FORM 10-Q
DICK’S SPORTING GOODS, INC.
(412) 809-0100(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes No X
The number of shares of common stock and Class B common stock outstanding at August 26, 2003 was 15,936,244 and 7,164,683, respectively.
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TABLE OF CONTENTS
INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See accompanying notes to unaudited condensed consolidated financial statements.
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1. Basis of Presentation
The accompanying unaudited condensed 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. 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 subsidiary.
2. Unaudited Interim Financial Data
The interim financial information as of August 2, 2003 and for the 13 and 26 weeks ended August 2, 2003 and August 3, 2002 is unaudited and has been prepared on the same basis as the audited 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 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 February 1, 2003 dated April 29, 2003, as filed with the Securities and Exchange Commission. Operating results for the 13 and 26 weeks ended August 2, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004 or any other period.
3. Earnings Per Share
Basic earnings per share are based upon the weighted average number of shares outstanding. Diluted earnings per share are based upon the weighted average number of shares outstanding plus the incremental shares that would be outstanding assuming exercise of dilutive stock options and warrants, calculated by applying the treasury stock method.
We are reporting earnings per share in accordance with accounting principles generally accepted in the United States of America and are disclosing earnings per share on a pro-forma basis. We effected an initial public offering on October 16, 2002. The pro-forma amounts assume that the initial public offering took place at the beginning of the 13 and 26 weeks ended August 3, 2002, and excludes interest expense, net of tax, of $131 and $262 for the 13 and 26 weeks ended August 3, 2002, respectively, on the portion of our revolving credit facility that would have been paid down with the proceeds to us from the initial public offering. The pro-forma results also include an increase in shares for basic and diluted earnings per share purposes as if the initial public offering was executed prior to the beginning of the 13 and 26 weeks ended August 3, 2002. The Company’s management believes the use of pro-forma results for the 13 and 26 weeks ended August 3, 2002 provides a more meaningful comparison to the 13 and 26 weeks ended August 2, 2003 results due to the significant increase in share count since October 15, 2002 when the Company completed its initial public offering, and the related reduction in interest expense due to the application of the net proceeds thereof.
The computations for basic and diluted earnings per share are as follows:
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4. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense has been recognized where the exercise price of the option was equal to or greater than the market value of the underlying common stock on the date of grant. The pro-forma net income and earnings per share in the following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
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5. Newly Issued Accounting Pronouncements
In November 2002, the FASB issued Emerging Issues Task Force Issue No. 02-16 (“Issue 02-16”), “Accounting by a Reseller for Cash Consideration Received from a Vendor.” Issue 02-16 addresses the issue of how a reseller of a vendor’s product should account for cash consideration received from a vendor. The adoption of Issue 02-16, effective with agreements entered into after November 21, 2002, did not have a material impact on the Company’s consolidated financial position or results of operations.
6. Construction In Progress – Leased Facilities
In accordance with Emerging Issues Task Force No. 97-10 (“Issue 97-10”), “The Effect of Lessee Involvement in Asset Construction,” the Company is considered to be the owner of certain buildings, for accounting purposes only, for various building leases during the construction period. As such, the Company has recognized a non-cash asset and related non-cash obligation of $7.1 million as of August 2, 2003. At the conclusion of the construction period, the asset and related liability will be removed from the balance sheet in a manner similar to a sale-leaseback transaction if certain conditions are met. The application of Issue 97-10 has no impact to cash balances, net cash flow, the statement of operations or cash obligations.
7. Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year presentation. RESULTS OF OPERATIONS" -->
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. Accordingly, 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,” “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 label business, projections of our future profitability, results of operations, capital expenditures or our financial condition or other “forward-looking” information and includes statements about revenues, earnings, spending, margins, liquidity, store openings and operations, inventory, exclusive branded 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 2003 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: the intense competition in the sporting goods industry and actions by our competitors; our inability to manage our growth, open new stores on a timely basis and expand successfully in new and existing markets; the availability of retail store sites on terms acceptable to us; the cost of real estate and other items related to our stores; our ability to access adequate capital; changes in consumer demand; risks relating to product liability claims and the availability of sufficient insurance coverage relating to those claims; our relationships with our suppliers, distributors or manufacturers and their ability to provide us with sufficient quantities of products; any serious disruption at our distribution or return facility; the seasonality of our business; the potential impact of natural disasters or national and international security concerns on us or the retail environment; risks relating to the regulation of the products we sell, such as hunting rifles; risks associated with relying on foreign sources of production; risks relating to implementation of new management information systems; risks relating to operational and financial restrictions imposed by our credit facility; factors associated with our pursuit of strategic acquisitions; the loss of our key executives, especially Edward W. Stack, our Chairman and Chief Executive Officer; our ability to meet our labor needs; changes in general economic and business conditions and in the specialty retail or sporting goods industry in particular; changes in our business strategies and other factors discussed in other reports or filings filed by us with the Securities and Exchange Commission.
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The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net sales and profits are realized during the fourth quarter of the Company’s fiscal year, which is due, in part, to the holiday selling season and, in part, to our sales of cold weather sporting goods and apparel. Any decrease in fiscal fourth quarter sales, whether because of a slow holiday selling season, unseasonable weather conditions, or otherwise, could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year.
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 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.
OVERVIEW
The Company 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. As of August 2, 2003, the Company operated 151 stores in 27 states throughout the Eastern half of the United States.
RESULTS OF OPERATIONS
The following table presents for the periods indicated the Company’s Condensed Consolidated Statements of Income data as a percentage of the Company’s net sales:
Cost of goods sold includes the cost of merchandise, inventory shrinkage, 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.
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.
Pre-opening expenses consist primarily of marketing, payroll and recruiting costs incurred prior to a new store opening.
Interest expense results primarily from interest on our revolving credit facility.
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13 WEEKS ENDED AUGUST 2, 2003 COMPARED TO THE 13 WEEKS ENDED AUGUST 3, 2002
Net Sales
Net sales increased by $43.4 million, or 14%, to $353.5 million for the 13 weeks ended August 2, 2003, from $310.1 million for the 13 weeks ended August 3, 2002. This increase resulted from a comparable store sales increase of $4.4 million, or 1.5%, and an increase of $39.0 million in non-comparable store sales. The increase in comparable store sales is attributable to sales increases in water sports, women’s apparel, team sports and exercise. These increases were partially offset by lower sales of in-line skates, bikes and fishing tackle.
Gross Profit
Gross profit increased by $16.1 million, or 20%, to $96.5 million for the 13 weeks ended August 2, 2003, from $80.4 million for the 13 weeks ended August 3, 2002. As a percentage of net sales, gross profit increased to 27.3% for the 13 weeks ended August 2, 2003, from 25.9% for the 13 weeks ended August 3, 2002. The gross profit percentage was favorably impacted by improved merchandise margin, lower shrink expense and improved productivity at the Company’s distribution center.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $11.3 million to $70.3 million for the 13 weeks ended August 2, 2003, from $59.0 million for the 13 weeks ended August 3, 2002. As a percentage of net sales, selling, general and administrative expenses increased from 19.0% for the 13 weeks ended August 3, 2002 to 19.9% for the 13 weeks ended August 2, 2003. The percentage increase was due primarily to increased net advertising expense, expenses relating to additional employer payroll taxes required as a result of stock option exercises and additional professional and insurance expenses associated with being a public company for the 13 weeks ended August 2, 2003 as compared to being a private company for the 13 weeks ended August 3, 2002.
Pre-Opening Expenses
Pre-opening expenses increased by $0.2 million to $1.2 million for the 13 weeks ended August 2, 2003, from $1.0 million for the 13 weeks ended August 3, 2002. Pre-opening expenses were for the addition of two new stores for the 13 weeks ended August 2, 2003, compared to three new stores for the 13 weeks ended August 3, 2002.
Income from Operations
Income from operations increased by $4.7 million, or 23%, to $25.1 million for the 13 weeks ended August 2, 2003, from $20.4 million for the 13 weeks ended August 3, 2002. The increase in income from operations is primarily attributable to a higher gross margin percentage combined with operating income from non-comparable stores.
Gain on Sale of Investment
Gain on sale of investment of $1.2 million for the 13 weeks ended August 2, 2003 resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider.
Interest Expense, Net
Interest expense decreased by $0.4 million to $0.5 million for the 13 weeks ended August 2, 2003, from $0.9 million for the 13 weeks ended August 3, 2002. This decrease was due to lower interest rates and lower average borrowings.
Provision for Income Taxes
The Company’s effective tax rate was 40% for both the 13 weeks ended August 2, 2003 and the 13 weeks ended August 3, 2002.
Net Income
Net income increased by $3.8 million, or 32%, to $15.5 million for the 13 weeks ended August 2, 2003, from $11.7 million for the 13 weeks ended August 3, 2002.
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26 WEEKS ENDED AUGUST 2, 2003 COMPARED TO THE 26 WEEKS ENDED AUGUST 3, 2002
Net sales increased by $71.4 million, or 12%, to $658.2 million for the 26 weeks ended August 2, 2003, from $586.8 million for the 26 weeks ended August 3, 2002. This increase resulted from a comparable store sales increase of $2.3 million, or 0.4%, and an increase of $69.1 million in non-comparable store sales. The increase in comparable store sales is attributable to sales increases in water sports, team sports and women’s apparel. These increases were partially offset by lower sales of in-line skates, fishing tackle and golf.
Gross profit increased by $29.0 million, or 19%, to $179.4 million for the 26 weeks ended August 2, 2003, from $150.4 million for the 26 weeks ended August 3, 2002. As a percentage of net sales, gross profit increased to 27.3% for the 26 weeks ended August 2, 2003, from 25.6% for the 26 weeks ended August 3, 2002. The gross profit percentage was favorably impacted by improved merchandise margin, lower shrink expense and improved productivity at the Company’s distribution center.
Selling, general and administrative expenses increased by $21.1 million to $139.1 million for the 26 weeks ended August 2, 2003, from $118.0 million for the 26 weeks ended August 3, 2002. As a percentage of net sales, selling, general and administrative expenses increased from 20.1% for the 26 weeks ended August 3, 2002 to 21.1% for the 26 weeks ended August 2, 2003. The percentage increase was due primarily to higher information systems costs, increased net advertising expense and higher professional and insurance expenses associated with being a public company for the 26 weeks ended August 2, 2003 as compared to being a private company for the 26 weeks ended August 3, 2002.
Pre-opening expenses increased by $0.4 million to $3.6 million for the 26 weeks ended August 2, 2003, from $3.2 million for the 26 weeks ended August 3, 2002. Pre-opening expenses were for the addition of ten new stores and one relocated store for the 26 weeks ended August 2, 2003, compared to nine new stores and three relocated stores for the 26 weeks ended August 3, 2002.
Income from operations increased by $7.5 million, or 26%, to $36.7 million for the 26 weeks ended August 2, 2003, from $29.2 million for the 26 weeks ended August 3, 2002. The increase in income from operations is primarily attributable to a higher gross margin percentage combined with operating income from non-comparable stores.
Gain on sale of investment of $1.2 million for the 26 weeks ended August 2, 2003 resulted from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider.
Interest expense decreased by $0.7 million to $1.0 million for the 26 weeks ended August 2, 2003, from $1.7 million for the 26 weeks ended August 3, 2002. This decrease was due to lower interest rates and lower average borrowings.
The Company’s effective tax rate was 40% for both the 26 weeks ended August 2, 2003 and the 26 weeks ended August 3, 2002.
Net income increased by $5.7 million, or 34%, to $22.1 million for the 26 weeks ended August 2, 2003, from $16.4 million for the 26 weeks ended August 3, 2002.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary capital requirements are for inventory, capital improvements, and pre-opening expenses to support expansion plans, as well as for various investments in store remodeling, store fixtures and ongoing infrastructure improvements. The Company’s main sources of liquidity for the 26 weeks ended August 2, 2003 have been our net income, borrowings under our revolving credit facility, proceeds and related tax benefit from the exercise of stock options and proceeds from sale-leaseback transactions.
Net cash used in operating activities was $33.9 million for the 26 weeks ended August 2, 2003 compared to $2.9 million for the 26 weeks ended August 3, 2002. All of the Company’s revenues are realized at the point-of-sale in the stores. Thus, net sales are essentially on a cash basis. Changes in inventory turnover affect net cash used in operating activities. Trailing four quarters inventory turnover was 3.60 and 3.67 as of August 2, 2003 and August 3, 2002, respectively. The reduction in inventory turn is attributable to an increase in in-transit import inventory where we take possession of inventory overseas at the point of shipment. Accounts payable was 50% of inventory at August 2, 2003 and 51% of inventory at August 3, 2002.
Net cash used in investing activities was $4.9 million for the 26 weeks ended August 2, 2003 compared to $11.1 million for the 26 weeks ended August 3, 2002. We use cash in investing activities to build new stores and remodel or relocate existing stores. Furthermore, net cash used in investing activities includes purchases of information technology assets and expenditures for distribution facilities and corporate headquarters. During the 26 weeks ended August 2, 2003 and August 3, 2002, the Company opened ten and nine new stores, respectively, and relocated one and three stores during the 26 weeks ended August 2, 2003 and August 3, 2002, respectively. During the 26 weeks ended August 2, 2003, the Company completed one building sale-leaseback of $5.0 million for which the capital expenditures were incurred in 2002. The Company generated $1.5 million in proceeds from the sale of a portion of the Company’s non-cash investment in its third-party internet commerce provider.
Net cash provided by financing activities was $43.9 million for the 26 weeks ended August 2, 2003 compared to $18.9 million for the 26 weeks ended August 3, 2002. Financing activities consist primarily of borrowings under the revolving credit facility and proceeds from transactions in the Company’s common stock. During the 26 weeks ended August 2, 2003, the Company received proceeds of $12.8 million from the exercise of employee stock options and purchases of common stock under the employee stock purchase plan.
The Company’s liquidity and capital needs have generally been met by cash from operations and borrowings under the revolving credit facility. This credit facility provides for borrowings in an aggregate outstanding principal amount of up to $180 million, including up to $25 million in the form of letters of credit. The actual availability under the credit facility is 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. Outstanding borrowings on the credit facility, as of August 2, 2003 and February 1, 2003 were $21.6 million and $0, respectively. Total remaining borrowing capacity, after subtracting letters of credit as of August 2, 2003 was $137.0 million. Interest on outstanding indebtedness under the credit facility currently accrues at the lender’s prime commercial lending rate or, if the Company elects, at the one month LIBOR plus 1.25% based on the Company’s current interest coverage ratio. The Company’s obligations under the credit facility are secured by interests in substantially all of the Company’s personal property excluding store and distribution center equipment and fixtures. The credit facility matures on May 30, 2006. The Company has used the credit facility to meet seasonal working capital requirements and to support the Company’s growth.
The credit facility contains restrictions regarding the Company’s and related subsidiary’s ability, among other things, to merge, consolidate or acquire non-subsidiary entities, to incur indebtedness or liens, to pay dividends or make distributions on the Company’s stock, to make investments or loans, or to engage in transactions with affiliates. The Company is also required to comply with a fixed charge coverage ratio.
Cash requirements in fiscal 2003, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new stores and investments in information technology. The Company plans to open 22 new stores during fiscal 2003. The Company also anticipates incurring additional expenditures for remodeling or relocating certain existing stores as well as other infrastructure improvements. While there can be no assurance that current expectations will be realized, the Company expects net capital expenditures in fiscal 2003 to be approximately $28.0 million.
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The Company believes that existing cash flows generated from operations and funds available under our credit facility will be sufficient to satisfy our capital requirements through fiscal 2003. Other new business opportunities or store expansion rates substantially in excess of those presently planned may require additional funding.
Contractual Obligations and Other Commercial Commitments
The only off-balance sheet contractual obligations and commercial commitments as of August 2, 2003 relate to operating lease obligations and letters of credit. The Company has excluded these items from the balance sheet in accordance with accounting principles generally accepted in the United States of America.
The following table summarizes the Company’s material contractual obligations, including both on-and off-balance sheet arrangements in effect at August 2, 2003:
The following table summarizes the Company’s other commercial commitments, including both on-and off-balance sheet arrangements, in effect at August 2, 2003:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company’s net exposure to interest rate risk will consist primarily of borrowings under the revolving credit facility. The Company’s revolving credit facility bears interest at rates that are benchmarked either to U.S. short-term floating rate interest rates or one-month LIBOR rates, at the Company’s election. The aggregate balance outstanding under the revolving credit facility as of August 2, 2003 and February 1, 2003 totaled $21.6 million and $0, respectively. The impact on the Company’s annual net income of a hypothetical one percentage point interest rate change on the average outstanding balances under the revolving credit facility would be approximately $0.5 million based upon fiscal 2002 average borrowings.
IMPACT OF INFLATION
The Company does not believe that operating results have been materially affected by inflation during the preceding three fiscal years. There can be no assurance, however, that operating results will not be adversely affected by inflation in the future.
TAX MATTERS
Presently, the Company does not believe that there are any tax matters that could materially affect the consolidated financial statements.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15 at the end of the reporting period of this Quarterly Report on Form 10-Q. This evaluation was conducted under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer. The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in accordance with the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls since the date the controls were evaluated.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company held on June 3, 2003, the stockholders elected two Class A directors to serve until their terms expire in 2006, approved the Company’s 2002 Stock Plan and approved the Company’s Employee Stock Purchase Plan.
The table below shows the results of the stockholders’ voting:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
b. Reports on Form 8-K:
During the second quarter of 2003 and through September 2, we furnished to the Securities and Exchange Commission a Form 8-K dated August 21, 2003, announcing our second quarter 2003 financial results.
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SIGNATURES
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 September 3, 2003 on its behalf by the undersigned, thereunto duly authorized.
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