DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the 13 and 39 weeks ended November 3, 2018, compared with the periods ended October 28, 2017. Although the request metadata says “2017 Q3,” the filing itself reports fiscal 2018 third-quarter results. DICK’S operates an omni-channel sporting goods retail business, including Golf Galaxy and Field & Stream. It ended the quarter with 861 stores.
Key financial results
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $1,857.3 million | $1,944.2 million | $5,944.5 million | $5,926.4 million |
| Gross profit | $523.6 million | $534.1 million | $1,743.2 million | $1,713.2 million |
| Operating income | $52.9 million | $50.0 million | $302.7 million | $299.3 million |
| Net income | $37.8 million | $36.9 million | $217.3 million | $207.5 million |
| Diluted EPS | $0.39 | $0.35 | $2.18 | $1.91 |
- Q3 gross margin was 28.19%, up 72 basis points; operating margin was 2.85%, up 28 basis points. Net margin was 2.04%, versus 1.90%.
- For the 39-week period, gross margin was 29.32%, up 41 basis points, while operating margin was 5.09%, up 4 basis points. Net margin was 3.66%, versus 3.50%.
- Q3 consolidated comparable-store sales fell 6.1%; adjusted for the retail-calendar shift, they fell 3.9%. E-commerce sales grew approximately 16% on the adjusted comparison and were about 12% of sales. Year-to-date comparable-store sales fell 3.0% (3.5% adjusted); e-commerce grew approximately 17%.
- Operating cash flow for 39 weeks was $160.5 million, versus $125.5 million. Investing cash outflow was $135.3 million, compared with $397.4 million, largely reflecting lower capital spending. Operating cash flow less capital expenditures was approximately $25.2 million.
- Cash was $92.1 million at quarter-end. Revolver borrowings were $382.3 million; remaining borrowing capacity was $851.6 million, with $16.1 million of letters of credit outstanding. Total current assets were $2,495.3 million and current liabilities $1,554.1 million.
Changes versus the prior comparable period
- Q3 sales declined 4.5%, primarily due to lower comparable-store sales. The 53rd week in fiscal 2017 caused a calendar shift that management said reduced the Q3 sales comparison by $40.8 million; adjusted comparable-store sales still declined.
- Q3 merchandise margin improved 213 basis points, attributed mainly to mix, fewer promotions, and improved product. Gross profit also benefited by $7.0 million from timing of ScoreCard loyalty-program expense recognition; management expected a roughly similar adverse impact in Q4.
- Freight and e-commerce shipping and fulfillment costs increased, and occupancy costs rose. SG&A fell in dollars but increased as a percentage of sales, reflecting lower revenue and higher incentive compensation and growth investments.
- Q3 2017 included $5.0 million after tax ($0.05 per diluted share) from a multi-year sales-tax refund. Prior-year other income also included an $8.1 million sales-tax refund and, year to date, a $12.0 million contract-termination payment. These items affect comparisons.
- Year-to-date net sales were nearly flat while comparable-store sales declined; new stores added sales. Share repurchases reduced weighted-average shares and supported EPS comparisons.
Outlook, commentary, and risks
- Management expected the hunt and electronics businesses to remain under significant pressure for the rest of fiscal 2018. Firearms-policy changes contributed to the hunt-category decline; the company was exiting most of its electronics business, primarily fitness tracking.
- Management expected freight costs to remain elevated for the rest of the fiscal year due to driver shortages and capacity constraints. It planned continued investment in digital capabilities, e-commerce fulfillment, supply chain, stores, and customer experience, while slowing new-store growth.
- Fiscal 2018 capital expenditures were expected to be approximately $195 million gross and $165 million net of landlord tenant allowances. The company said operating cash flow and credit-facility availability should cover expected fiscal 2018 capital needs, repurchases, and dividends; no earnings or sales guidance figures are provided in the supplied filing text.
- The company repurchased 8.6 million shares for $289.6 million during the 39 weeks, with approximately $467.2 million remaining under its authorization. It paid $68.1 million in dividends during the period and declared a subsequent quarterly dividend of $0.225 per share.
- Key risks include discretionary consumer spending, retail competition and promotions, execution of omni-channel initiatives, supply-chain disruption and higher freight or product costs, tariffs and trade tensions, cybersecurity and reputational risks, and store lease and operating costs. The company anticipated that adoption of the new lease standard in fiscal 2019 would add significant lease assets and liabilities, but not materially affect its income statement.
- Management reported effective disclosure controls and no material change in internal controls over financial reporting during the quarter. The company said ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for the quarter ended November 3, 2018, not 2017 Q3.
- Assess the underlying sales trend after the calendar adjustment and the continuing weakness in hunt, electronics, and outdoor equipment.
- Evaluate whether improved merchandise margins can offset higher freight, fulfillment, occupancy, and SG&A costs; also account for the disclosed Q4 loyalty-expense timing reversal.
- Review cash generation and seasonal inventory needs alongside revolver use, remaining borrowing capacity, capital spending, buybacks, and dividends.
- Consider the comparability effects of prior-year tax refunds and contract-termination income, the Tax Act’s lower tax rate, and the expected balance-sheet impact of lease-accounting adoption.