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Dick's Sporting Goods, Inc. (NYSE:DKS)

Q1 2008 Earnings Call

May 22, 2008 10:00 am ET

Executives

Anne-Marie Megela, Director of Investor Relations

Ed Stack - Chairman, CEO and President

Joe Schmidt - Executive Vice President and Chief Operating Officer

Tim Kullman - Executive Vice President, Finance, Administration & Chief Financial Officer

Analysts

Matthew Fassler - Goldman Sachs

Gary Balter - Credit Suisse

Chris Robinson - Suntrust Robinson Humphrey

Brian Nagel - UBS

Sean McGowan - Needham & Co

Kate Mcshane - Citi Investment Research

Mitch Kaiser - Piper Jaffray

Dan Wewer - Raymond James

John Shanley - Susquehanna

Unidentified Analyst - Buckingham Research

David Cumberland - Robert Baird

Bob Simonson – William Blair

Ralph Jean - Wachovia

Joe Feldman - Telsey Advisory Group

Sam Poser - Sterne Agee

Thomas Paulson – Cornerstone Capital Management

John Barrett - Columbia Management

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 Dick's Sporting Goods Incorporated conference call. My name is Naketa and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Anne-Marie Megela, Director of Investor Relations; please proceed maam.

Anne-Marie Megela

Thank you very much and good morning to everyone participating in today’s conference call to discuss the first quarter financial results for Dick’s Sporting Goods. Please note that a re-broadcast of today’s call will be archived on the Investors Relations portion of our website located at 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 the safe harbor rule, I would like to remind you that we have included in today’s discussion some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectation and involve known and unknown risks and uncertainties. Our actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statement, please refer to our periodic report filed with the SEC. We have also included some Non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable GAAP financial measures calculated in accordance with generally accepted accounting principles and a related reconciliation can be found on our website.

Leading our call today will be Ed Stack, Chairman, CEO and President. Ed will discuss our first quarter financial and operating results and review the guidance contained in our press release. Also joining us this morning are Joe Schmidt, Executive Vice President and Chief Operating Officer and Tim Kullman, Executive Vice President, Finance, Administration & Chief Financial Officer. Joe will review our store opening program and provide an update on our plans for our third distribution centre. Tim will then discuss in more detail our financial results. I’d now like to turn the call over to Ed Stack.

Ed Stack

Thank you Anne-Marie. Considering the challenging and uncertain economic environment we are operating in today, we are very please to report earnings for Q1 of $0.18 per diluted share. This quarter we generated net income with $20.8 million or $0.18 per diluted share including $0.01 per share gain from the sale of a corporate aircraft. These results are inline with our previous guidance.

Total sales for the quarter were up 11% to $912 million. At Dick’s Sporting Goods Stores comp sales were at the low-end of our expectations declining by 3.8%. Golf Galaxy stores pro forma sales declined 7.4%. We believe the consumer is very cautious and will continue to be so at least through the balance of this year. Gas and food prices along with the general concern about the future have impacted our customers. That being said, we feel this is a great time to gain market share.

We will continue to focus on our primary customer the core athlete and outdoor enthusiast. We will continue to work with our vendors to provide unique and exclusive products such as the David Ortiz baseball shoe from Reebok, the AROD cleat from Nike, both of which were very successful this spring. We worked very closely with Under Armour and to our knowledge had the most successful launch of the UA Cross Trainers of any retailer. We will continue to build our private label program which helps to expand our margins rates with our merchandised margins rates up 24 basis points this past quarter.

Our store development program is on track to add 44 new Dick Stores in 2008 and we are looking at expenses to be scaled back without negatively impacting the business as we bring our expenses in line with our new sales expectations.

We have seen irrational pricing in specific markets and at selectively lower prices. In light of the macro economic conditions, we are revising our 2008 guidance. For the year we expect earnings per diluted share of approximately $1.22 to $1.36 as compared to earnings per diluted share for the full year 2007 of $1.33. We are expecting comp store sales to decrease approximately 3% to 5% in 2008.

For the second quarter 2008, we expect to earn approximately $0.34 to $0.38 per diluted share as compared to the second quarter of 2007’s earnings per diluted share of $0.41. We are anticipating comp source sales to be approximately negative seven to negative four in the second quarter. Our expectations include about one penny worth of expenses in each quarter associated with the start up of our Atlanta distribution centre.

Both Dick’s Sporting Goods and Golf Galaxy Stores are included in our comp store sales comparison for the second quarter but not for the full year. The Chick's Sporting Goods Stores will be included in the comp store sales comparison one year after the conversion to Dick’s Sporting Goods Stores. Our team of associates from our store group, the distribution centers and the corporate office have managed this business, the industry leading performance since the company became public in 2002.

Dick’s Sporting Goods has been the last in our industry to feel the effects of the economic slowdown in cautious consumer. With that we believe based on our culture of strict financial discipline and focus on execution, we will be the first to lead our sector out of this slowdown once these issues are behind our country.

At this time I would like to turn the call over to Joe Schmidt.

Joseph H. Schmidt

Thanks Ed. In the first quarter we opened eight new Dick’s Sporting Goods Store and entered two new states, Oregon and Mississippi. These new stores were opened in Tempe, Arizona; Portland, Oregon; Dayton, Ohio; Williamsburg, Virginia; Ocala, Florida; Montgomery, Alabama; Tupelo, Mississippi and Indianapolis, Indiana. Also in the first quarter we opened four new Golf Galaxy Stores these stores were opened in Miami, Florida; St. Louis, Missouri; Baltimore, Maryland and Philadelphia, Pennsylvania.

At the end of the first quarter, we operated 348 Dick’s Sporting Goods Stores with $19.5 million square feet, 83 Golf Galaxy Stores with $1.3 million square feet and 15 Chick’s Stores with approximately 800,000 square feet. New store productivity for the Dick’s Stores was 84%. In total, we are planning to open approximately 44 Dick’s and 10 Golf Galaxy Stores in 2008.

Much like 2007, we expect our 2008 new store program to include a mix of new and existing markets. Of the remaining Dick stores to open nearly one third will be in the second quarter with the remaining in the third quarter. Of the remaining Golf Galaxy Stores, they will be opened in the second, third and fourth quarters with approximately half being opened in the third quarter.

Finally, our third distribution centre in Atlanta, Georgia is on track and is expected to be operational in the third quarter, 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 11% to $912 million. Comp store sales at Dick’s Stores decreased 3.8% driven by pure transactions and partially offset by higher sales per transaction. Cannibalization impacted comps by approximately 1% similar to recent levels. Gross profit of $259 million was 28.41% of sales, 127 basis points lower than the first quarter of 2007.

Expanded merchandised margins and lower freight costs were offset by de-leverage on the occupancy line. SG&A expenses up $220 million were 24.12% of sales and eight basis points higher than last year’s first quarter. Advertising and admin expense leverage was slightly more than offset by store payroll expenses. Operating income decreased $5.1 million or 12.9% to $34.2 million. As a percent of sales operating income margin of 3.75% was 102 basis points lower than the first quarter of 2007. Merchandised margin gains, freight savings and advertising leverage were more than offset by the impact of occupancy and payroll expense de-leverage.

We exercised our early buy out rights on an aircraft lease during the quarter and recognized a $2.4 million gain on the subsequent sale of the aircraft. Net income decreased 4% to $20.8 million and earnings per diluted share decreased 5% to $0.18 compared to prior year net income of $21.7 million or $0.19 per diluted share. First quarter 2008 results included pretax gain on the sale of a corporate aircraft totaling $2.4 million or a penny per diluted share.

Let’s move to the balance sheet. At the end of the first quarter inventory per square foot was approximately 2% higher than in 2007 when including the Chick’s Sporting Goods inventory results in the 2007 first quarter number. We ended the quarter with $121 million in outstanding borrowings on our $350 million line of credit as compared to $159 million in outstanding borrowings last year. Our borrowing rate is LIBOR plus 75 basis points which averaged to 3.73% in the first quarter.

Net capital expenditures were $35 million in the first quarter or $49 million on a gross basis inline with our previous expectations. We are now expecting net capital expenditures of approximately $125 million in 2008 or approximately $205 million on a gross basis.

I would like to make a few remarks about our expectations for 2008. Merchandised margin expansion is benefited from better buying, expansion of our private label and more recently private brand program and improvements in inventory and markdown management. We expect each of these factors to continue to contribute to merchandised margin for the full year of 2008 and beyond.

As Joe outlined earlier we are planning to open our third distribution centre this year. As a result of pre-opening and other cost associated with the opening in operating a new DC, we expect to absorb a penal impact of about a penny in each quarter in 2008. The impact will be seen in our cost of goods sold and is incorporated in our guidance, but we have reduced the cost associated with freight and distribution in the first quarters even with the consideration of the new DC. We are expecting freight and distribution to be slightly de-leveraged for the full year of 2008 primarily due to increasing fuel costs.

As we stated in our last call we are expecting a relative increase on the occupancy line in 2008 due to declining same store comps in 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. For the full year merchandised margin expansion is expected to be more than offset by the occupancy and freight and distribution de-leverage.

Moving to the balance sheet we do expect to have seasonal borrowing needs consistent with our business as it has operated historically. Our expectation is to end 2008 with no outstanding borrowings. Thank you this concludes our prepared remarks. At this point operator I would like to open it for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matthew Fassler of Goldman Sachs please proceed.

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning to you. A couple of questions; I guess I would like to be begin with what kind of assumptions you have about the macro backdrop and then any other factors driving sales as you think about your expectations for the reminder of the year and obviously I know you guys never use weather as an excuse of any sort; obviously parts of the first quarter were difficult, perhaps May is difficult. From that perspective if you could give us any color on how you think the weather has impacted our business that would be helpful.

Ed Stack

Matt I think that the weather has had some impact although I believe the majority of what the issue is today centers around the whole outlook of the economy and consumer sentiment in those concerns and I think that’s something that we are fighting right now and I can outline some of the things that we are planning to do because of this, whether it would be continuing to work with our vendors to provide exclusive and unique products for our consumers to looking at expenses that are not going to negatively impact our -- we don’t feel will negatively impact our business as we bring those expenses inline with sales expectations, so right now we think this is more the economic state of affairs that we are in versus the weather.

Matthew Fassler - Goldman Sachs

Can you give us some color added on product mix and how the cycle or other factors might have impacted that?

Ed Stack

Well, what exactly do you mean that?

Matthew Fassler - Goldman Sachs

I guess sources of relative strength and weakness within the top line.

Ed Stack

There was some strengths in some areas and weaknesses in others. The golf business was particularly weak, the base ball business has been -- was pretty good, the cleat business was really very good. We had a number of products that were exclusive and unique to us whether it was the Ortiz shoe that we put a marketing campaign around with using Ortiz in the commercial or the AROD shoe or what we did with the deal that surrounds Ryan Howard, so where we have been able to do promotions and marketing events such as that it’s been better. The fitness business has gotten a little better; we were really very pleased about that. The tackle business has been very difficult and that’s probably one area that I would say has been weather driven because of all the rain. A lot of the streams and rivers are high, they are running pretty fast; tough to fish, but again the majority of our issue is around the economic environment.

Matthew Fassler - Goldman Sachs

And then, a last -- very quick question for Tim. In terms of understanding the occupancy cost pressures because clearly the de-leverage there seems to be the culprit on the gross margin, can you talk about the underlying rent trends that are booked into your leases, other step ups, time of sales, etc and how should we think about modeling that?

Tim Kullman

Now I think we have said this at several different occasions Matt, there are no step ups in the rent base for financial reporting purposes. Rent is smooth according to the total amount of rent that will be paid in the leas stream for each individual lease. So what we are seeing is the fact that at a negative 3.8% comp you just cannot leverage occupancy expense and we said before that we need a much higher positive comp in order to leverage occupancy expense and slightly lower positive comp to leverage SG&A.

Operator

Your next question comes from the line of Gary Balter of Credit Suisse, please proceed.

Gary Balter - Credit Suisse

Thank you, just a couple of questions. I want to follow-up just to Matt’s -- just on the guidance, I speculate the way we should think about it is that all comp related and just a carry through on whether thoughts about either gross margin or expenses that changed as well.

Ed Stack

Yeah this is primarily comp driven Gary.

Gary Balter - Credit Suisse

Okay, so okay. You made a comment Ed about irrational pricing in certain markets; could you expand on that a little bit?

Ed Stack

Yes, there has been a couple of competitors who have gotten very aggressive from a pricing standpoint, primarily in Texas and to a bit lesser extent in Georgia.

Gary Balter - Credit Suisse

Okay, but that -- but it’s been on selected items.

Ed Stack

It’s been more selected items, but it has been -- it’s there has been a more irrational pricing out there in Q1 and into Q2 than we have seen in the past. Now we think from a margin rate stand point, our merchandized margin rate will still be fine and based on the penetration of our private label and private brand products which help drive that off but there is some pricing pressure.

Gary Balter - Credit Suisse

In an environment where you change your comp guidance and given the amount of business you are now doing in private label and private brands or controlled brands what’s the risks in terms of on an inventory point of view like stuff that you have ordered already that’s coming in that now the sales level may not be there. I know we think it as a risk.

Ed Stack

We feel that there is very little risk. Our merchandizing group has done -- merchandizing a planning group have done a great job of keeping our inventories in line and we are very comfortable with not only the inventory that we have in stock today but also the products that are coming -- that we have coming in through the pipeline and we are not concerned about having a glut of inventory which are going to cause us to take significant markdowns. So, we see no markdown pressure coming at us other than competitive market down pressure.

Gary Balter - Credit Suisse

Okay and then one last question. Just -- I saw you obviously at the ICSC, any thoughts on what’s going on in the real estate community; like it was -- as I was asking people like who is going to replace Series at one point, everybody would say Dick’s as their new anchor, so you must have had a lot of attention. Anything you are seeing from either cost that you are going to have in the future for real-estate or our opportunities, etc if you pulled away from the show?

Ed Stack

Well we think that the amount of product being delivered into the market place from a shopping centre stand point is going to be less than it has in the past and I think everybody has already started to see that as a number of retailers have pulled back their development program and we are not. So we think we are in a very good position to continue to take a look at any centre that’s being delivered. We are still developing stores so we think that gives us an opportunity to be on the front end to help drive some centers which will give us some occupancy cost leverage going forward.

Gary Balter - Credit Suisse

Yes, so you may actually end up with lower rents in the future.

Ed Stack

We think that’s a possibility.

Operator

Your next question comes from the line of David Magee at Suntrust Robinson Humphrey, please proceed.

Chris Robinson - Suntrust Robinson Humphrey

Hello, this is Chris Robinson on the phone for David, good morning. I had a question about the new store productivity I was wondering if you could talk a little bit about that rate relative to plan?

Ed Stack

Yes we are pretty pleased with our new store -- the new store productivity in light of the economic environment. At 84% it’s a little bit lower than what has traditionally been but not only we are comps effective, but new stores are effective the same way as comps are, but we plan our new stores pretty conservatively coming out of the block, so actually our new stores are very close to what our -- we are slightly ahead of what we had planned them to be through the first quarter and into the second quarter but they are slightly below our traditional performance.

Chris Robinson - Suntrust Robinson Humphrey

And related to that any change in your long term target for 800 stores etc?

Ed Stack

No, we still feel 800 stores is our target and we see no difference there.

Chris Robinson - Suntrust Robinson Humphrey

Okay and then finally with regard to scaling back expenses I was wondering if you could give some detail on particular areas of opportunity there?

Ed Stack

Well we are looking at all areas in the business from an expense stand point, but I will just give you a couple of examples. We were going to remodel three stores this year which would have been fairly sizable from a capital stand point. We have since decided that we are going to postpone the remodeling of those stores. They are very good stores, very profitable stores, so we are going to postpone the remodeling of those three stores, so that has an impact on our CapEx number. Of course it has a positive impact from a depreciation stand point and a positive impact from an interest rate stand point. We are also looking at new hires that we had planned to make in the business and are looking at where we can postpone those hires or eliminate those hires until next year. So there is really nothing that’s -- there are no secret counts here, we are looking at everything as we bring these expenses in line with the new sales expectations.

Operator

Your next question comes from the line of Brian Nagel of UBS please proceed

Brian Nagel - UBS

Hi good morning. The first question I have and I do want to touch upon the weather. You guys talked -- in the last conference call you talked a lot about the impact weather is having in your business particularly since there’s snow on the fields in some areas, so give us just a clear idea as Q1 progresses presumably weather did get better and these fields will clear off; did you see sales pick up in those categories at all?

Ed Stack

We did and we felt that Q1 was impacted by some of the conditions that kids weren’t able to get out and basically all seasons were somewhat delayed, soccer seasons were some what delayed along with -- some were crossed but as we got into the second quarter, taking a look at the second quarter and going forward we really feel that the economy is more the issue than the weather but we did see a pickup in those categories towards the end of the first quarter.

Brian Nagel - UBS

Okay, then the second question I have is with regard to real estate and we understand there is a long lead time to open your stores, but given this typical pressures you are seen now does that cause you to maybe rethink moving aggressively into some of the areas in the country that which have been more depressed such as the West Coast or maybe the Florida type markets. Does it cause you to rethink to be moving those, as quickly as you had plan before?

Ed Stack

Really no and in especially Florida. Florida has been hard hit by the housing downtown for sure but our stores in Florida are performing extremely well and we couldn’t be happier with what’s going on in Florida and we’ll continue this -- our expansion into the Florida market.

Operator

Your next question comes from the line of Sean McGowan of Needham; please proceed.

Sean McGowan - Needham & Co

I was wondering if you could repeat what you said about inventory, these will be the Chicks acquisition and maybe give us an idea of how much of inventory increase was due to that and how much was might be due to increases in private brand and private label.

Ed Stack

From a standpoint of inventory there was -- the Chick stores have a bit more inventory than last year, so that our inventory would be down a bit more if -- would not be up quite as much if we didn’t include the Chicks Stores. So, if we had excluded those that inventory level of 2% would be somewhat less than that but again I would say that we are very pleased with the level of inventory we have in light of the economic environment. We are very pleased with the quality of the inventory and our merchandizing and planning group did an outstanding job working with our vendors and our vendors were very cooperative as we took a look at products that had slowed down and looking to modify some products coming in. So we are very pleased with the products we have in stock, we are very pleased with the pipeline of products and I can’t stress enough that we do not see significant markdown issue facing us from an inventory stand point.

Sean McGowan - Needham & Co

Were you able to increase the percentage of the business done in private label and private brand?

Ed Stack

It was just slightly. It -- we did increase it slightly and certain areas of our private label or private brand program did extremely well. The launch of the baseball product was very, very successful.

Sean McGowan - Needham & Co

Okay thanks and then shifting gears can you comment on how you feel the Golf Galaxy Stores are doing relative to the rest of the Golf Market given some shift in competitive strengths and weaknesses and the overall market there and do you still feel like your gaining share?

Ed Stack

We do. We think that the golf market is quite difficult out there right now, but I think the Golf Galaxy Group is doing a very good job of running this business in a difficult environment and is certainly out performing the rest of the golf industry.

Sean McGowan - Needham & Co

And anything from a product stand point that we should be looking at that’s on the horizon, interesting new products coming up in golf business.

Ed Stack

No, not really. The high MOI drivers, square drivers are still being talked about and looked at, but the golf business is a little soft right now on new products.

Operator

Your next question comes from the line of Kate Mcshane of Citi Investment Research. Please proceed.

Kate Mcshane - Citi Investment Research

Hi, thanks very much. Can you give a little more detail behind the gross margins contraction? Is there any way you can break down how much was driven by the de-leveraging of cost and higher promotions during the quarter?

Ed Stack

I will probably fall a little bit short of everything you want, but let me give you a couple of the details. Overall de-leverage from occupancy was about 170 basis points. We picked up 24 basis points in March margin and we picked up another 24 basis points on the supply chain side.

Kate Mcshane - Citi Investment Research

Okay and are there any products being introduced in the second quarter that could drive some incremental traffic?

Ed Stack

The launch of the Under Armor shoes in the second quarter has helped that business but other than the UA shoe that’s -- there is no, there is now blockbuster product out there that we are terribly excited about, that can have a meaningful difference.

Kate Mcshane - Citi Investment Research

Okay and then my final question is can you talk a little bit about from the private label that now in Golf Galaxy and how sales for that type of product has been trending in the Golf Galaxy Stores?

Ed Stack

Sure the Golf Galaxy penetration of private label products has moved up significantly through the first quarter and now into the second quarter. From the Slazenger golf ball standpoint they are doing extremely well. The Maxfli golf balls we have in there, they are doing very well along with some other Slazenger accessories golf bags, golf gloves and some clubs from both Slazenger and Maxfli. So the Golf Galaxy group has embraced the private brand program and the Golf Galaxy consumers have embraced it and its doing very well and like the exporting goods had a merchandised margin rate increase, Golf Galaxy had a merchandised margin rate increase also.

Operator

Your next question comes from the line of Mitch Kaiser of Piper Jaffray. Please proceed.

Mitch Kaiser - Piper Jaffray

Thanks guys. Quick question; I think you eluded to it but we’ve had a couple of year of very good product innovation; Ed could you just comment on kind of where you see that playing out and may be if you look out a little bit farther how do you see that kind of playing out?

Edward Stack

I think that there is a number of people out there continuing to work on product innovations. The Under Armor group is -- the launch of the Cross Training shoe was very successful, we were very pleased with it. I know that Nike has got some new products coming out from a footwear standpoint and new technology in apparel for this fall that we are really quite excited about. The new Taylor Made Tour Burner Driver that we are marketing right now with Justin Rose on the golf channel we are really quite excited about. So there continues to be product innovation, it’s just not today broad enough across enough vendors to really -- for us to get terribly excited and move the needle but there are pockets as I said Under Armor, Nike and TaylorMade.

Mitch Kaiser - Piper Jaffray

Okay and in the past you’ve talked about trading within the narrow bands at the economy. Is it some of the bigger ticket items that you are feeling pressure on -- basketball systems and some of the table sports and things like that. Could you talk a little bit about how that’s performed?

Edward Stack

Its kind of a -- it’s somewhat inconclusive if you will. There is some areas that the high ticket items are doing extremely well. We’ve done really quite well and the fitness business is doing much better. Some areas in our hunting business with higher price to fire alarms are doing quite well. Our basket ball systems have been soft and as we said the golf business has been a bit soft, but inside the golf business there has been some softness in some high ticket category such as the driver category but the iron category has been better which is also high ticket items, so it’s -- we can’t say that it’s across the board, high ticket items are issues. There’s pockets of strength and pockets of weakness.

Mitch Kaiser - Piper Jaffray

Okay and I guess given the comp on the SG&A line it looks like you did a pretty good job of managing expenses. Is there opportunities at the store level to manage pay roll a little more aggressively and a week comp environment?

Ed Stack

We are looking at expenses all across the companies I indicated including the store payroll line as we try to move the expenses in line with the sales expectation. So with that yes we are looking at the store payroll as to what we should -- what the store payroll numbers should be and we feel that there is some savings they going into the third quarter and the rest of the year.

Operator

Your next question comes from the line of Dan Wewer of Raymond James; please proceed.

Dan Wewer - Raymond James

Yeah its Dan Wewer. Ed in the last couple of conference calls you noted that the ebbs and flows at Dick’s business would be narrower than the sporting goods industry as a whole due to your diversified merchandise mix and the fact that you focus on the athlete and not fashion, but today’s guidance honestly doesn’t look a lot better than anyone else in the sector. I was kind of curious as to what may have changed from that perception of your company being economically sensitive then the other in the industry?

Ed Stack

While, I think it -- I think it has shown that we have been. When you take a look at our performance versus others in this industry, over this last year when the economy started to struggle, the housing crisis, the credit crisis we have traveled in a much narrower band as than the industry as a whole. We expect to be able to continue to do that and as I said if you take a look at the performance over this last year versus the rest of the industry we have outperformed it pretty significantly. We are now just feeling the effects of that and I believe that based on our discipline, our merchandise philosophy, our execution, we will be the first one to come out of this. So, I suspect once we get through all of this and it’s behind us and if we chart our performance versus the industry performance through this, what it will be from when it began to when it ends, a 24 to 36 month period, I think you’ll see that we traveled in a much narrower band than the competition.

Dan Wewer - Raymond James

Okay of the irrational pricing in Texas and in Georgia is that in the outdoor category?

Ed Stack

Actually no. It’s really been more in the golf category and in the general sported goods category.

Dan Wewer - Raymond James

And in the golf category you had noted that sales and drivers are week but -- aren’t showing good. Is that reflecting some of your key brands like Callaway now in the second year of their premium product lines?

Ed Stack

Well, I think there has something to do with it. There was a lot of innovation last year with the square drivers from Nike and from Callaway. We also saw the marketing push around all high MOI drivers from Telemate who was our number one performer, our number one brand and also with Cleveland. So as this pipeline gets filled and customers -- early adaptors bought them, the growth associated with that is a bit less this year.

Dan Wewer - Raymond James

And then the last question; what are you instructing your buyers to do with purchase orders that may have been placed three or four months ago. Are they able to cancel these orders or delay shipments?

Ed Stack

We’ve taken a look at a number of things, so there is not one pad answer for it but there has been some products that we have pushed out whether it be 30, 60, 90 days, some orders have been cancelled based on -- both of those based on our sales projections and there has been some products that we have moved up delivery because they have done extremely well.

Operator

Your next question comes from the line of John Shanley of Susquehanna; please proceed.

John Shanley - Susquehanna

Its John and good morning. Ed I wondered if you could comment on the -- with the negative comps that you had in the first quarter and the expected negative comps in the second and for the full fiscal year. Are there certain merchandize categories -- major merchandize categories like footwear, apparel or hard lines that are basically underperforming your business plan expectations more so than the overall merchandize mix?

Ed Stack

Yes as you could imagine the tackle business has been particularly difficult. We think that that could have some impact -- be impacted somewhat by the economy and people driving to fish and we think that has some impact on it but in tackle we really do believe that the rivers and streams being as highest they are right now and running as fast as they are, they are difficult to fish, so that’s an issue. The kid’s footwear business has been particularly difficult as we were selling a lot of healey shoes last year and the healey’s business is basically done and if we took a look at healey’s and backed that out of the 3.8% comp decline in the first quarter, 80 basis points of that decline is specifically attributable to healey’s.

John Shanley - Susquehanna

Looking at overall major merchandize categories like footwear; is that on plan and versus apparel, versus the balance of your hard launch product. Is there one major product category that’s weaker than the other major product categories?

Ed Stack

I think the two that I just spoke of were the tackle business and you could broaden that out to somewhat of a camping business also were anybody has to usually drive a fairly long distance to participate in that and then the healey’s category, I talked to you about the youth athletic shoe business. So, those will be the two that are really under performing the rest of the market.

John Shanley - Susquehanna

Right and the rest of the categories are basically on plan?

Ed Stack

Well yes -- the question was -- I thought the question was; are there ones that are performing significantly below other categories, so those would be the ones that are really very negative.

John Shanley - Susquehanna

Okay alright I understand. Can you comment on the traffic levels? Are they basically -- is that a major component of the weakness in the sales line or is it -- and is that localized to certain geographic markets most of the others -- in other words are your business in the west weaker than your business in the east or Midwest or so on and is it traffic levels although there is a down from previous experiences in those markets.

Ed Stack

For competitive reasons we are not going to comment on specific areas of the country but the majority of this is traffic related as traffic was down in the first quarter about 4.5% the ticket was up 70 basis points and that’s how we got the negative comp of 3.8, but its primarily traffic. If you walk into our stores and I spend a lot of time in our stores and talking with our sales associates and talking with customers, we are not missing product, we’ve got the right product. We don’t have customers saying -- asking us why we don’t have a particular brand or a particular skew. Our stores are well inventoried, we’ve made sure that we are in stock in those key items and we are very pleased with our inventory level and this is all traffic generated.

John Shanley - Susquehanna

Right, thank you. The last question I have is on Golf Galaxy. Is the 7.4 negative comp in the Golf Galaxy that you had in the first quarter comparable to the performance of the golf business in the Dick Stores or did Dick’s do better than Golf Galaxy?

Ed Stack

Dick’s did better than Golf Galaxy but only slightly. We did better than Golf Galaxy by less than 100 basis points.

John Shanley - Susquehanna

Is there -- do you think its primarily product related that’s causing the weakness of the golf business because of the way you like to view the new product innovation or is there something else that’s going on in terms of participation in golf as a hobby being perhaps less vigorous than it may have been in the past?

Ed Stack

I don’t think it’s got to do with -- anything meaningfully to do with participation or rounds or I think this has to do with the economy and if somebody is looking at a $200, $300 or $400 driver, the driver that they are using is still viable. They are just postponing these purchases based on what’s going on with the economy and gas prices and just being uncertain about the future. So, I don’t think this is a fundamental issue with the game of golf although we do have to try to grow the game, get more rounds played, but this isn’t the issue we are facing right now. I believe this is primarily around the economy.

Operator

Your next question comes from the line of John Zolidis of Buckingham Research. Please proceed.

Unidentified Analyst - Buckingham Research

Good morning. This is Jody here on behalf of John Zolidis. I have a question on your product cost, are you seeing any inflationary pressure on product costs?

Ed Stack

We are starting to see some, which would be in the back half of the year, but nothing that concerns us significantly at this point.

Unidentified Analyst - Buckingham Research

Okay and are you seeing any differences between your regular merchandise versus your private label?

Ed Stack

From a cost standpoint?

Unidentified Analyst - Buckingham Research

Yes.

Ed Stack

No, they are both -- we some pressure on both of those sides of the business. We are seeing a little bit less pressure from our private label as we gain scale from a private label standpoint we still have some -- we still think we can do a better job of buying from a private label standpoint or we are seeing those benefits, so they are increasing at a slower rate than the branded product.

Operator

Your next question comes from the line of David Cumberland of Robert Baird. Please proceed.

David Cumberland - Robert Baird

Thank you. A couple of question on your advertising; how were you able to leverage that in Q1? Was there a timing issue or has vendor support increased?

Ed Stack

There has been some support -- increased support from the vendor side. We’ve also been able to with the increase in our store count and the sales did go up by 11% to $912 million this year and moving our advertising program to be more national based across ESPN, the golf channel some of our direct marketing components we have been able to just be more efficient and leveraged some of the national campaigns on TV across a broader base, so we are able to leverage that advertising expense. We think there is more leverage that can be gotten from advertising as we go forward also.

David Cumberland - Robert Baird

That helps and then my other question are you making any real changes to your marketing tactics and promotional approach to cope with the difficult environment?

Ed Stack

Yes, I mean it’s a dynamic environment out there and you need to move with that environment. As I said we have selectively lowered some prices. Some of the inserts that were -- we put in the paper on Sundays we are going to continue to be aggressive in the categories and areas of the countries that we need to be from a pricing stand point. So yes and we constantly reevaluate what we need to do from a marketing stand point to remain competitive in top of mind and with the consumer.

Operator

Your next question comes from the line of Bob Simonson of William Blair please proceed

Bob Simonson – William Blair

Good morning, two questions. Tim so I got this right; did you say that gross will be down this year, SG&A ratio will be down but the gross will be down more than the SG&A ratio?

Timothy Kullman

No we didn’t say that. We said that the gross would be down slightly but the SG&A based on where the comp base is will be slightly de-leveraged.

Bob Simonson – William Blair

So that might be up a bit?

Timothy Kullman

Yes.

Bob Simonson – William Blair

The ratio and a number of economics talked about some hope for the consumer because of the rebates going on which I guess are $40 or 50 billion have been deposited so far but your comp estimate is more difficult in the second quarter than the first quarter. Is that your way of saying that the rebates aren’t getting spent at least in your category?

Timothy Kullman

We are up against a much more difficult comp from the second quarter of last year and I think the rebates -- but I am just -- I feel that the rebates at -- oil at $133 a barrel or whatever it is at today, I think people are just cautious and I think that that rebates is going into gas tanks.

Operator

Your next question comes from the line of Rick Nelson of Stephens please proceed.

Rick Nelson - Stephens

Thank you and good morning. Tim you talked about the progress you are making transitioning the Chicks stores to Dick’s stores. Have you made any decisions on ski and snow board in those stores and other life style, other categories?

Timothy Kullman

Sure. The transition is progressing quite well. We are in the process of converting one store to a Dicks sporting good store and just test how this conversion is going to work how the customer is going to respond, so we are very pleased with that. Joe has got that working and we will be converting that sometime in this October, so we’ll have a good test through holiday in next spring. As far as snow board and skiing snow board, we will continue to keep skiing in those Southern California stores and the lifestyle apparel of the beach brands -- we will continue with those beach brands in Southern California also. Where that square footage is going to come from is we are going to enter Southern California in the conversion of the chicks sporting goods stores to our full marketed stores; we will be entering those markets with no fire alarm so the hunting side of the business which there is not a tremendous amount of hunting in Southern California we are going to be taking that square footage and reallocating that to the beach ski snow board aspect of the chicks business.

Operator

Your next question comes from the line of Ralph Jean of Wachovia; please proceed.

Ralph Jean - Wachovia

Great thanks. Just wanted to get a little more detail on the Under Armor launch you said that was very successful. You’ve had about two or two and half weeks of sales; what percentage are your total purchase that you have sold so far?

Ed Stack

No, for competitive reasons we are not going to guide to that but we are quite successful with the and quite pleased with the Under Armor launch of product.

Ralph Jean - Wachovia

Do you see that products sales accelerating or was the first week the strongest or what do you think its going to play out as?

Ed Stack

We think that Under Armor has the opportunity to be a meaningful player in this category and I think that we’ve seen a solid business in Nike shoes, a solid business in the Under Armor shoes and we think that those two brands are going to continue to get stronger in this category.

Ralph Jean - Wachovia

Right and then on the irrational pricing committee; are you able to say who was -- like in Texas is it Academy of Sports Authority and in Georgia is it Sports Authority or Hibbett?

Ed Stack

I could say, but I’m -- we are not going to get into that but if you say that there is some people on the -- there is some competitors on the Golf side and on the general sporting goods side that have some irrational pricing out there and selectively and the products that we think have appropriately lowered some prices.

Operator

Your next question comes from the line of Joe Feldman of Telsey Advisory Group; please proceed.

Joe Feldman - Telsey Advisory Group

Hi guys, just this one -- being a -- a lot of the questions have really brought to light a lot about the macro, what change in the past two months or so that to cause you guys to so dramatically change your outlook for the balance of the year. Because it seems like two months ago we were at 25%, 30% higher about in EPS and now we are where we are today. So what change -- has it gotten worse in the past couple of months or?

Ed Stack

What’s changed is the economic environment out there with what’s happening in the stores. Gas prices continued to escalate, food prices continued to escalate, uncertainty around the election and what’s going to happen. I just think that there is a tremendous amount of uncertainty out there and people are becoming more and more cautious and that’s what’s happened; its nothing more than that.

Joe Feldman - Telsey Advisory Group

Okay and so then with the categories you are showing -- I mean you’d highlighted a few of the strengths and weaknesses but are you finding that its more like the less discretion -- like just things for kids or things for high school teen sports, thing like that that are selling as oppose to I don’t know discretionary apparel purchases or new running gear let’s say for an adult.

Ed Stack

Well it’s -- the high school products have continued to do quite well, we are quite pleased with those. As we said the tackle business has been difficult, the camping business has been difficult, the golf business has been difficult. We have seen strength in Under Armor which is primarily for the high school athlete, we have strength in Nike shoes we’ve moved up orders on Nike shoes, again many of those for the high school athlete, also that quarter runner which he or she is going to continue in that product; we have moved -- requested moving up men’s and women’s Nike apparel also. So a lot of these products is for that true athlete who is competing has done quite well. Some of the discretionary purchases for the weekend warrior whether he’d be a golfer or some other categories. Tennis has been a bit more difficult and we don’t expect that to change between now and the end of the year.

Joe Feldman - Telsey Advisory Group

Thanks and then just one more follow up. With regard to market share trends, have you -- as you look at your studies are you guys picking up in any specific areas or regions of the country or if you could just discuss market share a little bit?

Timothy Kullman

Well we think overall we have traditionally in the past outperformed the markets. So if you take a look at some other publicly held sporting good companies, our comp guidance -- our comps have usually been higher than what theirs are, so we picked up market share. I think as we take a look at this and we see what’s going on in the market place we talk to vendors, we have had the opportunity to buy some off price product from some other people who have cancelled the products and it is not quite as clear what’s happening out there because our largest direct competitor, sports authority is no longer public but we still feel that we are in a number of categories picking up market share. The UA launch of shoes -- we were indicated that our launch was the most successful out there. A number of the Nike products that we have out there from both an apparels stand point and a foot work stand point they have done very well, we’ve had to go and reorder those and some of the comments we have gotten back is that there is not many people out there reordering. So it’s -- well we feel that we are picking up market share.

Operator

Your next question comes from the line of Sam Poser of Sterne Agee.

Sam Poser - Sterne Agee

Good morning. Question you have the crocks shop set up in a whole in large number of stores which you -- you did last -- I think you did the end of last year. Is that store working out well for you or how has that business changed?

Timothy Kullman

We are still very pleased with what’s going on with crocks. We did very well in the first quarter with crocks especially around the mammoth shoe. The crock shops were continuing to go forward with the ones that we have got; we won’t be investing heavily in many new ones but the crocks business is although not as strong as it had been, we are still selling an awful lot of hues.

Sam Poser - Sterne Agee

Okay and then I just wanted to pick up on -- follow-up on one the questions to give us -- even if you break it up in the quarters; I mean can we get some idea of the regional differences. I mean you’ve chosen to go with the new store up in the North West your first entry there. I mean could you give us some idea of just some regional differences in performance?

Timothy Kullman

No for competitive reasons we really -- we are not going to do that. I will tell you that the new store that we opened in the Pacific North West in Pole and Oregon has gotten off to a great start; we are very, very pleased. We have commented in the past that our Florida program has been very successful we are really quite pleased with that and we indicated that Texas was going to be a bit more difficult and in the last call we said Texas was a bit more difficult but we are getting attraction in Texas and we expect Texas to improve.

Sam Poser - Sterne Agee

Okay and there is one other thing. I mean as you’re looking forward you said you are going to be the last one to feel the effects of all this and you believe you are going to be the first ones out, I mean how good -- I mean if you are looking out right now from what you are seeing from vendors and what you are seeing from the economy, are you seeing right at the end of the tunnel here at the moment, I mean as you plan your business are you looking for improvement into next year. I mean how long do you think this is going to last?

Ed Stack

Well, as we said in the script, we think that this is going to last at least through the balance of this year. With our comp guidance at negative three to negative five for the balance of the year, we don’t -- we are not anticipating it to get any better but we are in a position to react if it does. With our inventory levels the way that they are at we are very liquid, we are -- can be in the market to buy product and a moments notice, we don’t have an inventory issue. We don’t expect it to get better but we are in a position to react to it if it does.

Sam Poser - Sterne Agee

And then in the guidance you guided down four to seven for Q2 which includes Golf Galaxy entering the comp and does your three to five include Golf Galaxy for the full year did you say no to that?

Ed Stack

It does not because Golf Galaxy wasn’t comp in the beginning of the year.

Sam Poser - Sterne Agee

So then you are going to?

Ed Stack

They don’t come into the comp base until the second quarter. So since they weren’t in the comp base for the beginning of the year what did you -- if you ask me to -- I think its going to get better at Golf Galaxy from the comps that we’ve provided their performance in the first quarter, No I don’t expect that to get significantly better either.

Sam Poser - Sterne Agee

And so a lot of that raise of four to seven for Q2, much of that is reflective of continued poor performance or even worsening performance of Golf Galaxy, not of -- the Q2 guidance is sort of different from the full year guidance because it inclusive the Golf Galaxy whether full year does not?

Ed Stack

Well you are right. Its not -- full year guidance does not include Golf Galaxy, but remember Golf Galaxy is roughly 10% of our business, so although important it’s not significant. We do see things at Dick’s Sporting Goods -- we see that consumers softening and being more cautious and we don’t see this changing until after the -- at least until the beginning of next year, but if we are wrong we are planning our business if it doesn’t get better, but if it does we are in position to react to that very quickly; if it does get better. Similarly to what we have talked about in previous calls where we had a colder harsher winter that we were able to go into the marketplace and chase product and react to it and we are in the same position right now.

Operator

Your next question comes from the line of Thomas Paulson of Cornerstone; please proceed

Thomas Paulson – Cornerstone Capital Management

Yes, thank you so much for taking my call. Just a few quick questions, one if I understood the inventories what you are saying is on a comp store basis the inventories are up or a little bit less than 2%?

Ed Stack

Yes.

Thomas Paulson – Cornerstone Capital Management

And what be your expecting? What would your expectation be for the end of this quarter?

Ed Stack

We would expect them to be up no more than what they are today.

Thomas Paulson – Cornerstone Capital Management

Okay and then just following on the prior question, if you look at the comps just -- the comparisons obviously are being shifted around quite a bit relative to last year, so is that also part of a pick up in the comp in the second half relative to Q2 as one of Golf Galaxy but also of comparison?

Ed Stack

Yes the comps in the second half of the year are much easier than the first half. With our comps in the – they are much easier in the second half of the year than they are in the -- in Q2.

Thomas Paulson – Cornerstone Capital Management

If you look on a shifted basis for Q3, we are at about a negative one last year and for Q4 about a 3.4.

Ed Stack

The two last year was 5.8, positive 5.8.

Thomas Paulson – Cornerstone Capital Management

Yes, so if you look at the underlying moment in the business per say you are not really expecting that to change as to sweeter comparisons and the Golf Galaxy impact.

Tim Kullman

I wouldn’t put a lot of impact on Golf Galaxy there. As I said they are an important part of our business but at 10%; that’s not moving the needle significantly.

Thomas Paulson – Cornerstone Capital Management

Okay and the last one is I guess you had noted that you are moving up apparel orders from Nike and that Under Armor had done well, so the overall performance, apparel category did continue to do quite well and much better than the average reported number or?

Ed Stack

I would say that we would look at that there is a market share shift that Nike and Under Armor continue to take market share from other vendors out there.

Thomas Paulson – Cornerstone Capital Management

And the Reebok performance apparel that you guys did?

Ed Stack

We are very pleased we launched Reebok apparel we were really quite pleased with that which took the place of our private label brands from last year which were fitness gear and Ativa and that we are really quite pleased with how Reebok did.

Operator

Your final question comes from the line of John Barrett of Columbia Management please proceed.

John Barrett - Columbia Management

Yes thanks for taking my question; just a quick question. Ed you talked about gas prices and food and the difficult economic time. I’ve heard from other executives in this boarding good industry that this is the worst they’ve ever seen it, guys who have been around for 25, 30 years; what about Dick’s pulling back on store growth in ’09 because if I sort of look at your model you are running -- looks to be like you are running free cash flow negative this year opening up I think you said 45 or 44 dick stores in Golf Galaxy how about the ability to pull back on real-estate in ’09 because we’ve seen that from a number of retailers given the macro.

Ed Stack

If we needed to pull back we would pull back. We are not -- we are looking at our store development program right now. Our biggest concern is not our performance as much as it is -- is there enough product out there in the development cycle from the shopping center developers to meet our needs and as there is less projects out there we need to make sure that we are very discriminating in the products that we go into, the projects that go into and we need to make sure that we are not concerned with hitting a number of store openings and meeting some target and having the wrong stores opened up, so we’ll -- there is a possibility that the number of stores that we opened in ’09 and ’10 maybe less than traditional levels; we haven’t seen that yet but there is a possibility but its more based on the shopping center development cycle than it is really what we believe our performance to be.

John Barrett - Columbia Management

But you mean you’re not locked into these to these agreements in ’09 already.

Ed Stack

We are not locked into any significant amount of deals. We’ve got deals done in ’09 but its -- we’ve got flexibility in some deals that we haven’t into yet and we’ve got some flexibility in some ’09 deals to move into ’10 if we have to, so we don’t feel that we are painted in the corner from a real estate development cycle by any means.

John Barrett - Columbia Management

Okay and just secondly Tim just on the occupancy de-leverage on a minus 3.7 comp it looks like the de-leverage is 170 bps. Is that the -- is that 40, 45 bps of de-leverage on occupancy for every negative 1% comp? Is that what we should use?

Tim Kullman

I haven’t done that math but I mean if that’s the way it worked out in your calculation, that’s in the ball part.

Operator

It appears there are no further questions at this time. I would now turn the call back over to management for closing remarks.

Ed Stack

I’d like to thank everyone for joining us on our Q1 call and we will look forward to talking to you all for the next call. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Dick's Sporting Goods Inc. Q1 2008 Earnings Call Transcript
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