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Dick's Sporting Goods
2Q08 Conference Call Notes

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By Mawchek
September 9, 2008

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Pro forma EPS for 2Q08 came in at $.39, excluding Golf Galaxy-related integration expenses, versus guidance of $.34/.38. Overall SSS declined -3.7%, better than the -7% to -4% expected. Dick's store comps were -3.7% while GG were -4.5%. Fifty basis points of the SSS decrease in Dick's stores were tied to the discontinuance of Heelys. Golf, fishing tackle, camping and water sports sales were weaker while athletic footwear/apparel and team sports were pluses.

Inventory was down 2% per sq ft versus last year and is expected to remain down due to the difficult environment. The consumer is "very cautious" and is expected to remain so into 2009. Management looks at this as an opportunity to take market share and will stay focused on its core sport enthusiast customer. They are excited over the private brand program with Reebok, Field & Stream and Adidas. PB growth was a catalyst for a 46 bp expansion in merchandise margin this quarter. They are managing inventory tightly, developing new stores and aligning expenses to the operating environment without hurting their growth strategy. This success allows them to increase the low end of their 2008 guidance to $1.27/1.36, excluding GG integration expenses. They earned $1.33 in 2007.

They are expecting SSS to fall -5 to -3% in 2008 versus a 2.4% gain in 2007. 3Q pro forma earnings are expected at $.04/.08 versus $.10 in 3Q07. Ed Stack commented they are proving their culture in tough times like they did in good times and expect to "moderately" leverage SG&A in the second half of the year.

They expect to open 43 Dick's stores and 10 GG in 2008. They have 357 Dick's stores open (Mawchek note: strategic presentations often quote 800 as their eventual national goal. There is plenty of room left for growth.) The Atlanta distribution center is supporting 60 stores already and provides total system capacity of 670 stores. Although $.01 of additional expense is expected each quarter this year for DC start up expenses, the location is already having a favorable affect on shipping costs.

Per Tim Kullman, 2Q08 saw fewer transactions but a higher average ticket per transaction. Gross margin was 29.43% of sales, 4 bp lower than in 2007. Expanded merchandise margins and lower freight cost were offset by deleverage of distribution and occupancy expenses. SG&A expenses were 21.88% of sales, 89bp higher than 2Q07. Advertising spending was relatively higher in the Q than it will be for the rest of the year. They have $10MM outstanding on their LOC and expect to have zero borrowings on the LOC at year-end. (Mawchek note: Financial condition remains strong and flexible, just what you want to see in a bad economic environment.)

Merchandise margins have benefited from better buying, the private brand initiative and good inventory/markdown management. These improvements are expected to live on in the future. $5.8MM of expenses related to integrating the GG headquarters into Pittsburgh will be incurred in the second half and is built into the pro forma guidance numbers. Likewise, $9-10MM of pre-tax savings are expected in 2009 from this move.

Q&A Highlights

In response to an analyst's comment that gross margin looks very healthy, Ed Stack credited better mark-down and overall inventory management. Clearance inventory is down 8.7% from last year. They have also been making "advantageous buys" from vendors and expect to do so for the rest of the year. He later mentioned how a vendor can move a lot of product from their inventory with a single call to Dick's. This was an example of the mutual benefits Dick's large store base offers. Chick's is performing within expectations.

Stimulus checks did not help Dick's to any great extent. They believe the checks went into gas tanks and food for the table. Neither did the Olympics help sales.

New store productivity is being affected by the competitive landscape in AZ and TX. They are excited about their move into these markets, however, and will remain "aggressive" there and in FL. TSA was later mentioned as a non-factor in the competitive landscape. No "irrational pricing" or panicking by competitors is being seen.

SSS guidance is "conservative" and "appropriate" as they don't know what will come of gas, energy and food prices. The Heelies impact on SSS will be over at the start of 1Q09. (Mawchek note: this is no small matter. Dick's was apparently selling a large volume of these in their heyday).

GG's management advised that it would be best to fold the GG HQ into the Pittsburgh headquarters. This had not been the original plan but was initiated this Q. Associated expenses are being incurred, but will provide substantial savings over the original game plan. No change in philosophy over running GG is expected. They want the "culture of service" to continue. Overall, the benefits of the acquisition are "greater than what we thought last year."

Margin expansion will be driven by the permanent cost/operational improvements noted before as well as the better merchandise margins gained in the private label/brand area. Some inflationary cost increase is being seen in guns/ammo. The affect on sales is uncertain right now but they think these customers are price sensitive.

Big ticket item sales have been OK but more difficult in the exercise business while golf is within expectations. Performance apparel continues to be a positive. Customers are not trading down to less expensive goods since the average ticket is up. The number of transactions is down, with the Carolinas mentioned as a singular weak spot due to problems in banks there. Golf is expected to be difficult through 2009.

Stack made a strong point that management has had "very direct conversations" with certain vendors that are entering the retail arena to understand what they are doing.

Mawchek