DICK'S SPORTING GOODS, INC. - Quarter Report: 2011 October (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended October 29, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                    .

 

Commission File No. 001-31463

 

 

DICK’S SPORTING GOODS, INC.

(Exact name of registrant as specified in its charter)

 

 

345 Court Street, Coraopolis, Pennsylvania 15108

(Address of Principal Executive Offices)

 

(724) 273-3400

(Registrant’s Telephone Number, including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

 

The number of shares of common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, outstanding as of November 17, 2011 was 95,759,427 and 24,960,870, respectively.

 

 

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INDEX TO FORM 10-Q

 

		Page Number
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		20
PART II. OTHER INFORMATION		20
Item 1. Legal Proceedings		20
Item 1A. Risk Factors		20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 6. Exhibits		21
SIGNATURES		21
INDEX TO EXHIBITS		22
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(Amounts in thousands, except per share data)

 

		13 Weeks Ended						39 Weeks Ended
		October 29,			October 30,			October 29,			October 30,
		2011			2010			2011			2010
Net sales		$	1,179,702		$	1,078,984		$	3,600,246		$	3,352,579
Cost of goods sold, including occupancy and distribution costs		829,111			771,913			2,518,137			2,383,142
GROSS PROFIT		350,591			307,071			1,082,109			969,437
Selling, general and administrative expenses		272,233			272,467			821,698			796,988
Pre-opening expenses		6,796			6,396			12,717			9,191
INCOME FROM OPERATIONS		71,562			28,208			247,694			163,258
Gain on sale of investment		—			—			(13,900		)	—
Interest expense		3,540			3,518			10,504			10,528
Other expense (income)		1,568			(1,177		)	977			(1,220		)
INCOME BEFORE INCOME TAXES		66,454			25,867			250,113			153,950
Provision for income taxes		24,970			9,004			97,283			59,362
NET INCOME		$	41,484		$	16,863		$	152,830		$	94,588
EARNINGS PER COMMON SHARE:
Basic		$	0.34		$	0.15		$	1.27		$	0.82
Diluted		$	0.33		$	0.14		$	1.22		$	0.78
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		120,432			116,024			120,000			115,665
Diluted		125,552			121,408			125,585			120,945

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(Dollars in thousands)

 

		October 29,			January 29,
		2011			2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	483,372		$	546,052
Accounts receivable, net		63,568			34,978
Income taxes receivable		35,180			9,050
Inventories, net		1,243,152			896,895
Prepaid expenses and other current assets		63,542			58,394
Deferred income taxes		14,028			18,961
Total current assets		1,902,842			1,564,330
Property and equipment, net		745,129			684,886
Intangible assets, net		50,755			51,070
Goodwill		200,594			200,594
Other assets:
Deferred income taxes		8,225			27,157
Investments		1,000			10,789
Other		66,087			58,710
Total other assets		75,312			96,656
TOTAL ASSETS		$	2,974,632		$	2,597,536
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	663,091		$	446,511
Accrued expenses		266,162			279,284
Deferred revenue and other liabilities		86,286			121,753
Current portion of other long-term debt and leasing obligations		995			995
Total current liabilities		1,016,534			848,543
LONG-TERM LIABILITIES:
Other long-term debt and leasing obligations		139,108			139,846
Deferred revenue and other liabilities		256,644			245,566
Total long-term liabilities		395,752			385,412
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock		957			938
Class B common stock		250			250
Additional paid-in capital		677,716			625,184
Retained earnings		883,298			730,468
Accumulated other comprehensive income		125			6,741
Total stockholders’ equity		1,562,346			1,363,581
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,974,632		$	2,597,536

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(Dollars in thousands)

 

		13 Weeks Ended						39 Weeks Ended
		October 29,			October 30,			October 29,			October 30,
		2011			2010			2011			2010
NET INCOME		$	41,484		$	16,863		$	152,830		$	94,588
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gain on securities available-for-sale, net of tax		—			590			2,119			324
Reclassification adjustment for gains realized in net income due to the sale of securities available-for-sale, net of tax		—			—			(8,738		)	—
Foreign currency translation adjustment, net of tax		(26		)	1			3			6
COMPREHENSIVE INCOME		$	41,458		$	17,454		$	146,214		$	94,918

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

(Dollars in thousands)

 

																		Accumulated
							Class B					Additional						Other
		Common Stock					Common Stock					Paid-In			Retained			Comprehensive
		Shares		Dollars			Shares		Dollars			Capital			Earnings			Income			Total
BALANCE, January 29, 2011		93,768,978		$	938		24,960,870		$	250		$	625,184		$	730,468		$	6,741		$	1,363,581
Exercise of stock options		1,688,377		17			—		—			21,411			—			—			21,428
Restricted stock vested		299,582		3			—		—			(3		)	—			—			—
Repurchase of common stock		(89,975	)	(1		)	—		—			(3,558		)	—			—			(3,559		)
Net income		—		—			—		—			—			152,830			—			152,830
Stock-based compensation		—		—			—		—			19,075			—			—			19,075
Total tax benefit from exercise of stock options		—		—			—		—			15,607			—			—			15,607
Foreign currency translation adjustment, net of taxes of $2		—		—			—		—			—			—			3			3
Unrealized gain on securities available-for-sale, net of taxes of $1,264		—		—			—		—			—			—			2,119			2,119
Reclassification adjustment for gains realized in net income due to the sale of securities available-for-sale, net of taxes of $5,162		—		—			—		—			—			—			(8,738		)	(8,738		)
BALANCE, October 29, 2011		95,666,962		$	957		24,960,870		$	250		$	677,716		$	883,298		$	125		$	1,562,346

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(Dollars in thousands)

 

		39 Weeks Ended
		October 29,			October 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	152,830		$	94,588
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		83,616			80,311
Deferred income taxes		27,795			(1,313		)
Stock-based compensation		19,075			17,933
Excess tax benefit from exercise of stock options		(15,320		)	(7,676		)
Tax benefit from exercise of stock options		421			693
Other non-cash items		1,154			1,162
Gain on sale of investment		(13,900		)	—
Changes in assets and liabilities:
Accounts receivable		(17,908		)	(10,454		)
Inventories		(346,257		)	(266,376		)
Prepaid expenses and other assets		(5,858		)	(22,404		)
Accounts payable		204,999			145,891
Accrued expenses		(22,821		)	(12,975		)
Income taxes payable / receivable		(10,944		)	(20,519		)
Deferred construction allowances		21,203			4,973
Deferred revenue and other liabilities		(41,921		)	(21,349		)
Net cash provided by (used in) operating activities		36,164			(17,515		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(148,038		)	(117,452		)
Proceeds from sale of investment		14,140			—
Proceeds from sale-leaseback transactions		9,071			10,731
Deposits and purchases of other assets		(18,052		)	—
Net cash used in investing activities		(142,879		)	(106,721		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other long-term debt and leasing obligations		(738		)	(697		)
Construction allowance receipts		—			—
Proceeds from exercise of stock options		21,428			19,244
Excess tax benefit from exercise of stock options		15,320			7,676
Repurchase of common stock		(3,559		)	—
Increase in bank overdraft		11,581			31,842
Net cash provided by financing activities		44,032			58,065
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		3			6
NET DECREASE IN CASH AND CASH EQUIVALENTS		(62,680		)	(66,165		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		546,052			225,611
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	483,372		$	159,446
Supplemental disclosure of cash flow information:
Accrued property and equipment		$	9,699		$	18,764
Cash paid for interest		$	9,351		$	9,287
Cash paid for income taxes		$	79,204		$	80,597

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Basis of Presentation

 

Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer selling sporting goods equipment, apparel and footwear through its 474 Dick’s stores and 81 Golf Galaxy stores as of October 29, 2011, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains e-commerce operations for both Dick’s and Golf Galaxy.  Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

 

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  The interim consolidated financial statements are unaudited and have been prepared on the same basis as the annual audited consolidated financial statements.  In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information.  This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 29, 2011 as filed with the Securities and Exchange Commission on March 18, 2011.  Operating results for the 13 and 39 weeks ended October 29, 2011 are not necessarily indicative of the results that may be expected for the year ending January 28, 2012 or any other period.

 

Newly Issued Accounting Pronouncements

 

Goodwill Impairment

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Testing Goodwill for Impairment.”  This update amended the procedures surrounding goodwill impairment testing to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Accounting Standards Codification (“ASC”) 350, “Intangibles — Goodwill and Other.”  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.”  This update amended the presentation options in ASC 220, “Comprehensive Income,” to provide an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with retrospective application required.  The adoption of this guidance will not have a significant impact on the presentation of the Company’s consolidated financial statements.

 

Fair Value Measurement

 

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This update amended explanations of how to measure fair value to result in common fair value measurement and disclosure requirements in U.S GAAP and IFRSs.  ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with prospective application required.  The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.

 

2.  Store and Corporate Office Closings

 

The calculation of accrued store closing and relocation reserves primarily includes future minimum lease payments, maintenance costs and taxes from the date of closure or relocation to the end of the remaining lease term, net of contractual or estimated sublease income.  The liability is discounted using a credit-adjusted risk-free rate of interest.  The assumptions used in the calculation of the accrued store closing and relocation reserves are evaluated each quarter.

 

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The following table summarizes the activity in 2011 and 2010 (in thousands):

 

		39 Weeks Ended
		October 29,			October 30,
		2011			2010
Accrued store closing and relocation reserves, beginning of period		$	46,918		$	35,716
Expense charged to earnings		—			19,386
Cash payments		(10,511		)	(8,192		)
Interest accretion and other changes in assumptions		1,279			120
Accrued store closing and relocation reserves, end of period		37,686			47,030
Less: current portion of accrued store closing and relocation reserves		(11,322		)	(14,913		)
Long-term portion of accrued store closing and relocation reserves		$	26,364		$	32,117

 

The Company recorded $16.4 million of expenses related to the closure of 12 underperforming Golf Galaxy stores in the third quarter of fiscal 2010.  These expenses are reflected as part of selling, general and administrative expenses on the unaudited consolidated statements of income.

 

The current portion of accrued store closing and relocation reserves is recorded in accrued expenses and the long-term portion is recorded in long-term deferred revenue and other liabilities on the unaudited consolidated balance sheets.

 

3.  Earnings per Common Share

 

Basic earnings per common share is computed based on the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share is computed based on the weighted average number of shares of common stock, plus the effect of dilutive potential common shares outstanding during the period, using the treasury stock method.  Dilutive potential common shares include outstanding stock options, restricted stock and warrants.

 

The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data):

 

		13 Weeks Ended						39 Weeks Ended
		October 29,			October 30,			October 29,			October 30,
		2011			2010			2011			2010
Net income		$	41,484		$	16,863		$	152,830		$	94,588
Weighted average common shares outstanding (for basic calculation)		120,432			116,024			120,000			115,665
Dilutive effect of stock-based awards		5,120			5,384			5,585			5,280
Weighted average common shares outstanding (for diluted calculation)		125,552			121,408			125,585			120,945
Earnings per common share - basic		$	0.34		$	0.15		$	1.27		$	0.82
Earnings per common share - diluted		$	0.33		$	0.14		$	1.22		$	0.78

 

For the 13 weeks ended October 29, 2011 and October 30, 2010, 0.6 million and 3.7 million shares, respectively, were attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.  For the 39 weeks ended October 29, 2011 and October 30, 2010, 0.5 million and 4.2 million shares, respectively, were attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.

 

4.  Investments

 

During the 39 weeks ended October 29, 2011, the Company realized a pre-tax gain of $13.9 million resulting from the sale of available-for-sale securities held in GSI Commerce, Inc. (“GSI”), in connection with GSI’s acquisition by eBay, Inc.  There were no sales of the Company’s investment in GSI during the previous fiscal year.

 

5. Subsequent Event

 

On November 14, 2011, the Company’s board of directors declared an annual cash dividend in the amount of $0.50 per common share payable on December 28, 2011 to stockholders of record as of the close of business on December 7, 2011.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.  Investors should not place undue reliance on forward-looking statements as a prediction of actual results.  You can identify these statements as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as “believe”, “anticipate”, “expect”, “estimate”, “predict”, “intend”, “plan”, “project”, “goal”, “will”, “will be”, “will continue”, “will result”, “could”, “may”, “might” or any variations of such words or other words with similar meanings.  Forward-looking statements address, among other things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profit margins and return on invested capital, plans to grow our private brand business, projections of our future profitability, issuance of dividends, results of operations, capital expenditures, our financial condition or other “forward-looking” information and include statements about revenues, earnings, spending, margins, costs, liquidity, store openings and operations, inventory, private brand products or our actions, plans or strategies.

 

The following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results, and could cause actual results for fiscal 2011 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our management:

 

·                        Continuation of the ongoing economic and financial downturn may cause a continued decline in consumer spending, and other changes in macroeconomic factors or market conditions, including the housing market and fuel costs, may adversely impact the level of consumer spending for the types of merchandise we sell;

 

·                        Changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular;

 

·                        Our quarterly operating results and same store sales may fluctuate substantially;

 

·                        Potential volatility in our stock price;

 

·                        Our ability to access adequate capital, which may be affected by a tightening of availability or higher borrowing costs resulting from uncertainty in financial markets or by restrictions imposed under our senior secured revolving credit agreement;

 

·                        The intense competition in the sporting goods industry;

 

·                        The ongoing financial and economic crisis may adversely affect our landlords and real estate developers of retail space, which may limit the availability of attractive store locations and affect our ability to grow our number of stores; further, a lack of available retail store sites on terms acceptable to us, an increase in the cost of real estate and other items related to our stores or our inability to manage our growth, open new stores on a timely basis or expand successfully in new and existing markets could negatively impact our business;

 

·                        Changes in consumer demand;

 

·                        Unauthorized disclosure of sensitive, personal or confidential information;

 

·                        Disruptions in our or our vendors’ supply chain, including as a result of political instability, foreign trade issues, the impact of the ongoing economic or financial downturn on distributors or other reasons;

 

·                        Our relationships with our vendors, including potential increases in the costs of their products and our ability to pass those cost increases on to our customers, their ability to maintain their inventory and production levels and their ability or willingness to provide us with sufficient quantities of products at acceptable prices;

 

·                        Factors that could negatively affect our private brand offerings, including fluctuations in the cost of products resulting from increases in raw material prices and other factors, reliance on foreign sources of production, compliance with government and industry safety standards, and intellectual property risks;

 

·                        Risks and costs relating to the products we sell, including: product liability claims and the availability of recourse to third parties, including under our insurance policies; product recalls; and the regulation of and other hazards associated with certain products we sell, such as hunting rifles and ammunition;

 

·                        The loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Officer;

 

·                        Costs and risks associated with increased or changing laws and regulations affecting our business, including those

 

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relating to labor, employment, privacy and the sale of consumer products;

 

·                        Our ability to secure and protect our trademarks, patents and other intellectual property;

 

·                        Risks relating to operating as a multi-channel retailer, including the impact of rapid technological change, internet security and privacy issues, the threat of systems failure or inadequacy, increased or changing governmental regulation and increased competition;

 

·                        Disruption of or other problems with our current management information systems or software;

 

·                        Any serious disruption at our distribution facilities;

 

·                        The seasonality of our business;

 

·                       Regional risks because our stores are generally concentrated in the eastern half of the United States;

 

·                        The outcome of litigation or other legal actions against us;

 

·                        Our pursuit of strategic acquisitions, including costs and uncertainties associated with combining businesses and/or assimilating acquired companies;

 

·                        Our ability to meet our labor needs;

 

·                        Currency exchange rate fluctuations;

 

·                        We are controlled by our Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;

 

·                        The impact on the U.S. retail environment of foreign instability and conflict;

 

·                        Our current anti-takeover provisions, which could prevent or delay a change in control of the Company;

 

·                        Impairment in the carrying value of goodwill or other acquired intangibles;

 

·                        Financial or other factors that alter our current intention to issue quarterly cash dividends; and

 

·                        Other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 29, 2011.

 

In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement.  We do not assume any obligation and do not intend to update any forward-looking statements except as may be required by the securities laws.

 

Investors should also be aware that while the Company does communicate with securities analysts, from time to time, such communications are conducted in accordance with applicable securities laws and investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

 

OVERVIEW

 

Dick’s is an authentic full-line sporting goods retailer offering a broad assortment of brand name sporting goods equipment, apparel and footwear in a specialty store environment.  The Company also owns and operates Golf Galaxy, LLC, a golf specialty retailer (“Golf Galaxy”).  Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

 

As of October 29, 2011, we operated 474 Dick’s stores in 42 states and 81 Golf Galaxy stores in 30 states, with approximately 27.3 million square feet in 43 states on a consolidated basis, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains e-commerce operations for both Dick’s and Golf Galaxy.

 

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year.  Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

 

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The primary factors that historically influenced the Company’s profitability and success have been its growth in the number of stores and selling square footage, positive same store sales and its strong gross profit margins.  In the last five years, the Company has grown from 294 stores as of October 28, 2006 to 555 stores as of October 29, 2011, reflecting both organic growth and acquisitions.  The Company continues to expand its presence through the opening of new stores, although the rate of growth has decreased from the rate of growth experienced in earlier years, reflecting ongoing economic conditions.

 

In order to monitor the Company’s success, the Company’s senior management monitors certain key performance indicators, including:

 

·                        Consolidated same store sales performance — For the 39 weeks ended October 29, 2011, the Company’s consolidated same store sales increased 2.9% compared to a 6.2% increase during the same period in fiscal 2010.  The Company believes that its ability to consistently deliver increases in consolidated same store sales will be a key factor in achieving its targeted levels of earnings per share and continuing its store expansion program to an ultimate goal of at least 900 Dick’s locations across the United States.

 

·                        Operating cash flow — Net cash provided by operating activities totaled $36.2 million in the 39 weeks ended October 29, 2011, while the Company used $17.5 million in operating activities during the same period in fiscal 2010.  We typically generate significant positive operating cash flows in our fiscal fourth quarter in connection with the holiday selling season and proportionately higher net income levels.  See further discussion of the Company’s cash flows in the “Liquidity and Capital Resources and Changes in Financial Condition” section herein. The Company believes that a key strength of its business has been the ability to consistently generate positive cash flow from operations.  Strong cash flow generation is critical to the future success of the Company, not only to support the general operating needs of the Company, but also to fund capital expenditures related to new store openings, relocations, expansions and remodels, distribution centers, quarterly cash dividends, costs associated with continued improvement of information technology tools and costs associated with potential strategic acquisitions or investments that may arise from time to time.

 

·                        Quality of merchandise offerings — To monitor and maintain acceptance of its merchandise offerings, the Company monitors sell-throughs, inventory turns, gross margins and markdown rates at a department and style level.  This analysis helps the Company manage inventory receipts and markdowns to reduce cash flow requirements and deliver optimal gross margins by improving merchandise flow and establishing appropriate price points to minimize markdowns.

 

·                        Store productivity — To assess store-level performance, the Company monitors various indicators, including new store productivity, sales per square foot, store operating contribution margin and store cash flow.  New store productivity compares the sales increase for all stores not included in the same store sales calculation with the increase in square footage.

 

CRITICAL ACCOUNTING POLICIES

 

As discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, business combinations, self-insurance reserves, stock-based compensation and uncertain tax positions to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.  There have been no changes in the Company’s critical accounting policies during the period ended October 29, 2011.

 

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

 

Executive Summary

 

The Company reported net income of $41.5 million for the current quarter, or $0.33 per diluted share, compared to net income of $16.9 million, or $0.14 per diluted share, for the 13 weeks ended October 30, 2010.  Net income for the 13 weeks ended October 29, 2011 includes an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during the fourth quarter of fiscal 2010.  Net income for the 13 weeks ended October 30, 2010 included expenses relating to future lease payments and asset impairment charges resulting from the closure of 12 underperforming Golf Galaxy stores of approximately $9.8 million, net of tax, or $0.08 per diluted share.

 

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Net sales for the current quarter increased 9.3% to $1.2 billion, due primarily to a 4.1% increase in consolidated same store sales and the opening of new stores.

 

As a percentage of net sales, gross profit increased 126 basis points to 29.72% for the quarter, due primarily to higher merchandise margins and leverage of fixed occupancy costs.

 

We ended the third quarter with no outstanding borrowings under our Second Amended and Restated Credit Agreement, as amended (the “Credit Agreement”).

 

On November 14, 2011, our Board of Directors (the “Board”) approved and declared our first ever cash dividend. The $0.50 per share dividend will be paid on December 28, 2011 to all stockholders of record as of the close of business on December 7, 2011.  The Company currently intends to begin payments of regular quarterly dividends beginning in fiscal 2012; however, the actual declaration of such future dividends and the establishment of the per share amount, record dates and payment dates for such future dividends are subject to the final determination of the Company’s Board, and will be dependent upon future earnings, cash flows, financial requirements and other factors.

 

The following represents a reconciliation of beginning and ending stores for the periods indicated:

 

		39 Weeks Ended						39 Weeks Ended
		October 29, 2011						October 30, 2010
		Dick’s Sporting Goods		Golf Galaxy		Total		Dick’s Sporting Goods		Golf Galaxy		Total
Beginning stores		444		81		525		419		91		510
Q1 New stores		3		—		3		5		—		5
Q2 New stores		8		—		8		1		—		1
Q3 New stores		19		—		19		12		—		12
Closed stores		—		—		—		—		(12	)	(12	)
Ending stores		474		81		555		437		79		516
Remodeled stores		14		—		14		11		—		11
Relocated stores		—		1		1		1		—		1

 

The following tables present for the periods indicated selected items in the unaudited consolidated statements of income as a percentage of the Company’s net sales, as well as the basis point change in the percentage of net sales from the prior year’s period.  In addition, other selected data are provided to facilitate a further understanding of our business.  These tables should be read in conjunction with the following management’s discussion and analysis and the unaudited consolidated financial statements and related notes thereto.

 

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						Basis Point
						Increase /
						(Decrease) in
						Percentage of
		13 Weeks Ended				Net Sales
		October 29,		October 30,		from Prior Year
		2011 (A)		2010 (A)		2010-2011 (A)
Net sales (1)		100.00	%	100.00	%	N/A
Cost of goods sold, including occupancy and distribution costs (2)		70.28		71.54		(126)
Gross profit		29.72		28.46		126
Selling, general and administrative expenses (3)		23.08		25.25		(217)
Pre-opening expenses (4)		0.58		0.59		(1)
Income from operations		6.07		2.61		346
Interest expense (6)		0.30		0.33		(3)
Other expense (income) (7)		0.13		(0.11	)	24
Income before income taxes		5.63		2.40		323
Provision for income taxes		2.12		0.83		129
Net income		3.52	%	1.56	%	196
Other Data:
Consolidated same store sales increase (8)		4.1	%	5.1	%
Number of stores at end of period		555		516
Total square feet at end of period		27,315,490		25,555,505

 

						Basis Point
						Increase /
						(Decrease) in
						Percentage of
		39 Weeks Ended				Net Sales
		October 29,		October 30,		from Prior Year
		2011 (A)		2010 (A)		2010-2011
Net sales (1)		100.00	%	100.00	%	N/A
Cost of goods sold, including occupancy and distribution costs (2)		69.94		71.08		(114)
Gross profit		30.06		28.92		114
Selling, general and administrative expenses (3)		22.82		23.77		(95)
Pre-opening expenses (4)		0.35		0.27		8
Income from operations		6.88		4.87		201
Gain on sale of investment (5)		(0.39	)	—		(39)
Interest expense (6)		0.29		0.31		(2)
Other expense (income) (7)		0.03		(0.04	)	7
Income before income taxes		6.95		4.59		236
Provision for income taxes		2.70		1.77		93
Net income		4.24	%	2.82	%	142
Other Data:
Consolidated same store sales increase (8)		2.9	%	6.2	%
Number of stores at end of period		555		516
Total square feet at end of period		27,315,490		25,555,505

 

(A)  Column does not add due to rounding.

 

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(1)       Revenue from retail sales is recognized at the point of sale, net of sales tax.  Revenue from e-commerce sales is recognized upon shipment of merchandise and any service-related revenue is recognized primarily as the services are performed.  A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded.  Revenue from gift cards and returned merchandise credits (collectively, the “cards”) is deferred and recognized upon the redemption of the cards.  These cards have no expiration date.  Income from unredeemed cards is recognized in the unaudited consolidated statements of income in selling, general and administrative expenses upon determination that redemption becomes remote.  The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption becomes remote.

 

(2)       Cost of goods sold includes the cost of merchandise, inventory shrinkage and obsolescence, freight, distribution and store occupancy costs.  Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, store maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses.

 

(3)       Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters.  Selling, general and administrative expenses also includes the partial reversal of litigation settlement costs for the fiscal quarter ended October 29, 2011 and expenses relating to future lease payments and asset impairment charges resulting from the closure of 12 underperforming Golf Galaxy stores for the fiscal quarter ended October 30, 2010.

 

(4)       Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs incurred prior to a new or relocated store opening, which are expensed as incurred.

 

(5)       Gain on sale of available-for-sale securities.

 

(6)       Interest expense primarily includes rent payments under the Company’s financing lease obligation for its corporate headquarters and interest on borrowings under the Credit Agreement.

 

(7)       Results primarily from gains and losses associated with changes in deferred compensation plan investment values and interest income earned on highly liquid instruments purchased with a maturity of three months or less at the date of purchase.

 

(8)       A store is included in the same store sales calculation in the same fiscal period that it commences its 14th full month of operations.  Stores that were closed or relocated during the applicable period have been excluded from same store sales.  Each relocated store is returned to the same store base in the fiscal period that it commences its 14th full month of operations at that new location.

 

13 Weeks Ended October 29, 2011 Compared to the 13 Weeks Ended October 30, 2010

 

Net Income

 

The Company reported net income of $41.5 million for the current quarter, or $0.33 per diluted share, compared to net income of $16.9 million, or $0.14 per diluted share, for the 13 weeks ended October 30, 2010.  Net income for the 13 weeks ended October 29, 2011 includes an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during the fourth quarter of fiscal 2010.  Net income for the 13 weeks ended October 30, 2010 included expenses relating to future lease payments and asset impairment charges resulting from the closure of 12 underperforming Golf Galaxy stores of approximately $9.8 million, net of tax, or $0.08 per diluted share.

 

Net Sales

 

Net sales for the current quarter increased 9.3% to $1.2 billion, due primarily to a 4.1% increase in consolidated same store sales and the opening of new stores.  The 4.1% consolidated same store sales increase consisted of a 3.8% increase in Dick’s Sporting Goods stores, a 2.4% increase in Golf Galaxy stores and a 16.8% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 37 basis points to the Company’s consolidated same store sales calculation for the 13 weeks ended October 29, 2011, compared to 140 basis points for the 13 weeks ended October 30, 2010.

 

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The increase in consolidated same store sales was primarily driven by increases in apparel, footwear and team sports, which were partially offset by decreases in outdoor categories.  The consolidated same store sales increase was attributable to an increase of approximately 4.8% in sales per transaction, partially offset by a decrease in transactions of approximately 1.0% at Dick’s stores.  Every 1% change in same store sales would have impacted earnings before income taxes for the current quarter by approximately $3 million.

 

Income from Operations

 

Income from operations increased to $71.6 million for the current quarter from $28.2 million for the 13 weeks ended October 30, 2010, primarily attributable to a $43.5 million increase in gross profit.

 

Gross profit increased approximately 14% to $350.6 million for the current quarter from $307.1 million for the 13 weeks ended October 30, 2010.  The 126 basis point increase as a percentage of net sales is due primarily to a 79 basis point decrease in fixed occupancy costs resulting from leverage on the increase in consolidated same store sales compared to last year’s quarter and a 47 basis point increase in merchandise margins that resulted from our continued inventory management efforts, evidenced by less clearance activity compared with last year and changes in sales mix at our Dick’s stores. Every 10 basis point change in merchandise margin would have impacted the current quarter earnings before income taxes by approximately $1 million.

 

Selling, general and administrative expenses decreased slightly to $272.2 million for the current quarter from $272.5 million for the 13 weeks ended October 30, 2010, but decreased as a percentage of net sales by 217 basis points.  Last year’s quarter included expenses totaling $16.4 million relating to future lease payments and asset impairment charges resulting from the Golf Galaxy store closures, which contributed 152 basis points to the total decrease.  Store payroll expenses decreased as a percentage of net sales by 55 basis points due to leverage on the increase in net sales in this year’s quarter.  During the third quarter of 2011, the Company transferred funds in final satisfaction of its obligations under a court approved settlement of a wage and hour class action lawsuit.  See Part II, Item 1. “Legal Proceedings” of this report for additional information.  The settlement funding was $2.1 million lower than the previous estimate of $10.8 million, recognized in the fourth quarter of fiscal 2010, and as a result contributed 18 basis points to the total decrease in selling, general and administrative expenses during the current quarter.  These basis point decreases were partially offset by a 23 basis point increase in advertising expenses as a percentage of net sales, due primarily to a decrease in vendor supported marketing initiatives in this year’s quarter.

 

Pre-opening expenses increased to $6.8 million for the quarter from $6.4 million for the 13 weeks ended October 30, 2010.  Pre-opening expenses were for the opening of 19 new Dick’s stores during the quarter as compared to 12 new Dick’s stores during last year’s quarter.  Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

 

Interest Expense

 

Interest expense was $3.5 million for both the current quarter and for the 13 weeks ended October 30, 2010. Interest expense for the 13 weeks ended October 29, 2011 and October 30, 2010 includes $2.7 million related to rent payments under the Company’s financing lease for its corporate headquarters building.

 

Income Taxes

 

The Company’s effective tax rate was 37.57% for the 13 weeks ended October 29, 2011 as compared to 34.81% for the same period last year.  The effective tax rate for the 13 weeks ended October 30, 2010 reflected certain discrete items including benefits associated with simplifying the organization of the Company’s tax entities.

 

39 Weeks Ended October 29, 2011 Compared to the 39 Weeks Ended October 30, 2010

 

Net Income

 

The Company reported net income of $152.8 million for the 39 weeks ended October 29, 2011, or $1.22 per diluted share, compared to net income of $94.6 million, or $0.78 per diluted share, for the 39 weeks ended October 30, 2010. Net income for the 39 weeks ended October 29, 2011 includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share and an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during the fourth quarter of fiscal 2010.  Net income for the 39 weeks ended October 30, 2010 included expenses relating to future lease payments and asset impairment charges resulting from the closure of 12 underperforming Golf Galaxy stores of approximately $9.8 million, net of tax, or $0.08 per diluted share.

 

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Net Sales

 

Net sales for the period increased 7.6% to $3.6 billion, due primarily to a 2.9% increase in consolidated same store sales and the opening of new stores.  The 2.9% consolidated same store sales increase consisted of a 2.3% increase in Dick’s Sporting Goods stores, a 3.4% increase in Golf Galaxy stores and a 24.0% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 50 basis points to the Company’s consolidated same store sales calculation for the 39 weeks ended October 29, 2011, compared to 60 basis points for the 39 weeks ended October 30, 2010.

 

The increase in consolidated same store sales was primarily driven by increases in apparel, footwear and golf, which were partially offset by decreases in outdoor categories.

 

Income from Operations

 

Income from operations increased to $247.7 million for the current period from $163.3 million for the 39 weeks ended October 30, 2010.  The increase was primarily due to a $112.7 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $24.7 million.

 

Gross profit increased approximately 12% to $1.1 billion for the period, from $969.4 million for the 39 weeks ended October 30, 2010.  The 114 basis point increase is due primarily to an 87 basis point increase in merchandise margins that resulted from our continued inventory management efforts, evidenced by less clearance activity compared with last year and changes in sales mix at our Dick’s stores.  Gross profit was further impacted by a 35 basis point decrease in fixed occupancy costs resulting primarily from leverage on the increase in consolidated same store sales compared to last year.

 

Selling, general and administrative expenses increased approximately 3% to $821.7 million for the period from $797.0 million for the 39 weeks ended October 30, 2010, but decreased as a percentage of net sales by 95 basis points.  Last year included expenses totaling $16.4 million relating to future lease payments and asset impairment charges resulting from the Golf Galaxy store closures, which contributed 49 basis points to the total decrease.  Store payroll expenses decreased as a percentage of net sales by 32 basis points due to leverage on the increase in net sales this year.  Additionally, advertising expenses decreased 32 basis points as a percentage of net sales due primarily to a reduction in national media and direct mail advertising, as well as leverage on the increase in net sales this year.  During the third quarter of 2011, the Company transferred funds in final satisfaction of its obligations under a court approved settlement of a wage and hour class action lawsuit.  See Part II, Item 1. “Legal Proceedings” of this report for additional information.  The settlement funding was $2.1 million lower than the previous estimate of $10.8 million, recognized in the fourth quarter of fiscal 2010, and as a result contributed 6 basis points to the total decrease in selling, general and administrative expenses during the current quarter.  These basis point decreases were partially offset by a 22 basis point increase in administrative expenses due to higher corporate costs to support our business strategies compared to the 39 weeks ended October 30, 2010.

 

Pre-opening expenses increased to $12.7 million for the period from $9.2 million for the 39 weeks ended October 30, 2010.  Pre-opening expenses were for the opening of 30 new Dick’s stores during the period as compared to 18 new Dick’s stores during last year’s period.  Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

 

Gain on Sale of Investment

 

Gain on sale of investment was $13.9 million in the current year resulting from the sale of the Company’s investment in GSI Commerce, Inc., the Company’s e-commerce service provider.

 

Interest Expense

 

Interest expense was $10.5 million for both the current year and for the 39 weeks ended October 30, 2010. Interest expense for the 39 weeks ended October 29, 2011 and October 30, 2010 includes $8.0 million related to rent payments under the Company’s financing lease for its corporate headquarters building.

 

Income Taxes

 

The Company’s effective tax rate was 38.90% for the 39 weeks ended October 29, 2011 as compared to 38.56% for the same period last year.

 

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