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DKS > SEC Filings for DKS > Form 10-Q on 30-Aug-2013All Recent SEC Filings

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Form 10-Q for DICKS SPORTING GOODS INC


30-Aug-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 and eCommerce businesses, 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, investments, 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 some or all of 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;


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? 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;

? 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 Sporting Goods, Inc. (together with its subsidiaries, the "Company") 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.


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As of August 3, 2013, we operated 527 Dick's stores in 44 states and 81 Golf Galaxy stores in 30 states, with approximately 30.0 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 any period within, or 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 have 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 372 Dick's stores as of August 2, 2008 to 527 Dick's stores as of August 3, 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 - Same store sales provide a measure of sales growth for stores and other channels open at least one year over the comparable prior year period. 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. Our management considers same store sales to be an important indicator of our current performance. Same store sales results are important to leverage our costs, including occupancy costs, store payroll and other store expenses. Same store sales also have a direct impact on our total net sales, cash and working capital. See further discussion of the Company's same store sales in the "Results of Operations and Other Selected Data" section herein.

? Operating cash flow - Cash flow generation supports the general operating needs of the Company and funds 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. 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.

? 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 August 3, 2013.


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RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

? Net income for the current quarter increased 57% to $84.2 million, or $0.67 per diluted share, as compared to net income of $53.7 million, or $0.43 per diluted share, for the 13 weeks ended July 28, 2012. Net income for the 13 weeks ended August 3, 2013 includes $4.7 million, net of tax, or $0.04 per diluted share related to a non-cash impairment charge to reduce the carrying value of a corporate aircraft held for sale to its fair market value. Net income for the 13 weeks ended July 28, 2012 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.

? Net sales increased 7% to $1.5 billion in the current quarter due primarily to the growth of our store network and a 1.2% increase 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 $20 million. Consolidated same store sales, adjusted for the shifted retail calendar, decreased 0.4% in the current quarter. eCommerce sales penetration in the second quarter of 2013 was approximately 5.6% of total sales.

? Gross profit increased 14 basis points to 31.30% as a percentage of net sales for the 13 weeks ended August 3, 2013 as compared to the 13 weeks ended July 28, 2012, due primarily to higher merchandise margins, partially offset by deleverage of fixed occupancy costs.

? In the second quarter of 2013, the Company declared and paid a quarterly cash dividend of $0.125 per common share and Class B common share.

? We ended the second quarter of 2013 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 (1):

                              26 Weeks Ended                              26 Weeks Ended
                               August 3, 2013                              July 28, 2012
                   Dick's                                      Dick's
                  Sporting                                    Sporting
                    Goods       Golf Galaxy       Total         Goods       Golf Galaxy       Total
Beginning stores       518              81           599           480              81           561
Q1 New stores            2               -             2             6               -             6
Q2 New stores            7               -             7             4               -             4
Ending stores          527              81           608           490              81           571

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

(1) Excludes the Company's True Runner stores

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 Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying unaudited Consolidated Financial Statements and related notes thereto.


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                                                                             Basis Point
                                                                              Increase /
                                                                              (Decrease)
                                                     13 Weeks Ended               in
                                                                              Percentage
                                                                             of Net Sales
                                                                              from Prior
                                                                                 Year
                                                August 3,       July 28,      2012-2013
                                                2013 (A)        2012 (A)         (A)
Net sales (1)                                     100.00  %       100.00 %       N/A
Cost of goods sold, including occupancy and
distribution costs (2)                             68.70           68.84         (14)
Gross profit                                       31.30           31.16          14
Selling, general and administrative expenses
(3)                                                22.00           21.63          37
Pre-opening expenses (4)                            0.35            0.16          19
Income from operations                              8.95            9.37         (42)
Impairment of available-for-sale investments
(5)                                                    -            2.25        (225)
Interest expense (6)                                0.05            0.07         (2)
Other (income) expense (7)                         (0.11 )             -         (11)
Income before income taxes                          9.02            7.04         198
Provision for income taxes                          3.52            3.31          21
Net income                                          5.50  %         3.73 %       177

Other Data:
Consolidated same store sales increase               1.2  %          3.8 %
Number of stores at end of period (8)                608             571
Total square feet at end of period (8)        30,029,317      28,053,986

                                                                              Basis Point
                                                                               Increase /
                                                                               (Decrease)
                                                     26 Weeks Ended                in
                                                                               Percentage
                                                                              of Net Sales
                                                                               from Prior
                                                                                  Year
                                                August 3,       July 28,       2012-2013
                                                2013 (A)          2012            (A)
Net sales (1)                                     100.00  %       100.00  %       N/A
Cost of goods sold, including occupancy and
distribution costs (2)                             68.90           69.02          (12)
Gross profit                                       31.10           30.98           12
Selling, general and administrative expenses
(3)                                                22.67           22.33           34
Pre-opening expenses (4)                            0.23            0.18           5
Income from operations                              8.19            8.47          (28)
Impairment of available-for-sale investments
(5)                                                    -            1.19         (119)
Interest expense (6)                                0.05            0.16          (11)
Other income (7)                                   (0.28 )         (0.07 )        (21)
Income before income taxes                          8.42            7.19          123
Provision for income taxes                          3.22            3.11           11
Net income                                          5.20  %         4.08  %       112

Other Data:
Consolidated same store sales (decrease)
increase                                            (0.2 )%          5.9  %
Number of stores at end of period (8)                608             571
Total square feet at end of period (8)        30,029,317      28,053,986

(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


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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. Selling, general and administrative expenses for the 26 weeks ended August 3, 2013 include $7.9 million relating to a non-cash impairment charge to reduce the carrying value of a corporate aircraft held for sale to its fair market value.

(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 reflected the Company's impairment of its investment in JJB Sports.

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

(7) Includes gains and losses associated with changes in deferred compensation plan investment values. During the 26 weeks ended August 3, 2013, the Company determined it would recover $4.3 million of its investment in JJB Sports, which is reflected herein.

(8) Store count and square footage amounts do not include the Company's True Runner stores.

13 Weeks Ended August 3, 2013 Compared to the 13 Weeks Ended July 28, 2012

Net Income

The Company reported net income of $84.2 million for the current quarter, or $0.67 per diluted share, compared to net income of $53.7 million, or $0.43 per diluted share, for the 13 weeks ended July 28, 2012. Net income for the 13 weeks ended August 3, 2013 includes $4.7 million, net of tax, or $0.04 per diluted share, related to a non-cash impairment charge to reduce the carrying value of a corporate aircraft held for sale to its fair market value. Net income for the 13 weeks ended July 28, 2012 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.

Net Sales

Net sales for the current quarter increased 7% to $1.5 billion, due primarily to the growth of our store network and a 1.2% increase in consolidated same store sales. The 1.2% consolidated same store sales increase consisted of a 1.9% increase at Dick's Sporting Goods and a 7.2% decrease at Golf Galaxy. eCommerce sales penetration was approximately 5.6% of total sales during the current quarter compared to 3.9% of total sales during the 13 weeks ended July 28, 2012. 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 $20 million. Consolidated same store sales, adjusted for the shifted retail calendar, decreased 0.4%, consisting of a 0.1% increase at Dick's Sporting Goods and a 6.1% 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 equipment, outdoor equipment and fitness businesses. Golf and outdoor equipment, such as water sports, camping and bikes, were negatively impacted by higher levels of precipitation and cooler temperatures. The same store sales increase at Dick's Sporting Goods was attributable to an increase of 2.0% in sales per transaction offset by a 1.9% decrease in transactions. Every 1% change in consolidated same store sales would impact earnings before income taxes for the current quarter by approximately $5 million.


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Income from Operations

Income from operations increased to $137.1 million for the current quarter from $134.6 million for the 13 weeks ended July 28, 2012. The increase was primarily due to a $31.5 million increase in gross profit, partially offset by a $26.1 million increase in selling, general and administrative expenses.

Gross profit increased 7% to $479.3 million for the current quarter from $447.8 million for the 13 weeks ended July 28, 2012. The 14 basis point increase as a percentage of net sales was due primarily to merchandise margin expansion of 31 basis points due to our continued inventory management efforts, partially offset by a 25 basis point increase in occupancy costs that increased as a percentage of net sales as a result of a lower increase in consolidated same store sales. Every 10 basis point change in merchandise margin would impact earnings before income taxes for the current quarter by approximately $1.5 million.

Selling, general and administrative expenses increased 8% to $337.0 million for the current quarter from $310.9 million for the 13 weeks ended July 28, 2012, and increased as a percentage of net sales by 37 basis points. The increase was primarily due to a $7.9 million non-cash impairment charge to reduce the carrying value of a Gulfstream G450 corporate aircraft held for sale to its fair market value. This corporate aircraft is not the aircraft that was sold to a related party as described in Note 6 to the unaudited Consolidated Financial Statements. Selling, general and administrative expenses were also impacted by an increase in administrative payroll costs for the Company's planned growth initiatives, partially offset by lower incentive compensation during the 13 weeks ended August 3, 2013 and a contribution to the Dick's Sporting Goods Foundation during the 13 weeks ended July 28, 2012.

Pre-opening expenses increased to $5.3 million for the current quarter from $2.3 million for the 13 weeks ended July 28, 2012. Pre-opening expenses relate to . . .

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