DICK'S Sporting Goods Inc (DKS) 2013 Q3 法說會逐字稿

Good morning, and welcome to the DICK'S Sporting Goods third-quarter 2013 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Anne-Marie Megela, Vice President of Treasury Services and Investor Relations.

Please go ahead.

Thank you.

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

Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website located at www.dickssportinggoods.com for approximately 30 days.

In addition, as outlined in our press release, the dial-in replay will be available for approximately 30 days.

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

Such statements relate to future events and expectations, and involve known and unknown 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 an 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 section of our website at www.dickssportinggoods.com.

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

Ed will review our third-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 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.

And I would like to thank all of you for joining us today.

This morning we announced third-quarter earnings of $0.40 per diluted share, which is $0.01 above the high-end of our guidance of between $0.37 and $0.39 a share and compared with consolidated earnings per diluted share of $0.40 in the same period in 2012.

The shift in calendar resulted in a 53rd week in 2012, which negatively impacted EPS by $0.06 in the third quarter of this year.

Total sales increased 6.7% in the third quarter, driven by the growth in our store network, and an increase in same-store sales.

Adjusted for the calendar shift, consolidated same-store sales increased 3.3%.

This was above our expectation of approximately flat to plus 1%.

And was on top of a 5.1% increase in the third quarter of last year.

Shifted to same-store sales were up 3.4% for DICK'S Sporting Goods and up 2.2% for Golf Galaxy.

Our third-quarter comparable store sales growth was led by strength in athletic footwear and apparel, and team sports.

This was partially offset by softness in fitness and the outdoor apparel area.

In addition to re-merchandising the fitness category, we have developed a store space allocation plan, which we will execute in 2014, to reallocate square footage to higher-growth categories, including youth and women's apparel.

While our outdoor apparel declined for the quarter, we saw encouraging indicators behind cold weather outerwear, and are confident in our assortment of strategies as we head into the fourth quarter.

This quarter we successfully implemented traffic-driving initiatives, as we had previously discussed.

We responded to isolated competitor pricing strategies.

Our traffic-driving initiatives included additional advertising, increased store payroll, more products at opening price points, and investing in growth categories.

These actions contributed to the 1.9% increase in traffic in the third quarter.

On the digital front, our eCommerce business represented 6.5% of sales in the quarter, and contributed to both our eCommerce business and increased its profitability.

We also continued to leverage our ship-from-store capabilities, expanding our product offering with more categories and price points, while improving our productivity.

We also recently announced an agreement to serve as the exclusive eCommerce provider of licensed merchandise and sporting goods for ESPN's online fan shop.

This arrangement uniquely blends sports content and commerce.

And it's the latest step in our growing relationship with ESPN.

Turning to our guidance.

In the fourth quarter of 2013, we continued to anticipate consolidated earnings per diluted share to be between $1.04 and $1.07.

Shifted 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.

Our guidance contemplates a continued cautious consumer environment, while a more promotional and shortened holiday selling season.

For the full year, we expect non-GAAP consolidated earnings per diluted share to be in the range of $2.62 to $2.65 a share.

We anticipate consolidated same-store sales of approximately flat to up 1% on top of a 4.3% increase last year.

In summary, we delivered better-than-expected third-quarter results despite the continued challenging consumer environment.

The traffic-driving initiatives we put in place were successful and contributed to an increase in the traffic in the quarter.

We expect continued consumer cautious in the fourth quarter.

However, we are confident that our merchandise assortment and marketing, both in-store and online, will resonate with our customers as we head into the holiday season.

We remain very excited about the long-term opportunities in our business that we presented at our Analyst Day in September, and will continue to drive toward those goals.

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

Thanks, Ed.

In the third quarter of 2013, we opened 25 new DICK'S Sporting Goods stores and fully remodeled 3 stores, bringing our total store count at the end of the quarter to 552 DICK'S Sporting Goods stores, with 29.9 million square feet.

We also opened one new Golf Galaxy store and repositioned one existing store, both in our new, larger format, which features enhanced services and experiential shopping.

We ended the quarter with 82 Golf Galaxy stores, with 1.4 million square feet.

New store productivity of our new DICK'S Sporting Goods stores was 89%, with our new DICK'S Sporting Goods stores performing to plan.

In the third quarter, we completed 22 apparel remodels in our DICK'S Sporting Goods stores, bringing our total to 75 completed apparel remodels for 2013.

The apparel remodels focus on strategic growth categories and feature branded shop in shops.

Within our DICK'S Sporting Goods stores, we had 211 shared service footwear [decks], 271 Nike Fieldhouse shops, 231 Under Armour shops, and 91 The North Face permanent shops at the end of the third quarter.

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

This quarter we added 81 seasonal outpost shops with The North Face, in addition to our existing permanent The North Face shops.

The seasonal outpost shops consist of a wall fixture installed in the seasonal section of the store.

This wall is branded for The North Face during the winter season, and will flex to incorporate other photography, such as football or baseball, during other seasons.

We also opened two Field & Stream stores in the third quarter.

Most stores opened very well, with strong results.

Over 20,000 people attended the recent grand opening weekend for our second store in Crescent Springs, Kentucky.

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

In the first two weeks of the fourth quarter, we completed our 2013 store development program.

In total, for DICK'S Sporting Goods in 2013, we opened 40 new stores, fully remodeled 4 stores, completed 75 apparel remodels, and relocated 1 store.

Of course, we could not deliver on our growth plan without the hard work and commitment from our associates.

I would like to thank all of our associates for their exceptional efforts and support.

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

Thank you, Joe, and good morning, everyone.

I want to focus my comments on four primary areas -- our third-quarter results, our balance sheet, capital allocation and the outlook for the remainder of the year.

Starting with our third-quarter results.

Total sales for the third quarter of 2013 increased 6.7% to $1.4 billion, compared with the same period a year ago.

Adjusted for the shifted calendar due to the 53rd week, consolidated same-store sales increased 3.3%.

DICK'S Sporting Goods same-store sales increased 3.4%, and Golf Galaxy increased 2.2%.

The same-store sales increase in the DICK'S Sporting Goods business was driven by a 1.5% increase in sales per transaction, and by a 1.9% increase in traffic.

Unshifted consolidated same-store sales increased 0.3%.

For DICK'S Sporting Goods, unshifted same-store sales increased 0.6%.

And for Golf Galaxy, they decreased 4.7% eCommerce penetration was 6.5% of total sales in the quarter.

Consolidated gross profit was $424.9 million or 30.34% of sales, and was 61 basis points lower than the third quarter of 2012.

The gross profit margin contraction was primarily driven by occupancy deleverage and increased shipping costs due to a higher mix of eCommerce sales.

Merchandise margins also declined slightly, reflecting the impact of our traffic-driving initiatives in response to isolated competitor pricing strategies.

SG&A expenses in the third quarter of 2013 were $333.7 million or 23.83% of sales, compared with SG&A expenses of $314.6 million or 23.98% of sales in last year's third quarter.

This leverage of 15 basis points was primarily due to lower incentive compensation as a percentage of sales.

Our Q3 earnings were $0.40 per diluted share.

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

Keep in mind that, that shifted calendar has its largest affect on the third quarter, and it also impacts sales and inventory levels.

Due to the shift, we traded a higher-volume week in July for a lower-volume week in October, which resulted in a shift of approximately $36 million in sales.

Moving to our balance sheet.

We ended the third quarter of 2013 with approximately $66 million in cash and cash equivalents and with approximately $116 million drawn under our $500 million revolving credit facility.

We expect to end 2013 with no outstanding borrowings on our revolving credit facility.

Last year, we ended the third quarter with $294 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, fund share repurchases, and pay both a special dividend and regular quarterly dividends.

Inventory per square foot increased by 5.6% at the end of the third quarter this year, compared with the end of the third quarter last year.

Approximately 390 basis points of the increase was attributable to the timing of inventory receipts due to the calendar shift, as receipts were shifted from last year's fourth quarter into this year's third quarter.

Adjusted for the calendar shift, our inventory growth was in line with our sales growth and we believe we are well-positioned as we enter into Q4, our key holiday selling season.

Net capital expenditures were $77 million in the third quarter of 2013 or $101 million on a gross basis.

Compared with the net capital expenditures of $53 million or $62 million on a gross basis in the third quarter of last year.

Now let's turn our attention to capital allocation.

At our Analyst Day in September, we discussed executing our 5-year up-to-$1 billion share repurchase program to not only offset dilution, but also to acquire shares opportunistically.

During the third quarter, we repurchased approximately 0.5 million shares at an average price of $52.09, for a total of about $25 million.

We will continue to look for opportunities to repurchase shares, both to offset dilution and to reduce our share count.

Turning to guidance.

We continue to anticipate consolidated earnings per diluted share of between $1.04 and $1.07 in the fourth quarter, including the negative impact of $0.03 from the shifted calendar.

Our fourth-quarter 2013 expectations compare with consolidated earnings per diluted share of $1.03 for the same period in 2012.

The fourth quarter of 2012, you'll recall, included an approximately $0.03 benefit from the 14th week.

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 increase approximately 2% to 3% in the fourth quarter.

Gross margins are expected to decline, driven by lower merchandising margins and occupancy deleverage.

This should be partially offset by lower SG&A expenses as a percentage of sales.

For the full-year 2013, we expect non-GAAP consolidated earnings per diluted share to be in the range of $2.62 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.

We anticipate consolidated same-store sales of approximately flat to up 1% on top of a 4.3% increase last year.

Gross margin is expected to decrease year over year, with flattened merchandise margin, anticipated to be offset by occupancy deleverage.

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

As a result of the above and these dynamics, operating margin is anticipated to decrease slightly year over year.

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

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

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

The anticipated increase in capital expenditures from 2012 to 2013 is primarily the result of planned growth investments in the business in 2013.

Summing it up, we are pleased with our performance for the third quarter.

We successfully drove traffic in an uncertain macro economic environment, resulting in better-than-expected sales and earnings growth.

We also continued to expand our store network, invest in our eCommerce business and return capital to shareholders.

We are confident that we have the plans in place to deliver our Q4 guidance.

Looking longer-term, we have made and will continue to make investments to reach the growth and profitability goals that we shared at our Analyst Day.

I want to thank all of you for your interest in DICK'S Sporting Goods.

This concludes our prepared remarks.

Operator, please open the line for questions when you're ready.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Robbie Ohmes of Bank of America Merrill Lynch.

Ed, it sounds like you guys are as well-positioned as you possibly could be for holiday here.

You've got -- the marketing is driving the traffic, your stores look great, all remodeled, all of the in-store shops.

Can I get you to talk a little bit about the first half of 2014 and what you're coming up against?

And how you feel about the golf business, the fitness category, maybe even the outdoor category, as you look into the spring, where you were seeing same-store sales come in a little bit lighter than people were hoping?

Yes.

Robbie, I'm not going to get into any type of guidance around 2014.

But as you take a look at the golf business, we think that we were impacted pretty heavily with some weather last year with the golf business, and not a very exciting product cycle.

We think that there's some better product cycles coming in that we've seen for next year from TaylorMade, from Titleist, from Callaway.

So we are pretty excited about that.

The outdoor category and, in particular, if the outdoor category is defined by hunts, the hunt category -- firearms and ammunition -- we think that's going to be a little bit of a headwind.

We've started to -- as you have probably heard from some of the other people who are more involved in that business than we are as a percent of their business -- that, that category has started to slow a little bit.

So we do see a little bit of a headwind there.

Although we do think from a margin rate standpoint, that will help with our margin rate mix.

So all in all, we are happy about the golf business.

We think we've got some headwinds there.

And we are reallocating some of the -- as we said in this -- some of the fitness square-footage, to focus more on the youth business and the women's apparel business, as we go into 2014.

Which we think will be beneficial to sales, and will be beneficial to the margin mix.

That sounds great.

Thanks so much, Ed.

Sure.

Matthew Fassler of Goldman Sachs.

I'd like to start out by asking about some of the moving pieces in gross margin.

It's interesting that it sounds like the merch margin wasn't necessarily the biggest moving part.

Can you talk about both why the increase in shipping cost now, as your online business has been growing for quite some time?

And also de-levering occupancy, despite a better top line, is also an interesting outcome.

Any color on the inputs to that result?

Certainly, Matt.

This is Andre.

Let me take a stab, and if Ed wants to embellish, he can.

I think -- you absolutely pointed out, merch margin was the lowest piece of that, down 61 basis points.

It was actually only down 11 basis points.

So that's where the merch margin ended up.

With respect to both the occupancy number, specifically.

As you know, Q3 is probably one of our smallest quarters from a revenue standpoint.

And we did put on an awful lot of additions to our fleet, if you will.

So this was one of the quarters where Joe and his team put on a lot of stores in the business.

So I think one of those things -- in addition to new stores, we also had a lot of our remodels come to life.

So we had a lot of costs that we put against this specific quarter.

I think those are the primary drivers, with occupancy being the biggest one.

And you mentioned -- there's the shipping cost number.

We had an excellent quarter in eCommerce.

And that comes with shipping cost.

Our ship-from-store business continues to excel.

So that's what we did this particular quarter.

And Matt, too, we also did more free shipping, which is getting to be more of an expectation of the consumers.

So we received a bit less ship revenue as a percent, and subsidized that shipping.

Which was really the right thing to do, as it more than offset the sales increase and the margin rates that we got from our online business.

So the online business was much more profitable than it was in the -- than we had anticipated.

So if we think about this gross margin trend, the end result, from a year-on-year change perspective, is a big departure.

You haven't seen declines like this since early 2009.

Should we consider this to be a philosophical change that will result in a different composition to the P&L?

Probably more top line and the somewhat lower margin rate gross profit dollars end up the same place?

Or was the third quarter more of an isolated incident of this theme playing out?

I think it's a bit more isolated.

There are some headwinds, but we don't think that they are significant.

So from a shipping standpoint, on eCommerce, that will probably continue to escalate.

I don't think free shipping is going to become less important, I think it's going to become more important.

Our margin rates being down 11 basis points, I think we will get to that base level.

And we feel that we have the ability to move those margin rates up as we get further out, certainly into 2014, with the headwinds that we've had with margin rate, because of the gun and ammunition business will be less.

And we think we've got the ability to take our margin rates up a little bit as we manage the inventory a little bit better.

We are pleased with where our inventory is now.

But we think we've got the ability to manage the inventory better next year than we did this year.

And one quick follow-up.

You indicated that there was some signs of encouragement from the outdoor apparel business.

What are you seeing that leads you to feel that?

And what's your inventory exposure at this point in that category?

Thanks so much.

Sure.

We are pretty comfortable with our inventory exposure in that outdoor/cold weather business.

The outerwear business, when we did get a little bit of a cold snap there in October, we saw a very meaningful increase in the business.

And it showed us that the customer likes the assortment we've got.

We've got the right assortment.

And it performed very well once we did get a little bit of that cold weather.

Thank you.

Sure.

Christopher Horvers of JPMorgan.

Wanted to follow-up a bit on the -- some of Matt's questions.

In the gross margin in the third quarter, the merchandise margin down 11 basis points.

Was any of that mark down related to cleared out fitness inventory, such that a piece of that does not persist?

I mean -- is there a piece of it?

Yes.

Is it meaningful?

No.

We got a bit more promotional, which we had talked about.

We reacted to some isolated pricing issues with some competitors.

And that's where the majority of it came from.

And we did clear out some inventory, but the fitness piece was a very small part of that.

And there's been some conversation in the market that perhaps you had reduced your inventories or custom orders early in the season.

Any thoughts on that?

And I know you mentioned that you feel good about where your inventory is positioned currently.

Have you already reacted in terms of what orders you may or may not bring in?

Well, we have reacted to the environment out there.

We still have the ability to react further if -- depending on how business is, we've got the ability to chase some merchandise that -- if things get better.

And we've got the ability to continue to modify some incoming orders, if required.

No different than we've always been able to do.

And then finally, on the occupancy [expense] pressure related to the shop in shop rollout.

You just completed the shop and shops, or you are close to completing them for the year.

You plan on doing more of those next year.

You also have a step-up in overall footage growth.

I think you're talking about 70 stores next year.

So do we have incremental pressure on what comp you need to lever occupancy as we look about over the next few quarters?

So Chris, I think certainly in my comments I said that it also happens to be a headwind for Q4.

Let me be clear, though.

It's not just only the remodels that Joe mentioned.

It is also how many stores we added to our fleet in Q3.

But I think it's something that we as a leadership team are actually, in fact, looking at.

Because it may say that we are going to have to look hard at raising our comp slightly to be able to do that.

But I do think that we've got that under control right now, and we are taking a look at it.

But it was the biggest factor right now in our gross margin decline for Q3.

Perfect, thanks very much.

Brian Nagel of Oppenheimer.

At the risk of beating a dead horse, I too wanted to ask a question on gross margins.

In particular, merchandise margins.

You mentioned in the prepared comments and here in some of the responses that you reacted to isolated competitor pricing.

Could you just maybe give more color on that?

The channel, the category.

And was this something that you have continued with in the past and maybe just not had to call it out?

Or is this something new?

Well, we called it out as being something new in last quarter's call.

So that there had been some isolated competitor pricing that we felt that we needed to react to, that we didn't feel we really needed to react to prior to that.

So we indicated that we were going to be doing this.

It's across a number of categories, including athletic apparel and athletic footwear, and a couple of other categories.

So we put this program in place.

We had terrific results.

We put a fair amount of marketing behind this also.

And we are really very pleased with the results that we've had.

It did have an impact on the margin rates.

But the offset of the margin rates was more than offset by the increase in sales that we got.

So we are very happy with the way that, that played out.

Got it.

And then -- so obviously we saw the impact upon the margins.

Is there any type of vendor support you get there with these type of actions?

With these actions right here, no.

Okay.

Well, thank you.

Sure.

Sean McGowan of Needham & Company.

Two questions to clarify.

One -- was the merchandise margin decline that you saw in the third quarter, was that something that you internally expected at the beginning of the quarter?

Or was it a little more than you had anticipated?

We anticipated it.

So it was baked into our guidance.

Okay, thank you.

And could you just comment on to what degree the normal or abnormal weather played an impact in either this quarter or the first few weeks of the fourth quarter?

I don't think the weather had a big impact one way or the other, versus -- as it looked at last year.

And so far this year -- in the fourth quarter?

As you know, we don't comment about anything going on in a particular quarter.

We will talk about the third quarter.

Thank you.

Sure.

Camilo Lyon of Canaccord Genuity.

With respect to the reset that you are talking about for next year.

Can you just talk about the timing of those resets, and when we should expect to see the floors swapped out for women's and kids'?

It will be all completed by back-to-school.

So progressively through the first three quarters?

Right.

Well, the first two quarters.

Got it.

And then on the women's category.

You mentioned at your Analyst Day that you were exploring getting bigger in the yoga and the lifestyle fitness categories.

Wondering if you could share some thoughts on, or some updated thoughts on, how you plan to roll out those fixtures.

Are they going to be more like your traditional pre-existing shop and shops by brand?

Or do you expect to have something more dedicated to the category, where both or multiple brands will be exposed?

In this particular instance, it will be multiple brands will be exposed together.

Okay.

And will that be across what percentage of the store base?

We expect to get that through the vast majority of the store base by the end of the second quarter.

Great.

And then just finally, just wrapping up on the gross margin -- couldn't let that one go.

So the merchant margin pressure that you experienced with the strength to the opening price points, and the more value-proposition products that you talked about.

Do you expect that pressure to be consistent in the fourth quarter?

Or will it be more widespread across a broader array of products?

I think it would be pretty consistent with what happened in the third quarter.

Okay.

Thanks a lot, and good luck with the holiday.

Thank you.

Paul Swinand of Morningstar Inc.

Thanks for the patience with all of the questions, as usual.

I'll switch from the gross margin and ask about the inventories.

I know we were all excited about the new concept at the Analyst Day.

And you've got really only a short time that you've seen them.

But do you feel like now, as you're seeing hunting season go through, do you think that's going to add to inventory turns?

Or do you think that, that will net the slower-turning inventory that compared to the main line stores?

Well, it's really too early to tell.

In those particular -- those two stores, we actually over-invested, from an inventory standpoint, in those two stores to see how high up is.

And we felt it's only two stores.

Now they are two great stores.

But it's still only two stores in a base of, between Dick's and Golf Galaxy, of well over 600 stores.

So it's a really small sample.

Our agenda was to go over-invest in those stores, make sure we didn't run out of inventory, and see how high up is.

And so that's what we are doing.

In these two stores today, I would say it is slightly slowing the turn.

But to the point you couldn't even -- if I didn't tell you that, you wouldn't have any concept of it, it's so small compared to the entire base.

But we think that as we go forward to this, the turn in those categories would be close to what the Company average is.

Maybe a little faster, maybe a little slower.

But we don't think it's going to have any meaningful impact one way or the other from a turn standpoint.

Does your online strategy, as you get deeper into the Field & Stream, does that allow you to carry a deeper inventory, since some of the fishing areas are [cue] intensive?

Or is that pretty much the same?

There would be a broader selection online than we have in the stores.

Because, especially in fishing, as you mentioned, in the store, it's going to be more of a regional assortment.

Whether you are really looking at a primary saltwater customer, or you get into freshwater, whether it's a bass customer, whether it's a trout customer.

That tackle assortment will be probably the one that will flex the most in the store, from one store to the next.

So we would have an online assortment that would be much broader than what we would have in the store, around tackle.

Understood.

Thanks a lot.

Best of luck in the holidays.

Thank you.

Scot Ciccarelli of RBC Capital Markets.

You talked about making some price investments against select competitors.

Can you talk about any changes you might be seeing on the eCommerce side?

From a competitive standpoint?

Nothing really.

I wouldn't say that any of that has really changed from earlier in this year.

The only thing I'd build on that is, what Ed mentioned earlier, is that what we are seeing in that space is, free shipping is becoming more and more of the norm.

So that's something that we are seeing.

But that's been out there for a bit, and that's where most of the competitors are.

But nothing else.

Do you think you're seeing more direct product overlap on Amazon's site because of what we are seeing on the marketplace?

Not necessarily from Amazon themselves.

But obviously from some of the third parties that are out there that are utilizing Amazon's site?

Thanks.

Nothing significantly different than what it has been.

We've seen no change.

Okay, got it.

Thank you, guys.

Kate McShane of Citi Research.

I wondered if I could ask a little bit more about the traffic change during the quarter.

Obviously it was a nice swing to the positive, which is fantastic.

And you highlighted the improved assortment in marketing that drove the improvement.

But I wondered if you could go into a little bit more detail about the drivers, and how we should expect the marketing focus to evolve over the next couple of quarters?

We have modified our marketing plan this year, versus last year, to include more direct-to-consumer marketing.

So more direct mail pieces, more digital campaigns, e-mail campaigns, which we think will be beneficial.

So we are making those modifications to our marketing plan in the fourth quarter.

We will have a bit more TV in the fourth quarter than we did last year.

We are doing that with -- we will be on prior to Black Friday, or Black Thursday, or whatever day it is this year, based on when everybody is opening up, which we haven't done in the past.

And we've done this by reallocating dollars.

We are not spending significantly more dollars.

But our marketing group has taken a look at past performance, and looked at the ROI on a number of our advertising components, and have suggested this shift.

Which we're pretty excited about.

The other thing I would add also, Kate, is that Joe and his team have actually put more in-store labor in these quarters to make sure that, that customer experience is truly special around the holidays and in the back-end of the year.

So we believe that, that will also make a difference as we engage the customer in-store.

Okay, great, thank you.

And then my second question.

I don't believe you guys mentioned this yet, but could you highlight which categories outperformed the comp during the quarter?

It was primarily athletic apparel, athletic footwear and some of the team sport categories.

Okay, great.

And then just one last question about the merch margin.

I think you said that your expectations for Q4 is that the merch margin would be flat.

And although it was only down slightly in Q3, can you give a little bit more detail between the differences of what we saw in Q3 and what you expect for Q4?

Kate, I believe what I said was, on a full-year basis, our merch margin year over year would actually be flat.

And these initiatives would actually contribute to a slight decline in our merch margin for Q4, is the way I articulated those thoughts.

And it's just a continuation of the things we are doing in the marketplace that Ed mentioned.

Okay, thank you.

Mark Miller of William Blair.

Andre, you touched on it a bit earlier.

But could you help frame the store labor investment, either as a percent of sales year to year, or store labor hours?

And how should we think about this rest of the year into 2014?

And then regarding the customer experience metrics that you're tracking.

Are you satisfied with where that's at?

Or does that have further to go?

A couple things.

I'm not going to get into the specifics of what percentage of labor we put back in.

But as we had looked at our business, we -- Joe, myself and Ed felt that the customer experience in-store is something that we want to make sure, as a brick-and-mortar retailer, that we make fairly special for our consumers.

So we've added some things back, based on where we were.

And we are seeing -- we believe it is contributing to the traffic increases that Ed articulated, in addition to our marketing and our focus in-store.

All right, thanks.

On the incentive comp you called out in third quarter being a factor in the SG&A.

Could you quantify that on EPS?

And would that be a consideration in the fourth quarter as well?

We are not -- it is going to be a consideration, obviously.

However, we are not going to call that out and quantify it.

Okay.

And then maybe just a final one.

On Field & Stream, what are the categories that you can -- what are the limitations to the eCommerce?

Or how expansive can it be with Field & Stream, given the relationship with the media property?

And where might that go?

Thanks.

I think it would be very similar to what other competitors are doing.

We won't be selling firearms online.

But as we take a look at hunting apparel and fishing tackle and camping and boots and accessories, and all of the other things that -- we are actually doing a lot of these today, from an eCommerce standpoint and the DICK'S site.

It will be no different than what we do on the DICK'S site.

It's just a broader assortment, and in some cases, some higher-end product than we have at DICK'S.

Okay, great, thanks.

Sure.

Dan Wewer of Raymond James.

Andre, in an earlier question, when asked about the impact of the higher occupancy costs from the faster number of store openings, as well as the remodeling cost, you noted that the amount of same-store sales needed to break even to be greater than originally expected.

With that in mind, how do we square that comment with the forecast at the Analyst Day of 150 basis points of operating margin improvement?

And as I recall, that was predicated on same-store sales about 2%.

And that was without eCommerce.

They sound to be incongruent.

So what we talked about, Dan, at Analyst Day was, for us, brick and mortar to be about 2.5%.

Now that's non comps.

I think what we have to start looking at from an occupancy standpoint is, we have to start looking at our total sales.

Because right now, we have been talking to the street about our comp sales.

But the reality is, the occupancy covers the entire gamut of our entire fleet.

So I don't think it's incongruent.

I think we need to consistently be focused on that line item as we continue to go forward.

Well, let me ask the question this way.

If your bricks and mortar comps are to grow at 2.5%, and knowing now what about occupancy cost pressure is 150 basis points of EBIT improvement, is that more of a best-case scenario, would you say?

No, I think to be fair, we believe that the operating income movement will be exactly the way we've laid it out, in terms of in-total.

I think that the items may shift around a little bit from -- in terms of the what makes up the gross margin increases, and what makes up the SG&A increases.

But I think we feel as a leadership team, we feel very confident we are going to get to our top line numbers, and we are going to get to our bottom line numbers.

So at that point in time, some things will move from there.

But I think we feel very confident that we could see this business getting to the operating margins we discussed, and getting to the top line we discussed.

Okay.

And Ed, I've got question for you.

Across the street from my office in Atlanta, Nike has opened an amazing two-level store at Lenux Mall.

And that store is about a 90-second walk from your store in Buckhead.

That was one of the 150,000 square-foot Gallion stores.

I know in the past we've talked about [Ora Binder] is also becoming competitors.

But it seems like the momentum from Nike and Under Armour is accelerating on the retail front, as a competitor.

Your thoughts?

Well, I don't know that it's accelerating.

I think they will continue to grow their business.

We continue to talk about growing our private brand business.

We've got a terrific relationship with Nike and Under Armour.

And the vast majority of people we do business with, their direct-to-consumer business is something that they will continue to grow.

But I don't see that, or we don't see that, nor do we feel that accelerating in any meaningful way.

Nike's talk about where they want to go from a direct-to-consumer basis is a big number, but it's worldwide.

It's not just in the United States.

So be sure not to interpret what they've laid out as that, that's what it's going to be in the United States.

Okay, thank you.

Sure.

Mike Baker of Deutsche Bank.

Couple questions.

So free shipping, I think, is an important thing to look at going forward.

Can you talk about what percent of your online orders right now come with free shipping?

And maybe where was that a year ago, or even a few quarters ago?

So we won't get to that specific granular detail.

But I will tell you that it's north of 50%.

And growing, I assume?

So that's something that we should --

And growing, yes.

But we've also seen that when we do a free shipping offer, the sales spike quite a bit.

So we are trying to find out where the optimal point is there.

But you would expect to see, as you would from most retailers, that there will be more free shipping, not less free shipping.

Sure, yes, of course.

So I'm just trying to understand what the long-term margin implications of that are.

And so including the free shipping, my guess is that online sales are below the in-store sales, in terms of the gross margin.

Is that right?

Including the shipping piece?

Yes.

Yes, right now -- which we've always said they were, and we continue to increase the profitability of that channel of distribution pretty significantly.

And we indicated that in the next couple of years, we anticipate to be ambivalent as to where that comes from, as our eCommerce group continues to look at ways to increase the margin, looking at distribution fulfillment channels, as we continue to get more efficient with our ship-from-store category, and we launch buy online/pick up in store.

So we are actually ahead of where we thought we would be.

We are very pleased where we thought we would be.

And we believe that in the next couple of years, we will truly be ambivalent as to where you shop.

Well, okay.

And not to harp on it, but that ambivalence -- does that include the need to offer free shipping?

Was that all contemplated in your expectations for that channel?

Yes, it is.

Okay, thanks.

One more.

Did the Red Sox World Series Championship impact your comps at all?

They helped.

Not significantly.

But it was better than it was when San Francisco won, because we've got a lot more stores in Boston and New England than we do in San Francisco.

So it helped.

But if St.

Louis had won, you wouldn't have even seen the difference.

Well, I did my part for you.

Thanks.

Well, we appreciate that.

(laughter)

Thank you.

Sure, thanks.

Sam Poser of Sterne, Agee.

It's Ben Shamsian in for Sam.

My first question is with regards to increased staffing in the stores.

Have you seen that initiative pay off?

Meaning, have you seen the sales leverage the investment there?

We have.

We monitor that pretty closely.

We direct the stores for that payroll, as far as staffing.

We look at specific areas that we feel we can improve the service levels.

And we monitor the results of those areas.

And we are seeing some good results from our investments.

Thank you.

And secondly, with regards to the resets.

Can you provide some specificity as to -- with regards to some of the product that's leaving, exactly what those are, and the margin implications there?

I wouldn't say there's really anything leaving.

We are scaling back some of the assortment.

So in the fitness category, as opposed to having as many treadmills and ellipticals and weight machines, we'll scale back the number of customer choices we have there, moving some of that business online.

But we are not exiting any category.

We are narrowing the category assortment.

Got it.

Okay, thank you so much.

Sure.

Joe Edelstein of Stephens.

The number of stores that you opened up in the quarter was solid, and especially considering that you did that across 19 different states.

Were there any stores that finished early, came into the third quarter, or was this pretty much in line with your internal expectations?

It's very much in line with our internal expectations.

Okay.

And as you build out plans for next year, is there a sense the real estate opportunities are opening up?

And just how fast do you want to grow the store base near-term in the framework of those long-term store plans that you outlined at the Analyst Day?

We think that the real estate market -- it continues to thaw.

As we look back to 2011, 30% to 40% of our new stores were ground-up construction.

And as we look at -- as we finish up 2013, that ground-up construction number grew to about 65%.

So we continue to see the real estate market thaw.

And as far as 2014, we will talk a little bit more specifically about 2014 at the end of our Q4 call.

Okay.

Thanks for taking my questions.

Sure.

John Zolidis of Buckingham Research Group.

I was wondering if you can give us the traffic and ticket data on a basis consistent with the 0.3% comp?

I don't have that number in front of me, John.

We could certainly get back to you on that.

We did all of ours on a shifted comp basis.

So it was the numbers we quoted.

We will get that back for you.

We just don't have it with us right now.

Fair enough.

Okay.

On the depreciation, it looks like it was up almost $10 million sequentially.

I was wondering if you could talk a little bit about the full-year expectation for depreciation?

And then the rate at which you expect that to grow in the longer-term, specifically in 2014?

Well, a couple things.

One is we aren't getting into 2014 guidance.

So that to be consistent.

But as you see, what we've put on -- and I talked about it in my prepared remarks -- relative to capital expenditures year over year and the sheer amount of new stores we are putting on the remodels, you are going to expect depreciation to increase year over year.

We've contemplated that in our guidance going forward.

And it was part and parcel of what we talked about during Analyst Day.

Okay, great.

And then lastly, on the guns and ammo business.

Can you remind us when you took the semiautomatic rifles out of the assortment?

And is that a material impact to the business?

And how is the guns and ammo business doing, excluding that piece?

Thanks.

Well, the gun and ammo business -- which is consistent with what we've heard in the marketplace from other retailers -- has slowed a bit.

We suspended the sale of those weapons right after about the middle of December last year.

And so it's a bit of a headwind as we get into through the middle of December.

And then it's no longer a headwind after the middle of December.

Okay, so we've almost lapped it.

Thanks a lot.

And good luck for holidays.

Thank you.

Michael Lasser of UBS.

Can you highlight within the competitive set, you are going out and matching prices?

Is it from the sporting goods specialty channel?

Is it from the mass merchants?

Is it from the online-only retailers?

Can you be a little more specific?

Well, I won't be real specific.

But it's primarily from the general sporting goods channel.

And is it within certain categories?

Golf seems to be a little more promotional?

No, it's not so much there.

It's more around the traditional sporting goods categories of team sports, and apparel and footwear.

And do you have any concern in your mind that this is going to be the beginning of a protracted price competition war that's going to disrupt the margin structure of the industry?

No, because I think this is still from an isolated area in a particular part of the country, and it's not that widespread.

And then last question is on the channel conflict.

So can you -- I think up until recently, you didn't have the ability to Geo price.

So did you get locked into having to match prices across the country, based on what was happening in that particular region?

No.

No?

Okay.

Thank you very much.

Sure.

Chris Svesia of Susquehanna Financial.

Just first, in responding to the promotional cadence of a particular retailer, I'm just curious what's -- you've reacted.

I'm just curious if they made any change in their reaction.

And just thinking about the fourth quarter, how quickly can you make adjustments, either getting more promotion or hopefully maybe less promotional intra-quarter?

There hasn't been a big reaction from any of the competitors out there.

And our ability to move -- we can move very quickly.

If we want to change a price in a particular region or a particular store on a particular SKU or a particular range of SKUs, if we made the decision right now we could have it done by 2 o'clock this afternoon.

Okay.

All right.

That's good to know.

And then just, Andre, for you.

What kind of comp, either shifted or unshifted, would you guys need to do in the fourth quarter to be able to leverage occupancy?

We would probably have to go a little north of the guidance we've given of 3% to 4%.

But again, our delivery of our quarter contemplates the things we talked about.

So 3% to 4% gets us in the range that we've talked about -- $2.62 to $2.65.

So we would have to do a little better than that, obviously, that's the way the math would work.

But we don't need to do more than that to deliver against the guidance we've articulated with you all.

Okay, fair enough.

And then just last question for you, Ed.

You commented you came through the third quarter as some of the positives and negatives in terms of category strength -- apparel and footwear, team sports doing well.

And I think outdoor apparel is a little bit more difficult.

Guns and ammo, a little more difficult.

Does that change any of your thought process as you head into the fourth quarter, relative to your plan?

And your thought process -- either some categories doing better or worse?

Or is it pretty much what you would expect?

Pretty much what we would expect.

So some of the outerwear categories, which we have been very clear about for a number of years, that is very weather-dependent, on how the performance of that is.

As we take a look at the gun and ammunition business, we anticipated that to be a bit softer going into the fourth quarter, as there was a big spike in this following the election.

And we knew that, that would be difficult to anniversary.

And we put that into our plan.

Okay, so no surprises.

No surprises.

Okay, good do know.

All the best on the holidays.

Thank you.

Thank you.

Joe Feldman of Telsey Advisory Group.

Congratulations, as well, on the quarter.

As you look out to 2014 -- and I know we don't want to get -- not looking really for guidance.

But wanted to better understand, are there any equipment changes on the horizon?

I remember, if I recall, a year ago, you've had a couple of seasons now where, like baseball bat changes.

Whether it was for little league, and the high schools the following year.

And are there other things out there that might have an impact on spending trends for team sports next year?

There's really not.

There's no rules changes like the BBCor bat conversation that we had.

Which was in California one year, and the rest of the country followed the next.

There really isn't any big issues, other than -- and we think it will be pretty good is -- it's a World Cup year.

So the World Cup has a nice impact and nice lift to our business.

And we've partnered with Adidas, and are really focused on the World Cup -- and to some extent Nike.

So the two brands that are really driving the World Cup, Nike and Adidas, we are partnering with them.

And that's going to be the biggest change this year versus last year, from a merchandising event or rule change, et cetera.

Got it, thanks.

And then one more just separate question.

Anything to note in terms of regional trends?

And I apologize of I missed this earlier in the call.

But just where -- or maybe, when weather became more seasonal, that you saw a spike in trend?

And if what people are buying in different parts of the country has been surprising or not -- surprising to you?

There really hasn't been anything surprising.

When we did get that cold spike in October, the customer came in and bought product pretty close to the way we bought it, and the way we are merchandising it.

So there's really no surprises in what we saw.

Got it.

Thanks, guys.

Good luck with this quarter.

Thank you.

This concludes our question-and-answer session.

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

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

We wish everybody a happy holiday, and look forward to talking to you when we announce our fourth-quarter results.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

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