UPDATE 2-Dick's Sporting Q1 tops Street; sees weak gross margins

Tue May 19, 2009 12:19pm EDT

* Q1 adj. EPS $0.11 vs est of $0.07

* Q1 rev rises 5 pct

* Q2 EPS view $0.28-$0.31 vs est $0.30

* Says expects 2009 to be challenging

* Sees lower gross margins in 2009 (Adds conference call details, analyst comments, share movement)

By Mihir Dalal

BANGALORE, May 19 (Reuters) - Dick's Sporting Goods Inc (DKS.N) posted higher-than-expected quarterly results as revenue from new stores offset weakness in its golf category, but said it sees gross margins falling in 2009 amid a tough promotional environment.

Shares of the Pittsburgh-based company, which sells sporting equipment, apparel and footwear, reversed earlier gains to trade down 6 percent at $18.65 Tuesday afternoon on the New York Stock Exchange.

Dick's Sporting expects 2009 to continue to be a difficult year, a company executive said on a conference call with analysts. The company will tighten spending and effectively manage inventory to weather the economic downturn, he said.

Gross margins, which fell 232 basis points to 26.1 percent in the first quarter, are expected to fall in 2009 compared with 2008, the company said.

"The one concerning component in Q1 was gross margin, likely reflecting increased promotions and perhaps some other remerchandising efforts at Golf Galaxy and Chick's stores," Credit Suisse analysts wrote in a note to clients.

The analysts said the decline was particularly concerning since a significant part of the company's earnings growth over the last few years had come through margin expansion.

"The promotional environment is intense so it was not unexpected that they would see some gross margin erosion," Barclays analyst Michael Lasser told Reuters.

He said the promotional environment will stay intense in 2009 and expects the company to discount some of its merchandise to keep up with competition.

The retailer said it plans to open about 20 new Dick's Sporting Goods stores and one new Golf Galaxy store in 2009. It opened nine Dick's Sporting Goods stores and one Golf Galaxy store in the first quarter.

Q2 EPS OUTLOOK

However, the retailer forecast second-quarter profit largely in line with analyst estimates.

It expects to earn 28 cents to 31 cents a share, excluding items, compared with analysts' estimates of 30 cents.

"The road to recovery throughout retail will be gradual and it is not going to quickly rebound and their conservative outlook reflects that," Lasser said.

The analyst, who has an "overweight" rating on the stock, said his $15 price target was under review.

The company sees same-store sales, which fell 6 percent in the first quarter, declining 6 percent to 9 percent in the second quarter and in 2009.

For the first quarter ended May 2, the company posted a profit of $10.2 million, or 9 cents a share. Excluding items, it earned 11 cents a share.

Revenue rose 5 percent to $959.7 million.

Analysts expected earnings of 7 cents a share, before special items, on revenue of $914.3 million. (Editing by Deepak Kannan)

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