Gander Mountain Company F4Q07 (Qtr End 02/02/08) Earnings Call Transcript

Gander Mountain Company (GMTN)

F4Q07 Earnings Call Transcript

April 15, 2008 9:00 am ET

Executives

Bob Burton – IR Squared

Mark R. Baker - Chief Executive Officer and President

Richard J. Vazquez - Executive Vice President, Merchandising and Marketing

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

Analysts

Bob Simonson - William Blair

Steve Denault - Northland Securities

Rick Nelson - Stephens, Inc.

Reed Anderson - D. A. Davidson

Peter Keith - Piper Jaffray

Presentation

Operator

Welcome to the Gander Mountain Company fourth quarter earnings release conference call. (Operator Instructions) I’ll turn the conference over to Mr. Bob Burton.

Bob Burton

Welcome to the Gander Mountain fourth 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 Vazquez, Executive Vice President of Merchandising and Marketing; and Bob Vold, Senior Vice President and Chief Financial Officer.

Mark will discuss business trends, Rick will review our merchandise initiatives and Bob will review our financial results. 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 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 website for approximately 90 days. The transcript of this call will be posted under archives in the Investor Relations section of our website.

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 with the SEC. These reports are available at the Investor Relations section of our website at gandermountain.com and at the SEC’s website at 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 adjusted EBITDA discussed during this call, is available on the 8-K we filed today and at the Investor Relations page of gandermountain.com under the Financial Information tab.

Now I’ll turn the call over to Mark.

Mark R. Baker

Let me begin with a frank assessment of these results. The economic and business trends we identified in the third quarter and into the fourth have produced results for the quarter and the year that were disappointing to all of us at Gander Mountain.

In the quarter that is traditionally the strength of our business sales declined 2.8%, to $318 million. Adjusted EBITDA was $23.8 million, a decline of 31%. Net income also fell 62% to $5.8 million.

While these results are disappointing versus the fourth quarter of last year, Gander Mountain did earn $7 million before absorbing $1.2 million in seasonal losses at our Overton’s acquisition. Our comparable sales performance in the quarter of minus $11.9 was certainly due in part to the economic conditions that pressured consumer spending and affected nearly every retailer in the November to January period.

Traditionally strong merchandise categories for Gander Mountain like firearms, hunting products were negative for the period as was apparel. Early in the season cold weather categories did not perform to expectations.

But we also felt the impact of management decisions during the quarter, in particular we made a deliberate decision to reduce our advertising spend out of conviction that given consumer confidence and the economic impact of our discretionary spending, incremental media investment would not produce a meaningful return in additional sales.

It is important to note that we are seeing a sequential improvement in sales performance thus far through the first quarter of fiscal 2008. With comparable sales running mid single-digit negatives but I’ll back with that for first quarter in a moment and 2008 expectations as well.

For the quarter, sales were soft in all geographic areas including the South, which had been a strong performer throughout the first half of the year. From an operational viewpoint, we remain encouraged by several items.

Soft sales were somewhat offset by initial margin gains of approximately 98 basis points resuming a trend of increasing initial margin in seven of the past eight quarters. Overall, margin gains reflect general improvement in the pricing structure, improved clearance management, benefits of scale and higher penetration of own-brand merchandise.

We have positioned ourselves for an increased focus on execution and cost control. The $6.5 million charge for fiscal ‘07 reflects several items that will benefit our cost structure in fiscal ‘08. Including the closing of two unprofitable stores at year-end, severance cost relates to the restructuring of our corporate overhead in the fall and the adjustment to our service model of our PowerSports business. We also score our stores by utilizing a customer service index continue to show solid results in the quarter.

Having laid out the top and bottom lines for the quarter, we would expect shareholders to ask, “Mark, what is Gander Mountain doing to address these conditions going forward?”

Let me tell you. November we said that we would review all spend centers, markets for additional cost reductions, we would manage our business to the current economic environment. Our management team has been diligently working on next steps to improve Gander Mountain performance over the coming year. It is important to gain more traction and produce stronger results, financials, for 2008.

To that end, we have implemented the following disciplines. We’re putting intense focus on improving performance in existing stores, closed two unprofitable stores the last day of the fourth quarter. We’ll open only five stores in the coming year, of which two are the replacements for three smaller older stores, three new southern stores in Florida and Virginia. This new store count represents a substantial slowing in our incremental square footage in capital spending.

Our CapEx for 2008 will be less than $25 million compared to $47 million in 2007. We have identified 25 stores where we have the greatest opportunity for improvement. We’ll bring management and financial support to these focus 25.

In addition to the focus 25, we’re implementing four major merchandising initiatives. Rick will expand on these in a moment, but specifically they are: continue to grow the Gander Mountain Gunsmith Certified program, which includes the Gander Gun Club Owners Club; expand our fieldwear and everyday apparel and denim workwear offerings; significantly increase the space allocation to our successful footwear business across all of our stores; and adjust the power of the model in our PowerSports footprint in selected stores even as we expect to grow this business over the coming year.

On an expense front, Bob will detail in a moment how cost-cutting actions taken last year will enable us to leverage SG&A by more than 100 basis points in the coming year. We will also pursue the opportunity to leverage the platform and accelerate and expand our entry into the direct marketing arena through Overton’s which was acquired December of last year.

As an example the Overton’s May 250-page catalog will include 44 pages of Gander Mountain branded products including apparel, fishing, and camping items. Most exciting to us of course, we’ll continue to expand through the launch of the Gander Mountain website, the Gander Mountain catalogs, later this year. Given the seasonal pattern of their business, our expectation is that Gander Mountain will benefit from Overton’s operations in the second quarter.

Overall, Overton’s enables Gander Mountain to greatly accelerate our strategy to be an integrated, multi-channel retailer featuring Internet catalogs and retail stores. Overton’s provides an excellent management team, proven platform and an infrastructure in natural seasonal complement with the majority of its sales in the first half of the year and the capacity to handle substantial additional volumes with minimal incremental investment.

This is an important step 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.

For Gander Mountain, our financial goals for the fiscal 2008 include revenues over $1 billion, producing a profitable company performance due to improved store economics and cost savings, and the cost structure that reflects a comparable sales plan at a slightly negative on the year, continued expansion of our initial margin based on the stronger sales performance in key margin categories, apparel and footwear, flat net store growth but a continued shift to southern markets.

We drive to better manage cost and improve sales in stores that currently are not meeting expectations, a profitable growth in the direct business.

Overall, we recognize there’s a lot to do but we feel good about the coming year, continue to have the strong support of majority of shareholders, particularly evidenced by the recent support of our Overton’s acquisition. We’re committed to our customers, our supplier partners and to our dedicated associates who provide great service every day.

Richard J. Vazquez

As Mark said, from a merchandising perspective we had a challenging quarter. With a handful of exceptions, our sales were slower than expected due to broader economic trends and factors relating to Gander Mountain decisions and performance.

Mark mentioned our decision to reduce advertising in mid-quarter. Let me walk through that decision and its implication for the coming year. First, as part of our overall focus on improving efficiency, we have evaluated this expense carefully, both for the second half of 2007 and all of 2008. In considering our sales trend midway through the fourth quarter, we felt that incremental spend would not produce offsetting sales and margin performance.

Looking at our plans for 2008, advertising expense will be about comparable to the past year but will be allocated differently and focus in two areas. First, our direct marketing launch later this year, and second the high-volume third and fourth quarters. We will continue to focus on broader media, for example radio, with a more tactical market-by-market allocation as the year progresses.

Overall merchandising trends were weak in hunting products, firearms, camping and apparel. In the critical hunting area, comparable sales were broadly negative and were below the company average for the quarter reflecting poor performance in ammunition, black powder and small categories like paintball and lighting.

Firearms, and particularly new firearms, were soft during the quarter in the mid-price points reflecting slower discretionary consumer spending.

Fishing was positive due to a strong ice-fishing season. The rod and reel combinations we have offered all year did well and we expect this trend to continue in 2008. Apparel comps in fieldwear and outerwear were negative, but ahead of the company performance. Footwear was a positive exception posting solid positive comps for the quarter. This is in part due to the initiatives we implemented in 2007 targeting women and youth.

For the quarter, apparel penetration increased 100 basis points to 31%. PowerSports was also positive reflecting our first year of carrying boats. Cooking accessories, grills, smokers and seasonings, continue to perform well as it has all year. The camping side of the business, tents and sleeping bags, as well as paddlesports were soft, consistent with year-to-date performance.

While sales on the quarter were disappointing, margin improvement initiatives provided support for margin gains. Own-brand penetration increased from 13.4% to 15.9% on the quarter led by gains in apparel and fishing and contributing about 25 basis points in initial margin expansion.

We finished the year at 13% penetration for own-brand products, up from 11% in the previous year. Initial margin increased 98 basis points on the quarter reflecting general improvement in pricing structure, improved clearance management, benefits of scale and higher penetration of own-brand merchandise.

Inventory ended at $404 million of which $385 million was in the Gander retail business, an increase of 10% over prior year. About half of that growth reflects additional stores and the remainder is annualizing of our expansion of PowerSports products.

Our inventory per square foot in open stores, excluding in-transit and pre-opening inventory, was $62.19 down 2% from prior year. Without PowerSports inventory per square foot was $50.07, a decline from $54 the prior year.

Clearance inventory levels are down over last year, which is important as we enter the New Year. On an annualized basis, inventory turnover slipped from 1.7 to 1.5x. We have several initiatives underway to improve this metric this year.

Ongoing SKU rationalization efforts have yielded SKU reductions in some spring categories by as much as 15% to 20% in average assortments. We’re also flowing goods more efficiently through our distribution center allowing us to reduce inventory in stores over time.

On a trailing 12-month basis, sales per square foot were $164.86 versus $174.90 down 6% as a result of second-half performance. Today, 78% of our square footage is in our 2003 and later big-box stores. Our average customer ticket increased 4.8% to $62.41 for the quarter.

Looking towards 2008, Mark listed several initiatives that will be first in our thinking and action. Obviously the leader is leveraging the Overton’s platform. As we said, Overton’s will continue to operate as a wholly owned subsidiary. We will go to market online and catalog under Overton’s and Gander Mountain.

With the acquisition of Overton’s, Gander Mountain expects to obtain national rates for our products, be able to offer both broad and specialized catalogs, offer our customers the convenience of 24/7 websites for product sales, realize higher margin direct product sales, substantially increase the distribution of Overton’s catalogs in part by distributing catalogs to the customers in the retail stores and offer Overton’s own-brand product in Gander Mountain stores.

As Mark indicated, our first steps will be visible very soon as Overton’s May catalog will include 44 pages of national and Gander Mountain branded products including apparel, fishing and camping items. Beyond that, we look forward to the launch of Gander Mountain’s e-commerce website and Gander Mountain branded catalog later this year. With this significant investment, both companies will look towards building full online product lines and service offerings over the coming quarters.

The next two of our initiatives are apparel related and built on the foundation of our merchandising team began putting in place a year ago. This team has been diligently working on reengineering our product from source to store and their first full efforts will be visible in two areas this spring.

The first is allocating incremental floor space to our successful footwear business across all stores. We will expand the footwear assortments in some areas by as much as 25% with category emphasis on casual footwear, cross trainers and hikers. We will focus on action wear footwear not sports and athletics.

Next, look for expanded Gander Mountain’s sportswear, denim and workwear offerings, as we begin to take delivery of our first full five-season product-line strategy. It is hard to overestimate the amount of change you will see here. In men’s, nearly every style has been re-engineered. In women’s, more than half the styles have been redone and we have expanded classifications. I’m excited about this end-to-end effort and the styles, quality and fit look terrific.

Our fourth initiative is the readjustment of the model for our PowerSports footprint. In our first year of this category we have found success where scale in the market size and support from a large format showroom are in place. We will continue to grow this business and will include it in Palm Beach Gardens and Madison stores this year.

However, based on the learning’s of the past year we are eliminating this category in stores where volumes have not validated the investment in the inventory and service. An example of this would be in the Twin Cities where we have consolidated these product lines from five stores to our two larger stores.

We have found that the financial performance of this category is considerably stronger at our large format stores and in certain targeted markets. In the future, we will take a flexible approach to this category. We have a PowerSports assortment in 33 stores now and carry loose motors and jon boats in all stores. We still expect this business to contribute increased sales and margins in 2008.

And fifth, we will grow our Gander Gunsmith Certified Program which provides additional value to our customers. We continue to be excited about this point of differentiation in the marketplace as nation’s leading firearms retailer.

Coming up, this has been a difficult six months but we feel good about what lies ahead in 2008.

And now, I will turn this call over to Bob Vold.

Robert J. Vold

First, I’ll summarize the results and then I’ll go into more detail on the financials.

For the quarter, Gander Mountain reported a sales decline of 2.8% and a comparable stores sales decline of 11.9%. The net income for quarter four of fiscal 2007 was $5.8 million. This compared to net income of $15.3 million last year.

This year’s fourth quarter includes $1.2 million net losses attributable to our Overton’s acquisition concluded in December. Quarter also includes $4.3 million in store closing costs, asset impairment and other charges.

As Mark indicated, comparable stores sales decrease which was the primary factor behind our reporting a loss for the quarter was system-wide, affecting all regions of our 23-state geographic area. Both Mark and Rick have discussed the contributing elements both economic and company-specific.

For the full fiscal year Gander Mountain reported sales growth of 6.4% and a comparable store sales decline of 5.4%. The net loss for the year was $31.8 million or $1.52 per share compared with the net loss of $13.2 million or $0.88 per share last year.

This year also includes the fourth quarter operating losses attributable for Overton’s as well as $6.5 million in store closing costs, asset impairments, and other charges. Last year’s fourth quarter included a $9 million non-cash debt conversion charge.

Now let me review the financial metrics.

Total square-footage year-over-year increased 12.8% to 6.2 million square feet. Of our two stores closed in the last day of the quarter, one in Pontiac, Michigan and one in Maplewood, Minnesota, both of which were unprofitable stores. The average square footage per store increased approximately 4% to 54,300 square feet for the fourth quarter compared to the same quarter last year. Our comp store base at the end of the quarter was 97 stores.

In the quarter, gross margin decreased 92 basis points, 26.8% of sales. This decrease resulted from a number of factors. Initial margin improved 98 basis points as we benefited from a general improvement in overall pricing strategy, reduced clearance activity and increased penetration of our own brands from 13.4% to 15.9% for the quarter.

This had a negative impact on our initial margin in the quarter as a result of increase PowerSports penetration. The decrease in gross margin was primarily related to de-leverage in store occupancy cost as well as increased sharing.

On an annual basis the gross margin improved 18 basis points to 24.8% primarily as result in increased in the initial margin rates of 107 basis points for the year partially offset by de-leveraging in store occupancy cost. Initial margin has increased three of the four quarters in the year and our own brand represented 13% of retail sales for the year as compared to 11.3% last year.

Turning to expenses, we have historically reported store operating expenses and general administrative expenses independently. As a result of the Overton’s acquisition the company will report SG&A going forward. We will provide segment reporting data for our retail and direct businesses as part of our reporting requirements in our 10-K.

In the quarter, SG&A increased 291 basis points to 21.7% of sales reflecting increased store operating expense, de-leveraging due to soft sales and the inclusion of Overton’s expenses. For the year SG&A increased $33 million to $241 million, or an increase of 16%.

Pre-opening expense was $84,000 compared to $0.00 in the fourth quarter last year. For the year pre-opening expense increased $1.6 million to $4.8 million reflecting incremental store opening.

Net interest expense was $5.7 million for the quarter versus $4.9 million in the fourth quarter of last year due to increased borrowing, partially offset by lower interest rates. For the year, net interest expense was $19.7 million and will increase to approximately $21 million in 2008 reflecting the acquisition of Overton’s.

As discussed the quarter included store closing costs, asset impairment and other charges of $4.3 million. This included the store closing cost of $2.6 million, website development cost incurred prior to the Overton’s acquisition of $1 million as well as cost of $700,000 for the reconfiguration of the PowerSports business.

Comparisons of earnings per diluted share year-over-year are affected by the company’s issuance of equity capital in 2007 which increased the number of weighted average shares outstanding year-over-year. The earnings per share for the fourth quarter of fiscal 2007 were $0.25 per share compared to earnings per share of $0.85 comparable period. The weighted average diluted shares for quarter were 22.9 million shares compared with 18.1 million in the comparable period last year.

As previously reported, we completed the acquisition of Overton’s Inc. on December 6 for $70 million in cash. Total purchase price of $72 million which includes acquisition cost and deferred payments was funded primarily by $24 million in new equity proceeds from current shareholders and from a $40 million term loan. Purchase price allocation resulted in $67 million in goodwill and other intangible assets.

Capital expenditures were $6 million for the quarter versus $5.4 million for the comparable quarter last year primarily for upgrades to existing stores. Total capital spending for fiscal 2007 was approximately $46 million. We expect cash for capital expenditures for fiscal 2008 to be less than $25 million.

The end of the quarter was borrowings under revolving credit facility of 246 million and shareholders equity of $194 million. Currently we have approximately $30 million in availability under our credit facility which is sufficient for our seasonal needs.

Depreciation and amortization was $27 million in fiscal 2007 and will increase to approximately $31 million in fiscal 2008.

Looking forward we are planning very conservatively for fiscal 2008. As Mark indicated, we have built our plans on a small number of net new stores and a slightly negative comparable sales performance to ensure we had the proper expense structure in place.

Our store growth plans in fiscal 2008 will include only five to six total new stores, of which five will be spring openings. We’re closing two smaller stores and opening larger stores in Madison, Wisconsin as well as we relocating our Eau Claire, Wisconsin store.

As a result of taking the cautious approach this economic period and in light of opportunities presented by the direct business, this marked reduction in store opening frequency and reduced capital spending is warranted and we’ll also reduce pre-opening expenses for the year.

In meeting our goals we will benefit from Overton’s strong EBITDA performance which is $8 million on the stand-alone basis last year primarily beginning in the second quarter.

We are committed to improving our operating results. We expand our direct business, our focus on all stores going forward will be on improvement in business fundamentals, product gross margins, expense control, store profitability and management of inventory.

We’ve already taken steps to reduce store operating and other controllable expenses by more than $10 million. We will continue to evaluate ongoing investments in labor and advertising and make the necessary adjustments while protecting our ability to serve the customers.

The second half of 2007 we eliminated 42 corporate overhead positions and pursued other cost reductions which will also benefit performance in 2008. We expect to save more than $5 million on an annualized basis as a result of these actions.

In addition we’ve identified 25 of our stores, the focus 25, that Mark mentioned, where additional efforts in leadership, merchandizing and staffing can deliver sharply improved execution and results for the coming year. We are committed to margin expansion, expense control and financial discipline as we develop the stronger business structure and deliver a profitable business performance in 2008.

Now we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll have our first question from Bob Simonson - William Blair.

Bob Simonson - William Blair

If I’ve got these numbers right, you’re going to have depreciation a little north of $30 million and CapEx of about $25. Does the difference and whatever net income you can earn go towards debt pay down? Or what are you looking for the balance sheet at the end of?

Robert J. Vold

Bob, clearly our goal is inventory management, deliver operating performance and pay down debt during the year.

Bob Simonson - William Blair

Are there any debt covenants that you have on the revolver that says you should or would hope to do a certain level of debt by the end of the year?

Robert J. Vold

No. there are no specific debt covenants relative to a dollar amount. There’s two covenants, one is a 5% minimum availability covenant, and the second is a limitation on capital expenditures.

Bob Simonson - William Blair

Bob, the extent of the revolver, how big is it now?

Robert J. Vold

We have about $30 million availability under our revolver today. Again our revolver capacity is $345 million. At year-end we’re at $246 million that would be under both term loan A and the revolver itself. So we would have $244 million in the revolver as of year-end. Be slightly higher than that as of today.

Bob Simonson - William Blair

Now was there also something with you could increase the $345 if needed?

Robert J. Vold

The $345 has an accordion provision. However, we cannot invoke that while term loan B, which is the Overton’s term loan, when that’s outstanding.

Bob Simonson - William Blair

If your 2008 results and your internal expectations prove reasonably accurate, can you give a guess as to how many stores you might have next year?

Mark R. Baker

Bob, what we would probably look to do is somewhat similar to what we’ve done this year. We’ve got a number of stores that are coming up on their lease provisions, a couple of them, but one or two replacements is what we have been and probably traditionally will do and there are a couple of other stores that we’ll look to in the markets, but it will be similar growth.

Bob Simonson - William Blair

And you have talked on a number of occasions even before Overton’s of the southern strategy hopefully moderating the losses in the first and second quarters and ultimately getting to some profits at least in the second quarter? Is that in this difficult environment still an expectation for 2008?

Richard J. Vazquez

It is Bob. We just came off the Palm Beach Gardens grand opening which was our largest grand opening we’ve ever had, in this springtime and our second-largest grand opening of all time which I think exhibits the ability for us to merchandise and market to those areas. And we remain very excited about it.

We do see some localities where the housing downturn and the consumer confidence is probably more challenge in some markets and obviously we’d like to see that cycle and improve. But overall we have had great success in the South and up until this last downturn on the discretionary side. We feel very strongly about it and again recently evidenced by the strength of the Palm Beach Gardens great grand opening.

Bob Simonson - William Blair

And regarding Overton’s, I think, Bob, you said that they did about $8 million in EBITDA for their full-year, what did that compare with? Was that an up year, down year, sideways year?

Robert J. Vold

And they’ve had a very stable business model over the last couple years. Again modest growth, but very stable business over last two, three years. Slight improvement, but they’ve been very stable.

Bob Simonson - William Blair

On the litigation side, are you intending at some point to not only have your merchandise in an Overton’s catalog, but also a Gander catalog?

Mark R. Baker

In fact we are free to compete. We’re putting the Gander Mountain products in the Overton’s catalog which you’ll see here being delivered at doorsteps in a couple of weeks. Their May catalog and later this summer and early this fall we’ll have a website that is Gander Mountain hosted and supported website which will distribute product as well as the Gander Mountain catalogs this fall.

Operator

We’ll go next to Steve Denault - Northland Securities.

Steve Denault - Northland Securities

I know you’ve made reference to the firearms category being down, I think, below the company average. What do you see there, what’s going on?

Mark R. Baker

A couple of things obviously, we had put in place in early September a program called Gander Gunsmith, which basically, we sell all of our firearms today with a full warranty, which nobody else can do. We’ve got 120 gunsmiths now across 23 states. And basically put a full warranty.

We put together a Gander Gun Owner Club which is a way for us to talk directly to these consumers and for them to get the first opportunity on new products. We do think that initially we didn’t probably execute as well as we wanted to in marketing that strategy. We have seen in the last couple of months, great growth in that program and our firearms business has picked up very significantly.

As well as we saw that the consumer shifted a fair amount to used firearms through the fall. We had a much bigger shift to the used firearms business. I think you’ve seen that across the lot of discretionary products where the consumers still want product, but shifted down a bit.

Richard J. Vazquez

Yes, and that’s basically what’s happened, Steve, is the execution on one hand which was something that we intend on improving and are putting steps to improving is one essence of it.

The others as we segment that business by different price points, different buckets, new use and ranges our data clearly shows that only specific areas of that business were challenged. And as I mentioned, the mid-price point guns, which would indicate something in the consumer discretionary spending has been challenged.

Steve Denault - Northland Securities

And the adjustment in PowerSports affected or resulted in the elimination of ATVs in how many stores?

Mark R. Baker

We show that number, Steve, in a moment here. It’s probably at 15 or 18 stores and generally these 65,000-square-foot stores had a hard time fitting them in there particularly with the new initiatives as we went to larger footwear and apparel businesses.

We worked with our supplier to make sure that in many cases we’ll actually drive more volume in certain markets than we have previously done because we consolidated that activity using the Twin City example or we’d have had them available in the Eden Prairie store, Blaine and Woodbury. Now they’ll be just consolidated with Forest Lake and Lakeville. And we can do a much bigger job the presentation of those larger stores.

Operator

We’ll go next to Rick Nelson - Stephens, Inc.

Rick Nelson - Stephens, Inc.

Did you address the inventory, I’m calculating up 16% in the quarter when sales declined.

Mark R. Baker

We saw, again reflecting on the same square footage, a significant decline, we cancelled a lot of inventory when we saw the business falling off in October and November, but there is growth largely based on the square footage, Bob and a couple of things.

Robert J. Vold

Yes. Rick, the biggest increase in inventory in quarter four was at Overton’s. Overton’s did $19 million as of year-end from an inventory standpoint. Again inventory dumped in the whole year went from $349 to $404 million. New stores accounted for approximately $40 million of that, Overton’s for another $19 million.

The boat inventory in PowerSports, as we grew the number of boat stores during the year in our first rollout added dollars to inventory as well. And then $4 per square decrease on average actually decreased inventory by approximately a little over $20 million in total, but Overton’s is the biggest factor in quarter four.

Rick Nelson - Stephens, Inc.

So you’re not anticipating any aggressive credit clearance activity there?

Richard J. Vazquez

As a matter of fact, Rick, we really feel good about our level of clearance inventory, it’s probably at the lowest level we’ve had in years, and the freshness of our inventory. I would see, seasonally you go through January, February where you do close out some remaining sizes and heavyweight apparel, but we got through the fishing season very clean.

We got through all the apparel and footwear. It was probably the best footwear season that we’ve had terms of moving through all the pack boots and things like that. So we feel very good about our inventory levels. That said, we continue to believe we can lower our inventory levels throughout the course of the year as we right size the business.

Rick Nelson - Stephens, Inc.

The Overton’s loss of $1.2 million over the period that you owned it; how does that compare to the prior-year, same period of time?

Robert J. Vold

Again, very similar, Overton’s is a very seasonal business. Again that’s really their slow period of time of the year. They’re ramping up now as we’re getting into the spring boating season.

Rick Nelson - Stephens, Inc.

And the tax rate 6% in the fourth quarter. What are you looking at for a rate as we’re looking at 2008?

Robert J. Vold

That’s really just state taxes again in individual jurisdictions both Overton’s and ourselves on a go-forward basis. It’s very similar in that range. Our NOL from a federal standpoint is $86 million. So we will not be a federal taxpayer for a period of time.

Rick Nelson - Stephens, Inc.

And as the debt levels, 62% debt to cap. Are you contemplating more equity in the current year?

Mark R. Baker

Rick, we’ve always done and you’ve seen it when we’ve done even the recent acquisition. Our significant shareholders have always supported this business as evidenced by the last $25 million. We don’t see any needs at the moment but we always feel confident that we can do what we need to do in advance of any needs. But we see ourselves in a position right now to pay down debt and to run the business the way it is.

Rick Nelson - Stephens, Inc.

The seasonality of the business, are you looking now as you look at this year, two profitable quarters and two loss quarters?

Mark R. Baker

We obviously don’t break out and give any guidance by quarter. And what we continue to believe is that we’ve made the right changes in our business from adding the boats last year and the ability to grow our boat and marine business which we had evidence through the first two quarters of last year. We are very new to that business. We expect that to grow, Rick pointed out all the opportunities we see in women’s and kids apparel.

And the footwear business, which we believe is a year-round business. And then finally obviously the seasonality of the Overton’s business, which I pointed out significantly impacts quarter two, is something we look forward to. But other than that we don’t break it out by quarter.

Operator

We’ll go next to Reed Anderson - D. A. Davidson.

Reed Anderson - D. A. Davidson

Mark, could you add a little more color on these 25 stores you’re focusing on in terms of improving, obviously they’re your underperformers, etc. But could you maybe give us more sense of some of the common characteristics there that you found, whether it’s geography or mix or management, and just give us a better sense of what kind of opportunity might lie within those stores?

Mark R. Baker

We see the opportunities in 25 stores. The effort here is going to be to do reviews of all the management there and make sure we’ve got the right people in place. We’re reviewing the merchandise and the mix of the merchandise in those markets. We’re reviewing the marketing in those markets. And frankly the displays in what we call the focus 25 will cause us to have learnings which we could apply across all of our stores.

In the last three or four years, we’ve spent a great deal of our top talent building and opening new stores and it’s always exciting to do that. And what we looked at when we turned around and looked at some of our stores that we believed had higher sales opportunities than we were achieving. Some cases we needed different management, some cases we needed different timing of merchandise, some cases slightly different marketing.

We’re really excited about focusing on these opportunities and spending a lot of quality time with this management and the merchants in those stores. Recognizing that these stores in some cases by the way are performing very well, some of these stores are actually our highest volume stores. But we believe they are capable of driving another million or $2 million of additional volume out of them.

What are the things that it takes to take our learnings from one store to the other? This pause in our absolute store rollout, it is sometimes very healthy for us to refocus on those existing opportunities and I look forward to reporting to those quarterly.

Reed Anderson - D. A. Davidson

So we shouldn’t infer then that these 25 are all losing money or are your worst performing stores. These are stores where you’ve identified the best opportunity for improvement?

Mark R. Baker

As a matter of fact, we only have a couple of stores, less than a handful, that lose in total probably $1 million in four wall contributions. So we have moved all of the stores across the line of profitability with a couple, three exceptions. And what we see these stores are, across the spectrum, there’s big opportunities in that marketplace to do a lot better.

Reed Anderson - D. A. Davidson

And are they spread across all your geographies or are they more concentrated in a particular area?

Mark R. Baker

They are spread across geographies primarily because we wanted each district manager to have a couple of these stores so that we can apply those learnings across the rest of that base. So every district has a couple of stores.

Reed Anderson - D. A. Davidson

Is this something where you think you can seriously drive meaningful improvement by the end of the year? Or are you just starting a multi-year process with these locations?

Mark R. Baker

The easy learnings and the low-hanging fruit will be applied across all the stores quickly. But we think this is a process which you continue to improve the rest of the life in retail. We see meaningful differences in these stores and what their upside can be throughout the year.

Reed Anderson - D. A. Davidson

Bob, if you just stripped out Overton’s, what would your, range or ballpark, what would your gross profit margin on a reported basis look like in the fourth quarter?

Robert J. Vold

Again, in the fourth quarter, Reed, it’s a very small difference. Again it’s – Overton’s revenues were $5 million or so in that period of time. It’s minimal basis points whatsoever.

Obviously on a go-forward basis as direct business becomes a larger component, the initial margin separate from Overton’s, we expect that we’ll have initial margin expansion similar to the last couple years. The last couple years we expanded initial margin by over 100 basis points each year. And in addition get the benefit from Overton’s in the direct business which could be 40 to 50 basis points impact on overall initial margin.

Reed Anderson - D. A. Davidson

If you look at just building out that direct piece knowing what they already have and what you’ve spent so far, how much do you think you’re going to have to spend just on that piece this year? Is it $3, $4 million? Is it more than that? Less than that?

Mark R. Baker

What we’ve done, Reed, is reevaluated some of the advertisement we’ve had in the past and reallocated in many cases to the catalog and the distribution of that. We believe that the catalog being distributed will support our retail stores as well as a marketing piece, so it won’t be incrementally very much larger for the year in our total advertising between the two companies.

Reed Anderson - D. A. Davidson

Rick, about the footwear expansion you talked about, approximately how many locations might that apply to where you’re talking about a 25% increase in floor space? Is this more of a portion to the women’s and kids, or you expanding the men’s as well, new brands?

Richard J. Vazquez

The actual expansion is really going to come across all stores. Exactly in which store it may get up to about 25% very difficult to pinpoint because we have to look at each store individually and assess a couple of things. The space that’s available and how we get there as well as the assortment needs for those markets. So that number is pretty tough to pin down with just a comment.

As far as the assortment growth, there really is opportunity across all categories. Men’s casual is one that we continue to have a lot of opportunity in, although we don’t talk a lot about it. We’re very strong in the hunting boot category but men’s casual is a big opportunity. And women and youth clearly continue to be our largest opportunity.

Having said that, there are some other classifications that our current customers that would, not only are regular users of, but they would expect to find in our stores. As I mentioned anything that’s outdoor lifestyle, action wear type of footwear that goes with sportswear, but not getting into athletics, not getting into team or anything of that nature, just keeping it within the outdoor lifestyle segment.

Reed Anderson - D. A. Davidson

And very much a push on the branded side primarily?

Richard J. Vazquez

Footwear continues to be primarily a national branded category in that we get great support from our manufacturers and we’ll continue to do that. We will do some own-brand where we see voids in the marketplace and opportunity. But, yes, the primary focus will be on branded.

Operator

We’ll go next to Peter Keith - Piper Jaffray.

Peter Keith - Piper Jaffray

The competitive environment, obviously it looks like you and others are pulling back on some of the advertising but at the same time would guess that the tough consumer environment might be creating some irrational behavior out there. So, are you starting to see more clearance or discounting activity from competitors? And how much would you be reacting to that?

Mark R. Baker

Peter, actually we haven’t seen in our category a lot of predatory pricing or even additional advertising significance. Just remember even though that the top three of us in this category still do less than 15% of the total business out there in many cases we don’t even have overlapping geographies with most of the other big box competitors. We don’t see much of that.

I think from a breath of fresh air this will be the first year that I can remember that there is no significant impacts of additional competitors opening real estate in our 23 states against us.

Peter Keith - Piper Jaffray

But any of the smaller independent retailers that maybe have one or two stores that are potentially going out of business, are you seeing any of that activity?

Mark R. Baker

There certainly is that stress in the marketplace. Whether it’s a small archery shop in the particular market or small gun shop in another market or a bait shop. We have heard and seen of the stress going on there and in these times there is an opportunity to consolidate that market share by performing and we are keenly aware of that and understand that we will be a place of choice for those consumers if we do the things right.

Peter Keith - Piper Jaffray

The boat launch, and last year I know there were some expenses that came up in Q1 and Q2, I think it was about $800,000 in Q1 and $2 million in Q2. But how would those expenses as you continue that boat launch compare to this year? Would they be about the same or a little bit less?

Mark R. Baker

Generally they should be less. There’s a lot of expenses it took to remodel some stores, make some space. Obviously some training that went into developing the mechanics and the sales training for the stores. We have cycled that quite a bit I think.

Robert J. Vold

Again, last year we really rolled those boats out in that March, April, May timeframe for the first time there were more start-up costs and again those were in the boat stores that we are in now other than in new stores that we may be going into, [inaudible] Those expenses really aren’t recurring in nature from last year to this year.

Peter Keith - Piper Jaffray

So it sounds like there will be some expense but it will certainly be down in both quarters this year.

Robert J. Vold

Yes.

Peter Keith - Piper Jaffray

On the advertising I know there has been an effort with the southern stores and trying to take out some of the seasonality of your business and spread it across the year. But now it appears your advertising is shifting more towards Q3 and Q4. It seems to kind of fly in the face of balancing the business over the course of the year. I was wondering if you just comment on that and let us know what you are thinking.

Mark R. Baker

I think what we’ve looked at is we still have 65% of Gander Mountain’s business because of the hunting season being such a significant piece of our business, that we spend more of our money in that period of time. Now within that, there are local markets and opportunities where they get ads that are not done on a national level.

Richard J. Vazquez

Yes, Peter, the real key for this is we’ve got to maintain what’s in proportion to our business the front half, back half business and we’ve got to make sure that we protect that.

Whatever we’re doing, whether it be in the front or the back half, the efforts to become more strategic and more surgical so that the actual advertising piece and all that is going where we’re going to get return becomes important. So, whether it’s driving first half business in a southern store because of the nature of its seasonality, then we will make sure that that concentration is in and around those locations.

And then the last part of it that I think is going to be a huge benefit to Gander Mountain is the ability to start reaching that customer via the web and the catalog later this year.

Operator

We’ll go next to Bob Simonson - William Blair.

Bob Simonson - William Blair

Did they say net or pre-tax, the $1.2 million for Overton, that’s a pre-tax impact or was that tax affected?

Robert J. Vold

That’s a pre-tax.

Bob Simonson - William Blair

The pre-opening, Bob, last year was $4.8 million with fewer stores an estimate for this year, is that one you can give?

Robert J. Vold

Again it’s about $400,000 per store we’re opening the five new stores this year.

Bob Simonson - William Blair

Less than half of what it was in ‘07?

Robert J. Vold

Yes.

Bob Simonson - William Blair

Mark, did you say you would like to see your SG&A ratio as you now report it down a 100 basis points this year versus ‘07?

Mark R. Baker

We said about at least that. We made all of those cuts, difficult choices, last fall. We have been operating on that and plans to the beginning of the year.

Bob Simonson - William Blair

You said you hope, anticipated or guided a number to a billion or more in sales. So the SG&A dollars have to go down to have that kind of impact unless you have the sales expectation that doesn’t seem to fit your commentary.

Mark R. Baker

We have some new stores that actually are little bit added to that but obviously from a base camp level, a leverageable piece of business, right.

Bob Simonson - William Blair

So you don’t need a flat or up comp to accomplish that SG&A leverage.

Mark R. Baker

My point that I made earlier, which was we have actually planned and anticipated slightly negative comps for the year and built a plan that it turns us to profitability with that anticipated.

Operator

We have no further questions.

Mark R. Baker

Thanks everyone for attending this call. We are developing a scale of business with stronger first half base on southern stores, new products, the acquisitions of Overton’s, the acceleration of our catalog and e-commerce efforts.

I want to thank all of our associates for handling 5 million customer transactions over the quarter. You are the real drivers of our success. Thanks for joining us today. We will speak to you again very soon.

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