DICK'S Sporting Goods Inc (DKS) 2012 Q2 法說會逐字稿

Good morning and welcome to the Dick's Sporting Goods second quarter earnings call.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Anne-Marie Megela, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning.

And thank you for joining us to discuss our second quarter 2012 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 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 uncertainties.

Our actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to our periodic reports filed with the SEC, including the Company's annual report on Form 10-K for the year ended January 28, 2012.

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 related reconciliation can be found on the Investor Relations portion of our website at dickssportinggoods.com.

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

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

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

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 will now turn it over to Ed Stack.

Thank you, Anne-Marie.

I'd like to thank all of you for joining us today.

In the second quarter we generated record results that exceeded expectations.

On a non-GAAP basis, earnings per diluted share increased 25% to $0.65, as a result of a 10% increase in sales and an operating margin expansion of 82 basis points.

Using the strength of our balance sheet to invest in the business with new stores, continuing developing our omni-channel capabilities, and support our private brands, including the recent purchase of the Field and Stream brand and a broad range of outdoor categories.

The 10% sales increase in the second quarter was driven by the growth of our store network, by a 3.8% increase in consolidated same store sales, which was on top of a 2.5% increase in the second quarter of last year.

Same store sales in the second quarter of 2012 for Dick's Sporting Goods were up 2.9%, Golf Galaxy, up 4.4%, and eCommerce sales were up 34.6%.

The comp growth at Dick's stores was broad-based with all l three major categories, Hardlines, Apparel and Footwear comping positively.

Our continued profitable growth is being fueled by our three growth drivers, which are expansion of our store base, strengthening of our omni-channel capabilities, and development of our margin rate accelerators.

Looking at our store growth, we opened four new Dick's Sporting Goods stores in the second quarter and in 2012 we expect to open approximately 38 Dick's Sporting Goods stores.

Our eCommerce business represented approximately 3% of total sales in the second quarter, with same store sales increasing 34.6% over the second quarter of last year.

In the second quarter, we increased our merchandise margin by 29 basis points.

As we move ahead, we plan to generate continued margin growth with the three main drivers.

One is to leverage our inventory management, another is to emphasize private brands, and the third driver is to optimize our product mix.

To strengthen our private brand platform, we entered into an agreement this month to purchase the intellectual properties and rights to the Field and Stream mark in the hunting, fishing, camping and paddle categories.

Upon completion, we expect this acquisition to give us the control and flexibility necessary to maximize and leverage the value of this popular brand.

Lastly, we are successfully shifting our product mix to include more higher margin products by increasing our focus on in-store specialty shops from Nike, Under Armour and the North Face, as well as continuing to build our shared service footwear decks in our new and remodeled stores.

As announced in our release this morning, we have fully impaired the value of our investment in JJB.

We continue to believe in this market thesis underlying our investment.

However, since our investment and as publicly announced by JJB's management, JJB's performance has materially deteriorated from its expectations.

The investment was structured to provide us with meaningful upside and to cap our downside.

Accordingly, we have no further funding obligations and will continue to monitor the situation.

For the third quarter of 2012, we now expect consolidated earnings per diluted share to increase by 13% to approximately $0.36, compared with non-GAAP consolidated earnings per diluted share of $0.32 for the same period in 2011.

This is better than our previously communicated expectations of mid-single digit growth.

Consolidated same store sales are expected to increase approximately 4% on top of a 4.1% increase from the third quarter last year.

We believe fiscal 2012 will also be better than originally expected and accordingly are raising our full year guidance to a greater extent than our second quarter beat.

We expect non-GAAP consolidated earnings per diluted share to increase by 22% to 24%, to between $2.47 and $2.51 a share, which includes approximately $0.03 coming from the 53rd week this year.

This guidance compares to non-GAAP earnings per diluted share of $2.02 in 2011.

On a 52 to 52 week comparative basis, we anticipate consolidated same store sales will increase to between 4% and 5% on top of a 2% increase last year.

We've delivered another exceptional quarter and are on track to post strong full year performance for 2012.

As always, our ability to fuel consistent progress across our Company is the direct result of the commitment and drive of our people.

We are grateful to all of our associates for their exceptional efforts.

We plan to drive continued long-term profitable growth by investing in new stores, continuing to develop our omni-channel capabilities, increasing our margins through inventory management, an emphasis on private brand and the continued shift of our product mix to higher margin merchandise categories.

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

Thanks, Ed.

In the second quarter of 2012, we opened four new Dick's Sporting Goods stores, bringing our store count to 490 Dick's Sporting Goods stores, with 26.7 million square feet and 81 Golf Galaxy stores, with 1.3 million square feet.

Within our stores we have 142 shared service footwear decks, 129 Nike Fieldhouse concept shops, 56 Under Armour All-American shops and five Under Armour Blue Chip shops at the end of the second quarter.

By the end of the year, we expect to have approximately 170 shared service footwear decks, 170 Nike Fieldhouse concept shops, 90 under Armour All-American shops and 10 Under Armour Blue Chip shops.

Our new Dick's Sporting Goods stores continue to perform well with the new store productivity of 102.2% in the second quarter, compared to 95% in the second quarter last year.

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

In total, we plan to open approximately 38 new Dick's Sporting Goods stores this year, approximately half of the stores are expected to be in new markets and half in existing markets.

This year, we also plan to relocate five Dick's Sporting Goods stores which are at the end of their leases, to preferred locations that we have secured.

For Golf Galaxy, we plan to reposition one store in the fourth quarter.

We had originally planned for two repositioned stores this year, one of these stores is now scheduled for Q1 of next year.

Our repositioned stores will be larger than our current format and include more services and more experiential shopping.

We are on plan to open our fourth distribution center in January of 2013.

This 600,000 square foot facility will be located in Arizona and combined with our existing DC network, we will be able to support a total of 750 stores.

On the digital front, we continue to invest in new capabilities, expand content, and upgrade site functionality to provide customers with an enhanced shopping experience and enable them to buy and receive products where, when, and how they want.

At the same time, these investments are improving our ability to manage our inventory, expedite fulfillment times and maintain a solid in-stock position.

In the second quarter, we completed the development of our ship from store capability, began testing it in select stores, and are pleased with the results to date.

In 2013, we will begin the development of an in-store pick-up capability to further enhance our service offerings.

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

Thanks, Joe.

Sales for the second quarter of 2012 increased by 10% to $1.4 billion, compared with the same period a year ago.

Consolidated same store sales increased 3.8%.

Dick's Sporting Goods same store sales increased 2.9%, Golf Galaxy increased 4.4%, and our eCommerce business increased 34.6%.

The increase in same store sales in the Dick's Sporting Goods stores was driven by a 4% increase in sales per transaction, and by 1.1% decrease in traffic.

As we mentioned in our first quarter call, we believe that there was some pull-forward of spring sales from the second quarter into the first quarter, particularly in the categories such as team sports, golf, and bikes.

Consolidated gross profit was $447.8 million, or 31.16% of sales, and was 47 basis points higher than the second quarter of 2011.

This increase was driven by merchandise margin expansion of 29 basis points and occupancy leverage, partially offset by freight and distribution deleverage due to the higher year-over-year mix of eCommerce sales.

SG&A expenses in the second quarter of 2012 were $310.9 million, representing 21.63% of sales, compared with 21.87% of sales in last year's second quarter.

This leverage of 24 basis points was primarily due to advertising leverage partially offset by an increase in payroll relative to sales, and a contribution to the Dick's Sporting Goods Foundation.

As we announced in the press release earlier this morning, we recorded a pretax impairment charge of $32.4 million related to our investment in JJB Sports, which impacted earnings per diluted share by $0.22.

On the balance sheet, we ended the second quarter of 2012 with $350 million in cash and cash equivalents and with no outstanding borrowing under our $500 million revolving credit facility.

Last year we ended the second quarter with $626 million in cash and cash equivalents and with no outstanding borrowings under the facility.

Over the course of the past 12 months we've utilized capital to fund the share repurchase program, initiate a dividend program, purchase our store support center, acquire intellectual property rights to the Top-Flite brand and build our new distribution center.

In the second quarter, we completed the share repurchase program.

Within the quarter, we repurchased 1.9 million shares of our common stock at the average cost of $49.40 per share, for a total cost of approximately $94.9 million.

In total, we purchased approximately 4.1 million shares of our common stock at an average cost of $49.33 per share, for a total cost of approximately $200 million.

As a reminder, the purpose of this share repurchase program was to offset the expected dilutive effect of anticipated option exercise activity from options set to expire in 2013.

Inventory per square foot increased by 4.2% at the end of the second quarter this year, compared to the end of the second quarter of last year.

About 25% of this increase is from the cold weather merchandise that we packed away after significantly warmer than normal winter last year.

This merchandise, which consists of basic winter product, will be sold in the upcoming season.

We expect inventory per square foot to be relatively flat at the end of 2012, as compared to the end of 2011.

Net capital expenditures were $50 million in the second quarter of 2012 or $54 million on a gross basis, compared with net capital expenditures of $44 million or $53 million on a gross basis in the second quarter of last year.

In the third quarter, we now expect non-GAAP EPS to grow approximately 13%, which is better than our previous expectations of mid-single digit EPS growth.

Our third quarter guidance contemplates the following considerations.

First, pre-opening expenses are anticipated to be higher in the third quarter of 2012 as compared to the same quarter in 2011, since there are more new store openings planned in the third and fourth quarters of 2012 as compared to 2011.

Second, we will be hosting the annual Dick's Sporting Goods Open, a champion's tour golf tournament in the third quarter this year.

Historically, this tournament has been a second quarter event.

As a result, the related expense of the Open will shift from the second quarter to the third quarter.

And lastly, we will not be anniversarying a favorable tax benefit of approximately $0.01 per share, which we benefited from in the third quarter of last year.

For the third quarter of 2012 we anticipate same store sales to increase to approximately 4%.

Earnings are expected to be $0.36 per diluted share compared to non-GAAP earnings per diluted share of $0.32 in the third quarter of last year.

Gross profit margin expansion is expected to be driven primarily by merchandise margin, which increased 29 basis points in the second quarter and is expected to expand to a greater extent in the third quarter year-over-year.

Occupancy is anticipated to remain relatively flat as a percent to sales in the quarter with leverage expected for the full year.

SG&A as a percentage of sales is expected to increase relative to sales in the third quarter, primarily due to the shift in the timing of the Open that I just mentioned.

For the full year 2012 we anticipate consolidated same store sales to increase between 4% to 5%, and non-GAAP consolidated earnings per diluted share to grow approximately 22% to 24%, or in the range of $2.47 to $2.51, as compared to the non-GAAP consolidated earnings per diluted share of $2.02 in 2011.

Fiscal 2012 includes a 53rd week, which we believe will add approximately $0.03 to non-GAAP consolidated earnings per diluted share and is contemplated in our guidance of $2.47 to $2.51.

Operating margin expansion in 2012 is expected to be driven by both an increase in gross margin rate and expense leverage.

The gross profit margin rate is expected to increase year-over-year, primarily driven by merchandise margin and occupancy leverage.

SG&A as a percent of sales is expected to decline as compared to 2011, primarily due to lower advertising and store related expenses, relative to sales year-over-year.

This decline is expected to be partially offset by planned investments in eCommerce and systems implementations.

With the execution of our share repurchase program, diluted shares outstanding are expected to be approximately 126 million for our full year, similar to the outstanding shares in 2011.

Just as a reminder, when contemplating the fourth quarter, we anticipate the start-up costs of our new distribution center will have an EPS impact of approximately $0.02 per diluted share.

The majority of these expenses will be incurred in the fourth quarter.

Also in the fourth quarter, we expect to earn approximately $0.03 per diluted share due to the extra week.

For the full year, net capital expenditures are expected to be approximately $190 million, or $241 million on a gross basis.

Net capital expenditures for 2011 were $154 million, or $202 million on a gross basis.

Anticipated increase in capital expenditures from 2011 to 2012 is primarily the result of the new distribution center, and to a lesser extent investments in new stores, vendor shops, system enhancements and eCommerce.

Our second quarter performance, coupled with the outstanding performance generated in the first quarter, has resulted in an exceptional first half of 2012 for Dick's Sporting Goods.

The ongoing initiatives that we've mentioned in this call and the investments we are making in our business, when considered with our strong balance sheet and cash balance, have positioned us well for continued future profitable growth.

This concludes our prepared remarks.

We will be happy to answer any questions you may have at this time.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Robbie Ohmes, Bank of America-Merrill Lynch.

Thanks.

Good morning, guys.

Good morning, Robbie.

Couple of quick questions.

Ed, I was hoping maybe you could give us -- now that we're in the middle of the back-to-school season, any flavor on how that's going for you guys?

Also your view, if there's any update on your view on what the product launch lineup looks like for the fall season here, both from a Footwear perspective and Apparel.

Then I have a quick follow-up after that.

The back-to-school season, we can speak to our second quarter results which were above our guidance, so we were pleased with the second quarter sales.

A portion of those sales, the back-to-school piece is in there.

So early on, we're pleased with it and as we indicated, it was above our guidance and what we expect back-to-school to be is baked into our third quarter guidance, which we can't speak to right now.

And from a product launch standpoint, we're pleased with some of the things that are out there.

We've seen some of Colombia's new technology, North Face's technology.

We're pleased with what's going on out there and we're obviously, relatively enthusiastic about our business because we took our annual guidance up to $0.01 higher than what we beat the second quarter by.

So for us, that's pretty bullish.

And then just a quick follow-up, Ed.

Can you comment on two things, one would be the running specialty store test that you guys have disclosed and the other maybe a little more on potentially what next steps might be in terms of your involvement with JJB from here.

Thanks.

Sure.

The running test, we've opened one store right now.

We have plans to open a second one.

But we think running is an important part of the business.

We're testing a couple of these stores.

They are roughly 4,000 square feet higher and technical running stores.

Where we're going to go with these, we can't comment right now.

We've got one open.

We're opening another one in October.

What we do believe will happen, and has already happened to some extent, is we will learn what that technical runner's looking for from both a Footwear and Accessory and Apparel standpoint, and be able to apply that to our stores.

Our running business has been very good and part of that has been due to the research we did on the technical running store.

So we're pleased with that.

Our involvement with JJB, all we did originally was we made an investment in JJB of a little more than $30 million.

$30 million of that was in the form of a convertible debt instrument.

We took that position.

We thought there would be -- there was potential great upside, but what we wanted to do was to cap our downside.

JJB has had a very difficult time.

We all know what's happening in Europe.

They've continued to have a difficult time.

With the announcements that they've made -- and it's important to understand we're not running JJB.

We are merely an investor with the ability to take a greater control if we converted.

But we're not running JJB.

The JJB management has -- the announcement that they've made about their performance and their financial condition, we felt that it was the prudent thing to do to fully impair this asset at this time.

And we'll monitor the situation and hopefully the management team there can turn that business around.

Got it.

Thanks very much.

Michael Lasser, UBS.

Good morning, thanks a lot for taking my questions.

Ed, you tend to be a conservative bunch.

You got a more difficult fourth quarter -- sorry, third quarter compare.

The election's going to be really heating up during the third quarter.

Can you talk about how you mapped out your guidance for the third quarter?

You're implying a nice acceleration of the business and what's driving that thinking?

What we see happening with our back-to-school sales earlier on in the second quarter, what our team has been doing on our eCommerce side has been very good with a 34% increase in the second quarter.

We feel that's going to continue to help drive the business.

Our Apparel and Footwear business continues to do very well.

In the shops that we've put in place with Nike and Under Armour have done extremely well.

In the ones that we put in place, and that we will put in place, going into the third quarter from The North Face, we expect those to have similar results.

And can you expand a little bit on the merch margin in the second quarter, it was up 29 basis points which was a nice result but not nearly as sizable of an increase as you saw last year.

Sounds like you're expecting it to accelerate.

So what restrained it in the second quarter?

We don't really think it was restrained.

We thought that based on the way that we manage the business and manage the clearance activity, that it was really very good.

One of the aspects that has been up pretty significantly has been the firearms business.

The firearms business is a lower margin rate than the Company average but at 29 basis points, with the comps that we had and what's happened in the firearm business, we were very pleased with that.

Great.

Thanks a lot and keep up the good work.

Thank you.

Gary Balter, Credit Suisse.

Thank you.

It's only 3% of your sales but can you talk about the eCommerce?

You had another good quarter, obviously.

What are the areas of strength and what are the areas where you've been surprised in terms of it not having the impact?

The strength has come from where you might expect.

So the Apparel and Footwear business has done extremely well.

We've partnered with vendors and in particular Nike, to build our micro site, a Nike micro site on our site which has done extremely well.

So Apparel, Footwear, the Golf business has been very good online.

A couple areas that have been a bit more difficult, and some of those are decisions we've made on how we're going to run the business has been the Fitness business, because we have not been as aggressive in the Fitness category due to the lack of profitability around the shipping costs associated with the Fitness business.

Fitness has been a bit more difficult online.

The Apparel, Footwear, Golf business has been very good.

And as part of that, is pricing pretty much agreed on with the suppliers or do you see -- is there discounting on other sites that may be impacting you, or no?

There's no pricing agreed to with the vendors, but there's not any aggressive discounting that we see on the sites.

Just to up follow up, could you talk about the competitive environment right now, specifically what's going on with Academy since their transaction and if you're seeing anything different from Sports Authority.

We haven't seen anything different with Sports Authority.

There's no irrational pricing out there.

Academy has been -- there's been no change with Academy.

They're a good, tough competitor and we compete well with them.

Our business in their stronghold of Texas has continued to do -- we're very pleased with.

So we haven't seen anything really different since the Academy transaction, nor have we seen anything really different from Sports Authority.

Thank you.

Sean Naughton, Piper Jaffray.

Hello.

Thanks for taking the question.

On the shop-in-shops, thanks for the detail on what you expect for the balance of the year on UA, Nike, and some of the shared Footwear businesses.

But can you talk about how many of these stores, shop-in-shops you have for The North Face and then how many you think you could put in moving forward?

Specifically around The North Face shop-in-shops, we'll have about 13 of the super shops by the end of the quarter.

The shops require a bit more in square feet and we're opening those in some of our larger volume stores.

You can expect some of the two level stores that we are putting those in.

We have some of the smaller concept stores -- excuse me, smaller concept shops in about 70 Dick's Sporting Goods stores.

So that's specifically around TNF.

Got it.

Can you give us some examples of categories?

Ed, I think you talked about you're moving into some higher margin categories, if you could give us some examples there.

As a follow-up on the same store sales trend, how do you think about cannibalization when you open up some of these stores in existing markets?

From a higher margin categories would be the Apparel categories being driven by Nike, Under Armour and The North Face.

As we add these shops, our penetration of Apparel goes up and Apparel margin rates are higher than the Company average, so that certainly helps our margin rate.

From a cannibalization standpoint, we certainly take a look at cannibalization as we look at our real estate program, but cannibalization is less than 1% chain-wide.

So it's important to take a look at but at less than 1%, it's not meaningful.

And then just the last question.

Just wondering if there's been any -- how the NFL Jersey launch by Nike has been going for you and if you think it's driving a little bit of traffic into the stores.

Thank you.

The NFL Jersey launch has certainly driven traffic in the store.

Those real serious fans want to have the newest jersey out there and we expect this to be additive to our business and a big part of this really in the third and the fourth quarter.

Best of luck in the second half.

Thank you.

Dan Wewer, Raymond James.

Thanks.

Ed, I was wanting to change topics, discuss your Golf business for a second.

I believe it's at its seasonal peak during the second quarter, based on the terrific sales numbers from TaylorMade.

I believe you are their largest customer in the US and I suspect TaylorMade is your number one brand.

I would have thought Golf Galaxy's comps would have been a little better than 4.4%.

Can you discuss any headwinds besides the sales trends for 1Q?

That's the biggest part of it is the transfer from Q2 to Q1.

We were very pleased with our Golf sales in Q2, especially in light of the transfer into Q1.

If you remember, last year there was nobody really playing golf in Q1 last year -- and they were.

So our comps for Q1 for Golf Galaxy were 12.6%, and in Q2 they were 4.4%.

So if you take an annualized -- those two quarters, they were really quite good.

Okay.

And then just one other question.

Field and Stream, what is this $25 million investment, that you're announcing, allow you to do with the Field and Stream brand that you were unable to do in the past year?

It's not that it allows us to do anything.

It keeps us from doing something and that's paying licensing fees and we expect this to be accretive a bit this year and certainly accretive going next year.

So we made that -- we ran the analysis and by buying this brand, it's certainly accretive from the licensing fees that we were paying prior to that.

I understand.

Thank you.

Sure.

Christopher Horvers, JPMorgan.

Thanks and good morning.

The pull-forward into 1Q from 2Q, can you put a number on that, on what you think that was and do you think that showed up mostly in the traffic line?

A lot of retailers have talked about on average maybe 200 basis points or so.

Is that about right?

Or maybe was that larger for you, given that really it's been warm since January and that impacted golf year all long?

We have a really hard time putting a number on that.

But clearly, the fact that people were playing golf or they had gotten outside and running earlier or the little leagues were not delayed this year like they were last year because of the weather, there's some number there.

I wouldn't even venture to put a number on it.

But it was enough that we would feel it and I think you really have to take a look at the two quarters combined and get a sense of our business.

So our second quarter was -- we were very pleased with our second quarter.

We knew that there would be some transfer out of Q2 into Q1.

We put that into our Q2 guidance when we guided Q2 to Q3.

And we beat that by 80 basis points, which we thought was, under the circumstances, we thought was fantastic.

As a follow-up to that, a lot of retailers saw a pretty sharp slow down in June, only to see a rebound in July.

Census data for your category was reported this morning and the monthlies for May, June and July were 9, 5 and 11.

So, just curious if you've seen a -- qualitatively, if you've seen a similar trend in terms of how the quarter occurred from a cadence perspective.

We've never talked about monthly basis, but we were very pleased with the second quarter sales and we were -- we've taken up what we had originally communicated as our EPS for the third quarter, as we said it would be mid single-digits.

We've now taken that up to lower double-digits and we're -- we took up our annual guidance above the beat.

So for us, as I said, that's tongue in cheek, for us that's bullish.

Thanks.

One follow-up for Tim.

On the merchandise margins, I didn't think you -- in case I missed it, did you break it down between what was inventory management versus mix or private label maybe in buckets?

We did not, Chris.

Could you add any color?

I think if you take a look at the overall margin, especially if we look at the components, most of that margin increase came on product mix and then of course, we had the overall increase in sales.

But that's about as much color as I think I'm willing to give.

Thanks very much.

Rick Nelson, Stephens, Inc.

Thank you.

I'd like to ask you about the Footwear category.

If you could comment on what's happening with comp units and ASPs and overall where you think we are in the Footwear cycle, it's performed well for a while.

We're not going to get to that level of granularity from a competitive standpoint, but the Footwear business has continued to do well.

Our AURs have gone up to some extent and driven by our technical running category.

Also, I'd like to ask you about the real estate market.

It looks like you pulled back a couple of Dick's stores from your prior guidance, if you could comment on development and opportunities.

I think as far as pull-back, I think we had guided that we would open approximately 38 to 40 stores, and we're not seeing a big change in the real estate environment out there.

It's still pretty difficult from a -- it's a lot of pick and shovel work to find some of this real estate.

We are seeing some mall opportunities and continue to see some vacant box opportunities with a number of retailers out there.

We're working with mall developers on consolidating space.

So it still remains pick and shovel work.

There's not a lot of new development out there.

We are working with Sears as an opportunity with some vacant boxes.

So we're taking a look at everything we can.

We didn't pull back from a standpoint that we're concerned from a business standpoint.

We said 38 to 40.

A couple of those sites have slid into Q1 of next year and the real estate development business is pretty fluid right now.

But we'll get the 38 stores opened.

We expect to be at least that, probably higher than that next year.

Also like to ask about private label, I think it represented about 15% of your sales last year.

You're making a big push in the Field and Stream acquisition.

What targets do you have over the near term and longer term?

We're not providing any real targets right now.

Understand that the Field and Stream brand is not something new.

This is a brand we've been licensing for years and decided that it would be better for us and accretive to our EPS if we bought it as opposed to continue to pay those licensing fees.

So the acquisition of the Field and Stream brand doesn't really increase our sales of private brand.

It just makes them more profitable for us.

Got you.

Helps on the cost side.

Thanks a lot and good luck.

Thanks.

Sam Poser, Sterne Agee.

Good morning.

Thank you for taking my question.

I just wanted to follow up on the JJB one more time.

So was this -- was it basically the rules of accounting that caused you to write it off for the time being?

Sam, this is Tim.

That's exactly what put us in that position to take that conservative approach.

Accounting rules here are pretty specific in terms of what we know about the business and we followed those as we should have.

And so, it doesn't really change the potential set-up for spring of 2014, assuming that things don't get -- things start getting a little better over there and so on.

The premise of your investment is still the same.

The premise of our investment at the outset was that we believe there was room in the UK for a premium sporting goods retailer.

That hasn't changed.

The question is whether or not JJB can measure up to that task and that is a very large mountain for them to climb.

But we still have all our rights and privileges under the original agreement.

So if things turned around and we wanted to take that -- make that second tranche of financing, we have the ability to do that but we are not required to do that.

And that decision comes up next spring, just confirming that; correct?

That's correct, yes.

And then secondly, you talked about the three major categories, Footwear, Apparel, and so on, being all up for the quarter.

Can you give us some form of idea of -- they were all up, but can you give us an idea of what was the larger driver?

From a competitive standpoint, Sam, no, we're not going to do that.

All right.

Thank you very much and good luck.

Sure.

Thanks.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good morning.

First of all, to clarify, to the extent that you raised the third quarter and you've been worrying about a soft year-on-year trend for a while.

Is that all about the higher comp guide or are there any shifts in the expense dollars versus your initial expectations to help get you there?

This is all around sales.

Sales and margin, Matt.

Got it.

Second question, and I think a lot of people have been dancing around this to some degree.

Clearly, the sense of the backdrop has changed a lot from the time you held your last conference call and a number of retailers, restaurant companies and others, though not all of them, have reported softer numbers and your higher third quarter guidance really stands out in that context.

Are you seeing anything in the business that would be indicative of some of the macro concerns that have been emerging?

We haven't.

We've been very pleased with our business.

As I said, we beat our second quarter comp guidance by 80 basis points after -- and a very good first quarter.

The back-to-school that we've seen so far doesn't mean it's going to continue, but the back-to-school that we saw in the second quarter gave us confidence to take the third quarter up from what we had originally guided to.

We see that Apparel and Footwear business continuing to comp quite strongly and those carry higher margin rates than the Company average.

So all of that, that's happening inside our business, we're pretty excited about.

Got it.

And then my final question is for Tim and it relates to the accounts payable line.

I know this line was down a bit in terms of percent of inventory in the first quarter and that presumably related to the hangover of maybe some of the pack-away product.

It was down a little more than that year-on-year here in the second quarter, and that was one reason why the cash balance is where it is year-on-year.

What's your thinking about the trajectory of this number and at what point do we start to flatten out or actually increase the payables ratio on a year-on-year basis?

I think you also have to take a look at where we stand on an inventory per square foot basis being at that 4.2%.

So as we're managing the inventory process throughout the quarter, you also manage receipts as part of that process.

So those receipts are now coming in, in Q3 versus in Q2.

That also indicates that you don't have those payables to record when those receipts aren't in the given quarter.

So part of that is the management of receipts for the most part.

Got it.

And your sense qualitatively on the freshness of the inventory, the amount of clearance in stock, et cetera?

The clearance inventory as a percent to our square footage is down by 2.3%.

Got it.

That's great.

Thank you so much.

Brian Nagel, Oppenheimer.

Hello.

Good morning.

Hello, Brian.

I want to continue along, follow what Matt's question and questions about this.

As you look -- it sounds -- some of the comments you made suggest the back-to-school started off quite nice for you guys.

As you think behind that, is there a product launch or some type of product cycle that may be helping that boost out here early in the season or do you think, conversely, is this something really the beginning of a sustained trend through the season?

It's pretty broad-based.

It's Apparel, it's Footwear, it's backpacks.

The back-to-school business has been really quite good.

We've also seen a nice lift in firearms sales, which our third and fourth quarter are big firearm sales.

So we're seeing a lift in that, that drives comps.

Although that being at a lower margin rate, some of the other categories that are doing well will offset the margin rate pressure that we would get from the gun side.

As we think about the balance of 2012, aside from firearms, how should we think about or how are you guys looking at the outdoor category in general?

We're relatively optimistic about it.

Whether that be the outdoor category of firearms or the outdoor category of our tackle business, or the outdoor category of the ski business, the ski related apparel business that we do.

We're relatively enthusiastic about what's going on right now.

Thank you.

Peter Benedict, Robert W. Baird.

Hello.

Thanks, guys.

I hope the firearms stuff is not back-to-school related.

(laughter) But I understand, separate the two.

We agree.

One real question here.

Just in terms of The North Face, just so I understand that correctly, remind us how many were in place at the end of second quarter.

I didn't know if you had any.

You're expecting that 13 of the larger sets and 70 of the smaller sets by the end of this year?

That's the first part of my question.

The 13 shops will be at the end of the quarter and Peter, those shops are about 2,000 square feet.

So they're significantly larger than you'd see in a typical single level store, which is approximately 500 square feet.

So you're going to see those primarily in our two level stores.

Okay.

And would you add any more in the fourth quarter or are you starting to get towards the holiday and you'd want to see how those go?

We're going to add three more by the end of the year.

Okay.

And then the second question, in terms of some of the bigger sets you have, the Shared Service Footwear, the Nike Fieldhouse, they should be in about a third of the stores -- the Dick's stores by the end of this year.

When we think longer term, is there any reason why these concepts can't go into 50% of the stores or more, or how should we think about the longer term opportunity assuming these continue to generate the returns you're looking for?

Think about on the Shared Service Footwear side of things, every store that we open moving forward we open with Shared Service Footwear.

Every store that we remodel, every store that we reposition, we also open those stores with a Shared Service Footwear model.

As far as the Apparel shops with Nike and -- there's no reason to think that they couldn't be in more than 50% the stores.

Okay.

Perfect.

Thanks so much, guys.

Camilo Lyon, Canaccord.

Thank you.

Good morning everyone.

My question relates to what the implied fourth quarter comp guidance suggests.

Coming off of the warmest winter in multiple decades and seems like you're embedding a pretty substantial two year deceleration.

I just wanted to better understand what the thinking is behind that, what you're contemplating around the fourth quarter and where some potential upside could come from.

I don't think we have changed anything regarding the fourth quarter since we started giving our guidance for the year.

So as we look at the third quarter versus the rest of the year, you'll see that we increased our guidance for the overall year, up to 4% to 5%.

So we have essentially left the fourth quarter alone sequentially from where it has been in our -- since we don't give guidance for that quarter, the implied guidance hasn't changed.

So maybe asked another way, what is the expectation around whether you're expecting it to improve at all from last year, are you expecting it to be comparable to last year?

Any color on that would be very helpful.

I think the way you ought to look at our fourth quarter is anticipate a normal winter versus what we saw last year.

Okay.

That would be an improvement.

Got it.

And then just going back to the margins, the gross margins, you mentioned that freight was an offset to the total as more eCommerce sales are flowing through and the DC expenses related to that.

Could you help us think about how we should think about that going forward as that business continues to expand and you're taking more ship from store, you're doing more of that business in stores and how we should really start to flow that through our models?

I think as you get into 2013, as we have more ship from store stores and we start the development of the order online, pick up in store, I think you'll see some of that current deleverage neutralize somewhat.

Because more of the penetration of the eCommerce business should be directed towards ship from store and order online pick up in store.

Would you be able to provide what that actual deleverage was in the second quarter?

I haven't gone that far.

It was not significant enough to offset the occupancy leverage.

Got it.

Thanks very much and good luck with the balance of the year.

Thank you.

Mike Baker, Deutsche Bank.

Thanks.

So one, just a short-term question, then a longer term question.

In the short term, you leveraged your occupancy on a slightly -- on a comp that was slightly less than 4% this quarter but said you won't leverage it next quarter on a 4% comp, just wondering if there's anything we should be thinking about there as to why that would change.

The longer term question relates to your store count.

You've consistently said 900 stores.

I think when you even look at your long-term projection of stores by state it gets to be a little bit higher than 900.

But as eCommerce gets to be a bigger part of your business, how much can that number -- how much do you think about that number potentially changing coming down as more sales go online?

And then related to that, not only the number of stores but the size of each store, how could that change?

Thanks.

We're trying to assess all of that right now.

Is it 900 stores, is it some different number?

We feel that 900 is still the right number.

As you said, if you take a look at this by state, we could actually be slightly higher than that.

900 we're very comfortable with.

Does the size of the store come down?

We're looking at that, although there are a number of categories that we see big opportunities in that, that can use that square footage.

So in some categories may contract, some other categories may expand.

So we don't see a big change in the size of the store but there may be some square footage allocations that are different in the future.

As to your SG&A question, but for the fact that the golf tournament moved into the third quarter, we would have leveraged SG&A.

Sorry, it was an occupancy cost question.

Pardon me.

The occupancy cost, we said that we had to have a comp in excess of 3% to leverage, but that shifts quarter by quarter.

You have to look at that leverage point on the whole year because in different quarters we can have CAM audits that come back with favorability, real estate tax assessments that are favorable.

Or in the prior year, for example, co-tenancy violations that reduce rent for a period of time.

So you have to continue to look at occupancy on an annual basis.

Okay.

Thanks.

If I could just ask one more follow-up.

Really just following up on the first question, just maybe a little more specific.

I'm sure as you guys a map out the 900 plus stores you do a pro forma for each store as to what the sales can be and the occupancy, et cetera.

Have you changed the inputs into those pro forma expectations over the past, let's say 18 months or 2 years, as eCommerce has become a bigger part of your business?

We've taken a look at where opportunities are in different businesses and it's an iterative process all the time.

We've taken a look at categories that we think can expand in the store, categories we think can contract in the stores and what we think the cost of providing those categories in a store and the margin rates associated with them.

Yes, we do have a very detailed analysis of this on a pretty regular basis.

Okay.

Thanks for that detail.

Sure.

Mark Miller, William Blair.

Hello, good morning.

Could you give us some perspective around the traffic decline in the quarter and how much the change from first to second quarter was due to the pull-forward and basically what would be the underlying run rate aside from that?

As we said, it's very difficult to put a number on that.

With the comps that we had in the first quarter versus the year before and the fact that people many were playing golf earlier, they were outdoor running earlier, they were playing high school sports earlier this year, that definitely moves some traffic and some business into Q1.

We can't put a -- we can't quantify that but we think that was the biggest -- the primary responsibility factor of the traffic change.

So Ed, I could infer from that, now that we've moved past, that the business is traffic positive?

We don't comment about a quarter inside the quarter, but we've guided our comps to roughly 4%.

We've taken the earnings number up above what we had originally communicated.

So you can -- we're pretty -- we're optimistic about our business in the third quarter.

Okay.

Got that.

On eCommerce, as we look at your store prices versus the eCommerce competition, I think we want to consider the score card certificates and coupons for the net pricing that your consumer pays.

So could you put any perspective around what portion of your sales have these incentives for the consumer and how much is that changing year to year, approximately?

Thanks.

There's a significant amount of our sales that come on the score card.

That's one of the reasons why we've got so much data and are able to market one on one to our consumers, be it through direct mail catalogs we send them or digitally through the eCommerce -- our eCommerce platform.

All of these, I think, are contributing factors to our increase in sales.

But we have not guided to exactly how many dollars come on the score card program, but it's meaningful and certainly helps us run our business to better understand what's going on with the consumer out there.

The other part of that, can you comment on -- is it constant year-to-year or is this something that the redemption's going up or issuance might be one way or the other year-to-year?

Thanks.

It's certainly going up as we continue to market more aggressively in this medium and direct to our consumers, that aspect of our business is certainly going up.

Terrific.

Thanks.

Kate McShane, Citi Research.

Thank you.

Good morning.

With regards to Q3, I wondered if you could just remind us what you're up against from both a positive and negative standpoint.

For instance, did the NFL lockout have a significant impact to your Q3 comps last year?

And do the sanctions on a certain large football program in Pennsylvania have any impact to your business?

The NFL lockout did have an impact on our business.

What also had an impact on our business last year was the transition that people knew that the jerseys were going to change with the NFL licensing moving from Reebok to Nike, and that had an impact on our business also.

So the NFL Jersey business has been very good right now and with what's happened at Penn State, we sympathize with all that's happened at Penn State but as it relates to our business, it's an insignificant amount of our business and will have no impact on our performance.

Matt Nemer, Wells Fargo Securities.

This is actually [Kate Wynne] in for Matt Nemer.

First, I was wondering if you could provide some more color on how the test of ship from store is going in terms of ironing out the process with employees in stores and if this has allowed you to shorten customer delivery times or perhaps even reduce mark down exposure in the stores?

Then second I was wondering if you could break out approximately how much SG&A benefited this quarter from the shift in the golf tournament into Q3.

I'll take the first portion.

As far as the ship from store, we continue to test that with our stores.

As you would expect in any test, we're learning every day on the labor piece, the shipping piece, but you alluded to the fact of having inventory more readily available to us and turning that around quicker to the consumer.

So early reads are that we're pretty pleased with how things are progressing and we'll take a look at adding stores as we progress.

In terms of the golf tournament, you can think about that in terms of a little bit better than a $0.01 impact on the quarter.

All right.

Great.

Thanks so much.

John Zolidis, Buckingham Research.

Hello.

Thanks for taking my question.

Two quick questions.

One, as I recall last year, the marketing around the outdoor segment affected the business at the end of the second quarter.

Aside from the firearms, how has that business done this year?

And then secondly, quick look on your website shows some Olympic related apparel.

Is that at all a factor with the second quarter or with the outlook for the third quarter?

Thank you.

The outdoor category, we learned from our mistakes and we're pretty good at not making the same mistake twice.

Our outdoor categories, we were very pleased with those around the hunting business, the fishing business, we were really very pleased with our performance there.

As far as the Olympic merchandise goes, yes, we have Olympic merchandise on our website.

It's a small portion and had very little to do with our comps.

Okay.

Thanks and good luck.

Paul Swinand, Morningstar.

Good morning.

Thanks for taking my question.

First, we got enough questions on the guidance.

Let's shift to something a little larger term here.

You had a new Marketing Director join and you talked about doing more brand advertising, more national advertising.

Can you tell -- can you give us any color on how that's going and how you're thinking about tactical versus strategic advertising going forward?

Sure.

We think that we brought Lauren Hobart in from Pepsi about 18 months ago.

She's really had a very significant, positive impact on our marketing and our marketing direction.

The branding advertising that we've done in the spring around Father's Day and now into back-to-school has been viewed as great.

We've never had more positive responses and comments to our marketing around our untouchables spot, the Father's Day spot and the comeback spot for back-to-school.

So it's been great.

We expect to transition more dollars into marketing like that than what we've done in the past.

And strategically, the way that we look to do this and the tactics behind it is we would expect to see less insert advertising in the newspapers on a Sunday and more of this brand-building advertising that Lauren and her team have put together, along with more direct marketing to our consumers either through digital marketing or through direct mail pieces into the home.

So our early results have been great.

We're very pleased with it and expect to strategically move more dollars in that direction and take more dollars out of the traditional Sunday newspaper.

Very interesting.

Thank you for that.

And then quickly on the hunting business, just to remind everybody, you guys are not in handguns at all and you don't have any rifles that aren't really hunting rifles.

That's correct, right?

We've got target shooting rifles, but we don't carry AK-47s and we don't carry any handguns.

You don't carry any of the SWAT style rifles either?

Just from a target sporting type -- the modern sporting rifles that are primarily 22s.

We carry some of those.

They're used for more sport target shooting.

The military type rifles, we don't carry any of those and we carry no handguns.

We can construe -- can we therefore conclude that the hunting business increase doesn't have anything to do with the election and you're taking market share from somebody else?

I don't know that I would go that far because gun owners are concerned about -- rightly or wrongly -- are concerned about what the administration might do.

So I think this has something to do with the election.

Okay.

Great.

Thank you again and best of luck for the second half.

Thank you.

David Magee, SunTrust Robinson Humphrey.

Yes, hello.

Good morning.

Just a quick question regarding inflation and what your current thinking is on the second half and say the first half of next year and what the -- any change might mean for comps and/or margins.

As we've indicated, we've seen some inflationary pressure in the back half of this year.

There's some North Face product that has taken some relatively significant price increases in that outdoor category, jackets and base layer product.

I think our merchants have done a very good job of buying around some of that product, North Face has done a good job of providing more technical aspects to that product and we'll see how it goes.

But the early indications of what we've seen from a back-to-school standpoint is we're relatively pleased and we don't think that we're going to have any meaningful pressure there.

Are you seeing less inflation in other categories?

Versus the categories that I just talked about, yes, we're seeing less inflation in other categories.

So overall, you'll see maybe less inflation than in the first half this past year?

I don't know about that, because these categories, North Face, Columbia, some of these outdoor categories from an Apparel standpoint that we've had some price increases in are a bigger percent of our business in the second half than they are in the first half.

Okay.

Great.

Thanks, Ed.

David Gober, Morgan Stanley.

Hello, guys, this is [Shaun Kolnick] on for Dave.

Thanks for taking the question.

Can you provide any color as to the drivers behind the improvement in new store productivity year-over-year and how sustainable that might be?

I think we've done a better job of marketing the business.

I think we've done a better job with our pre-opening campaigns than we've done in the past.

I think we've also done some of the areas that we've opened the stores, we're a bit stronger in.

The real estate that we've taken has been better.

So there's not one silver bullet.

But we took a look at that whole process and deconstructed it and said okay, we've got to take a look at our real estate strategy.

We've got to take a look at how we market this.

We've got to do a better job of having the right content in the store, right off the bat.

The group has done a great job of executing that and that's a big part of the reason why this new store productivity has increased.

Great.

Just to confirm, there was no impact from the baseball bat regulation change in 2Q, correct?

It was small.

It was much greater in Q1 than Q2.

Thanks, guys.

It was all around high school.

Chris Svezia, Susquehanna Financial Group.

Good morning, everyone.

I just have one quick question.

Just on the Fitness category, I know in the past it's been one of the weaker categories for you guys, treadmills, ellipticals.

What are you guys doing as you go into the key fourth quarter in terms of making changes to that category, either reducing the square footage?

What are the categories you're putting that inventory into?

And are you doing more with regard to foam rollers or assistance bars, things of that nature, just your thoughts in that category as you head into the back half.

We'll be launching a private brand of treadmills called Epic that we've worked with that provide some technology that many treadmills don't have.

So, we're enthusiastic about that to stop the -- hopefully stop the bleeding there.

We've also transitioned inventory dollars into, as you would say, foam rollers, resistance bands, medicine balls, kettle bells, a lot of the products that are required for the P90X workout.

We've done really very well with.

So we've transitioned dollars there.

Now, a treadmill or an elliptical takes a lot of foam rollers and resistance bands to make up for that, but the margin rates on those foam rollers and resistance bands, et cetera, are much higher than treadmills.

So we expect the Fitness business to continue to be somewhat challenged, but that's all baked into our guidance and are comfortable with our overall guidance.

Okay.

All right.

Fair enough.

Thank you and all the best.

Kelly Chen, Telsey Advisory Group.

Hello, guys.

It's actually Joe Feldman.

Hello, Joe.

Wanted to ask you -- to follow up on that question about inflation a little bit, the ticket increase that you guys had to drive the comp, how much of that was driven by higher pricing?

Because we are hearing the sporting good manufacturers talking about prices coming down a little bit.

Just wondering how we should think about that in the quarter and maybe going forward.

I don't think -- we talked about this, that we didn't see a real big increase in prices across the board in the first quarter, they're going to be a little bit more -- first and second quarter -- little more in the third and fourth quarter with some of the Apparel categories we talked about.

There were some categories or some -- I should say there were some SKUs that took price increases that in some of them worked out fine and the customer accepted them and some other ones didn't.

I'm not going to get into what those specifics of that are, but there was -- sometimes they accepted it, sometimes they didn't.

But overall we were pleased with the AURs we put out there.

A driver of the AURs were also -- continue to be our Golf business, around what TaylorMade has done with the R11S driver, the Rocketballz Fairway Woods, Drivers, Hybrids, and that business has been really very good and has helped move the AURs up.

Got it.

That's helpful.

Just one longer term question.

As we think about maybe the potential for where operating margins can go one day, because there are so many good things you are doing beyond just adding stores and obviously with the private label, and the shop-in-shops, and the shared Footwear model.

Stores that have that full complement of the assortment and where you envision the Company, what's the margins like in those stores relative to say a store that doesn't have all that?

What could we see in the future is what we're trying to get at.

We've indicated that we think over the next several years we can get to double-digit operating margins.

Got it.

It's driven by all those things.

Okay.

Thanks.

All those things.

There's not a silver bullet.

There's a number of things we need to continue to improve on.

Got it.

Thanks.

Good luck with the quarter.

Thank you.

Thanks, Joe.

Ladies and gentlemen, this will conclude our question-and-answer session.

I would like to turn the conference back over to Mr. Edward Stack, Chairman and CEO, for his closing remarks.

I'd like to thank everyone for joining us on our second quarter conference call and look forward to talking to you all at the end of our third quarter.

Thank you very much.

The conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect.