Conclusions From Dick's Recent Quarter: Plenty Of Room Left For Growth

Dick's Sporting Goods (DKS) held its second quarter 2007 conference call on 21 August 2007. Seeking Alpha provided its first Dick's conference call transcript. I will review the company's earnings release as well as provide commentary on the conference call.

The earnings release contained the bulk of the company's prepared information on the conference call. The question and answer session was more wide ranging. When considering the company's results, you should note that results for first quarter 2006 did not include Golf Galaxy, but results for first quarter 2007 do include Golf Galaxy from the date of the acquisition of 13 February 2007.

First Quarter Results

• Net income was $47.9M, an increase of 87% over the prior year's result of $25.7M;
  • EPS was $0.83, an increase of 77% over the prior year's result of $0.47;
• Net Sales increased 38% to $1,013.4M with a 7.2% (or 5.8% adjusting for the calendar, compared to a 6.5% increase in Q2 last year) comparable store sale increase;

• According to the company's press release:

  "The Dick's Sporting Goods portfolio of businesses produced an outstanding second quarter. We achieved increased sales not only in golf but across most of our businesses, delivered gross margin improvements, provided operating expense leverage and solid inventory management. In addition, Golf Galaxy delivered strong sales and earnings in their seasonally largest quarter. I would like to commend all of our team members for their efforts in driving the results for our second quarter," said Edward W. Stack, Chairman and CEO.

Stores

• In first quarter, the company opened six Dick's Sporting Goods Stores and two Golf Galaxy stores;

Year To Date Results

• Net Income was $69.6M, an increase of 88% (prior year was $37.1M)
• EPS was $1.21, an increase of 78% (prior year was $0.68)
• Net sales increased 33% to $1,837M with comparable sales up 4.7% (or 3.1% adjusting for the shifted retail calendar), additional stores, and the inclusion of Golf Galaxy in the results

As noted at the outset, please note Golf Galaxy acquisition and its effect on the financial statements.

Current 2007 Financial Outlook

Full Year 2007

• Company increased guidance for the year:
  • Estimated 58 million shares outstanding;
  • EPS $2.47 – $2.50 (prior estimate was $2.37 – $2.40);
  • Revised estimate represents 23% EPS increase over last year;
  • Comparable store sales expected to increase 2% (last year was 6%); and
  • Company expects to open 45 new Dick's Sporting Goods stores, 16 new Golf Galaxy stores, and relocate one Dick's Sporting Goods store.

Third Quarter 2007

• 59 million shares outstanding;
• Consolidated EPS $0.09 – $0.12 ($0.14 last year);
• Results were higher last year because of shifted retail calendar and Golf Galaxy will be $0.02 dilutive in the third quarter;
• Retail sales expected to decrease 1% – 3% (again affected by shifted retail calendar; without shifted calendar, flat to down 2%);
• Plans to open 24 new Dick's Sporting Goods stores.

Quick Financial Highlights on Margins and SG&A

Quoting from Seeking Alpha's transcript:

• 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 merchandise 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.

General Remarks

• Company is justifiably proud of its accomplishments this past quarter;
• Company reiterated that its debt attributable to the Golf Galaxy acquisition will be retired by year-end; much of the $147 million has already been repaid;
• Private labels are providing strong wins and there is the opportunity to take private labels from Dick's to Golf Galaxy;
• Further strength of the business resulted in stronger cash flows and therefore lower borrowings and a revolving line of credit, all of which resulted in a lower interest expense;
• Business was strong across most lines including golf, athletic apparel, footwear, and the outdoor category;
• Company, because of its store locations and products, has not experienced adverse consequences from the weak housing markets;
• Private label business represents 17.6% of sales, an increase of 0.6% from last year;
• Company plans to open its third distribution center which will be located in Atlanta, Georgia. The size will be about 650,000 square feet and will have the capacity to serve 210 stores;
• The company has begun contemplating a fourth distribution center, most likely in Texas;
• Both Florida and Texas are target markets;
• Company does not see irrational pricing in its markets;
• Several brands are performing very well including Crocs (CROX), Nike (NKE), Under Armour (UA), North Face; footwear continues to be strong;
• By year-end the company plans to have 100 Under Armour shops, 200 men's Nike shops; and 150 women's Nike shops; all shops are within the Dick's Sporting Goods shop, or shop in a shop;
• Golf Galaxy's new stores are performing very well and the company plans to open more stores in California; and
• Company will be reducing its advertising in print and increase its advertising in television and direct mail, the direct to consumer marketing.

Concluding Remarks

As mentioned after the prior conference call, I remain pleased with the company's progress. Because management is performing well and because there remains plenty of opportunity for expansion, I am a satisfied shareholder.

Disclosure: I am long Dick's Sporting Goods stock.