DICK'S Sporting Goods, Inc. (DKS) Q3 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Quarter 3, 2007 Dick's Sporting Goods Incorporated Earnings Conference Call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the presentation over to your host for today, Mr. Dennis Magulick, Director of Investor Relations. Please proceed.

Thank you, and good morning to everyone participating in today's conference call to discuss the third quarter financial results for Dick's Sporting Goods. Please note that a rebroadcast of today's call will be archived on the Investor Relations portion of our website, located at dickssportinggoods.com for approximately 30 days. In addition, as detailed in our press release, a dial-in replay will also be available for approximately 30 days. In order for us to take advantage of Safe Harbor rules, I would like to remind you any projections or statements made today reflect our current views with respect to future events and financial performance. There is no assurance that such events will occur or that any projections will be achieved. Our actual results could differ materially from any projections due to various risk factors, which are described from time-to-time in our periodic reports with the SEC. Leading our call today will be Ed Stack, Chairman and CEO. Ed will discuss our third quarter financial and operating results and review the guidance contained in our press release. Also joining us this morning are Bill Colombo, President and Chief Operating Officer; and Tim Kullman, Senior Vice President and Chief Financial Officer. Bill will highlight our store opening program and provide an update on our plans for a third distribution center. Tim will then review in more detail our financial results. I would now like to turn the call over to Ed Stack.

Thank you, Dennis. I am pleased to report the results of our third quarter, a quarter in which we have achieved our comp sales guidance and exceeded our earnings guidance. Our performance for this quarter demonstrates once again our emphasis on execution combined with the strength of our business model delivers consistent financial performance. This quarter we generated net income of $12.2 million or $0.10 per diluted share, which is $0.04 above the high end of our guidance on a split adjusted basis and is $0.03 over last year. Higher margins, continued efficiencies in freight and distribution, strong cash flow and the performance at Golf Galaxy all contributed to earnings greater than guidance. Total sales for the quarter increased 19% to $839 million. At Dick’s Sporting Goods stores comp sales decreased 2.5%, which is in line with our guidance. Adjusting for the shift in the retail calendar comps sales at Dick’s stores declined 1% also in line with our guidance of an 8.9% gain over last year. As a reminder, this quarter’s results were affected by the shift in the 2007 retail calendar, which positively impacted quarters one and two and is offset in the third and fourth quarters. In addition, last year’s third quarter benefited from some very favorable cold weather that we did not expect to repeat. During the quarter, we saw increases in our golf, license, and footwear businesses. These gains were offset by declines in cold weather and hunting apparel. At Golf Galaxy stores, pro forma comp sales decreased 2.7%. Comp sales at Golf Galaxy stores increased 4.7% on a pro forma shifted basis. Our private label and private brand program continues to be an important element of our assortment, and we are on track for these products to represent approximately 15% of sales this year compared to 14.1% in 2006. For competitive reasons, we are no longer to planning to disclose penetration levels on a go forward basis. Our private brand partnerships have established an important presence in our stores. For example, exclusive products under the Slazenger name in golf and tennis and Umbro in soccer further distinguish Dick’s in the marketplace during the spring and summer sport seasons. In partnership with Nike, this fall we introduce our exclusive line of ACG, active and outdoor apparel. We are enthusiastic about the prospects of these and other private brand agreements. We introduced several of our Slazenger products since the Golf Galaxy stores this year, we are very pleased with the results and with the opportunity expand our private brand assortment in these stores in 2008 and beyond. We are increasing our earning guidance for the total year 2007 and providing our initial guidance for the fourth quarter. For the year, we now expect to earn [Technical Difficulty] per diluted share of approximately $1.29, a 26% increase over 2006. We expect comp sales at Dick’s stores for the year to increase approximately 2% in 2007 on top of a 6% gain in 2006. For the fourth quarter 2007, we expect to earn $0.59 per diluted share as compared to $0.60 in the fourth quarter 2006. We are anticipating comp sales at Dick’s stores to increase approximately 2% in the fourth quarter. On a shifted basis, we are expecting comp sales at Dick’s stores to increase approximately 2.5%. The fourth quarter comparison is impacted by several factors, as we have outlined in previous earnings calls this year. On the topline, the shift in the 2007 retail calendar, which positively impacted quarters one and two this year is offset in the third and fourth quarters. Further, in this year’s fourth quarter, there is one fewer week and we are up against the favorable impact of the Chicago Bears and Indianapolis Colts Superbowl runs of the 2006 season. We estimate the combination of these two factors contributed approximately $0.05 to our 2006 earnings. Finally, the inclusion of Golf Galaxy this year is approximately 4%... $0.04 dilutive in the fourth quarter. We are pleased to have delivered third quarter earnings in excess of our guidance. Improved margins, greater efficiencies, the strength of our Golf business and strong cash flow continue to fuel our financial performance. As we head into the fourth quarter, our inventory is clean, our stores are well positioned to deliver another solid quarter. At this time, I will turn the call over to Bill.

Thanks Ed. We opened 25 new Dick’s stores in the third quarter representing our Company’s second largest quarterly new store opening campaign. For Dick’s stores, this completes a very successful 2007 new store program. Our stores consistently produce new store productivity at or above 90% and this quarter was no exception. I would like to congratulate all of our associates across the Company who together collaborated to make these opening so successful each and every quarter. Congratulations on a job well done. This quarter, we entered the following 13 new markets. Auburn and Oxford, Alabama; Augusta, Georgia; Carbondale, Illinois; Jackson, Johnson City; Kingsport and Memphis, Tennessee; Phoenix, Arizona; Rochester, Minnesota; Sandusky, Ohio; Shreveport, Louisiana; and Tampa, Florida. Overall, approximately 40% of our new stores in 2007 were in new markets. We also added 12 Dick’s stores to existing markets this quarter in Atlanta, Georgia; Columbus, Ohio; three stores in Dallas, Texas; Denver, Colorado; Detroit, Michigan; two stores in Harrisburg, Pennsylvania; Omaha Nebraska; Pittsburg Pennsylvania; and Syracuse, New York. One of our new stores in Dallas was a two level store. At the end of the third quarter, we operated 340 Dick’s Sporting Good stores with 19 million square feet and 77 Golf Galaxy stores with 1.2 million square feet. In 2008, we expect to continue our 15% new store growth, roughly 40% of the new stores in 2008 will be in new markets and much like 2007, we expect about half the stores will open in the third quarter with the other half split among quarters one and two. Lastly, I would like to provide an update for our third distribution center, which as we outlined in the second quarter earnings call will be located in Atlanta, Georgia. Our DC remains on track to be operational in mid to late 2008, at which point out total network capacity will be 670 stores. Much of the build out cost associated with this distribution center will be financed through leases thereby minimizing our net capital expenditures. I will now turn the call over to Tim to go through our financial performance in more detail.#

Thanks, Bill. Sales for the quarter increased 18% to $839 million with comp sales decline at Dick’s stores of 2.5% or 1% on a shifted basis. Higher price points were offset by a decrease in transactions. As I outlined earlier, this year’s results were affected by the retail calendar shift and a difficult comparison against some very favorable cold weather last year. Cannibalization impacted comps by approximately 1%, similar to recent levels. Gross profit was $239 million, increasing 144 basis points to 28.45% of sales. This increase was driven by expanded merchandise margins and lower freight costs, the result of continued efforts to become more efficient in this area. These gains were partially offset by de-leverage on the occupancy line due to negative comp sales this quarter. Our merchandise margin gains continued to benefit from better buying, our private label program and improvements in inventory and mark down management. For example, we began and ended the quarter with clearance inventory below prior year levels on a per square foot basis and did not anniversary clearance event that we ran last year. SG&A expenses of $209 million were 24.95% of sales or 132 basis points higher than last year’s third quarter, driven by de-leverage of payroll and admin expenses, resulting from the negative comp sales this quarter. Operating income increased $6.1 million or 39% to $21.7 million. Net income for the quarter increased 57% to $12.2 million. Let’s move to the balance sheet. Inventory per square foot is roughly flat with prior year levels after adjusting for Golf Galaxy and a retail calendar shift with Black Friday occurring one week earlier this year. We ended the quarter with $140 million in outstanding borrowings on our line of credit that compared to $102 million in outstanding borrowings last year. The strength of our business has enabled us to repay much of the $148 million in borrowings, resulting from our acquisition of Golf Galaxy in February. Our average borrowing rate for the quarter was 6% reflecting LIBOR plus 75 basis points, representing a decrease from last quarter. Our recently renewed credit facility, in addition to reducing the borrowing rate provides for an additional $100 million in borrowing capacity, up to $450 million. The new facility expires in 2012. Our expectation continues to be that we will end the year with no outstanding borrowings. Net capital expenditures are expected to be approximately $115 million in 2007, or approximately $175 million on a gross basis, consistent with our previous expectation. As Bill mentioned earlier, we are planning to open our third distribution center in 2008. As a result of pre-opening and other costs associated with opening and operating at D.C. we expect to absorb a P&L impact in 2008, the magnitude of which will be incorporated in our guidance. Earnings guidance for fiscal 2008 will be provided with our year end earnings release in March 2008 consistent with Dick’s standard practice. Thank you. This concludes our prepared remarks. At this point, operator I would like to open it up for questions and answers. Question and Answer

[Operators Instructions]. You first question comes from the line of Gary Balter of Credit Suisse. Please proceed.

Thank you and congratulations on a great quarter. Could you just talk… few people called us on the inventory being up 30% with the built up 18 and you have put in the press release that it’s in line with your expectation, could you talk about where that inventory is…under which categories?

Well, it’s really across the board, Gary, because one of the biggest issues on a shifted basis is relatively flat; when you include Golf Galaxy also. But with Thanksgiving a week earlier this year than last year, we have brought inventory in earlier to accommodate that and if you are back that out it’s relatively flat with last year, so there’s really no inventory issue, there is no mark down pressure coming, the inventory is really in terrific shape.

Yes, I visited, I was actually in Ithaca yesterday, visited your store there and clearance looked real minimal so…

Yes. On a per square foot basis, our clearance is roughly 4% less than it was last year at the same time.

That’s great, just out of curiosity, you have rights to the Umbro name and obviously Nike bought out Umbro. How does that… that’s a great position for you to be in. What does that allow you to do now in terms of furthering your relationship with Nike and building up Umbro?

Well, we have got a ... we have and continue to have a great relationship with Nike, they are terrific partners. The fact that they have bought Umbro, what they have indicated is it’s going to be run as a separate business out of England and we don’t see any real change.

Okay.

I think that Nike buying Umbro is only positive but we don’t see any real change in this right now.

And last and I’ll let somebody else ask. You are in great shape and you mentioned your inventory is in great shape, when you look around your industry, sports authority or anybody else you are continuing with, are they…are you seeing clearance sales coming from them or anything that implies potential price pressures or not?

We haven’t. I think that we have not seen anything like that, we haven’t seen any pricing pressure nor irrational pricing out there in the marketplace.

That’s great. Congratulations again and good luck in the fourth quarter.

Thanks Gary.

Your next question comes from the line of Robby Ohmes of Bank of America. Please proceed.

All right. Thank you. Can you guys hear me, okay?

Yes. We hear you Robby.

Terrific, just two quick questions. The first question is as you said, no mark-down pressure based on how you are viewing the fourth quarter right now. Can you just remind us what the marketing program changes are through the fourth quarter this year versus what you were doing last year and then also in terms of the 2% comp guidance, the impact that may or may not have on whether that’s going to be a traffic driven comp or an average ticket driven comp as it was in the third quarter? Thanks.

Our marketing calendar is not significantly different than it was last year. We had started the transition from reducing the dependency on newspaper inserts and it moved to more of a multi-media platform with the direct mail, TV, playing a more important role. We will continue that again his year. So the marketing program is not significantly different than last year. And the comp will come from a combination of ticket and we expect that… we are feeling pretty confident about our business on a go forward basis from a traffic stand point with what we have got from a content stand point than some of the products that we expect to offer in the fourth quarter.

And is there a category of your business that you expect to pick up, I mean do you expect the cold weather to perform a lot better than it did in the third quarter?

We do expect that to perform better than the third quarter. I think that our content is much better… is better than it was last year. In partnership with Nike we have launched the ACG brand which has got some terrific traction going forward. So, we are very pleased with what’s going on in the market and as the weather has got a little bit colder here in the beginning of the fourth quarter versus what it was in the third quarter, we do expect an uptick in that category of merchandize.

And then just my last question, I think you mentioned the product footwear is a standout in the third quarter. Can you be a little more specific what areas in footwear outperformed?

It was really across the board. Our footwear business as a whole did very well. It did well from a athletic standpoint; it did well from a broad shoe category, the hiking aspect of our business has been very good. So the footwear business as a whole has been really quite good for us.

Terrific. Thanks a lot Ed

Thanks Robby.

Your next question comes from the line of Brian Nagel of UBS. Please proceed.

Thank you. Good morning, and nice job, and a really good quarter. The first question, I wonder if we dug a little deeper into the gross margin, there is once again showed very good …nice gross margin gains like you have in the past few quarters. As we look, longer term I guess, how should we think about the drivers we have seen in this quarter and then Q1 and Q2 and sustainability of those drivers. I know you are not going to be breaking out the private label in this year explicitly anymore but is that something we should think about as continued driver or other factors here?

It is, I think it is still going to continue to come from the three buckets, we have talked about in the past, which is going to be increased penetration of private label and as we characterize it moving to private brands. Again in conjunction with the partnership we have with Nike in launching the ACG brand. The partnership we have with Adidas launching Adidas baseball product. We have got a number of these partnerships that we expect will increase that private label, private brand component of our business. So, and those margin rates are roughly 600 basis to 800 basis points higher than the products that they replace. So, that’s one bucket that will continue to come from. We feel that we can continue to leverage the….our buying opportunities with our suppliers. We also feel that systemically we continue to make improvements in our planning and allocation area which allows us to mitigate markdown pressure in the back end, and we feel that all of these things, we still have more runway from a margin rate expansion aspect.

The second question I want to ask. On a competitive front, you have been expanding your footprint in the United States, into new geographies, what have you seen if anything as a competitive response, sort of, say, in some of these newer markets and some of the more entrenched sporting good retailers?

We have…in Texas is where we have seen the biggest response and I think the group in Texas Academy runs a very good operation. They are and I have said this before, they will be the toughest competition we face to date, but other than Academy, all the competition we face is competition we have continued to face throughout the rest of the United States and there hasn’t been a big difference.

And then final question, just we got… there’s been a lot of reports lately from a lot of different retailers who speak to weakness out there in the consumer. You guys are performing very well. As you look at your business even more granularly, have you seen any impact as far as buying patterns from your consumers that suggest that your core customer is more pinched?

We haven’t, and I’ve said this for a number years that our business really travels in a narrower band than the economy as a whole. Based on staying… keeping our business focused on that core athlete and outdoor enthusiast, we are not going to see the lows when the economy is a bit more difficult, but then on the other hand and I’m sure everyone will forget this when the time comes, when the economy turns around, we won’t… we don’t expect to see the big spike in our business either.

It’s helpful. Thank you and good luck for the holidays.

Thanks, you too.

Your next question comes from the line of Michael Baker of Deutsche Bank. Please proceed.

Hi. Thanks guys. Two quick questions. One… some of the categories that weren’t as good in the third quarter of the cold weather and then the hunting. I mean, is that is simple of the fact that it was warm in… I guess it was September and October and then… so, I’m assuming in November that those… you said you expect them to pickup and my assumption is that they have picked up as it’s gotten colder. Is that just too simple, as it’s gotten colder, these businesses have gotten better? And then my second question would be if you can update us on the Under Armour stores in the store program, where are you in that rollout, and has that had a positive impact to business? Thanks.

Sure. Well, we indicated that the gains were offset in declines in cold weather and hunting apparel, not hunting in general. So, it was hunting apparel, which is primarily driven by cold weather. So, similar to the first quarter, when we said that some of the seasons have been impacted from the start standpoint, we feel the same thing is happen because of the cold weather. We have indicated on a number of our conference calls that last year the third quarter was unseasonably cold, and we took full advantage of that and you can see that in the third quarter of ’06 with our comps increasing 8.9%, that was a big driver of that. We do expect as the cold weather gets better if the… cold weather gets here that our cold weather merchandise will continue to pickup. As far as the UA shops go, we continue to rollout the Under Armour shops as we continue to also rollout additional Nike Shops. We continue to rollout some Adidas shops. With all of the shops in a shops across all the brands that we do business with, have done quite well.

Okay. If I could ask a follow-up then so… correct me if I am wrong. It sounds like when you are seeing… saying maybe you are going to see a shift from the third quarter into the fourth quarter for some of the warmer… I’m sorry… colder weather products. Yet it seems as though your fourth quarter comp balance is exactly where it had been backing into I think you would always looking for 2% comps. So, is that pickup in that number or is it just being conservative, just trying to reconcile those two ideas?

Well, if you remember when we planed this and we’ve talked about this really from our fourth quarter call of last year, when we gave guidance for the full year that we did not expect that the third quarter would have the same weather pattern in ’07 as it did ’06, and we thought that the ’07 winter, we would be planning for a more normalized winter. So, the colder weather in the fourth quarter was always planned into our guidance right from the beginning.

Great. That makes prefect sense. Thanks.

Your next question comes from the line of Hardy Bowen of Arnhold and Bleichroeder. Please proceed.

Arnhold Bleichroeder. The Nike All Conditions Gear, will that continue in the spring, or is that fall on like fall winter only?

Hardy, that is Nike All Conditions Gear and it’s a 12 month business. It will be spring products also.

Okay. And I guess as we look at Adidas, RBK, and Nike and Gilmens stream [ph] and so forth. I seems like our private brands are going to increase… are going to be probably more than half of the combination of what used to be in private label as we go in the next year?

Over a period of time, I would say that that is an appropriate assumption.

Okay. As far as the promotion program TV and so forth, is it… can we measure whether we get benefit out of TV out of direct mail relative to what we were doing in the newspapers? Or this more an assumption that this is the way the market is going and we better go that direction too?

Well, I’m not sure that this is the way the market is going, but we think that that’s the way that is best for our business is the research we’ve done on newspapers, newspaper readership, the products that we’ve tested in the categories that we’ve tested on TV with the Nike spot, we did with A-Rod, the Nike football spot, we did with Troy Polamalu, the TaylorMade a burner driver spot, we did with Justin Rose. We can certainly measure the increase in those products in those brands in market share. So, yes, I think we can measure that. The direct mail pieces, every direct mail piece is bar-coded, so we can… if Hardy Bowen gets a direct mail piece and comes in and uses it, we can tell exactly what you bought when you came in that you use that, and so we have a very good tracking system in place and can identify the performance of each of these direct mail pieces that go well.

Excellent. And in regard to Golf, I guess, this is the first time we are buying for Golf Galaxy and Dick’s can buy going into next spring. Are the vendors responsive to this, I mean we are now the biggest buyer of Golf by far, I would expect that we are getting… we will get substantial benefits.

We continue to leverage our ability for special make ups from a number of other people from a Golf standpoint as we look at Golf Galaxy’s business on a go forward basis, our ability to put in our private label programs in Golf Galaxy with Slazenger, the Slazenger products across golf balls, golf clubs, apparel, the Walter Hagen apparel, all of this is accretive and is really going to be beneficial to both Golf Galaxy’s business and exporting goods golf business.

Okay. Excellent. Congratulations.

Thanks Hardy.

And your next question comes from the line of Dan Wewer, Raymond James. Please proceed.

Ed, the Golf Galaxy segment did not appear to dilute the third quarter earnings as much as initially anticipated. Was that primarily a function of the warm weather benefiting that category?

I think it was a combination of the warm weather benefiting the category and the Golf Galaxy management team taking advantage of that weather and doing an excellent job of running the business. When they saw the weather the way that it was, they continued to move in to get products into the store, continued to service the customer, I think they took full advantage of the weather that was given to us very similarly to… in the third quarter of last year. The Dick’s Sporting Goods team did a great job of taking full advantage of the cold weather that impacted… that we were given in the third quarter.

We are estimating a $0.04 cost from Golf Galaxy during the fourth quarter. It is difficult to measure the seasonality of Golf Galaxy given the fiscal year has changed, but I would have assumed to you the gift giving component of that category would have resulted in earnings closer to what you saw in the third quarter.

Well, I think intellectually you could come to that conclusion, but as you get into the reality of it, the gift giving portion of kind of core golf business is really the month of December. See, take the month of November and the month of January and when combined into the quarter makes it dilutive. One of the strategies that Randy Zanatta and I have talked about is development program for Golf Galaxy on a go forward basis is going to be heavily skewed into California, the South West and into the Southern part of United States to help with this issue, work to try to be in more places that they are playing golf roughly 12 months out of the year. Golf Galaxy was started in Minnesota kind of the company built from there. They did a great job. But now we've got the ability with the development program to move it more South. That will certainly help with the seasonality issues in the business today.

And that was just the last question I had on Golf Galaxy given that its brand awareness out West in the Southwest and Southeast is minimal. What's the strategy for changing that given your national ad are only for the Dick’s brand? I guess, the one exception would be on the Slazenger commercials. And then kind of related to that. Have you considered opening a Golf Galaxy concepts store inside of Dick’s.

No. We’re not going to do that. Golf Galaxy is a standalone entity we feel that keeping it separate in customers mind will help us increase market share in the golf businesses as a whole. And Golf Galaxy is not that well known in California or some of these markets yet, but they started in Minnesota and when they went to Chicago or they went up sate New York or they went to one of the Carolinas, they weren’t very well known either when they first got there and that team has done great job of creating the brand awareness would be golf enthusiast. And obviously they run a terrific business and I suspect that they will be able to do the same thing in California and the Southwest.

I am sure they will. Great thanks.

Thank you.

Your next question comes from the line of Jim Duffy of Thomas Weisel Partners. Please proceed.

Thank you. Congratulation on nice quarter.

Thank you.

Can you speak to some of the things that you have done that have helped you manage you inventory levels? Are you working differently with your vendors or there is some different initiatives in the works that have really contributed there?

I think there is couple of things. We have worked with our vendors and our vendors have been very supportive of inventory controls and flowing of product. Internally, we have done a great job from a planning standpoint, our chief merchant Gwen Manto has really done a very good job of keeping our merchants focused, sustain stock on the key items, which has certainly helped our inventory. So, we have done a number of different things with vendors and internally that had helped us. Our Logistic group, the supply chain is really done a great job of flowing product to the stores at a quicker rate and getting them to the right stores at the right time.

So, you are doing more on a replenishment basis with the vendors and does that leads you to deal more with vendors whose supply chain is just sort of catered enough to support that?

We are doing more with automatic replenished product, number of our vendors have really supported that. Nike came out with the new program in athletic basics this year and really has done a great job and that’s certainly helped the inventory control. So, a number of our vendors have really stepped to the plate to help with the supply chain.

With regards to the cold weather merchandise, was there any order cancellations there, or have the product flows been consistent with your plan?

We've not cancelled any orders… we've not cancelled any orders as of yet. We've got all of that baked into out plan. Our inventory levels and I can't stress enough how good I feel about our inventory levels and the content of the inventory as we walk into the stores. So, we're as optimistic as we ever get about a quarter.

Yes. The stores certainly look clean. I want to dig into a lower freight expense. Some orders… some of the things you've done to help you reduce freight expense and then as we look into next year, with the new distribution centers. Should we expect further progress there? I guess you spoke to a P&L impact, obviously some additional expense, but will the benefit from reducing freight expense offset that? #Timothy E. Kullman - Senior Vice President and Chief Financial Officer: Well, the initiatives that Lee Belitsky and the folks in the supply chain have worked on are the same we talked about in our earlier conference call, which is cubing out our trailers on an outbound basis to our stores. We're using floor load initiatives wherever we possibly can and we work a lot on import and container programs in reducing freight. Now obviously we have to combat like everybody else does the fuel cost and we anticipate going into ’08 to continue to work our savings programs and see where that gets us.

Very good. Thanks very much.

Your next question comes from the line of Jim Chartier of Monness, Crespi and Hardt. Please proceed.

Good morning. Just want to talk a little bit more about advertising. Is there still an opportunity to drive more traffic through the shift to TV advertising as well as direct mailing and e-mail campaigns?

We absolutely do believe that and as we move into ’08, we’ll further reduce our percent of sales spend on newspaper inserts and move that into more TV advertising and direct communication with our scorecard customers.

So, would you say you're half way to where you think you could be or could you give some an idea along those lines?

Actually, we are… I can tell you exactly where we are. We’re just about a third of the way.

Great. Thank you.#

Your next question comes from the line of Sean McGowan of Needham & Company. Please proceed. Sean McGowan - Needham & Company: Thank you. A couple of questions on capital expenditures. Could you remind us of what you're expecting for the full year ’07 and will there be any portion of cash out from Dick’s on a new DC in ’07? And kind of ballpark, what do you think the incremental piece above normal business in ’08 might be?

But we won’t comment on individual components of the DC, but for the full year 2007 on a gross CapEx basis, we're looking for $175 million and that’s been our call out for each of the last three quarters. Sean McGowan - Needham & Company: Okay. Thank you.

Your next question comes from the line of Rick Nelson of Stevens Inc. Please proceed.

Thank you. Good morning and my congratulations as well. I guess as I looked at your third quarter store openings, it looks like kind of Dick’s is making inroads into some smaller markets, with smaller populations. Wondering if you can elaborate on that kind of strategy and are you doing it at all with a smaller store footprint?

We're not doing it with a smaller store footprint. Our footprint continues to be 50,000 square feet or it… and a single level store, or is it two level program at 3,000 square feet. And there might be a few smaller stores in there like, smaller markets like, Augusta Georgia; Johnson City, Tennessee. But that’s really no different than what we've done in a percent basis in other years. So, there’s really no different real estate strategy that we're clawing from a development program.

Thank you for that. Private label, you mentioned the target of 15% for this year. I’m wondering, over the longer haul do you see any limits as to how big that might become, or because of some of your new strategies there are substantially higher?

We feel they can exceed 15% as we continue to partner with a number of our main… our better partners, such as Nike. What we've done with ECG. What we've done with Adidas from a baseball standpoint. But, so we do think it can go above 15% for a combination of both private label and private brand programs. But we're not going to call out that penetration on the go forward standpoint any longer for competitive reasons.

Final question on Golf Galaxy, the $0.04 dilution that you're forecasting for the fourth quarter. How does that compare to the same three months in the prior year period, had you owned it?

Roughly the same. Not materially different.

Thanks.

Your next question comes from the line of David Magee of SunTrust Robinson. Please proceed.

Yes. Hi good morning. Good quarter. Couple of questions, one is on the private brand initiative. I just want to… just touch on the economics again, the margin benefits that you get, that’s comparable to what you get with private label. But your price points there are higher and I also would surmise that the turn would be faster under the private brand program?

I am not sure that I would agree with that. I would look at the turns as relatively the same because we take… that we have to take possession of that product overseas as opposed to from a traditional vendor relationship. We take delivery of it when we receive it. So, you are right, the margin rates are about the same as private label. The AUR’s are higher, the brands do command a higher price, but the turn number I wouldn’t bake too much of a turn difference into your model.

And that margin being… group of the same, that’s inclusive of a license fee that you pay as well.

That is inclusive of the license fee.

Then, secondly the… with regard to the Academy, it’s my perception that you are the higher end of the marketplace than where they are? Is it just because they are being aggressive on prices as why they maybe posing stiffer competition?

Well, they do… we do cater to a higher end customer to some better products than the Academy does. But there is an overlap there. And the Academy is a very well run operation and they will be the toughest competition we have had to face.

Thanks Ed.

Thank you.

Your next question comes from the line of David Cumberland of Robert W. Baird. Please proceed.

Thanks. Gross margin was cited as contributing to EPS overage. What caused a positive variance versus your plan on gross margin given the comps were within plan?

A couple of things that helped the gross margin rate was the penetration of private label, and also the elimination of a clearance event that we did on our anniversary this year, based on how well our… the company our merchandizing group, the planning group, the store group have done controlling inventory. And as I said a little earlier, our clearance inventory is actually 4% less on a square foot basis than it was last year. So, those are a couple of things that helped the margin rate.

Thanks. And the pre-open expense per store was down significantly. What was the reason for that?

Our pre-opening expense is determined all on the timing of the stores. And as the stores open closer to the end of the quarter, you have less of an impact in the quarter itself.

Okay. Thank you.

Your next question comes from the line of Reed Anderson of D.A. Davidson. Please proceed.

Yes. Good morning. Ed your fitness is an area that if you visit your stores… looks like you have been doing some work there to re-merchandise, re-sort, the category looks better there. If you could just comment qualitatively on what you have done and how you… what your expectations for that might be the next three to six months because that’s going to become more important to you.

Yes. We have done some things… you are right, we have worked very hard on the fitness side of the business. Remember we have got some additional products in there, we re-laid out how the people shop for Treadmills , the signing package associate, the information package associate with tread-mills and Elliptical. We still see a continued shift from Treadmills into Elliptical. We have looked at ways to take other categories of the fitness business, whether it’s core training, boxing and making those areas of the fitness business more important. We had indicated that we thought that the fitness business would continue to be soft through the third quarter with hopefully it getting a little bit better in the fourth quarter and that we are still optimistic that we will be able to live up to those expectations based on some of the changes that the group has made.

And early results here from your changes, I mean is it mature expectation exceeded underperformed.

It’s around our expectations. It’s… the fitness category continues to be a difficult… the category which we have talked about. We expect it to continue to be difficult but we expect to see some improvement in the fourth quarter.

And from a pricing standpoint are you pricing product a little more aggressively there now or you are about where you were a year ago, just overall in that category?

We’ve not been anymore promotional, not putting any pressure on our margin rates, but the group developed some of the private brand products that we have in fitness and worked with our… some of our suppliers on exclusive products to try to bring more features and benefits into the product at the same price. So, we are not promotionally priced. We are taking average unit retails down. But we are trying to pack a few… pack a little bit more of a punch in the product than in the years past.

Okay. Good. And one final question on the comment about I thinik it was in Tim’s remarks about pricing being a positive factor on comps, is it fair to assume that that’s more related to the ramp up you saw on the private brand initiatives as opposed to broader pricing rise across your other merchandise categories?

I think it’s a couple of things. It’s private brands and then it’s also at least in this last quarter was the elimination of that clearance event that we did not have to anniversary because as I said our merchants have done a very good job of keeping our inventory in control and we have 4% less clearance this year than we did last.

Super. Thank you.

Thank you.

Your next question comes from the line of Sam Poser of Sterne Agee. Please proceed.

Good morning. It is very, very good quarter. A quick question on, sort of, the timing of merchandise. How much have you changed the timing of the seasonal goods that you bring in as a lot of people used to take their markdowns, outerwear, let’s say around Christmas, but it’s staying cold through February in a lot of places. How you are looking at that because it looked to me like you in brought in your outwear a little later than you did a year ago?

We didn’t bring it in a whole lot later than we did a year ago, was roughly the same timing and we take our markdowns based on rates of sale as opposed to seasonally. So, we don’t have a counter that says December 15, we are going to take markdowns in these particular areas. We have the systemic ability to go in and take a look at how products are selling, what the rate of sale is, what we expect will be left at the end of the year and take our markdowns or not, based on rate of sale. And if you remember last year in the fourth quarter that was one of the big benefits to our margin rate improvement last year in the fourth quarter is that we did not rush to take these markdowns when the weather got cold and we were able to move our margin rates up pretty substantially in the fourth quarter last year.

Right and then also on the private label as you… on the special make-up, branded goods that you are bringing in, when you look at let’s say outerwear or some of the other areas, how are you deciding… because it’s not all incremental. I mean how are you deciding how to… who to takeaway from and how do you create room for those opportunities because it looks to be you are really working on getting… developing a lot of really better exclusive products within your mix in general?

We are and it’s not as difficult as you might think to decide who should go and who should stay. The consumer really tells us that and analytical tools that we have inside the business with what our planning group does, we can very quickly see products that are performing that the customers are voting for and what the customers are passing on. So we can make those moves quickly from a seasonal standpoint, as we don’t bring all orders in at once. So we’ve got orders flowing in through the quarter and through the third and fourth quarter and if products are slowing down or products… if we have made a mistake we will cancel those orders move the product into something else and we’ve got the ability to move pretty quickly like that.

Okay and just quick follow-up there. What systems do you use that are helping the planners. Number one. And number two, the… well one has for that one is … move on to the next one.

For our merchandize system we use is, JDA and we the system has been great for us from a standpoint of… from a merchandising standpoint.

Okay and then are you looking at most of the brands that you end up that get chosen to be put out? I mean, are they… are you getting less response in general to brands that have much broader assortments, so you're ending up having more narrowness, more brands that have less distribution around in general. Is that… would that be a fair general statement? With the brands that sort of stay versus the one that go as you bring in your special incomes?

I am sorry. I don’t quite understand the question.

Do you find that the brands that are getting removed for let’s say for Slazenger golf ball, for argument sake? Are the brands that would take its place? But those are the ones that have that much broader distribution versus ones that are much narrower. So more likely… I don’t want to take, I don’t want to pick on anybody, so… I mean, Titleist, Titleist would generally stay it’s about our distributors, some of the others.

Titleist is definitely going to stay. I understand what you are saying. Were they private brands and private label products are taking the pace of our really second tier vendors. We have made a very concentrated effort not to impede on the market share of our main partners. So, we are not impeding on the market share of Nike, we are not impeding on the market share of Titleist or TaylorMade or the North Face, we’re really trying to grow those businesses and we have identified a number of brands that we want to grow their business with and we make sure that from private label standpoint, we don’t impede upon those brands.

Okay. Thank you very much.

Sure.

You next question comes from the line of Bob Simonson of William Blair. Please proceed.

Tim, you mentioned CapEx number for this year. Is it hopeful to get a preliminary number for next year?

We haven’t solidified those plans yet and we will have a better opportunity to explore than in the fourth quarter call.

Okay and in the Golf business, Ed, the new drivers this year. Did they have a measurable impact on the comps this year? And to follow on to that, does that make a somewhat more difficult comparison for next year and are there other new products coming online that could be of that magnitude?

The drivers were certainly helpful to this year and so they definitely did have an impact, they helped to move the needle. And on the flip side, we think there are new products coming out for next year that will help continue to drive that. One of the things that I think helped our Golf business at Dick’s Sporting Goods was that we made a pretty significant investment from a training standpoint and physical plan standpoint to be able to fit drivers and irons this year. And we think that had a very significant impact on our market share and helped our Golf business and that’s what.

Is that both you as well as the Golf Galaxy stores?

Well, Golf Galaxy had been doing that, they were really ahead of the curve as it relates to… plus at Dick’s Sporting Goods on fitting Golf clubs. That had been a part of their standard operating procedure for a while and we hadn’t kept pace with that. And they are putting that in place last year or early this year, really helped our business.

Thank you very much.

Okay, Bob.

Your next question comes from the line of Robert Samuels of JP Morgan. Please proceed.

Thanks. Most of my questions have been answered, but can you just give the breakdown between traffic and ticket with respect to the comp?

Sure, on a shifted basis, ticket was 2.7% and traffic was a negative 3.7% and on un-shifted basis, ticket was 3.4% and traffic was negative 5.8%.

Thanks very much.

Your next question comes from the line of John Shanley of Susquehanna Financial. Please proceed.

Thank you very much. Ed, with the increase in the shop within shops and the private label products that have been particularly over flow in the apparel category, has there been a reallocation of the floor space between footwear apparel and hard lines? And do you expected that shift… if it is occurring will likely accelerate one way or the other?

There hasn’t really been much of a shift. The products that we brought in have replaced other products in the store. So the apparel square footage and footwear square footage has remained fairly constant. And the one… the one great thing we think about both our private label and our private brand program is that they are not just apparel based. They are inclusive of apparel, footwear, more on the brown shoe side and then also on the equipment side in baseball, in fitness products, in bikes, and in Golf. So we have got a fishing tackle, camping that we really have a broad based equipment side of our private label and private brand program also.

It would be a fair assessment that because of a higher product margin that you generally achieve from your private label or your labels that you basically control that you are likely to give more floor space to those items and less to some of the branded items that maybe replaced?

In theory, yes, but just as to qualify, the square footage will come from second tier brands not from not from our primary brand. So, Nike is not going to be losing any floor space, Under Armor is going to be losing floor space, Adidas is not going to be losing floor space. So, it’s not coming from our primary vendor, it is coming from second tier vendors.

I understand. I’ll stay on real estate for a second. In terms of your store growth, you are opening your first store on the West Coast shortly in Portland. Do you anticipate any difficulty as you move down the coast in terms of entering a market such as California which has more restrictions in terms of the big box construction than you may find in other parts of the country?

We are not seeing anything now. We are doing a complete assessment of California and we are not seeing any obstacles to our entry into California as a whole.

Great. Just a quick merchandising question, in athletic apparel you have basically been growing your business for some of the brands and some of the private label. In the athletic footwear side of the business you see adding any new product categories or are you going to continue to stay away, for example, the marquee or the high-end fashion end of the business or anything like or would that be something that you could add at a later date if you see an opportunity?

Our mission statement and our business philosophy and strategy has always been to stay focused on that core athlete not to enthusiasts. And the athletic shoes that are more fashion based. We are not really looking to play in. I think the fashion side of the business is difficult to sustain and difficult to scale and we are going to stay focused on that core athlete not to enthusiasts.

Okay. Fair enough. Last question I have is, has there been a noticeable increase in the Golf product margins now that you are able to… five for two separate chains in terms of the kind of deals that you work out with the big suppliers like Titleist or Callaway or TaylorMade.

Well, I won’t mention any brands in particular, but as a whole, yes, our margin rates in Golf have expanded. We have seen the synergies that we expected with the purchase of Golf Galaxy and we expect to see even more margin expansion into next year.

Are the Golf brands willing to do the same type of programs that you have with some of the soft line or footwear companies like… what you do with Nike and what you do with Under Armor. Are they willing to work with you in terms of shop and shop, are things that may make it more of a destinations location within your stores or within Golf Galaxy?

They are.... we are working with the brands and how we… we are not sure Golf … the brands, we would love to do this. We are not sure that a shop within a shop on a branded standpoint is the right approach to Golf. So, when somebody comes in we want to have all the drivers in one area. So, we want all of the Nike drivers, Callaway drivers, TaylorMade drivers having the same general area for the customers to shop with the brands work with us on and we work with them is how that’s signage fixturing program works to differentiate one brand from another and the brands have been very helpful and responsive to accommodate that.

Thank you very much. I appreciate it.

Thank you.

Your next question comes from the line of Mitchell Kaiser of Piper Jaffray. Please proceed.

Thanks guys. Good morning. You mentioned that Texas markets and your pleasure with those stores there. Could you talk a little bit about Florida specifically Tampa what you are seeing out of those stores?

Well, we’ve never talked about markets in general. We said in Texas, it is going to be the… that academy will provide us with the toughest competition we face. In Florida the competition there is very similar to what we faced in other areas of the country. We are very pleased with our Florida performance and are looking to ramp out a development program for both Golf Galaxy and Dick’s at a pretty rapid range.

Okay. And if you look at the relative performance between these two states, where do you think the biggest opportunity is?

Florida will perform better in the early years than Texas as well.

Okay. And lastly, could you remind us, is there… you mention anniversary in the clearance of the third quarter last year. Was there anything related similar in the fourth quarter last year?

No.

Okay. Thanks guys. Nice quarter.

Thank you.

Your next question comes from the line of Jeff Sonnek of FBR. Please proceed. Jeff Sonnek - Friedman, Billings, Ramsey & Co: Thank you. Going back to the Golf category. Initially you guys thought I think the Golf Galaxy business would be accretive to over $0.02 per square, $0.01 or so there after. But kind of incremental data points you guys have been giving or somewhat inconsistent. I’m just wondering if you can reconcile for us. Year-to-date, where are we relative to that initial plan you would kind of laid out? And can you maybe better quantify exactly what the influence was in the third quarter?

Are you talking about specifically about Golf Galaxy’s influences? Jeff Sonnek - Friedman, Billings, Ramsey & Co: Yes.

I’m not sure where the inconsistency have come from. We’ve been pretty consistent on what our guidance has been that it would be accretive. If anything… and we are going to talk about Golf Galaxy’s specific financial performance, but if anything the Golf Galaxy performance has been better than we had anticipated. Jeff Sonnek - Friedman, Billings, Ramsey & Co: That’s all we want to hear. Thank you.

Thank you.

Your next question comes from the line of Ralph Jean of Wachovia. Please proceed.

Great. Thanks. Just curious Cabalas opened the store and you start for Connecticut about a month ago, I’m wondering if you are seeing any impact in your stores around those… around that market?

Well, I will talk about that particular store, but as we’ve said in the past anytime that our competitor like Bass Pro or Cabela opens up, I think Cabela is terrific retailer. They do a great job. And when they do open up, we do feel an impact in the categories that the Cabela handles. But I’ve also indicated and it’s been very consistent that we get that impact to first year and then as we come around on anniversary that our comps start to move back positively. So, you could suspect… you could expect that the same things happening in the Connecticut.

Okay. Thank you.

And your next question is a follow-up from the line of Michael Baker. Please proceed.

Hi. Thanks. One quick follow-up. Online business, do you expect that to be big factor this holiday season? Remind me, I think you guys… you outsource so if that does ramp up where do you see the benefit from that.

We think that the online business will continue to grow. I think our business will grow at least what the online business gross. Yes, we do outsourced that to GSI. We think GSI, Michael Rubin and his group have just done a great job with our online business and expect to continue doing that in the this foreseeable future. If the more business we do online, the more we’d benefit financially as we are on a revenue share of program with GSI, which we converted to… I guess… from towards the end of last year as we had originally taken an equity position in GSI as oppose to a rough share and we’ve seen pretty sizeable gain in our equity position as we liquidated some of the that position over number of years. So, it’s been a great partnership for us. We think it’s been great for GSI and as the online business ramps up, this fall, we will certainly benefit.

Great. Thanks. I appreciate that.

Sure.

Your next question comes from the line of John Zondol of Buckingham Research. Please proceed.

Hi. It’s John Zolidis. Thanks for taking my question. Good quarter guys.

Thank you.

Question on the traffic versus ticket data. I was curious if you could share a little bit more information about the ticket increases that you are seeing. Are those primarily average price going up, or is there also an increase in units per transaction? And then on the ticket or on the traffic rather, do you think the decline in traffic in the quarter was primarily weather related, or is the cannibalization and there other issues apply there that you can call out for us? Thank you.

It was really a combination of both, on your first question. And then the decrease in traffic, we have plan for that. We believe that it had to do with the change in the weather pattern where a number of this kids that were that needed cold weather product for soccer or football in the fall last year. It didn’t need to buy that product this year. So, we think that it was really a function of weather and we’ve got all that planned and has that all planned into the third quarter and we’ve got that planned into the guidance for the fourth quarter. And the last part of this is you can underestimate the traffic that the clearance events that we did in our anniversary had an impact on this quarter. The clearance event we did last year was pretty deep to clean up some of that inventory and not doing that this year certainly had an impact on traffic.

Okay. And then just relate to that how much… what you would see as the potential to continue to increase the ticket size going forward?

We think there is still an opportunity to do that, especially as we move to these partnerships with some of this very important brand to us such as what we did with Nike with ACG or Adidas. We feel that as we move into the private brand aspect, we can move to AUR up replacing some of those other brands that we… other national brands or our private label products will be replaced by the private branded product.

Great. Thanks a lot and good luck for the holiday season.

Thank you.

And that does conclude your question-and-answer session. I will now turn it back to Mr. Stack for closing remarks.

I would like to think everyone for joining us on our third quarter earnings call and look forward to talking to everyone at our fourth quarter results. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.