DICK'S SPORTING GOODS, INC. - Quarter Report: 2011 July (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 July 30, 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 August 17, 2011 was 95,414,038 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	18
Item 4. Controls and Procedures	18
PART II. OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 6. Exhibits	20
SIGNATURES	20
INDEX TO EXHIBITS	21
EX-10.7
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						26 Weeks Ended
		July 30,			July 31,			July 30,			July 31,
		2011			2010			2011			2010
Net sales		$	1,306,695		$	1,226,063		$	2,420,544		$	2,273,595
Cost of goods sold, including occupancy and distribution costs		905,620			865,918			1,689,026			1,611,229
GROSS PROFIT		401,075			360,145			731,518			662,366
Selling, general and administrative expenses		285,729			271,372			549,465			524,521
Pre-opening expenses		3,655			715			5,921			2,795
INCOME FROM OPERATIONS		111,691			88,058			176,132			135,050
Gain on sale of investment		(13,900		)	—			(13,900		)	—
Interest expense		3,480			3,502			6,964			7,010
Other expense (income)		517			646			(591		)	(43		)
INCOME BEFORE INCOME TAXES		121,594			83,910			183,659			128,083
Provision for income taxes		47,746			32,394			72,313			50,358
NET INCOME		$	73,848		$	51,516		$	111,346		$	77,725
EARNINGS PER COMMON SHARE:
Basic		$	0.61		$	0.44		$	0.93		$	0.67
Diluted		$	0.59		$	0.43		$	0.89		$	0.64
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		120,207			115,815			119,784			115,485
Diluted		125,836			121,039			125,602			120,713

 

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)

 

		July 30,			January 29,
		2011			2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	626,415		$	546,052
Accounts receivable, net		55,587			34,978
Income taxes receivable		1,652			9,050
Inventories, net		1,026,861			896,895
Prepaid expenses and other current assets		63,159			58,394
Deferred income taxes		13,651			18,961
Total current assets		1,787,325			1,564,330
Property and equipment, net		737,484			684,886
Intangible assets, net		51,098			51,070
Goodwill		200,594			200,594
Other assets:
Deferred income taxes		28,004			27,157
Investments		1,015			10,789
Other		57,863			58,710
Total other assets		86,882			96,656
TOTAL ASSETS		$	2,863,383		$	2,597,536
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	553,108		$	446,511
Accrued expenses		284,457			279,284
Deferred revenue and other liabilities		92,595			121,753
Income taxes payable		23,915			—
Current portion of other long-term debt and leasing obligations		995			995
Total current liabilities		955,070			848,543
LONG-TERM LIABILITIES:
Other long-term debt and leasing obligations		139,359			139,846
Deferred revenue and other liabilities		258,804			245,566
Total long-term liabilities		398,163			385,412
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock		954			938
Class B common stock		250			250
Additional paid-in capital		666,981			625,184
Retained earnings		841,814			730,468
Accumulated other comprehensive income		151			6,741
Total stockholders’ equity		1,510,150			1,363,581
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,863,383		$	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						26 Weeks Ended
		July 30,			July 31,			July 30,			July 31,
		2011			2010			2011			2010
NET INCOME		$	73,848		$	51,516		$	111,346		$	77,725
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gain (loss) on securities available-for-sale, net of tax		105			(1,470		)	2,119			(266		)
Reclassification adjustment for gains realized in net income due to the sale of securities available-for-sale, net of tax		(8,738		)	—			(8,738		)	—
Foreign currency translation adjustment, net of tax		7			(16		)	29			5
COMPREHENSIVE INCOME		$	65,222		$	50,030		$	104,756		$	77,464

 

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		1,404,268		14			—		—			18,980			—			—			18,994
Restricted stock vested		293,262		3			—		—			(3		)	—			—			—
Repurchase of common stock		(87,224	)	(1		)	—		—			(3,454		)	—			—			(3,455		)
Net income		—		—			—		—			—			111,346			—			111,346
Stock-based compensation		—		—			—		—			13,326			—			—			13,326
Total tax benefit from exercise of stock options		—		—			—		—			12,948			—			—			12,948
Foreign currency translation adjustment, net of taxes of $18		—		—			—		—			—			—			29			29
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, July 30, 2011		95,379,284		$	954		24,960,870		$	250		$	666,981		$	841,814		$	151		$	1,510,150

 

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)

 

		26 Weeks Ended
		July 30,			July 31,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	111,346		$	77,725
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		55,316			52,153
Deferred income taxes		8,393			(13,907		)
Stock-based compensation		13,326			12,511
Excess tax benefit from exercise of stock options		(12,795		)	(6,220		)
Tax benefit from exercise of stock options		231			446
Other non-cash items		761			774
Gain on sale of investment		(13,900		)	—
Changes in assets and liabilities:
Accounts receivable		(13,180		)	(3,696		)
Inventories		(129,966		)	(90,023		)
Prepaid expenses and other assets		(5,415		)	(6,453		)
Accounts payable		103,656			74,009
Accrued expenses		(16,363		)	(15,212		)
Income taxes payable / receivable		44,030			5,608
Deferred construction allowances		12,687			4,815
Deferred revenue and other liabilities		(32,149		)	(25,859		)
Net cash provided by operating activities		125,978			66,671
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(85,600		)	(61,611		)
Proceeds from sale of investment		14,140			—
Proceeds from sale-leaseback transactions		3,073			5,874
Deposits and purchases of other assets		(8,045		)	—
Net cash used in investing activities		(76,432		)	(55,737		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other long-term debt and leasing obligations		(487		)	(458		)
Construction allowance receipts		—			—
Proceeds from exercise of stock options		18,994			9,225
Excess tax benefit from exercise of stock options		12,795			6,220
Repurchase of common stock		(3,455		)	—
Increase in bank overdraft		2,941			26,632
Net cash provided by financing activities		30,788			41,619
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		29			5
NET INCREASE IN CASH AND CASH EQUIVALENTS		80,363			52,558
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		546,052			225,611
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	626,415		$	278,169
Supplemental disclosure of cash flow information:
Accrued property and equipment		$	21,536		$	21,612
Cash paid for interest		$	6,205		$	6,155
Cash paid for income taxes		$	19,173		$	58,053

 

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.  Company

 

Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer selling sporting goods equipment, apparel and footwear through its 536 stores, 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.

 

2.  Basis of Presentation

 

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 26 weeks ended July 30, 2011 are not necessarily indicative of the results that may be expected for the year ending January 28, 2012 or any other period.

 

Comprehensive Income

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Presentation of Comprehensive Income.”  This update amended the presentation options in Accounting Standards Codification (“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.

 

3.  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):

 

 

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 in the unaudited consolidated balance sheets.

 

4.  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						26 Weeks Ended
		July 30,			July 31,			July 30,			July 31,
		2011			2010			2011			2010
Net income		$	73,848		$	51,516		$	111,346		$	77,725
Weighted average common shares outstanding (for basic calculation)		120,207			115,815			119,784			115,485
Dilutive effect of stock-based awards		5,629			5,224			5,818			5,228
Weighted average common shares outstanding (for diluted calculation)		125,836			121,039			125,602			120,713
Earnings per common share - basic		$	0.61		$	0.44		$	0.93		$	0.67
Earnings per common share - diluted		$	0.59		$	0.43		$	0.89		$	0.64

 

For the 13 weeks ended July 30, 2011 and July 31, 2010, 0.6 million and 4.6 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 26 weeks ended July 30, 2011 and July 31, 2010, 0.5 million and 4.4 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.

 

5.  Investments

 

During the 13 and 26 weeks ended July 30, 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 13 and 26 weeks ended July 31, 2010.

 

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

 

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·                        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; 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 July 30, 2011, we operated 455 Dick’s stores in 42 states and 81 Golf Galaxy stores in 30 states, with approximately 26.4 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.

 

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 268 stores as of July 29, 2006 to 536 stores as of July 30, 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.

 

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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 26 weeks ended July 30, 2011, the Company’s consolidated same store sales increased 2.3% compared to a 6.8% 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 $126.0 million in the 26 weeks ended July 30, 2011, while the Company generated $66.7 million 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, 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 July 30, 2011.

 

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

 

Executive Summary

 

The Company reported net income of $73.8 million for the current quarter, or $0.59 per diluted share, compared to net income of $51.5 million, or $0.43 per diluted share, for the 13 weeks ended July 31, 2010.  Net income for the current quarter includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

 

Net sales for the current quarter increased 6.6% to $1.3 billion, due primarily to a 2.5% increase in consolidated same store sales and the opening of new stores.

 

As a percentage of net sales, gross profit increased 132 basis points to 30.69% for the quarter, due primarily to higher merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels compared to last year’s second quarter.

 

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

 

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

 

		26 Weeks Ended						26 Weeks Ended
		July 30, 2011						July 31, 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
Closed stores		—		—		—		—		—		—
Ending stores		455		81		536		425		91		516
Remodeled stores		1		—		1		3		—		3
Relocated stores		—		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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(A)	Column does not add due to rounding.
(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 is 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.
(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.

 

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13 Weeks Ended July 30, 2011 Compared to the 13 Weeks Ended July 31, 2010

 

Net Income

 

The Company reported net income of $73.8 million for the current quarter, or $0.59 per diluted share, compared to net income of $51.5 million, or $0.43 per diluted share, for the 13 weeks ended July 31, 2010.  Net income for the current quarter includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

 

Net Sales

 

Net sales for the current quarter increased 6.6% to $1.3 billion, due primarily to a 2.5% increase in consolidated same store sales and the opening of new stores.  The 2.5% consolidated same store sales increase consisted of a 1.7% increase in Dick’s Sporting Goods stores, a 4.0% increase in Golf Galaxy stores and a 31.9% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 58 basis points to the Company’s consolidated same store sales calculation for the 13 weeks ended July 30, 2011, compared to 38 basis points for the 13 weeks ended July 31, 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.  Higher precipitation levels as well as cooler temperatures in March and April 2011 contributed to unfavorable conditions for outdoor activities that continued to affect sales at the beginning of the second quarter.  The consolidated same store sales increase was attributable to an increase of approximately 2.5% in sales per transaction, partially offset by a decrease in transactions of approximately 0.8% at Dick’s stores.  Every 1% change in same store sales would have impacted earnings before income taxes for the current quarter by approximately $4 million.

 

Income from Operations

 

Income from operations increased to $111.7 million for the current quarter from $88.1 million for the 13 weeks ended July 31, 2010.  The increase was primarily due to a $41.0 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $14.3 million.

 

Gross profit increased approximately 11% to $401.1 million for the current quarter from $360.1 million for the 13 weeks ended July 31, 2010.  The 132 basis point increase is due primarily to a 121 basis point increase in merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels due to our continued inventory management efforts. 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 increased approximately 5% to $285.7 million for the current quarter from $271.4 million for the 13 weeks ended July 31, 2010, but decreased as a percentage of net sales by 26 basis points.  Store payroll expenses decreased as a percentage of net sales by 43 basis points due to leverage on the increase in net sales in this year’s quarter.  Additionally, advertising expenses decreased as a percentage of net sales by 28 basis points from last year’s quarter, as last year included advertising expenses related to the Company’s collaborative marketing initiative with adidas for the adiZero shoe launch, as well as investments geared toward pursuing other market share gains that included the promotion of our customer loyalty program.  These basis point decreases were partially offset by a 44 basis point increase in administrative expenses due to higher corporate costs to support our business strategies and a 5 basis point increase in bankcard charges resulting from higher debit interchange rates compared to last year’s quarter.

 

Pre-opening expenses increased to $3.7 million for the quarter from $0.7 million for the 13 weeks ended July 31, 2010.  Pre-opening expenses were for the opening of eight new Dick’s stores during the quarter as compared to one new Dick’s store during last year’s quarter.  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 quarter resulting from the sale of the Company’s investment in GSI Commerce, Inc., the Company’s e-commerce service provider.

 

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Interest Expense

 

Interest expense was $3.5 million for both the current quarter and for the 13 weeks ended July 31, 2010. Interest expense for the 13 weeks ended July 30, 2011 and July 31, 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 39.27% for the 13 weeks ended July 30, 2011 as compared to 38.61% for the same period last year.

 

26 Weeks Ended July 30, 2011 Compared to the 26 Weeks Ended July 31, 2010

 

Net Income

 

The Company reported net income of $111.3 million for the 26 weeks ended July 30, 2011, or $0.89 per diluted share, compared to net income of $77.7 million, or $0.64 per diluted share, for the 26 weeks ended July 31, 2010. Net income for the 26 weeks ended July 30, 2011 includes a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share.

 

Net Sales

 

Net sales for the period increased 6.5% to $2.4 billion, due primarily to a 2.3% increase in consolidated same store sales and the opening of new stores.  The 2.3% consolidated same store sales increase consisted of a 1.6% increase in Dick’s Sporting Goods stores, a 3.7% increase in Golf Galaxy stores and a 28.6% increase in the Company’s e-commerce business.  The inclusion of the e-commerce business resulted in an increase of approximately 56 basis points to the Company’s consolidated same store sales calculation for the 26 weeks ended July 30, 2011, compared to 29 basis points for the 26 weeks ended July 31, 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 $176.1 million for the current period from $135.1 million for the 26 weeks ended July 31, 2010.  The increase was primarily due to a $69.1 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $25 million.

 

Gross profit increased approximately 10% to $731.5 million for the period, from $662.4 million for the 26 weeks ended July 31, 2010.  The 109 basis point increase is due primarily to a 105 basis point increase in merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels due to our continued inventory management efforts.

 

Selling, general and administrative expenses increased approximately 5% to $549.5 million for the period from $524.5 million for the 26 weeks ended July 31, 2010, but decreased as a percentage of net sales by 37 basis points.  Advertising expenses decreased 58 basis points as a percentage of net sales due primarily to a reduction in national media and direct mail advertising, as well as last year’s inclusion of advertising expenses related to the Company’s collaborative marketing initiative with adidas for the adiZero shoe launch, as well as investments geared toward pursuing other market share gains that included the promotion of our customer loyalty program.  Additionally, store payroll expenses decreased as a percentage of net sales by 22 basis points due to leverage on the increase in net sales this year. These basis point decreases were partially offset by a 39 basis point increase in administrative expenses due to higher corporate costs to support our business strategies and a 7 basis point increase in bankcard charges resulting from higher debit interchange rates compared to the 26 weeks ended July 31, 2010.

 

Pre-opening expenses increased to $5.9 million for the period from $2.8 million for the 26 weeks ended July 31, 2010.  Pre-opening expenses were for the opening of 11 new Dick’s stores during the period as compared to six 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.

 

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Interest Expense

 

Interest expense was $7.0 million for both the current quarter and for the 26 weeks ended July 31, 2010. Interest expense for the 26 weeks ended July 30, 2011 and July 31, 2010 includes rent payments under the Company’s financing lease for its corporate headquarters building of $5.3 million and $5.4 million, respectively.

 

Income Taxes

 

The Company’s effective tax rate was 39.37% for the 26 weeks ended July 30, 2011 as compared to 39.32% for the same period last year.

 

LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

 

Our primary capital requirements are for working capital, capital improvements, and to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements.

 

The change in cash and cash equivalents is as follows (in thousands):

 

		26 Weeks Ended
		July 30,			July 31,
		2011			2010
Net cash provided by operating activities		$	125,978		$	66,671
Net cash used in investing activities		(76,432		)	(55,737		)
Net cash provided by financing activities		30,788			41,619
Effect of exchange rate changes on cash and cash equivalents		29			5
Net increase in cash and cash equivalents		$	80,363		$	52,558

 

Operating Activities

 

Cash flow from operations is seasonal in our business.  Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-holiday inventory increase being the largest.  In the fourth quarter, inventory levels are reduced in connection with holiday sales and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.

 

Cash provided by operating activities increased $59.3 million for the 26 weeks ended July 30, 2011 compared to the same period last year.  Higher net income for the 26 weeks ended July 30, 2011 impacted operating cash flows by $33.6 million.  Changes in income taxes payable for the 26 weeks ended July 30, 2011 improved operating cash flows by $38.4 million compared to the same period in fiscal 2010.  Legislation that provides for a bonus depreciation deduction for qualified capital expenditures and stock option exercises contributed to a $38.9 million decrease in income tax payments.

 

Investing Activities

 

Cash used in investing activities for the 26 weeks ended July 30, 2011 increased by $20.7 million to $76.4 million. The Company’s gross capital expenditures were $85.6 million during the current period, compared to $61.6 million during the 26 weeks ended July 31, 2010, which related primarily to the opening of new stores, ongoing remodeling of existing locations, information systems and administrative facilities.

 

The Company opened 11 stores during the 26 weeks ended July 30, 2011, as compared to opening six stores during the 26 weeks ended July 31, 2010.

 

Financing Activities

 

Cash provided by financing activities for the 26 weeks ended July 30, 2011 totaled $30.8 million, compared to $41.6 million of cash provided in the same period of fiscal 2010.  The decrease in cash provided primarily reflects bank overdraft activity, which was partially offset by higher proceeds and excess tax benefits from exercises of stock options.

 

The Company’s liquidity and capital needs have generally been met by cash from operating activities and borrowings under the Credit Agreement, including up to $75 million in the form of letters of credit.  Borrowing availability under the Credit

 

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