Dick’s Sporting Goods was able to pull off a strong enough first quarter to hit the high end of its guidance in spite of a “very challenging retail environment” this spring. While some of the increase in the top line was spurred by the inclusion of Golf Galaxy for the last month of the quarter, most of the margin and all of the earnings up-side were attributed to strong performance within Dick’s Sporting Goods. DKS management said that Golf Galaxy was about two cents dilutive to Q1 earnings, but will be 13 cents accretive in Q2.

With abnormally cold spring weather throughout much of the Northeast and Midwest, DKS top-line growth was limited by late starts to the youth soccer and youth baseball leagues, as well as a late start to the golf season. This delay depressed comp-sales somewhat, with overall calendar adjusted comps increasing 2%, Dick’s Sporting Goods comps up 0.1% and Golf Galaxy comps flat. The weather caused store traffic to be somewhat lower that last year, but this was offset by higher average selling prices. Management said that they expect sales in soccer and baseball in Q2 to offset any shortfalls from the first quarter, but they believe golf will not.

Management said some portions of athletic footwear were “very good,” including cleats. This category was driven by the Under Armour cleat launch and Dick’s exclusive A-Rod cleats from Nike. Apart from the cleated footwear, Crocs and Heelys were said to be strong. Sales of technical athletic apparel were also said to be “very good” due to Under Armour. DKS is in the early stages of launching UA shop-in-shops, which will go into roughly 100 doors. Management said that the early results from these shop-in-shops were “very helpful to our business and the Under Armour business.”

In golf, DKS said that the new class of high-MOI drivers, including the new square headed drivers, is doing well at retail. In particular, Callaway’s FT-i has been selling faster than DKS can get the product into stores. While the product shortage may have slowed things down in Q1, DKS said that Callaway has now caught up and shipments are coming in at the right pace.

The fitness business was soft in Q1 and management expects it to remain soft through Q3. However, the merchandising and buying team has “restrategized” their approach to the category and they expect to see some improvements in Q4.

Perhaps the biggest contribution to the bottom line this quarter, from a product category standpoint, was the private label program. Private label represented 13.9% of sales in the Dick's stores versus 12.5% last year. In addition, the company has introduced several private label products into the Golf Galaxy stores and they are “very pleased” with the early results. Management reiterated their target of 15% in private label. DKS’ approach is to make sure they remain balanced across the outdoor, footwear, apparel, golf, team sports and fitness businesses. Currently, DKS sees a big up-side in their soccer private label program, where they have secured the rights to the Umbro brand for footwear, apparel and soccer balls.

The late cold weather had a positive impact that partially offset the late start to the spring team sports season. Due to the late cold snap, cold-weather product had a much higher margin during this year’s Q1 as opposed to last year.

The increased private label penetration and the better margins in cold weather gear combined with better freight and distribution expenses to boost overall gross margins 216 basis points.

While the private label and distribution efficiencies are expected to carry over to future quarters, the margin boost from the cold weather product is not.

Higher SG&A expenses offset a small portion of the improved margins. This offset was caused by increased advertising spend, which was more of a shift in timing than an increase in the overall budget. The company is shifting their advertising strategy somewhat and moving away from the Sunday insert print ad and more towards television and radio.

The improved margins and marginally higher SG&A expenses all added up to a 90% increase in income for the quarter.

Looking ahead, management believes that second quarter earnings will be in the 74 to 77 cents per diluted share range compared to 47 cents in 2006. From an earnings perspective, Golf Galaxy's results will have the largest impact for the year in the second quarter. Dick's Sporting Goods stores comparable store sales are expected to increase approximately 3% to 5% in the second quarter, or approximately 2% to 4% adjusting for the shifted retail calendar.

For the year, DKS management expects earnings per diluted share of approximately $2.37 to $2.40, 18% above 2006 earnings. Comp sales at Dick's stores should increase approximately 1% to 2% in '07. Due to the shift in the retail calendar, DKS is expecting considerably lower earnings in the back half of the year compared to the first two quarters.

Dick’s Sporting Goods, Inc. 
First Quarter Results
(in $ millions) 2007 2006 Change
Total Sales $823.6  $645.5  +27.6%
Gr. Profit %  29.7% 27.5% +220 bps
SG&A 24.0% 23.6% +50 bps
Net Income $21.7  $11.4  +90.1%
Diluted EPS 38¢ 21¢ +81.0%
Inventory* $818.4  $649.9  +25.9%
Comps +2.0% +6.5%  
* at quarter-end