DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period note: The request metadata says “2013 Q3,” but the filing is for the 13 and 39 weeks ended November 1, 2014, compared with periods ended November 2, 2013. The interim financial statements are unaudited.
Business context and reporting period
DICK’S is an omni-channel sporting goods retailer operating DICK’S Sporting Goods, Golf Galaxy, Field & Stream and True Runner stores, as well as eCommerce sites. At November 1, 2014, it operated 690 stores across its concepts and had approximately 34.0 million square feet. Results are seasonal; the company typically generates stronger sales, earnings and operating cash flow in the holiday fourth quarter.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $1,526.7 million | $1,400.6 million | $4,654.5 million | $4,265.8 million |
| Gross profit | $452.0 million | $424.9 million | $1,395.4 million | $1,315.9 million |
| Income from operations | $79.9 million | $79.1 million | $303.6 million | $313.8 million |
| Net income | $49.2 million | $50.0 million | $188.7 million | $199.0 million |
| Diluted EPS | $0.41 | $0.40 | $1.55 | $1.58 |
Q3 sales rose 9%; consolidated same-store sales increased 1.1% (DICK’S +1.7%, Golf Galaxy −8.9%). eCommerce represented 7.3% of quarterly sales, versus 6.5% a year earlier. Q3 gross margin declined 74 basis points to 29.60%, while operating margin fell 40 basis points to 5.24%. For the 39-week period, same-store sales rose 2.0%, but gross margin fell 87 basis points to 29.98% and operating margin declined 84 basis points to 6.52%.
Q3 net income declined about 1.5%, although diluted EPS increased from $0.40 to $0.41, aided by fewer weighted-average diluted shares. Year-to-date net income and diluted EPS declined from the prior-year period.
Cash flow, debt and liquidity
For the 39 weeks, operating cash flow was $102.8 million, compared with cash used of $57.7 million in 2013. Capital expenditures were $271.3 million, up from $196.9 million; operating cash flow less capital expenditures was approximately negative $168.5 million, before asset-sale proceeds. Cash decreased $103.8 million from fiscal year-end to $77.9 million.
At November 1, 2014, revolving credit borrowings were $280.5 million, compared with none at February 1, 2014 and $116.4 million at November 2, 2013. Remaining availability, net of letters of credit, was $370.6 million under the $500 million facility. The company reported compliance with its credit agreement covenants. Inventory was $1.765 billion, versus $1.570 billion a year earlier, reflecting seasonal stocking ahead of the holiday period.
Material changes, outlook and risks
- Sales growth was driven principally by new stores and modest same-store gains. Athletic apparel and team sports performed well; golf and hunting were weaker. Management attributed the hunting comparison in part to elevated prior-year sales amid concerns about potential gun-law changes.
- Margin pressure reflected higher markdowns and promotional activity, occupancy deleverage from store growth, and higher eCommerce shipping costs. Year-to-date cost of goods sold included a $2.4 million golf-inventory write-down.
- Year-to-date results included a $14.4 million pre-tax gain on sale of a corporate aircraft and golf-restructuring charges, including $14.3 million of impairment charges and $3.7 million of severance. Management reported these items as $8.7 million net of tax in gain and $12.2 million net of tax in restructuring charges. Prior-year results included a JJB Sports investment recovery and an aircraft impairment.
- The company acquired additional Field & Stream trademark rights for $26.3 million. It repurchased approximately 4.3 million shares for $200.0 million and paid $46.6 million in dividends during the 39 weeks. The board declared a subsequent quarterly dividend of $0.125 per share.
- Management expected hunting business to be relatively flat in Q4 and believed operating cash flows and credit-facility availability would meet current capital needs through the remainder of fiscal 2014. No specific earnings or revenue guidance is provided in the filing.
- Key disclosed risks include consumer-demand shifts, intense competition, seasonality, store and supply-chain disruption, vendor costs and availability, cybersecurity and information-system issues, and product liability and regulatory risks, including those involving firearms and ammunition. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Investor verification checklist
- Confirm the reporting period: the filing covers Q3 2014, notwithstanding the request metadata’s “2013 Q3.”
- Assess whether sales growth can offset persistent merchandise-margin pressure and Golf Galaxy’s same-store sales decline.
- Review the sustainability of cash generation given seasonal inventory needs, capital spending and revolving borrowings.
- Separate recurring operating performance from the aircraft-sale gain and golf-restructuring charges when comparing periods.
- Monitor store expansion, eCommerce growth and the planned retirements of senior executives disclosed after quarter-end.