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DKS > SEC Filings for DKS > Form 10-Q on 27-Nov-2013All Recent SEC Filings

Show all filings for DICKS SPORTING GOODS INC

Form 10-Q for DICKS SPORTING GOODS INC


27-Nov-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. These statements can be identified 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 Quarterly Report on Form 10-Q or otherwise made by our management:

? Our business is dependent on general economic conditions in our markets and 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 ability 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;


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? 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 and the impact of unseasonable weather;

? 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 Quarterly Report on Form 10-Q are made as of the date hereof. 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 specialty 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. 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 November 2, 2013, we operated 552 Dick's Sporting Goods stores in 45 states and 82 Golf Galaxy stores in 30 states, with approximately 31.4 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 398 Dick's Sporting Goods stores as of November 1, 2008 to 552 Dick's Sporting Goods stores as of November 2, 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 Sporting Goods 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 open at least one year over the comparable prior year period, as well as the corresponding eCommerce sales. A store is included in the same store sales calculation in the same fiscal period that it commences its 14th full month of operations. Stores that were closed or relocated during the applicable period have been excluded from same store sales. Each relocated store is returned to the same store base in the fiscal period that it commences its 14th full month of operations at that new location. 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 November 2, 2013.


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RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

? Net income for the current quarter was $50.0 million, or $0.40 per diluted share, as compared to net income of $50.1 million, or $0.40 per diluted share, for the 13 weeks ended October 27, 2012.

? Net sales increased 7% to $1.4 billion in the current quarter due primarily to the growth of our store network and a 0.3% 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. The seasonal timing change resulting from this shift unfavorably impacted net sales comparisons to the same period in the prior year by approximately $36 million. Consolidated same store sales, adjusted for the shifted retail calendar, increased 3.3% in the current quarter. eCommerce sales penetration in the third quarter of 2013 was 6.5% of total sales.

? Gross profit decreased 61 basis points to 30.34% as a percentage of net sales for the 13 weeks ended November 2, 2013 as compared to the 13 weeks ended October 27, 2012, due primarily to increased occupancy and shipping costs.

? In the third quarter of 2013, the Company:

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

? Repurchased approximately 0.5 million shares of common stock for $25.0 million.

? We ended the third quarter with $116.4 million of borrowings under our current senior secured credit agreement.

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

                             39 Weeks Ended                            39 Weeks Ended
                             November 2, 2013                          October 27, 2012
                               Golf Galaxy                               Golf Galaxy
                               / Specialty                               / Specialty
                   Dick's         Store                      Dick's         Store
                  Sporting      Concepts                    Sporting      Concepts
                    Goods          (1)          Total         Goods          (1)          Total
Beginning stores       518            83           601           480            81           561
Q1 New stores            2             -             2             6             -             6
Q2 New stores            7             -             7             4             -             4
Q3 New stores           25             3            28            21             2            23
Ending stores          552            86           638           511            83           594

Remodeled stores         3             -             3             -             -             -
Relocated stores         1             1             2             4             -             4

(1) Includes the Company's Field & Stream and 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 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
                                              November 2,    October 27,     2012-2013
                                                  2013         2012 (A)         (A)
Net sales (1)                                     100.00 %       100.00 %       N/A
Cost of goods sold, including occupancy and
distribution costs (2)                             69.66          69.05          61
Gross profit                                       30.34          30.95         (61)
Selling, general and administrative expenses
(3)                                                23.83          23.98         (15)
Pre-opening expenses (4)                            0.87           0.71          16
Income from operations                              5.64           6.26         (62)
Interest expense (6)                                0.05           0.07         (2)
Other income (7)                                   (0.20 )        (0.08 )       (12)
Income before income taxes                          5.79           6.28         (49)
Provision for income taxes                          2.22           2.46         (24)
Net income                                          3.57 %         3.82 %       (25)

Other Data:
Consolidated same store sales increase               0.3 %          5.1 %
Number of stores at end of period (8)                638            594
Total square feet at end of period (8)        31,386,846     29,202,376

                                                                            Basis Point
                                                                             Increase /
                                                                             (Decrease)
                                                    39 Weeks Ended               in
                                                                             Percentage
                                                                            of Net Sales
                                                                             from Prior
                                                                                Year
                                              November 2,    October 27,     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)                             69.15          69.03          12
Gross profit                                       30.85          30.97         (12)
Selling, general and administrative expenses
(3)                                                23.05          22.86          19
Pre-opening expenses (4)                            0.44           0.36          8
Income from operations                              7.36           7.75         (39)
Impairment of available-for-sale investments
(5)                                                    -           0.80         (80)
Interest expense (6)                                0.05           0.13         (8)
Other income (7)                                   (0.25 )        (0.07 )       (18)
Income before income taxes                          7.56           6.89          67
Provision for income taxes                          2.89           2.90         (1)
Net income                                          4.66 %         3.99 %        67

Other Data:
Consolidated same store sales increase               0.0 %          5.6 %
Number of stores at end of period (8)                638            594
Total square feet at end of period (8)        31,386,846     29,202,376

(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.


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(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 39 weeks ended November 2, 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 first quarter of 2013, the Company determined it would recover $4.3 million of its investment in JJB Sports, which is reflected herein.

(8) Includes the Company's Field & Stream and True Runner stores.

13 Weeks Ended November 2, 2013 Compared to the 13 Weeks Ended October 27, 2012

Net Income

The Company reported net income of $50.0 million for the current quarter, or $0.40 per diluted share, compared to net income of $50.1 million, or $0.40 per diluted share, for the 13 weeks ended October 27, 2012.

Net Sales

Net sales for the current quarter increased 7% to $1.4 billion for the 13 weeks ended November 2, 2013 compared to the 13 weeks ended October 27, 2012, due primarily to the growth of our store network and a 0.3% increase in consolidated same store sales. The 0.3% consolidated same store sales increase consisted of a 0.6% increase at Dick's Sporting Goods and a 4.7% decrease at Golf Galaxy. eCommerce sales penetration was 6.5% of total sales during the current quarter compared to 4.4% of total sales during the 13 weeks ended October 27, 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 unfavorably impacted net sales comparisons to the same period in the prior year by approximately $36 million. Consolidated same store sales, adjusted for the shifted retail calendar, increased 3.3%, consisting of a 3.4% increase at Dick's Sporting Goods and a 2.2% increase at Golf Galaxy.

The increase in consolidated same store sales, as adjusted for the shifted retail calendar, was primarily driven by increases in athletic footwear and apparel, and team sports, partially offset by declines in the fitness and outdoor apparel categories. The same store sales increase on a shifted basis at Dick's Sporting Goods was attributable to an increase of 1.5% in sales per transaction and a 1.9% increase in transactions. This 1.9% increase in transactions reflects the Company's efforts to increase traffic, including additional advertising, increased store payroll, more merchandise offerings at opening price points and investments in growth categories. Every 1% change in consolidated same store sales would impact earnings before income taxes for the current quarter by approximately $4 million.

Income from Operations

Income from operations decreased to $79.1 million for the current quarter from $82.2 million for the 13 weeks ended October 27, 2012.

Gross profit increased 5% to $424.9 million for the current quarter from $406.1 million for the 13 weeks ended October 27, 2012, but decreased as a percentage of net sales by 61 basis points compared to the same period last year. Occupancy costs and shipping expenses increased as a percentage of net sales by 47 basis points in the current quarter. Occupancy costs increased at a higher rate than the 0.3% increase in consolidated same store sales during the current quarter. Shipping expenses as a percentage of sales increased due to the growth in our eCommerce sales relative to the growth in sales at our brick and mortar stores. Merchandise margins decreased 11 basis points, reflecting our efforts to offer more products at opening price points and


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respond to isolated competitor pricing strategies. Every 10 basis point change in merchandise margin would impact earnings before income taxes for the current quarter by approximately $1.4 million.

Selling, general and administrative expenses increased 6% to $333.7 million for the current quarter from $314.6 million for the 13 weeks ended October 27, 2012, but decreased as a percentage of net sales by 15 basis points. Selling, general and administrative expenses were impacted by lower incentive compensation during the 13 weeks ended November 2, 2013, partially offset by an increase in administrative payroll costs to support the Company's planned growth initiatives.

Pre-opening expenses increased to $12.1 million for the current quarter from $9.3 million for the 13 weeks ended October 27, 2012. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. During the current quarter, the Company opened 25 new Dick's Sporting Goods stores, one new Golf Galaxy store and two new Field & Stream stores, a specialized outdoor concept. Additionally, the Company relocated one Dick's Sporting Goods store and repositioned one Golf Galaxy store during the current quarter. The Company opened 21 new Dick's Sporting Goods stores and relocated three Dick's Sporting Goods stores in last year's third quarter.

Income Taxes

The Company's effective tax rate was 38.4% for the 13 weeks ended November 2, 2013 as compared to 39.2% for the same period last year.

39 Weeks Ended November 2, 2013 Compared to the 39 Weeks Ended October 27, 2012

Net Income

. . .

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