DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period and business: The filing covers the 13 weeks ended May 3, 2014, compared with the 13 weeks ended May 4, 2013. Although the request metadata says “2013 Q1,” the filing itself reports fiscal 2014 first-quarter results. Dick’s operates sporting-goods, Golf Galaxy, Field & Stream and True Runner stores and sells through eCommerce. At quarter-end it operated 650 stores and had approximately 32.1 million square feet.
Financial performance
| Metric | 13 weeks ended May 3, 2014 | Prior-year period | Change |
|---|---|---|---|
| Net sales | $1,438.9 million | $1,333.7 million | Approximately +8% |
| Gross profit / margin | $440.9 million / 30.64% | $411.7 million / 30.87% | Margin down 23 basis points |
| Operating income / margin | $112.1 million / 7.79% | $97.6 million / 7.32% | Margin up 47 basis points |
| Net income | $70.0 million | $64.8 million | Approximately +8% |
| Diluted EPS | $0.57 | $0.52 | Up $0.05 |
| Operating cash flow | $13.9 million provided | $75.4 million used | Improved $89.3 million |
| Capital expenditures | $63.9 million | $34.0 million | Higher, reflecting more planned self-developed stores |
SG&A was $322.6 million, up 3%, and 22.42% of sales versus 23.45% a year earlier. The lower expense ratio included a $14.4 million pretax gain from selling a Gulfstream G650 aircraft. Pre-opening costs rose to $6.2 million from $1.3 million. The effective tax rate was 38.5%, compared with 37.2%.
Sales, margins and material changes
- Consolidated same-store sales increased 1.5%, versus a 1.7% decline a year earlier. Dick’s Sporting Goods comparable sales rose 2.3%; Golf Galaxy comparable sales fell 10.4%.
- Growth was driven mainly by the store network and strength in athletic apparel, team sports and footwear. Hunting and golf declined.
- Gross margin declined 23 basis points as higher occupancy and shipping costs (up 48 basis points as a share of sales) more than offset 30 basis points of merchandise-margin expansion.
- eCommerce represented 7.0% of sales, up from 5.8%. The company opened eight new Dick’s stores and relocated one Dick’s store and one Golf Galaxy store.
- Reported net income included an $8.7 million after-tax, $0.07-per-diluted-share aircraft-sale gain. Prior-year net income included a $4.3 million after-tax, $0.04-per-share recovery of the impaired JJB Sports investment.
Cash, debt and liquidity
Cash and cash equivalents were $139.4 million at May 3, 2014, down $42.4 million from February 1, 2014. Inventory was $1,480.7 million, up $248.7 million from fiscal year-end; accounts payable rose $138.6 million. Operating cash flow benefited from working-capital and tax-payment timing, so the year-over-year improvement should be considered in that context.
The company had no borrowings under its $500 million revolving credit facility and reported $486.0 million of remaining capacity after letters of credit. It reported $6.8 million of other long-term debt and leasing obligations, including the current portion. The company was in compliance with credit-agreement terms. Management said operating cash flow and facility availability were expected to meet current capital needs through fiscal 2014. The facility matures December 5, 2016.
Investing activities provided $9.5 million, including $73.4 million of aircraft-sale proceeds, against $63.9 million of capital expenditures. Financing activities used $65.8 million, including $25.0 million for share repurchases and $16.6 million of dividends. The board declared a further $0.125-per-share quarterly dividend after quarter-end.
Outlook, risks and contingencies
- Management expected the golf downturn to continue for the balance of fiscal 2014. It expected hunting weakness to continue through the second quarter, improve somewhat in the third quarter and be relatively flat in the fourth quarter. The two categories represent approximately 30% of annual sales.
- The company planned to invest in its omni-channel platform, specialty-store concepts, supply chain and information technology, while continuing dividends and share repurchases. It stated that higher-than-planned expansion, acquisitions or other investments could require additional funding.
- Key disclosed risks include consumer spending and economic conditions, intense competition, forecasting demand, store-site availability and costs, supply-chain disruption, eCommerce and information-system interruptions, customer-data security, product and litigation risks (including firearms and ammunition), seasonality, regional concentration, labor needs and dependence on key executives.
- Management reported no material changes in market-risk exposures or internal controls during the quarter and concluded disclosure controls were effective as of May 3, 2014. The company said ordinary-course legal proceedings were not expected to have a material adverse effect; no material changes to contractual obligations outside the ordinary course were reported.
Important facts for investors to verify
- Whether sales and earnings trends persist after excluding the aircraft-sale gain and accounting for the prior-year JJB recovery.
- Whether Golf Galaxy, golf merchandise and hunting sales stabilize as management anticipated, and how those categories affect comparable sales.
- Whether merchandise-margin gains can offset rising occupancy and eCommerce shipping costs.
- Inventory growth, seasonal working-capital needs, capital spending and the timing-related tax benefit to operating cash flow.
- Planned store openings, share repurchases, dividend payments, and continued availability under the revolver.