Dick’s Sporting Goods, Inc. Q2 2008 Earnings Call Transcript

| About: Dick's Sporting (DKS)

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

Q2 2008 Earnings Call Transcript

August 21, 2008 10:00 am ET

Executives

Anne-Marie Megela – Director, IR

Ed Stack – Chairman and CEO

Joe Schmidt – EVP and COO

Tim Kullman – EVP, Finance, Administration & CFO

Analysts

Robby Ohmes – Merrill Lynch

Matthew Fassler – Goldman Sachs

Kate Mcshane – Citi Investment Research

David Cumberland – Robert Baird

Gary Balter – Credit Suisse

Rupesh Patel [ph] – UBS

Mitch Kaiser – Piper Jaffray

John Shanley – Susquehanna

Rick Nelson – Stephens Inc.

Bob Simonson – William Blair

David Magee – Suntrust Robinson Humphrey

Mike Baker – Deutsche Bank

Jim Duffy – Thomas Weisel Partners

Hardy Bowen – Arnhold and Bleichroeder

Dan Wewer – Raymond James

Sean McGowan – Needham & Co.

Joe Gagen – Atlantic Equity Research

Jeff Mintz – Wedbush Morgan

Joe Feldman – Telsey Advisory Group

John Curty – Principal Global Investors

Operator

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

Anne-Marie Megela

Thank you, and good morning to everyone participating in today’s conference call to discuss the second quarter financial results for Dick’s Sporting Goods. Please note that a re-broadcast of today’s call will be archived on the Investor Relations portion of our Web site located at dickssportinggoods.com for approximately 30 days. In addition, as detailed in our press release, a dial-in replay will also be available for approximately 30 days.

In order for us to take advantage of the safe harbor rule, I would like to remind you that we have included in today’s discussion some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and 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 statement, please refer to our periodic reports filed with the SEC. We have also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable GAAP financial measure is calculated in accordance with generally accepted accounting principles and a related reconciliation can be found on our Web site.

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

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

Ed Stack

Thank you Anne-Marie. Considering the challenging and uncertain macroeconomic environment, we are pleased to report income of $44.5 million or $0.39 per diluted share, excluding the impact of the costs related to the Golf Galaxy integration. These results exceeded our previously issued guidance of $0.34 to $0.38 per diluted share.

Total sales for the quarter increased 7% to $1,086 million. Comp sales exceeded our guidance declining by 3.7% compared to our guidance of negative 7% to negative 4%, and compared to a 5.8% increase in the second quarter of 2007. Comps for Dick's Sporting Goods stores were negative 3.7% and for Golf Galaxy stores were negative 4.5%. Of the negative 3.7% comp from the Dick's Sporting Goods stores, 50 basis points were from the discontinuation of Heelys. Golf and categories that are more dependent on gasoline usage such as tackle, camping, and watersports were also negatively impacted. Athletic footwear excluding Heelys and athletic apparel performed well in addition to our team license sports area.

Our inventory levels were down approximately 2% per square foot at the end of the quarter compared to last year. Throughout the remainder of the year, we expect inventory per square foot to be below last year’s levels. Given the difficult macroeconomic environment, we are pleased with the second quarter results but we still believe the consumer is very cautious and will continue to be so into 2009. However, we continue to recognize that this is a great opportunity to gain market share and will continue to focus on our primary customer, the core athlete and outdoor enthusiast, while working with our vendors to provide unique and exclusive products.

We continue to be excited about our private brand program, with the launch of Reebok performance apparel, the Field & Stream brand, along with the continued success of Adidas Baseball. Private brand growth is a key driver of our merchandise margin expansion, which increased 46 basis points in the second quarter compared to the same period last year. We are effectively managing inventory, our store development program is on track and we are aligning our expenses to our current sales expectations, without negatively impacting our growth strategy.

Considering all these factors, we are updating our guidance for 2008. We are raising the low end of our guidance and anticipate consolidated earnings per diluted share of approximately $1.27 to $1.36. This guidance excludes expected merger and integration costs related to Golf Galaxy. Earnings per diluted share for the full year of 2007 is $1.33.

We are expecting comp store sales to decrease approximately 5% to 3% in 2008, consistent with previously-issued guidance, versus 2.4% gain in 2007. For the third quarter, we are anticipating consolidated earnings per diluted share of approximately $0.04 to $0.08, excluding expected merger and integration costs related to Golf Galaxy. Earnings per diluted share was $0.10 in the third quarter of 2007. We are anticipating a comp store sales decrease of approximately negative 5% to negative 2% in the third quarter. Our expectations include approximately $0.01 worth of expenses in each quarter associated with the startup of our Atlanta distribution center.

Both Dick's Sporting Goods and Golf Galaxy stores are included in our comp sales comparison for the third quarter, but Golf Galaxy is not included in the full-year guidance as they didn’t enter the comp base until the second quarter of this year. Chick's stores will be included in the comp sales comparison, one year after the conversion into Dick's Sporting Goods stores.

Once again, I would like to commend our associates who have been able to deliver solid results in a difficult macroeconomic environment. With our culture of strict financial discipline and emphasis on execution, we have proven our ability to execute in the good times and are now demonstrating the same in tough times. We are growing the business and will have opened 43 Dick's Sporting Goods stores by the end of the year, we are effectively managing inventory, and on a square-foot basis, expected to be below last year’s levels at the end of Q3 and Q4. We continue to control our expenses and expect to moderately leverage SG&A in the back half of the year.

I will now turn the call over to Joe.

Joe Schmidt

Thanks, Ed. In the second quarter, we opened 9 new Dick's Sporting Goods stores. These stores were opened in South Fredericksburg, Virginia; Garland, Texas; Montgomeryville, Pennsylvania; St. Peters, Missouri; Gilbert, Arizona; Brighton, Colorado; Cedar Hill, Texas; and two stores in San Antonio, Texas. Also in the second quarter, we opened one new Golf Galaxy store. This store was opened in Encinitas, California. At the end of the second quarter, we operated 357 Dick's Sporting Goods stores with 20 million square feet, 84 Golf Galaxy stores with 1.3 million square feet, and 15 Chick’s stores with approximately 800,000 square feet.

New store productivity for the Dick's stores was 81% adjusted for timing of openings. In total, we are planning to open approximately 43 Dick's stores and 10 Golf Galaxy stores in 2008. Much like 2007, we expect our 2008 new store program to include a mix of new and existing markets. The remaining Dick's stores are anticipated to open in the third quarter. The remaining Golf Galaxy stores are expected to be opened in the fourth quarter. In the third quarter, we will also convert one Chick’s store to a Dick’s store with the remaining Chick’s stores to be converted in the second half of 2009.

Finally, our third distribution center in Atlanta opened on July 7. It is already supporting about 60 stores and we believe that will eventually bring our total network capacity up to 670 stores. We expect to see savings as a result of this new DC in 2009.

I will now turn the call over to Tim to go through our financial performance in more detail.

Tim Kullman

Thanks Joe. Sales for the quarter increased 7% to $1,086.3 million. Comp store sales at Dick’s stores decreased 3.7% driven by fewer transactions, partially offset by higher sales per transaction. Cannibalization impacted comps by approximately 1%, similar to recent levels. Gross profit of $319.7 million was 29.43% of sales, 4 basis points lower than the second quarter of 2007.

Expanded merchandised margins and lower freight costs were offset by de-leverage of distribution and occupancy. SG&A expenses of $237.7 million were 21.88% of sales and 89 basis points higher than last year’s second quarter. As planned, our advertising spend was relatively higher in the second quarter compared to expectations for the rest of the year, due to timing of selected initiatives. For the full year, we expect to leverage advertising.

Operating income before merger and integration costs decreased $4.9 million or 6% to $78.3 million. As a percent of sales, the pro forma operating income margin of 7.21% was 100 basis points lower than the second quarter of 2007. Merchandise and freight margin gains were more than offset by the impact of occupancy, distribution, advertising and payroll expense de-leverage.

Net income excluding merger and integration costs and the tax impact of non-deductible executive separation costs decreased 5% to $45.5 million and earnings per diluted share decreased 5% to $0.39 compared to prior year net income of $47.9 million or $0.41 per diluted share.

Let’s move to the balance sheet. At the end of the second quarter inventory per square foot was approximately 2% less than in 2007 for Dick's stores and on a pro forma basis. We ended the quarter with $10 million in outstanding borrowings on our $315 million line of credit as compared to $52 million in outstanding borrowings last year. Our borrowing rate is LIBOR plus 75 basis points averaging 3.4% in the second quarter.

Net capital expenditures were $32.1 million in the second quarter or $59.4 million on a gross basis, in line with our previous expectations. We are expecting net capital expenditures of approximately $125 million in 2008 or approximately $205 million on a gross basis.

I would like to make a few remarks about our expectations for 2008. Merchandise margin expansion has benefited from better buying, expansion of our private label/private brand program, and improvements in inventory and mark-down management. We expect each of these factors to continue to contribute to merchandise margin for the full-year 2008 and beyond.

As Joe outlined earlier, we have opened our third distribution centre. As a result of pre-opening and other costs associated with opening and operating a new DC, we expect to absorb a P&L impact of about $0.01 in each quarter in 2008. The impact will be seen in our cost of goods sold and is incorporated in our guidance. We are expecting a relative increase in the occupancy line in 2008 from declining same stores sales comps. This impact is most influential in the first and third quarters and is in our guidance. For the full year, the merchandise margin expansion is expected to be more than offset by the occupancy and freight and distribution de-leverage.

As we look at SG&A, as we have mentioned, we went through a comprehensive re-budget process in the second quarter. As a result, we expect to modestly leverage our expenses in the second half of the year, most notably in the fourth quarter. Primary drivers of expected savings include lower relative advertising spend and a reduction in payroll and incentive payments as compared to last year.

We are in the process of integrating Golf Galaxy’s front and back offices into the Pittsburgh headquarters and expect to be completed by the end of the fiscal year. As a result, there were $5.5 million of costs incurred in the second quarter. We are currently expecting merger and integration costs pre-tax of approximately $2.5 million in the third quarter and $3.3 million in the fourth quarter. The costs expected in 2008 are one-time in nature and relate to severance, retention, office closure, and related taxes.

Our initial estimated cost savings in 2009 from this integration is approximately $9 million to $10 million pre-tax. For the full year, the comp guidance is negative 5% to negative 3%. Our comp guidance for the third quarter is negative 5% to negative 2%, and includes expected negative comps from Heelys of approximately 40 basis points. We’ve not included any potential opportunity to benefit from the World Series.

Moving to the balance sheet. We do expect to have seasonal borrowing needs consistent with how our business has historically operated. Our current expectation is that we’ll end 2008 with no outstanding borrowings on our revolving credit facility.

Thank you. This concludes our prepared remarks. At this point, operator, I would like to open the line for questions and answers.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Robby Ohmes representing Merrill Lynch. Please proceed.

Robby Ohmes – Merrill Lynch

Thanks. Nice quarter guys. Couple of questions. First, can you give us actually a little more detail on the strength of your merchandize margins and what exactly you are doing there, is it private label sourcing, is it mixed shift towards private label and private brand, because the gross margin looked very healthy given that you had almost 4% comp decline. So, I’d love a little more detail there. The other question I had was on just if you could tell us a little more how Chick's is performing. I know you won’t give the comps. But sort of how it is performing versus your expectations as you are waiting to do the conversions in the next year? I’ll stop there for now. Thanks.

Ed Stack

Robby, the margins – the increase in margins came from a couple different sources. One was better mark-down management. We’ve down very well controlling the inventory and you can see with inventory down 2% on a per-square-foot basis is – the group has done a very good job and our clearance inventory is down 8.7% versus last year. So, the group has just done a much better job with inventory management. We have been able to make some advantages buys out in the marketplace, which have helped to increase the margins. And we expect to – it is our anticipation that we’re able to do that again going forward into the back half of the year. As far as Chick's goes, Chick's are kind of in the zone of our expectations. Whenever you do a conversion like this, it’s always difficult. But Chick's are performing kind of in the zone of what we had anticipated.

Operator

Your next question will come from the line of Matthew Fassler representing Goldman Sachs. Please proceed.

Matthew Fassler – Goldman Sachs

Thanks a lot. Good morning Tim. I guess the first question relates to the composition of the charges, particularly this quarter I know that you had a separation (inaudible) filing for the former CEO of Golf Galaxy. I’m curious if that was a significant part of the charge that we saw?

Tim Kullman

As you might expect, we had charges related to two executive offers at Golf Galaxy. So, the amount of the charge is about a 50/50 split in that $0.9 million pre-tax on the M&I side, and then also related to the $2.6 million non-deductible portion on the tax expense side.

Matthew Fassler – Goldman Sachs

Got you. Second question just relates to the tone of business and fiscal stimulus. As we’ve been through earnings in the past a couple of weeks, particularly for companies that hadn’t reported monthly, there are some companies that probably didn’t expect to benefit that in retrospect thought they might have and were able to discernible that through, for example most of the (inaudible) consumers more of a swing towards cash or debit cards as opposed to credit. I am curious as you looked at the tone of business through the quarter as you looked at ticket trends and means of payment whether you can (inaudible) any kind of a role in the better comps.

Ed Stack

Matt, we don’t think it did. We don’t think we benefitted very much at all from the stimulus package. I guess the long and short answer is no, we didn’t think we benefitted a lot.

Matthew Fassler – Goldman Sachs

Okay. And finally on (inaudible) productivity, 81% is a very good number. It’s probably not quite what you had been showing. So, if you could give us some color whether you think its environment and its impact on new stores, whether there is a geographic tilt to that and what your expectations are going forward?

Ed Stack

I think there is a couple of things, there is a geographic tilt to it into those Texas markets that we had talked about were going to be our most competitive markets that we would do. And Arizona is a bit more competitive, not like Texas, but that’s where a number of these stores were. So, we are pleased with the traction we’ve gotten there. So, we continue to be excited about our move into Texas and to the Southwest and we’ll continue to do that in a pretty aggressive fashion.

Matthew Fassler – Goldman Sachs

They’re showing 80% versus 90% or 95% material impact, the ROI hurdles at all would make you think differently about your investment approach going forward?

Ed Stack

It doesn’t matter. We just think it is a timing difference. It’s just going to be a bit more difficult, which is what we had always indicated that it would be a bit more difficult in a few of those markets to start out. But over a reasonable period of time, we don’t think it has any impact.

Matthew Fassler – Goldman Sachs

Thanks a lot, and congratulations on good quarter.

Ed Stack

Thanks.

Operator

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

Kate Mcshane – Citi Investment Research

Good morning. Your comp store sales guidance number for the third quarter, it’s a little bit lower than we expected since you are going up against easier comp than last year. And I was just wondering if there was any timing shift in that number was due to the second quarter benefit, or will there be stronger comp for the fourth quarter?

Ed Stack

We don’t – we just think that it continues to be a difficult environment. We think that it’s going to continue to be difficult out there. We have no idea what’s going to happen with gas prices, energy prices, food prices and we are taking a conservative approach. Our comps last year were – it seems like an easy comparison, but they were against a very difficult comparison the year before. So, we are looking at this as a more – last year and this year is more normalized weather pattern in the third quarter, and looking at the economic environment out there, we think that this is the appropriate guidance to provide.

Kate Mcshane – Citi Investment Research

Okay. And then my second question has to do with store opening and as you’ve pointed out, four the store openings this quarter were in Texas. I was wondering if you could talk a little bit about what you are seeing in terms of the competitive environment in Texas? And also, I was under the impression that you would be opening more stores in Florida, which we didn’t see during the second quarter. Has that strategy changed just because of the continued weakness in that market?

Joe Schmidt

This is Joe, speaking to Florida we don’t anticipate any change in our cycle of growth down in Florida. We are going to continue to be aggressive down in Florida just happen to be where the stores fell for the quarter. So, we are not going to back off of Florida at all. We are going to continue to move into Florida.

Ed Stack

As far as Texas goes, we think that that still a competitive environment as we had always anticipated it would be, and as I said in the last call, we’ve seen some traction in Texas and are encourage by our performance in Texas.

Kate Mcshane – Citi Investment Research

Okay. Thank you.

Operator

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

David Cumberland – Robert Baird

Thanks. On the Golf Galaxy integration, did your plans changed for the timing or nature of integration steps in recent months as you did a re-budget?

Ed Stack

Yes. The timing did change. The previous management came to us and discussed their view of the business and felt that it was in the best interest of the company as a whole to consolidate the Minneapolis into Pittsburgh. So, we hadn’t anticipated doing that. But when the management team came and indicated that they thought it was in the best interest based on the competitive environment out there, we talked with them and ultimately agreed with them and have taken the course of action that we have. We think that long term this is really going to be a better model for the company with everything being brought here in Pittsburgh, and as Tim guided that we see that the cost savings are in approximately the $8 million to $10 million range in savings and synergies from a cost standpoint going into next year.

David Cumberland – Robert Baird

And related to cost savings, could you achieve some in the fourth quarter?

Ed Stack

Probably, not. The office will continue to operate in Minneapolis through the fourth quarter. If there are any cost savings, it will be minimal.

David Cumberland – Robert Baird

And then, Tim talked about lower advertising in the second half, first, question related to that. Would that be a lower spend ratio or lower in dollars spend and if you could comment why it might lower and just generally your advertising plans for the second half.

Tim Kullman

It will be lower in terms as a percent of sales. As we open stores, you need to advertise with those stores. So, the pure number will be higher. But it will be lower as a percent of sales and as we’ve gone back and taken look at some of the advertising and marketing that we’ve done. We’ve looked at some opportunities pull that back whether that’s from eliminating an insert in the newspaper or reducing some pages on some of the inserts. We’re looking at some of the TV advertising that we’ve done. There is a combination of a number of components that we’ve looked at, and our marketing group has done a great job taking a look at areas to cut back and we will see that leverage in the back half of the year.

David Cumberland – Robert Baird

Thanks and one other question. Does the $1.27, $1.36 guidance exclude the $0.01 gain from Q1?

Tim Kullman

It does not.

David Cumberland – Robert Baird

Great. Thank you.

Operator

Your next question comes from the line of Gary Balter representing Credit Suisse. Please proceed.

Gary Balter – Credit Suisse

Thank you. Thanks congratulations first of all on another good quarter. A strange question, but with the Olympics going on, are you selling first of all more suite of swimsuits that are in general seeing an impact – do you normally see an impact on the Olympics?

Ed Stack

First of all, we’ve seen no significant change in the sale of our suites. The second half of the question, we’ve really never felt that the Olympics has provided any direct sales increase. We don’t see a direct correlation between sales in the Olympics. I think there maybe some indirect component on a go-forward basis, and I think these games have been really exciting for people to watch, and have gotten people maybe more interested in sports at least for this period of time. But we don’t think that – it hasn’t had an impact on our business, and the Olympics never really has.

Gary Balter – Credit Suisse

Okay. Could you talk – you had mentioned the competitive landscape and there have been some questions already on the call. One of the things that we know, in last few weeks of sport authority (inaudible) which to us was a surprise, how many of – do you know where those are going, like those going into – they’re obviously going to your market because you are in most of the markets, but does that – are there now two growth companies in this –?

Ed Stack

Well, I am not sure. The Sports Authority has continued to open stores. They have never really stopped opening stores like some of our other competitors in some of the outdoor categories have significantly reduced their store count. But Sports Authority is looking in California; we have seen some activity in Chicago. But we’ve competed with Sports Authority for a very long time. They’ve continued to open stores and we really don’t see it having a big impact on us.

Gary Balter – Credit Suisse

Okay. And then, we have in ’08 guidance and I know you are kind of not want to give an ’09 guidance, but if you kind of look out for the future, is there some preliminary thoughts you could give us on kind of how you envision (inaudible) opportunities or other things for going past kind of current economic slowdown.

Ed Stack

Well, we think that there is – we think that they will continue to be margin rate expansion driven by an increase in private label and private brand products that have been quite successful for us, especially in the – help put some of our vendor such as the Adidas Baseball component, Nike ACG. So, we’re really enthusiastic about that and we feel that that can help drive continued margin rate expansion. We think that the costs that we’ve gone back through from this re-budgeting process and looking at cost associate in the business and how are organized in the business, we feel will continue to pay dividends going forward. Some of these cost savings that we’ve put in place we feel that they are going to be permanent in nature and not a one-time cut the cost and will go back and catch up at a later date. These are fundamental aspects of our business. We’ve gone back and said how organized where we making investments, what can we change and the vast majority of these are changes that will be permanent in nature going into ’09 and beyond.

Gary Balter – Credit Suisse

So, on that tone, what comp should we be thinking you need to leverage expenses going forward?

Ed Stack

We are not going to comment on that right now, Gary, for competitive reasons, and we have more work to do. So, I can’t make any comment on that other than to say that we think that margin rate will continue to expand if the environment doesn’t change. And we feel that the cost cuts that we’ve put in place are permanent in – most of the cost cuts that we’ve put in place are permanent in nature.

Gary Balter – Credit Suisse

Okay. Thank you very much.

Ed Stack

Thanks, Gary.

Operator

Your next question comes from the line of Brian Nagel representing UBS. Please proceed.

Rupesh Patel – UBS

Hi, this is Rupesh Patel [ph] for Brian Nagel. We saw the inventory was up 15% this quarter. How much of that reflects the Dick's acquisition, and do you see any mark-down risk?

Ed Stack

We don’t see any mark-down risk. While I can’t comment for competitive reasons on inventory in any of these particular banners that we’re doing business with. But I think the number you should be focused on is the fact that our inventory on a per square foot basis is down 2% versus last year, which is one of the key components that’s helped us with the margin rate expansion of 46 basis points in this quarter, and the fact that our clearance inventory is down 8.7%, which we talked about a few minutes ago, down 8.7% versus last year, which again has helped the margin rate expansion. We don’t see any markdown issues. We don’t have an inventory quality issue, and as I had said at the end of the first quarter call we see no mark-downs outside our normal mark-down cadence, or anything that would causes us any trouble going forward.

Rupesh Patel – UBS

Thank you.

Operator

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

Mitch Kaiser – Piper Jaffray

Thanks guys. Good morning and nice quarter. I was hoping you could talk a little bit about the promotional environment, in the first quarter you talked about golf being particularly competitive I think in Atlanta and maybe even the Texas market, and then kind of what you’ve seen back to school. So, far I know that you ran (inaudible) $60 or more on the purchase of footwear.

Ed Stack

We don’t see that the competitive nature of the promotional nature of the primarily golf business seems to have subsided. We were very aggressive in a couple of those markets and gained significant market share. We were pleased with that, and that pricing is continued, we don’t see it escalating promotional activity. As far as the advertising, that’s just normal course of advertising that we did. Every once in a while, we run a coupon and there was just normal course of advertising. I would read anything else into that.

Mitch Kaiser – Piper Jaffray

And then on the Golf Galaxy side, I guess now that it’s going to be integrated into Pittsburgh, do you see any change in philosophy in running the business or should we look for any changes there?

Ed Stack

We wouldn’t look for any changes. The management team and the team that had run that had instilled a culture of service in that business that we intend to continue and would see no difference in how that business is run, other than we’d like to get the comps moving in a positive direction.

Mitch Kaiser – Piper Jaffray

Sure. Good luck with that. Thanks guys.

Operator

Your next question comes from the line of John Shanley representing Susquehanna. Please proceed.

John Shanley – Susquehanna

Thank you, and good morning. Ed, you mentioned in your prepared remarks that merchandize margins were up 50 basis points, which is great. Can you tell us if that was primarily generated by the footwear and apparel component of your business and conversely has there been a slowdown in terms of consumer purchase interest I think ticket hard-line times whether it’s golf equipment or exercise equipment, and so on?

Ed Stack

The margin rate expansion as indicated has really come from a number of different areas across the board in the company, not one particular area, but more of a philosophy of how we’re running the business. So, better mark-down management, better inventory control all contributed to the margin rate expansion along with what we’ve been able to do with private brands, and then also leverage that we’ve had with obtaining better pricing. So, all those things are what drove the margin rate.

John Shanley – Susquehanna

What about the bigger ticket items?

Ed Stack

The bigger ticket items have been a bit more of a struggle primarily on the exercise business but the golf business has been kind of what we had planned it to be. We haven’t seen a big drop off in those high ticket items outside of exercise.

John Shanley – Susquehanna

Okay. As you look in terms of the back half of current fiscal year, is there a period where you are going to be anniversarying the introduction of a lot of the private label merchandize that you’ve basically been getting next to (inaudible) in terms of your merchandize margins. Was there a period last year where there was a large influx of that type of product that you’re going to be anniversarying this year?

Ed Stack

We launched ACG last year in the third quarter. We had an early launch of Adidas Baseball toward the end of the fourth quarter and we had a launch of some of the Reebok performance apparel at the end of the fourth quarter. Although, we are up against those lunches we actually feel that the product that we are bringing to market this year is better than the product last year. We learned, we are a lot smarter this year than we were last year about these products and feel that these will actually help enhance sales and margin rate and not put us at a disadvantage of having to anniversary anything. So, we are looking at it as a positive.

John Shanley – Susquehanna

Okay. That’s great to hear. Last question I have is on you mentioned about the promotional environment within Dick's stores, can you give us a indication of whether you are seeing a higher level of competitive promotional activity in the marketplace either during the current back to school selling season or what you are anticipating would likely be up against as you get further into the full selling season.

Ed Stack

We haven’t seen the back-to-school selling season – hasn’t been any more promotional than we had anticipated and really no more promotional than it was last year. So, we haven’t seen any retailers panicking and dropping prices and being irrational.

John Shanley – Susquehanna

That’s great to hear. Thank you very much.

Operator

The next question comes from the line of Rick Nelson representing Stephens Inc. Please proceed.

Rick Nelson – Stephens Inc.

Hi, thank you and good morning. A question about performance apparel, are you seeing any resistance there at the higher price points within various lines?

Ed Stack

Not really, Rick. The performance apparel business has still continued to be positive – a positive influence on our business and really we haven’t seen any change.

Rick Nelson – Stephens Inc.

Also, I have a question about Golf Galaxy. As I visit the stores, I see there is a 25% more trade-in offer that you are offering on the trade-ins. How does the accounting for that work, to have reduced the margin at the time of the new product sales or does that work into higher cost of goods sold on the used side?

Ed Stack

It’s for the most part neutral because that product, if we turn around and sell it, we sell it for what we have into it or a slight profit. We also have in the Dick's business and we could put it to some of the Golf Galaxy products also. A third party that we have – if we take in a trade, we turn around sell it to them and we get our money back out of it. Then there is a –similar to cars, there is a golf blue book, if you will, that give the values of these clubs, and we take those trade-ins based on those values and then turn around and flip them to a third party.

Rick Nelson – Stephens Inc.

All right, thank you for that. Heelys you mentioned was a drag in the quarter and would be I think you mentioned 20 basis points in the third quarter, when do you anniversary the Heelys impact?

Ed Stack

It gets a lot better in the fourth quarter. We cleaned most of our Helios in the fourth quarter the day after Thanksgiving. But there will be some impact in the fourth quarter and we will be completely done with this in the first quarter of next year.

Rick Nelson – Stephens Inc.

Okay. All right. Thank you, thanks a lot.

Ed Stack

Thanks Rick.

Operator

The next question comes from the line of Bob Simonson representing William Blair. Please proceed.

Bob Simonson – William Blair

Good morning.

Ed Stack

Good morning Bob.

Bob Simonson – William Blair

Tim in the first quarter report you had guidance of $1.22 to $1.36. In this quarter, it’s $1.27 to $1.36, but it also includes an estimate for the Golf Galaxy cost of $1.20 to $1.29. That wasn’t in the first quarter. One, what was your expectation at that – in the first quarter for what these costs would be?

Tim Kullman

Well, since we went through the re-budget process in the second quarter those costs were not anticipated when we gave guidance in the first quarter for the second quarter or for the year.

Ed Stack

And Bob, when we had done the first quarter call, we didn’t anticipate having the Golf Galaxy office consolidated to Pittsburgh. It was only after their CEO came down and talked with us and said, based on the way the business is we feel it’s best to consolidate this into Pittsburgh and close the Minneapolis office. And until that point, we hadn’t anticipated doing that. There why there was no guidance associated with it.

Bob Simonson – William Blair

Okay. And Ed, you were asked about some preliminary thoughts on ’09 and your – those comments, you didn’t get direct in terms of margins, but is thought process, you did say earlier that you thought the difficult environment would last until next year, your planning does it assume your comps will be down next year?

Ed Stack

We haven’t worked through that. I think we’ve got to wait and see what happens in the back half of this year. So, I know you are going to try to get me to make some comment on comps, Bob. But I just can‘t do it right now for ’09. And we’ve never done that, we’ve never guided comps for more than one quarter in advance and give an annual thought at the beginning of the year. But we haven’t done that and I don’t think this is – under this environment this isn’t the time to start.

Bob Simonson – William Blair

Okay. And could you give a couple examples as you said, many of the cost savings you put in place are permanent; could you give some examples of those?

Ed Stack

Sure. I think some of the advertising that we have modified is permanent in nature. I think some of the organization and headcount aspects of the business that we put in place are permanent in nature. Some of the productivity improvements that we’ve made through our distribution component are permanent in nature. So, we feel that there is a lot of these cost savings in these organizational changes that are permanent nature going into ’09 and beyond.

Bob Simonson – William Blair

I know, one, I believe you have mentioned that you are going to get into apparel for Yoga. Is that still on track, have you got a vendor yet or some thoughts on the timing of that?

Ed Stack

Yes, we are looking at Yoga. We’d be testing some things with Yoga this quarter. But Yoga will be a part of our athletic presentation. And you shouldn’t view it as a game changing aspect of the business that will be an important component going forward. But it – we can’t let anybody get ahead of themselves; we are not going to be looking to be a direct competitor to LULU. It will be a component of our business. We hope it will be an important component of our business. But it is not going to be game changing.

Bob Simonson – William Blair

Very good. Thanks a lot.

Operator

The next question comes from the line of David Magee representing Suntrust Robinson Humphrey. Please proceed.

David Magee – Suntrust Robinson Humphrey

Hi, good morning. And congratulations on a good quarter.

Ed Stack

Thank you.

David Magee – Suntrust Robinson Humphrey

Couple of questions. One is on the Golf Galaxy, when you say that the restructuring is appropriate given the business conditions, I am just wondering everybody knows that golf business slump right now. Presumably it will recover over the next year or so, is this the right decision for the next couple of years, are we staying in effect that maybe the benefits from this acquisition are being looked at differently now?

Ed Stack

I am sorry. You cut off the last part of the question –

David Magee – Suntrust Robinson Humphrey

Benefits from the acquisition might be different than we had thought last year?

Ed Stack

I think it will be even greater than what we had thought last year. When we had originally bought the business we had – our thought process was it would continue to be run out of Minneapolis. The management in Minneapolis deemed that that was probably appropriate that they strongly suggested that we move it to Pittsburg for cost savings opportunities. So, we think that all the benefits that we put that we thought we would get out of this acquisition from a leverage standpoint on the cost side and the margin rate side for leverage with the vendors and stronger partnerships with the vendors and the ability to drive our private brand business into Golf Galaxy, those are all still valid. The added benefit is that the now based on the request of the former management team, that we will have a significant cost savings associated by moving this operation to Pittsburg.

David Magee – Suntrust Robinson Humphrey

And secondly, do you go to market any differently with your private label, private brand during times like this when traffic is down year to year, do you price it any differently or do you adjust the mix?

Ed Stack

We don’t make any other adjustments to that than you would think in a normal course of running the business in a dynamic environment. Nothing different than what other brands would do. These private brands that we have in place today, whether it’d be our partnership with Nike and the ACG brand, our partnership with Adidas on Baseball, the brands that we have, Umbro, Slazenger, these are all brands that we are looking to build well into the future in this difficult economic environment that we are experiencing here in 2008 and probably into 2009, we are not going to short-change those brands and make short-term decisions that will have long-term consequences with these brands.

David Magee – Suntrust Robinson Humphrey

And just lastly, are you anticipating any of the equipment lines to be performing better at the holidays and are you seeing any ASP compression on the equipment side?

Ed Stack

Other than the fitness business, we are not seeing any price compression, and we think that kids are going to continue to play sports and we think that it continues to be an important part of our business and I think it will continue to perform the way that it has in the first and second quarters.

David Magee – Suntrust Robinson Humphrey

Great. Thank you. Good luck.

Ed Stack

Thank you.

Operator

The next question comes from the line of Mike Baker representing Deutsche Bank. Please proceed.

Mike Baker – Deutsche Bank

Thanks, guys. So, a couple of questions. So your Golf Galaxy golf business was better on the comp line by about 3 percentage points, but you don’t think it was rebate driven. So was that promotional stuff that you talked about and is that reflective of the golf business within the Dick's stores? That is my first question.

Tim Kullman

The golf business in the Dick's stores was somewhat better than the Golf Galaxy business. We expect that will probably – that is the way it has been; that will probably continue. As far as the rebate checks, I don’t think anybody took their rebate checks and those who qualified for the rebate checks, I doubt that they did anything in the golf business. I believe that rebate checks unencumbered by any scientific research, I think that the rebate checks went into gas tanks and food on the table.

Mike Baker – Deutsche Bank

So then how would you explain the improvements in the Golf Galaxy – it is still negative, but less negative in arguably a deteriorating environment, is it just that you got a little bit promotional there?

Tim Kullman

No, we didn’t get more promotional. If you are talking about the difference between the first quarter and the second quarter, the difference there is – if you remember on the first quarter we talked about that people, especially in the Midwest and the Northeast, they couldn’t play golf in the first quarter. It was a very late start to the season and that is what drove the significant negative comps at both Golf Galaxy and at Dick's Sporting Goods. Both companies, Golf Galaxy and Dick's Sporting Goods got significantly better in the second quarter, and as I said, Dick's was slightly better than Golf Galaxy’s performance.

Mike Baker – Deutsche Bank

Okay, good. That makes sense. Second question, so I think Tim had said that the ticket was up – yet you said it sort of big ticket items is a little bit more of a struggle, so is that more items per basket? And then my last question would be – I think Tim also said that you leveraged fuel cost. So, I am wondering how you accomplished that given the more gas [ph] prices are. Thanks.

Tim Kullman

I will take the fuel cost question. We said that the freight was a positive for us in the distribution line. But we had some offsetting positives in the way we process the business as well. But keep in mind we opened up the third distribution center in Atlanta this quarter. That helps us with less legs in our trips to our stores, and therefore we do save on fuel based on the less amount of travel.

Mike Baker – Deutsche Bank

Okay, that makes sense. (inaudible) driven by more items per basket?

Ed Stack

To some degree but it was kind of a mixed shift – our bicycle business was very good, parts of our kayaks, paddling business was really very good, a part of that was driven by the mix of product.

Mike Baker – Deutsche Bank

I see. So, I guess (inaudible) makes sense, before you said about big ticket, the exercise equipment is down but some of the other categories caught up reasonably well.

Ed Stack

Correct.

Mike Baker – Deutsche Bank

Okay, thank you.

Operator

The next question comes from the line of Jim Duffy representing Thomas Weisel Partners. Please proceed.

Jim Duffy – Thomas Weisel Partners

Thank you. Couple of questions on the consumer behavior that you are seeing; other retailers are talking about a trade-down effect, are you guys seeing this and if so, do you think that’s something that can benefit your private label and private branding program?

Ed Stack

We are not seeing anything meaningful, and I think that is evident in the fact that the average ticket has gone up. So we are not seeing a meaningful trade-down yet in the business, whether that happens going forward or not, I don’t know, but – into the fourth quarter, but in the second quarter, we didn’t see that.

Jim Duffy – Thomas Weisel Partners

AUR is up, is that in the athletic footwear category, is that consistent with what you are seeing there?

Ed Stack

For competitive reasons, we are not going to guide by category, but the company as a whole, we haven’t seen a reduction in average ticket.

Jim Duffy – Thomas Weisel Partners

Okay, thanks. That is helpful. And then Tim, when I do the new store productivity calculation, I come up with a lower number than 81% –?

Tim Kullman

Yes, you would. We have adjusted the calculation as if the stores were open the entire quarter because of the impact of having the square footage in the calculation for the full quarter.

Jim Duffy – Thomas Weisel Partners

Okay, so that is not the Chick’s Sporting Goods’ influence?

Tim Kullman

Not at all.

Jim Duffy – Thomas Weisel Partners

Okay. And then aside from the newer markets that you mentioned, are you guys seeing big regional disparity in sales trends and if so, are you merchandising differently on a regional basis to addresses this?

Ed Stack

We are not seeing a whole – the only pocket that we are seeing some meaningful weakness, and we are not going to get into it terribly specifically, but is in the Carolinas – has been a bit more difficult and we think that has to do with some of the financial institutions there that have had a difficult time, and a little bit in Florida, but not enough in Florida to make us rethink our redevelopment program.

Jim Duffy – Thomas Weisel Partners

Okay. And then final question, I know you guys have stopped talking about private label as a percent of revenue, it seems the private label and private branded programs have good momentum. Where would you be comfortable taking that as a percent of revenue? Kind of a longer term philosophical question.

Ed Stack

We think that it has the ability to go higher. We are not going to guide as to what we think that would be. Our hope is to continue to work with some of our brand partners on these programs such as what we did with Nike, what we did with Adidas, but we think that there are still some legs there, but from a guidance standpoint, we are not going to talk about what that might be.

Jim Duffy – Thomas Weisel Partners

So would you take it as high as it could go, or do you kind of have in your mind a ceiling as to what is the appropriate level?

Ed Stack

We have in our mind what we think the ceiling is – I'm not going to discuss what that ceiling is, but we do have an idea in mind of where we think that ceiling is, understanding that it is important to continue to view it as a brand house, which is why some of the products that we are trying to develop here are branded in nature, whether it be Slazenger on the golf side, or the Maxfli acquisition that we did from TaylorMade or what we are doing with Nike on the ACG side, we think that brands are extremely important. We feel that we have the ability to have the best of both worlds continue to partner with brands we do business with and have private brands and/or exclusive products to offer our customer.

Jim Duffy – Thomas Weisel Partners

Very good. Thanks so much for taking my questions.

Ed Stack

Sure.

Operator

The next question comes from the line of Hardy Bowen representing Arnhold and Bleichroeder. Please proceed.

Hardy Bowen – Arnhold and Bleichroeder

Hardy Bowen. Ed, in retrospect, do you think that weather shifted business out of the first quarter to the second quarter about the same as it did last year or more than last year?

Ed Stack

You know Hardy, that’s really good question. I really can’t offer you an answer on that. I think that it was difficult. The first quarter from the weather pattern was difficult in both years, so it was probably about the same in both years. We had a difficult start to the golf season in both 2007 and in 2008, difficult start to the baseball season. Our baseball business went longer this year than it did last year when you kind of take relative peak weeks it all moved and I think that happened too based on the weather. So I think the weather have certainly impacted the second quarter both this year and last year.

Hardy Bowen – Arnhold and Bleichroeder

So you are looking forward to a little better weather next year maybe?

Ed Stack

You know what, the one thing I try to really focus on things like I can control. I can’t control the weather at all, so I'm not going to – we will continue to look at as kind of the weather patterns as we have had the last couple of years and we will react to kind of whatever the weather gives us.

Hardy Bowen – Arnhold and Bleichroeder

The guidance for comps in the second half of the year is about the same as what we had in the first half of the year. The comparisons look a little easier, I would say. Does that imply that you think the economy is going to be a little worse in the second half of the year, or are you just trying to be conservative, you don’t know what’s going to happen?

Ed Stack

Hardy, we are not smart enough to know what is going to happen, I mean there are so many things out there about what is going to happen with the price of oil. The last I looked today before we jumped on the call, it was back up $4 today, what is going on with the election. There is just so many uncertainties out there right now that we just feel that if things don’t change in the world, these are the guidance, this is what we think it will be, and if things get a little better, then maybe we have some upside, but we are certainly not counting on that.

Hardy Bowen – Arnhold and Bleichroeder

And with Golf Galaxy as we integrate this, are we using the same buying teams to buy for Dick's and Golf Galaxy, do we keep them totally separate or more integrated than they would have been?

Ed Stack

They will more integrated than they would have been, but there will still – what we don’t want to do is we don’t want to have a marginalized assortment between both Golf Galaxy and Dick's Sporting Goods. We think that that needs to be – Golf Galaxy has its own personality, it has got its own customer base, which is a bit more of an enthusiastic golfer than what we have at Dick's Sporting Goods and we need to make sure that we continue to talk to that customer. So there will be some components of the business that will have shared services and then there will be other components that will be independent, if you will – obviously reporting into the same management team but there will be a separate equipment buyer, ball buyer, shoe buyer, apparel buyer, to make sure that Golf Galaxy doesn’t lose the personality that Golf Galaxy has developed. But on the planning side, the allocation side, they will all have shared services there and will get that savings and synergies.

Hardy Bowen – Arnhold and Bleichroeder

Do you plan to have less direct store delivery to Golf Galaxy from vendors than they have had historically?

Ed Stack

As we go forward there will probably be less direct to stores, yes.

Hardy Bowen – Arnhold and Bleichroeder

Okay. Good quarter.

Ed Stack

Thank you.

Operator

The next question comes from the line of Dan Wewer representing Raymond James. Please proceed.

Dan Wewer – Raymond James

Thanks. Couple of questions, Ed. First, several of your suppliers are increasing their retail effort, particularly noteworthy is Under Armour’s comment that it is expecting very strong growth in its direct-to-consumer channel during the holiday season, both for their few full priced stores as well as their Web site. What is your thought, what kind of discussions do you have with the suppliers who are now becoming competitors as well?

Ed Stack

We have had some very direct conversations. I won’t get into what the nature of those conversations was, but we have had some very direct conversations with those brands.

Dan Wewer – Raymond James

And it’s not to wish them good luck?

Ed Stack

It is to make sure that we understand exactly what their plan is and what they are doing.

Dan Wewer – Raymond James

Okay, and then just a separate question. The golf category appears to be softer now in the US than it has been in 10 years. Callaway is indicating they are going to increase the number of new products before the holiday season compared to a year ago to help rejuvenate sales, I think Titleist has been introducing some new lines as well. I understand that you guys have had a chance to look at the new Callaway product line. Do you think this will be sufficient to help rejuvenate the golf category by year end?

Ed Stack

I think it would be helpful. We thought that the fourth quarter was kind of a lost quarter in the golf business, where it is really the best retail quarter. We have talked to the brands above this in a way to invigorate the fourth quarter. I think the golf business is difficult. We think that there is a real market share gain opportunity for us between both the Dick's Sporting Goods and the Golf Galaxy stores. But we anticipate the golf business is going to be a little bit difficult through 2009.

Dan Wewer – Raymond James

And then the last question. You had noted in your prepared comments about an increased number of opportunistic purchases. What would be a few examples of that that we would see in your stores today?

Ed Stack

It could be – I won’t get specific, but it could be some athletic shoes that we bought off-price, it could be some athletic apparel we bought off-price, we bought some golf products off-price as products are being transitioned out and new lines are coming in. So there has been – the group has done a great job making sure that our inventory was in-line and that we had the ability from a financial standpoint to take advantage of these opportunities when they presented themselves.

Dan Wewer – Raymond James

Then again for example, when TaylorMade takes the burner, drive down to 299, that would be an example where you would get protected on that type of item?

Ed Stack

If TaylorMade wanted to – I won’t say it was that particular item but as brands transition out of old product into new product, they can make one phone call and quickly move, if not all of their merchandise, the vast majority of their merchandise because of the number of stores we have, the volume we do, we have a big appetite for this product, we have kept our inventory in line so that we have got the ability to take advantage of that, and they can make one phone call and get rid of a lot of product.

Dan Wewer – Raymond James

Got you. I appreciate it.

Ed Stack

Sure. Thank you.

Operator

Your next question comes from the line of Sean McGowan representing Needham & Company. Please proceed.

Sean McGowan – Needham & Co.

Most of my questions have been asked. I just wanted to know if you could comment on sort of the pace of business throughout the quarter and whether there were any meaningful spikes up or down relative to your expectations?

Ed Stack

They were pretty much kind of within our expectations, other than the camping business was a little softer in the quarter at the beginning than we had anticipated, but other than that, kind of played out the way we had thought it would in our guidance.

Sean McGowan – Needham & Co

Was July better than the rest of the quarter?

Ed Stack

We have never commented on a month-by-month basis and for competitive reasons, we are not going to do that, but the quarter was laid out pretty much as we had anticipated.

Sean McGowan – Needham & Co

Okay, thank you.

Operator

The next question comes from the line of Joe Gagen representing Atlantic Equity Research. Please proceed.

Joe Gagen – Atlantic Equity Research

Yes, I have a couple of questions around pricing inventory for the golf business. One of your competitors mentioned that some of the vendors were offering lower prices in the second half. Are you seeing the same thing, are they helping you out in that regard?

Ed Stack

It depends on what they talked about with lower prices, –

Joe Gagen – Atlantic Equity Research

Meaning the prices they charge you.

Ed Stack

I understand, but I'm not sure if you mean that – I'm not familiar with what conversation you are talking about, but if you are talking about lowering prices of some products that they are discontinuing, yes. Talking about lowering product on go-forward merchandise that is going to continue into the fourth quarter and continue into the first and second quarter of next year, we haven’t seen that.

Joe Gagen – Atlantic Equity Research

Okay, and then as far as the inventory of the golf business, I think you said it was down – for your total business it was down 2.5% per square foot, right? And so I know the golf business obviously has performed worse than your other product lines right? So what I'm wondering is the golf – the inventory you are taking in for golf more aggressively down than the rest of your business?

Ed Stack

We are not going to comment on a particular category like that, but we did not comment that our inventory in golf was down – we didn’t comment specifically what our inventory in golf was down. We indicated that the comps in Golf Galaxy were down 4.5% and indicated that the comps at Dick's were somewhat better than that. We are very pleased with our golf inventory right now. We actually have some open to buy to go back out and buy some golf products, which we are able to do at some very advantageous prices. So our golf business is – if you take a look at Golf Galaxy down 4.5%, the Dick's golf business being somewhat better than that, you could make the assumption that the golf business at Dick's performed within a pretty narrow tolerance range of what the Dick's Sporting Goods business performed as a whole.

Joe Gagen – Atlantic Equity Research

Okay. And then, I had read somewhere else that a number of smaller golf retailers went out of business the last year or so, right? Have you seen that same thing, and does that help your business as far as giving you better buying power with the vendors and allow you to pick up more market share because all these smaller retailers went out of business?

Ed Stack

Yes, we are seeing a number of the smaller retailers who have 1, 2 or 3 shops in a town having a very difficult time and have seen a number of them go out of business, which is a benefit to our business.

Joe Gagen – Atlantic Equity Research

All right. Thank you.

Operator

Your next question comes from the line of Jeff Mintz representing Wedbush Morgan. Please proceed.

Jeff Mintz – Wedbush Morgan

Thanks very much. A couple of questions. First of all on real estate. Given the kind of bankruptcies that we are seeing the retail market, have you seen some real estate opportunities come up or better real estate than in the past six months?

Ed Stack

There has been some bankruptcies but the – what is going to happen to those retailers and what is going to happen to that real estate is still up in the air. So, to that point, really no. With the Mervyns’ bankruptcy, with the Steve & Barry’s’ bankruptcy and with what Boscov’s has filed; Steve & Barry’s was just acquired; Mervyns, they are looking to reorganize; Boscov’s is looking to reorganize; and some of the – what is happening to that real estate is going back to the landlord, we will get a look at that real estate but we haven’t made any deals on that real estate yet. We expect that we are going to get a peek at it, we will probably take advantage of some of it, some other ones we may not. But we will certainly get a look.

Jeff Mintz – Wedbush Morgan

Okay. And then on sourcing costs, obviously we are hearing a lot about increased costs coming out of China and other places and I'm wondering what you are hearing from your vendors as well as in your private label. Are you starting to see the increases, and if you are starting to increase prices in stores, kind of what the consumer reaction has been to higher prices?

Ed Stack

We have seen some increase. The increases that we have seen to date, we have been either able to absorb or to pass on. Where we see the biggest increase is coming out of the Ammunition & Guns category, and there has been – we expect, we don’t know, but we think that this consumer is the most price-sensitive, so we expect to see some resistance to the price increases with that hunting customer.

Jeff Mintz – Wedbush Morgan

Okay, great. And then finally, on the new store productivity, do you do any analysis or have you looked at kind of the new store productivity when you put a store in a new market versus an existing market and how that kind of breaks out?

Ed Stack

We have. We are not going to discuss it for competitive reasons. We have what you get there was a blended rate, between both new market stores and existing market stores.

Jeff Mintz – Wedbush Morgan

Okay, thanks very much and good luck.

Ed Stack

Thank you.

Operator

Your next question comes from the line of Joe Feldman representing Telsey Advisory Group. Please proceed.

Joe Feldman – Telsey Advisory Group

Hi, guys. Question about the advertising, I know that you increased the ad spending in the quarter as you had planned. We are just wondering if you got the effectiveness or the response rate that you had projected that would be associated with that in the quarter?

Ed Stack

We did. We are very pleased with the response on the promotions that we put in place, and so the answer is yes.

Joe Feldman – Telsey Advisory Group

Great. You also mentioned earlier in the call when you first were discussing the comps that obviously the Heelys was a drag and then you just said that Camping & Outdoor in general was a drag on the business, but you never really quantified, and I guess I was just wondering if you could give us any kind of understanding as the quantification of that, how much of a drag in basis points or what percentage of the business that it is and maybe relative to a year ago?

Ed Stack

For competitive reasons, we don’t comment to that level. We think that we wanted to provide color on the Heelys component and a number of other retailers have commented on Heelys and it is a business that we have discontinued and thought that it would be appropriate to give you some color, but on ongoing businesses for competitive reasons, we are not going to get that deep and that granular.

Joe Feldman – Telsey Advisory Group

And then, just one other. With the golf, I know it has come up quite a bit and we were just wondering – we understand that it was a little bit better for you at Dick's versus at Golf Galaxy. We were just curious as to what you think drove that.

Ed Stack

I think that at Dick's we are very focused around the golf business. I think we had some opportunities from the year before and we added an additional golf promotion which was very successful for us that Golf Galaxy did not add.

Joe Feldman – Telsey Advisory Group

That is helpful, thanks and good luck with the next quarter.

Ed Stack

Thank you.

Operator

Gentlemen, your final question comes from the line of John Curty representing Principal Global Investors. Please proceed.

John Curty – Principal Global Investors

Good morning. Given your guidance with respect to the level of comps, for the balance of the year would you expect your inventory levels to be down approximately 2% per square foot at year end and then if the environment stays relatively difficult into 2009 and maybe improves a little bit from where we are at currently, do you expect that there would be further opportunities to reduce that inventory?

Joe Schmidt

We didn’t guide to what the inventory would be. At the end of the second quarter it was down 2%. We expect it to be below last year’s levels in the third quarter and fourth quarter and we will take a look at that inventory level on a go-forward basis, but if the environment continues to be difficult, it is in our best interest and it would be our intention to continue to monitor those inventory levels and make reductions where appropriate.

John Curty – Principal Global Investors

Okay. Thank you very much.

Operator

There are no further questions in the queue at this time. I would now like to turn the call back to Mr. Ed Stack for closing remarks.

Ed Stack

I would like to thank everyone for joining us for our second quarter call. We are pleased to be able to report earnings in excess of what our guidance, and we look forward to talking to everyone at our third quarter call. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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