DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 2, 2013, with comparisons to the periods ended October 27, 2012. This differs from the “2012 Q3” period in the request metadata. Financial statements are unaudited.
Business context and results
DICK’S is an omni-channel sporting goods retailer. At quarter-end it operated 552 DICK’S stores and 86 Golf Galaxy/specialty concept stores across 45 and 30 states, respectively. Results are seasonal, with sales and earnings typically higher in the fourth quarter.
| Metric | 13 weeks ended Nov. 2, 2013 | 13 weeks ended Oct. 27, 2012 | 39 weeks ended Nov. 2, 2013 | 39 weeks ended Oct. 27, 2012 |
|---|---|---|---|---|
| Net sales | $1,400.6M | $1,312.1M | $4,265.8M | $4,030.8M |
| Gross profit | $424.9M | $406.1M | $1,315.9M | $1,248.5M |
| Operating income | $79.1M | $82.2M | $313.8M | $312.6M |
| Net income | $50.0M | $50.1M | $199.0M | $161.0M |
| Diluted EPS | $0.40 | $0.40 | $1.58 | $1.28 |
| Gross margin | 30.34% | 30.95% | 30.85% | 30.97% |
| Operating margin | 5.64% | 6.26% | 7.36% | 7.75% |
| Net margin | 3.57% | 3.82% | 4.66% | 3.99% |
Performance drivers and material changes
- Quarterly sales rose 7%, primarily on store growth; reported same-store sales increased 0.3%. Adjusted for the fiscal-calendar shift, same-store sales rose 3.3%. The shift reduced quarterly sales comparisons by about $36M. eCommerce represented 6.5% of quarterly sales, versus 4.4%.
- Quarterly reported same-store sales were up 0.6% at DICK’S and down 4.7% at Golf Galaxy; adjusted for the calendar shift, they were up 3.4% and 2.2%, respectively.
- Quarterly gross margin declined 61 basis points, mainly from occupancy and shipping costs; merchandise margin declined 11 basis points. Operating income fell despite higher sales, while net income was essentially flat.
- For the 39-week period, sales increased about 6%, but same-store sales were flat as reported and down 0.4% adjusted for the calendar shift. eCommerce penetration increased to 6.0% from 4.0%.
- Year-to-date net income included a $4.3M after-tax estimated recovery of the previously impaired JJB Sports investment and a $4.7M after-tax non-cash impairment charge on a corporate aircraft held for sale. The prior-year period included a $27.6M after-tax JJB impairment charge.
- Year-to-date SG&A included a $7.9M non-cash aircraft impairment charge. A separate corporate aircraft was sold to an entity 50% owned by the CEO for $11.0M, its carrying value; the filing says the related-party transaction was approved under company policy.
Cash flow, balance sheet, and liquidity
- For the 39 weeks, operating cash flow was a use of $57.7M, versus a source of $83.3M a year earlier. The filing attributes the deterioration largely to working-capital movements, including higher tax payments and inventory investment.
- Investing cash outflow was $245.9M, including $196.9M of capital expenditures, up from $157.4M. Financing cash inflow was $24.1M, including $116.4M of net revolving-credit borrowings, partly offset by repurchases and dividends.
- Cash declined $279.6M during the period to $65.6M. Inventory was $1,570.0M, versus $1,096.2M at fiscal year-end; management describes inventory build as seasonal ahead of peak selling periods.
- At November 2, 2013, revolving borrowings were $116.4M, with $370.6M of remaining borrowing capacity after letters of credit. The $500M facility matures December 5, 2016; the company reported compliance with its covenants. Cash plus disclosed remaining capacity provides liquidity, but the filing notes seasonal working-capital needs.
- Other long-term debt and leasing obligations were $14.1M, in addition to revolving borrowings. Total assets were $3,347.9M and stockholders’ equity was $1,698.0M.
Outlook, risks, and other disclosures
- No specific earnings or sales guidance is provided in the supplied filing text. Management said it expects operating cash flow and credit-facility availability to meet current capital requirements through fiscal 2013; additional acquisitions, repurchases, investments, or faster expansion could require more funding.
- Fiscal 2013 investment priorities included new stores, remodels, and omni-channel, technology, and supply-chain infrastructure. The company reported 34 new DICK’S stores, one Golf Galaxy store, and two Field & Stream stores opened in the 39-week period; its fiscal-year store development plan was completed by November 8.
- Key risks cited include economic conditions and consumer demand, competition, inventory and merchandising execution, store expansion costs and site availability, supply-chain and vendor disruptions, eCommerce and information-system disruptions, weather and seasonality, product and litigation risks (including firearms and ammunition), and dependence on key executives.
- The company reported no material changes in market-risk exposure or internal controls during the quarter. It said ordinary-course legal proceedings were not expected to materially adversely affect financial position or results. Off-balance-sheet arrangements include operating leases, guaranteed contractual payments, and letters of credit; the company did not expect them to have a material effect.
- The board declared a subsequent quarterly dividend of $0.125 per share, payable December 27, 2013. The company repurchased $105.6M of shares during the 39 weeks under a $1B five-year authorization; $894.4M remained available at quarter-end.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for Q3 2013, not Q3 2012.
- Assess whether comparable-sales momentum and Golf Galaxy performance improved after adjustment for the shifted retail calendar.
- Track gross-margin pressure from occupancy, shipping, and eCommerce fulfillment costs, alongside merchandise margins.
- Monitor inventory, operating cash flow, seasonal liquidity needs, revolving borrowings, and facility availability.
- Review the assumptions and accounting treatment for the JJB recovery and aircraft impairment, as well as the related-party aircraft sale.
- Evaluate the returns on the company’s substantial store, remodel, and omni-channel investments and its ongoing repurchases and dividends.