Highlights From DKS's Q2 Conference Call: Performance Reflects Continued Growth - Raises EPS Estimate Range

Dicks Sporting Goods, Inc. (NYSE: DKS) reported Q2 EPS of $0.52, $0.02 better than the analyst estimate of $0.50. Revenue for the quarter came in at $1.31 billion versus the consensus estimate of $1.32 billion.

Sees FY2011 EPS of $1.94-$1.96, versus prior guidance of $1.91-$1.93 and the consensus of $1.94.

Sees Q3 2011 EPS of $0.24-$0.26, versus the consensus of $0.28.

Shares are making a slight comeback heading into the close...currently down $0.56 (-1.70%)

Highlights From DKS's Q2 Conference Call:

• (Edward W. Stack, Chairman and CEO) Our performance during the quarter reflects the continued growth of our stored network as well as the development of our E-Commerce business and the healthy expansion of our overall margin rates, which were driven by margin growth of approximately 120 basis points compared to second quarter of last year.
  
• Sales for the quarter increased 6.6% compared to the same period last year driven by the growth of our store network and by a 2.5% increase in consolidated same store sales.
  
• Consolidated same store sales reflects increases across all of our channels with Dick's Sporting Goods up 1.7%, golf galaxy up 4 and E-Commerce up 31.9%.
  
• We also significantly improved our balance sheet by building our cash position to $626 million at the end of the second quarter, up 348 million from the $278 million balance at the end of Q2 of last year. It's important to mention we delivered this performance despite some notable business challenges.
  
• This definitely improved the footwear and apparel business which helped our overall margin mix. However, it had a bigger than anticipated affect on the outdoor business.
  
• Our research indicates that we can organically double the size of our Dick's Sporting Goods network to at least 900 stores nationwide over time without the need for an acquisition.
  
• In 2012 and 2013, we expect to open stores at a slightly higher growth rate. The strength of our balance sheet provides us the financial flexibility to continue to meaningfully grow our store base.
  
• Moving to our E-Commerce business, we view this as an excellent growth vehicle.We have historically maintained a measured approach to growing our E-Commerce channel carefully researching the best way to develop it over the long term.
  
• As a result, we've been able to mitigate markdown at the end of the season and reduce our clearance inventory which is down 20% compared to last year. During the second quarter of 2011, we continue these efforts as inventory per square foot declined by .9 of a percent compared to the end of the second quarter of 2010.
  
• We're doing this through the continued buildout of the Nike fieldhouses (NYSE: NKE) of Dick's Sporting Goods, the new Under Armour (NYSE: UA) blue chip and all-American shops and a newly developed North Face concept store within our store.
  
• To date, we operate 92 stores with the shared service model and we'll continue to open all new stores in this proven format.The third margin accelerators is our private brand business which today contributes 15% of our total sales volume. We expect to grow our private brand business to approximately 20% over the next five years.
  
• (for Q3) We expect consolidated same store sales to be in the range of 1 to 2% for the third quarter of 2011. Looking to the full-year 2011, we're raising our EPS guidance from between $1.91 and $1.93 to be between $1.94 and $1.96. We expect our consolidated same store sales to increase 1 to 2% compared with 2010.
  
• We have probably the best quality inventory in our history along with the strong balance sheet with no debt and over $600 million in cash and several multiyear growth drivers which combined put us in in a solid position to continue to deliver double-digit earnings growth in 2011 and behind.
  
• (Joseph H. Schmidt, President and COO) As Ed mentioned, we continue to be pleased with the performance of the new Dick's Sporting Goods stores posting new store productivity of 95% in the second quarter. This compares with 67.4% in the second quarter of 2010.
  
• The detailed calculation of new store productivity can be found in the table section of the press release we shared this morning. For the full year of 2011, we now expect to open approximately 36 new stores resulting in a unit growth rate of approximately 38% for our Dick's Sporting Goods chain in 2011 compared with a 6% growth rate in 2010. We anticipate opening 18 of these stores in the third quarter.
  
• (Timothy E. Kullman, Executive Vice President, Finance, Administration and CFO) Consolidated same store sales increased 2.5%. Dick's Sporting Goods same store sales increased 1.7%.
  
• Golf galaxy increased 4% and E-Commerce business increased 31.9%. The increase of Dick's Sporting Goods stores was driven in part by 2.5% increase in sales per transaction partially offset by a .8% decline in traffic.
  
• SG&A expenses were $285.7 million representing 21.87% of sales compared with 22.13% of sales in last year's second quarter. This leverage of 26 basis points was primarily due to a decline in stores payroll and advertising, partially offset by an increase in administrative expenses.
  
• On the balance sheet, we ended the second quarter of 2011 with $626 million in cash and cash equivalence and we would not have any outstanding borrowings under our $440 million credit facility.
  
• Last year, we ended the second quarter with $278 million in cash and cash equivalence and no limits under the facility.Inventory per square foot decreased .9% at the end of second quarter of 2011 as compared with the end of the second quarter of 2010. Net capital expenditures were $44 million in the second quarter of 2011 or $53 million on a gross basis.
  
• As a result of the gross profit rate expanse and expense dynamics, we anticipate that operating margin will increase in the third quarter of 2011 compared with the third quarter of 2010. Diluted shares outstanding are expected to be approximately 126 million compared with 121 million in the third quarter of last year.
  
• Earnings per diluted share are expected to increase 24 to 26 cents from 22 cents last year. For the full year 2011, we are increasing anticipated earnings per diluted share from a range of $1.91 to $1.93 to a range of $1.94 to $1.96.
  
• We expect our occupancy costs as a percentage of sales will remain relatively flat in 201010 compared to 2010 and we expect SG&A expenses to leverage in 2011.
  
• For the full year, diluted shares outstandings are expected to be approximately 126 million compared to122 million last year.
  
• Net capital expenditures for the full year are expected to be approximately 197 million or 252 million on a gross basis. Net capital expenditures for 2010 were $128 million or $159 million on a gross basis.
  
• To sum up, we are very pleased with our performance for Q2 of 2011, we posted increases in sales and we delivered profitable growth that exceeded the EPS guidance. We also made marked progress in developing all of our growth drivers fighting pro-productive profitable stores, building our E-Commerce business and expanding our overall margin rates. As a result, we are well positioned to continue to grow our business.
  
• (Q&A) Ed, could you talk a little bit more about, you know, just the-- how you're feeling about, you know, back to school, and I understand the macro point of view, but is there a merchandising aspect as you look to the balance of this year, the fall season and holiday season that makes you concerned that the comparisons are tough to lap or that we'll restrain the complement? So maybe more flavor outside the macro on, you know, why the complement might not stay, you know, above 3%, which I guess is what you were siege the last couple months. (A) Though there's nothing that really makes us concerned of what's happening that we've seen today. We're just-- we're concerned about what's going on in this political environment of the-- as I talked with some other people a while back and the food fight that we see on cable TV every night and exasperated by this political gamesmanship in Washington has made the consumer kind of cautious. They're going to wake up and see what happened to the stock market. They had see the 401(K)s have taken a pretty big hit in the last month, and I'm not sure how they're going to react to that. So you can say we're being cautious, but I think in this environment we live in today, bow the global macro markets and kind of some of the things happening here at home it's not a bad time to be cautious.
  
• So a couple from me. Just, I guess, more specific and I hate to keep many talking about August, is that one to two% comp is that because you think consumers might wake up and be concern 3WD 401(K) and see the sales, or is that actually what you're seeing in the first half of August? I think it's an important distinction? (A) Well, we don't talk about-- we have never commented about what's happening with in a quarter, but as I just answered Robby's question 2 that we think based on what's happening in the geopolitical environment, globally right now and what's happening at home with the the political-- the political issues we've got coming out of Washington right now, I think it's a good time to be conservative.
  
• Okay. Thanks. That helps a little bit, and then two more from me. One, this reallocating of the advertising, so I guess it hurt the outdoor--presumably it helped the footwear. Was it a net negative, however, and I guess related to that as you shifted back the other way, you think, I guess presumably you expected to help the outdoor, will it hurt the footwear business in the third quarter? (A) It was not a net positive so it definitely, as I said, a greater than expected impact on the outdoor category. We think that we can fine tune this. That we don't see a negative on the apparel and footwear business, but as we reallocate this, we think that we can do a better job in the outdoor category and get back some of the market share we unfortunately lost in the second quarter.

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