DICK'S Sporting Goods, Inc. (DKS) Q2 2012 Earnings Report, Transcript and Summary

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

Thank you. Good morning, and thank you for joining us to discuss our second quarter 2012 financial results. 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 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 risks and uncertainties. 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 statements, 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 the 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 second 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 program. 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 I'd like to thank all of you for joining us today. In the second quarter, we generated record results that exceeded expectations. On a non-GAAP basis, earnings per diluted share increased 25% to $0.65 as a result of a 10% increase in sales and an operating margin expansion of 82 basis points. Using the strength of our balance sheet to invest in the business with new stores, continuing developing our omni-channel capabilities and support of our private brand, including the recent purchase of the Field & Stream brand in a broad range of outdoor categories. The 10% sales increase in the second quarter was driven by the growth of our store network by a 3.8% increase in consolidated same-store sales, which was on top of a 2.5% increase in the second quarter of last year. Same-store sales in the second quarter of 2012 for Dick's Sporting Goods were up 2.9%; Golf galaxy up 4.4%; and e-commerce sales were up 34.6%. The comp growth at Dick's stores was broad-based, with all 3 major categories: hardlines, apparel and footwear comping positively. Our continued profitable growth is being fueled by our 3 growth drivers which are expansion of our store base, strengthening of our omni-channel capabilities and development of our margin rate accelerators. Looking at our store growth, we opened 4 new Dick's Sporting Goods stores in the second quarter. And in 2012, we expect to open approximately 38 Dick's Sporting Goods stores. Our e-commerce business represented approximately 3% of total sales in the second quarter, with same-store sales increasing 34.6% over the second quarter of last year. In the second quarter, we increased our merchandise margin by 29 basis points. As we move ahead, we plan to generate continued margin growth with the 3 main drivers. One is to leverage our inventory management, another is to emphasize private brands, and the third driver is to optimize our product mix. To strengthen our private brand platform, we entered into an agreement this month to purchase the intellectual properties and rights to the Field & Stream mark in the hunting, fishing, camping and paddle categories. Upon completion, we expect this acquisition to give us the control and flexibility necessary to maximize and leverage the value of this popular brand. Lastly, we are successfully shifting our product mix to include more higher-margin products by increasing our focus on in-store specialty shops from Nike, Under Armour and The North Face, as well as continuing to build our shared service footwear decks in our new and remodeled stores. As announced in our release this morning, we have fully impaired the value of our investment in JJB. We continue to believe in this market pieces underlying our investment, however, since our investment and as publicly announced by JJB's management, JJB's performance has materially deteriorated from its expectations. The investment was structured to provide us with meaningful upside and to cap our downside. Accordingly, we have no further funding obligations and will continue to monitor the situation. For the third quarter of 2012, we now expect consolidated earnings per diluted share to increase by 13% to approximately $0.36 compared with non-GAAP consolidated earnings per diluted share of $0.32 for the same period in 2011. This is better than our previously communicated expectations of mid-single digit growth. Consolidated same-store sales are expected to increase approximately 4% on top of a 4.1% increase from the third quarter last year. We believe fiscal 2012 will also be better than originally expected and accordingly are raising our full year guidance to a greater extent than our second quarter beat. We expect non-GAAP consolidated earnings per diluted share to increase by 22% to 24% to between $2.47 and $2.51 a share, which includes approximately $0.03 coming from the 53rd week this year. This guidance compares to non-GAAP earnings per diluted share of $2.02 in 2011. On a 52 to 52-week comparative basis, we anticipate consolidated same-store sales will increase to between 4% to 5% on top of a 2% increase last year. We’ve delivered another exceptional quarter and are on track to post strong full year performance for 2012. As always, our ability to fuel consistent progress across our company is the direct result of the commitment and drive of our people. We are grateful to all of our associates for their exceptional efforts. We plan to drive continued long-term profitable growth by investing in new stores, continuing to develop our omni-channel capabilities, increasing our margins through inventory management, an emphasis on private brands and the continued shift of our product mix to higher-margin merchandise categories. I'd now like to turn the call over to Joe.

Thanks, Ed. In the second quarter of 2012, we opened 4 new Dick's Sporting Goods stores, bringing our store count to 490 Dick's Sporting Goods stores with 26.7 million square feet and 81 Golf Galaxy stores with 1.3 million square feet. Within our stores, we have 142 shared service footwear decks, 129 Nike Fieldhouse concept shops, 56 Under Armour All-American shops and 5 Under Armour blue chip shops at the end of the second quarter. By the end of the year, we expect to have approximately 170 shared service footwear decks, 170 Nike Fieldhouse concept shops, 90 Under Armour All-American shops and 10 Under Armour blue chip shops. Our new Dick's Sporting Goods stores continue to perform well with a new store productivity of 102.2% in the second quarter compared to 95% in the second quarter last year. 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 38 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. This year, we also plan to relocate 5 Dick's Sporting Goods stores which are at the end of the lease -- their leases to preferred locations that we have secured. For Golf Galaxy, we plan to reposition 1 store in the fourth quarter. We had originally planned for 2 repositioned stores this year, one of these stores is now scheduled for Q1 of next year. Our repositioned stores will be larger than our current format and include more services and more experiential shopping. We are on plan to open our fourth distribution center in January of 2013. This 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. On the digital front, we continue to invest in new capabilities, expand content and upgrade site functionality to provide customers with an enhanced shopping experience and enable them to buy and receive products where, when and how they want. At the same time, these investments are improving our ability to manage our inventory, expedite fulfillment times and maintain a solid in-stock position. In the second quarter, we completed development of our ship-from-store capability, began testing it in select stores and are pleased with the results to date. In 2013, we will begin the development of an in-store pickup capability to further enhance our service offerings. I will now turn the call over to Tim to review our financial performance in greater detail.

Thanks, Joe. Sales for the second quarter of 2012 increased by 10% to $1.4 million compared with the same period a year ago. Consolidated same-store sales increased 3.8%. Dick's Sporting Goods same-store sales increased 2.9%, while Galaxy increased 4.4% and our e-commerce business increased 34.6%. 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 1.1% decrease in traffic. As we mentioned in our first quarter call, we believe that there was some pull forward of spring sales from the second quarter into the first quarter, particularly in the categories such as team sports, golf and bikes. Consolidated gross profit was $447.8 million or 31.16% of sales and was 47 basis points higher than the second quarter of 2011. This increase was driven by merchandise margin expansion of 29 basis points and occupancy leverage, partially offset by freight and distribution deleverage due to the higher year-over-year mix of e-commerce sales. SG&A expenses in the second quarter of 2012 were $310.9 million, representing 21.63% of sales compared with 21.87% of sales in last year's second quarter. This leverage of 24 basis points was primarily due to advertising leverage, partially offset by an increase in payroll relative to sales and a contribution to Dick's Sporting Goods Foundation. As we announced in the press release earlier this morning, we recorded a pretax impairment charge of $32.4 million related to our investment in JJB Sports, which impacted earnings per diluted share by $0.22. On the balance sheet, we ended the second quarter of 2012 with $350 million in cash and cash equivalents and with no outstanding borrowing under our $500 million revolving credit facility. Last year we ended the second quarter with $626 million in cash and cash equivalents and with no outstanding borrowings under the facility. Over the course of the past 12 months, we've utilized capital to fund the share repurchase program, initiate the dividend program, purchased our Store Support Center, acquire intellectual property rights to the Top-Flite brand and build our new distribution center. In the second quarter, we completed the share repurchase program. Within the quarter, we repurchased 1.9 million shares of our common stock at the average cost of $49.40 per share for a total cost of approximately $94.9 million. 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. As a reminder, the purpose of this share repurchase program was to offset the expected dilutive effect of anticipated option exercise activity from options set to expire in 2013. Inventory per square foot increased by 4.2% at the end of the second quarter this year compared to the end of the second quarter of last year. About 25% of this increase is from the cold weather merchandise that we packed away after a significantly warmer-than-normal winter last year. This merchandise, which consists of basic winter product, will be sold in the upcoming season. We expect inventory per square foot to be relatively flat at the end of 2012 as compared to the end of 2011. Net capital expenditures were $50 million in the second quarter of 2012, or $54 million on a gross basis compared with net capital expenditures of $44 million, or $53 million on a gross basis in the second quarter of last year. In the third quarter we now expect non-GAAP EPS to grow approximately 13%, which is better than our previous expectations of mid-single-digit EPS growth. Our third quarter guidance contemplates 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 will be hosting the annual Dick's Sporting Goods Open, a Champions Tour golf tournament in the third quarter this year. Historically, this tournament has been a second quarter event. As a result, the related expense 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. For the third quarter of 2012, we anticipate same-store sales to increase to approximately 4%. Earnings are expected to be $0.36 per diluted share compared to non-GAAP earnings per diluted share of $0.32 in the third quarter of last year. Gross profit margin expansion is expected to be driven primarily by merchandise margin, which increased 29 basis points in the second quarter and is expected to expand to a greater extent in the third quarter year-over-year. Occupancy is anticipated to remain relatively flat as a percent of sales in the quarter, with leverage expected for the full year. SG&A as a percentage of sales is expected to increase relative to sales in the third quarter, primarily due to the shift in the timing of the Open that I just mentioned. For the full year 2012, we anticipate consolidated same-store sales to increase between 4% to 5% and non-GAAP consolidated earnings per diluted share to grow approximately 22% to 24%, or in the range of $2.47 to $2.51 as compared to the non-GAAP consolidated earnings per diluted share of $2.02 in 2011. Fiscal 2012 includes a 53rd week, which we believe will add approximately $0.03 to non-GAAP consolidated earnings per diluted share and is contemplated in our guidance of $2.47 to $2.51. Operating margin expansion in 2012 is expected to be driven by both an increase in gross 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. 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 implementations. With the execution of our share repurchase program, diluted shares outstanding are expected to be approximately $126 million for our full year, similar to the outstanding shares in 2011. Just as a reminder when contemplating the fourth quarter, we anticipate the startup costs of our new distribution center will have an EPS impact of approximately $0.02 per diluted 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. For the full year, net capital expenditures 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 from 2011 to 2012 is primarily the result of the new distribution center and, to a lesser extent, investments in new stores, vendor shops, system enhancements and e-commerce. Our second quarter performance coupled with the outstanding performance generated in the first quarter has resulted in an exceptional first half of 2012 for Dick's Sporting Goods. The ongoing initiatives that we've mentioned in this call and the investments we are making in our business when considered with our strong balance sheet and cash balance have positioned us well for a continued future of profitable growth. This concludes our prepared remarks. We will be happy to answer any questions you may have at this time.

[Operator Instructions] The first question comes from Robby Ohmes of Bank of America Merrill Lynch.

A couple of quick questions. Ed, I was hoping maybe you could give us -- now that we're sort of in the middle of the back-to-school season, any sort of flavor on how that's going for you guys? And then also, your view -- if there's any update on your view on what the product launch lineup looks like for the fall season here, both from a footwear perspective in apparel. And then I have a quick follow-up after that.

Well the back-to-school season, we can speak to our second quarter results, which were above our guidance. So we were pleased with the second quarter sales. A portion of those sales, the back-to-school piece, is in there. So early on, we're pleased with it. As we indicated, our -- it was above our guidance, and what we expect back-to-school to be is baked into our third quarter guidance, which we can't speak to right now. And from a product launch standpoint, we're pleased with some of the things that are out there. We've seen some of Columbia's new technology, North Face's technology. We're pleased with what's going on out there, and we're obviously relatively enthusiastic about our business because we took our annual guidance up to $0.01 higher than what we beat the second quarter by. So for us, that's pretty bullish.

And then just a quick follow-up, Ed, can you comment on 2 things? One would be the running specialty store tests that you guys had disclosed and the other, maybe a little more on potentially what next steps might be in terms of your involvement with JJB from here.

Sure. The running tests, we've opened one store right now. We have planned to open a second one, but we think running is an important part of the business. We're testing a couple of these stores. They're roughly 4,000 square feet higher and technical running stores. What we're going to go with these we can't comment right now. We've got one open. We're opening another one in October. What we do believe will happen, and has already happened to some extent, is we will learn what the technical runner’s looking for from both a footwear and accessory and an apparel standpoint and be able to apply that to our stores. Our running business has been very good, and part of that has been due to the research we did on the technical running store. So we're pleased with that. Our involvement with JJB, all we did originally was we made an investment in JJB of a little more than $30 million. $30 million of that was in the form of a convertible debt instrument. We took that position. We thought there would be -- there was potential great upside, but what we wanted to do is to cap our downside. JJB has had a very difficult time. We all kind of know what's happening in Europe. It's continued to have a difficult time with the announcements that they've made. And it's important to understand, we're not running JJB. We are merely an investor with the ability to take a greater control if we converted. But we're not running JJB. The JJB management has -- the announcements that they've made about their performance and their financial condition, we felt that it was the prudent thing to do to fully impair this asset at this time. And we'll monitor the situation and hopefully, the management team there can turn that business around.

Our next question will come from Michael Lasser of UBS.

Ed, you tend to be a conservative bunch. You've got a more difficult fourth quarter -- sorry, third quarter compare. The election is going to be really heating up during the third quarter. Can you talk about how you mapped out your guidance for the third quarter? You're implying a nice acceleration in the business. And what's driving that thinking?

Well, it's kind of what we see happening with our back-to-school sales earlier on in the second quarter. What our team has been doing on our e-commerce site has been very good, with a 34% increase in the second quarter. We feel that's going to continue to help drive the business. Our apparel and footwear business continues to do very well, and the shops that we've put in place with Nike and Under Armour have done extremely well. And the ones that we've put in place and that we will put in place going into the third quarter from The North Face, we expect those to have similar results.

And can you expand a little bit on the merch margin in the second quarter? It was up 29 basis points, which was a nice result, but not nearly as sizable of an increase as you saw last year. And it sounds like you're expecting it to accelerate. So what restrained it in the second quarter?

We don't really think it was restrained. We thought that based on the way that we manage the business and manage the clearance activity, that it was really very good. One of the aspects that has been up pretty significantly has been the firearms business. The firearms business is a lower margin rate than the company average. But at 29 basis points with the comps that we had and what's happened in the firearm business, we were very pleased with that.

The next question will come from Gary Balter of Credit Suisse.

It's only 3% of your sales, but can you talk about the e-commerce? You had another good quarter, obviously. What are the areas of strength? And what are the areas where you've been surprised in terms of its not having the impact?

Well, the strength has come from where you might expect. So the apparel and footwear business has done extremely well. We've partnered with vendors and in particular Nike, to build our -- a micro site, a Nike micro site on our site, which has done extremely well. So apparel, footwear, the golf business has been very good online. A couple areas that have been a bit more difficult -- and some of those are decisions we’ve made on how we're going to run the business has been the fitness business, because we have not been as aggressive in the fitness category due to the lack of profitability around the shipping costs associated with the fitness business. So fitness has been a bit more difficult online. The apparel, footwear, golf business has been very good.

And as part of that, has pricing pretty much like you agreed on with the suppliers? Or do you see -- is there discounting on other sites that may be impacting you or no?

Well, there's no pricing agreed to with the vendors, but there's not any aggressive discounting that we see on the sites.

Could you -- just a follow-up. Could you talk about the competitive environment right now? Like specifically, what's going on with Academy since their transaction? And have you seen anything from Sports Authority?

We haven't seen anything different with Sports Authority. There's no irrational pricing out there. Academy has been -- there's been no change with Academy. They're a good, tough competitor and we compete well with them. Our business can -- in their stronghold of Texas, has continued to do -- we're very pleased with. So we haven't seen anything really different since the Academy transaction, nor have we seen anything really different from Sports Authority.

Our next question will come from Sean Naughton of Piper Jaffray.

On the shop-in-shops, thanks for the detail on what you expect for the balance of the year on UA, Nike and some of the shared footwear businesses. But can you talk about how many of these stores you -- shop-in-shops you have for The North Face? And then how many you think you can put in moving forward?

Specifically around The North Face shop-in-shops, we'll have about 13 of the super shops by the end of the quarter. The shops require a bit more in square feet, and we're opening those in some of our larger-volume stores. You can expect some of the two-level stores that we're putting those in. And we have some of the smaller concept stores -- excuse me, smaller concept shops in about 70 Dick's Sporting Goods stores. So that's specifically around TNF.

Okay, got it. And then can you give us some examples of categories? Ed, I think you talked about you're moving into some higher-margin categories because -- if you could give some examples there? And then just as a follow-up on the same-store sales trends, how do you think about cannibalization when you open up some of these stores in existing markets?

From higher-margin categories would be the -- the apparel category is being driven by Nike, Under Armour and The North Face. As we add these shops, our penetration of apparel goes up. The apparel margins rates are higher than the company average, so that certainly helps our margin rates. And from a cannibalization standpoint, we certainly take a look at cannibalization as we look at our real estate program. But cannibalization is less than 1% chain-wide. So it's important to take a look at but if it's less than 1%, it's not meaningful.

Okay. And then just a last question, just wondering if there's been any -- how the NFL jersey launch by Nike has been going for you and if you think it's driving a little bit of traffic into the store.

The NFL jersey launch has certainly driven traffic in the store. Those real serious fans want to have the newest jersey out there, and we expect this to be additive to our business and a big part of this really in the third and the fourth quarter.

Our next question will come from Dan Wewer at Raymond James.

Ed, I was wanting to change topics, discuss your golf business for a second. I believe it's had its seasonal peak during the second quarter based on the terrific sales numbers from TaylorMade. And I believe you were their largest customer in the U.S, and I suspect TaylorMade is your #1 brand. I would have thought that Golf Galaxy's comps would've been a little better than 4.4. Can you discuss any headwinds besides the sales transfer into 1Q?

No, that's the biggest part of it, is the transfer from Q2 to Q1. We were very pleased with our golf sales in Q2, especially in light of the transfer into Q1. If you remember, last year there was nobody really playing golf in Q1 last year, and they were. So our comps for Q1 for Golf Galaxy were 12.6%, and in Q2 they were 4.4%. So if you take an annualized -- those 2 quarters, Dan, they were really quite good.

Okay. And then just one other question. Field & Stream, what does this $25 million investment that you're announcing allow you to do with the Field & Stream brand that you were unable to do in the past year?

Well, it's not that it allows us to do anything. It keeps us from doing something and that's paying licensing fees. And we expect this to be accretive a bit this year and certainly accretive going next year. So we made that -- we ran the analysis. And by buying this brand, it's certainly accretive from the licensing fees that we were paying prior to that.

The next question will come from Christopher Horvers of JPMorgan.

The pull forward into 1Q from 2Q, can you put a number on that on what you think that was? And do you think that showed up on -- mostly in the traffic line? A lot of retailers have talked about, on average, maybe 200 basis points or so. Is that about right? Or maybe was that larger for you given that really, it has been warm since January and that impacted golf all year long?

We have a really hard time kind of putting a number on that. But clearly, the fact that people were playing golf or they had gotten outside and running earlier or the Little Leagues were not delayed this year like they were last year because of the weather, there's some number there. I wouldn't even venture to put a number on it, but it was enough that we would feel it. And I think you really have to take a look at the 2 quarters combined and get a sense of our business. So our second quarter was -- we were very pleased with our second quarter. We knew that there would be some transfer out of Q2 into Q1. We've put that into our Q2 guidance when we guided 2 to 3, and we beat that by 80 basis points, which we thought was -- under the circumstances, we thought was fantastic.

And as a follow-up to that, I mean a lot of retailers saw a pretty sharp slowdown in June, only to see a rebound in July. Census data for your category was reported this number morning and the monthlies from May, June and July were 9, 5 and 11. So just curious, have you seen sort of a -- qualitatively, have you seen a similar trend in terms of how the quarter occurred from a cadence perspective?

We've never kind of talked about a monthly basis, but we were very pleased with the second quarter sales, and we were -- we've taken up what we had originally communicated is our EPS for the third quarter, as we said it would be mid-single digits. Now we've now taken that up to low double-digits, and we took up our annual guidance above the beat. So for us, as I said, that's kind of tongue-in-cheek for us. That's kind of bullish.

And one follow-up for Tim. On the merchandise margins, I didn't think you -- in case I missed it, did you break it down between what was inventory management versus mix or private label, maybe in buckets?

We did not, Chris.

Could you add any color?

I think if you take a look at the overall margin, especially if we look at the components, most of that margin increase came on product mix. And then of course we had the overall increase in sales. But that's about as much color as I think I'm willing to give.

The next question will come from Rick Nelson of Stephens Inc.

I'd like to ask you about the footwear category. If you could comment on what's happening with comp by units and ASPs and overall where you think we are in the footwear cycle. It's performed well for a while.

Well, we're not going to get to that level of granularity from a competitive standpoint. But the footwear businesses has continued to do well. Our AURs have gone up to some extent and driven by our technical running category.

Got you. Also, I'd like to ask you about the real estate market. It looks like you pulled back a couple of Dick's stores from your prior guidance. If you could comment on development and opportunities.

I think as far as pullback, I think we had guided that we would open approximately 38 to 40 stores, and we're not seeing a big change in the real estate environment out there. It's still pretty difficult from a -- it's a lot of pick and shovel work to find some of these real estate. We are seeing some mall opportunities and continue to see some vacant box opportunities with a number of retailers out there. We're working with mall developers on consolidating space. So it still remains a pick and shovel work. There's not a lot of new development out there. We are working with Sears as an opportunity with some vacant boxes, so we're taking a look at everything we can. But we didn't pull back from a standpoint that we -- that we're concerned from a business standpoint. Now we said 38 to 40. A couple of those sites have slid into Q1 of next year, and the real estate development business has -- is pretty fluid right now. But we'll get to 38 stores open. We expect to be at least that, probably higher than that next year.

Okay. Also, I'd like to ask you about private label. I think it represented about 15% of your sales last year. You're making a big push in the Field & Stream acquisition. What kind of sort of targets do you have for the near term and longer term?

Well, we're not providing any real targets right now. And understand, the Field & Stream brand is not something new. This is a brand we've been licensing for years and decided that it would be better for us and accretive to our EPS if we bought it as opposed to continue to pay those licensing fees. So the acquisition of the Field & Stream brand doesn't really increase our sales of private brand, it just makes them more profitable for us.

Our next question will come from Sam Poser of Sterne Agee.

I just wanted to follow-up on the JJB one more time. So was this -- was it basically the rules of accounting that caused you to write it off for the time being?

Sam, this is Tim. That's exactly what put us in that position, to take that conservative approach. The accounting rules here are pretty specific in terms of what we know about the business. And we follow those as we should have.

And so it doesn't really change the potential set up for spring of 2014, assuming that things don't get -- things start getting a little bit better over there and so on? I mean, the premise of your investment is still the same?

The premise of our investment at the outset was that we believe that there was room in the U.K. for a premium sporting goods retailer. That hasn't changed. The question is whether or not JJB can measure up to that task, and that is a very large mountain for them to climb.

But we still have all our rights and privileges under the original agreement. So if things turned around and we wanted to take that, make that second tranche of financing, we have the ability to do that. But we are not required to do that.

And that decision comes up next spring? Just confirming that. Correct?

That's correct, yes.

Okay. And then secondly, you talked about the 3 major categories, I guess for apparel and so on, being all up for the quarter. Can you give us some form of idea of sort of -- they were all up, but can you give us an idea of what was the larger driver?

From a competitive standpoint, Sam, no, we're not going to do that.

The next question will come from Matthew Fassler of Goldman Sachs.

First of all to clarify, to the extent that you raised the third quarter and you sort of have been warning about a soft year-on-year trend for a while, is that all about the higher comp guide? Or are there any shifts in the expense dollars versus your initial expectations to help get you there?

No, this is all around sales. Sales and margin, Matt.

Got it. Second question, and I think a lot of people have been sort of dancing around this to some degree, clearly the sense of the backdrop has changed a lot from the time you held your last conference call. And a number of retailers, restaurant companies and others, though not all of them, have reported softer numbers, and your higher third quarter guidance sort of stands out in that context. Are you seeing anything in the business that would be indicative of some of the macro concerns that have been emerging?

Well, we haven't. We've been very pleased with our business. As I said, we -- now we beat our second quarter comp guidance by 80 basis points, after a -- and a very good first quarter. The back-to-school that we've seen so far doesn't mean it's going to continue, but the back-to-school that we saw in the second quarter gave us confidence to take the third quarter up from what we had originally guided to. We see that apparel and footwear business continuing to comp quite strongly, and those carry higher margin rates than the company average. So kind of all of that that's happening inside our business, we're pretty excited about.

Got it. And then my final question is for Tim, and it relates to the accounts payable line. We know this line was down a bit in terms of percentage of inventory in the first quarter, and that presumably related to the kind of hangover, maybe some of the pack away product, and it was down a little more than that year-on-year here in the second quarter, and that was, I guess, one of the reason why the cash balance is where it is year-on-year. What's your thinking about the trajectory of this number? And at what point do we start to flatten out or actually increase the payables ratio on a year-on-year basis?

I think you also have to take a look at where we stand on an inventory per square foot basis being at that 4.2%. So as we're managing the inventory process throughout the quarter, you also manage receipts. It's part of that process. So those receipts are now coming in, in Q3 versus in Q2. That also indicates that you don't have those payables to record when those receipts aren't in the given quarter. So part of that is the management of receipts for the most part.

Got it. And sort of qualitatively, on the freshness of the inventory, the amount of clearance and stock, et cetera?

The clearance inventory as a percent to our square footage is down by 2.3%.

Our next question will come from Brian Nagel of Oppenheimer.

So I want to continue along. I mean, follow what -- I guess, Matt's question and then the questions of others. But as you look at -- it sounds -- some of the comments you made suggests that the back-to-school to started off quite nicely for you guys. As you think behind that, is there a product launch or some type of product cycle that may be helping this boost out here early in the season? Or do you think that -- or conversely is this something -- really a beginning of a sustained trend through the season?

It's pretty broad-based. It's apparel, it's footwear, it's backpacks. I mean the back-to-school business has been really quite good. We've also seen a nice lift in firearm sales, which -- our third and fourth quarter are big firearm sales. So we're seeing a lift in that to drive comps. Although that being at a lower margin rate, some of the other categories that are doing well will offset the margin rate, the pressure that we would get from the gun side.

Okay, then as a follow-up, as we think about the balance of 2012, and aside from firearms, how should we think about -- or how are you guys looking at the outdoor category in general?

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

The next question will come from Peter Benedict of Robert W. Baird.

I hope the firearms stuff is not back-to-school related, but I understand you have to separate the 2.

We agree.

One real question here. Just in terms of The North Face, just so I understand that correctly, remind us how many were in place at the end of the second quarter? I didn't know if you had any. And then you're expecting 13 of the larger sets and 70 of the smaller sets by the end of this year? That's the first part of my question.

Yes, the 13 shops will be at the end of the quarter. And Peter, those shops are about 2,000 square feet. So they're significantly larger than you'd see in a typical single-level store, which is approximately 500 square feet. So you're going to see those primarily in our 2-level stores.

Okay. And would you add any more in the fourth quarter? Or are you starting to get towards the holiday and you'd want to see how those go?

We're going to add 3 more by the end of the year.

Okay. And then second question, in terms of some of the bigger sets you have, the shared service footwear, the Nike Fieldhouse, they should be in about 1/3 of the stores, I’d like to think the Dick's stores by the end of this year. When we think longer term, is there any reason why these concepts can't go into 50% of the stores or more? Or how should we think about the longer-term opportunity, assuming these continue to generate the returns you're looking for?

Well, think about -- on the shared service footwear side of things, every store that we open moving forward, we opened with shared service footwear. Every store that we remodel, every store that we position, we'll also open those stores with a shared service footwear model. As far as the apparel shops with Nike and -- there's no reason to think that they couldn't be in more than half the stores.

Our next question will come from Camilo Lyon of Canaccord.

My question relates to what the implied fourth quarter comp guidance suggests, coming off of the warmest winter in multiple decades, and it seems like you're embedding a completely substantial 2-year deceleration and I just wanted to better understand what the thinking is behind that, what you're contemplating around the fourth quarter and where some potential upside could come from.

I don't think we have changed anything regarding the fourth quarter since we started giving our guidance for the year. So as we look at the third quarter versus the rest of the year, you'll see that we increased our guidance for the overall year up to 4% to 5%. So we have essentially left the fourth quarter alone sequentially from where it has been in our -- since we don't give guidance for that quarter, the implied guidance hasn't changed.

So maybe asked another way, what is the expectation around whether -- are you expecting it to improve at all from last year? Are you expecting it to be comparable to last year? Any sort of color on that would be very helpful.

I think the way you ought to look at our fourth quarter is anticipate a normal winter versus what we saw last year. That would be an improvement.

Got it. And then just going back to the margins, the gross margins, you mentioned that freight was an offset to the total as more e-commerce sales are flowing through and the DC expenses related to that. Could you help us think about how we should think about that going forward as that business continues to expand and you're taking more ship from store? You're doing more of that sort of business in the stores. And then how will you really start to flow that to our models?

I think as you get into 2013, as we have more ship from store stores and we start the development of the order online pickup in store, I think you'll see some of that current deleverage neutralized somewhat, because more of the penetration of the e-commerce business should be directed towards ship from store and order line pickup in store.

Got it. And would you be able to provide what that actual deleverage was in the second quarter?

I haven't gone that far. It was not significant enough to offset the occupancy leverage.

Our next question will come from Mike Baker of Deutsche Bank.

So one, just a short-term question and a longer-term question. In the short term, you leveraged your occupancy on a slightly -- on a comp that was slightly less than 4% this quarter, but said you won't leverage it next quarter on a 4% comp. Just wondering if there's anything we should be thinking about there as to why that would change. The longer-term question relates to your store count. You've consistently said 900 stores and I think when you even look at your long-term projection of stores by state, it gets to be a little bit higher than 900. But as e-commerce gets to be a bigger part of your business, how much can that number -- how much can you think about that number potentially changing coming down as more sales go online? And then I guess related to that, not only the number of stores but that size of each store, how could that change?

Well, we're looking through -- we're trying to assess all of that right now. So is it 900 stores? Is it some different number? We feel that 900 is still the right number. As you said if you take a look at this by state, we could actually by state, we could actually be slightly higher than that. So 900, we're very comfortable with. And does the size of the store come down? We're looking at that, although there are a number of categories that we see big opportunities in that can use that square footage. So some categories may contract, some other categories may expand. So we don't see a big change in the size of the store, but there may be some square footage allocations that are different in the future.

As to your SG&A question, but for the fact that the golf tournament moved into the third quarter, we would have leveraged SG&A.

Sorry, it was an occupancy cost question.

Oh, pardon me. The occupancy cost, had -- we said that we had to have a comp in excess of 3% to leverage. But that ships quarter by quarter. You have to look at that leverage point on the whole year because in different quarters, we can have cam audits that come back to a favorability real estate tax assessment that are favorable. Or in the prior year, for example, co-tenancy violations that reduce rent for a period of time. So you have to continue to look at occupancy on an annual basis.

If I could just ask one more follow-up and really just following up on the first question, just maybe a little bit more specific I'm sure, as you guys map out the 900-plus stores that you sort of do a pro forma for each store as to what the sales can be and the occupancy, et cetera. Have you changed the inputs into those pro forma expectations over the past, let's say 18 months or 2 years as e-commerce has become a bigger part of your business?

We've taken a look at where some -- where opportunities are in different businesses. And it's an iterative process all the time. So yes, we've taken a look at categories that we think can expand in the store, categories that we think can contract in the store and what we think the cost of providing those categories in the store and the margin rates associated with them. So yes, we do a very detailed analysis of this on a pretty regular basis.

The next question will come from Mark Miller of William Blair.

Could you give us some perspective around the traffic decline in the quarter and how much the change from first to second quarter was due to the pull forward? And basically, what would be the underlying run rate aside from that?

Yes. As we said, it's very difficult to put a number on that, the comps that we had in the first quarter and it reverses the year before, and the fact that people were playing golf earlier, they were outdoor running earlier, they were playing high school sports earlier this year, that definitely moved some traffic and some business into Q1. We can't put a -- we can't quantify that, but we think that was the biggest -- the primary responsibility factor of the traffic change.

And so, Ed, I could infer from that, now that we've moved past that, that the business is traffic positive?

No. We don't comment about a quarter inside the quarter. But we've guided our comps to roughly 4%. We've taken the earnings number up above what we had originally communicated. So you can -- we're pretty -- we're optimistic about our business in the third quarter.

Okay, got that. On e-commerce, as we look at your store prices versus the e-commerce competition, I think we want to consider the ScoreCard certificates and coupons for the net pricing that your consumer pays. So could you put any perspective around what portion of your sales have these incentives for the consumer? And how much is that changing year-to-year approximately?

Well, there's a significant amount of our sales that come on the ScoreCard. That's one of the reasons why we've got so much data and are able to market kind of one on one to our consumers be it through direct mail, catalogs we send them or digitally through the e-commerce -- our e-commerce platform. All of these, I think, are contributing factors to our increase in sales. But we have not guided to exactly how many dollars come on the ScoreCard program, but it's meaningful and certainly helps us run our business to better understand what's going on with the consumer out there.

And just the other part of that, I mean, can you comment on -- is it constant year-to-year? Or is it something that -- in the redemptions going up? Or just issuance might be one way or the other year-to-year?

It's certainly going up. As we continue to market more aggressively in this medium and direct to our consumers, that aspect of our business is certainly going up.

The next question will come from Kate McShane of Citi Research.

With regards to Q3, I wondered if you could just remind us what you're up against from both a positive and a negative standpoint? For instance, did the NFL lockout have a significant impact to your Q3 comps last year? And do the sanctions on a certain large footfall program in Pennsylvania have any kind of impact to your business?

The NFL lockout did have an impact on our business. What also had an impact on our business last year was the transition that -- people knew that the jerseys were going to change with the NFL licensing moving from Reebok to Nike and that had an impact on our business also. So the NFL jersey business has been very good right now. And with what's happened at Penn State -- we sympathize with all that's happened at Penn State. But as it relates to our business, it's an insignificant amount of our business. So it will have no impact on our performance.

The next question will come from Matt Nemer of Wells Fargo Securities.

This is actually Kate Wendt in for Matt Nemer. First, I was wondering if could you just provide some more color on how the test of ship from store is going in terms of ironing out the process with employees in stores and if this has allowed you to shorten customer delivery times or perhaps even reduce markdown exposure in the stores? Then second, I was wondering if you could break out approximately how much SG&A benefited this quarter from the shift in the golf tournament into Q3.

I'll take the first portion. As far as the ship from store, we continue to test that with our stores. As you would expect in any test, we're learning every day on the labor piece, the shipping piece. But you alluded to the fact of having inventory more readily available to us and turning that around quicker to the consumer. So early reads are that we're pretty pleased with how things are progressing, and we'll take a look at adding stores as we progress.

In terms of the golf tournament, you can think about that in terms of a little bit better than a $0.01 impact on the quarter.

The next question will come from John Zolidis of Buckingham Research.

Two quick questions. One, as I recall last year, the marketing around the outdoor segment affected the business at the end of the second quarter. Aside from the firearms, how has that business done this year? And then secondly, a quick look on your website shows some Olympic-related apparel. Is that at all a factor with the third -- second quarter or with the outlook for the third quarter?

The outdoor category, we learned from our mistakes and we're pretty good at not making the same mistake twice. So our outdoor categories, we were very pleased with those. Around the hunting business, the fishing business, we were really very pleased with our performance there. As far as the Olympic merchandise goes, yes, we have Olympic merchandise on our website. It's a small portion and had very little to do with our comps.

The next question will come from Paul Swinand of Morningstar.

First, just a -- I guess we got enough questions on the guidance, let's shift to something a little larger term here. You had a new marketing director join, and you talked about doing more brand advertising, more national advertising. Can you tell -- can you give us any color on how that's gone and how you're thinking about tactical versus strategic advertising going forward?

Sure. We think that -- we brought Lauren Hobart in from Pepsi about 18 months ago. She's really had a very significant positive impact on our marketing, in our marketing direction. The branding -- advertising that we've done in the spring around Father's Day and now into back-to-school has been viewed as great. We've never had more positive responses and comments to our marketing around our untouchable spot, the Father's Day spot and the comeback spot for back-to-school. So it's been great. We expect to transition more dollars into marketing like that than what we've done in the past. And strategically, the way that we look to do this and the tactics behind it is we would expect to see less insert advertising in the newspapers on a Sunday and more of this brand-building advertising that Lauren and her team have put together, along with more direct marketing to our consumers, either through digital marketing or through direct mail pieces into the home. So our early results have been great. We're very pleased with it and expect to strategically move more dollars in that direction and take more dollars out of the traditional Sunday newspaper.

And then quickly on the hunting business, just to remind everybody, you guys are not in handguns at all and you don't have any rifles that aren't really hunting rifles. That's correct, right?

We've got target shooting rifles, but we don't carry AK-47s, and we don't carry any handguns.

Right. You don't carry any of the SWAT-style rifles either? Maybe...

Just from a target sporting type, the modern sporting rifles that are primarily 22s. We carry some of those. But they're used for more sport target shooting. But the military-type rifles, we don't carry any of those. And we carry no handguns.

Right. So we can construe the -- we can therefore conclude that the hunting business increase doesn't have anything to do with the election, and you're taking market share from somebody else?

Well, I don't know that I would go that far, because gun owners are concerned about -- rightly or wrongly, are concerned about what the administration might do. So I think this has something to do with the election.

The question will come from David Magee of SunTrust Robinson Humphrey.

Just a quick question regarding inflation and what your current thinking is on the second half and, say, the first half of next year and what the fee change might mean for comps and/or margins.

As we've indicated, we've seen some inflationary pressure kind of in the back half of this year. There's some North Face product that has taken some relatively significant price increases in that outdoor category jackets and base layer products. We've done -- I think our merchants have done a very good job of buying around some of that product. North Face has done a good job of providing more technical aspects to that product, and we'll see how it goes. But the early indications of what we've seen from a back-to-school standpoint is we're relatively pleased, and we don't think that we're going to have any meaningful pressure there.

Are you seeing less inflation in other categories?

Versus the category that I just talked about, yes, we're seeing less inflation in other categories.

So overall, you'll see maybe less inflation than in the first half this past year?

I don't know about that because these categories, North Face, Columbia, some of these outdoor categories from an apparel standpoint that we've had some price increases in, are a bigger percent of our business in the second half than they are in the first half.

The next question will come from David Gober of Morgan Stanley.

This is Shaun Kolnick on for Dave. Can you provide any color as to the drivers behind the improvement in new store productivity year-over-year and how sustainable that might be?

I think we've done a better job of marketing the business. I think we've done a better job with our preopening campaigns than we've done in the past. I think we've also done -- some of the areas that we've opened the stores, we're a bit stronger in. We're -- the real estate that we've taken has been better. So there's not one silver bullet. But we took a look at that whole process and deconstructed it and said, "Okay, we've got to take a look at our real estate strategy. We've got to take a look at how we market this. We've got to do a better job of having the right content in the store right off the bat." And the group has done a great job of executing that, and that's a big part of the reason why this new store productivity has increased.

Great. And just to confirm, there was no impact from the baseball bat regulation change in 2Q, correct?

Small. It was much, much greater in Q1 than Q2 because it was all around high school.

The next question will come from Chris Svezia of Susquehanna Financial Group.

I just have one quick question. Just on the fitness category, I know in the past it's been one of the weaker categories for you guys, treadmills, ellipticals. What are you guys doing as you go into the Q4 quarter in terms of making changes to that category, either reducing the square footage, what are the categories you're putting that inventory into? And are you doing more with regard to foam rollers or resistance bars and things of that nature? Just kind of your thoughts about that category as you head into the back half.

Well, a couple things. We'll be launching a private brand of treadmills called Epic that we've worked with that provides some technologies that many treadmills don't have. So we're enthusiastic about that to kind of stop -- to hopefully stop the bleeding there. We've also transitioned inventory dollars into, as you would say, foam rollers, resistance bands, medicine balls, kettle bells, kind of a lot of the products that are required for the P90X work out we've done really very well with. So we've transitioned dollars there. Now a treadmill or an elliptical, it takes a lot of foam rollers and resistance bands to make up for that, but the margin rates on those foam rollers and resistance bands, et cetera, are much higher than treadmills. So we expect the fitness business to continue to be somewhat challenged, but that's all baked into our guidance and are comfortable with our overall guidance.

Our final question will come from Kelly Chen of Telsey Advisory Group.

It's actually Joe Feldman. So I wanted to ask you -- to follow-up in that question about inflation a little bit. With the ticket increase that you guys had to drive the comp, how much of that was driven by higher pricing? Because we are hearing the sporting goods manufacturers talking about prices coming down a little bit. Just wondering how we should think about that in the quarter and maybe going forward.

I don't think there -- and we talked about this, that we didn't see a real big increase in prices across the board in the first quarter. They're going to be a little bit more in the -- or first of the second quarter, a little more in the third and fourth quarter with some of the apparel categories we talked about. There were some categories or some -- I should say there were some SKUs that took price increases that -- and some of them worked out fine and the customer accepted them. And some other ones didn't. I'm not going to get into what those specifics of that are, but there were -- sometimes they accepted it and sometimes they didn't. But overall, we were pleased with the AURs that we put out there. A driver of the AURs were also our -- continued to be our golf business around what TaylorMade has done with the R11S driver, the RocketBallz, Fairway Woods drivers, Hybrids, as that business has done really very good and has helped move the AURs up.

Got it. That's helpful. And then Just one kind of longer-term question. I guess as we think about maybe the potential for where operating margins can go one day, because there are so many good things you are doing beyond just adding stores and obviously with the private label and the shop in shops and the shared footwear model. I mean -- I guess stores that have that full complement of the assortment and sort of where you kind of envision the company, how are the -- what's the margin like in those stores relative to, say, a store that doesn't have all of that? What could we see in the future, I guess, is what we're trying to get at.

Well, we've indicated that we think over the next several years we can get to double-digit operating margins.

Got it. And it's driven by all those things. Okay.

All those things. Yes. And there's not a silver bullet. There's all those -- there's a number of things we need to continue to improve on.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Edward Stack, Chairman and CEO, for his closing remarks.

I’d like to thank everyone for joining us on our second quarter conference call and look forward to talking to you all at the end of our third quarter. Thank you very much.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect.