August 2007 Archives

Interesting optical illusion, isn't it? Look at the squares A and B in diagram above. Do they appear to be the same color to you?

For those that are unconvinced that squares A and B are the same color, you can read the read the explanation and see proof yourself.

This illusion certainly fooled me. I ended up importing the image into Photoshop™ to sample the colors. Yes, squares A and B are the same, surprisingly enough.

Because of my photography interest, I usually think of myself as being able to discern colors. This example has proved how easily one can be fooled.

Linda and I enjoyed our photography shoot last Friday in Heritage Park. We met for the first time at the park and spent the next five hours exploring and photographing.

We were fortunate because Friday was a warm day at about 20C (about 70F), whereas Thursday and Saturday were cooler.

I knew in advance of working with Linda that she has a strong background in dance. When I was working with her, I noticed how she was able to incorporate elements of dance into her poses. If I have the opportunity to work with Linda again, I would like to focus more on her dancing. My photography skills, however, would need further development. I know there are photography courses that focus on capturing dance movement. Perhaps that is something I can look persue in the future.

Working with Linda was tremendous fun. At the end of our five hour session, we both felt as though only two or three hours had elapsed. That told me that we both enjoyed the experience. I tended to be very methodical in that I set up my tripod at almost every location, metered the scene, and then had Linda pose. That whole process took a fair amount of time, especially because we moved from location to location frequently. So even though we had plenty of time, we did not take a large number of photographs. What we lacked in number we made up in variety.

We walked through some houses but found that they were too constraining for photography because the best locations for photography were near the windows in the individual rooms. The rooms, however, were sealed off and guests were only allowed access to the hallways of the houses. Thus, we could peer into the rooms, but not photograph there. The Prince House was especially beautiful, but unfortunately too small for me to get far enough away to get a great shot.

We took some photographs near some trees and the Vulcan Ice Cream Parlour 1910 / Rotary Historical Hall, which is a white building that served as a natural reflector. We then walked along a series of stores en route to the Wainwright Hotel. We experimented with a few pictures there. Afterwards, we took some pictures of along the railing of the Wainwright Hotel. Following the Wainwright Hotel railing pictures, we explored the Railway Roundhouse, a building that houses older trains. The challenge we had inside was a lack of light. Moreover, Linda was wearing primarily black and trains themselves were black. Black on black photography is challenging. We took a break for lunch at the Wainwright Hotel. After lunch, Linda changed into a white dress. We took more pictures of her near the trees and Vulcan Ice Cream Parlour 1910 / Rotary Historical Hall. A local stage actor, Cameron, kindly assisted for a few shots. You will see some of the pictures of Linda and Cameron together later in the series. One of Linda's ideas was to take some photographs near a fountain. My favorite photograph, the one shown above, is Linda at the fountain.

After the fountain shot, we went back to the Railway Roundhouse and took more pictures, this time with her white dress. At the end of Railway session, our time was ending. We began making our way toward the entrance, stopping periodically at various venues. We did not take many photographs on our way back.

As mentioned at the outset of this post, we both thought time had passed quickly. I could have spent more time and explored more. It would have been great to go on boat ride on the reservoir. There were still many parts of the park that we did not have an opportunity to explore because of time constraints. Heritage Park itself is a fantastic location for amateur photographers because there are so many buildings and props to work with. And guests can find places to eat and shop too. I highly recommend Heritage Park for both photographers and tourists alike.

I thoroughly enjoyed working with Linda. She is a fun person with an engaging personality. Her dance background helps her with various poses. Linda travels a fair amount and is leaving Calgary soon. Because I enjoyed working with Linda so much, I hope that our paths cross again and that I have an opportunity to work with her in the future.

The photograph of Linda is hosted at Flickr. If you click on her picture above, you will be taken to where you can view a larger version. And if you click here, you can see more pictures of Linda. I will be adding pictures over the next few weeks.

Dick's Sporting Goods (DKS) held its second quarter 2007 conference call on 21 August 2007. Seeking Alpha provided its first Dick's conference call transcript. 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 company's prepared information on the conference call. The question and answer session was more wide ranging.

Second Quarter Results

• Net income was $47.9M, an increase of 87% over the prior year's result of $25.7M;
  • EPS was $0.83, an increase of 77% over the prior year's result of $0.47;
• Net Sales increased 38% to $1,013.4M with a 7.2% (or 5.8% adjusting for the calendar, compared to a 6.5% increase in Q2 last year) comparable store sale increase;

• According to the company's press release:

  "The Dick's Sporting Goods portfolio of businesses produced an outstanding second quarter. We achieved increased sales not only in golf but across most of our businesses, delivered gross margin improvements, provided operating expense leverage and solid inventory management. In addition, Golf Galaxy delivered strong sales and earnings in their seasonally largest quarter. I would like to commend all of our team members for their efforts in driving the results for our second quarter," said Edward W. Stack, Chairman and CEO.

Stores

• In first quarter, the company opened six Dick's Sporting Goods Stores and two Golf Galaxy stores;

Year To Date Results

• Net Income was $69.6M, an increase of 88% (prior year was $37.1M)
• EPS was $1.21, an increase of 78% (prior year was $0.68)
• Net sales increased 33% to $1,837M with comparable sales up 4.7% (or 3.1% adjusting for the shifted retail calendar), additional stores, and the inclusion of Golf Galaxy in the results

As noted at the outset, please note Golf Galaxy acquisition and its effect on the financial statements.

Current 2007 Financial Outlook

Full Year 2007

• Company increased guidance for the year:
  • Estimated 58 million shares outstanding;
  • EPS $2.47 – $2.50 (prior estimate was $2.37 – $2.40);
  • Revised estimate represents 23% EPS increase over last year;
  • Comparable store sales expected to increase 2% (last year was 6%); and
  • Company expects to open 45 new Dick's Sporting Goods stores, 16 new Golf Galaxy stores, and relocate one Dick's Sporting Goods store.

Third Quarter 2007

• 59 million shares outstanding;
• Consolidated EPS $0.09 – $0.12 ($0.14 last year);
• Results were higher last year because of shifted retail calendar and Golf Galaxy will be $0.02 dilutive in the third quarter;
• Retail sales expected to decrease 1% – 3% (again affected by shifted retail calendar; without shifted calendar, flat to down 2%);
• Plans to open 24 new Dick's Sporting Goods stores.

Quoting from Seeking Alpha's transcript:

• Sales for the quarter increased 38% to over $1 billion with the comp sales gain at Dick's stores of 7.2% or 5.8% on a shifted basis. Higher price points and a 1% increase in transactions on a shifted basis accounted for the comp sales gain. Cannibalization impacted comps by approximately 1% similar to recent levels. Gross profit was $299 million increasing 122 basis points to 29.5% of sales. This increase was driven by expanded merchandize margins and better freight and distribution expenses resulting from initiatives to increase our efficiencies in these areas. We also achieved occupancy leverage resulting from two consecutive years of positive comp store sales and the magnitude of Golf Galaxy's contribution in their seasonally large second quarter.
• SG&A expenses of $213 million or 21% of sales and 70 basis points lower than last year's second quarter driven by leverage of payroll and store expenses and once again the magnitude of Golf Galaxy's contribution. Operating income increased $37 million or 82% to $83 million. As a percent of sales, operating income increased 198 basis points. Net income for the quarter increased 87% to $48 million.

• Company is justifiably proud of its accomplishments this past quarter;
• Company reiterated that its debt attributable to the Golf Galaxy acquisition will be retired by yearend; much of the $147 million has already been repaid;
• Private labels are providing strong wins and there is the opportunity to take private labels from Dick's to Golf Galaxy;
• Further strength of the business resulted in stronger cash flows and therefore lower borrowings and a revolving line of credit, all of which resulted in a lower interest expense;
• Business was strong across most lines including golf, athletic apparel, footwear, and the outdoor category;
• Company, because of its store locations and products, has not experienced adverse consequences from the weak housing markets;
• Private label business represents 17.6% of sales, an increase of 0.6% from last year;
• Company plans to open its third distribution centre which will be located in Atlanta, Georgia. The size will be about 650,000 square feet and will have the capacity to serve 210 stores;
• The company has begun contemplating a fourth distribution centre, most likely in Texas;
• Both Florida and Texas are target markets;
• Company does not see irrational pricing in its markets;
• Several brands are performing very well including Crocs, Nike, Under Armour, North Face; footwear continues to be strong;
• By yearend the company plans to have 100 Under Armour shops, 200 men's Nike shops; and 150 women's Nike shops; all shops are within the Dick's Sporting Goods shop, or shop in a shop;
• Golf Galaxy's new stores are performing very well and the company plans to open more stores in California; and
• Company will be reducing its advertising in print and increase its advertising in television and direct mail, the direct to consumer marketing.

As mentioned after the prior conference call, I remain pleased with the company's progress. 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.

Calgary model Judith Aldama is featured in the photograph, which is hosted at Flickr. If you click on the picture of Judith, you will be taken to where you can view a larger version and see even more pictures of her.

After last week's tumultuous markets, will the markets settle down this week or will they continue to be volatile? My guess is that the markets will continue to be volatile. The reality is, everyone is trying to guess what everyone else will do. And with the increased and unpredictable volatility, the quant hedge funds are likely to reduce their leverage and thus their exposure to the markets.

During the past week, some of my positions took a pounding. Blue Nile, Inc. (NILE) was roughly $88 last Monday and closed the week at $74.67. Blue Nile went down on housing fears, profit taking, and generally a weak retail outlook. If I were a more agile trader, I would have sold and repurchased Blue Nile. That said, I am content to continue to hold Blue Nile. I believe it will do well—especially compared to traditional brick and mortar jewelry retailers—even in a difficult environment.

Pan American Silver Corp. (PAAS) fell from about $28 on Monday to about $21.50 on Friday. Silver prices fell and many of the commodity stocks were clobbered as the momentum players exited. Should the U.S. dollar come under pressure, gold and silver could be large beneficiaries as people look to precious metals as a defensive play. Moreover, the BRIC countries are likely to continue expanding regardless of what the U.S. does. And they will continue to devour commodities such as gold and silver. Because I remain bullish on silver prices and because Pan American is an extremely well run mining company, I will be looking to increase my exposure to Pan American.

That is one the great things about periods of extreme volatility—they allow you to reposition your portfolio. You can close out some of your longs and purchase some of your favorites at favorite prices. And for those that are extremely agile traders, they can make a lot of money from the day to day swings in prices. I am not an agile trader, however, so I do not take advantage of the volatility in that manner.

As the week kicks off, I am going to be paying close attention to the investment banks for more signs of weakness; the Fed; U.S. dollar; investment bank stocks; commodities, particularly silver and gold, and oil; and the general mood of the market. Asia opened the week strong, but so far, our markets have reacted cautiously. It promises to be an interesting week.

Calgary model Judith Aldama with her Elvis Presley sneer is featured in the photograph, which is hosted at Flickr. If you click on the picture of Judith, you will be taken to where you can view a larger version and see even more pictures of her.

Adam Warner over at Daily Options Report provides an excellent lesson in using options. Earlier he had constructed two theoretical positions: one, a short strangle on SPY and trades SPY aggressively, shorting into weakness and purchasing into strength; and two, the opposite where trader seemingly overpays for a strangle with the high volatility and flips SPY aggressively to overcome decay and to pay for his initial position. Now, four days later, guess which trader is ahead? Go over to Adam's site to read his complete article.