DICK'S Sporting Goods, Inc. (DKS) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Dick's Sporting Goods First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Anne-Marie Megela. Please go ahead.

Thank you, Amy. Good morning, and thank you for joining us to discuss our first quarter 2012 financial results. Please note that a rebroadcast of today's call will be archived on Investor Relations portion of our website located at dickssportinggoods.com for approximately 30 days. In addition, as outlined in our press release, the dial-in replay will be available for approximately 30 days. In order for us to take advantage of the Safe Harbor rules, I would like to remind you that today's discussion includes some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which includes but are not limited to our views and expectations concerning our future results. Such statements relate to future events and expectations and involve known and unknown risk and uncertainty. Our actual results or actions may differ materially from those projected in the forward-looking statements. For a summary of risk factors that could cause results to differ materially from those expressed in the forward-looking statement, please refer to our periodic reports filed with the SEC, including the company's annual report on Form 10-K for the year ended January 28, 2012. We disclaim any obligation and do not intend to update these statements, except as required by the securities law. We have also included some non-GAAP financial measures in our discussion today. Our presentation of the most directly comparable financial measures calculated in accordance with Generally Accepted Accounting Principles and a related reconciliation can be found on the Investor Relations portion of our website at dickssportinggoods.com. Leading our call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our first quarter financial and operating results, our guidance and discuss our growth strategy. Following this, Joe Schmidt, our President and Chief Operating Officer, will outline our store and e-commerce development programs. After Joe's comments, Tim Kullman, our Executive Vice President of Finance and Administration and Chief Financial Officer, will provide greater detail regarding our financial results. I will now turn it over to Ed Stack.

Thank you, Anne-Marie, and thanks to all of you for joining us today. We had an exceptionally strong first quarter, generating a 50% increase in earnings per diluted share and a 15.1% increase in sales year-over-year as operating margins expanded 168 basis points. Additionally, we maintained a healthy balance sheet, while executing our stock repurchase and dividend plans, augmenting our private brand through the Top-Flite acquisition and deploying capital for our U.K. investment in JJB Sports. The 15.1% increase in the first quarter was driven by the growth of our store network and by an 8.4% increase in consolidated same-store sales on top of a 2.1% increase in the first quarter of last year. Same-store sales from the first quarter of 2012 for Dick's Sporting Goods were up 7.3%, Golf Galaxy up 12.6% and e-commerce sales were up 33.4%. The comp growth at the Dick's stores was broad based with all 3 major categories, hardlines, apparel and footwear, comping positively. Golf, team sports, athletic apparel and athletic footwear were particularly strong, with the fitness category continuing to be soft. Looking ahead, our continued profitability will be fueled by our 3 growth drivers, which are expanding our store base, strengthening our e-commerce business and continuing to develop our margin rate accelerators. Regarding our store base, we opened 6 new Dick's Sporting Goods stores in the first quarter, and in 2012, we expect to open approximately 38 to 40 Dick's Sporting Goods stores. Looking at the longer term, we believe we have the potential to open more than 400 additional stores over the next several years, giving us approximately 900 stores in the United States. With regards to our e-commerce business, which represented approximately 3% of total sales in the first quarter, same-store sales increased 33% over the first quarter of last year. We continue to invest in and grow this business as Joe will detail. We will be implementing capabilities that will improve the customer experience and profitability of this business. We continue to make advancements in our margin rate accelerators, which are to increase private brand and private label penetration, migrate product mix and continue to improve inventory management. In the first quarter, we augmented our private brand portfolio with the purchase of the Top-Flite brand. We are successfully shifting our product mix through proven initiatives like the enhanced shops from Nike, Under Armour and the North Face and a shared service footwear deck, with higher-margin product increasing as a percent of sales. At the beginning of 2013, we expect to start seeing a positive impact from the system enhancements like price optimization, size and packaging optimizations that will facilitate more systemic inventory management solutions. For the second quarter of 2012, we expect consolidated earnings per diluted share to increase by 19% to 21% to between $0.62 and $0.63 compared with non-GAAP consolidated earnings per diluted share of $0.52 for the same period in 2011. We expect consolidated same-store sales to be positive 2% to 3%, on top of a 2.5% increase in the second quarter last year. For the full year 2012, we expect consolidated earnings per diluted share to increase by 21% to 23% to between $2.45 and $2.48 a share, which includes approximately $0.03 coming from the 53rd week this year. This compares to non-GAAP earnings per diluted share of $2.02 in 2011. On a 52-week to 52-week comparative basis, we anticipate consolidated same-store sales will increase to between 3% and 4% on top of a 2% increase last year. We generated record earnings this quarter, a 50% improvement over last year. Our balance sheet remains healthy, and we continue to invest in the growth opportunities of our business. I'd also like to take this opportunity to thank all of our associates for their hard work and commitment to serving our customers. I'd now like to turn the call over to Joe.

Thanks, Ed. In the first quarter of 2012, we opened 6 new Dick's Sporting Goods stores, bringing our store count to 486 Dick's Sporting Goods stores with 26.5 million square feet, and 81 Golf Galaxy stores with 1.3 million square feet. Within our stores, we have 138 shared service footwear decks, 118 Nike Fieldhouse concept shops, 52 Under Armour All-American shops and 3 Under Armour Blue Chip shops. Our new Dick's Sporting Goods stores continue to perform well with a new store productivity of 105.8% in the first quarter. The detailed calculation of new store productivity can be found in the table section of the press release we issued this morning. In total, we plan to open approximately 40 new Dick's Sporting Goods stores this year. Approximately half of the stores are expected to be in new markets and half in existing markets. As a reminder, our leases are typically 10 years with options to renew. This year, we also plan to relocate 5 Dick's Sporting Goods stores, which are at the end of their leases, to preferred locations that we have secured. For Golf Galaxy, we plan to reposition 2 stores this fall. To support future store growth, we are on plan to open our fourth distribution center in January of 2013. The 600,000 square foot facility will be located in Arizona, and combined with our existing DC network, we will be able to support a total of 750 stores. With respect to our e-commerce business, we are on target with piloting of ship-from-store capabilities in 2012. In 2013, we will begin to develop in-store pickup capabilities. As we continue to invest in capabilities, site functionality and analytics, we will provide customers with enhanced shopping experiences and the opportunity to buy and receive product where, when and how they want. We will also be able to better leverage our inventory investment, while improving our fulfillment time and our in-stock positions. I will now turn the call over to Tim to review our financial performance in greater detail.

Thanks, Joe. Sales for the first quarter of 2012 increased by 15.1% to $1.3 billion, compared with the same period a year ago. Consolidated same-store sales increased 8.4%, Dick's Sporting Goods same-store sales increased 7.3%, Golf Galaxy increased 12.6% and our e-commerce business increased 33.4%. The increase in same-store sales in the Dick's Sporting Goods stores was driven by a 4% increase in sales per transaction and by a 3.3% increase in traffic. Consolidated gross profit was $394.6 million or 30.79% of sales and with 112 basis points higher than the first quarter of 2011. This increase was driven by occupancy leverage. Merchandise margin slightly declined by 8 basis points, primarily due to the clearance of select cold weather-related product and, to a lesser degree, the clearance of fitness equipment. We believe the margin impact for the excess cold weather-related inventory is now complete and was contained within the first quarter as planned. SG&A expenses in the first quarter of 2012 were $296.1 million, representing 23.1% of sales, compared with 23.68% of sales in last year's first quarter. This leverage of 58 basis points was primarily due to payroll leverage and, to a lesser degree, advertising. Moving to the balance sheet. We ended the first quarter of 2012 with $521 million in cash and cash equivalents and with no outstanding borrowings under our $500 million revolving credit facility. Last year, we ended the first quarter with $533 million in cash and cash equivalents and with no outstanding borrowings under this facility. Our cash on hand at the end of the first quarter was impacted by our one year share repurchase program, dividend payments, the recently announced investment in U.K.-based JJB Sports and the purchase of the Top-Flite brand. With regards to share repurchase program in the first quarter, we repurchased 2.1 million shares of our common stock at an average cost of $49.39 per share for a total cost of approximately $104 million. We completed the share repurchase program yesterday. In total, we purchased approximately 4.1 million shares of our common stock at an average cost of $49.33 per share for a total cost of approximately $200 million. Net capital expenditures were $33 million in the first quarter of 2012 or $41 million on a gross basis, compared with net capital expenditures of $26 million or $33 million on a gross basis in the first quarter of last year. On May 7, which is in our second quarter, we purchased our Store Support Center for approximately $133 million. While leasing this property, we recorded the cost of this building as property and equipment and recorded a corresponding lease obligation pursuant to GAAP reporting requirements. In the second quarter, our payment to purchase the building will be reflected on the balance sheet as an extinguishment of this pre-existing financing lease obligation. Going forward, we'll continue to record depreciation expense, but because the debt has been eliminated, we will not incur interest expense in future quarters. This transaction was and is contemplated in our guidance. Now looking forward to our guidance for the second quarter of 2012. We anticipate same-store sales to increase approximately 2% to 3%. We believe there was some pull-forward of spring sales from the second quarter into the first quarter, particularly in categories like team sports, golf and bikes. Earnings are expected to grow by 19% to 21% or in the range of $0.62 to $0.63 per share from non-GAAP earnings per diluted share of $0.52 in the second quarter of last year. In the second quarter, gross profit margin is expected to modestly increase, and SG&A is expected to leverage. As I mentioned earlier, interest expense will not be incurred in the second quarter of this year as compared to the $2.7 million incurred in the second quarter of last year due to our purchase of the Store Support Center. The year-over-year decline in interest expense was already reflected in our original 2012 guidance. For the full year 2012, we anticipate consolidated same-store sales to increase 3% to 4% and earnings per diluted share to grow by approximately 21% to 23% or in the range of $2.45 to $2.48, as compared to non-GAAP earnings per diluted share of $2.02 in 2011. Fiscal 2012 includes a 53rd week, which we believe will add approximately $0.03 to earnings per diluted share, and is contemplated in our guidance of $2.45 to $2.48. Operating margin expansion in 2012 is expected to be driven by both an increase in gross profit margin rate and expense leverage. The gross profit margin rate is expected to increase year-over-year, primarily driven by merchandise margin and occupancy leverage. Merchandise margin is expected to build momentum in the second half of the year. SG&A as a percent of sales is expected to decline as compared to 2011, primarily due to lower advertising and store-related expenses relative to sales year-over-year. This decline is expected to be partially offset by planned investments in e-commerce and systems implementation. With the execution of our share repurchase plan, diluted shares outstanding are expected to be approximately 126 million for our full year, similar to the outstanding shares in 2011. Looking at anticipated quarterly trends, we expect that in the second and fourth quarters, earnings per diluted share will grow at a high-teens to low-20s percentage rate. In the third quarter, we believe the EPS growth will be in the mid- to high-single digits due to the following considerations. First, preopening expenses are anticipated to be higher in the third quarter of 2012, as compared to the same quarter in 2011, since there are more new store openings planned in the third and fourth quarters of 2012 as compared to 2011. Second, we'll be hosting the Annual Dick's Sporting Goods Open, a Champions Tour golf tournament in the third quarter this year. Typically, this tournament is a second quarter event. However, due to the flood damage to the En-Joie Golf club caused from Tropical Storm Lee, the opening has been rescheduled to give the course more time to recover. As a result, the related expenses of the open will shift from the second quarter to the third quarter. And lastly, we will not be anniversary-ing a favorable tax benefit of approximately $0.01 per share, which we benefited from in the third quarter of last year. Looking to the fourth quarter. We anticipate the startup cost of our new distribution center will have an EPS impact of approximately $0.02 per share. The majority of these expenses will be incurred in the fourth quarter. Also in the fourth quarter, we expect to earn approximately $0.03 per diluted share due to the extra week. Turning into CapEx. Net capital expenditures for the full year are expected to be approximately $190 million or $241 million on a gross basis. Net capital expenditures for 2011 were $154 million or $202 million on a gross basis. The anticipated increase in capital expenditures for 2011 and 2012 is primarily a result of the new distribution center and, to a lesser extent, investments in new stores, vendor shops, system enhancements and e-commerce. We have delivered an exceptional quarter to kick off 2012. With our financial strength and discipline, we plan to continue to deliver shareholder value by investing in and growing our business through new stores, e-commerce advancements and avenues to support continued margin expansion with inventory management, private brands and product mix shift. This concludes our prepared remarks. We would be happy to answer any questions you may have at this time.

[Operator Instructions] Our first question comes from Christopher Horvers at JPMorgan.

A lot of retailers are talking about the weather and potential pull-forward, and I was -- perhaps you could share how you’ve fleshed that out and what your thoughts on what was incremental to the comp in 1Q that doesn't repeat and comes out at 2Q. For what it's worth, you saw this morning the census data in your category showed a 200-basis-point acceleration to 7 from 5. So any insights there would be helpful.

Well, we think that there was probably some pull-forward into Q1, based on the weather that we had last year. I mean, people were playing golf earlier this year. They were fishing earlier this year. The kids were out on the field playing lacrosse and baseball earlier this year, and there was -- we feel there was definitely some pull-forward into Q1 from Q2 sales. But can we quantify that? No, we can't quantify that. It's just a sense that we have based on how good the first quarter was, and those categories that were weather-sensitive last year performed much better this year. With that being said, our merchants, our marketing people, the people in the stores did a great job taking full advantage of the better conditions we had this year than last year. And as we said, our comps were north of 8% this year, which we thought was pretty good.

For sure. So then, and was there any -- I mean, a lot of retailers had great February and March's, and then April ended up decelerating. Do you think that pull-forwards, some of that impacted April, or it’s all coming out of 2Q?

We think it's coming out of -- we think it may be coming out of the second quarter. We were very pleased with April also.

And then as a follow-up, BBCOR, any thoughts on how that impacted your comps overall in the first quarter and including the halo effect and how that might play out going forward?

Well, it did impact our first quarter. It was important, although it was not meaningful to the 8%. We're not going to give exactly what it was, but it was important, but it wasn't meaningful. It was less than 1%. And as we said in our guidance, in our call last time, that we thought this was a first quarter phenomenon. Most of these bats are used for high school baseball players, and it really wouldn't move into the second quarter. It was primarily a first quarter opportunity.

The next question comes from Michael Lasser at UBS.

If we look back over the last couple of years including the first quarter, there's been a pretty wide variability in your comp results. How do you feel about your ability to manage, especially store labor in that environment, especially if that continues? Is that going to be a source of strain as you become a larger organization? Or could it actually be a source of potential benefit?

We've got what we think a very good systemic solution to the store payroll. Our mix of full-time and part-time associates, we feel are appropriate. And we can flex that payroll number as appropriate. So as business gets better, we're able to move payroll into the store to service our customers. And if the business is a little bit softer, we have the ability to move that payroll back so as to not impact our earnings, negatively impact our earnings.

And then on the occupancy leverage, you saw a really nice result in the first quarter. Is that how we should think about this line item moving forward? And what's the leverage point that you need -- is the comp point -- the comp level you need right at this point to lever?

This is Tim. On the occupancy side, we had a very good leverage because of the 8.4% comp. We feel that we need about a 3% comp these days to leverage occupancy. So we got that significant benefit because we had such a high comp in the quarter. Don't expect a triple-digit basis point improvement in occupancy going forward based on where our comp guidance is at this point.

Okay. Then if I could sneak one last one in on a related subject to that. Joe mentioned that you're still going after 10-year leases. Philosophically, what's the thought process there, especially with retail changing so quickly? A lot of sales are migrating online, and you're seeing some of that impact yourself. Was there any thought given to the possibility of going after shorter-term leases? Or as you roll out ship-from-store, you're not as concerned about it given that this could act as mini warehouses.

Well, we continue to pursue the opportunity to shorten these leases, and we've had very minimal success so far. But by and large, the industry average, as we get down and look of these sites, it’s 10 years with the ability to re-up with a number of options. So I think you can look for the 10-year lease period to be pretty consistent moving forward. And again, we'll look at those opportunities to grab a 5-year lease where we can.

Our next question comes from Gary Balter at Crédit Suisse.

Maybe -- I may have missed it, did you give the percent of private label sales that you're at now?

We did not, but it -- we've said what we want to try to migrate that to over the next several years, but for competitive reasons, we haven't given what that exact number is.

Okay. But could you talk -- like I thought the Top-Flite acquisition was a great acquisition. Could you talk about your thinking on that acquisition and kind of where you're taking that business right now in terms of private label and controlled label and growth opportunities in that?

We think the Top-Flite acquisition was really a terrific acquisition for us, so obviously, we agree with you. And it plays across both chains. It plays across the Dick's chain, and it plays across the Golf Galaxy chain. And the margin rates that we're able to get on private brand golf balls is significantly better than buying from a domestic source. We still have -- we still do an awful lot of business with the domestic companies and those partners. It's just that the margin rate on the private brand golf balls are significantly higher, probably among the highest of anything we do in relation to the traditional brands, where these margin rates are in the 2,200 to 2,500 basis point difference. So that's a huge difference, and it will be positively felt at both Dick's and in Golf Galaxy.

Are there other categories -- I guess you're not going to tell me -- that you're looking to do similar things? As I ask it, I think I got the answer. I'll switch the topic, and then I'll get off. Can you talk about the competitive environment? Obviously, you had really strong sales that flowed through to earnings. Did you see anything changing competitively? Or was everybody just enjoying such a strong environment that you didn't see a lot of price competition?

Well, we didn't see any irrational competition out there. I think everybody's business was relatively good. Our business, I think, was better than most if you compare some of the people that have reported that we compete directly with, such as Golfsmith. Our golf numbers were pretty meaningfully above theirs. So I think everybody -- business, I think, was pretty good. I think we did better than most.

Our next question comes from Dan Wewer at Raymond James.

Ed, you just brought up Golfsmith. I was kind of curious, your thoughts on their merger into Golf Town and how that could impact Golf Galaxy. And then also Golfsmith has been making a push into these 39,000 square foot stores, I guess, similar in size to PGA Superstore. I believe one opened so far in Nashville, where you have one of the -- your older Golf Galaxy stores. I was curious in relocating Golf Galaxy, you talked about a couple locations. Is Nashville one of those stores where you feel like you have to make a change in response to what Golfsmith is doing?

Well, we're not making a response to what Golfsmith or Golf Town is doing. As we take a look at our business with Golf Galaxy, we're looking to reposition a number of the Golf Galaxy stores, and they'll be in the larger format stores. We've tested a few of those. We've got one here in Pittsburgh. It's done extremely well. And as we go forward, we'll be repositioning these into larger boxes that we think will be more effective than some of the boxes we have today. I don't believe that the Golf Town-Golfsmith merger is going to be -- significantly impact our business at all. If you take a look at their results -- I don't think it's going to have a big impact on our business.

Okay. Second question I had on the inventory per store, it’s up about 6%, and I recognize that's in line with your same-store sales growth, but that's the fastest rate of inventory growth, I believe, since the fourth quarter of 2007. With your thoughts that the rate of same-store sales growth might moderate to a 3% or 4% rate for the year, would expect your inventory per square foot to moderate as well going forward?

Well, I think -- if you remember, and I'm sure you do, that we talked about the inventory being slightly elevated going forward because of the cold weather merchandise that we had left over. We felt that, and as Tim indicated, the clearance activities that we, also, as you remember, indicated would happen in the first quarter, did happen. We've concluded that. And we did indicate very clearly that, that inventory level would be slightly elevated as we go into the year. We expect, as we come out of the fourth quarter, that we'll have this back down to the appropriate levels because inventory that we would have to go back and buy again that was left over because of the warm winter weather, such as black ski gloves and black ski pants, which were going to be the exact same again in the fourth quarter, we didn't go out and flood the market and discount those. We just said, "You know what, there's no issue with packing these up. They're going to be the same products we're going to sell again next year." And that's what we did. And that's a big part of what's causing this increase in inventory.

Okay. So the comments about the gross margin impact of the winter inventory. So we're saying that the winter -- the excess winter inventory will no longer have an impact on gross margin rate, but it'll still stay on the balance sheet until it's sold next year?

That's correct. Well, later this year, so into the fourth quarter of this year, yes.

Your next question comes from Matthew Fassler at Goldman Sachs.

First of all, if you could quantify the impact of the cold weather clearance activity on merchandise margins in the first quarter. And then, I guess, talk to us about the rationale for the merch margin outlook building over the course of the year.

We won't give exactly what that was, but it was a big part of the margin erosion that we incurred in this quarter. And we feel that this is behind us now. The merchandise that we do have left over going into the fourth quarter we don't think is going to have -- we're not going to need to discount it. It's very basic cold weather product. And as we take a look at continuing to migrate our merchandise mix to higher margin rate products such as footwear, apparel, we think the NFL jerseys for the third quarter are going to be very helpful to the margin rate. And as we go into the fourth quarter, we feel that this is a onetime blip in margin rate activity, which I think we called out.

And when you talk about -- you've said the majority of the margin erosion, not to be nitpicky at all, but I think you said merch margin is down 8%. Presumably the clearance -- 8 basis points, rather. Presumably the clearance activity was greater than an 8-basis-point impact?

Yes, absolutely.

Okay. Secondly, you have a lot of -- you have really an evolving e-commerce business. I know some of that relates to the evolution of your agreement with GSI and to your own capabilities. Can you talk to us about how your evolving capabilities in e-commerce and the way the mix of that business is going to evolve impacts the profitability of that business as it grows for you?

Well, I think we talked about that we had a -- we renegotiated with GSI the fee structure. So as we go forward, that fee structure as a percent of sales comes down. And also, we feel in -- are in the process of doing this, that we're migrating sales to more higher margin rate sales of apparel and footwear. We're seeing great growth in those areas, which are the mix of that business is helping the profitability pretty significantly. And we think that will continue going forward.

Is there a structural difference in the terms of your deal with GSI or for other reasons, the profitability of goods when it's shipped by them versus shipped to you versus in-store pickup? Is there kind of a stratification there that we should be thinking about?

Sure. As more of the distribution or the fulfillment to the consumer, the less of it that's done by GSI, the more profitable it is. So shipped from store or in-store pickup is meaningfully, meaningfully more -- and vendor direct, is meaningfully more profitable than shipping out of GSI's warehouse.

Got it. And then finally, you had spoken about the expectation of some inflation driven by materials costs, what much of the apparel complex [ph] saw last year, you thought you'd see as we move through 2012. Any update on whether that is in fact transpiring, how the pass-through is going, et cetera?

It is. So we have seen that. We are managing through that, as you can see. And our merchants and store personnel, everybody, we've done a very good job of managing through that. So we don't think it's going to have any meaningful impact.

Our next question comes from Sean Naughton at Piper Jaffray.

Just in terms of the real estate pipeline, can you remind us how long it typically takes you to get into a new location? And then maybe any sort of update on the current real estate development environment in key states, where you feel like you may be underpenetrated compared to some of your peers?

Sure. The pipeline really is dependent upon whether or not it's a new build versus a reconstruction. And it can vary anywhere from 12 to 18 months. If it's an existing site, if we're taking over, for an example, a Kmart site, a Linens, or Best Buy, think something of that nature, we can generally turn that building in less than a year. If it's ground-up construction, it typically takes 12 to 18 months, depending upon the size of the building. As far as the landscape is concerned, there still is very limited new development out there. We continue to look at opportunities such as Kmart, Sears, Best Buy, Linens, Empty Box opportunities, like those retailers. And we think that's really going to continue for the next couple of years.

Okay. That's helpful. And then I guess just secondly then, can you talk about further uses of cash? It looks like you have about $300 million in the balance sheet today. What do you think the appropriate level is to run the business? And then maybe along those lines, could you discuss some of the rationale and how much maybe of management's time is going to be spent in the U.K.?

As far as the appropriate amount of cash, we feel that we've spent -- we've made the investments we're probably going to make through the balance of the year. There may be a few small insignificant uses of cash. But for the most part, we feel that we've used that -- we’ve put our cash to work for the balance of the year. And we'll reassess that as we get into next fiscal year. As far as management's time in the U.K., we've provided the JJB group with the capital that they need to continue the business. Adidas, which has been announced, has also helped with the GBP 15 million investment in JJB. We have great confidence in the management team at JJB and don't feel that there will be a significant amount of -- a significant requirement of our management's team in this endeavor. We will support them whenever -- however they need it, but we'll be spending the -- we'll continue to spend 90% of our time here in the United States.

Okay. Great. And then just lastly, any update on the outdoor categories? I know there was a little bit of a hiccup in Q2 last year. How do you feel like that business is tracking right now?

That business is tracking extremely well. And in the vast majority of the outdoor categories, we are comping above the company average, so it's doing very well.

Our next question comes from Robbie Ohmes at Bank of America Merrill Lynch.

Just a couple of quick follow-up questions. The first one, Ed, would be the -- could you talk about the footwear product outlook and maybe about how on the price increases -- I know you had mentioned earlier in the quarter at our conference that the price increases are working. Is that still happening? And then, also, as you get into July, August here, how do the quantities of the Flyknit and the Nike+ basketball sneaker work? And your thoughts on whether that could be meaningful to the category or not? And then I have a follow-up question after that.

Yes. Our footwear business continues to perform extremely well. As we called that out, it was one of the better performing categories that we had. The technology that is coming out in footwear continues to help drive the business. Our partnerships with Nike, with Brooks, with Asics, a number of other brands, they continue to bring out new products that's been very well accepted by the consumer. And we expect our footwear business to continue to move in the same direction it has.

And can you comment specifically on the Flyknit and the new Nike+ and whether you guys will be involved in those product launches?

We're enthusiastic about those, but it's too early to really make any real comments.

And then the other question I had, just a follow-up on the JJB Sports investment. What is -- can you give us the broader strategy that you guys are thinking of? What is in your head about whether you would fully consolidate that out in, I guess, I think it's first quarter 2014? What are you looking to see happen at JJB Sports over the next 1.5 years?

Well, we expect them to be able to turn the business around. We feel that the U.K. is a large market. It's a $9.5 billion market, and JJB doesn't have -- has about maybe 6%, 7% of that market share. So we think that there's a big opportunity. The marketplace is very competitive in JJB. Their previous management team didn't do a very good job of running that business. We think there's an opportunity for JJB to turn this business around. We understand, and we clearly communicated, that this is a high-risk and very high-reward investment. But as we've spent time with the group there, understanding what their strategy is and what we can bring to the party, so to speak, we think that this is a very good investment, and we expect it to work out well for us.

Our next question comes from Sam Poser at Sterne Agee.

Just a question on your store opening plans. You talked about 900 stores. Can you give us an idea of the time frame of getting there a little more specifically?

Well, it will -- how long it will take us to do approximately 40 stores a year. So if the real estate pipeline improves, we can open up more stores, and it will take us less time. Otherwise, it's kind of roughly 40 stores a year, maybe 45. Nothing is -- the only thing that's constraining our growth, it's not distribution capabilities, it's not management strength, it's not capital. It's really the real estate pipeline. And the one thing we've worked very hard at is to not compromise our real estate strategy. And so we want to make sure we've got the right stores in the right location. And if that means it takes a little longer, then it takes a little longer.

And then you talked -- you've saved money, you’ve leveraged on store costs, I guess. Does that have to do with the payroll optimization and so on? And isn't your -- you talked about raising your staff when business is strong and lowering it when it isn't. I mean, how much of staffing becomes almost a self-fulfilling prophecy, though, when you -- if business picks up, you add staff, it gets better versus it being low and not doing as much business?

I'm not really sure I understand the question, Sam. If you're not doing as much business, there's not as many customers in, we don't schedule as many part-timers to come in. If business is good, we know that we've got more customers in the store, we bring more part-time help in to assist those customers. I'm not sure what...

All right. Let me re-ask, if I may. Have you adjusted sort of the minimum level of staffing in your stores and -- your stores are absolutely beautiful stores, but sometimes, I found that the staffing levels don't quite live up to how nice the stores look if you're busy or not busy. Have you raised the minimum staffing levels in the stores to make sure that everybody gets taken care of on the manner by which you feel they should?

We feel that we have the appropriate level of staffing in our stores to provide the appropriate level of service to our customers. And that has been no change to that. We survey our customers many times during the year and keep an eye on how they view our customer service. And our customer service scores have actually gone up recently as we have done a better job of training, a better job of hiring our personnel. But we have not increased or decreased the level of service or level of payroll dollars we have in the store.

The next question comes from Kate McShane at Citi Investment Research.

I was wondering if -- this is a follow-up to another question that was asked earlier. If you could remind us of some of the dynamics that you're going up against in Q2 and Q3 from last year. And what kind of changes can we expect to see in your Lodge business in the upcoming quarters versus maybe what happened last year when you lost some footing in that category?

Well, we did. We were very clear and upfront in saying that we stubbed our toe in our outdoor business. We moved marketing dollars out of that category and felt the consequences of it. Thought that we could move marketing dollars out of that category into other areas of the business, and we got hurt in the outdoor category. We have not done that and are not going to do that this year, and it was very helpful in the first quarter. We've also made some changes to our management in the outdoor category and put a merchant in charge of the outdoor camp water sports category, who was really doing an excellent job, and we expect that business to improve significantly through the balance of the year and into next year. So we're pretty optimistic about it. Like we said, all of our businesses right now we’re doing pretty well with the exception of the fitness category. And the fitness category is primarily attributable to the big machines. So the strength machines, the cardios, ellipticals, that type of exercise has moved to foam rollers, stretch-resistance bands, kettlebells, so we are working through that. So fitness remains to be soft, but the rest of the business, including the Lodge, is really quite good.

Okay. Great. And then my second question was just on the systems implementation that you're putting into place. I think there are 4 different systems that you're updating or implementing, with the expectation it will contribute to gross margins next year. And I just wondered if you could update us where you are in the process. Is it on schedule or ahead of schedule? Any update there would be great.

Kate, this is Joe. We're still in the implementation and testing phase of those systems right now. We’ll start to see some very small benefits in Q4 of this year, but really look for those benefits to be in 2013.

The next question comes from Camilo Lyon at Canaccord Genuity.

I was hoping to get a little bit more color on your plans for the shop-in-shops, specifically around Nike and Under Armour, and how you plan to grow those this year.

We plan to continue to grow those. Nike, we'll probably add approximately 50 of those this year. Under Armour, we'll probably grow those at about an additional 80 stores. And we'll also be continuing to add the North Face shops, which have been very productive also for us.

And can you talk about the timing of when you expect to open up those additional 80 Under Armour stores? Because I believe you opened up the initial 50 or so in Q3 of last year.

Yes. They'll be up basically throughout the year, with very few in the fourth quarter. We don't do a whole lot in the fourth quarter.

Got it. And then if you could also just share maybe some of the initial sales increases and sales that you are seeing from those shop-in-shops. Obviously, they're very accretive to the top line and to gross margin as you stated in the past. Maybe any sort of financial numbers or quantitative numbers you could provide around that would be appreciated.

From a competitive standpoint, we won't do that. But as you could expect, they are -- as you could expect because we continue to invest in them as does Nike, Under Armour and the North Face continue to invest in them, they're very beneficial to both our business and Nike, Under Armour and the North Face's business.

Got it. And then just a final question on that. Is the sales lift that you do see in those, in those shop-in-shops, just a one-year phenomenon? Or do those continue -- does that sales lift continue into years 2, 3 and going forward?

We continue to see a sales lift going forward.

Our next question comes from Eric Tracy at Janney Capital Markets.

If I could, just a couple of follow-ups as well. You’ve obviously got an easier compare from a weather perspective for this fall holiday. But can you maybe talk to how you're planning the sort of cold weather product within apparel and footwear? I know you've got some carryover that you're continuing, but maybe just speak to the open to buy dollars, as well as your ability to chase, if in fact the season does progress nicely.

Well, we had indicated that we've -- the cleanup that we had to do of that merchandise that wasn't going forward has been completed in the first quarter, so that have no impact going forward. We have indicated that we do have some product that is very basic winter merchandise that we carried over, and we'll continue to carry over into the fourth quarter of this year. We feel that there is little or no margin impact of that product. We did have a -- we were impacted by the warm weather this past winter. The first quarter was better this year because of the weather. So the weather hurt us in the fourth quarter, helped us in the first quarter. If we do get a more traditional winter this next year, we do have the ability to chase products. We have partnership orders with a number of the vendors that we do business with, and we'll be able to chase that product and optimize sales.

And do you feel like the vendors, say, the Columbias, the North Faces are -- because it seems like they have been pretty conservative in terms of their inventory positions. Do you feel like that they are positioned enough to sort of chase with you?

We feel that the vendors that we want to be in a position to chase product with, we're in a position to chase product with, yes.

Okay. Fair enough. And then maybe just to follow up again with respect to the price increases that you've seen from some of the key vendors, Nike, Under Armour, really hitting this spring, predominantly within the footwear category and, to a lesser degree, apparel. Just again your sense of -- clearly, comps coming through, your sales per transaction up, but are you able -- you're probably not going to be able to, but to quantify what that contribution from the incremental pricing was to the comp and then how you think about it playing out for the balance of the year?

So we're not going to be able to quantify that, but we've seen -- for the most part, we have seen little price resistance. I think I said in a question at the last call that there had been some specific items that prices had hit a -- when the price increase had gone into effect, it did have an impact on some specific items. But overall, it hasn't been very impactful.

Our next question comes from Michael Baker at Deutsche Bank.

I just wanted to ask you a little bit more on the trend through the quarter. You said April was good, so how did that compare to the previous months? And then I guess the follow-on to that is, if April was good, why are we expecting such a drop-off in the second quarter? Is part of it -- I think your comparisons got tough -- get tougher in June and July. Is it sort of just anticipating those tougher comparisons and wanting to stay a little bit conservative? Or is there something else that we should note?

Well, as I said, I think we've moved business from the first -- from the second quarter last year into the first quarter of this year. April was good. There was a shift in Easter earlier, which is usually a bit better for us. But even through April last year wasn't great, and we did very well in this first quarter, and we'd be naive to think that, because people were playing golf 6 weeks earlier, just to pick a number, roughly 6 weeks earlier this year, playing some meaningful golf 4 to 6 weeks earlier this year than they were last year, we'd be naive to think that, that wasn't going to impact sales in the second quarter. So are we being conservative? I'm not sure we're being conservative. We’re being realistic.

So have you already seen that drop-off already start to occur in May, I guess?

Well, we never talk about what's happening in a quarter as it's happening, which is consistent with our practice over the last 10 years. But we are comfortable with the guidance that we've provided.

Okay. Two more quick follow-ups. One, can you talk to us about the lacrosse business? I know you put some emphasis there, but some of the data I have on lacrosse from the National Sporting Goods Association has it about a $40 million business, growing about 10% a year. How meaningful can that actually be to your long-term comps? And then one last question, if I could. Now that you've gone through your entire buyback plan, but with plenty of cash, any thoughts of re-upping on that?

First of all, on the lacrosse piece. We define the lacrosse business as bigger than $40 million. So we think this can be -- this is becoming meaningful to us, and we believe it will become even more meaningful to us. But I wouldn't look at the lacrosse market as a $40 million market. It's bigger than that.

So do you have a number on the market, not necessarily your share, because that might be proprietary, but how you think of the total lacrosse market?

I don't, but I can tell you that $40 million is not right. Just based on our business, $40 million is not right. And as far as the continued buyback, we have completed the buyback program. We indicated that this was a onetime buyback because of some unusually large amount of options that will be expiring in 2013. We've also indicated that we've kind of put the cash to work this year that we're going to -- there'll be nothing meaningful -- there will probably be nothing meaningful the balance of the year. If something kind of shows up on our doorstep, we will take a look at it. But we don't expect anything meaningful through the balance of the year, which would mean that there's no additional buyback coming through the balance of the year either.

The next question comes from Matt Nemer at Wells Fargo.

It's Kate Wendt in for Matt Nemer. First, just wanted to follow-up on real estate. I was wondering if you guys would consider a smaller box depending on the real estate that's available. And if you have any plans to test the smaller format, particularly given the really strong growth that you've been seeing in e-commerce?

As far as the smaller box, we have looked at some smaller box opportunities. In fact, over the last couple of years, we have opened some smaller boxes, and really, it's dependent upon the marketplace. As we look at some of these smaller towns with smaller populations, we've opened some stores that roughly are 35,000, 40,000 square feet, which is about 10,000 to 15,000 square feet smaller than our prototype store of about 50,000 square feet. So we have opened some smaller stores. Those stores have done pretty well. We're happy with the results. We continue to look at those opportunities across the country as we fill out real estate portfolio. As far as anything really smaller, just because of the e-comm business, we're not looking to downsize the size of our typical prototype store, which again is about 50,000 square feet.

What I'd like to add to that is there's -- I think there's a misconception in retail today that whatever a retailer’s box is, it's too big, based on what's happened with Best Buy. I think Best Buy is a very good company, and I think Best Buy is going to do quite well. But Best Buy encountered some issues that are not the same as our business. Best Buy had some categories of products that they sold that technology eliminated or significantly reduced how that product was sold: music and movies, if you will. There is no -- we see nothing on the horizon that is going to replace baseball gloves or a technology that's going to replace baseball gloves, baseball bats, golf clubs, athletic shoes. And those products will be sold somewhere in the state that they are today. There's no technology that's going to alter those. So I think there's a misconception out there that whatever size a retailer’s box is, it needs to be smaller, or there needs to be fewer of them, based on what's happened with Best Buy. And I think you got to look deeper under the story of what happened to Best Buy and not apply those thoughts to all retailers.

Okay. That's helpful. I think I was more talking about the consumer purchases shifting from off-line to online, but I definitely see your point about Best Buy. Just as a quick follow-up on the outdoor category. I was wondering if you could talk about how your hunting and shooting business performed in the quarter and whether or not you think you're going to face some issues potential supply constraints in that category.

We haven't seen supply constraints in that category, although we are somewhat concerned about it, and that's part of the inventory -- the increase in inventory we have. Those categories are carrying a bit more inventory because we are concerned about that. That business continues to do very well, and we expect to continue to do very well for the balance of the year for 2 reasons. The business environment is good for that product, and we were not very good with that product last year, and we've made the appropriate improvements.

Next question comes from Sean McGowan at Needham & Company.

Two questions. One, can you talk about the extent to which the improvement in golf you think is just weather, or is there a lot more going on there, people feel more comfortable about spending on equipment? And then a quick question for Tim. Is the tax rate we see in the first quarter the best indication of what we’d have for the full year?

Sure. So from golf standpoint, we think there's 3 things happening with golf. So the weather in the first quarter was definitely beneficial to our golf business. Second, we think that from an economic standpoint, things are a little bit better, and some people have postponed the purchase of golf product, and they're now kind of -- because they're feeling a bit better, they've started to spend on golf product. And then also, the technologies that are out there from a golf standpoint have been very helpful. What TaylorMade did with the -- not only with the R11S but the RocketBallz promotion, what's going on in golf ball technology, what Titleist has done with the -- redoing the AP2s, the new PING product out there. There's some technology out there from a golf standpoint that's very good. Along with footwear, the lightweight, more casual athletically-inspired footwear from a golf standpoint has been really very good. So there's a number of things that are working in golf technology: product, weather and the economy.

And Sean, assume a 39% tax rate for the year.

The next question comes from John Zolidis at Buckingham Research Group.

Two quick questions. One, you mentioned that the breakout of new markets versus existing markets for new stores this year is about 50-50, but you also highlighted the very strong performance of the new stores. Is there any meaningful difference on the revenues you see out of the gate, depending on whether it's an existing or new market? And then my second question is on the Internet business over time. Do you see additional entrants into that category, primarily Amazon, affecting the premium element that you're involved with much?

I'll start with the new store question. As far as new stores and new markets versus existing markets, we're not seeing anything materially different in how those stores perform.

And from an Amazon standpoint, we certainly keep an eye on what Amazon is doing. But from a premium standpoint, which is a bit more where we play, in kind of the better and best products, they don't have access to a lot of that product. Nike doesn't sell them on a direct basis. Under Armour doesn't sell them on a direct basis. So some of that premium product, they don't have access to.

Okay. Great. So that makes it more defensible for Dick's. Is it surprising to you internally that the stores in new markets do just the same as the stores in existing markets? Because I find that a bit odd.

Actually, it doesn't. So in new markets, we're not competing with ourselves. And we feel the toughest competitor we have is ourself, so we're not sharing that business with ourselves. And we think that the national advertising that we do with ESPN, the Golf Channel and some other partners has really helped broaden our name recognition and our brand image so that when we are coming to a new market, people are pretty enthusiastic to have a store. I've had a number of people that I have met at conferences or out of town, and they'll say, “When are we going to get a Dick's store?” So when we do open a store, there's some brand recognition that we didn't have before we started this campaign a couple of years ago.

The next question comes from Paul Swinand at Morningstar.

I guess I'd like to follow up on the e-commerce and store size questions, since I thought it was interesting, the one analyst about the stores getting smaller. The same time you commented that the Golf Galaxy stores, you're testing some larger concept stores. What are you filling the stores with incrementally? Is it just more assortment in the same brands? In other words, deepening with some brands, or is it really a broader assortment of SKUs and offering more choice, even broader category-wise?

Well, there's a couple of things. So part of it -- what's very important in golf today is the fitting process. And coming in and being fitted to make sure that you've got the right driver, the right set of irons, the right analysis of gapping of your wedges and distances, so that space is being devoted to more fitting and services around those categories to make sure that your driver, you've got the right launch angles, spin rate, all of these things that really do have a pretty meaningful impact on how far the ball travels. From an iron standpoint, making sure that you've got the right irons, the right loft and lie on your irons. Another aspect of our -- so that's a big part of this. Another important aspect of this is we'll be offering a much broader and more complete apparel assortment. Golf apparel is becoming much more important than it has been in the past. It's growing as a percent of the business, which will also help the profitability of that business.

Okay. Great. And then also on your comments on big-ticket fitness not selling as well. I guess I was thinking that as the economy picked up and same-store sales picked up, big-ticket would start to come back a little bit. Do you think some of that is due to the weather? In other words, people get outside, they don't need to go on a treadmill or an indoor cycle. Or is that just a long-term industry trend? Or do you think it's something you did in the merchandise mix that you could fix?

Well, I think there is some weather impact of that, although we are seeing a very fundamental shift in how people exercise, that there is different ways to do cardio today, and it's not just on a treadmill or an elliptical machine or a bike. People doing cardio through boxing, through use of a medicine ball, through the whole cross-fit craze that's going on out there. So there's a fundamental shift in how people work out, and people are starting to realize, and there's a lot of noise out there, that to just do cardio, to just do treadmill work is really not -- you need more than that. You need that strength workout, you need the flexibility workout and you need the cardio workout. And there's a number of ways to get cardio without a treadmill. So there's -- we believe there's a fundamental shift in how people are working out that's not good for the treadmill and elliptical and even the big weight machine workouts. We've seen a big increase in our sales of resistance bands, medicine balls, physioballs, all of those types of products. And although the average unit sale is less, the profit margins on those categories are significantly better. And I kind of just directionally look at 30% margin versus a 50% margin. So roughly 2,000 basis points difference. So as we cycle through this and we start to then be able to grow the fitness business again because of these other categories, our margin rates will move up significantly.

The next question is from David Magee at SunTrust Robinson Humphrey.

Just a couple of follow-ups. One, you had mentioned earlier the relative margins on e-commerce depending on how you fulfilled the product. Can you talk about where you see that category going relative to the retail stores and whether you're seeing any earlier signs of cannibalization with certain stores?

We're not seeing any signs of cannibalization. We really feel that we believe in the idea of the omni-channel experience that we don't really care where that market share comes from, in-store or online. And actually when you get a customer that buys online and in-store, they actually buy a lot more product from you in both places. So we're not seeing any cannibalization. And based on -- and we know and we've indicated that the weather was helpful to us in the first quarter. Based on our first quarter results, you can see that there -- you would assume there's little or no cannibalization.

And being agnostic on the channel, I would assume you would expect margins to be similar over time.

Over time, yes. We've indicated that an e-commerce sale today is less profitable than in-store sale, but we’re moving in that direction. And we suspect, over time, that we'll be ambivalent as to where that comes from.

And then secondly, you talked about the enthusiasm on footwear, what you see there in terms of the fashion side of things. I would assume you feel the same way about apparel and what you see sort of in the second half of this year on the fashion.

We see apparel doing very well also, but if I indicated fashion, I didn't mean to. Where we're seeing our growth in the business is primarily out of the technical side of footwear. So technical running, technical basketball shoes. It’s not -- the only component of footwear that I would say is fashion that we're doing very well in is the free [ph] shoe. We think the lightweight shoes that are technical are doing very well. We think from an apparel standpoint, the technical products that have been broadened out into color are doing very well, but they're still technically based.

The next question comes from Peter Benedict at Robert Baird.

Most of the questions have obviously been asked here, but just wanted to circle back to the margin accelerators, particularly on the systems front. Could you guys help us may be rank order the timing and the magnitude of impact from some of the systems-related initiatives you have on tap? I mean, on our notes, we've got the merchandise sizing and packaging optimization is one, price optimization is another and then labor scheduling. I understand, generally, kind of 2012 rollout, 2013 benefit, but can you give us maybe a little more granularity around that and maybe rank which are the most impactful that we should expect over the next several quarters?

I think the way you need to think about the implementation process is the combination of the implementation of the systems and how they collectively work together to bring science to the art is the thing that we are most confident of. So as we move forward and we get through to the 2012 implementation process, as Joe mentioned earlier, for those first 2 that you mentioned in particular, that’s when we will see some light benefit in 2012 near the end of the year, but more substantial benefit in 2013. What we won't do yet is quantify what we believe the basis point benefit from each of those systems will be.

The next question comes from Joe Feldman at Telsey Advisory Group.

Most of mine were asked, but I did want to go back to the shop-in-shops for a minute. I know you don't want to give too much detail on the metrics, but we were just kind of curious, for the ones that have been opened now for a year or so, are you still seeing good comp performance? Is it trending, I guess, in line with the plan that you had, had? Or is it helping to continue to drive traffic? Or any more color you can give us around that?

They're continuing to comp positively. Dick's, Nike, Under Armour and North Face are all very pleased with the performance that we've had. They are at or exceeding plan, and we were pretty optimistic about what benefit these would provide us. So we're very pleased with these and continue to be so.

The next question comes from Joseph Edelstein at Stephens, Inc.

Just like to follow up on the e-commerce margins. I believe last quarter, you said that you were on a path of roughly 18 months before you could reach the store level margins. Are we on track for that timing?

I'm not sure we quantified an 18-month time frame, but we've said over a reasonable period of time we feel that we'll be ambivalent as to where a sale comes from. But I'm not sure that we identified 18 months.

Okay. And then just one other question. I know you said that the BBCOR bats were only a small component of the overall comp. But I'm curious to know how the sale of those bats performed against the plan. And really, did you have a similar kind of experience that you saw to last year in California? Or do you think you were actually able to perform better in that particular category?

Well, we were very pleased with the results, and it's not over with yet, although it's got a much smaller impact in Q2. But we were very close to our plan. It was very positive for the baseball business, and it was very helpful to the overall business.

This concludes our question-and-answer session. I would like to turn the conference back over to Ed Stack for any closing remarks.

I'd like to thank everyone for joining us on our first quarter earnings call, and we’ll look forward to talking to everybody again in a couple of months. Thank you.

The conference has now concluded. Thank you for attending today's event. You may now disconnect.