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DKS > SEC Filings for DKS > Form 10-Q on 23-Nov-2011All Recent SEC Filings

Show all filings for DICKS SPORTING GOODS INC

Form 10-Q for DICKS SPORTING GOODS INC


23-Nov-2011

Quarterly Report


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

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

Potential volatility in our stock price;

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

The intense competition in the sporting goods industry;

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

             Changes in consumer demand;



             Unauthorized disclosure of sensitive, personal or confidential
information;

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

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

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

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

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

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


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

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

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

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

Any serious disruption at our distribution facilities;

The seasonality of our business;

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

             The outcome of litigation or other legal actions against us;



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

Our ability to meet our labor needs;

Currency exchange rate fluctuations;

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

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

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

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

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

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

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

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

OVERVIEW

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

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

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


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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

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


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

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

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

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

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

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

Remodeled stores            14             -         14          11             -         11
Relocated stores             -             1          1           1             -          1

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


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                                                                               Basis Point
                                                                               Increase /
                                                                              (Decrease) in
                                                                              Percentage of
                                                     13 Weeks Ended             Net Sales
                                               October 29,    October 30,    from Prior Year
                                                2011 (A)       2010 (A)       2010-2011 (A)

Net sales (1)                                       100.00 %       100.00 %        N/A
Cost of goods sold, including occupancy and
distribution costs (2)                               70.28          71.54         (126)
Gross profit                                         29.72          28.46          126
Selling, general and administrative
expenses (3)                                         23.08          25.25         (217)
Pre-opening expenses (4)                              0.58           0.59          (1)
Income from operations                                6.07           2.61          346
Interest expense (6)                                  0.30           0.33          (3)
Other expense (income) (7)                            0.13          (0.11 )        24
Income before income taxes                            5.63           2.40          323
Provision for income taxes                            2.12           0.83          129
Net income                                            3.52 %         1.56 %        196

Other Data:
Consolidated same store sales increase (8)             4.1 %          5.1 %
Number of stores at end of period                      555            516
Total square feet at end of period              27,315,490     25,555,505

                                                                               Basis Point
                                                                               Increase /
                                                                              (Decrease) in
                                                                              Percentage of
                                                     39 Weeks Ended             Net Sales
                                               October 29,    October 30,    from Prior Year
                                                2011 (A)       2010 (A)         2010-2011

Net sales (1)                                       100.00 %       100.00 %        N/A
Cost of goods sold, including occupancy and
distribution costs (2)                               69.94          71.08         (114)
Gross profit                                         30.06          28.92          114
Selling, general and administrative
expenses (3)                                         22.82          23.77         (95)
Pre-opening expenses (4)                              0.35           0.27           8
Income from operations                                6.88           4.87          201
Gain on sale of investment (5)                       (0.39 )            -         (39)
Interest expense (6)                                  0.29           0.31          (2)
Other expense (income) (7)                            0.03          (0.04 )         7
Income before income taxes                            6.95           4.59          236
Provision for income taxes                            2.70           1.77          93
Net income                                            4.24 %         2.82 %        142

Other Data:
Consolidated same store sales increase (8)             2.9 %          6.2 %
Number of stores at end of period                      555            516
Total square feet at end of period              27,315,490     25,555,505


(A) Column does not add due to rounding.


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

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

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

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

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

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

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

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

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

Net Income

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

Net Sales

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


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

Income from Operations

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

Gross profit increased approximately 14% to $350.6 million for the current quarter from $307.1 million for the 13 weeks ended October 30, 2010. The 126 basis point increase as a percentage of net sales is due primarily to a 79 basis point decrease in fixed occupancy costs resulting from leverage on the increase in consolidated same store sales compared to last year's quarter and a 47 basis . . .

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