Gander Mountain Q3 2007 Earnings Call Transcript

Gander Mountain Company (GMTN)

Q3 2007 Earnings Call

December 6, 2007 5:00 pm ET

Executives

Mark R. Baker - President, Chief Executive Officer, Director

Robert J. Vold - Chief Financial Officer, Senior Vice President, Treasurer

Richard Vazquez - Executive Vice President - Merchandising and Marketing

Analysts

William Wallace - Friedman Billings Ramsey

Steve Denault - Northland Securities, Inc.

Peter Keith - Piper Jaffray

Rick Nelson - Stephens Inc.

Robert Simonson - William Blair & Company

Velin Mezinev - Donald Smith & Company

Presentation

Operator

Good day, everyone, and welcome to the Gander Mountain Company third quarter earnings release conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Bob Burton. Please go ahead, sir.

Bob Burton

Thank you, Christine. Good afternoon and thanks to all of you for joining us. Welcome to the Gander Mountain Third Quarter 2007 conference call. I’m Bob Burton of IR Squared. Joining us on our call today are Mark Baker, President and CEO of Gander Mountain; Rick Vasquez, Executive Vice President of Merchandising and Marketing; and Bob Vold, Senior Vice President and Chief Financial Officer. We understand that a backlog at PR News Wire delayed the crossing of our earnings release until a few moments ago and we apologize for that unintentional delay. The full release is available both on the wires at this point and on our Web site at www.GanderMountain.com under Investor Relations.

On the call today, Mark will discuss business trends, Bob will review our financial results, and Rick will review our merchandise initiatives. We’ll take your questions after that. We expect the call to last about an hour. As a reminder, the question and answer period is available to all interested parties although questions will be limited to investors and analysts. This conference call is being broadcast real time on the Internet at www.GanderMountain.com. We will also offer an Internet replay of the call which will be available shortly after the call is concluded and will remain on our Web site for approximately 90 days. The transcript of this call will be posted under archives in the Investor Relations section of our Web site.

Please remember that our discussion today may include forward looking statements relating to our estimates and expectations that involve risks and uncertainties. Our actual results could differ materially from those projected in any forward looking statement. Additional information concerning important factors that could cause our actual results to differ materially from these forward looking statements are described in the Risks and Factors Affecting Current and Future Results section of our annual report on Form 10-K as filed with the Securities and Exchange Commission as well as in our subsequent reports filed by the SEC. These reports are available at the Investor Relations section of our website at www.GanderMountain.com and at the SEC’s Web site at www.SEC.gov.

We caution you that forward looking statements reflect our current views with respect to future events and speak only as of the time they are made and we undertake no obligation to update them in light of new information or future events. The reconciliation and other information required to be disclosed about non-GAAP measures, including EBITDA, discussed during this call is available at the Investor Relations page at www.GanderMountain.com. Now, I’ll turn the call over to Mark Baker.

Mark R. Baker

Hello, good afternoon to Gander Mountain’s third quarter call. Once again, I’ll apologize. There was a delay in getting you these numbers. It was our best effort.

But this is a banner day for Gander Mountain. I am extremely pleased and very excited to announce Gander Mountain’s acquisition of Overton’s. During the day’s earlier announcement, Gander Mountain has acquired Overton’s, Inc., a leading Internet and catalog marketer of specialty water sports, related marine accessories, marine electronics, apparel and footwear. Overton’s offers a strong, trusted brand name and distributes over 15 million catalogs annually. Headquartered in Greenville, North Carolina, Overton’s operation includes a fulfillment center and a call center offering available capacity to support Gander Mountain’s Internet and catalog marketing opportunities, 2006 revenues, in excess of $90 million and EBITDA of approximately $8.0 million, we expect this transaction to be a credence to Gander Mountain’s earnings for fiscal 2008.

This acquisition enables Gander Mountain to greatly accelerate our strategy to be an integrated, multi-channel retailer featuring Internet, catalog, and retail stores. Overton’s provides an excellent management team, a proven platform and infrastructure, and a natural seasonal complement with the majority of its sales in the first half of the year with capacity to handle substantial additional volumes with minimal incremental investment. This is an important step forward in building a national retail operation that goes to market across all channels and brings new customers the opportunity to do business with Gander Mountain.

Overton’s will continue to operate with Overton’s brand as a wholly owned subsidiary of Gander Mountain. As will be indicated in our 8(k) filing, Overton’s is restricted from selling hunting and related products until March 2009, pursuant to a non-compete agreement, however, between Gander Mountain and Overton’s capability and resources, we will be able to feature a full complement of Internet and catalog offerings in the coming seasons.

Now, let me turn to quarterly results.

This was not the quarter we anticipated reporting to you. At -8.4% comp., sales were well below expectations for the quarter and the earnings reflect that shortfall. Coming into our fourth quarters, four consecutive quarters of positive comps. with a solid 4.2% in the second quarter and similar positive performance in August, we were then disappointed to see sales weaken significantly since early-September. A number of factors weighed in our performance, including warm, dry weather across the country. It also appears that the consumers are generally be affected by everything from the housing market to credit concerns and rising fuel. These factors created difficult conditions for most retailers in the quarter and our third quarter performance demonstrates that Gander Mountain was also affected. Sales softness was present in all geographic areas, including the south, which has been strong for the year-to-date. In the upper Midwest where we have a concentration of stores experienced warmer fall seasons in more than a century.

Within the quarter, we opened nine new stores including two replacement stores. As has been true all year, we invested our new growth in southern stores in Tennessee, Texas, Florida, Mississippi, Virginia, and Kentucky. With the single exception of Evansview, Indiana this fall, the average ticket increased 3.0% ($63.33) while comparable store transaction accounts declined. Rick will talk more about the moving of the average ticket in our pricing structure a bit later.

From an operational viewpoint, we were encouraged by several items, including we’re confident in our in-stock performance and our ability to flow goods this season. Explore our stores by utilizing the customer service index and we continue to show solid results in this quarter. Soft sales were somewhat offset by strong margining issues resuming the trend of increasing initial margins for six of the past seven quarters. Overall margin gains reflect new merchandising initiatives, remodels, increased own brand product presentations. We also increased our focus on cost control. We incurred $1.2 million percentage cost which we focused on cost control in the G&A area. Over the next quarter, we will review all expense centers and markups for additional cost reductions. Bob will expand on the cost control efforts in his comments.

While the environment has improved as the weather turned colder recently, our costs remain negative for the fourth quarter. Overall, our outlook for the year is that we will approach but not reach our goal of $1.0 billion revenue. In light of the weak retail environment, Gander Mountain will deliver positive EBITDA performance and will not be profitable this fiscal year. Looking forward, we will manage our business to the current economic environment. We expect that during that coming year, new store openings will be limited to five to six on the year and capital expenditures will be less than $25.0 million.

That concludes my comments on the quarter. Before closing, let me sum up Overton’s acquisition. This strategic step will really accelerate our strategy to be an integrated, multi-channel retailer between Internet and catalog and retail operations; offers substantial growth opportunities in both eCommerce and catalogs; build brand awareness and provide strong leverage for our retail network; and to strengthen our long term competitive position. Bob, will talk through the purchase details with you in a moment. I also want to point out that this transaction not only takes the continued support of our bank group, but also the strong support of our leading shareholders, the Pratt and Erickson families, who helped finance this transaction by purchasing an additional $24.0 in common stock at a premium to the market.

We’re very excited about this strategic opportunity presented by Overton’s acquisition. We look forward to discussion our progress on future calls. We’re committed to our customers, our supply partners, and to our dedicated associates who provide great service every day. Bob?

Robert J. Vold

Thanks, Mark. First, I’ll summarize our results and then I’ll go into more detail on the financials and wrap up with a discussion of the Overton’s transaction.

In the quarter, Gander Mountain reported 5.3% sales growth and a comparable store sales decline of 8.4%. The net loss for Q3 of fiscal 2007 was $5.1 million as compared to net income of $2.0 million last year. Last year’s Q3 net income included a $1.4 million gain on an insurance settlement. As Mark indicated, the comparable stores sales decrease, which was the primary factor behind our reporting a loss for the quarter, was systemwide, affecting all regions of our twenty-three state geographic area. In our view, this reflects both the underlying economic conditions as well as warm weather conditions in specific markets particularly in September and October.

As a result of the disappointing results in Q3 and results to date in Q4, I’d like to update you on our outlook in three areas. First, as Mark said, we will approach but not reach $1.0 billion in revenues for the year. Second, we expect that even quarter four will be profitable and EBITDA will be positive for the year, Gander Mountain will not reach profitability for the full fiscal year. Last, as a result of the shortfall in profitability for the year, we currently expect that our bank debt at fiscal yearend will be higher than the prior year and our previous expectations.

Now, let me review the third quarter.

Total square footage year-over-year increased 14% to 6.2 million square feet. There were nine new stores added for the quarter of which two were replacement stores. The average square footage per store increased approximately 3.9% to 53,800 square feet for the third quarter compared to the same quarter last year. Our comp store base at the end of the quarter was 95 stores.

As I said, sales increased in the quarter 5.3% on an 8.4% comp. decrease. On the year-to-date basis, sales increased 11.5% with comparable stores decrease of 1.9%. In the quarter, gross margin increased 150 basis points or 27% of sales as compared to 25.5% last year. This increase resulted from a number of factors.

As Rick will discuss more in a moment, initial margin improved approximately 260 basis points as we benefited from the general improvement in overall pricing structure, reduced clearance activity, and increased penetration of our own brands from 10.9% to 13.0% for the quarter. Mix had a slight negative impact on the initial margin in the quarter as a result of increased power sports penetration and decreased apparel penetration. The increase in initial margin was partially offset by deleveraged and (inaudible) costs. On a year-to-date basis, gross margin dollars increased from $134.0 million to $155.5 million while gross margin rate improved from 22.9% to 23.9% primarily as a result of increases in initial margin rates.

Turning to expenses in the quarter, store operating expenses increased 19.8% to $53.4 million driven by new store growth over the last year. As a percent of sales, store operating expenses from 18.1% in Q3 of 2006 to 20.6% in the comparable quarter this year as a result of the decrease in comparable store sales. Pre-opening expense increased to $3.2 million in the quarter as compared to $1.8 million the last year primarily as a result of opening nine stores this quarter as compared to five stores in the comparable quarter last year.

In the third quarter, G&A expenses increased 25.0% to $13.1 million. As a percent of sales, G&A increased 80 basis points to 5.1% due to an increase of approximately 40 basis points of severance costs in the quarter with the remainder primarily due to deleverage as a result of the decreased comp. sales. Net interest expense was $5.5 million for the quarter unchanged from the comparable quarter last year.

Comparisons of earnings per diluted share year-over-year are affected by the company’s issuance of equity capital in December 2006 which increased the number of weighted average shares outstanding year-over-year. The loss per share for the third quarter of fiscal 2007 was $0.25 per share compared to earnings per share of $0.14 for the comparable period. The weighted average diluted shares for the quarter were 20.4 million shares compared to 14.3 million in the comparable period last year.

At the time of our August 2007 amendment and restatement of our credit facility, we increased the size of our revolver from $275.0 million to $345.0 million and extended the maturity date by three years. As of today and after the completion of the Overton’s transaction, we have approximately $55.0 million in availability under our credit facility.

We ended the quarter with borrowings under our credit facility of $308.0 million and shareholders’ equity of $163.0 million. Capital expenditures were $23.1 million for the quarter versus $13.9 million for the comparable quarter last year primarily for new store openings and upgrades to existing stores. We expect cash for capital expenditures for fiscal 2007 to approximate $44-45 million.

Looking forward, we are making the following adjustments to our business model. Our store growth plans in fiscal 2008 will include five to six total new stores of which five will have spring openings. Included in these are two to three relocations. This is marked reduction store opening frequency. We expect cap ex for fiscal 2008 to be in the range of $24-25 million. We are committed to improving our operating results before resuming a faster level of store expansion. As we integrate the Overton’s acquisition, our focus going forward will be improvement in business fundamentals, product gross margins, store profitability, and management of inventory. We are committed to making the necessary adjustments to store operations and support operations in line with the current retail environment. Accordingly, in the third quarter 2007, we reduced G&A head count by 40 positions. We will take a cautious approach to planning for business in 2008. We are currently in the 2008 budget planning process and we are committed to delivering a profitable business structure and model for 2008.

Now, let me outline the financial aspects for the transaction we announced earlier today. As you know, Gander Mountain announced it has completed the acquisition of all the outstanding equities of Overton’s holding company. As a result of this transaction, Overton’s became a wholly owned subsidiary of Gander Mountain. The total purchase price of the acquisition was approximately $70.0 million which included the repayment of Overton’s existing long term indebtedness at closing. The purchase price was funded via three actions.

At first, Gander Mountain entered into an amended bank agreement to add an additional $40.0 million term loan to the company’s secured credit facility. The term loan will have a four-year maturity with interest only payments in year one, mandatory semi-annual payments in years two and three, and mandatory quarterly principal payments in year four that will fully amortize the loan. The amended bank agreement limits permitted capital expenditures and replaces former covenants with the minimum operating cash flow and EBITDA with a minimum excess access availability reserve covenant.

Second, Gander Mountain entered in stock purchase agreement with Bradco, LLC, an affiliate of David Pratt, the company’s chairman, and Holiday Station Stores, an affiliate of Ron Erickson, the company’s vice chairman, and Gerald Erickson, the director of the company. Under the agreement, Bradco purchased approximately 3.1 million shares and Holiday purchased approximately 1.0 million shares for an aggregate of 4.1 million shares of the company’s common stock at a per share purchase price of $5.90 and an aggregate purchase price of approximately $24.0 million. This is a very significant investment of equity capital at above current market valuations. Third, Gander Mountain made up the remaining amount of approximately $6.0 million from its existing revolving credit agreement. The purchase price of approximately $70.0 million represents a multiple between eight and nine times EBITDA.

In their comments, Mark and Rick are focusing on the business reasons why this is an exciting opportunity to Gander Mountain and I share those sentiments. This is a very strategic transaction that provides large new opportunities to Gander Mountain. We expect this acquisition to be predict to earnings in fiscal 2008. Overton’s lowered cost structure should improve our gross margin and leverage existing overhead. Overton’s is a uniquely counter-cyclical business to our own and their stronger financial performance in the first half of the calendar year provides balance to Gander Mountain’s current seasonal sales and earnings pattern. Over the long term, as we are able to offer more Gander Mountain products online, this business will help us manage store level inventory to improve our terms. We are all very excited about this transaction.

Now, I’ll turn the call over to Rick.

Richard Vazquez

Thank you, Bob. From the merchandising perspective, we had a challenging quarter. As Mark indicated, we entered this quarter with second quarter sales momentum carrying over into August and then saw a sharp deterioration during September and October. Warm weather in the north explains part of this trend, but our business was also soft across the south indicating a broader economic trend.

Overall, merchandising trends were weak in firearms, camping, and apparel. Growth and power sports reflected our new entrance into the boat market earlier in the year. In the hunting area, equipment and ammunition sales were positive, but were weighted down by poor performance in firearms and gun stakes. The Consumer Marine products were stronger than the company’s performance as warm weather extended the fishing and boating season across the board. The rod and reel combinations did well this fall and we expect this trend to continue in 2008. Cook accessories--grills, smokers, and seasoning--continued to perform well as it has all year. The camping side of the business--tents, sleeping bags and paddle sports--were soft consistent with year-to-date performance. Selected areas like fleece and women’s and children’s footwear were solid in the quarter, but warm weather did hold back important sales of Camu and outerwear, traditionally, a strong areas for Gander Mountain in the fall.

For the quarter, apparel penetration declined 1.3% year-over-year. While sales volume on the quarter were disappointing, margin improvement initiatives provided solid support for a strong margin performance. Own brand penetration increased from 10.9% to 13.1% on the quarter led by gains in hunting and apparel and contributing about 115 basis points in initial margin expansion. We continue to be focused on delivering improving initial margins. In addition, to increase own brand, we’re emphasizing better and best products and price points in our stores which is showing up in areas like average apparel retails, the combos in the fishing area I mentioned before, and our Gander Gunsmith Certified program.

Inventory ended at $475.0 million an increase of 19.0% from the third quarter of 2006 reflecting additional stores and the receipt of expanded power sports products. Our inventory per square foot in opened stores excluding in-transit and pre-opening inventory was $76.06 versus $72.81 which is up 5.0% from prior year. Excluding power sports, stores’ inventory per square foot are down 2.5%. Average inventory per store was $4.1 million versus $3.8 million reflecting growth in power sports. Clearance levels are down year-over-year which is an important aspect as we enter the fourth quarter. On an annualized basis, inventory turnover slipped to 1.7% from 1.6% which continues to be an area of opportunity for us.

On a trailing 12-month basis, sales per square foot were $173.00 versus $170.00 a slight improvement as the result of higher sales per square foot in our larger format stores. This is the third consecutive quarter of improvement in this metric. Today, 76% of our square footage is in the 2003 and larger big box stores. Our average customer ticket increased 3.0% to $63.33 for the quarter. This reflects the increasing number of larger stores in our mix where the average ticket is more than $12.00 higher.

Our approach to the fourth quarter is balance. While we are committed to the EDLP strategy, we are using selective promotions such as “buy one, get one” in areas with much success. We will continue to work towards a clean inventory approach to the coming fiscal year and lower levels of clearance inventory going into the quarter are supporting that effort.

Finally, picking up on Mark’s comments regarding Overton’s acquisition, I am thrilled by the opportunity accelerate our plans to be a multi-channel retailer. The integration of this acquisition will be an important work are for our merchants and stores over the coming year. As we said, Overton’s will continue to operate as a wholly owned subsidiary. We will go to market online under three brands: Overton’s, Consumers Marine, and Gander Mountain. With the acquisitions of Overton’s, Gander Mountain expects to obtain national reach for each of our brands, be able to offer broad and specialized catalogs, offer our customers the convenience of a 24/7 Web site for product sales, realize higher margins direct product sales, substantially increase the distribution of Overton’s catalog in part by distributing catalogs to customers in our retail stores, and offering Overton’s own brand product in Gander Mountain stores. With this significant investment, we will each be working towards building full online product lines and service offerings over the coming quarters.

In addition to these benefits, we also have the ability to introduce and test new products. It’s really cool to be able to offer products to all fifty states of the union. We look forward to making this a significant part of our business over the next several years.

And now, I will turn the call over to the operator as we are ready for questions.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator Instructions) We’ll pause for a moment to give everyone the opportunity to signal. We’ll take our first question from Steve Denault with Northland Securities.

Steve Denault - Northland Securities, Inc.

In regards to the firearms category, I mean, how bad was it in the quarter and what do you think is driving that?

Richard Vazquez

Steve, the firearms business has always been one of Gander Mountain’s friends and we’ve had quarter-over-quarter-over-quarter growth the last several years--continued growth in the firearms business and we continue to believe that we’re the largest firearm dealer now in the nation with the biggest services in gunsmithing and all that. The challenge I think in this particular season relates to discretionary purchases where, in many cases, we’re selling a number of units and, in some cases, there were some lower price point changes and, in some cases, we just didn’t get the transactions in the $1,000-$1,500 ranges where we had wanted them to be. Obviously, we rolled out the Gander Gunsmith Program, a certified program, and continue to have great success in signing up new customers and getting people to belong to Gander Gun Club. We’ve seen big followings being built on that. We were disappointed with firearms, but you can look also at optics and electronics and see the very similar kinds of shortfalls and sales.

Steve Denault - Northland Securities, Inc.

Okay. What interest rate should we assume for the term loan?

Robert J. Vold

Steve, there is some grid pricing based on the level of outstanding debt. I mean, it’s higher than our traditional pricing of $150. It’s in the $300+ range from an individual standpoint. That will be detailed more in the 8-K that will be filed in the next couple of days.

Steve Denault - Northland Securities, Inc.

Okay. What is the EBITDA level or the revenue level look for that in Overton’s business?

Robert J. Vold

Overton’s, this last fiscal year, last term 12 months, I mean, revenues were approximately $90.0 million. Our gross margin was 43.0% and EBITDA margin in the 8-9% range, pretax in the 3-4% range.

Steve Denault - Northland Securities, Inc.

Okay. That’s trailing 12 months as opposed to 2006?

Robert J. Vold

Correct.

Steve Denault - Northland Securities, Inc.

Okay. Any update on the ASB [scallop?] How’s that program coming along?

Robert J. Vold

We’ve sold a couple of the units, but I think it falls in line with what we’ve seen in a lot of the discretionary items this year. I think they’ve been delayed in terms of purchasing, but we’re still excited about what that can mean going forth in a number of stores.

Steve Denault - Northland Securities, Inc.

Okay. Thank you.

Operator

Our next question comes from Bob Simonson with William Blair.

Robert Simonson - William Blair & Company

Yeah. On the Overton acquisition, are you going to show that, Bob, separately on revenues from that and profits from that or is it going to get merged into one set of line items?

Robert J. Vold

Bob, what I would imagine as we move forward it will be a separate segment and so, you know, eCommerce and catalog operations will be separate. I mean, it will be combined with eCommerce activities that we have with Gander Mountain as well, but you’ll see retail stores probably separate from the Overton’s in the catalog in the Internet business that we have.

Robert Simonson - William Blair & Company

Would you show separate gross profit dollars off retail versus the catalog in terms of Overton?

Robert J. Vold

Most likely, again, Bob, I don’t know if we want to get into that level of detail, but certainly, there will be details about the business segments to the extent that we’re required to do so.

Robert Simonson - William Blair & Company

And has the transaction closed now?

Robert J. Vold

The transaction closed earlier today.

Robert Simonson - William Blair & Company

So there’s a touch of it in your fourth quarter?

Robert J. Vold

You know, effective today going forward, there will be a small amount in the fourth quarter. I think it’s important to remember Overton’s business, in their model, again, about 70% of their business really is in our first and second quarters, I mean, as it relates to the boating season. Again, we believe that we have significant capabilities to improve not only the first half of the business but also the second half as well as we go with additional products.

Robert Simonson - William Blair & Company

Okay. The gross margin improvement--the bulk of that, I guess, was private label, even though--how much did the occupancy go up and will that hurt your reported gross margin because of the negative comp.?

Robert J. Vold

Occupancy costs in the quarter were approximately an increase of 75 basis points in the quarter. Again, I think the margin improvement is really a combination of three things. I mean, it’s better pricing, improvements of pricing structures, reduced clearance hinders the impact of the higher owned brand during the quarter as well.

Robert Simonson - William Blair & Company

Okay. That improved initial markup in pricing, is that principally in just a few areas or is it across the board?

Robert J. Vold

I think, Bob, when we talk about pricing, we talk about some of the conviction that we continue to have about everyday price and, you know, there have been segments in our business where we’ve had more clearance activity or end-of-season clearance. Some of the pricing structure also is we have now become the retailer in twenty-three states. We do have different retailers in different parts of the country and we’re finally starting to get an advantage of being in some of those more remote markets as well.

Robert Simonson - William Blair & Company

Okay. Bob, your depreciation year-to-date in the nine months I think I saw was $20.0 million?

Robert J. Vold

That’s correct.

Robert Simonson - William Blair & Company

An estimate for the year, for the full year?

Robert J. Vold

The estimate of depreciation this year will be approximately $26.0 million. I mean, on a combined basis going forward, next year will be in the $32-33 million range from depreciation. I think we talked earlier about cap ex as well will be in the $44-45 million range this year. And next year, on a combined basis, again, with the reduction of number of stores, will be in the $24-25 million range.

Robert Simonson - William Blair & Company

So even without looking at the net income line which for you is a pretax line that you bring over, you should be able to pay down some debt throughout next year, is that right?

Robert J. Vold

That’s correct.

Robert Simonson - William Blair & Company

Okay. And could you go through a little exercise. You had $163.0 million of stockholders’ equity at the end of the quarter. You’ve got at the year-end of 2007 you’ll have $24.0 million of new equity in there. Does Overton’s add some equity to the equity account?

Robert J. Vold

No. Of course, this account we’ll add the $24.0 million to the Q3 numbers plus the money that we make in Q4.

Robert Simonson - William Blair & Company

Okay. And how about the debt? Did you say you retired the debt so there is no debt coming over from Overton’s?

Robert J. Vold

Yeah. I mean, all of the existing debt of Overton’s was paid off as part of the $70.0 million purchase price. I mean, you know, the new debt relative to the Overton’s is the $40.0 million plus the $6.0 million in change that we borrowed and put on the revolver. Our debt balance at the end of the quarter, I think, was $308.0 million and our debt today after the Overton’s transaction was about $338.0 million including all the debt borrowed for Overton’s.

Robert Simonson - William Blair & Company

Okay. The way you were going through the inventories, not only the dollars but per square foot basis, despite the comp. store sale shortfall in the third quarter, are you comfortable with where they are? I think--what did you say they were up? Five percent on a per square foot basis ex the motor sports?

Robert J. Vold

Well, actually, I think Rick would say it’s 2% which is important to note.

Robert Simonson - William Blair & Company

Down 2%?

Richard Vazquez

Down 2.45%. Our inventories--I made that point that, you know, a couple of years ago, we struggled somewhat with our DC employing of goods and we have made tremendous progress in gaining our DC and our replenishment. To date, they had--you know, with the sales challenge we had to wind up with managing our inventory 2% less on a comparable basis, meaning without the power sports which weren’t in there last year, I think is pretty significant.

Robert Simonson - William Blair & Company

And last one. You talked about cap ex depreciation, number of stores. It’s five or six stores net of two relocations, so you’re actually seven or eight stores. Is that correct?

Robert J. Vold

No, five or six is the total number of new stores. Again, we’re committed to five in the spring. Again, the two or three are--so the net will be two to three.

Robert Simonson - William Blair & Company

Oh, so it’s net two to three?

Robert J. Vold

Correct.

Robert Simonson - William Blair & Company

Okay. And do you have a guestimate on finding stores for the pre-opening expenses? Obviously, they’ll be down quite a bit.

Robert J. Vold

Again, it will be very similar to the averages this year over last year. Part of this year’s number includes some pre-opening expenses relative to eCommerce. I mean, I think we’re looking in the range of $360,000 to $375,000 per store.

Robert Simonson - William Blair & Company

So I’d multiple that by five or six stores?

Robert J. Vold

Correct.

Robert Simonson - William Blair & Company

Any expenses associated with the two relocations maybe that are out of the ordinary?

Robert J. Vold

Well, to the degree that we always absorb the lower margin for a period of time during those transitions as we close out that inventory, but they’re ultimately at the end of their lease.

Robert Simonson - William Blair & Company

Okay. So there’s no write-offs or catch-ups or anything like that to shut them down?

Robert J. Vold

Correct.

Robert Simonson - William Blair & Company

Very good. Thank you.

Operator

Once again, if you would like to ask a question, please press STAR + 1 on your touchtone telephone. We’ll take our next question from Rick Nelson with Stevens.

Rick Nelson - Stephens Inc.

Thank you. Good afternoon. Do you anticipate any integration charges with Overton’s?

Robert J. Vold

No, Rick. The integration is probably a different word for this thing because we are going to continue to operate this as a wholly owned subsidiary. There are so much opportunity that we see to drive the business so there won’t be, in one sense, a synergy savings cost, nor do we see a lot of integration costs either. There will be some capital spent probably in the tune of $1-2 million for the course of the year to add some additional capacity there and in our current Web site that Rick and his team have been developing for Rick to launch this spring, but those were all anticipated.

Rick Nelson - Stephens Inc.

Okay. Thank you for that. Can you talk about the seasonality of the $8.0 million in EBITDA and am I to understand correctly that 70% of that comes in the first two quarters? In order words, $5-6 million. Then $2-3 million in the back half of year?

Robert J. Vold

Yeah, Rick. When you line it up, I mean, in comparison to our quarters, it would be about 71-72% of the business is within our first six-month period. Again, the bigger period being the second quarter and, again, their EBITDA would track very much those percentages within the year period of time.

Rick Nelson - Stephens Inc.

And is the business profitable in all four quarters?

Robert J. Vold

You know, clearly, the first couple of quarters are the biggest quarters. The third quarter is close to a breakeven level. And the fourth quarter is probably the smallest quarter overall from that standpoint and they lose a little bit of money there.

Rick Nelson - Stephens Inc.

Okay. Got it. If you reach your targets for EBITDA for the company, you mentioned debt is currently at $338.0 million inclusive of Overton’s, where do you see debt levels at the end of the year? Above those levels?

Robert J. Vold

Rick, we really haven’t again provided specific guidance. Again, I think, as we limit the number of stores and continue to focus on our expansion in the eCommerce area and focus on store performance and management of inventory, I would expect that number to decrease.

Richard Vazquez

Okay. Rick, to make sure we heard your question correct, you’re talking about debt at the end of 2007?

Rick Nelson - Stephens Inc.

Yeah. Yeah. January 2008.

Robert J. Vold

Clearly, at the end of 2007, Rick, I mean, we’re in our busiest selling period and, again, we’re at--you know, even without Overton’s acquisition, we’re in a very high debt period right now based with the increased inventories. Those numbers decrease significantly in the next month period of time and debt goes down, of course, correspondently.

Rick Nelson - Stephens Inc.

I see. So when you said bank debt would be higher, you meant versus the third quarter?

Richard Vazquez

Versus our previous expectations.

Rick Nelson - Stephens Inc.

Oh. Got’cha.

Richard Vazquez

To the degree that the sales and the margins won’t be quite what we anticipated when we said the debt would either stay the same or slightly decrease year-over-year. There will be a slight increase of debt compared to year-over-year, but will come down significantly. Today, Bob sits on more than $55.0 million of availability. So we feel like we’re in good shape.

Rick Nelson - Stephens Inc.

Got’cha. And do you have marketing plans for Overton here within the stores during the --as soon as the fourth quarter?

Robert J. Vold

Well, I think, Rick could tell you that you can go to the Web site today and you can click into Overton’s today, Rick?

Richard Vazquez

Yeah. Hey, Rick, right now, if you could look at the Gander Mountain Web site, we’re welcoming--or you can click right from our Web site over to the Overton’s Web site and start shopping on that one. So the marketing of it has begun already.

Rick Nelson - Stephens Inc.

Okay. Thank you.

Operator

Our next question comes from William Wallace with FBR Capital Markets

William Wallace - Friedman Billings Ramsey

Hi, gentlemen, I’m on the line for Jeff Sonnek today. I have a couple questions regarding Overton’s as well. The first question is how many skews are offered by Overton’s and how many of those skews overlap with skews you currently carry?

Richard Vazquez

Hi, William. This is Rick. You know, Overton’s is a full line outdoor boating, recreation, water sports, and marine area. Their skew account will vary throughout the year based on their seasonality, but I think over the course of the year, they may have something north of about 15,000 skews in those specific categories. From an overlap standpoint, our marine assortments in the Gander Mountain stores are really not that big compared to theirs, so it’s really a minimal overlap on a handful of commodities, if you will.

William Wallace - Friedman Billings Ramsey

Do you expect to change the skew assortment offerings at Overton’s reducing it or perhaps offering more of the skews that they currently carry in the Gander Mountain stores.

Mark R. Baker

I think, William, I’ll let Rick finish it out, but the opportunities here to take adjacent products such as fishing which has not been widely distributed in an Overton’s catalog or outerwear, rainwear, footwear, some lifestyle products that have been included in their pages of the Web and catalog seem obvious to us and we will go as fast as we can to support those products there. We also see certainly that customers will be able to access, for instance, a number of motor replacement propellers that they might need in Atlanta today than they would’ve otherwise been able to get in our retail stores. So the synergy and the opportunity to grow both of our businesses, we think, is very significant.

William Wallace - Friedman Billings Ramsey

So will you be able to use their infrastructure to turn on the www.GanderMountain.com Web site and sell your skews and are you planning on keeping the brands separate?

Mark R. Baker

Yes. We see the three brands, as Rick mentioned, which is as small as being Consumer Marine electronics which is a specialty, higher end electronics for larger boats. Overton’s which has had a long history of serving the water sports customer and marine accessories. Clearly, the Gander Mountain brand which goes back to 1960 . As working together in harmony to attract all kinds of different customers from different places with different propositions of why you might visit that site. Clearly, the harmony and marketing them as all Gander Mountain companies, we see as a big advantage we have compared to 10 years ago or in 1996, the last there was a Gander Mountain catalog. It still appears every day that customers recall and request getting catalogs from Gander Mountain, so we think we can play that big. Rick?

Richard Vazquez

Yeah. As far as the different Web sites as Mark mentioned, you know, the opportunities that we have to expand on their assortments and add that as soon as possible is really where a big opportunity lies. The Gander Mountain site will continue to do as we have talked in the past along the lines of the plans that we had talked previously, to get those done sometime in the first half of this year--the coming year in 2008--so that the customers can go under the Gander Mountain Web site as well. But if you click on www.GanderMountain.com, you can quickly on over to www.Overtons.com and start buying. And they’re ready to ship before Christmas.

William Wallace - Friedman Billings Ramsey

Okay. And switching gear real quick, I was wondering if you could speak to us a little bit about when and how you came to the decision to slow store growth?

Robert J. Vold

I think, William, on that issue, there are a couple of things. Clearly, the current economic environment out there is somewhat challenging from a consumer point. We there are a lot of things and opportunities now that we have the largest retail network that we can go back and reinforce, execute, and do a better job with the assets we currently have out there. And the, clearly, with this transaction, we want to make sure we don’t stretch ourselves too thin on too many fronts where we get this thing working the way we want it to, driving retail store traffic via the web and the catalogs. So we have enough to do and a little time to get some of the execution improved at store level that will benefit us all.

William Wallace - Friedman Billings Ramsey

Okay. My last question would be just if you’d care to quantify the annual savings from your head count reductions?

Mark R. Baker

I mean, it’s again 40 people, you know, average salary and benefits is probably a little bit over $40,000-$50,000, so maybe it’s close to $2.0 million from the 40 head count. Plus their travel and expenses.

William Wallace - Friedman Billings Ramsey

Thank you, gentlemen.

Operator

We’ll take a follow up question from Bob Simonson with William Blair

Robert Simonson - William Blair & Company

Yeah. Maybe I’m the only one who’s not clear on this, are you going to put any of Overton’s product in the stores, in your stores?

Robert J. Vold

Yes. We anticipate that, you know, they’ve got some private labels--Gladiator--a great brand for personal water floatation devices. Some of those things will be expanded in our stores as we make room and time to get those things done. We don’t have any absolute ideas on how much space or products those are today, but we’re going to work on it pretty fast for the coming weeks.

Robert Simonson - William Blair & Company

And the vice versa. Will you put or what can you put on their Web site or is it just going to be a push from if you want apparel or boots or something, you’ll just show a button and come on over to Gander Mountain or will you have any tags series on the Overton’s site?

Robert J. Vold

We will eventually do that. We’ll have a Gander Mountain series on the Overton’s site or Gander Mountain stuff on the Gander Mountain site. So we’re going to work to make sure that the full complement of all of our products by sometime this summer is available to all of our customers. It will take us a while to get it all figured out, but we will be available with all products to all customers in the coming season.

Robert Simonson - William Blair & Company

Now, are you going to fulfill some of the Gander Mountain product from the Gander Mountain side?

Robert J. Vold

Yes. We will. Rick and the team have been working for months on establishing and are pretty far down the path with having the Gander Mountain stuff--some of the Gander Mountain stuff-- and the Web site and the catalogs are going to be in advance of those seasons, but we’ll use our assets at Gander Mountain to ship some of the goods.

Robert Simonson - William Blair & Company

When does the first Gander Mountain catalog go out?

Robert J. Vold

That’s a secret. It is expected that we will have some presence on the Web as early as the spring and we’ll be on that and have some type of catalogs in advance of the right seasons coming this summer.

Robert Simonson - William Blair & Company

In 2008? So you’ll have something out there for the fall season?

Robert J. Vold

That’s correct.

Robert Simonson - William Blair & Company

Okay. Thank you.

Operator

We’ll take an additional follow up question from William Wallace with FBR Capital Markets.

William Wallace - Friedman Billings Ramsey

Sorry, guys. I guess I lied when I said that was my last question. I did want to actually ask if you could discuss the private label penetration at Overton’s.

Robert J. Vold

At this point, I don’t have those numbers in front of me, William. We can look those up. They have a nice growth in their rec sourcing. In their private label, they have a number of brands including Gladiator, which I mentioned, and a number of other ones. They do a very nice job and we see, though, our ability to help them source that stuff directly. And because of the scale of our business, they could grow that a lot.

William Wallace - Friedman Billings Ramsey

Okay. And you’re not sure what the penetration is?

Robert J. Vold

No. Not at this moment. We’ll get back to you on that, though.

William Wallace - Friedman Billings Ramsey

Okay. Fair enough. And then, my real last question is would it be fair to say that this deal prompted your decision to slow growth or was the decision to slow growth already in the works? The reason I ask is you’ve already been able to slow it to five stores and I imagine you are probably in the process of managing leases and it’s a longer term lease, so it would seem that perhaps this decision had been in the works for perhaps quite some time.

Robert J. Vold

Actually, I think I’m going to suggest it to you this way. As we watch the season unfold, we always look out six to nine months to try to understand and manage our business to the best opportunity. We would have probably made the decision--likely made the decision even without the Overton’s thing to slow down growth in the current economic environment and focus on, you know, the assets that we have today. That said, the catalyst for it and making sure that we can manage our business in the financial business that we have and the opportunities became the Overton’s deal.

William Wallace - Friedman Billings Ramsey

That’s a fair answer. Thank you, guys.

Operator

We’ll take our next question from Mitch Kaiser with Piper Jaffray.

Peter Keith - Piper Jaffray

Hi guys, it’s Peter Keith calling for Mitch. Good afternoon to you. I’m wondering just about some of the marketing discussion that you just touched on briefly and how you think about that here in the current macro environment. It appears that traffic was down by a sizable amount which, certainly, weather would have factored into that, but do you feel a need now or an opportunity where you could ratchet up some of your circulars or maybe a radio advertising in order to drive traffic to the stores?

Robert J. Vold

That’s a good question. I’ll let Rick finish it out and I’ll give you my thoughts on advertising. We’ll see what happens in the market. When you’re in the neighborhood and you’re recognizing that we finally have the best weather pattern in the upper Midwest and across the north that we’ve had as a favor with an ice-fishing business that officially starts probably this weekend and the cold weather patterns that seem to continue. That is probably more important than any type of advertising that we could do because we know, if you advertise when there isn’t a season, it doesn’t do us a lot of good. We think we’re going to see some natural traffic, particularly, once people can get to the stores and not get bottled up on the freeway. Rick?

Richard Vazquez

Yeah. That’s what I would concur with is that really the best form of marketing right now that’s going on is just the natural traffic that comes with the good weather and the season that we have in front of us, so a lot of our efforts are really focused around what we’re doing in store and the execution in store and that will work very well for us.

Peter Keith - Piper Jaffray

Okay. Thank you for that. Certainly, the weather here, at least in Minnesota, has been very cold and across the upper Midwest, so I’m sure that’s exciting to you and I know you also don’t like to guide too specifically, but it would seem to me that apparel would probably do a little bit better this quarter than last quarter. Would you anticipate, at least how things are turning right now, that the makeshift in terms of your gross margin may actually be a benefit?

Robert J. Vold

Well, again, not giving guidance for the quarter, but this kind of weather, if it does continue, obviously influences consumer behavior and, as a gift-giving season which is a big time of year for us, we still have more business ahead of us in this quarter than we have behind us in this quarter, the fourth quarter. So we are very excited about what we see, but we’re also cautious that some of the discretionary purchases are going to be a little bit challenging.

Peter Keith - Piper Jaffray

Okay. That’s fair. Another question and I don’t know if you’ll be able to slice this out exactly, but just thinking about some of the current macro factors that are causing headwinds for the consumer, are there any that you can pinpoint that are particularly troubling for your customer? Would it be gas, for example, or you know, based on maybe some of the regional performances of your stores, would it be housing?

Mark R. Baker

Well, you know, it’s all of those certainly. The consumer confidence pretty well tracks what we see in terms of traffic in discretionary purchase. It’s been challenging. Clearly, we have a big profile in SUVs and pickup truck owners, so gas, you know, when it gets to that $3.00 can always give the first sign of a challenge for us.

Richard Vazquez

I think people get used to it, but initially it can be a bit challenging.

Peter Keith - Piper Jaffray

Okay. One last question just on the Overton’s and you’ve talked it being, I guess, slightly (inaudible) for next year, would that be as if you just left it as a standalone company or is that factoring in already some of the expected synergies?

Richard Vazquez

It’s a combination. I mean, again, they have a very stable business and, again, we have some modest growth opportunities right out of the chute. I mean, certainly, a big opportunity as we go forward and get into our fall hunting season and move out of (inaudible) farther.

Peter Keith - Piper Jaffray

Okay. Great. Thanks a lot, guys, and good luck in Q4.

Operator

We’ll take our next question from Velin Mezinev with Donald Smith & Company.

Velin Mezinev - Donald Smith & Company

What is the goodwill that you guys plan to put as a result of the acquisition?

Mark R. Baker

Again, we don’t have an exact number, but it’s probably in the $50.0 million range.

Velin Mezinev - Donald Smith & Company

Thanks.

Operator

We’ll take another followup question from Bob Simonson with William Blair.

Robert Simonson - William Blair & Company

Just a quickie. Have you got contracts with the senior managers and the manager of Overton’s?

Mark R. Baker

Yes, we do, Bob.

Robert Simonson - William Blair & Company

Okay.

Mark R. Baker

Bob? We didn’t hear you?

Robert Simonson - William Blair & Company

That takes care of me. That you do have indeed--the guys are going to stay at Overton’s and be active employees.

Mark R. Baker

They’re very excited about being part of Gander Mountain. You know, they’ve been part of a private equity group which manages business differently and opportunity differently and I can tell you the management group, which we’re headed off to tonight to welcome to the Gander Mountain company and culture, is very excited about being a part of this growth opportunity.

Robert Simonson - William Blair & Company

Very good. Thanks.

Operator

It appears there are no further questions at this time. Mr. Baker, I’d like to turn the conference back over to you for any additional or closing remarks.

Mark R. Baker

Thanks, Christine. Thanks, everyone, for attending this call. We are developing a scalable business with a stronger first half based on southern stores, new products, and the acquisition of Overton’s. In acceleration of our catalog and eCommerce business, we can grow towards that long term goal of being in excess of $3.0 billion. (Inaudible)…margins we still see and double-digit ROIC are still part of our expectations.

I want to thank all of our associates for handling over 4 million customer transactions this quarter. They are the real drivers of success. Thanks for joining us today. We’ll speak to you soon in the coming months. Thank you.

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