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DKS > SEC Filings for DKS > Form 10-Q on 29-May-2014All Recent SEC Filings

Show all filings for DICKS SPORTING GOODS INC

Form 10-Q for DICKS SPORTING GOODS INC


29-May-2014

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 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 2014 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 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;


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? 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 1, 2014. 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 this date. 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, referred to as the "Company", "we", "us" and "our" unless otherwise specified) is a leading omni-channel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories through a blend of dedicated associates, in-store services and unique specialty shop-in-shops. The Company also owns and operates Golf Galaxy, Field & Stream and True Runner specialty stores. 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.

As of May 3, 2014, we operated 566 Dick's Sporting Goods stores in 46 states and 79 Golf Galaxy stores in 29 states, with approximately 32.1 million square feet on a consolidated basis, the majority of which are located throughout the eastern half of the United States.


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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 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 407 Dick's Sporting Goods stores as of May 2, 2009 to 566 Dick's Sporting Goods stores as of May 3, 2014. The Company plans to expand its business through the opening of new stores, enhancing its eCommerce platform and leveraging all sales channels to deliver a consistent, seamless and high-quality customer experience.

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 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 omni-channel platform, 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.

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 1, 2014, 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 the consolidated financial statements. There have been no changes in the Company's critical accounting policies during the period ended May 3, 2014.

RESULTS OF OPERATIONS AND OTHER SELECTED DATA

Executive Summary

?      Net income for the current quarter was $70.0 million, or $0.57 per diluted
       share, as compared to net income of $64.8 million, or $0.52 per diluted
       share, for the 13 weeks ended May 4, 2013.



?         Net income for the 13 weeks ended May 3, 2014 includes $8.7 million,
          net of tax, or $0.07 per diluted share, related to the gain on sale of
          a Gulfstream G650 corporate aircraft.


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?         Net income for the 13 weeks ended May 4, 2013 included $4.3 million,
          net of tax, or $0.04 per diluted share, related to the partial recovery
          from the Company's previously impaired investment in JJB Sports.

? Net sales increased 8% to $1.4 billion in the current quarter due primarily to the growth of our store network and a 1.5% increase in consolidated same store sales.

? Gross profit decreased 23 basis points to 30.64% as a percentage of net sales for the 13 weeks ended May 3, 2014 as compared to the 13 weeks ended May 4, 2013, due primarily to increased occupancy costs and shipping expenses as a percentage of net sales, partially offset by higher merchandise margins.

? In the first quarter of 2014, the Company:

?            Opened eight new Dick's Sporting Goods stores and relocated one
             Dick's Sporting Goods store and one Golf Galaxy store, while the
             eCommerce sales penetration for the quarter increased to 7.0% of
             total sales, compared to 5.8% in the first quarter last year.

? 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.

? Ended the period with no outstanding borrowings under our current senior secured credit agreement.

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

                             13 Weeks Ended                            13 Weeks Ended
                               May 3, 2014                               May 4, 2013
                               Golf Galaxy                               Golf Galaxy
                               / Specialty                               / Specialty
                   Dick's         Store                      Dick's         Store
                  Sporting      Concepts                    Sporting      Concepts
                    Goods          (1)          Total         Goods          (1)          Total
Beginning stores       558            84           642           518            83           601
Q1 New stores            8             -             8             2             -             2
Ending stores          566            84           650           520            83           603

Relocated stores         1             1             2             -             -             -

(1) Includes the Company's Field & Stream and True Runner stores. As of May 3, 2014, the Company operated two Field and Stream stores and three 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
                                                 May 3,         May 4,        2013-2014
                                                  2014         2013 (A)          (A)
Net sales (1)                                     100.00 %       100.00 %        N/A
Cost of goods sold, including occupancy and
distribution costs (2)                             69.36          69.13           23
Gross profit                                       30.64          30.87          (23)
Selling, general and administrative expenses
(3)                                                22.42          23.45         (103)
Pre-opening expenses (4)                            0.43           0.10           33
Income from operations                              7.79           7.32           47
Interest expense                                    0.04           0.05          (1)
Other income (5)                                   (0.16 )        (0.47 )         31
Income before income taxes                          7.91           7.73           18
Provision for income taxes                          3.05           2.87           18
Net income                                          4.86 %         4.86 %         -

Other Data:
Consolidated same store sales increase
(decrease)                                           1.5 %         (1.7 %)
Number of stores at end of period (6)                650            603
Total square feet at end of period (6)        32,070,371     29,672,733

(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, 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 technology, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company's corporate headquarters. During the first quarter of 2014, selling, general and administrative expenses include a $14.4 million pre-tax gain on sale of a Gulfstream G650 corporate aircraft.

(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) Includes investment income recognized to reflect changes in deferred compensation plan investment values with a corresponding charge to selling, general and administrative costs for the same amount. During the first quarter of 2013, other income included $4.3 million related to the partial recovery of its previously impaired investment in JJB Sports.

(6) Includes Dick's Sporting Goods, Golf Galaxy, Field & Stream and True Runner stores.


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13 Weeks Ended May 3, 2014 Compared to the 13 Weeks Ended May 4, 2013

Net Income

The Company reported net income of $70.0 million for the current quarter, or $0.57 per diluted share, compared to net income of $64.8 million, or $0.52 per diluted share, for the 13 weeks ended May 4, 2013. Net income for the 13 weeks ended May 3, 2014 includes $8.7 million, net of tax, or $0.07 per diluted share, related to a gain on the sale of a Gulfstream G650 corporate aircraft. Net income for the 13 weeks ended May 4, 2013 included $4.3 million, net of tax, or $0.04 per diluted share, related to the partial recovery from the Company's previously impaired investment in JJB Sports.

Net Sales

Net sales for the current quarter increased 8% to $1.4 billion for the 13 weeks ended May 3, 2014 compared to the 13 weeks ended May 4, 2013, due primarily to the growth of our store network and a 1.5% increase in consolidated same store sales. The 1.5% consolidated same store sales increase consisted of a 2.3% increase at Dick's Sporting Goods and a 10.4% decrease at Golf Galaxy. eCommerce sales penetration was 7.0% of total sales during the current quarter compared to 5.8% of total sales during the 13 weeks ended May 4, 2013.

The increase in consolidated same store sales was primarily driven by increases in athletic apparel, team sports and footwear, partially offset by declines in the hunting and golf categories. The increase in athletic apparel reflects the growth in our women's and youth businesses, which we will emphasize in fiscal 2014 as we reallocate more square footage in our stores to these businesses. The hunting category decline was driven by higher sales in last year's period resulting from concerns about legislative action that would broadly change gun laws. The decline in our golf business was impacted by lower average unit retail prices on golf equipment, resulting from aggressive pricing on discontinued products by vendors in response to growing inventories, coupled with a lack of customer acceptance of new technology and a declining trend in rounds played. We expect the downward trend in our golf business to continue for the balance of the year. We anticipate the downward trend in the hunting business to continue through the second quarter, improve slightly from this trend in the third quarter and be relatively flat in the fourth quarter of fiscal 2014. These two businesses represent approximately 30% of our annual sales.

The same store sales increase at Dick's Sporting Goods was attributable to an increase of 2.5% in sales per transaction and a 0.2% decrease in transactions. Based upon our current quarter sales mix, every 1% change in consolidated same store sales would impact earnings before income taxes for the current quarter by approximately $5.0 million.

Income from Operations

Income from operations increased to $112.1 million for the current quarter from $97.6 million for the 13 weeks ended May 4, 2013.

Gross profit increased 7% to $440.9 million for the current quarter from $411.7 million for the 13 weeks ended May 4, 2013, but decreased as a percentage of net sales by 23 basis points compared to the same period last year. Occupancy costs and shipping expenses increased as a percentage of net sales by 48 basis points in the current quarter, which was offset by merchandise margin expansion of 30 basis points. Occupancy costs increased at a higher rate than the 1.5% increase in consolidated same store sales during the current quarter. 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. 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 3% to $322.6 million for the current quarter from $312.7 million for the 13 weeks ended May 4, 2013, but decreased as a percentage of net sales by 103 basis points. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to a pre-tax gain on sale of a Gulfstream G650 corporate aircraft of $14.4 million, or 100 basis points. The remaining decrease was primarily due to lower administrative expenses as a percentage of sales.

Pre-opening expenses increased to $6.2 million for the current quarter from $1.3 million for the 13 weeks ended May 4, 2013. 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 eight new Dick's Sporting Goods stores and relocated one Dick's Sporting Goods store and one Golf Galaxy store. The Company opened two new Dick's Sporting Goods stores in last year's first quarter.


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Income Taxes

The Company's effective tax rate was 38.5% for the 13 weeks ended May 3, 2014 as compared to 37.2% 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. There was no related tax expense, as the Company reversed a portion of the deferred tax valuation allowance it 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 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 the 13 weeks ended May 3, 2014 was $13.9 million compared to net cash used in operating activities of $75.4 million for the 13 weeks ended May 4, 2013. 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.

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