Dick's Sporting Goods does not appear to be as affected by the licensed apparel or fitness equipment issues that have caused other sporting goods retailers to reduce their expectations for the second quarter. That fact, coupled with the retailer’s increased guidance for the full year on better-than-expected earnings accretion from the Galyans acquisition, pushed DKS shares up nearly 14% on Tuesday, finishing up 21.1% for the week to close at $32.41 on Friday.

Dick’s plans to be the largest sporting goods retailer in the country in the fourth quarter in terms of retail sales dollars, an estimate made possible by an increase in new store openings and guidance that reflects a low single-digit comp store sales gain for the back half.

The company still plans to have the Galyans stores re-merchandised by mid-2005 to reflect the merchandising model in the Dick’s SG two-story model. Look for the shift to happen more quickly in some categories like performance athletic apparel, where Dick’s has already secured new goods for the Galyans stores from Under Armour for the fall. They expected the goods to be in-store by the weekend.

Also look for the fashion apparel business to be sacrificed sooner rather than later, particularly in the Juniors and Young Men’s categories, areas that Dick’s CEO Ed Stack said were already being eliminated by the Galyans merchant team. That real estate will make room for a larger Golf presentation, which is expected to increase by about 3,000 square feet more than it has today in a Galyans store, and the Team Sports area.

Dick’s reported “favorable results” in Men’s, Women’s and Kid’s Apparel in the quarter and also called out the Footwear, Baseball, and Licensed categories on the plus side for the period. Stack said one could assume that the average footwear ticket has “gone up slightly”, thank sin large part to more performance product from Nike at $100 and above. Asics Gel Kuyanos and 2090’s were also called out as key performers.

Inline Skates, Street Shoes, and Camping were mentioned as tougher categories for the quarter, with Stack referring to Inline as a category that “continues to deteriorate” that hasn’t found a bottom yet. The Camping business, which was said to be affected by price compression in the furniture side of the business, came in below last year’s results but on plan for this year.

Private label generated about 12%, or $50 million, of total sales for the period, versus 10.6% of sales in the year-ago period. The Galyans private label business was estimated at around 7% of sales. Stack said the Galyans merchant team was able to halt much of the private label goods there for the fourth quarter, which will make room for the DKS product for Spring ’05.

The other upside opportunity at the Galyans stores is in the area of inventory control, a central cog in the Dick’s model.

Stack said he expects to improve the inventory turns in the Galyans stores “fairly quickly” to bring them in line with the Dick’s stores. He sees upside in the gross margin as result of the focus here.

Stack said thirty corporate personnel from Galyans have accepted positions with Dick’s and will make the move to Pittsburgh.

The positives appear to be outweighing any near-term negatives in the integration of the two formats, which has led Dick’s to increase full-year EPS guidance to a range of $1.35 to $1.37 a share, or about a 5% increase since the deal was originally announced. Galyans is now expected to be approximately six cents accretive for the year.

Net income for Q3 is expected to be approximately $1.9 million, 3 cents to 4 cents per share, versus net income of $4.7 million, or 9 cents a share, in the year-ago period. The results this year include a loss of $4.5 million, or 9 cents per share, from the operation of Galyans, excluding merger integration costs.

Dick’s now intends to open 28 stores for the year, including three stores planed by Galyans that will open as Dicks stores. They plan to open 15 stores in 2005.
Starting in 2005, Dick’s sees roughly $20 million in annual savings and merchandising buying improvements from the merger.

The 2004 second quarter results include $1.2 million of pre-tax store relocation expense, while Q2 2003 includes a $1.2 million pre-tax gain on sale of investment. Adjusting for these two items, earnings per share increased 21% to 35 cents per diluted share from 29 cents per diluted share in the year-ago period.

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