Dick's Sporting Goods - 10-Q quarterly report FY2011 Q1

 

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The number of shares of common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, outstanding as of May 17, 2011 was 95,160,348 and 24,960,870, respectively.

INDEX TO FORM 10-Q

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

Dick’s Sporting Goods, Inc. (together with its subsidiaries, the “Company”) is a specialty retailer selling sporting goods equipment, apparel and footwear through its 528 stores, the majority of which are located throughout the eastern half of the United States. Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared by us, in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The interim consolidated financial statements are unaudited and have been prepared on the same basis as the annual audited consolidated financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim financial information. This unaudited interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 29, 2011 as filed with the Securities and Exchange Commission on March 18, 2011. Operating results for the 13 weeks ended April 30, 2011 are not necessarily indicative of the results that may be expected for the year ending January 28, 2012 or any other period.

The calculation of accrued store closing and relocation reserves primarily includes future minimum lease payments, maintenance costs and taxes from the date of closure or relocation to the end of the remaining lease term, net of contractual or estimated sublease income. The liability is discounted using a credit-adjusted risk-free rate of interest. The assumptions used in the calculation of the accrued store closing and relocation reserves are evaluated each quarter.

The following table summarizes the activity in fiscal 2011 and 2010 (in thousands):

The current portion of accrued store closing and relocation reserves is recorded in accrued expenses and the long-term portion is recorded in long-term deferred revenue and other liabilities in the unaudited consolidated balance sheets.

Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted average number of shares of common stock, plus the effect of dilutive potential common shares outstanding during the period, using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock and warrants.

The computations for basic and diluted earnings per common share are as follows (in thousands, except per share data):

For the 13 weeks ended April 30, 2011 and May 1, 2010, 0.4 million and 4.3 million shares, respectively, were attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Quarterly Report on Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as “believe”, “anticipate”, “expect”, “estimate”, “predict”, “intend”, “plan”, “project”, “goal”, “will”, “will be”, “will continue”, “will result”, “could”, “may”, “might” or any variations of such words or other words with similar meanings. Forward-looking statements address, among other things, our expectations, our growth strategies, including our plans to open new stores, our efforts to increase profit margins and return on invested capital, plans to grow our private brand business, projections of our future profitability, results of operations, capital expenditures, our financial condition or other “forward-looking” information and include statements about revenues, earnings, spending, margins, costs, liquidity, store openings and operations, inventory, private brand products, 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 2011 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:

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. We do not assume any obligation and do not intend to update any forward-looking statements except as may be required by the securities laws.

Investors should also be aware that while the Company does communicate with securities analysts, from time to time, such communications are conducted in accordance with applicable securities laws and investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report.

Dick’s is an authentic full-line sporting goods retailer offering a broad assortment of 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”). Unless otherwise specified, any reference to “year” is to our fiscal year and when used in this Form 10-Q and unless the context otherwise requires, the terms “Dick’s”, “we”, “us”, “the Company” and “our” refer to Dick’s Sporting Goods, Inc. and its wholly-owned subsidiaries.

As of April 30, 2011, we operated 447 Dick’s stores in 42 states and 81 Golf Galaxy stores in 30 states, with approximately 26.0 million square feet in 43 states on a consolidated basis, the majority of which are located throughout the eastern half of the United States. Additionally, the Company maintains e-commerce operations for both Dick’s and Golf Galaxy.

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

The primary factors that historically influenced the Company’s profitability and success have been its growth in the 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 263 stores as of April 29, 2006 to 528 stores as of April 30, 2011, reflecting both organic growth and acquisitions. The Company continues to expand its presence through the opening of new stores, although its rate of growth has decreased from the rate of growth experienced in earlier years, reflecting recent economic conditions.

In order to monitor the Company’s success, the Company’s senior management monitors certain key performance indicators, including:

As discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011, the Company considers its policies on inventory valuation, vendor allowances, goodwill and intangible assets, impairment of long-lived assets and closed store reserves, business combinations, 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 April 30, 2011.

The Company reported net income of $37.5 million for the current quarter, or $0.30 per diluted share, compared to net income of $26.2 million, or $0.22 per diluted share, for the 13 weeks ended May 1, 2010.

Net sales for the current quarter increased 6.3% to $1.1 billion, due primarily to a 2.1% increase in consolidated same store sales and the opening of new stores.

As a percentage of net sales, gross profit increased 82 basis points to 29.67% for the quarter, due primarily to higher merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels compared to last year’s first quarter.

We ended the first quarter with no outstanding borrowings under our Second Amended and Restated Credit Agreement, as amended (the “Credit Agreement”).

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

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 is provided to facilitate a further understanding of our business. This table should be read in conjunction with the following management’s discussion and analysis and the unaudited consolidated financial statements and related notes thereto.

(1) Revenue from retail sales is recognized at the point of sale, net of sales tax. Revenue from e-commerce sales is recognized upon shipment of merchandise and any service related revenue is recognized primarily 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 in the unaudited consolidated statements of income in selling, general and administrative expenses at the point at which redemption becomes remote. The Company performs an evaluation of the aging of the unredeemed cards, based on the elapsed time from the date of original issuance, to determine when redemption is remote.

(2) Cost of goods sold includes the cost of merchandise, inventory shrinkage and obsolescence, freight, distribution and store occupancy costs. Store occupancy costs include rent, common area maintenance charges, real estate and other asset-based taxes, store maintenance, utilities, depreciation, fixture lease expenses and certain insurance expenses.

(3) Selling, general and administrative expenses include store and field support payroll and fringe benefits, advertising, bank card charges, information systems, marketing, legal, accounting, other store expenses and all expenses associated with operating the Company’s corporate headquarters.

(4) Pre-opening expenses consist primarily of rent, marketing, payroll and recruiting costs incurred prior to a new or relocated store opening which are expensed as incurred.

(5) Interest expense results primarily include rent payments under the Company’s financing lease obligation for its corporate headquarters and interest on borrowings under the Credit Agreement.

(6) Other income results primarily from gains associated with changes in deferred compensation plan investment values and interest income earned on highly liquid instruments purchased with a maturity of three months or less at the date of purchase.

(7) Stores are included in the same store sales calculation in the same fiscal period that it commences its 14^th 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 14^thfull month of operations at that new location.

The Company reported net income of $37.5 million for the current quarter, or $0.30 per diluted share, compared to net income of $26.2 million, or $0.22 per diluted share, for the 13 weeks ended May 1, 2010.

Net sales for the current quarter increased 6.3% to $1.1 billion, due primarily to a 2.1% increase in consolidated same store sales and the opening of new stores. The 2.1% consolidated same store sales increase consisted of a 1.4% increase in Dick’s Sporting Goods stores, a 3.3% increase in Golf Galaxy and a 25.2% increase in the Company’s e-commerce business. The inclusion of the e-commerce business resulted in an increase of approximately 53 basis points to the Company’s consolidated same store sales calculation for the 13 weeks ended April 30, 2011, compared to 16 basis points for the 13 weeks ended May 1, 2010.

The increase in consolidated same store sales was primarily driven by increases in apparel and footwear, which were partially offset by decreases in outdoor categories. Higher precipitation levels and related flooding, as well as cooler temperatures, contributed to unfavorable conditions for outdoor activities including team sports, fishing, camping and boating. The consolidated same store sales increase was attributable to an increase in transactions of approximately 0.8% and an increase of approximately 0.6% in sales per transaction at Dick’s stores. Every 1% change in same store sales would have impacted earnings before income taxes for the current quarter by approximately $3 million.

Income from operations increased to $64.4 million for the current quarter from $47.0 million for the 13 weeks ended May 1, 2010. The increase was primarily due to a $28.2 million increase in gross profit, partially offset by an increase in selling, general and administrative expenses totaling $10.6 million.

Gross profit increased approximately 9% to $330.4 million for the current quarter from $302.2 million for the 13 weeks ended May 1, 2010. The 82 basis point increase is due primarily to an 88 basis point increase in merchandise margins that resulted from changes in sales mix at our Dick’s stores and lower clearance levels due to our continued inventory management efforts. Every 10 basis point change in merchandise margin would have impacted the current quarter earnings before income taxes by approximately $1.0 million.

Selling, general and administrative expenses increased approximately 4% to $263.7 million for the current quarter from $253.1 million for the 13 weeks ended May 1, 2010. Selling, general and administrative expenses decreased as a percentage of net sales by 49 basis points due primarily to a 93 basis point decrease in advertising expenses resulting from a reduction in national media and direct mail advertising. Administrative expenses increased 34 basis points from last year’s quarter primarily due to higher corporate costs incurred to support our business strategies. Bankcard charges increased 11 basis points as a percentage of net sales resulting from higher debit interchange rates compared to last year’s quarter.

Pre-opening expenses increased to $2.3 million for the quarter from $2.1 million for the 13 weeks ended May 1, 2010. Pre-opening expenses were for the opening of three new Dick’s stores during the quarter as compared to five new Dick’s stores during last year’s quarter. Pre-opening expenses in any period fluctuate depending on the timing and number of store openings and relocations.

Interest expense was $3.5 million for both the current quarter and for the 13 weeks ended May 1, 2010. Interest expense for the 13 weeks ended April 30, 2011 includes $2.7 million related to rent payments under the Company’s financing lease for its corporate headquarters building.

The Company’s effective tax rate was 39.6% for the 13 weeks ended April 30, 2011 as compared to 40.7% for the same period last year. The effective tax rate for the 13 weeks ended April 30, 2011 reflects the Company’s efforts to simplify the organization of its tax entities.

Our primary capital requirements are for working capital, capital improvements, and to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements.

The change in cash and cash equivalents is as follows (in thousands):

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.

Cash flows used in operating activities increased $0.8 million for the 13 weeks ended April 30, 2011 compared to last year’s quarter.

Cash used in investing activities for the 13 weeks ended April 30, 2011 increased by $10.3 million to $34.6 million. The Company’s gross capital expenditures were $32.6 million during the current quarter compared to $24.3 million during the 13 weeks ended May 1, 2010, which related primarily to the opening of new stores, ongoing remodeling of existing locations, information systems and administrative facilities.

The Company opened three stores during the 13 weeks ended April 30, 2011 as compared to opening five stores during the 13 weeks ended May 1, 2010.

Cash provided by financing activities for the 13 weeks ended April 30, 2011 totaled $35.5 million, compared to $19.3 million of cash provided in the same period of fiscal 2010. The increase in cash provided primarily reflects increased proceeds and excess tax benefits from exercises of stock options.

The Company’s liquidity and capital needs have generally been met by cash from operating activities and borrowings under the Credit Agreement, including up to $75 million in the form of letters of credit. Borrowing availability under the Credit Agreement is generally limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s inventory’s liquidation value, in each case net of specified reserves and less any letters of credit outstanding. Interest on outstanding indebtedness under the Credit Agreement accrues, at the Company’s option, at a rate based on either (i) the prime corporate lending rate minus the applicable margin of 0.25% or (ii) the LIBOR rate plus the applicable margin of 0.75% to 1.50%. The applicable margins are based on the average availability during the prior three months. The Credit Agreement’s term expires July 27, 2012.

There were no outstanding borrowings under the Credit Agreement as of April 30, 2011 or January 29, 2011. As of April 30, 2011 and January 29, 2011, total remaining borrowing capacity, after subtracting letters of credit, was $417.9 million and $418.5 million, respectively.

The Credit Agreement contains restrictions regarding the Company’s and related subsidiaries’ ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur certain specified types of indebtedness or liens in excess of certain specified amounts, to make distributions on the Company’s stock, to make certain investments or loans to other parties, or to engage in certain lending, borrowing or other commercial transactions with subsidiaries, affiliates or employees.

Under the Credit Agreement, the Company may be obligated to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 in certain circumstances. The obligations of the Company under the Credit Agreement are secured by interests in substantially all of the Company’s personal property excluding store and distribution center equipment and fixtures. As of April 30, 2011, the Company was in compliance with the terms of the Credit Agreement.

The Company believes that cash flows generated by operations and funds available under the Credit Agreement will be sufficient to satisfy our current capital requirements through fiscal 2011. Normal capital requirements are expected to consist primarily of capital expenditures related to the addition of new stores, remodeling of existing stores, enhanced information technology and improved distribution infrastructure. Other investment opportunities, such as potential strategic acquisitions or investments or store expansion rates substantially in excess of those presently planned, may require additional funding. Currently, the Company plans to open approximately 34 new Dick’s stores and three Golf Galaxy stores during fiscal 2011. The Company currently plans to lease all of its fiscal 2011 new stores. This level of store expansion is significantly lower than levels prior to fiscal 2009 largely as a result of a lack of new real estate development. Currently, the Company also plans to remodel 14 Dick’s stores and relocate one Golf Galaxy store in fiscal 2011. The Company currently anticipates receiving landlord allowances at 12 of its planned fiscal 2011 new stores and remodels totaling approximately $29.2 million. The amount and timing of receipt of these allowances depend, among other things, upon the timing of new store construction and the ability of landlords to satisfy their contractual obligations.

The Company has a capital appropriations committee that approves all capital expenditures in excess of certain amounts and groups and prioritizes all capital projects among required, discretionary and strategic. The Company currently expects capital expenditures, net of deferred construction allowances and proceeds from sale leaseback transactions, to be approximately $197 million in fiscal 2011.

The Company’s off-balance sheet contractual obligations and commercial commitments as of April 30, 2011 primarily relate to operating lease obligations, future minimum guaranteed contractual payments and letters of credit. The Company has excluded these items from the Consolidated Balance Sheets in accordance with generally accepted accounting principles. The Company does not believe that any of these arrangements have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or resources. There have been no significant changes in the Company’s off-balance sheet contractual obligations or commercial commitments since the end of fiscal 2010.

There have been no material changes in the Company’s market risk exposures from those reported in our Annual Report on Form 10-K for the year ended January 29, 2011.

During the first quarter of fiscal 2011, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the quarter, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, management, including the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report (April 30, 2011).

There are inherent limitations in the effectiveness of any control system, including the potential for human error and the circumvention or overriding of the controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of simple error or mistake. An effective control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our control system can prevent or detect all error or fraud. Finally, projections of any evaluation or assessment of effectiveness of a control system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance with policies and procedures.

The Company is a defendant in Tamara Barrus, et al. v Dick’s Sporting Goods, Inc. et al. (“Barrus”), a case that makes claims concerning alleged failures to pay wages and overtime wages as required by the Fair Labor Standards Act (“FLSA”) and New York law. The case was filed in May of 2005 in the U.S. District Court for the Western District of New York. In their complaint, in addition to the unpaid wage and overtime allegations, plaintiffs seek liquidated damages, injunctive relief and attorneys’ fees and costs. In September 2006, a magistrate judge for the U.S. District Court for the Western District of New York conditionally certified a class for notice purposes under the FLSA, which the U.S. District Judge upheld. The parties and the court agreed to stay the litigation pending an attempt to resolve all claims through mediation. Mediation sessions were held in April and August 2007 and November 2008 and these attempts to resolve the case through mediation were unsuccessful. In December 2009, plaintiffs filed an amended complaint adding five individual defendants, claims for allegedly unpaid wages and overtime under the laws of thirty-five states, and claims under the Employee Retirement Income Security Act (“ERISA”) and Racketeer Influenced and Corrupt Organizations Act (“RICO”). In August 2010, the court dismissed plaintiffs’ state law claims (except those arising under New York law), ERISA claims and RICO claims.

In September 2010, following the dismissal of the state law claims in Barrus (except those arising under New York law), state wage and hour class action complaints were filed against the Company in Connecticut, Minnesota, Illinois, Ohio, Missouri, Delaware, Indiana, Kansas, Pennsylvania, Michigan, Nebraska, New Jersey, South Carolina, Maryland, Vermont, North Carolina, Maine, Tennessee, West Virginia, Colorado, Florida and Massachusetts (collectively, the “State Claims”). In these actions, plaintiffs assert claims similar to those in the Barrus case and plaintiffs are seeking remedies that include (to the extent applicable in each state) injunctive relief, unpaid wages (including fringe benefits), liquidated damages, attorneys’ fees, expenses, expert fees and an award of interest.

On January 28, 2011, the Company and attorneys for a group of plaintiffs filed a settlement agreement in the United States District Court for the Western District of New York to settle Barrus and the State Claims. The settlement, which is subject to court approval, covers wage and hour claims under the laws of 36 states. Under the settlement, the total amount to be paid will depend on the number of claims that are submitted by class members with a maximum settlement amount not to exceed $15 million plus interest and taxes. On February 3, 2011, the court granted preliminary approval to the parties’ settlement agreement and set a fairness hearing for June 1, 2011. The settlement and related fees resulted in a pre-tax charge during the fiscal fourth quarter of 2010 of approximately $10.8 million ($6.5 million after tax).

In addition to the above matters, various lawsuits, regulatory proceedings and other claims arising in the normal course of business are pending or may be initiated against us. These claims primarily relate to commercial, intellectual property, advertising, real estate and employment matters. The outcome of these claims cannot be predicted with certainty and some of these claims may be disposed of unfavorably to us. Based on currently available information, including legal defenses available to us, we do not believe that the outcome of these claims will have a material adverse effect on our consolidated financial position, liquidity or results of operations.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended January 29, 2011 as filed with the Securities and Exchange Commission on March 18, 2011, which could materially affect our business, financial condition, financial results or future performance. Reference is also made to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements” of this report, which is incorporated herein by reference.

The following table sets forth repurchases of our common stock during the first quarter of 2011:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 23, 2011 on its behalf by the undersigned, thereunto duly authorized.

Attached as Exhibits 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011 formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balance Sheets — Unaudited, (ii) the Consolidated Statements of Income — Unaudited, (iii) the Consolidated Statements of Comprehensive Income — Unaudited, (iv) the Consolidated Statement of Changes in Stockholder’s Equity — Unaudited, (v) the Consolidated Statements of Cash Flows — Unaudited, and (vi) related notes to these unaudited consolidated financial statements tagged as blocks of text.

The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.