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Executives

Anne-Marie Megela – Director, IR

Ed Stack – Chairman and Chief Executive Officer

Joe Schmidt –President and Chief Operating Officer

Tim Kullman – Executive Vice President Finance, Administration & Chief Financial Officer

Analysts

Robby Ohmes – Bank of America Merrill Lynch

Matthew Fassler – Goldman Sachs

Gary Balter – Credit Suisse

Robert Samuel – Oppenheimer

Kate Mcshane – Citi Investment Research

Mike Baker – Deutsche Bank

Michael Lasser – Barclays Capital

Chris Horvers – JP Morgan

John [Zodis] – Buckingham Research

Rick Nelson – Stephens Inc.

Chris Svezia – Susquehanna Financial Group

Jim Duffy – Thomas Weisel Partners

Jeff Mintz – Wedbush Morgan

Jack Murphy – William Blair

Reed Anderson – D.A. Davidson & Co.

Joe Feldman – Telsey Advisory Group

James [Lewellus] – Needham & Co.

Dicks Sporting Goods, Inc. (DKS) F4Q08 Earnings Call March 10, 2009 10:00 AM ET

Operator

Welcome to the fourth quarter 2008 Dick's Sporting Goods earnings conference call. (Operator instructions)

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

Anne-Marie Megela

Thank you and good morning to everyone participating in today’s conference call to discuss the fourth quarter and full year 2008 financial results for Dick’s Sporting Goods. Please note that a re-broadcast 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 detailed in our press release, a dial-in replay will also be available for approximately 30 days.

In order for us to take advantage of Safe Harbor rules, I would like to remind you that we have included in today’s discussion some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 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. We have also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable GAAP financial measures calculated in accordance with generally accepted accounting principles and a related reconciliation can be found on our website.

Leading our call today will be Ed Stack, Chairman and CEO. Ed will discuss our fourth quarter financials and operating results and review the guidance contained in our press release. Also joining us this morning are Joe Schmidt, President and Chief Operating Officer and Tim Kullman, Executive Vice President, Finance Administration, Chief Financial Officer. Joe will review our store development program and Tim will then discuss in more detail our financial results.

I’d now like to turn the call over to Ed Stack.

Ed Stack

Thank you Anne Marie. I am pleased to report another quarter in which we delivered comp store sales and earnings results in line with our expectations. We generated net income of $63.4 million or $0.55 per diluted share excluding the non-cash impairment charge and costs associated with the Golf Galaxy and Chick’s Sporting Goods integration.

These results are in line with our previously issued fourth quarter guidance that we would obtain at least the mid point of our original earnings estimate of $0.49 to $0.56 per share. Total sales for the quarter declined 0.4% to $1.2 billion. Comp sales declined by 8.6% as compared to our guidance of negative 10% to negative 6%. Dick’s Sporting Goods sales were negative 8.1% and comp sales for Golf Galaxy stores were negative 20.7%.

In the Dick’s Sporting Goods stores golf equipment and exercise negatively impacted same store sales while hunting and outerwear positively impacted same store sales in the quarter. Once again our inventory levels were under tight controls, down 13.9% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007 on a consolidated basis. For Dick’s Sporting Good stores only, inventory was down 12.7% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007.

Due to the lack of visibility created by the current economic environment particularly in the back half of the year we believe it is appropriate to provide estimates based on the continuation of trends from the fourth quarter 2008 into fiscal 2009. We are currently anticipating consolidated earnings per diluted share of approximately $0.80 to $1.00 excluding merger and integration costs.

For the full year 2008 we reported $1.19 excluding the non-cash impairment charge and merger integration costs. On a GAAP basis we are anticipating earnings per share of $0.77 to $0.97 in 2009 compared to a net loss of $0.31 per diluted share in 2008. In 2009 we are expecting comp store sales to decrease approximately 12% to 8% versus a decline of 4.8% in 2008.

We are anticipating reporting consolidated earnings per diluted share of approximately $0.03 to $0.08 in the first quarter of 2009 excluding merger and integration costs. In the first quarter of 2008 we reported earnings per diluted share of $0.18.

On a GAAP basis we anticipate reporting earnings per diluted share of $0.01 to $0.06 in the first quarter of 2009 compared to earnings per share of $0.18 per diluted share in the first quarter of 2008. We are anticipating comp store sales decline of approximately 12% to 9% for the first quarter versus a 3.8% decline in the first quarter of last year.

The comparable store sales calculation to the first quarter and full year 2009 include Dick’s Sporting Goods stores and Golf Galaxy stores. The comparable store sales calculations for the first quarter and full year of 2008 included only Dick’s Sporting Goods stores. The Chick’s Sporting Goods stores will be included in the comp store sales comparison 13 months after the conversion to Dick’s Sporting Goods Stores.

Our associates have done an excellent job running the business in such a difficult economic environment. We have successfully managed expenses, and more importantly inventory, and ended the year with no borrowings on our credit facility. In 2009 we will continue to remain focused on servicing the core athlete and outdoor enthusiast, carefully managing our inventory levels, tightly controlling expenses and modestly growing our store base.

I will now turn the call over to Joe.

Joe Schmidt

Thanks Ted. In the fourth quarter we opened a total of four new Golf Galaxy stores in Seattle, Washington, Houston, Texas and Naples and Orlando, Florida. At the end of the fourth quarter we operated 384 Dick's Sporting Goods Stores with 21.4 million square feet, 89 Golf Galaxy stores with 1.5 million square feet and 14 Chick’s Sporting Goods stores with 700,000 square feet.

New store productivity for the fourth quarter was 66% and includes Dick's Sporting Goods Stores only. This is lower than what we have historically generated. The decline is primarily driven by the overall decrease in consumer spending as evidenced by a 5.8% decline in transactions and a 2.3% decline in sales per transaction in the fourth quarter.

In 2009 we expect to add approximately 19 new Dick's Sporting Goods Stores, relocate one Dick's Sporting Goods Store, add one new Golf Galaxy store, close two Chick’s Sporting Goods stores and convert the 12 remaining Chick’s Sporting Goods stores to Dick's Sporting Goods Stores. Roughly 25% of the new Dick's Sporting Goods Stores in 2009 are anticipated to be in new markets. We expect that approximately nine of the new stores will open in the first quarter, four in the second quarter and six in the third quarter.

The Golf Galaxy store is expected to open in the first quarter. The Chick’s Sporting Goods stores are anticipated to be converted in the second quarter.

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

Tim Kullman

Thanks Joe. Sales for the quarter decreased 0.4% to $1.2 billion. Comp store sales at Dick’s stores decreased 8.1% driven by a 5.8% decline in transactions and the remaining coming from a decline in sales per transaction of 2.3%. Cannibalization impact accounts for approximately 1% similar to recent levels.

Gross profit of $352 million was 29.17% of sales, 186 basis points lower than the fourth quarter of 2007. Merchandise margin improvement for Dick's Sporting Goods Stores of 29 basis points was more than offset by the decline in merchandise margin generated by Chick’s Sporting Goods and Golf Galaxy stores. The consolidated merch margin contraction of 23 basis points was compounded by the fixed cost de-leverage of 143 basis points. The remaining de-leverage of gross margin was primarily driven by distribution.

As a result of our expense control efforts SG&A expenses of $242 million were 20.01% of sales which was 64 basis points lower than last year’s fourth quarter. Operating income before the non-cash impairment charge and integration costs decreased to $110.4 million and as a percent of sales non-GAAP operating income margin of 9.14% was 114 basis points lower than the fourth quarter of 2007.

Pro forma net income decreased to $63.4 million and earnings per diluted share decreased to $0.55 compared to the fourth quarter prior year net income of $73.2 million or $0.62 per diluted share. In the quarter we reported a pre-tax non-cash impairment charge of $193.4 million that decreased net income by $161.7 million or $1.44 per diluted share.

The deterioration of the economy combined with projections of a continuing trend created a shortfall in the fair value estimations for certain assets such as goodwill, property and equipment and other intangible assets below their current book value. The pre-tax non-cash impairment charge consisted of approximately $164.3 million for goodwill and other intangible assets acquired as part of the Golf Galaxy acquisition in February 2007. $29.1 million for the write down of Golf Galaxy, Dick’s Sporting Goods and Chick’s Sporting Goods store assets.

As a result of this write down related depreciation of approximately $2 million will be eliminated in 2009.

Let’s move to the balance sheet. At the end of fiscal 2008 inventory per square foot was 13.9% less than at the end of fiscal 2007 on a consolidated basis. For Dick's Sporting Goods Stores only inventory was down 12.7% per square foot at the end of fiscal 2008 compared to the end of fiscal 2007. We ended the quarter without any borrowings on our $440 million line of credit. Our borrowing rate is LIBOR plus 75 basis points and averaged 3.16% in the fourth quarter.

Net capital expenditures were $8 million in the fourth quarter or $32 million on a gross basis. For the full year net capital expenditures were $115 million or $191 million on a gross basis as we proactively reduced our capital spend in the fourth quarter.

We expect that the current difficult economic environment will continue at least through 2009. However, even with lower comp store sales and providing more promotional activity in 2009 we are anticipating merchandise margins driven by Dick's Sporting Goods merchandise margins partially offset by Golf Galaxy and e-commerce merchandise margins. We will continue to maintain our focus on expense management in 2009. Specifically, over the course of this year we expect to reduce operating costs by approximately $50 million. These savings are expected to come primarily from payroll, advertising and pre-opening expenses.

We also recognize that it is important to continue to build for the future. On that front we have recently changed the way we go to market with our e-commerce business. This change in our approach means a change in the accounting for this business as well. Under the previous contract GSI was the seller of the merchandise and managed the online inventory. Therefore we only recorded a royalty fee and revenue share. Under the new agreement we will now record all sales, inventory costs and fees incurred through GSI’s services.

In 2009 we expect GSI to be P&L neutral. Specifically we expect to recognize approximately $124 million in revenue and incur an additional approximately $30 million in SG&A expenses as well as capital expenditures related to the e-commerce investment in 2009.

Looking at the balance sheet we do expect to have seasonal borrowing needs consistent with how our business has historically operated. As previously announced $172.4 million was paid on February 18 to bond holders who put the majority of their senior convertible notes to us. This payment was financed with cash on hand and our credit facility. Our credit facility provides us with $440 million of availability for borrowing and for letter’s of credit. We believe we have a strong liquidity position and expect to generate positive cash flow in 2009.

In 2009 we are expecting net capital expenditures to decline to approximately $60 million or to approximately $100 million on a gross basis. This decline is driven by the opening of fewer stores in 2009 as compared to 2008, the completion of a new distribution center in 2008 and by simply managing the capital spend more tightly in this tough economic environment.

We do have one housekeeping item to inform you about. In May 2008 the FASB issued FSP APB 14-1 which impacts the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1 will impact the accounting associated with our senior convertible notes. This FSP will require us to recognize additional non-cash interest based on the market rate for similar debt instruments without the conversion feature. FSB APB 14-1 is effective for fiscal periods beginning in 2009 and will require retrospective application beginning the first quarter of 2009. We expect the adoption of this standard will reduce historical earnings per diluted share by approximately $0.04 for the full year 2008 and by approximately $0.01 for the first quarter of 2008.

Since FSB APB 14-1 is not yet effective for the fiscal 2008 results we reported this morning it is not reflected in those results.

As described in our form 8K filing dated February 19, 2009 we repaid over 99% of the senior convertible notes on February 18, 2009 and thus the effect of the adoption of FSP APB 14-1 is not expected to be material for fiscal 2009 but is considered in our 2009 outlook.

In summary, we expect 2009 to be another difficult year. However, through effective merchandising, inventory management and a disciplined expense control environment we expect to be cash flow positive in 2009. Our financial discipline coupled with a tireless emphasis on operational execution will provide us with the ability to continue to weather the economic storm and most importantly will position us to excel as the environment improves.

This concludes our prepared remarks. At this point operator I would like to open it up for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Robby Ohmes – Bank of America Merrill Lynch.

Robby Ohmes – Bank of America Merrill Lynch

When you think about the inventory reductions you achieved in the fourth quarter and then also looking at further inventory reductions for 2009 can you give us more detail on how you are managing that from a couple of perspectives? One would be sort of hard lines versus apparel and footwear. Also from the price point perspective are you doing more at lower price points? You mentioned this value approach in your release this morning. Then maybe put that in the context of brands, focusing on the more expensive brands like Nike versus bringing in lower cost brands. Then also related to that inventory question is how are you thinking about out of stock levels in this environment? I know that historically in better economic environments you always did a great job of being in stock. I know that is a lot of questions but all revolving around inventory management.

Joe Schmidt

First of all on the inventory level we really look at inventory across the board as to where we could rationalize our inventory and our SKU’s. Our merchandising group and our planning group all did a great job of identifying where inventory wasn’t needed, SKU’s that could be taken out of the mix and they really did a terrific job. It was across all categories of merchandise. A couple of categories that I would say would be an exception to that would be the firearms and ammunition business as that business has been very, very good. We are actually struggling to keep up with inventory in those categories because of the business being as robust as it has been.

As far as brands go we didn’t do anything to reduce in any meaningful way our primary brands of Nike, Under Armour, Titlist, Callaway, those types of brands. Those brands are still very effective in the store and we are very pleased with those. It was some of the tertiary brands that just didn’t have the traction that we scaled back. As far as out of stocks go our merchandising group and our planning and allocation group have done a terrific job of making sure that we are in stock in those key items. Have there been a few mistakes here and there? Yes. When you cut the inventory to this level there can be a few out of stocks but we have gotten that…they were fewer than we would have anticipated with inventory coming down this level and we are really in very, very good shape on those key items and we don’t see any issues there.

As far as the value message we gave we don’t want people to misinterpret that our value message means we are cutting our prices on premium products. We are not. Some of those premium products have still continued to do well. The new Titleist Pro V 1 golf ball has done extremely well. The Under Armour running shoes have done quite well and when we talk about the value message we have been able to go out into the marketplace and buy products from our partners and our suppliers at reduced prices that we will be able to pass that value and those price concessions on to the consumer. Therefore giving a value message out in our tabs of a call to action we think is going to be really very good. As we have started to do this we are starting to see a little bit more traction and we are cautiously optimistic.

Robby Ohmes – Bank of America Merrill Lynch

Footlocker reported last week and they did sort of a negative 7-ish comp for the quarter but they indicated that their February comps in the U.S. had picked up very nicely supported by a Kobe Bryant basketball sneaker. I was wondering if you could comment on February trends or if you saw similar lift in your footwear category?

Joe Schmidt

We are pleased with our footwear category and although we didn’t call it out here in the release the footwear category was pretty good. The athletic footwear category was pretty good. Any little bit of improvement it has been kind of up and down. The business has gotten a little better and then it kind of drops down a little bit so we really don’t have any visibility. We think from a guidance standpoint our most conservative and appropriate guidance we can give to the marketplace is we anticipate 2009 being maybe a bit worse than 2008.

Operator

The next question comes from Matthew Fassler – Goldman Sachs.

Matthew Fassler – Goldman Sachs

The first question I have relates to, I guess both my questions relate to gross margin. The first one relates to the fourth quarter. It looks like just rough and tough if you look at Chick’s and Golf Galaxy combined their merchandise margins were down a combined 400 basis points or so to the extent that they took the total company margins down by 40-50 bips. Can you comment on what is transpiring in those businesses? I know they are smaller and you don’t usually focus on them but they have a material impact on profits here. Did they have one-time clearance activity or would you say this margin pressure in those businesses should be recurring?

Ed Stack

From a Golf Galaxy standpoint that margin pressure is really based on the negative comps and how we calculate margin. We anticipate the Golf business to continue to be difficult. I think you saw with Golf Smith’s release the golf business is difficult. It is a little bit better inside the Dick's Sporting Goods Stores than it is in the Golf Galaxy stores but we expect that to continue to be difficult. From a Chick’s standpoint that was a combination of the clearance activity that we don’t expect to be recurring once we get through this conversion. That is only 15 stores so we don’t expect that to be meaningful going forward.

Matthew Fassler – Goldman Sachs

So of the two Golf Galaxy was probably a bigger drag on a company wide basis?

Ed Stack

Yes.

Matthew Fassler – Goldman Sachs

You alluded in your press release to the need to emphasize value. That would impact your margins in 2009. Are you thinking about where you expect mix to naturally evolve as consumers re-focus on value oriented brand to price points or are you focused on your relative pricing kind of on a like-item basis?

Ed Stack

As we started to read some of the reports this morning I think maybe we weren’t as clear as we could have been. We don’t expect our merchandise margin to fall. We expect to have a modest increase in our merchandise margin more at Dick's Sporting Goods and then slightly offset by the merchandise margin at Golf Galaxy and to some extent with what we do with the internet. The internet margins are slightly lower than our store margins. Our overall merchandise margin we expect to be positive. That will be driven by our ability to give value to the consumer based on our ability to buy product off-price from our suppliers. There are some suppliers that have offered us some terrific buys at off-price that we are able to pass those prices on to the consumer and as they look at our inserts and walk into our stores they will be able to see great value as compared to what it was six months or a year ago. Those value messages we give out will not negatively impact our gross merchandise margins.

Our gross margins may be under pressure because of negative comps. We de-lever those fixed costs and some of those fixed costs are in our margin calculation.

Matthew Fassler – Goldman Sachs

You expect those special buy opportunities to be enduring or would you say the are more of a transient fact of life in the current macro environment?

Ed Stack

I don’t know how long they will last but we have placed a number of those buys to date for spring and we have actually placed some of those buys for next fall. One of two things have happened; we have either taken delivery of that merchandise and it is sitting in our warehouse that will be for next fall or we have made the commitment to the vendor to buy that merchandise and it is sitting in their warehouse waiting to be shipped next September or October.

Operator

The next question comes from Gary Balter – Credit Suisse.

Gary Balter – Credit Suisse

I guess I will be following up a little bit on what Matt and Robby just asked in this whole value thing. The question, which is a little bit wider than just buying inventory, as you look at your box at 50,000 square foot or so box has there been a thought of going to lower opening price points or other changes in the merchandising mix because of the fact the consumer may not feel as wealthy going forward as they used to? How do you reconcile that?

Ed Stack

We have brought in some lower priced product. You will see in our inserts some value messages of athletic shoes at $29 and $39 that if you rewind the film 12 months ago you might not see quite as much of that. You will see in the golf business some golf ball prices that are a bit more aggressive. We have brought in some apparel from Russell and a couple of brands more opening price point. We have gotten some terrific incentives to buy that product that we can pass on to the consumer that will be lower price points and create that value message. I should add all of which does not negatively impact our merchandising margin at Dick's Sporting Goods. Our merchandising margin at Dick's Sporting Goods we expect to expand in 2009 versus 2008.

Gary Balter – Credit Suisse

Could you talk about the controlled brands? What is the exposure you have on inventory for some of those brands? You no longer obviously break out the percent you do in private label and controlled brand but how does the exposure look?

Ed Stack

The inventory exposure is we have placed the order and we own the inventory. We have been very careful in placing our private label brands. Our inventory in that category is in line with the total company inventory as we look at this and we don’t feel that we have any mark down exposure or any issues associated with our private brand any greater than we do with other brands. We feel very comfortable with the shape our inventory is in from a private label standpoint.

Gary Balter – Credit Suisse

One of your competitors in fitness is Sears obviously with some of the fitness equipment. In other areas like appliances they got very aggressive at Christmas time. Did you see anything in price points and I recognize their price points are lower than yours but in some of the fitness areas where they got aggressive to push some product or did you not see that?

Ed Stack

We didn’t. Our fitness business average unit retail was down a bit but that was primarily driven by the strength category; the home gym units. The home gym unit’s strength category has been difficult; the cardio business has continued to kind of hold its own.

Gary Balter – Credit Suisse

Can you talk about acquisitions going forward? We were surprised to see already two of the Chick’s stores and can you talk a little bit about how that acquisition has measured up? Between that and Golf Galaxy should we assume we are not going to see as many acquisitions going forward given the success you have in opening your own stores and some of the challenges, it seems, you faced in some of the acquisitions you have done?

Ed Stack

I would not anticipate us doing any acquisitions in the near future. As far as the Chick’s acquisition goes that is really going quite well. We are quite pleased with that right now. The two stores we are looking to close one of them we never liked the location and had anticipated probably closing that from the beginning and another one is a store we are going to close because we have a better location. Before we bought Chick’s we were working on a location where we would compete with the location we are closing and we like the location that we looked at and it negotiated much better than the Chick’s location.

Operator

The next question comes from Robert Samuel – Oppenheimer.

Robert Samuel – Oppenheimer

Can you talk about the current promotional environment? What you are seeing with the competition as we have begun to see one or two Chapter 11’s in this space?

Ed Stack

Could you repeat that question? You broke up here a second.

Robert Samuel – Oppenheimer

If you can just talk about the current promotional environment and what you are seeing with regards to your competitors as we have seen Chapter 11 last week in this space? Just your thoughts around that.

Ed Stack

The Chapter 11 last week we only have one store that competes directly with them. As we have heard rumors of some other people filing or having difficulty we have not seen aggressive promotional activity yet although we expect if there are some filings of some other companies and liquidation that could have an impact.

Robert Samuel – Oppenheimer

With regard to the comp guidance can you talk about how you think about the Dick’s stores and the Golf Galaxy stores and just maybe give a little bit more color on the golf category in both of those locations?

Ed Stack

The Golf Galaxy you should anticipate the comps in our plan similar to what they were in the fourth quarter. So as we indicated in the press release and in the call here we think the best course of action is to anticipate the results of the fourth quarter continue into next year. So you can take a look at both of those kind of data points and continue those into 2009. The golf business at Dick's Sporting Goods is right now this year a fair amount better than the Golf Galaxy business to date.

Operator

The next question comes from Kate Mcshane – Citi Investment Research.

Kate Mcshane – Citi Investment Research

Following up on a question about private brands how should we think about private brands in 2009? Can they continue expanding the brands that you have and continued products or will there be more brands you will be introducing in 2009?

Ed Stack

In 2009 there will really be no new brands we will be adding. You will see additional product categories being broader in some of the brands we have today. There will be some additional field and stream hunting clothing and maybe some more boots but it will be more category expansion. There will be no additional meaningful brands added this year.

Kate Mcshane – Citi Investment Research

In an unrelated question, how do we think about your business over the long-term? As a result of the changed environment do you continue to believe there can be an 800 store chain in its current store format and if so what are you seeing in the environment to give you that encouragement?

Ed Stack

I think we absolutely continue to view ourselves as an 800 store chain. Some of the things that give us the confidence that this is still attainable is that our business has held up relatively well in this environment. I understand that is the new definition of relatively well but the company has done relatively well. Sales are down, yes. We have been able to control our inventory. We have been able to control our merchandise margin rates. We feel that there is going to be consolidation in this industry. We have seen the filing in the Pacific Northwest that gives they were a well entrenched chain in the Pacific Northwest and it gives us an opportunity to move into that area of the country with much less competition than there was in the past.

We understand there is another retailer we have some information on that is having a very difficult time in the outdoor category that something may happen there. So we think from a consolidation standpoint there is going to be less competition out there which gives us the opportunity to move in and capture that market share.

Operator

The next question comes from Mike Baker – Deutsche Bank.

Mike Baker – Deutsche Bank

On your SG&A down $50 million that is leverage of I think about 25 basis points. Is that right? You are going to be able to leverage your SG&A on minus roughly 10 comp?

Tim Kullman

No. The way you have to look at the business is when we consolidate Golf Galaxy, Chick’s and Dick's Sporting Goods there is a $50 million cost of savings. As we then consolidate the e-commerce business on the sales we indicated there are certain fees associated that are going to have to be paid to GSI so there is $30 million of SG&A that will be added with the GSI. At the end of the day it would be net $20 million with the addition of GSI.

Mike Baker – Deutsche Bank

The $124 million in revenues does that go in the comp number or is that outside the comp number?

Tim Kullman

It is outside the comp number.

Mike Baker – Deutsche Bank

I would have to redo my math but it is probably then here gross margins down about 150 basis points next year at the mid point of your guidance, merchandise margins slightly up so I imagine the rest is coming from occupancy de-leverage. If that is the case is there any opportunity to start to reduce some of that occupancy de-leverage either first of all because you are opening fewer stores or just by going back and renegotiating some rent?

Ed Stack

The rest of that de-leverage is across all of our fixed costs. Occupancy in particular we are in the process of renegotiating some leases that are coming up for renewal in both Dick’s and Golf Galaxy so we do see there is the opportunity to at least this year modestly modify some of the occupancy costs but we think there is more potential in the out years that we would see the benefits of this in the out years of 2010 and 2011.

Mike Baker – Deutsche Bank

You said your balance against your revolving line of credit was zero at the end of the fourth quarter. I imagine it is up now because you used some of that to pay down your convertible. Can you tell us where you stand currently on that line of credit?

Tim Kullman

As we said we used cash and the credit revolving credit facility. We stand today at about $150 million borrowed.

Operator

The next question comes from Michael Lasser – Barclays Capital.

Michael Lasser – Barclays Capital

With Golf Galaxy comping down 20% in the fourth quarter and the expectation that is going to continue at what point do you have to change the footprint of that chain and maybe close down some stores to improve the economics of the overall organization?

Ed Stack

We think that is premature right now. I think we are going through one of the worst economic cycles we have some argue since 1929. We think that there will be consolidation of the golf business also. If this continued for 24 months or 30 months then I think we would probably have to make some decisions. At the present time we think that we have got a plan in place to better these sales and to improve these sales.

We have a new merchandising team in place comprised primarily of people from Dick's Sporting Goods. We have a new marketing plan in place that will begin to be deployed in the end of March. So we have a number of things in place that are very different than the previous Golf Galaxy management team that we think will have significant improvement. From a guidance standpoint we don’t think it is appropriate to put that in place from a guidance standpoint until we have actually seen that it works.

Michael Lasser – Barclays Capital

On the break down between ticket and traffic the ticket decline was the most we have seen in a long time. Can you offer a little more insight into what was propelling that downward particularly in firearms sales which were performing quite well and I would imagine that is a higher ticket item?

Ed Stack

As we called out in the prepared announcement the golf and fitness business were very difficult and obviously with a high retail of those items that had a significant impact on our average ticket.

Michael Lasser – Barclays Capital

Trying to balance the market share opportunity you are seeing with some of the less well capitalized competitors going out of business, at some point might you accelerate your square footage growth even if the difficult trends continue because you will have such a more wide open playing field than you are having at this point?

Ed Stack

I think at the present time I would say no. I think there are some headwinds to doing that. One of the headwinds is the developers are bringing less product onto the market so that is an issue. There is less centers being developed. When we open a store we have usually some pretty strict co-tenancy requirements and with other people scaling back it is difficult for the developer to meet those co-tenancy requirements. I also think based on the environment we are in today the square footage growth we have laid out is appropriate and we won’t probably revisit that for another 12-18 months before we really start to accelerate to where we had been in the past.

We need to see the economy turn around before we do that.

Operator

The next question comes from Chris Horvers – JP Morgan.

Chris Horvers – JP Morgan

Just for clarification did the outerwear category and the footwear category comp positively in the fourth quarter?

Ed Stack

For competitive reasons we don’t talk specifically about categories specific like that. Both of those categories certainly did better than the company average.

Chris Horvers – JP Morgan

As you think about the innovation you see in the pipeline in the different categories that are in your store are there any particular categories that you are excited about in 2009 and perhaps not as excited about as you were in 2008?

Ed Stack

I think the launch of the Under Armour running shoes has breathed life into the athletic footwear category so we are enthusiastic about that. In an odd way some of the things in the golf business we think can improve the golf business. Some of the technology innovations that Titleist is out with a new golf ball which early results have been really good. Callaway has some new clubs out there that from a driver standpoint we think have some potential. The new Nike technology which we think has some legs also. There are a few things out there we think can be helpful to the business.

We think there are some other categories we feel can help drive the business. The kid’s sports, that high school athlete, has continued to be very good for us and with Nike we are launching the Jordan Shots from an apparel and footwear standpoint which is product we haven’t had before and the early results we have gotten out of Jordan in the stores that we have tested this in have been really very positive at terrific margins also.

Chris Horvers – JP Morgan

Is it fair to say as you think about 2009 and your comp guidance it is really a continuation of trend in what you saw in 2008 with the exception of maybe guns which have some really tough comparisons in the back half of the year?

Ed Stack

Firearms and ammunition will have some very difficult comparisons in the back half of the year. Right now based on this environment and we are all watching what is going on you don’t know what is going to happen one day to the next. We don’t feel it is appropriate to provide guidance other than what has happened in the fourth quarter until we see something different happening than what happened in the fourth quarter. If that makes sense.

Operator

The next question comes from John [Zodis] – Buckingham Research.

John [Zodis] – Buckingham Research

The topic of occupancy has been addressed a little bit so far but just based on your comments I estimate that the full year occupancy per square foot was up about 7% in 2008 and that is on top of a 7% increase in 2007. In 2007 part of it was due to Golf Galaxy which simultaneously had much higher sales productivity in the new stores and you can see that. However, this year it appears the sales productivity in new stores was down double digits versus the previous year. I guess my question is that is not a particularly favorable dynamic of metrics. Looking into 2009 how should we think about the new stores and their contribution relative to the pressure on occupancies?

Ed Stack

Let me get to the increase in occupancy based on I’m not sure how your calculation went but keep in mind that in 2008 we had 12 months of Chick’s Sporting Goods rent versus two months of Chick’s Sporting Goods rent in 2007. So that is part of an occupancy increase. We touched on some of the things we are doing from an occupancy standpoint for the future but overall with the low comps we are experiencing these fixed costs will continue to de-leverage.

Joe Schmidt

We have been through this a few times. There is nothing inherently unique about how our occupancy costs are calculated or what our leases are. Our leases are primarily a 10-year lease with a rent bump of $0.50 at the end of the fifth year. So there is no back end loaded occupancy costs that was inaccurately portrayed. When you take a look and comps go down negative 9-10% occupancy cost is a fixed cost and it will de-leverage by definition.

John [Zodis] – Buckingham Research

To follow-up, I understand that you have now anniversaried the bump up from the Chick’s. Is that also what explains the lower sales productivity at new stores in 2008?

Ed Stack

No I think we touched on that in Joe’s comments. We indicated that if you take a look at the components of our comp which was a 5.8% reduction in transactions and 2.3% reduction in ticket indicating some consumer sentiment overall. That is the driving force behind that.

Operator

The next question comes from Rick Nelson – Stephens Inc.

Rick Nelson – Stephens Inc.

I have a follow-up question about the golf category. Why do you think the Golf Galaxy comps are lagging Dick’s golf comps? If you could provide any data on traffic and ticket within the Golf Galaxy stores that would be helpful.

Ed Stack

I think part of the reason, we are not going to talk specifically about ticket in Dick’s compared to Golf Galaxy for competitive reasons but one of the reasons we think there is a difference between the Dick’s performance and Golf Galaxy performance is going through this integration and transition from one management team to another is always difficult. There was a big change that has happened with Golf Galaxy. The senior management team has been replaced. The buyers have been replaced. We have gone through an integration and a big change in that business and when you do that usually sales come down a little bit. We anticipate some of the things we are going to be doing with Golf Galaxy in the future beginning in March when we launch this new marketing campaign that our hope is things will improve. We will be taking the same type of approach with Golf Galaxy as we have with the Dick’s Sporting Goods business overall. We have been able to buy product from some of our suppliers at reduced prices that will be able to provide a more value message to the consumer in Golf Galaxy than has been the marketing plan from the previous management team. We think that is going to have an improvement with Golf Galaxy.

Rick Nelson – Stephens Inc.

You also cited footwear as being a relatively healthy category. I am wondering within that business where is the strength and also performance apparel are you seeing resistance to the high priced points?

Ed Stack

The apparel business has not been as good as the athletic footwear business but the athletic footwear business specifically to your question has been pretty strong across a number of categories. The running business continues to be good with the launch of the Under Armour shoes. We have seen since President Obama has come into office kind of a focus around the President and his love of basketball. Our basketball business has actually gone up pretty dramatically. So we are pretty enthusiastic about the athletic footwear business right now.

Rick Nelson – Stephens Inc.

And performance apparel area any comments on trading down occurring in that category?

Ed Stack

We haven’t seen anything of any significance yet.

Operator

The next question comes from Chris Svezia – Susquehanna Financial Group.

Chris Svezia – Susquehanna Financial Group

First what are your plans for addressing the square footage you have dedicated to the fitness segment as you look for fiscal year 2009? I guess possibly golf as well in your Dick’s Sporting Goods stores? I guess footwear, apparel or outdoor have room to increase in comp stores as a percentage of floor space or is it potentially evenly distributed among the other categories as well?

Ed Stack

We are taking a look at the fitness category and looking to reallocate some space out of fitness into other categories. If we were to take a look at where that would probably be it would be in the apparel area and in the team sports area.

Chris Svezia – Susquehanna Financial Group

Do those changes take effect as we go into 2009?

Ed Stack

We are looking at those and they would be kind of towards the end of the second quarter of 2009.

Chris Svezia – Susquehanna Financial Group

You mention getting vendor support and adjusting the pricing that you are getting and kind of stressing the value message of Dick’s. Is it pretty much across all the vendors or is it more skewed towards those categories that are more challenging from a pricing or from a sell through perspective versus those vendors in those categories that are actually performing reasonably well?

Ed Stack

I think it is across all categories. All vendors have been really supportive of this strategy. We think we have the ability to move the needle in all of the categories of the business. Understanding moving the needle does not necessarily mean making those categories positive, comp positive, but we think we can improve on the results we have been having.

Chris Svezia – Susquehanna Financial Group

The Jordan [Shop in Shops] that you are doing in apparel and footwear can you tell me how many stores you have that in right now? Or what is the plan for 2009?

Ed Stack

We have got by the end of the first quarter about 60 and we will rate these and then decide where we are going to go after that.

Chris Svezia – Susquehanna Financial Group

On the apparel side when you say that potentially could be an opportunity to take some of that fitness business and put it towards apparel is it just broad apparel? Is it more technical? Is it outdoor? I’m just trying to get a sense of what that might mean.

Ed Stack

There is some things we are already starting to do. The Jordan Apparel Shops we think are going to be very helpful. We think as part of the fitness business we haven’t had a meaningful presence from a yoga apparel standpoint so we think yoga is an area that we can have a meaningful acceleration to our apparel business at margins higher than the company average.

Operator

The next question comes from Jim Duffy – Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

I wanted to talk a little bit about the $50 million in the SG&A savings and some of the components of that. With regard to the payroll savings you are expecting some of that is corporate. Are you also planning savings on in-store payroll? What would the split there be? Then with regards to advertising would you expect to keep it consistent as a percent of revenue or will we see declines as a percent of revenue?

Joe Schmidt

I’ll address the in-store payroll piece. As we do with any sales either positive or negative we react to payroll according to the business. So in down times as we planned the business this year of course we have looked at payroll in store and addressed that accordingly.

Ed Stack

In terms of the advertising question we will see advertising leverage as a percent of sales year-over-year. I think the larger impact on advertising in terms of a reduction will be third quarter oriented.

Jim Duffy – Thomas Weisel Partners

Can you speak a little bit to where are the places within the advertising budget where you will see cuts? Will it be less frequent? More presence in circulars? Less national advertising? Less sponsorship?

Ed Stack

The answer is yes to pretty much all of those. There will be a bit less national advertising. Our circulars we have cut a couple of circulars that we have analyzed as less productive. Certain circulars will have a few less pages associated with those. Some of the sponsorships we have done we are modifying those sponsorships. There is a little bit of everything. There is not one silver bullet. We took a look at this and said there is really nothing sacred here and we needed to take a look at everything that we do and analyze that and reconstruct our advertising and marketing in this difficult time. We have done that. I think the marketing group has done a terrific job putting forth these cuts and to be able to execute those and keep the business intact.

Jim Duffy – Thomas Weisel Partners

With regards to the in-store payroll how much more opportunity is there? It seems like anecdotally from being in the stores in the fourth quarter you are already operating pretty lean.

Joe Schmidt

Again it is going to be based on sales. If sales decline any more than planned then we will adjust accordingly. We take a look at the service components in our stores in footwear and in golf and we make sure we maintain the hours in those service intensive areas. The other thing we have done is we have reduced store hours. Typically a year ago we opened the stores at 9 a.m. and closed at 9:30 p.m. six days a week. We have actually adjusted our store hours Monday through Thursday where we open a half hour later and actually close a half hour earlier. So that has helped a little bit as well.

Jim Duffy – Thomas Weisel Partners

A follow-up on something you spoke to earlier about real estate availability. Given the moderation of new development if you so chose would it be possible to take square footage growth back to a double digit level or is that really dependent on the pace of new development?

Ed Stack

If we could find the right real estate we could do that. I think it is difficult to find the right real estate in order to do that. There is not as much new product coming out and we are actually looking at more re-developed product than we have in the past. Re-developed product some of the issue is you can’t get the right prototype or exactly the right square footage so we are wrestling with a few of those thoughts right now. Moving this back to double digit square footage growth in 2009 or the front half of 2010 I don’t believe that is going to happen. I don’t think that is the prudent thing to do in this environment.

Jim Duffy – Thomas Weisel Partners

With re-purposed real estate what type of tenant improvement allowances are generally available there? Is it equally as favorable as new development terms or economically more challenging?

Ed Stack

Every one is different. The re-developed real estate from a Circuit City, landlords are challenged to get capital also and we have traditionally had our buildings turn keyed for us. We are not looking to make any meaningful changes to that from a capital standpoint. So we think that the real estate business is going to continue to be challenging out there and we are not going to force anything.

Operator

The next question comes from Jeff Mintz – Wedbush Morgan.

Jeff Mintz – Wedbush Morgan

On the questions regarding new stores, looking at it the opposite way, are there stores that you are looking at potentially to close given the tougher environment and do you think that might accelerate as we head through 2009?

Ed Stack

We don’t. We have less than a handful, and I mean that literally, less than a handful of stores that are not profitable within the four walls and a couple of those we feel that we will get to be profitable within the four walls. From a cash flow standpoint we don’t have any store closing coming at us.

Jeff Mintz – Wedbush Morgan

On the e-commerce business can you just talk a little bit about what the advantages of the business shift is and it looks like you are talking about e-commerce being about 3% of revenues in 2009 roughly. Can you talk a little bit about how big you think that business can get longer term?

Ed Stack

I think that we hope to grow that business. We think that business is going to continue to grow. One of the reasons we did this was the arrangement we had with GSI was very good at the time but it did not provide us the opportunity to be ambivalent about where the sales came from. It was a terrific opportunity for GSI and Dick's Sporting Goods when we first put the deal together and as we looked at this we felt that the best course of action for both GSI and for Dick’s was to take control of this. It gave Michael Ruben and his group the ability to shed inventory investment. It gave us the ability to better control and more thoroughly control the customer experience from an online standpoint. We have redone the arrangement with GSI. I think both companies are really very happy with that. We think long-term it will be more profitable for both of us.

Jeff Mintz – Wedbush Morgan

On the private label and private brands in your stores obviously you are not giving the actual percentage any more but have you seen any kind of a shift in that percentage as the economy has gotten tougher? Have your customers moved more towards that business given the more difficult environment or has it stayed steady?

Ed Stack

It has really been steadier. There are some categories that have increased and some other categories that have been a bit more difficult. Overall it has been relatively steady.

Operator

The next question comes from Jack Murphy – William Blair.

Jack Murphy – William Blair

I’m not sure if I heard this earlier but could you give us what you anticipate D&A would be and then looking at the free cash flow for this year what you might expect from working capital? I guess in particular the big improvement in inventory, how you are looking at that for 2009?

Tim Kullman

We typically don’t disclose depreciation number for the year so I won’t be doing that today. From a working capital perspective you can assume we are going to continue to look at inventory declines in 2009.

Jack Murphy – William Blair

Again, I’m not sure if you addressed this but regionally can you talk a little bit about what you are seeing? I think in the past you may have mentioned Texas in particular. Could you talk about the competitive level of that market? What you have learned there and if there will be any change in approach regarding more competitive markets?

Ed Stack

Texas has been and continues to be the most competitive market we compete in. We have indicated that we put together a different marketing plan in Texas. We have modified some of our content. We have talked over the last couple of quarters that we have had pretty positive traction in Texas. That has continued. So we are really quite pleased with Texas and continue to open stores in Texas.

Operator

The next question comes from Reed Anderson – D.A. Davidson & Co.

Reed Anderson – D.A. Davidson & Co.

Back to the web or e-commerce business, how does the $124 million expected this year compare to what that business might have done last year?

Ed Stack

Slightly higher.

Reed Anderson – D.A. Davidson & Co.

In terms of the inventory question just asked, my assumption would be unless business got a lot worse than the forecast you laid out today the inventory declines per quarter would be less at the end of 2009 than at the end of 2008. Is that a fair assumption?

Tim Kullman

That is a fair assumption.

Operator

The next question comes from Joe Feldman – Telsey Advisory Group.

Joe Feldman – Telsey Advisory Group

Back to the real estate for a minute, given the availability of spaces out there and like you said taking prior usabilities, our understanding in talking to a lot of real estate developers is that there is space available and they actually really are looking to you guys as one of their desired tenants for the future. So are you seeing good deal opportunities out there? I guess again just to ask how quickly could you accelerate some of the growth if you wanted to?

Joe Schmidt

As Ed mentioned we do see some availability out in the marketplace but much of that is existing empty boxes. We anticipate with the consolidation of retail in the coming months and what we have seen and what we have heard about that we will see some more empty boxes to look at. As Ed mentioned some of those boxes are a little bit more difficult from a configuration point and do they match our prototype. It is a little bit more work when you are looking at existing boxes. New development we have seen a significant slow down in new development. Developers are certainly having difficulty with liquidity and their ability to get financing. We will continue to keep an eye on it. We will continue to look at the available real estate. We are typically one of the first retailers called to look at available real estate and we expect that will continue.

Joe Feldman – Telsey Advisory Group

Do you notice a big variance between your mall stores versus your power center stores? Obviously I know the size of the box can be different but I guess on a per foot basis or just any type of big productivity differences that you prefer one over the other?

Ed Stack

We don’t see anything meaningfully different between a mall store and a power center store.

Joe Feldman – Telsey Advisory Group

On Under Armour who do you think they are taking some share from? You mentioned in the sneaker category that their new running shoe is doing well. Is it taking share from somebody else or is it just incremental? I would assume it is just taking share.

Ed Stack

I think Under Armour has helped drive the total running shoe business and I think some of those sales have been incremental.

Operator

The next question comes from James [Lewellus] – Needham & Co.

James [Lewellus] – Needham & Co.

What is your anticipated tax rate for fiscal 2009?

Tim Kullman

We are still looking at 40% for 2009.

Operator

This concludes our question-and-answer session for today’s call. I would now like to turn the call back over to Mr. Ed Stack for closing remarks.

Ed Stack

I would like to thank everyone for joining us on our fourth quarter conference call. We look forward to seeing everybody for our first quarter call. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Dicks Sporting Goods, Inc. F4Q08 (Qtr End 01/31/09) Earnings Call Transcript
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