Nov 13, 2012
Executives
Edward W. Stack – Chairman & Chief Executive Officer Joseph H.
Schmidt – President & Chief Operating Officer Timothy E Kullman – Executive Vice President of Finance and Administration & CFO Anne-Marie Megela – Director, Investor Relations
Analysts
Matthew Fassler - Goldman Sachs Christopher Horvers – JP Morgan Gary Balter – Credit Suisse Robbie Ohmes – Bank of America Merrill Lynch Michael Lasser - UBS Rick Nelson - Stephens Michael Baker - Deutsche Bank Sam Poser - Sterne, Agee David Gober - Morgan Stanley John Zolidis - Buckingham Research Group Kate Lent - Wells Fargo Securities Paul Swinand - Morningstar Investment Research David Magee - SunTrust Camilo Lyon - Canaccord Genuity Chris Svezia - Susquehanna Financial Group Joe Feldman - Telsey Advisory Group Wayne Hood - BMO Capital Sean Naughton – Piper Jaffray
Operator
Good morning and welcome to the Dick’s Sporting Goods Third Quarter 2012 Earnings Call. (Operator instructions) Please note this event is being recorded.
I would now like to turn the conference over to Anne-Marie Megela, Please go ahead.
Anne-Marie Megela
Thank you. Good morning, and thank you for joining us to discuss our third 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 www.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’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 principle and related reconciliation can be found on the Investor Relations portion of our website at www.dickssportinggoods.com. Leading our call today will be Ed Stack, Chairman and Chief Executive Officer.
Ed will review our third quarter financial and operating results and discuss our guidance. Joe Schmidt, our President and Chief Operating Officer, will then outline our store development improvement and program results.
After Joe’s comments, Timothy 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.
Edward Stack
Thank you Anne-Marie. I’d like to thank all of you for joining us today.
In the third quarter, we again generated record results with earnings per diluted share increasing 25% to $0.40 and exceeding our original expectations of approximately $0.36. Sales increased to 11.2% in third quarter, driven by the growth of our stored network of 5.1% increase in consolidated same-store sales which was on top over 4.1% increase in the third quarter of last year.
Same-store sales in the third quarter of 2012 for Dick’s sporting goods were up 3.9%. Golf Galaxy up 2.3% and ecommerce sales were up 46.7%.
We’ve generated positive comps in all three of our major categories of apparels, footwear and hard lines. Looking to our progress on the digital front, we’ve accomplished much in the third quarter.
We continue to grow our ecommerce business while improving transaction profitability, increasing inventory productivity, providing customers more choices about where, when and how they shop in fortifying our competitive positioning. We also made significant progress in the third quarter with our ship-from-store testing.
It continues to progress very well with a 115 stores operating under this program at the end of the third quarter. Ship-from-store is an incredibly powerful tool as it reduces delivery time to the customer, while improving productivity and transaction and profitability because ship-from-store allows us to utilize the inventory located in our stores, which was previously unavailable online to customers, we’re seeing a meaningful increase in our online sales.
We will continue to roll this program out and add more stores in 2013. Finally, in the third quarter, we also launched a comprehensive mobile application through which users had access to all the benefits of the scorecard rewards program.
The ability to locate our stores or make purchases directly from the app, as well as be rewarded for engaging with the big sporting goods brand on social media. As I have said before, the digital space provides us a powerful growth opportunity, so while we have accomplished a lot on this front, we continue to aggressively invest in our people, infrastructure and partner relationships, so that we are positioned to maximize this opportunity.
Looking to the fourth quarter 2012, we have raised the low end of our prior expectations and now anticipate consolidated earnings per diluted share over $1.03 to $1.05. We previously anticipated a range of a $1.01 to $1.05.
The fourth quarter this year includes a fourteenth week, which is expected to contribute approximately $0.03 in earnings per diluted share. On a thirteen week basis, earnings per diluted share for the fourth quarter is expected to be a $1.00 to a $1.02 compared with Non-GAAP consolidated earnings per diluted share of $0.88 for the same period last year.
Consolidated same-store sales are expected to increase approximately 4% on top of a one-tenth of a percent increase in the fourth quarter last year. Our fourth quarter guidance contemplates an 1% earnings per diluted share impact from the startup cost related to our new distribution centre.
Our guidance also takes into account the NHL lockout and hurricane Sandy, which includes a donation of approximately $1 million in retail value of outdoor supplies, footwear and cold weather apparel that we made to the American Red Cross to assist with for the relief efforts. We are raising our full year guidance and now expect Non-GAAP consolidated earnings per diluted share to increase 25% to 26%, to between 253 and 255 a share, which includes approximately $0.03 coming from the 53rd week this year.
On a 52 week basis, Non-GAAP earnings per diluted share are expected to be 250 to 252. This guidance compares to Non-GAAP earnings per diluted share of $2.02 in 2011.
On a 52 week to 52 week comparative basis, we anticipate consolidated same-store sales will increase approximately 5% on top of a 2% increase last year. In summary, we delivered record third quarter earnings anchored by steady increases in both, sales and operating margins, as well as the expansion of our stored network and our continued success in driving inventory productivity.
We also made significant progress in growing our omni-channel presence by enhancing our ecommerce site, ramping up our digital marketing strategy in giving our customers more choices about how, when and where to shop at Dick’s Sporting Goods. We are optimistic about our continued growth and have adjusted our full year earnings estimates to reflect this.
I’d like to thank our team of associates, our progress is a direct result of their hard work and unwavering commitment to our goals and I’m deeply grateful for their support. I’d now like to turn the call over to Joe.
Joseph Schmidt
Thanks Ed. In the third quarter of 2012, we opened 21 new Dick’s Sporting Goods stores, bringing our total store count at the end of the quarter to 511 Dick’s Sporting Goods stores, with $27.9 million sq ft and 81 Golf Galaxy stores with 1.3 million sq feet.
Within our stores we have a 166 shared-service footwear decks, 159 Nike Fieldhouse concepts, 88 Under Armor All-American shops and 10 Under Armor Blue Chip shops at the end of third quarter. By the end of the year, we expect to have approximately 174 shared-service footwear decks, 171 Nike Fieldhouse concepts, 97 Under Armor All-American shops and 10 Under Armor Blue Chip shops.
Our new Dick’s Sporting Goods stores continue to perform well, with new store productivity at 98.9% in the third quarter compared to 101.9% in the third quarter of last year. The detailed calculation of new-store productivity can be found in the tables section of the press release we issued this morning.
We completed our 2012 new-store plan in the first two weeks of the fourth quarter. In total, we opened 38 new Dick’s Sporting Goods stores this year.
We also relocated 5 Dick’s Sporting Goods stores, which were at the end of their leases to preferred locations. For Golf Galaxy we repositioned one store in the fourth quarter.
This store is larger than our current format and includes more services and more experiential shopping. We remain 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. I will now turn the call over to Tim to review our financial performance in greater detail.
Timothy Kullman
Thanks Joe. Sales for the third quarter 2012 increased by 11.2% to $1.3 billion compared with the same period a year ago.
Consolidated same-store sales increased 5.1%. Dick's Sporting Goods same- store sales increased 3.9%, Golf Galaxy increased 2.3% and our ecommerce business increased 46.7%.
The increase in same-store sales and the Dick’s Sporting Goods stores was driven by 2.9% increase in sales per transaction and by a 1% increase in traffic. Consolidated gross profit was $406.1 million or 30.95% of sales and was 123 basis points higher than the third quarter of 2011.
This increase was driven by merchandise margin expansion of 91 basis points and occupancy leverage of freight and distribution remained relatively flat. SG&A expense in the third quarter of 2012 was $314.6 million with 23.98% of sales due to Non-GAAP SG&A expenses of $274.4 million, or 23.26% of sales in last year’s third quarter.
This deleverage of 72 basis points was due to previously announced shifts of the expenses from Q2 to Q3 related to the Dick’s Sporting Goods Open, our World Series marketing sponsorship this year, in increased administrative expenses. On the balance sheet, we ended the third quarter of 2012 with $294 million in cash and cash equivalents and with no outstanding borrowing under our $50 million revolving credit facility.
Last year, we ended the third quarter with $483 million in cash and cash equivalents with no outstanding borrowings under the facility. Over the course of the past 12 months, we’ve utilized capital to fund the $200 million share repurchase program, pay quarterly dividends, purchase our store support centre in make investments to acquire intellectual property rights to the Top-Flite and Field & Stream brands and to build to our new distribution center.
Inventory per sq foot increased by 4% at the end of third quarter this year compared to the end of the third quarter of last year. Net capital expenditures were $53 million in the third quarter of 2012, or $52 million on a gross basis, compared with capital expenditures of $48 million or $52 million on a gross basis in the third quarter of last year.
In the fourth quarter, we now anticipate earnings per diluted share of $1.03 to $1.05 compared to our previous expectations of $1.01 to $1.05. This guidance includes approximately $0.03 for the fourteenth week in the quarter and our thirteen week basis earnings per diluted share expected to be $1.00 to a $1.02 compared to earnings per diluted share of $0.88 in the fourth quarter of last year.
Fourth quarter same-store sales are anticipated to increase approximately 4%. Gross profit margin expansion is expected to be driven primarily by merchandise margin and occupancy leverage.
SG&A as a percentage of sales is expected to increase in the fourth quarter, due to an increase in administrative expenses, primarily payroll related. Just as a reminder, on contemplating the fourth quarter, we anticipate to startup costs of our new distribution center will have an EPS impact of approximately $0.01 per diluted share.
Also in the fourth quarter, we expect to earn $0.03 per diluted share due to the extra week. For the full year, 2012 we anticipate consolidated same-store sales to increase approximately 5% and Non-GAAP consolidated earnings per diluted share to grow approximately 25% to 26% in the range of $2.53 per to $2.55, as compared to Non-GAAP consolidated earnings per diluted share of $2.02 in 2011.Fiscal 2012 includes a 53rd week, which we believe had approximately $0.03 to the Non-GAAP consolidated earnings per diluted share and its contemplated in our guidance of $2.53 to $2.55.
On a 52-week basis, Non-GAAP earnings per diluted share in anticipated to be $2.50 to $2.52. Operating margin expansion in 2012 is expected to be generated from an increase in gross marginally, primarily driven by merchandise margin and occupancy leverage.
SG&A as a percent of sales is expected to remain relatively flat, compared to 2011. Advertising and store payroll expense leverage is expected to offset by increased administrative expenses.
Timothy Kullman
With the execution of our share repurchase program, diluted shares outstanding are expected to be approximately $126 million for a full year. So, much of the outstanding shares in 2011.
For the full year, net capital expenditures are expected to be approximately $190 million or $235 million on a gross basis. Net capital expenditures for 2011 were $154 million or $202 million on a gross basis.
Anticipated increase in capital expenditures for 2012 is primarily the result of the new distribution center and too lesser extent investments in new stores then to shops, system enhancement and e-commerce. Before concluding I would like to discuss the change in our disclosure policy for same stores sales.
Beginning in 2013, we will report same stores sales for our Dick’s Sporting Goods Ecommerce business together with our brick and mortar business. We will continue to provide the size of the e-commerce business as a percentage of total sales.
To provide an example, had we reported third quarter results with this new methodology the comps would have been as follows, a 5.1% increase in consolidated same store sales with same store sales for Dick’s Sporting Goods up 5.3% and Golf Galaxy up 2.3%. E-commerce penetration will be reported as 4.4% of total sales.
We are making this reporting change because if we build out our arm channel platform is becoming apparent that the traditional sales channels are overlapping with the digital space and providing comp sales on a combined basis will be more meaningful. We had an excellent third quarter with notable increases in sales and margin.
As a result we delivered strong third quarter earnings that exceeded our original expectations. We are solidly positioned to continue to profitably grow the business and we have raised our earnings estimates for the full year 2012 to reflect our expectations.
This concludes our prepared remarks. We would be happy to answer any questions you may have at this time.
Operator
We will now begin the question and answer sessions. (Operator Instruction) Our first question comes from Matthew Fassler of Goldman Sachs.
Please go ahead.
Matthew Fassler - Goldman Sachs
Thanks a lot, good morning. One strategic question and then one on the numbers.
So, you just spoke a second ago about multichannel convergence. Can you talk about to the extent that this is transpiring, what you are learning about your customers, what the access to more data as more of your business comes in online and contribute and how you think about the overlap between the in-store and online customers to say patronize different channels with their new business.
Timothy Kullman
Matt, we are finding out what -- some of these are going to be surprises here. People are shopping at Dick’s Sporting Goods from a number of different directions whether it be in the store, whether it be online, people that are researching product and coming into the store to buy, the ship from store program has been more successful than we had anticipated, that has been a big adder to our online sales and we are making sure that we’ve got all of these tools available to our customer to make sure that he or she can shop whenever they want and whatever device they want.
Matthew Fassler - Goldman Sachs
I guess related to that, this is not an original follow up, but I will ask it to the extent that your profitability is improving nicely particularly this quarter on the gross margin line. Is that – any of that coming from the shifting online business away from your traditional fulfillment partner which we know has terms that are somewhat onerous for your company or is the mix shift online with that margin pressure still outweighing I guess the next within the online piece.
Timothy Kullman
Well, the overall business is it didn’t have a huge impact, but as we move this, this fulfillment channel to be in the stores that is meaningfully more profitable and if we go through GSI’s warehouse.
Matthew Fassler - Goldman Sachs
Got it and then my original follow up question which I will still ask. So, you talked about merchandise margin being the primary driver of gross margin expansion here in the third quarter, there were still about 30 bips of additional leverage if you could just indicate whether that can primarily from occupancy from freight and distribution or from somewhere else and then related to that the fourth quarter last year you leveraged occupancy despite a flat comp.
It looks like you have some things really go your way in Q4 last year. So, any color you could give us on the compare and then whether that would stand in the way of more leverage here in Q4.
Timothy Kullman
Sure Matt. This is Tim.
The extra 33 odd basis points you’re talking about came from occupancy leverage in Q3 and in Q4 we expect to leverage occupancy once again.
Matthew Fassler - Goldman Sachs
Got it. Thank you so much.
Operator
Our next question comes from Christopher Horvers of JP Morgan. Please go ahead.
Christopher Horvers – JP Morgan
Thanks and good morning. Also wanted to follow up the gross margin a little bit.
The merchandise margin expansion was very impressive and it continued to really a long string of merchandise margins comparison, through ups and downs on the comp. Can you talk about what’s driving that, how much of that is the new merchandising planning system, how much of that is just new clearance of inventory, and so forth?
Edward Stack
There is not a silver bullet. There is a number of things, so the merchandise planning system, its inventory control, it’s also the mix of more of apparel and footwear, as we move to the shared-service footwear concept and to the brand concepts with the Nike Fieldhouse, the Under Armor shops and then what we are doing with the North Face.
We’ve also taken a look at some of- what we’ve learned from this and how we’ve applied this to other areas of our business, whether it be the outerwear business, the Golf apparel business. So, we’ve moved that mix has been helpful also.
We expect now that the election has concluded, we expect that the gun and ammunition business will move to be a slightly bigger part of our business, going forward. And that will help the earnings but that could have a little bit of impact on gross margins, going forward.
Although, we don’t think really significantly as we’ve got so much momentum on the apparel side. But the election has had an impact on the amount of guns and ammunition that we’re selling.
Christopher Horvers – JP Morgan
And then, as you think about how that merchandise, I know your thinking about having laid out 2013 criteria, but how do you think about merchandise margin expansion progression over the year, next year, given the price up and space and so forth will really start contributing towards the midpoint of the year.
Edward Stack
Well, we still think that we’ve got margin rate expansion going into next year, we’re not going to provide a glimpse into guidance for next year, but we still think that we’ve got margin rate expansion available to us.
Christopher Horvers – JP Morgan
And then, one follow up on Sandy, you have a lot of stores in New York and New Jersey, and it is the hot topic out there with investors. Can you talk about, if you saw any negative impact into the end of the quarter, given Sandy and is there anything that you’re seeing in November that we can talk about in the region, thanks.
Edward Stack
Well as we said, we’ve -- to the best of our ability included the impacts of Sandy in our guidance in the fourth quarter. But yes, as you could imagine that there was some impact to our business at the end of the third quarter, at one point, we had 114 stores closed because of Sandy.
They weren’t closed for long period of time, but we did have a 114 stores closed and our heart goes out to the people affected by this storm, as they started to redevelop their lives and kind of try to get things back to normal. Coming to shop in a Sporting Goods store was probably not on the top of their list, they had other more essentials that they needed to take care of.
So, yeah it had an impact and we’ve put that impact into our guidance into the fourth quarter.
Christopher Horvers – JP Morgan
Could that have been a half a point in comp perhaps for you in Q3 that was lost?
Edward Stack
We’re not going to get to that level of granularity. I’m not sure what it is, but we have 114 stores closed and you have a lot of people who can’t get to your store, that has an impact.
Christopher Horvers – JP Morgan
Thanks very much.
Operator
The next question comes from Gary Balter of Credit Suisse. Please go ahead.
Gary Balter – Credit Suisse
Thank you. On the comps, you guided to 4% in Q4, which implies a significant deceleration on unto you basis, what’s the thinking behind the comp guidance?
Edward Stack
There is couple of things Gary. There is Sandy, there is the NHL lockout, there is the fiscal cliff, there is a number of things that are going on out there that where we are aware of and we need to be careful of.
Gary Balter – Credit Suisse
So, once the lockout gets settled any day now, as I keep on hoping, we should raise our comp guidance?
Edward Stack
We’re hoping Gary. We’d like to see some hockey played here in Pittsburg, let me tell you and everywhere else.
Gary Balter – Credit Suisse
Could you talk also about your private label, obviously that continues to strengthen, I don’t think you gave us a percent that it was in this quarter.
Edward Stack
No, we didn’t, we haven’t laid that out there, but. We continue to invest from a private brand and a private label standpoint.
We invested in the Field & Stream name, which will be accretive to the business because then we won’t have a licensing fee going forward. We’ve bought the Top-Flite brand, this is an area that we continue to be very aggressive with and feel that it is an important part of our future going forward.
Gary Balter – Credit Suisse
Just a follow up and then I’ll get off. You talked about how strong the online business.
How is the mix different online versus the stores and how’s that changing what sells in the stores and how are you reacting to that in terms of the way you’re presenting merchandise, thank you.
Edward Stack
Sure, the mix is changing. We’re doing more apparel and footwear business than we’ve had in the past.
The mix is always going to be a little bit different online than it is going than it is going to be in the store, and therefore at a gross margin merchandise rate standpoint, we think that it will eventually be higher than what the stores are, because we don’t sell guns and ammunition online. So, there is a mixed benefit from an online standpoint, which we expect will continue to improve and as we go forward.
But we’re really enthusiastic about the response we’re getting from our apparel and footwear online.
Operator
Our next question comes from Robbie Ohmes of Bank of America Merrill Lynch. Please go ahead.
Robbie Ohmes – Bank of America Merrill Lynch
Good morning.
Edward Stack
Good morning Robbie.
Robbie Ohmes – Bank of America Merrill Lynch
Couple of quick questions on, Ed can you talk about just how you may be positioned the same or differently for holiday this year, what is going to be different and maybe specifically on the outerwear category, and maybe remind us what kind of carry over position you’re in and out, or where for the fourth quarter, and what could go, really right or really wrong year-over-year. And then, the other question also on the fourth quarter, and maybe into the first quarter is, your coming up against very tough comparisons in the Golf category.
Are there things that can help you anniversary that or maybe speak to how your thinking about the tough Golf comparisons to begin this quarter? Thanks.
Edward Stack
So, what could go right or wrong in the fourth quarter? If we get some snow and some cold weather this year, that would go right.
We need it at the right time, we don’t need it like a couple of years ago, that last weekend before, or for last weekend or two weekends before Christmas we has that big snow storm. But, we feel we’re very well positioned, our merchants have done a terrific job working with planning our inventory, our carry over we kind of laid out with that carry over, else we expected to be no more this year than it was last year, notwithstanding what the weather is, meaning if we have a winter like we had last year, we would expect the carry over to no worse than it was last year.
So, we feel pretty comfortable about where we’re at. As far as the Golf comparisons go, we are against difficult Golf comparisons in the first quarter of next year.
There were two things that drove that. There was the product cycle and there were some new products coming up.
We think the product cycle for next year is probably as strong as it has been this past year. The biggest driver in the first quarter comps around the Golf business was really the weather.
And we’ve got no control over that. We would suspect that if its reasonable weather, comps may shift from the first quarter to the second quarter, like this year they went from the second quarter to the first quarter, but as you get down with the first two quarters, we think weather will have a little impact overall.
So we’re pretty optimistic about the Golf business going forward.
Robbie Ohmes – Bank of America Merrill Lynch
Great, thanks very much.
Edward Stack
Okay Robbie, thanks.
Operator
The next question comes from Sean Naughton of Piper Jaffray. Please go ahead.
Sean Naughton – Piper Jaffray
Given the change you’re describing on the comp reporting for next year and some of the success you guys are seeing in the multi-channel efforts, how does this change your overall thoughts on store prototypes size moving forward and then potentially the overall store base in the U.S. at this point?
Edward Stack
So, this is just from a reporting standpoint. We think it doesn’t change the strategy at all.
And we still feel that we can have at least 900 stores in the United States. Our store footprint categories that we’re looking to expand, we may have modified some allocation of space, but we don’t think that we have the wrong store size as we take a look at categories of business that are doing extremely well.
We’d like to increase our space allocated to apparel, we’d like to increase space allocated to our team sports category. We’d like to increase space allocated to our footwear area and what we’re doing online, doesn’t really impact that.
We really think the customer is going to shop online for mobile apps, going to shop at the stores and we haven’t seen any reason to change our strategy. We really like the way we’re positioned, I think based on what you saw from our comps, not only this quarter, but this year, we feel like, we’re in a really very good spot.
Sean Naughton – Piper Jaffray
Alright and then just secondly on all three categories, sounds like they performed well in the quarter, but just thinking specifically about some of the easier comparisons you might have had in the outdoor segment. We began to talk about how the large business performed in the quarter mentioned fire arms a couple of times on the call has been strong.
Maybe just any changes you are seeing in the competitive environment with that particular segment. Thanks
Edward Stack
As I said the three categories were all very strong. We’re not going to call out specifically and rank them.
I indicated that the firearms sales have spiked since the election, which is really in the fourth quarter, not in the third quarter. But based on the results of the election which we had anticipated if the election went this way, this business would react in this fashion.
Sean Naughton – Piper Jaffray
Good luck for holiday, thanks.
Operator
Our next question comes from Dan Wewer of Raymond James. Please go ahead.
Dan Wewer – Raymond James
Thanks. I just want to follow up with your comments about the product cycle of the Golf Industry?
Are you alluding to rocket blades from Taylor-made and supposedly a new product lineup from Callaway Golf, is that what you are alluding to for next year?
Edward Stack
Yes, what we have looked at – it’s not just, but we have looked at – we have seen all of the products that’s coming out. So, whether it be the Rocket Blades, what TaylorMade is doing to follow-up on the RocketBallz, Fairway Woods.
Nike’s got their new driver coming out, we think it’s terrific. Callaway is great, and we think that there is a good move in footwear, as we continue to shift to spikeless shoes is extremely important.
And we have had great luck in the apparel business and we will continue to expand our apparel business in our Golf business, both at Dick’s and Golf, taking what we have learned from the Nike Fieldhouse concept and the Under Armor in applying goes into our Golf business. And where we have done that in a couple of test areas, the results have been very encouraging.
Robbie Ohmes – Bank of America Merrill Lynch
The price points on some of the brands that you are alluding to are moving higher. Do you think it’s primarily benefiting Golf Galaxy in 2013, maybe more so than for the Dick’s Golf departments?
Edward Stack
No, not really. And we don’t really see, I mean, the basics, high-end driver from Callaway and from TaylorMade, Nike, they are all going to be relatively the same prices that were last year.
So, the top end TaylorMade driver will be driver would be $399, and there will still be products in that $399, $299 standpoint. The average unit retail isn’t going up significantly.
Where we do think we have got some AUR opportunity is on the footwear, because it’s odd as it sounds, the spikeless shoes are actually more expensive than the traditional golf shoes, and we have had some really good luck in that category.
Robbie Ohmes – Bank of America Merrill Lynch
And just a real quick follow-up, have you had a chance to pencil through the affordable Healthcare Act? That was like that’s going to be the law for a long time now, how that might impact your operating expenses over the next couple of years?
Edward Stack
We have looked at it. We are not ready to comment about what that will be, but it will certainly be more expensive, and it really doesn’t kick in, in any meaningful until 2014.
So, we have got some time to kind of work through that.
Robbie Ohmes – Bank of America Merrill Lynch
Okay, great. Thank you.
Edward Stack
Sure.
Operator
The next question comes from Michael Lasser of UBS. Please go ahead.
Michael Lasser - UBS
Good morning. Thanks for taking my questions.
Can you size the EPS impact in the fourth quarter from all the one-time-ish type items that you talked about between the energy lockout, the donation and etcetera?
Edward Stack
No. For competitive reasons, we are not going to lay out what we think we are earning from NHL product.
Sandy is – we indicated that we did make a $1 million donation to the Red Cross to help the relief efforts there, and if you take a look at the $1 million, that’s a $0.005.
Michael Lasser - UBS
But altogether you think there will be a material impact from all of these one-time events?
Edward Stack
I didn’t say that. We said we kind of laid those into our guidance.
The $1 million donation that we thought was absolutely the right thing to do to help the relief efforts of those that were in the wake of Hurricane Sandy, we think was the right thing to do. That’s a $0.005, and we have taken into account what we think could happen to the NHL or what is happening to the NHL right now, and kind of the effects of Hurricane Sandy of when people are going to get back to shopping for this product.
Once they kind of get there, their lives and their homes back in order.
Michael Lasser - UBS
And switching gears, on the eCommerce front, how is your eCommerce doing in markets where you have a pretty good store presence versus other areas, where you are less penetrated on the retail side?
Edward Stack
As you would expect, we do more business in markets where we have stores than in markets where we don’t have stores.
Michael Lasser - UBS
Is that because of the shipment store and associates walking consumers over and ordering from stores, or is it just because of the brand awareness and so there should be a halo benefit as you get more penetrated across the country? Thanks a lot.
Edward Stack
We think it’s all three of those things that you laid out, and we found that once we open a store in a trade area, then our sales primarily go up.
Michael Lasser - UBS
Okay. Good luck with the Holidays.
Thank you very much.
Edward Stack
Thank you.
Operator
The next question is from Rick Nelson of Stephens. Please go ahead.
Rick Nelson - Stephens
Thank you. Good morning.
I would like to ask about the SG&A, that deleverage that you are guiding to for the fourth quarter with a 4% comp, I was curious what the drivers, you know, the Red Cross payment obviously was?
Timothy Kullman
This is Tim. One of the things that we talked about continuously last year and this year was the investments that were going to be making in systems and in our eCommerce business.
You can see the fruits of those labors already coming through our numbers. So, along with those investments are headcount investments.
So, on the administrative expense side, that is primarily payroll and related benefits costs that we are seeing coming through the numbers.
Rick Nelson - Stephens
Okay. And the pre-tax and EPS that you are calling out for the extra 53rd week, can you tell us what that represents in terms of top line sales?
Timothy Kullman
We haven’t broken out the top line sales, but we have been very open about this recent impact on the EPS.
Rick Nelson - Stephens
And as we model the quarters for next year of 52 weeks compared to a 53-week, are there meaningful shifts in high volume weeks between the quarters would impact the quarterly comp?
Timothy Kullman
There are not.
Rick Nelson - Stephens
Thanks.
Operator
Rick Nelson - Stephens
The next question comes from Michael Baker of Deutsche Bank. Please go ahead.
Michael Baker - Deutsche Bank
Thank you. Couple of questions I would want to ask.
First of all, can you sort of parse out what the quarter looks like, maybe early in the quarter versus late in the quarter? Was back-to-school particularly strong or any hint there on how the pace of business may have been?
Timothy Kullman
Michael, this is Tim. We just don’t talk about sequential or individual month performance within a quarter.
So, we are going to make you very happy with that answer.
Michael Baker - Deutsche Bank
What (inaudible) wide variations that would be something that would be interesting or relatively consistent or can you even go that far?
Timothy Kullman
No, we won’t go that far.
Michael Baker - Deutsche Bank
Okay. Then I will ask you something else.
Let me ask you about the merchandise margins. And is the biggest driver to the improvement in the merchandise margins, is it price within the categories or are you seeing – is the mix from hard goods to apparel and footwear, and then maybe even more?
Is it within each of those categories moved to more higher-end type product? Just trying to parse out what’s driving that merchandise margin gain.
Edward Stack
It’s a combination of the number of things. So, it’s the mix of products and it’s not just the mix from hard line to soft lines, because we have got a number of hard line areas that are extremely profitable, but it is that, that mix goes higher margin categories.
That’s also better inventory control from the planning standpoint. So, we have mitigated markdowns on the back end.
And those are the key drivers of that.
Michael Baker - Deutsche Bank
Okay, great. Thanks.
Operator
The next question is from Sam Poser of Sterne, Agee. Please go ahead.
Sam Poser - Sterne, Agee
Good morning. Thanks for taking question.
A couple of questions. Just a clarification, Sandy didn’t affect third quarter, it’s really a fourth quarter story just based on when it happened.
Am I thinking about that correctly?
Timothy Kullman
Yes, Sam, this is Tim. That’s correct.
Sam Poser - Sterne, Agee
Okay. You talked about adding headcount.
Was that entirely in your digital platform or did you or have you added some headcount in the stores as well?
Timothy Kullman
My discussion point was on administrative expense and payroll. So, that gives the home office support center payroll, primarily IT, eCommerce, and marketing and then a little bit spread on the other functional areas.
Sam Poser - Sterne, Agee
Will we find any – is there any variation of headcount in the stores this year over last year?
Timothy Kullman
Not significantly. The research that we have gotten back has been great from a service standpoint.
As we compare it this year to last year and the metrics that we use, it’s been very positive.
Sam Poser - Sterne, Agee
Thank you. And then lastly, there has been some conversation about trucks moving more slowly, given Sandy deliveries.
Two ways, is your flow of goods better than it was and are you filing yourself with your non-private brand, private label business ordering or being able to order closer to need that you have in the past?
Edward Stack
There hasn’t been any meaningful change.
Sam Poser - Sterne, Agee
And as far as the flow of merchandise given Sandy, trucks and rail and so on?
Edward Stack
Nothing meaningful now.
Sam Poser - Sterne, Agee
Thank you very much and good luck.
Operator
The next question comes from David Gober of Morgan Stanley. Please go ahead.
David Gober - Morgan Stanley
Good morning. Thanks for taking the question.
Just wanted to follow-up on SG&A. Obviously you have had a decent amount of lumpiness this year and a couple of moving pieces.
Is there a need to tell you about what you are thinking of normalized SG&A per store looks like, maybe not in 2013, but more on an ongoing basis, obviously given some of the puts and takes in 2Q, 3Q and 4Q this year?
Edward Stack
Well, I would actually answer it this way. When we are in a situation where we are delivering very large profits for the store, and we are investing in the business, which we said we are going to do.
There is going to be some lumpiness in SG&A. So, as we continue the investment mode into 2014 and 2013, you are going to continue to see some lumpiness there.
So, rather than trying to give you a normalized number, as we go forward in the next two years, in particular I won’t be able to do that for you.
David Gober - Morgan Stanley
Okay. Fair enough.
I guess more of a kind of quick detailed question. We heard that the new NFL jerseys have been selling particularly well.
Any sense of how to compare more generically speaking how those types of changes tend to pin back the business over time.
Edward Stack
I am not sure I really understood. Could you – I am not sure I understand the question.
David Gober - Morgan Stanley
Sorry. Just the switchover in manufacturers for the (inaudible) we have heard that, that has been a benefit this quarter.
And that those jerseys are selling particularly well, but I am just curious if you found that to be the case historically, if you tie on any impact this quarter?
Edward Stack
I mean, it’s definitely a positive impact. You have changed the jerseys, a lot of fans want to have the jersey and that the player are wearing, and it’s been very positive and we would expect that to be a positive impact in the fourth quarter also.
Especially since last year, people knew the jersey was going to change. So, it negatively impacted the fourth quarter of last year.
People not wanting to buy a jersey that they know were going to be obsolete at the end of the year.
David Gober - Morgan Stanley
Okay, that’s helpful. Thank you.
Edward Stack
Sure.
Operator
The next question comes from John Zolidis of Buckingham Research Group. Please go ahead.
John Zolidis - Buckingham Research Group
Hi good morning. Question on your longer-term operating margin target of 10%.
You look like you are going to get almost 100 or around 100 basis points of operating margin expansion in the current year based on the updated guidance. Do you say that you are running ahead of plan relative to that 10% target that you originally laid out?
Edward Stack
I would say, John, based on the way we have outlined our future plans that we are on plan.
John Zolidis - Buckingham Research Group
Okay. So, then over the next two years more modest operating margin expansion should be expected?
Edward Stack
Yes.
John Zolidis - Buckingham Research Group
Okay. Great.
And then, just one other question, for the fourth quarter, you gave us some big picture things that you expect to potentially be disruptive to sales. Can you talk about specific product categories that are either going to be a drag or that you think can outperform the chain?
Thank you.
Edward Stack
We don’t want to get into the specifics on merchandise categories as we have done that before, but some of the aspects that will drive it will be the gun and ammunition business based on the results of the election. We anticipate that the results we are getting out of some of the vendor shops that we have done will continue to be additive.
One of the drags on this will be that we don’t have a World Series team of any meaningful impact on our business this year with the Giants winning the World Series versus what happened last year. So, that’s going to be a bit of a drag on sales this year.
But for the most part, we are relatively positive. I think the fitness business will continue to be a bit a big challenge, but most other areas of the business, we are pretty enthusiastic about.
John Zolidis - Buckingham Research Group
Great, thanks very much and good luck.
Edward Stack
Sure.
Operator
The next question comes from Kate Lent of Wells Fargo Securities. Please go ahead.
Kate Lent - Wells Fargo Securities
Yes, hi thanks. Help us, if you could talk a little bit to your strategy with respect to prices and promotions for the Holiday season this year compared to last year, and given that some of your competitors have discussed plans to adopt more aggressive caps.
Edward Stack
Yes, we don’t have anything planned right now. We have done – our merchants have really done a terrific job differentiating us in the marketplace with product, the majority of the brands that we were selling, we don’t feel that there need to be a significant promotional strategy around what we are doing in the Nike Fieldhouse concept, what we are doing with the North Face, what we are doing Under Armor, what we were doing with some of the Gulf Brands that are out there right now.
So, we have got the flexibility to move promotionally if we need to. Right now, we don’t feel that we have to.
So, we are not looking, we are anticipating a negative impact on our margin rates.
Kate Lent - Wells Fargo Securities
Okay, got it. And then on SG&A, can you remind us when you really started to ramp up investments in systems and eCommerce and even though and we will continue to see some lumpiness, what are the rate of increase in spends will be as meaningful going forward, given that you have already increased investments this year?
Edward Stack
I think you can consider the fact that, that rate of spend started pretty much in the second quarter and it will also impact Q3 and Q4 and a little bit of Q1 next year.
Kate Lent - Wells Fargo Securities
Okay, that’s helpful. And then just finally, do you have an update on your plans for rolling out pickup in-store and what the timing of that might look like next year?
Edward Stack
Kate, right now, it looks like it will be testing that in 2014. We haven’t announced specifically, but probably mid-year in 2014 for us to – excuse me, 2013 to be testing that.
I am sorry, Kate, 2013, we will be testing that.
Kate Lent - Wells Fargo Securities
Okay, great. Thanks guys.
Operator
The next question comes from Paul Swinand of Morningstar Investment Research. Please go ahead.
Paul Swinand - Morningstar Investment Research
Good morning and thanks for your patience through all these questions. I wanted to, I think you have got the longest list in the book here, but wanted to ask, I have seen a lot of merchandise that is saying only at Dick’s or special for Dick’s, and I know you guys have always worked on this type of thing, but I am seeing it even for Under Armor or some of the national brands Is that really that new and is it starting to move the needle for you?
And then, have you planned down the merchandise that would have been at every other competitor stores? So, it’s a net neutral or is it actually additive?
Edward Stack
Some of it’s additive and some it’s neutral, and we work very closely with our brand partners, whether it be Nike, the North Face, Under Armor, some of the other groups on the hard line side, and have developed franchises, if you will, that are either exclusive or primarily exclusive to Dick’s Sporting Goods. It’s really kind of gained traction over the last 12 to 18 months, and we will continue to be very aggressive and our partners have been very helpful in working through this with us.
We feel that it’s important to differentiate ourselves not only with – as it relates to our other brick-and-mortar competitors, but also to differentiate ourselves with online competitors that we have out there. So, it’s gotten more important and we expect it to continue to be more important as we go forward.
Paul Swinand - Morningstar Investment Research
Interesting. Thanks.
And can you give us any metrics, like better margin, better sell-through, I know you don’t want to share everything, but anything color there?
Edward Stack
Directionally, it would be better margins because we are not competing with anybody else from a standpoint on this. The sell-throughs, I wouldn’t say are significantly better, some are better, some are not as good, but that’s just because we run a business like we do, you buy some winners and you make some mistakes.
And what we have always done is when we made a mistake, we go as in any merchandising category, if we make a mistake, we fix it pretty quickly, mark it down and get out of it. So, but overall, I would say the margin rates will be better.
Paul Swinand - Morningstar Investment Research
Interesting. Thanks again and best of luck for the holidays.
Edward Stack
Thank you.
Operator
The next question is from David Magee of SunTrust. Please go ahead.
David Magee - SunTrust
Hi, good morning, good quarter. Just two questions.
One is what are you seeing by now with regard to competitive (inaudible), is that something sort of unchanged or is that getting better or worse as we go into next year?
Edward Stack
As a percent of total, I would say it’s relatively the same.
David Magee – SunTrust
Okay. And then, secondly, can you talk a little bit about advertising in terms of the different approach that you have taken this year and whether you are leveraging that cost out at this point?
Edward Stack
We are taking a look at, from a marketing standpoint, and really have made some big changes to our marketing. As we indicated that we plan to do, we reduced our spend in newspaper inserts and have moved more dollars into talking directly with the consumer through our direct marketing program, whether it be through the digital online marketing and also through the TV campaigns that we have done.
The TV campaigns, the digital marketing, some of these things are much easier to leverage as we go forward than the newspaper insert program. So, as we go forward, we are not planning to leverage our marketing dollars over the next 12 to 24 months in any meaningful way, but we are going to continue to look to – we allocate the spend and we anticipate a great ROI on this change and you will see us moving out of the inserts and more into digital, direct-to-consumer and the TV campaigns that we have put together.
David Magee – SunTrust
Great, thanks Ed.
Edward Stack
Thank you.
Operator
The next question is from Camilo Lyon of Canaccord Genuity. Please go ahead.
Camilo Lyon - Canaccord Genuity
Thank you, good morning. Ed, you mentioned that you have seen an acceleration of apparel and that’s offsetting the guns and ammo margin drag.
I was wondering if you could specifically call out if it’s coming from the outwear category or is it the athletic performance gear or is it the Nike NFL jerseys, any color there would be helpful?
Edward Stack
I won’t get too specific, but I will tell you based on – it’s not coming from the outwear category right now. It’s coming from other apparel and footwear categories.
The licenses pieces on the NFL side has been good, but that’s been offset by the lack of a World Series Champion and what’s going on in the NHL. But overall, we are very pleased with what’s going on an athletic standpoint.
As we get further into the quarter, the outwear business gets to be a much more important part of our business, and we expect that, that will also be helpful in leveraging against the gun and ammunition business. We don’t look at the gun and ammunition business as being bad for our business, it’s going to be additive, it’s going to drive more foot traffic into the store.
It may impact the growth of our rate, but it’s going to certainly positively be accretive to our earnings.
Camilo Lyon - Canaccord Genuity
Great. And then, switching gears, could you update us on price optimization and where you are with that initiative?
Edward Stack
We are still very early in the process. As we have indicated in some of the calls and some of our meetings, that the benefit of these programs is really going to be felt more in 2013, 2014 and 2015.
As I said, we are in the very early innings.
Camilo Lyon - Canaccord Genuity
Okay. And then my final question is, Ed, on shop-in-shops.
It looks like the annual run rate for the Under Armor shop-in-shops is about 50 or so per year. Is that the right piece of opening that we should think about, or could you conceivably accelerate the pace of those openings?
Edward Stack
Right now, I would look at it to be relatively what it has been, and as we kind of look and work with Under Armor, if we find that we can move quicker on this, we will, but right now, I would kind of look at it as it has been in the past.
Camilo Lyon - Canaccord Genuity
And that’s relegated to more new store openings and remodels?
Edward Stack
For the most part, yes. We continue to remodel our stores.
One of the things that we always talk about internally is we don’t want to wake up someday and have a tired old chain. So, we are confidently remodeling stores, relocating stores.
So, that’s an important part of our overall strategy.
Camilo Lyon - Canaccord Genuity
Thanks very much and best of luck for the holiday.
Edward Stack
Thank you.
Operator
Our next question comes from Chris Svezia of Susquehanna Financial Group. Please go ahead.
Chris Svezia - Susquehanna Financial Group
Good morning everyone and thanks for taking my call. Just not to beat this to death, but just on the SG&A piece, Tim, just while I got you here, you said some of the increase in SG&A spend began in Q2, obviously Q3, Q4 and some of Q1 next year?
Timothy Kullman
Yes.
Chris Svezia - Susquehanna Financial Group
Okay. Let me ask it this way.
Would you, fair to say that SG&A is a leverageable line item on an annualized basis assuming you do a 2% to 3% same-store sales increase?
Timothy Kullman
That is correct.
Chris Svezia - Susquehanna Financial Group
Okay. All right.
Last question real simple here. Store openings for next year, any thoughts at this point, roughly the number relative to this year, it’s 38, any color you can add about what the potential could be?
Edward Stack
It should be at least the amount that we did last year.
Chris Svezia - Susquehanna Financial Group
Okay. All right.
Thank you very much and all the best on the holiday.
Edward Stack
Thank you.
Operator
The next question is from Joe Feldman of Telsey Advisory Group. Please go ahead.
Joe Feldman - Telsey Advisory Group
Yes, hi guys, congratulations on the quarter. Wanted to ask about also on the stores, any update on real estate, any changes in terms of availability of the real estate?
And also, within real estate in the stores, as far as productivity goes, are there any differences you see by region or the format, some of the smaller format stores or any of those kind of things you could address?
Timothy Kullman
Yes, Joe, Ed indicated that we would open at least as many stores for next year and we have been pretty consistent over the last couple of years, with around an 8% growth rate, and I think you can look for something pretty similar to that in 2013. As far as the market is concerned, there isn’t a big change in the marketplace as far as availability of real estate.
We are seeing some opportunities with some of the REITs that are buying some properties from department stores, we are seeing some more repurposing of mall shop space. And we have had some discussions with Sears about repurposing some of its space.
We have nothing to talk about today specifically, but we are having those discussions. New store growth has been pretty consistent in the last couple of years.
Around 50% of our boxes are ground-up construction versus repurpose and I think you can look for something pretty similar in 2013 as well. As far as productivity by region, we are not seeing a meaningful difference across the country as to how these stores are performing as we open them.
Joe Feldman - Telsey Advisory Group
Got it, all right. That’s good to hear.
Excellent. That was it.
Most of my answers were answered. Thanks guys, good luck for this quarter.
Edward Stack
Thank you.
Operator
The next question is from Wayne Hood of BMO Capital. Please go ahead.
Wayne Hood - BMO Capital
Yes, thanks. Two questions.
One was the percentage of sales that are tied to free shipping. Now, is that growing at a faster rate than you would expect, and as you get into the fourth quarter, maybe even greater and to what extent if it does place at risk any gross margin targets you have or does pickup in store help mitigate some of that.
Edward Stack
We are seeing a meaningful increase in free shipments. It will be more competitive as we get into the fourth quarter as you would expect, but we don’t see anything meaningfully different this year versus last year and we haven’t seen anything over the last quarter with a significant change there.
Wayne Hood - BMO Capital
Okay. And my other last question was on eCommerce again, the conversion rate, how close are you to bridging the gap between where you are and in industry average of about 2.4 and your conversion on the eCommerce business?
Did you narrow that gap in the quarter or do you think you can get there over the next year?
Edward Stack
We have narrowed the gap. In the next year, I would think that we will not get there, but we are working at that and we expect it to continue to increase, but I don’t expect us to be a 2.4 in a year.
Wayne Hood - BMO Capital
All right. Thank you guys.
Edward Stack
Thank you.
Operator
The next question is from Matthew Fassler of Goldman Sachs. Please go ahead.
Matthew Fassler - Goldman Sachs
Thanks a lot for taking the follow-up question. I want to think now about fourth quarter and sort of an interplay between the fact that you have some layaway inventory, essentially inventory that you held over the course of the year.
Now, the fact that your vendors and your competitor for that matter seem to be planning outwear are reasonably conservatively. What’s your sense on the availability of product on how vendor plans, given last year’s tough experience will impact other flexibility and also the margin in that category here in Q4?
Edward Stack
Matt, we work with our partners as we have in the past with what we characterize as partnership orders. So, we have got a flow of product that we have scheduled to come in.
So, we are not over-inventoried right now. If winter doesn’t come, we have got the ability to get canceled this product.
We have it on the books. If it does come, we have the ability to bring that product in.
We have got a couple of different trigger dates, one of them coming up right now after, the Monday after Thanksgiving, Monday, Tuesday, after Thanksgiving, and then, we will have another one later in the month of December. So, we have got some trigger points.
We feel that we have got inventory available to us. If it gets cold and this business takes off, we have got the ability to grab that product.
And if it stays similar to last year, we have got the ability to move that product off or cancel that product, and we will end up with no meaningful difference in inventory this year versus last year.
Matthew Fassler - Goldman Sachs
And how should we think about last year’s gross margin compare, the merchant margin was up 27 bps, the second smallest increase you have had in a while. Would you consider that 27 basis point improvement a difficult compare given that it could have been worse, or is that something that should be very much surmountable given the momentum that you have right now?
Edward Stack
The group did a very good job last year, managing the inventory and managing through a very difficult year. I won’t say that 27, I won’t say that that’s a slam dunk, but if it gets cold, it will be better, and if it doesn’t, it will be about the same.
Matthew Fassler - Goldman Sachs
And one other quick one, your west-coast competitors kind of smaller, not necessarily perfect comps to you. Came up with some better numbers recently, I know your exposure to that part of the country is still modest and growing.
Have you seen any regional recovery on the west coast relative to product trend?
Edward Stack
Yes, we are actually pretty happy with what’s going on in the west coast right. So, we are very pleased with what’s going on out there.
Matthew Fassler - Goldman Sachs
Great, thank you.
Edward Stack
Thanks Matt.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Ed Stack for any closing remarks.
Edward Stack
I would like to thank everyone for joining us for our third quarter call. I wish everybody happy holidays and look forward to seeing everybody for our fourth quarter call.
Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.