Gander Mountain Company F1Q08 (Qtr End 05/03/08) Earnings Call Transcript

Gander Mountain Company (GMTN)

Q1 2008 Earnings Call

June 3, 2008 9:00 am ET

Executives

Bob Burton – IR Squared

Mark Baker – President & CEO
Rick Vazques – Executive VP Merchandising & Marketing
Bob Vold – Senior VP & CFO

Analysts

Steve Denault – Northland Securities, Inc.
Robert Simonson – William Blair & Company
Rick Nelson – Stephens, Inc.
Dan McCallum – River Capital Partners

Reed Anderson – DA Davidson & Co.

Presentation

Operator

Good morning everyone and welcome to the Gander Mountain Company first quarter earnings release conference call. At this time I would like to turn the call over to Mr. Bob Burton; please go ahead sir.

Bob Burton

Good morning, thank you for joining us. Welcome to the Gander Mountain first quarter 2008 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 www.gandermountain.com. We will also offer an Internet replay of the call, which will be available shortly after the call is concluded and will remain on our 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 www.gandermountain.com and at the SEC’s website at www.sec.gov.

We caution you that forward-looking statements reflect our current views with respect to future events and speak only as of the time they are made and we undertake no obligation to update them in light of new information or future events. The reconciliation and other information required to be disclosed about non-GAAP measures, including adjusted EBITDA discussed during this call is available on the 8-K we filed today which is at the Investor Relations page of www.gandermountain.com under the Financial Information tab.

Now I’ll turn the call over to Mark.

Mark Baker

Good morning everyone. In the economic environment that continues to be challenging for all retail Gander Mountain’s results were in line with management’s expectations. Sales expanded 18.2% to $208 million. Adjusted EBITDA improved from a loss of $12.5 million to a loss of $10.7 million on a higher number of stores. Net loss for the quarter was $24.4 million versus $22.8 million last year.

As Gander Mountain has grown the first quarter has reflected the seasonal nature of our business. Because of our concentration of northern stores, we have historically reported operating losses for the seasonally small first quarter. In 2008 our first quarter retail operating performance fell flat despite operating eight additional stores and their square footage. Put another way, operating losses per square foot improved by 12%. This continues a similar trend from last year in a business as seasonal as Gander Mountain’s is an important data point for us.

The 2008 quarter also includes seasonal operating losses for our new direct marketing business. Our comparable sales performance in the quarter was a minus 6.7% compares to a positive 1% one year ago. This performance reflects the pressure of consumer spending that affected nearly every retailer this spring. Nonetheless it was a sharp improvement in the comp performance in the fourth quarter and met our expectations for the start of fiscal 2008.

From an operational viewpoint we are encouraged by several items. We did see some rebound in the traditionally strong merchandise categories for Gander Mountain by used firearms, accessories and ammunition. Fishing, particularly salt water categories were ahead of company’s comp. As expected power sports was solidly positive as we completed our first full year in the boating business. Our new apparel offering started off with mixed results which Rick will discuss more in a moment. Key strengths were in denim, workwear as well as women’s and youth products.

Gander Mountain is determined to deliver better quality, fresher product, and a better selling environment throughout the coming year. Comparable sales performance were somewhat offset by initial margin gains of approximately 104 basis points, extending the trend of increasing initial margin eight of the past nine quarters. Overall margin gains reflect primarily the impact of direct sales on mix. Our SG&A costs improved 100 basis points as a percent of sales due the results of cost initiatives launched late in 2007.

Given the seasonal nature of our operations this is consistent with our expectations for the quarter and on track to deliver a leverage of 100 plus basis points on the year. On our last call we listed some of the programs which we have devoted our time and resources over the coming year. Let me update you on those.

First we continue to put intense focus this year on improving performance in existing stores. We have identified 25 stores where we have the greatest opportunity for that improvement. These 25 stores were provided additional management resources, reallocation of marketing support, increased management focus and merchandise initiatives and emphasis on operational execution. It is very early on in our multi year program that will eventually benefit all stores.

Second we completed our new store program for 2008 as we opened two stores recently; one in Ocala, which is our fifth store in Florida, and one replacement store in Eau Claire, Wisconsin. As a result of this slowing in our incremental square footage and capital spending, we continue to believe that our CapEx for fiscal 2008 will be less then $25 million compared with $47 million in 2007.

We have made good progress in leveraging the direct marketing platform and expanding our entry into this area through Overton’s. In mid-May we issued an Overton’s catalogue which included 44 pages of Gander Mountain branded products including apparel, fishing and camping items. While Overton’s business reflects some of the broad economic issues that have affected all retailers, we are pleased with the initial response from our customers.

Given the seasonal pattern of our primary marine business our expectation is that Gander Mountain will benefit from Overton’s operation in the second quarter. This is an important step in building national retail operation in goes-to-market across all channels, brings us new customers as we launch our Gander Mountain website and catalogue later this year.

For Gander Mountain our financial goals for 2008 include revenues of over $1 billion, producing profitable company performance due to improved store economics and cost savings with a cost structure that reflects a comparable sales plan that is mid single-digit negatives on the year; an [inaudible] of initial margin based on stronger sales performance from key margin categories of apparel and footwear, flat net store growth but continued shift to southern markets; a drive to better manage costs and improve sales in stores that are currently not meeting expectations; a significant reduction in our revolving credit facility debt by year-end resulting from a reduction in inventory balances by year-end improving operating performance; a profitable growth in the direct business.

Overall we are well prepared to deliver on our goals this year despite the difficult economic environment. We continue to have the strong support of our majority shareholders particularly evidenced by our recent support of the Overton’s acquisition. We are committed to our customers, our suppliers and partners and dedicated associates who provide great service every day.

Rick Vazques

Thank you Mark and good morning. The first quarter performance in merchandising was mix across key categories with relevant improvement from fourth quarter performance in areas of focus like firearms, footwear and selected areas of apparel. Merchandising trends were better then our reported comp of negative 6.7% in power sports, fishing, firearms, ammunition, and selected apparel areas like denim, workwear and women’s outerwear. Areas of particular weakness included men’s sportswear and outerwear, marine accessories, and camping.

Early spring weather was somewhat colder which had some affect on volumes but echoing Mark, we are seeing the affects of higher fuel prices and a slow economy on our business. While our customers are passionate about their pastime, we anticipate that these economic pressures will continue into the second and third quarter and have planned accordingly.

As mentioned last call, we have also reallocated our marketing spend to focus in two areas. First our direct marketing launched later this year and second the high volume third and fourth quarters. While sales volumes in the quarter were disappointing, margin improvement initiatives provided support for margin gains. Own brand penetration increased from 9% to 11% on the quarter led by the inclusion of direct marketing as well as gains in apparel and fishing. Initial margin increase of 104 basis points on the quarter reflecting primarily the inclusion of direct marketing products and their higher related margin, higher penetration of own brand merchandise and general improvement in pricing structure.

Inventory ended at $426 million versus $393 million last year, $23 million is related to the Overton’s business and the remainder is attributable to incremental stores. Our retail inventory per square foot in open stores excluding in-transit and pre-opening inventory was $62.72, down 10.8% from prior year. On a trailing 12 month basis, retail sales per square foot were $161.85 versus $174.76, down 7%. Today 79% of our square footage is in our 2003 and later big box stores. Our average customer ticket increased 5.7% to $58.53 for the quarter. Let me review our work on the merchandising initiatives I outlined for you last quarter.

Obviously first is leveraging the Overton’s platform. As Mark said, we have made good initial progress in leveraging the direct marketing platform through Overton’s. Our first step was visible recently as Overton’s May catalogue included 44 pages of national and Gander Mountain branded products, including apparel, fishing and camping items. We have begun distributing Overton’s catalogues through Gander Mountain stores and delivered several mailing pieces to Gander credit card customers.

We continue to make progress towards the launch of Gander Mountain’s e-commerce website and Gander Mountain branded catalogue later this year. The next two of our initiatives are apparel-related and build on the foundation our merchandising team began putting in place a year ago. This team has been diligently working on reengineering our product from sourcing to store and their first full efforts have been visible this spring. We have been reallocating incremental floor space to our successful footwear business across all stores. This expands the footwear assortments in some areas by as much as 25% with category emphasis on casual, cross trainers and hikers. Our spring assortment is 100% executed but look for further progress on this initiative in the second half.

Next, expanded Gander Mountain apparel and denim workwear offerings are in place as the initial offering of our first full five season product lines. Early results are mixed as I indicated earlier with good response across the board in denim and workwear and mixed performance in sportswear. We are early in the process of introducing this amount of change in our stores, but we like what we are seeing thus far in the product and in the distribution.

Our fourth initiative is the readjustment of the model for our power sports footprint which is largely complete as we have centered our efforts in stores where scale and the market size and support from a large format are in place. We have completed these shifts and will continue to grow this business. As an example, we included it in both Palm Beach Gardens and Madison stores this year.

Last we are gaining momentum in 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 the nation’s leading firearms retailer.

Now I will turn the call over to Bob Vold.

Bob Vold

Thank you Rick, first I will summarize the results and then I’ll go into more detail on the financials. For the quarter, Gander Mountain reported sales of $207.7 million and revenue growth of 18.2% on a comparable store sales decline of 6.7%. The net loss for the first quarter of fiscal 2008 was $24.4 million as compared to a net loss of $22.8 million last year. This performance was consistent with our expectations despite higher fuel prices, the overall economic environment and their affect on discretionary spending.

While the first quarter is our seasonally smallest in terms of revenue, this quarter includes $19.7 million in revenue and a net loss of $1.6 million attributable to our direct business. As Mark indicated at the close of the first quarter compared to a year ago, Gander Mountain operated eight additional stores and approximately 840,000 incremental square feet of retail space. On a retail operating basis, losses per square foot improved by 12%, indicating better per-store operating performance year-over-year.

Now let me review the financial metrics. Total square footage year-over-year increased 15.3% to 6.4 million square feet. By mid-May Gander Mountain had completed its 2008 store-opening program with recent openings in Palm Beach Gardens and Ocala, Florida and Roanoke, Virginia as well as Eau Claire and Madison, Wisconsin. The company relocated two stores in Madison and one in Eau Claire and incurred store closing costs of $776,000 in quarter one of fiscal 2008. The average square footage per store increased approximately 5.9% to 55,500 square feet for the first 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 increased 96 basis points to 20.2% of sales. Initial margin improved 104 basis points primarily from the inclusion of higher margin direct sales and the mix. Other factors adding to gross margin performance included improved retail margins, and increased penetration of our own brands from 9% to 11% for the quarter.

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 began reporting consolidated SG&A last quarter and will do so going forward. We will provide segment reporting data for our retail and direct businesses as part of our reporting requirements in our 10-Q. In the quarter, SG&A expenses increased 14%. As a percent of sales SG&A decreased 100 basis points to 28.4% of sales reflecting cost management activities in the retail business, partially offset by increased store operating expenses and the conclusion of direct marketing expenses.

This is consistent with our expectations of more then 100 basis points of improvement in this metric in fiscal 2008. Pre-opening expense was $1.6 million which reflects costs for three new stores opened in quarter one and two stores which opened in May as compared to $730,000 in the quarter last year. With our store program for the year complete as of the end of May, we expect approximately $500,000 in pre-opening expenses in quarter two and zero for the remainder of the year.

Net interest expense was $4.8 million for the quarter versus $4 million in first quarter of last year due to increased borrowing, principally to fund the Overton’s acquisition, partially offset by lower interest rates. Comparisons of earnings per diluted share year-over-year are affected by the company’s issuance of equity capital in December, 2007 which increased the number of weighted average shares outstanding year-over-year. The loss per share for the first quarter of fiscal 2008 was $1.02 per share compared to the loss per share of $1.14 in the comparable period.

The weighted average diluted shares for the quarter were 24.1 million shares compared with 20.1 million in the comparable period last year. Cash, capital expenditures were $6.5 million for the quarter versus $8.9 million for the comparable quarter last year, primarily for new stores. We also continue to invest in systems and are currently implementing and upgrading our ERP merchandising and supply chain software. Depreciation and amortization was $8 million for the quarter. We demonstrated significant improvement in cash used in operations during the quarter. Cash utilized improved from $47 million in the quarter last year to $18 million in the quarter this year, or a 39% improvement as a result of better working capital management, particularly in inventory and payables.

We ended the quarter with borrowings under our revolving credit facility of $274 million and shareholders equity of $170 million. Current availability under the company’s senior credit facility ranges from $25 million to $30 million. Our plans for fiscal 2008 remain conservative as we have budged for a small number of net new stores and mid single-digit negative comparable store sales performance to ensure we have a proper expense structure in place.

We expect the positive seasonal impact of Overton’s peak marine business to emerge in the second quarter of fiscal 2008. We are committed to improving our operating results as we expand our direct business, our focus on all stores going forward, the improvement in business fundaments, product gross margins, expense control, store profitability and management of inventory as we develop a stronger business structure and deliver a profitable business performance in 2008.

Now we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve Denault – Northland Securities, Inc.

Steve Denault – Northland Securities, Inc.

You made reference to a I think it was four categories that seemed to be strong and one of which appeared to be firearms and I’m not certain whether you suggested it was used firearms or new firearms, I guess the question is what are you seeing within both new and used firearms and ammunition lately?

Mark Baker

Clearly there’s been an explosive increase in costs as it relates to ammunition and yet in some cases availability has been a problem, but we’ve had great supply from our suppliers. Our new higher costs obviously that have been passed on to the consumers and yet our ammunition business in dollars and in most cases units, continue to be strong. There has been somewhat of a shift to used firearms from new, but our firearm business has picked up substantially from the third quarter.

Rick Vazques

Yes, that’s pretty much it. We see a growing stronger trend in the used firearms business both from a lot of people coming in to trade in as well as our ability to sell them. But by no means is new firearms too far behind. It’s doing very well as well.

Mark Baker

Be also mindful that we are a unique opportunity because of our gunsmith to buy a used firearm and have them reconditioned for that consumer; unique to anybody else.

Steve Denault – Northland Securities, Inc.

Are there any particular changes in the trends amongst handguns versus long guns?

Mark Baker

Clearly we’ve seen some handgun business increase and continue to increase, that’s actually up year-over-year. But it’s pretty good across the board.

Operator

Your next question comes from the line of Robert Simonson – William Blair & Company

Robert Simonson – William Blair & Company

With your comps going down I assume that you had some deleveraging on your occupancy costs that hit the gross margin, you talked about some of the things that were favorable to your gross margin and the improvement that you posted, can you quantify what the impact on the gross was of negative comps?

Mark Baker

As a result of including direct for the first time, the reality is the store occupancy really only had about a four basis point negative hit to the expense ratio. Again on a retail basis it would have been closer to 100 basis points by itself but again because we’re including direct for the first time there’s minimal impact in quarter one.

Robert Simonson – William Blair & Company

You noted that Overton’s is going into their big quarter, would someone like to stick their neck out and say is that, because its tough to figure out what Overton’s is going to do in that quarter, could it make you breakeven in the second quarter? Is that enough?

Mark Baker

We don’t do—the one thing that will help you connect the dots are we said we did $19 million in this first quarter with Overton’s and we’ve consistently said that Overton’s does about 75% of their business in the first half. And on a $90 million to $100 million basis, you can get pretty close to how significant that is in the second quarter.

Robert Simonson – William Blair & Company

And now with you putting out your catalogue and with Gander Mountain being, what was it 44 pages in the book, there have been some legal issues in the past, can you give a status update as to whether there’s any issues remaining?

Mark Baker

We’re not commenting specifically on any of those legal matters. We have a great deal of confidence that we have a structure in place and have delivered the first set of Gander Mountain products through the Overton’s catalogue and have a great deal of confidence that we’ll be on the website here later this summer as well as our first catalogue will be out this fall.

Robert Simonson – William Blair & Company

I just missed what you said Mark on gross margin improvement, you had noted that private label was up and there were two other factors. Could you repeat them?

Bob Vold

The primary factor is including the direct in quarter one which had a significant impact, that was the biggest factor. Also included was—the retail margins were up, not to the same degree as direct but they continued to the trend of increases. The third impact was the overall impact of own brand. Again own brand went from 9% to 11%.

Robert Simonson – William Blair & Company

That second factor, the retail margins, could you expand on what that was?

Rick Vazques

What Bob is referring to there is on the retail side of the business without the direct marketing the margin expanded as well and the initiatives to do that are the same that we’ve been working on diligently which is the expansion of own brand as Bob mentioned already, the change in the mix of our assortment. Our buyers continue to work on better assortments to [trade] the consumers from a lot of opening price point products to better and best and I think as we go through and we architect our retails accordingly so that consumers can trade up, in some categories that’s having a positive impact as well. And our inventory is in better shape.

Robert Simonson – William Blair & Company

Okay so you had fewer markdowns as well.

Mark Baker

Yes.

Operator

Your next question comes from the line of Rick Nelson – Stephens, Inc.

Rick Nelson – Stephens, Inc.

First question on the merchandise side, just following up on your last comment that you had fewer markdowns, from our store visits lately it appears actually that your merchandise is cleaner. Is there a net lower number of items on sale or marked down or do you actually have less clearance then last year at this time?

Rick Vazques

We actually have pretty much across all categories, we have less clearance inventory then we’ve had in the past and that’s been primarily due to really a couple of years now of changing how we flow product in, how we get it to market and then in some cases, taking earlier markdowns on early reads of products that are not going to sell. So that’s been a real big benefit. The other is that we’ve also been working on for some time and have really stepped it up this year, is on rationalizing our assortments to make sure that our SKU offering is less because of better planning on our good, better, best and not necessarily carrying every SKU available out there. We’ve made a lot of progress on the buy side, we’ve made a lot of progress on the SKU rationalization side and consequently that had even in light of the weaker sales, that has put us in better position to manage a clearance.

Rick Nelson – Stephens, Inc.

It looks like you have less, I would call it clearance out-of-season, is that fair to say as well?

Rick Vazques

Yes, very much so. That’s attributable in a couple of areas as well. One of them, on the apparel side, we did come really pretty clean out of the last season, but also as we go forward part of the five season plan that the merchandising team has rolled out, is really identifying good core basic items that are really good year-round. So from that standpoint of changing the buying habits and changing the assortments, that’s also giving us less—there’s just going to be less altogether on the carry-over. On the hard line side of the business we find in certain categories that we have traditionally treated very seasonally, we find some customers are wanting to buy it year-round so as long as we buy it in the right quantities to support it, then they become good categories for year-round purposes.

Rick Nelson – Stephens, Inc.

On the brand strategy, another comment it seems that you have some brands doing little presentations in the store. Is that something that’s going to increase? Is that in all stores right now?

Mark Baker

Specifically are you talking about some of the national brands that we position or are positioning?

Rick Nelson – Stephens, Inc.

Yes, in other words in the past you maybe had a rack or a rounder here or there and now you’ve got like a wall or some kind of special presentation. I’m just wondering it that’s something I just saw in some of the local stores or is that across the chain now?

Mark Baker

For example what you probably saw was a Wrangler wall who also supplies are private label denim and we’ve made a great partnership with Wrangler and they’ve supported us and helps us replenish much faster then doing it ourselves. They are able to stay in the sizes and by having the national brand and then supported by our own brand we’ve made I think—with that and the Riggs Workwear side which is also a Wrangler company, as well as the Columbia and some of the footwear things that you see.

Rick Vazques

From brand strategy we’ll continue to say that we have positioned ourselves as a branded house and continue to support the brands that the customers are asking for and we augment those brands with the Gander Mountain brand where the opportunities exist for a number of different reasons. But we clearly position ourselves as a retailer that does support the brands that the customers are asking for. That’s why whether it’s in apparel or firearms or camping or wherever it is, you will see a lot of national brands. While in many areas merchandising by category is the right thing to do there are some instances where the power of merchandising a brand is also very beneficial as Mark stated. On the denim side its really two in one because the brand being Wrangler, but yet the category being denim are both in the same vein and you’ve probably seen a bigger expansion in that area since that was one of our apparel focuses for 2008.

Rick Nelson – Stephens, Inc.

I wanted to ask for a little more color on the comp, I think you said a positive impact on the comp was power sports, fishing, firearms, ammo, footwear and denim and then the soft side was men’s sports apparel, marine accessories, camping, was there something else?

Mark Baker

I think you covered them pretty well.

Rick Nelson – Stephens, Inc.

The question there is just I realize that it’s a seasonal difference with the spring and camping is stronger, but fishing is strong in the spring too. It seems like on the positive side as a percentage of your total volume is quite big. Were there things that were particularly weak in those subcategories? In other words, power sports, fishing, firearms, ammo, footwear, denim, seems like that would be at least 65% of your business. So where there things on the other side that were dragging the comp down sort of excessively or something?

Mark Baker

I think we saw some bigger tickets that were challenged. Sometimes in the ATV business was off whereas the boat business would have been up significantly. Some of the other areas in men’s apparel as you pointed out Rick were particularly soft. Some of it seasonally but those are the things that really happen. Our average ticket was up nicely but there were some areas where the consumer just held back. But nothing in a broad based category that [you’re making a big statement on].

Rick Nelson – Stephens, Inc.

Was the average ticket up without power sports?

Mark Baker

Yes it was it was up in all stores basically with or without power sports.

Rick Nelson – Stephens, Inc.

Could you tell us, what Overton’s 1Q sales compared to last year? Were they above or below last year and then did they have a negative operating contribution last year or in other words did they have a negative operating profit last year in the same matching year month fiscal year?

Rick Vazques

Yes, Overton’s was down compared to the year ago slightly again, they’ve been impacted somewhat just like any other retailer from the economy and some degree with the colder weather in the spring as it affects the boating season so its been a little delayed in that sense. They did lose money a year ago in the same quarter comparable period, again included in the $1.6 million charge-offs it was acquisition interest so it’s a little bit higher then the loss as it relates to that.

Rick Nelson – Stephens, Inc.

And then did any of your net catalogue distribution whether its stores or mailing, did that hit this quarter or is that only going to hit starting next quarter or the second quarter?

Mark Baker

The second quarter is where most of that activity you seen from particularly the launch of the Gander Mountain 44 pages was really at the beginning of May which is our Q2 and actually that was the first time there was [inaudible] as well as Overton’s spent more of their distribution in the Q2 this year as what they had planned to do.

Operator

Your next question comes from the line of Dan McCallum – River Capital Partners

Dan McCallum – River Capital Partners

Just a question on your working capital, you explained the decrease in inventories pretty well, my question is about accounts payable, it seems you are stretching accounts payable at least on a quarterly basis on a year-over-year basis, and I’m trying to gauge how I can think about this going forward so if you could discuss that, and what your accounts payable days or what the metric we should be thinking of moving forward.

Bob Vold

There are actually two factors, two or three factors that play into the payables. Part of it is again, getting back to what I would call more of a normal accounts payable days outstanding, again if you go back to a year ago we had gone down, really gone backwards in that regard, and this really gets it back to a more normalized level. The second aspect of it is, again we had—with more new stores in this earlier period, five compared to four a year ago, but also two of the stores that we opened up in the spring were significantly larger stores then average and we get new store dating on all those terms. That’s significant. Also boats are up year-over-year and we get specific dating on those and then also the direct business is included the first time as well and has traditionally better dating in the seasonally peak [accretive] time as you’re building inventory. All those factors have an impact on accounts payable dating as [specifically] as compared to last year.

Operator

Your next question comes from the line of Reed Anderson – DA Davidson & Co.

Reed Anderson – DA Davidson & Co.

In terms of comps, just kind of trends, I know Mark coming out of the fourth quarter we were talking about comps being down mid-singles, you kind of held in there. I’m just curious as you look out over the balance of the year, are there any anomalies out there that you think of as you look toward being down sort of this level for the full year, is there anything we should think about on a quarterly or monthly basis that would cause that to sway one way or the other significantly?

Mark Baker

Clearly the next quarter, Q2, has a tougher comparable; it’s nearly 4% comp last year at this point in time. So it will probably be a little more difficult comparison. As we look into the Q3 and Q4, we see we were negative on those periods of time, we think those will be a little bit easier to cycle. Nonetheless I think the point that we’re making is that even in mid single-digits which we told you we’ll do well over a billion dollars in sales, and trying to be a profitable company is what—we’ve managed the expenses and I think the first quarter is the first evidence you’ve seen of SG&A and the store operating costs that even if it turns out to be the economic world that it is out there, we can manage through it and get to our goals. At this point in time we don’t see anything that gets in the way of that.

Reed Anderson – DA Davidson & Co.

Bob in your prepared remarks you talked about, it seems like they were conflicting. I just want to clarify. You talked about the SG&A being down 100 basis points, I think your first point was that it was cost management of retail but then the second point was something like higher store ops. Can you just reconcile or clarify that for me?

Bob Vold

Again, most of the decrease is you break down the components of SG&A in total; clearly the inclusion of direct had a negative impact as it was to leverage. There was a slight deleverage again primarily as it relates to store occupancy as you look at stores by itself. And then the biggest benefit altogether was in what we used to call the G&A category, and again net of all those three really combined to give us the 100 basis point improvement.

Reed Anderson – DA Davidson & Co.

And so if we were to just be very simplistic here, at these types of comp levels is that sort of year-over-year SG&A trend more or less sustainable or will that move around a lot?

Bob Vold

No again we truly believe it’s sustainable. We’ve said all along that we believe our SG&A percentage in total is in excess—we can gain leverage of over 100 basis points for the year.

Reed Anderson – DA Davidson & Co.

Rick on the—I’m curious more about the men’s sportswear piece being real weak and you’re starting to see a little more markdown activity in that category at least at a lot of other retailers, I’m just curious—a couple of things. One is performance of your own branded product versus the national brands, just color on that and then secondly is this a category, because it looks like its coming out of the gate very weak, that you’re thinking about getting a little more aggressive on the pricing?

Rick Vazques

Actually when we look at the overhaul that we’ve done in the apparel, it’s really in and of itself, it’s too early to make any kind of corrections. The product is really, really good product. It’s priced very fair and while we’re down, in light of the economic situation and what all the apparel retailers are facing out there, I think we’re doing well. On the other hand I also believe that this is not the kind of product—we have positioned ourselves, we’re not the kind of product that’s too perishable.

If you recall back about a year ago when we started down this journey, we said that we’re looking to produce more of the core basic products that last year-over-year and not get too much into very unique kinds of items and that was one of the game plans to reduce the amount of the need for clearance or markdowns. So consequently if you look at our sales floor today, what you will see in our apparel other then the improved quality and fits, etc. you’ll see a lot of very good, staple core items whether it be in the denims, or in the jeans, the shorts, short sleeved shirts, long sleeved shirts, those are all long-lasting. So no I am not at this point, I am not prepared or planning on looking at our strategy and making any kind of radical changes in pricing or promotability just to try to move some inventory or drive some sales.

Reed Anderson – DA Davidson & Co.

And so really no major differences between your national brands and your own brand in the quarter?

Rick Vazques

No not really.

Reed Anderson – DA Davidson & Co.

Inventory down nicely on a store basis, you said 10.8%, is that a level that makes sense at the store level by the end of the year as then secondly what do you think overall inventory might look like year-over-year at the end of this fiscal year?

Bob Vold

Again I think that the levels of inventory we have and the work we’re doing there is a continuing work in progress. I think we’ve made good progress. I think there’s potentially more to be had there. At the same time as Mark indicated in his remarks by year-end we still expect a significant reduction in inventory balances across the board which really funds a good part of our debt pay-down through year-end and through the heavy selling season of the third and fourth quarters from that standpoint. So again, there are a lot of different factors. Its SKU rationalization. Its assortments. It’s across the board from that standpoint. It’s the five seasons of inventory that Rick is buying. A big significant difference this year compared to last year also is they would have brought in apparel inventory in for the first half and again, we’re really into the five season program. So a significant number of items will drive that but our goal is better inventory management across the board.

Mark Baker

The long-term, there’s no question we have to get this company north of two turns and we are on our path to get there.

Operator

Your final question is a follow-up from the line of Robert Simonson – William Blair & Company

Robert Simonson – William Blair & Company

Bob, did you say CapEx would be something under $25 million?

Bob Vold

Yes, we’ve—similar to guidance at the end of quarter four, CapEx will be less then $25 million.

Robert Simonson – William Blair & Company

And the depreciation I think you said was about $8 million in the first quarter?

Bob Vold

Yes, $8 million for the quarter, I think we said earlier just north of $30 million so in the $31 million, $32 million range for the year.

Robert Simonson – William Blair & Company

Okay and you’ve got 44 pages of Gander merchandise in the Overton’s catalogue currently, just a technical question, does that revenue show up in what you report for Overton’s or do you put that into the Gander Mountain category?

Bob Vold

Again you’ll see in the 10-Q, its really between direct and retail segments, so again it’ll be included in the direct segment.

Robert Simonson – William Blair & Company

And the Overton’s, the $1.6 million loss, that’s pre-tax correct?

Bob Vold

That’s pre-tax, correct.

Robert Simonson – William Blair & Company

And the final one, on your expectations for the boat business versus your overall guidance of mid single declines, I noticed where Marine Max and Bass Pro are having a boat sale May 30^th to June 15^th, can you talk a little bit about the boat business and what your expectations are versus a year-ago and just going forward?

Mark Baker

I think the first quarter that we pointed out was in a significantly positive primarily due to the cycling, not being in the boat business in February, March as we rolled it out April of last year. The comparables will be a little more difficult as we get into the second quarter where boats were pretty significant a year ago and so were the deliveries. That said, we’re having great success in what we call open stock motors, replacement Mercury motors, they continue to sell very well. John Boats continue to do very well and even many of the fiberglass runabout boats do very well. So we’re still very bullish long-term of being in the boat business. It’s a very difficult category nationally this year. You’ve seen numbers of 20% to 30% down depending on category. But we expect that we’ll be finishing the year up reasonably significant for a relatively small base for Gander Mountain’s boat business for the year.

Robert Simonson – William Blair & Company

It does seem a little odd that Bass and Marine Max kind of teamed together; were you approached about participating in that boat sale?

Mark Baker

We don’t overlap in very many of those markets. They tend to—apparently we’re there and share the same area, but we don’t overlap very often.

Operator

It appears that we have no further questions at this time; I would like to turn the conference back over the Mr. Baker for any additional or closing remarks.

Mark Baker

Thanks everyone for attending the call. We are developing a scale of business with a stronger first half business based on southern stores, new products, and the acquisition of Overton’s and the acceleration of our catalogue and e-commerce efforts. I want to thank our associates for handling 3.3 million customer transactions over the quarter; they are the real drivers of our success. Thanks for joining us today and we’ll speak to you again very soon.

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