Business context and reporting period
DICK’S Sporting Goods, Inc. is a sporting-goods retailer operating DICK’S and Golf Galaxy stores and e-commerce businesses. The filing is a Form 10-Q for the 13 and 26 weeks ended July 30, 2011. Although the request identifies “2010 Q2,” the supplied filing reports fiscal 2011 Q2 and compares it with 2010.
At quarter-end, the company operated 455 DICK’S stores and 81 Golf Galaxy stores, with approximately 26.5 million square feet. Results are seasonal; management says revenue and earnings are typically greatest in the fourth quarter.
Financial results
| Metric | 13 weeks ended July 30, 2011 | 13 weeks ended July 31, 2010 | 26 weeks ended July 30, 2011 | 26 weeks ended July 31, 2010 |
|---|---|---|---|---|
| Net sales | $1,306.7 million | $1,226.1 million | $2,420.5 million | $2,273.6 million |
| Gross profit | $401.1 million | $360.1 million | $731.5 million | $662.4 million |
| Income from operations | $111.7 million | $88.1 million | $176.1 million | $135.1 million |
| Net income | $73.8 million | $51.5 million | $111.3 million | $77.7 million |
| Diluted EPS | $0.59 | $0.43 | $0.89 | $0.64 |
| Gross margin | 30.69% | 29.37% | 30.22% | 29.13% |
| Operating margin | 8.55% | 7.18% | 7.28% | 5.94% |
| Net margin | 5.65% | 4.20% | 4.60% | 3.42% |
Quarterly sales rose 6.6% and year-to-date sales rose 6.5%. Same-store sales increased 2.5% for the quarter and 2.3% year to date. Quarterly diluted EPS and net income include an $8.7 million after-tax investment-sale gain, or $0.07 per diluted share.
Cash flow, balance sheet and liquidity
- For the first half, operating cash flow was $126.0 million versus $66.7 million a year earlier; investing cash flow was negative $76.4 million, including $85.6 million of capital expenditures; financing cash flow was positive $30.8 million. Cash increased $80.4 million to $626.4 million.
- Inventory was $1,026.9 million at July 30, 2011, up from $896.9 million at January 29, 2011. Management notes that inventory investment is seasonal.
- Total current assets were $1,787.3 million and current liabilities were $955.1 million. Other long-term debt and leasing obligations totaled approximately $140.4 million, including the current portion.
- No borrowings were outstanding under the credit agreement. Remaining borrowing capacity, net of letters of credit, was $419.6 million. The agreement expires July 27, 2012; the company reported compliance with its terms.
Material changes and management commentary
- Quarterly gross margin expanded 132 basis points; year-to-date gross margin expanded 109 basis points. Management attributed the improvement mainly to higher merchandise margins, sales mix and lower clearance levels.
- SG&A rose in dollars but declined as a share of sales: 26 basis points in the quarter and 37 basis points year to date. Store payroll leverage and lower advertising rates were partly offset by higher administrative costs and bankcard charges.
- Same-store sales growth slowed from 5.7% to 2.5% in the quarter and from 6.8% to 2.3% year to date. Apparel, footwear and golf improved; outdoor categories declined. Management cited wet and cooler weather as a headwind to outdoor sales early in the quarter.
- E-commerce same-store sales grew 31.9% in the quarter and 28.6% year to date. DICK’S and Golf Galaxy store same-store sales increased 1.7% and 4.0%, respectively, in the quarter.
- Operating cash flow improvement included higher earnings and a favorable year-over-year change in income taxes payable. Management said bonus depreciation and stock-option exercises contributed to lower income-tax payments, so cash-flow growth includes a timing-related tax benefit.
Outlook, risks and contingencies
- Management expects cash from operations and available credit to meet current capital needs through fiscal 2011. Planned fiscal 2011 activity includes approximately 36 new DICK’S stores, 14 DICK’S remodels and one completed Golf Galaxy relocation. Expected capital expenditures, net of landlord allowances and sale-leaseback proceeds, are approximately $197 million.
- The company anticipated approximately $26.5 million of landlord allowances for 11 planned new stores and remodels; timing and receipt depend on construction and landlord performance.
- Key disclosed risks include weak consumer spending and economic conditions, competition, sales and seasonal volatility, inventory and vendor cost pressures, store-site availability, supply-chain disruptions, cybersecurity and systems risks, product liability and regulation, and litigation.
- A wage-and-hour class-action settlement covering claims under the laws of 36 states received final court approval on July 29, 2011. The maximum settlement was $15 million plus interest and taxes; the filing says the settlement and related fees were charged in fiscal Q4 2010. The appeal-notice deadline was August 29, 2011.
- The company said other ordinary-course claims were not expected, based on information then available, to materially adversely affect its financial position, liquidity or results. Interim results are unaudited and not necessarily indicative of full-year performance.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2011, not Q2 2010.
- Assess earnings excluding the $8.7 million after-tax investment gain and determine the sustainability of margin improvement and same-store sales trends.
- Review inventory growth, seasonal working-capital needs and the tax-timing contribution to operating cash flow.
- Track planned store openings, remodel spending, capital expenditures and receipt of landlord allowances against management’s estimates.
- Verify the final settlement payment and any appeal developments, and review the credit agreement’s July 2012 expiration and borrowing conditions.