DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 28, 2017, compared with the periods ended October 29, 2016. Although the request metadata labels this “2016 Q3,” the filing is for fiscal 2017 Q3.
Business context and financial results
DICK’S is an omni-channel sporting goods retailer operating DICK’S Sporting Goods, Golf Galaxy, Field & Stream, and Dick’s Team Sports HQ. All dollar amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Net sales | $1,944.2m | $1,810.3m | $5,926.4m | $5,438.5m |
| Gross profit / margin | $534.1m / 27.5% | $552.8m / 30.5% | $1,713.2m / 28.9% | $1,646.0m / 30.3% |
| Operating income / margin | $50.0m / 2.6% | $73.8m / 4.1% | $299.3m / 5.1% | $311.6m / 5.7% |
| Net income | $36.9m | $48.9m | $207.5m | $197.2m |
| Diluted EPS | $0.35 | $0.44 | $1.91 | $1.75 |
| Operating cash flow | Not separately reported | Not separately reported | $125.5m | $193.1m |
Quarterly sales rose 7.4%, but consolidated same-store sales fell 0.9%; sales from stores not yet in the comparable-store base contributed $148.5m. E-commerce sales grew approximately 16% and represented 10.3% of quarterly sales. For the 39-week period, sales rose 9.0% and same-store sales increased 0.5%.
Quarterly gross margin fell 307 basis points, reflecting promotional merchandise margins, occupancy deleverage, and higher e-commerce shipping and fulfillment costs. SG&A increased 3.5% in dollars but improved as a share of sales. For the 39 weeks, net income increased despite lower operating income, alongside higher other income and a lower effective tax rate.
Cash, debt, liquidity, and capital returns
At October 28, 2017, cash was $111.8m, revolving credit borrowings were $454.7m, and remaining borrowing capacity was $779.2m; the credit facility also had $16.1m of outstanding letters of credit. The $1.25bn secured revolving facility matures in August 2022 and includes an option to request up to $350m of additional commitments, subject to conditions. It requires minimum adjusted availability of 7.5% of the borrowing base. The company also reported $66.6m of other debt and leasing obligations, including current and long-term amounts.
For the 39 weeks, investing cash outflow was $397.4m, principally reflecting $386.6m of capital expenditures; financing cash inflow was $218.9m. Cash declined $53.0m. The company repurchased 6.8m shares for $242.1m and paid $55.4m in dividends. Inventory was $2,178.5m at quarter-end, up from $1,638.6m at fiscal year-end, consistent with seasonal working-capital needs.
Material changes, outlook, and risks
- Management said intense competition, vendor distribution changes, and limited new product innovation were driving a highly promotional market, which it expected to continue through 2018. It expected promotional activity and planned strategic investments to reduce fiscal 2018 profitability versus fiscal 2017.
- Management expected fiscal 2017 capital expenditures of approximately $400m net of tenant allowances ($515m gross), and fiscal 2018 net capital expenditures of $250m–$300m as new-store growth slowed. The fifth distribution facility was planned for completion in fiscal 2017.
- Quarterly net income included $5.0m after tax, or $0.05 per diluted share, related to a multi-year sales-tax refund. The quarter also included $8.1m of sales-tax-refund benefit and $2.5m of investment income in other income. Year-to-date other income additionally included a $12.0m contract-termination payment and $7.7m of investment income.
- Year-to-date SG&A included $7.1m of corporate restructuring charges. The prior-year quarter included $4.7m after-tax costs related to converting former Sports Authority stores.
- A related-party transaction involved acquiring aircraft purchase rights and obligations from an entity owned by the CEO and Chairman. DICK’S agreed to reimburse $62.8m for prior principal and financing interest and pay a further $4.0m to the aircraft seller. The aircraft was financed in part through a $62.5m term loan at a fixed 3.41% rate, with a $29.3m balloon payment due in December 2024.
- Key disclosed risks include discretionary consumer spending, competitive promotions, demand and inventory forecasting, e-commerce execution and disruption, supply-chain and vendor risks, labor and occupancy costs, weather and seasonality, and the success of strategic investments. Management said it did not expect pending ordinary-course legal proceedings to materially harm financial position or results.
The board declared a subsequent quarterly dividend of $0.17 per share, payable December 29, 2017. The company stated that operating cash flow and available credit were expected to cover planned needs through fiscal 2017, subject to potential additional funding needs for acquisitions, investments, repurchases, or expansion beyond current plans.
Important facts for investors to verify
- Whether promotions, margin pressure, and declining quarterly same-store sales persisted beyond this reporting period.
- How seasonal inventory build, operating cash generation, and revolving borrowings developed through the holiday quarter.
- Whether fiscal 2017 and fiscal 2018 capital-spending plans and management’s profitability outlook were achieved.
- The sustainability of earnings excluding sales-tax refunds, the contract-termination payment, investment income, and restructuring or conversion costs.
- The terms, governance approval, and total cost of the CEO-related aircraft transaction, as well as ongoing share repurchases and dividends.