't need this to be a super-cold and snowy winter to get these numbers.

Got it. Thank you so (multiple speakers)

But it can't be unseasonably warm, either, so it's got to be relatively normal.

Paul Swinand, Morningstar Inc.

(Technical difficulty)

Robbie Ohmes, Bank of America Merrill Lynch.

Thanks. Good morning, guys. Two follow-up questions, just quickly, on the footwear. Ed, can you talk about the timing of some of the price increases coming in footwear for next year? My understood is that while the apparel price increases may be not as much as people thought, footwear price increases from Nike, et cetera, do start coming in in the first quarter, even in December here, and just your thoughts on whether the net result of that could actually help your same-store sales in that category or sort of be a neutral type of situation.

And then, the other question is just on the shared-service footwear model. You've got, I think, 124, you guys said. Are those conversions a significant comp lift in those stores and is there a seasonality to how the shared service performs? Does it perform better in the back half than the front half? Any more color you can give us on how those are going? Thanks.

So the inflation rate in footwear, there is certainly some inflation that's going to hit us in the first quarter of next year. We're pretty confident that we'll be able to maintain and grow our margin rates and grow the sales there.

You know, it's part of our job. It's what our buyers do, our merchants do, is to work that mix. So we're pretty confident we can -- that that's not going to have a negative impact on us.

As far as the shared-service footwear, we continue to be very pleased with the performance that we've had here in the shared-service footwear. They've outperformed the market as a whole, and also what's important as we've kind of talked with the customers, they like this idea of the shared-service footwear. They feel that we've got -- we provide better service because they don't have to wait for someone to go get the product for them, although we do fully staff these areas so that there is help there if people need it. They're staffed to help people when they need it. The customer finds that our service is better, and they gave us give us credit for a broader product assortment, although we really don't have a better product assortment. It just looks that way.

So, all in all, as we take a look at this and we've analyzed this in many different ways, and we continue to come up with this is the way to move forward.

Michael Lasser, UBS.

Good morning. Thanks a lot for taking my questions. Two, actually, number one on the traffic. This is the second quarter in a row you've seen traffic decline year over year. What can you do to reinvigorate the transactions line?

And then, second, Tim, from your commentary on the occupancy leverage in the quarter, it sounds like a lot of that is going to be sustainable, so has that line item been rebased to a lower level such that we should see a similar trajectory of a leverage moving forward?

Let me pick up the question on the occupancy. Keep in mind, my comment regarding Q3 was more specific to Q3 because we do have those changes happening differently each quarter.

But I will say this, that we certainly expect for the entire year that we will leverage occupancy based on the overall comp guidance for the year. So I wouldn't suggest that this is a run-rate item, that I think is what you were alluding to, as much as we are seeing slight improvement in the three categories that I mentioned in terms of real estate taxes, CAM, and, to some degree, co-tenancy issues.

From a traffic -- sorry.

No, no, I meant I was just going to say on the traffic side.

Yes, on the traffic side, there is a number of retailers that have talked about traffic being down slightly. Our traffic is down slightly.

I think that part of this is what is happening from an e-commerce standpoint. People are doing more investigation in the -- of what they want to buy before they come into the store. We're seeing that a lot. I think trips are -- there's a few less trips, but people are buying more products when they get there, which has contributed to our comp of just over 4%.

And do you think that there's something you could do to reinvigorate traffic growth?

Well, I think that there is some things that we can do, but you have to take a look at what some of the reason for this traffic is, and part of the traffic is the Internet. That is one. Another bucket of the issue with the traffic is just the reduction in our clearance products. We've got 20% less clearance this year over last year. That affects that also, so that affects traffic in a negative way, if you will, but it also attracts -- it affects margin in a positive way and average unit retail in a positive way.

Joseph Edelstein, Stephens Inc.

Good morning, everyone. Under Armour recently reported that its direct-to-consumer sales were up over 70% in the latest quarter. I know this has been a point of contention between the retailers and vendors, but is there anything that regulates pricing or the timing of product rollouts between the retail and direct-to-consumer channels? And if not, is your solution really to just focus on the private-branded products as well as the shop-in-shop concepts?

Well, there's nothing that's regulating price or when products are introduced, and our brands will continue to kind of move in the direction that they feel they need to move in. Our product assortment will do the same, and there is a bit of a quid pro quo of the brands direct to consumer and our acceleration of private brands.

Okay, and then, on a second topic, last quarter you mentioned that there were several long-term IT and operational initiatives related to the inventory management. I know that you have now been working through the clearance inventory, but can you tell us a little bit more about those initiatives? What the benefit might look like as we work through that process?

Sure. There's a number of initiatives that we've been working on. Our price management system, you know, that's really going to bring structure and consistency to our pricing process across the channels. We're going to really start to see that benefit in 2012, sometime in 2012.

Merchandising sizing and packing optimization is another initiative that we're working on. Again, that is something we worked on this year. Again, we'll see benefits to that sometime in 2012.

Supply-chain intelligence is another initiative that we've focused on as well, and really, that improves management visibility to key distribution, transportation, vendor, and logistics performance metrics.

So, those are just some of the things that we've worked on in 2011 and will continue to work on in 2012 and 2013.

Can you quantify what the benefit might look like from those three initiatives?

No, we haven't quantified that.

John Zolidis, Buckingham Research.

Hi, good morning, and congrats on a great third quarter.

A question about future store openings. My sense is that there hasn't been a lot of real estate expansion out there, so could you just comment on the availability of real estate and how challenging it might be to hit your target to increase the rate of square-footage growth next year and going beyond that?

And then, secondly, with regard to the outdoor category. Great to see that it improved back into positive comps this quarter, but could you also comment on whether competitors in that category may be making it more difficult, i.e., the other more big-box focused outdoor retailers? Are those a factor in that category's underperformance versus the rest of the store? Thanks.

From a real estate standpoint, our real estate group is quite competent, and we have the vast majority of leases signed for next year. So we're highly confident that we'll be able to deliver a slightly accelerated growth rate next year and we're working on a number of things for 2013 also. So we're pretty confident.

It's pick-and-shovel work, though. I mean, this is hard stuff out there because there's not a lot of new development out there, although we've seen a slight improvement going forward. So we're quite confident that we can do this. If we weren't, we wouldn't have indicated that we think we can accelerate the growth rate.

As far as the outdoor category goes, I think there is a combination of things from an outdoor standpoint. There's a couple of outdoor retailers that we have got great respect for. We think that they do a terrific job.

But I think that most of our issues from the outdoor standpoint were really self-inflicted, from what we did from a marketing standpoint, and as we kind of moved into the third quarter, we thought that we would be more aggressive and we would change some of those marketing dollars back to that category of business, and we're pleased with the results. And as I said, the hunting area, which is the important third-quarter category, moved to be slightly comp-positive in the third quarter.

Sam Poser, Sterne, Agee.

Good morning. You mentioned the margin mix as far as it helped the margins. Can you walk through the mix of product of hard line, soft lines, and how that may have affected the numbers?

The soft-lines business increased. The hard-lines business as a percent -- portions of the hard-lines business decreased, and some of the higher-profit margin hard-lines business around team sports increased as a percent of sales. So we really -- we worked the mix around the more profitable businesses.

And that's also reflected in the -- when you're redoing the stores or new-store openings. In other words, that's reflected in the layout -- the new layouts, as well, correct?

We haven't changed the layout significantly, Sam. I'm not sure what you mean by that.

Giving more space to apparel versus taking some space away from a hard line, less productive business.

It's so small that you wouldn't even notice it.

Okay, and then -- thank you. The new stores that you're opening, what is the size of those new stores, on average? I noticed that your average square footage went down a little bit on the store openings for the quarter, so I was just wondering if you could talk about the size of the new stores that you're opening and planning to open going forward.

The majority of the stores that we're planning to open are in that 50,000-square-foot range. We've taken some slightly smaller real estate and modified a little bit of some of the products that we carry. There's been a couple of stores that we took out parts of the outdoor category because we didn't think that they played real well in those areas of the country or the market we were going into.

But we're still looking at primarily the 50,000-square-foot stores and we will, where appropriate, open some two-level 80,000-square-foot stores.

Thank you, and then, lastly, the stores that -- the productivity, the new-store productivity of around 102% is a little bit -- not quite as good as last year, but very, very high. Is this a situation -- could you talk about sort of the productivity of those stores, like the stores that have just hit the comp base? Are those the stores that are really driving it versus the older stores, and how are the re-dos doing on a relative basis to the comp? Remodels?

Our comp has really been very good across all classes of stores, so some of our older stores that are 10, 12, 13 years old have comped very nicely. The new stores have comped very nicely, and 102% new-store productivity is really quite good, Sam. We're pretty happy with that.

Of course, what I'm asking is is like the year out, from last year those stores that are on year two should have even gotten better, I would assume?

They've comped nicely. We're very pleased with the classes of stores that have opened from a comp standpoint.

Mike Baker, Deutsche Bank.

Thanks. Two questions. One, I think on the last call you guys were talking about a double-digit operating margin at some point. I think you're at about 7.9% today on a trailing 12-month, so double-digit, I assume that is still the plan. Can you -- do we expect more of that to come in the gross margin or the SG&A line?

We've said that the double-digit operating percent of sales is certainly possible for us as we get out three to five years, and you will see that being generated from both gross margin enhancements as well as operating expense leverage.

And the gross margin drivers are primarily private-label, the mix going more towards these store-within-a-store type things which I imagine are higher label, and/or systems, or can you sort of order those three?

Those are exactly the primary drivers, and then the one that you didn't indicate was our relationship with our vendors.

Okay, good. If I could ask just one or two more, just could you update us where you are in your e-commerce in terms of in-store pickup and other initiatives to try to differentiate your e-commerce experience versus what some pure-play e-commerce retailers might be doing?

Sure. Mike, as Ed indicated, we're still in the buildout phase of the e-comm business and expect that we will be for the next 12 to 15 months.

As far as vendor direct-to-customer, order online, pick up in store, we're still working through those initiatives. We expect to launch those sometime in 2012. We haven't announced specifically what part of 2012 we're going to announce those or launch those, but we're still working through those and expect those to launch in 2012.

We continue to work on the functionality and content, improving that in our website, and I think if you jumped on our website you'd see many examples of that. And I think that pretty much takes care of (multiple speakers)

That answers the question, thanks. One more, while I have you. What are you seeing from your competitors? I think Sports Authority has opened -- they were closing stores earlier in the year; now they're starting to open them back up, and any changes to what you're seeing from Academy now that they're under new ownership?

We haven't seen any real change in the competitive dynamics since TSA is doing whatever TSA is doing and from the acquisition of Academy by KKR.

Sean McGowan, Needham & Company.

Thank you. Two questions, as well. Tim, any commentary on the distribution center? When that will start hitting cash flow and even operating expenses?

Some cash-flow considerations will be late, very late this year as we start the building process, moreso in 2012, and the opening of that distribution center isn't expected until January, February of 2013. There will be some pre-opening costs in the fourth quarter of 2012.

And when it is open, I know this is way out, but would you expect any material deleveraging of overall expenses?

Nothing material. There's always some initial startup, but we think we are getting pretty good at the distribution process and opening these facilities with very little impact on the business.

Terrific, thanks. And a question for Ed, any comment on how your initiative is going in some of the smaller markets, you know, markets that are little smaller than your typical markets?

Those small markets have continued to do really quite well. They're less competitive. Occupancy costs are a little bit less, and they've been really very good for us.

Mark Mandel, ThinkEquity.

Thank you very much. Good morning, everyone. Last year in the fourth quarter, your expenses were up 16% due to a number of initiatives and, I guess, efforts to more deeply penetrate the West Coast. How should we think about or how are you thinking about expenses in the fourth quarter of this year, either in terms of year-over-year growth or just overall leverage?

The investment we made in the West Coast was not last year in the fourth quarter. It was the year before.

Okay, but you did increase spending at a 16% rate last year in Q4, so how should we think about this year?

We did, but I just wanted to make sure we called out the fact that the investment in the West Coast was the year before. (Multiple speakers). Tim?

No, we expect to leverage operating expenses in the fourth quarter. It's our best quarter in terms of overall leverage possibility, but you should think more of a normal spending range in terms of increases in the overall SG&A, so look at that as an inflationary type of increase.

So something less than the rate of square-footage growth, something along those lines?

Yes.

Okay, in terms of -- and then, finally, tax rate. What should we look for in terms of the fourth quarter or the full year?

For the fourth quarter, you should anticipate a 39.4% tax rate. For the year, 39.2%.

Great. Good luck with the holiday season.

Thank you.

Chris Svezia, Susquehanna Financial Group.

Good morning, everyone, and congratulations. A couple questions. Ed, for you, in the third quarter relative to your forecast in terms of comp performance, anything that you can call out in terms of what surprised you in terms of outperformance? And I believe historically you've always made a reference to apparel and footwear outperforming the overall comp. Can you add any color in and around that this quarter as well?

Apparel and footwear certainly outperformed the comp as a whole. The outerwear products performed extremely well inside the apparel category, driven by some cold weather that we were fortunate enough to get in October.

Okay, and then, when you think about fourth quarter and going to holiday, I know you had touched a little on golf, a little on outerwear, and hopefully the trends in the outdoor piece continue to show improvement. Any other areas worth noting in terms of where you think there could be some excitement? Anything in the fitness category, et cetera, that's notable?

Yes, no, I think we've pretty much covered them. It's going to be apparel, footwear, the golf category. The hunting category is very important to us in the fourth quarter, especially in November and December, and those are the key categories that will help drive our business, and we're all doing the snow dance around here.

I hear you. And then, the other two questions I have is one, maybe Tim for you, if you can talk at all about the actual cash component for the new DC center. And the other piece was just in terms of new stores as you look to 2012, percentage in new markets versus existing markets. Any color in and around that would be helpful.

In terms of the DC, we are going to build and own this DC. It's approximately a $40 million investment for us, but there is additional investment in CapEx when it comes to the equipment inside the warehouse, and as we get through those plans, we'll outline that additional CapEx on top of that.

Okay, I've got you, and then, new stores?

I think you can expect pretty consistent performance. We'll have a mixture of new store markets and some backfilling some existing. We haven't announced the breakdown of that.

Okay. Well, best of luck to you guys. Thank you.

Joe Feldman, Telsey Advisory Group.

Hi, guys. Thanks for taking the question. A couple of questions for you. One was -- I may have missed this. You mentioned about regional trends, and I was kind of thinking if you saw anything specific around the country in weather-related issues earlier in the quarter with the hurricanes or anything going on in, like, California that you could talk about or the Midwest?

There's nothing significant going on in a regional basis. As you would expect, areas that got colder, the areas that had that freak snowstorm in -- kind of up the East Coast in October did extremely well from an outdoor standpoint, outerwear, boots, all of those products, but that was really caused by the weather, not by any fundamental change of what's going on in a particular area of the country.

Got it. And then, another unrelated question, kind of on -- on all the in-store initiatives, like the Nike Field House shops and the Under Armour in-store shops, are you seeing a difference among the shops, like where -- is one brand or one format working better than another that you know, or is it -- I know we have a lot more Nike shops right now. I know that's probably more timing as opposed to an indication of performance, but I'm just curious if you are seeing anything that you could share.

No, when we do these shops, whether it be Nike, Under Armour, the North Face, they have all performed really quite well, and we do have some more Nike shops than we do Under Armour shops, but where we've put in the UA shops, they've performed very well. Where we've put the Nike shops in, they performed very well, too. So this has been a great program across the board.

That is good to hear. Thanks. And then, one other question, sort of related to your online initiative. Since I guess taking over more control of your e-commerce site, obviously sales have been pretty good, but anything you've learned since doing that or you're saying, wow, there are some really good opportunities that we're not even capitalizing on yet. Any new ideas that you might have since you've taken more ownership?

Well, there are some things that -- we think there's great opportunity from an e-commerce standpoint. I think that there are some things that we are working on that are limitations inside the system right now, such as order online, pick up at the store, or order online, ship from the store. There are some systemic shortcomings in the system that is being addressed at a pretty rapid rate with our partners, and as we get those done, we think that there is very little -- at that point, there's very few roadblocks to us growing this business at a pretty rapid rate.

Got it. Thank you and good luck with this quarter, guys.

David Magee, SunTrust Robinson Humphrey.

Good morning, guys. Just two questions. One is the -- as you look down the road with regard to the e-commerce business, how do you think the pricing shakes out over time and how will that channel compare to your stores, do you think, in relative profitability from, say, an EBIT standpoint?

How pricing is going to play out is interesting. We've talked with a number of retailers. Everybody's trying to figure this out, so there's nobody that has -- I don't think there's anybody who has really got the answer on how they feel this is going to ultimately play out.

We do feel that the profit, as we leverage our e-commerce business, that it can be close to as profitable, maybe a bit -- even more profitable than the stores, but that's going to take a little while yet, so that's a number of years out. But we think this will be a very profitable channel for us going forward.

Mark Miller, William Blair.

Hi, good morning. Another follow-up question on e-commerce. The growth did slow a little bit versus prior quarters, but I know it is a small base so percentages can be misleading. But anything you discern from that on traffic or conversion? And then, how much has the assortment changed since the beginning of the year?

As far as business in Q3 slowing from Q2 and Q1, that was expected. We did not anniversary a promotion from last year where last year we had no exclusions, no minimums, free ship. And as you would expect, that drove a lot of the high price point businesses, like the fitness business. So we anticipated that we would not anniversary that business.

That said, we're pretty pleased with our business in Q3. We continue to learn, and with the inventory we continue to grow the sales in areas that you would expect, very similar to our store base, athletic apparel, athletic footwear. It dovetails pretty closely with our brick-and-mortar business.

Thanks. And I'm curious what you've learned about your customers' behavior online. As you're getting this growth, do you think it is coming -- is it additive to the business or is it business moving from the store online? Can you track that, and do you have a sense for whether it's growing the overall pie?

We think it's a little of both. I mean, Ed indicated earlier that customers are doing a lot more work prior to shopping. They're online, they're shop -- they're doing their features and benefits. They're doing their pricing homework. We think that some of that customer is converting to store, and we're gaining some new customers there. And we think we continue to pick up new customers online as well.

This is my final question on the average ticket. As you indicated, there's not much benefit from inflation. To be clear, then, is that average ticket going up with more units per transaction or is there also a mix element, perhaps a little bit better movement on the high end of the good/better/best? Thanks.

I think it's a little bit of both. We've done a better job with some of our accessory programs that are driving those average units per transaction, but also some better product, whether it be better product coming from vendors such as Nike and Under Armour and the North Face, Spyder. We have been able to -- TaylorMade on the driver category. So it's been a combination of both.

Sean Naughton, Piper Jaffray.

Hi, thanks for taking my question. Just a couple of quick questions here. Number one is your sales per square foot, kind of bumping up close to $200. Is that kind of the ceiling that you guys see and is there anything that you need to do from a POS standpoint to help improve the velocity in the store?

And then, secondly, are you making any changes in your winter and seasonal product for this year? Thanks.

$200 a square foot is certainly not the ceiling. We've got a lot -- we have a number of stores doing more than $200 a square foot. So we don't see that that is even close to a ceiling. We have a lot of capacity to do more business in our square footage.

And the changes that we've made to the winter category, we've added some -- continue to add some premium brands to our assortment and add premium brands to a broader assortment of stores. So those are the primary changes that we've made in the winter business.

And just to answer your question on POS, we continue to look at ways to become more efficient in our front-end operations. We've got a number of doors, all new doors, that we opened today. We've installed queue-style checkouts, which have received some pretty favorable responses from our customers and our associates. But as you would expect, we're looking at other opportunities such as mobile checkout and some perimeter checkout opportunities as well.

Got it. Best of luck for the holidays.

Matthew Fassler, Goldman Sachs.

Thanks for taking my follow-up. Just on the inflation theme, to the extent that you expect to see ticket higher next year, is it your sense in your category over the years that consumers have bought to dollars or to units? And how would that -- as we think preliminarily about comps next year, understanding that you don't have a forecast out there yet, how are you thinking that that impacts the sales projections?

It depends on the category. So what we've seen is when there has been certain products that have moved up in price, there's been more resistance to it.

An example would be if we got into the gun and ammunition business, that's pretty price-sensitive business and that has not reacted particularly well to price increases.

We take on the Nike side, the Under Armour side, if the brands bring to market great products, great designs, and technological advancements, the customers have pretty much stepped to the plate and said, yes, I need to have that product, whether it be increases in prices along key styles of football cleats, basketball shoes, running shoes, compression product, North Face products. Columbia has moved up their average unit retail with their Omni-Heat pretty substantially, and the customer has accepted that.

So it's really going to be mixed bag, and it is our job to work that mix in our business to make sure that our sales increase and that we are able to continue to increase the margin rates in which we have done such a great job moving forward with over the last number of years.

And my second follow-up relates to comments that Tim made about the profitability of e-commerce relative to the base. What are the elements that tracks your profitability there, and if you could speak specifically about how you're seeing and experiencing free shipping this holiday?

Well, there's a number of things that affect the profitability, so it would be the shipping revenue or shipping costs. So we're trying to determine what is the right shipping revenue level that we have.

Certainly the fulfillment costs, which as we kind of move into this new release with our partners at GSI, we feel we can reduce the fulfillment costs through GSI going forward, which will certainly help our profitability.

We continue to move our mix to be more apparel, footwear, team sports at higher-margin rate of product. We are trying to accelerate that business, which will move our profitability up, and just as we continue to gain scale, sales are going to be this year roughly 3% of our business. As we continue to move that scale up, we'll be able to leverage our costs associated with our e-commerce business and make it more profitable.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I would like to turn the call back to Ed Stack for any closing remarks.

I would like to thank everyone for joining us on our third-quarter conference call and we'll look forward to seeing everybody as we report our fourth-quarter results. Everybody, have a happy holiday. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect.