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Dick's Sporting Goods, Inc. (NYSE:DKS)

Citi's 2013 Global Consumer Conference

May 30, 2013 9:40 am ET

Executives

Joseph H. Schmidt - President and Chief Operating Officer

Timothy E. Kullman - Former Chief Financial Officer, Executive Vice President of Finance & Administration and Treasurer

Michele B. Willoughby - Senior Vice President of E-Commerce

Analysts

Kate McShane - Citigroup Inc, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Kate McShane - Citigroup Inc, Research Division

Let's get started. Good morning. Thank you, again, for joining us for day 2 at the Global Citi Consumer Conference. Again, for those who don't know me, I'm Kate McShane, Citi's footwear, apparel and retail and hardline analyst. We're very happy to be hosting DICK's Sporting Goods today. We have to hear today Joe Schmidt, President and COO of DICK's Sporting Goods; Tim Kullman, CFO; and Michele Willoughby, SVP of eCommerce. We are going to have a brief presentation from the company, and then we are going to conduct the rest of the meeting in a fireside chat. We thought it'd be helpful to walk through some of the bigger topics with Joe, Tim and Michele today with regards to their beyond-the-consumer, longer-term growth trends and U.S. expansion and their view on retail versus eCommerce. And we'll also have plenty of time for Q&A at the end of today's session. So thank you, and thank you for joining us today.

Joseph H. Schmidt

Good morning. At DICK's Sporting Goods, our mission is to be recognized by our customers as the #1 sports and fitness specialty omni-channel retailer that serves and inspires athletes and outdoor enthusiasts to achieve their personal best through the relentless improvement of everything we do. And we will continue to accomplish this by growing our store base, continuing to partner with our brands, aggressively building out our omni-channel presence and executing our strategic marketing plan.

We operate in a stable and predictable industry as U.S. retail sporting goods sales have grown slightly at a compound annual growth rate over the last several years. As the clear leader in this space, we have grown our sales at a more rapid pace, growing sales at a compound annual growth rate of 16% compared to the industry growth rate of 2% for the same period. We are the largest U.S.-based full-line sporting goods retailer with sales of nearly $6 billion in 2012, with approximately 8.5% market share, and we believe our size is a strategic asset, particularly in a fragmented space.

And while we are the largest, we have a lot of room to grow. In the past, we have stated that we believe there is an opportunity for at least 900 DICK's Sporting Goods stores in the U.S. Our strategy for new store growth is evolving to include a smaller market focus.

Based on research in smaller markets and considering the success of our smaller market format stores, we believe this strategy opens up a range of new expansion possibilities for us. The addition of our smaller market strategy expands our opportunity to about 1,100 stores. So with 520 stores at the end of Q1 in 2013, we believe we can more than double our store base.

Our new DICK's stores also have been very productive. This is due to in part to a disciplined real estate selection and an effective marketing strategy. As you walk our stores or shop us online, it is evident that brand partnerships are important to us, and we're important to these brands. We offer a deep selection from brands like Nike, Under Armour, The North Face, TaylorMade, Callaway, Asics, adidas. A few years ago, we began adding premium shops with some of these key vendors. With Nike, we have developed this Fieldhouse concept shops. At the end of the first quarter, we had 178 of these Fieldhouse shops in our stores. Also, Nike is investing with us online. In 2012, we rolled out a Nike microsite located on dickssportinggoods.com. This microsite is an enhanced online experience and was developed in partnership with Nike. Sales resulting from the microsite are recognized by us.

We continue to add more of these enhanced shops as they drive sales, margin and traffic. With Under Armour, we are adding All-American and Blue Chip shops, and at the end of the first quarter, we had 111 of these in total.

We also have The North Face concept in super shops with 91 at the end of the first quarter. These branded shops provide customers with a wider and deeper selection.

We're also working with our key brand partners on important product initiatives, whether it's with Nike and their golf collection or TaylorMade and their R1 driver, adidas and their lightweight products. These partnerships help us highlight products exclusive to DICK's, leverage athletes sponsored by these vendors, receive marketing budget contributions, maintain authenticity and credibility and provide a differentiation from our competitors.

Our brand partnerships also provide us opportunities to offer customers exclusive product such as certain Nike Elite basketball products, select Under Armour Combine merchandise and adiZero Sonic footwear.

Also exclusive at DICK's are our private brand and private label products. For 2012, the sale of private brand/private label were $719 million. Private brand and private label products generate significantly higher margins, differentiate us amongst our competitors and encourage customer loyalty. We are targeting these brands to grow $1 billion in sales by the end of fiscal 2017. Examples include Field & Stream, adidas baseball, Umbro and men's and women's Reebok athletic apparel. Also, last year, we added Top-Flite to our portfolio of golf brands, which includes Walter Hagen, Maxfli, Nickent and Slazenger.

Within our stores, we operate specialty stores. These stores include footwear, team sports, lodge, golf, fitness and athletic apparel. Each of these stores is designed to fulfill the discerning needs of athletes and outdoor enthusiasts of all skill levels.

In our new stores, we continue to install shared service footwear decks. These shared service models generate higher comps and AURs. And according to our customers, this model improves the overall shopping experience. We continue to roll this out, and at the end of the first quarter, we had 176 in total. In 2013, all new stores will have these shared service footwear deck models.

We complement these shops with some outstanding associates. These associates live the brand, and they offer a wide range of services, including our LPGA and PGA pros, who provide swing analysis, custom club fitting, club repair and regripping, and our bike techs, who assemble bikes, perform safety inspections, custom fitting and repairs and tune-ups.

Another key element to our success is the progress we have made and the future potential we recognize on the digital front. The sporting goods online market is growing rapidly. Today, it's estimated to be approximately $5 billion with significant growth ahead. In 2012, our eCommerce business represented approximately 5% of our sales or approximately $292 million. We have dramatically grown our eCommerce sales and continue to invest in this business. We believe we can at least triple the size of our eCommerce sales by fiscal 2015 from 2011 levels. We are upgrading site functionality, expanding content, investing in new capabilities and beginning to leverage our store base. At the same time, these investments improve our ability to manage our inventory, expedite fulfillment times and maintain a solid in-stock position. As you would expect, today, we have return-to-store capabilities and associate ordering. We have rolled out ship-from-store to all stores, which reduces delivery time while improving inventory productivity and increasing transaction profitability. This year, we will be piloting pick-up-in-store, which will provide an additional delivery option, drive traffic to our stores, provide competitive advantages and improve transaction profitability.

On the marketing front, we have developed a much more robust and effective strategy. We are building passion and loyalty for the DICK's brand, driving traffic and excitement around key initiatives and optimizing the media mix.

As our consumers' media consumption continues to evolve to include more digital platforms, our marketing mix is shifting to take advantage of this opportunity. This year, we had a new campaign called "Run for ____". In this campaign, we look at a wide range of powerful motivations for why people run, and we feature 13 very personal reflections, all focused on the love and the passion for running.

We are also evolving our TV media. In 2012, we began with Untouchable, an anthemic commercial that captured authentic and memorable moments of that true athlete. Father's Day was the next step in building some emotion around the brand, and we showed how passion for playing sports extends across generations and can be the cornerstone in the relationship between a father and his children. With Come Back Untouchable, which launched during back-to-school, we focused on how defeat can be an incredible motivator. And then finally, The Glove, our holiday campaign, illustrated the importance of the gift of sports and finding that gift that matters.

In 2013, our TV marketing continues to evolve with the next commercial in that series that urges the athletes to be untouchable from day 1. These campaigns have done really well as we build this emotional connection with these kids. The feedback that we've received from these kids, athletes and these parents has just been phenomenal. So what we're doing from a marketing point of view, what we're doing to grow digital and some of the investments that we are making to grow our business, we're very excited about where we think our business can go.

I'll now turn it over to Tim.

Timothy E. Kullman

Thanks, Joe. Looking to our recent financial results, we have successfully grown our top line over the years with our 5-year CAGR for sales at 8%, while our bottom line is growing at an even faster pace at 16%.

On the inventory front, we have been focusing on reducing inventory per square foot. At year-end 2012, clearance inventory was down 14% per square foot. However, we are not done. With system solutions being implemented, we believe there's more opportunity for improvement ahead.

Now looking to return on invested capital. While this metric has improved in recent years, we recognize that we have much opportunity ahead. And to that end, we prioritize our use of our cash as follows. First, we want to invest in our business to develop sustainable and continuing growth, whether that be in adding or investing in stores, eCommerce or new systems. Second, we are returning cash to shareholders. We initiated a dividend program in 2011. Through fiscal 2012, we repurchased 4.1 million shares of our stock in order to offset the dilutive impact from the exercise of a 10-year option set to expire in 2013. We recently announced a new 5-year $1 billion share repurchase plan that is, at a minimum, intended to keep our share count flat. We may use the share repurchase program in the future for similar and/or other reason. And finally, we will consider other investment opportunities from time to time.

Looking to our recent results, in the first quarter of 2013, sales increased 4.1%, driven by the opening of new stores and offset by a 3.8% consolidated same-store sales decline. The gross margin rate increased 8 basis points, and operating profit increased from $95.7 million to $97.6 million, resulting in a 6.7% increase in EPS from $0.45 to $0.48.

Our guidance as of May 21 was as follows. For the second quarter of 2013, we expect consolidated earnings per diluted share to be in the range of $0.75 to $0.77. For the full year, we expect consolidated earnings per diluted share of $2.84 to $2.86. And on a shifted basis, consolidated same-store sales in the second quarter of 2013 are expected to be 2% to 3%. On an unshifted basis, consolidated same-store sales are expected to be 3.5% to 4.5% in the second quarter. For the full year, we anticipate that our consolidated same-store sales will increase between approximately 2% to 3% on top of a 4.3% increase in 2012.

In 2013, we plan to open approximately 40 DICK's Sporting Goods stores, of which 7 are scheduled to open in the second quarter. We also plan to reposition approximately 2 Golf Galaxy stores and relocate approximately 1 DICK's Sporting Goods store this year, as well as open approximately 2 additional True Runner stores and open approximately 2 new Field & Stream stores.

Considering the opportunities in front of us, our planned strategies and our demonstrated ability to execute, we have set the following goals: first, to reach double-digit operating profit margin; second, to triple the 2011 size of our eCommerce business by 2015; third, over time, to grow our store base to 1,100-plus stores; and finally, to grow private brand/private label business to $1 billion in sales by 2017.

This concludes our prepared remarks. Kate, I think I'll turn it over to you.

Question-and-Answer Session

Kate McShane - Citigroup Inc, Research Division

Great. Thank you, and thank you for the presentation. I thought we could start the conversation off by just addressing your current view of the consumer. Can you help us understand who your core customer is today, how maybe that's changed over time and what this customer is looking for from DICK's?

Joseph H. Schmidt

Our focus is really on that core athlete, that outdoor enthusiast. We're focused on that high school athlete. As you think about some of the key brands that are important to our business, Nike, Under Armour, we have some great brand partners that we highlighted in the presentation, they're all around that core athlete and that outdoor enthusiast. And we've talked a little bit about some of these trends that you might see around the fashion side of the business, specifically in some of our mall competitors in the footwear segment, if you will. We typically don't chase a whole lot of fashion. We're very focused on that core athlete and that outdoor enthusiast. So that's kind of the meat in the market for us.

Kate McShane - Citigroup Inc, Research Division

And has the mix of the store changed at all as you've entered into new markets? So you've always had a very big hardline mix, with apparel and footwear being about 1/4 of your business -- each 1/4 of your business. Has that mix changed at all, or do you expect it to change at all in any categories within those bigger categories?

Joseph H. Schmidt

We're making a pretty big investment we have over the last couple of years with this vendor shop-in-shops, specifically with Nike, with Under Armour, with The North Face, a little bit more recently with adidas. So we think the mix, we're trying to drive some of that mix down the middle of our store, if you will, to apparel and footwear. Our investment that we're making in these shops with Nike with over 175 of them today, another 100 that we'll add on this year, the same kind of growth with Under Armour and with adidas and with The North Face. So we think we'll continue to grow that mix around the technical apparel side of our business and footwear as well.

Kate McShane - Citigroup Inc, Research Division

Okay, great. If I can move on to the competitive landscape, obviously, the shop-in-shops that you're doing with Nike and Under Armour have been a big differentiator for your business. I think another big differentiator that we have talked about is how you've been much more focused on local marketing and local team sports and how you don't really see that from anybody else. Can you talk about that a little bit, what your strategy is there as you go into the smaller markets, what you expect to drive from that business?

Joseph H. Schmidt

One of the things that we discussed internally a number of years ago is how do we become relevant in those markets where we do business in. And we said we want to act and behave like we're headquartered in each one of those markets. So it's been a focus of ours over the last 4 to 5 years to really focus on that athlete, in that consumer in those local markets. So it's created a lot of attention inside of our organization. We market very similar, with that thought in mind.

Kate McShane - Citigroup Inc, Research Division

Michele, I was wondering if you could help us reconcile some of that more localization factor with your eCommerce business and how that might be different or how you leverage eCommerce on that strategy.

Michele B. Willoughby

Well, probably the biggest opportunity has been really mining that data that's happening in eCommerce, where we have the ability to offer product across all categories nationwide and then track where the shipments are going. So that can really provide live insight into local market opportunities and translate that into store.

Kate McShane - Citigroup Inc, Research Division

Okay, great. And with regards to the competitive environment, we've seen some changes now that Academy is owned by someone else and they started to expand outside of Texas. Can you identify who your strongest competitor is right now and what you expect to see from the competitive environment over the next couple of years?

Joseph H. Schmidt

Sure. We've talked about Academy as being one of our strongest competitors. As we enter the state of Texas, we knew that Academy had a pretty strong presence in the state of Texas, did pretty well with that consumer in Texas, and we continue to believe that Academy, since the purchase, KKR purchase done a couple of years ago, continues to grow out of Texas. They've moved into the southeast, into the Carolinas, Alabama. And we continue to see pretty consistent growth but nothing out of the ordinary over the last couple of years, pretty consistent 8% growth over the last couple of years. And listen, they're a pretty good competitor. They understand their consumer. I think they do a pretty good job in marketing to that consumer. But as they've started to get out of Texas a little bit, we think it's been a bit more challenging for them to get away from their home state. And we'll see how their growth continues. As far as PSA goes, another, probably, a big competitor of ours. We haven't seen a lot of different behavior out of them over the last couple of years. Their store growth has been pretty minimal. In fact, they've closed a handful of stores over the last couple of years. So those are probably our 2 prime competitors in the full sporting goods side of the business. In the outdoor side, we've seen growth out of Cabela's the last couple of years, and we think Cabela's does a great job with the outdoor category. They've added a couple of new concept stores, one about 80,000 to 110,000 square feet and another at about 40,000 to 50,000 square feet. And we expect that they will continue to grow over the next couple of years. And as far as [indiscernible] and Bass Pro and Gander Mountain is concerned, we've seen a little bit of growth out of them in the outdoor category, given what's going on with guns and ammo, but not as much as we've seen out of Cabela's.

Kate McShane - Citigroup Inc, Research Division

And in that same vein, a lot of who you mentioned as your stronger competitors are traditional brick-and-mortar retailers. What about from a more pure-play eCommerce side? Is there anyone that you have your eye on as things are getting more competitive?

Joseph H. Schmidt

Yes, it certainly does. We've got our eye on the usual suspects. I think it's hard to ignore Amazon. That's someone we keep a close eye on. And the advantage that we have over Amazon is our key brands right now are not selling direct to Amazon, so that's -- and we don't see that changing over the next couple of years. There's no indication that we can expect any different behavior out of our key brands, Nike, Under Armour, to not sell them direct. But we continue to look at our eComm competition as closely as we do our brick-and-mortar competition, and Amazon certainly is probably the biggest in the business.

Kate McShane - Citigroup Inc, Research Division

Okay, great. And in April, you had mentioned, I guess, on the last quarterly call that the commercial real estate environment has started to improve in the last couple of quarters. Can you update us on how the environment looks today and what you're expecting over the next year or so?

Joseph H. Schmidt

Yes, we've seen the construction, new construction over the last, probably, 12 months start to thaw a bit. And new construction primarily around some of these shopping centers, smaller shopping centers, really kind of -- when shopping centers were built, they often were built with phase 2, phase 3 in mind. When the economy cratered back in 2008, phase 2 and phase 3 were mothballed, and we're starting to see that those phases are starting to come alive now. If you look at our new store construction over the last couple of years, it's typically been around 50% new, 50% re-purposing of boxes. And in 2013, we're starting -- we will see a rise in that to about 60%, and we think that will continue over the next couple of years with new construction. We're also seeing some re-purposing of boxes in malls, specifically around Sears. We're seeing some opportunity with Sears. And then what's going on with Best Buy closing some of their bigger stores, 45,000, 40,000 square feet, we think there's some opportunities in re-purposing some boxes there as well. So combination of new construction, re-purposing of boxes and some vacant real estate by some other retailers, we think there's a tremendous opportunity for retail development over the next handful of years.

Kate McShane - Citigroup Inc, Research Division

And then you've recently announced, at least within the last year, that you could expand beyond the 900 doors that you initially thought into 1,100 doors, with that incremental 200 being in some smaller markets. Could you walk us through what you're seeing in those smaller markets that are making it so attractive to expand there?

Joseph H. Schmidt

Years ago, we opened a handful of these smaller stores, about 30,000 square foot stores in some of these smaller markets, and they did pretty well. And when the economy started to get soft in 2008 and new development really started to dry up, we started to revisit the opportunity around these smaller markets. And we've opened a handful of these, probably 10 or so, over the last couple of years, and the smaller markets have done quite well. These smaller markets are probably in the neighborhood of $75,000 to $150,000. The store size in those smaller markets is anywhere from 35,000 to 40,000 square feet. And our experience has been pretty strong, markets like Oneonta, New York, so small college town in Upstate New York. Hilton had smaller market like that, and these stores have done really well. So we're pretty enthusiastic about the smaller market opportunity. As we studied this, we identified an additional-200-store opportunity for us, which now raised our kind of growth rate opportunity to about 1,100 stores. So we continue to be pretty enthusiastic about these stores. Interesting about these stores is they behave a little bit differently based on the marketplace. So if we're in a very rural marketplace, we see an opportunity around that hunt/fish/camp customer. As we get into a more suburban opportunity, maybe an in-field market where we're currently doing business, they behave a little bit more like a typical 50,000 square foot DICK's Sporting Goods store might as far as the categories go.

Kate McShane - Citigroup Inc, Research Division

Okay. And then my final question, just on brick-and-mortar. With this acceleration and with this objective to get to 1,100 doors over the long term, can you help us narrow or at least understand what the eCommerce strategy will be with a brick-and-mortar growth expansion? How are you viewing both growth opportunities?

Joseph H. Schmidt

Well, as I highlighted in the presentation, and I think Tim brought it up as well, we're pretty enthusiastic about the eCommerce business. The beauty of our involvement in the eCommerce business is how we tie it to our brick-and-mortar business. Number one, from a marketing point of view, we have a lot of weapons that we can market our DICK's Sporting Goods eCommerce business through our typical brick-and-mortar marketing channels. The beauty of order-online and pick-up-in-store, which we'll pilot this fall in all of our -- in some stores, we think is a huge advantage over kind of the eComm competitors, if you will, the ability to order a product online and pick it up in the store later that day or that afternoon. We recently went to ship-from-store in all stores, and that has just been fantastic for us. So the ability to tie in our brick-and-mortar business with ship-from-store, giving us the ability to the long tail on inventory and make it more productive for us, the ability to order online and use our store as distribution pickups, we think, is a huge advantage for us to tie the brick-and-mortar business together with the eCommerce business.

Kate McShane - Citigroup Inc, Research Division

Okay, great. You are embarking on quite a few remodel this year?

Joseph H. Schmidt

We are.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And I wondered if you could walk us through, again, what the remodel is going to concentrate on, if it's incorporating any of the changes that you are making towards ship-from-store eCommerce. And are you seeing any kind of comp lift as a result?

Joseph H. Schmidt

Yes, we really look at remodel -- one of the things that -- and I have a lot of fireside chats similar to this and some honest discussion about our business, and one of the things that we've talked about over the years is we don't want to grow up and be a tired old chain. So we invest quite a bit of capital in remodeling our stores. It's pretty important to us to stay current. And we look at remodels a couple different ways. There's a full remodel, where we got the entire store and remodel the whole store, and we have 4 of those going on this year. So it will be soup to nuts -- it will be a brand-new store at the end of the year. And now we also look at these remodel opportunities as partial remodels. And we have 75 stores this year that are going through what we call a partial remodel, really focused on the middle of the store. So we talked a little bit about the shop-in-shops, what we're doing with Nike, with Under Armour. And that's really the focus of our remodel strategy this year is to really cut the middle of the store, give us the portal walls where we can really make a brand presence with Under Armour, with Nike, adidas, The North Face and really focus those brands.

Kate McShane - Citigroup Inc, Research Division

One area of your store that I think is very unique and has been a great contributor to both comp and margin has been the footwear shared service. And I know you've been through a couple of iterations of that as you've tried to get the model right. And I think you're happy with version #3 now. But could you walk us through what you're seeing from that, why it's been a success and, again, how the remodels may be addressing that?

Joseph H. Schmidt

Yes, as Ed and I have talked about not wanting to be a tired old chain someday, we do a lot of testing and we change quite rapidly. If something's working, we try to expand on that to improve it. We take a lot of feedback from our customers, from our associates. And the shared-service footwear is a perfect example of this. We rolled out our first iteration of this 4 or 5 years ago, and it was well received by our consumers. But we got some great feedback to say you can improve this. So we rolled out our second iteration of that not long after. I think the following year, we made some tweaks and changes, learned from that, and then we rolled out our third iteration of that 2 years ago. And we're extremely pleased with our third iteration of this. The feedback from our customers, from our overall satisfaction scores that we read from the comments in store, the feedback from our associates and then just looking at the data, and that's the AURs, the comp lift that we see in those stores after we remodel these stores, it's been pretty strong for us. So we're pretty pleased with the shared-service footwear model. And we continue to invest in that both in new construction and some remodels as we remodel the total store that we'll get this shared-service footwear model as well.

Kate McShane - Citigroup Inc, Research Division

Okay, great. And then I just had 2 more questions, and we can open it up to the audience. I think, Tim, this is more for you. You had guided a $0.12 impact from some of the investments that you're making and a ramp up in CapEx as well. In addition to store remodels and eCommerce going forward, where do you think the level of investment will go? And will it be at a similar level to what we saw this year for the next couple of years?

Timothy E. Kullman

I think over the short term, the next couple of years, you're going to see our continuing investment in the business. One thing adding on to -- not only not wanting to grow up and be a tired old chain, we want systems to continue to develop. We want the stores to continue to develop and heavily investing on the eComm side. But the idea is to make sure that we have sustainable, viable opportunities to continue to grow the business. That also means the infrastructure side. So we carved out the $0.12 for this year. What will be more interesting is outlining some additional investments that you'll see at Analyst Day on September 18, and we'll have more information, particularly on the eCommerce investment, which, over time, particularly over the next 5 years, will be significant.

Kate McShane - Citigroup Inc, Research Division

And you have mentioned that the share repurchase is at a minimum or to keep the share count flat. Are there any circumstances that you can identify where you'd consider accelerating your share buyback?

Timothy E. Kullman

Well, I think yes, our investors look for buying opportunities. If there looks to be a weakness in stock at some point, we will always look at that as a buying opportunity. I think at a minimum, we want to make sure that we are able to keep the share count neutral so that we can produce the appropriate operating results. But we are always looking at opportunities to appropriately allocate our capital.

Kate McShane - Citigroup Inc, Research Division

Okay, great. We have about 7 minutes for Q&A if there are any questions from the audience. Question up in the front.

Joseph H. Schmidt

Go ahead.

Kate McShane - Citigroup Inc, Research Division

I'm sorry, there's a microphone in the back.

Unknown Analyst

I may have missed this, but do you plan any growth through acquisition? There's a lot of regional strong players and some other ones you have mentioned and...

Joseph H. Schmidt

I think over the near term, you should view DICK's Sporting Goods as an organic growth story. It would have to be an awfully strategic, important opportunity for us to consider an acquisition.

Unknown Analyst

Do you see any particular competition from Amazon in any of your areas that you're currently in?

Joseph H. Schmidt

Do you want to take that?

Michele B. Willoughby

No, thanks.

Joseph H. Schmidt

As far as particular area, nothing in particular. We look at our competitors -- as far as all of our categories, the categories that we do business in, we look at all those categories pretty closely with Amazon and with all of our competitors. As I mentioned, some of our key brands today are not selling Amazon direct, and we continue to watch that to see if there are any changes in behavior there. And we don't expect any. We're not seeing any. But as far as key categories in Amazon, anything that has us particularly concerned, no.

Unknown Analyst

So a couple of questions if I can. First, the hired new CFO looks like a little light on retail background. So I'm just curious, and maybe this is more a question for Ed, what the team saw as the strong attributes of the new CFO.

Joseph H. Schmidt

Well, we spent a lot of time. Obviously, replacing Tim is not an easy task. We spent a lot of time looking at opportunities. And we think Andre brings a lot of leadership, a lot of experience, and we think he'll be pretty successful in the role.

Unknown Analyst

Second question. It seems that now, you're at a point where online is driving the lion's share, I guess, with over 100% of the recent comp. And can you just remind us of the profitability implications of the online in light of the agreement with GSI? And then also, as you evolve into pick-up-in-store and ship-from-store and microsite, just remind us the profitability implications relative to the agreement with GSI.

Joseph H. Schmidt

Well, our eCommerce business is not as profitable as our brick-and-mortar business. I think we've stated that with our relationship with GSI, with them doing a fulfillment, we pay a fee for that. We've done a couple of things over the last couple of years to improve the profitability of our eCommerce business. Number one is the mix of our eCommerce business. We continue to work on the mix to some of those higher-margin categories to drive some margin improvement. Second is the levers in which we fulfill our products. So GSI, today, if it's fulfilled out of a GSI warehouse, the rate that we pay GSI is significantly higher than when we fulfill it out of the stores. So specifically ship-from-store, order-online and pick-up-in-store, the margin rates get significantly better. So as we move this business to more ship-from-store, order-online, pick-up-in-store or direct-from-vendor, it gets much more profitable. As we look out over the next couple of years, we think in the next 2 to 3 years, we will be ambivalent as to where that purchase is made, whether it be brick-and-mortar or eCommerce.

Kate McShane - Citigroup Inc, Research Division

We have time for one more question.

Unknown Analyst

I was hoping you'd just explain a little further the Livestrong fitness situation. I mean, this brand evidently is half of your sales there. It's gotten great reviews. I happen to have one of the treadmills [indiscernible]. I just don't understand -- I mean, obviously, they don't manufacture it. They're just a licensee. I don't understand why you can't keep it to a different licensee and keep selling the same products and selling well and getting good reviews. I mean, Susan Komen or RED or something and slap out on the machine instead of the yellow thing.

Joseph H. Schmidt

Livestrong represents about 50% of our cardio business, which is treadmills and ellipticals. And as we stated at the end of our first quarter call, that business was pretty challenging for us. Obviously, we didn't see -- at the time of our commitment with Livestrong, we didn't see the announcement for Lance Armstrong coming. But the feedback inside our stores and the resistance to the Livestrong, it was pretty strong. We had a lot of -- we received a fair amount of comments in our stores from customers about the Livestrong brand. As far as moving forward, where we're taking the business, we're taking it to a national brand in Q3 of 2013, so you're going to start to see us transition to this national brand. We're pretty confident with the national brand, and we think that there's a lot of upside potential in the cardio business based on Q4 and Q1 of this year. So we think that we have a pretty strong solution to the problem.

Unknown Analyst

Just to follow up, are you licensing the national brand?

Joseph H. Schmidt

No.

Unknown Analyst

And manufacturing it by the same person? Because it seems like whoever was manufacturing the equipment, it was well received by both customers and reviewers.

Joseph H. Schmidt

Right. It was fairly well received from a review point of view, but we think that where we're headed with this national brand will be stronger than that. So it's a strong reputation in the brand, and we think it's a big opportunity for us.

Kate McShane - Citigroup Inc, Research Division

Okay, thank you. That brings us to the end of our presentation. Thanks for joining us today.

Joseph H. Schmidt

All right. Thanks.

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Source: Dick's Sporting Goods' Management Presents at Citi's 2013 Global Consumer Conference (Transcript)
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