Dick's Sporting Goods' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Dick’s Sporting Goods, Inc. (DKS)

Q2 2012 Earnings Call

August 14, 2012 10:00 am ET

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

Presentation

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.

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