DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. This differs from the request metadata identifying “2018 Q1.” Unless noted, amounts below are in U.S. dollars.
Business context and results
DICK’S operates an omnichannel sporting-goods retail business, including DICK’S Sporting Goods, Golf Galaxy and Field & Stream stores, and an e-commerce platform. It ended the quarter with 857 stores across its formats.
| Metric | Quarter ended May 4, 2019 | Prior-year quarter |
|---|---|---|
| Net sales | $1,920.7 million | $1,909.7 million |
| Gross profit / margin | $563.8 million / 29.35% | $560.4 million / 29.34% |
| Operating income / margin | $76.1 million / 3.96% | $87.3 million / 4.57% |
| Net income | $57.5 million | $60.1 million |
| Diluted EPS | $0.61 | $0.59 |
| Operating cash flow | $(222.2) million | $(19.1) million |
| Capital expenditures | $46.9 million | $49.3 million |
Changes and key financial position
- Sales increased 0.6%; consolidated same-store sales were flat versus a 0.9% decline in the prior-year quarter. E-commerce sales grew approximately 15% and rose to approximately 13% of sales from 11%.
- Gross margin improved 1 basis point, but operating margin fell 61 basis points. SG&A increased 3.6% to $487.2 million, or 25.36% of sales versus 24.63%.
- Net income declined despite higher diluted EPS, reflecting fewer weighted-average diluted shares (94.4 million versus 102.2 million). Basic and diluted EPS were $0.62 and $0.61, respectively, versus $0.59 for both in the prior-year period.
- Operating cash use increased by $203.1 million year over year, primarily because inventory investments reduced operating cash flow by $205.0 million relative to the prior-year quarter. Inventory was $2,142.0 million at May 4, 2019, versus $1,842.9 million a year earlier.
- Cash was $92.4 million. Revolver borrowings were $369.5 million, compared with none at February 2, 2019 and $280.1 million a year earlier. Remaining credit-facility capacity was $864.4 million; the facility is $1.25 billion. These borrowings are seasonal working-capital financing.
- The company adopted lease accounting in fiscal 2019. At May 4, it reported $2,484.7 million of operating lease assets and approximately $3,051.3 million of operating lease liabilities. This accounting change substantially increased reported assets and liabilities; the company said adoption did not materially affect net income or cash flows.
Management outlook, risks and unusual items
- Management expects fiscal 2019 capital expenditures of approximately $230 million gross and $200 million net of landlord allowances, and plans seven new DICK’S stores. It said operating cash flows and available credit should fund 2019 needs, including planned investments and shareholder returns. The filing provides no specific earnings or sales guidance.
- Fiscal 2019 priorities include improving the in-store athlete experience, e-commerce fulfillment and technology, while pursuing productivity and expense reductions. Management plans to remove hunt merchandise from approximately 125 underperforming or less locally relevant stores and redeploy the space. Hunt-category weakness, including effects management attributes in part to firearm-policy changes, weighed on sales.
- Management reported a $7.6 million pre-tax non-cash impairment charge on a corporate aircraft held for sale and a $6.4 million benefit from settlement of a previously accrued litigation contingency. A $6.6 million deferred-compensation investment-related SG&A expense was offset by corresponding investment income in other income. The filing describes the impairment and settlement as affecting net income by $(5.6) million and $4.7 million after tax, respectively.
- Effective May 10, 2019, U.S. tariffs on certain Chinese imports increased from 10% to 25%. Management expected to mitigate the impact and did not expect a material adverse effect on fiscal 2019 net income; the risk-factor discussion cautions that tariffs and mitigation actions could adversely affect sales and profitability.
- Other principal risks include discretionary consumer spending, retail competition and promotions, e-commerce or information-system disruptions, vendor direct-to-consumer sales, supply-chain and freight costs, labor costs, weather and seasonality, and execution of strategic investments. The company said it did not expect pending ordinary-course legal proceedings to materially adversely affect financial position or results.
- The company repurchased 3.0 million shares for $107.3 million and paid $27.0 million in dividends during the quarter. It repurchased an additional $78.5 million of shares during the first three weeks of the following quarter. A quarterly dividend of $0.275 per share was declared on May 24, 2019.
Important facts for investors to verify
- Confirm the intended period: this is a 2019 first-quarter filing, not a 2018 first-quarter filing.
- Track inventory levels, seasonal revolver usage, operating cash generation and remaining credit capacity.
- Assess whether e-commerce growth and category changes can sustain sales while controlling freight, fulfillment and SG&A costs.
- Monitor tariff developments and whether sourcing, merchandising or pricing actions offset higher product costs.
- Distinguish the lease-accounting balance-sheet increase from interest-bearing debt, and review the company’s substantial future lease commitments.
- Evaluate the sustainability of buybacks and dividends relative to cash flow, investment needs and borrowings.