DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2009 Q2, but the filing is for the 13 and 26 weeks ended July 31, 2010, compared with periods ended August 1, 2009. The financial statements are unaudited.
Business context
The company operates sporting goods, footwear and apparel stores, including DICK’S Sporting Goods and Golf Galaxy. At July 31, 2010, it operated 425 DICK’S stores and 91 Golf Galaxy stores, or 516 stores total. Results are seasonal, with revenue and earnings typically highest in the fiscal fourth quarter.
Financial results and liquidity
| Metric | 13 weeks ended July 31, 2010 | 26 weeks ended July 31, 2010 |
|---|---|---|
| Net sales | $1,226.1 million; up 8.8% | $2,273.6 million; up 9.0% |
| Gross profit / margin | $360.1 million / 29.37% | $662.4 million / 29.13% |
| Income from operations | $88.1 million | $135.1 million |
| Net income | $51.5 million | $77.7 million |
| Diluted earnings per share | $0.43 | $0.64 |
For the quarter, gross margin improved 187 basis points year over year and operating income rose from $63.8 million. For the six months, gross margin improved 227 basis points and operating income rose from $80.7 million. SG&A increased as a share of sales by 94 basis points for the quarter and 79 basis points for the six months; higher advertising, headquarters and technology costs contributed.
For the six months, operating cash flow was $66.7 million, down from $143.7 million. Capital expenditures were $61.6 million, net cash used in investing was $55.7 million, and cash increased $52.6 million to $278.2 million. Management attributed much of the year-over-year operating cash flow decline to the smaller favorable accounts-payable effect compared with the prior year.
At July 31, 2010, current assets were $1,385.0 million and current liabilities were $876.9 million. Cash was $278.2 million; revolving-credit borrowings were zero, and other long-term debt and leasing obligations totaled $140.8 million. Remaining credit-facility availability, net of letters of credit, was $418.2 million. The company reported compliance with its credit agreement.
Changes, outlook and risks
- Consolidated comparable sales rose 5.7% in the quarter and 6.8% for the six months, versus declines of 4.1% and 5.0% in the respective prior-year periods. The six-month comparison includes e-commerce in 2010 but not in 2009.
- Management cited higher merchandise margins, reduced Golf Galaxy clearance activity, and leverage of occupancy and distribution costs as drivers of gross-margin improvement. Sales growth reflected comparable-sales gains and new stores.
- The company planned to close 12 underperforming Golf Galaxy stores in Q3 2010 and estimated approximately $19.0 million of third-quarter pretax expenses, primarily future lease payments, severance and inventory liquidation. Management expected the closures to benefit future operating results.
- Fiscal 2010 plans included approximately 26 new DICK’S stores, two DICK’S relocations, two new Golf Galaxy stores and 11 DICK’S remodels. Expected capital expenditures, net of construction allowances and sale-leaseback proceeds, were approximately $145 million. Management believed operating cash flow and credit-facility availability would meet fiscal 2010 capital needs.
- Material risks discussed include weak consumer spending and economic conditions, competition, store-site availability and expansion execution, supplier and product availability, seasonality, technology and information-security risks, litigation, and credit-agreement restrictions. The filing reported no material change in market-risk exposures.
- A wage-and-overtime lawsuit remained pending; certain state-law, ERISA and RICO claims had been dismissed in August 2010. The company continued to contest class treatment and stated it was defending the case. It said other ordinary-course claims were not expected to materially harm its financial position, liquidity or results.
Important facts for investors to verify
- Confirm the correct period: the filing covers Q2 2010, not Q2 2009.
- Assess the sustainability of comparable-sales and gross-margin gains, including the differing e-commerce comparison basis.
- Track the timing, cash costs and expected benefits of the 12 planned Golf Galaxy closures.
- Monitor operating cash flow, inventory and accounts-payable movements, planned capital spending, and available credit capacity.
- Review subsequent developments in the wage-and-overtime litigation and any changes to the company’s fiscal 2010 plans or outlook.