DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period: 13 weeks ended May 2, 2020, compared with the 13 weeks ended May 4, 2019. The request metadata says “2019 Q1,” but the supplied filing is for the first quarter of fiscal 2020. Amounts below are in U.S. dollars.
Business context and results
DICK’S operates sporting-goods stores and e-commerce, along with Golf Galaxy, Field & Stream and GameChanger. COVID-19 drove temporary store closures beginning March 18, 2020 and materially affected quarterly results. Same-store sales had risen 7.9% through March 10, before the disruption.
- Net sales were $1.333 billion, down 30.6%; consolidated same-store sales fell 29.5%.
- Gross profit was $219.3 million, down 61.1%. Gross margin was 16.45%, versus 29.35% a year earlier.
- Operating loss was $186.2 million, versus operating income of $76.1 million; operating margin was -13.96%, versus 3.96%.
- Net loss was $143.4 million, or $1.71 per diluted share, versus net income of $57.5 million, or $0.61 per diluted share.
- Cost of goods sold, including occupancy and distribution, was 83.55% of sales versus 70.65%. SG&A was $403.2 million, down 17.2% in dollars but up to 30.24% of sales from 25.36%.
- After store closures, e-commerce sales grew 210%; e-commerce represented approximately 39% of quarterly sales, versus approximately 13% a year earlier. Curbside contactless pickup accounted for over 40% of online business during that period.
Cash flow, liquidity and debt
- Operating cash flow was negative $214.9 million, compared with negative $222.2 million. Investing cash flow was negative $59.6 million, primarily capital expenditures; financing cash flow was positive $1.689 billion.
- Cash and equivalents were $1.484 billion at May 2, versus $69.3 million at February 1, 2020. The increase chiefly reflected borrowing and convertible-note proceeds.
- Revolving-credit borrowings were $1.429 billion, with $213.8 million of remaining capacity after letters of credit, under the amended $1.855 billion facility. The facility includes a minimum adjusted-availability covenant and other restrictions.
- The company issued $575 million principal amount of 3.25% convertible senior notes due 2025, receiving $557.7 million net of issuance expenses. The balance-sheet carrying value was $398.1 million; this reflects the accounting separation of debt and equity components. The company said it intended to repay principal in cash, subject to available liquidity.
- Gross capital expenditures were $59.6 million. The company paid $28.1 million in dividends during the quarter, then temporarily suspended dividends and share repurchases in response to COVID-19.
Material changes and unusual items
- Gross margin pressure reflected fixed-cost occupancy deleverage, lower merchandise margins and higher e-commerce shipping and fulfillment costs. Merchandise margin was affected by sales mix, promotions and $28 million of inventory write-downs.
- The quarter included approximately $34 million of incremental teammate compensation and safety costs and $28 million of inventory write-downs related to COVID-19. The reported net loss included $41.8 million of these costs net of tax, or $0.50 per diluted share.
- Operating expenses benefited from approximately $93.7 million of reductions associated with temporary closures, partly offset by compensation and safety costs. CARES Act employee-retention tax credits reduced operating expenses by approximately $16.6 million.
- Interest expense rose to $8.0 million from $3.1 million, primarily due to higher average revolver borrowings and interest on the new notes. Other expense was $13.5 million, versus other income of $6.7 million, substantially reflecting changes in deferred-compensation investment values and corresponding SG&A adjustments.
- The prior-year quarter included a $5.6 million after-tax non-cash asset impairment charge and a $4.7 million after-tax benefit from settlement of a previously accrued litigation contingency.
Outlook, risks and contingencies
No formal fiscal-year earnings or sales guidance is provided in the supplied filing. Management said the pandemic’s duration and economic effects prevented a reliable estimate of its full impact, and expected adverse reported results in the second quarter and possibly beyond. It reported that approximately 80% of stores were open to the public by the end of May; same-store sales for the first four weeks of the second quarter were down approximately 4% year over year. Management expected to continue reopening stores through the rest of the second quarter and into the third quarter.
Management believed available cash, operating cash flows and credit-facility availability would be sufficient for at least the next 12 months. This assessment is subject to substantial uncertainty: prolonged closures, renewed restrictions, weaker discretionary spending, supply-chain or fulfillment disruptions, excess inventory, asset impairment, and debt-service or covenant constraints could adversely affect liquidity and results. The company delayed planned removals of hunt departments from additional stores. It reported no material adverse effect expected from ordinary-course legal proceedings. Management reported effective disclosure controls and no material effect on internal controls from the remote-work changes.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers the quarter ended May 2, 2020, despite the request metadata indicating 2019 Q1.
- Track store reopenings, same-store sales, e-commerce performance and the extent to which sales recover without margin-diluting promotions or elevated fulfillment costs.
- Monitor revolver availability, borrowing-base covenant compliance, cash needs and the ability to meet the convertible notes’ cash repayment obligations.
- Assess inventory levels, markdowns and potential further write-downs or impairment charges as demand and consumer behavior evolve.
- Confirm the duration of the dividend and repurchase suspensions and the effect of the delayed hunt-business restructuring and reduced capital spending.