DICK'S Sporting Goods Inc (DKS) 2012 Q3 法說會逐字稿

Welcome to the Dick's Sporting Goods third quarter 2012 conference 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.

Please go ahead.

Thank you.

Good morning.

Thank you for joining us to discuss our third 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 include but are not limited to our views and expectations concerning our future results.

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

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

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

Ed will review our third quarter financial and operating results and discuss our guidance.

Joe Schmidt, our President and Chief Operating Officer, will then outline our store development program results.

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 and expectations.

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 third quarter, we again generated record results with earnings per diluted share increasing 25% to $0.40 and exceeding our original expectations of approximately $0.36.

Sales increased 11.2% in the third quarter, driven by the growth of our store network, a 5.1% increase in consolidated same store sales, which was on top of 4.1% increase in the third quarter of last year.

Same store sales in the third quarter of 2012 for Dick's Sporting Goods were up 3.9%, Golf Galaxy up 2.3% and eCommerce sales were up 46.7%.

We generated positive comps in all three of our major categories, Apparel, Footwear and Hardlines.

Looking to our progress on the digital front, we've accomplished much in the third quarter.

We continue to grow our eCommerce business, while improving transaction profitability, increasing inventory productivity, providing customers more choices about where, when, and how they shop and fortifying our competitive positioning.

We also made significant progress in the third quarter with our ship-from-store testing.

It continues to progress very well with 115 stores operating under this program at the end of the third quarter.

Ship-from-store is an incredibly powerful tool as it reduces delivery time to the customer, while improving productivity and transaction profitability.

Because ship-from-store allows us to utilize inventory located in our stores, which was previously unavailable online to customers, we are seeing a meaningful increase in our online sales.

We will continue to roll this program out and add more stores in 2013.

Finally, in the third quarter, we also launched a comprehensive mobile application through which users have access to all the benefits of the ScoreCard Rewards Program.

The ability to locate our stores or make purchases directly from the app, as well as be rewarded for engaging with the Dick's Sporting Goods brand on social media.

As I've said before, the digital space provides us a powerful growth opportunity.

So while we have accomplished a lot on this front, we continue to aggressively invest in our people, infrastructure and partner relationships, so that we are positioned to maximize this opportunity.

Looking to the fourth quarter of 2012, we have raised the low end of our prior expectations and now anticipate consolidated earnings per diluted share of $1.03 to $1.05.

We previously anticipated a range of $1.01 to $1.05.

The fourth quarter, this year, includes a 14th week, which is expected to contribute approximately $0.03 in earnings per diluted share.

On a 13-week basis, earnings per diluted share for the fourth quarter is expected to be $1 to $1.02, compared with non-GAAP consolidated earnings per diluted share of $0.88 for the same period last year.

Consolidated same store sales are expected to increase approximately 4% on top of a 0.10% increase in the fourth quarter last year.

Our fourth quarter guidance contemplates a $0.01 earnings per diluted share impact from the start-up costs related to our new distribution center.

Our guidance also takes into account the NHL lockout and Hurricane Sandy which includes a donation of approximately $1 million in Retail value of outdoor supplies, Footwear and cold weather Apparel that we made to the American Red Cross to assist with the relief efforts.

We are raising our full year guidance.

Now expect non-GAAP consolidated earnings per diluted share to increase 25% to 26%, to between $2.53 and $2.55 a share, which includes approximately $0.03 coming from the 53rd week this year.

On a 52-week basis, non-GAAP earnings per diluted share are expected to be $2.50 to $2.52.

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

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

In summary, we delivered record third quarter earnings anchored by steady increases in both sales and operating margins, as well as the expansion of our store network and our continued success in driving inventory productivity.

We also made significant progresses in growing our omni-channel presence by enhancing our eCommerce site, ramping up our digital marketing strategy and giving our customers more choices about how, when, and where to shop at Dick's Sporting Goods.

We are optimistic about our continued growth and have adjusted our full year earnings estimates to reflect this.

I'd like to thank our team of associates.

Our progress is a direct result of their hard work and unwavering commitment to our goals and I'm deeply grateful for their support.

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

Thanks, Ed.

In the third quarter of 2012, we opened 21 new Dick's Sporting Goods stores, bringing our total store count at the end of the quarter to 511 Dick's Sporting Goods stores with 27.9 million square feet and 81 Golf Galaxy stores with 1.3 million square feet.

Within our stores, we have 166 shared service Footwear decks, 159 Nike Fieldhouse concepts, 88 Under Armour All American shops, and 10 Under Armour Blue Chip shops at the end of the third quarter.

By the end of the year, we expect to have approximately 174 shared service Footwear decks, 171 Nike Fieldhouse concepts, 97 Under Armour All American shops and 10 Under Armour Blue Chip shops.

Our new Dick's Sporting Goods stores continue to perform well with new store productivity of 98.9% in the third quarter, compared to 101.9% in the third quarter last year.

Detailed calculation of new store productivity can be found in the Table section of the press release we issued this morning.

We completed our 2012 new store plan in the first two weeks of the fourth quarter.

In total, we opened 38 new Dick's Sporting Goods stores this year.

We also relocated five Dick's Sporting Goods stores, which were at the end of their leases, to preferred locations.

For Golf Galaxy, we repositioned one store in the fourth quarter.

This store is larger than our current format and includes more services and more experiential shopping.

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

This 600,000 square foot facility will be located in Arizona.

Combined with our existing DC network, we will be able to support a total of 750 stores.

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

Thanks, Joe.

Sales for the third quarter of 2012 increased by 11.2% to $1.3 billion, compared with the same period a year ago.

Consolidated same store sales increased 5.1%.

Dick's Sporting Goods same store sales increased 3.9%, Golf Galaxy increased 2.3% and our eCommerce business increased 46.7%.

The increase in same store sales in the Dick's Sporting Goods stores was driven by a 2.9% increase in sales per transaction and by a 1% increase in traffic.

Consolidated gross profit was $406.1 million, or 30.95% of sales and was 123 basis points higher than the third quarter of 2011.

This increase was driven by merchandise margin expansion of 91 basis points and occupancy leverage while freight and distribution remained relatively flat.

SG&A expense in the third quarter of 2012 was $314.6 million, or 23.98% of sales, compared to non-GAAP SG&A expenses of $274.4 million or 23.26% of sales in last year's third quarter.

This deleverage of 72 basis points was due to previously announced shifts of expenses from Q2 to Q3 related to the Dick's Sporting Goods Open, our World Series marketing sponsorship this year and increased administrative expenses.

On the balance sheet, we ended the third quarter of 2012 with $294 million in cash and cash equivalents and with no outstanding borrowing under our $50 million revolving credit facility.

Last year, we ended the third quarter with $483 million in cash and cash equivalents and with no outstanding borrowing under the facility.

Over the course of the past 12 months, we've utilized capital to fund the $200 million share repurchase program, pay quarterly dividends, purchase our store support center and make investments to acquire intellectual property rights to the Top Flite and Field & Stream brands and to build our new distribution center.

Inventory per square foot increased by 4% at the end of the third quarter this year, compared to the end of the third quarter of last year.

Net capital expenditures were $53 million in the third quarter of 2012 or $[62] million on a gross basis, compared with net capital expenditures of $48 million or $[62] million on a gross basis in the third quarter of last year.

In the fourth quarter, we now anticipate earnings per diluted share of $1.03 to $1.05, compared to our previous expectations of $1.01 to $1.05.

This guidance includes approximately $0.03 for the 14th week in the quarter.

On a 13-week basis, earnings per diluted share are expected to be $1 to $1.02 compared to earnings per diluted share of $0.88 in the fourth quarter of last year.

Fourth quarter same store sales are anticipated to increase approximately 4%.

Gross profit margin expansion is expected to be driven primarily by merchandise margin and occupancy leverage.

SG&A as a percentage of sales is expected to increase in the fourth quarter, due to increased administrative expenses, primarily payroll related.

Just as a reminder, when contemplating the fourth quarter, we anticipate the startup costs of our new distribution center will have an EPS impact of approximately $0.01 per diluted share.

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

For the full year 2012, we anticipate consolidated same store sales to increase approximately 5% and non-GAAP consolidated earnings per diluted share to grow approximately 25% to 26%, in the range of $2.53 to $2.55.

That's compared to 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 the non-GAAP consolidated earnings per diluted share and is contemplated in our guidance of $2.53 to $2.55.

On a 52-week basis, non-GAAP earnings per diluted share is anticipated to be $2.50 to $2.52.

Operating margin expansion in 2012 is expected to be generated from an increase in gross margin rate, primarily driven by merchandise margin and occupancy leverage.

SG&A as a percent of sales is expected to remain relatively flat compared to 2011.

Advertising and store payroll expense leverage is expected to be offset by increased administrative expenses.

With 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.

For the full year, net capital expenditures are expected to be approximately $190 million, or $235 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 for 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.

Before concluding, I would like to discuss a change in our disclosure policy for same store sales.

Beginning in 2013, we will report same store sales for our Dick's Sporting Goods eCommerce business together with our brick and mortar business.

We will continue to provide the size of the eCommerce business as a percentage of total sales.

To provide an example, had we reported third quarter results with this new methodology, the comps would have been as follows -- a 5.1% increase in consolidated same store sales with same store sales for Dick's Sporting Goods up 5.3% and Golf Galaxy up 2.3%.

eCommerce penetration would be reported as 4.4% of total sales.

We are making this reporting change because as we build out our omni-channel platform it is becoming apparent that the traditional sales channels are overlapping with the digital space and that providing comp sales on a combined basis will be more meaningful.

We had an excellent third quarter with notable increases in sales and margin.

As a result, we delivered strong third quarter earnings that exceeded our original expectations.

We are solidly positioned to continue to profitably grow the business and we have raised our earnings estimates for the full year of 2012 to reflect our expectation.

This concludes our prepared remarks.

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

(Operator Instructions)

Matthew Fassler, Goldman Sachs.

One strategic question, then one on the numbers.

So you just spoke, Tim, a second ago about multi-channel convergence.

Can you talk about, to the extent that this is transpiring, what you're learning about your customers, what the access to more data as more of your business comes in online contributes?

How you think about the overlap between in-store and online customers as they patronize different channels within your business?

Matt, we're finding out what -- I don't think there's going to be any surprises here.

People are shopping at Dick's Sporting Goods from a number of different directions, whether it be in the store, whether it be online, people that are researching product and coming into the store to buy.

The ship-from-store program has been more successful than we had anticipated.

That's been a big adder to our online sales.

We're making sure that we've got all of these tools available to our customer to make sure that he or she can shop whenever they want, with whatever device they want.

I guess related to that -- this is not my original follow-up, but I will ask it -- to the extent that your profitability is improving nicely, particularly this quarter on the gross margin line, is any of that coming from the shift in online business away from your traditional fulfillment partner, which we know has terms that are somewhat onerous for your Company?

Or is the mix shift to online with that margin pressure still outweighing the mix within the online piece?

The overall business -- it didn't have a huge impact.

But as we move this fulfillment channel to be in the stores, that's meaningfully more profitable than if we go through GSI's warehouse.

Got it.

Then, my original follow-up question, which I will still ask -- you talked about merchandise margin being the primary driver of gross margin expansion here in the third quarter.

There was still about 30 bps of additional leverage.

If you could just indicate whether that came primarily from occupancy, from freight and distribution, or from somewhere else?

Then related to that, the fourth quarter last year you leveraged occupancy despite a flat comp.

It looked like you had some things really go your way in Q4 last year.

So any color you could give us on the compares and whether that would stand in the way of more leverage here in Q4.

Sure, Matt.

This is Tim.

The extra 33-odd basis points you're talking about came from occupancy leverage in Q3.

In Q4, we expect to leverage occupancy once again.

Christopher Horvers, JPMorgan.

Also wanted to follow up on the gross margin a little bit.

The merchandise margin expansion was very impressive, and continued to really a long string of merchandise margin comparison, through ups and downs on the comp.

Can you talk about what's driving that?

How much of that is the new merchandising planning system?

How much of that is just clearance inventory, and so forth?

There's not a silver bullet.

There's a whole -- there's a number of things.

So, it's the merchandise planning system, it's inventory control, it's also the mix of Apparel and Footwear, as we move to the shared service Footwear concept, and to the brand concepts with the Nike Fieldhouse, the Under Armour shops, and what we're doing with the North Face.

We've also taken a look at some of the -- what we've learned from this and how we've applied this to other areas of our business, whether it be the outerwear business, the golf Apparel business, so we've moved that mix -- has been helpful also.

We expect now that the election has concluded, we expect that the gun and ammunition business will move to be a slightly bigger part of our business going forward.

That will help the earnings, but that could have a little bit of impact on gross margins going forward -- although we don't think really significantly as we've got so much momentum on the Apparel side.

But the election has had an impact on the amount of guns and ammunition that we're selling.

Then as you think about how that merchandise -- I know you're thinking about having laid out 2013 quite yet -- but how do you think about merchandise margin expansion progression over the year, next year, given that the price out and space and so forth will really start contributing towards the midpoint of the year?

Well, we still think that we've got margin rate expansion going into next year.

We're not going to provide a glimpse into guidance for next year, but we still think that we've got margin rate expansion available to us.

Then one follow-up.

On Sandy -- you have a lot of stores in New York and New Jersey.

It's the hot topic out there with investors.

Can you talk about if you saw a negative impact into the end of the quarter, given Sandy?

And is there anything that you're seeing in November that you can talk about in the region?

Thanks.

Well, as we said, we've, to the best of our ability, included the impacts of Sandy in our guidance in the fourth quarter.

But yes, as you could imagine that there was some impact to our business at the end of the third quarter, as we had -- at one point we had 114 stores closed because of Sandy.

They weren't closed for a long period of time, but we did have 114 stores closed.

Our heart goes out to the people affected by this storm.

As they started to redevelop their lives and kind of try to get things back to normal, coming to shop at a sporting goods store was probably not at the top of their list.

They had other more essentials that they needed to take care of.

So yes, it had an impact and we put that impact into our guidance into the fourth quarter.

Could that have been a 0.5 point of comp, perhaps for you in 3Q that was lost?

We're not going to get to that level of granularity.

I'm not sure what it is, but you have 114 stores closed and you have a lot of people who can't get to your store, that has an impact.

Gary Balter, Credit Suisse.

On the comps, you guided to 4% in Q4 which implies a significant deceleration on the two-year basis.

What's the thinking behind the comp guidance?

There's a couple things, Gary.

There's Sandy.

There's the NHL lockout.

There is the fiscal cliff.

There's a number of things that are going on out there that we're aware of and we need to be careful of.

So once the lockout gets settled -- any day now as I keep on hoping -- we should raise our comp guidance?

(laughter) We're hoping, Gary.

We'd like to see some hockey played here in Pittsburgh, let me tell you -- and everywhere else.

Could you talk also about your private label.

Obviously that's been one of -- that continues to strengthen.

I don't think you gave us the percent that it was in this quarter.

We didn't.

We haven't laid that out there.

Not sure of that anymore?

Are there any -- Sorry, go ahead.

We continue to invest from a private brand and a private label standpoint.

We invested in the Field & Stream name, which will be accretive to the business because we won't have a licensing fee going forward.

We've bought the Top-Flite brand.

This is an area that we continue to be very aggressive with, and feel that is an important part of our future going forward.

Just a follow-up.

Then I'll get off.

You talked about how strong the online business is.

How is the mix different online versus the stores?

How is that changing what sells in the stores?

How are you reacting to that in terms of the way you're presenting merchandise?

Thank you.

Sure.

Well, we are -- the mix is changing.

We're doing more Apparel and Footwear business than we've had in the past.

The mix is always going to be a little bit different online than it is going to be in the store; therefore, on a gross margin merchandise rate standpoint, we think that it will eventually be higher than what the stores are because we don't sell guns and ammunition online.

So there's a mix benefit there from an online standpoint, which we expect will continue to improve as we go forward.

But we're really enthusiastic about the response we're getting from Apparel and Footwear online.

Robbie Ohmes, Bank of America Merrill Lynch.

Couple of quick questions.

Ed, can you talk about just how you may be positioned the same or differently for holiday this year?

What is going to be different?

Maybe specifically, on the outerwear category?

And maybe remind us what kind of carryover position you're in, in outerwear for the fourth quarter?

What could go really right or really wrong year-over-year?

Then the other question, also on the fourth quarter and maybe into the first quarter is, you're coming up against very tough comparisons in the golf category.

Are there things that can help you anniversary that?

And maybe speak to how you're thinking about the tough golf comparisons that begin this quarter?

Thanks.

So what could go right or wrong in the fourth quarter?

If we get some snow and some cold weather this year, that would go right.

We need it at the right time.

We don't need it like a couple years ago, that last weekend or two weekends before Christmas, we had that big snowstorm.

But we feel we're very well positioned.

Our merchants have done a terrific job working with planning our inventory.

Our carryover -- we kind of laid out what that carryover was.

We expect it to be no more this year than it was last year, notwithstanding what the weather is.

Meaning, if we have a winter like we had last year, we would expect the carryover to be no worse than it was last year.

We feel pretty comfortable about where we're at.

As far as the golf comparisons go, we are against difficult golf comparisons in the first quarter of next year.

There were two things that drove that.

There was the product cycle and there are some new products coming out that we think the product cycle for next year is probably as strong as it has been this past year.

The biggest driver in the first quarter comps around the golf business was really the weather.

We've got no control over that.

We would suspect that if it's reasonable weather, comps may shift from the first quarter to the second quarter, like this year they went from the second quarter to the first quarter.

But as you get done with the first two quarters we think weather will have little impact overall.

So we're pretty optimistic about the golf business going forward.

Sean Naughton, Piper Jaffray.

Given the change you're describing on the comp reporting for next year and some of the success you guys are seeing in the multi-channel efforts, how does this change your overall thoughts on store prototype size moving forward?

And then, potentially the overall store base in the US at this point?

So this is just from a reporting standpoint.

We think it doesn't change the strategy at all.

We still feel that we can have at least 900 stores in the United States.

Our store footprint categories that we're looking to expand, we may modify some allocation of space, but we don't think that we have the wrong store size as we take a look at categories of business that are doing extremely well.

We would like to increase our space allocated to Apparel.

We'd like to increase space allocated to our team sports category.

We'd like to increase space allocated to our Footwear area.

What we're doing online doesn't really impact that.

We really think the customer's going to shop online from mobile apps, going to shop at the stores; and we haven't seen any reason to change our strategy.

We really like the way we're positioned.

I think, based on what you saw from our comps, not only this quarter but this year, we feel like we're in a really very good spot.

All right.

Then, just secondly -- on all three categories, sounds like they performed well in the quarter.

But just thinking specifically about some of the easier comparisons you might have had in the outdoor segment, maybe you could talk about how the lodge business performed in the quarter?

You mentioned firearms a couple of times on the call as being strong.

Maybe just any changes you're seeing in the competitive environment with that particular segment.

Thanks.

As I said, the three categories were all very strong.

We're not going to call out specifically and rank them.

I indicated that the firearm sales have spiked since the election, which is really in the fourth quarter, not in the third quarter.

But based on the results of the election, which we anticipated if the election went this way that this business would react in this fashion.

Good luck for holiday.

Thanks.

Dan Wewer, Raymond James.

Ed, just wanted to follow up with your comments about the product cycle for the golf industry.

Are you alluding to the Rocketbladez from TaylorMade?

And supposedly a new product line-up from Callaway Golf?

Is that what you're alluding to for next year?

Yes.

We've looked at -- it's not just them.

We've seen all the product that's coming out.

So whether it be -- the Rocketbladez; what TaylorMade is doing to follow up on the Rocketballz; Fairway Woods; Nike's got their new driver coming out, we think is terrific; Callaway is great.

We think there's a big move in Footwear as we continue to -- the shift to spikeless shoes is extremely important.

We've had great luck in the Apparel business.

We will continue to expand our Apparel business and our golf business both at Dick's and Golf Galaxy, taking what we've learned from the Nike Fieldhouse concept and the Under Armour shops and applying those into our golf business.

Where we've done that in a couple test areas the results have been very encouraging.

The price points on some of the brands that you're alluding to are moving higher.

Do you think it's primarily benefiting Golf Galaxy in 2013, maybe more so than for the Dick's golf departments?

No, not really.

We don't really see -- I mean, the basic high end driver from Callaway and from TaylorMade, Nike -- they're all going to be relatively the same prices they were last year.

So the top end TaylorMade driver will be $399.

There will still be product in that $399, $299 standpoint.

The average unit Retail isn't going up significantly.

Where we do think we've got some AUR opportunity is on the Footwear side, because as odd as it sounds, the spikeless shoes are actually more expensive than the traditional golf shoe.

We've had some really good luck in that category.

Just real quick follow-up.

Have you had a chance to pencil through the Affordable Health Care Act?

It looks like that's going to be the law for a long time now -- how that might impact your operating expenses over the next couple of years?

We've looked at it.

We're not ready to comment about what that will be.

But it will certainly be more expensive.

It really doesn't kick in, in any meaningful way until 2014.

So we've got some time to work through that.

Michael Lasser, UBS.

Can you size the EPS impact in the fourth quarter from all of those one-time-ish type items that you talked about between the NHL lockout, the donation, et cetera?

No.

For competitive reasons, we're not going to lay out what we think we're earning from NHL product.

Sandy is -- as we indicated that we did make a $1 million donation to the Red Cross to help the relief efforts there.

If you take a look at $1 million, that's a $0.005.

But -- so all together, you think there will be a material impact from all these one-time events?

I didn't say that.

We said, we've laid those into our guidance.

The $1 million donation that we thought was absolutely the right thing to do to help the relief efforts of those that were in the wake of Hurricane Sandy, we think was the right thing to do.

That's a $0.005.

We've taken into account what we think could happen to the NHL, what we can -- or what is happening to the NHL right now, and the effects of Hurricane Sandy of when people are going to get back to shopping for this product once they get their lives and their homes back in order.

Switching gears -- on the eCommerce front, how is your eCommerce doing in markets where you have a pretty good store presence versus other areas where you're less penetrated on the Retail side?

As you would expect, we do more business in markets where we have stores than in markets where we don't have stores.

Is that because of the ship-from-store and associates walking consumers over and ordering from stores?

Or is it just because of the brand awareness, and so there should be a halo benefit as you get more penetrated across the country?

Thanks a lot.

We think it's all three of those things that you laid out.

We found that once we open a store in a trade area, that our sales primarily go up.

Okay.

Good luck with the holidays.

Thank you very much.

Rick Nelson, Stephens.

I'd like to ask about the SG&A, about deleverage that you're guiding to for the fourth quarter with a 4% comp.

Curious what the driver is there -- the Red Cross payment obviously one of those.

This is Tim.

One of the things that we've talked about continuously last year and this year was the investments that we were going to be making in systems and in our eCommerce business.

You can see the fruits of those labors already coming through our numbers.

So along with those investments are headcount investments.

On the administrative expense side, that is a primarily payroll and related benefits cost that we're seeing coming through the numbers.

Okay.

Got you.

The $0.03 in EPS that you're calling out for the extra 53rd week -- can you tell us what that represents in terms of top line sales?

We haven't broken out the top line sales, but we've been very open about the $0.03 impact on the EPS.

As we model the quarters for next year, a 52-week compared to a 53-week -- are there meaningful shifts in high volume weeks between the quarters that would impact the quarterly comp?

There are not.

Michael Baker, Deutsche Bank.

Couple questions I want to ask.

First of all, can you sort of parse out what the quarter looked like, maybe early in the quarter versus late in the quarter?

Was back-to-school particularly strong or -- any hint there on how the pace of business may have been?

Michael, this is Tim.

We just don't talk about sequential or individual month performance within a quarter.

So we aren't going to make you very happy with that answer.

Well, at the very least, can you tell us if there are wide variations that would be something that would be interesting or relatively consistent?

Or can you even go that far?

We won't go that far.

Okay.

Then I will ask you something else.

Let me ask you about the merchandise margins.

Is the biggest driver to the improvement in the merchandise margins, is it price within the categories?

Are you seeing -- is it the mix from hard goods to Apparel and Footwear?

Then maybe even more, is it within each of those categories, moves to more higher-end type product?

Just trying to parse out what's driving that merchandise margin gain?

It's a combination of a number of things.

So it's the mix of product.

It's not just the mix from Hardlines to Softlines, because we've got a number of Hardlines areas that are extremely profitable.

But it is that mix to those higher-margin categories.

It's also better inventory control from a planning standpoint, so we've mitigated markdowns on the back end.

Those are the key drivers of that.

Sam Poser, Sterne Agee.

A couple of questions.

Just a clarification -- Sandy didn't affect third quarter.

It's really a fourth quarter story, just based on when it happened.

Am I thinking about that correctly?

Yes, Sam.

This is Tim.

That's correct.

Okay.

You talked about adding headcount.

Was that entirely in your digital platform?

Or have you added some headcount in the stores as well?

My discussion point was on administrative expense and payroll.

So that is the home office support center payroll, primarily IT, eCommerce and marketing; and then a little bit spread on the other functional areas.

Is there any variation of headcount in the stores this year over last year?

Not significantly.

The research that we've gotten back has been great from a service standpoint.

As we compared this year to last year, in the metrics that we use, has been very positive.

Thank you.

Then lastly, there's been some conversation about trucks moving more slowly, given Sandy, deliveries.

Are your -- two ways.

Is your flow of goods better than it was?

Are you finding yourself with your non-private brand, private label business ordering or being able to order closer to need than you have in the past?

There hasn't been any meaningful change.

As far as the flow of merchandise given Sandy, trucks and rail and so on?

Nothing meaningful, no.

Thank you very much.

Good luck.

David Gober, Morgan Stanley.

I just wanted to follow up on SG&A.

Obviously, you've had a decent amount of lumpiness this year in a couple of moving pieces.

Is there anything you can say about what you think in a normalized SG&A per store looks like -- maybe not specifically in 2013, but more on an ongoing basis, obviously given some of the puts and takes in 2Q, 3Q and 4Q this year.

I'd actually answer it this way.

When we're in a situation where we're delivering very large profits for the store and we're investing in the business, which we said we were going to do, there's going to be some lumpiness in SG&A.

So as we continue the investment mode into 2014 and 2013, you're going to continue to see some lumpiness there.

So rather than trying to give you a normalized number, as we go forward in the next two years in particular, I won't be able to do that for you.

Okay, fair enough.

I guess more of a quick detailed question -- we've heard that the new NFL jerseys have been selling particularly well.

Any sense of how that helped the comp?

Or more generically speaking, how those types of changes tend to impact the business over time?

I'm not sure I really understood.

Could you -- I'm not sure I understand the question.

Sorry.

Just the switch over in manufacturers for the NFL jerseys.

We've heard that, that has been a benefit this quarter and that those jerseys are selling particularly well.

I'm just curious if you found that to be the case historically, or specifically if you can comment on any impact this quarter.

Well, yes.

I mean, it's definitely a positive impact.

You change the jerseys, a lot of the fans want to have the jersey on that the players are wearing.

It's been very positive.

We would expect that to be a positive impact in the fourth quarter also.

Especially since last year, people knew the jersey was going to change, so it negatively impacted the fourth quarter last year.

People not wanting to buy a jersey that they know were going to be obsolete at the end of the year.

John Zolidis, Buckingham Research Group.

Question on your longer-term operating margin target of 10%.

You look like you're going to get almost 100 or around 100 basis points of operating margin expansion in the current year, based on the updated guidance.

Would you say that you're running ahead of plan relative to that 10% target that you originally laid out?

I would say, John, based on the way we've outlined our future plans, that we are on plan.

Okay.

So then, over the next two years, more modest operating margin expansion should be expected.

Yes.

Okay.

Great.

Then just one other question.

For the fourth quarter, you gave us some big picture things that you expect to potentially be disruptive to sales.

Can you talk about specific product categories that are either going to be a drag or that you think can outperform the chain?

Thank you.

We don't want to get into specifics on merchandise categories, as we've not done that before.

But some of the aspects that will drive it will be the gun and ammunition business, based on the results of the election.

We anticipate that the results that we're getting out of some of the vendor shops that we've done will continue to be additive.

One of the drags on this will be that we don't have a World Series team of any meaningful impact on our business this year, with the Giants winning the World Series versus what happened last year.

So that's going to be a bit of a drag on sales this year.

But for the most part we're relatively positive.

I think the Fitness business will continue to be a bit challenged, but most other areas of the business we're pretty enthusiastic about.

Great.

Thanks very much and good luck.

Kate Wendt, Wells Fargo Securities.

I was hoping you could talk a little bit to your strategy with respect to prices and promotions for the holiday season this year compared to last year, and given that some of your competitors have discussed plans to adopt more aggressive stance.

Yes.

We don't have anything planned right now.

Our merchants have really done a terrific job, differentiating us in the marketplace with product.

The majority of the brands that we're selling, we don't feel that there needs to be a significant promotional strategy around what we're doing in the Nike Fieldhouse concept, what we're doing with the North Face, what we're doing with Under Armour, what we're doing with some of the golf brands that are out there right now.

So we've got the flexibility to move promotionally if we need to.

Right now, we don't feel that we have to.

So we don't -- we're not looking -- we're not anticipating a negative impact on margin rates.

Okay.

Got it.

Then on SG&A -- can you remind us when you really started to ramp up investments in systems and eCommerce?

Even though we'll continue to see some lumpiness, whether the rate of increase in spend will be as meaningful going forward, given that you've already increased investment this year?

I think you can consider the fact that rate of spend started pretty much in the second quarter and will also impact Q3 and Q4 and a little bit of Q1 next year.

Okay.

That's helpful.

Then just finally -- if you have an update on your plans for rolling out pick-up in-store, and what the timing of that might look like next year.

Kate, right now looks like we'll be testing that in 2014.

We haven't announced specifically, but probably look mid-year in 2014 for us to -- or, excuse me, 2013, to be testing that.

I'm sorry, Kate, 2013, we'll be testing that.

Paul Swinand, Morningstar Investment Research.

Thanks for your patience through all these questions.

(laughter) I wanted to -- I think you've got the longest list in the book here.

But, I wanted to ask -- I've seen a lot of merchandise that is saying, only at Dick's or special for Dick's; and I knew you guys have always worked on this type of thing but I'm seeing it even for Under Armour or some of the national brands.

Is that really that new and is it starting to move the needle for you?

Then have you planned down that the merchandise that would have been at every other competitor's store, so it's a net neutral or is it actually additive?

Well, some of it's additive and some of it's neutral.

We worked very closely with our brand partners, whether it be Nike, the North Face, Under Armour, some of the other groups on the Hardlines side, and have developed franchises, if you will, that are either exclusive or primarily exclusive to Dick's Sporting Goods.

It's really kind of gained traction over the last 12 to 18 months and we will continue to be very aggressive in this.

And our partners have been very helpful in working through this with us.

We feel that it's important to differentiate ourselves not only as it relates to our other brick-and-mortar competitors, but also to differentiate ourself with online competitors that we have out there.

So this will -- it's gotten more important.

We expect it to continue to be more important as we go forward.

Interesting.

Thanks.

Can you give us any metrics, like is there better margin, better sell-through, or -- I know you don't want to share everything.

But anything color there?

Directionally, it would be better margins, because we don't -- we're not competing with anybody else from a price standpoint on this.

The sell-throughs, I wouldn't say are significantly better.

Some are better, some are not as good.

But that's just because when you run a business like we do, you buy some winners and you make some mistakes.

What we've always done is, when we've made a mistake, as in any merchandising category, if we make a mistake, we fix it pretty quickly, mark it down and get out of it.

But overall I would say the margin rates will be better.

Interesting.

Thanks again and best of luck for the holidays.

David Magee, SunTrust.

Good quarter.

Just two questions.

One is, what are you seeing right now with regard to competitive openings?

Is that something that's unchanged or is that getting better or worse as we go into next year?

As a percent of total, I would say it's relatively the same.

Okay.

Then, secondly, can you talk a little bit about advertising in terms of the different approach that you've taken this year, and whether you're leveraging that cost item at this point?

We're taking a look at -- from a marketing standpoint --and I really have made some big changes to our marketing.

As we indicated that we planned to do, we reduced our spend in newspaper inserts and have moved more dollars into talking directly with the consumer through our direct marketing program, whether it be through the digital online marketing and also through the TV campaigns that we've done.

The TV campaigns, the digital marketing, some of these things are much easier to leverage as we go forward than the newspaper insert program.

So as we go forward, we're not planning to leverage our marketing dollars over the next 12 to 24 months in any meaningful way.

But we are going to continue to look to reallocate the spend.

We're getting what -- we anticipate a great ROI on this change, and you'll see us moving more out of the inserts and more into digital, direct to consumer, and the TV campaign that's we've put together.

Camilo Lyon, Cannacord Genuity.

Ed, you mentioned that you're seeing an acceleration in Apparel and that's offsetting the guns and ammo margin drag.

I was wondering if you could specifically call out if it's coming from the outerwear category?

Or is it the athletic performance gear?

Or is it the Nike NFL jerseys?

Any color there would be helpful.

I won't get too specific, but I will tell you based on -- it's not coming from the outerwear category right now.

It's coming from other Apparel and Footwear categories.

The licensed piece on the NFL side has been good, but that's been offset by the lack of a World Series champion and what's going on in the NHL.

But overall, we're very pleased with what's going on from an athletic standpoint.

As we get further into the quarter, the outerwear business gets to be a much more important part of our business and we expect that, that will also be helpful in leveraging against the gun and ammunition business.

We don't look at the gun and ammunition business as being bad for our business.

It's going to be additive.

It's going to drive more foot traffic into the store.

It may impact the growth of our rate, but it's going to certainly positively be accretive to our earnings.

Great.

Then just switching gears -- if you could update us on price optimization and where you are with that initiative.

We're still very early in the process.

As we've indicated in some of the calls and some of our meetings, that the benefit of these programs was really going to be felt more in 2013, 2014 and 2015.

As I said, we're in the very early innings.

Okay.

Then my final question is -- Ed, on shop-in-shops, it looks like the annual run rate for, say, the Under Armour shop-in-shops is about 50 or so per year.

Is that the right pace of openings that we should think about?

Or could you conceivably accelerate the pace of those openings?

Right now, I would look at it to be relatively what it has been.

As we look and work with Under Armour, if we find that we can move quicker on this, we will.

But right now, I would look at it as it's been in the past.

That's relegated to more new store openings and remodels?

For the most part, yes.

Great.

We continue to remodel our stores.

One of the things that we always talk about internally is that we don't want to wake up some day and have a tired old chain.

So we're constantly remodeling stores, relocating stores, so that's an important part of our overall strategy.

Thanks very much and best of luck for the holiday.

Chris Svezia, Susquehanna Financial Group.

Not to beat this to death, but just on the SG&A piece -- Tim, just so I've got you here, you said some of the increase in SG&A spend began in Q2, obviously Q3, Q4 and some of Q1 next year?

Yes.

Okay.

Let me ask it this way -- fair to say that SG&A is a leverageable line item on an annualized basis, assuming you do a, call it, 2% to 3% same-store sales increase?

Is that a fair --

That is correct.

Okay.

All right.

Last question, real simple here

Store openings for next year -- any thoughts at this point?

Roughly the number relative to this year -- you did 38 -- any color you could add about what that potentially could be?

It should be at least the amount that we did last year.

Okay.

All right.

Thank you very much, and all the best on the holiday.

Joe Feldman, Telsey Advisory Group.

Congratulations on the quarter.

I wanted to ask about -- also on the stores.

Any update on real estate -- any changes in terms of availability of the real estate?

Also, within real estate and the stores, as far as productivity goes, are there any differences you see by region?

Or the format -- some of the smaller format stores?

Or any of those kind of things you could address?

Yes, Joe, Ed indicated that we'd open at least as many stores for next year.

We've been pretty consistent over the last couple of years with around an 8% growth rate.

I think you can look for something pretty similar to that in 2013.

As far as the market is concerned, there isn't a big change in the marketplace as far as availability of real estate.

We are seeing some opportunities with -- some of the REITs are buying some properties from department stores.

We are seeing some more repurposing of mall shop space.

We have had some discussions with Sears about repurposing some of its space.

We have nothing to talk about today, specifically, but we are having those discussions.

New store growth has been pretty consistent in the last couple of years, around 50% of our boxes are ground-up construction versus repurpose.

I think you can look for something pretty similar in 2013 as well.

As far as productivity by region -- you know what, we're not seeing a meaningful difference across the country as to how these stores are performing as we open them.

Got it.

That's good to hear.

Actually, that was it.

Most of my others were answered.

Thanks, guys.

Good luck with this quarter.

Wayne Hood, BMO Capital.

I just had two questions.

One was, the percentage of sales that are tied to free shipping now -- is that growing at a faster rate than you would expect?

As you get into the fourth quarter maybe even greater?

To what extent if it does, place at risk any gross margin targets you have?

Or does pick up in-store help mitigate some of that?

We aren't seeing a meaningful increase in free shipments.

It will be more competitive as we get into the fourth quarter, as you would expect, but we don't see anything meaningfully different this year versus last year.

We haven't seen anything over the last quarter with a significant change there.

Okay.

My other last question was on eCommerce again.

The conversion rate -- how close are you to bridging the gap between where you are and industry average of about 2.4 in your conversion on the eCommerce business?

Did you narrow that gap in the quarter?

Do you think you can get there over the next year?

We've narrowed the gap.

In the next year, I would think that we will not get there.

But we are working at that.

We expect it to continue to increase, but I don't expect us to be at 2.4 in a year.

Matthew Fassler, Goldman Sachs.

I want to think now about fourth quarter and the interplay between the fact that you have some lay away inventory, essentially inventory that you held over the course of the year.

The fact that your vendors, and your competitors for that matter, seem to be planning outerwear reasonably conservatively.

What's your sense on the availability of product; on how vendor plans, given last year's tough experience, will impact their flexibility; and also the margin in that category here in Q4?

Matt, we've worked with our partners as we have in the past with what we characterize as partnership orders.

So we've got a flow of product that we have scheduled to come in.

So we're not over-inventoried right now.

If winter doesn't come, we've got the ability to cancel this product.

We have it on the books.

If it does come, we have the ability to bring that product in.

We have got a couple of different trigger dates, one of them coming up right now the Monday after Thanksgiving -- Monday, Tuesday after Thanksgiving -- and then we'll have another one later in the month of December.

So we've got some trigger points here.

We feel that we've got inventory available to us; if it gets cold and this business takes off, we've got the ability to grab that product.

If it stays similar to last year, we've got the ability to move that product off or cancel that product.

We'll end up with no meaningful difference in inventory this year versus last year.

How should we think about last year's gross margin compare?

The merch margin was up 27 bps; it was the second smallest increase you've had in a while.

Would you consider that 27 basis point improvement a difficult compare, given that it could have been worse?

Or is that something that should be very much surmountable, given the momentum that you have right now?

The group did a very good job last year of managing the inventory and managing through a very difficult year.

I won't say that 27 -- I won't say that it's a slam dunk, but if it gets cold, it will be better and if it doesn't, it will be about the same.

One other quick one -- your West Coast competitors, the smaller, not necessarily perfect comps to you, came up with some better numbers recently.

I know your exposure to that part of the country is still modest and growing.

Have you seen any regional recovery on the West Coast, relative to prior trend?

We're actually pretty happy with what's going on with the West Coast right now.

So we're very pleased with what's going on out there.

This concludes our question-and-answer session.

I would like to turn the conference back over to Ed Stack for any closing remarks.

I'd like to thank everyone for joining us for our third quarter call.

I wish everybody happy holidays and look forward to seeing everybody for our fourth quarter call.

Thank you.

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