DICK'S Sporting Goods, Inc. (DKS) Q1 2013 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. And now I would like to turn the conference over to Anne-Marie Megela, Vice President, Treasury Services and Investor Relations. Anne-Marie, please go ahead.

Thank you. Good morning, and thank you for joining us to discuss our first quarter 2013 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 include 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 the 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 February 2, 2013. We disclaim any obligation and do not intend to update these statements except as required by the securities law. We've 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 related reconciliations can be found on the Investor Relations portion of our website at dickssportinggoods.com. With me on the call today will be Ed Stack, Chairman and Chief Executive Officer. Ed will review our first quarter financial and operating results and discuss our guidance. Joe Schmidt, our President and Chief Operating Officer, will then review our store 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 and expectations. 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. This morning, we announced our first quarter financial results. While we're pleased to announce we generated earnings in line with our original guidance, we're more pleased with our top line performance. We had meaningful sales miss [ph] in several key areas of our business. Our Golf Galaxy chain experienced negative comps of 11.8%, while sales in the DICK'S Sporting Goods golf business were moderately worse. We also saw sales decline in our fitness and baseball business and, to a lesser extent, select outdoor businesses such as bikes, water sports and camping. Our primary objective in the next quarter is to drive sales while preserving margins. For example, we are working with our vendors to develop promotions and events in key areas of our business, and particularly golf. We are also continuing the process of divesting or significantly reducing the Livestrong brand in both the fitness business and our apparel business. The Livestrong fitness equipment business represented 50% of our treadmill and elliptical business. These are the 2 largest categories in the fitness area by a wide margin. We expect to complete this transition by the end of the third quarter. Additionally, we remain focused on our clearance inventory, which was down 7.4% on a square foot basis versus last year. There was limited drivers of our margin rate expansion in the first quarter. We have begun the remodeling program in our stores, which is expected to be completed in 75 stores this year, of which 56 will be completed by the end of the second quarter. These remodels allow us to add a Nike Fieldhouse concept, the Under Armour All-American concept and to revitalize our youth business under the young athlete banner. Finally, we continue to aggressively invest in our eCommerce business. We have experienced terrific results in this area, which represented 5.8% of our business in Q1 this year versus 3.7% in Q1 of last year. Turning to the financial results. In the first quarter, we generated earnings per diluted share of $0.48, excluding an estimated recovery of $4.3 million, or $0.04 per share, of our original investment in JJB Sports. These earnings compare to first quarter 2012 earnings per diluted share of $0.45 and to our guidance of $0.47 to $0.49. Sales increased 4.1% in the first quarter driven by the growth of our store network, offset by a decrease in consolidated same-store sales. Adjusted for the calendar shift due to the 53rd week in 2012, consolidated same-store sales decreased 3.8% from the first quarter of 2013. This compares to our expectation of approximately negative 2% to negative 1%. Shifted same-store sales for DICK's Sporting Goods were down 3.2%, and Golf Galaxy was down 11.8% in the first quarter of 2013. Our 2-year stacked consolidated same-store sales on a shifted basis increased 4.5%. On an unshifted basis, consolidated same-store sales decreased 1.7% compared to our expectation of approximately flat to 1% up. Unshifted same-store sales for DICK's Sporting Goods were down 1.3%, and Golf Galaxy was down 7.4%. Our 2-year stacked consolidated same-store sales on an unshifted basis increased 6.7%. These same-store sales results compare to the first quarter of 2012, where consolidated same-store sales increased 8.4%. For the second quarter of 2013, we expect consolidated earnings per diluted share to increase 15% to 18% to between $0.75 and $0.77 compared with consolidated non-GAAP earnings per diluted share of $0.65 for the same period in 2012. On a shifted basis, consolidated same-store sales are expected to increase approximately 2% to 3% compared to a 3.8% increase in the second quarter last year. On an unshifted basis, consolidated same-store sales are expected to increase approximately 3.5% to 4.5%. For the full year 2013, we continue to anticipate consolidated 2013 same-store sales will increase approximately 2% to 3% on a 52- to -- 52-week basis on top of a 4.3% increase in 2012. We're anticipating non-GAAP consolidated earnings per diluted share between approximately $2.84 and $2.86, excluding an estimated recovery of $4.3 million, or $0.04 per share, from our original investment in JJB Sports. This compares to non-GAAP earnings per diluted share of $2.53 in 2012, including the $0.03 from the 53rd week and excluding $0.22 from the JJB impairment charge. Our guidance also includes a $0.12 impact from our growth investments. So even with the substantial investments we're making in the business in 2013, we expect to generate double-digit earnings growth and deliver operating margin expansion. Despite the challenging sales we experienced in Q1, primarily in the Midwest, Northeast and Atlantic markets, we were able to grow earnings in line with guidance, maintain our strong balance sheet and continue to make improved -- investments in our future. I'd like to also thank our CFO, Tim Kullman, who announced his intent to retire last December and will be leaving us in June. Over the past 6 years, Tim played a vital role here, providing an exceptional blend of financial discipline and insight that has been important to our growth. The board, our associates and I are sincerely grateful to Tim for his many contributions and wish him well in the future. I'd now like to turn the call over to Joe.

Thanks, Ed. In the first quarter of 2013, we opened 2 new DICK's Sporting Goods stores, bringing our total score count at the end of the quarter to 520 DICK's Sporting Goods stores for 28.3 million square feet and 81 Golf Galaxy stores with 1.4 million square feet. We also started our partial remodel program in the first quarter. The partial remodels focused on strategic growth categories and feature Nike and Under Armour shops. Within our stores, we have 176 shared service footwear decks, 178 Nike Fieldhouse shops and 111 Under Armour shops at the end of the first quarter. By the end of the year, we expect to have 220 shared service footwear decks, 291 Nike Fieldhouse shops and 240 Under Armour shops. New store productivity of our new DICK's Sporting Goods stores was 89.1% in the first quarter compared to 105.8% in the first quarter last year. In total for 2013, we plan to open approximately 40 DICK's Sporting Goods stores, fully remodel 4 stores and partially remodel 75 stores. We are also planning to open 1 new Golf Galaxy store and relocate 1 store, both in the new format, which includes a greater focus on golf services and experiential shopping. We currently operate 2 True Runner concept running stores. These stores allows us to further connect with enthusiast runners and provide us valuable insight that we can apply across our businesses. We plan to open 2 additional True Runner locations in 2013. Finally, we remain on track to introduce our outdoor concept store in 2013. Our Field & Stream stores will be destinations for hunting, fishing and camping enthusiasts and will offer premium assortments with superior service levels. Our plans are to open 2 stores this year, the first of which is scheduled to open in Pittsburgh in the third quarter. Collectively, the strategic investments that we are making in new and existing stores, new concepts and the omni-channel capabilities position us to drive continued growth in the years ahead. I will now turn the call over to Tim to review our financial performance, investment and outlook in greater detail.

Thanks, Joe. Before I get into the detailed results, I'd like to remind everyone of the change in our disclosure policy for same-store sales. Beginning this quarter, we will report same-store sales for our stores and eCommerce business together. We will continue to provide the size of eCommerce business as a percentage of our total sales. We're making this reporting change because as we build out our omni-channel platform, it has become apparent that the traditional sales channels are overlapping with the digital space and that providing comp sales on a combined basis will be more meaningful. As a result of this change in reporting, we will no longer provide the detailed calculation of new store productivity in the Tables section of our press release. The calculation includes DICK's Sporting Goods store comps, which we are no longer disclosing on a stand-alone basis. Sales for the first quarter of 2013 increased by 4.1% to $1.3 billion. Adjusted for the shifted calendar due to the 53rd week in 2012, same-store sales were negative 3.8% compared to our guidance of approximately negative 2% to negative 1%. First quarter 2012 same-store sales increased 8.4%. Shifted same-store sales in the first quarter of 2013 for DICK's Sporting Goods were down 3.2% and for Golf Galaxy were down 11.8%. The decrease in same-store sales in DICK's Sporting Goods was driven by a 2% increase in sales per transaction and a 5.2% decrease in traffic. Unshifted same-store sales for DICK's Sporting Goods decreased 1.3% and Golf Galaxy decreased 7.4%. eCommerce penetration was 5.8% of total sales. Moving on to gross profit. In the first quarter of 2013, consolidated gross profit was $411.7 million, or 30.87% of sales, and was 8 basis points higher than the first quarter of 2012. Merchandise margin expanded by 84 basis points. This was offset by occupancy deleverage of 47 basis points as well as freight and distribution deleverage of 26 basis points. Occupancy deleveraged primarily due to lower sales. Freight and distribution deleveraged due to the increase in eCommerce supply chain costs as a result of higher sales. SG&A expense in the first quarter of 2013 was $312.7 million, or 23.45% of sales, compared to SG&A expenses of $296.1 million or 23.1% of sales in last year's first quarter. This deleverage of 35 basis points was due to increased administrative expenses, primarily related to payables for IT, eCommerce and our new concepts. During the first quarter, we have determined that we would recover $4.3 million, or $0.04 per share, of our original investment in JJB Sports before we impaired our investments in the second quarter of 2012. There was no related tax expense as we reversed a portion of the deferred tax valuation allowance previously recorded for the net capital loss carryforward we did not expect to realize at the time the investment in JJB Sports was fully impaired. This represents our current estimate of expected recoveries from JJB, and we do not expect any material change in such expected recoveries. For the first quarter, we generated non-GAAP earnings of $0.48 per share, which includes a $0.05 benefit from the shifted calendar. Now looking to the balance sheet. We ended the first quarter of 2013 with $114 million in cash and cash equivalents and with no outstanding borrowing under our $500 million revolving credit facility. Last year, we ended the first quarter with $521 million in cash and cash equivalents and with no outstanding borrowings under the facility. Inventory per square foot increased by 2.5% at the end of the first quarter this year compared to the end of the first quarter of last year. At quarter end, current inventory was down 7.4% per square foot. Net capital expenditures were $27 million in the first quarter of 2013, or $34 million on a gross basis, compared with net capital expenditures of $33 million or $41 million on a gross basis in the first quarter of last year. In March, we announced a $1 billion 5-year share repurchase authorization. During the first quarter, we repurchased 1.7 million shares of our common stock at an average cost of $47.41 per share for a total cost of approximately $80.6 million. We also paid our regular quarterly dividend of $0.125 per share. Looking to our guidance. Please keep in mind that because fiscal 2012 included 53 weeks, any comparison to the 2012 retail calendar will reflect the shift. This shift will not have a net effect on our total results for the fiscal year but will impact our quarterly results. Our reported comparable sales and earnings would be positively impacted in quarters 1 and 2, but this will be offset in quarters 3 and 4. Also keep in mind that our earnings guidance takes into consideration the impact of the substantial investments planned in 2013 in our omni-channel platform, our stores, our information systems and our new concepts, which are expected to have a $0.12 impact on earnings per diluted share for the full year. The impact of these growth investments is expected to be approximately $0.03 each quarter. For the second quarter of 2013, we anticipate consolidated earnings per diluted share of $0.75 to $0.77 compared with consolidated non-GAAP earnings per diluted share of $0.65 for the same period last year. Our earnings expectation includes a $0.04 benefit from the shifted calendar. Gross profit margin is expected to increase year-over-year, driven by higher merchandise margins, partially offset by an increase in eCommerce supply chain costs as a percentage of sales. Occupancy is expected to remain relatively flat. SG&A as a percentage of sales is expected to decline as a result of a contribution made to the DICK'S Sporting Goods Foundation last year and lower incentive pay as a percentage of sales this year. On a shifted basis, consolidated same-store sales in the second quarter of 2013 are expected to be approximately 2% to 3% compared to 3.8% in the second quarter last year. On an unshifted basis, consolidated same-store sales are expected to be approximately 3.5% to 4.5% in the second quarter. For the full year, we continue to anticipate consolidated earnings per diluted share to be between approximately $2.84 and $2.86 a share, excluding the partial recovery of the investment in JJB Sports. As a reminder, this guidance also includes a $0.12 impact for the meaningful growth investments being made in 2013. For the full year, gross margin is expected to slightly deleverage in 2013, driven by merchandise margin expansion, offset by an increase in occupancy costs relative to total sales. Occupancy is expected to deleverage in 2013 due to the 53rd week in 2012, an increase in new store costs and store remodels. SG&A as a percent of sales is expected to leverage compared to 2012 even with the significant investments in eCommerce, IT and new concepts due to lower administrative expenses as a percent of sales. We anticipate consolidated 2013 same-store sales will increase approximately 2% to 3% on top of a 4.3% increase in 2012. Diluted shares outstanding are expected to be approximately 126 million for the full year compared to 126 million outstanding shares in 2012. For the full year, capital expenditures on a net basis are expected to be approximately $258 million or $299 million on a gross basis. Net capital expenditures for 2012 were $187 million or $219 million on a gross basis. The anticipated increase in capital expenditures for 2012 to 2013 is primarily the result of the planned growth investments in 2013. We continue to see significant opportunity ahead and plan to make meaningful investments over the next 5 years to capture that opportunity. As we announced in our last earnings call, we'll discuss our longer-term strategic growth opportunity and investment plans at our first ever Analyst Day on September 18. This concludes our prepared remarks. We'll be happy to answer any questions you may have at this time.

[Operator Instructions] And our first question will come from Gary Balter of Crédit Suisse.

Ed, you emphasized that you want to get more back to value equation, and you specifically mentioned golf. Why? What are you seeing that says that that's necessary in your stores and specifically in that space?

Well, the golf business, Gary, has been a little bit -- as we've said, was one of the areas that had been more impacted from a sales standpoint, and a number of the vendors are starting to work on promotions in order to drive some business. So we're in the process of working with them to offer our opinion and to work with them on how to best support the golf business to try to drive new sales. So we -- and it's -- and we thought it would be somewhat difficult to anniversary what happens in the golf business last year. But because of some factors, it was a little bit worse than we anticipated, which had been pretty well chronicled. But this is one of the areas that we think we've got an -- there's some pent-up demand, and we want to go after that pent-up demand with some better promotion so that we don't have some of these people deferring new purchases till next year.

And is that extending out past -- like when you look at other categories, is that extending your past calls value equation?

Clearly, there are some other areas where we're looking at some of these promotions we talked about. The fitness business, especially cardio business, has continued to be difficult, and we're working through some promotions to exit out of this Livestrong product as we start to transition into another brand.

Our next question is from of Brian Nagel of Oppenheimer.

First question just on weather. I know that that was a big issue in the quarter, but -- and I apologize if you've addressed this in your prepared comments. But the weather was obviously an issue for sales going into Q1. But as weather improved in various markets, did you see sales pick up? And maybe some color around that?

Well, we didn't -- weather certainly has an impact. We didn't call out the weather just as a specific issue because we didn't want to hide behind the weather. We've got a responsibility to drive sales and earnings irrespective of the weather. We did -- under the circumstances, I think the team did a very good job of driving those earnings numbers. As we've seen, weather did better, and there has been a change in the sales trend, yes.

We -- do you want to quantify that at all or...

We've never really for competitive person [ph]. We've never gotten to that level of detail to actually say that it got better as the weather got better. So it's different for the disclosures that we've provided in the past. But under these circumstances, I think we should do that. But as it got better in different parts of the country, it certainly had a meaningful impact with sales.

Got it. And the second question on the Livestrong product, I guess we -- this was called out in Q4. So the comment you're making today about further phasing down that product, I think you said by Q3, should we take that as kind of an incremental negative versus what we heard in the fourth quarter call? Or was this basically just a continuation of the effort you put forth a few months ago?

It's a continuation. I thought we indicated in the call that the fitness business was important in the fourth quarter, but it was -- it's very important in the first quarter also. Now with New Year's resolutions in that -- in the Livestrong brand being 50% of that total cardio business, which is the biggest part of the fitness business, it's continued to have an impact, and we expect it to continue to have an impact through the second quarter, and I think we'll be in good shape going into the third quarter. But we've indicated we'll be out of all of this issue by the -- in the fitness side by the end of the third quarter. I actually think it'll be earlier than that.

And is that bringing in a competing brand? Or is it actually the process deemphasizing the category within your stores?

It's bringing in a different brand.

Our next question is from Michael Lasser of UBS.

I wanted to ask about the experience you've seen with the stores that you've already remodeled. Can you just give us some indication of the type of comps [ph] that you're experiencing and then how scalable that experience will be to the rest of the remodels that you'll be doing over the course of the year?

Well, we haven't talked about what the comps are in the stores that we've remodeled. But this remodel program that we're doing here is not a full remodel of the stores. It's substantial as we're remodeling the entire middle of the store to be able to accommodate, as I said, the Nike Fieldhouse, the Under Armour shops and our youth initiative. So we've only had -- we've only gotten one of those stores done, and it's only been done for a couple of weeks, which is really too early to say. But if we take a look at stores that have these concepts in and then the stores that don't, the sales are higher, the margin rate is higher. There's all the -- as a retailer, all the good things you want to have happen happen in the stores that have these -- the UA All-American shop and the Nike Fieldhouse concept. So we're pretty enthusiastic about this not only from a sales standpoint, but also this is a part of our initiative that we've talked about over the last 18 months or so to try to influence and focus on higher-margin merchandise. And this is certainly -- the apparel side of our business is certainly higher margin than many other areas.

And are the benefits pretty immediate such that you will see an accelerating impact from all of these remodels in the second half of the year?

We expect it to be relatively quickly that we get the benefit of it, yes.

Okay. And then just a quick clarification question on the ticket and [ph] traffic breakdown for the DICK's business? That 5% decrease in traffic in DICK's, is that inclusive of the website traffic? Or is that just store-based traffic?

This is Tim. It is not store-base traffic only.

Okay. And then just remind us, was -- in our model, we have that eCommerce sales as a percent of total was about 3.7% in 1Q '12. Is that correct?

In 1Q, that's correct, and 5.8% in 1Q '13.

So the business continued to grow about 50%?

Correct.

Roughly.

Our next question is from Sean Naughton of Piper Jaffray.

Just sort of a follow-up to the eCommerce. You continue to see very strong growth there. Is there any change in terms of the thinking about the total number of stores you're willing to open? And I guess as a follow-up to that, from a margin perspective, how are those sales relative to the company average today? And what is the outlook for that particular segment moving forward?

So as we look at the stores, the number of stores, I mean, it hasn't changed the number of stores that we plan to open. What it has influenced as we kind of -- as we went through that plan of how many stores to open, it influenced a bit how we look at cannibalization. So we're a bit more sensitive to store cannibalization. But we still have so many markets that we don't have stores in, and so it really looks at more how we cannibalize stores and the total number of stores. The profitability of the eCommerce business, it's not as profitable as the store yet, which we've talked about. But we expect over the next 2 years or so that we expect that we would be ambivalent as to where the sales come from. And as we make changes to our merchandise mix, kind of the distribution channel that it comes out of, that means getting more and more profitable every day. And as we move through -- as we move to ship from store and we continue to get better at that, we will look at that we have over 500 distribution centers around the country that can get product to customers quickly and inexpensively. And as we use the stores as a distribution channel, but still online sales is a very profitable venture for us as opposed to using GA [ph]-size warehouse.

That makes sense. And then I guess a clarification on the shop-in-shops. Is this an increase on the number of UA shops that you plan to open versus your prior guidance? And if so, what was the catalyst for that change?

Well, it's certainly more than we've done in years past. So it's a big increase in what we've done in years past. Just the sales benefit that we see, that Under Armour sees, where we see that Nike sees in this, and we've all decided that we think it's best to continue to invest in these shops because it pays off for us and for our vendors.

Our next question is from Chris Horvers of JPMorgan.

First, in the clearance. Inventory level is down 7% year-over-year is great. Is there any markdown risks as you think about the second quarter? Or any meaningful markdown risks? Are there any categories that are in better or worse shape than others, perhaps specifically golf and apparel?

No, we don't see there any big risk. We've got that all planned into our guidance. Our inventory is really in very good shape. As we take a look at golf, we'll work with the vendors in order to help liquidate this inventory. We've got great partnerships there. So no, there's not a markdown. If you're asking because it was down 7.4%, did we take markdowns? The answer is yes. We don't have any unrealized markdowns that are kind of sitting out there.

Perfect. And then can you talk about -- just geographically, can you talk about the -- some relative performance in the east and the north versus the south and the west? Did you see positive comps in the more-normal-weather markets?

No, we're not going to get to that level of granularity from a competitive standpoint. But as you can imagine, the midwest and the northeast had a more difficult business trend than the south and the west.

Okay. And then finally, as you think about the -- following up on the online transaction profitability question, how meaning -- how meaningful is the closing of the profitability gap once you do buy online, pick up in store? And how much of the delta is really the basket, the fact that the online transaction tends to be a rifle shop and is tougher to attach?

No, we think we have a lot of opportunity to build the basket. We don't do -- right now, we don't do a great job of merchandising, if you will, kind of the add-on sales. So we think we've got a big opportunity there. We don't think that the way people shop, that it will limit the add-on sales that we can get to build this basket. So we think there's a big opportunity for us there. And that will help increase the profitability, but we don't think there's anything structural from way people shop that would inhibit us from doing that, at least not in our business.

So it's building the right systems and algorithms to do that. And then what about the buy online, pick up in store? Is that a meaningful driver of closing the profitability levels?

We think it will be, yes. And we'll have that up and operational this year. But yes, kind of the models that we've shown and how we believe this will play out will certainly help increase the profitability just as the ship-from-store attribute helped a lot, too, from a profitability standpoint.

Your next question is from Matthew Fassler of Goldman Sachs.

A couple of questions, and the first relates to eCommerce. From what we can tell, you noticed your gross margin guidance off a little bit to down slightly from flattish, and distribution costs seem to be making the difference. Can you talk about whether that's a reflection of mix of online within the business and the fact that that business has gone stronger? Or does it relate to the kind of offers that you're providing or the competitive channel is asking you to provide related to free shipping or other deals for consumers?

Well, Matt, there's a lot of things happening in the eCommerce business. So we're getting -- we are looking at what happens from a shipping standpoint and how -- what that -- costs associated with shipping versus trying to lift the revenue. We really think -- eventually, if we fast forward some -- I don't know if it's 12 months from now, 18 months from now, but we think the vast majority of everything is going to be free shipping. That's just going to be what the customer wants. As we take a look at how we're mixing out our online business, we're doing a better job from an apparel standpoint in those higher-margin areas. We think as we go forward, and we're not there yet, as I said, we think that the attachment rate of those building a basket of higher-margin merchandise we can do a better job of -- we're not doing a very good job of that right now. So that does impact margin rate a little bit right now to drive sock [ph] sales, to drive accessory sales when somebody makes a purchase. We're not doing as good a job there as we need to. Some of those constraints are inside the GSI system, which we're working with them right now to modify so that we can be better merchants online, if you will.

Okay. And my second question, your SG&A was obviously very well controlled during the quarter. And I would think that that's particularly tough to do when you have the investments that you laid out at the beginning of the year. So did you have that investment spending in Q1 in line with the original plan? And if so, what we really want cut back to enable the SG&A to go down to levels that we saw?

Matt, this is Tim. We indeed have the investment spending that we anticipated for the quarter, approximately an impact of $0.03. And as we look through the other expense categories, the business dictates us to take action. And if you take a look at what we typically are able to pull in terms of the levers of the business, while we didn't take a great amount out of advertising, advertising leveraged for us for the quarter. And then if you also take a look at the performance, as I had indicated, we are not happy with the sales performance. And at this point in the year, our overall expense on incentive pay is also under the accrual we had in last year's first quarter.

And also, if we saw sales trending the way that they were, Matt, the store operations group did a very good job of controlling store payroll.

Our next question is from Robbie Ohmes of Bank of America.

This is Rafe Jadrosich on behalf of Robbie. Can you guys give a little color around your youth initiatives and what the plans are for the remodels there?

What we're going to do with the youth initiative is we've tested this with great results. We've taken the youth area. And although it won't be necessarily vendor-specific, but take the youth area and build it similar to what we've done with the Under Armour All-American or Nike Fieldhouse concept, pulling the youth product together in a better way, merchandising it better, getting it on the power aisle, the same as we've done with these other brand shops. And when we tested that, we had great results. So we're very pleased with that and going after this in a pretty aggressive way.

And can you guys discuss trends and -- for, particularly, on the running side? There's a little bit of a slowdown in the industry. Have you seen any uptick with new product launches or as the weather has improved?

Well, as the weather improved, you could -- yes, we have. But we haven't seen an issue in the running category similar to maybe some other people in the mall-based retailers because we're really not in the fashion side of that as much. We're really in that core True Runner, if you will. And those true runners need to replace their shoes and wear them out. It's not fashion item for these guys, these men and women. They are actually taking these shoes and going out running races or working out in them. So we haven't seen a big change.

Our next question is from Michael Baker of Deutsche Bank.

So I also want to follow up on the footwear category and ask how you're doing in basketball, which I think you guys are a little bit behind in merchandising but have added to that product. So if you could talk about that. And then 2 other quick ones. One, guns and ammo, any color there? And then third, can you quantify the contribution to the DICK'S Foundation in the second quarter last year?

On the basketball piece, we've certainly seen an uptick in basketball. The basketball business has certainly been on the rise. We have made great improvements in our basketball assortment with -- from the different brands. Certainly, Nike leads that category. Changes we've made from -- with Nike's assortment, Adidas and some of the other brands. So basketball business has done much better. We'll see a much bigger presentation with basketball in our stores really now and then going forward into back to school. The guns and ammo piece, that certainly had a positive impact in our business, but our guns and the ammos businesses is a small portion of our business versus some other people in this industry. There's - we've got a narrower assortment of that product. We don't promote it like others; it's just a smaller part of our business. So we didn't see the big pop that some others have.

Your question on the foundation, it was approximately worth $0.02.

Our next question is from Mark Miller of William Blair.

Regarding the value offerings and the opportunities you're pursuing with vendors, I was hoping to get some perspective also on your market research. And what are you seeing from a customer perception in terms of your value? And have you seen some online competitors come in with aggressive list prices? You have the ScoreCard and other discounts which provide value, but I'm wondering if you feel like you're getting credit from the consumer for that.

Well, I think that we're getting credit from the consumer, and we think that there was a couple of categories that hit us particularly hard on the transition in golf. The golf business is up significantly last year versus the year before. Our Golf Galaxy business last year was up roughly 12% in the first quarter, and the DICK'S business was relatively the same. It was really a strong cycle last year, a lot of promotion out there. And by promotion, I mean advertising around some new technology that would help you play better. This year really was robust, and the -- it kind of showed in the sales. We've got an issue around the fitness business and Livestrong, which we've talked about. So we're trying to price -- work with the vendors to bring some promotion and excitement to that golf category in order to try and drive through some of this inventory and get people out there buying. We think that there's a concern that there's some pent-up demand, and as we get later into the season, we want to realize that pent-up demand and encourage people to buy as opposed to have them postponing their purchase until next year.

And I have a question about eCommerce. I know it's early, but I'm interested in what you've learned about mobile to this point. And can you share any metrics on what you're seeing as a portion of dot-com traffic and conversion for purchases?

Yes, we're not going to get to specific granularity on that. But as you would imagine, the mobile aspect of our eCommerce business is growing, although from a smaller base, is growing at a much faster rate than any other aspect. And mobile continues to be extremely important. We continue to focus on it. And as everybody believes, mobile is really going to be the future of the eCommerce business.

Our next question is from Sean McGowan of Needham.

Some questions on the Field & Stream initiative to the extent that you care to share it. Are you planning to go into markets where there are existing kind of big-box competitors and specialty, or go where there aren't any? And second, can you talk a little bit about how the product offering might be a differentiated from what you would expect to find at some of those other stores?

From a -- our outdoor concept, Field & Stream, we don't anticipate right now to kind of go jump in and compete with the other outdoor retailers. We'll get our kind of shoelace under us and see how this concept does. We anticipate it's going to do very well. But we're going to be -- to open this up, we'll be opening up where they're not.

From a product offering point of view, I think you're going to see some greater focus and some differentiation in the Field & Stream store that you would in a DICK'S Sporting Goods store. Some categories to highlight would be fly fishing, archery, casual apparel, food processing. Those are some categories where we think we can really blow out the square footage in sales. Some brands and some better quality merchandise that you might find at Field & Stream which you might not find at DICK'S would be Hoyt from a boat perspective; hunting apparel, we're going to carry Sitka; on the rifle side of the business, we're going to carry Sako and Dakota. And so those are just some of the name brands and key brands that we're going to carry that you won't find at a DICK'S Sporting Goods store.

One of the other differentiating factors between Field & Stream and some of the other brands that are out there, we'd be very focused from an apparel standpoint on branded hunting apparel as opposed to some other retailers who have done a really wonderful job with their private brands and are much more private brand focused.

Okay, that's very helpful. I want to add my congratulations to Tim, and it's been a pleasure working with you over the years. Best of luck.

Thanks, Sean.

Our next question is from Sam Poser of Sterne Agee.

This is Ben Shamsian calling in for Sam. Given the current spending levels, what same-store sales do you need to lever the occupancy line?

The occupancy line is going to take a little bit more than our SG&A line. And as we have said in the past, that means about 1% to 2%. In occupancy, it's closer to between 3% and 4%.

3% to 4%, got it. And secondly, can you please provide us an update on the merchandising assortment planning system that rolled out last year? What have you learned so far? And has it -- is it what you had hoped for when you started it?

On the merchandise assortment plan, we're still working through the conversion of the merchandise assortment plan. We're -- if this were a baseball game, we're somewhere in the sixth inning. So we still have some opportunity to learn more about that and really the gaining the benefits of that program. So we're still kind of in the middle of this.

Our next question is from Camilo Lyon of Canaccord Genuity.

Or -- Ed, now that you've had a few different branded shop-in-shops in place for a couple of years at least, can you talk about the performance of those shop-in-shops in year 2 and after? We know that shop-in-shop performance in year 1 is pretty dramatic, but I'm curious to see how the shop-in-shops perform after that initial year 1 lift.

Well, they continue to perform better than the stores that don't have it, even as we move forward into the subsequent years. So yes, it's been a very good investment for us and a very good investment for the brands that we've partnered with.

Great. And then just my last -- my next question is on the smaller market stores. I was wondering if you could share some of your thoughts on how those stores have performed, any learnings that you might have, if there's a difference in the competitive landscape that you noticed, seeing more different way that the consumer behaves in those smaller town markets.

Now we continue to be very enthusiastic about these smaller market opportunities. Just in the past year, a couple of examples of small markets, some [indiscernible] in New York, where -- Pinehurst would be another one in North Carolina. And these small markets all behave a little bit differently. If they're rural, we think there's an opportunity to do a little bit more with the outdoor consumer. If they're are little bit more suburban, they behave more closely to what a DICK'S Sporting Goods store would behave. So really, it depends on the market, but we continue to be very enthusiastic and are happy about the results of these smaller market opportunities.

Okay. And just lastly, I wanted to clarify something. Ed, you've made a statement in your prepared remarks about vendors helping you to manage the promotions in some of those key categories that you want to work down. I just want to be clear, though, that you are getting some support from the vendors in managing -- in marking down that inventory and helping -- and their taking some of the margin reductions that are needed to move it. Is that correct?

Yes, we are getting help from the vendors, yes.

Our next question is from Matt Nemer of Wells Fargo Securities.

It's actually Kate Wendt in for Matt Nemer. First, I wanted to follow up on ship from store. I'm wondering what percent of your eCommerce orders are being fulfilled from stores today versus this time last year and if you've made any sort of improvements in shipping speed.

Well, we're not going to get to that level of granularity. But we're really -- the increase in ship from store has been pretty dramatic. We expect it to continue to move to be a significant move to ship from store. And as we said, it's the more profitable the distribution channel, and we're doing the best we can to get as much shipped from store as possible. Well, it's cheaper and it's quicker. And just so that -- I'm not sure if you know. We've now got it in all stores. So all stores are available to ship product.

Great. And then second, quickly on Field & Stream, I'm wondering how you feel about being able to offer a robust assortment in guns and ammo, given some of the supply constraints that are out there.

Kate, at the present time, we work with the vendors. We don't think that it's going to be big issue. And remember, we're only opening 2 stores this year. So it's not like we need a -- we think these stores are going to do terrific as though these 2 stores opened up. But in the grand scheme of things, it's not a lot of inventory that's required in the grand scheme of it all. So we don't think we have an issue getting inventory.

Our next question is from Kate McShane of Citi Research.

Ed, you mentioned you didn't want to hide behind the weather, and I wondered if you thought there was anything else going on in the competitive environment that could have impacted your business during the quarter. And I was wondering if you could walk us through some of your bigger categories, like footwear and athletic apparel, and how it comped versus the average.

Well, I will tell you that we didn't want to hide behind the weather. As I said, I think we've got the responsibility to deliver to our shareholders the sales and the earnings results that we guided to. We were able to do that on the earnings side, which I think is the more important of the 2 sides. So we were pleased with that. Again, I called out the areas of the business that were difficult and kind of the areas of the country that were more difficult. Let's take a look at the footwear business and the apparel business. Although we're not going to be specific, they were significantly different than the company average.

Okay, great. And just a longer-term question with regards to competitive environment. Just -- could you give us your view on the growth trajectory of some of the other sporting goods retailers as well as some of the vendor retail initiatives, and how you manage that along with your own expanded store growth plans?

Well, we keep an eye on what our competitors are doing. We -- and whenever a competitor opens, it's -- we don't like to see that happen, but it's part of the business cycle. It's been part of the business cycle since we started the business. So since we went public or after the kind of economy cratered, it's always been there. So we'll continue to work through that and provide the customer what we hope is the best alternative out there in this industry today. And to date, it's been quite successful. From a vendor standpoint, we continue to drive our online business. And although the vendors are -- offer some -- their product at a -- online, the one thing they've done is that they -- it hasn't become a price war with the vendors. And so they're selling the product at the same price or, in some cases, higher than what we're selling it for on our site. So we're saying we're doing it, but that's part of the competitive environment out there, just as their outlet stores have been in the past. And it's something we just have to deal with, and we've done pretty good at dealing with the competitive issues by providing the customer the best alternative.

Our next question is from John Zolidis of the Buckingham Research Group.

And let me add my congratulations, Tim, and good luck.

Thanks, John.

Two questions. First, could you talk about the trend in transaction size, which has been increasing probably for about 2 years on a fairly consistent basis? What's driving the transaction size gains? And then my second question is around the merchandise margin improvement we saw in the current quarter. Both this quarter and last quarter had difficult sales trends, but yet merchandise margins were up even with presumably some discount a little bit more. Can you give us a little bit more color around how you're achieving the merchandise margin improvement?

Well, the way we were achieving the merchandise -- the margin improvement has been a couple things. And it's nothing different than what we've talked about that was in our plan. So we've been able to continue to focus and drive business in higher-margin categories, whether that be in the apparel business or the footwear business. So the investments we have made in the athletic apparel, with the Fieldhouse, the Under Armour All-American shops, the North Face shops, we've really worked hard to drive that apparel business. The changes we've made in the shared service footwear deck has helped drive that business and has helped drive the margin rates. The third component of that is we've really done a very good job managing our inventory and being able to manage that inventory and manage those markdowns. Our buying group has done a really very good job of having the right products. We haven't made, knock on wood, any real big mistakes other than Livestrong, which was kind of a little bit out of our control. But we've done a very good job of buying product and managing those markdowns and clearing that inventory, as evidenced by the fact that our clearance inventory was down 7% -- a little more than 7% on a per square foot basis this year versus last year.

And my first question was back on the transaction size.

Yes, I think the transaction size was driven by that we've done a good job of trying to provide the consumer some of those better quality products. So our technical running business has done very well. The technical apparel business has done very well. And a lot of these were at higher price points than have been sold in the past, and the consumers reacted quite -- really quite well to them.

Our next question is from Paul Swinand of Morningstar Investment Research.

I wanted to just ask about the online. You mentioned that mobile is growing very rapidly. Is the current mobile sale in customer different in terms of sale and search? Is it more occasional or more consumable compared to -- with desktops, you might be doing some more research or something?

Well, I think with desktop, you're probably doing some more research. Mobile is used for a lot of different things. We find mobile is used for eCommerce, which is growing quickly, but there's also to try to find the nearest store, to look up the -- a store number to call to ask a question. There's a lot of things that people are using the -- they're using their mobile phone for a lot of different things which relates to a store, and the mobile traffic has been extraordinary.

Do you eventually see that converging, though, it sounds like? With their desktop?

When you say converging, would do you mean?

Well, just doing some more research and more engagement in general. And I guess my -- what I would think is that people are spending more and more time doing research. As you improved the site, as you improve vendors' links, there's more engagement, more stuff going on, which hopefully involve the customer more.

Absolutely, yes.

Our next question is from David Magee of SunTrust.

I had a question regarding the store traffic. Obviously, in the first quarter, there were some weather impact with that number being down about 5%. What do you have sort of baked into the second half? And how should we think about that number over the immediate term given there might -- there may be some small impact from the eCommerce growth? How do you think about that?

We think traffic could well be relatively flat, could be down a little bit, could be up a little bit. If we look at this right now into the second quarter, we would think that this would be relatively flat, and we think that there's still some continued upsides in the basket size.

And as you looked to 2014, assuming that we'll continue to see a macro recovery, would you expect that now to become more positive?

I would expect it to be more positive as we go forward, yes.

And secondly, based on what you know about the real estate over the next 12, 18 months, should the average store size come down modestly? Is that a fair assumption to make?

Actually, no. We expect it to be at relatively the same size. There'll be a change in street configuration. There are some categories that we think we can continue to add space to that can drive sales and margin. We still think there's a big opportunity in the athletic portion of this business. We think there's a big opportunity in the youth portion of the business and in the women's side of the business. So we think that those areas are actually undersized for the size of the opportunity.

Our next question is from Peter Benedict from Robert Baird.

Quickly, Tim, any comment on the DC start-up costs, what impact that had on gross margin in the first quarter? I apologize if you already mentioned that.

No, we didn't. We -- for the first 2 quarters of the year, we still don't expect a whole lot of impact because with the new DC in place, we're getting great mitigation of those expenses by the reduction in overall freight costs.

All right, good to hear. And then secondly, just update us, if you guys would, maybe on your latest thoughts on how many stores you ultimately think you can put the Nike Fieldhouse into the Under Armour All-American shops. And remind us what the limiting factors are. Are there certain of stores that you'll never be able to get them in?

There will be some stores that we won't be able to get them in or we don't want to put them in. I mean, there's an investment to doing this and then we will put them in the ones that we think we'll get the appropriate investment in.

Our next question is from Chris Svezia of Susquehanna Financial.

I guess just first, going back to the Livestrong product and ellipticals and fitness category, when you replace that potentially coming to the third quarter, are you replacing it with a branded product or a private-label product? And what's the thought process about -- is that a one-for-one replacement? Or are you going to shift maybe some of that square footage to places like women's, athletic, youth apparel, things you just called out?

So it will shifted to a branded brand, if you will. And we are going to be having less product on the floor. So some of that space will be shifted to other categories.

Okay, that's helpful. And then just on the outerwear business, I guess 2 parts. One, your decision to pull out of some of the product early in the fourth quarter hurt you a little bit. I would guess it possibly hurts a little bit in Q1, given what happened with the weather. I wonder if you can maybe comment about that at all. And then secondarily, as you think about fall of this year and you show your planning process, is it in terms of planning business as usual, normalized winter and weather patterns? You're just kind of -- I know it's difficult to predict but just some of your thoughts in and around that.

Yes. It really didn't have an impact on our first quarter business. I mean, we -- it didn't have any meaningful impact on our first quarter business. As we look forward, I -- we're planning this as kind of a normal winter. We've -- we continue to work with our brands, that partnership for us. If it's cold, we'll be able to chase some merchandise. If it doesn't, we will have a big impact from an inventory standpoint, our hope is, but I have no idea what the weather is going to do like in -- this fall. We're hoping it's going to be cold, but you never know.

This concludes our question-and-answer session. I'd 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 earnings call today, and we look forward to talking to you all in a couple of months. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.