DICK’S Sporting Goods, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q2, but the filing is for the 13 and 26 weeks ended August 4, 2018, compared with periods ended July 29, 2017. Amounts below are in millions unless stated otherwise.
Business context and reporting period
DICK’S operates sporting goods stores and eCommerce, as well as Golf Galaxy, Field & Stream and other specialty concepts. At quarter-end it had 858 stores. The filing describes an omni-channel investment strategy and plans to moderate new-store growth while using lease-renewal opportunities to adjust its real estate portfolio.
Financial performance
| Metric | 13 weeks ended Aug. 4, 2018 | 13 weeks ended July 29, 2017 | 26 weeks ended Aug. 4, 2018 | 26 weeks ended July 29, 2017 |
|---|---|---|---|---|
| Net sales | $2,177.5 | $2,156.9 | $4,087.2 | $3,982.2 |
| Gross profit / margin | $659.3 / 30.28% | $637.2 / 29.54% | $1,219.7 / 29.84% | $1,179.1 / 29.61% |
| Operating income / margin | $162.5 / 7.46% | $159.2 / 7.38% | $249.9 / 6.11% | $249.3 / 6.26% |
| Net income | $119.4 | $112.4 | $179.5 | $170.6 |
| Diluted EPS | $1.20 | $1.03 | $1.78 | $1.55 |
- Quarterly sales rose 1.0%; six-month sales rose 2.6%. The prior-year 53rd week caused a favorable calendar shift estimated to add $49.8 million to quarterly sales comparisons and $82.1 million to six-month comparisons.
- Reported same-store sales declined 1.9% for the quarter and 1.4% year to date; calendar-adjusted declines were 4.0% and 3.3%. eCommerce sales increased 12% for the quarter and approximately 17% year to date on the adjusted comparisons.
- Quarterly gross margin increased 74 basis points, primarily from improved merchandise margins, fewer promotions and favorable mix; higher freight and eCommerce fulfillment costs and occupancy deleverage offset part of the gain. SG&A rose 5.3% for the quarter and 6.2% year to date, reflecting incentive compensation and strategic investments.
- Prior-year comparisons included $12.0 million of contract-termination income and $4.4 million after tax of restructuring costs in the quarter; year-to-date prior results also included $3.5 million of costs converting former Sports Authority stores. Lower current-period tax rates benefited comparisons: 26.1% quarterly and 26.9% year to date, versus 34.4% and 35.2%.
Cash flow, debt and liquidity
- For the first 26 weeks, operating cash flow was $315.9 million, versus $244.5 million; capital expenditures were $96.5 million, versus $235.7 million; and financing cash outflow was $196.3 million, versus $39.7 million. Cash increased $23.0 million to $124.3 million.
- At August 4, 2018, revolving-credit borrowings were $108.4 million, other long-term debt and leasing obligations were $57.4 million, and cash was $124.3 million. Remaining credit-facility capacity was $1,125.5 million; the facility is a $1.25 billion revolver.
- Inventory was $1,795.8 million, compared with $1,917.9 million a year earlier. The company repurchased 5.6 million shares for $181.7 million and paid $46.0 million in dividends during the first half.
Outlook, material developments and risks
- The filing provides no specific earnings or same-store-sales forecast. Management expected hunt and electronics, primarily fitness tracking, to remain under significant pressure through the rest of fiscal 2018, and said it was exiting most of its electronics business and evaluating its hunt assortment and floor-space strategy.
- Management expected fiscal 2018 capital expenditures of approximately $250 million gross and $225 million net of tenant allowances, and planned 19 new DICK’S Sporting Goods stores for the year. It stated operating cash flow and revolver availability should fund planned capital needs, repurchases and dividends through fiscal 2018.
- Management cited higher freight costs from driver shortages and capacity constraints. Risks include retail competition and discretionary spending, eCommerce execution and cybersecurity, vendor and supply-chain disruption, and escalating U.S.-China tariffs that could raise product costs or require supplier and pricing changes.
- Changes to firearms-sale policies were followed by a continued decline in the hunt business; some firearms manufacturers indicated they would stop doing business with the company. The filing also identifies reputational risk related to the company’s policies and public positions.
- The company was evaluating adoption of the new lease accounting standard for fiscal 2019 and anticipated significant lease assets and liabilities because most retail locations and many supply-chain facilities are operating leases; it did not expect a significant income-statement impact. The credit facility was amended to exclude specified new lease-accounting obligations from its financial calculations.
- Management reported no expected material adverse effect from ordinary-course legal proceedings, no material change in market-risk exposures, and effective disclosure controls as of quarter-end.
Key facts for investors to verify
- Confirm the requested period: this filing covers Q2 and the first half of fiscal 2018, not 2017 Q2.
- Assess underlying sales trends using calendar-adjusted same-store sales, and separate the calendar shift’s benefit from reported sales growth.
- Track whether gross-margin gains can persist as freight, fulfillment and occupancy costs rise, while SG&A investment continues.
- Monitor hunt and electronics sales, the effects of firearms-policy changes, and any impact from tariffs on merchandise costs and supply availability.
- Review capital returns and liquidity against seasonal borrowing needs, planned capital spending, and the upcoming lease-standard transition.