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DKS > SEC Filings for DKS > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for DICKS SPORTING GOODS INC

Form 10-K for DICKS SPORTING GOODS INC


28-Mar-2014

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 Part I, Item 6, "Selected Financial Data" and our Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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 Sporting Goods, Inc. (together with its subsidiaries, referred to as the "Company", "we", "us", and "our" unless specified otherwise) 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. As of February 1, 2014, we operated 558 Dick's Sporting Goods stores in 46 states and 79 Golf Galaxy stores in 29 states, with


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approximately 31.6 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 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 398 Dick's Sporting Goods stores at the end of fiscal 2008 to 558 Dick's Sporting Goods stores at the end of fiscal 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 performance - 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" 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" 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 sales per square foot, store operating contribution margin and store cash flow.

Executive Summary

      Net income for the 52 weeks ended February 1, 2014 increased 16% to $337.6
       million, or $2.69 per diluted share, as compared to net income of $290.7
       million, or $2.31 per diluted share, during the 53 weeks ended February 2,
       2013.



         Fiscal 2013 net income includes $4.3 million, net of tax, or $0.03 per
          diluted share, related to the partial recovery from its previously
          impaired investment in JJB Sports recorded during the first quarter of
          2013 and a charge of $4.7 million, net of tax, or $0.04 per diluted
          share, related to a non-cash impairment to reduce the carrying value of
          a corporate aircraft held for sale to its fair market value.



         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.

Net sales increased 6% to $6,213.2 million in fiscal 2013 from $5,836.1 million in fiscal 2012 due primarily to a 1.9% increase in consolidated same store sales on a 52-week to 52-week basis and the growth of our store network, partially offset by the inclusion of the 53rd week of sales in fiscal 2012. Sales during the 53rd week of fiscal 2012 totaled approximately $74 million.


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Gross profit decreased to 31.29% in fiscal 2013 as a percentage of net sales from 31.48% in fiscal 2012 due primarily to increased occupancy and shipping expenses, partially offset by higher merchandise margins.

In fiscal 2013, the Company:

Declared and paid aggregate cash dividends of $0.50 per share.

Launched two Field & Stream stores, a specialized outdoor concept.

Repurchased 4.8 million shares of common stock for $255.6 million.

         Made substantial capital investments in the business, increasing
          capital expenditures to $285.7 million in fiscal 2013 from $219.0
          million in fiscal 2012.

The Company ended fiscal 2013 with no outstanding borrowings under the current senior secured credit agreement (the "Credit Agreement").

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)     (Decrease)
                                                                      in             in
                                                                  Percentage     Percentage
                                                                 of Net Sales   of Net Sales
                                                                  from Prior     from Prior
                                     Fiscal Year                     Year           Year
                                                                 2013 - 2012    2012 - 2011
                          2013        2012 (A)        2011           (A)            (A)
Net sales (1)            100.00  %     100.00  %     100.00  %       N/A            N/A
Cost of goods sold,
including occupancy
and distribution
costs (2)                 68.71         68.52         69.40           19            (88)
Gross profit              31.29         31.48         30.60          (19)            88
Selling, general and
administrative
expenses (3)              22.31         22.23         22.03           8              20
Pre-opening
expenses (4)               0.34          0.28          0.28           6              -
Income from operations     8.64          8.97          8.29          (33)            68
Impairment of
available-for-sale
investments (5)               -          0.55             -          (55)            55
Gain on sale of
investment (6)                -             -         (0.27 )         -              27
Interest expense (7)       0.05          0.10          0.27          (5)            (17)
Other (income)
expense (8)               (0.20 )       (0.08 )           -          (12)           (8)
Income before income
taxes                      8.79          8.39          8.29           40             10
Provision for income
taxes                      3.36          3.41          3.23          (5)             18
Net income                 5.43  %       4.98  %       5.06  %        45            (8)


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(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 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, shipping 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 52 weeks ended February 1, 2014 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 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 in fiscal 2012 and 2011 includes rent payments under the Company's financing lease obligation for its corporate headquarters building, which the Company purchased on May 7, 2012.

(8) Includes gains and losses associated with changes in deferred compensation plan investment values with a corresponding charge to selling, general and administrative costs for the same amounts. During the first quarter of 2013, the Company recorded $4.3 million related to the partial recovery of its previously impaired investment in JJB Sports.

Fiscal 2013 (52 weeks) Compared to Fiscal 2012 (53 weeks)

Net Income

The Company reported net income for the year ended February 1, 2014 of $337.6 million, or $2.69 per diluted share, as compared to net income of $290.7 million, or $2.31 per diluted share, in fiscal 2012. Fiscal 2013 net income includes $4.3 million, net of tax, or $0.03 per diluted share, related to the partial recovery from its previously impaired investment in JJB Sports recorded during the first quarter of 2013 and a charge of $4.7 million, net of tax, or $0.04 per diluted share, related to a non-cash impairment to reduce the carrying value of a corporate aircraft held for sale to its fair market value. 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.

Net Sales

Net sales increased 6% to $6,213.2 million in fiscal 2013 from $5,836.1 million in fiscal 2012 due primarily to a 1.9% increase in consolidated same store sales on a 52-week to 52-week basis and the growth of our store network, partially offset by the inclusion of the 53rd week of sales in fiscal 2012. Sales during the 53rd week of fiscal 2012 totaled approximately $74 million.


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The 1.9% consolidated same store sales increase consisted of a 2.4% increase at Dick's Sporting Goods and a 7.1% decrease at Golf Galaxy. eCommerce sales penetration was 7.9% of total sales during the current period compared to 5.3% of total sales during the 53 weeks ended February 2, 2013.

The increase in consolidated same store sales was broad based, with larger increases in athletic apparel, athletic footwear and outdoor apparel and cold weather accessories, partially offset by declines in the golf, fitness and outdoor equipment categories. The same store sales increase at Dick's Sporting Goods was driven by an increase in sales per transaction of approximately 1.8% and an increase in transactions of approximately 0.6%. Based upon our fiscal 2013 sales mix, every 1% change in consolidated same store sales would have impacted fiscal 2013 earnings before income taxes by approximately $19 million.

Store Count

During fiscal 2013, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store, two new Field & Stream stores and one new True Runner store. Additionally, the Company relocated one Dick's Sporting Goods store, repositioned one Golf Galaxy store and closed three underperforming Golf Galaxy stores. As of February 1, 2014, the Company operated 558 Dick's Sporting Goods stores in 46 states, 79 Golf Galaxy stores in 29 states, two Field & Stream stores in two states and three True Runner stores in three states, with approximately 31.6 million square feet on a consolidated basis.

Income from Operations

Income from operations increased $13.1 million to $536.8 million in fiscal 2013 from $523.7 million in fiscal 2012.

Gross profit increased 6% to $1,944.0 million in fiscal 2013 from $1,837.2 million in fiscal 2012, but decreased as a percentage of net sales by 19 basis points compared to fiscal 2012. Occupancy costs and shipping expenses increased as a percentage of net sales by 61 basis points in the current year. Occupancy costs increased at a higher rate than the 1.9% increase in consolidated same store sales during the fiscal year and were unfavorably affected by 13 basis points due to the inclusion of sales from the 53rd week in fiscal 2012. Shipping expenses as a percentage of sales increased due to the growth in eCommerce sales relative to the sales growth at our brick and mortar stores. The decrease in gross profit as a percentage of net sales was partially offset by merchandise margin expansion of 35 basis points. Every 10 basis point change in merchandise margin would impact earnings before income taxes for the current period by approximately $6 million.

Selling, general and administrative expenses increased approximately 7% to $1,386.3 million in fiscal 2013 from $1,297.4 million in fiscal 2012, and increased as a percentage of net sales by 8 basis points primarily due to increased payroll costs for planned growth initiatives and 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. The increase in selling, general and administrative expenses was partially offset by lower incentive compensation during the 52 weeks ended February 1, 2014 and a contribution to the Dick's Sporting Goods Foundation during the 53 weeks ended February 2, 2013.

Pre-opening expenses increased to $20.8 million in fiscal 2013 from $16.1 million in fiscal 2012. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. During fiscal 2013, the Company opened 40 new Dick's Sporting Goods stores, one new Golf Galaxy store, two new Field & Stream stores and one new True Runner store. Additionally, the Company relocated one Dick's Sporting Goods store and repositioned one Golf Galaxy store in the current year. During fiscal 2012, the Company opened 38 new Dick's Sporting Goods stores and two new True Runner stores, relocated five Dick's Sporting Goods stores and repositioned one Golf Galaxy store.

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 $2.9 million for fiscal 2013 compared to $6.0 million for fiscal 2012. Interest expense for fiscal 2012 included $2.9 million related to rent payments under the Company's financing lease for its corporate headquarters building. 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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Other Income

Other income was $12.2 million for fiscal 2013 compared to $4.6 million for fiscal 2012. The Company recognizes investment income to reflect changes in the investment value of assets held in its deferred compensation plans with a corresponding charge to selling, general and administrative costs for the same amount. The Company recognized investment income totaling $6.0 million in fiscal 2013 compared to $3.2 million for fiscal 2012 due to an overall improvement in the equity markets, which impacted the deferred compensation plan investment values. During the first quarter of 2013, the Company recorded $4.3 million related to the partial recovery of the Company's investment in JJB Sports, which it had previously fully impaired.

Income Taxes

The Company's effective tax rate was 38.2% for fiscal 2013 as compared to 40.7% for fiscal 2012. During fiscal 2012, 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 carryforward resulting from the impairment of its investment in JJB Sports, as the Company did not believe that it was more likely than not that the Company would generate sufficient capital gains in future periods to recognize that portion of the expected net capital loss. During the first quarter of fiscal 2013, the Company determined that it would recover $4.3 million of its investment in JJB Sports. There is no related tax expense, as the Company reversed a portion of the deferred tax valuation allowance it recorded during fiscal 2012 for net capital loss carryforwards it did not expect to realize at that time.

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 measured on a 52-week to 52-week basis, growth of our store network and the inclusion of the 53rd week of sales. Sales during the 53rd week of fiscal 2012 totaled approximately $74 million. The 4.3% consolidated same store sales increase consisted of a 2.4% increase at Dick's Sporting Goods and a 5.5% increase at Golf Galaxy. eCommerce sales penetration was 5.3% of total sales in fiscal 2012 compared to 4.0% of total sales in fiscal 2011.

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

Store Count

During fiscal 2012, the Company opened 38 new Dick's Sporting Goods stores and two new True Runner stores. Additionally, the Company relocated five Dick's Sporting Goods stores and repositioned one Golf Galaxy store. As of February 2, 2013, the Company operated 518 Dick's Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states, with approximately 29.6 million square feet on a consolidated basis.

Income from Operations

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


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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 was due primarily to a 58 basis point decrease in fixed occupancy costs resulting primarily from the leverage on the increase in sales compared to fiscal 2011, including 13 basis points due to the inclusion of sales from the 53rd week in fiscal 2012 and merchandise margin expansion of 40 basis points resulting from 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 in 2012 and the partial reversal in 2011 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 in fiscal 2012.

Pre-opening expenses increased $1.5 million to $16.1 million in fiscal 2012 from $14.6 million in fiscal 2011. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations. During fiscal 2012, the Company opened 38 new Dick's Sporting Goods stores and two new True Runner stores, relocated five Dick's Sporting Goods stores and repositioned one Golf Galaxy store. During fiscal 2011, the Company opened 36 new Dick's Sporting Goods stores and relocated one Golf Galaxy store.

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 May 7, 2012.

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 carryforward resulting from the impairment of its investment in JJB Sports, as the Company did not believe that it was more likely than not that the Company would generate sufficient capital gains in future periods to recognize that portion of the expected net capital loss.

Liquidity and Capital Resources

Overview

The Company's liquidity and capital needs have generally been met by cash from operating activities and the Company's revolving credit facility. Cash flow from operations is seasonal in our business. Typically, we use cash flow from operations to increase inventory in advance of peak selling seasons, with the pre-Christmas inventory increase being the largest. In the fourth quarter, inventory levels are reduced in connection with Christmas sales and this inventory reduction, combined with proportionately higher net income, typically produces significant positive cash flow.

Net cash provided by operating activities for fiscal 2013 was $403.9 million compared to $438.3 million for fiscal 2012. Net cash from operating, investing and financing activities are discussed further below.


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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 . . .

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