Tuesday, March 11, 2008

Psychology of the Call for Dick's Sporting Goods (Q4, 2007)

Dick's Sporting Goods (DKS) just reported their Q4 results. The stock closed at $25.69 Monday, only $1.55 off its 52 week low. DKS gave guidance for the Q1 below analyst estimates and the shares were down $1.00 ahead of the live Call. We (POTC) were anxious to hear this conference call because DKS went through an upper management change on 2 February and was downgraded by John Shanley of Susquehanna on 13 Feb, based on "weakening economic concerns". Here is the Psychology of this Call:

Mr. Magulick from Investor Relations Dept. started the call at 0:40s with some rehearsed notes. At 2min Mr. Stack read the Q4 results; his delivery was average as he read past Q4 data for DKS.

At 3m:25s the forward-looking data began to be addressed. Stack offered guidance of $1.49-$1.54 for 2008. He said comparable (comp) store sales will be flat for the year (3m:40s). POTC never likes to hear the word flat. At 3m:45s he mentioned another buzz word POTC hates to hear: "cautiously optimistic."

At 4m:05s he pointed out the "uncertain macro-economic environment” and at 4m:25s the "challenging environment". Then the bomb was dropped at 4m:50s. He estimated Q1 same store comp sales to be down 1%-4%. POTC never likes to hear sales going down, ever.

At 5m:40s Schmidt said a few words related to opening and closing stores, details of square footage offered, all good information, and at 7m:20s the Atlanta distribution center was mentioned. POTC heard nothing important.

Mr. Kullman began at 7m:35s and read details of the Q4 results. His delivery was slow and boring and no relevant forward-looking information was offered until 10m:30s. DKS expect merchandise margin improvement, BUT at 11m:10s POTC learned the "magnitude of margin gains will not carry over to 2008”.

11m:55s Costs will increase; 12m:10s Declining gross profit margin rate. They claimed to be "focused on long term". POTC feels the use of "long term" is only an excuse for bad planning and execution.

Analyst Questions and Management Answers began at 13m:40s
Q: Pete with Citi asked how the Underarmour (UA)/Footlocker competition factor was addressed.
A: Footlocker is smaller than Dick's, and we have exclusive UA products, we don't feel it will have an impact. That answer didn't score points with POTC.

15m:10s Q. about Nike.
A: No plans with Nike ACG.

16m:05s John Shanley of Susquehanna, related to Golf Galaxy same store comp sales.
A: The "weather" was cited as the reason. Our readers MUST fast forward to this Q/A and hear what we feel is only an excuse for poor strategy and executive planning. They reiterated that comp same stores sales down 1%-4% and at 17m:50s cited a "difficult economic environment"

18m:50s Matthew at Goldman, regarding the Golf Galaxy impact on earnings.
A: On target. Whispers were heard in the back ground and management sounded exhausted, almost tired and confused at 19m:40s. A question at 20m:30s related to Inventory. A: We don't see inventory being an issue

21m:50s Brian at UBS: Explain guidance.
A: We don't see an improving economic environment. At 23m:05s DKS stated that there’s no guidance for Golf Galaxy because of competitive issues. POTC feels that if Golf Galaxy was doing well, the management tone would have been more upbeat. We heard no indication of a positive related to Golf Galaxy.

25m:40s Mike regarding square footage efficiency.
A: 26m:25s. Very discriminating with development cycle, no change in business as related to square footage seen. At 26m:55s, the fact that nothing has changed was reiterated by management.

28m:20s Sean from Needham, on the conversion of Chick's Stores to Dick's stores.
A: Sometime in 2009, as presence in the Southern California market grows. They expect end of calendar 2009 to have only 15 stores, so comps won't have great effect.

30m:10s Dan at Raymond, related to sales per square foot; why such an aggressive purchasing plan?
A: 30m:45s: They were quite enthusiastic, but "weather" was used as an excuse AGAIN!! This was an emotional Q/A exchange. Dick's blamed weather and seasonality on performance.

32m:20s: Why so optimistic for year compared to Q1
A: Mumble, mumble, mumble. POTC felt management was almost trying to deny something, stumbling through at times.

33m:30s Change in management explanation.

34m:30s Vivian at Oppenheimer asked about Super Bowl benefits
A: One penny reduction in earnings. At 35m:15s NY Giants victory was used as an excuse because Dick's doesn't have many stores in NY. Not a good answer as far as POTC is concerned.

36m:40s Mike with Merrill, related to inventory Golf Galaxy
A: Margin pressures addressed at 38m:30s, some good and others bad.

39m:10s Hardy, related to Super Bowl cost issue
A: I can't give you that. The penny loss was in Q1. Hardy continued to dig for more, and management seemed to skirt the Super Bowl effect in the current Q1. At 41m the Columbia brand was addressed, also Russell and private label price points.

42m. Robert at JP Morgan, related to Footwear performance.
A: We won't speak to specific brands, but on balance we were pleased.

Q: Under Armor shoe launch.
A: 43m:10s. It should drive entire category of shoe sales. POTC felt this answer was less than genuine.

43m:30s David at Robert Baird, related to Exercise equipment.
A: We did quite well. Q: Chick's addressed again at 44m:30s. A: Marginally accretive, very pleased with Chick's performance, snow helped drive higher year end sales.

45m:20s Jay at Morgan, on gross margin follow up
A: 45m:40s, we lost an extra week, difficulty leveraging occupancy costs, lack of 53rd week versus last year.

47m:30s Peter at Piper Q, asking for more Golf Galaxy explanation.
A: We are NOT prepared to provide guidance for Golf Galaxy for competitive reasons. As the price of gas keeps going up, the Atlanta hub will be a benefit for distribution. POTC feels DKS's is focused more on cutting costs than growing sales/revenues.

49m Q. (Rick) Break down in markets and plans for California.
A: Roughly same as last year, don't see anything new opening up in California, focus on Texas and Arizona markets. For competitive reasons we don't address single market stores.

50m:20s Q. (Sam): Follow up on private brands and label margins. Adidas was addressed.

51m:45s Q: On distribution improvement.
A: Inventory turns were addressed.

53m:50s Christian asked for an explanation of margins going forward.
A: Pressure on margins will be there based on occupancy costs and other cost.

The Conference Call ended at 54m:40s.

POTC concludes our feelings like this: Dick's management didn't offer any competitive advantages or positive scenarios going forward. Dicks's management obviously needs great help from the economy, and we don't like stocks that rely on anything or anyone but their own dynamic growth genius. Comparable store sales were estimated to fall 1%-4% in Q1 of 2008, but we see that closer to the 4% after this Call.

Management offered far too many excuses for us to be comfortable with any shares of DKS under our armor. Here's to avoiding a stock focused on cutting costs than increasing sales. Here's to more pain at Dick's. Avoid.

Thanks for coming back to the Psychology of the Call, where hearing is believing.

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