DICK'S SPORTING GOODS, INC. - Quarter Report: 2012 October (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the Quarterly Period Ended October 27, 2012

 

OR

 

 

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  No

 

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  No

 

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.

Large accelerated filer      Accelerated filer      Non-accelerated filer   Smaller reporting company

(Do not check if a smaller reporting company)

 

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

 

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 16, 2012, was 97,692,127 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	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	22
PART II. OTHER INFORMATION	22
Item 1. Legal Proceedings	22
Item 1A. Risk Factors	22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6. Exhibits	23
SIGNATURES	23
INDEX TO EXHIBITS	24

 

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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 27,			October 29,			October 27,			October 29,
		2012			2011			2012			2011
Net sales		$	1,312,072		$	1,179,702		$	4,030,818		$	3,600,246
Cost of goods sold, including occupancy and distribution costs		905,948			829,111			2,782,306			2,518,137
GROSS PROFIT		406,124			350,591			1,248,512			1,082,109
Selling, general and administrative expenses		314,637			272,233			921,631			821,698
Pre-opening expenses		9,294			6,796			14,311			12,717
INCOME FROM OPERATIONS		82,193			71,562			312,570			247,694
Impairment of available-for-sale investments		-			-			32,370			-
Gain on sale of investment		-			-			-			(13,900)
Interest expense		860			3,540			5,309			10,504
Other (income) expense		(1,113)			1,568			(2,923)			977
INCOME BEFORE INCOME TAXES		82,446			66,454			277,814			250,113
Provision for income taxes		32,307			24,970			116,855			97,283
NET INCOME		$	50,139		$	41,484		$	160,959		$	152,830
EARNINGS PER COMMON SHARE:
Basic		$	0.41		$	0.34		$	1.33		$	1.27
Diluted		$	0.40		$	0.33		$	1.28		$	1.22
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic		122,103			120,432			121,181			120,000
Diluted		125,938			125,552			125,825			125,585
Cash dividend declared per share		$	0.125		$	-		$	0.375		$	-

 

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 27,			October 29,			October 27,			October 29,
		2012			2011			2012			2011
NET INCOME		$	50,139		$	41,484		$	160,959		$	152,830
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized (loss) gain on securities available-for-sale, net of tax		-			-			(27,636)			2,119
Reclassification adjustment for impairment of securities available-for-sale, net of tax		-			-			27,636			-
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		8			(26)			(4)			3
COMPREHENSIVE INCOME		$	50,147		$	41,458		$	160,955		$	146,214

 

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 27,			January 28,
		2012			2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	294,493		$	734,402
Accounts receivable, net		57,212			38,338
Income taxes receivable		2,779			4,113
Inventories, net		1,382,684			1,014,997
Prepaid expenses and other current assets		35,367			64,213
Deferred income taxes		26,755			12,330
Total current assets		1,799,290			1,868,393
Property and equipment, net		851,302			775,896
Construction in progress - leased facilities		-			2,138
Intangible assets, net		99,033			50,490
Goodwill		200,594			200,594
Other assets:
Deferred income taxes		8,269			12,566
Other		111,093			86,375
Total other assets		119,362			98,941
TOTAL ASSETS		$	3,069,581		$	2,996,452
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	665,608		$	510,398
Accrued expenses		296,232			264,073
Deferred revenue and other liabilities		96,233			128,765
Income taxes payable		-			29,484
Current portion of other long-term debt and leasing obligations		8,584			7,426
Total current liabilities		1,066,657			940,146
LONG-TERM LIABILITIES:
Other long-term debt and leasing obligations		14,157			151,596
Non-cash obligations for construction in progress - leased facilities		-			2,138
Deferred revenue and other liabilities		283,835			269,827
Total long-term liabilities		297,992			423,561
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock		977			964
Class B common stock		250			250
Additional paid-in capital		855,881			699,766
Retained earnings		1,047,668			932,871
Accumulated other comprehensive income		114			118
Treasury stock		(199,958)			(1,224		)
Total stockholders’ equity		1,704,932			1,632,745
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	3,069,581		$	2,996,452

 

See accompanying notes to unaudited consolidated financial statements.

 

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DICK’S SPORTING GOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY  - UNAUDITED

(Dollars in thousands)

 

																			Accumulated
								Class B					Additional						Other
		Common Stock						Common Stock					Paid-In			Retained			Comprehensive			Treasury
		Shares			Dollars			Shares		Dollars			Capital			Earnings			Income			Stock			Total
BALANCE, January 28, 2012		96,373,002			$	964		24,960,870		$	250		$	699,766		$	932,871		$	118		$	(1,224)		$	1,632,745
Exercise of stock options		5,087,945			51			-		-			71,632			-			-			-			71,683
Restricted stock vested		367,253			3			-		-			(3)			-			-			-			-
Minimum tax withholding requirements		(112,584)			(1)			-		-			(5,328)			-			-			-			(5,329		)
Net income		-			-			-		-			-			160,959			-			-			160,959
Stock-based compensation		-			-			-		-			23,643			-			-			-			23,643
Total tax benefit from exercise of stock options		-			-			-		-			66,171			-			-			-			66,171
Foreign currency translation adjustment, net of taxes of $2		-			-			-		-			-			-			(4)			-			(4		)
Unrealized loss on securities available-for-sale, net of taxes of $4,734		-			-			-		-			-			-			(27,636)			-			(27,636		)
Reclassification adjustment for impairment of securities available-for-sale, net of taxes of $4,734		-			-			-		-			-			-			27,636			-			27,636
Purchase of shares for treasury		(4,023,900)			(40)			-		-			-			-			-			(198,734)			(198,774		)
Cash dividend declared		-			-			-		-			-			(46,162)			-			-			(46,162		)
BALANCE, October 27, 2012		97,691,716			$	977		24,960,870		$	250		$	855,881		$	1,047,668		$	114		$	(199,958)		$	1,704,932

 

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 27,			October 29,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	160,959		$	152,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		88,627			83,616
Impairment of available-for-sale investments		32,370			-
Deferred income taxes		(10,128)			27,795
Stock-based compensation		23,643			19,075
Excess tax benefit from exercise of stock options		(61,461)			(15,320)
Tax benefit from exercise of stock options		4,761			421
Other non-cash items		227			1,154
Gain on sale of investment		-			(13,900)
Changes in assets and liabilities:
Accounts receivable		(17,374)			(17,908)
Inventories		(367,687)			(346,257)
Prepaid expenses and other assets		31,599			(5,858)
Accounts payable		178,700			204,999
Accrued expenses		18			(22,821)
Income taxes payable / receivable		33,260			(10,944)
Deferred construction allowances		21,744			21,203
Deferred revenue and other liabilities		(35,922)			(41,921)
Net cash provided by operating activities		83,336			36,164
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(157,448)			(148,038)
Purchase of JJB Sports convertible notes and equity securities		(31,986)			-
Proceeds from sale of investment		-			14,140
Proceeds from sale-leaseback transactions		-			9,071
Deposits and purchases of other assets		(54,819)			(18,052)
Net cash used in investing activities		(244,253)			(142,879)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other long-term debt and leasing obligations		(138,856)			(738)
Construction allowance receipts		-			-
Proceeds from exercise of stock options		71,683			21,428
Excess tax benefit from exercise of stock options		61,461			15,320
Minimum tax withholding requirements		(5,329)			(3,559)
Cash paid for treasury stock		(198,774)			-
Cash dividend paid to stockholders		(45,668)			-
(Decrease) increase in bank overdraft		(23,505)			11,581
Net cash (used in) provided by financing activities		(278,988)			44,032
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(4)			3
NET DECREASE IN CASH AND CASH EQUIVALENTS		(439,909)			(62,680)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		734,402			546,052
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	294,493		$	483,372
Supplemental disclosure of cash flow information:
Construction in progress - leased facilities		$	-		$	-
Accrued property and equipment		$	44,568		$	9,699
Accrued deposits and purchases of other assets		$	14,500		$	-
Cash paid for interest		$	1,402		$	9,351
Cash paid for income taxes		$	100,939		$	79,204

 

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 an authentic full-line sporting goods retailer selling sporting goods equipment, apparel and footwear through its 511 Dick’s stores and 81 Golf Galaxy stores as of October 27, 2012, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains eCommerce 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 (“GAAP”).  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 28, 2012 as filed with the Securities and Exchange Commission on March 16, 2012.  Operating results for the 13 and 39 weeks ended October 27, 2012 are not necessarily indicative of the results that may be expected for the year ending February 2, 2013 or any other period.

 

Recently Adopted 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 Company adopted ASU 2011-08 during the first quarter of 2012.  The adoption of this guidance did not impact 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.  Additionally, this update requires disclosure of reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements.  In December 2011, the FASB subsequently issued ASU 2011-12, “Comprehensive Income – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income,” which indefinitely deferred the presentation requirements of reclassification adjustments within ASU 2011-05.  The Company adopted ASU 2011-05 and ASU 2011-12 during the first quarter of 2012.  In accordance with this guidance, the Company presented two separate but consecutive statements that include the components of net income and other comprehensive income.

 

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 International Financial Reporting Standards.  ASU 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with prospective application required.  The Company adopted ASU 2011-04 during the first quarter of 2012.  The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

 

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Recently Issued Accounting Pronouncement

 

Indefinite-Lived Intangible Assets Impairment

 

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.”  This update amended the procedures for testing the impairment of indefinite-lived intangible assets by permitting an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible assets are impaired.  An entity’s assessment of the totality of events and circumstances and their impact on the entity’s indefinite-lived intangible assets will then be used as a basis for determining whether it is necessary to perform the quantitative impairment test as described in ASC 350-30, “Intangibles – Goodwill and Other – General Intangibles Other than Goodwill.”  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  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.

 

The following table summarizes the activity in 2012 and 2011 (in thousands):

 

 

		39 Weeks Ended
		October 27,			October 29,
		2012			2011
Accrued store closing and relocation reserves, beginning of period		$	36,121		$	46,918
Expense charged to earnings		2,234			-
Cash payments		(7,511)			(10,511)
Interest accretion and other changes in assumptions		1,548			1,279
Accrued store closing and relocation reserves, end of period		32,392			37,686
Less: current portion of accrued store closing and relocation reserves		(7,447)			(11,322)
Long-term portion of accrued store closing and relocation reserves		$	24,945		$	26,364

 

The current portion of accrued store closing and relocation reserves is included within accrued expenses and the long-term portion is included within 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 27,			October 29,			October 27,			October 29,
		2012			2011			2012			2011
Net income		$	50,139		$	41,484		$	160,959		$	152,830
Weighted average common shares outstanding (for basic calculation)		122,103			120,432			121,181			120,000
Dilutive effect of stock-based awards		3,835			5,120			4,644			5,585
Weighted average common shares outstanding (for diluted calculation)		125,938			125,552			125,825			125,585
Earnings per common share - basic		$	0.41		$	0.34		$	1.33		$	1.27
Earnings per common share - diluted		$	0.40		$	0.33		$	1.28		$	1.22

 

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For the 13 weeks ended October 27, 2012 and October 29, 2011, 0.5 million and 0.6 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 39 weeks ended October 27, 2012 and October 29, 2011, 0.8 million and 0.5 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.  Investment in JJB Sports

 

On April 27, 2012, the Company invested an aggregate of £20 million in JJB Sports, plc (“JJB Sports”), consisting of junior secured convertible notes (“Convertible Notes”) in the principal amount of £18.75 million and 12.5 million ordinary shares (“Ordinary Shares”) of JJB Sports for £1.25 million, for a total cash outlay of $32.0 million.  The Company classified its investments in JJB Sports as available-for-sale investments, which were recorded at fair value.

 

Based upon macroeconomic factors and weather conditions impacting the United Kingdom, as well as the financial performance of JJB Sports, the Company assessed its investment in JJB Sports for impairment during the fiscal quarter ended July 28, 2012.  Declines in the fair value of available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of credit losses represents the difference between the present value of cash flows expected to be collected on such securities and the amortized cost.  Based on the Company’s assessment, which contemplated probability weighted future expected cash flows and the credit quality of the underlying collateral, the Company recorded an other-than-temporary impairment charge of $30.4 million on the Convertible Notes and $2.0 million on the Ordinary Shares within the unaudited Consolidated Statements of Income, fully impairing the carrying value of its investment as of July 28, 2012.  On October 1, 2012, JJB Sports appointed administrators under UK insolvency laws and is in the process of administration.

 

The Company’s initial fair value of its investment in the Convertible Notes was determined using a binomial lattice model with Level 2 inputs, including JJB Sports’ stock price, the expected stock price volatility, the interest rate on the Convertible Notes, the risk-free interest rate based upon appropriate government yield curves and option-adjusted spreads for comparable securities.  Due to the use of discounted expected future cash flows to derive the fair value of the Convertible Notes, the Company reclassified its investment as a Level 3 investment (see Note 5) during the fiscal quarter ended July 28, 2012.

 

5.  Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  ASC 820, “Fair Value Measurement and Disclosures”, outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Observable inputs such as quoted prices in active markets;

 

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3:    Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Assets measured at fair value on a recurring basis as of October 27, 2012 and January 28, 2012 are set forth in the table below (in thousands):

 

 

Description		Level 1			Level 2			Level 3
As of October 27, 2012
Assets:
Deferred compensation plan assets held in trust		$	34,767		$	-		$	-
Total assets		$	34,767		$	-		$	-
As of January 28, 2012
Assets:
Deferred compensation plan assets held in trust		$	27,102		$	-		$	-
Total assets		$	27,102		$	-		$	-

 

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The fair value of cash and cash equivalents, accounts receivable, accounts payable and certain other liabilities approximated book value due to the short-term nature of these instruments at both October 27, 2012 and January 28, 2012.

 

The Company uses quoted prices in active markets to determine the fair value of the aforementioned assets determined to be Level 1 instruments.  There were no transfers between Level 1 and 2 during the 39 weeks ended October 27, 2012.  The Company’s policy for recognition of transfers between levels of the fair value hierarchy is to recognize any transfer at the end of the fiscal quarter in which the determination to transfer was made.

 

The following table provides a reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):

 

 

		13 Weeks Ended			39 Weeks Ended
		October 27,			October 27,
		2012			2012
Beginning balance		$	-		$	-
Transfers in (see Note 4)		-			32,370
Total realized losses included in net income		-			(32,370)
Ending balance		$	-		$	-

 

Realized losses are included within impairment of available-for-sale investments on the unaudited Consolidated Statements of Income.

 

6. Intangible Assets

 

On March 30, 2012, the Company purchased the intellectual property rights to the Top-Flite brand from Callaway Golf Company for $20.0 million. The intellectual property rights acquired include all Top-Flite trademarks and service marks world-wide.  These assets are indefinite-lived intangible assets, which are not being amortized.

 

On August 1, 2012, the Company agreed to purchase the intellectual property rights to the Field & Stream mark in the hunting, fishing, camping and paddle categories for $24.5 million.  The Company previously licensed these rights since 2007.  The Company made an initial $10.0 million payment on August 1, 2012.  The remaining $14.5 million liability is included within accrued expenses on the unaudited Consolidated Balance Sheets.  These assets are indefinite-lived intangible assets, which are not being amortized.

 

7. Store Support Center Purchase

 

On May 7, 2012, the Company purchased the Store Support Center, its corporate headquarters building, for $133.4 million including closing costs, pursuant to a purchase option included in its pre-existing lease agreement.  Due to the Company’s purchase option under the lease agreement, the agreement was recorded as a financing lease in accordance with GAAP and the debt obligation recognized by the Company represented our obligation to the lessor upon exercise of the purchase option.  Accordingly, the Company’s payment to purchase the Store Support Center is reflected as an extinguishment of its pre-existing financing lease obligation in the current period.  The Company funded the purchase of the building from cash on hand.

 

8. Income Taxes

 

The Company determined that a valuation allowance totaling $7.9 million was required for a portion of the deferred tax asset recorded relating to a $32.4 million net capital loss carry-forward resulting from the impairment of its investment in JJB Sports, as the Company does not believe that it is “more likely than not” that the Company will generate sufficient capital gains in future periods to recognize that portion of the expected net capital loss.

 

9. Subsequent Event

 

On November 7, 2012, the Company’s Board of Directors declared a quarterly cash dividend in the amount of $0.125 per share of common stock and Class B common stock payable on December 28, 2012 to stockholders of record as of the close of business on November 30, 2012.

 

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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, plans to return capital to stockholders through dividends or share repurchases, our financial condition or other “forward-looking” information and include statements about revenues, earnings, spending, margins, costs, liquidity, store openings, eCommerce 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 2012 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:

§                        Our business is dependent on the general economic conditions in our markets and the ongoing economic and financial downturn may cause a decline in consumer spending that may adversely affect the Company’s business, operations, liquidity, financial results and stock price;

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

§                        Our ability to access adequate capital to operate and expand our business and to respond to changing business and economic conditions;

§                        The intense competition in the sporting goods industry;

§                        Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to our stores, or our inability to open new stores on a timely basis or otherwise expand successfully in new or existing markets;

§                        Changes in consumer demand or shopping patterns;

§                        Unauthorized disclosure of sensitive, personal or confidential customer information;

§                        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;

§                        Disruptions in our or our vendors’ supply chain, including as a result of political instability, foreign trade issues, the impact of the ongoing economic and 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;

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

§                        Currency exchange rate fluctuations;

§                        Costs and risks associated with increased or changing laws and regulations affecting our business, including those relating to labor, employment and the sale of consumer products;

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

§                        Risks relating to operating as an omni-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

 

 

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increased competition;

§                        Disruption of or other problems with the services provided by our third-party service provider for our eCommerce website or our information systems;

§                        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;

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

§                        Our ability to meet our labor needs;

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

§                        Potential volatility in our stock price;

§                        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;

§                        Our current intention to declare and pay 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 28, 2012.

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 27, 2012, we operated 511 Dick’s stores in 44 states and 81 Golf Galaxy stores in 30 states, with approximately 29.2 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States.  Additionally, the Company maintains eCommerce 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 417 stores as of November 3, 2007 to 592 stores as of October 27, 2012, primarily reflecting organic growth.  The Company continues to expand its presence through the opening of new stores and believes it has the potential to reach approximately 900 Dick’s locations across the United States.

 

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 27, 2012, the Company’s consolidated same store sales increased 5.6% compared to a 2.9% increase during the same period in fiscal 2011.  The Company believes that

 

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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 growth and continuing its store expansion program.

§                  Operating cash flow – Net cash provided by operations totaled $83.3 million in the 39 weeks ended October 27, 2012, while the Company generated $36.2 million during the same period in fiscal 2011.  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 its store network, distribution and administrative facilities, costs associated with continued improvement of information technology tools, costs associated with potential strategic acquisitions or investments that may arise from time to time and stockholder return initiatives, including cash dividends and share repurchases.

§                  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 on 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 product mix, 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 28, 2012, 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 27, 2012.

 

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

 

Executive Summary

 

§                  Net income for the current quarter increased 21% to $50.1 million, or $0.40 per diluted share, as compared to net income of $41.5 million, or $0.33 per diluted share, for the 13 weeks ended October 29, 2011.

 

§                  Net income for the 13 weeks ended October 29, 2011 included 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 sales increased 11% to $1.3 billion in the current quarter due primarily to the growth of our store network and a 5.1% increase in consolidated same store sales.

 

§                  Gross profit increased 123 basis points to 30.95% as a percentage of net sales for the 13 weeks ended October 27, 2012, due primarily to merchandise margin expansion and leverage of fixed occupancy costs on the increase in sales.

 

§                  In the third quarter, the Company:

 

§                  Declared and paid a quarterly cash dividend of $0.125 per common share.

 

§                  Agreed to purchase the intellectual property rights to the Field & Stream mark in the hunting, fishing, camping and paddle categories for $24.5 million.

 

§                  We ended the third quarter with no outstanding borrowings under our credit agreement (the “Credit Agreement”).

 

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

 

		39 Weeks Ended						39 Weeks Ended
		October 27, 2012						October 29, 2011
		Dick’s Sporting Goods		Golf Galaxy		Total		Dick’s Sporting Goods		Golf Galaxy		Total
Beginning stores		480		81		561		444		81		525
Q1 New stores		6		-		6		3		-		3
Q2 New stores		4		-		4		8		-		8
Q3 New stores		21		-		21		19		-		19
Ending stores		511		81		592		474		81		555
Remodeled stores		-		-		-		14		-		14
Relocated stores		4		-		4		-		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.  This table should be read in conjunction with the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and the unaudited consolidated financial statements and related notes thereto.

 

						Basis Point
						Increase /
						(Decrease) in
						Percentage of
		13 Weeks Ended				Net Sales
		October 27,		October 29,		from Prior Year
		2012 (A)		2011 (A)		2011-2012 (A)
Net sales (1)		100.00%		100.00%		N/A
Cost of goods sold, including occupancy and distribution costs (2)		69.05		70.28		(123)
Gross profit		30.95		29.72		123
Selling, general and administrative expenses (3)		23.98		23.08		90
Pre-opening expenses (4)		0.71		0.58		13
Income from operations		6.26		6.07		19
Interest expense (6)		0.07		0.30		(23)
Other (income) expense (7)		(0.08)		0.13		(21)
Income before income taxes		6.28		5.63		65
Provision for income taxes		2.46		2.12		34
Net income		3.82%		3.52%		30
Other Data:
Consolidated same store sales increase (8)		5.1%		4.1%
Number of stores at end of period		592		555
Total square feet at end of period		29,193,169		27,315,490

 

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						Basis Point
						Increase /
						(Decrease) in
						Percentage of
		39 Weeks Ended				Net Sales
		October 27,		October 29,		from Prior Year
		2012		2011 (A)		2011-2012 (A)
Net sales (1)		100.00%		100.00%		N/A
Cost of goods sold, including occupancy and distribution costs (2)		69.03		69.94		(91)
Gross profit		30.97		30.06		91
Selling, general and administrative expenses (3)		22.86		22.82		4
Pre-opening expenses (4)		0.36		0.35		1
Income from operations		7.75		6.88		87
Impairment of available-for-sale investments (5)		0.80		-		80
Gain on sale of investment (5)		-		(0.39)		39
Interest expense (6)		0.13		0.29		(16)
Other (income) expense (7)		(0.07)		0.03		(10)
Income before income taxes		6.89		6.95		(6)
Provision for income taxes		2.90		2.70		20
Net income		3.99%		4.24%		(25)
Other Data:
Consolidated same store sales increase (8)		5.6%		2.9%
Number of stores at end of period		592		555
Total square feet at end of period		29,193,169		27,315,490

 

(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 eCommerce 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”) are 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 at the point at which 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)  Impairment of available-for-sale investments reflects the Company’s impairment of its investment in JJB Sports.  Gain on sale of investment resulted from the sale of the Company’s available-for-sale securities in GSI Commerce, Inc.

 

(6)  Interest expense includes rent payments under the Company’s financing lease obligation for its corporate headquarters building, which the Company purchased on May 7, 2012.

 

(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)  Stores are 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

 

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