DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 weeks ended April 30, 2011, compared with the 13 weeks ended May 1, 2010. This differs from the request metadata’s “2010 Q1.” The interim financial statements are unaudited.
Business context and reporting period
DICK’S operates sporting goods, apparel, footwear and e-commerce businesses, including Golf Galaxy. At April 30, 2011, it operated 447 DICK’S stores and 81 Golf Galaxy stores across 42 and 30 states, respectively. Results are seasonal; management says revenue and earnings are typically greatest in the fiscal fourth quarter.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,113.8 million | $1,047.5 million |
| Gross profit / margin | $330.4 million / 29.67% | $302.2 million / 28.85% |
| Operating income / margin | $64.4 million / 5.79% | $47.0 million / 4.49% |
| Net income / margin | $37.5 million / 3.37% | $26.2 million / 2.50% |
| Diluted EPS | $0.30 | $0.22 |
| Operating cash flow | $(14.5) million | $(13.7) million |
| Capital expenditures | $32.6 million | $24.3 million |
Sales rose 6.3% and net income rose approximately 43%. Consolidated same-store sales increased 2.1%, versus 8.2% in the prior-year quarter. Gross margin improved 82 basis points; SG&A declined to 23.68% of sales from 24.17%. Interest expense was $3.5 million in both periods, and the effective tax rate was 39.6%, compared with 40.7%.
Cash and cash equivalents were $532.5 million at April 30, 2011, down from $546.1 million at January 29. Inventory was $1,054.9 million, up from $896.9 million. The company had no revolving-credit borrowings and reported $417.9 million of remaining borrowing capacity after letters of credit. Other long-term debt and leasing obligations totaled $139.6 million, plus a $1.0 million current portion. Current assets were $1,721.4 million and current liabilities were $946.7 million.
Operating cash use reflected the seasonal inventory build: inventory absorbed $158.0 million, partly offset by a $142.4 million increase in accounts payable. Financing cash flow was $35.5 million, primarily reflecting stock-option exercise proceeds and related excess tax benefits. Cash decreased $13.5 million during the quarter.
Material changes and management commentary
- Same-store sales growth slowed to 2.1% from 8.2%. DICK’S stores increased 1.4%, Golf Galaxy 3.3%, and e-commerce 25.2%. Apparel and footwear gains were partly offset by weakness in outdoor categories; management cited precipitation, flooding and cooler temperatures.
- Gross-margin improvement was attributed mainly to higher merchandise margins from sales mix and lower clearance levels. SG&A increased in dollars but fell as a percentage of sales, primarily due to lower advertising expense; corporate costs and debit interchange charges increased.
- Three DICK’S stores opened during the quarter, compared with five a year earlier. The company had 528 total stores at period-end, versus 515 a year earlier.
Outlook, risks and contingencies
Management said operating cash flow and available credit were expected to meet current capital needs through fiscal 2011. Plans included approximately 34 new DICK’S stores and three Golf Galaxy stores, remodeling 14 DICK’S stores, relocating one Golf Galaxy store, and approximately $197 million in fiscal-year capital expenditures net of allowances and sale-leaseback proceeds. The filing provides no specific earnings or sales guidance.
The credit agreement expires July 27, 2012, contains restrictions and may require a fixed-charge coverage ratio of at least 1.0-to-1.0 in specified circumstances; the company reported compliance at quarter-end. Management highlighted consumer spending and economic conditions, competition, seasonality, weather, supply-chain and vendor risks, store-site availability, systems and information security, and litigation among factors that could affect results. The filing says off-balance-sheet commitments had not changed significantly since fiscal year-end and were not expected to have a material effect.
A proposed settlement of wage-and-hour litigation covering claims under the laws of 36 states was awaiting court approval. The maximum settlement was $15 million plus interest and taxes, with the actual amount dependent on claims submitted. A related approximately $10.8 million pretax charge had been recorded in fiscal Q4 2010. Other ordinary-course claims were disclosed; management did not expect them, based on available information, to materially affect the company.
Important facts for investors to verify
- Confirm the reporting period: this is Q1 2011, not Q1 2010, and compare same-store sales and margins on a consistent basis.
- Monitor inventory growth and seasonal operating cash use, along with clearance levels and merchandise margins.
- Track execution and funding of the fiscal 2011 store, remodeling and capital-expenditure plans, including landlord allowances.
- Check the final wage-and-hour settlement approval, claims and payment against the disclosed maximum.
- Review available revolver capacity, covenant requirements and the July 2012 credit-agreement expiration.