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DKS > SEC Filings for DKS > Form 10-Q on 21-Nov-2012All Recent SEC Filings

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Form 10-Q for DICKS SPORTING GOODS INC


21-Nov-2012

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, 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                              Dick's Sporting
                        Goods        Golf Galaxy     Total           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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at that new location. The Company's eCommerce business is included in the same store sales calculation.

13 Weeks Ended October 27, 2012 Compared to the 13 Weeks Ended October 29, 2011

Net Income

The Company reported net income of $50.1 million for the current quarter, or $0.40 per diluted share, 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

Net sales for the current quarter increased 11% to $1.3 billion, due primarily to the growth of our store network and a 5.1% increase in consolidated same store sales. The 5.1% consolidated same store sales increase consisted of a 3.9% increase at Dick's Sporting Goods stores, a 2.3% increase at Golf Galaxy and a 46.7% increase in the Company's eCommerce business. The inclusion of the eCommerce business resulted in an increase of 128 basis points to the Company's consolidated same store sales calculation for the 13 weeks ended October 27, 2012, compared to 37 basis points for the 13 weeks ended October 29, 2011.

The increase in consolidated same store sales was broad-based, with larger increases in athletic footwear and athletic apparel, partially offset by a decrease in the outdoor apparel and fitness categories. The same store sales increase in the Dick's Sporting Goods stores was attributable to an increase of 2.9% in sales per transaction and a 1% increase in transactions. 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 $82.2 million for the current quarter from $71.6 million for the 13 weeks ended October 29, 2011. The increase was primarily due to a $55.5 million increase in gross profit, partially offset by a $42.4 million increase in selling, general and administrative expenses.

Gross profit increased 16% to $406.1 million for the current quarter from $350.6 million for the 13 weeks ended October 29, 2011. The 123 basis point increase as a percentage of net sales was due primarily to merchandise margin expansion of 91 basis points and a 33 basis point decrease in fixed occupancy costs resulting primarily from the leverage on the increase in sales compared to last year's third quarter. Every 10 basis point change in merchandise margin would have impacted the earnings before income taxes for the current quarter by approximately $1 million.

Selling, general and administrative expenses increased 16% to $314.6 million for the current quarter from $272.2 million for the 13 weeks ended October 29, 2011, and increased as a percentage of net sales by 90 basis points. Advertising expenses increased as a percentage of net sales by 31 basis points as a result of the previously announced shift in timing of a Company sponsored professional golf event as well as the Company's World Series marketing sponsorship in this year's quarter. During last year's third quarter, the Company partially reversed litigation settlement costs that were previously accrued during the fourth quarter of 2010, which reduced administrative expenses by $2.1 million, or 18 basis points. The remaining increase in administrative expenses as a percentage of net sales resulted from payroll increases relative to sales.

Pre-opening expenses increased to $9.3 million for the quarter from $6.8 million for the 13 weeks ended October 29, 2011. Pre-opening expenses were for the opening of 21 new and relocating of three Dick's stores during the quarter as compared to the opening of 19 new Dick's stores during last year's third quarter. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

Interest Expense

Interest expense was $0.9 million for the current quarter and $3.5 million for the 13 weeks ended October 29, 2011. Interest expense includes rent payments under the Company's financing lease for its corporate headquarters building for . . .

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