Dick’s SG Completes Galyans Integration Ahead of Schedule; Shakes Off Weather…

Dick's Sporting Goods, Inc. has completed the conversion, re-merchandising, and grand re-opening of all of the former Galyans stores that will remain in the company portfolio and will start reporting comp store sales for those stores a quarter ahead of schedule. Company chairman and CEO Ed Stack and the senior team here obviously prefer to under-promise and over-deliver as they again beat their own forecast on EPS and comp store sales gains for the fist quarter ended April 30.

Excluding merger integration and store closing costs, DKS saw pro forma net income jump 140% to $12.2 million, or 23 cents per share. The EPS also beat the company’s guidance of earnings per share in the 18 cents to 20 cents per share range. The reported figures include $19.5 million, or 36 cents per share, in after-tax merger integration and store closing costs.

The retailer opened seven stores and closed five others in Q1 for a total of 236 stores in 34 states at quarter-end. They will close one more store in the second quarter. Total merger costs related to the Galyans deal are still seen at approximately $70 million, with $5.5 million expected in Q2 and a total of $6.5 million in pre-tax expenses for the final three quarters of the year. DKS sees opening a total of 25 stores for the year.

Dick’s posted a 3.2% comp store sales increase for the period versus a forecasted increase in the 1% to 2% range, a forecast they plan to stick with throughout the year. While analysts appeared to be frustrated by Stack’s reluctance to shed his conservative approach to guidance, it is clear that the talk of low single-digit comp gains isn’t just smoke and mirrors. Management is committed to keeping costs in line with the forecast, thereby mitigating any potential bottom line issues if the business goes flat during the year, a discipline that may also bode well for earnings if the retailer keeps beating the sales guidance by a 2-to-1 margin.

Mr. Stack said they had posted “favorable results” throughout much of the business, highlighting athletic footwear and apparel, exercise, sport games, and accessories. Bicycles, paint ball, and in-line skates continue to be a drag on results. The Dick’s team was able to get their private label programs rolled out into the former Galyans stores during the quarter, resulting in a 10.1% share for the PL business across the whole business. That number was clearly a nice gain from the 7.7% pro forma private label number for last year, but slipped a bit from the 11%+ that DKS had in Q1 last year on a stand-alone basis. DKS still sees private label at 15% of sales within the next couple of years.

New store productivity was just 80% in the first quarter, a number that management said was influenced by the Galyans store conversions and cannibalization in some of the in-fill markets. The team was quick to point out that ROIC was the key metric here as the stores in denser markets become more profitable, an increase Mr. Stack described as “substantial.”

Dick’s is finding some upside in their new assortments in Galyans, pointing to improvements in athletic shoe mix and cleated product. Golf is also seen as a standout in the former GLYN stores. Rugged outdoor/casual apparel has apparently struggled a bit as DKS tries to anniversary stronger numbers from last year, but Stack said the margins on that product did not meet their modeling. They also saw weakness in the hunting category due to their exit of the handgun business.

As for winter sports, the ski business will go forward in 35 stores for fall, primarily the former Galyans stores that performed well with it and a couple of the higher volume Dick’s stores in the Northeast. Stack stressed that ski was still going to be a test and that the vast majority of their focus would be on the snowboard category.

On the other side of the coin, Dick’s is increasing a number of categories that performed well for Galyans, calling out the sandal and hiking boot businesses as key areas for opportunity. The other key area for new focus is in watersports, a business that Dick’s sees expanding due to solid sell-through of higher-end goods.

For Q2, DKS estimates EPS in the 43 cents to 45 cents per share range, excluding after-tax merger integration and store closing costs, more than double the 21 cents posted in Q2 last year on a pro forma basis excluding the sales costs. Dick’s will open four stores in Q2.

DKS increased its full year guidance, bumping EPS estimates by three cents to a new range of $1.82 – $1.87 per share, excluding merger integration and store closing costs. That new range would represent a 55.5% to 60% increase in earnings over fiscal 2004 pro forma results excluding the same costs. DKS sees opening a total of 25 stores for the year, but plans to get back to 15% annual unit growth in 2006.

>>> Hmmm… No talk of weather woes…