Dick's Steers Clear of Housing Weakness

| About: Dick's Sporting (DKS)

On 20 November, 2007, Dick's Sporting Goods (NYSE:DKS) held its third quarter 2007 conference call. Seeking Alpha provided Dick's conference call transcript, which I found invaluable.

The earning release provided the overall framework of information. During the conference call, the company elaborated on the earnings release during its prepared remarks. Later, during the question and answer session, the analysts asked their questions. I did not find too many noteworthy questions, but I did find that the question and answer session provided more general information about Dick's.

I enjoy listening to how ably the executives are able to respond to questions and how they frame their answers. I am impressed by Dick's management, because they are executing against their business plan and because they have a clear vision of how they plan to continue to grow the business.

Third Quarter Results

  • Net income was $12.2M, an increase of 57% over the prior year's result of $7.8M;
    • EPS was $0.10, an increase of 43% over the prior year's result of $0.07;
  • Net Sales increased 18% to $838.8M with a 7.2%;
  • According to the company's press release:

    "Our performance this quarter demonstrates once again how our emphasis on execution, combined with the strength of our business model delivers consistent financial performance. Improved margins, greater efficiencies, the strength of our golf business and strong cash flow continue to drive our earnings increases. As we head into our seasonally largest quarter, our inventory is on plan and our stores are well positioned to deliver solid results," said Edward W. Stack, Chairman and CEO.


  • In first quarter, the company opened 25 Dick's Sporting Goods Stores;

Year To Date Results

  • Net Income was $81.9M, an increase of 82% (prior year was $44.9M);
  • EPS was $0.71, an increase of 73% (prior year was $0.41);
  • Net sales increased 28% to $2,675.8M with comparable sales up 2.3% (or 1.7% 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 117 million shares outstanding;
    • EPS $1.29 (prior estimate was $1.24 – $1.25);
    • Revised estimate represents 26% EPS increase over last year;
    • Comparable store sales expected to increase 2.0% (last year was 6.0%); and
    • Company has opened 46 new Dick's Sporting Goods stores and has relocated one Dick's Sporting Goods store, and expects to open 16 new Golf Galaxy stores.

Fourth Quarter 2007

  • 119 million shares outstanding;
  • Consolidated EPS $0.59 ($0.60 last year);
  • Comparable store sales are expected to increase approximately 2.0%, or approximately 2.5%, adjusting for the shifted retail calendar which compares to a 2.0% increase in Q4 last year;
  • Plans to open 4 new Golf Galaxy stores.

Quick Financial Highlights on Margins and SG&A

Quoting from Seeking Alpha's transcript:

I [Edward W. Stack - Chairman and Chief Executive Officer] am pleased to report the results of our third quarter, a quarter in which we have achieved our comp sales guidance and exceeded our earnings guidance. Our performance for this quarter demonstrates once again our emphasis on execution combined with the strength of our business model delivers consistent financial performance. This quarter we generated net income of $12.2 million or $0.10 per diluted share, which is $0.04 above the high end of our guidance on a split adjusted basis and is $0.03 over last year. Higher margins, continued efficiencies in freight and distribution, strong cash flow and the performance at Golf Galaxy all contributed to earnings greater than guidance. Total sales for the quarter increased 18% to $839 million. At Dick's Sporting Goods stores comp sales decreased 2.5%, which is in line with our guidance. Adjusting for the shift in the retail calendar comps sales at Dick's stores declined 1% also in line with our guidance of an 8.9% gain over last year. As a reminder, this quarter's results were affected by the shift in the 2007 retail calendar, which positively impacted quarters one and two and is offset in the third and fourth quarters. In addition, last year's third quarter benefited from some very favorable cold weather that we did not expect to repeat.

During the quarter, we saw increases in our golf, license, and footwear businesses. These gains were offset by declines in cold weather and hunting apparel.

At Golf Galaxy stores, pro forma comp sales decreased 2.7%. Comp sales at Golf Galaxy stores increased 4.7% on a pro forma shifted basis. Our private label and private brand program continues to be an important element of our assortment, and we are on track for these products to represent approximately 15% of sales this year compared to 14.1% in 2006. For competitive reasons, we are no longer to planning to disclose penetration levels on a go forward basis.

By all metrics, the company continues to perform very well. Switching away from quantitative to qualitative observations, the company sounds very well run. The executives on the conference call have a firm command of the facts and fully understand their markets. I have a strong sense that they understand their business extraordinarily well. Having just finished listening to Zale Corporation's (NYSE:ZLC) conference call, I find the two conference calls an interesting study in contrast.

General Remarks

  • Company reiterated again this quarter 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;
  • Company, because of its store locations and products, has not experienced adverse consequences from the weak housing markets;
  • Company does not see irrational pricing in its markets, though it noted that Texas Academy is providing strong competition;
  • Company reiterated that it will be reducing its advertising in print and increase its advertising in television and direct mail, the direct-to-consumer marketing;
  • Dick's Sporting Goods will continue its 15% new store growth, roughly 40% of the new stores in 2008 will be in new markets and much like 2007, with about half the stores opening in the third quarter with the other half split among quarters one and two.

I found the company's remarks concerning its consumers interesting.

Brian Nagel - UBS

And then final question… there's been a lot of reports lately from a lot of different retailers who speak to weakness out there in the consumer. You guys are performing very well. As you look at your business even more granularly, have you seen any impact as far as buying patterns from your consumers that suggest that your core customer is more pinched?

Edward W. Stack - Chairman and Chief Executive Officer

We haven't, and I've said this for a number years that our business really travels in a narrower band than the economy as a whole. Based on staying… keeping our business focused on that core athlete and outdoor enthusiast, we are not going to see the lows when the economy is a bit more difficult, but then on the other hand and I'm sure everyone will forget this when the time comes, when the economy turns around, we won't…we don't expect to see the big spike in our business either.

The company made similar comments during its last quarterly conference call, but it was reassuring to see it reiterate that it does not expect to be as adversely affected as many other retailers.

Concluding Remarks

As a repeat of my article on Dick's prior quarter, 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.