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DKS > SEC Filings for DKS > Form 10-Q on 31-May-2013All Recent SEC Filings

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Form 10-Q for DICKS SPORTING GOODS INC


31-May-2013

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, 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 2013 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 uncertainties may cause a decline in consumer spending;

Intense competition in the sporting goods industry;

Our ability to predict or effectively react to changes in consumer demand or shopping patterns;

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;

Unauthorized disclosure of sensitive or confidential customer information;

Risks associated with our private brand offerings, including product recalls and protection of proprietary rights;

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

Risks and costs relating to changing laws and regulations affecting our business, including: consumer products; product liability; product recalls; and the regulation of and other hazards associated with certain products we sell, such as firearms and ammunition;

Disruptions in our or our vendors' supply chain that could be caused by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials and foreign political instability;

Litigation risks for which we may not have sufficient insurance or other coverage, including risks relating to the sale of firearms and ammunition;

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;

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

Our ability to secure and protect our trademarks and other intellectual property and defend claims of intellectual property infringement;

Disruption of or other problems with the services provided by our primary eCommerce services provider;

Disruption of or other problems with our information systems;

Any serious disruption at our distribution facilities;

Performance of professional sports teams, professional team lockouts or strikes, or retirement or scandal involving sports superstars;


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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 Chairman and Chief Executive Officer and his relatives, whose interests may differ from those of our other stockholders;

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

         Our current intention to issue quarterly cash dividends; and



         Our repurchase activity, if any, pursuant to our share repurchase
program.

The foregoing and additional risk factors are described in more detail in other reports or filings filed or furnished by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended February 2, 2013. 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. The forward-looking statements included in this report are made as of the date of this report. We do not assume any obligation and do not intend to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise except as may be required by the securities laws.

OVERVIEW

Dick's is an authentic full-line sports and fitness omni-channel retailer offering a broad assortment of high-quality 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"). When used in this Quarterly Report on Form 10-Q, unless the context otherwise requires or unless otherwise specified, any reference to "year" is to our fiscal year and the terms "we", "us", "the Company" and "our" refer to Dick's Sporting Goods, Inc. and its wholly-owned subsidiaries.

As of May 4, 2013, we operated 520 Dick's stores in 44 states and 81 Golf Galaxy stores in 30 states, with approximately 29.7 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States.

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 have 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 363 Dick's stores as of May 3, 2008 to 520 Dick's stores as of May 4, 2013. 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 including smaller-market 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 13 weeks ended May 4, 2013, the Company's consolidated same store sales decreased 1.7% compared to an 8.4% increase during the same period in fiscal 2012. 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 - Net cash used in operations totaled $75.4 million for the 13 weeks ended May 4, 2013, while the Company used $17.8 million during the same period in fiscal 2012. 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


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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 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.

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 February 2, 2013, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, 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 May 4, 2013.

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

Net income for the current quarter increased 13% to $64.8 million, or $0.52 per diluted share, as compared to net income of $57.2 million, or $0.45 per diluted share, for the 13 weeks ended April 28, 2012. Net income for the 13 weeks ended May 4, 2013 includes $4.3 million, net of tax, or $0.04 per diluted share related to an estimated partial recovery from the Company's previously impaired investment in JJB Sports.

Net sales increased 4% to $1.3 billion in the current quarter due primarily to the growth of our store network, partially offset by a 1.7% decrease in consolidated same store sales. Due to the 53rd week in fiscal 2012, there is a one-week shift in fiscal 2013 results as compared to fiscal 2012. In the current quarter, the seasonal timing change resulting from this shift favorably impacted net sales comparisons by approximately $31 million. Consolidated same store sales, adjusted for the shifted retail calendar, decreased 3.8%. eCommerce sales penetration was approximately 5.8% of total sales.

Gross profit increased 8 basis points to 30.87% as a percentage of net sales for the 13 weeks ended May 4, 2013, due primarily to higher merchandise margins, partially offset by deleverage of fixed occupancy costs and higher freight and distribution costs.

In the first quarter, the Company:

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

Repurchased 1.7 million shares of common stock for approximately $80.6 million. The Company funded the repurchase program from cash on hand.

We ended the first quarter with no outstanding borrowings under our current senior secured credit agreement (the "Credit Agreement").

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

                                   13 Weeks Ended                             13 Weeks Ended
                                    May 4, 2013                               April 28, 2012
                      Dick's Sporting                            Dick's Sporting
                           Goods        Golf Galaxy    Total          Goods        Golf Galaxy    Total
Beginning stores                  518            81        599               480            81        561
Q1 New stores                       2             -          2                 6             -          6
Ending stores                     520            81        601               486            81        567

Remodeled stores                    -             -          -                 -             -          -
Relocated stores                    -             -          -                 1             -          1


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The following table presents 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 from
                                                     May 4,        April 28,        Prior Year
                                                    2013 (A)        2012 (A)       2012-2013 (A)
Net sales (1)                                         100.00  %       100.00 %          N/A
Cost of goods sold, including occupancy and
distribution costs (2)                                 69.13           69.21               (8 )
Gross profit                                           30.87           30.79                8
Selling, general and administrative expenses
(3)                                                    23.45           23.10               35
Pre-opening expenses (4)                                0.10            0.21              (11 )
Income from operations                                  7.32            7.47              (15 )
Interest expense (5)                                    0.05            0.27              (22 )
Other income (6)                                       (0.47 )         (0.15 )            (32 )
Income before income taxes                              7.73            7.35               38
Provision for income taxes                              2.87            2.89               (2 )
Net income                                              4.86  %         4.46 %             40

Other Data:
Consolidated same store sales (decrease)
increase (7)                                            (1.7 )%          8.4 %
Number of stores at end of period (8)                    601             567
Total square feet at end of period (8)            29,663,526      27,856,605

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

(6) 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. During the first quarter of 2013, the Company determined it would recover $4.3 million of its investment in JJB Sports, which is reflected herein.


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(7) 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 at that new location. The Company's eCommerce business is included in the same store sales calculation.

(8) Store count and square footage amounts do not include our True Runner stores.

13 Weeks Ended May 4, 2013 Compared to the 13 Weeks Ended April 28, 2012

Net Income

The Company reported net income of $64.8 million for the current quarter, or $0.52 per diluted share, compared to net income of $57.2 million, or $0.45 per diluted share, for the 13 weeks ended April 28, 2012. Net income for the 13 weeks ended May 4, 2013 includes $4.3 million, net of tax, or $0.04 per diluted share related to an estimated partial recovery from its previously impaired investment in JJB Sports.

Net Sales

Net sales for the current quarter increased 4% to $1.3 billion, due primarily to the growth of our store network, partially offset by a 1.7% decrease in consolidated same store sales. The 1.7% consolidated same store sales decrease consisted of a 1.3% decrease at Dick's Sporting Goods, and a 7.4% decrease at Golf Galaxy. eCommerce sales penetration was approximately 5.8% of total sales. Due to the 53rd week in fiscal 2012, there is a one-week shift in fiscal 2013 results as compared to fiscal 2012. In the current quarter, the seasonal timing change resulting from this shift favorably impacted net sales comparisons by approximately $31 million. Consolidated same store sales, adjusted for the shifted retail calendar, decreased 3.8%, consisting of a 3.2% decrease at Dick's Sporting Goods and an 11.8% decrease at Golf Galaxy.

The decrease in consolidated same store sales, as adjusted for the shifted retail calendar, was primarily driven by declines in our golf, fitness and baseball businesses and, to a lesser extent, in select outdoor businesses, such as bicycles, paddle sports and camping. The fitness category reflects our continued divestiture of the LIVESTRONG brand, which we expect to materially complete in the Company's third quarter of fiscal 2013. The same store sales decrease at Dick's Sporting Goods was attributable to an increase of 2.0% in sales per transaction and a 5.2% decrease 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 $97.6 million for the current quarter from $95.7 million for the 13 weeks ended April 28, 2012. The increase was primarily due to a $17.1 million increase in gross profit, partially offset by a $16.6 million increase in selling, general and administrative expenses.

Gross profit increased 4% to $411.7 million for the current quarter from $394.6 million for the 13 weeks ended April 28, 2012. The 8 basis point increase as a percentage of net sales was due primarily to merchandise margin expansion of 84 basis points due to our continued inventory management efforts, partially offset by a 47 basis point increase in fixed occupancy costs that increased as a percentage of sales as a result of the 1.7% decrease in consolidated same store sales and a 26 basis point increase in freight and distribution costs, driven by the increase in eCommerce sales. Freight and distribution costs for eCommerce sales are higher as a percentage of sales than for sales made in our brick and mortar stores. 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 6% to $312.7 million for the current quarter from $296.1 million for the 13 weeks ended April 28, 2012, and increased as a percentage of net sales by 35 basis points. The increase in administrative expenses was primarily due to increased payroll costs for planned growth initiatives.

Pre-opening expenses decreased to $1.3 million for the quarter from $2.7 million for the 13 weeks ended April 28, 2012. Pre-opening expenses were for the opening of two new Dick's stores during the quarter as compared to the opening of six new Dick's stores during last year's first quarter. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

Interest Expense

Interest expense was $0.7 million for the current quarter and $3.4 million for the 13 weeks ended April 28, 2012. Interest expense for the 13 weeks ended April 28, 2012 included $2.7 million related to rent payments under the Company's financing lease for its corporate headquarters building and the decrease in interest expense year over year reflects the Company's purchase of its corporate headquarters building on May 7, 2012.


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Income Taxes

The Company's effective tax rate was 37.2% for the 13 weeks ended May 4, 2013 as compared to 39.3% for the same period last year. During the first quarter of 2013, the Company determined that it would recover an estimated $4.3 million of its investment in JJB Sports, which it had previously fully impaired. There is no related tax expense, as the Company reversed a portion of the deferred tax valuation allowance it had previously recorded for net capital loss carryforwards it did not expect to realize at the time its investment in JJB Sports was fully impaired.

LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

Overview

The Company's liquidity and capital needs have generally been met by cash from operating activities. The Company ended the first quarter of 2013 with $113.9 million in cash and cash equivalents as compared to $521.0 million at the end of the first quarter of 2012. Over the course of the past twelve months, the Company utilized capital to fund shares purchased pursuant to share repurchase programs, pay quarterly dividends, purchase its store support center, acquire intellectual property rights to the Field & Stream brand, build a distribution center and fund its $246 million special dividend.

Net cash used in operating activities for the 13 weeks ended May 4, 2013 was $75.4 million compared to $17.8 million for the 13 weeks ended April 28, 2012. 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 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. 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 . . .

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