DICK'S Sporting Goods Inc (DKS) 2013 Q2 法說會逐字稿

Good morning and welcome to the DICK'S Sporting Goods second-quarter 2013 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, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning and thank you for joining us to discuss our second-quarter 2013 financial results.

Please note that a replay and 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 risks and uncertainties.

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

For a summary of the 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 February 2, 2013.

We disclaim any obligation and do not intend to update these statements except as required by the Securities law.

We have 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 second-quarter financial and operational results and discuss our guidance.

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

After Joe's comments, Andre Hawaux, 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 would like to thank all of you for joining us today.

This morning we released our second-quarter financial results.

While we generated record non-GAAP earnings of $0.71 per diluted share excluding an asset impairment charge, this was below our guidance of $0.75 to $0.77.

The lower than anticipated earnings were driven by lower than expected same-store sales.

Total sales increased 6.6% in the second quarter, driven by the growth in our store network offset by a decline in same-store sales.

Adjusted for the calendar shift due to the 53rd week in 2012, consolidated same-store sales decreased 0.4%.

This compares to our expectation of approximately 2% to 3% growth.

Shifted same-store sales for DICK'S Sporting Goods were up 0.1% and Golf Galaxy was down 6.1%.

Our e-commerce business, which represented 5.6% of sales in the quarter, continued to deliver strong results while increasing in profitability.

Despite a challenging environment, we expanded our operating margins year-over-year.

Categories that were strong performers in the second quarter included hunting, athletic footwear and apparel.

Combined, these categories generated mid-single-digit comp increases.

Hunting continued its strong growth, driven primarily by firearms and ammunition.

Athletic footwear was solid across men's, women's, and youth.

Apparel sales benefited from an increase in licensed apparel due to the NHL playoffs as well as growth in outdoor and the athletic apparel areas.

We continue to be excited about these categories.

Our second-quarter same-store sales however were negatively impacted by a sluggish consumer environment, higher levels of precipitation and cooler weather, cooler temperatures, and challenges in select categories.

These factors all contributed to a decline in traffic.

The two categories most impacted were golf equipment and the outdoor equipment such as water sports, camping, and bikes.

We believe the relatively wet and cool conditions discouraged participation in these areas.

In addition to the weather, a weaker golf product cycle compared to the strong innovations we've seen in the last two years compounded the challenges from fewer rounds played.

Fitness continues to be a declining category and we now expect the trend to continue into 2014.

Golf equipment, outdoor equipment, and fitness were the primary drivers of our same-store sales shortfall and together impacted our same-store sales by approximately 330 basis points.

We also believe the sluggish consumer environment is impacting our overall business and we expect the consumer to be cautious in the second half of the year.

Looking to the rest of the year, we believe there are several steps we can take to drive traffic, respond to the cautious consumer, and address isolated promotional tactics by competitors.

We are increasing our advertising levels, adding store payroll to improve the customer experience and continuing to invest in growth categories such as hunting, athletic apparel, athletic footwear, and the high school athlete.

We are also strategically adding more products at opening price points and we have reduced key categories in selected markets to react to the pricing strategies of competitors.

Taking into consideration current trends and anticipated consumer pressure along with the additional expenses related to the actions we are taking, we are revising our guidance for the year.

We now anticipate consolidated 2013 same-store sales will be approximately flat to up 1% on a 52- to 52-week basis on top of a 4.3% increase in 2012 and compared to our previous guidance of 2% to 3%.

Non-GAAP consolidated earnings per diluted share are expected to be between $2.60 and $2.65.

This compares to our previous expectations of $2.84 to $2.86 and to non-GAAP earnings per diluted share of $2.53 in 2012, which included $0.03 from the 53rd week.

For the third quarter of 2013 we expect consolidated earnings per diluted share to be between $0.37 and $0.39 compared with consolidated earnings per diluted share of $0.40 in the same period in 2012.

On a shifted basis, consolidated same-store sales are expected to be approximately flat to up 1% compared to a 5.1% increase in the third quarter last year.

For the fourth quarter of 2013, we expect consolidated earnings per diluted share to be between $1.04 and $1.07 compared with consolidated earnings per diluted share of $1.03 for the same period in 2012, which includes $0.03 from the 53rd week.

On a shifted basis, consolidated same-store sales are expected to increase approximately 3% to 4% compared to 1.2% increase in the fourth quarter last year.

We believe the challenges we are facing today are short-term in nature and will not impact our long-term profitable growth.

There remains significant runway in our stores, e-commerce, and our new concepts.

We are excited about the future growth across our business and will share more details of our long-term strategy at our Analyst Day in September.

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

Thanks, Ed.

In the second quarter of 2013, we opened seven new DICK'S Sporting Goods stores, bringing our total store count at the end of the quarter to 527 DICK'S Sporting Goods Store for 28.7 million square feet and 81 Golf Galaxy stores with 1.4 million square feet.

New store productivity of our new DICK'S Sporting Goods Stores was 85.4% in the second quarter compared to 102.2% in the second quarter last year.

The lower new store productivity is in line with the performance of the business this quarter.

In total for 2013, we plan to open approximately 40 DICK'S Sporting Good Stores and fully remodel four stores.

We've opened nine stores to date this year and we expect to open an additional 31 stores and complete the four full remodels during the remainder of the year.

In the third quarter, we expect to open 20 new stores and complete three full remodels.

We have completed 53 of the planned 75 partial remodels we had announced for 2013.

Our remodeled stores focus on strategic growth categories such as youth apparel and feature Nike, Under Armour, and Adidas Shops.

We are pleased with the early results of these remodels and expect to complete the remaining 22 partial remodels by the end of the third quarter.

Within our stores we had 183 shared service footwear decks, 222 Nike Field House shops, 174 Under Armour shops, and 91 North Face shops at the end of the second quarter.

By the end of the year, we expect to have approximately 220 shared service footwear decks, approximately 290 Nike Field House shops, and approximately 240 Under Armour shops.

In the third quarter of this year, we will be adding approximately 80 seasonal outpost shops with the North Face in addition to our existing shops.

A seasonal outpost shop consists of a permanent back wall being installed in the seasonal section of the store.

During the winter season, this wall will be branded for North Face.

During the other seasons, the wall will incorporate appropriate photography for that season such as football or baseball as we leverage our ability to flex our sales floor.

At the end of the year, we expect to have approximately 90 North Face shops and 80 seasonal outpost shops.

We are planning to open one new Golf Galaxy store and relocate one store in 2013.

Both stories would be in our new format with a greater focus on golf services and experiential shopping.

We currently operate two True Runner concept running stores which allow us to further connect with enthusiast runners.

These stores provide a valuable insight that we are applying across our businesses.

We plan to open one additional True Runner location in 2013.

Finally, we opened our first Field & Stream store last week.

The grand opening exceeded our expectations and was the best grand opening in the history of the Company.

Our Field & Stream stores will be destinations for hunting, fishing, and outdoor enthusiasts and offer premium assortments with superior service levels.

We expect to open a second store in the fourth quarter of this year.

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

Thank you, Joe.

I would like to cover several topics with you today.

First, our second-quarter results; second, our guidance for the remainder of the year; and third, our capital allocation strategy.

Starting with the second-quarter results, total sales for the second quarter of 2013 increased 6.6% to $1.5 billion compared with the same period a year ago.

Adjusted for the shifted calendar due to the 53rd week, consolidated same-store sales decreased 0.4%.

DICK'S Sporting Goods same-store sales increased 0.1% and Golf Galaxy decreased 6.1%.

The relatively flat same-store sales in the DICK'S Sporting Goods business was driven by a 2% increase in sales per transaction and by a 1.9% decrease in traffic.

Unshifted same-store sales for DICK'S Sporting Goods increased 1.9% and Golf Galaxy decreased 7.2%.

E-commerce penetration was 5.6% of total sales.

Consolidated gross profit was $479.3 million or 31.3% of sales and was 14 basis points higher than the second quarter of 2012.

The gross profit margin leverage was primarily driven by merchandise margin expansion of approximately 31 basis points, partially offset by occupancy deleverage.

Excluding an asset impairment, SG&A expense in the second quarter of 2013 was $329.1 million or 21.49% of sales compared to SG&A expenses of $310.9 million or 21.63% of sales in last year's second quarter.

This leverage of 14 basis points was primarily due to lower incentive compensation and the anniversary of a contribution made to the DICK'S Sporting Goods Foundation in the second quarter of last year.

For the second quarter we generated non-GAAP earnings of $0.71 per share which includes a $0.04 benefit from the shifted calendar and excludes a $0.04 per share charge related to an asset impairment for our corporate (inaudible).

Now onto the balance sheet.

We ended the second quarter of 2013 with approximately $135 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 $350 million in cash and cash equivalents and with no outstanding borrowing under the facility.

Over the course of the past 12 months, we have utilized cash to invest in our OMNI channel growth, remodel our stores, build a distribution center, fund share repurchases, pay a special dividend, pay our normal quarterly dividends, and acquire the Field & Stream brand.

Inventory per square foot increased by 5% at the end of the second quarter this year compared to the end of the second quarter of last year.

Clearance inventory was down 4.1% on a square foot basis.

We are comfortable with the quality of our inventory.

Current inventory levels are positioned for our second half expectations and new concepts.

Net capital expenditures were $56 million in the second quarter of 2013 or $62 million on a gross basis compared with net capital expenditures of $50 million or $54 million on a gross basis in the second quarter of last year.

Now turning to our guidance, please keep in mind that because fiscal 2012 included 53 weeks, any comparison to the 2012 retail calendar will reflect a shift.

This shift will not have a net impact on our total results for the fiscal year but will impact our quarterly results.

For the full year 2013, we are lowering our guidance and now anticipate consolidated same-store sales of approximately flat to up 1% compared to our original expectations of a 2% to 3% increase.

We expect non-GAAP consolidated earnings per diluted share will be in the range of $2.60 to $2.65 excluding an estimated recovery of $0.04 per share of our original investment in JJB Sports and a $0.04 per share charge related to an asset impairment.

This compares to our original expectations of $2.84 to $2.86 and to 2012 non-GAAP consolidated earnings per diluted share of $2.53, which included $0.03 of earnings per diluted share due to the 53rd week and excluded the JJB impairment charge.

The midpoint of our original guidance was $2.85 per share and the low end of our new guidance range is $2.60 per share.

Factors that contributed to the $0.25 decrease include approximately $0.21 from our lower same-store sales expectation, $0.06 from the traffic-driving initiatives Ed discussed earlier, $0.05 from the lower second-quarter results, and $0.02 from additional marketing to support our Field & Stream launch.

These decreases are offset by approximately $0.09 from lower administrative expenses.

For the full year, gross margin is expected to decrease year-over-year with the merchandise margin expansion anticipated to be more than offset by occupancy deleverage.

SG&A as a percentage of sales is expected to decline slightly.

Keep in mind that our earnings guidance continues to take into consideration the impact of the previously disclosed investments planned in 2013 with our OMNI channel platform, our stores, our information systems, and our new concepts which are expected to have a $0.12 impact on earnings per diluted share for the full year.

The impact of these growth investments is expected to be approximately $0.03 each quarter.

Diluted shares outstanding are expected to be 126 million shares for the full year.

Net capital expenditures are expected to be approximately $258 million or $299 million on a gross basis.

Net capital expenditures for 2012 were $187 million or $219 million on a gross basis.

Anticipated increases in capital expenditures from 2012 to 2013 is primarily the result of planned growth investments in the business in 2013.

Breaking it down by quarter, we anticipate third-quarter earnings per diluted share of between $0.37 to $0.39 compared to $0.40 in the third quarter of last year.

The shifted calendar as a result of the 53rd week in 2012 is expected to negatively impact EPS by $0.06 in the third quarter.

We received a benefit from the shifted calendar in the first half of the year and expect the net impact to be approximately neutral for the year.

On a shifted basis, consolidated third-quarter same-store sales are expected to be approximately flat to up 1% compared to a 5.1% increase in the third quarter of last year.

On an unshifted basis, consolidated same-store sales are expected to be down approximately 2% to 3% in the third quarter.

In the fourth quarter of 2013, we expect consolidated earnings per diluted share of between $1.04 and $1.07 compared with our consolidated earnings per diluted share of $1.03 for the same period in 2012.

The shifted calendar as a result of the 53rd week in 2012 is expected to negatively impact EPS by $0.03 in the fourth quarter.

On a shifted basis, consolidated same-store sales are expected to increase approximately 3% to 4% compared to a 1.2% increase in the fourth quarter of last year.

On an unshifted basis, consolidated same-store sales are expected to be approximately negative 2% to negative 1% in the fourth quarter.

Finally as I mentioned, I would like to remind investors about our capital allocation strategy.

There are four main components to our strategy.

First and foremost is investing in the growth of our core business.

Second is our quarterly dividend.

Third is the $1 billion share repurchase plan which was announced previously.

Fourth is the consideration of opportunistic acquisitions.

To sum up, our second-quarter earnings were below our expectations, largely driven by lower than anticipated same-store sales that reflected weakness in golf equipment, our floor equipment, and fitness, as well as the continued sluggish consumer environment.

We expect some of the trends currently impacting these categories to continue in the near term and we are taking appropriate steps to drive traffic.

We have revised our guidance for the full year to reflect these factors.

Our long-term growth prospects remain strong and we continue to invest in the future especially in the areas that offer significant growth potential such as our store network, our e-commerce business, and new retail concepts.

We look forward to discussing our future growth with you at our upcoming Analyst Day.

That concludes our prepared remarks.

We would be happy to answer any questions you may have at this time and I would like to thank you all for your interest in DICK'S Sporting Goods.

(Operator Instructions).

Brian Nagel, Oppenheimer.

Good morning.

My first question I wanted to ask is just on sales and maybe from a bigger picture perspective.

But as I listen to you talk about sales by category and having followed DICK'S awhile, it seems to me that the underperformers and the outperformers are still largely the same as they have been for a while.

But the sales performance of the Company is deteriorating.

So the question I have is -- is that right?

And then behind scenes and putting aside any type of near-term or recent weather disruptions, is there something else inflecting for the negative that's causing a further deterioration in your topline results?

We don't think so.

In the second quarter, we are so reliant upon the golf business and that outdoor category is a big part of our business.

As we said, those are the categories that were really difficult this year compared to last year and they accounted for 3.3% of our 330 basis points of sales reduction.

So we don't see that there's something fundamentally an issue with the business.

We just kind of hit the perfect storm.

We are not happy about it.

But we really feel that we hit the perfect storm.

We do think the consumer is somewhat cautious so that's the other difference that we see right now is that we do feel that the consumer is going to continue to be cautious and is also -- we have kind of all heard about what the housing business is doing, what the auto business is doing, and we are probably right now not at the top of the food chain from a consumer expense standpoint, but there's nothing fundamental inside our business that really concerns us.

Maybe I can just follow up with one quick -- just on markdowns, your gross margins held up well in the quarter.

As we look at back half of the year and maybe in light of the guidance you gave, is there an assumption of more aggressive markdowns assuming the sales could stay soft -- in clearance and product?

No, Brian, this is Andre.

Actually our margins actually from a merchandising margin standpoint hold up very well.

The decline in the back half is really driven by occupancy deleverage.

So the net effect -- we don't see a lot of that and we think and we know that our inventory is very well positioned.

Okay, thank you.

Michael Lasser, UBS.

Good morning, thanks a lot for taking my questions.

First on your market share, do you think you gained or lost market share during the quarter and how about relative to where you have been trending over the last couple of quarters?

I think the market share as a whole is -- I wouldn't say that we lost market share.

There's some categories of business that are more important to some other retailers in our category and a bit less important to us such as the gun and ammunition business.

There's some other people that it's a much more -- it's a much bigger part of the business so they get a bigger benefit from that.

But in our main categories of athletic apparel, footwear that high school athlete, we don't feel that we lost market share.

Based on that commentary, there's been a couple kind of down traffic quarters in a row.

Does it make you rethink the size of the box, given that you are having to go after some categories that probably are in decline?

We are looking at what categories we can move around and square footage allocation.

We feel that -- we think the fitness business is going to continue to be difficult.

I think people are just working out and exercising differently than they have in the past, so we think that business is going to continue to struggle.

We've got other opportunities to move that square footage.

There are some other things that we've done from a women's athletic standpoint around the studio concepts that we tested with Under Armour have done extremely well.

So there's ebb and flow.

We think that there is the opportunity to take some of these down trending categories and scale that square footage back and some other categories that we think have got a lot of legs to them, we can expand.

The women's category is one.

The other one that is doing extremely well is the youth business.

So the youth apparel business from both Nike, Under Armour, and Reebok is doing extremely well and we anticipate continuing to add square footage to those categories.

Then if I could have one more final question, presumably you are going to get some lift from the partial remodels that you have done.

E-commerce is going to continue to grow and you should see some benefit from the incremental traffic driving investments that you're putting in in the third quarter.

So can you kind of frame how you thought about your third- and fourth-quarter sales guidance in light of all those different factors?

Thank you very much.

Sure, we look to kind of where we think the business can come from and to be honest with you, we are somewhat cautious about what's happening with the consumer out there.

As we said, it's been pretty well chronicled the consumer seems to be a bit sluggish and may have other priorities right now in the short term of where they want to spend their money.

Okay, thank you very much.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

My first question is about your inventory.

It was up much more than sales obviously.

Clearly the topline shortfall was a factor in driving that.

I know your clearance inventory is down and that's I guess to some degree in the eye of the beholder.

So how do we think about the pace of inventory growth relative to sales growth over the rest of this year?

Are you combating the sales softness with higher inventory?

Then finally related to that, how much inventory growth is associated with your new concepts?

Matt, we are not going to talk specifically about the new concepts and what that inventory is but there's a good part of that to -- we've got two of the new concept stores opening this year.

We have inventoried them in a very significant manner to see how high up is.

As Joe said in his comments, the grand opening we had at the Field & Stream store this week was the best we've had in the Company's history.

We didn't feel that there was a real issue of over buying this one store because we've got 500 stores we can distribute that product back into, so we don't feel that there's an issue from an inventory standpoint.

Part of the other growth in inventory is that we brought in some categories earlier this year to try to take advantage of the back-to-school season and the college kids going back to school that we hadn't done in the past.

And we have been pleased with that decision so far.

Okay, my second question relates to pricing.

You intimated sort of tangentially some actions that some of your competitors have taken on the pricing front and while it sounds like you are still guiding merchant margins up, it also sounds like you feel compelled to respond.

Any color on who, where, or what is either acting or being impacted here?

There is -- it's in select areas, so this isn't that widespread, but there's just some selected areas in more the southern part of the country that we felt that we needed to take some pricing action based on action that some competitors have taken.

Okay, thanks so much.

Christopher Horvers, JPMorgan.

Thanks and good morning.

Thinking about the ticket as you have put in the shop and shops tickets and then you had inflation over the prior four quarters, ticket has been a larger driver of same-store sales.

Do you think as you go forward and you invest in price and there's some more of a focus on the opening price point, I guess how does that impact -- how does that affect your overall thinking about the business and potential comp growth?

And I guess is there a way to quantify how you thought about that in the updated guidance for the back half?

We think that there is certain areas where we can continue to drive that ticket.

The women's athletic apparel area and the studio areas has been very good.

Our ticket in the youth business has been really very good but we also feel that we have left open some opening price point items and that we think will help drive traffic into the store.

So as we said, we've got select items that we are going to be bringing into the store that we haven't had in the past to hit some opening price points to drive some -- that we hope will drive some traffic into the store.

How much do you think -- and I know this is hard to disaggregate, but obviously the innovation has been a big driver of trends in the sporting goods category and I would suspect even maybe in 2012 there were some color element, sort of a fashion element understanding that you focus on the core athlete -- there was this fashion element.

So how do you think about the innovation aspect going forward overall and what are your thoughts on the color aspect helping sales last year?

I think the color aspect did helps sales last year.

The color aspect is still an important part of the business today.

From an innovation standpoint, this is one of the issues that we had this past year because golf, which is an important part of our business, a little bit less than 20% of our business, there was little innovation this year compared to the innovation that we had over the last two years.

That lack of innovation coupled with the fact that rounds were down pretty significantly throughout the country and even more significantly in the areas where we are most invested in, which would be kind of the Midwest and up into the Northeast and the mid-Atlantic, it had an impact on our sales.

When it had such a positive impact last year, quite honestly we weren't quite as smart as we looked last year and we are not nearly quite as dumb as we look this year.

But would you say in the athletic footwear and apparel side, is the innovation still consistent with what it was a year ago?

Yes, I think it is.

We are really pleased with what Under Armour has done with the alter ego product of the compression product that they've got around Superman, Batman, and it has been just fantastic.

That product has been flying off the shelves and we took a very big position in this and have been very pleased with it.

There continues to be innovation in the cleat business primarily around football with what Under Armour has done with the highlight cleats, Nike has come out with some great new cleats this year and we are really excited about the innovation in the expansion that we put around the basketball business going forward.

Thanks very much.

Robbie Ohmes, Bank of America.

Good morning.

Just a couple other merchandising question follow-ups.

One was you called out the licensed apparel business in the second quarter.

Could you just give some examples of what that is, remind us what licensed apparel is for you guys?

And also is it something that could be supportive for the back half?

And then also related to that -- you called out your basketball business.

Can you give us an update on your running footwear business and the outlook for that for the back half?

And then my third question would be e-commerce, you didn't give us the year-over-year growth but you called it out as strong.

Is it -- can you just remind us what the drivers are to driving that growth there?

Is the merchandise expanding?

Is it in store things you are doing to get people on the web or changes in pricing or delivery?

Thanks.

Sure, hopefully I can remember all that, Robbie.

From a licensed business standpoint, it was really driven by the hockey business.

We had great playoffs, great teams for our business in the hockey playoffs and then the Stanley Cup, it was terrific.

So that drove a lot of the licensed business right there.

The running business is still okay, that is not growing quite as fast as it had been but we are still pleased with the running business.

In e-commerce, we couldn't be any more pleased with what's going on from an e-commerce standpoint.

That business at 5.6% of our business this year is a meaningful growth over last year.

What's driving that is the -- being better at the ship from store capabilities, which gives us a lot more inventory to satisfy the consumer when they are in buying the product.

We will piloting, as a go forward, we will be piloting by online pickup in the store and that will be -- we are targeting that for September.

Then just doing a better -- our e-commerce group is really doing just a very good job of keeping up with promotions and who's buying and communicating with those customers and we are just getting better at that every day.

So we expect that business to continue to be an important driver of our comp sales and this business is becoming more and more profitable for us each month and each quarter as we do a better job through our fulfillment channels.

We couldn't be more excited about our e-commerce business and the positive steps we've taken there.

That sounds great.

Thanks so much, Ed.

Kate McShane, Citigroup.

Thanks, good morning.

I know you don't usually comment on trends in the current quarter but I would say that overall retailers have sounded better about trends going into back-to-school and I wondered with you are expanded youth assortments this quarter, can you give us any more details about how you are feeling about the more recent results?

As you said, we normally don't talk about what's going on in the quarter, but under the circumstances of where we are at right now and the guidance we have provided, we think it is probably appropriate to let you know and to be honest with you, the back-to-school business in this quarter so far has been a bit better than we anticipated.

Okay, and is that coming from any particular category or do you see a reversal on some of the trends that you'd seen in Q2?

Yes, we have.

So the back-to-school business, as we have said, is a bit better than we anticipated and it is broader-based with some of those other areas doing a bit better right now.

Now where we are still cautious about that, some of the issues in the golf business have been mitigated with the new TaylorMade SLDR driver that's out there and that is clearly kind of got people excited a little bit again.

But again, we are not far enough into the quarter to be too terribly excited, so I would just caution and say that as of right now it's a bit better than we anticipated.

Thank you.

Rick Nelson, Stephens.

Good morning.

You talked about strengths in the firearms and I'm wondering if you can discuss the outlook there, how you are planning that business from an inventory standpoint?

We are going to be coming up against some pretty strong numbers with firearms based on the election results last year.

But we still think it's going to be relatively strong, where we are still pretty enthusiastic about it and there's still a bit of -- the capacity hasn't caught up with the demand on ammunition, so we think that's still going to be an important driver of the business going forward.

Okay, got it.

Can you discuss the expected economics of the Field & Stream stores?

Right now we can't, Rick.

We have just got -- we've got what we think is going to happen and as Joe said, it was a terrific grand opening and they are better than we thought from a sales standpoint.

Actually the margins are a little better than we had anticipated also.

But it's way too early to say anything and the store has been open up for less than a week or just a week now from a soft opening standpoint.

We've got another one opening up in November and we've got a couple more that will be opening up next spring.

Okay, got you and the True Runners stores I think you had previously planned for two store openings and today we are hearing about one store.

Rick, the second store that we talked about earlier will probably slide to the spring season in 2014.

Got you.

Thanks and good luck.

Sean McGowan, Needham & Company.

Yes, I also have a couple things of varying degrees of complexity.

The first one is on e-commerce.

I think you've given us enough numbers in the past to say that it doubled in the quarter year-over-year and the rate of growth has actually been accelerating for several quarters now.

Is that a trend you expect to continue or should we look for these big kinds of increases for the balance of the year?

We are pretty enthusiastic about what we can do going forward.

We don't see -- your double is a little bit too high from the math you might be doing, but we don't see a big slowdown in our e-commerce business through the balance of the year.

Okay, thanks.

Second question back to golf, can you give us some sense of how the golf business performed in the DICK'S stores?

Was it in line with the Galaxy?

A little better than the Galaxy business.

Okay, thanks.

Then the last question is more in terms of how do you manage against a lot of moving parts.

So you have weather in the quarter and that's always a factor, positively or negatively.

You have consumer attitude and you have competitive dynamics.

How are you able to figure out which of these is the overwhelming driver of performance in any particular category as you go forward?

What kind of metrics are you using to figure out which of those three variables is at play?

As you said, it's a complicated answer to the question ,but we can draw correlations between different areas of the country, what's happening with temperatures.

We can take a look at categories that are similar in nature and how they are doing.

We also spend a lot of time out in the stores.

Myself, Joe, our merchant group, we spend a lot of time out in the stores talking with people in the field on our sales floor, talking with customers.

We just spend a lot of time kind of doing old-fashioned work of talking with our customers, talking with the people who are in the stores, talking with our vendors.

And as you go through that work, you start to see common themes and you can draw correlations.

You can connect the dots, and we've always been pretty good at that.

Great, thank you very much.

Paul Swinand, Morningstar Investment Research.

Good morning, thanks for taking all the questions as usual.

Just wanted to focus on the e-commerce business, which is obviously strong for you and a lot of retailers these days.

I'm wondering are you seeing more activity or juice from the real SKU-intensive categories?

What I am trying to drill down at is, is there some kind of competitive advantage or something that leverages your bricks and mortar business that would differentiate you from the other online competitors?

I think we've got a couple of things that help us.

A lot of the relationships we have with vendors -- and I'm not sure about what other retailers are doing -- but we have been able to increase pretty significantly our direct-from-vendor shipments to our consumers, which along with -- to provide a much broader selection of product line than we are able to in the stores.

Footjoy is a perfect example on the golf side that we can show every Footjoy that's made and show that online.

We certainly couldn't do that in the store.

We've got also the margins are better on that direct-to-consumer, direct-from-vendor standpoint.

So we try to get out there with exclusive colors from the vendors, exclusive styles from the vendors, our own private brand products have been really very good, so we try to continually differentiate ourselves from the competitors out there.

I guess obviously you have less inventory risk and working capital, positive implications?

Definitely, absolutely.

Real quick question on the fitness business, I know you said there are some changes you saw in just the way the categories or the way the consumer is behaving.

I guess I would've thought maybe the big-ticket stuff might improve at the home improvement trends but could you just expand on that and why you think that it's a shift in the consumer behavior, why it's down?

I think there's just -- people are working out differently, kind of what the gyms have done whether it's LA Fitness and in gyms like that, they've really done a wonderful job.

They are well laid out.

They are clean.

They've got terrific programs and you don't have to sign a -- I'm being a bit facetious here -- you don't have to sign a lifetime contract.

You can go kind of pay-as-you-go which you weren't able to do before.

And I think they've done a really great job of reinventing their business.

So now you can go and work out in a more social environment, different equipment and it's really changed the way people are working out today and has had an impact on our big-ticket business.

So you think people are working out in a gym for their weights and their kind of heavy equipment and then doing sort of softer running or yoga at home?

Is that fair?

I think they are even doing yoga out in studios with other people.

It has really become a bit of a -- I don't mean to say a social gathering but people want to be out where other people are.

You can run on a treadmill that's more of an industrial treadmill that is different than what we are doing.

But I think they are doing all kinds of work out activities at these gyms.

So you go to LA fitness, they will have different classes.

They will have Pilates, they will have yoga, they will have all of these types of classes, spinning classes that people are doing now and it has had an impact on our fitness business.

We found -- we believe we have got businesses that we can expand and take some of that square footage over.

As I said, the youth business has been terrific for us.

The women's business, what we are doing there from a studio standpoint with Under Armour and to some extent Nike, we think is going to be really positive for our business.

Great.

Thanks a lot and best of luck.

Mark Miller, William Blair.

Regarding the objective to enhance the customer experience, is that predominantly investments to increase store associate hours?

Then what are you seeing in your own customer satisfaction scores?

What aspects to do you need to enhance?

I think we need to enhance -- we are adding some payroll back into the store in some areas that require a higher level of service that had become a more important part of our business and I will give you two examples.

As we get into the lodge area from a firearms and ammunition standpoint, especially on the firearms side, that requires a higher level of service than other areas of the store with the background checks and all of that that need to be done.

And also as we take a look at this women's apparel area, they require a different level of service than we've done in the past as we look at increasing our women's apparel and basically the ticket on our women's apparel around this whole studio concept.

I mean are you seeing feedback from customers that's leading you to want to make this investment or can you share what your own findings are?

As we get the stores, we just don't feel that we have enough people working these areas which these areas in the past have grown in a much faster rate than other areas of the business and they require a higher level of service.

As we've talked to our customers, we've talk to our associates on the floor, we've talked to our store managers, this is what they have -- the information they've given back to us and we have responded.

Okay, that makes sense.

On Field & Stream, it was an amazing grand opening.

The store literally was packed.

I wanted to know how you are thinking about product development in this format, considering your leading competitor is very high penetration of own brand.

Is that part of the investment spend in the second half?

And then I know it's very early, but if you are to expand the rollout of Field & Stream, how many stores do need to get critical mass to offset some of the upfront costs and organizational spend?

Thanks.

The spend is on these new concepts of really bringing people in to help run them, so we are really enthusiastic about Field & Stream.

To get to critical mass, I'm not sure exactly how many stores we need.

It depends on how you define critical mass and how big we want to make this.

But once we get to probably 15 or 20 stores we'd be really happy with the profitability that that would spin out.

The investments that we are making in other areas of the business, they are in our product development area and a portion of those will be dedicated to Field & Stream and what we might do there but the vast majority of those are dedicated to the brands that we have today such as Top-Flite, Maxfli, Reebok, Adidas baseball, and brands like that.

Great.

Thanks, Ed.

Michael Baker, Deutsche Bank.

Thanks, just a bigger picture question, then a couple follow-ups.

Bigger picture is just on your square footage growth opportunity longer-term and with things struggling a little bit here and a lot of investments that you're making to try to turn that around, have you guys thought at all about maybe slowing down the square footage growth primarily in the core store?

I understand -- I think the Field & Stream opportunity is pretty big so you go forward with that, but maybe thinking about -- have you guys thought about opening up fewer of the full-line stores?

That's my bigger picture question.

The other sort of follow-up, just on the fitness business, Lance Armstrong was an issue.

Has that gone away?

But then it sounds like the thought process was as the Lance Armstrong pressure goes away, that business would come back but it sounds like that's not exactly what you are seeing.

Thanks.

Let me go over the first one on the stores.

We really don't see that there's a -- that we have to scale back the stores, so there's still a lot of white space.

There's places where we don't have stores.

Where we are a bit more cautious about is how we look at stores from a cannibalization standpoint.

So we do think that's an issue, but there's still so many places where we don't have stores.

We have no stores in Houston.

We have a little -- very few stores in South Florida.

We've got only one in the five boroughs.

And then we feel as we talked about we have a very big small market opportunity where we have opened several of those stores that have done extremely well, so we don't think that we are going to be over stored and we don't feel when we need to slow that down but we are not looking to add any more stores that what we've already talked about.

From a fitness standpoint, the Lance Armstrong piece around LIVESTRONG has still been a factor on the treadmills and ellipticals and that type of business, but as we continue to look at this, that we just feel people have really -- and the research we've done, they are working out differently than they have in the past as I said earlier and the gyms have done a good job of enticing customers into those facilities.

Thanks, interesting.

If I could just follow up quickly on that, when you talked about the concern around cannibalization, is that concern greater than or is that the same concern you had when you put out that 1100 store number on the fourth quarter?

It's a bit greater but the 1100 -- as we've looked at this, we feel that we can do 1100 stores and kind of make sure that we don't -- that we are cautious from a cannibalization standpoint and still hit that 1100 store number.

Okay, thanks.

Sam Poser, Sterne Agee.

It's Ben Shamsian for Sam.

Thanks for taking my call.

On the open price points, what categories do you see the competitive weakness cadence and overall where do you stand in terms of pricing versus your competitors?

And I have a follow-up on the second question.

There's several places from an opening price point standpoint, so we have talked about a bit from an opening price point in athletic footwear, some of the athletic apparel areas, the youth apparel areas are some of the areas that we've talked about that we could go to a bit more of an opening price point.

Also in the outdoor category that we -- that was a bit of a difficult issue this year, but we feel that some of the opening price points in that camping area, family camping area we can hit and then you will see some more opening price points from an outerwear standpoint this year than what we've had in the past.

And overall pricing as you stand next versus your competition, where do you stand?

I think we are very competitively priced.

Our intent is to be competitively priced with other people.

We don't want to be the price leader but we don't want to be higher priced either.

You can go and shop our store, you will find us a little lower on some items and you might find us a little higher on some other items but our goal is to be competitively priced in the marketplace.

Got it, then what are your assumptions on the fourth quarter in terms of weather year-over-year?

We are looking at this to be something similar to last year.

Our hope is that it will be a little bit better but we haven't -- we are not planning for a cold, snowy winter by any means.

Got it, thank you so much.

Dan Wewer, Raymond James.

Thanks.

Ed, in the previous quarter, you were looking to get greater vendor support, protect margins.

I think that you were alluding to the golf category.

Can you give us an update as to whether or not the vendors actually did chip in and protect margins in that category that was so soft.

Vendors -- if they cascade product and they do this for other retailers also, not just us, but they will help you from a margin standpoint to make sure that the margins don't get beat up too badly.

Second question, same-store sales have been slightly negative to slightly positive actually in the last three quarters, which is a bit surprising given how young the DICK'S store base is, growing your square footage about 7% a year.

Are you seeing less of a benefit from that new store waterfall today than you did, say, two or three years ago?

No.

What would account then?

It is not just one quarter issue with the weaker sales?

I think that the new store productivity has been very good.

If you take a look at the last three quarters we have had our sales haven't been what we had anticipated, but I think if you take a look at -- and I hate to use the weather -- but the weather we had in the fourth quarter was the warmest winter on record in I don't know how many years but a lot of years.

And we have talked about the innovation cycle in golf, which is a very important part of our business in the first two quarters of the year, which overall the business is a little bit less than 20% in the first two quarters.

It's probably more than 20% of our business and that innovation cycle was very difficult.

If you take a look at some of the other golf companies, the largest golf company what they reported, they were down also.

So it's really an innovation cycle and it's got nothing -- we don't think it has anything to do with the fundamental aspect of our business.

Then just the last question I had on the impairment charges, $8 million on I guess you're selling an aircraft that's below book value.

Three or four years ago, the Company actually booked a gain on the sale of an aircraft.

Maybe just kind of fill us in as to what's happening.

I don't know if this is going to be a risk down the road or not.

When we did this, when we had a gain on it, it was a time when aircraft were really hot and we were able to take a used plane that we were cycling out that was out or warranty and we were able to sell it for more than it was on the books.

Right now we have got a plane out of warranty.

It's being sold and we are -- the price of planes are depressed right now.

We have to take mark down on it.

It's as simple as that.

Okay, great.

Thank you.

Camilo Lyon, Canaccord Genuity.

Good morning, thanks for taking the question.

What I wanted to ask you about how you are thinking about your inventory position and your inventory buys for weather sensitive categories given the inventory position that you are growing into Q3 with.

Is that causing you to push out some of the deliveries?

Are you downsizing exposure and shifting some more of those -- some of those buys more to an at once purchase?

If you could give some color, that would be appreciated.

As we've talked, we've got buys set up to come in through the third quarter and fourth quarter so we've got kind of go/no go dates that we've got the partnership orders with a number of these vendors.

So I'm not concerned about that inventory in any meaningful way.

If we have another warm winter or warmer winter, yes, we will have some inventory left over, more than we had anticipated, but we've got a very good plan with our vendors of how to shift this merchandise in.

We have also transitioned more of our buy to more fleece pieces, transitional pieces, pieces that are used from a layering standpoint that will help with the winter if it is again a warmer winter.

Great, then just a question on the Under Armour studio concepts for the women's business.

Is that separate from the UA shop-in-shops?

We are looking at that separately, yes, but it's kind of -- it will occupy some of the same space that it has today.

Can that be considered an incremental square footage allocation if this is something that you end up rolling out to either all of the current existing base of shop-in-shop stores or the fleet?

There is some incremental space that would be used to accommodate this concept.

What do you need to see to really get that acceleration and allocation of footage?

Just more product to come through and see the consumer's response or just a little bit more time to elapse to see how that allocation --?

It's a little bit of both.

So a little more time to make sure that this is sustainable and how the consumer reacts to this, but so far we are very pleased with it.

Okay.

Thanks and good luck for the balance of the year.

Matt Nemer, Wells Fargo.

Thanks for taking my questions.

First I just wanted to ask about the corrective actions that you are taking to drive traffic, particularly the advertising investments.

Is that a new message, new channels, or just increased frequency of the current message?

It's a little bit of both, so it will continue to be some TV advertising that will be a bit incremental to what it was last year in the fourth quarter and then also more marketing standpoint from a direct mail standpoint, direct to consumer marketing kind of one-on-one marketing that we are continuing to increase and have found that to be really quite effective.

Okay, great.

Then secondly, could you just talk to the impact that you are seeing from the partial remodels?

Are they providing the comp lift that you had hoped they would?

It's way too early to tell.

They were really put in place to -- for the back-to-school season and it's just too early to say yet.

Okay, I just got two housekeeping questions.

The first is the prepaid expenses were quite a bit higher than we've seen in any recent quarter.

Just wondering if there is a one timer in there, an expense that was capitalized that may have driven that higher?

Then secondly, are you able to comment on how many leases you have signed for Field & Stream in 2014?

This is Andre.

Ed, why don't you take the Field & Stream first.

The Field & Stream, what we have signed, we've got another store opening up this November.

We've signed two additional leases and we're looking at a couple of other ones right now.

And the prepaid has to do with the sale of the aircraft that we have actually talked about on this call.

Okay, great.

Thanks so much.

David Gober, Morgan Stanley.

Good morning, thanks for taking the question.

Just wondering if you could comment a little bit more on gross margins both in the quarter and into the back half.

I guess given the mix shifts in the business towards -- it sounds like towards footwear and apparel, I would've expected maybe a little bit more of a bump in gross margins.

Just curious if that's just being offset by some of the other price pressures and promotional activity out there?

And then as you go into the back half, just if you could give some commentary about some of the price optimization, localization, and sizing initiatives, you've got going on, whether you are seeing any partners there, if that's still too early days?

David, I'll take the first part of that question and I will turn the second part over to Ed.

The first part of that question, we are seeing again merch margins perform quite well in Q3 and Q4 but that's being delevered by occupancy deleverages as we've taken our comp store sales assumption in our guidance for both Q3 and Q4.

So that's where that is netting out.

As far as some of the systems that we've talked about that you referenced, we are still kind of in the early innings of this and we expect to see some benefits as we go forward into next year.

Great, thanks.

And just one clarification I guess on the fourth-quarter guidance.

When I look at the unshifted number and looking at the negative 2 to negative 1, is that actually -- is that still 13 to 13 and not shifted or is it 13 to 14 weeks?

This is Andre.

It's 13 to 13.

The shifted number of the guidance is 3% to 4% positive and the unshifted guidance for Q4 is, as you rightly point out, negative 2% to negative 1%.

Got you.

Thank you.

Peter Benedict, Robert W. Baird.

Thanks, just a quick one for Andre.

In terms of the buyback strategy how you are thinking about it here.

It's kind of an on and off the last few quarters so as you look going forward, what should we be thinking in terms of buyback strategy?

Thanks.

Thanks, Peter.

One of the things we've said all along is that one of the things that we would do is that we would use our buyback to neutralize the dilution of stock options and that's still first and foremost.

But depending on if we see buying opportunities with our share -- depending on what our share prices are, we would actively take a look at whether we would be opportunistic with the fact that we have an authorization to do about $1 billion.

So again, it is part of our capitalization strategy, something we talk about to our Board all the time and we will take a look at it opportunistically.

Okay, that's helpful.

Just to clarify, is there any buyback in the back half assumed in your back half guidance?

No I've pointed out, we are assuming 126 million diluted shares.

All right, terrific.

Thank you.

Joe Feldman, Telsey Advisory Group.

Thanks for taking my question and for doing the whole call.

I wanted to come back to the fourth quarter guidance for a minute.

I was just wondering what kind of weather pattern are you assuming?

Are you assuming a more normal winter season or are you assuming more similar to last year or the year before?

I'm just trying to understand where your heads are at with that, because it seems a little conservative to us the way you've got the unshifted comp guidance.

We are looking at this as relatively the same as last year.

On a shifted basis, which is really the way to look at it, the comps are 3 to 4, which is based on what's going on.

I don't think that's all that conservative.

The unshifted is different because of the -- you get an extra week in the month of January, so I don't think that we think that they -- we think they are realistic.

We don't think that they are terribly conservative.

But we are looking at the weather to be relatively the same as last year.

We are hoping, as I said earlier, we are hoping for it to be just a little bit better.

Right, which makes sense because last year I recall weather wasn't terrific in the fourth quarter.

Okay.

It was not.

I guess the one other quick question was I know you addressed it a little bit earlier but with regard to like the hunting and outdoor category and maybe this is something you will address at the Analyst Day but I guess I'm just trying to better understand where you are coming from in the Field & Stream concept.

I understand you've got a great brand and it does seem like there's some opportunity there but just wondering is there the sustainable trend in that category that over the next five, 10 years that gives you confidence that boy, you're going to get this underlying mid to high single-digit kind of growth and that's why we want to be in this category as a separate standalone store?

We are very enthusiastic about this.

We think this is not going to -- this may not have the growth that it has right now based on the scarcity of ammunition but we think this is a very solid business that not only encompasses the hunting business but also encompasses the shooting business.

So whether it's sporting, clay, skeet, target shooting, we think this is a business that definitely has some legs in it and we have got a core competency here and we think that there is a great opportunity here going forward.

We are going after this.

We are very, very excited about the Field & Stream concept and even more so based on the grand opening we had this past weekend of the first store.

It was -- as I said, it was the very best brand opening we've had in the history of the Company, so obviously that would get us pretty excited.

That's great.

Thank you so much, guys.

Good luck with the quarter.

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

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

I would like to thank everyone for joining us today and anybody that needs any additional questions answered, please feel free to call into Anne-Marie or Andre and we'll look forward to talking to everyone about our third-quarter results.

Thank you.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.