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Executives

Ed Stack – Chairman & Chief Executive Officer

Joe Schmidt – President & Chief Operating Officer

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

Anne-Marie Megela – Director, Investor Relations

Analysts

Robbie Ohmes – Bank of America Merrill Lynch

Michael Lasser – UBS

Gary Balter – Credit Suisse

Sean Naughton – Piper Jaffray

Dan Wewer – Raymond James

Christopher Horvers – JP Morgan

Rick Nelson – Stephens Inc.

Sam Poser – Sterne Agee

Matthew Fassler – Goldman Sachs

Brian Nagel – Oppenheimer & Co.

Peter Benedict – Robert W. Baird

Camilo Lyon – Canaccord Genuity

Mike Baker – Deutsche Bank

Mark Miller – William Blair & Co.

Kate McShane – Citi Research

Kate Went – Wells Fargo Securities

John Zolidis – Buckingham Research

Paul Swinand – Morningstar

David Magee – SunTrust Robinson Humphrey

[Sean Colnig] – Morgan Stanley

Chris Svezia – Susquehanna Financial Group

Joe Feldman – Telsey Advisory Group

Dick’s Sporting Goods, Inc. (DKS) Q2 2012 Earnings Call August 14, 2012 10:00 AM ET

Operator

Good morning and welcome to the Dick’s Sporting Goods Q2 Earnings Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela, Director of Investor Relations. Please go ahead.

Anne-Marie Megela

Thank you. Good morning, and thank you for joining us to discuss our Q2 2012 results. Please note that a rebroadcast of today’s call will be archived on the Investor Relations portion of our website located at www.dickssportinggoods.com for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will be available for approximately 30 days.

In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today’s discussion includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which includes but is not limited to our views and expectations concerning our future results. Such statements relate to future events and expectations 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 statements, please refer to our periodic reports filed with the SEC including the company’s annual report on Form 10(k) for the year ended January 28, 2012. We disclaim any obligation and do not intend to update these statements except as required by the Securities law.

We’ve also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in occurrence with generally accepted accounting principles, and a related reconciliation can be found on the Investor Relations portion of our website at www.dickssportinggoods.com.

Leading our call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our Q2 financial and operating results, our guidance, and discuss our growth strategy. Following this, Joe Schmidt, our President and Chief Operating Officer, will outline our store and ecommerce development programs. After Joe’s comments, Tim Kullman, our Executive Vice President of Finance and Administration and Chief Financial Officer will provide greater detail regarding our financial results. I will now turn it over to Ed Stack.

Ed Stack

Thank you, Anne-Marie, and I’d like to thank all of you for joining us today. For Q2 we generated record results that exceeded expectations. On a non-GAAP basis, earnings per diluted share increased 25% to $0.65 as a result of a 10% increase in sales and an operating margin expansion of 82 basis points. We’re using the strength of our balance sheet to invest in our business with new stores, continuing developing our online channel capabilities and supporting our private brand, including the recent purchase of the Field & Stream brand and a broad range of outdoor categories.

The 10% sales increase in Q2 was driven by the growth of our store network, by a 3.8% increase in consolidated same-store sales which was on top of a 2.5% increase in Q2 of last year. Same-store sales in Q2 2012 for Dick’s Sporting Goods were up 2.9%, Golf Galaxy up 4.4%, and ecommerce sales were up 34.6%. The comp growth at Dick’s stores was broad-based with all three major categories – hard lines, apparel and footwear – comping positively.

Our continued profitable growth is being fueled by our three growth drivers, which are expansion of our store base, strengthening of our omni-channel capabilities, and development of our margin rate accelerators. Looking at our store growth, we opened four new Dick’s Sporting Goods stores in Q2 and in 2012 we expect to open approximately 38 Dick’s Sporting Goods stores. Our ecommerce business represented approximately 3% of total sales in Q2, with same-store sales increasing 34.6% over Q2 last year.

In Q2 we increased our merchandise margin by 29 basis points. As we move ahead we plan to generate continued margin growth with the three main drivers. One is to leverage our inventory management, another is to emphasize private brands and the third driver is to optimize our product mix. To strengthen our private brand platform we entered into an agreement this month to purchase the intellectual property and rights to the Field & Stream mark in the hunting, fishing, camping, and flannel categories. Upon completion, we expect this acquisition to give us the control and flexibility necessary to maximize and leverage the value of this popular brand. Lastly, we are successfully shifting our product mix to include more higher-margin products by increasing our focus on in-store specialty shops from Nike, Under Armour and The North Face as well as continuing to build our shared-service footwear deck in our new and remodeled stores.

As announced in our release this morning we have fully impaired the value of our investment in JJB. We continue to believe in this market thesis underlying our investment; however, since our investment and its public announce by JJB’s management, JJB’s performance has materially deteriorated from its expectations. The investment was structured to provide us with meaningful upside and to cap our downside. Accordingly we have no further funding obligations and will continue to monitor the situation.

For Q3 2012, we now expect consolidated earnings per diluted share to increase by 13% to approximately $0.36, compared with non-GAAP consolidated earnings per diluted share of $0.32 for the same period in 2011. This is better than our previously communicated expectations of mid-single digit growth since consolidated same-store sales are expected to increase approximately 4.0% on top of a 4.1% increase for Q3 last year.

We believe F2012 will also be better than originally expected and accordingly are raising our full-year guidance to a greater extent than our Q2 beat. We expect non-GAAP consolidated earnings per diluted share to increase by 22% to 24% to between $2.47 and $2.51 a share which includes approximately $0.03 coming from the 53rd week this year. This guidance compares to non-GAAP earnings per diluted share of $2.02 in 2011. On a 52- to 52-week comparative basis we anticipate consolidated same-store sales will increase to between 4% and 5% on top of a 2% increase last year.

We’ve delivered another exceptional quarter and are on track to post a strong full-year performance for 2012. As always, our ability to fuel consistent progress across our company is the direct result of the commitment and drive of our people. We are grateful to all of our associates for their exceptional efforts. We plan to drive continued long-term profitable growth by investing in new stores, continuing to develop our omni-channel capabilities, and increasing our margins through inventory management, an emphasis on private brands and the continued shift of our product mix to higher-margin merchandise categories. I’d now like to turn the call over to Joe.

Joe Schmidt

Thanks, Ed. In Q2 2012 we opened four new Dick’s Sporting Goods stores, bringing our store count to 490 Dick’s Sporting Goods stores with 26.7 million square feet, and 81 Golf Galaxy stores with 1.3 million square feet. Within our stores we have 142 shared service footwear decks, 129 Nike Fieldhouse concept shops, 56 Under Armour All-American shops, and five Under Armour Blue Chip shops at the end of Q2. By the end of the year we expect to have approximately 170 shared-service footwear decks and 170 Nike Fielhouse concept shops, 90 Under Armour All-American shops and 10 Under Armour Blue-Chip shops.

Our new Dick’s Sporting Goods stores continue to perform well with a new store productivity of 102.2% in Q2 compared to 95% in Q2 last year. The detailed calculation of new-store productivity can be found in the tables section of the press release we issued this morning. In total, we plan to open approximately 38 new Dick’s Sporting Goods stores this year. Approximately half of the stores are expected to be in new markets and half in existing markets.

This year, we also plan to relocate five Dick’s Sporting Goods stores which are at the end of their leases to preferred locations that we have secured. For Golf Galaxy we plan to reposition one store in Q4. We had originally planned for two repositioned stores this year; one of these stores is now scheduled for Q1 of next year. Our repositioned stores will be larger than our current format and include more services and more experiential shopping.

We are on plan to open our fourth distribution center in January of 2013. This 600,000 square foot facility will be located in Arizona, and combined with our existing DC network we will be able to support a total of 750 stores. On the digital front we continue to invest in new capabilities, expand content and upgrade site functionality to provide customers with an enhanced shopping experience and enable them to buy and receive products when, where, and how they want.

At the same time, these investments are improving our ability to manage our inventory, expedite fulfillment times and maintain a solid in-stock position. In Q2 we completed the development of our ship-from-store capability, began testing it in select stores and are pleased with the results to date. In 2013 we will begin the development of an in-store pickup capability to further enhance our service offerings.

I will now turn the call over to Tim to review our financial performance in greater detail.

Tim Kullman

Thanks, Joe. Sales for Q2 2012 increased by 10% to $1.4 billion compared with the same period a year ago. Consolidated same-store sales increased 3.8%. Dick’s Sporting Goods same-store sales increased 2.9%, Golf Galaxy increased 4.4%, and our ecommerce business increased 34.6%.

The increase in same-store sales in the Dick’s Sporting Goods stores was driven by a 4.0% increase in sales per transaction and by a 1.1% decrease in traffic. As we mentioned in our Q1 call we believe that there was some pull forward of spring sales from Q2 into Q1, particularly in the categories such as team sports, golf, and bikes.

Consolidated gross profit was $447.8 million or 31.16% of sales and was 47 basis points higher than Q2 2011. This increase was driven by merchandise margin expansion of 29 basis points and occupancy leverage, partially offset by freight and distribution de-leverage due to the higher year-over-year mix of ecommerce sales.

SG&A expenses in Q2 2012 were $310.9 million, representing 21.63% of sales compared with 21.87% of sales in last year’s Q2. This leverage of 24 basis points was primarily due to advertising leverage partially offset by an increase in payroll relative to sales and a contribution to Dick’s Sporting Goods Foundation. As we announced in the press release earlier this morning we recorded a pre-tax impairment charge of $32.4 million related to our investment in JJB sports, impacting earnings per diluted share by $0.22.

On the balance sheet we ended Q2 2012 with $350 million in cash and cash equivalents and with no outstanding borrowing under our $500 million revolving credit facility. Last year we ended Q2 with $626 million in cash and cash equivalents and with no outstanding borrowings under the facility. Over the course of the past 12 months we’ve utilized capital to fund the share repurchase program, initiate a dividend program, purchase our store support center, acquire intellectual property rights to the Top-Flite brand and build our new distribution center.

In Q2 we completed the share repurchase program. Within the quarter we repurchased 1.9 million shares of our common stock at the average cost of $49.40 per share for a total cost of approximately $94.9 million. In total, we purchased approximately 4.1 million shares of our common stock at an average cost of $49.33 per share for a total cost of approximately $200 million. As a reminder, the purpose of the share repurchase program is to offset the expected dilutive effect of anticipated option exercise activity from options set to expire in 2013.

Inventory per square foot increased by 4.2% at the end of Q2 this year compared to Q2 last year. About 25% of this increase is from the cold weather merchandise that we packed away after a significantly warmer than normal winter last year. This merchandise, which consists of basic winter product will be sold in the upcoming season. We expect inventory per square foot to be relatively flat at the end of 2012 as compared to the end of 2011.

Net capital expenditures were $50 million in Q2 2012 or $54 million on a gross basis compared with net capital expenditures of $44 million or $53 million on a gross basis in Q2 last year. In Q3 we now expect non-GAAP EPS to grow approximately 13% which is better than our previous expectations of mid-single digit EPS growth.

Our Q3 guidance contemplates the following considerations. First, pre-opening expenses are anticipated to be higher in Q3 2012 as compared to the same quarter in 2011 since there are more new store openings planned in Q3 and Q4 2012 as compared to 2011. Second, we’ll be hosting the Annual Dick’s Sporting Goods Open, a Champion store golf tournament in Q3 this year. Historically, this tournament has been a Q2 event. As a result the related expense of the Open will shift from Q2 to Q3. And lastly we will not be anniversary-ing a favorable tax benefit of approximately $0.01 per share which we benefited from in Q3 last year.

For Q3 2012 we anticipate same-store sales to increase to approximately 4%. Earnings are expected to be $0.36 per diluted share compared to non-GAAP earnings per diluted share of $0.32 in Q3 last year. Gross profit margin expansion is expected to be driven primarily by merchandise margin which increased 29 basis points in Q2 and is expected to expand to a greater extent in Q3 year-over-year.

Occupancy is anticipated to remain relatively flat as a percent of sales in the quarter with leverage expected for the full year. SG&A as a percentage of sales is expected to increase relative to sales in Q3 primarily due to the shift in the timing of the Open that I just mentioned.

For the full year 2012 we anticipate consolidated same-store sales to increase between 4% to 5% and non-GAAP earnings per diluted share to grow approximately 22% to 24% or in the range of $2.47 to $2.51 as compared to the non-GAAP consolidated earnings per share of $2.02 in 2011. Fiscal 2012 includes a 53rd week which we believe will add approximately $0.03 to non-GAAP consolidated earnings per diluted share and is contemplated in our guidance of $2.47 to $2.51.

Operating margin expansion in 2012 is expected to be driven by both an increase in growth margin rate and expense leverage. The gross profit margin rate is expected to increase year-over-year primarily driven by merchandise margin and occupancy leverage. SG&A as a percent of sales is expected to decline as compared to 2011 primarily due to lower advertising and store-related expenses relative to sales year-over-year as declines are expected to be partially offset by planned investments in ecommerce and systems implementations.

With the execution of our share repurchase program, dilutive shares outstanding are expected to be approximately 126 million for our full year, similar to the outstanding shares in 2011. Just as a reminder, when contemplating Q4 we anticipate the startup costs of our new distribution center will have an EPS impact of approximately $0.02 per diluted share. The majority of these expenses will be incurred in Q4. Also in Q4 we expect to earn approximately $0.03 per diluted share due to the extra week.

For the full year, net capital expenditures are expected to be approximately $190 million or $241 million on a gross basis. Net capital expenditures for 2011 were $154 million or $202 million on a gross basis. The anticipated increase in capital expenditures from 2011 to 2012 is primarily the result of the new distribution center and to a lesser extent investments in new stores, vendor shops, system enhancements and ecommerce.

Our Q2 performance coupled with the outstanding performance generated in Q1 has resulted in an exceptional first half of 2012 for Dick’s Sporting Goods. The ongoing initiatives that we’ve mentioned in this call and the investments we are making in our business when considered with our strong balance sheet and cash balance have positioned us well for continued future profitable growth.

This concludes our prepared remarks. We will be happy to answer any questions you may have at this time.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) The first question will come from Robbie Ohmes from Bank of America Merrill Lynch. Please go ahead.

Robbie Ohmes – Bank of America Merrill Lynch

Thanks, good morning guys. A couple of quick questions, and I was hoping you could maybe give us now that we’re sort of in the middle of the back-to-school season any sort of flavor on how that’s going for you guys. And then also your view, if there’s any update in your view on what the product launch looks like for the fall season here both from a footwear perspective and apparel. And then I’ll have a quick follow-up after that.

Ed Stack

Well, the back-to-school season, we can speak to our Q2 results which were above our guidance. We were pleased with Q2 sales. A portion of those sales, the back-to-school piece is in there. So early on we’re pleased with it. As we indicated it was above our guidance, and what we expect back-to-school to be is baked into our Q3 guidance which we can’t speak to right now.

But from a product launch standpoint we’re pleased with some of the things that are out there. We’ve seen some of Columbia’s new technology, North Face’s new technology. We’re pleased with what’s going on out there and we’re obviously relatively enthusiastic about our business because we took our annual guidance up to $0.01 higher than what we beat Q2 by. So for us that’s pretty bullish.

Robbie Ohmes – Bank of America Merrill Lynch

And then just a quick follow-up: can you comment on two things, one would be the running specialty store test that you guys have had disclosed and the other maybe a little more on potentially what next steps might be in terms of your involvement with JJB from here? Thanks.

Ed Stack

Sure. The running test, we’ve opened one store right now. We have plans to open a second one but we think running is an important part of the business. We’re testing a couple of these stores. They’re roughly 4000 square feet, higher-end technical running stores. Where we’re going to go with these we can’t comment right now. We’ve got one open and we’re opening another one in October.

What we do believe will happen and what has already happened to some extent is we will learn what that technical runner’s looking for from both a footwear, an accessory and an apparel standpoint and be able to apply that to our stores. Our running business has been very good and part of that has been due to the research we did on the technical running store so we’re pleased with that.

Our involvement with JJB, all we did originally is we made an investment in JJB of a little more than $30 million. $30 million of that was in the form of a convertible debt instrument. We took that position; we thought there was potential great upside but what we wanted to do was to cap our downside. JJB has had a very difficult time – we all kind of know what’s happening in Europe. They continue to have a difficult time.

With the announcement that they made, and it’s important to understand we’re not running JJB. We’re merely an investor with the ability to take a greater control if we convert it but we’re not running JJB. The JJB management has the announcements that they’ve made about their performance and their financial condition. We felt that it was the prudent thing to do to fully impair this asset at this time and we’ll monitor the situation, and hopefully the management team there can turn that business around.

Robbie Ohmes – Bank of America Merrill Lynch

Got it, thanks very much.

Operator

Our next question will come from Michael Lasser of UBS. Please go ahead.

Michael Lasser – UBS

Good morning, thanks for taking my questions. Ed, you tend to be a conservative bunch. You’ve had a more difficult Q3 compare; the election is going to be really heating up during Q3. Can you talk about how you mapped out your guidance for Q3? You’re implying a nice acceleration of business and what’s driving that thinking?

Ed Stack

Well, what we see happening with our back-to-school sales earlier on in Q2. What our team has been doing on our ecommerce side has been very good with a 34% increase in Q2; we feel that’s going to continue to help drive the business. Our apparel and footwear business continues to do very well. And the shops that we’ve put in place with Nike and Under Armour have done extremely well and the ones that we’ve put in place and that we will put in place going into Q3 from The North Face – we expect those to have similar results.

Michael Lasser – UBS

And can you expand a little bit on the merch margin in Q2? It was up 29 basis points which was a nice result but not nearly as sizable of an increase as you saw last year. And it sounds like you’re expecting it to accelerate so what restrained it in Q2?

Ed Stack

We don’t really think it was restrained. We thought that based on the way we manage the business and manage the [clearance] activity that it was really very good. One of the aspects that has been up pretty significantly has been the firearms business. The firearms business is a lower margin rate than the company average, but at 29 basis points with the comps that we had and what’s happening in the firearms business we were very pleased with that.

Michael Lasser – UBS

Great, thanks a lot and keep up the good work.

Operator

Our next question will come from Gary Balter of Credit Suisse. Please go ahead.

Gary Balter – Credit Suisse

Thank you. It’s only 3% of your sales but can you talk about the ecommerce? You had another good quarter, obviously. What are the areas of strength and what are the areas where you’ve been surprised in terms of it’s not having the impact?

Ed Stack

Well, the strength has come from where you might expect. So the apparel and footwear business has done extremely well. We’ve partnered with vendors and in particular Nike had built a Nike microsite on our site which has done extremely well. So apparel, footwear, the golf business has been very good online.

A couple areas that have been a bit more difficult in some of those are decisions we’ve made on how we’re going to run the business has been the fitness business because we have not been as aggressive in the fitness category due to the lack of profitability around the shipping costs associated with the fitness business. So fitness has been a bit more difficult online; the apparel, footwear and golf business has been very good.

Gary Balter – Credit Suisse

And as part of that, is pricing pretty much agreed on with the suppliers, or do you see is there discounting on other sites that may be impacting you or no?

Ed Stack

Well, there’s no pricing agreed to with the vendors but there’s not any aggressive discounting that we see on the sites.

Gary Balter – Credit Suisse

Could you just talk a little about the competitive environment right now, specifically what’s going on with Academy since their transaction and if you’ve seen anything different from Sports Authority?

Ed Stack

We haven’t seen anything different with Sports Authority. There’s no irrational pricing out there. There’s been no change with Academy. They’re a good, tough competitor and we compete well with them. Our businesses kind of in their stronghold of Texas we’re very pleased with so we really haven’t seen anything really different since the Academy transaction; nor have we really seen anything different from Sports Authority.

Gary Balter – Credit Suisse

Thank you.

Operator

Our next question will come from Sean Naughton of Piper Jaffray. Please go ahead.

Sean Naughton – Piper Jaffray

Hi, thanks for taking the question. On the shop-in-shops, thanks for the detail on what you expect for the balance of the year on UA, Nike and some of the shared footwear businesses. But can you talk about how many of these shop-in-shops you have for The North Face and then how many you think you can put in moving forward?

Joe Schmidt

Specifically around The North Face shop-in-shops we’ll have about 13 at the super shops by the end of the quarter. The shops require a bit more in square feet and we’re opening those in some of our larger volume stores. You can expect some of the two-level stores, that we’re putting those in, and we have some of the small concept shops in about 70 Dick’s Sporting Goods stores. So that’s specifically around TNF.

Sean Naughton – Piper Jaffray

Got it. And then can you give us some examples of categories, Ed, I think you talked about you were moving into some higher margin categories? Can you give us some examples there? And the just as a follow-up on the same store sales trends, how do you think about cannibalization when you open up some of these stores in existing markets?

Ed Stack

The higher-margin categories would be the apparel category being driven by Nike, Under Armour and The North Face. As we add these shops our penetration in apparel goes up, and the apparel margin rates are higher than the company average so that certainly helps our margin rates. From a cannibalization standpoint we certainly take a look at cannibalization as we look at our real estate program, but cannibalization is less than 1% chain-wide. So it’s important to take a look at but at less than 1% it’s not meaningful.

Sean Naughton – Piper Jaffray

Great. And then just my last question: I’m just wondering how the NFL jersey launch by Nike has been going for you and if you think it’s driving a little bit of traffic into the store. Thank you.

Ed Stack

The NFL jersey launch has certainly driven traffic into the store. Those real serious fans want to have the newest jersey out there and we expect this to be additive to our business, and a big part of this really in Q3 and Q4.

Sean Naughton – Piper Jaffray

Great, best of luck on the second half. Thank you.

Operator

Our next question will come from Dan Wewer of Raymond James. Please go ahead.

Dan Wewer – Raymond James

Thanks. Ed, I want to change topics and discuss your golf business for a second. I believe it’s at its seasonal peak during Q2. Based on the terrific sales numbers from the TaylorMade, I believe you were their largest customer in the US and I suspect TaylorMade’s your number one brand. I would have thought Golf Galaxy’s comps would have been a little better than 4.4%. Can you discuss any headwinds besides the sales transferred to Q1?

Ed Stack

That’s the biggest part of it, the transfer from Q2 to Q1. We were very pleased with our golf sales in Q2, especially in light of the transfer into Q1. If you remember, last year there was nobody really playing golf in Q1 last year and they were [this year], so our comps for Q1 for Golf Galaxy were 12.6% and in Q2 they were 4.4%. So if you take annualized those two quarters, Dan, they were really quite good.

Dan Wewer – Raymond James

Okay, and then just one other question. Field & Stream, what does this $25 million investment that you’re announcing allow you to do with the Field & Stream brand that you were unable to do in the past year?

Ed Stack

Well, it’s not that it allows us to do anything; it keeps us from doing something, and that’s paying licensing fees. And we expect this to be accretive a bit this year and certainly accretive going next year. So we ran out the analysis, and by buying this brand it’s certainly accretive from the licensing fees that we were paying prior to that.

Dan Wewer – Raymond James

Okay, I understand. Thank you.

Operator

Our next question will come from Christopher Horvers of JP Morgan. Please go ahead.

Christopher Horvers – JP Morgan

Thanks, and good morning. The pull forward into Q1 from Q2 can you put a number on that, on what you think that was? And do you think that showed up mostly in the traffic line? A lot of retailers have talked about on average maybe 200 basis points or so – is that about right or maybe was it larger for you given that really it’s been warm since January and that’ll impact golf all year long?

Ed Stack

Chris, we have a really hard time kind of putting a number on that, but clearly the fact that people were playing golf or they had gotten outside running earlier, or the Little Leagues were not delayed this year like they were last year because of the weather – there’s some number there. I wouldn’t even venture to put a number on it but it was enough that we would feel it, and I think you really have to take a look at the two quarters combined and get a sense of our business.

So our Q2 was, we were very pleased with our Q2. We knew that there would be some transfer out of Q2 into Q1. We put that into our Q2 guidance – we guided 2% to 3% and we beat that by 80 basis points which under the circumstances we thought was fantastic.

Christopher Horvers – JP Morgan

And as a follow-up to that, a lot of retailers saw a pretty sharp slowdown in June only to see a rebound in July. Census data for your category was reported this morning and the monthlies for May, June, and July were 9, 5, and 11. So just curious qualitatively if you’ve seen a similar trend in terms of how the quarter occurred from a cadence perspective?

Joe Schmidt

We’ve never kind of talked about monthly basis, but we were very pleased with the Q2 sales and we’ve taken up what we originally communicated as our EPS for Q3. As we said it will be mid-single digits, and we’ve now taken that up to low double digits and we took our annual guidance up above the beat. So for us as I said, it’s kind of tongue-in-cheek for us but that’s kind of bullish.

Christopher Horvers – JP Morgan

Thanks. And one follow-up for Tim: on the merchandise margins, in cased I missed it did you break it down between what was inventory management versus mix or private label, maybe in buckets?

Tim Kullman

We did not, Chris.

Christopher Horvers – JP Morgan

Could you add any color?

Tim Kullman

I think if you take a look at the overall margin, especially if you look at the components, most of that margin increase came in product mix. And then of course we had the overall increase in sales but that’s about as much color as I think I’m willing to give.

Christopher Horvers – JP Morgan

Thanks very much.

Operator

Our next question will come from Rick Nelson of Stephens, Inc. Please go ahead.

Rick Nelson – Stephens Inc.

Thank you. I’d like to ask you about the footwear category, if you can comment on what’s happening with comp on units and ASPs; and overall where you think we are in the footwear cycle. It’s performed well for a while.

Ed Stack

Well, we’re not going to give that level of granularity from a competitive standpoint but the footwear business has continued to do well. Our AURs have gone up to some extent and driven by our technical running category.

Rick Nelson – Stephens Inc.

Gotcha. I’d also like to ask you about the real estate market. It looks like you pulled back a couple of Dick’s stores from your prior guidance. If you can comment on development and opportunities?

Jim Schmidt

I think as far as pullback, I think we had guided that we would open approximately 38 to 40 stores. We’re not seeing a big change in the real estate environment out there. It’s still pretty difficult; it’s a lot of pick and shovel work to find some of this real estate. We are seeing some mall opportunities and continue to see some vacant box opportunities with a number of retailers out there. We’re working with mall developers on consolidating space. So it still remains pick and shovel work. There’s not a lot of new development out there. We are working with Sears as an opportunity with some vacant boxes so we’re taking a look at everything we can.

But we didn’t pull back from the standpoint that we’re concerned from a business standpoint. We said 38 to 40 – a couple of those sites have slid into Q1 of next year. The real estate development business is pretty fluid right now but we’ll get the 38 stores open. We expect to be at least that, probably higher than that last year.

Rick Nelson – Stephens Inc.

Okay. I’d also like to ask you about private label and the reference on it of about 15% of your sales last year. You’re making a big push in the Field & Stream acquisition. What sort of targets do you have over the near term and longer term?

Joe Schmidt

We’re not providing any real targets right now, and understand that the Field & Stream brand is not something new. This is a brand we’ve been licensing for years and decided that it would be better for us and accretive to our EPS if we bought it as opposed to continue to pay those licensing fees. So the acquisition of the Field & Stream brand doesn’t really increase our sales of private brand; it just makes them more profitable for us.

Rick Nelson – Stephens Inc.

Gotcha. I’ll jump back in line. Thanks and good luck.

Operator

Our next question will come from Sam Poser of Sterne Agee. Please go ahead.

Sam Poser – Sterne Agee

Good morning, thank you for taking my question. I just wanted to follow up on the JJB one more time. So was it basically the rules of accounting that caused you to write it off for the time being?

Tim Kullman

Sam, this is Tim. That’s exactly what put us in that position to take that conservative approach. The accounting rules here are pretty specific in terms of what we know about the business and we followed those as we should have.

Sam Poser – Sterne Agee

So it doesn’t really change the potential setup for spring of 2014 assuming that things start getting a little bit better over there and so on. I mean the premise of your investment is still the same?

Tim Kullman

The premise of our investment at the outset was we believed that there was room in the UK for a premium sporting goods retailer – that hasn’t changed. The question is whether or not JJB can measure up to that task and that is a very large mountain for them to climb.

Ed Stack

But we still have all our rights and privileges under the original agreement. So if things turned around and we wanted to make that second tranche of financing we have the ability to do that, but we are not required to do that.

Sam Poser – Sterne Agee

And that decision comes up next spring, just confirming that.

Ed Stack

That’s correct, yes.

Sam Poser – Sterne Agee

Okay. And then secondly, you talked about the three major categories – footwear, apparel and so on – being all up for the quarter. Can you give us some form of idea, they were all up but can you give us an idea of what was the larger driver?

Ed Stack

From a competitive standpoint, Sam, no, we’re not going to do that.

Sam Poser – Sterne Agee

Alright. Well thank you very much and good luck.

Ed Stack

Sure, thanks.

Operator

The next question will come from Matthew Fassler of Goldman Sachs. Please go ahead.

Matthew Fassler – Goldman Sachs

Thanks a lot, good morning. First of all to clarify, to the extent that you raised the Q3 and you’ve sort of been warning about a soft year-on-year trend for a while, is that all about the higher comp guide or are there any shifts in the expense dollars versus your initial expectations to help get you there?

Ed Stack

No, this is all around sales, sales and margin, Matt.

Matthew Fassler – Goldman Sachs

Got it. Second question, and I think a lot of people have been dancing around this to some degree – clearly the sense of the backdrop has changed a lot from the time you held your last conference call, and a number of retailers, restaurants and others though not all of them have reported softer numbers. And your higher Q3 guidance really stands out in that context. Are you seeing anything in the business that would be indicative of some of the macro concerns that have been emerging?

Ed Stack

Well, we haven’t. We’ve been very pleased with our business. As I said, we beat our Q2 comp guidance by 80 basis points in a very good Q1. The back-to-school that we’ve seen so far doesn’t mean it’s going to continue, but the back-to-school that we saw in Q2 gave us confidence to take the Q3 up from what we had originally guided to. We see the apparel and footwear businesses continuing to comp quite strongly and those carry higher margin rates than the company average. So kind of all that that’s happening inside our business we’re pretty excited about.

Matthew Fassler – Goldman Sachs

Got it. And then my final question is for Tim, and it relates to the accounts payable line. I know this one was down a bit in terms of percent of inventory in Q1 and that presumably related to the hangover of maybe some of the pack-away product. And it was down a little more than that year-on-year here in Q2, and that was I guess one reason why the cash balance is where it is year-on-year. What’s your thinking about the trajectory of this number and at what point do we start to flatten out or actually increase the payables ratio on a year-on-year basis?

Tim Kullman

And I think you also have to take a look at where we stand on an inventory per square foot basis, being at that 4.2%. So as we’re managing the inventory process throughout the quarter you also manage receipts as part of that process. So those receipts are now coming in in Q3 versus in Q2; that also indicates that you don’t have those payables to record when those receipts aren’t in the given quarter. So part of that is the management of receipts for the most part.

Matthew Fassler – Goldman Sachs

Got it. And sort of your sense qualitatively on the freshness of the inventory, the amount of clearance and stock, etc.?

Tim Kullman

The clearance inventory as a percent to our square footage is down by 2.3%.

Matthew Fassler – Goldman Sachs

Got it, that’s great. Thank you so much.

Operator

Our next question will come from Brian Nagel of Oppenheimer. Please go ahead.

Brian Nagel – Oppenheimer & Co.

Hi, good morning. So I want to continue a line, and follow I guess Matt’s question and the question of others. But some of the comments you’ve made have suggested that the back-to-school has started off quite nice for you guys. As you think behind that, is there a product launch or some type of product cycle that may be helping to boost that here early in the season, or conversely is it something that’s really the beginning of a same trend through the season?

Ed Stack

It’s pretty broad-based. It’s apparel, it’s footwear, it’s backpacks – I mean the back-to-school business has been really quite good. We’ve also seen a nice lift in firearms sales which Q3 and Q4 are big in firearms sales. So we’re seeing a lift in that to drive comps, although that being at a lower margin rate, some of the other categories that are doing well will offset the margin rate pressure that we would get from the gun side.

Brian Nagel – Oppenheimer & Co.

Okay, and then a follow-up: as we think about the balance of 2012 and aside from firearms, how should we think about or how are you guys looking at the outdoor category in general?

Ed Stack

We’re relatively optimistic about it, whether that be the outdoor category of firearms or the outdoor category of our tackle business, or the outdoor category of the ski business, the ski-related apparel business that we do. So we’re relatively enthusiastic about what’s going on right now.

Brian Nagel – Oppenheimer & Co.

Thank you.

Operator

Our next question will come from Peter Benedict of Robert W. Baird. Please go ahead.

Peter Benedict – Robert W. Baird

Thanks, guys, I hope the firearms stuff is not back-to-school related [chuckling].

Ed Stack

We agree.

Peter Benedict – Robert W. Baird

Exactly. One real question here: just in terms of The North Face, just so I understand that correctly remind us how many were in place at the end of Q2. I didn’t know if you had any. And then you’re expecting that 13 of the larger sets and 70 of the smaller sets by the end of this year? That’s the first part of my question.

Joe Schmidt

Yeah, the 13 shops will be at the end of the quarter, and Peter, those shops are about 2000 square feet. So they’re significantly larger than you’d see in a typical single-level store which is approximately 500 square feet. So you’re going to see those primarily in our two-level stores.

Peter Benedict – Robert W. Baird

Okay, and would you add any more in Q4 or are you starting to get to the holidays and you’ll want to see how those go?

Joe Schmidt

We’re going to add three more by the end of the year.

Peter Benedict – Robert W. Baird

Okay. And then the second question in terms of some of the bigger sets you have – the shared-service footwear, the Nike Fieldhouse – they should be in about a third of the Dick’s stores by the end of this year. When we think longer-term, is there any reason why these concepts can’t go into 50% of the stores or more or how should we think about the longer-term opportunity assuming these continue to generate the returns you’re looking for?

Joe Schmidt

Think about, on the shared-service footwear side of things, every store that we open moving forward we open with shared-service footwear. Every store that we remodel, every store that we reposition we also open those stores with the shared-service footwear model. As far as the apparel shops with Nike, there’s no reason to think that they couldn’t be in half the stores.

Peter Benedict – Robert W. Baird

Okay, perfect. Thanks so much, guys.

Operator

Our next question will come from Camilo Lyon of Canaccord. Please go ahead.

Camilo Lyon – Canaccord Genuity

Thank you, good morning, everyone. My question relates to what the implied Q4 comp guidance suggests. We’re coming off of the warmest winter in multiple decades and it seems like you’re embedding a pretty substantial two-year deceleration and I just wanted to better understand what the thinking is behind that, what you’re contemplating around Q4 and where some potential upside could come from?

Ed Stack

I don’t think that we have changed anything regarding Q4 since we started giving our guidance for the year. So as we look at Q3 versus the rest of the year you’ll see that we increased our guidance for the overall year up to 4% to 5%. So we have essentially left Q4 alone sequentially from where it has been because we don’t give guidance for that quarter. The implied guidance hasn’t changed.

Camilo Lyon – Canaccord Genuity

So maybe asked another way: what is the expectation around whether you’re expecting it to improve at all from last year? Are you expecting it to be comparable to last year? Any sort of color on that would be very helpful.

Ed Stack

I think the way you ought to look at our Q4 is anticipate a normal winter versus what we saw last year. That would be an improvement.

Camilo Lyon – Canaccord Genuity

Got it. And then just going back to the margins, the gross margins, you mentioned that freight was an offset to the total as more ecommerce expenses are flowing through and the (inaudible) expenses related to that. Can you help us think about how we should think about that going forward as that business continues to expand and you’re taking more ship-from-store, doing more of that kind of business in stores and the way that we really start to flow that through our models?

Ed Stack

I think that you get into 2013 as we have more ship-from-stores and we start the development of the order online/pick-up in store, I think you’ll start to see some of that current de-leverage neutralize somewhat because more of the penetration of the ecommerce business should be directed towards ship-from-store and order online/pick-up in store.

Camilo Lyon – Canaccord Genuity

Got it. And would you be able to provide what the actual de-leverage was in Q2?

Ed Stack

I haven’t gone that far. It was not significant enough to offset the occupancy leverage.

Camilo Lyon – Canaccord Genuity

Got it. Thanks very much and good luck with the balance of the year.

Operator

Our next question will come from Mike Baker of Deutsche Bank. Please go ahead.

Mike Baker – Deutsche Bank

Thanks. So one, just a short-term question and then a longer-term question. In the short term you leveraged your occupancy on a comp [down] slightly less than 4% this quarter but said you won’t leverage it next quarter on a 4% comp – I’m just wondering if there’s anything we should be thinking about there as to why that would change.

The longer-term question relates to your store count. You’ve consistently said 900 stores and I think when you even look at your long-term projection of stores by state it gets to be a little bit higher than 900. But as ecommerce gets to be a bigger part of your business, how much do you think about that number potentially changing, coming down as more sales go online? And then I guess related to that, not only the number of stores but the size of each store – how could that change? Thanks.

Joe Schmidt

Well, we’re trying to assess all of that right now. So is it 900 stores? Is it some different number? We feel that 900 is still the right number. As you said, if you take a look at this by state we could actually be slightly higher than that so 900 we’re very comfortable with. And does the size of the store come down? We’re looking at that although there are a number of categories that we see big opportunities in that can use that square footage. So some categories may contract; some other categories may expand. So we don’t see a big change in the size of the store but there may be some square footage allocations that are different in the future.

Tim Kullman

As to your SG&A question, but for the fact that the golf tournament moved into Q3 we would have leveraged SG&A.

Mike Baker – Deutsche Bank

Sorry, it was an occupancy cost.

Tim Kullman

Oh, pardon me. The occupancy cost, we said that we had to have a comp in excess of 3% to leverage but that shifts quarter-by-quarter. You have to look at that leverage point on the whole year because in different quarters we can have [cam] audits that come back with favorability, real estate tax assessments that are favorable, or where in the prior year for example, co-tenancy violations had reduced rents for a period of time. So you have to continue to look at occupancy on an annual basis.

Mike Baker – Deutsche Bank

Okay, thanks. If I could just ask one more follow-up, and really just following up on the first question but just maybe a little bit more specific. I’m sure as you guys map out the 900 plus stores you sort of do a pro forma for each store as to what the store’s sales can be and the occupancy, etc. Have you changed the inputs into those pro forma expectations for the past let’s say 18 months or two years as ecommerce has become a bigger part of your business?

Ed Stack

We’ve taken a look at where some opportunities are in different businesses, and it’s an iterative process all the time. So yeah, we’ve taken a look at categories that we think can expand in the store, categories that we think can contract in the store and what we think are the costs of providing those categories in a store and the margin rates associated with them. So yes, we do a very detailed analysis of this on a pretty regular basis.

Mike Baker – Deutsche Bank

Okay, thanks for that detail.

Operator

Our next question will come from Mark Miller of William Blair. Please go ahead.

Mark Miller – William Blair & Co.

Hi, good morning. Can you give us some perspective around the traffic decline in the quarter and how much the change from Q1 to Q2 was due to the pull forward; and basically what would be the underlying run rate aside from them?

Joe Schmidt

Yeah, as we said, it’s very difficult to put a number on that with the comps we had in Q1 versus the year before and the fact that people were playing golf earlier, they were outdoor running earlier, they were playing high school sports earlier this year. That definitely moved some traffic and some business into Q1. We can’t quantify that but we think that was the biggest primary responsibility factor of the traffic change.

Mark Miller – William Blair & Co.

And so I can infer from that, now that we’ve moved past that that the business is traffic positive?

Joe Schmidt

We don’t comment about a quarter inside the quarter, but we’ve guided our comps to roughly 4%. We’re taking the earnings number up above what we’d originally communicated so we’re optimistic about our business in Q3.

Mark Miller – William Blair & Co.

Okay, got that. Now on ecommerce, as we look at your store prices versus the ecommerce competition, I think we want to consider the scorecard certificates and coupons in the net pricing that your consumer pays. So could you put any perspective around what portion of your sales have these incentives for the consumer and how much is that changing year-to-year approximately? Thanks.

Ed Stack

Well, there’s a significant amount of our sales that come on the scorecard – that’s one of the reasons why we’ve got so much data and are able to mark it kind of one-on-one to our consumers, be it through direct mail catalogs that we send them or digitally through our ecommerce platform. All of these I think are contributing factors to our increase in sales but we’ve not guided to exactly how many dollars come on the scorecard program. But it’s meaningful and certainly helps us run our business to better understand what’s going on with the consumer out there.

Mark Miller – William Blair & Co.

And just the other part of that, I mean can you comment on is it constant year-to-year or is it something with redemptions going up or just issuance might be one way or the other year-to-year? Thanks.

Ed Stack

It’s certainly going up. As we continue to market more aggressively in this medium and direct to our consumers, that aspect of our business is certainly going up.

Mark Miller – William Blair & Co.

Perfect, thanks.

Operator

The next question will come from Kate McShane of Citi Research. Please go ahead.

Kate McShane – Citi Research

Thank you, good morning. With regards to Q3, I wonder if you could just remind us what you’re up against from both a positive and negative standpoint. For instance, did the NFL lockout have a significant impact to your Q3 comps last year and do the sanctions on a certain large football program in Pennsylvania have any kind of impact to your business?

Ed Stack

The NFL lockout did have an impact on our business. What also had an impact on our business last year was the transition that people knew that the jerseys were going to change with the NFL licensing moving from Reebok to Nike and that had an impact on our business also. So the NFL jersey business has been very good right now. And what’s happened at Penn State, we sympathize with all that’s happened at Penn State but as it relates to our business it’s an insignificant amount of our business. It will have no impact on our performance.

Operator

The next question will come from Matt Nemer of Wells Fargo Securities. Please go ahead.

Kate Went – Wells Fargo Securities

Hi, this is actually Kate Went in for Matt Nemer. First, I was wondering if you could just provide some more color on how the tests on ship-from-store is going in terms of ironing out the process with employees and stores, and if it’s allowed you to shorten customer delivery times or perhaps even produce mark down exposure in the stores. Then second I was wondering if you could break out approximately SG&A benefited this quarter from the shift in the golf tournament into Q3.

Joe Schmidt

I’ll take the first portion. As far as the ship-from-store, we continue to test that with our stores. As you would expect in any test, we’re learning every day on the labor piece, the shipping piece. But you alluded to the fact of having inventory more readily available to us and turning that around quicker to the consumer, so early reads are that we’re pretty pleased with how things are progressing and we’ll take a look at adding stores as we progress.

Tim Kullman

In terms of the golf tournament, you can think about that in terms of a little bit better than a $0.01 impact on the quarter.

Kate Went – Wells Fargo Securities

Alright, great. Thanks so much.

Operator

The next question will come from John Zolidis of Buckingham Research. Please go ahead.

John Zolidis – Buckingham Research

Hi, thanks for taking my question. Two quick questions: one, as I recall last year the marketing around the outdoor segment affected the business at the end of Q2. Aside from the firearms how has that business done this year? And then secondly, a quick look on your website shows some Olympic-related apparel. Is that at all a factor with the Q2 or with the outlook for Q3? Thank you.

Ed Stack

On the outdoor category we learned from our mistakes, and we’re pretty good at not making the same mistake twice. So our outdoor categories, we were very pleased with those around the hunting business, the fishing business. We were really very pleased with our performance there. As far as the Olympics merchandise goes, yes, we have Olympics merchandise on our website. It’s a small portion and had very little to do with our comps.

John Zolidis – Buckingham Research

Okay, thanks and good luck.

Ed Stack

Thank you.

Operator

The next question will come from Paul Swinand of Morningstar. Please go ahead.

Paul Swinand – Morningstar

Good morning, thanks for taking my question. First just I guess we’ve had enough questions on the guidance; let’s shift to something a little larger-scale here. You had a new Marketing Director join and you’ve talked about doing more brand advertising, more national advertising. Can you give us any color on how that’s gone and how you’re thinking about tactical versus strategic advertising going forward?

Ed Stack

Sure. We brought in Lauren Hobart from Pepsi about 18 months ago. She’s really had a very significant positive impact on our marketing and our marketing direction. The branding advertising that we’ve done in the spring around Father’s Day and now into back-to-school has been viewed as great. We’ve never had more positive responses and comments to our marketing around our “Untouchables” spot, the Father’s Day spot and the “Come Back” spot for back-to-school. So it’s been great.

We expect to transition more dollars into marketing like that than into what we’ve done in the past, and strategically the way we look to do this and the tactics behind it is we would expect to see less insert advertising in the newspapers on a Sunday and more of this brand building advertising that Lauren and her team have put together along with more direct marketing to our consumers either through digital marketing or through direct mail pieces into the home. So our early results have been great, we’re very pleased with it and expect to strategically move more dollars in that direction and take more dollars out of the traditional Sunday newspaper.

Paul Swinand – Morningstar

Very interesting, thank you for that. And then quickly on the hunting business, just to remind everybody you guys are not in handguns at all and you don’t have any rifles that aren’t really hunting rifles – that’s correct, right?

Ed Stack

We’ve got target shooting rifles but we don’t carry AK-47’s and we don’t carry any handguns.

Paul Swinand – Morningstar

You don’t sell any of the SWAT rifles either?

Ed Stack

Just from a target sporting type, the modern sporting rifles that are primarily 20-2’s, we carry some of those. But they’re used for more sport target shooting. But the military-type rifles we don’t carry any of those and we carry no handguns.

Paul Swinand – Morningstar

Right, so we can we therefore conclude that the hunting business increase doesn’t have anything to do with the election and you’re taking market share from someone else?

Ed Stack

Well, I don’t know that I would go that far because you know, gun owners are concerned – rightly or wrongly – about what the administration might do. So I think this has something to do with the election.

Paul Swinand – Morningstar

Okay, great. Well thank you again and best of luck for the second half.

Ed Stack

Thank you.

Operator

The next question will come from David Magee of SunTrust Robinson Humphrey. Please go ahead.

David Magee – SunTrust Robinson Humphrey

Yeah, hi, good morning. Just a quick question regarding inflation and what your current thinking is on the second half and say the first half of next year, and what any change might mean for comps and/or margins?

Ed Stack

As we’ve indicated, we’ve seen some inflationary pressure kind of in the back half of this year. There’s some North Face product that has taken some relatively significant price increases in that outdoor category, jackets and base layer product. I think our merchants have done a very good job of buying around some of that product. North Face has done a good job of providing some more technical aspects to that product and we’ll see how it goes. But the early indications of what we’ve seen from a back-to-school standpoint is we’re relatively pleased and we don’t think that we’re going to have any meaningful pressure there.

David Magee – SunTrust Robinson Humphrey

Are you seeing less inflation in other categories?

Ed Stack

Versus the categories that I just talked about, yes we’re seeing less inflation in other categories.

David Magee – SunTrust Robinson Humphrey

So overall you’ll see maybe less inflation than in the first half this past year?

Ed Stack

I don’t know about that because these categories – North Face. Columbia, some of these outdoor categories from an apparel standpoint that we’ve had some price increases, and are a bigger percent of our business in the second half than they are in the first half.

David Magee – SunTrust Robinson Humphrey

Okay. Great, thanks Ed.

Ed Stack

Sure.

Operator

Your next question will come from David Gober of Morgan Stanley. Please go ahead.

[Sean Colnig] – Morgan Stanley

Hi, guys, this is [Sean Colnig] on for Dave – thanks for taking the question. Can you provide any color as to the drivers behind the improvement in new store productivity year-over-year and how sustainable that might be?

Joe Schmidt

I think we’ve done a better job of marketing the business. I think we’ve done a better job with our pre-opening campaigns than we’ve done in the past. I think we’ve also done some of the areas that we’ve opened the stores we were a bit stronger in. The real estate that we’ve taken has been better. So there’s not one silver bullet, but we took a look at that whole process and deconstructed it, and said “Okay, we’ve got to take a look at our real estate strategy, we’ve got to take a look at how we market this, we’ve got to do a better job of having the right content in the store right off the bat.” And the group has done a great job of executing that, and that’s a big part of the reason why this new store productivity has increased.

[Sean Colnig] – Morgan Stanley

Great. And just to confirm, there was no impact from the baseball bat regulation change in Q2, correct?

Joe Schmidt

It was small, but it was much greater in Q1 than Q2 because it was all around high school.

[Sean Colnig] – Morgan Stanley

Alright, thanks guys.

Operator

The next question will come from Chris Svezia of Susquehanna Financial Group. Please go ahead.

Chris Svezia – Susquehanna Financial Group

Good morning, everyone. I just have one quick question just on the fitness category. I know in the past it’s been one of the weaker categories for you guys, the treadmills, the ellipticals. What are you guys doing as you go into the key Q4 in terms of making changes to that category, either reducing the square footage, what are the categories you’re putting that inventory into? And are you doing more with regards to foam rollers or systems bars, or things of that nature? Just kind of your thoughts about that category heading into the back half.

Ed Stack

Well, a couple things. We’ll be launching a private brand of treadmills called Epic that we’ve worked with to provide some technology that many treadmills don’t have, so we’re enthusiastic about that to hopefully stop the bleeding there. We’ve also transitioned inventory dollars into as you would say foam rollers, resistance bands, medicine balls, kettle bells and kind of a lot of the products that are required for the P-90X workout we’ve done really very well with. So we’ve transitioned dollars there.

Now, a treadmill or an elliptical, it takes a lot of foam rollers and resistance bands to make up for that but the margin rates on those foam rollers and resistance bands, etc., are much higher than treadmills. So we expect the fitness business to continue to be somewhat challenged but that’s all baked into our guidance and we’re comfortable with our overall guidance.

Chris Svezia – Susquehanna Financial Group

Okay, alright, fair enough. Well thank you and all the best.

Operator

Our final question will come from [Kelly Ginn] of Telsey Advisory Group. Please go ahead.

Joe Feldman – Telsey Advisory Group

Hi guys, it’s actually Joe Feldman – [I got in] by accident. So I wanted to ask you, to follow-up on that question about inflation a little bit, the ticket increase that you guys had to drive the comp, how much of that was driven by higher pricing? Because we are hearing this morning manufacturers talking about prices coming down a little bit – I’m just wondering how we should think about that in the quarter and maybe going forward.

Ed Stack

We talked about this – we didn’t see a real big increase in prices across the board in Q1 and Q2, a little more in Q3 and Q4 with some of the apparel categories we talked about. There were some categories or some I should say SKUs that took price increases and some of them worked out fine and the customers accepted them, and some other ones didn’t. I’m not going to get into what the specifics of that are but sometimes they accepted it and sometimes they didn’t. But overall we were pleased with the AURs that we’ve put out there.

A driver of the AURs also continues to be our golf business around what TaylorMade’s done with the R11S driver, the Rocketballz fairway woods, drivers, hybrids and that business has been really very good and has helped move the AURs up.

Joe Feldman – Telsey Advisory Group

Got it, that’s helpful. And then just one kind of longer-term question. I guess as we think about maybe the potential for where operating margins can go one day, because there are so many good things you are doing beyond just adding stores, and obviously with the private label and the shop-in-shops and the shared footwear model. I guess stores that have that full complement of the assortment and sort of where you envision the company, what’s the margins like in those stores relative to say a store that doesn’t have all that? What could we see in the future is what we’re trying to get at.

Ed Stack

We’ve indicated that we think over the next several years that we can get to double digit operating margins.

Joe Feldman – Telsey Advisory Group

Got it. And it’s driven by all those things, thanks.

Ed Stack

Yeah, there’s not a silver bullet. There’s a number of things we need to continue to improve on.

Joe Feldman – Telsey Advisory Group

Got it, thanks. Good luck with the quarter, thank you.

Ed Stack

Thanks, Joe.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference over to Mr. Edward Stack, Chairman and CEO for his closing remarks.

Ed Stack

I’d like to thank everyone for joining us on our Q2 conference call and look forward to talking to you all at the end of Q3. Thank you very much.

Operator

The conference has now concluded. We thank you for attending today’s presentation; you may now disconnect.

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