Dick’s Sporting Goods Inc., Q4 2007 Earnings Call Transcript

| About: Dick's Sporting (DKS)

Dick’s Sporting Goods Inc. (NYSE:DKS)

Q4 2007 Earnings Call

March 11, 2008 10:00 am ET

Executives

Edward Stack – Chairman & CEO

Joseph Schmidt – Executive VP & COO

Timothy Kullman – Executive VP & CFO

Dennis Magulick – Director IR

Analysts

Kate McShane - Citigroup

John Shanley - Susquehanna Financial Group

Matthew Fassler - Goldman Sachs

Brian Nagel – UBS

David Magee - SunTrust Robinson Humphrey

Michael Baker - Deutsche Bank

Sean McGowan - Needham & Company

Dan Wewer - Raymond James & Associates

Vivian Ma – Oppenheimer

Michael Keara - Merrill Lynch

Unidentified Analyst

Robert Samuels - JP Morgan

David Cumberland - Robert W. Baird

[Jay Soleil] – Morgan Stanley

Mitchell Kaiser - Piper Jaffray

Richard Nelson - Stephens Inc.

Sam Poser – Sterne, Agee & Leach

Jim Duffy - Thomas Weisel Partners

Operator

Good day ladies and gentlemen and welcome to the Dick’s Sporting Goods Inc. fourth quarter fiscal year 2007 earnings conference call. (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

Good morning to everyone participating in today’s conference call to discuss the fourth 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 www.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 that 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 Edward Stack, Chairman and CEO. Edward will discuss our fourth quarter financial and operating results and review the guidance contained in our press release. Also joining us this morning are Joseph Schmidt, Executive Vice President and Chief Operating Officer and Timothy Kullman, Executive Vice President, Finance, Administration and Chief Financial Officer. Joe will review our store opening program and provide an update on our plans for a third distribution center. Tim will then discuss in more detail our financial results.

I’d now like to turn the call over to Edward Stack.

Edward Stack

Thank you Dennis. I’m pleased to report the results of our fourth quarter, a quarter in which we exceeded our guidance on both the top and bottom line. Our portfolio of businesses and emphasis on execution combined to produce another quarter of consistent financial results. This quarter we generated net income of $73 million or $0.62 per diluted share which is $0.03 above our original guidance. Strong sales, higher margins and efficiencies in freight and distribution all contributed to earnings greater than guidance.

Total sales for the quarter increased 18% to $1.2 billion. At Dick’s Sporting Goods stores comp sales exceeded our expectations increasing 2.7% or 3.4% adjusted for the shift in the retail calendar. At Golf Galaxy pro forma comp sales declined 8.8%. On a shifted basis pro forma comp sales declined 9.8%.

Comp sales gains at Dick’s Sporting Goods were driven by our athletic apparel, outerwear and footwear businesses. These increases were offset by the NFL business, table games and the golf business which overall was challenging. We planned for the difficult NFL license business which was up against last year’s comparison of the Indianapolis Colts and Chicago Bears Super Bowl runs.

We are providing our initial guidance for 2008. For the year we expect earnings per diluted share of approximately $1.49 to $1.54, a 12% to 16% increase versus 2007. We are expecting comp store sales to be approximately flat to positive 1% in 2008. We are cautiously optimistic about our business prospects in 2008. This year we will add approximately 46 Dick’s Sporting Goods stores, ten Golf Galaxy stores and will open a new distribution center in Atlanta to support our continued growth. We will continue to build our private brands strategy with partnerships such as Nike ACG, adidas baseball, Reebok apparel and our newest brand Maxfli. Even with all these key initiatives we can’t ignore the uncertain macro economic environment we are all currently facing.

For the first quarter 2008 we expect to earn approximately $0.16 to $0.19 per diluted share as compared to $0.19 in the first quarter of 2007. In addition to the challenging environment the year over year comparison is impacted by the Super Bowl. While the New York Giants’ victory did benefit our business, the impact was $0.01 less than the Indianapolis Colts’ victory last year as we have very few stores in the core New York City market.

Our quarter is also impacted by $0.01 worth of expenses associated with the start up of our Atlanta distribution center. We are anticipating comp stores sales to range from negative 4% to negative 1% in the first quarter where we still have not yet seen the start of the spring sports seasons due to many of the fields still being covered with snow.

Both Dick’s and Golf Galaxy are included in our comp store sales comparison for each quarter and the year. Chick’s Sporting Goods stores will be included in the comp sales comparison one year after the conversion to Dick’s Sporting Goods stores.

We are pleased to have delivered a solid fourth quarter culminating in a year which our business generated a 30% earnings per share increase. We also made two acquisitions, continued to capture market share in new and existing markets, expanded our merchandise margin and improved our operating efficiency. I’m proud of our associates who once again demonstrated their ability to execute against our business plan. At this time I’ll turn the call over to Joe.

Joseph Schmidt

Thanks Ed. For 2007 new store opening program for Dick’s stores was completed in our third quarter. Our new stores continue to perform well. In quarter four, new store productivity for the Dick’s stores was 91% continuing a trend through 2007. This calculation excludes the newly acquired Chick’s stores. In the fourth quarter we opened four and closed two Golf Galaxy stores. New Golf Galaxy stores were opened in Baltimore, Maryland, Fairfax, Virginia, Phoenix, Arizona and Washington, DC. Golf Galaxy stores closed in Memphis, Tennessee and Pittsburg, Pennsylvania.

At the end of the fourth quarter we operated 340 Dick’s Sporting Goods stores with 19 million square feet, 79 Golf Galaxy stores with 1.3 million square feet and 15 Chick’s stores with approximately 800,000 square feet. We’re planning to open approximately 46 Dick’s and ten Golf Galaxy stores in 2008. Much like 2007 we expect our 2008 new store program to include a mix of new and existing markets. Nearly half the new store openings will be split among quarters one and two with the other half opening in the third quarter.

Lastly I would like to provide an update for our third distribution center which as we outlined last year will be located in Atlanta, Georgia. Our Atlanta DC remains on track to be operational by mid year at which point our total network capacity will be 670 stores. I will now turn the call over to Tim to go through our financial performance in more detail.

Timothy Kullman

Thanks Joe. Sales for the quarter increased 18% to $1.2 billion. Comp store sales at Dick’s stores increased 2.7% or 3.4% on a shifted basis driven by higher price points. Cannibalization impacted comps by approximately 1% similar to recent levels. Gross profit of $376 million was 31.03% of sales, 18 basis points lower than 2006. Expanded merchandise margins and lower freight costs were offset by deleverage on the occupancy line due to one less week in this year’s fourth quarter.

SG&A expenses of $250 million were 20.65% of sales and 80 basis points higher than last year’s fourth quarter. Advertising expense leverage was offset by store payroll and admin expenses which much like occupancy were higher as a percent of sales due to one less week in the quarter. Operating income increased $9.5 million or 8% to $125 million. As a percent of sales, operating income margin of 10.28% was 94 basis points lower than 2006. Merchandise margin gains, freight savings and advertising leverage were more than offset by the impact of one less week in the quarter and the resulting occupancy, payroll and administrative expense deleverage.

Net income for the quarter increased 8% to $73 million. Recall last year’s fourth quarter included a $0.05 impact combined for the 53rd week and the Indianapolis Colts and Chicago Bears Super Bowl runs.

Let’s move to the balance sheet. At year end inventory per square foot was 3.5% higher than 2006 when including Golf Galaxy and Chick’s Sporting Goods in the 2006 year end number. This increase was driven by increases in average price points. We ended the quarter with no outstanding borrowings on our line of credit. Our borrowing rate is LIBOR plus 75 basis points averaging 5.675% in the fourth quarter. The strength of our business enabled us to repay the borrowings from both our acquisitions of Golf Galaxy and Chick’s Sporting Goods in 2007. This is the third consecutive year in which we’ve ended the year with no outstanding borrowings.

Net capital expenditures were $108 million in 2007 or $172 million on a gross basis in line with our previous expectations. We’re expecting net capital expenditures of approximately $150 million in 2008 or approximately $230 million on a gross basis.

I would like to make a few remarks about our expectations for 2008. Merchandise margin expansion has been an important part of our earnings growth over the last several years including 2007. We continue to benefit from better buying, expansion of our private label and more recently private brand program, and improvements in inventory and mark down management. We expect each of these factors to contribute to merchandise margin improvements in 2008 and beyond. The freight and distribution gains achieved in 2007 were meaningful in result of increased productivity and programs designed to improve our processes. While continue improvements are planned the magnitude of the gains in 2007 are not expected to carry into 2008.

As Joe outlined earlier we’re planning to open our third distribution center this year. As a result of pre opening and other costs associated with opening and operating a new DC we expect to absorb a P&L impact of about $0.01 in each quarter in 2008. This impact is incorporated in our guidance. We’re also expecting a relative increase on the occupancy line in 2008 due to real estate costs associated with some of our new stores. This impact is most influential in the first and third quarters and is in our guidance.

Specifically in the first quarter merchandise margin gains are likely to be more than offset by the combination of the factors I just described, especially distribution center start up costs and higher occupancy. As a result of these factors which occur in a quarter in which we are expecting our comp sales to be negative, we expect to report a declining gross profit margin rate for the quarter. Over the course of the year, we do expect to mitigate the affect of the occupancy and distribution center start up costs. Again the impact of all these factors is in our guidance and while it is important to understand the factors which influence EPS growth rates throughout the year, we are focused on growing the business for the long term. We are planning to provide guidance one quarter at a time throughout 2008 consistent with our customary practice and we are guiding to an EPS increase of approximately 12% to 16% in 2008 on top of a 30% increase in 2007.

Moving to the balance sheet for 2008 we do expect to have seasonal borrowing needs consistent with how our business has historically operated. Our expectation is to end 2008 with no outstanding borrowings.

Thank you, this concludes our prepared remarks. At this point Operator, I’d like to open the line for questions and answers.

Question-and-Answer Session

Operator

Your first question comes from Kate McShane – Citigroup

Kate McShane – Citigroup

Footlocker just announced that they’re going to be selling Under Armour at over 1,000 of their store locations by the end of the year, and although you don’t compete directly with Footlocker how do you view this change in the competitive landscape and will there be any differentiation between what you are selling and what Footlocker sells with regards to Under Armour products?

Edward Stack

Yes, I think they’ll be a very big difference in what we sell versus Footlocker from an assortment standpoint. The Footlocker stores are obviously much smaller than our stores though larger Under Armour shops that we have carry a much broader array of Under Armour product then will be at Footlocker and we’ve got a number of products and colors of Under Armour products that are exclusive to Dick’s Sporting Goods. So we don’t think its going to have a meaningful impact.

Kate McShane – Citigroup

Okay thank you and my second question is in regards to your private brand strategy, since it’s a fairly new strategy in terms of the private brand as opposed to private label, can you talk a little bit more about how these brands performed over the last quarter and in terms of your initiatives with Nike ACG or some of the other brands, will we be seeing more categories for those brands so beyond apparel for Nike ACG for example?

Edward Stack

Well with Nike ACG right now we don’t have any plans to do anything broader with Nike ACG than we have today. We’re very pleased with the program of Nike ACG. We’re very, very pleased with the performance of the other private brands that we have whether it be Slazenger Golf Balls which did extremely well for us along with Umbro from a soccer standpoint. The early reads on adidas baseball have been very promising, above our expectations. So the private brand strategy is working quite well.

Kate McShane – Citigroup

And any indication that the Umbro private brand strategy will change now that Nike owns Umbro?

Edward Stack

No, we’ve talked with Nike. There doesn’t seem to be any, there will be no change, we have a long term agreement with Umbro which was in place before Nike bought.

Kate McShane – Citigroup

Okay, thanks very much.

Operator

Your next question comes from John Shanley - Susquehanna Financial Group

John Shanley - Susquehanna Financial Group

Thank you and good morning everybody. Ed, with the Golf Galaxy comp sales down 9% in the quarter are you experiencing comparable slow down in golf product sales within the core of Dick’s operation as well?

Edward Stack

Yes, the comps in golf at Dick’s mirrored Golf Galaxy. We’re a little bit better than what Golf Galaxy was but there was a big difference in this quarter versus last year in the fourth quarter where people were playing golf in November and December in 2006 and this year they certainly weren’t. So we don’t see this as a fundamental change to the golf business and I won’t comment by region, but where you see golf being played 12 months a year, the golf business performed much better than what those comps would indicate.

John Shanley - Susquehanna Financial Group

That’s encouraging. I wonder if you can drill down just a little more on the expectations for the flat to slightly up comps in the first quarter. Is this due to a fall off in shopper traffic or concerns about the economy or merchandise related issues. I’m wondering if you can kind of elaborate a little bit for us.

Edward Stack

Well on the first quarter we actually indicated comps would be negative 4 to negative 1 and that’s primarily as I said we haven’t seen a start to the spring sports seasons versus even how it was last year where many of the fields are still covered with snow and the kids just aren’t out there. I know I’ve got two of my daughters play lacrosse and they have not been outside for lacrosse yet this year.

John Shanley - Susquehanna Financial Group

So its weather related as much as anything else?

Edward Stack

Well we think that there is a combination of weather and a combination of just the difficult economic environment that we’re all experiencing right now. What the breakdown is between those we really can’t tell because of the spring sports seasons haven’t started yet.

John Shanley - Susquehanna Financial Group

I see, okay and lastly I wonder if you could comment on the various major merchandise sectors within the Dick’s operation between apparel, footwear and [inaudible], are all of the business plans or business sectors meeting expectations or are there some that are falling short of your business plan expectations?

Edward Stack

We don’t see a meaningful difference between any of these businesses. As we said the golf business was a bit difficult because of the people hadn’t, they played last year, they weren’t playing this year, but other than that we don’t see any meaningful difference across any of the categories.

John Shanley - Susquehanna Financial Group

Great, thank you very much, appreciate it.

Operator

Your next question comes from Matthew Fassler - Goldman Sachs

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning to you, a couple of follow-up questions. I believe that in your third quarter guidance you quantified the expected impact of Golf Galaxy on fourth quarter earnings at roughly $0.04 a share; can you say what it looked like when all was said and done?

Timothy Kullman

We were just about there in terms of you’re talking about the dilution?

Matthew Fassler - Goldman Sachs

Correct.

Timothy Kullman

Yes, right about on target.

Matthew Fassler - Goldman Sachs

And did sales for Golf Galaxy miss plan and if that’s the case how did you compensate there?

Edward Stack

We’ve talked that we weren’t going to provide guidance in Golf Galaxy specifically Matt to call the two out but we would report what their comps were. Their comps were a bit less than what we anticipated but with the portfolio of businesses we have in the Dick’s Sporting Goods business have more than made up for it. The comps in Golf Galaxy were not much different than we saw in the Dick’s Sporting Goods business because of the factors we talked about earlier that people weren’t playing but as I said with the portfolio of businesses we have, we’ve talked about this before, we’ve got the ability to make that up and you can see in the fourth quarter we did make that up.

Matthew Fassler - Goldman Sachs

Understood, secondly, on the inventory, thanks for the inventory per square foot guidance, you know to the extent that the inventory was up a little more than we thought we probably had not thought about Chick’s appropriately in that context. If you could give us a sense as to what the inventory looked like in the businesses that you’ve owned for more than 12 months versus Chick’s which you had acquired more recently, that would be quite helpful.

Edward Stack

We don’t see any inventory issues. We don’t have any inventory that’s built up that we have concerns about. We don’t see any markdowns coming at us. Our inventory is really in very good shape. Gwen Manto and her group from a merchandising and planning perspective have really done a great job of focusing, of keeping our inventory in check. We do have an increase in the average ticket which is planned as we continue to try to move that average unit retail and a number of products and so it’s all planned and we’re very, very pleased with our inventory. If we weren’t we would certainly be calling that out.

Matthew Fassler - Goldman Sachs

Understood and just to follow-up on that if you could take a look at the comp that you printed in the fourth quarter and differentiate between traffic and ticket just directionally as a driver.

Timothy Kullman

For the fourth quarter we had traffic at negative 1.4% and ticket was at 4%. If you want that on a shifted basis traffic was negative 1.3% and ticket was positive 4.7%.

Matthew Fassler - Goldman Sachs

Great, thank you so much.

Operator

Your next question comes from Brian Nagel – UBS

Brian Nagel – UBS

Thank you good morning. My first question I guess for Tim with respect to the 2008 guidance you gave. To what extent is the $1.49, $1.54 predicated on or potentially improving macro environment in the second half of 2008?

Timothy Kullman

Brian, I would say that our guidance is relative to how we think the business will perform through the year. We are not counting on an upside in the macro economic environment for the year. I think you’ll see that the range for the year is probably a little bit wider than we’ve done in the past. We’re trying to accommodate whatever might transpire in the economic environment as the year unfolds.

Brian Nagel – UBS

Okay and then with respect to the Golf Galaxy, now that the comps will be included in, aggregated into your business in 2008, could you help us understand what type of assumption for comps in that 2008 guidance is for Golf Galaxy?

Timothy Kullman

Brian, I don’t think we’re going to be generous with the details much any more on Golf Galaxy as we go forward. We’ll give the consolidated comp and that will be our position in ’08 and forward.

Edward Stack

From a competitive standpoint we’ve talked and we weren’t going to provide guidance for Golf Galaxy separately and based on what’s going out there in the golf business from a competitive standpoint we definitely don’t want to do that.

Brian Nagel – UBS

Fair enough; thank you.

Operator

Your next question comes from David Magee - SunTrust Robinson Humphrey

David Magee - SunTrust Robinson Humphrey

Thank you and good morning, just a couple of questions. One is with regard to your same store sales guidance this coming year, what do you have factored in as far as the ASP, I’m just wondering how you see people potentially trading down I guess in a tougher economic climate.

Edward Stack

With what we’ve been able to do we haven’t seen people trading down. We still feel that technology is a big part of what’s driving our business. We think that that’s going to continue and we, in a very difficult economic environment in the fourth quarter which we’ve seen other retailers and certainly people in our category having a difficult time, take a look at our fourth quarter, we had a really very good fourth quarter in compared to the environment as a whole. We had a great fourth quarter.

David Magee - SunTrust Robinson Humphrey

Thank you and then secondly, how do you feel about the success right now of your national advertising. Are you going to continue that this year in the same way that we saw in the last half of ’07?

Edward Stack

Yes, we think that it was very helpful, very beneficial to the business and I think if you take a look at the results we had with a 30% EPS growth in 2007 over 2006 a portion of that success has to be driven by the advertising program, marketing program that our group put together.

David Magee - SunTrust Robinson Humphrey

Thank you and then lastly as we think about the second quarter you’ve got a pretty tough comparison there on the core side, at a plus 7% comp last year, should we be expecting a pretty, maybe at least a flattish number against that or was there anything last year in the second quarter that was unusual in terms of calendar last year?

Edward Stack

We talked about the second quarter last year being a pop from the first quarter. We didn’t have a great quarter from a sales standpoint last year in the first quarter. We had a very earnings number but the sales number was difficult and we said that when the kids got out there to actually start playing and those spring sports started then we thought that there would be a pop and there was. So we’re not going to comment on the second quarter right now. We’re here to provide fourth quarter guidance and our fourth quarter quarterly call and guidance for the first quarter but we’re not going to do anything on the second quarter right now.

David Magee - SunTrust Robinson Humphrey

Fair enough, good luck this year, thank you.

Operator

Your next question comes from Michael Baker - Deutsche Bank

Michael Baker - Deutsche Bank North America

Thanks guys, one or two questions, one just the square footage outlook for next year, its pretty close to your typical 15% but it is a little bit under that, I think its 13 and change, is there a reason that you’re pulling the square footage down a little bit or am I just being too fine with my details?

Edward Stack

Well I don’t think you’re being too fine with your details, but what we’re doing is we’re very discriminating as where we put our stores and the way that the development cycle is played out this year; these are the number of stores that we’re comfortable opening up in the quality real estate that we’ve come to expect. So no change in the business just the way the real estate happened to fall.

Michael Baker - Deutsche Bank North America

Still same long term outlook, 800 stores et cetera?

Edward Stack

Yes, absolutely. Nothing’s changed.

Michael Baker - Deutsche Bank North America

Okay. Second question would be, so I think as you just articulated April was pretty bad for you last year so because of the weather, so in that sense you have an easy comparison, does your minus one to minus four guidance for this quarter anticipate things getting better later in the quarter or is that just sort of where you’re running now or just trying to understand how that plays out.

Edward Stack

Well as we take a look at the quarter, that’s how based on what we see today that’s what we believe that the quarter will be, will be negative four to negative one.

Michael Baker - Deutsche Bank North America

Okay so but not necessarily including a pick up in April?

Edward Stack

We’re not going to talk, we’ve never in the past nor are we going to talk about how things are trending in a quarter, what do we think by month in a quarter, just we believe the quarter right now will be based on what we see, will be negative four to negative one.

Michael Baker - Deutsche Bank North America

Okay, thanks, if I could ask one more, I think in the third quarter call just on the inventories you did articulate pretty clearly that the clearance was down year over year, I think you said that earlier in the call but is that the case, the clearance levels are, how are the clearance levels versus last year?

Edward Stack

Not a lot different than what they were last year.

Michael Baker - Deutsche Bank North America

Okay, thank you.

Operator

Your next question comes from Sean McGowan - Needham & Company

Sean McGowan - Needham & Company

Thank you, can you comment on what the plan is for the conversion of the Chick’s stores to Dick’s stores, timing wise?

Edward Stack

The timing of that will be, we talked about this before, we thought that it will be some time toward the back half of 2009.

Sean McGowan - Needham & Company

Okay so they’ll stay as Chick’s stores this year and then when you have more of a presence in California do the conversion to Dick’s, is that what you mean?

Edward Stack

When we get a bit more of a presence in California as our development cycle kicks in and then also as we get a better understanding of the southern California market we will then modify those stores to be Dick’s Sporting Goods stores and that should happen sometime in the back half of 2009.

Sean McGowan - Needham & Company

And you mean calendar 2009 by that right?

Edward Stack

Yes, calendar 2009.

Sean McGowan - Needham & Company

So we shouldn’t expect those to be in the comp base then until really like the end of 2010 right?

Edward Stack

Correct.

Sean McGowan - Needham & Company

Okay.

Edward Stack

Also its only 15 stores so it’s not going to affect the comp base a whole lot.

Sean McGowan - Needham & Company

Not a big deal. And the timing of the store opens, did I get this right, you said about half of them would be in the first two quarters of this fiscal year, for the Dick’s stores?

Edward Stack

That’s correct.

Sean McGowan - Needham & Company

Okay and just a follow-up on an earlier question did you give, or if you didn’t please could you provide what the percentage of private brand/private label is for the quarter and for the year?

Edward Stack

We said in our call last quarter that we were not going to provide that information anymore for the competitive reasons but we did say that we would be at least at the 15% number that we had always talked about. So it’s not below 15% but for competitive reasons we indicated we were no longer going to provide that information.

Sean McGowan - Needham & Company

Is it fair to ask did it grow?

Edward Stack

It’s fair to ask but I’m not going to answer.

Sean McGowan - Needham & Company

Okay, thanks a lot.

Operator

Your next question comes from Dan Wewer - Raymond James & Associates

Dan Wewer - Raymond James & Associates

Thanks, Ed you had noted the inventory per square foot is up 3 ½% heading into the first quarter, if your same store sales drop 1% to 4% that would imply sales per square foot will drop about 2% to 5%, you’d also noted that the clearance inventory had not any heavier than a year ago so I’m just trying to reconcile why such an aggressive purchasing plan heading into a period where you appear to be a bit concerned about the top line growth.

Edward Stack

Well we were quite enthusiastic as we were finishing up the fourth quarter. The issues with these, the high school and junior high school athletes not being able to get out to the fields has tempered our enthusiasm here a little bit. We do have orders flowing in for product through the quarter, not everything is here. So Gwen and her team will be looking at orders coming in and modifying some orders coming in, changing the delivery dates to more closely mirror the spring sports seasons.

Dan Wewer - Raymond James & Associates

Do you think you’ll be able to get out of this excess inventory without clearance markdowns and instead be able to return this product back to some of your suppliers?

Edward Stack

Well we think that our inventory is really in very good shape as we look forward with the inventory that’s coming in versus our sales plan, we’re quite confident that our inventory will be in good shape and it’s not so much returning inventory to vendors as it is pushing delivery dates out 30, 45 or 60 days depending on when the season kicks in.

Dan Wewer - Raymond James & Associates

And then a separate question, I understand you don’t want to provide outlook beyond the first quarter, I think on the other hand you can appreciate the view of investors looking at a first quarter sales forecast that could be down as much as 4%, but for the year you’re only anticipating worse case scenario flat comps and then further we’ve got this difficult second quarter comparison coming up so I’m just trying to get a better understanding why you appear to be a lot more optimistic for the year than for the first quarter.

Edward Stack

Well I think part of it is that the first quarter, what we see today and I can only reiterate that these spring sports seasons haven’t started with the fields in Ohio and New York and these places that are covered with snow, these kids are not out there. Practices have been delayed. They might be in the gym but some of the products that they need, shoes et cetera, they’re not out there in the fields yet practicing. So…

Dan Wewer - Raymond James & Associates

I understand that but you’re assuming that business isn’t lost but rather it comes back later on.

Edward Stack

That’s correct, I’m not saying that this is what’s going to happen in the second quarter but that’s what we talked about last year and you saw that business in the first quarter was from a sales standpoint, was disappointing. As I said earlier the earnings number was very good, sales were disappointing but the second quarter there was a terrific second quarter.

Dan Wewer - Raymond James & Associates

And then just real quickly, could you talk about Bill’s decision to retire from the company and your plan for replacing that position?

Edward Stack

Well Bill changed his position; he moved into the Vice Chairman role and has not left the company completely. He’s certainly involved and involved in some special projects. That was a personal decision that Bill made and you know he wanted to spend some more time with his family. He’s got, so he made those personal decisions but he in no way, shape or form wanted to leave the company completely. He’s still very much involved here. And as far as replacing Bill, his responsibilities have been divided between Timothy Kullman has picked up an area of responsibility and Joseph Schmidt who’s now our Chief Operating Officer has been moved into that role to take over the majority of Bill’s responsibility. Joseph has been with us for close to 20 years now and has worked very closely with Bill over the years and will do a terrific job replacing Bill.

Dan Wewer - Raymond James & Associates

Okay, thank you.

Operator

Your next question comes from Vivian Ma – Oppenheimer

Vivian Ma – Oppenheimer

Good morning, just wondering whether you’ve seen any benefits from the Super Bowl game in your fourth quarter comps and if so, what was that magnitude?

Edward Stack

Actually as we indicated in the script, we saw about $0.01 reduction in earnings as in Indianapolis we’ve got a number of stores right in that core Indianapolis market and although we have many stores in New York State we have very few stores in that core New York City market and once you get outside the core of the main city with these licensed product sales the fall off from a sales standpoint is pretty significant. So we enjoyed great success when the Steelers won as we have so many stores right in the core Pittsburg market, Indianapolis a lot of stores right in the core Indianapolis market, the Giants won and we just don’t have many stores in the core New York City market.

Vivian Ma – Oppenheimer

Okay of the merchandise category that you planned for increases in average ticket, can you just outline what were some of those categories?

Edward Stack

For competitive reasons we’ve never talked about specific categories of business and as I said for competitive reasons we don’t want to do that now.

Vivian Ma – Oppenheimer

Okay fair enough and then just lastly given that many others in your sectors are performing weaker have you noticed more accelerated share gains in any of your geographies and/or more opportunities for acquisitions?

Edward Stack

Well from an acquisition standpoint we’re not looking at anything right now. You should really look at us as an organic growth story. Yes we bought Chick’s which was 15 stores as an entry into southern California but we’re primarily an organic growth story and in the fourth quarter we were really quite pleased on balance with our sales performance across the entire country.

Vivian Ma – Oppenheimer

Thank you.

Operator

Your next question comes from Michael Keara - Merrill Lynch

Michael Keara – Merrill Lynch

Good morning everyone, can you talk about inventory at the Golf Galaxy stores, one of your competitors last week had said that some manufacturers were beginning to implement minimum pricing for retail. I don’t know where margins are going there, I know you don’t talk specifically for the Golf Galaxy business but in general, should we I guess perceive that as a positive at some point?

Edward Stack

From an inventory standpoint with Golf Galaxy the Golf Galaxy inventories were actually down slightly year over year.

Michael Keara – Merrill Lynch

Really, okay.

Edward Stack

And so the group really did a very good job of maintaining their inventory balance. As far as minimum pricing, a number of manufacturers are implementing minimum pricing and we don’t think that will do anything to hurt the margins, it’ll certainly stabilize margins in that category.

Michael Keara – Merrill Lynch

And I assume those margins were probably under some pressure in the fourth quarter as like you said, a lot of people weren’t playing.

Edward Stack

Yes and well what we didn’t do is we didn’t go out and try to reduce prices to try to artificially drive the business so there’s a couple of competitive markets that the Golf Galaxy group is involved in with Golf Smith and PJ Superstores and there’s was some margin pressure in some of those markets but taking those markets out, there was actually margin rate expansion especially in light of the additional private label products that we were able to move into Golf Galaxy.

Michael Keara – Merrill Lynch

Okay so you basically didn’t chase sales in that category?

Edward Stack

We didn’t artificially go chase sales.

Michael Keara – Merrill Lynch

Okay, that’s good. Did you guys take down the store growth for them in ’08, ’09 or am I just reading the press release; I guess I had a higher store count for Golf Galaxy in ’08.

Edward Stack

And I would expect you probably did, it’s going to be ten stores and this was really around the real estate strategy. We are really trying to move Golf Galaxy’s real estate strategy to be more southern-based where people are playing golf nine to 12 months out of the year and tried to have a better balance of north south real estate strategy and we’re just, as we’re implementing that we weren’t able to get as many stores in the southern region as we would have liked and we took the store count down to ten.

Michael Keara – Merrill Lynch

Okay, that’s fine. Good luck on the year.

Operator

Your next question comes from Unidentified Analyst

Unidentified Analyst

Yes Ed, it sounds like if the Super Bowl cost you $0.01 that it must have cost you about 7/10th of a percent in sales, something on that order.

Edward Stack

You know Hardy, I can’t give you that, I’m not sure but that sounds reasonable.

Unidentified Analyst

And probably will cost you the same thing in the first quarter that some of those sales go into February?

Edward Stack

That’s where the penny that we talked about is in the first quarter.

Unidentified Analyst

In the first quarter?

Edward Stack

Yes, we didn’t talk about what impact it had on the fourth quarter, we just talked about that it was a penny in the first quarter.

Unidentified Analyst

Okay so it probably cost you that, at least that in the first quarter I would guess. In the area of private brands I know you want to build brands like ACG into being a brand but on the other hand a year ago, we were using private label as our price brand and its kind of an interesting concept as to what to do, whether you want to keep the gross margins high and build the reputation of the brand, whether you want to use it to promote and drive traffic in the store. What is your feeling about that?

Edward Stack

Well we’re not abdicating those opening price points and there’s still some private label brands that are going to be out there that will help drive that opening price point. But then other opening price points we will look to buy out in the market place and not take that inventory risk on that opening price point product.

Unidentified Analyst

Or maybe use Columbia or somebody like that can be the opening price point in some areas.

Edward Stack

Well in some categories Columbia can be the opening price point. Columbia has really done a very good job moving their price points up so there will be some other brands that we would take a look at for opening price points. Whether it be in the athletic apparel area, we’ll be using Russell. Russell really did a great job of coming in and talking to us and putting a program together to capture that market share and that opening price point with which we think are terrific margins in flow of product. So we’re working not only the private label side but also then the branded side for those opening price points.

Unidentified Analyst

You’re not going to abandon the opening price point?

Edward Stack

We’re not going to be abandoning the opening price point no; we’re just going to be trying to move the opening price point to the right. I mean our average points to the right but we’re not abdicating and walking away from those opening price points.

Unidentified Analyst

Okay. Sounds good.

Operator

Your next question comes from Robert Samuels - JP Morgan

Robert Samuels - JP Morgan

Good morning, can you just elaborate a little bit more on the footwear performance during the quarter, perhaps maybe highlighting some specific brands that helped to drive the performance?

Edward Stack

Well we’re not going to speak to specific brands but we were pleased with our footwear business across the board. The boot business and the casual shoe business did better than the athletic footwear business but on balance we were pleased with out footwear business across the board, across the athletic footwear, cleats and then the boot and shoe business.

Robert Samuels - JP Morgan

And then how should we think about the upcoming Under Armour shoe launch in terms of how it could positively impact the business?

Edward Stack

Well we think Under Armour has really done a terrific job of marketing this, the cross trainers. We think that it’s going to be very positive to the business. We also think that some other people, there’s some other brands out there who are enthusiastically marketing their footwear business. We’ve had great success with Nike footwear. We’ve had great success with ASICS and we think that this marketing that Under Armour is doing, that Nike’s doing will help drive the entire category.

Robert Samuels - JP Morgan

Okay, thanks.

Operator

Your next question comes from David Cumberland - Robert W. Baird

David Cumberland - Robert W. Baird

Good morning, in Q4 how were sales versus plan in your fitness equipment business?

Edward Stack

Again we’re not going to talk about specific categories on a comp basis. We’d indicated that we expected the exercise business to get a bit better in the fourth quarter and it did get a bit better in the fourth quarter. Some of the products that we put in place performed quite well. We brought some higher end products in. We did some redesigning of some products. Added some color to some products. And the cardio category did extremely well. The strength category, we’re still a little bit difficult but the cardio category between treadmills and elliptical machines did quite well.

David Cumberland - Robert W. Baird

And then on Chick’s about how much revenue did Chick’s contribute in Q4 and what is the amount of EPS accretion you expect from Chick’s in ’08?

Edward Stack

We expect, we had indicated that we expect it to be marginally accretive in the year. We didn’t guide to what it would be specifically but we said that it would be marginally accretive. And we were very pleased with Chick’s performance in the fourth quarter. Some of the snow that they got in the mountains certainly helped drive their business and help drive some higher margin rate product in outerwear so we’re very pleased with the Chick’s acquisition to date.

David Cumberland - Robert W. Baird

And last question on the third DC at what point should the negative impact from the ramp up go away?

Edward Stack

In ’09, as we said it’s going to impact about $0.01 each quarter for the entire year.

David Cumberland - Robert W. Baird

Thank you.

Operator

Your next question comes from [Jay Soleil] – Morgan Stanley

[Jay Soleil] – Morgan Stanley

Good morning, I just wanted to follow-up on the gross margin, it looks like gross margin was down about 20 basis points this quarter, and just wanted to know with kind of the increase in private label in supply chain initiatives and that maybe we expected to bring gross margin up, what were some of the factors that maybe brought it down this quarter.

Timothy Kullman

Well from a gross margin basis, we lost an extra week in the quarter if you recall, we had a 53rd week in 2006 and trying to leverage occupancy costs in that scenario was very difficult for us so most of the gross margin gains would have been offset by the occupancy cost deleverage.

Edward Stack

We did talk in the script that our merchandise margin rates were up versus last year and it was all driven by the lack of the 53rd week this year versus last year.

[Jay Soleil] – Morgan Stanley

Okay and then just with regard to the store openings, now it seemed like you know the commitments were made to open stores in 2008 and I know you said the plan hasn’t changed for 2009 but because the commitments have already been made, does that make it possible that leveraging occupancy costs going forward will be continued, will be as difficult in 2008 as it was this quarter?

Timothy Kullman

What we’ll find is as we take the whole year into consideration, we’ll be able to leverage those costs but we need the whole year sales base to do that.

[Jay Soleil] – Morgan Stanley

Okay and then one other accounting-type question, on the cash flow statement it looked like there was a $70 million cash influx this quarter from a line item in working capital called income taxes payable/receivable. Can you just provide some color on what that is and how that’s working because that’s something I don’t think we’ve seen in the last few quarters it hit the cash flow statement?

Timothy Kullman

That just is the result of a deferred payment for a quarterly cash payment that fell into the quarter versus being paid previous to that. So rather than being paid in the quarter it’s an amount that’s sitting out there to be payable in Q1.

[Jay Soleil] – Morgan Stanley

Okay, thanks so much.

Operator

Your next question comes from Mitchell Kaiser - Piper Jaffray

Mitchell Kaiser - Piper Jaffray

I know in the past you’ve talked about the Golf Galaxy acquisition being accretive to last year, I think it was about by $0.02 but it was our understanding that the accretion benefits actually might be greater in ’08 so I was hoping you might care to break that out as it would relate to your guidance in terms of EPS?

Timothy Kullman

I know this seems to be a never ending story in what we say here, but we are not prepared to provide additional guidance specific to Golf Galaxy.

Edward Stack

Primarily for competitive reasons.

Mitchell Kaiser - Piper Jaffray

Okay, that’s fair. And then just as it relates to the new DC I understand it’s going to be a drag here this year, would it overall be a benefit as we kind of think longer term just simply due to decreased transportation costs?

Edward Stack

Absolutely, with the, I’m not sure if everybody knows the price of gas keeps going up and as we look to mitigate that this distribution center in Atlanta will help an awful lot as we’re looking to grow our business both in Texas and in Florida and as we look forward this will be a big benefit to the business.

Mitchell Kaiser - Piper Jaffray

Okay and that could start as soon as early 2009?

Edward Stack

Yes.

Mitchell Kaiser - Piper Jaffray

Okay, thank you.

Operator

Your next question comes from Richard Nelson - Stephens Inc.

Richard Nelson - Stephens Inc.

Thank you and good morning, I want to follow-up on the store expansion plans for this year, can you talk about the markets you’re targeting Texas and Florida obviously, but maybe a break down between your existing and new markets and plans for California?

Edward Stack

As a percent, new markets existing markets, roughly the same as last year. California I don’t believe we’re going to get anything new open in California this year. It’ll be, but Texas and Florida will be two states that we’re really focused on and a bit in Arizona also.

Richard Nelson - Stephens Inc.

As you’ve opened a number of stores in the past year in smaller markets, can you speak to the performance of those stores, the returns on capital and your expansion plans there?

Edward Stack

Rick, we won’t for competitive reasons speak about those stores specifically but we see those single store market stores as very good performers that certainly at least meet our model.

Richard Nelson - Stephens Inc.

Okay, thank you.

Operator

Your next question comes from Sam Poser – Sterne, Agee & Leach

Sam Poser – Sterne, Agee & Leach

Good morning, just a follow-up on the private label/private brands, I hope you can answer this one. Are you finding that your out the door margins on the private brands are surpassing that of what you were getting on the private label?

Edward Stack

From a margin rate standpoint they are relatively in line with the private label. The gross margin dollars generated are higher and that’s because of the higher average unit retails.

Sam Poser – Sterne, Agee & Leach

And in general are you continuing to work with other brands as you are with adidas baseball this spring, are we going to see new concepts for fall 2008 as well within this category?

Edward Stack

It’s possible, we continue to work with brands on new initiatives whether they be products that we design and source our self similar to the great partnership we have with Nike on ACG or the partnership we have with adidas on baseball. We’ll continue to look at those and our continuing to look at those and we hope that there may be one or two new ones in the fall. Although we can’t guarantee that. We continue to work on it.

Sam Poser – Sterne, Agee & Leach

Okay and then can you also just talk a little bit about with the new distribution center and the existing ones I guess what are you doing to really improve your speed to market and I guess drive up your turnover. I mean and are you getting cooperation from most of the brands to support you and what percentage of your business is replenishable right now I guess all of that’s probably together.

Edward Stack

Well as we take a look we really are focused on trying to increase those inventory turns. The distribution center in Atlanta will help us do that as we will get product to the stores quicker than servicing them out of Pittsburg or Indianapolis. We have two distribution centers and the one in Atlanta will be the third. We are getting great cooperation from a number of our vendors on this project and some of the largest vendors we do business with have really stepped to the plate and are working to do this such as Nike, Under Armour focusing on more replenishable product and this is something that we’re really focused on in an effort to try to increase that inventory turn.

Sam Poser – Sterne, Agee & Leach

How much has that irreplenishable product increased over the last few years and where is it relative to where you want it to be?

Edward Stack

Well its, I won’t comment specifically although it has grown and again for competitive reasons we don’t want to talk about that but it has grown but it’s not where we want it to be yet. So we still feel that there’s additional growth in replenished product from a number of our vendors.

Sam Poser – Sterne, Agee & Leach

Can you give us some idea of where you are like are you 80% there, or 50% where you want to be?

Edward Stack

I would say we are, north of 50 but we’re not 80% there. I would say if I had to pick a number right now, I’d say we’re probably 60 to 65% of the way there.

Sam Poser – Sterne, Agee & Leach

Thank you and continued success.

Operator

Your next question comes from Jim Duffy - Thomas Weisel Partners

Jim Duffy – Thomas Weisel Partners

I had a question about the merchandise margin expectations for 2008 wondering if you could give a little of color on what your expectations are there?

Edward Stack

No specifically again, for competitive reasons we’re not going to lay that out but we do expect our merchandise margins to increase. We feel that there will be some pressure on those based on the distribution center and based on the occupancy costs.

Jim Duffy – Thomas Weisel Partners

All right, thanks a lot.

Operator

At this time we do not have any more questions in queue and I would like to turn the call back over to Mr. Stack for closing remarks.

Edward Stack

I’d like to thank everyone for joining us on our fourth quarter call and we look forward to speaking with everyone as we report our first quarter results. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!