While a jolly old time appeared to be had by all in London with the Olympics shining a bright light on the sporting goods world, Dick’s Sporting Goods found itself far short from the medal round.

The leading U.S. sporting goods chain was forced to take an impairment charge tied to its stake in U.K.'s troubled JJB Sports chain that led to a rare decline in quarterly earnings. Excluding the charge, second-quarter earnings rose 24.9 percent and beat expectations to make the company one of the few retailers across channels to raise its full-year guidance in the period.
But the whopping pre-tax impairment charge of $32.4 million, or 22 cents a share after-taxes, caused net earnings to slide 27.2 percent to $53.7 million, or 43 cents per share.

“We continue to believe in this market thesis underlying our investment,” said Chairman and CEO Ed Stack on a conference call with analysts. “However, since our investment and as publicly announced 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.”

The £20 million investment in April gave Dick’s SG a 3 percent stake in JJB along with the right to buy a further £20 million of convertible loans in Spring 2013 that would give it a 61 percent stake in the U.K. chain. On the call, Dick’s SG’s officials said it still has the same rights and privileges under the original agreement to acquire the majority stake if JJB’s business improves but also highlighted that Europe remains challenged.

“The premise of our investment at the outset was that we believe there was room in the UK for a premium sporting goods retailer,” said Tim Kullman, Dicks SG’s CFO, on the call. “That hasn't changed. The question is whether or not JJB can measure up to that task and that is a very large mountain for them to climb.”

Removing the one-time charge, earnings increased to 65 cents per share, from 52 cents, and bested Wall Street’s consensus estimate of 64 cents a share.

On the call, Stack said the healthy U.S. performance came from a 10 percent increase in sales and an operating margin expansion of 82 basis points. Robust new store productivity rates, strong double-digit e-commerce gains, its private label push that included the purchase of the Field and Stream brand, as well as the success of in-store shops from Nike, Under Armour and North Face were listed as key drivers.

Consolidated same store sales increased 3.8 percent. The Dick's SG flagship chain’s same store sales increased 2.9 percent on top of a 2.5 percent increase in the second quarter of last year. The improvement reflected a 4 percent increase in sales per transaction that offset a 1.1 percent decrease in traffic. DKS officials also noted that the gains came despite some spring sales being pulled-forward from the second into the first quarter, particularly in categories such as team sports, golf and bikes.

“The comp growth at Dick's stores was broad-based with all three major categories – Hardlines, Apparel and Footwear – comping positively,” said Stack.

Golf Galaxy’s comps increased 4.4 percent while its e-commerce business increased 34.6 percent and represented 3 percent of overall sales.

Gross margins improved 47 basis points to 31.2 percent of sales. Merchandise margin expansion of 29 basis points and occupancy leverage offset freight and distribution deleverage that was due to the higher year-over-year mix of e-commerce sales.

SG&A expenses were 21.6 percent of sales, compared with 21.9 percent of sales. Advertising leverage partially offset an increase in payroll relative to sales, and a contribution to the Dick's Sporting Goods Foundation.

Inventory per square foot increased 4.2 percent at the end of the quarter. About 25 percent of the increase reflected cold weather merchandise packed away after the warmer-than-normal winter last year. Inventory per square foot is expected to be relatively flat at the end of 2012 versus the end of 2011.

Stack said Dick’s SG’s continued organic profit growth continues to be fueled by expansion of its store base, strengthening its omni-channel capabilities, and its focus on margins.

The company opened four new Dick’s SG stores in the quarter, ending with 490 Dick's SG and 81 Golf Galaxy stores.. Within its flagship stores, it had 142 shared service footwear decks, 129 Nike Fieldhouse concept shops, 56 Under Armour All-American shops and five Under Armour Blue Chip shops at the end of the second quarter. By the end of the year, it expects to have approximately 170 shared service footwear decks, 170 Nike Fieldhouse shops, 90 UA All-American shops and 10 UA Blue Chip shops. It also expects to have 13 North Face “super” shop-in-shops – averaging 2,000 square feet – by the end of the third quarter along with about 70 smaller North Face shops that average closer to 500 square feet.

New store productivity at Dick's SG stores reached 102.2 percent in the quarter, compared to 95 percent in the second quarter last year. It expects to open 38 new Dick's SG stores this year and relocate five.

Margins in the quarter were aided by a focus on inventory management, private brands, and optimizing its product mix, according to Stack. To strengthen its private brand platform, Dick’s SG entered into an agreement in August to purchase the intellectual properties and rights to the Field and Stream mark in the hunting, fishing, camping and paddle categories. The company had been licensing the brand.  “Upon completion, we expect this acquisition to give us the control and flexibility necessary to maximize and leverage the value of this popular brand,” said Stack on the call.

Margins also benefited focusing on more higher margin products by increasing its focus on in-store specialty shops and shared service footwear decks in its new and remodeled stores. Stack said the Under Armour and Nike in-store shops “have done extremely well. In the ones that we put in place, and that we will put in place, going into the third quarter from The North Face, we expect those to have similar results.”

While declining to discuss early third-quarter trends, Stack said Dick’s SG’s bullish BTS outlook reflects promising technology launches from Columbia and The North Face as well as overall healthy momentum across Footwear and Apparel. Said Stack, “We see that Apparel and Footwear business continuing to comp quite strongly and those carry higher margin rates than the Company average. So all of that, that's happening inside our business, we're pretty excited about.”

The Golf category is also “very good” across the company, evidenced by Golf Galaxy comp gains of 12.6 percent in Q1 and 4.4 percent in Q2. AURs overall are being bolstered by hot demand for new launches of drivers and club hybrids by TaylorMade and others, as well as strength in technical running. While a lower-margin category, firearms has been “up pretty significantly” and supports an overall upbeat outlook around outdoor.

“We're relatively optimistic about it,” said Stack of the outdoor category. “Whether that be the outdoor category of firearms or the outdoor category of our tackle business, or the outdoor category of the ski business, the ski related apparel business that we do. We're relatively enthusiastic about what's going on right now.”

Online, Apparel and Footwear are doing “extremely well,” aided by partnership with vendors, particularly Nike, around microsites. Golf has also done “very good online,” said Stack. Fitness has been “more difficult online,” and remains a challenging category overall. To revive Fitness, a private brand of treadmills, called Epic, is being launched that features some technologies new to treadmills. It’s also transitioned inventory dollars into foam rollers, resistance bands, and medicine balls, kettle bells that are required for the P90X workout.

Regarding its new True Runner specialty concept, a second door will open in October in an undisclosed location following the opening of its first on Aug. 1 in the Shadyside section of Pittsburgh. Stack the stores run roughly 4,000 square feet with a focus on technical running. Said Stack, “Our running business has been very good and part of that has been due to the research we did on the technical running store. So we're pleased with that.”

Looking ahead, third-quarter EPS is expected to grow approximately 13 percent, better than its previous expectations of mid-single digit EPS growth. Same-store sales are expected to increase approximately 4 percent. EPS is expected to come in at 36 per share, up from 32 cents a year ago. Merchandising margins are expected to increase 29 basis points.

For the full year, EPS is now expected to reach a penny more than previously projected to a range of $2.47 to 2.51 a share, excluding the JJB impairment charge and including approximately 3 per diluted share for the 53rd week. That compares with $2.02 earned in 2011. Same-store sales are expected to increase 4 to 5 percent on top of a 2.0 percent gain in 2011.