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

Q2 2007 Earnings Call

August 21, 2007, 10:00 AM ET

Executives

Dennis Magulick - Director of IR

Edward W. Stack - Chairman and CEO

William J. Colombo - President and COO

Timothy E. Kullman - Sr. VP and CFO

Analysts

Sean McGowan - Wedbush Morgan Securities, Inc.

Michael Baker - Deutsche Bank Securities, Inc.

Mitchell Kaiser - Piper Jaffray

Robert F. Ohmes - Banc of America Securities

Hardy Bowen - Arnhold & Bleichroeder

Kate Mcshane - Citigroup

Jonathan Cramer - Cowen & Co.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

Sujata Shekar - CIBC World Markets

David Cumberland - Robert W. Baird & Co., Inc.

Dan Wewer - Raymond James & Associates

David Magee - SunTrust Robinson Humphrey

Reed Anderson - D. A. Davidson & Co.

N. Richard Nelson - Stephens, Inc.

Robert Simonson - William Blair

Christopher Svezia - Susquehanna Financial Group

James Chartier - Moness, Crespi, Hardt

Michael Keara - Merrill Lynch

Ralph Jean - Wachovia Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2007 Dick's Sporting Goods Incorporated Earnings Conference Call. My name is Shawn and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today's call Mr. Dennis Magulick, Director of Investor Relations. Please proceed.

Dennis Magulick - Director of Investor Relations

Thank you and good morning to everyone participating in today's conference call to discuss the second quarter financial results for Dick's Sporting Goods. 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 detailed in our press release, a dial-in replay will also be available for approximately 30 days.

In order for us to take advantage of Safe Harbor rules, I would like to remind you any projections or statements made today reflect our current views with respect to future events and financial performance. There is no assurance that such events will occur or any projections will be achieved. Our actual results could differ materially from any projections due to various risk factors, which are described from time to time in our periodic reports with the SEC.

Leading our call today will be Ed Stack, Chairman and CEO. Ed will discuss our second quarter financial and operating results and review the guidance contained in our press-release. Also joining us this morning are Will Colombo, President and Chief Operating Officer; and Tim Kullman, Senior Vice President and Chief Financial Officer. Bill will highlight our second quarter store openings and provide an update on our plans for a third distribution center. Tim will then review in more detail our financial results. And now I would like to turn the call over to Ed Stack.

Edward W. Stack - Chairman and Chief Executive Officer

Thank you Dennis. I am pleased to report the results of our second quarter. A quarter in which we exceeded our guidance for both comp store sales and earrings. This quarter we delivered net income of $48 million or $0.83 per diluted share as compared to our guidance of $0.74 to $0.77 per share and $0.47 last year. A very strong top line performance was the most significant contributor to our earnings greater than guidance. Further the strength of our business resulted in stronger cash flow and therefore lower borrowings and a revolving line of credit and lower interest expense. Total sales for the quarter increased 38% to over $1 billion.

At Dick's stores comp sales increased 7.2%. Adjusting for the shift in the retail calendar comp store sales at Dick's increased 5.8%. I am very pleased with our performance in the second quarter which is on top of a 6.5% comp sales gain last year and is approximately 200 basis points ahead of our guidance.

During the quarter we saw increases across most of our businesses including golf, athletic apparel, footwear, and the outdoor category. At Golf Galaxy stores comp sales increased 4.7%. On a shifted basis, pro forma comp sales at Golf Galaxy stores were 5.5%. I am very pleased with the performance of our golf business which outpaced the overall company this quarter. We delivered strong results at both Dick's and Golf Galaxy in the biggest golf period of the year. Our merchant teams maximized our opportunities, capitalizing on new technologies and managing inventories appropriately. We believe that out two retail formats position us to continue to capture market share in the golf industry.

Our private label businesses represented 17.6% of sales in the Dick stores versus 17% last year. Seasonally, our second quarter is typically the highest penetration for private label and is the result of higher penetration in some seasonal businesses. On a year-to-date basis, private label sales represented 15.9% of sales versus 14.9% last year. For the total year 2007, we expect private label sales to represent 15% of sales versus 14.1% in 2006. We've recently partnered with several key brands and have introduced exclusive products under the Slazenger name in golf and tennis and Umbro in soccer. We've also introduced several of our Slazenger products into the Golf Galaxy stores and we're very pleased with the results.

We're increasing our earnings guidance for the total year 2007 and providing our initial guidance for Q3. For the year, we now expect earnings per diluted share of approximately $2.47 to $2.50 a share. This represents an increase of $0.10 from our previous guidance and now indicates an approximately 23% increase versus 2006. We expect comp sales at Dick stores to increase approximately 2% in 2007 on top of a 6% gain in 2006.

For the third quarter 2007, we expect to earn approximately $0.09 to $0.12 per diluted share compared to 14% in Q3 of last year. The year-over-year comparison is impacted by several factors. On the top line the shift in the 2007 retail calendar, which positively impacted quarters one and two this year, is offset in Q3 and Q4. Secondly, last year's third quarter benefited from some very favorable cold weather in the last weeks of the quarter.

Finally from an EPS perspective the inclusion of Golf Galaxy is approximately 2% dilutive in the third quarter. We are expecting comp sales at Dick stores to decrease approximately 1% to 3% in Q3. On a shifted basis, we are expecting comps at Dick's stores to be approximately flat to negative two.

Our business delivered a very strong second quarter. We exceeded our expectations as the result of strong sales across many categories and solid cash flow. Golf Galaxy delivered in their important second quarter and inventories are well positioned as we enter the second half of the year. Our increased expectations for the total year 2007 of an approximately 23% earnings improvement, and positive comp sales of 2% on top of the 6% gain last year are further testament of our confidence in the sustainable profitable growth of our business. At this time, I would like to turn the call over to Bill.

William J. Colombo - President and Chief Operating Officer

Thanks Ed. We opened 6 new Dick's stores in the second quarter and two new Golf Galaxy stores. All of the new Dick's stores were added to existing markets in Charlotte, North Carolina; Chicago; Dallas; Long Island; Millville, New Jersey; and Nashville, Tennessee. Our new store in Long Island is a two level store. Golf Galaxy stores were opened in new markets of Sacramento and San Diego, California. At the end of the second quarter, we operated 315 Dick's Sporting Goods stores with 17.8 million square feet, and 77 Golf Galaxy stores with 1.1 million square feet. We expect to open 45 new Dick's stores and 16 new Golf Galaxy stores in 2007, most of which we expect to be open at the end of the third quarter. Approximately, 40% of the new Dick's stores this year are in new markets.

I am pleased to announce our plans to open our third distribution centre which will be located in Atlanta, Georgia. This distribution centre will be approximately 650,000 square feet similar in size to our two existing distribution centers and have the capacity to service approximately 210 stores.

We expect the Atlanta distribution center to be operational at the end of 2008 at which point our total network capacity will be 670 stores. Much of the build-out cost associated with this distribution center will be financed through leases thereby minimizing our net capital expenditures. The location and capacity of this distribution center will support our growth for the next several years, especially as we grow deeper into key southern markets like Florida and Texas. The State of Texas will be an area of focus for us for the next few years.

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

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

Thanks Bill. Sales for the quarter increased 38% to over $1 billion with the comp sales gain at Dick's stores of 7.2% or 5.8% on a shifted basis. Higher price points and a 1% increase in transactions on a shifted basis accounted for the comp sales gain. Cannibalization impacted comps by approximately 1% similar to recent levels. Gross profit was $299 million increasing 122 basis points to 29.5% of sales. This increase was driven by expanded merchandize margins and better freight and distribution expenses resulting from initiatives to increase our efficiencies in these areas. We also achieved occupancy leverage resulting from two consecutive years of positive comp store sales and the magnitude of Golf Galaxy's contribution in their seasonally large second quarter.

SG&A expenses of $213 million or 21% of sales and 70 basis points lower than last year's second quarter driven by leverage of payroll and store expenses and once again the magnitude of Golf Galaxy's contribution. Operating income increased $37 million or 82% to $83 million. As a percent of sales, operating income increased 198 basis points. Net income for the quarter increased 87% to $48 million.

Let's move to the balance sheet. On a per square foot basis, inventory increased 2% as compared to last year when excluding Golf Galaxy. Including Golf Galaxy in both years, inventory per square foot decreased 2%. We ended the quarter with $52 million in outstanding borrowings on our $315 million line of credit as compared to $41 million in outstanding borrowings last year.

The strength of our business has allowed us to repay much of the $147 million in borrowings resulting from our acquisition of Golf Galaxy in February. Our average borrowing rate for the quarter was 6.7%, reflecting a LIBOR plus 125 basis points. Our expectation continues to be that we will end the year with no outstanding borrowings.

Our recently renewed credit facility will reduce our borrowing rate to LIBOR plus 75 basis points and provides for an additional $100 million in borrowing capacity up to $450 million. The new facility expires in 2012. We expect net capital expenditures of approximately $150 million in 2007, or approximately $175 million on a gross basis. Our store development program is an important element to our success and our new stores continue to perform well. New store productivity for Dick stores was greater than 90%, in line with historical levels.

I like to make a few additional comments on our guidance which I had outlined earlier and which we first discussed in last year... in last quarter's call. For the full year 2007 we expect earnings per diluted share to increase approximately 23%, despite having one fewer week and being up against the favorable impact of the Chicago Bears and Indianapolis Colts Super Bowl run in 2006. We estimate the combination of these two factors contributed approximately $0.09 to our 2006 earnings.

From quarterly earnings per share perspective, there are several factors influencing our growth rate throughout 2007. Earnings per diluted share increased 78% in the first half of this year. This increase is due to the growth of the Dick's business, a shift in the retail calendar and the inclusion of Golf Galaxy whose largest portion of annual earnings occurs in the second quarter.

As a result of the extra week in the Bears and colts Super Bowl runs in 2006, the retail calendar shift and the effect of Golf Galaxy, we expect earnings per diluted share to be down slightly in the back half of 2007 as compared to 2006. The Dick's Sporting Goods portfolio of businesses are healthy and performing well. We experienced increases across most of our businesses in the second quarter and our strong cash flow is contributing to the increased earnings expectations in the back half of 2007. We have reflected these trends in our guidance, providing for a 23% increase in earnings per diluted share in 2007.

This ends our formal comments. At this point operator, I would like to open the line for questions and answers.

Question And Answer

Operator

Sure. [Operator Instructions]. Your first question comes from the line of Sean McGowan with Wedbush Morgan. Please proceed.

Sean McGowan - Wedbush Morgan Securities, Inc.

Thank you. Firstly a question regarding the new distribution center opening. When do you expect that to have any adverse impact on earnings ahead of the opening or around the time of the opening and then secondly related to that when would you expect it to start providing some positive leverage?

Edward W. Stack - Chairman and Chief Executive Officer

We expect in the first year would have a very slight impact but by the second year as we realign stores, we are going to be in good shape.

Sean McGowan - Wedbush Morgan Securities, Inc.

When you say a first year, do you mean 2008 or the first year after it's open.

Edward W. Stack - Chairman and Chief Executive Officer

2008.

Sean McGowan - Wedbush Morgan Securities, Inc.

Okay. And then second question, is there any impact in any of your markets either in the second quarter or the third quarter expected from either new sales tax holidays or shifts in sales tax holidays that you can measure?

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

There has been a few shifts here and there, but nothing meaningful.

Sean McGowan - Wedbush Morgan Securities, Inc.

Okay. That's it from me. Thank you.

Operator

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

Michael Baker - Deutsche Bank Securities, Inc.

Hi. Thanks guys. So, two questions: one, the comp in the third quarter, I understand the calendar shifts, I understand the tough comparison, but so you are up against a nine, I mean, jeez, you are up against a 6.5 in the second quarter and you still comped north of seven or north of five with the adjustments. So the third quarter being guided negative, is it because of the weather at the end of the third quarter last year that you talked about? Is it... there's some trend that you have seen towards the end of the second quarter which sounds like consumers are weak, generally speaking, or is there something else we need to think about there? Then my second question would be on Golf Galaxy, it sounds like you paid it off a little bit... the debt a little bit quicker than expected, yet you are only $0.02 accretive, I am wandering as if you could square that for me. Thanks.

Edward W. Stack - Chairman and Chief Executive Officer

As far as the second quarter, if you remember we talked about at the first quarter call that our comps were less than 1% in the first quarter and we indicated that there were a number of golf courses that didn't open up. There were a number of leagues that postponed the start of little leagues and huge soccer leagues. And we though that there would be some bounce into the second quarter, we weren't sure how much. We... there was a bigger bounce than we had anticipated which was part of the help in the second quarter.

The third quarter issue is it is the calendar shift and is that cold weather we had at the end of the third quarter last year which we called out in our third quarter call last year that we had taken full advantage of the cold weather that we had and moved up deliveries of Under Armour ColdGear, Nike products, the North Face products and we called this out in the quarter of just how we did take full advantage of the weather that was given to us. As far as any trend in towards the end of the second quarter, we have seen no issue with any sales trend that would make us think there's some fundamental issue with our business. The trend at the end of the second quarter was very good also.

Michael Baker - Deutsche Bank Securities, Inc.

Okay, great. That's helpful.

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

To answer your question on the dilution for Golf Galaxy, the performance of the Dick's business is what we are indicating on the strong cash flow. We are being cautious on the second half of the year, because the Golf Galaxy business is the weakest in the second half of the year.

Michael Baker - Deutsche Bank Securities, Inc.

Okay. But is it fair to say that you did pay off the debt associated with the Golf Galaxy quicker than expected?

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

That is true.

Michael Baker - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

Your next question comes from the line of Mitch Kaiser with Piper Jaffray. Please proceed.

Mitchell Kaiser - Piper Jaffray

Thanks guys. Nice quarter.

Edward W. Stack - Chairman and Chief Executive Officer

Thank you.

Michael Baker - Deutsche Bank Securities, Inc.

Obviously, the gross margin trends have been very favorable and I understand that Golf Galaxy has contributed to some of that due to the seasonally strong part of the business. But could you talk more broadly about kind of how you see gross margin trends playing out, and particularly I know you've talked about the transition from private label to private brands kind of within the context to where you are thinking in terms of that program and the impact on gross margins might be?

Edward W. Stack - Chairman and Chief Executive Officer

We continue to see gross margins positively impacted in three categories. As we continue to gain scale from a buying leverage standpoint with our vendors, we have been able to do a better job there. We have also talked that systemically we have been able to do a better job, mitigating markdowns in the backend by planning our inventory better and you can see that on a pro forma basis including Golf Galaxy in both years that our inventory is down 2% versus last year. We have done a much better job clearing inventory and done a better job of allocating inventory into stores which has helped to mitigate markdown pressure on the back end. And then also the continued... increase penetration of private label and private brands into our business has helped leverage our gross margin and has helped... positively impacted that, along with the comp gain that we had in the second quarter that helped leverage some of our operating expenses... occupancy costs, etc.

Mitchell Kaiser - Piper Jaffray

Okay. At this point do you feel that you have been able to recognize a lot of the synergies... purchasing synergies on the Golf side or is that something that we should look for more next year?

Edward W. Stack - Chairman and Chief Executive Officer

We still feel that the majority of that is going to start coming into next year. There was... we'll get some of that a bit in the fourth quarter. But the vast majority of that will come next year as we develop the programs from a private label standpoint where Golf Galaxy do some things that the Golf Galaxy management team wants to do inside the business with apparel. So, most of that is going to come into next year.

Mitchell Kaiser - Piper Jaffray

Okay thanks guys, good luck.

Edward W. Stack - Chairman and Chief Executive Officer

Thanks.

Operator

Your next question comes from Robbie Ohmeswith Banc of America Securities. Please proceed.

Robert F. Ohmes - Banc of America Securities

Good morning, nice quarter guys. Just two quick questions, first on the Field & Stream announcement I think was yesterday, the day before on the licensing side. Is there anything else that might be in the works or any categories on a private label side, that you could see doing more licensing like that, Ed?

Edward W. Stack - Chairman and Chief Executive Officer

Well, we've actually had Field & Stream for a while, we just broadened it... we just broadened this agreement with Field & Stream. We have done a couple of other things, we have got the exclusive rights to design, source and sell Adidas baseball products in the United States including gloves, bats, batting gloves, catchers' equipment, training aids, So, we did this deal with Adidas also. So, that's another one.

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

And we... Robbie, we are looking at a couple of other ones that for competitive reasons and we are in negotiations with right now that we were not able to talk about. But we are looking at a couple more.

Operator

Your next question comes from Hardy Bowen with Arnhold & Bleichroeder. Please proceed.

Hardy Bowen - Arnhold & Bleichroeder

That's pretty close. Good quarter. Ed the gross margins for the second quarter were less than the gross margins of the first quarter, I think that's the first time in history that that's happened, was that because we had cold weather early in the quarter. So, we ended up, somewhat more markdowns as a percent of sales? Why would that be?

Edward W. Stack - Chairman and Chief Executive Officer

Give me the question again Hardy?

Hardy Bowen - Arnhold & Bleichroeder

Yes, the gross margin in the second quarter was lower than the gross margin in the first quarter. I think it's always been higher in the second quarter than the first quarter in previous years. I was wondering if... we had a lot of cold weather, and I know the sales were postponed by that, if that had an influence on the gross margin in the second quarter, or is this something that we are going to have in the future, I guess is the question?

Edward W. Stack - Chairman and Chief Executive Officer

Couple of things that happened. We worked from a clearance standpoint, and moved a lot of clearance product out of the... we were more aggressive from a clearance standpoint in the second quarter than we have been in the past, and you can see that with the... our inventory levels at 2% below last year. We are very pleased with what we did from a clearance standpoint. Our merchant team has just done a great job there, and then also in the second quarter, the golf business is a bit of a less... less of a margin rate than the Company as a whole.

Hardy Bowen - Arnhold & Bleichroeder

Right, sure.

Edward W. Stack - Chairman and Chief Executive Officer

With Golf Galaxy being included in this, that had some pressure on the gross margin rate, that you see. But it certainly helped impact our overall earnings.

Hardy Bowen - Arnhold & Bleichroeder

And I guess assumptions going in the third quarter for weather is just normal weather, average over the last couple of years, is the way we would look at this?

Edward W. Stack - Chairman and Chief Executive Officer

Yes absolutely, we didn't... the big pop that we called out on our third quarter call last year of that cold weather, that really helped to drive Under Armour Mocks, Nike... similar products from Nike that we are not planning on having that this year, but we are planning to have a more seasonable weather pattern.

Hardy Bowen - Arnhold & Bleichroeder

Okay. And with private label being 15% of sales are we thinking that's high enough or we might go somewhat further or we just want to do more exclusives to capture this kind of thing in a different kind of way?

Edward W. Stack - Chairman and Chief Executive Officer

We expect that it can probably go higher than that. We've guided to 15%, so we are not going to be guiding to any further number than that. But some of the things that we've done with some of our main vendors, with some of the licensing agreements that we've done is... the Adidas one I talked about; Nike, a couple of them, we think that this exclusive and private brand product can move up past that 15% which we think will continue to help expand margin rates.

Hardy Bowen - Arnhold & Bleichroeder

Okay. Good quarter.

Edward W. Stack - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line Kate Mcshane with Citigroup. Please proceed.

Kate Mcshane - Citigroup

Hi. Thank you. It sounds like there was improvement in your footwear business during the quarter. What was this driven by and have you seen any pick-up in women's athletic footwear?

Edward W. Stack - Chairman and Chief Executive Officer

The footwear business as a whole was really quite good and the women's athletic footwear business has been a bit better, but its still not... it's still not as robust as it was a few years ago with the introduction of Nike Shox, etc. But the women's business as a whole has been quite good. The athletic portion of it has still been a little bit softer.

Kate Mcshane - Citigroup

Okay. Thanks and then can you talk a little bit about the competitive environment and what you are seeing there. Some of your competitor have not had a successful quarter or outlooks as you have. And I wondering if you were seeing any more price competition in the market and then also wondered if there are any signs that things maybe changing at the sports authority. Now that the company has been private for over 15 months?

Edward W. Stack - Chairman and Chief Executive Officer

Yes, from a competitive situation pricing, we don't see any irrational pricing out there to-date and we really haven't seen much of a difference in sports authority since they have gone... since the company has become private.

Kate Mcshane - Citigroup

Okay thank you.

Edward W. Stack - Chairman and Chief Executive Officer

Welcome.

Operator

Your next question comes from the line of Jon Cramer with Cowen. Please proceed.

Jonathan Cramer - Cowen & Co.

Hi guys. I just wanted to see what your outlook is for both the footwear and apparel categories. Specifically, what key drivers you see for those segments?

Edward W. Stack - Chairman and Chief Executive Officer

We think that the footwear category, we're still quite bullish on the footwear category. Around the outdoor category. The Crocs have continued to do quite well. We continue to be enthusiastic around the training category from an athletic standpoint. And from the apparel standpoint, technical apparel still continues to perform extremely well driven by both Nike and Under Armour and the early indications are the product from the North Face which we've indicated we think the North Face is one of those brands that can really help drive sales in the future, they have been very positive also.

Jonathan Cramer - Cowen & Co.

Any new releases coming out for the back half of the year in any of those categories?

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

The releases, I mean there's new products that are out from Under Armour, some additional products that we're pleased with early results and we're enthusiastic about them. Nike's cold water product will be... is coming out, we like how that looks. And the North Face products, the second year of the bionic, the soft shell products continue to be gaining strength. So, we are real pleased with the product offering that's on the floor right now.

Jonathan Cramer - Cowen & Co.

Okay, thank you.

Operator

Your next question comes from the line of Jeff Sonnek with FBR. Please proceed.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

Thank you and congratulations guys. Can you give us traffic ticket please for comps?

Edward W. Stack - Chairman and Chief Executive Officer

Sure. The traffic was increased on a shifted basis 1.1% and ticket was 4.7% on an un-shifted basis. We were at 2.5% increase in traffic and 4.6% increase in ticket.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

Thanks. And then can you give us, a sense of how inventory flows through for the balance of this year. I guess we kind of have modeled last year with the Golf Galaxy. But should we expect this to continue to trend lower on a per store basis or per foot?

Edward W. Stack - Chairman and Chief Executive Officer

We don't see any different trend in our inventory. We have got no trend modeled differently then the way it's laying out right now.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

Which will imply further inventory leverage?

Edward W. Stack - Chairman and Chief Executive Officer

Or the same inventory leverage. I am not going to say we are inventory... that we are going to leverage anymore, but it's going to be consistent inventory leverage.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

And then do you care to kind of characterize, how you see the back half playing out just in terms of kind of the margin structure, 3Q versus 4Q? Just directionally gross margin versus SG&A for example?

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

Let's do it this way. In Q3 as you can see with our guidance at 9% to 12%... $0.09 to $0.12, excuse me, with potentially negative comps, there's going to be very... it's going to be very difficult to leverage operating expenses. So, most of the contribution for Q3 will come through gross margin improvement. In Q4 with more sales, we will have a slight contribution from operating expense leverage. But, still majority of the contribution for the fourth quarter will come from gross margin enhancement.

Jeff Sonnek - Friedman, Billings, Ramsey & Co.

Fantastic. Thank you.

Operator

Your next question comes from line of Sujata Shekar with CIBC World Markets. Please proceed.

Sujata Shekar - CIBC World Markets

Yes, Sujata here. Good morning.

Edward W. Stack - Chairman and Chief Executive Officer

Good morning.

Sujata Shekar - CIBC World Markets

My first question was on this... the increased trend that I see from private label into exclusive brands. What is the difference in your... in the economics of the two, as you tie-up with more and more of these exclusive brand arrangements?

Edward W. Stack - Chairman and Chief Executive Officer

The private brands and private label margin rates compare to the products that they replace are going to be roughly the same right now, roughly 600 to 800 basis point difference. With private brands, they are more recognizable by nature and we are able to move the average unit retails up on private brand product versus private label product.

Sujata Shekar - CIBC World Markets

Okay. My second question was on Golf Galaxy's new stores in California that you mentioned. Are they going to just test the market there or do you plan to aggressively open up stores in that state?

Edward W. Stack - Chairman and Chief Executive Officer

The stores that we put into California have opened up quite well. Very pleased with them, and you can expect to see more stores in California.

Sujata Shekar - CIBC World Markets

Okay. And then the third question I had was related to soccer, the category. You have invested a lot in soccer, in the marketing side and in inventory. Do you see the benefits of that coming in already, or what's the status there?

Edward W. Stack - Chairman and Chief Executive Officer

Yes we do. This is really the second year of our meaningful soccer push, and we're... it was a very successful last year. We continue to get more traction with that enthusiast soccer player as average unit retails in our soccer shoes have gone up. We are very pleased with what's going on from a soccer standpoint. And we have also developed and licensed the Umbro brand in the United States. So, we are the exclusive supplier of Umbro product in the United States and that we design and source our self, and that program has been very successful. We introduced at this spring. We are getting a big push on it right now for the back-to-school and fall soccer season, and are very pleased with the results we are having in our soccer program overall, and in particular Umbro soccer program.

Sujata Shekar - CIBC World Markets

Okay, very good. And then my last question was on the fitness side. Obviously that's more important in the second half of the year, and you had mentioned that you were going to be making some changes in reacting to the external market environment. Could you share some more of that with us?

Edward W. Stack - Chairman and Chief Executive Officer

Sure. You will start to see some of those changes on the sales for now. There has been a bit of an improvement in the fitness business from a sales standpoint, although we're... we still feel that we have a ways to go. We indicated that we thought we would see the softness through the second or third quarter, and as we get into the fourth quarter, which really kicks off the fitness business, we are anticipating to see some improvement.

Some of the products that we have got coming into the market are some different designed treadmills that have more entertainment build into the treadmills and elliptical machines that are iPod compatible, TV compatible. We have done some really terrific things in the strength category with some new machines and we are still optimistic about the fitness business going into the fourth quarter.

Sujata Shekar - CIBC World Markets

Okay. Thank you very much. That's all I had.

Edward W. Stack - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line David Cumberland with Robert W. Baird. Please proceed.

David Cumberland - Robert W. Baird & Co., Inc.

Thank you. Can you comment on how you feel about your recent marketing efforts, including changes versus your past approaches and also your marketing plans for the second half?

Edward W. Stack - Chairman and Chief Executive Officer

We are obviously quite pleased with the marketing programs that we put in place for the... as you can see from the results in both the first quarter and the second quarter. So, those efforts that we put in place have paid off, we are really quite pleased with them. And you will similar marketing efforts in the back half of the year to what you saw in the first half of the year. And as we move forward into next year, you will see a further reduction in print advertising and continued increase in the TV market and direct mail, the direct-to-consumer marketing.

David Cumberland - Robert W. Baird & Co., Inc.

My other question. In which categories, maybe other than fitness did you see relative weakness and what are your initiatives to improve results in those areas?

Edward W. Stack - Chairman and Chief Executive Officer

Other than really the women's athletics footwear business which really wasn't that weak, we didn't see much in... we didn't see much weakness. I think that our entire team, the merchandising team, marketing team, store operations, allocations, they have really done a great job of looking at places to grow the business in this difficult environment and they really done a wonderful job. And other than fitness, there is really nothing that comes to mind that's meaningful that would be... that there was a difficult business.

David Cumberland - Robert W. Baird & Co., Inc.

Thanks. Well done.

Operator

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

Dan Wewer - Raymond James & Associates

Yes, thanks. Bill you had noted that Texas is going to be an area of focus for Dick's going forward.

William J. Colombo - President and Chief Operating Officer

Yes.

Dan Wewer - Raymond James & Associates

Do you think that we are going to see a faster rate of unit growth in Texas than in Florida?

William J. Colombo - President and Chief Operating Officer

I think it would be close... I mean both areas are of focus of ours. Texas has obviously moved up a little bit. We... I talked about the distribution center, the third one opening in Atlanta. We have been for a while working on our supply chain network and have already started to investigate our fourth distribution center and right now are preliminarily... that's looking like it's going to be in Texas.

Dan Wewer - Raymond James & Associates

Okay. That builds me a follow-up question. I can you figure out why you would locate a distribution center in Atlanta to support the Texas market? So... as you get a critical mass in Texas then you will look at DC in that region.

Edward W. Stack - Chairman and Chief Executive Officer

Absolutely.

Dan Wewer - Raymond James & Associates

The second question I had on the Golf category. Are you seeing stronger demand in golf footwear and apparel than you are in equipment?

Edward W. Stack - Chairman and Chief Executive Officer

We are seeing it across the board in Golf. The apparel business has been quite good. The equipment business has really been quite good, also driven by the new technology of the high MOI drivers. And I think that some of the marketing that we did on the golf channel was certainly helpful with that. The TaylorMade quake [ph] spot that we did featuring Justin Rose was a terrific, was a terrific spot and drove a lot of that higher MOI driver.

Dan Wewer - Raymond James & Associates

Now that is a terrific ad and it is seen nationally even though Dick's today is a regional company. You alluded earlier to opening Golf Galaxy stores now as far as California. At some point do you ask yourself, do we need to start using a co-branded marketing strategy to leverage these national ads like you are doing on the golf channel for the Golf Galaxy business as well as Dick's?

Edward W. Stack - Chairman and Chief Executive Officer

Yes. We have talked about that. We are not sure where that's going to go, but right now we will continue to market these brands independently. The national exposure that we are receiving with the ads that we are doing, have really helped us as we enter new markets. Some of the markets in Florida that we've opened up, some of the new markets that we will be opening up has really given our brand some recognition that in the past it hadn't had when we opened up in new markets.

Dan Wewer - Raymond James & Associates

Do you think that alluding to the seasonality of Golf Galaxy in the third quarter; is that business more seasonal than the golf business in Dick's?

Edward W. Stack - Chairman and Chief Executive Officer

I would say that it is right now because Golf Galaxy has more stores kind of north of the Mason-Dixon Line, if you will. As the Golf Galaxy management team continues to roll out stores, the majority of the rollout is going to be in the markets where you can play golf 10 to 12 months out of the year and that would provide some less seasonality to the Golf Galaxy business as we go forward.

Dan Wewer - Raymond James & Associates

Okay. And then as a last question I had, during the month of July in our store visits we saw more in-store clearance markdowns in the past, but on the other hand it appears that you are not using the tent sales and the sidewalk sales like you have in the past. Was that a strategy that was successful and would you expect continuing that next year?

Edward W. Stack - Chairman and Chief Executive Officer

It was very successful. We did the clearance in-store as opposed to going out in the tents, that certainly saved us some expenses associated with actually renting the tents, the payroll savings of moving product in and out of the tent each day. So that is a strategy going forward. It was... we were able to do this with our merchant team and our operation team really working the inventory situation and having less clearance this year that we've had in the past. So, we didn't feel like we needed to go out to the tents and it was absolutely the right thing to do. So, yes that's what you would expect to see in the future and that's why when you walked into the store, you felt there was more clearance this year than last year, because it was all in the store and not spread out into the tent also. But in effect, it was really less clearance. Our clearance inventory today on a per-square-foot basis is approximately 5% less than it was last year.

Dan Wewer - Raymond James & Associates

That's amazing. Great, I appreciate the help.

Edward W. Stack - Chairman and Chief Executive Officer

Sure.

Operator

Your, next question comes from the line of David Magee with SunTrust Robinson Humphrey. Please proceed.

David Magee - SunTrust Robinson Humphrey

Yes, hi good morning, good quarter. Just a quick question, the new store productivity seems... is very impressive and being achieved at the same time and more and more stores are being opened farther afield. That has been seen as a risk factor I guess as you move farther from the East-Coast and your stores doing very well, are you finding that the geographic differences to be less maybe than folks thought of five years ago or is the competitive environment maybe a little less intense as you move westward?

Edward W. Stack - Chairman and Chief Executive Officer

Actually no, I think that geographic diversity and seasonal diversities that has been in this business for a longtime is still there. I think we've just done a better job of managing to it, we've got a new store opening team that gets out into the markets before the store is opened, bringing back information to the merchandizing group as to... and the planning group as to what sports are important with the seasonality of that is. We continue to open stores in markets and test them and understand that seasonality and those geographical differences, as we did in Florida. We opened up... we had two stores in Florida for about 24 months; understanding the differences in Florida versus other areas, and now we've rolled out and we've got over six stores in Florida continuing to ramp Florida up and that new store productivity in Florida is terrific. The same in Texas, we had the two Galyan's stores... former Galyan's stores in Texas. We indicated that Texas would be a state that we wouldn't start really developing until about now, we're in the process of doing that. We just opened another store in outside Dallas and continued to understand those differences and we are ready to roll the state of Texas and to roll the state of Florida right now. And we have a tremendous amount of data available to us so that we don't make those mistakes. And we've just done a better job of managing getting out in front of this.

David Magee - SunTrust Robinson Humphrey

Okay. Thanks Ed.

Operator

Your next question comes from the line of Reed Anderson with D. A. Davidson. Please proceed.

Reed Anderson - D. A. Davidson & Co.

Good morning. Just a couple of questions. First just circling back to the private brand initiatives you got kind underway now and specifically Field & Stream; just wondered from a timing standpoint, does it make sense that as early as next year that the Field & Stream brand will essentially take the place of what your current private label is in the outdoor category or is it weight in more gradually than that?

Edward W. Stack - Chairman and Chief Executive Officer

You can pretty much assume that next spring the Field & Stream category will be the vast majority of our private products in the outdoor category.

Reed Anderson - D. A. Davidson & Co.

Okay, that makes sense, thank you. And then, could you remind me how many stores do you have out of the core Dick's Sporting Goods stores that are attached to a regional mall. And then secondly I am just curious, the performance of those relative to the corporate average was a little bit worse this quarter, or is it better or about the same?

Edward W. Stack - Chairman and Chief Executive Officer

I am going to tell you that the performance of the mall based stores is really no different than the Company as an average. We're really a destination, so we don't rely on mall traffic to support our business, we are really a traffic generator to the mall and we are... I don't have the exact numbers off the top of my head of what the mall based stores are, but I am going to say directionally it's around 15%.

Reed Anderson - D. A. Davidson & Co.

Perfect. Thank you.

Operator

Your next question comes from line of Rick Nelson with Stephens, Inc. Please proceed.

N. Richard Nelson - Stephens, Inc.

Thank you and good morning, congrats. I may have missed this, but did you break out Golf Galaxy contribution to EPS in the second quarter?

Edward W. Stack - Chairman and Chief Executive Officer

No, and we have indicated right from the beginning that we weren't going to do that, that we would provide the Golf Galaxy's comps on each quarter, but we weren't going to break out their contribution for competitive reasons.

N. Richard Nelson - Stephens, Inc.

Did you have a first half guide for Golf Galaxy, $0.11?

Timothy E. Kullman - Senior Vice President and Chief Financial Officer

We said that Golf Galaxy would be approximately $0.11 accretive in the first half.

N. Richard Nelson - Stephens, Inc.

Accretive, okay. And how was that coming in relative to expectation?

Edward W. Stack - Chairman and Chief Executive Officer

We are in... it's in... we are very pleased with the Golf Galaxy's performance.

N. Richard Nelson - Stephens, Inc.

Just to dig a little deeper, on the penetration of private label in Golf Galaxy stores, specifically, where are you now and where do you see that going. Can you hit the 15% in those units, that's you're planning with those stores?

Edward W. Stack - Chairman and Chief Executive Officer

Golf Galaxy's private label sales right now, you can look at, are minimal, I mean less that a couple percent right now. But as we go forward, we are testing products, getting a better understanding of what can go into Golf Galaxy's business and I suspect it can... over the next couple of years, it can approach that 15% number.

N. Richard Nelson - Stephens, Inc.

Thank you for that. And any plans for a smaller store format?

Edward W. Stack - Chairman and Chief Executive Officer

Not at the present time.

N. Richard Nelson - Stephens, Inc.

Okay, thanks a lot. My other questions have been asked.

Operator

Your next question comes from line of Bob Simonson with William Blair. Please proceed.

Robert Simonson - William Blair

Good morning. You have done a... you did a very good job of explaining how the quarterly pattern of earnings would be influenced this year by that extra week and the shift in the calendar. Without quantifying necessarily, but could... qualitatively, are there any factors outside of the economy or weather differences that will impact the pattern '08 versus '07?

Edward W. Stack - Chairman and Chief Executive Officer

Not that we see, Bob, none. I mean it's just the... it's just the actual calendar shift and then the weather in the third quarter that we got last year, we are not counting on getting that this year. And then the 53rd week which we have talked about, and then we had about as good as it can get with the Super Bowl run with the Bears, and the Colts being in the Super Bowl, and again our group, merchandising marketing operations team did a great job, logistics team did a great job of taking full advantage of that... those teams in the Super Bowl, and we sold an awful lot of license product, and between the 53rd week, and the Super Bowl run, it was approximately $0.09 a share that we are just... we don't have a 53rd week this year, and we have no idea who is going to be in the Super Bowl. So, we don't have that planned in the... we don't have that in the plan.

Robert Simonson - William Blair

But you also noted for like this most recent quarter, the shift in high school football dropped in the second quarter versus the third quarter last year, I believe that was the case. Is this --

Edward W. Stack - Chairman and Chief Executive Officer

[Multiple Speakers].

Robert Simonson - William Blair

Does that shift again next year, or are there other factors like that that will influence the year-over-year change in the quarters next year?

Edward W. Stack - Chairman and Chief Executive Officer

No, the only thing influencing the changes this year is the 53rd week. So, we won't have this again for... I think the 53rd week comes again in 7 years or something like that. So, we won't have to... we don't have to talk about this again. After we get done with this year, we don't have to talk about it again for 7 years.

Robert Simonson - William Blair

That's good.

William J. Colombo - President and Chief Operating Officer

We feel the same way.

Robert Simonson - William Blair

On the inventory turns, you didn't say that private label overall couldn't rise above 15% in the Dick's stores, but... and it can go up at Golf Galaxy. But it probably will rise as a percent of sales more slowly in the future than it has in the last three or four years. How will that impact your inventory turns, will it be a bigger positive, and do you have a target for inventory turns?

Edward W. Stack - Chairman and Chief Executive Officer

We have got a target of what we are trying to get to inventory turns; we are not going to guide to what that is. But we feel that we can continue to move our inventory turns up and even as private label and private brand products gain additional traction in the merchandising mix.

Robert Simonson - William Blair

Thank you very much.

Operator

Your next question comes from the line of Christopher Svezia with Susquehanna Financial. Please proceed.

Christopher Svezia - Susquehanna Financial Group

Good morning and add my congratulations as well. I have two quick questions, mostly on product. I guess first Ed, could you just update us on the number of Under Armour and Nike shop-in-shop concepts, you currently have in your stores, and kind of what your plans are for the balance of the year? I think you had previously mentioned Under Armour you expect to have a roughly a 100 shops, and will it be fair to say that these shops are more profitable in terms of sales than the product being sold on separate racks or prior to the shop-in-shop concept being installed in your stores?

Edward W. Stack - Chairman and Chief Executive Officer

The shops are quite profitable for both Under Armour and us and also the Nike shops. By the end of the year we will have approximately 100 Under Armour shops. We will have more than 200 men's Nike shops and more than 150 women's Nike shops by the end of the year.

Christopher Svezia - Susquehanna Financial Group

Okay. And 200 men's Nike shops and 100... excuse me, 150 women's, are those also in a same stores as well or is there a tradeoff where there is a women's shop and not a men's shop?

Edward W. Stack - Chairman and Chief Executive Officer

I can't... I don't believe we have any place, we women's a shop without a men's shop. They usually go hand in hand and we have got them usually in the first position when you walk into the store on the first two pads on the right and left when you walk into stores. I can't think of the store... the only store that we have a very meaning... that we have one store in Cincinnati that we have a very meaningful women's area versus the men's area, but we still do have a men's presence in that store.

Christopher Svezia - Susquehanna Financial Group

Okay. That's helpful. And then just want to circle back quickly to the... on the footwear end of your business, and you guys have kind of seem to have weathered some of the issues in the overall footwear business with regard to some of the more mall-based operators and granted, you can make arguments that they are tied more to the urban consumer or more fashion focused. You guys seem to be more team focused. I was wondering maybe you can talk about you non-cleated footwear business more of the basketball products or running product, how that fared relative to your expectations and particularly in those mall-based stores, roughly 15% or so your base, where you might backup against a Foot Locker or Finish Line type store?

Edward W. Stack - Chairman and Chief Executive Officer

We are really... calling out performance by store type in a particular category. We are not going to do, but there is not a big difference between those two. The footwear business, athletic footwear business for the most part met our expectations. There is a tradeoff between athletic shoes right now, and brown shoes or sandals, or flip-flops, three points, slides, etc., and that we are very heavily invested in the three point business and in the slide business and in the sandal business. So our overall footwear business has done really quite well. We have indicated on a number of occasions and asking the street, so to speak to please not confuse the performance of our footwear business with the performance of the mall-based specialty channel which is really much more fashion driven than what we are.

Christopher Svezia - Susquehanna Financial Group

Okay. That's helpful. Congratulations.

Edward W. Stack - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jim Chartier with Moness, Crespi, Hardt & Co. Please proceed.

James Chartier - Moness, Crespi, Hardt

Good morning. Two questions, just a follow up on previous question. How many shop-in-shops you currently have for Under Armour and Nike?

Edward W. Stack - Chairman and Chief Executive Officer

Right now with Nike we have about 200 men's and 140 something women's. And in Under Armour shops there's probably 20 out there right now, 25. And the majority of getting up to that 100 is going to be put in this year and right after the first of the year.

James Chartier - Moness, Crespi, Hardt

Okay. And then you mentioned earlier that you were more aggressive in clearing inventory in second quarter this year. Was that a benefit to second quarter comps at the expense of third quarter comps?

Edward W. Stack - Chairman and Chief Executive Officer

It's not at the expense of third quarter comps. They really have nothing to do with one other. It... we cleared through it to move that inventory down. We had less clearance than we've had in the past because of better inventory management and better systemic solutions to our allocation process. We still have ways to go. We're not... but we still have real opportunities in that area. We have just done a better job of clearing inventory and planning our business and you can see that through the comp-store sales gains, the inventory improvement and the margin rate improvement.

James Chartier - Moness, Crespi, Hardt

Right. Thank you.

Operator

Your next question comes from the line of Michael Keara with Merrill Lynch. Please proceed.

Michael Keara - Merrill Lynch

Thanks. Good morning guys. Great quarter.

Edward W. Stack - Chairman and Chief Executive Officer

Thanks.

Michael Keara - Merrill Lynch

Certainly in contrast to a lot of other names. I know you guys aim at a much different demographic and most of your core stores are located in what are probably considered not... probably not located in what are considered bad housing market. But have you seen any signs of weakness in demand, say like in Detroit area which is probably considered a tough housing market?

Edward W. Stack - Chairman and Chief Executive Officer

We really haven't. I mean no that... and we have talked about this before. We are going to travel in a narrower band in the economy as a whole.

Michael Keara - Merrill Lynch

Right.

Edward W. Stack - Chairman and Chief Executive Officer

And so these athletes... young athletes and high school athletes are... they are going to be playing baseball, they are going to be playing soccer, football, etc., and where we have been fortunate to be the destination of choice. We worked very hard at that and the housing market really has not impacted our business with these athletes.

Michael Keara - Merrill Lynch

Okay.And as far as the '08 plans for store openings, we are all set and secured on that?

Edward W. Stack - Chairman and Chief Executive Officer

Yes. We have got that plan basically done. We have got a number of '09 sites done and we have even got some '10 sites, leases signed and executed.

Michael Keara - Merrill Lynch

Okay. Thanks a lot.

Edward W. Stack - Chairman and Chief Executive Officer

Sure.

Operator

Your next question comes from the line of Ralph Jean with Wachovia. Please proceed.

Ralph Jean - Wachovia Securities

Great, thank you. Just I wanted to ask a couple of follow-up questions on the Adidas business. You mentioned you are going to have exclusivity on the baseball equipment. I assume that would be for the next baseball season and then how long does that exclusivity last? In other words do you own their baseball equipment brand or not, and what percentage of the category square footage do you think you would allocate to the Adidas baseball branded product?

Edward W. Stack - Chairman and Chief Executive Officer

Well, the exclusivity is kind of in perpetuity where we hold the license. And although I won't go into the exact structure of the deal, if we hit certain levels then it continues to roll over. But this is a multi-year deal, so we have this for a very long time.

Ralph Jean - Wachovia Securities

Okay.

Edward W. Stack - Chairman and Chief Executive Officer

Square footage associated with this will... it will replace primarily our PowerBolt brand that we had in the past and Adidas will have, say directionally probably 10%, maybe 15% of the square footage associated with baseball and directionally that's kind of where it's at.

Ralph Jean - Wachovia Securities

Great. And then just one last question on the Field & Stream product; is that a situation where you would put their label on, their logo on product you make or do they actually make it and ship it to you for distribution?

Edward W. Stack - Chairman and Chief Executive Officer

No, this is all products that we make. So, we have the licensing agreement to design, source, sell and market Field & Stream products in these category. So it's all product that we design and source our self.

Ralph Jean - Wachovia Securities

Great. Thank you very much.

Edward W. Stack - Chairman and Chief Executive Officer

Okay. Thank you.

Operator

This ends our Q&A session. I would like to turn it back over to Mr. Stack for closing remarks.

Edward W. Stack - Chairman and Chief Executive Officer

I would like to thank everyone for joining us on our 2007 second quarter earnings call, and look forward to talking with everyone at our third quarter call. Thank you.

Operator

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

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Source: Dick's Sporting Goods Q2 2007 Earnings Call Transcript
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