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Highlights on Dick's Sporting Goods (DKS) Q3 Conference Call: Strong Earnings & Revenues, But Guidance Below Expectations

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November 19, 2009 3:44 PM EST

Dick's Sporting Goods, Inc. (NYSE: DKS) reports Q3 EPS of $0.16, 7 cents better than the analyst estimate of $0.09. Revenue for the quarter was $989.82 million, which compares to the estimate of $961.52 million. Stock being beaten, down over 9%.

Highlights on DKS Q3 Conference Call:

(CEO) We generated net income of $18.9 million or $0.16 per diluted share as compared to $0.07 in Q3 of 2008, a 129% improvement. The earnings growth was driven by higher sales levels and effective expense management.
Specifically net sales for the third quarter of '09 increased by 7.1% to 989.8 million due primarily to 1.9% increase in consolidated comparable store sales, the opening of new stores and the addition of e-commerce sales.
The 1.9% consolidated same-store sales increase consisted of a 2.2% increase in Dick's Sporting Goods stores and 1.5% decline in the Golf Galaxy stores.
We leveraged operating expenses by 148 basis points, primarily from a reduction in advertising and payroll compared to last year.
Inventory, which declined 8.6% per square foot on a consolidated basis at the end of Q3 in '09 as compared to Q3 '08.
Our Golf Galaxy business continues to improve. Year-over-year sales, gross profit margins and operating efficiencies improved in the third quarter compared to the year-over-year results in Q1 and Q2 of '09.
While we're pleased with Q3 sales, we do believe that some of the benefits are the better than anticipated business was a result of the shift of cold weather product sales from Q4 into Q3.
For the full year we are increasing our previous estimated range of $1.02 to $1.07 per diluted share
excluding merger and integration costs and are now raising that to a per earnings diluted share of $1.04 to $1.09 excluding merger and integration costs.
For the full year 2008, we've reported earnings per diluted share of $1.15 excluding the non-cash impairment charge and merger and integration costs. On a GAAP basis we currently anticipate reporting full year earnings per diluted share of $0.99 to $1.04 in 2009 compared to a net loss of $0.36 per diluted share in 2008.
In Q4, we're anticipating consolidated earnings per diluted share of approximately $0.41 to $0.46. In the fourth quarter of '08 we reported non-GAAP consolidated EPS of $0.54. On a GAAP basis, we reported a net loss of $0.94 per diluted share, which included a non-cash impairment charge and merger and integration costs.
In summary, we're very pleased with the performance of our Dick's Sporting Goods stores and Gold Galaxy stores in the third quarter. Our balance sheet is very strong and we have completed our 2009 store program.
(COO) We opened 11 new Dick's Sporting Goods stores bringing our total new store count to 24 this year and successfully completing our 2009 new store program for Dick's Sporting Goods.
At the end of Q3 we operated 420 Dick's Sporting Goods stores with 23.4 million square feet and 91 Golf Galaxy stores with 1.5 million square feet. New store productivity for the quarter was 68% and includes Dick's Sporting Goods stores only.
Excluding the new stores in Oregon, new store productivity would have been 73%. In the third quarter of 2008 new store productivity was 76%.
In 2010 we expect to add at least 24 new Dick's Sporting Goods stores and five Golf Galaxy stores. These new stores are expected to range in size from 35,000 to 55,000 square feet depending on the market opportunity as well as size and attractiveness of available real estate. We expect our 2010 new
stores to open in the first three quarters of the year.
(CFO) Sales for the quarter increased by 7.1% to $990 million, consolidated same-store sales increased 1.9%. Dick's Sporting Goods stores comp sales increased 2.2%, in Golf Galaxy declined 1.5%. The comp store sales increased at the Dick's Sporting Goods stores was driven in part by a 2.5% increase in transactions and a decline in sales per transaction of 0.3%.
We estimate that cannibalization impacted comps by less than 1%. Consolidated gross profit of $266.8 million was 26.96% of sales or 43 basis points lower than the third quarter of 2008. This decline was primarily driven by a decrease in the merchandise margin slightly offset by the leverage of freight and distribution costs.
The merchandise margin decline of 63 basis points was driven by clearance activity at Golf Galaxy stores and promotions in clearance activity at Dick's Sporting Goods stores.
Due to increased same-store sales and our continued expense control efforts, SG&A expenses of
$230.4 million or 23.28% of sales, which was a 148 basis points lower than last year's Q3.
Long-term debt declined by $292 million from the end of Q3 of 2008 to the end of Q3 of 2009 due to the repayment of a $172.5 million for the company's senior convertible notes in the first quarter of this year and $122 million decrease in revolving credit borrowings. Our borrowing rate is LIBOR plus 75 basis points and averaged to 1.39% in Q3.
Inventory per square foot was 8.6% less at the end of Q3 of 2009 as compared to the end of the third quarter of 2008. net capital expenditures were $29 million in the third quarter of 2009 or $36 million on a gross basis. This compares to a net capital spend of $41 million or $51 million on a gross basis in Q3 of last year.
In Q4, we're anticipating the gross profit margin rate to decline year-over-year but not to the degree seen in Q3.
Net capital expenditures for the full year 2009 are now expected to be approximately $100 million or approximately $150 million on a gross basis.
The P&L impact of the expenses associated with all of these programs in 2010 is expected to be between 30 and $35 million.
Although we are not prepare to give detail estimates for 2010, we do expect 2010 earnings to exceed our expected 2009 earning of $1.04 to $1.09.(consensus is $1.13)
(Q&A) How should we think about gross margins for next year, can you discuss a little bit some of the puts and takes there that we should be thinking about?(A)Well, we think that the gross margin rates will certainly - the merchandized gross margin rates will certainly stabilized as we talked before that in the first quarter, second quarter and even a bit into the third quarter was a result of clearing excess inventory out of the Golf Galaxy stores. We've done that, we are very pleased with the inventory levels in Golf Galaxy and the quality of the inventory in Golf Galaxy and we're enthusiastic about the Golf business going forward. We are going to open five Golf Galaxy stores next year and the Golf business between Dick's and Golf Galaxy was comp positive in the third quarter.
Great and then any more color on the strength within the athletic footwear business?(A)No more or less than it's been in the past, it's been a good business or us we are pleased with it. And we are as I've said before we are different than some of the mall based fashion athletic footwear retailers, but we are really focused on that core athlete, the football player, basket ball player and those businesses have been quite good for us.
I also wanted to dig in on the fourth quarter comp guidance a little bit here, maybe you could help us by talking about how much the guns business contributed to your comps overall and then within the rest of the mix you would thought that apparel saw a big drop off last year to have guns be positive and still pull off minus of 8.6. So, it seems like you're really expecting the big drop off from the apparel side, you also mentioned in this quarter the Golf, Hardlines and footwear are all positive. So, are you also anticipating that those categories slow dramatically at a sequential basis?(A)Well, we haven't provided category-by-category guidance on from a business standpoint. But the increase in the gun business last year was meaningful with the concern about stricter gun controls. So, we've got an anniversary that. And as we take a look at that we had comps in the third quarter in all of these categories, we're really quite concerned about the moving of some of this business from the fourth quarter to the quarter and I
don't mean to be so competitive on that, but it is important. But then we are also very concerned about how the consumer is reacting to the pending legislation in Washington. And kind of the research that we've done, no body really believes that this legislation is not going to cost them more money out of their - out of their pockets and I think it has really kind of frozen the consumer right now.
Well, aiming into that last point for sure in my part, but - okay, so it's - but it doesn't sound like in response to Dan's question earlier it's necessarily something that you are seeing with the big slowdown now, it's just that it's the overall uncertainty in the environment, is that fair?(A)It is, but we're - we see the trends that we're outlining here in our guidance. And there we're providing guidance today at a particular point in time with the best information we have at this particular point in time. And at this point in time we are seeing kind of the guidance that we've laid out.