Dick’s Sporting Goods Beats Expectations in Q2; Sees Athletic Footwear Soften…

While many mall based athletic retailers were impacted by shifting fashion trends in their teen client base, Dick’s Sporting Goods seems to be somewhat insulated from these market ebbs and flows. The company reported strong top- and bottom-line growth and saw a healthy comp store sales increase in spite of a negative 1% impact resulting from cannibalization related to the former Galyan’s stores entering the comp store base this quarter.

During the company’s quarterly conference call one analyst pointed out that, excluding the first quarter of this year, which was driven by the Steelers’ Super Bowl win, the second quarter was the best that DKS has shown since the fourth quarter of 2000. On a comp store basis, management said that the former Galyan’s stores’ sales were strong but the legacy Dick’s Sporting Goods stores were stronger.

Baseball, men’s athletic apparel, and golf apparel were all called out as strong categories while the Outdoor category was said to be particularly strong. The category was said to have created positive comps due to the re-merchandising effort undertaken two years ago. Management said that this effort has “really ramped up” over the past year and they are seeing results across all categories in outdoor.

Athletic apparel grew “at a fairly constant rate,” due to strong sales of Under Armour and Nike product.

The golf apparel business was described as “very strong” during the quarter while the equipment business was “a bit weaker.” During the conference call with analysts, Dick’s Sporting Goods Chairman & CEO Ed Stack said that he thinks the golf business is going to be difficult over the next 12 to 24 months due to the technology advancements, which have been limited by the USGA, “who is somewhat concerned by the integrity of the game.”

Management said that they have no plans to expand their pilot golf stores at the moment. DKS plans to re-launch its golf strategy in the spring and expects to see results similar to their re-launch in outdoor. Mr. Stack said, “It was a test to understand the golf business from a specialty perspective. We are gaining that insight every day and putting a number of the things that we have learned to work in our golf business, in the core business.”

The improvements in these businesses were partially offset by declines in in-line skates and athletic footwear. The athletic footwear business was described as “a bit softer” due to women’s athletic footwear, which is moving more towards flip-flops and Crocs and away from some of the higher price point athletic shoes. Management emphasized that they are still pleased with their overall footwear business since their buying teams picked up on the flip-flop/Crocs trend early.

DKS continues to roll out running shop-in-shop merchandising, which management described as “one of our core competencies.” DKS considers this to be one more way the company focuses on the core athlete and said that it has been a successful program.

Private label sales represented 17% of sales in the second quarter of 2006 versus 14.5% last year. Management stated that the second quarter is typically the highest penetration level for private-label due to higher penetration in some seasonal businesses, such as the golf and outdoor categories. On a year-to-date basis, private-label sales represented 14.9% of sales versus 12.4% last year.

The company is still comfortable with their 15% annual target for private label penetration over the next couple of years.

Private label product sales remain roughly 500 to 600 basis points better in terms of gross margin than the brands that they replace. The company has also increased its gross margin rate with the brands due to increased buying leverage.

This year DKS did not see any meaningful impact from the various back-to-school tax free days that were heavily promoted in certain states around the country.

DKS’s third-quarter store opening program of approximately 27 stores will represent the largest single quarter store opening program for Dick’s Sporting Goods to date. Twenty one of the stores will be fill-in and five will be in new markets. Many of the fill in stores will be in former Galyan’s markets that Galyan’s hadnt fully filled yet, like Chicago, Atlanta, and Minneapolis.

Dick’s Sporting Goods management has increased full-year guidance by the amount that the company exceeded guidance in the second quarter, from approximately $1.81 to $1.85 up to the new range of approximately $1.84 to $1.88 per diluted share. This represents an increase of approximately 24% versus 2005 after adjusting for the 25 cents impact of stock option expense in 2005. Comp store sales should increase approximately 4% in 2006. For the third quarter of 2006, the company expects three cents to four cents in earnings per diluted share.

The company is expecting comp store sales in the third quarter to increase approximately 3% to 4%.