DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Reporting period: 13 and 39 weeks ended October 31, 2020, compared with periods ended November 2, 2019. The request metadata says “2019 Q3,” but the supplied filing is for 2020 Q3. Financial amounts below are in U.S. dollars; “$” amounts are millions unless otherwise indicated.
Business context and performance
DICK’S is an omni-channel sporting goods retailer operating DICK’S Sporting Goods, Golf Galaxy and Field & Stream stores, plus the GameChanger app. All stores had reopened by the end of June 2020 after temporary COVID-19 closures. In Q3, management cited stronger demand in golf, outdoor activities, home fitness and active lifestyle categories, alongside accelerated eCommerce growth.
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $2,412.1 | $1,962.2 | $6,458.7 | $6,142.1 |
| Gross profit | $842.2 | $580.6 | $1,998.4 | $1,821.5 |
| Gross margin | 34.91% | 29.59% | 30.94% | 29.66% |
| Operating income | $246.1 | $45.6 | $451.3 | $276.7 |
| Operating margin | 10.20% | 2.33% | 6.99% | 4.50% |
| Net income | $177.2 | $57.6 | $310.6 | $227.6 |
| Diluted EPS | $1.84 | $0.66 | $3.44 | $2.53 |
| Operating cash flow | Not presented by quarter in the supplied cash flow statement | $917.5 | $(212.8) |
Financial position, liquidity and capital
- Cash and cash equivalents were $1,060.0 at October 31, 2020, versus $87.6 at November 2, 2019. The company reported no Credit Facility borrowings outstanding and $1,839.2 of remaining capacity after letters of credit.
- Debt included $575.0 principal of 3.25% convertible senior notes due 2025; their balance-sheet carrying value was $411.3, reflecting the debt discount. The notes generated $24.4 of year-to-date interest expense, including $14.3 of non-cash discount amortization. The company said it intended to repay note principal in cash, but noted additional financing could be needed.
- Operating lease liabilities totaled $2,785.1, including $474.8 current and $2,310.3 long term. These are lease obligations, distinct from the notes and revolving credit borrowings.
- Year-to-date capital expenditures were $156.4; cash dividends paid were $80.9. Share repurchases were suspended in April 2020. A $0.3125-per-share dividend was declared in November for payment in December.
- Year-to-date operating cash flow improved by $1,130.3 versus 2019. Management attributed much of the swing to inventory and accounts-payable movements, including comparison with prior-year inventory investment; inventory was down 9.8% year over year. The company anticipated higher cash outflows for income taxes, inventory replenishment and rent over the next 12 months.
Material changes and management commentary
- Q3 net sales rose 22.9%; consolidated same-store sales increased 23.2%, including transactions up 3.6% and sales per transaction up 19.6%. Year-to-date sales rose 5.2% and same-store sales increased 5.8%, despite transactions down 9.7% and sales per transaction up 15.5%.
- eCommerce sales grew approximately 95% in Q3 and 135% year to date. eCommerce was approximately 21% of Q3 sales and 28% of year-to-date sales, versus approximately 13% in each prior-year comparable period. About 70% of Q3 online sales were fulfilled by stores.
- Q3 gross margin expanded 532 basis points, mainly from merchandise margin improvement and occupancy leverage, partly offset by higher eCommerce shipping costs. Year-to-date gross margin expanded 128 basis points; higher eCommerce shipping and fulfillment costs reduced margin by 107 basis points.
- COVID-related teammate compensation and safety costs were approximately $48 in Q3 and $124 year to date. Year-to-date SG&A also reflected a $16.9 benefit from CARES Act employee-retention credits. The company deferred approximately $41.4 of qualifying payroll and other tax payments under the CARES Act.
- Management said favorable demand trends continued into Q4 but were partly offset by warmer weather affecting cold-weather categories. It planned to maintain a 15% pay premium for store and distribution-center teammates through the remainder of calendar 2020, remove hunt departments from another 180 stores by fiscal 2021 year-end, and continue a slower store-growth strategy. No numerical full-year earnings or sales guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- COVID-19 remains a principal uncertainty: renewed closures, restrictions, supply-chain disruption, weaker discretionary spending or shifts in customer behavior could reduce sales and cash flow and increase inventory or asset-impairment risks. Management said it could not estimate the pandemic’s full future impact.
- Q3 2019 included a $33.8 pretax gain from selling two technology subsidiaries. The prior-year quarter also included costs related to exiting eight Field & Stream stores and a corporate-aircraft impairment. These items affect year-over-year comparability.
- The convertible notes’ fair value was approximately $1.0 billion versus carrying value of $411.3 at October 31, 2020. The notes, conversion rights and related warrants create potential dilution and cash-settlement/refinancing risks; the company’s hedge is intended to mitigate, but may not eliminate, dilution.
- The Credit Facility has a minimum adjusted-availability covenant and other restrictions that may limit certain actions in specified circumstances. The company reported compliance-related liquidity information but the supplied text does not state a numerical covenant headroom figure.
- The company is involved in ordinary-course legal proceedings and did not expect them to have a material adverse effect. It also identifies risks involving competition, consumer demand, leases, fulfillment and supply chains, regulation, cybersecurity, and firearms-related claims.
Key investor verification points
- Confirm the intended reporting period: this filing covers Q3 2020, not Q3 2019.
- Assess whether unusually strong same-store sales and eCommerce growth are sustainable, and how weather, product availability and post-pandemic consumer behavior may affect subsequent results.
- Separate recurring operating performance from COVID-related costs and tax credits, and from prior-year subsidiary-sale and impairment items.
- Review the quality and repeatability of the operating cash-flow improvement, including expected catch-up payments for inventory, taxes and rent.
- Evaluate cash resources and borrowing capacity against the $575 million convertible-note principal, lease obligations, potential conversion dilution and the company’s stated cash-settlement intention.
- Track the effects of the planned hunt-department exits, store strategy and future dividends or share repurchases; these remain subject to execution and board decisions.