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Executives

Anne-Marie Megela - Director, IR

Ed Stack - Chairman and CEO

Joe Schmidt - President and COO

Tim Kullman - EVP, Finance, Administration and CFO

Analysts

Matthew Fassler - Goldman Sachs

Robby Ohmes - Bank of America/Merrill Lynch

Michael Baker - Deutsche Bank

Michael Lasser - UBS

Chris Horvers - JPMorgan

Kate McShane - Citigroup

Seth Sigman - Credit Suisse

Brian Nagel - Oppenheimer

Christina Cheng - Susquehana

Sean Naughton - Piper Jaffray

Mark Miller - William Blair

Rick Nelson - Stephens

David Magee - SunTrust Robinson Humphrey

Joe Feldman - Telsey Advisory Group

Sam Poser - Sterne, Agee

John Zolidis - Buckingham Research

Paul Swinand - Morningstar Incorporated

Dan Wewer - Raymond James

Dick’s Sporting Goods, Inc. (DKS) Q2 2011 Earnings Call August 16, 2011 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2011 Dick’s Sporting Goods Earnings Conference Call. My name is Larry and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I’d now like to turn the conference over to your host for today Miss Anne-Marie Megela of Investor Relations. Please proceed.

Anne-Marie Megela

Good morning and thank you for joining us to discuss our second quarter 2011 financial results. Please note that a rebroadcast of today’s call will be archived on the Investor Relations portion of our website located at DicksSportingGoods.com for approximately 30 days. In addition as outlined in our press release a dial-in replay will be available for approximately 30 days.

In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today’s discussion include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which includes, but are not limited to our views and expectations concerning our future results. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to our periodic reports filed with the SEC including the company’s Annual Report on Form 10-K for the year ended January 29, 2011. We disclaim any obligation and do not intend to update these statements.

We have also included some non-GAAP financial measures in our discussion today. Our presentation is the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principles and a related reconciliation can be found on the Investor Relations portion of our website at DicksSportingGoods.com.

Leading our call today, will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our second quarter financial and operating results and discuss our growth strategy. Following Joe Schmidt, President and Chief Operating Officer will outline our store development program. After Joe’s comment Tim Kullman, our Executive Vice President of Finance, Administration and Chief Financial Officer will provide greater detail regarding our financial results.

I will turn over the call to Ed Stack.

Ed Stack

Thank you, Anne-Marie. This morning we announced strong results for the second quarter of 2011, highlighted by the steady increase in both sales and earnings. Our performance during the quarter reflects the continued growth of our stored network as well as the development of our e-commerce business and the healthy expansion of our overall margin rate which were driven by margin growth of approximately 120 basis points compared to the second quarter of last year.

Our consolidated non-GAAP earnings per diluted share for the second quarter of 2011 were $0.52 which represents an increase of 21% compared to the second quarter of 2010 and exceeds our original expectation of between $0.47 and $0.49. Sales for the quarter increased 6.6% compared to the same period last year driven by the growth of our stored network and by 2.5% increase in consolidated same-store sales. Consolidated same-store sales reflects increases across all of our channels with Dick’s Sporting Goods sales up 1.7%, Golf Galaxy up 4 and e-commerce up 31.9%. As far as apparel, footwear and golf were performance leader while the outdoor business declined year-over-year.

The results were fueled by our continued success in driving margins particularly through prudent inventory management, merchandize mix and select store enhancements. We also significantly improved our balance sheet by building our cash position to $626 million at the end of the second quarter up $348 million from the $278 million balance at the end of Q2 of last year.

It’s important to mention we delivered this performance despite some notable business challenges. These included a shorter sports season in the Northeast, Mid-West and Mid-Atlantic region, which were blanketed by extreme cold and wet weather this spring contributing to weaker than expected sales that affected our May business. In June and July, however, we showed acceleration with both months comping above 3%. Also in the quarter we tested reallocating a portion of our marketing dollars dedicated to the outdoor area by transferring them to our footwear and apparel businesses. This definitely improved the footwear and apparel business which helped our overall margin mix, however, it had a bigger than anticipated effect on the outdoor business.

For the third and fourth quarters, we have specific plans to renew the emphasis on our outdoor marketing and expect to regain the market share we lost during the second quarter. Our ability to manage these challenges and still deliver both sales growth and higher margins during the quarter is a result of our success in developing and leveraging our three growth drivers; namely expanding our store network, building and strengthening our e-commerce business, and continuing to focus on margin enhancement opportunities. These three growth drivers are essential to our business strategy and I’d like to review our progress in each of them.

On the store network front, we have always taken a research intensive approach regularly conducting in-depth studies on our industry, consumer demands and regional demographics to identify our growth potential. Our research indicates that we can organically double the size of our Dick’s Sporting Goods store network to at least 900 stores nationwide over time, without the need for an acquisition.

In 2011, we expect to open approximately 36 new Dick’s Sporting Goods stores representing 8% growth rate. In 2012 and 2013, we expect to open stores at a slightly higher growth rate. The strength of our balance sheet provides us the financial flexibility to continue to meaningfully grow our store base. At the same time, we continue to focus our new store productivity and profitability. Our success in this area is reflected in our new store productivity of 95% in the second quarter of 2011.

Moving to our e-commerce business, we view this is an excellent growth vehicle. We have historically maintained a measured approach to growing our e-commerce channel carefully researching the best way to develop it over the long-term. In 2009, we began shifting gears by restructuring our relationship with GSI. Since then, we have developed an e-commerce strategy, designed to offer visitors the same authentic shopping experience they enjoy in our stores.

We are executing the build out phase of this strategy by working to develop new content and capabilities that will help us compete more effectively with online only competitors, as well as taking measures to drive both our profitability and our sales. As a result, we expect our e-commerce business to make a more meaningful contribution to earnings by 2013. Joe will provide you with more detail on our e-commerce initiatives.

Looking now to our third growth driver, we are expecting to expand our margin rates by focusing on three margin accelerators. These include inventory management, product mix and private brands. These margin accelerators are fundamental to our profitability, and we believe our continued focus on them will enable us to reach double-digit operating margins within the next three to five years.

Our first margin accelerator is prudent inventory management. Over the past two years, we have realized dramatic improvements in inventory productivity by developing a better preplanning model, a more efficient allocation protocol, along with a disciplined markdown process. As a result, we have been able to mitigate markdowns at the end of the season and reduce our clearance inventory, which is down 20% compared to last year.

During the second quarter of 2011, we continue these efforts as inventory per square foot declined by nine-tenth of a percent compared to the end of the second of 2010. We’re supporting further progress on our inventory management strategies through several long-term IT and operational initiatives that we expect to generate measurable benefits beginning in 2013.

Our second margin accelerator is product mix. We continue to develop our apparel and footwear businesses, which carries higher margins than most other businesses. We’re doing this through the continued build out of the Nike Fieldhouses at Dick’s Sporting Goods to new Under Armour Blue Chip and All-American shop and a newly developed, North Face Concept stores within our store.

We expect to have approximately 100 Nike Fieldhouses in place by the end of the year and we’ll aggressively build out the Under Armour shops including two recently opened Blue Chip shop in the Chicago and New York markets. We’re also continuing to develop the shared service footwear concept which has performed extremely well, as both comps and average ticket prices have exceeded the performance of the balance of the chain. Today, we operate 92 stores with the shared service model and we’ll continue to open all new stores in this proven format.

The third margin accelerator is our private brand business which today contributes approximately 15% of our total sales volume. We expect to grow our private brand business to approximately 20% over the next five years. Our margin rates are approximately 600 to 800 basis points higher than the products they replace.

This year we launched three new brands, KOPPEN in the outdoor area, Nickent Golf and Nishiki Bike accessories and apparel. All three of these brands have performed very well. These brands along with other private brands of Umbro, Slazenger and Maxfli, Field and Stream, Quest, and others are an important component to helping us expand our operating margins to double-digits in the next three to five years.

As we look at the balance of the year, we’re taking a cautious approach. The uncertain economic environment that has been exacerbated by the political gamesmanship in Washington makes it difficult to predict the future of consumer spending. Understanding and recognizing these challenges, we will concentrate on those elements of our business that we have demonstrated weakened control to deliver steady earnings growth for the third and fourth quarters of 2011.

Specifically for the third quarter of 2011, we expect consolidated earnings per diluted share to increase between $0.24 and $0.26 compared with non-GAAP consolidated earnings per diluted share of $0.22 for the same period of 2010. We expect consolidated same-store sales to be in the range of 1 to 2% for the third quarter of 2011.

Looking to the full-year 2011, we are raising our EPS guidance from between $1.91 and $1.93 to be between $1.94 and $1.96. We expect our consolidated same-store sales to increase 1 to 2% compared with 2010.

On the earnings side, we continue to refine our engine, create new opportunities who are focused on growth and margin drivers and execute well. As a result, we’ve maintained our earnings expectations for the second half of the year despite an uncertain political and macroeconomic environment. We are very pleased with our second quarter of 2011. We have probably the best quality inventory in our history along with a strong balance sheet with no debt and over $600 million in cash and several multi-year growth drivers which combined put us in a solid position to continue to deliver double-digit earnings growth in 2011 and behind.

I’d like to thank all of our associates for their hard work and dedication that are fueling the progress of our company today. Now I’d like to turn the call over to Joe Schmidt.

Joe Schmidt

Thanks, Ed. At the end of second quarter of 2011, we operated 455 Dick’s Sporting Goods stores with 25.1 million square feet. As Ed mentioned, we continue to be pleased with the performance of the new Dick’s Sporting Goods stores posting new store productivity of 95% in the second quarter. This compares with 67.4% in the second quarter of 2010. The detailed calculation of new store productivity can be found in the tables section of the press release we issued this morning.

For the full-year 2011, we now expect to open approximately 36 new stores resulting in a unit growth rate of approximately 8% for our Dick’s Sporting Goods chain in 2011 compared with a 6% growth rate in 2010. We anticipate opening 18 of these stores in the third quarter. We also plan to remodel a total of 14 stores this year. To support our anticipated store growth and better leverage our infrastructure particularly on the West Coast we plan to open a new 600,000 square foot distribution center in 2013. When this new DC is up and running our network is anticipated to be able to support 750 stores.

In addition to the growth opportunity of our overall store base, we have much opportunity in our e-commerce business as well. We are concentrating our attention on three core areas; content, profitability, and sales. As far as content goes we are working on website design and technologies to enrich content and functionality of our website. Home page and category pages continue to be refreshed with a focus on a cleaner look and marketing alignment.

We are fueling our e-commerce profitability through several measures such as refining our fulfillment capabilities, upgrading our technology and a continued shift of mix toward the higher margin categories.

Finally, for the remainder of this year and into 2012, we plan to accelerate our focus on driving e-commerce sales through a more robust marketing strategy. We will utilize all traditional marketing channels to emphasize our website more prominently as well as increasing our spend for digital, social and mobile marketing.

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

Tim Kullman

Thanks, Joe. Sales for the second quarter of 2011 increased by 6.6% to $1.3 billion compared with a same period a year ago. Consolidated same-store sales increased 2.5%. Dick’s Sporting Good same-store sales increased 1.7%, Golf Galaxy increased 4%, and e-commerce business increased 31.9%. The increase at Dick’s Sporting Goods stores was driven in part by a 2.5% increase in sales per transaction partially offset by a 0.8% decline in traffic.

Consolidated gross profit of $401 million was 30.69% of sales or 132 basis points higher than the second quarter of 2010. This increase was driven primarily by an increase in merchandise margin. Merchandise margin increased as a percentage of sales primarily due to continued and effective inventory management, (inaudible) less clearance activity compared to last year, and a change in product mix with relative increases in athletic apparel, footwear, and accessories and a decrease in the outdoor category.

SG&A expenses were $285.7 million representing 21.87% of sales compared with 22.13% of sales in last year’s second quarter. This leverage of 26 basis points was primarily due to a decline in store’s payroll and advertising partially offset by an increase in administrative expenses. Also in the second quarter, we recognized a $13.9 million gain when our shares in GSI were liquidated in connection with eBay’s acquisition of GSI.

On the balance sheet, we ended the second quarter of 2011 with $626 million in cash and cash equivalent, and we do not have any outstanding borrowings under our $440 million revolving credit facility. Last year we ended the second quarter with $278 million in cash and cash equivalents and no outstanding borrowings under the facility.

Inventory per square foot decreased by 0.9% at the end of the second quarter of 2011 as compared with the end of the second quarter of 2010. Net capital expenditures were $44 million in the second quarter of 2011, or $53 million on a gross basis, compared with the net capital expense of $27 million or $37 million on a gross basis in the second quarter of last year.

For the third quarter of 2011, we anticipate our gross profit rate to increase year-over-year primarily as a result of merchandise margin improvement as our margin accelerators gain traction, partially offset by occupancy cost deleverage. We expect SG&A to deleverage slightly as a percentage of sales in the third quarter of 2011 as compared with the third quarter of 2010. As a result of the gross profit rate expansion and expense dynamics, we anticipate that operating margins will increase in the third quarter of 2011 compared with the third quarter of 2010.

Diluted shares outstanding are expected to be approximately 126 million compared with 121 million in the third quarter of last year. Earnings per diluted share are expected to increase $0.24 to $0.26 from $0.22 last year. For the full-year 2011, we are increasing anticipated earnings per diluted share from a range of $1.91 to $1.93 to a range of $1.94 to $1.96. Specifically, we anticipate that our gross profit rate will increase year-over-year primarily as a result of improving merchandise margins driven by our margin accelerators.

We expect that our occupancy cost as a percentage of sales will remain relatively flat in 2011 compared to 2010, and we anticipate SG&A expenses to leverage in 2011. For the full-year, diluted shares outstanding are expected to be approximately 126 million compared to 122 million last year. Net capital expenditures for the full-year are expected to be approximately 197 million or 252 million on a gross basis.

Net capital expenditures for 2010 were $128 million or $159 million on a growth basis. The increase in capital expenditures between 2010 and 2011 is a result of our efforts to support our growth drivers, including opening a greater number of new stores, completing store remodels and implementing systems as we discussed earlier.

To sum up, we are very pleased with our performance for the second quarter of 2011. We posted increases in sales and we delivered profitable growth that exceeded the EPS guidance. We also made marked progress in developing all of our growth drivers providing productive profitable stores, building our e-commerce business and expanding our overall margin rates. As a result, we are well-positioned to continue to grow our business.

This concludes our prepared remarks, we’ll be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Matthew Fassler of Goldman Sachs. Please proceed.

Matthew Fassler - Goldman Sachs

I’d like to start out by addressing the difference in the outdoor category, difference in sales performance if that is between the outdoor category and the other categories of the business. Can you give us some directional sense of how big the spread was between those two big pieces of the business?

Ed Stack

Between the company as a whole in the outdoor category.

Matthew Fassler - Goldman Sachs

That’s a fair way to look at it, sure.

Ed Stack

It was pretty meaningful, Matt. Sure, I mean, as you saw, what we disclosed in terms of our overall comp for the company at 2.5%. We were looking at numbers about twice that to three times that on the outdoor categories including hunting and larger outdoors and outdoor accessories.

Matthew Fassler - Goldman Sachs

When you say numbers two to three times, do you mean declines?

Ed Stack

Decline. Yes.

Matthew Fassler - Goldman Sachs

So, I’m not sure how bigger piece of the business that is, if you could either kind of size that for us or then maybe just solve for what the rest of the business did? Then I have a follow-up related to that.

Tim Kullman

Directionally you can say that if those areas were flat, I don’t have this exactly, but it would have been very close to if not exceeded our comp guidance that we laid out there.

Matthew Fassler - Goldman Sachs

Let me then move on to kind of the second part to the question. I guess if we move pass to the macro issues, if there is any high-level concern that we’ve heard feedback on, some of your most important vendors like Nike and Under Armour have delivered very strong numbers, and your comp performance over the past couple of quarters hasn’t really been consistent with what one would expect from the category. So I guess as we talk about what you did in outdoor versus the rest of the business, rest of the business being where those vendors are concentrated, would that business be closer to something like mid-singles and perhaps, a bit more consistent with the numbers that your vendors are showing?

Ed Stack

The apparel and footwear portion of our business has significantly outperformed the comp guidance as a whole or the comp performance as a whole.

Matthew Fassler - Goldman Sachs

And what’s your sense from your own data and from talking to your vendors about market share thinking about those other retail competitors and also as you think about competing channels such as Vendor Direct?

Ed Stack

We feel that we’re in those areas we are probably maintaining market share. Some of the Vendor Direct issues, with other retailers I don’t think we’re losing market share. From a Vendor Direct standpoint with what Nike is doing with Vendor Direct, Under Armour indicated that their Vendor Direct business was up approximately 80%, that’s certainly a concern of ours and one that we’re not pleased with what’s going on from the vendor community.

Operator

Our next question comes from the line of Robby Ohmes of Bank of America/Merrill Lynch. Please proceed.

Robby Ohmes - Bank of America/Merrill Lynch

Ed, could you talk a little bit more about just how you are feeling about back-to-school, and I understand the macro point of view, but is there a merchandising aspect as you look to the balance of this year, the fall season, and holiday season that makes you concerned that the comparisons are tough to lap or that will restrain the comp momentum. So, maybe some more flavor outside the macro on why it is that comp momentum might not stay above 3%, which I guess is what you were seeing in the last couple months?

Ed Stack

There is nothing that really makes us concerned of what’s happening that we’ve seen today. We are concerned about what’s going on in this political environment, as I talked with some other people a while back and the food fight that we see on cable TV every night and exasperated by this political gamesmanship in Washington, I think it’s made the consumer kind of cautious. They are going to wake up and they are going to see what’s happened to the stock market. They are going to see their 401(k)s have taken a pretty big hit in the last month. I’m not sure how they are going to react to that. So, you could say, we’re being cautious but I think in this environment we live in today, both the global macro markets and kind of some of the things happening here at home it’s not a bad time to be cautious.

Robby Ohmes - Bank of America/Merrill Lynch

And just a follow-up question, is there any update to the price increases you’re seeing people like Nike push through and the timing of when we would start to see that hit in footwear and apparel in your stores from the big vendors.

Ed Stack

Nothing different than what’ve talked about in the past.

Operator

Our next question comes from the line of Michael Baker of Deutsche Bank. Please proceed.

Michael Baker - Deutsche Bank

I guess more specific, and I hate to keep talking about August, but is that 1 to 2% comp, is that because you think your consumers might wake up and be concerned about 401(k) and see strong sales or is that actually what you’re seeing in the first half of August? I think it’s an important distinction.

Ed Stack

We have never commented about what’s happening within a quarter, but as how I just answered Robby’s question that we think based on what’s happening in the geopolitical environment globally right now and what’s happening at home with the political issues we’ve got coming out of Washington right now, I think it’s a good time to be conservative.

Michael Baker - Deutsche Bank

That helps a little bit. And then two more from me, one this reallocating of the advertising, so I guess it hurt the outdoor. Presumably it helped the footwear. Was it a net negative, however, and then I guess related to that as you shifted back the other way do you think I guess presumably you expected the healthy outdoor will it hurt the footwear business in the third quarter.

Ed Stack

It was not a net positive. It definitely had, as I said, a greater than expected impact on the outdoor category. We think that we can fine tune this that we don’t see a negative on the apparel and footwear business, but as we reallocate this, we think that we can do a better job in the outdoor category and get back some of that market share we unfortunately lost in the second quarter.

Michael Baker - Deutsche Bank

If I could ask, slide in one more, quick one. How was your NHL licensed apparel business in the northeast in the quarter?

Ed Stack

At the end of the second quarter?

Michael Baker - Deutsche Bank

Yes, specifically May and early June, around the Bruins championship.

Ed Stack

It did a lot better than if Vancouver won.

Operator

Our next question comes from the line of Michael Lasser of UBS. Please proceed.

Michael Lasser - UBS

Is it safe to infer to that the traffic decline in the second quarter was all due to the softness in the outdoor categories? The traffic numbers are marking a stark contrast to what we saw from last year. So, when should we expect to see that reverse?

Ed Stack

Can you repeat the first part of that question, please?

Michael Lasser - UBS

Sure. The 80 basis point decline in traffic transactions and was that all due to the weakness in the outdoor categories?

Ed Stack

The outdoor category is an important traffic driver of the business, and based on what we saw we don’t keep traffic by category. You can’t do that, but we would expect that that was a big part of that as we reduced that marketing in the outdoor category.

Michael Lasser - UBS

And then more broadly speaking, so you anticipate that will reverse as the outdoor categories will improve.

Ed Stack

You’ll see much different marketing from us in the third quarter this year, from an outdoor standpoint than we did in the second quarter.

Michael Lasser - UBS

And then back to the margin question, can you quantify how each of the three margin accelerated strategies performed and contributed to the overall margin result in the second quarter?

Ed Stack

We’re not going to talk about those specifically in that level of detail. But the private brand had some acceleration this year, not meaningfully, but the private brand aspect would be the least impactful as of right now. But we expect that to become more impactful over the next three to five years.

Michael Lasser - UBS

Last one from me is, on the inventory, it’s managed pretty well. Do you think that there was any negative impact to the sales results from being out of stock in any particular area?

Ed Stack

We think there may have been some impact, but we don’t think it was terribly meaningful.

Operator

Our next question comes from the line of Chris Horvers of JPMorgan. Please proceed.

Chris Horvers - JPMorgan

As you think about the monthly comp trends that you alluded to during the quarter, did outdoor not turning positive as you proceeded through the quarter? So I’m just trying to bear out really the weather impact to the other categories versus the outdoor? Then I have a follow-up on gross margin.

Ed Stack

It got slightly better, but it didn’t get positive.

Chris Horvers - JPMorgan

Okay. And then on the margin side, it sounds like all that 120 was merchandise margin expansion and not really a leverage on occupancy or fixed costs. I know you mentioned outdoor seems like a one-time boost to that. So, maybe of that 120 just try to get a sense of what would persistent to the back half, from a mix perspective, how much was that outdoor portion?

Tim Kullman

This is Tim, Chris. First, the merch margin improvement was the majority of the increase, but we did leverage occupancy for the quarter.

Chris Horvers - JPMorgan

Then how much of that was simply that this underperformance in outdoor that you don’t expect to persist?

Tim Kullman

Well, if you think about the outdoor category is particularly in the hunt in outdoor categories for large, they have lower margins than certainly the apparel and the footwear business have. So that certainly help a great deal, that product mix help a great deal on the increase in merch margin for this quarter.

Chris Horvers - JPMorgan

Then, finally, it seems like correct me if I’m wrong seems like you are sort of implying flattish comps in the fourth quarter even granted it is an uncertain environment, but there are certain products that you see coming down the pipeline or certain maybe marketing and merchandising plans that you could point to that allow you to overcome that steep comp acceleration in the 4Q?

Tim Kullman

It’s a big number last year that we’ve got a comp. We think that this political environment we’re just uncertain as to how this is going to play out. I think there is going to be more rhetoric coming out of Washington than less. So, we just think it’s a good time to be cautious right now.

Chris Horvers - JPMorgan

That’s just more of it’s an anticipation of what could happen. Is that fair?

Ed Stack

Well, it’s an anticipation of what could happen based on kind of what we’re seeing coming out of there in the past. I believe it’s going to get worse before it gets better in Washington and how that affects the consumer, I don’t know. But I don’t think it’s necessarily going to be positive.

Operator

Our next question comes from the line of Kate McShane of Citi Investment Research. Please proceed.

Kate McShane - Citigroup

Ed, we’ve heard your comments on the Vendor Direct business before, but I wondered, just based on what you said today, things have gotten incrementally tougher in regards to that conversation and aside from the Shop N Shop, Nike, Under Armour and I guess The North Face now are building out in your stores, how do you see this playing out?

Ed Stack

I think I was just trying to answer that question of what’s happening with Vendor Direct and how we feel about it. Our position hasn’t changed. It’s something we try to work through with the vendors. They are going to that’s something that’s in the environment today it’s not going to go away and we need to manage through that and we’re doing that. Do I wish that they weren’t selling direct to the consumers? Yes. I wish they weren’t selling direct to the consumer. Do they wish, we didn’t have any private brand business? Yes, they wish we didn’t have any private brand business. So it’s kind of quid pro quo that it’s usually on every agenda that we have with our major partners.

Kate McShane - Citigroup

Okay. I think it was Under Armour that highlighted on its second quarter call that it had lessen sales on the table by not getting retailers product in time. Did this impact your comp at all in the second quarter?

Ed Stack

No, we were fine with Under Armour.

Kate McShane - Citigroup

Okay. And then my very last kind of bigger picture question, if there is the potential for a double-dip over the next couple of quarters. I would argue that you’re a little bit better positioned than the last time because you don’t have as many high ticket treadmills and electrical machines and things like that. Is that a good characterization and how would you describe Dick’s for the next couple of quarters and what you’re selling versus the last downturn?

Ed Stack

I think you’re right. So, some of those higher ticket items, of the fitness category is not as important to us as it was a couple of years ago when the world was coming to an end. If we do go into double-dip, I do think, we’re much better positioned than we were a few years ago and the fact that our inventory is in much better shape. We’ve got much leaner inventory. The quality of the inventory is much higher. As I said, our clearance inventory is down 20% versus what it was last year which was down pretty meaningful from what it was the year before. So, our inventory is in great shape and we’ve got an extremely strong balance sheet with no debt and over $600 million sitting in cash. So, I think, we are in great shape to weather a double-dip if it does come and that certainly seems to be getting more and more press each day, the possibility of that.

Operator

Our next question comes from the line of Gary Balter of Credit Suisse. Please proceed.

Seth Sigman - Credit Suisse

This is Seth. I just wanted to clarify on the marketing expenses. The higher expected spending in the second half in outdoor category. Are you just shifting the mix of spending back to this category away from footwear and apparel or should we be thinking about higher marketing expenses overall for the remainder of the year?

Ed Stack

We are not looking at meaningfully higher marketing spend and we’re not shifting it away from apparel and footwear, we’re just going back to a bit more of a traditional mix of our outdoor category where the third and fourth quarter are two largest quarters for the outdoor business.

Seth Sigman - Credit Suisse

Just a follow-up, in the golf business, how did you feel about the performance of that business? It looked like it was pretty good given the weather and declining rounds played. Could you just discuss some of the drivers of that business at this stage?

Ed Stack

We’re relatively happy with our golf business. The TaylorMade R11 Driver continued to perform very well. Golf apparel continued to perform very well, so overall at both Dick’s and Golf Galaxy, we’re relatively pleased with our golf business.

Operator

Our next question comes from the line of Brian Nagel of Oppenheimer. Please proceed.

Brian Nagel - Oppenheimer

Just a quick question. In your prepared remarks you commented on the uptick in new store productivity which is pretty remarkable in the quarter. As you look at the data more granularly, was there something, so to say quirky in those numbers, or was that truly underlying improvement in the performance of the stores that you opened most recently?

Ed Stack

There’s nothing quirky about it and if you take a look at our new store performance over the last several quarters, you’ll see it has improved quite a bit over four or five quarters prior to that.

Brian Nagel - Oppenheimer

Then a follow-up to that and with your real estate strategy, kind of longer term in nature question, but can we hear, obviously there’s still a lot of dislocations out there in retail real estate. Are you seeing indications of some better real estate deals as you’re looking out to your new store openings, next year or the year after that, so on and so forth?

Ed Stack

We continue to see the market improve slowly. (inaudible) continue to be our area of focus and growth. We continue to look at the opportunity such as ultimate electronics and obviously with the most recent announcement with Borders, there is more boxes to take a look at. We’re more optimistic around spending with these landlords as we’re seeing more scrape and build opportunity within existing power centers. Roughly 45% of our stores this year are new builds compared to about 15% last year. So, we’re fairly optimistic around the growth opportunities with these existing boxes and the market is starting to improve.

Operator

Our next question comes from the line of Christina Cheng of Susquehana. Please proceed.

Christina Cheng - Susquehana

Can you give us some color as to regionally how the stores have performed maybe California versus Texas versus the other regions?

Ed Stack

We’ve not talked about that for competitive reasons. We continue to be pleased with our performance in Texas, which has been pretty consistently over the last several quarters, but that’s as granular for competitive reasons as we’d like to get.

Christina Cheng - Susquehana

Fair enough. And then as far as for some of your markets that have started back-to-school, do you see any meaningful difference between how they are comping versus markets which haven’t entered back-to-school yet?

Ed Stack

Again, we’ve indicated on this call and prior calls that we just don’t talk about what’s going on inside a particular quarter?

Christina Cheng - Susquehana

Okay. Just looking forward to second half, I mean you had a really strong fourth quarter last year. How should we kind of look at how you are planning to drive comps because I know you had increased your advertising spend meaningfully during fourth quarter last year? Is that sort of a game plan this year?

Tim Kullman

Well, we’ll be relatively comparative this year to last year at the comps at north of 8% last year, our difficult comps to go up against, and as we’ve indicated in the past, we took full advantage of the weather that we had last winter, and we’re hoping it’s another cold winter.

Christina Cheng - Susquehana

How do you feel about the winter categories from what you’ve seen in your buying meetings? Are they better, is it broader in terms of different brands?

Ed Stack

We have broadened some of the better brands that we carry such as Marmot, Mountain Hardware, Patagonia, Spyder. We just went through walk through of the outdoor set in our office here yesterday, and I would tell you, I think it looks great. I think it looks better than last year, but with that being said, we still need the weather to cooperate and be cold in order to kind of get the kind of sell-through at the margin rates that we want out of this. So it’s an important variable that we don’t control.

Christina Cheng - Susquehana

Finally, as far as SG&A is concerned, 3Q and 4Q, you start to anniversary some of these higher spending for the infrastructure and the rationalization of that. Do you expect to see some kind of benefit from that going to the second half of this year?

Ed Stack

We expect to deleverage in Q3 and leverage in Q4 and leverage for the entire year.

Operator

Our next question comes from the line of Sean Naughton of Piper Jaffray. Please proceed.

Sean Naughton - Piper Jaffray

In terms of the back-to-school, is there anything you’re doing differently in terms of the merchandise presentation in order to capitalize on those students? And then secondly, is there any way you can comment on what’s happening inside of the basket in terms of AUR versus units?

Ed Stack

We’re not doing anything meaningfully different this year versus last year from a merchandising standpoint. We are from a promotion standpoint or community involvement standpoint, where we’ve instituted pace which is protecting young athletes through concussion education, which has gotten great success. We’ve got Jerome Bettis working with us. Our intent is to donate a dollar for every pair of shoes that we sell to impact, which is the concussion baseline testing company headquartered here in Pittsburgh. Our goal is to test a million student athletes on this baseline concussion testing and it’s gotten great reviews and we’ve gotten great feedback from consumers, from coaches, from everybody involved in this program. So, that’s one thing, we’re doing meaningfully different. We are also increasing the number of Nike shops that we’re putting in our stores which is extremely helpful.

Sean Naughton - Piper Jaffray

Okay. And then any comment on the basket, what’s happening in terms of pricing versus units? I know traffic was down a little bit, but anything on that 2.5% increase that you saw at Dick’s Sporting Goods?

Tim Kullman

As we mentioned that, the ticket is up to 2.5% as a component of our comp and we’ve got a slight increase in overall AUR.

Sean Naughton - Piper Jaffray

Okay. And then lastly, the topic of inflation obviously it seems to have dissipated a little bit. Can you comment on anything that you’re seeing as you’re looking out to the fourth quarter and the first quarter of next year in terms of those negotiations with vendors, what is the inflationary environment look like on those goods right now?

Ed Stack

As I said earlier, it’s no different than what we had talked about in the previous couple of quarters. We don’t really see any meaningful inflationary pressures until Q1 of next year.

Sean Naughton - Piper Jaffray

One last question, just on the cash is there any plans for the usage on that cash other than remodels and reinvesting in the business right now?

Ed Stack

As of right now, no. The political and economic environment out there I think it is a good time to sit with cash in the balance sheet and see what happens in the world.

Operator

Our next question comes from the line of Mark Miller of William Blair. Please proceed.

Mark Miller - William Blair

One of your mass merchant large box competitors that reported earnings today, commented that the expansion of assortment has helped them in sporting goods. And I think outdoor being one of the better categories for them. Is this something is contributing to the market share change at Dick’s and do you view this as a material competitive change?

Ed Stack

I really don’t, I think the issues that we had at Dick’s Sporting Goods in our outdoor category are self-inflicted.

Mark Miller - William Blair

Okay. And then clarity on the second half in maintaining the EPS outlook on a lower comp. Can you just give us a sense I guess for what is changed then below sales. Are you adjusting the overall outlook for operating expenses, or are you more optimistic on gross margin?

Ed Stack

Well I think it’s a combination of the two. So I think, as Tim said we can leverage the SG&A number for the entire year and in the fourth quarter. We do feel that based on some of the three margin drivers we’ve talked about that we’ll still have margin rate expansion, and a big part of that is driven by the quality of the inventory. We also feel that the mix, there is we’re in a very good environment right now for apparel and footwear. We think that we are in a good environment from an apparel standpoint in the winter categories, as we go into the fourth quarter.

Operator

Our next question comes from the line of Rick Nelson of Stephens. Please proceed.

Rick Nelson - Stephens

I like to follow-up on the golf category, if you could tell us how the Dick’s stores performed in relation to Golf Galaxy?

Ed Stack

The Dick’s stores were slightly below Golf Galaxy, but not meaningfully so kind of similar to what it’s been over the last couple of quarters.

Rick Nelson - Stephens

I noted at Golf Galaxy, you’re not planning store openings I think previously you had guided to three like to get your thoughts?

Ed Stack

Yes. We had some sites we had looked at that we thought we were going to get done, that quite frankly we weren’t able to come to terms with the landlords on the terms of the lease, terms and conditions of the lease. So, we’ve got a very disciplined real estate strategy and we felt that it was appropriate to walk away right now and we’ll continue to look at Golf Galaxy opportunities.

Rick Nelson - Stephens

How do you think about Golf Galaxy. I know you mentioned Dick’s you plan to accelerate the store openings next year. How are you thinking about Golf Galaxy?

Ed Stack

Can you ask that again please?

Rick Nelson - Stephens

You had mentioned an acceleration in the growth rate in the Dick’s stores?

Ed Stack

Yes.

Rick Nelson - Stephens

Next year. How are you thinking about Golf Galaxy store growth?

Ed Stack

I think we’ll continue to look at opportunities for Galaxy I think you can expect it to be much more conservative comparative to our Dick’s store growth.

Operator

Our next question comes from the line of David Magee of SunTrust Robinson and Humphrey. Please proceed.

David Magee - SunTrust Robinson Humphrey

Just a couple of questions, first on the online strategy. How much traction you think the category is getting now online and how impactful is the Vendor Direct in that regard? Lastly, as a piece of that how happier are you all with the ShopRunner partnership?

Ed Stack

We think that this is going to gain more traction as we continue to grow this business. As we had indicated, we wanted to really make sure that we had the right content and understand how to drive sales and be profitable and we were kind of moving in that direction, so we think that this is getting more traction. And we’re still evaluating ShopRunner, so I think it’s too early to comment on it.

David Magee - SunTrust Robinson Humphrey

Are the vendors a big piece of that e-commerce activity today?

Ed Stack

Not sure what you mean by that.

David Magee - SunTrust Robinson Humphrey

In terms of selling direct, are they using their websites and had a big part of that share?

Ed Stack

Yes, the vendors continue to sale on a direct basis and you saw Under Armour’s comment that their direct-to-consumer business was up by approximately 80%, so yes, they continue to participate in the market share.

David Magee - SunTrust Robinson Humphrey

And then secondly, what are you assuming with regard to having to be promotional in the second half of the year, you are showing good gross margin numbers now, given your outlook has been sort of down be with the macro. Do you have much built in terms of becoming more promotional possibly in the second half of the year?

Ed Stack

We don’t think we need to be anymore promotional or not meaningful more promotional than we’ve been in the past and one of the reasons why we don’t think we need to do is the high quality of our inventory. As I said our clearance inventory is down 20%. Our inventory only rose less than a 1% and comp’s up 2.5% and the inventory has been down in each of the last couple of years, so our quality of inventory is very, very good and we don’t think the products, that we have in stock, are going to require any meaningful promotional activity.

Operator

Our next question comes from the line of Joe Feldman of Telsey Advisory Group. Please proceed.

Joe Feldman - Telsey Advisory Group

I wanted to ask about the in-store shops a little bit more. You have the Nike Fieldhouse and now Under Armour. I guess, a quick question is more about, are you taking more space from other parts of the store or is it just more like a better version of what you’re doing on the current pads within stores? Then what kind of lift you might be seeing to sales and some of those operating metrics or are you seeing more people shop the rest of the store or are they just shopping that one component of the store when they’re coming in?

Ed Stack

Under Armour and Nike and North Face have gotten a bit larger space within our apparel area. We haven’t meaningfully taken space away from other areas of the store. So, they have gained some market share space in the store of our apparel area, if you will. As far as guiding and talking about for competitive reasons what the change has been, we haven’t done that, but it continues to be meaningful both in a sales and a margin rate standpoint because of the better quality of inventory that we have there. It’s been very good for both us and Nike and we expect it to be for Under Armour also.

Joe Feldman - Telsey Advisory Group

I guess have you, with the build-out of some of these shops, like are you seeing an incremental customer or is it even more penetration with that guy that used to come in and buy Nike product anyway?

Ed Stack

I think they are buying more products. I think some market share is shifted to Nike and Under Armour from some other vendors because of these shops.

Joe Feldman - Telsey Advisory Group

And then also, if I can ask, with e-commerce, I understand that’s obviously for big part of the strategy and bringing it in-house, makes a lot of sense, better alignment. I guess wanted to better understand, are you seeing again, kind of that core customer cross shopping or spending more or are you attracting a new customer. And also kind of wanted to lay in a social media component because I think your customer that younger more fit person might be pretty good target for social media and how are you trying to leverage that?

Ed Stack

I think you’re seeing a little bit of both. I think you’re seeing some new customers looking at our website and then navigating to our store and I think you’re seeing a lot of our existing customers, check our website as well. I think depending upon what you read more and more customers are spending time online doing their research before they go to stores to understand the product and certainly you are seeing that with ours. As far as the younger customers as I mentioned in our prepared remarks, we’re going to continue to up that marketing spend around some of the social media aspects of our business and we think that’s certainly an opportunity to grow the business as well.

Joe Feldman - Telsey Advisory Group

If I could just follow-up with one another, just, are you seeing from a competitive standpoint, any change in the environment. I know we’ve kind of danced around a lot of different ways, but just anything new promotionally or from the competition, some of the big box guys or even just the corresponding good retailers?

Ed Stack

Well, really not. We watch that pretty closely and we’re not seeing anything abnormal. We’ll continue to watch it as we proceed in the third and fourth quarter, but we’re not seeing anything meaningfully different.

Operator

Our next question comes from the line of Sam Poser of Sterne, Agee. Please proceed.

Sam Poser - Sterne, Agee

I have got three questions. On the Q1 call when asked about current trends, you said that after the spring season was a return to expected sales performance and that made it sound like May was probably comping up three based on what the guidance was. So, could you sort of clarify what that meant relative to how the quarter turned out?

Ed Stack

Well, if you remember what happened in May is that we had indicated at that the call I believe that, the most recent few weeks had gotten much better and then the weather turned back again and May was not a very good month. You go back and take a look at rounds played, you look at what happened with baseball games and that changed, the weather changed again and May was relatively difficult month. As we said June and July comp did north of 3%.

Sam Poser - Sterne, Agee

With your accelerating store opening in the next couple of years, is that a more real estate becoming available, are you altering where you’re looking to open stores or could you talk about the sizes of the stores you’re planning on opening and so on?

Ed Stack

The stores will be relatively the same size as we have been opening. From an accelerated standpoint, I said in the remarks that we would open slightly more stores than we have in the past, but we’re not modifying our real estate strategy, our discipline around real estate. Our real estate group has just done a very good job of getting out there on the ground and flushing out these pieces of real estate where we can open successful stores in. So, we don’t expect it to be any different than the group of stores that we just opened up that opened up at 95% new store productivity rate.

Sam Poser - Sterne, Agee

And then lastly, in the Shop N Shop, the Nike shops or the I guess, the pending The North Face shops and Under Armour and so on, are you getting vendor supported staffing, are they working with you sort of like the department store, cosmetic department kind of staffing situation, I mean are they providing or co-oping personnel with you in those departments?

Ed Stack

In some of the brands that we’ve done this with, we’ve had some help from the staffing standpoint or merchandising standpoint and we expect that will continue.

Sam Poser - Sterne, Agee

Could you talk a little bit about how that’s set up?

Ed Stack

For competitive reasons, I don’t think we want to do that and probably with the brands, we prefer we not do that also.

Operator

Our next question comes from the line of John Zolidis of Buckingham Research. Please proceed.

John Zolidis - Buckingham Research

Number of my questions have been asked already. Can you just comment on the NBA strike, if the NBA does not have a season, do you anticipate that that will have much of an impact on your business? Then second, can you just update us on the shared service with the footwear, is that been rolled out to the whole chain at this point? Thanks.

Ed Stack

If there is an NBA strike we’ll be very disappointed from a fan standpoint, but it won’t have any meaningful impact on our business. From a shared service footwear standpoint and in the prepared remarks we indicated that there is 92 of those in our stores today and we expect to open all new stores under that format.

John Zolidis - Buckingham Research

Can you just comment on the performance of the footwear category in the 92 stores where you have that format setup? How does it compare to the rest of the chain?

Ed Stack

As I said in the prepared remarks, we’re not commenting specifically, but it is comped higher and it’s had an average, unit retail higher than the balance of the chain.

Operator

Our next question comes from the line of Paul Swinand of Morningstar Incorporated. Please proceed.

Paul Swinand - Morningstar Incorporated

I wanted to ask a little bit of a question about the private label, private brands. I noticed you’ve mentioned you’ve got a few new ones like Nishiki. When you roll that out, is that something where you’ve done a lot of merchandising and sourcing or is it something that you just license from an existing vendor and they are substantially responsible for the product development and the merchandising?

Ed Stack

There is a difference between exclusives that the brands provide us that they design the product with our input, but they are primarily responsible for the design and the manufacture of the product. Nishiki, KOPPEN that we talked about, Nickent, the Field & Stream, Umbro, all of those. Those are all products that we design and source ourselves.

Paul Swinand - Morningstar Incorporated

And you’re exclusive with them, right?

Ed Stack

We are exclusive with the vast majority of those. Umbro still has a brand in the United States that is slightly different than what we are doing. But there is some Umbro product in other stores. As far as Field & Stream in the outdoor categories that’s exclusive to us, Nishiki is exclusive to us, Maxfli is exclusive to us.

Paul Swinand - Morningstar Incorporated

Just trying to think a little longer term about the running category. We keep hearing running is good, running is strong, things are driving through running. Can you tell us more about who the customer is or what do you think that is driving running and how sustainable it is?

Ed Stack

Well, I think there’s two components to running. There is that core enthusiast runner who is running for fitness, if you will, and for wellness. Then there is also the running silhouette that we characterize as a fashion performance business, which would be Nike Free, Reebok Flex, which people are running in those shoes but the vast majority of those shoes are being worn by people who like the look of the running silhouette. We feel that that’s going to continue. We feel that is very strong. You’re right, and we expect it to continue for some time into the future.

Paul Swinand - Morningstar Incorporated

Is that segment that like the running silhouette, is that a younger customer or an older customer, or a little bit across the board depending on the model.

Ed Stack

It crosses generations today. It’s the most popular silhouette out there today.

Operator

Our next question comes from the line of Dan Wewer of Raymond James. Please proceed.

Dan Wewer - Raymond James

So, Ed in the golf category which is one of your stronger categories during the quarter, it’s also at its seasonal peak in terms of sales contribution during the second quarter, the next two quarters. There’s really not a lot going on within that category. On the other hand you’ve disclosed that your outdoor business dropped about 7%, but it becomes seasonally a lot more important to Dick’s during the next six months. Do those changes in the seasonality of those two categories also impact the more cautious sales guidance for the back half of the year?

Ed Stack

No. I think, as I said, I think the issues we had on the outdoor category are really self-inflicting. We pulled back some marketing expense there, reallocated it someplace else, and we’re not going to do that in the third and fourth quarter. You are right, third and fourth quarter are an important part of our outdoor category and we will be spending marketing dollars in the third and fourth quarter consistent with what we’ve done in the past. So, we expect to get that market share back.

Dan Wewer - Raymond James

So, you believe that outdoor category can grow far in the second half of the year just like golf did during the second quarter?

Ed Stack

We think we’ve got the ability to take back that market share that we lost, yes.

Dan Wewer - Raymond James

Then the other question I had, you’ve reiterated that the price increases Nike and Under Armour had announced a quarter ago remain intact and I guess those will be fully in place by the second quarter or the spring of 2012. You had also indicated that consumer demand probably weakens given all the shenanigans in Washington. So, it’s a very precarious situation for the industry, isn’t it, if we’re going to have weakening demand in the face of higher price increases, who wins that tug of war?

Ed Stack

Who wins that tug of war?

Dan Wewer - Raymond James

Yes.

Ed Stack

I don’t think anybody does. That’s why we’ve given relatively cautious guidance.

Operator

With no further questions, I would like to turn the call back over to Mr. Ed Stack.

Ed Stack

I’d like to thank everyone for joining us on our second quarter call, and we look forward to talking to everyone when we report our third quarter results. Thank you.

Operator

Thank you. This concludes today’s conference. Thank you for your participation. You may disconnect at this time. Have a great day.

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Source: Dick's Sporting Goods, Inc. CEO Discusses Q2 2011 Results - Earnings Call Transcript
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