DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. Although the request identifies 2017 Q1, the filing itself is for fiscal 2018 Q1. The company operates sporting goods stores and specialty concepts and sells through an integrated eCommerce platform.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Net sales | $1,909.7 million | $1,825.3 million | Up 4.6%; includes an estimated $32.3 million benefit from the fiscal-calendar shift |
| Comparable sales | Down 0.9% | Up 2.4% | Down 2.5% after adjusting for the shifted retail calendar |
| Gross profit / margin | $560.4 million / 29.34% | $541.9 million / 29.69% | Gross profit up 3.4%; margin down 35 basis points |
| Operating income | $87.3 million | $90.1 million | Down 3.0%; operating margin declined from 4.93% to 4.57% |
| Net income | $60.1 million | $58.2 million | Up 3.2% |
| Diluted EPS | $0.59 | $0.52 | Up 13.5%; fewer weighted average diluted shares |
| Operating cash flow | $(19.1) million | $36.5 million | Down $55.6 million year over year |
| Capital expenditures | $49.3 million | $113.9 million | Lower primarily due to reduced store growth and prior-year distribution-center construction |
Costs and margins: Merchandise margin improved 18 basis points, helped by lower promotions and favorable mix, but was outweighed by higher eCommerce shipping and fulfillment costs and occupancy deleverage. SG&A rose 7.1% to $470.3 million and increased 56 basis points as a share of sales, reflecting marketing, incentive compensation, and strategic investments. The effective tax rate fell to 28.3% from 36.5%, primarily because of the lower federal corporate tax rate under the Tax Act.
Liquidity and debt: Cash was $104.6 million at May 5, 2018. Revolver borrowings were $280.1 million, versus none at February 3, 2018 and $92.5 million a year earlier; remaining borrowing capacity was $953.8 million. The company reported a $1.25 billion secured revolving facility. Operating cash use and capital spending were partly offset by $71.8 million of financing cash flow, including net revolver borrowings. Inventory was $1.843 billion, up from $1.711 billion at fiscal year-end.
Material changes and management commentary
- eCommerce sales increased 24% and represented approximately 11% of net sales, compared with approximately 9% a year earlier. Calendar-adjusted comparable sales still declined 2.5%; transactions fell approximately 3.7%, partly offset by a 1.2% increase in sales per transaction.
- Management attributed comparable-sales weakness primarily to declines in hunt and electronics, partially offset by gains in fitness equipment, team sports, licensed products, and private brands. It expected hunt and electronics to remain under significant pressure and said it was exiting most of its electronics business, primarily fitness tracking.
- The company opened eight Dick’s Sporting Goods stores in the quarter and ended with 853 total stores, including 129 specialty concept stores. Management planned 19 new Dick’s stores for fiscal 2018 and a slower new-store growth rate.
- The company repurchased 3.3 million shares for $107.9 million and paid $23.7 million in dividends. A quarterly dividend of $0.225 per share was declared for payment June 29, 2018.
Outlook, accounting matters, and risks
- Spending outlook: Fiscal 2018 capital expenditures were expected to be approximately $280 million gross and $250 million net of tenant allowances. Management stated that operating cash flows and available credit were expected to cover planned capital expenditures, repurchases, and dividends through fiscal 2018.
- Customer and vendor risk: The company said changes to its firearms and accessories policy accelerated declines in the hunt business, and certain firearms manufacturers indicated they would no longer do business with the company. Management also cited competitive promotional activity, changing consumer demand, vendor direct-sales channels, and execution risks in digital and other growth initiatives.
- Accounting change: The company adopted Topic 606 using the modified retrospective method. Gift-card breakage is now recognized over time; adoption increased retained earnings by $20.5 million, net of tax, and reclassified $27.7 million from deferred revenue and other liabilities. Prior-year results were not restated, and management expected no significant ongoing impact.
- Leases: The company was evaluating the new lease standard and anticipated significant lease assets and related liabilities because its retail locations and most supply-chain facilities were operating leases.
- The filing reported no material change in market-risk exposure or contractual obligations outside the ordinary course, and no material adverse effect expected from ongoing ordinary-course legal proceedings. Management said disclosure controls were effective as of May 5, 2018.
Important facts for investors to verify
- Separate underlying sales performance from the estimated $32.3 million calendar-shift benefit; monitor comparable sales and eCommerce growth.
- Track whether pressure in hunt and electronics persists, including the effects of firearms-policy changes and vendor decisions, and assess execution of the electronics exit.
- Assess whether gross-margin and SG&A deleverage reverse as strategic investments, fulfillment costs, and occupancy costs evolve.
- Monitor seasonal working-capital needs, inventory, operating cash flow, and revolver borrowings alongside the planned capital returns.
- Consider the $20.5 million Topic 606 retained-earnings adjustment when interpreting balance-sheet comparisons; the filing does not restate prior-period results.
- Review the company’s full-year capital-spending and store-opening plans against actual results and the material future balance-sheet effect expected from lease accounting.