May 2007 Archives

I have finished uploading my pictures of model Jennifer Nguyen from our shoot at Bowness Park to my Flickr account. So for those interested, you can see more pictures of her there.

As mentioned in my prior article about Jen, because I thoroughly enjoyed working with her, I would like to see Jennifer gain more modeling exposure. For those interested in working with her, please send me your name and phone number, and I will pass that information along. You can contact me by using my contact page.

The above picture is hosted on Flickr. If you click on the picture, you will be taken to my picture of Jennifer on Flickr.

I just finished reading the Wall Street Journal article Gates, Jobs Trade Compliments And Jabs in Rare Joint Appearance (subscription required) and watching the accompanying seven segment video. I do not believe the seven segments require a subscription.

1. Wall Street Journal Video - WSJ.com: Segment 1
2. Wall Street Journal Video - WSJ.com: Segment 2
3. Wall Street Journal Video - WSJ.com: Segment 3
4. Wall Street Journal Video - WSJ.com: Segment 4
5. Wall Street Journal Video - WSJ.com: Segment 5
6. Wall Street Journal Video - WSJ.com: Segment 6
7. Wall Street Journal Video - WSJ.com: Segment 7

Please note that it takes a few moments for the video to load.

I thoroughly enjoyed the videos and, for those interested, I am sure you will too.

Dick's Sporting Goods (DKS) held its first quarter 2007 conference call today. I will review the company's earnings release as well as provide commentary on the conference call.

The earnings release contained the bulk of the information discussed on the conference call. You should note that results for first quarter 2006 did not include Golf Galaxy, but results for first quarter 2007 do include Golf Galaxy from the date of the acquisition of 13 February 2007.

• Net income was $21.7M, an increase of 90% over the prior year's result of $11.4M;
  • EPS was $0.38, an increase of 81% over the prior year's result of $0.21;
• Net Sales increased 28% to $823.6M with a 2% comparable store sale increase;
• Company was pleased with sales results considering weather in Northeast and Midwest as well as shifts in holiday seasons.

• In first quarter, the company opened 15 Dick's Sporting Goods Stores and 10 Golf Galaxy stores;
• In 2007 the company plans to open 45 new Dick's stores and 17 new Golf Galaxy stores and relocate one Dick's store;
• In the second quarter the company plans to open six new Dick's stores and two new Golf Galaxy stores and relocate one Dick's store.

• Company reaffirms guidance for consolidated earnings per diluted share of approximately $2.37 – $2.40;
  • Assumes 58 million shares outstanding;
  • Represents approximately 18% increase of prior year's result of $2.03;
• Comparable store sales are expected to increase 1% – 2% compared to 6% last year.

• Company anticipates consolidated earnings per diluted share of approximately $0.74 – $0.77;
  • Assumes 58 million shares outstanding;
  • Represents approximately 61% increase of prior year's result of $0.47;
• Comparable store sales are expected to increase 3% – 5%.

• Gross margins increased from 27.52% to 29.68%, an increase of 216 basis points, which was partially attributable to shipping and distribution;
• SG&A rose from 0.64% to 0.86% of sales that resulted from a higher advertising spend.

• Company is proud of its accomplishments given the weather, holiday seasons, and weak exercise equipment sales. Sometimes holiday schedules help and other times not;
• I am not certain of this next point: The company indicated on the conference call that the debt attributable to Golf Galaxy acquisition will be gone by yearend;
• Golf Galaxy will contribute most in the second quarter, as that is the time when Golf sales are traditionally strongest;
• Private labels are providing strong wins and there is the opportunity to take private labels from Dick's to Golf Galaxy;
• Although the cool weather hurt some sales, it helped margins as the company was able to unload some winter gear with less discounting;
• While the company is focused on growth, it wants to grow in a manageable manner with growing sales at 15% and net income at 20%. Net income will grow faster as the company improves some of its internal processes;
  • I like that the company is focused on removing cost out of system while still growing. A low cost structure will pay big dividends during the next economic downturn.

Overall, I remain pleased with the company's progress. Management is focused and disciplined. The company is hitting its targets and is growing at a sound measured rate. The company has plenty of room for expansion. Moreover, management is focused on continuous improvement to eek out further gains from its existing operations.

Because management is performing well and because there remains plenty of opportunity for expansion, I am a satisfied shareholder.

Disclosure: I am long Dick's Sporting Goods stock.

This morning I listened to Zale Corporation's (ZLC) third quarter conference call. Using Seeking Alpha's transcript, I will provide my thoughts and analysis.

Before launching into the company's conference call, I will provide highlights in point form from its third quarter earnings release.

• A net loss of $3.1 million or $0.06 per share;
  • Included are a reduction of $6.9 million because of the adoption of its lifetime jewelry protection plan and a benefit of $1.6 million for the net impact of derivative versus hedge accounting on its gold and silver contracts;
  • Excluding these items, the Company reported earnings of $2.2 million, or $0.05 per diluted share;
• For the same period last year after various adjustments, the company earned $11.6M or $0.24 per share;
• Revenues for the quarter ended April 30, 2007 were $511.9 million compared to $526.9 million last year, a decrease of 2.9%;
• Comparable store sales for the third quarter decreased 3.4%; and
• Company projects a fourth quarter comparable store sales decrease of 2% to 3% and GAAP earnings per share in the range of ($0.11) to ($0.15). The guidance includes an estimated ($0.12) impact due to the decline in revenue recognized from the change to its jewelry protection plan offering and approximately $0.02 for the net impact of derivative versus hedge accounting. Excluding these items, the Company continues to expect earnings per share in the range of ($0.01) to ($0.05) per share.

I will work through the conference call and provide my thoughts, once again in point format.

• The Zales brand had a mid-single digit comp decrease, lesser transactions but higher average ticket;
• Gordon's brand had a mid single digit comp decrease, less promotional than Zales;
• Pagoda also experienced mid single digit comp decrease, lesser transactions but higher average ticket;
• Bailey, Banks, and Biddle experienced low single digit comp decrease because of a decline in average ticket. The trend has reversed;
• Outlet comps were flat;
• Peoples and Mappins in Canada were strong with comp sales up in the high single digits and total revenues up in the mid teens;
• dotcom was strong too with sales up over 50% versus last year; traffic was up 20% and conversion was up 30%;
• Lifetime jewelry plan generate $10M in cash.

• Tough macro environment;
• Retailing, especially jewelry is difficult;
• Higher energy prices are soaking up discretionary dollars;
• Jewelry is not a must but rather a want;
• Lower priced items are down, but larger ticket items (larger solitaire carat weights) are up with double digit growth;
• Company has about $70M in excess inventory, which it plans to eliminate by reduced replenishment cycles;
• Company also has $40M in clearance inventory to work through;
• Company reduced its inventory by over $30 million in Q3 and its goal is to reduce inventory even further by $50 to $70 million in Q4.

• Total revenues decreased 2.9% for the quarter and were flat year-to-date;
  • Total revenues negatively affected by a decrease of $8.7 million in recognized revenues from the sale of lifetime jewelry protection plans or JPPs;
  • Sales of lifetime jewelry protection plans were $28M compared $18M same quarter last year;
• Average transaction sizes for the quarter by brand:
  • Zales $367 versus last year $341;
  • Gordon's $411, $400;
  • Bailey Banks & Biddle $1724, $1763;
  • Outlet $427, $414;
  • Peoples $301, $283;
  and
  • Pagoda $38, $37;
• Gross margin declined from 51.7% to 51%. Positive merchandise margin gains were offset by the decline in revenue recognized for lifetime JPPs. Moreover, SG&A was 47.7% for the quarter versus 45.8% last year as a percentage of revenues;
• The effective tax rate for the quarter was 38.3% versus 34.3% last year. Last year the effective tax rate included a tax repatriation benefit in the quarter;
• Store count:
  • Zales, 787;
  • Gordon's, 284;
  • Bailey Banks & Biddle, 72;
  • Outlet, 137;
  • Peoples, 189;
  • Peoples Two, 26;
  and
  • Pagoda, 797;
• The capital expenditures are expected to total about $95 million for the fiscal year;
• Merchandised inventory at April 30th, 2007 was $1.1 billion or $148 million and 15.8% higher than last year's level at $938 million;
• Ended the quarter with $53 million in cash and borrowings of $290 million under a line of credit compared to $60 million in cash and borrowing of $205 million last year;
  • The increased inventory levels and the decline in current receipts and merchandise payables resulted in increased borrowings and a significant reduction in free operating cash flow;
  • Estimated fiscal 2007 free cash flow to be in the range of a negative $70 to $80 million.

I did not find anything particularly noteworthy.

In listening to the call, I got the sense that the executives were defensive. Business is difficult, and some of that difficulty can be explained with high energy prices and, although they did not mention it, housing. The executives seemed very focused on cost cutting, looking at various options to spin things out (portfolio review), and direct sourcing. While that is all good, I did not get the sense the company is going on the attack to attract and get new business.

I got a completely different impression when I listened to Blue Nile, Inc.'s (NILE) conference call. It was one of optimism and increased guidance. Zale is the polar opposite. It is fighting off its various demons in hopes of throwing off positive cash flow in the future.

I certainly do not have any magic bullets for Zale. I agree that retail, especially mall based jewelry retail, is darn difficult. I suspect that jewelry retailers with substantially less margins (Blue Nile, Costco Wholesale Corporation (COST)) are making life difficult for Zale. Unless Zale radically changes its business model, its competitors with their lower cost structures are going to continue to do damage.

All that said, the Zale stock closed up $0.31 to $27.91 for a gain of 1.12%. Possible explanations are investors feared worse or investors are hopeful that private equity will play a role in the portfolio review or something else entirely.

As a matter of disclosure, I have no positions in Costco, am long shares in Blue Nile, and am short shares in Zale.

In prior posts I urged readers to visit The Wall Street Journal's Markets Data Center page (WSJMarkets.com). It provides a comprehensive yet succinct view of the markets. This information is available to both WSJ subscribers and non-subscribers.

Dave Pettit from WSJ informed me via email that Markets Data Center has become even better.

Readers now have free access to an archive of the 30 or so most popular tables, including major stock-market indicators (including U.S. and international indexes, actives, gainers, money flows, etc.) money rates, forex rates, cash-commodity prices and futures settlement prices. The archive starts with May 1 and it will continue to build over time. Details are here: http://online.wsj.com/static_html_files/whatsthis.html.

As a general practice, I do not quote emails. But in this instance, I am confident that Dave does not mind.

WSJ's Market Data Center is an excellent resource for all investors. I urge you to have a look.