DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period: Fiscal second quarter and first half of fiscal 2019, ended August 3, 2019 (13 and 26 weeks, respectively). The filing-period metadata says “2018 Q2,” but the filing itself covers 2019 Q2.
Business context and performance
DICK’S is an omnichannel sporting-goods retailer that also operates Golf Galaxy and Field & Stream stores and the GameChanger youth-sports app. At quarter-end it operated 857 stores, including specialty concept stores. Management emphasized digital and fulfillment capabilities, store experience, and productivity investments.
- Q2 net sales rose 3.8% to $2.259 billion; comparable sales increased 3.2%, including approximately 21% eCommerce growth. eCommerce was approximately 12% of sales, versus 11% a year earlier.
- First-half net sales rose 2.3% to $4.180 billion; comparable sales increased 1.7%, including approximately 18% eCommerce growth.
- Sales gains were broad-based, while the hunt category continued to decline. The company removed hunt merchandise from approximately 125 stores and reallocated space.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $2,259.2 million | $2,177.5 million | $4,179.9 million | $4,087.2 million |
| Gross profit | $677.1 million | $659.3 million | $1,240.9 million | $1,219.7 million |
| Operating income | $155.0 million | $162.5 million | $231.1 million | $249.9 million |
| Net income | $112.5 million | $119.4 million | $170.1 million | $179.5 million |
| Diluted EPS | $1.26 | $1.20 | $1.85 | $1.78 |
- Q2 gross margin was 29.97%, down 31 basis points year over year; operating margin was 6.86%, down 60 basis points; net margin was 4.98%, down 50 basis points. First-half gross margin was 29.69%, down 15 basis points, and operating margin was 5.53%, down 58 basis points.
- Lower operating income and net income contrasted with higher diluted EPS, which benefited from a lower weighted-average share count amid substantial repurchases.
- First-half operating cash flow was negative $27.2 million, versus positive $315.9 million a year earlier, chiefly reflecting a $312.1 million inventory cash outflow and changes in payables. Capital expenditures were $111.0 million; cash ended at $116.7 million.
- At August 3, cash was $116.7 million, revolving-credit borrowings were $441.5 million, and remaining revolver capacity was $1.142 billion. The amended facility totals $1.6 billion, matures June 28, 2024, and includes an option to seek up to $500 million of additional capacity.
- Operating lease liabilities totaled $3.015 billion, including $410.5 million current and $2.605 billion long term. Adoption of the new lease standard added lease assets and liabilities to the balance sheet; it reduced opening retained earnings by $8.0 million and did not materially affect net income or cash flow.
Changes, outlook, risks, and unusual items
- Gross-margin pressure reflected lower merchandise margins from hunt clearances and private-brand inventory transitions, plus higher eCommerce fulfillment costs. These were partly offset by occupancy leverage. SG&A increased from strategic investments and wage inflation.
- First-half SG&A included a $7.6 million non-cash aircraft impairment, $8.1 million of deferred-compensation-plan expenses (with corresponding investment income in other income), and a $6.4 million litigation settlement benefit.
- Management expected fiscal 2019 capital expenditures of approximately $230 million gross and $200 million net of tenant allowances, and anticipated opening eight new DICK’S stores. It said operating cash flow and facility availability should meet capital needs through 2019. No specific sales or earnings guidance is provided in the supplied filing text.
- The company repurchased approximately 7.5 million shares for $266.6 million in the first half and authorized a new five-year, $1 billion repurchase program. It paid $51.3 million in dividends and declared a subsequent $0.275-per-share dividend.
- On August 22, 2019, the company sold Blue Sombrero and Affinity Sports for $45 million and expected to record a pretax gain in Q3; it also entered a long-term strategic partnership with the buyer.
- Tariffs on certain Chinese imports rose from 10% to 25% in May 2019, with further tariffs scheduled for September and December. Management included announced tariff impacts in fiscal 2019 expectations, while noting uncertainty over subsequent developments. Risks include discretionary spending, retail competition and promotions, tariffs and supply costs, eCommerce disruption, and continued weakness in hunting.
- Management reported no material change in market-risk exposures, effective disclosure controls, and no legal proceedings expected to materially adversely affect financial position or results.
Key facts for investors to verify
- Whether comparable-sales momentum and eCommerce growth can offset continued hunt-category weakness and margin pressure.
- How inventory investment, seasonal borrowing, and cash generation develop in the second half.
- The eventual effect of tariffs and other supply-cost changes on merchandise margins and pricing.
- Execution and returns from digital, fulfillment, store, and productivity investments, alongside ongoing buybacks and dividends.
- The Q3 gain and ongoing business implications of the Blue Sombrero and Affinity Sports sale and partnership.