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DKS > SEC Filings for DKS > Form 10-K on 22-Mar-2013All Recent SEC Filings

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Form 10-K for DICKS SPORTING GOODS INC


22-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Item 6, "Selected Financial Data" and our Consolidated Financial Statements and related notes appearing elsewhere in this report. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See "Forward-Looking Statements" and Part I, Item 1A. "Risk Factors".

Overview

Dick's is an authentic full-line sports and fitness omni-channel retailer offering a broad assortment of high quality, competitively priced 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"). As of February 2, 2013, we operated 518 Dick's stores in 44 states and 81 Golf Galaxy stores in 30 states, with approximately 29.6 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States.

The primary factors that historically influenced the Company's profitability and success have been the growth in its 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 355 Dick's stores at the end of fiscal 2007 to 518 Dick's stores at the end of fiscal 2012. The Company continues to expand its presence through the opening of new stores and believes it has the potential to reach approximately 1,100 Dick's locations across the United States.


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


Consolidated same store sales performance - Fiscal 2012 consolidated same store sales increased 4.3% compared to a 2.0% increase in fiscal 2011. 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 growth and continuing its store expansion and omni-channel development programs.


Operating cash flow - The Company generated $438.3 million of cash flow from operations in fiscal 2012 compared to $410.4 million in fiscal 2011. See the "Liquidity and Capital Resources" section herein for further discussion of the Company's cash flows. 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 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 levels 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.

Executive Summary


Net income for the 53 weeks ended February 2, 2013 increased 10% to $290.7 million, or $2.31 per diluted share, as compared to net income of $263.9 million, or $2.10 per diluted share, during the 52 weeks ended January 28, 2012.


Fiscal 2012 net income included a charge of $27.6 million, net of tax, or $0.22 per diluted share related to the Company's impairment of its investment in JJB Sports plc ("JJB Sports").


Fiscal 2011 net income included a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share and an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during fiscal 2010.


Net sales increased 12% to $5,836.1 million in fiscal 2012 from $5,211.8 million in fiscal 2011 due primarily to a 4.3% increase in consolidated same store sales on a 52-week to 52-week basis, growth of our store network and the inclusion of the 53rd week of sales.


Gross profit increased to 31.48% in fiscal 2012 as a percentage of net sales from 30.60% in fiscal 2011 due primarily to leverage of fixed occupancy costs and higher merchandise margins.


In fiscal 2012, the Company:


Declared aggregate cash dividends of $2.50 per share, including a special cash dividend in the amount of $2.00 per share.


Augmented its private brand portfolio through the acquisition of the Top-Flite brand. The Company acquired all Top-Flite trademarks and service marks world-wide.


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Made a 20 million investment in JJB Sports, purchasing 18.75 million of junior secured convertible notes and 12.5 million ordinary shares of JJB Sports for 1.25 million, for a total investment of $32.0 million. The Company fully impaired its investment in its second fiscal quarter, as further described in Note 15 to the Consolidated Financial Statements.


Purchased its corporate headquarters building for $133.4 million, which included closing costs. The Company funded the purchase with cash on hand.


Completed its previously announced share repurchase program. In total, the Company repurchased 4.0 million shares of its common stock for approximately $200 million. The Company funded the repurchase program from cash on hand.


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


Completed construction of a fourth distribution center in Goodyear, Arizona, which we expect will increase the Company's total distribution capacity to approximately 750 stores. This distribution center became operational in January 2013.

Results of Operations

The following table presents for the periods indicated selected items in the Consolidated Statements of Income as a percentage of the Company's net sales, as well as the basis point change in percentage of net sales from the prior year:

                                                           Basis Point         Basis Point
                                                            Increase /         Increase /
                                                          (Decrease) in       (Decrease) in
                                                          Percentage of       Percentage of
                                                            Net Sales           Net Sales
                                Fiscal Year              from Prior Year     from Prior Year
                     2012 (A)      2011        2010       2011-2012 (A)         2010-2011
Net sales (1)          100.00%     100.00%     100.00%           N/A                 N/A
Cost of goods
sold, including
occupancy and
distribution
costs (2)                68.52       69.40       70.25           (88)               (85)

Gross profit             31.48       30.60       29.75            88                 85
Selling, general
and administrative
expenses (3)             22.23       22.03       23.18            20                (115)
Pre-opening
expenses (4)              0.28        0.28        0.22            0                   6

Income from
operations                8.97        8.29        6.35            68                 194
Impairment of
available-for-sale
investments (5)           0.55           -           -            55                  -
Gain on sale of
investment (6)               -       (0.27 )         -            27                (27)
Interest
expense (7)               0.10        0.27        0.29           (17)                (2)
Other (income)
expense (8)              (0.08 )         -       (0.05 )         (8)                  5

Income before
income taxes              8.39        8.29        6.11            10                 218
Provision for
income taxes              3.41        3.23        2.37            18                 86

Net income               4.98%       5.06%       3.74%           (8)                 132

(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. Service-related revenue is recognized 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


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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 on the Consolidated Statements of Income within 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 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.

(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.

(6)
Gain on sale of investment resulted from the sale of the Company's available-for-sale securities in GSI Commerce, Inc.

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

(8)
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.

Fiscal 2012 (53 weeks) Compared to Fiscal 2011 (52 weeks)

Net Income

The Company reported net income for the year ended February 2, 2013 of $290.7 million, or $2.31 per diluted share, as compared to net income of $263.9 million, or $2.10 per diluted share, in fiscal 2011. Fiscal 2012 net income included a charge of $27.6 million, net of tax, or $0.22 per diluted share related to the Company's impairment of its investment in JJB Sports. Additionally, fiscal 2012 included approximately $0.03 per diluted share for the 53rd week. Fiscal 2011 net income included a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share and an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during fiscal 2010.

Net Sales

Net sales increased 12% to $5,836.1 million in fiscal 2012 from $5,211.8 million in fiscal 2011 due primarily to a 4.3% increase in consolidated same store sales on a 52-week to 52-week basis, growth of our store network and the inclusion of the 53rd week of sales. The 4.3% consolidated same store sales increase consisted of a 2.4% increase at Dick's Sporting Goods stores, a 5.5% increase at Golf Galaxy and a 48.5% increase in the Company's eCommerce business. The inclusion of the eCommerce business resulted in an increase of approximately 166 basis points to the Company's consolidated same store sales calculation for fiscal 2012.

The increase in consolidated same store sales was broad based, with larger increases in athletic apparel, hunting, athletic footwear, golf, accessories and team sports, partially offset by a sales decrease in outerwear and cold weather accessories due to a second consecutive warm winter season and a decline


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in sales of large fitness equipment, like treadmills and ellipticals. The same store sales increase at Dick's stores was driven by an increase in sales per transaction of approximately 3.3%, offset by a decrease in transactions of approximately 0.9% at Dick's stores. Every 1% change in consolidated same store sales would have impacted fiscal 2012 earnings before income taxes by approximately $17 million.

Store Count

During 2012, we opened 38 new Dick's stores, relocated five Dick's stores and repositioned one Golf Galaxy store, resulting in an ending store count of 599 stores with approximately 29.6 million square feet in 44 states.

Income from Operations

Income from operations increased $91.7 million to $523.7 million in fiscal 2012 from $432.0 million in fiscal 2011.

Gross profit increased 15% to $1,837.2 million in fiscal 2012 from $1,594.9 million in fiscal 2011. As a percentage of net sales, gross profit increased to 31.48% in fiscal 2012 from 30.60% in fiscal 2011. The 88 basis point increase is due primarily to a 58 basis point decrease in fixed occupancy costs resulting primarily from the leverage on the increase in sales compared to last year, including 13 basis points due to the inclusion of sales from the 53rd week and merchandise margin expansion of 40 basis points that resulted from our continued inventory management efforts. Every 10 basis point change in merchandise margin would have impacted fiscal 2012 earnings before income taxes by approximately $6 million.

Selling, general and administrative expenses increased 13% to $1,297.4 million in fiscal 2012 from $1,148.3 million in fiscal 2011, representing a 20 basis point increase as a percentage of net sales. Administrative expenses increased 54 basis points as a percentage of net sales as a result of payroll increases relative to sales, charitable contributions made this fiscal year and last year's partial reversal of previously accrued litigation settlement costs. Higher administrative expenses were substantially offset by a 16 basis point reduction in both store payroll expenses and advertising expenses from fiscal 2011 due to leverage on the increase in net sales this year.

Pre-opening expenses increased $1.5 million to $16.1 million in fiscal 2012 from $14.6 million in fiscal 2011. Pre-opening expenses were for the opening of 38 new Dick's stores as well as the relocation of five Dick's stores and the repositioning of one Golf Galaxy store in fiscal 2012 compared to the opening of 36 new Dick's stores as well as the relocation of one Golf Galaxy store in fiscal 2011. Pre-opening expenses in any year fluctuate depending on the timing and number of store openings and relocations.

Gain on Sale of Investment

Gain on sale of investment was $13.9 million in fiscal 2011 resulting from the sale of the Company's remaining investment in GSI Commerce, Inc., the Company's eCommerce service provider.

Impairment of Available-for-Sale Investments

Impairment of available-for-sale investments was $32.4 million in fiscal 2012 resulting from the full impairment of the Company's investment in JJB Sports, as further described in Note 15 to the Consolidated Financial Statements.

Interest Expense

Interest expense totaled $6.0 million for fiscal 2012 compared to $13.9 million for fiscal 2011. Interest expense included rent payments under the Company's financing lease for its corporate headquarters building for fiscal 2012 and fiscal 2011 of $2.9 million and $10.6 million, respectively. The decrease in interest expense reflected the Company's purchase of its corporate headquarters building on


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May 7, 2012, as further described in Note 7 to the Consolidated Financial Statements. The Company did not have any borrowings under its revolving credit facility in fiscal 2012 or 2011.

Income Taxes

The Company's effective tax rate was 40.7% for fiscal 2012 as compared to 38.9% for fiscal 2011. The Company determined that a valuation allowance totaling $7.9 million was required for a portion of the deferred tax asset related 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.

Fiscal 2011 Compared to Fiscal 2010

Net Income

The Company reported net income for the year ended January 28, 2012 of $263.9 million, or $2.10 per diluted share, as compared to net income of $182.1 million, or $1.50 per diluted share, in fiscal 2010. Fiscal 2011 net income included a gain on sale of investment of $8.7 million, net of tax, or $0.07 per diluted share and an increase to net income of $1.3 million, net of tax, or $0.01 per diluted share, resulting from a partial reversal of litigation settlement costs previously accrued during fiscal 2010. Fiscal 2010 net income 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 and a litigation settlement charge of approximately $6.5 million, net of tax, or $0.05 per diluted share.

Net Sales

Net sales increased 7% to $5,211.8 million in fiscal 2011 from $4,871.5 million in fiscal 2010 due primarily to a 2.0% increase in consolidated same store sales and the growth of our store network. The 2.0% consolidated same store sales increase consisted of a 0.8% increase in Dick's Sporting Goods stores, a 4.3% increase in Golf Galaxy and a 36.4% increase in eCommerce. The inclusion of the eCommerce business resulted in an increase of approximately 100 basis points to the Company's consolidated same store sales calculation for fiscal 2011.

The increase in consolidated same store sales was broad based, with increases in apparel, footwear, team sports and golf. The same store sales increase at Dick's stores was driven by an increase in sales per transaction of approximately 2.4%, offset by a decrease in transactions of approximately 1.6% at Dick's stores. Every 1% change in consolidated same store sales would have impacted fiscal 2011 earnings before income taxes by approximately $15 million.

Store Count

During 2011, we opened 36 Dick's stores and relocated one Golf Galaxy store, resulting in an ending store count of 561 stores with approximately 27.6 million square feet in 43 states.

Income from Operations

Income from operations increased $122.8 million to $432.0 million in fiscal 2011 from $309.2 million in fiscal 2010.

Gross profit increased 10% to $1,594.9 million in fiscal 2011 from $1,449.0 million in fiscal 2010. As a percentage of net sales, gross profit increased to 30.60% in fiscal 2011 from 29.75% in fiscal 2010. The 85 basis point increase is due primarily to a 68 basis point increase in merchandise margin that resulted from our continued inventory management efforts, evidenced by less clearance activity compared with last year and changes in sales mix at our Dick's stores. Gross profit was further impacted by a 36 basis


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point decrease in fixed occupancy costs resulting primarily from leverage on the increase in consolidated same store sales compared to fiscal 2010. Every 10 basis point change in merchandise margin would have impacted fiscal 2011 earnings before income taxes by approximately $5 million.

Selling, general and administrative expenses increased 2% to $1,148.3 million in fiscal 2011 from $1,129.3 million in fiscal 2010, but decreased as a percentage of net sales by 115 basis points. Fiscal 2010 included expenses totaling $16.4 million relating to future lease obligations and asset impairment charges resulting from the closure of 12 underperforming Golf Galaxy stores, which contributed 34 basis points as a percentage of net sales to the total decrease. During the third quarter of 2011, the Company transferred funds in final satisfaction of its obligations under a court approved settlement of a wage and hour class action lawsuit. The settlement funding was $2.1 million lower than the previous estimate of $10.8 million, recognized in fiscal 2010. In total, this legal settlement contributed 26 basis points to the decrease in selling, general and administrative expenses from fiscal 2010. As a percentage of net sales, advertising and store payroll expenses decreased 20 basis points and 17 basis points from fiscal 2010, respectively, due to leverage on the increase in net sales in fiscal 2011.

Pre-opening expenses increased $4.1 million to $14.6 million in fiscal 2011 from $10.5 million in fiscal 2010. Pre-opening expenses were for the opening of 36 new Dick's stores as well as the relocation of one Golf Galaxy store in fiscal 2011 compared to the opening of 26 new Dick's stores and two new Golf Galaxy stores and the relocation of two Dick's stores in fiscal 2010. Pre-opening expenses in any year fluctuate depending on the timing and number of store openings and relocations.

Gain on Sale of Investment

Gain on sale of investment was $13.9 million in fiscal 2011 resulting from the sale of the Company's remaining investment in GSI Commerce, Inc., the Company's eCommerce service provider.

Interest Expense

Interest expense totaled $13.9 million for fiscal 2011 compared to $14.0 million for fiscal 2010. Interest expense for fiscal 2011 and fiscal 2010 included $10.6 million related to rent payments under the Company's financing lease for its corporate headquarters building. The Company did not make any borrowings under its revolving credit facility in fiscal 2011 or 2010.

Income Taxes

The Company's effective tax rate was 38.9% for fiscal 2011 as compared to 38.8% for fiscal 2010.

Liquidity and Capital Resources

Overview

The Company's liquidity and capital needs have generally been met by cash from operating activities. Net cash provided by operating activities for fiscal 2012 was $438.3 million compared to $410.4 million for fiscal 2011. Net cash from operating, investing and financing activities are discussed further below.

The Company has a $500 million revolving credit facility, including up to $100 million in the form of letters of credit, in the event further liquidity is needed. Under the credit agreement governing the facility (the "Credit Agreement"), subject to the satisfaction of certain conditions, the Company may request an increase of up to $250 million in borrowing availability.

The Credit Agreement, which matures on December 5, 2016, is secured by a first priority security interest in certain property and assets, including receivables, inventory, deposit accounts and other personal property of the Company and is guaranteed by certain of the Company's domestic subsidiaries.

The interest rates per annum applicable to loans under the Credit Agreement are, at the Company's option, a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin percentage.


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The applicable margin percentage for base rate loans is 0.20% to 0.50% and for adjusted LIBOR rate loans is 1.20% to 1.50%, depending on the borrowing availability of the Company.

The Credit Agreement contains certain covenants that limit the ability of the Company to, among other things: incur or guarantee additional indebtedness; pay distributions on, redeem or repurchase capital stock or redeem or repurchase subordinated debt; make certain investments; sell assets; and consolidate, merge or transfer all or substantially all of the Company's assets. In addition, the Credit Agreement contains a covenant that requires the Company to maintain a minimum adjusted availability of 7.5% of its borrowing base.

There were no outstanding borrowings under the Credit Agreement as of February 2, 2013 or January 28, 2012. As of February 2, 2013 and January 28, 2012, total remaining borrowing capacity, after subtracting letters of credit, was $488.7 million and $478.8 million, respectively.

Normal capital requirements consist primarily of capital expenditures related to the addition of new stores, remodeling and relocating existing stores, enhancing information technology and improving distribution infrastructure. The Company has a capital appropriations committee that approves all capital expenditures in excess of certain amounts and groups and prioritizes all capital projects among required, discretionary and strategic categories.

Store and distribution infrastructure - The Company completed its plan to open 38 new Dick's stores, relocate five Dick's stores and reposition one Golf Galaxy store during fiscal 2012, all of which the Company leased.

Additionally, the Company completed construction of its 624,000 square foot distribution center in Goodyear, Arizona during fiscal 2012. The distribution center became operational in January 2013 and is expected to increase the Company's total distribution capacity to approximately 750 stores. The Company owns this distribution center.

Share repurchases - On January 11, 2012, the Company's Board of Directors authorized a one-year share repurchase program of up to $200 million of the Company's common stock, which was completed on May 14, 2012. During fiscal 2012, the Company repurchased 4.0 million shares of its common stock for $198.8 million.

Strategic investments


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.


On April 27, 2012, the Company made a 20 million investment in JJB Sports. . . .

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